Anthony Eric Ryan Hotung v. Hotung, Michael Eric a.B. Mak Shun Ming, The Executor of the Estate of Ho Yuen Ki Winnie, also known as Ho Yuen Ki, Deceased

CACV 151/2021

[2022] HKCA 951

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 151 OF 2021

(ON APPEAL FROM HCA NO 1216 OF 2006)

________________________

________________________

Before:  Hon Kwan Ag CJHC, Au JA and Chow JA in Court

Date of Hearing:  8 June 2022

Date of Judgment:  29 June 2022

________________________

J U D G M E N T

________________________

Hon Kwan Ag CJHC (giving the Judgment of the Court):

Introduction

1.This is an appeal brought by the plaintiff, Anthony Eric Ryan Hotung (“Anthony”), against the judgment of Lok J handed down on 9 March 2021 (“Judgment”) after a four-day trial. For ease of reference, we will adopt the terms and abbreviations in the Judgment.

2.In summary, Anthony is one of the beneficiaries of the “HEL Trust” and the “HICL Trust”, collectively the “2 Trusts”. He brought this action alleging that the late Ho Yuen Ki Winnie (“Ho”)[1] had breached her duties as the trustee of the 2 Trusts and claimed, inter alia, equitable compensation and/or damages for breach of trust, an order for replacement of such sums as are necessary to restore the value of the 2 Trusts to its value prior to the events pleaded in the re-amended statement of claim (the “RASOC”)[2], an order that an account be taken of what is due to the 2 Trusts and payment of all monies found due on taking the account.

3.The judge ruled that Anthony should be held strictly to his case as pleaded in the RASOC and found that of the breaches of duties complained of, the only breach established was the undisputed fact of Ho having failed to inform Anthony of his interests in the 2 Trusts (“Failure to Inform Claim”) when he reached the age of majority of 21 on 14 March 1987. But as Anthony could not prove that any loss has flowed from such breach of duty, the judge only awarded $1 as nominal damage and ordered Anthony to pay Ho the costs of this action.

4.By this appeal, Anthony seeks to challenge the judge’s conclusions. Mr Barlow, SC[3], who appears for him on appeal but not below, primarily seeks a declaration that Ho breached her duties as trustee and an order that Ho is to account to Anthony upon the “wilful default” basis and costs.

Background

5.We adopt the background matters set out in the Judgment at §§2 to 20:

“2. The Plaintiff, Mr Anthony Eric Ryan Hotung (‘Anthony’), is the son of the 2^nd Defendant Mr Eric Edward Hotung (‘Eric’). The 3^rd Defendant is a company called Hotung Estates Ltd (‘Hotung Estates’).

3. Eric died on 20 September 2017. He had 8 children by his wife Madam Patricia Ann Shea: Michael Eric Hotung (‘Michael’), Robert Eric Hotung, Eric Shea Kim Hotung, Sean Eric Mclean Hotung (‘Sean’), Anthony, Mara Tegwen Hotung Lamb (‘Mara’), Gabrielle Marie Hotung (‘Gabrielle’), Sheridan Patricia Hotung Shea (‘Sheridan’).

4. The original 1^st Defendant, the late Madam Ho Yuen Ki (‘Ho’), had a brief romantic involvement with Eric in the 1950’s. They had 2 children.

5. Under a Declaration of Trust dated 29 November 1979 (the ‘HEL Trust’), Ho held as trustee 10,001 shares in Hotung Enterprises Ltd (‘HEL’) upon trust for Anthony and two of his brothers Michael and Sean and 1 share upon trust for Eric. Pursuant to another Declaration of Trust dated 6 February 1980 (the ‘HICL Trust’), Ho held as trustee 3 shares in Hotung Investment (China) Ltd (‘HICL’) upon trust for Anthony and two of his brothers Michael and Sean.

6. For easy reference, I will refer [to] these two trusts collectively as the ‘2 Trusts’.

7. In respect of the shareholding of HEL at the material time, Ho held 10,002 shares for the said parties pursuant to the HEL Trust. The other 10,002 shares were held by Hillhead Limited (‘Hillhead’), which was a professional trustee company under the management of Ernst & Young, upon trust for Anthony’s sisters Mara, Gabrielle and Sheridan. HEL was dissolved in September 2014.

8. In respect of the shareholding of HICL at the material time, Ho held the 3 shares for the said beneficiaries pursuant to the HICL Trust, and Hillhead held 3 shares upon trust for Mara, Gabrielle and Sheridan. The remaining 90 shares were held by HEL.

9. Eric was the settlor of the 2 Trusts. He was at all material times a director of HEL and HICL[4]. He was also a director of Hotung Estates and had a controlling beneficial interest in it.

10. According to Anthony, Eric was a man of strong and formidable character. He describes Eric as a “control freak”. As a father, Eric was a “tyrant” to his family and children, and his words were “commands” in the family.

11. There is no serious dispute that Anthony did not know about his interests in the 2 Trusts until about 2000. Anthony was born on 14 March 1966 and so he attained the age of 21 on 14 March 1987.

12. In 1989, Anthony returned to Hong Kong and worked in Eric’s flagship listed company Cosmopolitan International Holding Ltd (‘Cosmopolitan’). He was also appointed as a director of HICL. He ceased to be a director of HICL in November 1995.

13. Despite his strong character, Eric and his sons used to have a good relationship. However, there was a dispute about the beneficial interest of a trust involving a property in MacDonnell Road (the ‘MacDonnell Road Property Trust’) in 1996 and the relationship between Eric and Anthony started to deteriorate ever since. Eventually, they settled their differences and Anthony discontinued the present claim against Eric and Hotung Estates in 2009.

