WANG MEI NA v. TANG MU LIEN AND OTHERS

HCA 421/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 421 OF 2010

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D E C I S I O N

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1.  This is an application by the plaintiff for appointment of an interim receiver to the estate of Mr Tong Zang in Hong Kong. The plaintiff also seeks consequential orders that the 1st to 7th defendants and the 8th defendant are required to deliver up the estate and to give proper accounts of the estate to the interim receiver. She also seeks an interim injunction to restrain the 1st to 7th defendants and the 8th defendant from dealing with the estate.

2.  Mr Tong was domiciled in Taiwan.  He died intestate on 4 January 2005.  He was a successful businessman and had amassed substantial wealth in his lifetime.  He married the plaintiff in Hong Kong on 27 September 2002.  The plaintiff is his lawful widow.  Mr Tong had three children from his previous marriage.  They are the 1st, 2nd and 3rd defendants. The plaintiff and the 1st to 3rd defendants are the only beneficiaries of Mr Tong’s estate.  The estate comprises of assets and properties in Hong Kong and worldwide. 

3.  This application only relates to the properties in Hong Kong as set out in a schedule of property issued by the Estate Duty Office of the Inland Revenue Department in Hong Kong and dated 12 June 2007. The net value of these assets as stated in the schedule was at HK$95,656,492.  The assets include moneys in the bank accounts in various banks in Hong Kong, an investment account with the HSBC Investment Holdings (Bahamas) Limited, two shares in a Shiu Shun Enterprises Limited, a deposit box with the Hang Seng Bank Limited and 4,990,000 shares of and in the 8th defendant, Bowdex Hong Kong Limited “Bowdex”.  The 4,990,000 shares represent 99.8% of the issued and allotted shares of Bowdex.

4.  No letters of administration has been granted. The plaintiff has entered caveats against the estate.  The 1st to 3rd defendants have not acted in relation to the caveats.  The plaintiff has issued a writ for grant of administration on 28 January 2010, but has not served the writ yet.

5.  The plaintiff makes this application on the ground that the three children, the 1st to 3rd defendants have acted together to damage the estate and to benefit from it at the plaintiff’s expense.

The plaintiff’s allegations

6.  Bowdex is a company incorporated in Hong Kong holding various subsidiaries in the mainland.  Prior to the deceased’s death on 4 January 2005, Bowdex had five directors.  They were deceased; the plaintiff; the 1st defendant; the 3rd defendant and one Ms Sze who was an employee of the Bowdex.  The deceased vacated the directorship upon his death.  His son, the 2nd defendant was appointed to fill the vacancy on 4 January 2005.

7.  The plaintiff said that, subject to further discovery, the 1st to 3rd defendants had taken active and deliberate steps to deplete the value of Bowdex.  They have diverted the business opportunities of Bowdex and its subsidiaries to their company the 4th defendant and its subsidiaries.  They acquired the 4th defendant on 18 February 2005.  They have excluded her from the management of Bowdex.  When the business of the subsidiaries of Bowdex had been depleted and taken over by their companies, they then closed down the subsidiaries.

8.  The 1st, 2nd and 3rd defendants transferred their shares in the 4th defendant to the 5th, 6th and 7th defendants on 30 July 2007 and they themselves were replaced by the 5th to 7th defendants as directors of the 4th defendant.  The plaintiff says that the 5th to 7th defendants have been acting as the nominees and are under the control of the 1st to 3rd defendants.  They plaintiff has engaged lawyers in the mainland and accountants in Hong Kong to investigate the affairs of Bowdex and its subsidiaries.

Bowdex’s subsidiaries

9.  Bowdex was acquired by the deceased on 10 January 1980.  According to the 1st defendant, the deceased initially used Bowdex to issue letters of credit to pay the BMW Group for vehicles supplied to a Shanghai Bowdex Motor Company Limited in the mainland.  However, Bowdex in 2001 and 2002 had become a holding company of various subsidiaries in the mainland.  Its annual report for the year ended 31 December 2003 stated its principal activities as letting properties, investment holding and trading of motor vehicles.  Its reports for the years of 2004, 2005 and 2006 stated the principal activities as investment holding and trading of motor vehicles. 

10.  For the mainland subsidiaries, Bowdex held 51% of the shares of Wenzhou Yuande Automobile Company Limited (“Yuande”), 100% of the shares of Nanjing Ningde Automotives (“Ningde”), 60% of Hangzhou Hangde Automotives (“Hangde”), 100% of the shares of Shanghai Baode Wai Gao Qiao Automobile Company Limited (“Baode”) and a joint venture interest in Shanghai Huide Automotives (“Huide”). 

