Extramoney Ltd. and Another v. Chan, Lai, Pang & Co. (A Firm)

Case No.CACV 56/1991

Court

Court of Appeal

Date29 Oct 1991

Judge—

Case Document

100%Judiciary

CACV000056/1991

IN THE COURT OF APPEAL

1991, No. 56
(Civil)

BETWEEN

	EXTRAMONEY LIMITED	1st Plaintiff (1st Appellant)
	CARRIAN HOLDINGS LIMITED (In Liquidation)	2nd Plaintiff (2nd Appellant)

	AND

	CHAN, LAI, PANG & CO. (a firm)	Defendants (Respondents)

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Coram: Hon. Kempster, Penlington, JJ.A. and Nazareth, J.

Date of hearing: 20 & 25 September 1991

Date of handing down judgment: 29 October 1991

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JUDGMENT

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Penlington, J.A. (giving the judgment of the Court) :

1. This is an appeal from a judgment of Mayo, J. delivered on the 13th March 1991 in which he refused applications by the plaintiffs for amendments to their statement of claim and for consequential amendments of the writ of summons.

2. A brief history of the matter is that the plaintiffs in a generally endorsed writ filed on the 21st December 1987 claimed damages against the defendants in respect of alleged breaches of the duty which they owed to the plaintiffs.

3. A statement of claim was filed on the 29th December 1987 in which it was alleged that the defendants were auditors of the 1st plaintiff ("Extramoney") which is a wholly owned subsidiary of the 2nd plaintiff ("CHL"). Negligently and in breach of their duty to the company as its auditors they failed to detect that an alleged profit of $101,688,640 derived from the purchase and sale of shares in Carrian Investments Ltd ("CIL") was non-existent. There was no or no sufficient documentation to show that such a profit had been made by Extramoney and the defendants should have so qualified the annual accounts. Because that was not done Extramoney was assessed the sum of $16,778,625 as profits tax and, due to late payment, a further penalty of $838,931 was imposed by the Commissioner of Inland Revenue. Eventually the sum of $17,617,556 was paid by CHL as tax on the profit made in respect of the CIL shares. An application to add an additional claim was heard by Mayo, J. on the 18th March 1991. This new claim was based on evidence which came to light following an examination of the records of Extramoney by its liquidators which, it is alleged, showed that on the 19th May 1981 the defendants purchased 328,000 shares in CIL from Extramoney for $8 per share and on the following day a further 2,000,000 CIL shares for $8.60 per share. It is alleged that the lowest market price of CIL shares on the 19th and 20th May 1981 was $8.70 per share and $8.65 per share respectively. The shares had therefore been purchased at an undervalue of $329,000, a fact of which the defendants and the directors of Extramoney, in particular a Mr. George Tan, must have been well aware. It was a breach of the fiduciary duty owed to Extramoney by its directors, to the knowledge of the defendants. It is further alleged that a payment of $1,200,000 was made by CHL to the defendants on the 21st May 1981 ostensibly as "overtime/bonus for the entire (Carrian) group internal auditing". As the defendants were not the internal auditors of the entire Carrian group and there was no evidence of overtime work having been done or of the defendants being entitled to a bonus, the payment was purely gratuitous, made by the directors of CHL, and again in particular by George Tan, in breach of their fiduciary duty to CHL, a breach of which the defendants must have been aware. The entry showing this payment was purported to be corrected by an entry in the journal of each plaintiff dated the 20th of May showing that the payment was not for overtime or bonus but was a refund of money overpaid for the 2,000,000 CIL shares purchased on the 20th of May. Again it is alleged that these were false entries, to the knowledge of the directors of CHL and of the defendants, as in fact the shares had been purchased at an undervalue and there was no overpayment.

4. The defendant opposed the plaintiffs' application on the basis that the new claim was barred by the Limitation Ordinance, being made more than six years after the cause of action arose. Order 20 Rule 5(5) of the Rules of the Supreme Court only allows a new claim which is statute barred to be brought as an amendment to an existing one if it arises from the same or substantially the same facts. Otherwise it is contrary to s. 35(3) of the Limitation Ordinance and the court shall not allow such an amendment. It is the defendants' case that apart from the defendants being the plaintiffs' auditors at the relevant time there is no such community of fact. The basis of each claim is totally different.