14. Before that, Eric and his children were involved in a series of litigations. After Anthony learned of his interests under the 2 Trusts, he and some of his brothers took legal proceedings against Ho demanding the latter to execute a power of attorney empowering them to deal with the shares in HICL and HEL. In response to that, Eric took out legal proceedings to revoke the 2 Trusts on the ground that they were made subject to conditions (the ‘Revocation Proceedings’). The case (HCA 571/2003 and HCMP 2820 & 4511/2002) was tried before Tang JA (as he then was) in 2005. The learned judge ruled the case against Eric.

15. Anthony commenced the present proceedings against Ho, Eric and Hotung Estates on 6 June 2006 relating to certain irregularities in the management of HICL and breach of duty as trustee on the part of Ho.

16. Earlier in July 1991, HICL acquired certain plots of land in Kam Tsin, New Territories (‘the Land’) for $7,440,000. In December 1998, HICL sold the Land to Hotung Estates for $17,500,000, giving a unit price of $143 per square foot. At the same time, Eric also sold to Hotung Estates several land plots registered in his personal name that were adjacent to the Land (‘the Adjacent Lands’). In April 2000, the Land together with the Adjacent Lands (the ‘Amalgamated Lands’) were sold by Hotung Estates to one Base One Ltd (‘Base One’) at $204,307,510, giving a unit price of $646 per square foot.

17. In a nutshell, Anthony claims that there were irregularities in these transactions, including that the sale of the Land to Hotung Estates should have included a premium to reflect the enhancement in value when amalgamated with the Adjacent Lands. Anthony also alleges that there were irregularities in the finance and management of HICL in the form of advances made to Eric and Hotung Estates and companies owned and controlled by Eric. It is claimed that these irregularities had potentially and adversely impacted on the value of the shares beneficially owned by Anthony.

18. For the claim against Ho, Anthony alleges that she was or reasonably should have been put on notice about these irregularities in the management of HICL. Further, Anthony alleges that Ho should have informed him of his interests in the 2 Trusts when he attained the age of majority in March 1987. In the Re-Amended Statement of Claim (‘RASOC’), Anthony claims against Ho for, inter alia, equitable compensation and damages for breaches of duties as trustee and an order for an account to be taken of what is due by Ho under the 2 Trusts.

19. Anthony also claims for an order for the removal of Ho as the trustee for the 2 Trusts. In HCMP 641/2009, Ho applied to retire as trustee, but C Chu J (as she then was) postponed Ho’s application until the determination of her possible liability for breach of duty as trustee under the 2 Trusts. Eventually on 8 March 2012, Chung J made an order permitting Ho to retire, and hence removal of trustee is no longer an issue in the present case. In any event, Ho died in 2018.

20. The case was originally fixed for trial in October 2018. By reason of the death of Ho, DHCJ M Ng (as she then was), on 3 September 2018, made an order for the executor of the estate of Ho (the ‘Executor’) be substituted as the 1^st Defendant in place of Ho. Anthony also applied for the adjournment of the trial and so the trial was refixed before me in November 2019. …”

Anthony’s case as pleaded in the RASOC

6.It is best to start with the pleaded case of Anthony in the RASOC.

7.§10 pleaded the obligations and duties owed by Ho as trustee to the beneficiaries. As noted by the judge[5], these are general allegations as to duties and not breaches.

8.As to what constitute breaches of duty as pleaded, the judge correctly identified three alleged breaches in the RASOC as follows[6]:

“(i) failing to inform or disclose to Anthony his interests in the 2 Trusts when he reached the age of majority (i.e. 21) on 14 March 1987 (the ‘Failure to Inform Claim’) as pleaded in §11A of the RASOC;

(ii) failing, as trustee of the 2 Trusts and shareholder of HICL, to inquire and investigate the following alleged financial irregularities in respect of the management of HICL as referred to in HICL’s audited reports of 1997, 1998 and 1999 (the ‘Dubious Payments Claim’) as pleaded in §§20 to 31 of the RASOC:

(a) dubious advance to a director[7] in the sum of $26,813,281 as referred to in the audited report of HICL in 1997 (pleaded in §20 of the RASOC);

(b) the dubious sum of $20,128,023 due from related companies without securities and no repayment terms as referred to in the audited report of HICL in 1998 (pleaded in §23 of the RASOC);

(c) the dubious sum of $36,761,228 due from related companies without securities and no repayment terms as referred to in the audited report of HICL in 1999 (pleaded in §26 of the RASOC);

(iii) failing, as trustee of the 2 Trusts and shareholder of HICL, to investigate or take action in respect of the sale of the Land from HICL to Hotung Estates, in that the selling price had failed to take into account the premium arising from the possible amalgamation of the Land with the Adjacent Lands (the ‘Undervalue Sale Claim’) as pleaded in §§32 to 46 of the RASOC”.

The trial below

9.At the trial in November 2019, Anthony was the only witness. Mr Michael Yin, who had appeared for Ho and later the Executor, did not rely on Ho’s witness statement.

10.The judge noted that the case only came to trial 13 years after the action was commenced and the litigation has “run out of steam”. He took the view “only half-hearted attempt” has been made by Anthony to pursue his claim at the trial: a lot of the allegations relating to possible irregularities in the management of HICL raised by Anthony’s trial counsel Mr Edward Alder have not been properly pleaded; Anthony could at most raise some queries about certain items in the financial accounts of HICL, no expert was engaged to examine the accounts, nor did Anthony study the financial records; no valuation evidence was produced to prove the proper market value of the Land, including the alleged premium for the possible amalgamation with the Adjacent Lands, in 1998[8].

