TRINITY CONCEPT LTD (IN LIQUIDATION) v. WONG KUNG SANG AND ANOTHER

HCA 2334/2019

[2022] HKCFI 547

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2334 OF 2019

_________________

_________________

_______________

DECISION

_______________

INTRODUCTION

1.  The writ in the present action was issued on 18 December 2019.

2.  By summons filed on 6 May 2020, the 1^st and 2^nd defendants apply to strike out the statement of claim.  The contention is that the plaintiff’s claim is time-barred.  The defendants also seek an alternative relief that a number of preliminary issues be determined under Order 14A.  The issues all concern the applicable time bar.  In both cases, the defendants ask for the action to be dismissed. 

3.  At the hearing, Mr Frederick H F Chan, appearing for the defendants, confirmed that if the striking out application fails, there is no need to deal with the Order 14A application separately, which would also fail. 

4.  Having considered parties’ submissions, I am of the view that (1) that part of the claim seeking an account is not time-barred, (2) it cannot be decided one way or the other at this interim stage whether the remainder of the claim seeking further orders upon the taking of the account and, alternatively, equitable compensation are time-barred or not, and (3) hence the claim should be allowed to proceed. 

5.  In light of that conclusion, I will not spell out the preliminary issues as it is unnecessary to deal with them. 

6.  The plaintiff is a company incorporated in Hong Kong.  It was put into compulsory liquidation upon the consent of the shareholders, pursuant to a court order made on 17 February 2016.  The present action was brought by the liquidators pursuant to leave of the court. 

7.  The 1^st and 2^nd defendants were the plaintiff’s directors since 2003 and remained so until the company was wound up.  They were also two (of the three) shareholders of the company, holding respectively 40% and 20% of the shares.

8.  As pleaded, in the course of their investigations, the liquidators found out about what they refer to in the statement of claim as “the Suspicious Transactions”.  They comprised 139 payments made by the plaintiff to recipients who do not appear to have any direct relation with the plaintiff. The payments were made between January 2010 and August 2011.  They amounted to $49,691,000 in total.  Despite various demands, the defendants had refused or failed to give a proper explanation for the payments. 

9.  The liquidators therefore instituted the present action to seek an account of the Suspicious Transactions, an order for delivery up of assets or payment of monies found due upon the taking of the account and, alternatively, equitable compensation. 

10.  It would be immediately noted that the Suspicious Transactions took place more than six years before the issue of the writ.  (The last of the Suspicious Transactions took place in August 2011.  The writ was issued in December 2019.)  The defendants contend that the claim is subject to a limitation period of six years.  Hence it is brought out of time and should be dismissed.

11.  The application raises the question where a company finds out about transactions involving payment out of its monies, which on their face appear to be suspicious, but the director in charge fails to give a proper explanation for them, whether the company is able to seek against the director the relief of account and payment if the transactions took place more than six years ago.

12.  The answer turns on the application of section 4(2) and (7) and section 20(1) and (2) of the Limitation Ordinance, Cap 347, to the facts as pleaded in the statement of claim.

13.  In this striking out application, the following issues are material:

(1) What is the nature of the duty of a director in relation to the assets of the company? 

(2) If the director is regarded as a trustee of the company’s assets, he has a duty to account for the assets.  What is the nature of a trustee’s duty to account?  What protection is afforded to a beneficiary in relation to the trust assets under our trust law?

(3) Is a beneficiary’s claim for an order for an account subject to any statutory limitation period?  Is his claim for further orders upon the taking of the account or for equitable compensation subject to any statutory limitation period?

(4) What is the proper approach which the court should apply in a striking out application mounted by a director in the situation as outlined in para 11 above?

14.  In my view, the answers to the above questions can primarily be found in the Court of Appeal’s decision in Liu Hsiao Cheng v Wong Shu Wai [2018] 1 HKLRD 1087, and Lord Millett NPJ’s judgment in Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681.

THE STATUTORY PROVISIONS

15.  It is convenient to set out at the outset the relevant provisions in the Limitation Ordinance.

The Limitation Ordinance

16.  Section 4(2) provides:

“An action for an account shall not be brought in respect of any matter which arose more than 6 years before the commencement of the action.”

17.  Section 4(7) provides:

“This section shall not apply to any claim for specific performance of a contract or for an injunction or for other equitable relief, except in so far as any provision thereof may be applied by the court by analogy in like manner as the corresponding enactment contained in the Limitation Act 1980 (1980 c. 58 U.K.) is applied in the English Courts.”

18.  Section 20 provides:

“(1) No period of limitation prescribed by this Ordinance shall apply to an action by a beneficiary under a trust, being an action—

(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or

(b) to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use.

(2) Subject as aforesaid, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Ordinance, shall not be brought after the expiration of 6 years from the date on which the right of action accrued:

[proviso omitted] …”

The English legislation

19.  The Limitation Ordinance is modelled on the English legislation.  Furthermore, section 4(7) expressly requires the court, where applicable, to adjudicate the matter in like manner as the corresponding enactment contained in the Limitation Act 1980 is applied in the English courts. It is therefore important to identify the corresponding or equivalent English sections which were enacted over the years.

20.  It is however important to remember as a starting point that at common law there is no inherent jurisdiction in the courts to prevent actions proceeding merely because they relate to old claims. The restriction on the right to sue by way of limitation periods is a creation of statute.  In England, Parliament has provided, by legislation which started in 1623 and has continued in stages since then, that there should be restrictions on rights to sue.  The equity courts have applied those provisions by analogy where properly applicable: Attorney-General v Cocke [1988] 1 Ch 414, per Harman J at 418F-G.

21.  The legislation is underpinned by policy reasons.  The legislature imposes time limits within which parties are required to institute proceedings because public interest leans against delay.  The purpose is, generally speaking, to avoid the investigation of a claim after a lapse of time which can prejudice the defendant’s ability to rebut the case.  The purpose is not to allow people to escape liability, although that may incidentally be the result in some cases.  However, that is the price the legislature was willing to pay for having a general and clear-cut rule.  See, eg, Peconic Industrial Development Ltd v Lau Kwok Fai (2009) 12 HKCFAR 139, at paras 7 and 29.

The Trustee Act 1888

22.  In the context of claims by beneficiaries against trustees, in England, the Trustee Act 1888 introduced for the first time a limitation period.  Before that, a claim against an express trustee was never barred by lapse of time.  The Court of Chancery had developed the rule that, in the absence of laches or acquiescence, such a trustee was accountable to their beneficiaries without limit of time: Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400, at 408f-g, per Millett LJ; Williams v Central Bank of Nigeria [2014] AC 1189, at para 12, per Lord Sumption JSC.

23.  As explained by Millett LJ in Paragon Finance, at 410d-e, it was evidently considered unduly harsh that trustees should remain liable indefinitely for innocent breaches of trust.  Section 8 of the Trustee Act 1888 introduced a period of limitation (effectively six years) for such claims.  Its purpose was to provide protection for trustees who would otherwise be liable without limitation of time (laches and acquiescence apart) where the breach of trust was committed innocently: Re Richardson [1920] 1 Ch 423 at 440. 

24.  The section excepted two cases from its provisions: (1) where the claim was founded upon any fraud or fraudulent breach of trust to which the trustee was party or privy, and (2) where the proceeds were still retained by the trustee or had previously been received by the trustee and converted to his use. 

The Limitation Act 1939

25.  The same scheme was adopted by section 19 of the Limitation Act 1939.  (Section 8 of the 1888 Act was differently worded.  It is unnecessary to reproduce the text here.  It can be seen from Millett LJ’s explanation in Paragon Finance that the section essentially operated in the same way as its successor provisions.)

26.  Section 19 of the 1939 Act is similar to section 20 of the Limitation Ordinance.  They are taken to have the same meaning: Peconic at para 19.

27.  Section 2(2) and (7) of the 1939 Act is identical to section 4(2) and (7) of the Limitation Ordinance save that the second part of section 2(7) reads as follows, with the different wording underlined:

“…, except in so far as any provision therefor may be applied by the court by analogy in like manner as the corresponding enactment repealed by this Act has heretofore been applied.”

28.  In this decision, I shall refer to the second part of section 2(7) of the 1939 Act and that of section 4(7) of the Limitation Ordinance as the “except” clause.

The Limitation Act 1980

29.  Lastly, the 1939 Act was consolidated into the Limitation Act 1980. 

30.  Section 21(1) and (3) of the 1980 Act is substantially the same as our section 20(1) and (2). 

31.  There is however a change to the provision in relation to account in the 1980 Act.  That is section 23, which reads:

“An action for an account shall not be brought after the expiration of any time limit under this Act which is applicable to the claim which is the basis of the duty to account.”

32.  The wording adopted in the legislation for account is therefore different in England and Hong Kong.  However, it would appear from the English case law that the difference in the wording between the 1939 Act (which is the same as the Hong Kong wording) and the 1980 Act in this regard has not brought about any major substantive change.  In fact, the Hong Kong legislation, ie section 4(2) and (7), has been described as “similar but not identical” to the English legislation, ie section 23 of the 1980 Act: see Lewin on Trusts (20^th ed) at para 50-044, footnote 202.

