CACV 219/2016
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF APPEAL
CIVIL APPEAL NO. 219 OF 2016
(ON APPEAL FROM HCMP NO. 1695 OF 2015)
________________________
IN THE MATTER of Lin Fung Industrial Company
and
IN THE MATTER of the Estate of Li Wan Lung, Deceased
and
IN THE MATTER of Order 85 of the Rules of the High Court, Cap. 4A
________________________
BETWEEN
LI LIM CHI DOROTHY,
Plaintiff
and
LIN FUNG INDUSTRIAL COMPANY
1st Respondent
LI KIN YAN
2nd Respondent
________________________
Before: Hon Lam VP, Cheung and Kwan JJA in Court
Date of Hearing: 9 March 2017
Date of Judgment: 9 March 2017
Date of Reasons for Judgment and Decision on Costs: 14 March 2017
________________________
REASONS FOR JUDGMENT
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Hon Lam VP :
1.1. I respectfully agree with the Reasons for Judgment of Cheung JA and the order set out at paragraph 8 below. It should be noted that the parties are litigating on issues relating to the affairs of the estate of the deceased and the operation of the mainland factory by New Lin Fung in HCA 2531 of 2015, which was commenced by the plaintiff in October 2015. By the time of the hearing before the learned judge, the plaintiff accepted that issues concerning ownership of the assets of New Lin Fung could not be resolved in a summary manner and counsel had to abandon the original declaratory relief originally sought in HCMP 1695 of 2015. Apparently Mr Smith SC sought relief in the amended version of the originating summons on the basis that all he needed to demonstrate is that there is reason to believe that Old Lin Fung had assets in the Mainland.
1.2. With the greatest respect, Mr Smith had overlooked that the amended relief he sought in HCMP 1695 of 2015 is not interlocutory in nature and the relief, as explained by my Lord in his reasons for judgment, cannot simply be regarded as a mechanism to facilitate the plaintiff (as administratrix of the estate) to deal with assets of the estate within the Mainland.
1.3. In my judgment, in light of the issues regarding the ownership of assets held by New Lin Fung, if the plaintiff wishes to secure any interim relief and if the evidence warrants interim relief to be sought, the proper course was to make such application in the context of HCA 2531 of 2015 instead of seeking final relief in HCMP 1695 of 2015. If the plaintiff could not establish a case for interim relief in HCA 2531 of 2015 (and we have not seen any evidence to that effect in the papers before us), it is simply not open to the plaintiff to attempt to achieve the same by the back door in HCMP 1695 of 2015.
1.4. Administration proceedings under Order 85 proceeded by way of originating summons procedure are suitable for summary resolution of disputes regarding the administration of an estate. However, when there are serious issues regarding whether certain assets formed part of the estate, particularly when complicated factual issues are raised and examination of evidence of the witnesses is necessary, it is not appropriate to proceed in such manner. The action has to be proceeded by writ.
1.5. For these reasons as well as those given by Cheung JA, we dismissed the appeal with costs except that the 2nd respondent should pay for the costs of the application to adduce fresh evidence.
Hon Cheung JA :
II. The appeal
2.1. Pursuant to Order 85, rule 2(2)(a) of the Rules of the High Court, Deputy High Court Judge Le Pichon ordered the 2nd respondent to take all necessary steps to procure the applicant to be registered as the sole proprietor of Lin Fung Industrial Company (‘New Lin Fung’) with business registration number 50434564‑000‑01 (‘the new BR’) and to provide the applicant with all documents relating to New Lin Fung. The 2nd respondent appealed against the order which we allowed at the conclusion of the appeal. I will now give reasons for our decision.
2.2. Subject to the final step of the parties lodging the signed documents to the relevant authority to change the business registration particulars, the order had since been performed by the 2nd respondent.
III. Background
3.1. The background leading to the making of the order is set out in the reasons for judgment of the learned judge which I will respectfully adopt and supplement them, where necessary, from the materials in this case.
3.2. The applicant is the administratrix of the estate of her father Li Wan Lung (‘the deceased’) who died intestate on 27 January 2009. The former administrator of the deceased’s estate was the 2nd respondent who was granted the letters of administration of the estate on 3 July 2009. He was replaced by the applicant on 19 May 2014.
3.3. The applicant, the 2nd respondent and Li Kin Wing are the three children of the deceased. The 2nd respondent is the eldest son.
3.4. During his lifetime the deceased was mainly engaged in manufacturing plastic hardware with Lai Fung Plastic Factory Company Ltd (‘Lai Fung’), a limited company incorporated in Hong Kong in 1996 as the retail arm of the business and a sole proprietorship business he established on 4 September 1987, carried on under the name of Lin Fung Industrial Co (‘Old Lin Fung’) with business registration number 11268978 (‘the old BR’) as the manufacturing arm. The products were manufactured in a factory in the Mainland.
3.5. The deceased’s assets included (1) Old Lin Fung and (2) an 85% shareholding in Lai Fung.
3.6. The 2nd respondent held the remaining 15% of the issued shares in Lai Fung.
3.7. On or about 3 November 1987, Old Lin Fung established Lin Fung Plastics Factory as a processing and assembly factory (‘the Mainland factory’).
