CHEN HA PING HEPBURN also known as CHEN HA PING AND ANOTHER v. LOONG SAN INVESTMENT COMPANY LTD AND ANOTHER

HCMP 1380/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1380 OF 2013

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HCMP 1381/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1381 OF 2013

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HCMP 1383/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1383 OF 2013

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(Heard Together)

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R E A S O N S   F O R   J U D G M E N T

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1. There are 3 applications for leave to commence statutory derivative action under s 168BC of the Companies Ordinance, Cap 32, on behalf of 3 companies – Loong San Investment Co Ltd (“LS”), Loong Wan Investments Ltd (“LW”) and Leeloong Investment Co Ltd (“LL”) (collectively “Companies”).  The Companies are the 1^st respondents in these applications.

2. The background of these applications is largely uncontroversial and can be briefly stated as follows.  Mr Chen Tsing Kwan (“TK”), who is now 92 years old, was a successful architect and property developer.  The Companies were founded by him.  Each one of the Companies holds a bock of commercial building in Hong Kong.  The only business of the Companies is the collection of rents and payment of related expenses. 

3. TK has 4 children – Daniel Chen (“Daniel”), Hepburn Chen (“Hepburn”), TH Chen (“TH”) and TN Chen (“TN”).  Daniel is the 2^nd, and the true, respondent to these applications and Hepburn and TH are the applicants.  

4. The shares in the Companies have been given by TK to his children.  In respect of LS and LW, each of them holds 25% of the shares of those companies.  As regards LL, Daniel has 40% of the shares and the remaining 60% are equally shared by the 3 other children.  Daniel and Hepburn are the directors of LS and LW, whereas TK, his wife and Daniel are the directors of LL.

5. For many years, Daniel had been working as the personal assistant of TK.  He was entrusted with the affairs of the Companies. His brothers and sister all have their own career and were not involved in the running of the Companies.  I should mention that there is some tension between the parties on this part of the evidence.  It is Daniel’s case that TK, despite his advanced age, remains in control of the Companies.  It is unnecessary to resolve this matter for the present purpose.

6. In the middle of 2010, TK instructed Daniel to distribute the accumulated rental income of the Companies amongst the 4 siblings.  Daniel refused.  He said that LS and LW were indebted to him to the tune of, respectively, HK$53m and HK$54m (“Loans”) and hence there was no money for distribution at all. Expectedly, that sparked off a major dispute between TK, Hepburn and TH and one side and Daniel on the other.  It appears that TN may have taken the side of Daniel or has simply washed his hands over the dispute.  It is, however, not a critical matter for the present purpose. 

7. The applicants say that the Companies’ business is confined to renting out their buildings and there is no reason to believe the genuineness of the Loans.  There is evidence that when TK and Hepburn demanded to inspect the books and accounts of the Companies, Daniel responded by having them removed.  Such evidence is not disputed.

8. Discovery applications were then taken out by TK, Hepburn and TH in October 2011 against Daniel for the books and accounts of the Companies.  Those applications were allowed in May 2012 with costs against Daniel. 

9. The applicants say that the disclosed material was analysed by their forensic accountants and it has been shown that a number of wrongs have been committed by Daniel against the Companies.  However, with TN’s disagreement with any shareholder’s resolution to institute proceedings against Daniel, it is necessary to resort to these applications.

The proposed causes of action

10. Based upon 2 reports of their accountants (“Reports”), the applicants have put forward 3 complaints against Daniel, which are set out in the applicants’ skeleton submissions :

“(1) He fabricated the accounts of the Companies to create a false pretence that the Companies are indebted to him for loans of HK$53,066,000 and HK$54,249,000 (when the truth is that the alleged loans do not exist) (“Loans Issue”);

(2) He fabricated the accounts of the Companies to make it appear that dividends declared in favour of shareholders in the total sum of HK$34 million were debts owed by the Companies to himself (“Dividends Issue”);

(3) He misappropriated an aggregate sum of HK$11,375,108 from the Companies (“Misappropriation Issue”).”

11. I shall deal with the complaints in turn.  However, before doing so, I need to deal with the objection of Mr Lo, who appeared for Daniel, on the admissibility of the Reports.  The objection is premised upon the absence in the Reports of any declaration of duty to the court as provided under O 38, r 37C.

12. I believe that the objection is misconceived.  O 38, r 37C(1) refers to “An expert report disclosed under these rules…”.  The disclosure of expert report is provided for under O 38, r 37 as a requirement to be satisfied when an application is made under O 38, r 36(1) for adducing oral expert evidence.  Rule 36(1) serves to render the production of expert evidence under the control of the court (save where it is agreed by all parties) by requiring an application to be made.  However, r 36(2) provides that “Nothing in paragraph (1) shall apply to evidence which is permitted to be given by affidavit …”.

13. Under O 38, r 2(3), “In any cause of matter begun by originating summons …, evidence may be given by affidavit unless … any provision of these rules otherwise provides or the Court otherwise directs, …”. 

14. There is no contrary direction by the court or contrary provision in the rules requiring the evidence in this case to be given otherwise than by way of affidavit.  Hence, O 38, r 37C(1) has no application to this case.  However, it must be said that it is desirable for all expert reports used in legal proceedings to contain a declaration of duty to the court. 

Dividends Issue

15. At the hearing which took place on 6 December 2013, it was thought that this dispute was resolved with an acknowledgement by Daniel made at the hearing that any dividends declared by the Companies, if booked to his credit (there was a dispute whether the dividends were so treated in the books), in fact belong to the individual shareholders.  The parties were given the opportunity to agree the appropriate measure to be taken to rectify the books of the Companies.

