THE JOINT LIQUIDATORS OF SUPER PERFECT LTD (IN LIQUIDATION) v. LEUNG YUK LAN AND OTHERS

HCA227/2022

[2025] HKCFI 602

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 227 OF 2022

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D E C I S I O N

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1.  This is an appeal from an order made by Master Ken To on 20 May 2024 setting aside a Third Party Notice (TPN). 

2.1.  At the hearing on 22 August 2024, counsel for the defendants made a concession of law, which he sought to withdraw, after the hearing, in further written submissions received by the court later that day. 

2.2.  After considering all the circumstances, including the nature of the concession, the authorities which were already in counsel’s list, and the views of the third party and the plaintiff (whose attendance at the hearing had been excused), I gave leave to the defendants to lodge those further submissions, and gave directions for further submissions to be lodged by the other parties.  The last submission was received on 12 November 2024.

Background

The companies

3.  In March 1999, Super Perfect Ltd (SPL) was incorporated in the BVI.  The shareholders were Cheng Kwok Yun (Mr Cheng) and his wife Leung Yuk Lan (Madam Leung).  

4.  Shortly before Mr Cheng’s death on 17 August 1999, Madam Leung became the sole shareholder of SPL.  She was also the sole director of SPL.

5.  On 1 August 2001, Yuns Enterprise Ltd (Yuns) was incorporated in Hong Kong.  It is a property-holding company.  The share capital of Yuns (8,000 shares) was held as to 7,920 shares (99%) by SPL and as to 80 shares (1%) by Madam Leung.  Its directors were SPL and Madam Leung.  In other words, Madam Leung was in sole control of both companies.

6.1.  A year later, on 16 August 2002, Madam Leung transferred 25% of her shares in SPL to each of her two sons, Cheng Sai Ho Louis (Louis) then 20 years of age, and Cheng Sai Kit Thomas (Thomas) then 18. 

6.2.  According to Madam Leung, on the date of transfer, a declaration of trust was signed by Louis and Thomas stating that they held the shares for her benefit.  Suffice to say at this stage that in Louis’ affirmation, he no longer persisted in an earlier allegation that he had not signed the document, but said “ ... the validity of the Declaration of Trust and [Madam Leung’s] beneficial ownership in SPL are key factual issues to be determined”[1].

7.  In 2003, Louis and Thomas were appointed directors of Yuns.  Yuns’ board thus comprised SPL, Madam Leung, Louis and Thomas.  Madam Leung remained the sole director of SPL.

8.  This remained the situation until some 12 years later, when on 15 September 2015 Louis ceased to be a director of Yuns.  The remaining directors of Yuns were thus SPL, Madam Leung and Thomas.

9.  About a year later, on 1 August 2016 Thomas was appointed a director of SPL in addition to Madam Leung.

10.  In other words, Louis was never a director of SPL (of which he was registered shareholder of 25%), and after 2015, he was not a director of Yuns either. 

Yuns’ Share Allotment to Madam Leung

11.1.  About three years after Louis ceased to be a director of Yuns, in July 2018, the company increased its share capital to 280,000 shares and allotted 272,000 of the new shares to Madam Leung.  SPL was not allotted new shares.  After the allotment, Madam Leung held 272,080 shares, while SPL held 7,920 shares.   

11.2.  As a result, SPL’s holding in Yuns was diluted from 99% to 2.8%. 

SPL’s transfer of its Yuns shares to Madam Leung

12.  About a year later, on 21 October 2019 SPL transferred 7,919 Yuns shares to Madam Leung and 1 Yuns share to Thomas for no consideration[2]. Consequently, SPL had no shares in Yuns and it resigned as a director of Yuns.  

13.  After this transfer, SPL had no assets.  According to Madam Leung[3], the above transactions were carried out as part of a corporate restructuring exercise (removing SPL as a holding company so she could directly hold Yuns shares) to avoid the burden of complying with regulatory and compliance rules of the BVI.   

14.  At some stage (the papers before me do not disclose the date), according to Madam Leung, she caused SPL (whose registered shareholders were herself as to 50%, and Louis and Thomas as to 25% each) to be deregistered by non-payment of the annual registration fee[4].

BVI costs order against SPL

15.1.  About a year later, on 21 August 2020 Louis brought a claim against SPL in the BVI court to inspect its books.

15.2.  On 20 October 2020, the BVI court granted the order, and also ordered SPL to pay Louis’ costs in the sum of USD30,821.39 (the BVI Costs Order).  This order has not been set aside or subject to appeal, and the sum has not been paid. 

SPL liquidation

16.1.  On 10 March 2021, Louis applied to the BVI court for an order that SPL be restored to the register of companies, and then to be placed in liquidation as it had failed to pay its judgment debt to him.

