KWONG YI LING (suing on behalf of herself and all other shareholders in the 6th Defendant except the 1st and 2nd Defendants) v. LAU KWUN LEUNG AND OTHERS

HCA 1108/2018

[2021] HKCFI 2303

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1108 OF 2018

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D E C I S I O N

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1.  This is an appeal brought by the plaintiff (“P”)  against the order of Master Sara Tong striking out P’s claim and dismissing the action as against the 5^th defendant (“MAST Animal”).

Factual background

2.  The following facts are taken from the draft Amended Statement of Claim (“ASOC”)  appended to the skeleton argument of Mr Thomas Wong, counsel for P, and are assumed to be true for the purpose of this appeal.

3.  The 6^th Defendant (“Company”)  was incorporated in Hong Kong on 2 March 2016 to operate a Chinese medical centre and to distribute certain healthcare apparatus.  Since December 2016, the Company has been owned and managed by P, the 1^st defendant (“D1”)  and the 2^nd defendant (“D2”), who are their only shareholders and directors.  Amongst them, each of P and D2 holds 39% shareholding, while D1 holds 22%. 

4.  The 3^rd and 4^th defendants (“D3” and “D4”)  are companies owned and controlled by D1-D2.

5.  MAST Animal was incorporated in Hong Kong on 25 April 2016 by the founding members of the Company.  The board consists of D1, D2, Mr Li Hang Nin Alex (“Li”)  and Mr Hung Fuk Man (“Hung”).  The shares in MAST Animal are held by D1 (25%), D2 (5%), Li (25%), Hung (20%), Mr Jeffrey Wong (5%)  and the Company (20%). 

6.  On 14 May 2018, P commenced this action as a common law derivative action against D1-D4 and MAST Animal for relief arising out of the following conduct or transactions whereby D1-D2 acted in breach of their fiduciary duties owed to the Company, and D3-D4 and MAST Animal participated in the breaches:

(1)   D1-D2 diverted the business of the Company to D3 and/or D4 (§§3.1-3.2 of ASOC);

(2)   D1 and/or D2 failed to register the Trade Name under the Company and, instead, caused it to be registered in the name of D3 (§§3.3-3.5 of ASOC);

(3)  D1 failed to cause the “IP Rights”[1] to be transferred to the Company and, instead, D2 applied to register the patent under her own name (§§3.6-3.7 of ASOC);

(4)  D1-D2, with the assistance of MAST Animal, misappropriated the sum of HK$521,532.30 (“Disputed Sum”)  from the Company (§§3.8-3.9 of ASOC);

(5)  D1-D2 charged their personal expenses in the aggregate amount of HK$1,920 against the Company (§3.10 of ASOC);

(6)  D1 and/or D2 wrongfully interfered with the Company’s website by removing P as a practitioner practising at the medical centre of the Company (§3.11 of ASOC);

(7)  D1-D2 wrongfully interfered with the business of the Company which led to P leaving the premises rented by the Company on 24 November 2017. D1-D2 subsequently registered the premises as the registered office of MAST Animal (§§3.12-3.18 of ASOC); and

(8)  D1-D2 failed to rectify the aforesaid breaches of duties and the Company has suffered loss and damage.  D1-D2, D3-D4 and MAST Animal are liable to pay equitable compensation or to account for their profits made from the breaches to the Company (§§3.20-3.22). 

6.  Amongst the above conduct / transactions, only 2 of them concern MAST Animal (see §5(4)  and (7)  above).  In his skeleton argument, Mr Wong (rightly)  does not pursue the complaint about the premises having become the registered office of MAST Animal.  There is no dispute that the registration only lasted for 29 days (up to 26 April 2018)  during which MAST Animal was not in active operation and did not have any staff.  It is impossible to see what loss has been suffered by the Company or what profit has been made by MAST Animal. 