5. The fundamental issue before Mayo, J. was whether the new claim, as set out in the proposed amendments, was barred by the Limitation Ordinance. He found it was and on the basis that the amendments then were outside the provisions of Order 20 refused the applications to amend. He was much influenced in his decision by Taylor v. Davies [1920] AC 636 and Clarkson v. Davies [1923] AC 100. These were both decisions of the Privy Council, and while not considering an appeal from Hong Kong, their Lordships were asked to interpret what the defendants submitted was very similar Canadian legislation and their decisions were clearly of the highest persuasive authority.

6. Those cases draw a distinction between a person who, having obtained property, is later declared to hold it in trust and one who takes the property in such a manner as to make him a trustee i.e. the trust arises by reason of a transaction which is impeached. The distinction is drawn in Clarkson v. Davies at p. 110:

"The effect of the Limitations Act on a claim arising under a constructive trust was considered in the case of Taylor v. Davies, and it was there laid down that there is a distinction between a trust which arises before the occurrence of the transaction impeached and cases which arise only by reason of that transaction."

7. In Taylor v. Davies the privy Council had to consider s. 5 and 20 of the Limitations Act 1914 of Ontario which would bar the claim being made unless the defendant was a "trustee" as defined in s. 47 of the Canadian Trustee Act which corresponded with s. 8 of the Trustee Act (U.K.).

8. Mayo, J. referred to the authority relied on before him by the plaintiffs, Belmont Finance Corporation v. Williams Furniture and ors. (No. 2) [1980] 1 AER 393. At 405 Buckley, L.J. said that:

"A limited company is of course not a trustee of its own funds: it is their beneficial owner; but in consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were trustees of those funds of the company which are in their hands or under their control, and if they misapply them they commit a breach of trust (Re Lands Allotmane Co, per Lindley and Kay LJJ). So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds. This is stated very clearly by Jessel MR in Russell v Wakefield Waterworks Co, where he said:

'In this court the money of the company is a trust fund, because it is applicable only to the special purposes of the company in the hands of the agents of the company, and it is in that sense a trust fund applicable by them to those special purposes; and a person taking it from them with notice that it is being applied to other purposes cannot in this Court say that he is not a constructive trustee'."

9. However he considered that the court should look to the true nature of the transaction and decide if the alleged constructive trust arose before the claimed breach of duty or because of and as a part of, that breach. If the latter it was statute barred on the authorities referred to. He considered that there could be no doubt that the funds alleged to be held by the defendants as constructive trustees did come into their possession as a result of the transactions now impeached and the claim was time barred.

10. Before us the plaintiffs sought to show that Taylor v. Davis and Clarkson v. Davies were no longer authority for the proposition that for the purposes of limitation of actions there were two forms of constructive trust. If a defendant did hold funds as constructive trustee the court should give effect to the clear and unambiguous words of s. 20 of the Limitation Ordinance. It reads as follows:

	"20. (1) No period of limitation prescribed by this Ordinance shall apply to an action by a beneficiary under a trust, being an action -
	(a)	in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or
	(b)	to recover from the trustee trust property or the property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use.
	(2) Subject as aforesaid, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Ordinance, shall not be brought after the expiration of 6 years from the date on which the right of action accrued:
	Provided that the right of action shall not be deemed to have accrued to any benericiary entitled to a future interest in the trust property, until the interest fell into possession.
	(3) No beneficiary as against whom there would be a good defence under this Ordinance shall derive any greater or other benefit from a judgment or order obtained by any other beneficiary than he could have obtained if he had brought the action and this Ordinance had been pleaded in defence."

11. That "trustee" includes a constructive trustee is set out in the definition of "trust" in s. 2 of the Trustee Ordinance, Cap. 29, as follows:

"'Trust' does not include the duties incident to an estate conveyed by way of mortgage but with this exception the expression 'trust' and 'trustee' extend to implied and constructive trusts and to cases where the trustee has a beneficial interest in the trust property ...".

12. Reliance is placed on statements contained in leading textbooks that Taylor v. Davies and Clarkson v. Davies are no longer good authority and that the enactment of the Limitation Act 1939 made it clear that the narrow interpretation given to the definition of "trustee" in the Trustee Act 1888 should no longer be followed. Even if not expressly overruled by a subsequent decision they are furthermore not decisions of the Privy Council when considering a Hong Kong appeal, are only persuasive, and should not be followed. Reference was made to the recommendation in the Fifth Report of the Law Revision Committee recommending that constructive trustees should only be able to rely on limitation to the same extent as an express trustee and for that purpose there should be no distinction between them. Reliance is also placed on the dicta of Romer, J. in re williams [1923] 2 Ch. 533 where at p. 539 he referred with approval to Soar v. Ashwell [1893] 2 QB 390 where Bowen, L.J. said:

"'Thirdly, a similar extension of the doctrine has been acted on in a case where a person received trust property and dealt with it in a manner inconsistent with trusts of which he was cognizant,'. He Cites as authority for that Lee v. Sankey [1872] LR 15".