Summary

33.  In summary, when determining the limitation period for a claim for an account, the directly applicable Hong Kong provision is section 4(2) and (7) of the Ordinance.  Its corresponding English provisions are, formerly, section 2(2) and (7) of the 1939 Act and, presently, section 23 of the 1980 Act.  When determining the limitation period for a claim in respect of trust property, the applicable Hong Kong provision is section 20(1) and (2).  Its corresponding English provisions are, formerly, section 8 of the 1888 Act and then section 19 of the 1939 Act and, presently, section 21(1) and (3) of the 1980 Act.

THE PLAINTIFF’S CLAIM

34.  The plaintiff’s factual case, as pleaded, is as follows.

35.  It carried on business as a holding company of a PRC factory and was engaged in decoration services and sale of furniture.

36.  When the Suspicious Transactions took place, the defendants were its only directors.

37.  Save for two transactions, the Suspicious Transactions were not accompanied by any documentary evidence to explain the purpose of payments.  For the two which were, there was only a summary of payments which was not supported by any primary invoices or payment records.

38.  When asked to explain by the liquidators, the defendants said a number of things.  First, some of the documents of the PRC factory had been removed by a group of gangsters in August 2009.  Second, the documents were left in the factory, which was subsequently re-possessed by the landlord.  Third, the financial documents of the plaintiff were managed by an accountant.  In late 2014, the accountant was dismissed on suspicion of theft. The defendants alleged that she had tried to cover her tracks and removed the records from the company.  As a result, the defendants asserted that there are difficulties to produce documents relating to the plaintiff and the factory.

39.  In the statement of claim, the plaintiff pleads to the fiduciary duties owed to it by the defendants as directors, including the duty “to account to the Company in respect of all dealings with the assets of the Company and [the PRC factory]” and “not to misappropriate or misuse the assets of the Company”: see para 6(d) and (h).

40.  In these factual premises, the plaintiff says:

“9. Despite various requests and demands made by the Liquidators, and in breach of their fiduciary duties owed to the Company, each of the 1^st and 2^nd Defendants had refused and failed to properly account to the Liquidators and/or the Company for the Suspicious Transactions.

…

12. The Company avers that as a matter of law:-

(1) The lack of accounts cannot work to the advantage of the defaulting fiduciary;

(2) Where detailed accounting is not possible, the Court is entitled to make every assumption against the defaulting fiduciary whose conduct has deprived it of necessary evidence.

13. In the premises:-

(1) The 1^st and 2^nd Defendants are liable to fully and properly account for the Suspicious Transactions;

(2) To the extent that they are unable to properly account therefor, an award of equitable compensation ought to be made against them as specific performance of their liability, as fiduciary, to account for assets which they are not able to vouch for;

(3) The Company has also suffered loss and damage to be assessed.

14. The Company is entitled to elect between seeking an account from the 1^st and 2^nd Defendants (including but not limited to the profits which they had made by their wrongful dealings with the Suspicious Transactions), or alternatively equitable compensation.”

41.  The prayer contains six paragraphs.  The first three are material.  They are:

“(1) An account of all assets and/or monies (and their proceeds) derived from the Suspicious Transactions, and all necessary inquiries, directions and orders to enable the Company to trace and recover such assets and/or monies as the Court deems fit;

(2) An order that the 1^st and 2^nd Defendants do deliver up or transfer to the Company such assets and/or monies (and their proceeds) found due upon the taking of such account and enquiry;

(3) Alternatively, an award of equitable compensation to be assessed;”

42.  As a matter of analysis, I shall divide the reliefs sought into three groups:

(1) The first part of para (1), which effectively seeks an order for an account;

(2) The second part of para (1) and para (2), which effectively seek further orders upon the taking of the account.  I shall refer to this group of orders generally as “the further orders” below; and

(3) Para (3), which seeks the alternative relief of equitable compensation.

43.  I would say that the reliefs sought by the plaintiff are those which are commonly or typically sought in claims for breach of trust or breach of fiduciary duties.

GROUNDS FOR STRIKING OUT

44.  The defendants have filed affirmations in support of their striking out application.  In gist, they say that the plaintiff had contracted with the PRC factory for the manufacture of furniture in the mainland and the sums involved in the Suspicious Transactions were remitted by the plaintiff to “middle men or companies” who then paid them to the PRC factory.  The payment was done in this indirect way because of PRC foreign exchange controls.  The arrangement was implemented with the full knowledge of the entire board of directors and shareholders of the plaintiff. Furthermore, the defendants had already tried their best to retrieve the documents to satisfy the requests of the liquidators.

45.  Whether the above allegations made by the defendants are true or not is not something which I can decide at this interlocutory stage. 

46.  Conversely, Mr Chan accepted that for the purpose of the striking out application, the pleaded facts in the statement of claim are generally assumed to be true, that is leaving aside the correctness of the pleas on the law.  I shall approach the striking out application on that basis.  It is therefore unnecessary for me to deal with the factual allegations made in the affirmations.

47.  The crux of the defendants’ argument is that the plaintiff’s claim is subject to a limitation period of six years.  As such, given that the writ was issued more than six years after the Suspicious Transactions were effected, the claim is time-barred and therefore bound to fail. 

48.  Mr Chan sought to arrive at this conclusion, primarily relying on the Court of Appeal’s ruling in Liu.  As a broad outline, he submitted as follows:

(1) Having reviewed the English and Hong Kong authorities on sections 4(2) and (7) and 20(1) and (2) of the Limitation Ordinance, Lam VP (as he then was), giving the judgment of the court, accepted the legal proposition that there is no limitation period in a case where an account is sought from a fiduciary without alleging any breach of duty on the part of the accounting party (paras 8 to 12).

(2) In that case, the judge concluded that the pleading only contained a cause of action for account, nothing more and nothing less, and that there was no claim for misappropriation of trust asset and no plea for an account of profits (paras 35 to 36). 

(3) It was held that the first instance judge was wrong in holding that a limitation period applied to a claim for an account simpliciter by analogy with section 4(2).  There was no basis for the application of that limitation period by analogy if the claim for an account simpliciter is sustainable in law (para 50).

(4) Unlike Liu, in the present case, the statement of claim goes well beyond a cause of action based on an account simpliciter. This is so because in paras 13 to 15 the plaintiff expressly avers that it is entitled to elect between an account of profits and an award of equitable compensation.  Furthermore, in the prayer, in addition to an account, the plaintiff seeks a raft of additional claims comprising a tracing order, a delivery up order, equitable compensation, damages for breach of directors’ duties and compound interest. 

(5) For these additional reliefs, section 20 of the Limitation Ordinance is directly applicable.  The question is whether sub-section (1) or sub-section (2) would apply.  The former imposes no limitation period whereas the latter a six-year bar.

(6) It is of crucial importance to note that there is no allegation of fraud or dishonesty pleaded against the defendants. Equally important, Mr Chan submitted, is the fact that the statement of claim is not alleging that the defendants have personally gained, obtained benefits from or retained the remitted sums in the Suspicious Transactions.  What is pleaded is a cause of action for alleged breaches of fiduciary duties in respect of the remitted sums. 

(7) Accordingly, the pleading does not come within the wording in either sub-section (a) or (b) in section 20(1).  In that case, section 20(2) applies and imposes a six-year limitation period to the claim.

The Court of Appeal decision in Liu Hsiao Cheng v Wong Shu Wai

49.  Liu is an important decision in the present case.  I shall now introduce the facts, the claim, and the ruling.

50.  The appeal concerned a striking out application of a counterclaim made by Wong.

51.  Liu and Wong were partners in various business ventures in Zimbabwe.  The main venture was a tobacco business.  It was conducted via a corporate vehicle referred to as GDIL, a Hong Kong company. Wong brought a common law derivative action against Liu (which was the counterclaim in the action).  Liu was a de facto director exercising control over GDIL’s assets.  The allegation was that Liu made requests for funds from time to time to be remitted by GDIL to Zimbabwe.  Wong relied on Liu to manage the funds believing that the latter would use the funds honestly and for proper purposes.  Over a specified period of time, sizable sums of money were remitted.  Liu failed to provide an account for these funds, despite Wong’s repeated requests.  (See para 7 of the first instance judgment, reported at [2017] 2 HKLRD 580.) 

52.  In the material paragraph which Liu sought to strike out, namely para 125 of the re-amended defence and counterclaim, Wong alleged that Liu was in breach of his fiduciary duties owed to GDIL as he failed to provide any financial information in relation to the tobacco business.  It was averred that Liu was liable to give an account of the funds remitted to Zimbabwe.  At the end of the paragraph, it was pleaded:

“Insofar as such an account may reveal that he has misappropriated any part of this sum, he is liable to repay the same and account for the profits made out of the same.”

53.  The prayer relevant to para 125 sought:

(1) An account and inquiry in respect of the total sum; and

(2) Further orders as the court sees fit upon the taking of such an account and inquiry.

54.  It can be immediately seen that the counterclaim in Liu is similar in nature to the present action.  In gist, in each case, a company starts an action to compel its director to account for payment of its funds after the director failed to explain the fund flow.  In each instance, the director tries to argue that the claim is time-barred six years after the payment.