11.  The partner in the joint venture of Huide was Shanghai Fande Automotives Sales Company Limited (“Shanghai Fande”), a company initially controlled by the deceased, but now by the 1st to 3rd defendants. The shares of Shanghai Fande were originally held by two person surnamed Tang as nominees for the deceased.  On 28 June 2006, they transferred the shares to one Wang Xiao Chun and one Tang Xiao Xiong.  The directors of this company since then are the 1st defendant, the 2nd defendant, the 3rd defendant, Tang Xiao Xiong and one Mao Qian Ping.

12.  The turnover of the Bowdex was substantial.  The accountants engaged by the plaintiff studied the audited reports of Bowdex and summarised its turnover for the financial years ending 31 December 2003 to 31 December 2007 which showed a significant decrease from 2005.  The turnover was:

13.  The plaintiff’s mainland lawyers also investigated into and reported on the affairs of the subsidiaries.  Mr Fung, leading counsel of the plaintiff prepared four summaries of the plaintiff’s allegations of diversion of business and depletion of the subsidiaries for the court’s reference.

Yuande

14.  Bowdex owned 51% of the shares of Yuande.  Its business was in the repair and sale of spare parts and information of BMW vehicles.  Since the death of the deceased, its directors were the 1st defendant, the 2nd defendant, one Wu Hui, one Li Wei Wei and Mao Qian Ping.  The legal representative was Wu Hui. 

15.  In about October 2005, another shareholder of Yuande, one Yang Shu Hui offered to sell 9% of Yuande’s shares to Bowdex for which Bowdex had a pre-emption right.  The 2nd defendant purportedly acting for Bowdex caused Bowdex to forgo the pre-emption right and not to take up the 9% shares. The 4th defendant then purchased five of the 9% shares and Li Wei Wei the remaining four.

16.  In 2006, the net sales profit of Yuande was RMB3,209,279.55.  On 11 October 2006, one Haodebao Automotive Services Company Limited (“Haodebao”) was established.  The 4th defendant held 56% of the shares of Haodebao.  The total shareholding of the 4th and 8th defendants in Yuande was also 56%. Haodebao’s directors, legal representative, scope of business and retail shop premises were the same as those of Yuande.  The net sales profit of Yuande went down to RMB494,384.10 in 2007.  Haodebao, however, achieved net shares profit at RMB1,877,176.88 in 2007.  In late 2007, Yuande advanced RMB2,637,634.25 to Haodebao, its apparent competitor, without any obvious reason.

17.  In December 2008, the 1st to 3rd defendants caused Yuande to enter into liquidation.  On 13 August 2009, Yuande was removed from the Companies Registry in the mainland.  On 19 August 2009, Haodebao expanded its scope of business to include import and retail of BMW vehicles.  The evidence shows that Yuande’s business had been taken over by Haodebao with the financial assistance of Yuande.

Ningde

18.  It is a wholly owned subsidiary of Bowdex.  Its directors are the 1st, 2nd and 3rd defendants and Tang Xiao Xiong.  Its legal representative is Mao Qian Ping.  Its scope of business included repair and information services of vehicles. 

19.  The 4th defendant on 30 April 2008 incorporated a wholly owned subsidiary Nanjing Ningbao Automotives (“Ningbao”).  Its directors are the 1st, 2nd and 3rd defendants, Tang Xiao Xiong and Mao Qian Ping.  Mao is also its legal representative.  Its scope of business is repair of vehicles.  Its retail shop is the same as that of Ningde.  The management, scope of business and place of business of the two companies are almost identical though Ningde is wholly owned by Bowdex and Ningbao by the 4th defendant.

20.  In late 2008, the 1st to 3rd defendants caused Ningde to grant a loan of RMB23,441,538.78 to Ningbao, its apparent competitor, for no obvious reason.

21.  On 14 April 2009, Ningbao expanded its scope of business to include import and retail of BMW and mini vehicles.

22.  On 11 November 2009, Ningde filed with the Commerce and Industry Bureau (工商局) of the mainland government, a memorandum of the composition of a liquidation committee.  On 23 November 2009, the plaintiff received from Bowdex a notice of a board meeting to be held on 10 December 2009 to consider the intended liquidation of Ningde on the ground that Ningde had lost the BMW licence from the manufacturer.  But there was no explanation for the loss. There was also no mention of the filing of the memorandum of liquidation committee.

Hangde

23.  At the time of the deceased’s death, Bowdex owned 60% of Hangde.  Zhejiang Nongye Group Jin Chang Automotive Sale Company Limited (“Jin Chang”) owned 20% of the shares and one Shan Qing Guang owned the remaining 20%.  Hangde’s directors from 2005 to 12 August 2009 were the 1st defendant and Mao Qian Ping.  The legal representative in this period was the 2nd defendant.  Its scope of business was automobile repair and consultation and technology development.

24.  On 31 August 2006, the 4th defendant and Jin Chang invested in one Hanzhou Baohu Automotive Sale Company Limited (“Baohu”) with the 4th defendant holding 65% of its shares and Jin Chang 35%.  Its directors were the 2nd defendant and Mao Qian Ping.  Its scope of business was the same as that of Hangde. 

