ALEPH FABRIZIO KRAUS, a minor by ERIC GEORGE KRAUS, his next friend and father v. ALL ASSET MANAGEMENT (ASIA) LTD AND ANOTHER

CAMP 264/2023, [2024] HKCA 669

On Appeal From [2022] HKCFI 2992

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 264 OF 2023

(ON AN INTENDED APPEAL FROM HCA NO 86 OF 2021)

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BETWEEN

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J U D G M E N T

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Hon G Lam JA (giving the Judgment of the Court):

1.  By his decision dated 5 October 2022,[1] DHCJ H Au-Yeung (as he then was) (“the judge”) granted the application of Twenty Two East Limited (in liquidation) (“TTE”) for it, acting through its joint liquidators, to be joined as an additional defendant in the action of HCA 86/2021 (“Action”).

2.  The plaintiff, who is a minor bringing the Action by his father and next friend Mr Eric Kraus (“Mr Kraus”), having unsuccessfully opposed TTE’s joinder, sought leave to appeal. The judge refused leave by his decision dated 14 July 2023.[2] The plaintiff now applies to this court for leave to appeal. He applies in addition by two summonses for leave to adduce further evidence in connection with his application for leave to appeal and for leave to amend the draft grounds of appeal.

3.  For present purposes, the background can be stated briefly.

4.  Mr Kraus and the 2^nd defendant were married in Moscow in October 2014, with the plaintiff, their son, having been born in May 2013. In 2015 their relationship deteriorated, and they were eventually divorced in March 2017.

5.  TTE is a BVI company incorporated in 2013, with a company called LCD Holdings Ltd (“LCD”) as its sole shareholder initially. In March to July 2014, Mr Kraus caused certain funds and assets, beneficially owned by him or by his corporate vehicle, to be transferred into 3 accounts held in the name of TTE with Bank of Singapore, CIM Bank and Mekong Portfolio Investment Ltd respectively (“TTE’s Accounts”). The shareholding in TTE was subsequently transferred to the 2^nd defendant.

6.  On Mr Kraus’ case, which is also the plaintiff’s case in this litigation, these transfers were made pursuant to an “Asset Holding Arrangement” whereby it was agreed between Mr Kraus and the 2^nd defendant that all the assets and companies placed by him under her legal or nominal ownership would remain in Mr Kraus’s ultimate beneficial ownership and under his full and complete control.

7.  Mr Kraus, and thus the plaintiff, say that as a result of the deterioration in Mr Kraus’s relationship with the 2^nd defendant, he took steps to set up an alternative arrangement. In late 2016, he caused TTE to transfer the assets in TTE’s Accounts to another BVI company called Ice Enterprises Ltd (“IEL”), and at around the same time he caused the shareholding in IEL to be transferred, first, from its original sole shareholder, LCD, to the 2^nd defendant, and then from the 2^nd defendant to Sovereign Trust International Ltd (“STIL”) as trustee of a trust known as the “Solaris Trust”, the beneficiaries of which included the plaintiff. Shortly thereafter, in December 2016, the 1^st defendant – a Hong Kong company providing trustee services – replaced STIL as the trustee of the Solaris Trust. In March 2017, the 1^st defendant by exercising its powers under the trust deed changed the proper law of the Solaris Trust from the law of Gibraltar to the law of Hong Kong.

8.  Subsequently, the 2^nd defendant communicated with, among others, STIL and its successor trustee the 1^st defendant, suggesting that the 2^nd defendant was the real settlor of the Solaris Trust, and demanded that the trust assets be transferred to another trustee appointed by her. She also obtained an order from the BVI court on 12 November 2020 restoring TTE, which had been put into voluntary liquidation and eventually dissolved in 2017, to the BVI register of companies.

9.  As a result of the 2^nd defendant’s competing claims, the 1^st defendant considered that it could not accede to Mr Kraus’s request for the assets to be put into a sub-trust with the plaintiff as the sole beneficiary.