55.  The Court of Appeal overturned the first instance decision and held that para 125 should not be struck out as no limitation period applied to the counterclaim.

LEGAL PRINCIPLES

56.  I shall now address the legal principles governing the four issues which I have identified above. 

Nature of a director’s duty in relation to the company’s assets

57.  What is the nature of the duty of a director in relation to the company’s assets?

58.  In Hong Kong, the answer is authoritatively stated by the Court of Appeal in Liu.  Directors of a company are to be treated as trustees of its assets which are in their hands or under their control: see paras 30 to 31. 

59.  A director is in the position of a trustee in relation to the company’s property on appointment to his office:  see para 23 citing JJ Harrison (Properties) Ltd v Harrison [2002] BCC 729 at para 29.    It is not a pre-condition for the trusteeship to arise that the director has to hold the assets personally or in his own name or through his nominee. The duty would arise if the property was vested in the company but was under the director’s control.  In this regard, the Court of Appeal disagreed with the view expressed by David Richards J in Barnett v Creggy [2015] PNLR 13 at paras 73 to 75: see paras 24 to 30. 

60.  On the facts of Liu, the ruling that a director is treated as a trustee of the company’s assets which are under his control forms part of the ratio of the decision.

61.  The same position has long been established in the English authorities.  For instance, in Re Lands Allotment Company [1894] 1 Ch 616, the English Court of Appeal held, at 631:

“Although directors are not properly speaking trustees, yet they have always been considered and treated as trustees of money which comes to their hands or which is actually under their control; and ever since joint stock companies were invented directors have been held liable to make good moneys which they have misapplied upon the same footing as if they were trustees …”

62.  More recently, in Burnden Holdings (UK) Ltd v Fielding [2018] AC 857, the Supreme Court reiterated that in the limitation context, directors are regarded for all purposes as trustees of the company’s assets.  This is because they are entrusted with the stewardship of the company’s property and owe fiduciary duties to the company in respect of that stewardship: para 11.

63.  It follows that as a matter of analysis, even though a director is not strictly speaking a trustee of the company assets, his duty in relation to them falls to be decided by reference to a trustee’s duty in respect of trust property.

A trustee’s duty to account

64.  It is important to gain a proper understanding of the nature of a trustee’s duty to account for the trust property.  Limitation periods are a creation of statute.  When determining whether any statutory limitation period applies to a claim for an account, the court’s task is to decide whether the claim comes within the wording of the legislative provisions.  To be able to do that, it is vital to appreciate the precise nature of the claim. 

65.  Once a trust relationship is established, the beneficiary is entitled to an account as of right: Libertarian at para 167.[1] 

66.  The rationale underpinning the duty is plain.

67.  Once a trust is established, the beneficiaries are entitled to the carrying out by the trustee of the purposes for which the trust property was vested in him or which the law imposes, that is the proper execution of the trust: Lewin at para 41-002.

68.  A trustee exercises power on behalf of another and pledges himself to act in the best interests of the other.  It is this obligation which is the foundation of the fiduciary relationship between the trustee and the beneficiary: Libertarian at paras 60 to 62.

69.  The trust property was vested in the trustee to hold on behalf of the beneficiary.  In such a case, the law would exercise its supervisory jurisdiction over the party who has custody of a fund which he is obliged to administer for the benefit of another.  The responsibility for the due administration of the fund may be enforced by holding the fiduciary to account.  The taking of an account is the means by which a beneficiary requires a trustee to justify his stewardship of trust property: Snell’s Equity at para 20-012.

70.  It has been said that the primary obligation of a trustee is to account for his stewardship.  The primary remedy of the beneficiary is to have the account taken, to surcharge and falsify the account and to require the trustee to restore to the trust estate any deficiency which may appear when the account is taken: Millett (1998) 114 LQR 214 at 225.

71.  Lord Millett makes the same point in an article in Tru LI 32 (2018) 44 at 48:

“The primary remedy for breach of trust is not equitable compensation but account, and the orders which follow the taking of the account are not compensatory but restorative; the court enforces the trustee’s duty to account for his stewardship of the trust fund and to make good any deficit which appears when the account is taken. As Peter Birks wrote:

  ‘accountability is the backbone of the trustee’s liability, and all breaches of trust have to be analysed on that basis.’ ”

Account is an entitlement and is not contingent on any breach of trust

72.  It must be emphasised that the beneficiary’s right to an account is an entitlement.  The right arises immediately out of the trustee’s receipt of the property.  He does not have to prove that there has been a breach of trust in order to obtain an order for account.  But like other equitable reliefs, such an order is discretionary: Libertarian at para 167; Snell’s Equity at para 20-015. 

73.  In Attorney-General v Cocke, Harman J explained, at 420G-421A:

“The basis of the duty to account is the fiduciary relationship. It is important to notice that the court, in a case where there is no allegation of any impropriety but merely an allegation of a relationship of a fiduciary and an object of the fiduciary duty, will frequently make a common form order for an account (unless indeed it be oppressive or for some other good reason the court in its discretion thinks it wrong to make an order) but will not make any order in respect of the costs of that application, reserving those costs until the account has been taken. That is because the duty to account arises, but if the accounting party is innocent and produces a true and good account, it would be quite wrong that the cost of carrying out that duty should be thrown upon the innocent accounting party.” (underline added)

74.  As a matter of proper analysis, therefore, when granting an order for account, the court is not granting a remedy for wrong but enforcing performance of an obligation: Libertarian at para 167.

75.  In Al-Dowaisan v Al-Salam [2019] EWHC 301 (Ch), this enforcement point was explained, at para 137:

“However, an application for an account in common form is not based upon a breach of trust and has never been seen as being contingent on any adverse finding against a trustee. The obligation that is relied upon is matched with the remedy sought. Subject to the court’s discretion, the order is essentially administrative in nature, and arises from the court’s supervisory jurisdiction over trusts.”

76.  The following commentary in Lewin at para 41-005 explains the broad mechanism of the enforcement and what is required of the trustee in giving an account in common form.  He is to set out what he has received, disbursed and distributed.  The passage highlights that the burden is on the trustee to justify any payment made, and not on the beneficiary to allege or prove any breach of trust.

“A claimant to an account in common form need not allege or prove any default in the trustee’s dealings. An order for an account of administration in common form requires the trustee to account only for what he has actually received, and his disbursement and distribution of it. Accordingly, such an account enforces the trustee’s primary duty to hold the trust property for the beneficiaries, paying out sums only as he is authorised to do under the terms of the trust. It is thus incumbent on the trustee to justify any payments made, and not on the beneficiary to prove any breach of trust.” (underline added)

77.  I would consider that it is this aspect of the duty to account which is determinative of the issue of whether any limitation period applies to a claim for account, as we shall discuss later.

Remedy for the beneficiary

78.  I have so far examined the nature of the duty to account from a trustee’s liability perspective.  I now turn to look at the matter from the angle of a beneficiary and answer the other question which I have posed earlier – What protection is afforded to a beneficiary in relation to the trust assets under our trust law?

79.  The settlement of accounts is rarely the ultimate end sought by the beneficiary through their claim for an account: Snell’s Equity at para 20-022.  

80.  Sometimes, the beneficiary may not know precisely what the trust fund has received, what has been disbursed from it and what has remained of it.  The beneficiary may suspect breaches of the trust but he does not have enough information to substantiate or quell such suspicions. The beneficiary may bring an action seeking an account and further orders following the taking of the account. 

81.  As noted by Lord Millett, the primary remedy for breach of trust is for the trustee to give an account and to make good any deficit which appears in the trust assets when the account is taken.  In short, the beneficiary’s protection lies in an order of account and payment of monies or delivery of assets to restore the trust fund.  I shall use the shorthand description of “an order for account and payment” below to denote this type of order.

82.  An order for an account does not in itself provide the beneficiary with a remedy.  It is merely the first step in a process which enables him to identify and quantify any deficit in the trust fund and seek an appropriate means by which it may be made good: Libertarian at para 167. 

83.  I now turn to the other steps in the process.

The three stages of accounting

84.  In a beneficiary’s action, the claim may be divided into three stages.  Conceptually, they are three distinct stages and serve different purposes. 

85.  The first stage is where the beneficiary asserts his right to an account.  An order for an account may be granted after trial.  Where granted, the second stage is the taking of the account.  This would end in a settlement covering the accounting period.  The third stage is where further or consequent relief is considered and, if made out, granted.  This may include an order for payment: Snell’s Equity at para 20-014.

86.  The second stage is the stage where the beneficiary would be able to find out how the trust has been administered in the past, to discover whether there has been a breach of trust, and then to decide what he wants to do with the breach. 

87.  In Barnett, David Richards J described the function of an account, at para 62:

“An order for an account … is the means by which the beneficial owners of the fund can ascertain the manner in which the fund has been administered and applied, and it may provide the basis for proceedings to recover trust property or for personal remedies against the trustee or others.”