7.  In respect of the Disputed Sum, the material facts pleaded in the ASOC[2] are as follows:

(1)  In September 2017, D1-D2 in breach of their fiduciary duties owed to the Company, wrongfully announced that the Company had to pay the Disputed Sum to MAST Animal (“Announcement”)  (ASOC §3.8).  The Disputed Sum has not been paid to MAST Animal (F&BP of SOC[3] §1(a)).

(2)  On 18 May 2018, MAST Animal commenced DCCJ 2166/2018 (“DC Action”)  against the Company for HK$506,432.30 (“Revised Sum”), being the amount due under an alleged agreement between the Company and MAST Animal to share the profits of sale of health products and equipment (ASOC §3.8A). 

(3)  Despite P’s requests, D1-D2 refused to procure the Company to defend the DC Action.  On 15 June 2018, P obtained an order from Master David Chan of the District Court allowing her “to intervene in [the DC Action] and to conduct the defence on behalf of [the Company]” (ASOC §3.8B).

(4)  D1-D2’s Announcement and their refusal to defend the DC Action constitute a breach of fiduciary duties (ASOC §3.8C).

(5)  MAST Animal assisted in the breach by attempting to receive the Disputed Sum and bringing the DC Action (ASOC §3.8D).

(6)  MAST Animal “knew or should have known of the aforesaid breach, for [D1] and [D2] were at all material times and are still directors of MAST Animal.  In the premises, the assistance rendered by MAST Animal was dishonest” (ASOC §3.9).

(7)  As a result of the aforesaid matters, the Company has suffered loss “in that it is liable to indemnify [P] for the legal costs incurred by her in the DC Action on a common fund or full indemnity basis” (ASOC §3.21(5)).

(8)  Further, “should [D1] and [D2] procure [the Company] to pay the Disputed Sum (or any part thereof)  to MAST Animal at any time before the trial, [the Company] will suffer loss (and MAST Animal will profit)  as a result of [D1] and [D2’s] breaches of Fiduciary Duties” (ASOC §3.21(6)).

(9)  By reason of the matters pleaded above, D1, D2 and MAST Animal are “liable to pay equitable compensation or for account of profits due and owing to” the Company (ASOC §3.22(1)).

(10)   P seeks an order that D1-D2 be restrained from transferring the Disputed Sum to MAST Animal (ASOC prayer §(6)).

Applicable principles

8.  The principles are well-established. 

9.  An appeal from the master to the judge in chambers is dealt with by way of a rehearing of the application which led to the order under appeal, and the judge treats the matter as though it came before him for the first time.  The judge is in no way fettered by the previous exercise of the master’s discretion.  Fresh points may be raised before the judge which were not raised or taken before the master (Hong Kong Civil Procedure 2021, §§58/1/2, 58/1/5).

10.  The Court will only strike out a pleading when it is plain and obvious that the claim is bound to fail.  Disputed facts are to be taken in favour of the party sought to be struck out.  Where an application to amend a pleading has been made, it would be more expedient to deal with the striking out application on the facts as pleaded in the proposed amended pleading (Hong Kong Civil Procedure 2021, §18/19/4).  However, the Court is not bound to accept the allegations in the pleading as true, and is entitled to look at the totality of the evidence, in particular evidence which is not in dispute or is indisputable (Chu Yue Bun v Lai Shiu Woon [2020] HKCFI 2195, §§24-25, per DHCJ Maurellet SC).

11.  Further, the Court will strike out a claim as against a defendant if it is plain and obvious that no relief will be granted against that defendant, and there is no other reason why that defendant should be joined in as a party (Re General Appliance (Holdings)  Ltd [2020] HKCFI 356, §§8-9, per Harris J).