10.  The 2^nd defendant’s version of events may be seen from a witness statement she signed dated 30 September 2020 filed in the BVI for the purpose of her application to restore TTE, exhibited by TTE to the affidavit filed in support of its joinder application. The 2^nd defendant’s case, in contrast to Mr Kraus’s, is that out of love and affection, Mr Kraus had given gifts to her. She has exhibited a deed of gift executed by Mr Kraus and herself in Vietnam in 2015 by which Mr Kraus gave her, inter alia, the entire issued shareholding of LCD. She says that she later realised that by this means she became the ultimate beneficial owner of TTE, since LCD was its sole shareholder. She complains that by various wrongful means Mr Kraus caused the assets held by TTE to be transferred away.

11.  On 15 January 2021, the writ in the Action was issued in the plaintiff’s name, acting by Mr Kraus as his next friend, against the 1^st and 2^nd defendants. The 1^st defendant was served in Hong Kong, and a concurrent writ was served on the 2^nd defendant, with the court’s leave, in Russia.

12.  In September 2021, a statement of claim was filed on behalf of the plaintiff. By way of relief, the plaintiff seeks a declaration that the 1^st defendant is entitled and bound to execute and administer the Solaris Trust on the basis that: (1) all assets held by or for the trust are assets subject to the trust; (2) the 2^nd defendant has no interest in the trust or the trust assets; (3) the sole beneficiaries of the trust and/or those beneficially interested in the trust assets are those persons specified as beneficiaries in the trust deed (and duly added and not removed as beneficiaries under the provisions thereof); (4) the 2^nd defendant is not and has never been a beneficiary of the trust; and (5) the 1^st defendant is under no obligation to provide to the 2^nd defendant any information or documents relating to the trust or trust assets. The plaintiff also seeks an injunction to restrain the 2^nd defendant from representing to third parties in Hong Kong that she has an interest in the trust or the trust assets.

13.  In January 2022, TTE, acting by its joint voluntary liquidators (Mr Kevin Hellard and Mr Matthew Richardson) appointed by the BVI court in the order restoring TTE, applied by summons to be joined as an additional defendant in the Action. In his decision dated 5 October 2022 (“Decision”),[3] the judge granted TTE’s joinder application.

14.  The 2^nd defendant also issued a summons disputing the jurisdiction of the Hong Kong court over her, but her application was dismissed by the judge in the Decision and the 2^nd defendant has not lodged any appeal.

15.  TTE’s application for joinder was made pursuant to Order 15 rule 6(2)(b) of the Rules of the High Court (Cap 4A), which provides:

“ (2) Subject to the provision of this rule, at any stage of the proceedings in any cause or matter the Court may on such terms as it thinks just and either of its own motion or on application—

(a) order any person who has been improperly or unnecessarily made a party or who has for any reason ceased to be a proper or necessary party, to cease to be a party;

(b) order any of the following persons to be added as a party, namely—

(i) any person who ought to have been joined as a party or whose presence before the Court is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon, or

(ii) any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter.”

16.  TTE’s case for joinder was that the assets in TTE’s Accounts belonged beneficially to TTE itself; that they were misappropriated by being transferred to IEL in late 2016 for no consideration; and that TTE therefore has a claim against the 1^st defendant and potentially others for restitution of the misappropriated assets. In contrast, the plaintiff avers in the Action that the assets were properly transferred from TTE to IEL. TTE’s interests would therefore be affected by the determination of the declarations sought by the plaintiff in the Action.

17.  In relation to rule 6(2)(b)(i) – referred to in the Decision as the Necessity Limb, the judge held that TTE has an arguable case that the transfer of assets from TTE to IEL should be set aside on the grounds that (1) Mr Kraus had made fraudulent misrepresentations to TTE through the 2^nd defendant that he planned to appoint her and the plaintiff as beneficiaries of the Solaris Trust and the plaintiff as the sole beneficiary of the sub-trust; (2) TTE had been misled as to Mr Kraus’s intention on the Solaris Trust and the sub-trust; and (3) Mr Kraus had no authority to cause the transfer to be made under the powers of attorney from TTE. On this basis, the judge considered the case to fall within rule 6(2)(b)(i).[4] He also held that rule 6(2)(b)(ii) – referred to in the Decision as the Just and Convenient Limb – was satisfied.[5] Finally, the judge considered that his discretion should be exercised in favour of joinder.[6]

18.  The plaintiff asked the judge for leave to appeal. This was refused in the judge’s decision dated 14 July 2023.[7] The plaintiff has renewed its application in this court for leave to appeal, raising 4 intended grounds of appeal in support. We deal with them in turn below. We consider it appropriate to deal with the applications before us on the basis of the written materials pursuant to Order 59 rules 2A(5) and 14A and that an oral hearing is unnecessary.

