Wah Nam Group Ltd v. Roderick John Sutton and Another
Read the full judgment text of CACV 217/2017 on BabelCite. This Court of Appeal judgment was delivered on 10 October 2018 before Yuen JA, Kwan JA, Poon JA.
Civil procedure – companies – winding-up – reflective loss – strike-out – Companies (Winding-up and Miscellaneous Provisions) Ordinance (Cap. 32) – Companies Ordinance s.200(5) and s.205 – shareholder's claim against former liquidators for negligence and vicarious liability – subsidiary companies suing same defendants for same loss – whether "no reflective loss" principle bars shareholder's claim – whether availability of company action at trial is relevant – settlement sanctioned by court – release of former liquidators – removal of liquidators – Companies Ordinance – nature of shareholder's loss – fall in value of interest in indirect subsidiary – de facto or shadow directors – derivative action – Barma J – Harris J – DHCJ William Wong SC – Court of Appeal – sub-contract terminated due to delay in progress not applicable – oral contract in loan agreement not applicable – key phrases of material facts: misappropriation of shares in Summit Mass Limited by George Wong; Summit Mass's sole asset was an undeveloped piece of mainland land classified as "idle land"; Former Liquidators directed Chater Secretaries Ltd and Lansdowne Nominees Ltd to act as directors of subsidiaries; settlement of RMB3.35 million for the shares sanctioned by Barma J in August 2011; release of Former Liquidators under s.200(5) by Harris J in May 2012 – whether the "no reflective loss" principle applies where shareholder and subsidiaries sue same defendants for same loss – held: yes; the principle is based on the nature of the loss, and a shareholder cannot maintain parallel proceedings merely because the company's pleaded cause of action may fail at trial – Shaker v Al-Badawi interpreted as requiring defendants to show the company has a viable claim "on the facts" by reference to its pleadings, not as postponing determination to trial – Basab followed in refusing to allow shareholder to bypass derivative-action threshold – Waddington applied; Giles v Rhind not followed – Topping Chance Development did not add or develop any principle – appeals dismissed with costs; order nisi for certificate for two counsel.
Legal issues: Application of the "no reflective loss" principle to bar a shareholder's claim against former liquidators where subsidiaries have also sued for the same loss
Outcome: Appeals dismissed; Wah Nam's claim in HCA960/2015 remains struck out and the reversal of the current liquidators' decision to commence that action stands.
Cited by 6 cases · Cites 5 cases
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CACV 215/2017 (Heard Together) [2018] HKCA 687 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO 215 OF 2017 (ON APPEAL FROM HCA NO 960 OF 2015) __________________________________
IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO 217 OF 2017 (ON APPEAL FROM HCCW NO 166 OF 2000) ________________________
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________________________ J U D G M E N T ________________________ Hon Yuen JA: CACV215/2017 1.CACV215/2017 is the appeal of Wah Nam Group Ltd (“Wah Nam”) from a decision of DHCJ William Wong SC given on 5 September 2017 (“the Decision”) striking out its claim in HCA960/2015 against its former liquidators (“the Former Liquidators”). The learned deputy judge struck out the claim on the ground that it contravened the “no reflective loss” principle1. CACV217/2017 2.The action (HCA960/2015) had been commenced by Wah Nam’s current liquidators. The Former Liquidators had also applied in HCCW166/2000 for the court to reverse that decision of the current liquidators. The learned deputy judge heard the strike-out application and the reversal application together, and in light of the strike-out, reversed the current liquidators’ decision to commence the action2. CACV217/2017 is Wah Nam’s appeal from that order. Background 3.1.The background has been set out in detail in the Decision. The facts material to this appeal are summarized below. 3.2.Wah Nam, a listed company, had3 two subsidiaries Great Strategy Properties Ltd (“GSP”) and Crystal Services Ltd (“CS”). 3.3.In January 2000, GSP and CS acquired all the shares in a company called Summit Mass Ltd (“Summit Mass”) for HK$45 million4. The sole asset of Summit Mass was a piece of land on the mainland (“the Land”)5. 3.4.In July 2000, Wah Nam was wound up in HCCW166/2000. Appointment of Former Liquidators 4.1.In January 2001, the Former Liquidators were appointed. 4.2.After their appointment,
5.According to Wah Nam,
