UDL HOLDINGS LTD AND ANOTHER v. LEUNG YUET KEUNG AND ANOTHER

CACV 356/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 356 OF 2008

(ON APPEAL FROM HCA NO. 4409 OF 2002)

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BETWEEN

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J U D G M E N T

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Hon Rogers VP:

1.  This was an appeal from a judgment of Stone J given on 22 October 2008. The plaintiffs’ claims were that the defendants were in breach of fiduciary duties owed to each of the plaintiffs and they had also misused confidential information obtained from the first plaintiff and were therefore liable to reimburse the plaintiffs in damages or to account for profits.

2.  The judge below dismissed the plaintiffs’ claims and the plaintiffs appealed from that judgment. At the conclusion of the hearing of this appeal judgment was reserved to be given in writing which we now do.

Background

3.  At the relevant time, the second plaintiff was a subsidiary of a company known as UDL Ship Management Limited, which itself was a subsidiary of the first plaintiff. The first plaintiff was the ultimate holding company of a group of over 100 subsidiaries. The second plaintiff owned a trailing suction hopper dredger named the “KAI HONG” (“the dredger”). During the relevant time the first and second defendants were directors of the first plaintiff and the first defendant was a de facto director of the second plaintiff. The second defendant was not a director of the second plaintiff.

4.  In February 1997, the second plaintiff agreed to purchase the dredger from Universal Dockyard Ltd under a bill of sale for HK$69.5 million on an ‘as is’ basis. Nippon Credit Bank (“Nippon Credit”), a Japanese financial institution, lent HK$48,650,000 under a Loan Agreement and the first plaintiff was the guarantor of the loan. It would appear that simultaneously the price was revised to $15,460,000. Importantly for this case, the second defendant mortgaged the dredger, in addition to its rights, title and interest in the insurance policy in respect of the vessel, to Nippon Credit as security for the loan.

5.  There was default under the loan and neither of the plaintiffs could pay the amounts due to Nippon Credit. As a result on 9 October 1998, Nippon Credit issued a writ in rem and warrant of arrest against the dredger and subsequently, by Order dated 13 November 1998, the dredger was ordered to be sold. The Invitation to Tender, signed by the Acting Registrar of the High Court, made clear that the dredger was offered on an ‘as is’ and ‘where is’ basis without any warranty or guarantee whatsoever.

6.  The first and second defendants placed bids through nominee BVI companies. One of those bids was made by Fanwick Limited (“Fanwick”). That was for $8,522,800 and has been referred to as a conforming bid, in other words it conformed to the terms of the Invitation to Tender. The other bid was made by Healthy Wharf Limited (“Healthy Wharf”). The amount of that bid was $14,721,200. That latter bid did not conform to the terms of the Invitation to Tender because there was a qualification that Nippon Credit should assign the benefit of two insurance claims which then remained outstanding and due in respect of two accidents that had been occasioned to the dredger. It suffices to say that, under the terms of the Deed of Covenants dated 7 March 1997 made by the second plaintiff, following the event of default, Nippon Credit was entitled to have any money recovered under the insurance policies in respect of those claims held in trust for it.

7.  The bid by Healthy Wharf was accepted by letter from the Chief Bailiff (Administration & Admiralty). The letter of acceptance stated specifically that the insurances and the proceeds of any such policies did not “form part of the vessel or her appurtenances advertised for sale by the court or, indeed, under the Court’s direction.” The letter continued that the mortgagee bank had agreed to the conditions. It was thus, because Nippon Credit agreed to assign the benefit of the insurance claims, to which it alone was entitled, that Healthy Wharf obtained the insurance payments. Nippon Credit was the only creditor entitled to the proceeds of sale of the dredger and it alone obtained the purchase money paid by Healthy Wharf.

8.  The basis of the plaintiffs’ claims were that the first defendant’s brother, Mr Leung Yat Tung, (“Y T Leung”), who was then the Chairman of the first plaintiff, had given the first defendant confidential information belonging to the first plaintiff namely that an Italian company, Dragomar SPA (“Dragomar”), was interested in purchasing the dredger for around US$5 million in a fully repaired state or alternatively for around US$3.5 million without repair. Furthermore, it was said that the first defendant, in addition to or alternatively the second defendant, had acquired information from Y T Leung that there would be bids for the dredger up to US$1 million but not beyond. It was also alleged that Y T Leung had told the first and second defendants that the insurance recovery in respect of the unrepaired damage was expected to be between US$1.1 million and US$1.5 million. On that basis it was said that the first and second defendants had been in breach of their duties and misused confidential information by purchasing the dredger and ultimately selling it on to Dragomar.

9.  For their part the first and second defendants claimed that they knew nothing of the Dragomar bid as alleged by the plaintiffs. Nevertheless, the dredger was ultimately sold to Dragomar for US$3.1 million. The dredger had been purchased because of representations made by Y T Leung who had said that he would charter the dredger when it had been repaired. In respect of the insurance claims a total amount of only US$520,778.51 had been recovered.