Ground 1

19.  The first ground is that there is not even a prima facie case that TTE beneficially owned the assets in TTE’s Accounts. The assets were originally Mr Kraus’s. Their beneficial ownership, upon the transfer of those assets to TTE, hinges on the intention of the relevant parties, namely, Mr Kraus and the 2^nd defendant. As a mere corporate repository controlled by Mr Kraus or the 2^nd defendant, TTE could not maintain a separate claim of beneficial ownership of the assets. There is no credible evidence that it had such beneficial ownership.

20.  We do not think this ground is made out. It is true that much will depend on the intention of Mr Kraus or the 2^nd defendant, at the time when the assets were placed into TTE’s Accounts. However, the fact that the assets originally came from Mr Kraus and that Mr Kraus or the 2^nd defendant thought that he or she “ultimately owned” the assets does not mean that the assets were held by TTE on trust for him or her. Where a person transfers his assets to a company owned by him, it may be intended as a loan to the company which incurs a corresponding liability to repay or a gift to the company which increases the value of its equity which the person owns, or the assets may be intended to be held by the company on trust for the transferor without any effect on the company’s balance sheet. An individual may in common parlance think that he or she beneficially owns certain assets even though they are actually beneficially owned by a company which is in turn owned by the individual. The two situations are legally distinct and different since a company has a separate legal personality, but for practical purposes they often seem the same to lay people.

21.  The 2^nd defendant’s case, according to her witness statement mentioned above, appears to be that TTE owned the assets in question beneficially while she owned TTE beneficially.

22.  As TTE was admittedly the legal holder of its accounts and the legal owner of the assets held therein, any party who suggests that TTE did not have beneficial ownership of them bears the burden of proving that assertion. In our view, the banking documentation entered into for the opening of TTE’s Accounts gives some support to the suggestion that TTE was the beneficial owner of the funds in the accounts, although TTE itself was owned by the 2^nd defendant or, on the plaintiff’s case, by Mr Kraus through the 2^nd defendant as trustee. We do not think that the judge fell into error by holding that there is sufficient basis to raise an issue to be tried in that regard.

23.  Furthermore, it should be noted that the plaintiff has not pleaded any particulars showing an intention that TTE held the assets on trust for Mr Kraus, rather than TTE itself being held on trust (by the 2^nd defendant) for him. The pleading that Mr Kraus remained the “ultimate beneficial owner” of the assets in TTE’s Accounts (Statement of Claim, §17) is ambivalent and consistent with the latter case. It is only the plaintiff’s alternative case that TTE held the assets in TTE’s Accounts directly on trust for Mr Kraus, and then only on a resulting trust (Statement of Claim, §18). TTE would in any event be a proper party for the purpose of that averment.

Ground 2

24.  Ground 2 says that the judge was wrong because the joinder of TTE would condone a breach of trust or of the principle of neutrality. It is said that since TTE is a bare trustee of the assets in TTE’s Accounts for either Mr Kraus or the 2^nd defendant, it has a duty to act impartially amongst beneficiaries. Joining TTE as a party for it to assert beneficial ownership over the assets is to allow it to act in breach of trust and the requirement of neutrality.

25.  In our view, this ground fails for two reasons. First, it is premised on TTE having held the assets in TTE’s Accounts as a nominee on trust. This is disputed by TTE and cannot be assumed in the plaintiff’s favour for present purposes.

26.  Secondly, the argument confuses the question of joinder with the question of the future conduct of the case after joinder. Even where it may be proper for a party such as a trustee in a fight between potential beneficiaries or a company in a shareholders’ dispute to take a neutral stance, this is not necessarily a reason for it not to be joined as a party to the proceedings. On the contrary, such a party is often joined for the purpose of being bound by the judgment and for other ancillary purposes such as giving discovery of documents. Whether or not that party should take active adversarial steps in the proceedings is a different and separate question for the court, which we touch on later in this judgment.