16.2.  On 19 April 2021, the BVI court wound up SPL and appointed joint liquidators.

HCA227/2022

ASOC

17.1.  On 22 February 2022, the joint liquidators of SPL issued a writ against Madam Leung, Thomas and Yuns.  In gist, the Amended Statement of Claim (ASOC) pleaded:

-  Madam Leung and Thomas as directors of SPL owed fiduciary duties to it [§8];

-  they caused:

-  Yuns to allot additional shares to Madam Leung, allowing her to gain control of Yuns at the expense of SPL [§17.1]; and

-  SPL to transfer its shares in Yuns without proper commercial reason and for no valuable consideration [§17.2];

-  these acts were in breach of their fiduciary duties and in breach of the no- conflict rule; 

-  they conspired to injure SPL by the above unlawful means, as a result of which SPL suffered loss and damage [§§18-20].

17.2.  The relief sought included:

(1)  a declaration that Yuns’ share allotment and SPL’s transfer of shares were unlawful, null and void and invalid, and an order rectifying Yuns’ share register;

(2)  an order restraining the defendants from dealing in Yuns shares;

(3)  a declaration that the defendants hold Yuns shares as constructive trustees for SPL;

(4)  a declaration that the defendants account to SPL for any profits;

(5)  damages and/or equitable compensation. 

Defence and Counterclaim

18.1.  On 14 October 2022, the defendants filed a Defence and Counterclaim.  Essentially, it was pleaded that:

-  since 17 August 1999, Madam Leung has been the sole legal and beneficial owner of the shares in SPL [§5(iii)] which was intended to be a corporate vehicle to hold her landed properties and investments [§5(vii)];

-  on 16 August 2002, Madam Leung transferred 25% of her shares in SPL to each of Louis and Thomas to avoid possible interruption of its business in case her health deteriorated with age, and subject to an express trust in her favour [§5(iv)];

-  Madam Leung has been in sole and de facto control of SPL, and its sole beneficial owner [§5(vii)];

-  Madam Leung has also been in sole and de facto control of Yuns, and its sole beneficial owner, directly through herself and indirectly through her control and ownership of SPL [§10(iv)];

-  Madam Leung and Thomas admit they owe fiduciary duties to SPL, but deny breach of such duties and conspiracy to injure because:

-  the share allotment and SPL’s transfer of shares were acts to restructure her corporate vehicles by removing SPL so that she directly owned Yuns [§15], which acts were authorised by and carried out with the consent and knowledge of Madam Leung as sole beneficial owner of SPL, and Thomas who assisted her in the process [§16];

-  further or alternatively, “by reason of all the above and in particular the purposes of setting up SPL and [Yuns]”, since her husband’s death, “assets registered or held under the respective names of SPL and [Yuns] were held on trust for the benefit of [Madam Leung]” [§19];    

-  even if Madam Leung and Thomas were in breach of directors’ and/or fiduciary duties owed to SPL,

“any such breach(es) have, in the circumstances and prior to SPL being struck off from the BVI companies register, been ratified by its sole beneficial owner, i.e. [Madam Leung]” (emphasis added) [§23].

18.2.  The defendants counterclaimed against the joint liquidators:

(1)  declarations that:

(i)   since 17 August 1999, Madam Leung was the sole beneficial owner of the entire shareholdings in SPL; and

(ii)  since 1 August 2001 (Yuns’ incorporation) until 21 October 2019 (SPL’s transfer of shares), Madam Leung was the “ultimate beneficial owner of the entire issued share capital of [Yuns], through her said capacity as the sole legal and beneficial owner of the entire issued share capital of SPL”;

(2)  further or alternatively, a declaration that at all material times since 17 August 1999 to 21 October 2019, “all assets held by and under the name of SPL were held on trust to the sole benefit of [Madam Leung]”;

(3)  a declaration that the share allotment, SPL’s transfer of shares, and SPL’s resignation from the board of Yuns were lawful and valid.

Reply and Defence to Counterclaim

19.1.  On 11 April 2023, the joint liquidators filed a Reply and Defence to Counterclaim.  They pleaded that:

-      (1)  they took a neutral stance towards the dispute concerning the beneficial ownership of SPL [§5(1)];

(2)  by virtue of the doctrine of separate legal personality, Madam Leung and Thomas owe fiduciary duties to SPL, particularly that of acting in the best interest of SPL, rather than individual shareholders of SPL [§5(2)];

(3)  as such, the dispute in relation to the beneficial ownership of SPL is not relevant to its claim [§5(3)];

(4)  Madam Leung was not entitled to treat SPL’s property as her own personal property, and disregard its interests, especially its creditor(s) [§5(4)];

-  by virtue of the doctrine of separate legal personality, Madam Leung was not entitled to treat Yuns shares as her personal property [§6];

-  the share allotment and SPL’s transfer of shares were not made in the best interest of SPL, especially its creditor(s) [§7].