Dealings with Shares in Summit Mass 6.1.In June 2006, George Wong Wai, an employee, servant or agent of Chater, Lansdowne and the Former Liquidators, who had been designated to handle the affairs of Wah Nam and its related companies, allegedly misappropriated the shares in Summit Mass and caused them to be purportedly transferred from GSP and CS to third parties. 6.2.This was not discovered by Chater, Lansdowne or the Former Liquidators until some 17 months later, in November 2007. “Idle Land” notice 7.In the meantime, after the appointment of the Former Liquidators, no steps had been taken to develop the Land. In July 2007, the Land was classified as “idle land” by notice from the authorities on the mainland, which meant that it was at risk of being forfeited or resumed. HCA245/2008 and sanction of settlement 8.1.After the transfer of the shares in Summit Mass came to the Former Liquidators’ notice, in 2008 litigation was commenced in Hong Kong8 and on the mainland against the third parties mentioned above. 8.2.Shortly before the trial was due to take place in Hong Kong in August 2011, there were negotiations for settlement. 8.3.On 12 August 2011, Barma J (now Barma JA) sanctioned9 the Former Liquidators’ entry into the settlement, under which GSP and CS received RMB3.35m for the transfer of the shares in Summit Mass to the third parties. One of the reasons for Barma J’s decision was the imposition of the “idle land notice” over the Land. Removal and release of Former Liquidators 9.1.By this time (if not earlier), the Committee of Inspection of Wah Nam had become dissatisfied with the Former Liquidators. 9.2.An application was made by a major creditor10 to remove the Former Liquidators which concluded with a consent order made by Harris J after a hearing on 2 May 2012, whereby it was ordered that:
9.3.Reasons were given by Harris J in a Decision given the same day which made it clear that he was not ordering the release of the Former Liquidators pursuant to s.205 of the Ordinance. HCA960/2015 10.Some three years later, the current liquidators of Wah Nam commenced proceedings against the Former Liquidators. In the Statement of Claim, it is pleaded that the Former Liquidators:
HCA962/2015 11.1.On the same day, GSP and CS commenced proceedings against George Wong, Chater, Lansdowne, the Former Liquidators, and the company formerly known as Ferrier Hodgson Ltd12. 11.2.The judge said13 that “a careful reading of the pleadings of both actions [HCA960/2015 and HCA962/2015] clearly shows that there is a high degree of overlap of the two statements of claim”. Former Liquidators’ strike-out applications etc 12.In 2016, the Former Liquidators applied:
The deputy judge’s Decision 13.1.The grounds on which the Former Liquidators sought to strike out the claims in both HCA960/2015 and HCA962/2015 were based on:
13.2.For the reasons given in his clear and detailed Decision, the judge refused the Former Liquidators’ applications based on the grounds set out above. 13.3.However, the judge held that Wah Nam’s claim should be struck out on the additional ground that the claim contravened the “no reflective loss” principle. This principle was not applicable to the claim of GSP and CS, and HCA962/2015 therefore progressed. Wah Nam’s appeal against strike-out and reversal of decision 14.Wah Nam appealed the judge’s order to strike-out HCA960/2015 and the reversal of the decision in HCCW166/2000 to commence that action. For their part, the Former Liquidators have filed a Respondent’s Notice in each appeal to emphasize that the pleaded loss was reflective even though the judge “did not ... specifically state this as an express basis on which the claim in HCA960/2015 should be struck out”. Discussion 15.In relation to the Respondent’s Notices, it is not necessary to deal with them as I think it is reasonably clear from the Decision that the judge had struck out the claim on the ground that the loss claimed by Wah Nam was a reflective loss14, and Mr Bernard Man SC15 leading counsel for Wah Nam has not suggested otherwise. 16.The argument before this court advanced by Mr Man was essentially this: that even though Wah Nam and GSP and CS have sued for the same loss, “there is a distinct possibility that only Wah Nam will succeed against the Former Liquidators, and [GSP and CS] will not; for example ... [GSP and CS] may not succeed in establishing that the Former Liquidators owed ... duties to them as de facto or shadow directors”16. He submitted that even though a cause of action against the Former Liquidators has been pleaded by GSP and CS in their Statement of Claim which has been verified by a statement of truth, GSP and CS may fail after trial, in which event it would be unjust for Wah Nam to be unable to recover any loss against the Former Liquidators even though it has a different cause of action against them17. 17.As I understand the present state of the law in this jurisdiction, the “no reflective loss” principle is a principle of law which is based on the nature of the loss. The focus on the nature of the shareholder claimant’s loss as the benchmark of the “no reflective loss” principle is shown in cases where that principle has been applied even though the company has itself declined or failed to sue18, or has been unable to sue whether for lack of merits19 or lack of financial resources caused by the wrongdoer20. Even in those situations, the shareholder was not entitled to claim directly against the alleged wrongdoer, because his loss is still only from the fall in the value of his interest in the company. Depending on the reasons for the company’s refusal or failure or inability to act, his recourse could be to issue a claim against the company or, by way of a derivative action or an application to court to direct a receiver, to sue the wrongdoer on behalf of the company21. 