25.  On 5 November 2007, the 4th defendant and Jin Chang invested in one Hangzhou Baorong Automotive Repair and Service Company Limited (“Baorong”) with the 4th defendant holding 65% of its shares and Jin Chang 35%.  Its scope of business was automotive repair and consultation which was very similar to that of Hangde.

26.  On 23 December 2008, Baorong expanded its scope of business to include import and retail of BMW vehicles.

27.  On 11 March 2009, the plaintiff received an unsigned notice of a board meeting of Bowdex to be held on 1 April 2009 in Taipei to consider whether to transfer its shareholding in Hangde to Jin Chang.  The plaintiff then received a letter from the 2nd defendant purportedly on behalf of Bowdex that advised the plaintiff that the board meeting would not be held as there was already a paper resolution by four members of the board approving the sale of the 60% shares of Hangde to Jin Chang.  The sale was completed pursuant to a contract dated 22 August 2009.  Jin Chang then owned 80% of the shares of Hangde and Shan Qing Guarng 20%.

28.  The 4th defendant had also by a contract dated 22 August 2009 sold its 65% shares in Baohu to Jin Chang.  Baohu then became the wholly owned subsidiary of Jin Chang.  The 2nd defendant and Mao also vacated the board of Baohu on 1 September 2009.

29.  Jin Chang on the other hand sold its 35% shares in Baorong to Shanghai Fande on 27 September 2009.  Shanghai Fande was the joint venture partner of Bowdex in Huide and was in the control of the 1st to 3rd defendants. 

30.  After these shares transactions, Jin Chang became the 80% owner of Hangde and Bowdex ceased to have any interest in it. The 4th defendant also relinquished its interest in Baohu to Jin Chang.  The 1st to 3rd defendants then obtained complete control of Baorong through the 4th defendant and Shanghai Fande.

31.  The price of 60% of the shares of Hangde was supported by a valuation report dated 17 July 2009.  However, the plaintiff and her mainland lawyers pointed out that the valuation was made on the basis of the assets and liabilities without taking into account the 60% shares being the controlling shares and the goodwill or future profits of Hangde.

32.  Furthermore, before Hangde was divested from Bowdex, it had in 2007 jointly with Shanghai Fande provided a guarantee to one Jie Jiang Jin Hu Electronics Limited (“Jie Jiang Jin Hu”) for RMB116,000,000.  Jie Jiang Jin Hu was a competitor of Hangde and there was no obvious reason for the provision of the guarantee.  The amount of the joint guarantee was increased to RMB132,000,000 in 2008.

Huide

33.  It was set up on 9 February 2002 as a joint venture of Bowdex and Shanghai Fande.  Its business was the provision of spare parts, repair and maintenance and technology consultation for vehicles.  Both Huide and Shanghai Fande operated in premises owned by Huide.  Shanghai Fande had to pay rent to Huide for the joint use of the premises.  The directors of Huide were the 1st, 2nd and 3rd defendants, Tang Xiao Xiong and one Wu Yuan Shun.  The 2nd defendant was its legal representative since 11 March 2005.  In about December 2005, Shanghai Fande increased its scope of business to include the import and sale of BMW and mini vehicles.

34.  In mid-June 2010, the plaintiff received a notice of a board meeting of Bowdex dated 7 June 2010 in which the directors were asked to consider passing a resolution to lease the factory and repair and operating assets of Huide to Fande for the reason that Huide as a “2S” shop was no longer competitive with “4S” shops.  It could also no longer carry out repair service from June 2010 onwards as it could not obtain the relevant authorisation from BMW.

The 1st Defendant’s Opposition

35.  The 1st defendant made an affirmation on behalf of the 1st to 7th defendants to oppose the application.  She criticized the report by the plaintiff’s accountant by saying that his reliance on turnover figures in commenting on the performance of a company was misleading as the bottom line of performance lies in net profit/loss after tax.

36.  Regarding the business of Bowdex, she referred to a change of policy of the mainland government in the first quarter of 2005 which allowed foreign carmakers to set up business in the mainland to sell their cars directly to mainland car dealers.  The BMW Group took advantage of the new policy and set up a wholly owned business in the mainland in around September 2005.  There was then no need for Bowdex to issue letter of credit for the car dealers to the carmakers and its business came to a standstill. Its turnover also took a nosedive from 2005.  Since the policy change, there were also new companies springing up to provide sale of BMW cars and system service in addition to the repair and maintenance services and sale of spare parts for BMW cars.  She gave the names of a number of such companies.

37.  Regarding the 4th to 7th defendants, she said these defendants owed no duty to the plaintiff and she declined to comment on the plaintiff’s allegation that the 4th defendant was used to set up new companies to take over the business of Bowdex’s subsidiaries. 