19.2.  It is noted that the liquidators took a “neutral stand” on the issue of beneficial ownership which they said was not relevant to SPL’s claim, and there was no specific plea to the defence of ratification pleaded in §23 of the Defence.

Third Party Notice (TPN)

20.1.  On 2 June 2023, the defendants applied ex parte to the court for leave to issue a TPN on Louis.  Leave was required under Order 16 rule 1(2) Rules of the High Court as they had already served their defence on the liquidators.

20.2.  Leave was sought pursuant to O.16 r.1(1)(c), i.e. where a defendant

“requires that any question or issue relating to or connected with the original subject-matter of the action should be determined not only as between the plaintiff and the defendant but also as between either or both of them and a person not already a party to the action”. (Emphasis added).

20.3.  Pausing here, the TPN was thus “issue-based”, as opposed to “claim-based” under r.1(1)(a) and (b)[5].

20.4.  On 9 June 2023, the defendants obtained leave from a master.  The questions or issues were formulated in the TPN as follows:

“1. Whether [Louis] has signed on and executed the Declaration of Trust on 16 August 2002 and since then been holding 12,500 shares in SPL on trust for the benefit of [Madam Leung];

2. Whether, at all material times-

(i) since 17 August 1999, [Madam Leung] had been in sole and de facto control, and also sole beneficial ownership, of SPL;

(ii) since 3 August 2001[6], [Madam Leung] directly through herself and indirectly through her control and ownership in SPL and later through [Thomas], has been in sole and de facto control, and sole beneficial ownership, of [Yuns];

(iii) SPL and/or [Yuns] were, and were intended to be, mere corporate vehicles to hold all landed properties and other financial investments of [Madam Leung];

(iv) since 17 August 1999, all assets registered or held under the respective names of SPL and [Yuns] were held on trust to the benefit of [Madam Leung]; and

3. If there was any breach of directors’ and/or fiduciary duties owed toward SPL on the part of [Madam Leung] and/or [Thomas], as alleged by the Plaintiff in the ASOC or at all, whether the breach(es)could have been, and have been ratified by [Madam Leung] alone as the sole beneficial owner of SPL (emphasis added) and

4. Whether [Madam Leung] and [Thomas] could conspire, or could be found to have conspired to injure SPL in light of the resolution of the issues and questions above, and if so whether they had conspired to injure SPL as alleged by the Plaintiff in the ASOC or at all”.

21.  On 1 December 2023, Louis acknowledged service of the TPN reserving his rights to challenge it.

22.  On 21 December 2023, Master Dick Ho heard the defendants’ application for Third party directions.  At the time, Louis did not ask the master to dismiss the application for directions and to terminate the proceedings in the TPN pursuant to O.16 r.4(3)( c).

Summons to strike out or set aside the TPN

23.1.  Subsequently on 26 February 2024, Louis filed a summons under O.18 r.19, O.16 r.4(3)(c) and the inherent jurisdiction of the Court for an order (among other things) that:

“(1) The TPN ... be struck out and the third party claim be dismissed against [Louis] on the grounds that:-

(a) It discloses no issue or question to be tried against [Louis];

(b) It is frivolous and vexatious; and/or

(c)  It is an abuse of the process of the Court.

(2) Alternatively, the TPN be set aside on case management grounds”.

23.2.  Affirmation evidence was filed by Madam Leung and Louis.

23.3.  The matter was heard before Master To on 20 May 2024. 

Master Ken To’s order

24.10.  As far as an application under O.16 r.4(3)(c) was concerned, as noted above, Louis had not asked for dismissal of the application for directions and termination of TPN proceedings when he appeared before Master Ho at the hearing for Third party directions. 

24.2.  At the hearing before Master To, Louis applied to amend the marginal reference in the summons to include O.16 r.6, which provides:

“Proceedings on a third party notice may, at any stage of the proceedings, be set aside by the Court”.

24.3.  Master To granted the amendment.

24.4.  For reasons given orally, Master To set aside the TPN and ordered that two-thirds of the costs of the Third Party proceedings be paid by the defendants to Louis, summarily assessed at $160,000. 

25. The defendants appealed.  The appeal is by way of rehearing[7].

Discussion

26.  Mr Tam for the defendants first submitted that the master should not have permitted an oral application to amend the summons to include reference to O.16 r.6.  Consequent to that, he submitted secondly as a preliminary point that O.18 r.19 does not apply to third party proceedings.

