ANTHONY ERIC RYAN HOTUNG v. HO YUEN KI

CACV 52/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 52 OF 2010

(ON APPEAL FROM HCA NO. 1216 OF 2006)

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BETWEEN

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JUDGMENT

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Hon Tang Ag CJHC:

Introduction

1.  This action was commenced in June 2006.  There were three defendants. The claims against the 2^nd and 3^rd defendants have been discontinued.  The 2^nd defendant is Eric Edward Hotung, the father of the plaintiff, and the 3^rd defendant is a company called Hotung Estates Limited.  The 1^st defendant, Madam Ho Yuen Ki, is the trustee under a Declaration of Trust dated 29 November 1979, under which she holds as trustee 10,001 shares in Hotung Enterprises Ltd ("HEL") upon trust for the plaintiff and two of his brothers.  She also holds 10,002 shares on trust for the plaintiff's sisters.  One share was held on behalf of the 2^nd defendant.

2.  Pursuant to another Declaration of Trust dated 1980, the 1^st defendant holds as trustee three shares in Hotung Investment (China) Ltd ("HICL") upon trust for the plaintiff and two of his brothers ("HICL Trust").  Another three shares in HICL are held on trust for the plaintiff's sisters.  The remaining 90 shares are held by HEL.

3.  The 2^nd defendant is the settlor of the two trusts.  He was at all material times a director of HEL and HICL.  He was and is a director of the 3^rd defendant and has a controlling beneficial interest in it.

4.  In July 1991, HICL acquired certain plots of land in Kam Tsin, New Territories ("the Land") for $7,440,000.  In December 1998, HICL sold the Land to the 3^rd defendant for $17,500,000, giving a unit price of $143 per square foot.  At the same time, the 2^nd defendant also sold to the 3^rd defendant several land plots registered in his personal name that are adjacent to the Land ("the Adjacent Land"). In April 2000, the Land together with the Adjacent Land were sold by the 3^rd defendant at $204,307,510, giving a unit price of $550 per square foot.

5.  In a nutshell, the plaintiff says that there were irregularities in these transactions, including that the sale of the Land to the 3^rd defendant should have included a premium to reflect the enhancement in value when amalgamated with the Adjacent Land.  The plaintiff also says there were irregularities in the finance and management of HICL in the form of advances made to the 2^nd and 3^rd defendants and companies owned or controlled by the 2^nd defendant.  It is said that these irregularities had potentially and adversely impacted on the value of the shares.

6.  The plaintiff pleaded that the 1^st defendant was or reasonably should have been put on notice about these irregularities in the management.  It is further pleaded that the 1^st defendant failed to fulfill her duties as trustee in that she failed to act personally, to exercise diligence and care and to safeguard the value of the shares in HICL and HEL, thereby resulting in a diminution in the value of the shares.

7.  The plaintiff claims against the 1^st defendant, a declaration that she has breached her duties as trustee, and damages for breach of trust.

8.  The 1^st defendant applied to strike out the claim on two grounds.  First, that the claim for damages is barred by the ‘reflective loss’ principle.  Secondly, that any cause of action against the 1^st defendant in respect of losses caused by diminution in value of the shares has become time-barred.

9.  Chu J held in favour of the applicant on the ‘reflective loss’ principle and struck out the plaintiff's claim against the 1^st defendant.  She, however, made no determination on the limitation ground.

The Appeal

10.  This is the plaintiff's appeal.  He appears in person.  The 1^st defendant is represented by Mr Michael Yin. 

11.  In its most basic form, the ‘reflective loss’ principle is that the shareholder

“cannot recover damages merely because the company in which he is interested has suffered damages. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a ‘loss’ is merely a reflection of the loss suffered by the company.” Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, 222

12.  Also, where

“… a company suffers loss caused by the breach of a duty owed both to the company and to the shareholder: … If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. …” per Lord Millett in Johnson v. Gore Wood & Co (No 1) [2002] 2 AC 1 at 62E.