11.Mr Alder sought leave to amend the RASOC after the close of evidence at the trial. One of the main proposed amendments is to include some of the new allegations in a document headed “Revised quantum table/particulars to ASOC §11, §21, §25, §29, §31, §42(c), §45, §49” (the “Table”)[9]. The judge analysed the 11 phases of alleged breaches of trust in the Table[10]. Some of the transactions which allegedly called for investigation occurred after the issue of the writ. The judge refused leave to amend for these post-writ transactions as they involve new causes of action and leave should not be granted to pursue post-writ breaches under the guise of ongoing trustee’s duties[11].

12.Other allegations of dubious payments in the Table do not fall within the Dubious Payments Claim, as it is clear according to the averments in the RASOC that the Dubious Payments Claim only covers the pleaded transactions referred to in the 1997, 1998 and 1999 audited financial reports of HICL and nothing else. Notwithstanding that Anthony had made some reference to the new allegations in his witness statement made on 19 April 2016 (the “2016 Statement”) some ten years after the commencement of this action, the judge held that Anthony should not be allowed to pursue new allegations that do not fall within the Dubious Payments Claim, the Failure to Inform Claim or the Undervalue Sale Claim as pleaded in the guise of provision of particulars, as it would be grossly unfair to Ho and the Executor if they had to deal with the new allegations. Eric was in the best position to know about the transactions sought to be impugned. The 2016 Statement was made long after Anthony discontinued the claim against Eric and Hotung Estates in 2009. Ho’s health had deteriorated over the years and Eric and she had passed away before the trial. The whole conduct of the defence case for Ho might have been different if Anthony’s case had been presented differently. For these reasons, the judge held that Anthony’s claim should be strictly confined to the allegations in the RASOC and he should not be allowed to expand his claim by new allegations in the 2016 Statement and the Table[12].

The Judgment below

13.The judge dismissed the Dubious Payments Claim for these reasons. It is Anthony’s duty to prove the transactions concerned were improper and the quantum of the related losses. At the very least, he should put enough materials before the court to call for an explanation or account on the part of Ho.

14.This he failed to do. He has not engaged any accountant to examine the accounts of HICL at the material time. For the few payments and advances in the Dubious Payments Claim which he queried, he is unable to supply any particulars as to the background of these payments and advances, or whether these advances had been repaid or not[13]. The accounting documents showed that HICL owed various sums of money to its director Eric from time to time. Without knowing how these liabilities, payment and advances were being booked in HICL’s accounts, it is impossible to conclude there was anything wrong with those payments and advances complained of in the RASOC. He has not established a prima facie case calling for Ho to account. There are insufficient materials to substantiate this claim. Even if he were allowed to rely on the unpleaded new allegations in the Table, it does not take his case any further[14].

15.In respect of the Undervalue Sale Claim, Anthony has not produced any valuation evidence on the market value of the Land at the material time in 1998, taking into account the alleged premium associated with the possible amalgamation of the Land with the Adjacent Lands. Without such crucial material, it is impossible to conclude that the sale of the Land to Hotung Estates in 1998 was at an undervalue. As for the offer of about $280 million made by an independent third party Metrobase Ltd in October 1997, it was an offer to purchase the yet to be amalgamated land, not the value of the Land itself taking into account the possible premium. Further, there was a valuation report made by C Y Leung & Co dated 22 December 1998 showing that the open market value of the Land as at 30 November 1998 was the same $17.5 million.

16.The judge did not think one can simply look at the offer price of Metrobase Ltd and the ultimate selling price of the Amalgamated Lands in 2000 and say there should be a premium on the sale of the Land. Without adducing any expert evidence, there is no room to conclude that the sale of the Land was at an undervalue and this claim fails[15].

17.The judge found there was a duty on the part of Ho to inform Anthony of his interests in the 2 Trusts after he attained the age of majority in March 1987 and Ho had not done so. In determining the equitable compensation against Ho for breach of such duty, two issues have to be considered: what would have happened if Ho had informed Anthony of his interests in 1987, and what Ho should have done to protect Anthony’s interests in the shares[16].

18.The judge found against Anthony on both issues.

19.Eric was in de facto control of the bulk of the family wealth and would not have allowed his children to interfere with his running of the business. If legal proceedings were taken by the children, he would have contested the claims to the end. Anthony would have been very reluctant to confront Eric. When Anthony was young and lacked the financial resources to litigate, he would probably have allowed Eric to run HICL and HEL even if aware of his interests in the 2 Trusts. After the dispute over the MacDonnell Road Property Trust in 1996, if legal proceedings were taken against Eric, Eric would probably have taken the same course in bringing proceedings to revoke the 2 Trusts, which would probably have taken three years to complete as in the Revocation Proceedings. So the alleged payments and advances in the Dubious Payments Claim and the sale of the Land in 1998 would still have been made. The likelihood of the children acting together in bringing effective concerted actions was doubtful[17].

20.The judge found it doubtful whether there was anything that should have alerted Ho to take action to protect Anthony’s interests. Even assuming there was something dubious which called for investigation, Eric would probably not have allowed Ho to interfere with his running of HICL, and Ho would have had to resort to legal proceedings to carry on with investigation. Ho should not be expected to have used her own money to finance possible legal proceedings. In March 2009, Anthony did not comply with the request of her solicitors to provide $100,000 as costs on account for Ho to make necessary applications as trustee following the judgment of the Court of Appeal on 10 July 2007 (“2007 CA Judgment”)[18]. There was very little Ho could have done in the circumstances[19].

21.Another problem is that only very vague allegations were made as to what Ho could have done to protect the beneficial interests of Anthony in the shares of HEL and HICL. It would be grossly unfair that the Executor has to deal with such vague and new allegations made 13 years after the commencement of the claim[20].

22.For these reasons, the judge held that even if Ho was in breach of duty in failing to inform Anthony of his interests in the 2 Trusts after he attained the age of 21, he has failed to prove any damages caused by the breach of duty. Hence, only $1 was awarded as nominal damage for such breach, with costs of the action against Anthony.