Romer, J. went on to say:

"Bowen L.J. clearly lays it down that a man who receives trust property with knowledge that it is trust property, though without the knowledge of the trustee, will be treated by the Court of equity, for the purposes of ascertaining whether the Statute of Limitations is available to him or not, exactly as it would treat an express trustee. Indeed, personally I find it very difficult to understand why where a man receives and misappropriates trust money with knowledge of the trust there should be any difference in favour of the man who does so without the knowledge of the trustee as compared with the man who does so with the knowledge of the trustee. In the first case he is doing a wrong both to the trustee and to the cestui que trust, in the second case he is doing a wrong to the cestui que trust only, and one would have thought that the case of the first man was at any rate as bad as the case of the second."

13. Underhill and Hayton's Law Relating to Trusts and Trustees (14th Ed.) at Article 99, having set out the effect of s. 21, 22 and 23 of the Limitation Act 1980, which restated s. 19 and 20 of the Limitation Act 1939, states that in the context of those sections "Express, resulting and constructive trustees are dealt with on the same footing". A footnote reads "the pre 1939 Limitation Act distinction between express and constructive trustees expounded in Taylor v. Davies no longer subsists". Clearly, it would seem, the author considered that the 1939 Act was so worded as to remove the previous distinction.

14. Whether Taylor v. Davies was still good law was also discussed by William Braithwaite in an article in The Conveyancer in 1980. He said, inter alia, with reference to the definition of "trustee" in the Trustee Act 1888:

" Despite the width of the definition of 'trustee' the question arose as to whether the exception contained in section 8 operated to deprive a constructive trustee of the limitation period protection which he had possessed at common law. The Privy council, interpreting a corresponding Ontario statute in Taylor v. Davies noted that there were two types of constructive trusts; first, those where a person takes possession of property on his own behalf and later as a result of some subsequent act is liable to be declared a trustee by the court and secondly, those where a person initially takes possession upon trust for and on behalf of others. For the purposes of the earlier common law position on limitation periods, persons within the latter category had been treated as 'express trustees'. The Privy Council concluded that it was only those constructive trustees within the second group to whom the exception applied.

The draftsmen of the Limitation Act 1939 sought to eliminate this disparity in the treatment of constructive trustees by altering the definition of 'trust' and 'trustee' for the purpose of that statute to incorporate the definition contained in the Trustee Act 1925 which expressly included 'constructive trusts'. Although there is at least one post-1939 decision which purports to maintain the Taylor v. Davies dichotomy, it would appear that the amendment has expressly abolished the distinction. However some Commonwealth jurisdictions, which had previously borrowed from the 1888 statute, have not adopted the amendment contained in the Limitation Act 1939. New South Wales, at the time relevant in Queensland Mines Ltd. v. Hudson, was one such jurisdiction."

He went on to say:

	"... Even more recently the Supreme Court of Ontario was forced to deal with Taylor v. Davies in Wotherspoon et al. v. Canadian Pacific et al. The case is not concerned with directors' liability but it is instructive to note the reluctance of the court to apply the early privy Council decision. While Hughes J. was able to distinguish Taylor v. Davies on the facts, he made the following inroad into the ambit of the earlier classification
		'the words [contained in s. 8 of the Trustee Act 1888] which most clearly apply to this situation are not mentioned in the judgment of the Board, and they are specifically "or previously received by the trustee and converted to his use". The element of conversion appears to me to take a fiduciary who sells property of which he has possession ... out of the category on which the distinction rests.'
	On that basis, Hughes J. concluded that the defendant, Canadian Pacific, who was accountable as a constructive trustee, was not entitled to the protection of the statutory limitation period."

15. Halsbury's Laws of England, 4th Ed., Vol. 48 at para. 943 says:

"no statutory period of limitation applies to an action by a beneficiary under a trust in respect of any fraud or fraudulent beach of trust to which a trustee was a party or privy or to recover from the trustee trust property or the proceeds of it in the possession of the trustee or previously received by the trustee and converted to his use."

16. No reference is made to any distinction between a trustee and a constructive trustee. Neither Taylor v. Davies or Clarkson v. Davies are cited.