3.8. Annual inspection reports of the Mainland factory for the years from 2002 to 2007 as well as that filed on 14 May 2009 (shortly after the deceased’s death) for the year 2008 contained the business registration certificate of Old Lin Fung showing its stamp or chop on the certificate.
3.9. On the advice of Old Lin Fung’s then accountant, on 9 March 2009, the 2nd respondent made an application for the business registration of New Lin Fung with the 2nd respondent named as sole proprietor for the period commencing 28 January 2009 (the day following the deceased’s death).
3.10. 3.10 The establishment of New Lin Fung was a device to enable the business of Lai Fung and the Mainland factory to continue, so that orders could be fulfilled.
3.11. After 14 May 2009, annual inspection reports of the Mainland factory contained the business registration certificate of New Lin Fung but showing the stamp/seal of Old Lin Fung on the new BR.
3.12. A year or so later, on or about 6 July 2010, the Mainland factory applied for a change of registration details, the effect of which was to replace the deceased with the 2nd respondent as its foreign contracting party. For this purpose, the Mainland factory submitted, inter alia, a Supplemental Agreement signed by the 2nd respondent using the stamp/seal of Old Lin Fung.
3.13. Several months later, on 27 October 2010, New Lin Fung established Lin Fung Plastics Factory (‘Dongguan Lin Fung’) as a wholly foreign‑owned enterprise. Dongguan Lin Fung was described as being ‘transformed locally’ or ‘transitioned in situ ’ from the Mainland factory.
3.14. The Mainland factory was de‑registered on 12 March 2012 due to its change from a processing assembly factory into a wholly foreign‑owned enterprise, the relevant authorities having decided to phase out processing assembly factories.
3.15. The originating summons for this application was issued on 13 July 2015. About three months later, the applicant issued a writ ation against the 2nd respondent and Li Lin Wing for breaches of fiduciary duty regarding Old Lin Fung, diversion of business of Old Lin Fung into New Lin Fung and Dongguan Lin Fung.
3.16. The 2nd respondent’s lawyers in the Mainland had given an opinion in relation to the acts of the 2nd respondent of using New Lin Fung to carry on the business of Old Lin Fung:
‘ We consider that in Li Kin Yan’s [i.e. the 2nd respondent] concealment of the fact that the legal personality (civil rights capacities and civil acts capacities) of Lin Fung Industrial Company ([the deceased]) had been terminated due to the death of [the deceased] in the implementation of the acts aforementioned and extension of the operation of Lin Fung Factory and signing of relevant documents through changing the contract signatory of the foreign investor of Lin Fung Factory from [the deceased] to [the 2nd respondent], there existed the suspicion of intentionally making abnormal representations to the relevant government departments in Mainland China as well as the legal risk of being held accountable.’
3.17. The Mainland law firms instructed by the applicant and the 2nd respondent respectively also agreed that a third party such as the applicant cannot collect or assert any rights over assets registered in the name of Old Lin Fung or New Lin Fung by registering a new sole proprietorship in Hong Kong. That is the case even if the name of the new sole proprietorship were to be identical.
IV. The applicant’s case
4. The applicant’s case set out in her first affirmation in support of the application is a simple one. She referred to the correspondence with the 2nd respondent’s solicitors who stated that New Lin Fung was set up by the 2nd respondent to continue the operation of Old Lin Fung and that the 2nd respondent held New Lin Fung on trust for the estate. Since she has replaced the 2nd respondent as the administrator of the estate, he ought to transfer New Lin Fung to her.
V. The Judge’s view
5. The learned judge accepted the applicant’s submission that there is reason to believe that Old Lin Fung had assets in the Mainland that are now registered in the name of New Lin Fung. She further held that :
‘ 32. I accept the applicant’s submission that it is clear from the PRC legal opinions obtained that it is not possible for the applicant in her capacity as administratrix per se to deal with the deceased’s assets in the PRC. While concerns have been expressed over the propriety of certain acts or steps taken by the 2nd respondent to continue the business of Lai Fung and the PRC factory, it is a fact that New Lin Fung has been operating for over 7 years under the new BR albeit using the stamp of Old Lin Fung.
33. I am satisfied that unless the applicant is registered as sole proprietor of New Lin Fung, she will not be able to collect or assert the estates rights to any assets of the deceased in the PRC acquired or held in the name of New Lin Fung.’
VI. My view
6.1. I respectfully disagree with the learned judge. It is clear that the registration of a sole proprietorship under the Business Registration Ordinance (Cap. 310) does not create a separate and distinct legal entity from the person who applies for the registration. The person who is registered as the sole proprietor can carry out the business in his own name or under a trade name. The use of a trade name does not mean that a separate legal entity has been created.
6.2. In respect of New Lin Fung the name ‘Lin Fung Industrial Company’ registered by the 2nd respondent is merely a trade name. In law it is the 2nd respondent who carries on the business activities and he has done so since the death of the deceased.