This appeal

23.The notice of appeal filed in 2021 was amended twice with the last amended version settled by Mr Barlow. There are 12 grounds of appeal[21]. In light of how the appeal was presented in Mr Barlow’s skeleton argument and oral submissions, it is best that we consider first the main focus of this appeal as presented by him before we turn to the grounds of appeal in the notice of appeal. We think it is fair to say that the grounds of appeal do not feature at the forefront of his submissions and have been argued succinctly in less than three pages of his skeleton argument. We would endeavour to address the grounds of appeal equally succinctly when we come to them.

The main focus of this appeal

24.In an attempt to overturn the Judgment, Mr Barlow sought to re-direct our focus to the issue of breach of duty of a trustee on a much broader basis (instead of the specific breaches pleaded as the Dubious Payments Claim, the Undervalue Sale Claim and the Failure to Inform Claim) and the appropriate relief that may be granted in this instance. His argument runs along these lines.

25.He referred to the duty of care of a trustee under the general law in administering trust property, and that in dealing with it, a trustee is required to use the same degree of diligence and care that an ordinary prudent person of business would exercise in managing similar affairs of his own[22]. He cited Bartlett v Barclays Trust Co (No 1) [1980] 1 Ch 515 at 531C to D, in which Brightman J quoted from Lindley LJ in In re Whiteley (1886) 33 Ch D 347 at 355:

“... care must be taken not to lose sight of the fact that the business of the trustee, and the business which the ordinary prudent man is supposed to be conducting for himself, is the business of investing money for the benefit of persons who are to enjoy it at some future time, and not for the sole benefit of the person entitled to the present income. The duty of a trustee is not to take such care only as a prudent man would take if he had only himself to consider; the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide. That is the kind of business the ordinary prudent man is supposed to be engaged in; and unless this is borne in mind the standard of a trustee’s duty will be fixed too low; lower than it has ever yet been fixed, and lower certainly than the House of Lords or this Court endeavoured to fix it in Speight v. Gaunt.” (emphasis added)

26.Mr Barlow also quoted from this passage in Bartlett v Barclays Trust at 532E to H:

“The bank, as trustee, was bound to act in relation to the shares and to the controlling position which they conferred, in the same manner as a prudent man of business. The prudent man of business will act in such manner as is necessary to safeguard his investment. He will do this in two ways. If facts come to his knowledge which tell him that the company’s affairs are not being conducted as they should be, or which put him on inquiry, he will take appropriate action. Appropriate action will no doubt consist in the first instance of inquiry of and consultation with the directors, and in the last but most unlikely resort, the convening of a general meeting to replace one or more directors. What the prudent man of business will not do is to content himself with the receipt of such information on the affairs of the company as a shareholder ordinarily receives at annual general meetings. Since he has the power to do so, he will go further and see that he has sufficient information to enable him to make a responsible decision from time to time either to let matters proceed as they are proceeding, or to intervene if he is dissatisfied.” (emphasis added)

27.Mr Barlow placed particular emphasis on the words that are underlined above. He relied further on the statements of Yuen JA in the 2007 CA Judgment at §§45 and 47, which will be discussed later. He called this general duty of the trustee the “Safeguarding Duty”. He submitted that where a trustee is entrusted with a controlling shareholding or a substantial measure of control in a private company, the Safeguarding Duty would require him to monitor or keep himself informed about the company’s affairs and about the directors’ plan for the future, either by board participation or “enhanced reporting” from the board[23]. He would have a duty to use his entitlements as shareholder to “shape or influence the composition of the company’s board and business projects”. And when he is put on inquiry, he has the duty to act in order to prevent dissipation of the company’s assets.

28.Mr Barlow contended that during the time Ho was in breach of the duty to inform Anthony of his interests in the 2 Trusts after he attained the age of majority in 1987, Ho was also in breach of the Safeguarding Duty in respect of the trust assets by denying and abrogating her duties as trustee in ignoring the affairs of HEL and HICL, even after:

(a)  November 2001

On 5 November 2001, Anthony and Sean issued an originating summons against Ho in HCMP 5851/2001 (the “Accounts Action”), asking for production of copies of: the share certificates covering the shares in HEL and HICL held in trust for them; the audited financial statements and profits tax returns of these companies from 1980 to 2001; minutes of meetings of shareholders and directors of HICL authorising the sale of the Land to Hotung Estates in 1998 and a full account of the sale proceeds received and disbursed by HICL; and authorisations signed by the beneficiaries of the 2 Trusts authorising Ho to approve the said sale of the Land.

29.Mr Barlow submitted that by bringing the Accounts Action, Anthony had put Ho on notice of “questionable transactions” involving HEL/HICL assets. Anthony maintained that by his supporting affirmation in the Accounts Action, Ho was by November 2001 put on notice of his concern that the Land “had been disposed of in 1998 at a gross undervalue, and that possible wrong had been done to HEL and HICL by the directors or other shareholders of those companies”[24].

(b)  2002

In the course of the Accounts Action, Ho submitted through Mr Yin that her sole duty was limited to holding the shares in specie in safe custody and she was not duty bound to do anything more[25]. She maintained this stance up to the time of the 2007 CA Judgment[26]. And this stance was reflected in her defence filed in this action in which it is pleaded that her duty to keep an accurate account of the trust property meant no more than that she should keep a record of the number of the shares registered in her name in HEL and HICL, that her duty to preserve the trust assets meant a duty to preserve the shares registered in her name in specie, and that she did not owe any duty of care or diligence towards the beneficiaries whether by exercising her rights as shareholder to take positive steps to supervise the management of HEL or HICL or otherwise[27].