18.In the present case, Mr Man accepts that the loss claimed by Wah Nam is the same as that claimed by GSP and CS, and that the nature of Wah Nam’s loss arises solely from the fall in value of its interest in its indirect subsidiary Summit Mass22, that being its only interest. That being the case, with respect to Mr Man I cannot see how it can be argued that there can be parallel proceedings by a shareholder (Wah Nam) and by a company (GSP and CS) against the same defendant for the same loss. The shareholder should look to the company and not directly to the wrongdoer, for his loss derives solely from his interest as a shareholder of the company. 19.Mr Man submitted that Wah Nam should be allowed to pursue its claim because even though GSP and CS may have a viable cause of action on the pleadings, that cause of action might not be substantiated at trial. However it would be noted that in Basab, the shareholder argued in the Court of Final Appeal that it should be allowed to sue the alleged wrongdoer directly, even though leave had not been granted for a derivative action in the BVI, because the threshold test for a derivative action in the BVI was higher. Put another way, the shareholder was arguing that he had a better case in Hong Kong than the company which had failed to mount an action in the BVI. The Court of Final Appeal held, refusing leave to appeal, that it was not an arguable exception to the “no reflective loss” principle23. 20.1.Finally I should refer to Mr Man’s citation of Shaker v Al-Badawi and others24where Peter Gibson LJ said25:
20.2.Mr Man submitted that the last words quoted above support his contention that, absent an admission from the defendants, it would only be at trial26 that the court can determine if GSP and CS have a cause of action against the Former Liquidators. With respect, I do not think that is what is meant. In my view, that passage means only that it is not enough for defendants (who are applying for a strike-out on the “no reflective loss” principle) simply to rely on the fact that a claim has been filed against them. They would also need to take the court through the company’s pleadings to see if it contains all the facts necessary for it to prove, to support its right to judgment, in other words, a “cause of action”: Hong Kong Civil Procedure 2019 vol.1, 15/1/2. If the necessary facts are pleaded, then the claim is “available on the facts”. There is no suggestion to the contrary here. 21.Finally Mr Man also relied on Topping Chance Development Ltd v CCIF CPA Ltd27 but I do not think it is suggested that any principle of law was added or developed in that judgment. Order 22.For the reasons above, I would dismiss the appeals with costs. There will be an order nisi that there be certificate for two counsel. Hon Kwan JA: 23.I agree with the judgment of Yuen JA. Hon Poon JA: 24.I agree with the judgment of Yuen JA.
Mr Bernard Man SC and Mr Adrian Lai, instructed by DS Cheung & Co, for the Plaintiff Ms Rachel Lam and Ms Jasmine Cheung, instructed by Stephenson Harwood, for the Defendants 1 §§59-68. 2 §100(1). 3 (Amongst others). 4 There is a dispute as to the true value of the Land. 5 The Land was not developed, had no connections to utilities and was not yet zoned. 6 §12(1) and §14(4) Statement of Claim, HCA960/2015. 7 §12(2), 13, 14(3) and 14(5), Statement of Claim, HCA960/2015. 8 HCA245/2008. 9 For reasons given in his Decision of the same day. 10 Mr Terence Ho. 11 A reference to “s.205” in the draft consent summons had been struck out and replaced with “s.200(5)” in the order. 12 This was the firm to which Mr Chiong (one of the Former Liquidators) and Mr John Lees, a former liquidator of Wah Nam, were associated. Mr Sutton (the other Former Liquidator) replaced Mr Lees in November 2003. 13 §59. 14 §60. 15 Who did not appear below, with Mr Adrian Lai (who appeared below). 16 It is not disputed between the parties before this court that the fact that GSP and CS may succeed against persons other than the Former Liquidators is irrelevant at the strike-out stage, for this court has held in Hotung v Ho Yuen Ki (No 4) [2001] 2 HKC 149, §§ 19 and 33 that it was not sufficiently plain and obvious that the “no reflective loss” principle applied where there was a difference in defendants. 17 Mr Man accepted that the fact that Wah Nam and GSP and CS have different causes of action against the Former Liquidators is by itself irrelevant to the applicability of the “no reflective loss” principle: Gardner v Parker [2005] BCC 46, §49. 18 Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370, §87. 19 Basab Inc and anor v Superb Glory Holdings Ltd HCA6/2014, unrep. 4 Dec 2014, CACV256/2014, unrep. 2 Dec 2016, (2017) 20 HKCFAR 384. 20 Waddington, §86, declining to follow Giles v Rhind [2003] Ch 618 which held there was an exception to the “no reflective loss” principle where the wrongdoer denuded the company of funds to pursue an action. 21 Waddington, §86. 22 HCA960/2015, Statement of Claim §42. 23 §9. 24 [2003] Ch 350. 25 §83. 26 Or perhaps even as late as the delivery of the judgment. 27 [2015] 3 HKC 71. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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