6.3. Likewise, in respect of the Old Lin Fung, the use of the trade name ‘Lin Fung Industrial Company’ means no more than that the deceased himself had carried on the business until his death.
6.4. This basic concept really highlights the misconceived notion of the applicant’s request to be substituted as the sole proprietor of New Lin Fung. The change in the particulars of the business registration will not achieve any substitution in substance: the applicant cannot in substance take over from the business of the 2nd respondent who had operated under the trade name of New Lin Fung. More importantly, this method will not ensure a continuation of Old Lin Fung because the business of the deceased had already ceased on his death.
6.5. The purpose of the 2nd respondent lodging the business registration of New Lin Fung was according to him, under the advice of an accountant and for the purpose of continuing with the business activities of Old Lin Fung. However, the question whether, on one hand, he was merely continuing the business of the deceased so that the business was carried on on behalf of the estate and hence the assets of New Lin Fung belong to the estate or whether, on the other hand, the 2nd respondent was carrying on his own new business as he had asserted (according to the evidence adduced by the applicant herself, the 2nd respondent had injected $3 million into the operation of New Lin Fung) or whether he had also taken advantage of the business activities of the deceased for his own benefit cannot be determined in an originating summons application under Order 85, rule 2. It is not the appropriate procedure to deal with factual disputes. A prima facie case of the estate having an interest in the assets of New Lin Fung is not sufficient to grant a final order like the present one.
6.6. I accept the principle that when a person engaged in trade or business dies, his trade or business descends to his representative as part of his assets : paragraphs 57-85 of Williams, Mortimer & Sunnucks on Executors, Administrators and Probate (2013 Edition). But the capacity in which the 2nd respondent carried on the business of Old Lin Fung is precisely the disputed issue that has to be resolved in the first place. By making the order to substitute the applicant as the sole proprietor of New Lin Fung so that she, as administratrix, could carry on the business of Old Lin Fung will have the effect of precluding this issue from being determined. Further the order that was made was a final order with no provision for undertakings for damages in the event that the 2nd respondent suffers loss and damage as a result of the order if it should transpire that it was wrongly made.
6.7. Further, according to the 2nd respondent’s Mainland lawyers, what the 2nd respondent had done in the first place was irregular. There were ‘abnormal representations’ to the Mainland government by concealing the death of the deceased and the 2nd respondent may face the risk of being held legally accountable. While the word ‘fraud’ has not been used in the legal advice, the action of the applicant bears the semblance of a fraud. Where there is evidence of the possibility of fraud being committed by the 2nd respondent, there is all the more reason an order should not be made. By making the order as requested by the applicant, the Court would be condoning a repetition of the same irregularity.
6.8. The applicant relied on Marley v Mutual Security Merchant Bank and Trust Co Ltd [1991] 3 All ER 198 at 201, where Lord Oliver stated that :
‘ the court is essentially engaged solely in determining what ought to be done in the best interests of the … estate’.
6.9. It is submitted that the applicant applied for the order to enable her to collect assets of the estate situated outside Hong Kong in circumstances where the applicant would not have been able to collect or assert the estate’s rights to such assets without such order.
6.10. With respect, it is only when the circumstances are appropriate, the Court will ensure what ought to be done is in the best interest of the estate. The Court will not grant relief which plainly is not appropriate simply for the purpose of overcoming obstacles the applicant may encounter in another jurisdiction.
6.11. For these reasons, the appeal was allowed and the order set aside. As the order has been performed, the applicant is required within 14 days to return to the 2nd respondent all the documents and seals of New Lin Fung that the 2nd respondent had disclosed and delivered to the applicant pursuant to the order. The applicant is further required not to take any steps to carry out the change in the business registration particulars of New Lin Fung.
VII. Application to adduce new evidence
7. The 2nd respondent applied to adduce another legal advice from his Mainland lawyer. The application does not fulfill the first threshold requirement in Ladd v. Marshall that this evidence could not with reasonable efforts be obtained at the time of the hearing below. The 2nd respondent said the new expert evidence further supports the finding already made in the judgment below that a third party like the applicant cannot collect or assert rights over assets registered in the name of Old Lin Fung or New Lin Fung by registering a new sole proprietorship in Hong Kong. He also relied on the change of focus of the applicant’s case since the hearing below to support his application. I do not see how these matters can justify the admission of the new evidence. The application was accordingly refused.
Decision on Costs
8. I would order that :
1) the 2nd respondent is to have the costs of the appeal and below with certificate for two counsel; and
2) the 2nd respondent is to pay the applicant the costs of the application to adduce new evidence.
Hon Kwan JA :
9. I agree with the reasons for judgment of Cheung JA and the decision on costs.
(M. H. Lam)
(Peter Cheung)
(Susan Kwan)
Mr Clifford Smith S.C. and Mr Edward Tang, instructed by Orrick, Herrington & Sutcliffe, for the applicant
Ms Audrey Eu S.C. and Mr Robert Chan, instructed by Ho & Partners, for the 1st and 2nd respondents