88.  The purpose of the account is explained in Snell’s Equity, at para 20-13:

“The accounting procedure serves the informative purpose of allowing the beneficiaries to know the status of the fund and what transformations it has undergone. The accounting may identify specific assets in respect of which the beneficiaries may be entitled to proprietary relief. The procedure also has a substantive purpose. It is through the accounting procedure, and in accordance with the principles that govern it, that any personal liability a custodial fiduciary may have arising out of maladministration is ascertained and determined.”

89.  Generally speaking, the accounts can be rendered on two bases.  In an account in common form, the trustee gives an account of the property he has actually received and of what has become of it.  An account on the footing of wilful default covers the same ground but in addition the trustee may be surcharged with items that it would have received if he had exercised due care and diligence, ie but for his wilful default.  The term “wilful default” bears a special meaning in this context.  See, eg, Snell’s Equity at paras and 20-013 and 20-025; Lewin at para 40-003.

90.  At the end of the passage in Lewin, the onus of proof in the two types of account is noted:

“For a surcharge the challenging party has the onus of proof, but the accounting party has the onus of justifying any item in the account which a challenger seeks to falsify.”

91.  In the present case, considering that the plaintiff is alleging payment out by the company to other persons in the Suspicious Transactions, the discussion below will focus on the account in common form and the taking of the account by falsification.

92.  Lord Millett explained in Libertarian what options are available to the beneficiary at the second stage.  (I shall omit the discussion on surcharge in the extract.)

“ 168. … Once the plaintiff has been provided with an account he can falsify and surcharge it. If the account discloses an unauthorised disbursement the plaintiff may falsify it, that is to say ask for the disbursement to be disallowed. This will produce a deficit which the defendant must make good, either in specie or in money. Where the defendant is ordered to make good the deficit by the payment of money, the award is sometimes described as the payment of equitable compensation; but it is not compensation for loss but restitutionary or restorative. The amount of the award is measured by the objective value of the property lost determined at the date when the account is taken and with the full benefit of hindsight.

169. But the plaintiff is not bound to ask for the disbursement to be disallowed. He is entitled to ask for an inquiry to discover what the defendant did with the trust money which he misappropriated and whether he dissipated it or invested it, and if he invested it whether he did so at a profit or a loss. If he dissipated it or invested it at a loss, the plaintiff will naturally have the disbursement disallowed and disclaim any interest in the property in which it was invested by treating it as bought with the defendant’s own money. If, however, the defendant invested the money at a profit, the plaintiff is not bound to ask for the disbursement to be disallowed. He can treat it as an authorised disbursement, treat the property in which it has been invested as acquired with trust money, and follow or trace the property and demand that it or its traceable proceeds be restored to the trust in specie.

…

  172.   At every stage the plaintiff can elect whether or not to seek a further account or inquiry. The amount of any unauthorised disbursement is often established by evidence at the trial, so that the plaintiff does not need an account but can ask for an award of the appropriate amount of compensation. Or he may be content with a monetary award rather than attempt to follow or trace the money, in which case he will not ask for an inquiry as to what has become of the trust property. In short, he may elect not to call for an account or further inquiry if it is unnecessary or unlikely to be fruitful, though the court will always have the last word.”

93.  In the third stage, after the account is taken and all further accounts and consequent inquiries, if any, are made, the beneficiary then seeks an order of payment or delivery, depending on the nature of the trust fund and what has become of it.  In practice, this would be the ultimate remedy which the beneficiary wants in order to have the breach of trust redressed.  With that order in place, he can compel the trustee to make good the deficit to the trust fund.

94.  As a matter of procedure, how the three-stage process is implemented varies from case to case.  It would depend on, among other things, the facts of the case, what evidence emerges in the course of the proceedings, what options are available to the beneficiary where the breach of trust is established and his choice. 

95.  For instance, at the end of the trial, the court may make an order for account and payment, ie it would direct that an account is to be taken and at the same time order the trustee to pay the sum found due upon the taking of the account.  It may do so because it is not expected that any issue affecting the substantive claim would arise in the course of the taking of account.  In this case, after the account is taken, there is no need for the parties to come back to the court to ask for the further order for payment.  Here, the third stage is effectively dispensed with.

96.  In other cases, the court may make an order for account only at the conclusion of the trial.  Then, the account will be taken before a master.  The parties will have to come back to the judge for the third stage relief. 

97.  In some other cases, it may be that the evidence at the trial has established the amount of the deficit.  In that case, no account would be needed and the court may proceed to grant an award of the appropriate amount of compensation: Snell’s Equity at para 41-006.  Libertarian is an example.  The Court of Final Appeal held that it was just and appropriate to make an immediate award of compensation (by making some robust assumptions) rather than order an account or inquiry because on the facts of the case, further accounts and enquiries were unlikely to be fruitful: paras 139, 165, 174 to 175.

98.  Hence, depending on the facts and evidence of each case, the three stages may go ahead in sequence or the stages may be “merged”.

99.  Notwithstanding that the court may implement or manage the three stages differently in each case, it should be borne in mind that as a matter of principle, the three stages are distinct parts of the beneficiary’s action.  It is important to recognise this point because, as we shall see, first, different limitation issues may arise and feature at the different stages and, second, whether the court should strike out a claim may depend on what knowledge the beneficiary possesses at the different stages.

100.  I would conclude this section by answering the question of how a beneficiary’s interest in the trust fund is protected vis-à-vis the trustee with this summary. 

101.  It is an entitlement of the beneficiary to seek an account of the trust fund from the trustee.  At this stage, he does not have to allege or prove any breach of trust.  The simple point here is that he has a right to know what is happening to the trust fund, which is beneficially his.

102.  Where it turns out that everything is above board and the trustee produces a true and good account, the beneficiary’s interest is protected in that he is provided with information about the trust. (That is the scenario of the innocent accounting party contemplated in Attorney-General v Cocke – see para 73 above).  On the other hand, if it transpires that there has been a breach of trust upon the account being taken, the beneficiary will be in a position to mount a claim against the trustee with a view to having the latter making good the deficit to the trust fund. 

103.  In each case, the accounting procedure provides the beneficiary with the information of the trust and put him in a position where he can make proper decision to safeguard his interest in the trust fund and seek remedy against the trustee from the court.

104.  The key questions in this striking out application are whether the plaintiff is now barred from invoking the accounting procedure because its claim is subject to a six-year limitation period and whether this is a question which can be definitively decided at this stage.

Limitation periods in relation to an action for account and further orders

105.  The defendants’ main ground of striking out is that the statement of claim goes beyond an account simpliciter and seeks further orders after the taking of account.  In this situation, the claim is subject to section 20 of the Limitation Ordinance.  In light of that submission, I shall structure the discussion of limitation periods into the following parts:

(1) I shall first consider the situation where the beneficiary’s claim against the trustee alleges no breach of trust and the beneficiary seeks an account only and no other relief.  In this case, is the claim for account subject to any statutory limitation period?   

(2) I shall next consider the situation where the beneficiary indeed makes an allegation of breach of trust and seeks an order for account and payment.  Is the claim subject to any statutory limitation period?

(3) Lastly, at which stage may the trustee properly or effectively raise the defence of limitation?

Where no breach of trust is alleged, is the duty to account subject to any limitation period?

106.  Where a beneficiary simply claims an account from the trustee without making any allegation of breach of trust and without seeking further orders upon the taking of the account, is the claim for account subject to any statutory limitation period?

107.  This question has throughout the years been consistently answered in the negative in England: see, most notably, Attorney-General v Cocke and Paragon Finance.  In Hong Kong, the Court of Appeal also answered no in Liu.

108.  Limitation periods are a creation of statute. When a question arises as to whether a claim is subject to any limitation period, the task of the court is to see whether any of the statutory provisions apply to the claim. 

109.  Here, the sections which may potentially prescribe a limitation period for an action for account in a trust context are section 4(2) and (7) and section 20(1) and (2) of the Limitation Ordinance. With a proper understanding of the nature of the duty to account, one would be able to conclude that none of the sections apply.  The reasons are as follows.

110.  The basis of the duty of account is the custodial fiduciary relationship.  It is the means by which the law holds the trustee accountable for the trust assets which have come under his stewardship.  It is through the taking of the account that the trustee’s liability is enforced.  It is not contingent on any breach of trust or cause of action against the trustee. 

(1) As such, section 20(1) and (2), which contemplates some breach or wrongdoing, has no application. 

(2) Furthermore, while section 4(2) imposes a six-year limitation period to an action for an account, the first part of section 4(7) dis-applies section 4(2) on the ground that an account is an equitable relief.  And the “except” clause in section 4(7) does not apply to revive it as there is no section in the Limitation Ordinance which may apply to the action for account in the present scenario by analogy.

111.  The “except” clause requires the Hong Kong court to consider the position under the Limitation Act 1980.   Section 23 of the Act is worded differently from section 4(2) and (7) of the Ordinance.  However, on a closer look of the wording, it is clear enough that both sections require the court to go through substantially the same deliberation process, namely to consider whether there is any other section in the statute which may apply to the claim for account.  (In this regard, see also the remark in Lewin that the two statutory provisions are similar.)  Attorney-General v Cocke and Paragon Finance are decisions on the 1980 Act.  They are directly on point.