17. Michael Franks in his book, Limitation of Actions, at p. 65 and 66 refers to Taylor v. Davies and said that although it was clear that the draftsman of the 1888 Trustee Act intended the definition of trustee to include implied and constructive trustees, the courts in cases such as Taylor v. Davies decided it only extended to express trustees. He refers to the decision of Roxburgn, J. in Tintin Exploration Syndicate v. Sandys [1947] 177 LT 412, on which the defendants here rely, but went on to say:

" It is submitted that the difficulties of classification existing under the 1888 Act and the equitable rules should not be reintroduced in construing the words of the 1939 Act which prima facie have an unequivocal meaning. It was clearly intended that the 1939 Act should dispose of all distinction between express, implied and constructive trustees for limitation purposes. Again the general tendency of the 1939 Act is to cut down the field in which the equitable limitation rules alone apply and in which the statutory limitations provisions are applied under the equitable jurisdiction only by analogy. Further it is submitted that it is more logical that the limitation position should be governed by the nature of the breach of duty in question, rather than by the manner in which the duty first arose."

In a footnote the author refers to the decision in Tintin as in any event being obiter on this point.

18. Reliance is also placed on Shephard v. Cartwright [1955] AC 431 where Viscount Simonds approved the judgment of Denning, L.J. in the Court of Appeal on the question of limitation ([1953] Ch. 728 at 756). In that case funds had been withdrawn from a bank by a father who had himself deposited them in trust for his children. Denning, L.J. said:

"It seems to me that the testator would here be in a dilemma. When he drew the money from the bank, either he intended to use the children's money as his own, or he did not. If he did intend to use it as his own and told them nothing about it, then the very nature of his dealing amounted to a fraudulent concealment from them of their right of action; and the period of limitation did not start to run until the children discovered it: see section 26(6) of the Limitation Act, 1939, and Beaman v. A.R.T.S. Ld. If the father did not intend to use the money as his own, but on behalf of the children as he ought to have done, then he was a trustee of it and he has since converted it to his own use, and the children are not bound by any period of limitation: see Lyell v. Kennedy, and Soar v. Ashwell; see also section 19(1) (b) of the Limitation Act, 1939."

Reliance is also placed on G.L. Baker Ltd v. Medway Building and Supplies Ltd [1958] 1 WLR 1216.

19. It is the case then for the plaintiffs that Mayo, J. was wrong in his conclusion that Taylor v. Davies and Clarkson v. Davies were unaffected by any subsequent legislation and should be followed. The wording of s. 20 of the Limitation Ordinance, being identical with s. 19 of the United Kingdom Act, was intended to and did remove any distinction between express and constructive trustees in the context of limitation and the earlier cases which had decided to the contrary, were overtaken.

20. Mr. Charles Ching, Q.C., leading counsel for the defendant, argued that Mayo, J. was right in following Taylor v. Davies and Clarkson v. Davies. Those cases were decisions of the Privy Council and in no subsequent case were they expressly said to be overruled. The recommendations of the Law Revison Committee were no more than that and the statements made in the various textbooks and learned articles relied on by the plaintiffs are not supported by authority. It may well be that there is a body of opinion that Taylor v. Davies was too narrow a construction but it is still good law and Mayo, J. was right to follow it. In any event what he was saying in his judgment was that even if the new claim was not time barred he would in his discretion refuse leave.

21. It was the defendants' case that leave to make the amendments should be refused. The plaintiffs would not be without remedy and could issue another writ and apply to consolidate the new action with the existing one.

22. It was argued by Mr. Ching that in the Canadian cases, and here, the claim is clearly statute barred unless the plaintiffs can show that they are beneficiaries of funds which the defendants hold as trustees and which have been obtained before the alleged fraudulent breach of trust (Soar v. Ashwell, p. 394). The Canadian Trustee Act contained exactly those words but the distinction previously referred to was drawn. In Taylor v. Davies at 649 Viscount Cave sets out the relative provision of the Canadian Act noting that they corresponded with s. 8 of the U.K. 1888 Act:

"(1.) 'Trustee' shall include an executor, administrator and a trustee whose trustee arises by construction or implication of law as well as an express trustee.

(2.) In an action against a trustee or any person claiming through him, except where the claim is founded upon any fraud or fraudulent breach of trust to which the trustee was party or privy, or is to recover trust property, or the proceeds thereof, still retained by the trustee, or previously received by the trustee and converted to his use, the following provisions shall apply: (a) All rights and privileges conferred by any statute of limitations shall be enjoyed in the like manner and to the like extent as they would have been enjoyed in such action if the trustee or person claiming through him had not been a trustee or person claiming through a trustee. (b) If the action is brought to recover money or other property, and is one to which no existing statute of limitation applies, the trustee or person claiming through him shall be entitled to the benefit of, and be at liberty to plead, the lapse of time as a bar to such action in the like manner and to the like extent as if the claim had been against him in an action of debt for money had and received".