30.Mr Barlow submitted that Ho’s stance throughout was indicative of an abrogation of the Safeguarding Duty in respect of the trust assets. She made no plea in the defence she had ever performed any trustee’s duties, either as a shareholder or otherwise in any attempt to monitor the management of HEL or HICL. She made no effort to comply with the duty of a trustee entrusted with a controlling shareholding or a substantial measure of control in a private company. At the trial, there was “absence of any contest” in respect of her breaches of the Safeguarding Duty.

31.Mr Barlow said this abrogation of duty was akin to Bartlett where the trustee failed to exercise its majority shareholders’ rights to require the directors to inform and consult it on the company’s affairs so it could have intervened if necessary to prevent the board from engaging in speculative property development, before the beneficiaries could act to rein in the board.

(c)  2005

On 24 November 2005, the solicitors for Hillhead (the trustee of the Hillhead trusts) wrote to Ho’s solicitors to inform her that Hillhead had been asked by a beneficiary to requisition the directors of HEL and HICL to convene extraordinary general meetings to pass certain resolutions including: to require the directors to give full account of dividends, property transactions and loans; to remove Eric as director and to appoint Sean and Anthony as directors; to conduct a tracing and discovery exercise into the accounts and assets of the companies. As Hillhead was the legal owner of 50% of the shares in each company and Ho was the legal owner of the other half, and since the resolutions would need to be passed by a majority, to enable Hillhead to determine the appropriate action it should take in respect of the beneficiary’s request, Ho was asked to indicate if she would vote in favour of the proposed resolutions.

32.Mr Barlow submitted this was a request by the trustee of the Hillhead trusts for Ho to co-operate in requisitioning shareholders’ EGMs of the companies, and thereby putting Ho on further enquiry of “questionable transactions” but Ho refused to co-operate and spurned the offer to investigate all the questionable transactions[28].

33.It was further contended that as regards the questionable transactions, they were either completed before Anthony discovered his entitlement under the 2 Trusts in about 2000, or after he had put Ho on notice of questionable transactions in 2001.

34.In light of Ho’s above breaches of the Safeguarding Duty by abrogating her trustee’s duties or failing to act after being put on inquiry, Mr Barlow submitted that she was in “wilful default”. The consequence of this is that a beneficiary is entitled to require the trustee to provide an account on the footing of wilful default, whereby the trustee will be required to account for the value of the trust assets as if there had been no wilful default or neglect. And once the trustee has provided an account, the beneficiary is entitled to challenge any deficit in the trust fund and seek the appropriate means by which it may be made good[29].

35.It was contended that in the circumstances Anthony was entitled at least to succeed on his claim that Ho should provide an account on the wilful default basis.

Discussion

36.There are two main problems with the above contentions. First, the case advanced by Mr Barlow that Ho was in breach of the Safeguarding Duty by abrogating her trustee’s duties or failing to act after being put on inquiry has not been pleaded in the RASOC. Second, the alleged breach of the Safeguarding Duty has not been proved at trial.

(a)  Pleading

37.The way in which the plaintiff’s case is said to be pleaded as regards the case advanced on appeal on breaches of the Safeguarding Duty is telling.

38.In Mr Barlow’s skeleton argument, he stated in §5 that the plaintiff’s trial case incorporated:

“(1) his [RASOC] including:

(a) the pleas that the sole Trustee for the 2 Trusts owed trustee’s duties to the Plaintiff, including the below-described Duty to Inform and the duty to safeguard and preserve the value of the trust assets; and

(b) his prayer for relief, including claims for equitable compensation or restitution or for the taking of an account; and

(2) his evidentiary case, including his witness evidence [i.e. the 2016 Statement] and [Anthony’s supplementary witness statement dated 8 November 2019] which was uncontradicted by any other witness evidence, that, in addition to deliberately concealing from him his beneficial interests in the Trusts, from at least 2001 onwards (see Plaintiff’s Chronology)[30], despite being put on notice of questionable dealings in HEL/HICL, the Trustee refused to take any action to safeguard the trust assets or to enable the Plaintiff to do so or to co-operate with the Hillhead trustee and do so.”

39.It is clear from the skeleton argument that in the RASOC, only the duties owed by Ho as trustee to safeguard and preserve the value of the trust assets[31] and the reliefs claimed as a result of breaches of the duties as trustee were pleaded. No specific breach of the Safeguarding Duty was pleaded in the RASOC save a general allegation in §11 that Ho breached her duties as a trustee by failing to carry out the duties pleaded in §10. The only breaches of duty as trustee that have been properly pleaded were those identified in the Judgment, being the Failure to Inform Claim (§11A), the Dubious Payments Claim (§§20 to 31) and the Undervalue Sale Claim (§§32 to 46). For breaches of the Safeguarding Duty, Mr Barlow would have to refer to the plaintiff’s “evidentiary case”, found in the 2016 Statement, Anthony’s supplementary witness statement, the Plaintiff’s Chronology and various documents produced in evidence as mentioned earlier.

40.Mr Barlow contended that Anthony should be permitted to pursue the unpleaded breaches of the Safeguarding Duty nonetheless because there was “absence of any contest in respect of her breaches of her Safeguarding Duty”. It would appear from Ho’s stance pleaded in §5C of the defence mentioned earlier that she had abrogated her Safeguarding Duty, and she adduced “no evidentiary case” at the trial in that her counsel did not rely on her witness statement and called no witness.