13.  However,

“Where the company suffers loss as a result of a wrong to the shareholder but has no cause of action in respect of its loss, the shareholder can sue and recover damages … measured by the diminution in the value of his shareholding. …”,

provided he has an independent cause of action. per Lord Millett at 62D.

14.  The 1^st defendant was not, at any of the times complained of, a director of HICL.  And Mr Yin does not argue that HICL has a claim against the 1^st defendant.  It is obvious that the 1^st defendant, qua shareholder, owed HICL no relevant duty.  Thus, in this case, the court has to decide whether the reflective loss principle would bar any claim which the plaintiff might have against the 1^st defendant as trustee for damages for diminution of the value of the shares held in trust by the 1^st defendant for him.

15.  In Lewin on Trusts (18th edition, 2008), learned editors state:

"39-39. ... There are two features in trust cases which are not normally present in cases where questions of reflective loss arise in other circumstances. One is that ... The other is that the defendants will not be necessarily... the same as those against whom the company has a claim. The beneficiaries' claim will be against the trustees while the company's claim will usually be against one or more of its directors. It is only where the trustees are also the directors against whom the company has a claim that the defendants to both claims will be the same. It is not, however, clear that the reflective loss principle can apply only in a case where the defendants to both claims are the same. The purpose of the reflective loss principle is to ensure, first, that double recovery is not achieved and secondly, that the company's assets are preserved in the interests of its creditors so that its claim takes precedence over the claims of persons interested in them. It is arguable that this purpose is engaged in the trust context irrespective of whether or not the trustees are the same as those against whom the company has a claim." (Emphasis added)

16.  In footnote 16 at page 1572, Lewin on Trusts referred to an observation of Neuberger LJ (as he then was) in Gardner v Parker [2004] 2 BCLC 554.

17.  In Gardner, at para. 38, Neuberger LJ recorded counsel's submission that:

“… the example of three trustees of a settlement which owned shares in a company of which one of the trustees was a director. If that trustee conducted the affairs of the company in breach of his duty to the beneficiary under the settlement and in breach of his duty as director to the company, it could lead to a curious result, so far as his fellow trustees were concerned, if he could avoid liability to the beneficiary on the basis of the rule against reflective loss. He, as the person principally responsible for the damage to the value of the settlement, could avoid liability to the beneficiary by invoking the rule against reflective loss, whereas his co-trustees, who may have been relatively innocent of any wrongdoing, could not avoid such liability, because, as they were not directors of the company, there would be no question of their being able to invoke the rule against reflective loss.”

18.  Then at para. 52, Neuberger LJ said:

“52. However, on reflection, I do not consider that the (above example) assists Mr Gardner's case. First, although it is perhaps a little more difficult to conceive of circumstances in which it might arise, the same point could be made where three persons are jointly liable in contract or tort to the shareholder, and only one of them is so liable to the company. Secondly, it may well be that, in a case such as that posited by Mr Steinfeld, the beneficiary would not be able to recover damages from the other two trustees, on the basis that the loss which founds his claim has the character of reflective loss and is therefore irrecoverable. Alternatively, if the two trustees were sued by the beneficiary, the remedy would lie in their hands, namely by joining the trustee director and the company to the proceedings, with a view to protecting their position by ensuring that the court's primary order involved the trustee/director having to reimburse the company for its loss, thereby enabling the other two trustees to avoid liability.” (Emphasis added)

19.  It is clear from the above it is not clear whether the principle of the reflective loss applies to the plaintiff's claim against the 1^st defendant.  The law most certainly is not settled.  Mr Yin rightly has not submitted otherwise.

20.  Lord Bingham of Cornhill in Johnson at page 36, said that on a strike-out application, the decision which a court must make is:

“whether on the facts pleaded a shareholder’s claim is sustainable in principle … On the one hand the court must respect the principle of company autonomy, ensure that the company’s creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation. The problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether (to use the language of Prudential Assurance Co. Ltd v. Newman Industries Ltd (No 2) [1982] Ch 204, 223) the loss claimed is ‘merely a reflection of the loss suffered by the company’. In some cases, the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of a shareholding attributable solely to depletion of the company’s assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for. At the strike-out stage any reasonable doubt must be resolved in favour of the claimant.”

