CARRIAN INVESTMENTS LTD v. WONG CHONG PO AND OTHERS

1985 No. A7392

Headnote

                 Striking out - Ord. 18 r. 19 - fiduciary duty owed by directors - accountable if profit made, even 'bona fide' - constructive trusts - Limitation period for equitable relief - Limitation Ordinance S. 20(1), 4(2) and 4(7).

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

1985 No. A7392

BETWEEN

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JUDGMENT

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1. This is a motion whereby four defendants seek to strike out a statement of claim served on them by the plaintiff. The matter raises points of obvious importance to all the parties. As I have reached clear conclusions in this matter, I do not consider it right to reserve my judgment; I apologize in advance therefore if this judgment is not as grammatically perfect as perhaps it should be in a reserved judgment, nor deals with all of the submissions which have been made by the respective parties.

2. On the opening day of this motion, I gave leave to Mr. Ching acting on behalf of the defendant to amend the motion. It was drafted in general terms. I gave him leave to amend the motion and the motion as amended attacks this statement of claim for three main reasons. Before I turn to those grounds it is right in my judgment that the scope of the remedy which is sought in this instance should be clearly expressed.

3. It is becoming more common for applications to be made to strike out pleadings or parts of pleadings without perhaps realizing what the role of the court is. In my judgment, the role of the court can be expressed in this way. Firstly, it is clear from the abundance of authorities conveniently set out and summarized at page 305 of the Rules of the Supreme Court Practice 1985 that it is only in plain and obvious cases that recourse should be had to this summary process. Words such as "where the claim is obviously unsustainable", "no reasonable cause of action" are found and it is fortotten that this indeed is a process which should only be rarely used because it is only in that rare category of cases that the court can say such an action is unsustainable.

4. Secondly, when such an application is made, it is the nature of the action which should be examined first. Each cause of action may contain within it different ingredients, or indeed different essential elements. Insofar as this amended motion is concerned, therefore, I examine it against the background of firstly the limited role which the court has in these instances and secondly the nature of the claim. The claim is a claim made by a company called Carrian Investment Limited in liquidation and it brought by the liquidators of that company against four defendants. The first, second and third defendants are said to be directors of that plaintiff company and the fourth defendant is described as a corporate director. The statement of claim is concise in its formulation of the cause of action; the pleading records in paragraph 3 that because of their respective positions those directors owed a fiduciary duty to the plaintiff, and it is put in two ways -  not to allow, permit or suffer their respective personal interests to conflict to the interest of the plaintiff and secondly not to use confidential information and knowledge acquired by them in the course of serving the plaintiff or while under its employment to make or obtain personal secret, profits or benefits of their own.

5. In paragraph 4, the allegation is made that there was a breach of that fiduciary duty in that the defendant and each of them wrongly utilized confidential information and knowledge they acquired as directors and indeed were purchasing and speculating in shares of the plaintiff company. Some particulars are given with regard to that paragraph, namely the confidential information and knowledge they acquired as directors and some particulars are given as to the profits which the plaintiff said were made by those directors.

6. In my judgment, the starting point of this case is to see what are the essential elements in this action. The basic principle can be summarized in this way - that any profit acquired by a fiduciary in or about his fiduciary position must be accounted for to his principle. I have been referred to a variety of authorities and I am grateful to counsel both for the conciseness of their submissions and also no doubt, the industry of their juniors, in preparing for the court first of all a bundle of index of documents, which does save considerable time, and secondly the variety of authorities with which I have been provided. I hope I will be forgiven if I do not in the course of this judgment refer to all of those matters. It is no reflection that I do not appreciate the work that has been put into this particular case.