112.  It was held in Attorney-General v Cocke that the trustee’s duty to account is not barred by any period of limitation.  In that case, the plaintiff did not make any allegation of breach of trust and sought no further orders.  In arriving at his conclusion, Harman J said, at 421C-E:

“Thus, as it seems to me, … this is not “an action … to recover trust property or [for] any breach of trust” within section 21(3) of the Act of 1980. It follows that no limitation applies and section 23 has nothing to do with the case because there is no basis of the duty which is otherwise dealt with in the Limitation Act 1980 itself. Thus, … in my view the Limitation Act 1980 has nothing to do with the case.

… a claim to an account simpliciter based upon a fiduciary relationship and nothing more is not barred by any period of limitation.” (underline added)

113.  It is worth emphasising here that when his lordship used the phrase “and nothing more”, it was in the context of considering whether the claim for account itself attracted any limitation period.  He was saying that in the trustee context, there was nothing else which formed the basis of the duty to account and the only basis was the fiduciary relationship.  Hence there was no other provision in the Limitation Act which could apply to the claim.  In my view, his lordship was not considering the question whether there was some other claim in addition to the claim for account.  (This distinction is going to be relevant when addressing one of Mr Chan’s submissions – see para 126.)

114.  In Paragon Finance, Millett LJ addressed this question comprehensively at 415h-416e.  His lordship drew the distinction between a trustee and a mere agent holding property for his principal who owes no fiduciary duty in relation to the property.  In the former case, the trustee has a duty to account without limit of time.  In the latter case, the statutory period of six years applies. 

“The law on this subject has been settled for more than a hundred years. An action for an account brought by a principal against his agent is barred by the statutes of limitation unless the agent is more than a mere agent but is a trustee of the money which he received: see Burdick v Garrick (1870) LR 5 Ch App 233, Knox v Gye (1872) LR 5 HL 656 and Re Sharpe, Re Bennett, Masonic and General Life Assurance Co v Sharpe [1892] 1 Ch 154. A claim for an account in equity, absent any trust, has no equitable element; it is based on legal, not equitable rights: see How v Earl Winterton [1896] 2 Ch 626 at 639 per Lindley LJ. Where the agent’s liability to account was contractual equity acted in obedience to the statute: see Hovenden v Lord Annesley (1806) 2 Sch & Lef 607 at 631 per Lord Redesdale. Where, as in Knox v Gye, there was no contractual relationship between the parties, so that the liability was exclusively equitable, the court acted by analogy with the statute. Its power to do so is implicitly preserved by s 36 of the 1980 Act (re-enacting in simpler terms the tortuous provisions of s 2(2) and (7) which were subjected to critical analysis by Megarry V-C in Tito v Waddell (No 2), Tito v A-G [1977] 3 All ER 129 at 248–250, [1977] Ch 106 at 250–252).

Accordingly, the defendant’s liability to account for more than six years before the issue of the writ in Nelson v Rye depended on whether he was, not merely a fiduciary (for every agent owes fiduciary duties to his principal), but a trustee, that is to say, on whether he owed fiduciary duties in relation to the money.

…

Unless the defendant was a trustee of the money which he received, however, the claim for an account was barred after six years.” (at 421C) (original italics)

115.  The same question arose for consideration in Liu. In the Hong Kong context, the question was whether section 4(2) of the Limitation Ordinance applies by analogy to a claim seeking an account from a fiduciary without alleging any breach of duty on the part of the accounting party: para 8.  Lam VP formulated the approach to the question as follows, at para 17:

(1) If the claim for account is based upon the assertion of legal rights alone, or concurrent legal and equitable rights, section 4(2) applies to the claim by analogy by virtue of the “except” clause in section 4(7).  Hence, the claim is subject to a six-year limitation period.

(2) If the claim is based on a pure equitable right, as in the case of a claim by a beneficiary against a trustee for an account, there is no scope for the application of the “except” clause.  Hence no limitation period is applicable.

116.  On the facts of Liu, Liu was a de facto director exercising control over the company’s assets.  It was held that the claim for account was therefore one based on a pure equitable right as in the case of a claim by a beneficiary against a trustee for an account.  The Court of Appeal then ruled (at para 33):

“For this reason, assuming it is possible to advance a claim of an account simpliciter on the basis as pleaded, there is no scope for the application of the limitation period in s.4(2) by analogy. In this connection, we respectfully disagree with the Judge’s conclusion to the contrary.”

117.  While the Hong Kong court and the English court have formulated the approach to the same question differently, the same answer is given.  Where the beneficiary seeks an account from the trustee based on the trust relationship, no limitation period applies.  The trustee is obliged to render an account without limit in time.

What limitation period applies where breach of trust is alleged?

118.  Where a beneficiary alleges breach of trust and in addition to an order for account, seeks further orders, eg, an order for payment of sums found due upon the taking of the account, is the claim subject to any statutory limitation period? 

119.  Here, it is necessary to draw a distinction between the claim for account and the claim for the further orders.  They are subject to different treatments for limitation purposes.

120.  The basis of the former arises from the custodial fiduciary relationship in the trust.  One of the purposes is to enable the beneficiary to find out more information about the trust and how it has been administered.  It is the first step which he may take to see if there has been any breach of trust.  It is not contingent on any breach of trust or wrongdoing on the part of the trustee.  Hence it is not subject to any limitation period.

121.  If in the course of taking the account, the court finds that there has been wrongdoing on the part of the trustee resulting in unauthorised or unjustified depletion of the trust fund (through the falsification process), the court will proceed to make an appropriate order to compel the trustee to make good the deficit, including eg an order for payment.  It is therefore plain that the basis of the further orders is the wrongdoing of the trustee.  The further orders are a remedy to redress the beneficiary’s grievance in the mismanagement of the trust.  As such, the claim would be subject to one of the limitation periods imposed in section 20(1) and (2) of the Limitation Ordinance. 

122.  Broadly speaking, the trustee may rely on section 20(2) if the beneficiary brings an action to recover trust property or in respect of any breach of trust.  Any such claim brought six years after the cause of action accrued is time-barred.  But that is subject to two exceptions set out in section 20(1).  If the beneficiary’s action is in respect of fraud by the trustee or is brought to recover from the trustee trust property in the possession of the trustee or previously received by him and converted to his use, no limitation period applies at all.  I shall use the shorthand description of “the fraud or possession exception” to refer to the two sub-sections in section 20(1).

123.  Once the different bases underlying the claim for account and the claim for further orders are appreciated, it is easy to see why they are treated differently for limitation purposes.

124.  Furthermore, in my view, in the scenario where the beneficiary seeks an order for account and further orders upon the taking of account, the fact that a six-year period may apply to the latter claim does not alter the legal position of the former claim, which remains to be free of any limitation period.  I have tried to analyse Harman J’s reasoning in Attorney-General v Cocke above.  In that case, the Attorney-General did not seek any further orders.  Hence the case may not serve as a direct authority on this point. 

125.  The authority which is directly on point is David Richards J’s judgment in Barnett.  (As noted in Liu at para 27, the case went on appeal and was reversed on another point.  But the discussion on this limitation issue was not disturbed.)  The ruling was to the effect that the claim for account is not subject to any limitation period whereas the claim for further orders might be: see paras 81 to 85. 

126.  Insofar as Mr Chan was submitting that once the beneficiary seeks any further relief in addition to an account, the claim for account will by reason of that become subject to a limitation period, I reject that submission as incorrect, both as a matter of principle and on the authorities.

127.  That said, however, the fact that the claim for further orders is subject to a six-year time bar will likely weigh heavily on whether the court would exercise its discretion to make the order for account or not.

When may the trustee properly or effectively raise the defence of limitation?

128.  At which stage may the trustee properly or effectively raise the defence of limitation?

129.  I would say that this is the crucial issue in the present striking out application.  The defendants contend that the statement of claim can be struck out now at the pleading stage.  That is to say, the claim should not be allowed to proceed to trial and the plaintiff is to be denied the account right away.

130.  In my view, it is in this context that the above discussion of the fiduciary relationship in a trust, the trustee’s duty to account, the three stages of accounting, and the beneficiary’s remedy in the form of account and payment is relevant.  These concepts must be properly understood and appreciated before the court can take the drastic action of striking out a claim brought by a beneficiary against a trustee by reason of lapse of time.

131.  At the pleading stage, the beneficiary may or may not know any or sufficient information of the trust so as to be in a position to know whether the trust has been properly administered.  He may only have piecemeal information.  He may have some queries, or even suspicions, about the management. 

132.  Here, the law recognises the difficulties which the beneficiary may face and says that the beneficiary should be entitled to know.  The court may exercise its discretion to order an account, notwithstanding that the beneficiary may not be able to pinpoint any wrongdoing at this stage.  In the course of taking the account, the beneficiary may falsify and surcharge the account and seek an order that the trustee do make good any deficit which appears on the taking of the account.  These are the substantive protections afforded to the beneficiary under our trust law.

133.  In the pleading, the beneficiary may plead to his queries or suspicions over the management of the trust.  If they relate to some dated transactions or events, it would not be surprising that the first reaction of the trustee may well be to raise the issue of limitation with a view to striking out the claim straightaway.