Discussion

12.  Mr Wong submits that there is clearly a viable claim against MAST Animal in at least dishonest assistance given that all the elements to sustain such a cause of action have been pleaded in the ASOC.  Reliance is placed on Bullen & Leake & Jacob’s Precedents of Pleadings, 19^th ed, 2019, §62-10 where it is stated that for a claim in dishonest assistance, the claimant must plead and prove:

(1)  that there has been breach of trust or fiduciary obligation owed to the claimant;

(2)  in which the defendant has assisted or which she/he has procured;

(3)  the defendant acted dishonestly; and

(4)  resulting in loss to the claimant. 

13.  Taking the above 4 elements in the same order, in his skeleton argument, Mr Wong contends that:

(1)  D1-D2 placed themselves in a position of conflict by making the Announcement and refusing to procure the Company to defend the DC Action;

(2)  MAST Animal assisted D1-D2’s breach of duties by bringing the DC Action and attempting to receive the Disputed Sum;

(3)  MAST Animal clearly acted dishonestly.  Dishonesty is an objective standard.  The defendant’s knowledge of the transaction must have been such as to render his participation contrary to normally acceptable standards of honest conduct (Bullen & Leake, §62-13).  D1-D2 knew about the breach of duties as they were directors and shareholders of MAST Animal, and their knowledge “must be attributable to MAST Animal”; and

(4)  The Company has suffered loss in that it is liable to indemnify P for the legal costs incurred by her in the DC Action.  This is because P will be entitled to be indemnified by the Company for the shortfall on a common fund or full indemnity basis (Wallersteiner v Moir (No 2) [1975] QB 373, 391G-392B, per Lord Denning MR).  Another “potential loss” is the Disputed Sum, given that D1-D2 are in control of the Company’s board and, therefore, they can change the bank mandate to allow money to be withdrawn from the Company’s bank account without P’s knowledge or consent.    

14.  Lastly, Mr Wong submits that although the DC Action took place after the commencement of this action, P may rely on it in this action as the Eshelby rule is only one aspect of the Court’s wide discretion as to whether to allow the proposed amendments (Qianhai Xinhuakang Financial Holdings (Shenzhen)  Ltd v Chen Jiarong & ors [2020] HKCFI 823, §§57-61, per Lok J).

15.  In so far as the pleas concerning D1-D2’s attempt to the receive the Disputed Sum and the so-called “potential loss” of the Disputed Sum, Mr Martin Ho, counsel for MAST Animal, submits that the pleas are plainly  unsustainable, given that (1)  the suggestion is “pure conjecture”; (2) P accepts that D1-D2 cannot operate the Company’s bank accounts without her signature; and (3)  unless and until D1-D2 procure the Company to pay the Disputed Sum to MAST Animal prior to the determination of the DC Action, no loss will be occasioned to the Company.  I agree with Mr Ho.  At the hearing, Mr Wong accepts that the pleas are bad and P does not seek to rely on them. 

16.  Mr Ho contends that the second, third and fourth elements required to sustain a viable claim in dishonest assistance have not been pleaded in the ASOC. 

17.  As regards “assistance”, Mr Ho submits that the assistance “must enable the breach by the trustee to be committed”, and will normally precede the breach or be contemporaneous with it. The principle is explained in Lewin on Trust, 20^th ed, 2020, §43-032:

“Having established that there is a trust and the trustee committed a breach of trust, the next requirement is to show that the defendant assisted it. It is a question of fact whether there has been assistance by the defendant. For the requirement of assistance what is required is conduct which in fact assists the commission of the act which is a breach of trust by the trustee, and this requirement does not have any mental element in addition to any separate requirement of dishonesty. The assistance must be more than of minimal importance, and must enable the breach by the trustee to be committed, but there is no requirement that what is done by the defendant inevitably has the consequence that a loss is suffered.