Ground 3

27.  Under this Ground, the plaintiff submits that the judge was wrong to find that the Action might not be adequately defended by the 2^nd defendant due to her impecuniosity.

28.  In our view, the judge did not make any finding that the 2^nd defendant was impecunious, but at the same time he did not feel able to reject that possibility entirely. We do not think there is any error in the judge’s approach to the evidence.

29.  Furthermore, we do not think that the financial position of the 2^nd defendant either way, even if it is at all relevant, is of much weight in relation to the question whether TTE ought to be joined as a party. Even assuming, in the plaintiff’s favour, that the 2^nd defendant is not impecunious and has the requisite financial resources to defend the Action, it does not follow that TTE should not be joined. In our view, in light of the plaintiff’s own averments and TTE’s case as adumbrated by its liquidators, and of the fact that TTE has been reinstated as a company, it plainly should be joined as a party to the Action. Again, what steps it should properly take at what stage is a separate question.

Ground 4

30.  On 28 October 2022, i.e. after the Decision and after the plaintiff filed a summons in the court below on 19 October 2022 seeking leave to appeal, TTE commenced its own action (HCA 1433/2022) against 8 defendants including Mr Kraus as the first defendant. According to the indorsement of claim on the writ, the claim essentially concerns the funds transferred from TTE’s bank accounts in 2016 and 2017, which are also the subject matter of TTE’s intended counterclaim in the Action. The writ in HCA 1433/2022 was allowed to expire in October 2023 without being served. Instead, TTE commenced a second and substantially similar action (HCA 1737/2023) on 30 October 2023.

31.  By summonses dated 12 October 2023 and 12 December 2023 in the present proceedings before this court (CAMP 264/2023), the plaintiff applies for leave to adduce in evidence two affirmations the main purpose of which is to produce the writs in the two new actions commenced by TTE. By the latter summons, the plaintiff further applies for leave to amend the draft notice of appeal put forward for the application for leave to appeal. The amendments are intended to refer to the existence of HCA 1737/2023.

32.  As stated in Man Tin Fook v 梁根林 [2019] HKCA 846, referred to by the judge in his decision refusing leave to appeal,[8] an application for leave to adduce new evidence could not be entertained until after leave to appeal has been granted. For present purposes, we are prepared to assume that the evidence is available and that the draft notice of appeal is as proposed to be amended, in considering whether leave to appeal should be granted.

33.  For its part, TTE has, by an affirmation of one of its liquidators, stated that the two new writs were merely “protective writs”, issued by TTE without an intention of serving them, in case TTE might eventually fail to join as a party to the Action. The first writ had in fact expired without being served, and the second one “will only be served if it appears in the lead up period to the expiry of the 2^nd New Writ that the Plaintiff’s appeal will not be resolved in sufficient time for [TTE] to obtain leave to serve out and effect service of the 2^nd New Writ prior to its expiration or in the event the appeal is determined in favour of the Plaintiff.”

34.  Further, TTE has offered the following undertaking, through counsel in their skeleton argument:

“ Subject to the present CA Leave Application being dismissed and there being no further appeal from the decision of the Court of Appeal within the prescribed time, alternatively that any further appeal (including any application for leave to appeal to the Court of Final Appeal) against the Joinder Decision be dismissed, [TTE] undertakes to discontinue the 2^nd New Action.”

35.  Having regard to the nature of the two new writs and the undertaking offered, it seems to us plain that the existence of the two new writs (one of which had indeed expired) does not in any way support the plaintiff’s application for leave to appeal. Whether or not it would be more desirable for TTE to have its own action which may be case-managed together or “consolidated” (in a loose sense) with the Action is not a matter that the Court of Appeal should enter into in the absence of any ground that vitiates the judge’s exercise of discretion.

Conclusion on the applications

36.  For the above reasons, the application to amend the draft notice of appeal should be refused and leave to appeal should be refused as there is no ground of appeal with a reasonable prospect of success. There being no appeal on foot, the applications to adduce new evidence fall away.

37.  The plaintiff’s summonses dated 28 July 2023, 12 October 2023 and 12 December 2023 are accordingly dismissed, upon the undertaking given by TTE mentioned above.