134.  Whether the striking out application would succeed must depend on the circumstances of each case and the facts which have been pleaded.  

135.  Generally speaking, in a situation where the beneficiary simply does not know the facts or enough facts, it would appear that prima facie he should be allowed to proceed with the claim for account and payment.  The accounting relief is discretionary.  Subject to that point, it would appear that the beneficiary should be allowed to proceed to trial.  In that case, the trustee may wish to expressly reserve the right to raise the limitation point in the future.

136.  Evidence may emerge as the action progresses.  This may shed light on how the trust has been managed and whether the suspicions of the beneficiary can be substantiated.  It may be the case that in the course of the proceedings, evidence relating to the limitation issue surfaces.  If it is capable of being resolved at trial, the court will proceed to do so. 

137.  Where that is not the case, eg, the evidence on limitation is incomplete, it is open to the court to grant the order for account and reserve the limitation issue to be dealt with at a later stage. The parties then proceed to the next stage of account taking.  This is the time when the beneficiary should be able to find out more information about the trust, decide whether there is any wrongdoing on the part of the trustee, and falsify or surcharge the account accordingly.  Once the facts are ascertained, where there is any argument that the defence of limitation may apply, that issue can then be dealt with.

138.  The above scenarios are of course just two of the many possibilities of how a beneficiary’s action which raises an issue of limitation may progress.  It must be emphasised that the question of when the defendant may properly raise the issue of limitation must depend on the circumstances of each case. 

139.  I make the above observations by drawing support from the English authorities of Re Blow [1914] 1 Ch 233, Re Richardson [1919] 2 Ch 50 (Peterson J) and [1920] 1 Ch 423 (Court of Appeal) and Attorney-General v Cocke. 

140.  Re Blow concerned an action brought by a creditor against, among others, the executors of a deceased’s estate.  The issue at trial was whether it was an action to recover money within the meaning of section 8 of the Trustee Act 1888, such that the executors were afforded the limitation defence.  The Court of Appeal held that it was and that the executors were not liable to pay the money.  There was an admission that there was no fraud or fraudulent breach of trust and that there was no trust property or trust proceeds still retained by the trustees or previously received by them and converted to their uses.  In other words, the admission was to the effect that the fraud or possession exception in section 8 did not apply (at 240).

141.  At the end of the judgment, Cozens-Hardy MR made this obiter remark (at 243):

“I desire to add that it may often be desirable to direct a full account to be taken in order to ascertain whether the case falls within the exceptions in s. 8 and to reserve the question as to s. 8 until further consideration. But in the present case the facts are not in dispute, and it would be wrong not to decide the point of law at the present stage, and indeed the parties have not disputed this.” (underline added)

142.  In Re Richardson, an action was brought against an executor, who was a solicitor, for the administration of the testator’s estate and for accounts from the executor of his dealings with it.  It was held at first instance that section 8(1)(a) of the Trustee Act 1888 applied to the action for account and the claim was barred by the lapse of six years as to all items in the account which did not fall within any of the exceptions in section 8(1). 

143.  Peterson J followed the suggested approach in Re Blow: see [1919] 2 Ch 50, at 56 to 57. 

“But as Cozens-Hardy M.R. pointed out in In re Blow (6), it may often be desirable to direct a full account to be taken in order to ascertain whether the case falls within these exceptions and to deal with the applicability of s. 8 when the facts have been established. Where, for instance, the persons entitled do not know what the estate consisted of when it reached the hands of an executor or trustee it is impossible for them to charge the executor or trustee with retaining part of it in his own hands, or converting it to his own use; and the only way in which it can be ascertained whether part of the estate still remains in the hands of the executor or trustee is by taking the account. The statute would then apply to all items in the account which do not come within the exceptions in s. 8, and would not free the executor or trustee from liability in cases which come within the exceptions. In the present case the plaintiffs do not know what the estate consisted of, nor, beyond the fact that the debts and legacies were paid, and that certain property forming part of the estate came to the hands of Mrs. Richardson, do they know what became of the estate. In these circumstances I am prepared to follow the suggestion of Cozens-Hardy M.R. and direct the usual accounts against the defendant as executor, leaving the question which items are protected by the Act of 1888 to be dealt with when the facts have been ascertained. I reserve the costs of the present application.” (underline added)

144.  This approach was however doubted on appeal at [1920] 1 Ch 423 at 440, 441, 447, 449 and 450.

145.  But in Attorney-General v Cocke, Harman J appeared to endorse Peterson J’s approach:

“That is exemplified by the decision of Peterson J. in In re Richardson [1919] 2 Ch. 50, where the usual accounts were directed, there being no allegation of breach of trust against an executor, leaving over any question as to what was then section 8 of the Trustee Act 1888 to be dealt with when the facts had been ascertained, and reserving the costs of the application for an order for an account. In my experience that, when I was young, was a common enough form of order, not specifically reserving the question of the Limitation Act but an order for an account reserving the costs until it was seen whether there was any wrongdoing which warranted the throwing of the costs of obtaining the account upon the fiduciary.” (underline added)

146.  Re Richardson is therefore an instance where the approach of ordering an account but reserving the issue of limitation to the second stage of accounting was adopted when the facts were not known at the first stage but were expected to be found out at the second stage. 

147.  However, if the facts available at the first stage already make it clear that the breach of trust claim is time-barred, the trustee may raise the defence of limitation straightaway to resist the entire claim for account and payment.  This is because the court would likely refuse an account as it would not serve any useful purpose.  The remedy of payment is in practical terms the ultimate remedy which the beneficiary is really after.  If it is certain that that remedy will not be forthcoming by reason of time bar, there is arguably no point in ordering an account.  But it must be stressed here that if the account is refused in this scenario, it is refused not because the claim for account is barred by any statutory period.  It is refused as a matter of discretion.

148.  This is what happened in How v Earl Winterton [1896] 2 Ch 626, a case on which Mr Chan placed some reliance.  The beneficiary brought an action against the trustee for an account.  After trial, it was held that (1) the beneficiary was entitled to an account of the moneys in the hands of the trustee six years before the issue of the writ, and (2) the limitation period in section 8 of the Trustee Act 1888 applied and the defendant was protected from demands more than six years before the issue of the writ.  The decision was affirmed on appeal.

149.  On the facts, none of the exceptions in section 8 applied: see 630, 631 and 636.  It followed that any claim arising out of matters happening prior to six years before the action would be time-barred. It was for this reason that no account was ordered.

150.  More recently, in Barnett, David Richards J remarked on the utility of an account (or, more accurately, the lack of it) in light of the prospect that further orders would be ruled to be time-barred (at paras 81 to 82).  His lordship also cited How as an example in which the account was not ordered because it would serve no useful purpose when all the claims were time-barred:

“81 It was submitted for Mr Creggy that any claim for an account was time-barred. As the purpose of an account is to obtain an order for payment in respect of unspecified breaches of trust, to which a six-year limitation period applies under s.21(3) of the Limitation Act 1980, so also must be the claim for an account. Reliance was placed on s.23 …

82 Section 23 would not appear to apply to a beneficiary’s claim against a trustee for an account in equity, as it is a free-standing remedy which is not based on any other claim: see Attorney-General v Cocke [1988] Ch. 414, Lewin on Trusts (18th edn, 2008) at 44–41, Underhill & Hayton: Law of Trusts and Trustees (18th edn, 2010) at 94.32. Nonetheless, as observed in Lewin, a trustee cannot be deprived of a limitation defence otherwise available to him merely because the beneficiary seeks an account. If it is clear that all claims against the trustee would be time-barred, and an account would serve no other useful purpose, the court will not order an account: see How v Earl Winterton [1896] 2 Ch. 626.” (underline added)

151.  In Hong Kong, the ratio in Liu is directly on point. 

152.  It would be recalled that in that case Liu applied to strike out Wong’s counterclaim for account.  One of the grounds was that the claim was subject to the time bar of six years under section 20(2) of the Limitation Ordinance. 

153.  The Court of Appeal held that it was not.  In gist, the ruling was this.  Libertarian had made it clear that an order for an account was merely the first step in the process in which a beneficiary could identify and quantify any deficit in the trust fund and seek the appropriate means to have the deficit made good.  After the account, the beneficiary could choose if he would proceed further and if so, by what means.  On the facts as pleaded, it could not be said that the taking of account would be plainly futile.  Hence, Wong should be allowed to continue with the counterclaim.  The court had earlier on held that section 4(2) did not apply by analogy to the claim for account.  There being no other provision in the Limitation Ordinance which barred the claim, it should not be struck out.

154.  I reproduce below the relevant parts of the judgment:

“ 44. Relying on Pole v Pattenden [1920] 1 Ch 423, Mr Wou [counsel for Liu] submitted that s.20(2) is applicable on the basis that the claim of Wong is a claim tantamount in nature to a claim for recovery of trust property.