Time of assistance

The assistance will normally precede the breach or be contemporaneous with it. Where the assistance takes the form of inducement, it must necessarily precede the breach. The assistance may even take place before the trustee committing the breach of trust has taken office, as for example where a third party facilitates the appointment to office of a fraudulent trustee so as to enable him to misappropriate the trust fund. Once the breach of trust has been fully implemented, the subsequent acts or omissions of the defendant will not assist its commission because it has already been committed.” (underlined added)

18.  I do not think “assistance” is confined to act which precedes or contemporaneous with the breach.  Much depends on the nature of the breach in question.  In Bullen & Leake, §62-12, the editors state the principle as follows:

“There can be dishonest assistance after the original breach of trust. In those cases where the breach consists in misappropriation of assets the breach will not end when assets have been initially removed from the trust fund but when they have been hidden away beyond the reach of the beneficiaries who might seek their recovery. Liability for dishonest assistance is not restricted to those who assist in the original disposal of funds in breach of trust or fiduciary duty. It extends to everyone who consciously assists in the continuing diversion of the money. Most of the cases have been concerned, not with assisting in the original breach, but in covering it up afterwards by helping to launder the money.

The assistance must have had some causative significance. … In Brink’s Ltd v Abu-Saleh[4], a wife accompanying her husband on trips to Switzerland to bank monies pursuant to what they thought was a tax evasion exercise was not ‘assisting’ because she was merely going to keep him company and to visit Switzerland and not to provide cover for his trip. The defendant will not be liable if he did not assist in the alleged breach but only in a later transaction which was not itself in breach of trust[5].

To plead a claim in dishonest assistance the particulars of claim should identify what it was the defendant did to assist the breaches of fiduciary duty: Ultraframe at [1761].” (underlined added)

19.  Mr Ho submits that the pleaded breach of duties are (1)  the Announcement made by D1-D2 in September 2017 and (2)  D1-D2’s refusal to procure the Company to defend the DC Action.  However:

(1)  There is nothing to suggest that MAST Animal rendered any assistance in respect of the Announcement, let alone enable the Announcement to be made. 

(2)  The DC Action was commenced in May 2018, which post-dated the Announcement.  In other words, MAST Animal could not possibly have “assisted” D1-D2 in making the Announcement by commencing the DC Action at a subsequent date after the alleged breach had already been carried out.

(3)  To the extent that P relies on D1-D2’s refusal to procure the Company to defend the DC Action, there is no pleaded conduct on the part of MAST Animal which constitute “assistance” in “enabling” D1-D2 to breach their fiduciary duties by refusing to procure the Company to defend the DC Action.  This is not surprising as MAST Animal, not being a director or shareholder of the Company, had no role to play in the Company.    

20.  Mr Wong does not dispute the principles stated in §17 above or that there is no plea that MAST Animal assisted D1-D2 in making the Announcement.  His only point is that the “assistance” was MAST Animal’s act in commencing the DC Action without which there would be no refusal on the part of D1-D2 to procure the Company to defend the DC Action.   

21.  I do not think MAST Animal’s act in commencing the DC Action can constitute “assistance” for the purpose of a claim in dishonest assistance for the following reasons:

(1)  There is no plea that the commencement of the DC Action was to assist D1-D2’s breach, whether as suggested by Mr Wong or at all.

(2)  Nor is there any plea that MAST Animal assisted in D1-D2’s failure to procure the Company to defend the DC Action (i.e. the alleged breach).  No such allegation can be made given that MAST Animal did not (and still does not)  hold any position in, or had any control over, D1-D2.   

(3)  MAST Animal’s act in commencing the DC Action was not itself in breach of duty. 

22.  In any event, the issue whether MAST Animal is entitled to receive the Revised Sum will be determined in the DC Action.  Other than suggesting that the Company will be liable to bear the shortfall of the costs incurred by P in defending the DC Action (which I will deal with in §§31-33 below), Mr Wong is unable to articulate any reason or justification as to why the same issue has to be raised as against MAST Animal in this action.  Apart from duplicating the time and costs required by the parties to deal with the issue, it also carries the risk of inconsistent findings to be made by the Court on the same issue in parallel proceedings.  For case management reason alone, the claim should be struck out. 