38.  She refused to explain why Bowdex had declined to purchase the 9% shares of Yuande from Yang Shu Hui and then liquidated Yuande.  She said these related to the decisions of Bowdex’s board and none of the defendants was liable to account to the plaintiff for the board’s decisions of which the plaintiff was a member.  But she did not refute the plaintiff’s case of the plaintiff’s ignorance about these matters. 

39.  She, however, did say that the board’s decisions were made in the light of the new policy of the mainland government that allowed carmakers to set up business in the mainland.  Nevertheless, she did not say a word on why Haodebao could thrive and prosper under the new policy but Yuande did not when both companies had the same management, scope of business and retail premises.  More importantly she did not say a word on why they had to set up Haodebao which was apparently to compete with Yuande.

40.  She referred to the loan of RMB2,637,634.25 advanced by Yuande to Haodebao in late 2007 and said that was the account payable by Haodebao to Yuande for purchase of some assets.  She did not disclose anything more about this on the same ground that it was the decision of the board of Bowdex or Yuande and the defendants were not liable to account the same to the plaintiff.  She also said this account payable had been settled by 2008 and that Yuande’s account had been audited after liquidation.

41.  Regarding the loan of RMB23,441,538.78 by Ningde to Ningbao and the liquidation of Ningde in late 2009, she again refused to give any explanation on the same ground that these were decisions of Bowdex’s board.  She did say that the loan was part of the account payable by Ningbao to Ningde for the purchase of its operating assets.  She also said the decision to liquidate Ningde was made in the light of the new policy of the mainland government.  She also said Ningde’s assets had been sold at book value before liquidation.  It is thus clear that Ningde has also been liquidated.

42.  Regarding the sale of the 60% shares of Hangde to Jin Chang, she again refused to give any explanation on the same ground that it was a decision of Bowdex’s board.  She also referred to the valuation report and said that the sale was at market value.  I have already referred to the plaintiff’s criticisms on this report above.

43.  Finally, she said that Bowdex’s business including those of its subsidiaries had no significant business activities since 2009.

The Plaintiff’s Reply

44.  The plaintiff’s accountant, Mr Yiu made an affirmation to refute the 1st defendant’s criticism on his reliance on Bowdex’s turnover rather than the net profit/loss after tax.  He said turnover in this case should provide a more reliable and accurate indicator of Bowdex’s performance and market trend.  It was derived from invoiced value of goods sold less discounts and returns.  It reflected the sales and hence the market size and demand potential the best.  He also said that the net profit/loss is subject to adjustment and provision as a matter of accounting exercise and the result might be illusory.

45.  He also referred to an alleged reduction of HK$47,000,000 trade payables in 2006.  He said this sum was repayment to a shareholder, but the alleged shareholder’s loan and repayment were not substantiated.

46.  The plaintiff also made a reply affirmation.  She referred to the report of her investigators in the mainland and said that the 1st to 3rd defendants had diverted the business of Bowdex to the 4th defendant.  Bowdex’s turnover was reduced from HK$1,305,732,646.77 in 2004 to HK$488,739,017.92 in 2005, but the 4th defendant replaced Bowdex in the sales to Nanjing Fande Automotives Sales Company Limited (“Nanjing Fande”) and achieved sales of RMB75,253,023.50 in 2005.

47.  The plaintiff also challenged the decision of Bowdex, which she was precluded from taking part, to liquidate Yuande rather than to upgrade it to a “4S” company and continue its business.  She said with Yuande’s previous experience and status in providing maintenance and repair service, it could have been upgraded and expanded to a “4S” company easily.  There was also no evidence from the defendants on why this could not be done.  She was therefore shocked to see Yuande being replaced by Haodebao.

48.  She made the same comment on why Ningde was not upgraded to a “4S” company.

49.  She also referred to what happened to Huide and said that the 1st to 3rd defendants wanted to destroy the business of Huide by expanding Shanghai Fande at the expense of Huide.  She made the same comment on why Huide was not upgraded to a “4S” shop but Shanghai Fandi was upgraded and operated as such in Huide’s premises.

50.  Finally, she also referred to two doubtful loans of RMB65,000,000 and RMB50,000,000 extended by Baode in Shanghai to Nanjing Fande and Jie Jiang Jin Hu respectively.  She said these were competitors of Baode.

Summary of the plaintiff’s allegations

51.  She summed up her allegations by saying that the 1st to 7th defendants had a modus operandi to deplete the value of the estate.  That was obviously to benefit the 1st to 3rd defendants.  They used the 4th defendant to establish new businesses to compete with the subsidiaries.  The new businesses were upgraded to “4S” businesses and expanded their scope to include sale of BMW vehicles.  The new businesses were managed by similar personnel and operated in the same premises.  They then closed down the business of the subsidiaries. 