23. Reliance is placed on what Mr. Ching argues is the only direct authority since the enactment of the Limitation Act 1939, Tintin Exploration Syndicate Ltd v. Sandys. There the defendant, Lord Sandys, received £1,500 on the allotment of shares in the plaintiff company to the second defendant. That allotment was held to be unlawful and the plaintiff claimed a refund of the £1,500. Inter alia the defendant pleaded that the claim was statute barred. Roxburgh, J. said this:

"now at this point I must refer to the question of the Statute of Limitations. Sect. 19 of the Limitation Act, 1939, provides: 'No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use.' In sect. 31(1) it is stated: '"trust" and "trustee" have the same meanings respectively as in the Trustee Act, 1925.' The Trustee Act, 1925, says, '"trust" and "trustee" extend to implied and constructive trusts, and to cases where the trustee has a beneficial interest in the trust property,' and so on. The point which Mr. Christie has taken, and it is an important point, is of this nature. He says that the defendant, Lord Sandys, only became liable as a trustee by reason of the receipt by him of the £1,500 and that the trustee who only becomes a trustee by reason of the wrongful act alleged is entitled to plead the statute. I think his point is well founded. The matter is very fully dealt with in a decision of the Court of Appeal in Soar v. Ashwell (69 L.T.Rep. 585, (1893) 2 Q.B. 390)."

24. In fact Lord Sandys was held to be an express trustee and liable to refund the £1,500, which is why no doubt Mr. Franks considered the decision on this point to be obiter.

25. It would seem that Mayo, J. was not referred to the authorities which suggest that Taylor v. Davies and Clarkson v. Davies have been overruled in Hong Kong by s. 20 of the Limitation Ordinance and the position is by no means as clear as he considered it to be. The general principle is that an amendment to a pleading should be allowed unless it be shown to be useless or is such as will cause prejudice to the other party which cannot be compensated for in costs. We do not consider that, at this interlocutory stage, we can say that the amendments would be useless or that it would be more appropriate for the plaintiffs to be required to issue a new writ incorporating the amendments now requested and to then apply to consolidate. That would lead to needless additional costs.

26. Mayo, J. said that even if he was wrong in deciding that the new claim was statute barred, it offended against Order 20 Rule 5(5) in that it was entirely separate and distinct from the original claim. It was argued that this indicated that he was, in any event, exercising his discretion to refuse the amendments but it seems to us that if the new claim is not statute barred, and clearly there is at the very least a triable issue that it is not, Order 20 Rule 5(5) does not apply. A new cause of action can be added to a claim if it is not statute barred, will not cause prejudice and is necessary for the purpose of determining the real question in controversy between the parties. We do not consider Mayo, J. has exercised a discretion in the manner suggested by the defendants.

27. There are clearly arguments on both sides as to whether or not the plaintiffs' new claim is statute barred which we consider are matters for the trial judge and not for us, at least at this juncture, to decide. In our view the amendments should have been allowed and the question of limitation can then be argued at the trial.

28. The form of the amendments to the statement or claim proposed were attacked below and Mayo, J. considered there was some justification for that criticism. The plaintiffs have accordingly made some changes to those amendments. We do not consider the form of the amendments now proposed to be objectionable.

29. We would therefore allow the appeal and grant leave to make the amendments to the writ and statement of claim presently sought, the amended pleadings to be filed within 7 days and the defendants to have leave to file an amended defence within 21 days thereafter. A reply, if any, to be filed within 14 days of that.

30. There will be an order nisi that the plaintiffs have their costs here and before Mayo, J.

(M.E.I. Kempster)
Justice of Appeal

(R.G. Penlington)
Justice of Appeal

(G.P. Nazareth)
Judge of the High Court

Representation:

R. Mills-Owens, Q.C. and C. Smith (Simmons & Simmons) for appellant

C. Ching, Q.C. and R. Faulkher (Chan & Cheng) for respondent

Cites 2 cases

Cases cited in this judgment

John Taylor v. The Queen

[1920] AC 636

Court of Appeal

Olivia Davies v. Lau Shek Yau John and Others

[1923] AC 100

High Court CFI11 Sep 1995