23.  The plea of dishonesty is equally demurrable. 

24.  As regards the requirements for a plea of “dishonesty”, Mr Ho refers the Court to the following principles:

(1)  Dishonesty has both a subject and objective element.  The subjective element is concerned with all the circumstances known to the defendant, his personal attributes and the reason why he acted as he did. The objective element is concerned with an objective assessment of the defendant’s mental state as established by the subjective element.  If by ordinary standards the defendant’s mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards (Lewin on Trusts, §43-036).

(2)  A plaintiff who alleges dishonesty must plead and establish facts to show that the defendant was dishonest and not merely negligent.  The Court will not infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with innocence (Li Shiu To v Cheung Pik Ng (No 2) [2018] 1 HKLRD 934, §54, per Au Yeung J).

(3)  Fraud or dishonesty must be distinctly alleged and as distinctly proved, and must be sufficiently particularised.  It is not sufficiently particularised if the facts pleaded are consistent with innocence.  (Li Shiu To, §55[6]).

(4)  An allegation that the defendant “knew or ought to have known” is not a clear and unequivocal allegation of actual knowledge and will not support a finding of fraud (Li Shiu To, §56).

(5)  A rolled-up plea that the defendant “knew or ought to have known” is, in itself, insufficient to meet the pleading requirements for fraud/dishonesty and would be struck out (Top Point Ltd v K&L Gates (A Firm)[2020] 1 HKLRD 814, §19, per Lok J). 

25.  Mr Wong does not dispute the above principles. 

26.  So far as the subjective and objective elements are concerned, the facts upon which the allegation of the subjective element of dishonesty is founded, and the facts upon which reliance is placed as demonstrating the objective element is satisfied, should be pleaded (Lewin on Trusts, §40-048).

27.  The only plea on “dishonesty” is that MAST Animal “knew or should have known of the aforesaid breach, for [D1] and [D2] were at all material times and are still directors of [MAST Animal].” (ASOC §3.9).  The plea is obviously bad and should be struck out for the following reasons:

(1)  Other than the allegations that MAST Animal knew or ought to have known about the breach and the assistance rendered by MAST Animal was dishonest, no material facts (or particulars)  have been pleaded in support of either allegations. 

(2)  There is no plea of any facts upon which the allegation of subjective element of dishonesty or as demonstrating the objective element have been pleaded. 

(3)  It is a rolled up plea, which is insufficient to meet the pleading requirements for dishonesty. 

28.  In so far as it is necessary, I accept Mr Ho’s submission that the fact that D1-D2 are directors of MAST Animal per se is insufficient to attribute their knowledge to MAST Animal, given that:

(1)  If a pleader asserts that an individual’s knowledge should be attributed to a corporate entity, such attribution must be specifically pleaded (The Pui Ying Middle School of Hong Kong v The Hong Kong Council of the Church of Christ in China [2021] HKCFI 692, §§123-124, per DHCJ Bernard Man SC).

(2)  There is no plea that D1-D2’s knowledge should be attributed to MAST Animal.  Nor is there any plea that D1-D2 were agents acting for, or that they were the directing mind and will of, MAST Animal.  No such allegations can be pleaded as D1-D2 were only 2 out of the 4 directors, and no allegation has been pleaded against the other 2 directors (i.e. Li and Hung).

29.  Lastly, the allegation that the Company has suffered any loss as a result of the commencement of the DC Action by MAST Animal is plainly unsustainable, for the reasons explained below. 

30.  First, if MAST Animal succeeds in the DC Action, the commencement of the DC Action cannot constitute “assistance”, let alone “dishonest assistance”.  P’s claim will fail as there can be no breach of fiduciary duties on the part of D1-D2 to comply with a court judgment.  On the other hand, if MAST Animal fails in the DC Action, the Company will not have to pay the Revised Sum and no loss will be suffered.