52.  On the evidence, the turnover of Bowdex was reduced from over HK$1,305 millions in 2004 to over HK$488 millions in 2005 and to just under HK$2 million in 2006. Yuande and Ningde have been liquidated though the 1st defendant alleged that Ningde’s assets had been sold per book value.  The Bowdex’s 60% interest in Hangde had been sold at a valuation that did not appear to have included the value of a controlling interest and goodwill of the business.

53.  Huide is not in a position to do business because it has not been upgraded and has lost its authorisation from BMW.  The only thing known about Baode is that it had extended some doubtful loans to its competitors and has no significant business activities since 2009.  The subsidiaries had also been procured to provide financial assistance to their competitors as set up by the 1st to 3rd defendants through the 4th defendant and others. 

54.  The businesses set up by the deceased in Bowdex and its five subsidiaries have more or less come to an end in 2009 whilst the 1st and 3rd defendants are in one way or another continuing and upgrading similar businesses through companies that the estate has no interest whatsoever.

55.  Though some of the plaintiff’s allegations including those of her accountant, Mr Yiu were made in their affirmations in reply, they were filed on 26 July 2010 and the 1st to 7th defendants could have applied to respond to the new allegations, but they had not done so.

The Submissions and Discussions

56.  Mr Fung, leading counsel for the plaintiff reminded me the statement of Mason J made in Hospital Products Limited v United States Surgical Corporation [1984-1985] 156 CLR 41 at 102 on the scope of the fiduciary duty:

“[t]he categories of fiduciary relationships are infinitely varied and the duties of the fiduciary vary with the circumstances which generate the relationship.”

57.  I am also referred to Peskin v Anderson [2001] BCLC 372 where Mummery J held at para. 34:

“… Fiduciary relationships, such as agency, involve duties of trust, confidence and loyalty. Those duties are, in general, attracted by and attached to a person who undertakes, or who, depending on all the circumstances, is treated as having assumed, responsibility to act on behalf of, or for the benefit of, another person. That other person may have entrusted or, depending on all the circumstances, may be treated as having entrusted, the care of his property, affairs, transactions or interest to him. …”

58.  The plaintiff’s case initially as advanced in counsel’s written submissions relied on certain misrepresentation as allegedly contained in an agreement dated 24 May 2005 (“24 May Agreement”) and a partition agreement (“the Partition Agreement”) both made between the plaintiff and the 1st to 3rd defendants.  The misrepresentations were to the effect that the 1st to 3rd defendants had undertaken to “promote and develop” the deceased’s businesses including Bowdex and to update the plaintiff in respect of the estate.

59.  The plaintiff further argued that the 1st to 3rd defendants are constructive trustees because they have exercised fraud on the plaintiff and they should hold the property acquired by such fraud on constructive trust.  The plaintiff also relied on the tort of deceit by reason of the alleged misrepresentation.  However, on the first day of hearing, these issues were given secondary importance.  Mr Fung focused his attack on the 1st to 3rd defendants as intermeddlers of the estate and executors de son tort. Williams, Mortimer and Sunnucks on Executors, Administrators and Probate, 19^th & 7th Ed., para. 17 states how a person can become an executor de son tort:

“Two principles are involved in making a person accountable as an executor de son tort. The first (and most frequently emphasised) is that no one should be permitted, by refraining from taking out probate or administration, to obtain possession of the deceased’s property free from his liabilities. The second is that where a person acts characteristically of an executor, and is not a complete stranger, the natural inference to be drawn is that he is named as executor in a will which he has not yet proved; and third parties should be able to rely on this inference.”

60.  Mr Fung also referred to paras. 61-02 and 61-03 of Williams, Mortimer and Sunnucks which discussed the appointment of a receiver to protect the estate of a deceased:

“Appointment pending grant of administration

61-02 The Chancery Division may, before probate or letters of administration have been granted, interfere on behalf of a creditor or beneficiary in case of need to protect the estate of the deceased by the appointment of a receiver or manager or both.

Grounds for appointment

61-03 Where any misconduct, waste or improper disposition of assets by the representative was shown, the Chancery Division would instantly interfere and appoint a receiver, …”

61.  Mr Fung further submitted that this is not a company matter.  The 1st to 3rd defendants have been handling the estate matters.  They have also been handling the assets of the estate especially Bowdex’s shares and subsidiaries.  It is just intermeddling whether the businesses were held by the deceased as a sole proprietorship before his death or by limited companies owned and controlled by him.  Though the 1st, 2nd and 3rd defendants are directors of Bowdex and some of the subsidiaries, they are also beneficiaries of the estate.  The estate owns 99.8% of the shares of Bowdex. They have, in administering the affairs of Bowdex and the subsidiaries in these circumstances, taken possession of the estate’s property in Bowdex and the subsidiaries and had acted characteristically of an executor.  They have therefore intermeddled with the estate and are executors de son tort.