45. On the other hand, Mr Lam [counsel for Wong] relied on Attorney General v Cocke as applied in Barnett v Creggy at [82] and submitted that there is no limitation period for a free-standing claim for an account in equity. Counsel further reminded us that this appeal only concerns whether there is any limitation period (by direct application or by analogy) to bar the claim without prejudice to the question of laches or other equitable defences. At this stage, it cannot be said if there had been any breach of trust or if a case of s.20(1)(a) or (b) could be made out after the taking of account. Hence, it cannot be said that the taking of account is plainly futile. If one were to follow the approach of David Richards J in Barnett v Creggy, the claim should not be struck out.

46. Notwithstanding that the example cited in Attorney General v Cocke (Re Richardson [1919] 2 Ch 50) had been doubted on appeal by the English Court of Appeal in Pole v Pattenden, Harman J’s decision was cited as good law in Lewin on Trusts (19th ed.), para.44-043 and Underhill & Hayton, Law of Trusts and Trustees (19th ed.), para.94.34 and applied by David Richards J in Barnett v Creggy at [82].

47. We note that Pole v Pattenden was decided under the Trustee Act 1888 and in the context of an administration action. In the modern setting and in the context of s.20(2), we are bound by the following observation of Lord Millett NPJ in Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681 at [167], [168] and [172] in determining if this is an action to recover trust property:

[167] … In the first place an account is not a remedy for wrong. Trustees and most fiduciaries are accounting parties, and their beneficiaries or principals do not have to prove that there has been a breach of trust or fiduciary duty in order to obtain an order for account. Once the trust or fiduciary relationship is established or conceded the beneficiary is entitled to an account as of right. Although like all equitable remedies an order for an account is discretionary, in making the order the court is not granting a remedy for wrong but enforcing performance of an obligation.

[168] In the second place an order for an account does not in itself provide the plaintiff with a remedy; it is merely the first step in a process which enables him to identify and quantify any deficit in the trust fund and seek the appropriate means by which it may be made good …

[172] At every stage the plaintiff can elect whether or not to seek a further account or inquiry …

48. It follows that a plaintiff can choose if he would proceed further (and if he does, the means to proceed further) after an account has been produced by the fiduciary.

49. The practice endorsed by David Richards J in Barnett v Creggy is based on the submissions we have heard in this appeal, in line with the above analysis of Lord Millett as to the nature of an order for an account. We respectfully prefer this approach to the construction of “action to recover trust property” in s.20(2) advocated by Mr Wou.

50. The Judge struck out part of the claim on the basis of the application of a limitation period by analogy with s.4(2) of the Limitation Ordinance. With respect, we have come to the clear view that there is no basis for application of limitation period by analogy if the claim for an account simpliciter is sustainable in law.

51. Further, we are of the view that there is no other provision in the Limitation Ordinance which bars the claim of Mr Wong in this action. Therefore, no part of the claim should be struck out on account of time bar.” (underline added)

155.  I would sum up the ratio in Liu concerning limitation periods as follows:

(1) Section 4(2) does not apply by analogy by virtue of section 4(7) to an action for an account of trust funds brought by a beneficiary against a trustee. 

(2) If, on the face of the pleaded facts, it cannot be determined whether there has been any breach of trust, or if there is, its nature cannot be ascertained, it would follow that the court cannot definitively decide whether section 20(1) or (2) applies. 

(3) In that event, the claim should generally not be struck out on account of time bar because the account may be useful for the beneficiary to find that out.  He should be allowed to proceed with the claim with a view to seeking the account and, if granted, he may take further action to seek the appropriate remedy. 

156.  I would therefore answer the question posed in para 128 this way – it must depend on the circumstances of each case.  The trustee may raise the issue of limitation as early as the pleading stage by a striking out application.  If the pleaded facts and/or the circumstances make it clear that any alleged or potential breach of trust would be time-barred, the court may find itself able to conclude at that stage that the entire claim for account and payment should be struck out as a matter of discretion.  At the other end of the spectrum, the trustee may only be able to raise the substantive defence of limitation as late as the third stage of accounting where the beneficiary seeks the further orders.

157.  I would sum up the discussion in this section by reproducing the following texts which neatly summarise the position.

“Here it is necessary to distinguish between an account and an order for payment of what is shown to be due on the taking of the account: the trustee is not to be made to pay an amount which depends on a claim that has become statute-barred. The court can order an account without limit of time in order to ascertain what the facts are, though it seems that the defendant must take the limitation point before the order for an account is made. But it can also order an account only of trust properly in his hands six years before the proceedings were begun and of other trust property come to him in the meantime; alternatively it may order an account of all receipts with liberty to the defendant to show payments away outside the six years. The particular order granted may depend on the extent to which the facts are known when it is made. It has been held that an account will be refused where it is clear that any claim to substantive relief is statute-barred.” (Lewin at para 50-044)

“A claim to enforce an equitable duty to account (as opposed to a contractual duty) is not subject to any statutory limitation, but the consequences of the passage of time, and any delay in bringing the claim, may be taken into account by the court in exercising its discretion whether to allow the claim. Statutory limitations may affect claims for consequential relief relating to assets or amounts revealed by the account, and the fact that any consequential relief would be time-barred may be a reason to refuse to order an account.” (Snell’s Equity at para 20-015)

The proper approach in a striking out application

158.  What is the proper approach the court should follow when a trustee applies to strike out a claim by a beneficiary seeking an order for account and payment on the ground of time bar under section 20(2) of the Limitation Ordinance (assuming that the alleged breach of trust, if any, is at least arguable)? 

159.  In my view, the court’s task is, first of all, to review the pleading with a view to determining whether there is an arguable case giving rise to a duty to account for the trust fund.  If so, given that the duty is a free-standing remedy available to the beneficiary regardless of the existence of any breach of trust and is hence not subject to any statutory limitation period, the claim for account should prima facie not be struck out.  The next and ultimate question is whether the trustee is able to demonstrate at this interlocutory stage that the claim for the further orders will be time-barred. 

160.  If the answer is yes, then it would appear that there is a good ground to strike out the claim, as the trustee would contend that there is no point in the court exercising its discretion to order the account, which would be of no use.  This would be the case where it is indisputable that the case does not come within section 20(1) of the Limitation Ordinance and hence the six-year limitation period in section 20(2) is bound to apply (and where there is no other reason to order an account).

161.  On the other hand, if the answer is no, it would appear that no striking out order should be made.

162.  The above is the general approach which I think the court should follow.  Every striking out application must, of course, be decided on its own facts and circumstances.

DISCUSSION

163.  In my view, the statement of claim should not be struck out.

164.  I would assume that the facts pleaded in the statement of claim to be true (leaving aside the correctness of the legal points made there). 

165.  On those facts, the defendants were the sole directors of the plaintiff when the Suspicious Transactions took place.  In the Suspicious Transactions, the plaintiff paid out sums of money apparently with no supporting documents.  These payments arguably call for an explanation.  The defendants are to be treated as trustees of the company assets, including those sums, as such assets can be said to be under their control by reason of their directorship: Liu at paras 30 to 31.

166.  As a matter of law, the defendants therefore owe to the plaintiff a duty to account for the Suspicious Transactions.  The plaintiff is entitled to an account of them as of right.

167.  This is the basis on which the plaintiff seeks an account. 

168.  In para 9, the plaintiff pleads:

“Despite various requests and demands made by the Liquidators, and in breach of their fiduciary duties owed to the Company, each of the 1^st and 2^nd Defendants had refused and failed to properly account to the Liquidators and/or the Company for the Suspicious Transactions.”

169.  In para 13(1), the plaintiff contends:

“The 1^st and 2^nd Defendants are liable to fully and properly account for the Suspicious Transactions”

170.  It is sufficiently clear from the statement of claim, when read as a whole, that the plaintiff, acting through the liquidators, does not have any further information about the Suspicious Transactions and is therefore not in a position to tell whether the sums were properly paid out or to specify any breach of trust on the part of the defendants. 

171.  In the circumstances, it prays in aid, at para 12, the following legal principles, which were cited by Lord Millett in Libertarian, at para 174, namely:

(1) The lack of accounts cannot work to the advantage of the defaulting fiduciary.

(2) Where detailed accounting is not possible, the court is entitled to make every assumption against the defaulting fiduciary whose conduct has deprived it of necessary evidence.

172.  In para 13(2), the plaintiff avers:

“To the extent that they are unable to properly account therefor, an award of equitable compensation ought to be made against them as specific performance of their liability, as fiduciary, to account for assets which they are not able to vouch for”

173.  These pleas and the reliefs sought, which are the common remedies of account, inquiries, payment and delivery, are in line with the approach described by Lord Millett in Libertarian and in the case law in this area.  That is the mechanism by which protection is afforded to a beneficiary to safeguard his interest in the trust fund when the facts about the administration of the trust fund are not known or not fully known.

174.  The claim for account, ie the first group of relief identified in para 42 above, is not subject to any statutory limitation period: Liu at para 33. 

175.  The crucial question in this application is whether I am in a position to decide now whether the further orders sought by the plaintiff, ie the second and third groups of relief, are bound to be time-barred under section 20(2) of the Limitation Ordinance.  This depends on whether, first of all, there is any plea of breach of trust, and secondly, if so, whether the alleged breach falls within section 20(1) or (2).  In the former case, no limitation period applies.  In the latter case, a six-year limitation period applies, which will have the effect of barring any claim brought in relation to the Suspicious Transactions.