31.  Second,  in respect of the costs of the DC Action (subject to my reservation about the propriety of the order allowing P to defend the DC Action on behalf of the Company, as discussed in §34 below):

(1)  If MAST Animal succeeds in its claim, P will be ordered to pay the costs.  No loss will be occasioned to the Company. 

(2)  If, on the other hand, P prevails in the DC Action, MAST Animal will have to pay the costs of the Company.  On the basis of the Court’s finding that the profit sharing agreement did not exist, it is likely that costs will be awarded against MAST Animal on a higher scale. 

(3)  Further, s 53(2)  of the District Court Ordinance (Cap 336)  confers the power on the court to award costs against a non-party, if it is satisfied that it is in the interests of justice to do so.  It is open to P to ask the court to order D1-D2 to pay the shortfall, if any, on the basis of the court’s finding that the alleged profit sharing agreement did not exist but D1-D2  allowed MAST Animal to make the claim against the Company.

32.  Third, as Mr Ho submits, there is no legal basis (and no authority has been cited by Mr Wong)  for the proposition that P can effectively mount another set of proceedings (i.e. this action)  to claim the shortfall in costs as against a losing party, on the basis that the taxing master in the other proceedings only assessed costs at a level lower than the actual costs incurred by the winning party.  It is plain and obvious that if P prevails in the DC Action, she cannot ask MAST Animal to make up the shortfall in separate proceedings (i.e. this action), as it would amount to P asking MAST Animal to pay 100% of the costs incurred by P, a proposition that goes against the very idea of costs taxation.  I agree.

33.  Fourth, I do not think there is a proper basis to assert that P will be able to obtain her costs in defending the DC Action on a common fund or indemnity basis. As is clear from Wallersteiner v Moir (No 2), the shareholder bringing the action bears the risk of having to pay the costs incurred personally, and if the shareholder wants to seek an order that the company indemnifies him/her against the costs to be incurred in the action, an application should be made at or shortly after the commencement of the action.  No such application has been made by P.    

34.  I would add this.  At the hearing, this Court raises the question as to whether Master has jurisdiction to make an order to allow P to conduct the defence on behalf of the Company.  This is because under ss 732-733 of the Companies Ordinance (Cap 622), the jurisdiction to allow a member to defend an action on behalf of the company is conferred on the Court of First Instance.  Mr Wong says that the application was made under common law, and Master has jurisdiction under common law to make such an order.  I have great difficulty with this submission.  The exception to the rule in Foss v Harbottle only allows a shareholder to bring an action on behalf of the company and for its benefit, it does not allow a shareholder to defend an action on behalf of the company.  In any event, even if (which I do not think is right)  the exception is wide enough to allow a shareholder to defend an action on behalf of the company, it is neither necessary nor appropriate for the shareholder to obtain leave of the court to do so, as all that required is for the shareholder to demonstrate that the company has been under “wrongdoer control” and that there is a “fraud on minority”.

Disposition

35.  For the reasons set out in §§12 - 33 above, even on the basis of the allegations in the ASOC, the claims pleaded against MAST Animal are demurrable and should be struck out.  The action as against MAST Animal should be dismissed. 

36.  It follows that P’s appeal must be dismissed. 

37.  As for costs, I make a costs order nisi that the costs of and occasioned by the appeal be paid by P to MAST Animal forthwith, and be assessed by way of gross sum assessment. For this purpose, I direct MAST Animal to lodge its statement of costs within 3 days of this Decision, and P to provide her comments on the statement, if any, within 3 days thereafter, both time to run during summer vacation.   

38.  As P will have to amend the SOC by removing the claims against MAST Animal, I give the following directions on filing of pleadings:

(1)  P to file and serve her Amended Statement of Claim within 7 days of this Decision;

(2)  D1-D4 to file and serve their Amended Defence within 14 days thereafter; and

(3)  P to file and serve her Reply, if any, within 21 days thereafter; and

(4)  time to run during summer vacation.