62.  Mr Wong, leading counsel for 1st to 7th defendants however submitted that the plaintiff has no proprietary right in the estate and thus has no ground to complain.  I am referred to para. 2-06 of Snell’s Equity, 31^st edition:

“Accordingly, the whole ownership is held to be vested in the personal representatives; and until an assent is made in respect of any particular asset, the beneficiary prospectively entitled to it has no greater interest in it than what may perhaps be described as a ‘floating equity’, which may or may not crystallise. In such cases equity protects the beneficiaries, not by giving them equitable interests, but by ensuring the due administration of assets by the personal representatives.”

63.  However I do not think that that would mean that the beneficiary of an estate will have no redress if the personal representative is guilty of breach of trust.  The court may appoint a receiver under its inherent jurisdiction as an interim measure pending the appointment of new trustee.  A receiver may also be appointed on the application of a beneficiary if the executor is of bad character (see Lewin on Trusts, 18^th edn., paras. 38-28, 38-30 and 38-34).

64.  Mr Wong further submitted that the 1st to 3rd defendants had not intermeddled with the estate.  Their dealings with the business of Bowdex and the subsidiaries were carried out by them as directors of these companies.  They dealt with the assets of the companies, not that of the estate.  A company should also not be equated with a sole proprietorship. A sole proprietorship has no independent legal personality and is run by the owner who is exposed to an unlimited liability.  The company law and reflective loss principle do not apply to it.  However, a company is an independent legal person despite it may be wholly owned by one shareholder.  It is run by a board of directors.  The shareholder is not exposed to the companies’ liability.  I bear all these in mind.

65.  However, I am of the view that the obvious reason for the 1st to 3rd defendants to have been able to deplete Bowdex and divert its business and the businesses of its subsidiaries to their companies is not simply because they were directors of Bowdex and the subsidiaries.  I do not think any shareholder of Bowdex who has not allied with them would have allowed them to do so.  They could have been so acted because they have usurped the estate’s rights and powers as Bowdex’s 99.8% shareholder.  They have taken possession of the rights and powers pertaining to these shares and have exercised such rights and powers purportedly as directors of the companies, but characteristically of executors of the estate.  On the evidence before me, I hold that they are intermeddlers and executors de son tort. 

66.  Mr Wong further submitted with emphasis that the properties of a limited company belong to the company and not its shareholders.  Whatever loss that had been suffered by Bowdex and/or the subsidiaries, they are the loss of these companies and are for these companies to pursue, if need be.  The shareholder’s loss in the diminution in value of his shares or loss of dividend is a reflective loss of that of the company.  It is not open to the shareholder to recover such loss.

67.  As a matter of principle Mr Wong is correct. The properties of a limited company do not belong to its shareholders.  There are also many authorities saying that a shareholder cannot sue for reflective loss.  If he should be allowed to do so, he may recover at the expense of the company, its creditors and other shareholders.  Alternatively, if both the shareholder and the company are allowed to sue for such loss, there will then be double recovery (see Johnson v Gore Wood & Co. (a firm) [2002] 2 AC 1 at 61G to 63G and Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 at paras. 81 to 88).

68.  However, apart from not allowing the estate to claim against the 1st to 7th defendants for reflective loss, it does not mean that the law will provide no remedy to the estate or the plaintiff, being the only beneficiary who suffers from the acts and conduct of the 1st to 3rd defendants.  Though Bowdex has an independent legal personality, the court is alert to the reality that the estate and the plaintiff suffer from the depletion of Bowdex by the 1st to 3rd defendants. 

69.  The plaintiff is only a director of Bowdex. Despite she had entered into the 24 May Agreement and the Partition Agreement with the 1st to 3rd defendants under which she would be distributed $1,247,500 Bowdex shares, she cannot exercise any right as a holder of such shares until they are registered in her name.  She is not yet a member of Bowdex (see Yan Kwok Jin Julian v Yan Kwok Kee Gay [1997] 3 HKC 237 at 240B-C).  She therefore has no right to bring a derivative action on behalf of Bowdex.  This is so whether it is under the common law or section 168BC of the Companies Ordinance, Cap. 32.  Nor can she petition for relief under section 168A of the Ordinance on the ground that the affairs of the Bowdex are conducted in a manner unfairly prejudicial to her as a member of the company.  She therefore cannot obtain any redress in the meantime.

70.  In these circumstances, Mr Fung drew my attention to Bond Brewing Holdings Ltd & Ors v National Australia Bank Ltd & Ors (1990) 1 ASCR 445.  Headnotes 1 and 2 of the report state:

“(i) The appointment of a receiver, like any another equitable remedy, is to be had only where the remedies obtainable at law are inadequate to meet the ends of justice. The inadequacy of legal remedies is a condition for the proper exercise of equitable jurisdiction rather than the foundation of the jurisdiction itself.

(ii) There is no principle that a receiver may be appointed only on the application of a person who asserts some proprietary interest in the property concerned. What the applicant must show is that he has some legal or equitable right which will be protected or enforced by the making of the order sought and that no other available remedy is adequate for that purpose.”