16. Regrettably, when the hearing resumed after 4 months on 10 April 2014, there was no agreement reached by the parties.  However, at that hearing an undertaking was given to the court on behalf of Daniel the effect of which is to reverse the declarations of dividends thereby putting an end to the dispute over this issue.  The terms of the undertaking were acceptable to the applicants and accepted by the court. 

17. In the premises, it is unnecessary to make any order for substantive relief in respect of the Dividends Issue and I ordered that the costs regarding this cause of action, assessed at 25% of the total costs incurred up to and including 10 April 2014, be paid by Daniel to be taxed if not agreed. 

Misappropriation Issue

18. The cause of action over the sum of HK$11,375,108 (“Sum”) concerns money belonging to LS (about HK$3.9 million) and LW (about HK$7.47 million) which are in the hands of Daniel but he has failed to deposit the same into the bank accounts of those companies.  The details of those matters have been set out in the 2^nd Report. 

19. There is no dispute by Daniel to the fact that he is in possession of the Sum.  The only “defence” advanced by Mr Lo is that those companies are heavily indebted to Daniel (the Loans) and therefore there is no requirement for him to repay the Sum.  The effect of Mr Lo’s argument is that there should be a set-off between the Sum and the debts owed by the companies to Daniel.

20. I am unable to accept Mr Lo’s argument for 2 reasons.  Firstly, I am not convinced on the evidence marshalled by Daniel that the Loans belong to him beneficially (see further below).  Indeed, I find his position on this critical issue deliberately opaque.  If he is merely a trustee in respect of the Loans, I cannot see why he can impose a set-off between the money owed to the trust and his own debts.

21. Secondly, there is no sanction at all for the set-off by the boards of directors.  It is not disputed that Daniel is a fiduciary of the companies.  He is not entitled to treat the companies’ assets as his own.  He is duty bound to, inter alia, avoid any conflict of interest with the companies.  I cannot accept that it is legitimate for Daniel to hold onto the companies’ funds as and when he desires. 

22. In the premises, I am unable to see any defence to this cause of action and it is appropriate for leave to be granted to institute derivative actions in the names of LS and LW in respect thereof and I did so at the end of the hearing on 6 December 2013.  I also granted the costs indemnity order sought in the originating summonses in respect of such actions. 

23. At the hearing on 10 April 2014, I made a costs order against Daniel in respect of this cause of action assessed at 25% of the costs incurred up to and including the hearing of 6 December 2013.

Truncated determination

24. Before dealing with the last issue, a few words should be said about the course which this hearing has taken.  When the Loans Issue was addressed in the course of the last hearing, it became apparent that the Reports were unsatisfactory in that they had not dealt with the evidence filed by Daniel in July and September 2013 because such evidence was adduced after the completion of the Reports.  I should add that Daniel’s evidence was voluminous and no proper effort was made to have them presented in a manner which would assist the court.  However, Mr Lo did try to do so with his very dense skeleton submissions. 

25. In those circumstances, Mr Wong SC, who appeared for the applicants with Mr Kwong, made an application to adjourn the hearing so that further expert evidence can be adduced on Daniel’s material.  Mr Lo also sought leave to adduce an expert report to properly present the evidence of his case.  Those applications were acceded to.

26. However, Mr Wong sought a determination of the Misappropriation Issue on the ground that there should be no further delay in light of TK’s age.  I agreed with Mr Wong given the importance of TK’s evidence.  Hence, the determination of these matters has, unusually, been truncated.

Loans Issue 

27. In summary, the Loans represent the purchase price paid for the buildings held by LS and LW.  The applicants’ case is that the money came from TK and that Daniel is a mere trustee for his father.  In these applications, the applicants seek to have those companies launching actions against Daniel so as to rectify what they say are incorrect entries in the books of those companies. 

28. At the hearing on 10 April 2014, this dispute has largely been overtaken by an action issued by TK against Daniel on 1 April 2014 to resolve the beneficial ownership of, inter alia, the Loans (“TK’s Action”).  LS and LW have been joined in that action so as to be bound by the results.  Mr Wong characterised this development as a pragmatic measure taken by TK’s side. 

29. Although Mr Wong initially tried to persuade the court to adjourn the relevant applications (HCMP 1380 and 1381 of 2013) pending the resolution of TK’s Action, he eventually had to withdraw this issue from the consideration of the court.  Such action was taken in light of the indication given by the court over the merits of these applications. 

30. Firstly, there is no dispute that (a) the purchase price for the properties in question was channelled through Daniel’s personal bank account; (b) assuming that the money came from TK, such arrangement was made with his consent at the material time; and (c) the issue is therefore confined to the beneficial entitlement of the Loans.  In these circumstances, I have considerable difficulty in understanding how is can be said that it is wrong for the companies’ books to record the Loans as owed to Daniel, being the legal owner of the Loans. 

31. Mr Wong was unable to point to any authority in support of his case, save and except s 121(2) of the Companies Ordinance, Cap 32 which provides that the books of account of a company should give a “true and fair view”. 

32. Secondly, I am troubled to as why the companies should get involved in the contest between TK and Daniel.  I am unable to see why it would be in their interest to do so.  Quite the contrary, the resources of the companies should not be deployed for the purpose of TK. 

33. There is no need to dwell further on these matters given the withdrawal of the Loans Issue by the applicants.  As for the costs in relation to this cause of action, I made no order for the costs incurred up to and including the hearing of 6 December 2013.  This reflects the unsatisfactory state of Daniel’s evidence.  In respect of the costs incurred thereafter, assessed at 50% of the total costs so incurred, they are to be paid by the applicants to Daniel to be taxed if not agreed. 

34. I also granted a certificate for 2 counsel in favour of the applicants.