7. The matter can be summarized in my judgment in a speech in the Regal Hastings case⁽¹⁾ which is a judgment of the House of Lords. I do not recite the facts of that matter. The judge at first instance and in the Court of Appeal in that case considered that insofar as fiduciary positions were concerned, it may well be that there should be an element of either fraud or dishonesty present to make the fiduciary accountable. That matter was dealt with in some detail in the speech of Viscount Sankey amongst others and also in the speech of Lord Russell, and at page 143, the learned judge said:

"Nevertheless, they may be liable to account for the profits which they have made, if, while standing in a fiduciary relationship to Regal, they have by reason and in course of that fiduciary relationship made a profit. "

And at page 144, he was examining part of the judgment of the then M.R. Lord Greene who had considered in the Court of Appeal and the earlier judgment considered that there should be some element of mala fides present to make such fiduciary accountable, and at letter G at page 144 the learned judge said this:

"My Lords, with all respect I think there is a misapprehension here. The rule of equity which insists on those, who by use of fiduciary position makes a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account. "

The position arises as an incident of fiduciary position and indeed it may be considered by some to be a disbenefit. It has been described in other instances as being a disadvantage of holding such a position. I examine therefore the attack that is made on this statement of claim bearing in mind those two fundamental points, that is, the nature and scope of the court in striking out pleadings and disbarring a plaintiff from coming to the judgment seat, as it has been called, and secondly the nature of the action with which this case is concerned.

8. Mr. Ching in his usual courteous and succinct submissions puts forward three matters which he says would justify me in not necessarily striking out the statement of claim, but making some order whereby that, if the plaintiff does not abide by that order, the statement of claim would indeed be struck out. He raises three specific points and I deal with them in turn. Firstly, he says, the fourth defendant was never a director of the plaintiff company. This is an application insofar this head is concerned, as I understand it, that in this hearing I should strike out the matter as against the fourth defendant. An affidavit is put in asserting that the fourth defendant was not a director and reference is made to a document contained in the bundle of document, I think it is page 94, attached to a letter dated the 15th of April 1986 referring to certain company searches which had been made in the end of December 1979 against Mai Hon Enterprises Ltd. which was the plaintiff company, showing that the fourth defendant is not such a director. Mr. Phillips says that the plaintiffs assert that he is a director and there was shown to me an affidavit sworn by Mr.Pearson, a partner in the plaintiff's instructing solicitors, saying that the assertion in the earlier affidavit is denied and exhibiting "NPP-1" a director's shareholding in Mai Hon the lst of December 1979 which appears to show the fourth defendant as a director. At any rate it shows it as being numbered within the director's shareholdings and there has also been exhibited to the statement of claim certain purchases and sales which had been made by that fourth defendant. This is in my judgment essentially a matter of fact for the trial judge to consider; whether or not he comes to the conclusion that the fourth defendant is, or was at the material times, a director is a matter essentially for him to be based on the evidence. I therefore reject that matter in the amended motion.

9. Insofar as the second matter is concerned it is said that paragraph 4 of the pleading does not particularize or sufficiently particularize the acts of confidential information or knowledge of each of the defendants and this is somewhat refined by Mr. Ching to an assertion that he does not know how it is said the directors acquired that confidential information and knowledge. Some particulars are given; this, in my respectful judgment, has an underlying fallacy. The submission made by Mr. Ching fails really to recognize what the purpose of this action is, and that the essential elements of this action are indeed to show that the defendants stood in a fiduciary position - the plaintiff saying they were directors standing in a fiduciary position, that there was either a breach of that relationship or that there was a utilization made of their position, or the opportunity which they had, or the knowledge which they had acquired as a result of that position and also that they made a profit arising from that particular situation.

10. Mr. Phillips points out to me that under Order 18 rule 12 of the Rules of the Supreme Court:

11. The complaint of Mr. Ching, in my judgment, goes essentially to the particularization of the claim which is made against these defendants. The particulars are indeed the means by which they acquired the confidential information and knowledge, the essential ingredients of this claim in my judgment are their fiduciary position and as I have said, either the breach of that duty or the opportunity to make use of their special position and the profit that is made; in my judgment, the elements are properly pleaded in this pleading and the complaint which is made goes essentially to matters of particulars. As far as the second part of this amended notice of motion is concerned, therefore, I reject it.