71.  Though the plaintiff is not a shareholder of Bowdex and cannot bring a derivative action for it, she no doubt has some rights and interests in the estate that has been described as a floating equity in Snell.  The evidence also shows that her rights and interests need protection.  The appointment of a receiver appears to be the appropriate remedy at this stage (see also Kerr & Hunter on Receivers & Administrators, 18^th edn., paras. 2-13 to 2-14).

72.  In answer to the argument of the 1st to 7th defendants that the loss of the estate is merely a reflective loss and there is therefore no serious question to be tried, I disagree and hold that there is a serious question to be tried on whether the estate’s loss and hence the plaintiff’s loss, though reflective, still deserves protection by the appointment of a receiver.

73.  Mr Wong further submits that there is no real danger of dissipation of assets as there is no impending real risk of dissipation.  Nevertheless, judging from the glaring deeds done by the 1st to 3rd defendants on Bowdex and the subsidiaries, there is an obvious risk that they may damage the estate further by depleting whatever that is still left in the estate.  There is not much known about the remaining assets of Bowdex and in particular the subsidiaries.  There is also a sum of HK$47,000,000 shareholders loan that has been queried by the plaintiff’s accountant, Mr Yiu.  Judging from their conduct, the 1st to 3rd defendants cannot be trusted with the assets of the estate in particular the assets of Bowdex and its subsidiaries.

74.  Mr Wong further submitted that on a balance of convenience, no receiver should be appointed as the plaintiff’s loss may be adequately compensated with damages.

75.  I do not accept this.  Though Yuande and Ningde have been liquidated and the interests in Hangde have been sold to Jin Chang, there are still the businesses of Huide and Baode.  Huide has allegedly lost the authorisation of BMW, but it is still there.  There is little known about Baode save that it had made some doubtful loans to its competitors.  There are also the assets of Yuande and Ningde and the proceeds of sale of Hangde that should be protected.

76.  Mr Fung for the plaintiff has also referred to Wong Chung Ming Development Fund Co. Ltd v Profit Surplus Ltd [2009] HKLRD 514 at para. 21 where Li Pichon JA said:

“Mr Yuen submitted that any repair or renovation required would be quantifiable and therefore reducible into a monetary sum. His approach was that so long as the loss can be quantified, it is compensatable in damages, such as would render damages an “adequate remedy”. In my view, Mr Yuen’s approach does not reflect the principles laid down by Lord Diplock. It confuses the ability to assess damages at common law with the question whether such damages would be an “adequate remedy”. The one does not follow from the other. While common law damages may be assessed for all kinds of loss, whether it constitutes an “adequate remedy” is a different question. The key consideration is whether an award of damages would adequately compensate the defendant. In American Cyanamid Co v Ethicon Ltd, the loss of a business opportunity (i.e. the chance of continuing to increase total market share in a particular pharmaceutical product) was not a loss where an award of damages was considered adequate, although such a loss could be assessed at common law.”

77.  Mr Wong also argued that the appointment of a receiver to the estate may cause irreparable loss to the defendants.  He referred to Re Niceline Co. Ltd [2003] 2 HKLRD 726 at paras. 71 and 72 where Kwan J (as she then was) cited Bond Brewing at 456 to 457:

71． I was asked to heed the words of caution in Bond Brewing Holdings Ltd v National Australia Bank Ltd & Others (1990) 1 ACSR 445 at p. 456 which are as follows:

‘The appointment of a receiver is one of the oldest remedies of the Court of Chancery, and a very useful remedy it is. But its very efficacy means that a corresponding caution must attend its employment. … The appointment of a receiver which is, so to speak, at the expense of the defendant’s possession and without his consent is a step never to be taken without proper consideration of the defendant’s position … Where a receiver is sought, not merely of a particular asset of the defendant, but of all his assets, particular caution is required and where, as in the present case, the receiver is to possess himself of and to manage the assets and undertaking of a collection of companies which, whether they are solvent or not, are in a very large way of business, very great circumspection is required. Of course in a strong enough case the court might, without warning to a trading company, divest it of control of its undertaking and assets. But it must always be borne in mind that the appointment of a receiver in such a case authorises an irresistible invasion and that even if the army of occupation is withdrawn after only a short time things may never be the same again. Rights of property and the company’s privacy are violated. … And in addition to the legal consequences there was the commercial consideration that, as Picarda, Receivers and Managers p. 4 has observed, the receiver is often seen not as the company doctor but as the undertaker, so that a blow is struck to the standing and credit of the defendants.’

72. I also note the dicta in Jaber v Science & Information Technology Ltd [1992] BCLC 764 at p. 789H and Re Mountforest Ltd [1993] BCC 565 at pp. 571E to 572A that it would be difficult for those in the outside world to distinguish between receivers appointed on grounds of insolvency and receivers appointed for other reasons and the inevitable slur which a receivership would cast on the assets of a company and its business, and that these are factors which would weigh with the court against appointing receivers.”