21.  This is a case which calls for “a fine judgment”, and in my view the claim should not be struck out on the basis that it is precluded by the principle of ‘reflective loss’.

22.  I have to say, in fairness to the learned judge, that the argument before her had not clearly highlighted the critical issue in this case. Instead, the parties were engrossed in the argument whether:

"on the authority of (Freeman & Ors v. Ansbacher Trustees (Jersey) Limited [2009] JLR 1, a decision of the Royal Court of Jersey) the plaintiff can circumvent the reflective loss rule simply by changing his claim for ‘damages for breach of trust’ to one for ‘replacement of such sums as are necessary to restore the value of the trust’s estate to his value prior to the events/wrongdoings complained of.”

23.  I now turn to the Limitation point.

24.  There is no Respondent's Notice on the point.  Nor was it mentioned in Mr Yin's skeleton submission.  In any event, Mr Yin has rightly accepted that the plaintiff's claim could only be struck out, if on the existing pleading it is clear that his cause of action against the 1^st defendant necessarily arose more than 6 years from June 2006. 

25.  It is not clear from the pleadings that that necessarily is so.  For example, in para. 37 of the Statement of Claim, it was pleaded that:

“The 1^st defendant attended in person the annual general meeting of HICL held on 30^th September 2000 at which the 1999 report was tabled, approved and adopted.”

26.  The Statement of Claim went on to allege that the 1^st defendant as trustee, was, or reasonably should have been, further put on notice by the 1999 report that there were irregularities in the management of HICL, brought about by the directors of HICL that potentially and adversely had impacted upon the value of the shares giving rise to an obligation to add (if necessarily jointly with Hillhead Limited, a company connected with the parties) in order to protect the trust assets and safeguard the value of the shares.  And of course, the sale of the united parcel for $204,307,510 took place on 17 April 2000.

27.  Thus, it may be that there was no breach of duty on the part of the 1^st defendant until after the 1999 report was tabled, approved and adopted on 30 September 2000; or alternatively that there was a continuing breach of duty. 

28.  In my view, these are all matters which have to be explored at trial.

29.  For the above reasons, I would set aside the order of Chu J striking out the plaintiff's claim.

Legal Aid

30.  I should also mentioned that on 22 November 2010, the plaintiff applied for legal aid.

31.  Under section 15 of Legal Aid Ordinance, Cap. 91, the appeal would be stayed unless the court orders otherwise.  Mr Yin applied to us to proceed with the hearing of the appeal, and we acceded to this request.

Costs

32.  The parties have agreed that costs should follow the event.  So, the plaintiff should have the costs of the appeal.  But because some time was taken up in dealing with the consequences of the plaintiff's application for legal aid, the plaintiff should only have 80% of the costs of the appeal, and I would make an order to that effect.

Hon Kwan JA:

33.  I have had the benefit of reading in draft the judgment of the Acting Chief Judge and respectfully agree with it. As we are of the view it is not plain and obvious that the principle against reflective loss applies to bar the plaintiff’s claim against the 1^st defendant, it would not be necessary to add to the discussion of the law in the paragraphs above, particularly as we only had the assistance of counsel on one side. I only wish to mention that the decision of Reyes J in Hotung v. Hillhead Ltd. [2008] 3 HKLRD 200 (which Chu J adopted in paragraphs 17 and 20 of her decision) was considered by this court. In the striking out application before him, Reyes J cited the same relevant extract in Lewin on Trusts and rejected the plaintiff’s submission that the reflective loss principle should not apply where there is a difference in defendants – a claim by the relevant companies would be against the settler and other wrongdoers whereas the claim by the plaintiff beneficiary was against the 1^st defendant trustee for breach of fiduciary duty (paragraphs 19 to 26). We have taken a different view, and consider this arguable for the purpose of the strike out application in the present proceedings.

Hon Stone J:

34.  I respectfully agree with the judgments of Tang Ag CJHC and of Kwan JA and have nothing to add.