12. The third and final point deals with a limitation point. The matter is raised by Mr. Ching and in his reply it was perhaps only faintly pursued, but it is right that as it raises a matter of some importance I should deal with it. The Limitation Ordinance, Cap. 347, defines in Section 2(1) -

"'trust', 'trustee' and 'trust for sale' have the same meanings respectively as in the Trustee Ordinance."

Section 4(2) of the Limitation Ordinance says as follows:

"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. "

And Section 4(7) says -

"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 1939 is applied in the English Courts. "

The definition of "trust" in the Trust Ordinance is found in Section 2, Cap. 29 in the Trust Ordinance -

"'Trust' does not include the duties incident to an estate conveyed by way of mortgage, but with this exception the expression 'trust' and 'trustee' extend to implied and constructive trusts, and to cases where the trustee has a beneficial interest in the trust property, and to the duties incident to the office of a personal representative, and 'trustee' where the context admits includes a personal representative, and 'new trustee' includes an additional trustee'.

13. The position here is that this particular situation is in the nature of a constructive trust; I refer to the decision of the House of Lords in Boardman v. Phipps(2) and at page 117 of that report in the speech of Lord Guest, he says,

"Applying these principles to the present case I have no hesitation in coming to the conclusion that the appellants hold the Lester & Harris shares as constructive trustees and are bound to account to the respondent. "

And also in the same case, but at first instance before Wilberforce J. (as he then was) which is reported in (1964) 1 W.L.R. page 993 at page 1005, the learned judge setting out the decision in regard to the shares in that instant case, he says -

"In March, 1962, the plaintiff issued a writ claiming first, a declaration that Boardman and Phipps held 5/18ths of 21,986 ordinary shares of £1 each in the company, or alternatively 5/18ths of the following holdings in the company, namely 2,925 shares, 14,567 shares or 4,494 shares (or some one or more of such holdings) as constructive trustee for the plaintiff; and secondly, an account of the profits made by them from these holdings; and, thirdly, an order that they should transfer to the plaintiff the shares which they held as constructive trustees .........."

And also at page 1018, I was referred to the relief that was given in that instant case.

14. When I turn back then to the Limitation Ordinance I find in Section 20(1) these provisions:

In my judgment this matter falls squarely within Section 20. This action indeed is to recover trust property or the proceeds which represented that trust property. The position here is that these defendants are fiduciaries and are in the nature of constructive trustees, and all that is happening here is that an action is being taken to recover that trust property. Therefore, in my judgment, the period of limitation prescribed by the Ordinance does not apply in this instant case and all that the account is doing is the machinery by which the beneficiaries discover what trust property should be accounted for to them. The provision which is found in Section 4(2) of the Ordinance "An action for an account shall not be brought in respect of any matter which arose more than 6 years" is dealing with a contractual position, or a legal position of an accounting party. What is being dealt with in this case essentially is equitable relief which falls squarely within Section 4(7). In my judgment therefore there is no period of limitation prescribed in the Ordinance for this action.

15. Mr. Phillips, however, in careful and clear submissions says that at any rate there is another answer to this problem, because he says that the acts by which the trustee has held on to the property are not acts where there is any separate period of limitation at all and the act of the trustee is incidental to their position - there does not have to be - he says - any breach at all, merely a consequence which flows from their fiduciary position as directors; he referred me to the lengthy judgment of the Vice-Chancellor, as he then was, in the well known Tito⁽³⁾ case; I hope I will not be considered in any way discourteous if I do not recite at length the matters contained within that very learned judge's judgment dealing with this matter. It is not necessary for me to come to any final conclusion on this matter, except merely to say this that I am persuaded that it may well be that in this instant case, namely a case where one is dealing with the accountability of a fiduciary, that those are indeed acts to which there is no prescribed period of limitation. It is not necessary, however, for me to come to any conclusion on that other aspect, because I am clearly of the conclusion that the period of limitation prescribed in the Ordinance does not apply to this action. In those circumstances insofar as the third matter raised by Mr. Ching in his amended notice of motion, I reject it. I therefore dismiss the amended notice of motion.

(1) (1967) 2 Appeal Cases 134
(2) (1967) 2 A.C. 46
(3) (1977) 1 Ch. 106