78.  However, judging from what the 1st to 3rd defendants have done to Bowdex and the subsidiaries on the purported ground of the new policy of the mainland government, if there is no intervention by a receiver, it is likely that Bowdex and the remaining subsidiaries will go out of all their businesses soon.  The 1st defendant has in fact said that Bowdex and the subsidiaries have no significant business activities since 2009.  Mr Wong has also said in the written submissions that:

“[t]here is no dispute that business of Bowdex (and its subsidiaries) had been closed down and its turnover dropped as a result.”

79.  I am fully alerted to the risks and warnings about the appointment of a receiver.  But in these circumstances, I do not think the 1st to 7th defendants can say that there is much that can be harmed by the appointment of a receiver.  I would rather think that a receiver should be appointed to save whatever that remains and to protect the estate from further depletion.

80.  Finally, Mr Wong submitted that there is no evidence of the plaintiff’s ability to meet her undertaking as to damages.

81.  The schedule of property issued by the Estate Duty Office of the Inland Revenue Department and dated 12 June 2007 stated the net principal value of the estate at $95,656,492.  The plaintiff is entitled to ¼ of this when the estate is duly administered less the 15% estate duty payable.  No reason has been suggested that the plaintiff’s entitlement will be reduced.

82.  Mr Wong does not accept this entitlement as sufficient evidence of the plaintiff’s ability to meet her undertaking.  His ground is that the plaintiff currently has no proprietary interest in the assets of the estate.

83.  I would take a realistic approach.  I take the view that the plaintiff’s entitlement to the estate is sufficient to back up her undertaking as to damages.

84.  There are also some arguments about who should be appointed as the interim receivers.  The plaintiff has proposed two accountants for appointment.  The 1st to 7th defendants have proposed other candidates.  The plaintiff alleged conflict of interests in the defendants’ candidates.  The 1st to 7th defendants asked for time to resolve this question if I should decide to make the appointment.  They however have not questioned the suitability of the plaintiff’s candidates.  In order to save time and costs, I will not adjourn the matter to resolve the alleged conflict of interest.  I accept the plaintiff’s candidates for appointment.

Decision

85.  In the premises, I accept the plaintiff’s application.  I order that pending the determination of this action or further order of this Court:

(1) Mr Edward Simon Middleton and Ms Wong Wing Sze Tiffany be appointed the interim receivers on a joint and several basis (“the Receiver”) to the estate of Tong Zang (唐誠) also known as Tang Zang alias S.S. Tang (“the Deceased”), late of 9F-4, No. 8, Fujin Street, Songshan District, Taipei City, 105, Taiwan, Republic of China, in Hong Kong, including but not limited to the 4,990,000 shares in the 8th Defendant registered under the name of the Deceased and the ancillary dividends and profits therefrom and such other assets and properties identified and listed in the Schedule of the Property issued by the Estate Duty Office of the Inland Revenue Department dated 12^th June 2007 (“the Estate”) as follows:-

(a) Without limiting the general powers of receiver, the receiver shall have the powers to trace, collate, investigate and recover the assets that belong to the Estate and to request all parties including any of the Defendants to disclose and to account to the Estate any assets belonging to the Estate, including but not limited to instituting legal proceedings against any of the Defendants in the name of the Estate.

(b) The Receiver shall give written report of the progress of the receivership to the Plaintiff and the 1st to 3rd Defendants as the beneficiaries to the Estate at an interval of every 6 months.

(c) The Receiver shall be remunerated on the terms and conditions and at the rate of fees set out in a letter dated 21 April 2010 from them to the plaintiff’s solicitors.

(d) The proper and reasonable remuneration and disbursements of the Receiver shall be paid out of the Estate and shall be assessed on the trustee basis if not agreed by the Plaintiff and the 1st to 3rd Defendants as beneficiaries to the Estate.

(e) The Receiver, be at liberty to employ agents, advisers and legal advisers to act for himself or the Estate as may be necessary and the costs of employing such agents, advisers and legal advisers shall be payable from the Estate.

(f) The receiver be at liberty to apply to the court for further directions with respect to the receivership.

(2) The Defendants, whether by themselves or their servants or agents or otherwise howsoever, be restrained from receiving, selling, charging or otherwise dealing with the Estate or any part or parts thereof.

(3) The Defendants be required to deliver up the Estate to the Receiver. The Defendants shall cause the shares in the 8th Defendant registered in the name of the Deceased to be registered under the name of the Receiver and to transfer such ancillary dividends and profits therefrom to the Receiver.

(4) The Defendants be required to give proper accounts of the Estate to the Receiver and to answer such inquiries as may be required by the Receiver.

86.  I further make a costs order nisi that the costs of the application be reserved save that the costs of the argument be paid by the 1st to 7th defendants to the plaintiff in any event with certificate for three counsel.