10.  At the trial the judge heard evidence from a number of witnesses and formed a very unfavourable view of the evidence from Y T Leung. Specifically, where it was at variance with the evidence from that of the first and second defendants he accepted the evidence of those latter two witnesses. The judge considered that the action was the continuation of a long running feud between the brothers. The judge’s conclusion on the facts alleged in respect of Dragomar were summarised in paragraph 61 and 62 of his judgment:

“61. I further find as a fact that YT Leung indeed did persuade the 1st and 2nd defendants to bid for the vessel via tender at the judicial sale with a specific view to entering into a charter of this vessel with either YT Leung (or a company owned or controlled by him), that any discussion as to the price that the vessel would fetch at the judicial sale was no more and no less than the subject of speculation, and merely was a ‘guesstimate’ as to the approach of such other bidders as they may have been; in the circumstances, therefore, I do not accept that there was any specific statement by YT Leung to the defendants to the effect that the bids at the tender for the vessel would not exceed US$1 million.

62. To sum up: I find truthful the specific evidence of the defendants as to their ignorance of Dragomar, and its interest in purchasing the vessel, until YT Leung proved incapable of taking the vessel on charter, which had been the original rationale of the purchase plan which he had taken to the defendants.”

11.  The judge was not satisfied that there was any confidential information relating to the insurance claims and, furthermore, that because of the event of default any information relating to the insurance was the property of Nippon Credit and not the plaintiff companies. The judge had little difficulty in holding that there had been no breach of the no conflict rule.

12.  On this appeal, Miss Lam initially sought to challenge the findings of fact made by the judge, but, when faced with the difficulty of disturbing findings of fact, that challenge as to the findings of fact was not pursued. In those circumstances any complaint relating to the allegation that Dragomar would have been willing to buy the vessel at much more than the bid price simply fell away. It is, perhaps, not impertinent to add that that aspect seems to have been the major ground of complaint at the trial.

13.  Although Miss Lam attempted to construct a case on breach of fiduciary duty in relation to the insurance claims, that seemed to me to have been hopeless from the start. The fact is that by putting in 2 bids using different nominee companies, the defendants had paid more than US$600,000 more to secure the benefit of the insurance claims than would have been the case had the Fanwick bid been the only bid put forward by the defendants. As it transpired only US$520,778.51 was received as a result of the insurance claims. Hence there was no profit at all.

14.  Mr Sussex SC, who appeared on behalf of the defendants, went further. He relied on the judgment in the case of Chan v Zacharia (1984) 154 CLR 178 for an exposition of the difference between what has been referred to as the “no profit” rule and the “no conflict” rule in relation to fiduciaries. In that case Deane J referred to what he called 2 themes in relation to the law as to fiduciaries having to account for profits they have made. At page 198-9 he explained that in respect of the “no conflict” aspect, the fiduciary must account where a conflict or significant risk of conflict existed between fiduciary duty and personal interest. The “no profit” aspect of the rule is one which prevents the fiduciary receiving any benefit or gain by reason of or by use of the fiduciary position.

15.  It was said that there was no conflict in this case because the judge held that there was no relevant duty, because there was no duty to bring the existence of the insurance claim to the attention of the bailiff. The benefit of the insurance claim belonged to Nippon Credit. The plaintiffs had, because of the event of default, no further interest in the insurance claims and there was no possibility of either of the plaintiffs benefiting from the insurance claims.

16.  The “no profit” aspect prevents the fiduciary from misusing his position to gain a profit. In the present case, the defendants did not receive any information because of their position as directors or in connection with their duties as directors. The evidence from Y T Leung himself was that anything that he told the defendants about the insurance claims was not because they were directors. The profit arose outside the scope of the company’s business; any information was not given to them as their capacity as directors. Furthermore, it could hardly be said that any information relating to the insurance claims was confidential information of the company. It might also be observed that there does not seem to have been any proper identification of what was confidential. The judge made clear that he did not accept the plaintiffs’ evidence as to the information that was alleged to have been passed to the defendants.

17.  In those circumstances, I see no alternative but to dismiss this appeal and make an order nisi of costs in favour of the defendants. The amendments to the Rules of the High Court have included a provision in Part II, 1(3) of the First Schedule of Order 62 that no costs shall be allowed in respect more than one counsel appearing before the Court of Appeal unless the attendance is certified as being proper. In view of the fact that parties will frequently forget to request such a certificate and nearly every case in the Court of Appeal merits the attendance of two counsel, the practice of this court in respect of substantive appeals will be to grant a certificate unless the matter is raised specifically.

Hon Le Pichon JA:

18.  I agree.

Hon Sakhrani J:

19.  I agree with the judgment of the Vice-President and have nothing to add.