41.We do not agree with his contentions. It is “extremely rare” for the Court of Appeal to allow unpleaded issues of fact to be run for the first time (Wing Hang Bank Ltd v Crystal Jet International Ltd & Ors [2005] 2 HKLRD 795 at §6(2)), and Anthony should not be permitted to do so. As stated by Ribeiro PJ in Sinoearn International Ltd v Hyundai-CCECC Joint Venture (2013) 16 HKCFAR 632:

“Pleadings are not mere formalities. They impose a necessary discipline and are fundamental to enabling every procedural facet of the adversarial system to operate fairly.” (at §34)

“A party must raise all the issues he wishes to raise to be dealt with at the trial. Parties are not entitled to have issues recently thought up dealt with separately and piecemeal. The other party is entitled to know from a clear pleading what is the entire case he has to meet so that he can decide whether particulars should be sought; how he should plead in response; what discovery he is entitled to; what evidence he should adduce to meet it; and what points of law should be taken.” (at §30)

42.And in Kwok Chi Wing v 21 Holdings Ltd (2013) 16 HKCFAR 663, Ma CJ made clear that unpleaded issues could not be raised out of the evidence:

“It is the pleadings that will define the issues in a trial and dictate the course of proceedings both before and at trial. Where witnesses are involved, it will be the pleaded issues that define the scope of the evidence, and not the other way round. In other words, it will not be acceptable for unpleaded issues to be raised out of the evidence which is to be or has been adduced. …” (at §21)

“In the present case, much reliance was placed on the Plaintiff’s testimony given in cross-examination … It is simply not permissible for an issue to be raised in this way: one does not sift through the evidence adduced in a trial in the hope that something was said that can conceivably found a cause of action. …” (at §22)

43.It is not an answer to say that there was “absence of any contest in respect of her breaches of her Safeguarding Duty” at the trial. Ho could not be expected to plead in response to any breach of the Safeguarding Duty in a meaningful way when only the duty but not the specific breach of any such duty was pleaded in the RASOC. Nor could the Executor be expected to adduce evidence to meet unpleaded allegations of abrogating the Safeguarding Duty and failing to act after being put on inquiry of questionable transactions, which had not even been identified in the RASOC. There was no mention in the RASOC of any of the matters in November 2001, 2002 and 2005 now sought to be relied on as matters that should have put Ho on inquiry. And without knowing in advance the case sought to be run regarding breaches of the Safeguarding Duty, the Executor’s counsel could not be expected to take legal points at the trial to meet this case properly.

44.In the trial, Anthony’s counsel applied unsuccessfully to amend the RASOC after the close of evidence in an attempt to salvage his case by incorporating new allegations in the Table. In this court, Mr Barlow did not even seek leave to amend the RASOC. He just referred to Anthony’s “evidentiary trial case”, which consisted inter alia, of “multiple HICL money transfer instructions in favour of [Eric] or entities controlled by him (i.e. Dubious Payments)”. These are among the new allegations in the Table which the judge had refused leave to amend by incorporating them in a new schedule to the RASOC. If it is Mr Barlow’s intention to rely on these multiple “money transfer instructions” by referring us to them, we see no basis why he should be permitted to do so. The same goes for some of the correspondence between Anthony’s solicitors and Ho’s solicitors referred to by Mr Barlow. As stated in Sinoearn International Ltd v Hyundai-CCECC Joint Venture at §31, where a late attempt is made to introduce a new case, it is “doubly important” that there should be a “clearly pleaded draft amendment”. We do not even have a draft amended pleading of Anthony’s new case as advanced on appeal.

45.For the above reasons alone, we refuse to allow Mr Barlow to pursue a new case on breaches of the Safeguarding Duty on appeal.

(b)   Proof of the alleged breaches of the Safeguarding Duty

46.Wilful default by a trustee in this context means a passive breach of trust, an omission to do something which as a prudent trustee he ought to have done. If an instance of such wilful default is pleaded and proved, the trustee may be ordered to account on the footing of wilful default (Bartlett v Barclays Trust at 546B to C). We have dealt with the pleading. For completeness, we would deal with proof of the alleged breaches.

47.Much was made by Mr Barlow of the duty of a trustee entrusted with a substantial shareholding in a private company to keep himself informed about the company’s affairs and the directors’ plans by board participation or enhanced reporting from the board. This duty must be considered in context, see Bartlett at 533 E to 534A in which Brightman J emphasised that “it would be useless, indeed misleading, to seek to lay down a general rule”, as “the possibilities are endless” and “every case will depend on its own facts”. “The purpose to be achieved is not that of monitoring every move of the directors, but of making it reasonably probable, so far as circumstances permit, that the trustee or … one of them will receive an adequate flow of information in time to enable the trustees to make use of their controlling interest should this be necessary for the protection of their trust asset, namely, the shareholding.”

48.Mr Barlow placed particular reliance on the 2007 CA Judgment in which Yuen JA discussed the conditions of the trusts concerning the HEL and HICL shares as found by Tang JA in the Revocation Proceedings. One of the conditions alleged by Eric was that the trustee was not to be concerned with and would be relieved of all duties regarding the management of the company to which the shares related. Tang JA held that this condition was not made out and the only condition proved was that “the trustees were not to interfere in the management of the companies”, though he did not deal with this condition at any length[32]. Yuen JA had this to say at §45 of this condition found by Tang JA:

“What is to be made of the ‘condition’ found by Tang JA in our case? There was no contemporaneous record of what exactly the settlor had said at the time and ‘interference with management’ may take many forms. Tang JA found that the father wished to have control over the companies. But it is one thing to exclude trustees from participating in day to day business or even strategically sensitive deals of a company. It is another to say that a trustee is entitled to sit back and do nothing even if it became reasonably apparent to her that trust property comprising shares of a company were being stripped of significant value. It is pertinent to note that Tang JA did not find proved the third condition (which referred to the trustees being ‘relieved of all duties’) and in his ruling on order and costs on 17 June 2005 his Lordship specifically said (para.7): ‘… It was not the [Father’s] case that the trustees were required to turn a blind eye to mismanagement or that the trustees should not look after the interests of the beneficiaries as shareholders. …’ ”

49.In §47, after quoting from Hotung & Anr v Ho Yuen Ki [2002] 3 HKLRD 641 at §32 (in which Cheung JA gave examples as to what a trustee entrusted with shares in a private company can do to safeguard the interest of beneficiaries), Yuen JA held that Tang JA’s finding of the settlor’s condition that the trustees do not “interfere with management” does not affect the duty of a trustee to preserve trust property.