27.1.  I do not accept these submissions.  First, it was a matter of discretion for the master in the exercise of his case management powers to permit the amendment.

27.2.  As for the second submission, Mr Tam claimed support from the judgment of DHCJ Keith Yeung (as he then was) in Super Cruise.  However, it is clear at §31 that the learned judge held the opposite view:

“But to the extent of his submissions involving the proposition that Order 18 rule 19 can under no circumstances have any application to third party proceedings, I reject the same”.

28.  Turning to substantive, rather than technical, matters, it seems to me that the main action will turn essentially on whether Madam Leung was the beneficial owner of all the shares in SPL when she allegedly ratified the acts of the company’s directors in procuring the share allotment and in effecting the transfer of the company’s shares in Yuns for no consideration.

29.  I do not accept the liquidators’ position that beneficial ownership of the shares registered in Louis’ name is not relevant.  Whilst normally a company looks only to legal ownership of shares, beneficial ownership is relevant in this case, because Madam Leung claims that she as sole beneficial owner of SPL shares could and did validly ratify the directors’ acts said to be in breach of fiduciary duty to the company[8].

30.  As I understand it, the following principles of ratification are now accepted by high authority as the common law for the purposes of the Duomatic principle:

(1)  a sole beneficial owner would be entitled to ratify any breach of duty on the part of a company’s directors

(2)  so long as that company was not insolvent or in such a financial position that the directors’ duty was modified to include a duty to act in the interests of the company’s creditors as a whole. 

31.1.  First, it has been held by the Privy Council that a beneficial owner can ratify directors’ acts as a registered shareholder can, at least where it is the beneficial owner, rather than the registered shareholder, who is taking all the decisions in the relevant transactions[9].

31.2.  In this regard, it is Madam Leung’s case[10] that she has since 17 August 1999 been in sole and de facto control of the two corporate vehicles holding her landed properties and other financial investments.  The liquidators have not specifically challenged this, pleading only that beneficial ownership was not relevant to their claim[11].  Louis no longer disputes that he had signed the declaration of trust of the SPL shares, saying only that there are (unspecified) issues as to its validity[12].  He has not denied that Madam Leung controlled both companies, and he has not asserted that he, as registered shareholder, took part in any decision-making of SPL. 

31.3.  Louis has only asserted that the core issues are the legality and validity of the share allotment, SPL’s transfer of shares and its resignation as director. Those are indeed material issues, but even if those acts were, on the face of it, breaches of duty by SPL’s directors, if Madam Leung was its sole beneficial owner, she could ratify those acts.

32.1.  Secondly, it is clear[13] that the shareholders’ power of ratification is not applicable where a company is insolvent or bordering on insolvency or if it was probable that it would enter into an insolvent liquidation or administration. 

32.2.  In the present case however, Madam Leung has stated that she ratified the directors’ acts before SPL’s deregistration.  Louis only obtained the BVI costs order afterwards.  SPL had no other creditors.  On that basis, ratification would prima facie be applicable if Madam Leung was the sole beneficial owner.

33.  However, the importance of the issue of beneficial ownership of the shares registered in Louis’ name does not necessarily mean that the court should exercise its discretion to order that he be joined as third party.

34.1.  The rationale of an issue-based third party notice is to avoid multiplicity of proceedings[14]. What other proceedings would there be on the issues set out in the TPN?   

34.2.  If the court finds in the main action that Madam Leung was the sole beneficial owner of SPL and that she had ratified the directors’ acts before deregistration (and the subsequent BVI costs order), there would be no breaches of directors’ duties, and SPL’s disposal of its assets was valid.  Even if Louis were to then start proceedings in his personal capacity against Madam Leung alleging that he was beneficial owner of the shares registered in his name, they would be worth nothing as SPL had no other assets.  He would not be able to start proceedings against the directors in his capacity as shareholder of the company under the reflective loss principle[15].

34.3.  If the court finds in the main action that Madam Leung was not the sole beneficial owner, then she would not have been able to ratify the directors’ breaches, and SPL would obtain relief, from which Louis would be compensated as shareholder.  There would be no need for him to start proceedings, and it is difficult to see how Madam Leung would be able to start proceedings against him personally.

Order

35.  In these circumstances, and given the additional costs and delay that would be caused by third party proceedings, it is neither necessary nor appropriate to have third party proceedings and the TPN should be set aside.  Accordingly, I would dismiss the appeal.  The parties having agreed that costs would follow the event of the appeal, I would order that the defendants bear the costs of the proposed third party and the plaintiff.