176.  While the plaintiff has not pleaded any specific breach of trust, in substance, it is tolerably clear from paras 13(2) and (3) and 14 and the prayer that it will do so if and when it is in a position to do so.  Hence, for present purposes, I say that there is a claim or a potential claim for breach of trust. 

177.  However, the company does not have in its possession sufficient information about the Suspicious Transactions.  Like Liu, I am therefore unable to conclude at this stage if there had been any breach of trust and if so the nature of such breach. It follows that I cannot say now whether the claim for the further orders are bound to be time-barred.

178.  The logical conclusion is therefore that the plaintiff should be allowed to carry on with the claim in order to find out. 

179.  However, before coming to a firm conclusion, I should address the specific striking out grounds put forward by the defendants. I just wish to state that I have in fact dealt with many of the points raised, and authorities cited, by Mr Chan and Mr Jonathan Chang, SC, appearing with Ms Crystal Lai for the plaintiff, in the discussion above.  A few of the authorities discussed were not cited by counsel, but were referred to by Lam VP in Liu.

The defendants’ submissions

180.  One of the defendants’ main submissions is that the statement of claim goes well beyond a cause of action based on an account simpliciter. In paras 13 to 15, the plaintiff expressly avers that it is entitled to elect between an account of profits and an award of equitable compensation. Furthermore, in addition to an account, the prayer seeks a raft of additional remedies.  Hence, the claim as revealed by the pleading is subject to the applicable limitation period prescribed by section 20 of the Limitation Ordinance. 

181.  Mr Chan emphasised that in Liu, Lam VP scrutinised the pleading in question and concluded that what was pleaded there was merely a cause of action for account, nothing more and nothing less, and Wong was not seeking an account of profits.  He submitted that that was precisely the task which the Court of Appeal undertook in that case in order to determine the applicable limitation period and this court should carry out a similar task.

182.  He relied on the following passages in Liu:

“ 36. Whilst we have reservations if it is appropriate to include that sentence at the end of para.125 [ie the sentence quoted in para 52 above], we agree with Mr Lam that as the pleadings stand there is no properly advanced claim based on misappropriation of any part of such sum and an account for profit. The prayer does not seek such relief and the further orders that the Court may give should be confined to the usual orders to be made upon the taking of an account like directions for falsifying the accounts or surcharges.

…

  43.     … Granted that there is no claim for breach of trust in the present action, it is still necessary to consider if there is a claim to recover trust property.”

183.  It seems correct for Mr Chan to say that in that case Lam VP was undertaking the task of ascertaining whether the pleaded claim fell within the description in section 20(2).  The description includes two parts. First, an action “to recover trust property”.  Second, an action “in respect of any breach of trust”.  When read in conjunction with para 43, Lam VP appeared to have concluded in para 36 that the pleading did not include a claim for breach of trust.  That was why he moved on to consider whether it included a claim to recover trust property from para 43 onwards.  (I would pause here to observe that his lordship arrived at the conclusion in para 36 without elaborating on why there was no properly advanced claim for misappropriation and why the reliefs sought there should be confined to “the usual orders to be made upon the taking of an account like directions for falsifying the accounts or surcharges”.)

184.  Nevertheless, I consider that the true ratio of Liu is what Lam VP continued to say in paras 44 to 51, which I have quoted.  In particular, his lordship explicitly stated this, in para 45:

“At this stage, it cannot be said if there had been any breach of trust or if a case of s.20(1)(2) or (b) could be made out after the taking of account. Hence, it cannot be said that the taking of account is plainly futile. If one were to follow the approach of David Richards J in Barnett v Creggy, the claim should not be struck out.”

185.  A little later, at paras 47 and 49, the judge said that the court was bound by Lord Millett’s observations in Libertarian and that Barnett was in line with those observations. 

186.  In other words, the Court of Appeal followed Barnett. In short, the ruling was that the claim for account was itself not time-barred and insofar as there was any claim to recover trust property, any defence of limitation could not be definitively resolved at that stage.  Hence the claim should be allowed to continue.

187.  I should add that Mr Chan was also correct in saying that any claim to recover trust property is subject to the limitation provisions in section 20(1) and (2).  However, what he omitted to appreciate is that at this stage it is not possible to tell how they would apply in the present case, as the facts, which the plaintiff is entitled to know, are not yet ascertained and may only be found out at a later stage.

188.  The other main submission put forward by Mr Chan is this.  It is of crucial importance that there is in the statement of claim no allegation of fraud and no allegation that the directors have in their possession the company assets or have previously received them and converted to their use.  Without such wording, the claim does not come within section 20(1).  The absence of the key statutory phrases in the pleading is fatal to the claim because this means that it falls within section 20(2) which attracts a six-year limitation period.  This is how Mr Chan put it:

“These key phrases on “in the possession” and “previously received by the trustee and converted to his use” that respectively appeared in section 20(1)(b), LO are all mandatory requirements in that absent a viable plea and proof by a claimant in relation thereto, a claim for recovery of trust property and for breach of trust will be subject to the 6-year time bar.”

189.  The submission is, in my view, incorrect as it is based on an inadequate understanding and appreciation of the nature of the trustee’s duty to account, the purpose of the accounting exercise and the onus of proof in the accounting procedure.

190.  A trustee is in a fiduciary position of stewardship regarding the trust assets.  The beneficiary is entitled to obtain information about them from the trustee.  That is an entitlement.  Often, it is only after the beneficiary is armed with the information that he can ascertain whether the trust has been administered properly and if not he can take steps to recover any trust property that has been wrongly dissipated.  If a claim can be struck down at the information seeking stage on the mere ground that the beneficiary does not allege the fraud or possession exception in his statement of claim, the protection given to the beneficiary in our legal framework would become meaningless.

191.  The Suspicious Transactions involve payment out of the plaintiff’s funds.  As a matter of legal analysis, in the taking of the account, the onus is on the defendants to justify the payments.  If it turns out that the payments were unauthorised or improper, the plaintiff may falsify them.  The effect is that the account is taken as though the unauthorised payments had not been made.  The plaintiff may then seek an order that the defendants pay back the sums in order to restore the trust fund.

192.  The incidence of the burden of proof is explained in Lewin, at para 41-006:

“Where the basis upon which a sum has been paid out from the trust fund is not clear, a claim that the beneficiaries be entitled to falsify the accounts may put the burden on the trustee to explain the payment without the claimant having [to] specify the precise nature of the breach.”

193.  Mr Chan set great store by the fact that the key statutory phrases in section 20(1) are absent in the statement of claim and insisted that the plaintiff must include them in the pleading in order to come within the sub-section. 

194.  In my view, such insistence is misplaced.  It ignores how the accounting regime works.  It fails to recognise that the present case is, as pleaded, a case of falsification.  As such, the burden of proof is on the defendants to explain the circumstances in which the Suspicious Transactions were made.  The plaintiff cannot be criticised for failing to plead the fraud or possession exception when it is the defendants who should justify the payments in the first place.

195.  Generally speaking, in a claim at common law (eg a contract claim or a tort claim), it is for the plaintiff to plead all material facts which constitute the essential elements of the cause of action. If he fails to do so, the claim is vulnerable to being struck out on the basis that it is bound to fail.  But, in the trust context, it may not be proper to apply this general approach mechanically to a claim for account and payment without paying sufficient regard to the true nature of the claim.  This is what Mr Chan has done.  That is not correct.  I therefore reject his submission.

196.  To conclude, none of the submissions advanced by Mr Chan go to support a striking out order.

The plaintiff’s submissions

197.  For completeness, I will also deal with a submission made in the plaintiff’s written submissions. 

198.  Briefly, Mr Chang emphasised that the defendants have a duty to account to the plaintiff irrespective of whether any wrongdoing or dishonesty is shown.  As pleaded, the defendants have failed to proffer any sensible explanation for the Suspicious Transactions.  The failure to account is itself a breach of their fiduciary duty.  For that breach, time would start to run from when the liquidators made the request in March 2017.  If (which is not accepted) the six-year limitation period in section 20(2) applies to this breach, the claim is still within time.  There is therefore no need to rely on section 20(1).

199.  I do not think that this submission helps to address the grounds put forward by the defendants.  The crux of their contention is that the plaintiff should not be allowed to bring any claim for breach of trust in relation to the Suspicious Transactions.  For this cause of action, time must start to run from when that breach was committed, but not when a subsequent request to account was turned down.

CONCLUSION

200.  For the above reasons, the striking out application fails.  In this event, the Order 14A application also fails.

201.  I dismiss the defendants’ summons.  They should file their defence within 28 days from the handing down of this decision.

202.  Parties have already made submissions on costs at the hearing. 

203.  Costs should follow the event.  I order that the plaintiff do have costs of the summons including any costs reserved, with certificate for two counsel.  This is an absolute order. 

204.  The plaintiff has already handed up a statement of costs.  The defendants should lodge and serve their list of objections, if any, within 14 days from the handing down of this decision.  The costs will be summarily assessed on the papers after the deadline.