50.Mr Yin accepted before us that Ho would not have been entitled to sit back and do nothing “if it became reasonably apparent to her that trust property comprising shares of a company were being stripped of significant value”. He submitted that a finding both that Ho has in breach of her duties omitted to take certain steps and that such breaches have caused a loss to the trust estate is necessary before an account could be ordered on the wilful default basis. Contrary to the assertions of Mr Barlow, it could not be said that at the material time, there were facts known to Ho concerning questionable transactions that would have put on inquiry a prudent person of business in her position that the affairs of HEL and HICL were not conducted as they should be. He drew our attention to these findings in the Judgment:

“44. The position of Ho was even more remote. She was just the shareholder and not director of HICL at the material times. She, as the trustee of the 2 Trusts, was not even the majority shareholder of HICL or HEL. Due to Eric’s character as further elaborated in the latter part of this Judgment, Ho might have had to take legal proceedings against HICL or Eric if she sought to obtain the relevant information about the alleged dubious transactions. In fact, Anthony claims that there were such dubious transactions in phase 4 when he was a director of HICL[33]. If he cannot obtain more information about these transactions, how can he expect Ho to do so? Hence, under the peculiar circumstances of the present case, the court should be slow in drawing any adverse inferences against Ho for the absence of explanations about these alleged dubious payment or advances. In particular, such task would be quite impossible after so many years, and Anthony himself should bear great responsibility for the delay in the prosecution of the claim.”

“53. … Generally, a trustee should inform a minor beneficiary of his or her interest in a trust after such beneficiary attains the age of majority. However, the present case is unique in the sense that the 2 Trusts involved a gift to the children of the settlor. Eric, the settlor, rightly or wrongly, took the view that the 2 Trusts were made with conditions and as a result the 2 Trusts were revocable. His stance turned out to be incorrect after the judgment handed down by Tang JA in the Revocation Proceedings. Yet, taking into account the relationship between Eric and Ho, she could have been influenced by Eric and genuinely took the view that the 2 Trusts were revocable, and as a result she considered that she was not obliged to inform Anthony of his interests in the 2 Trusts.”

“61. I also have to consider the issue as to what Ho could have and should have done to protect the interests of Anthony. First, I doubt whether there was anything that should have alerted Ho to take action to protect Anthony’s interests. So far as the sale of the Land is concerned, the selling price was supported by an apparent credible valuation report. Even assuming that there was something dubious which called for investigation, Eric probably would not have allowed Ho to interfere with his running of HICL, and as a result Ho would have had to resort to legal proceedings to carry on with the investigation. There is no dispute that Ho had obtained no money or remuneration from the 2 Trusts, and so one should not expect Ho to have used her own financial resources to finance the possible legal proceedings. It is also worth noting that when Ho’s solicitors, in March 2009, requested Anthony to provide a modest sum of $100,000 as costs on account for Ho to make the necessary applications as trustee following the judgment of the Court of Appeal on 10 July 2007, Anthony did not comply with the request. Hence, there was very little Ho could have done in the circumstances.”

51.Mr Yin further submitted that in the context of family companies, there is nothing self-evidently improper or dubious about payments being made to a director or to related companies without securities or repayment terms. It should be borne in mind that HEL and HICL had annual audited accounts, and no alarm was ever raised by the auditors of any funds improperly siphoned from the companies. Without knowing the background of the alleged questionable transactions, whether they had been repaid, how they were booked in the accounts, no prudent person of business would have jumped to the conclusion that they were otherwise than above board.

52.We agree with the judge’s findings and the submissions of Mr Yin. It has not been proved on the evidence that Ho had abrogated her duties as a trustee, or that she should be put on inquiry of questionable transactions, or that losses have arisen as a result of the alleged breaches. That the shares of HEL (dissolved in 2014) and HICL are of no value today is not evidence that the loss was caused by any wrongful omission of Ho as trustee. The new case on breaches of the Safeguarding Duty advanced on appeal cannot get off ground.

The grounds of appeal

53.It remains for us to deal with the contentions in the notice of appeal succinctly. We will group the grounds of appeal under the various headings as in the skeleton argument of Mr Barlow.

(a)  Failure to Inform Claim (Ground 5)

54.This ground seeks to attack the judge’s finding that even though Ho was in breach of her duty to inform Anthony of his interests in the 2 Trusts on his attaining the age of majority, that would have made no difference to the outcome in that Eric’s misfeasances would have happened anyway. Hence, Anthony has failed to prove that such breach of duty had caused loss so as to give rise to equitable compensation.

55.Mr Barlow contended that once breach of the duty to inform was established, “in light of absence of contest concerning [Ho’s] Wilful Default”, Anthony is not required to particularise in the pleading what could and should have been done by Ho to protect his interests in the shares of HEL and HICL and no further factual conclusion or conjecture (along the lines of §§55 to 60 of the Judgment) is required. In other words, there was no need for the judge to inquire further in light of the absence of contest regarding Ho’s breaches of the Safeguarding Duty.