38.  There will be an order nisi that the plaintiff do pay TTE’s costs of the summonses.

39.  We also make an order pursuant to Order 59 rule 2A(8) that the plaintiff may not ask for his application for leave to be re-determined at an oral hearing.

Case management of the Action

40.  We do not think we should end this decision without making some observations on the management of the Action, because the parties seem to have thought that the question of joinder is the only issue that matters. As foreshadowed above, however, joinder is not the end of the analysis; there remains the question of how the case should be conducted after TTE has been joined as a defendant.

41.  Mr Kraus, who is in control of the Action as the plaintiff’s next friend, takes the position that TTE and the assets in TTE’s Accounts all ultimately belonged beneficially to him. If he is eventually proved right, whether the assets in TTE’s Accounts were strictly speaking TTE’s assets does not practically matter and there would be little point in investigating whether he transferred TTE’s assets to another entity without providing consideration to TTE, so long as there is no creditors’ interest intervening.

42.  Similarly, as we understand her position, the 2^nd defendant takes the view that she was the ultimate beneficial owner of TTE and the underlying assets as a result of gifts made by Mr Kraus to her, and that she was subsequently misled by him into signing documents that transferred the assets into other entities and trusts. If she prevails in her contentions, then she would be the ultimate beneficial owner of the underlying assets, either directly or through corporate vehicles such as TTE.

43.  In these circumstances it may need to be considered whether – and we put it no higher than that for we have not heard argument directly on this matter – the primary contest is that between the plaintiff/Mr Kraus and the 2^nd defendant. The case of Re Chime Corporation Ltd (2004) 7 HKCFAR 546 is illustrative, where administrators pendente lite of the estate of the late T H Wang brought a petition relating to a company owned in part by the estate, alleging that the widow Mrs Nina Wang had misappropriated the company’s assets by causing the company to make loans to related companies. The primary issue before the court was whether, on an unfair prejudice petition presented by a shareholder, there is jurisdiction to make an order for the payment of damages or compensation, or for the grant of restitution, to the company itself. Nevertheless, in the course of his judgment Lord Scott of Foscote NPJ made certain comments on the management of the petition:

“ 55. … First, this dispute between the petitioners and Mrs Wang is not, in my judgment a dispute, primarily, if at all, about management of Chime’s affairs. It is primarily a dispute about proprietary rights. The petition itself is topsy-turvy. It is based on the proposition that the various things that have happened and that are complained about were unfairly prejudicial to Mr Wang’s estate. Mrs Wang, it is said, was concerned to ‘advance her own interest at the expense of the Estate’ (para. 26 of the Re-Amended Petition). But what is ‘the Estate’? The petitioners themselves have no beneficial interest in the ‘Estate’. They are merely administrators pendente lite. The current probate proceedings will in due course decide to whom ‘the Estate’ belongs. There are two, and as I understand it only two, possible results of those proceedings. One possible result is that Mrs Wang will be established as the beneficial owner of the estate. In that event the proposition that she was concerned to advance her own interest at the expense of the estate will become meaningless. The s.168A petition will be pointless and an inexcusable waste of money, time and the judicial resources of Hong Kong. The other possibility is that Mr Wang Snr will be established as the beneficial owner of the estate. He will have become the testamentary successor to Mr Wang’s interests in Chime and the Chinachem group. Let me, therefore, consider the s.168A petition on that hypothesis.

…

60. If the petition is looked at in the round its topsy-turvy nature becomes apparent. Chime and the Chinachem group, of which CAL is a part, is like the goose that lays the golden eggs. The real issue in this litigation is who owns the goose. Once it is known who owns the goose it will be known who is entitled to the golden eggs. This petition is asserting, in effect, that Mrs Wang has appropriated to herself some of the golden eggs. That may turn out to be true, but whether it matters depends on who owns the goose. The dispute has been dressed up as a dispute about how the goose has been managed. But the real dispute is not about management of the goose. It is about ownership of the goose and its golden eggs.”

44.  The analogy is not exact but there is likewise in this Action a question as to who owned and owns TTE. We are obviously not in a position to give any case management directions for the Action, and we are not suggesting here that any specific direction should be imposed. All that we do is to draw attention to the need for effective case management, which is a matter for the Court of First Instance, taking into account all relevant considerations.