56.We do not accept his contentions. We have held that his reliance on the absence of contest by Ho in respect of the alleged breaches of the Safeguarding Duty is misconceived and rejected his submissions on breaches of this duty which have not been proved. The judge was right to inquire what difference it would have made if Anthony had been promptly informed of his beneficial interests on attaining majority, given the requirement applicable in every case (even assuming the common law causation rules on remoteness and foreseeability do not apply to this claim of breaches involving a lack of appropriate skill or care) that there must be shown “some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable”[34]. We reject also the contention it is for the trustee to show that adopting mechanisms which could have been taken to prevent loss to the trust fund would have yielded no result.

57.Having had the benefit of live testimony from Anthony, the judge is entitled to be sceptical whether the early notification of his interests would have made a difference and to find that Anthony would have been very reluctant to confront Eric directly and chose to pursue Ho instead as an easier and vulnerable target[35]. We do not think the judge had engaged in conjectural hypothesis under the guise of drawing inference. We are satisfied that his conclusion is properly and logically grounded on the facts found. There is no basis for the appeal court to intervene.

(b)   Pleadings (Grounds 1, 5.2, 6 and 7)

58.These grounds seek to attack the judge’s decision to confine Anthony to his case pleaded in the RASOC and exclude reliance on the allegations and supporting evidence in the 2016 Statement. The contention is that those allegations constituted additional voluntary particulars of already pleaded allegations and should be allowed to be pursued.

59.Mr Barlow cited McPhilemy v Times Newspapers Ltd [1999] 3 All E R 775 in which Lord Woolf MR questioned the necessity and desirability of extensive pleadings commonly adopted by libel practitioners and said at 792j to 793a: “The need for extensive pleadings including particulars should be reduced by the requirement that witness statements are now exchanged. In the majority of proceedings identification of the documents upon which a party relies, together with copies of that party’s witness statements, will make the detail of the nature of the case the other side has to meet obvious. This reduces the need for particulars in order to avoid being taken by surprise.”

60.The submission that the allegations in the 2016 Statement are particulars of already pleaded allegations was rightly rejected by the judge. It is not necessary to repeat our analysis of Anthony’s pleaded case or the established principles regarding pleadings in the quotations from cases set out earlier. There is no substance in the contention that the judge had adopted an “overly-stringent approach” to the plaintiff’s pleaded and evidentiary case. The reliance on various statements of Ma CJ in Wing Fai Construction Co Ltd v Yip Kwong Robert (2011) 14 HKCFAR 935 at §§47, 75(8) and 81(5) (that the attitude of “letting sleeping dogs lie” is no longer acceptable after the Civil Justice Reform, said in a different context of striking out a claim for inordinate and inexcusable delay) is misconceived.

61.Likewise, Lord Woolf’s statements in McPhilemy v Times Newspapers Ltd should not be read out of context, as he went on to say at 793b: “Pleadings are still required to mark out the parameters of the case that is being advanced by each party. In particular they are still critical to identify the issues and the extent of the dispute between the parties. What is important is that the pleadings should make clear the general nature of the case of the pleader.” In the earlier part of his statements, Lord Woolf was decrying the prolixity and verbosity of pleadings. He was not advocating that unpleaded issues could be raised out of witness statements or the evidence adduced.

(c)  Dubious Payments Claim (Grounds 2, 3 and 8)

62.These grounds seek to attack the judge’s conclusion that Anthony has not established a prima facie case calling for Ho to account and there are insufficient materials to substantiate this claim. The complaint is that the judge adopted a standard that is “legally incorrect”, “inappropriately and excessively stringent”, and that he had eschewed any “actual analysis or assessment of the trial evidence” including the 2016 Statement, Anthony’s 5^th affidavit and supplemental witness statement, the multiple HICL money transfer instructions and various correspondence mentioned in Mr Barlow’s skeleton argument.

63.We do not think counsel’s criticisms are justified. Nor could we discern any error of law or principle to disturb the judge’s conclusions on the evidence. We have rejected the submission that Anthony should be allowed to pursue unpleaded allegations by relying on his “evidentiary case”.

(d)   Undervalue Sale Claim (Ground 4)

64.This seeks to challenge the judge’s conclusion that without crucial evidence, it could not be found that the sale of the Land to Hotung Estates was at an undervalue. Again the complaint was that the judge failed to “include any actual analysis or assessment of the trial evidence”. We have dealt with this complaint. We agree with the judge’s analysis, and do not agree with the contention that the sale was “self-evidently improper”.

65.Mr Barlow also submitted that in §52 of the Judgment, the judge has mis-described the pleaded case in the RASOC in stating that it has never been pleaded that the consideration for the sale of the Land had not been paid. In §33 of the RASOC, it was contended that Hotung Estates had “never paid the Purchase Price” of $17.5 million, and that “No such payment has been recorded as being made prior to 2003 and no such sum or cash equivalent has been conclusively confirmed or verified, as having been received by HICL at any time”[36].

66.Mr Yin accepted this is a valid criticism and the judge has made an error about the pleading. We do not think this could take Anthony’s case any further. The amount of $17.5 million would appear to have been booked as a debt due from Hotung Estates to HICL. In the audited accounts of HICL for the year ended 31 March 1999, under “Current Assets” for the item of “Amount due from related companies”, it would appear from note 11 that $17,511,627 was recorded as due from Hotung Estates to HICL as at 31 March 1999.

(e)  The course that the Judgment should have taken (Grounds 8 to 11)

67.These grounds contain contentions that the judge should have reached certain conclusions and granted certain reliefs premised on the success of the grounds raised earlier. As we have rejected the earlier grounds, it is not necessary to deal with the contentions that are said to follow.

Conclusion and costs

68.For all the above reasons, we dismiss Anthony’s appeal.

69.The judge made an order nisi that Anthony should pay the 1^st defendant the costs of this action. Ho made a sanctioned payment into court on 20 January 2017 of $1,010,000, which Anthony refused to accept.

70.In a decision on costs given on 12 April 2022, the judge varied the costs order nisi to the extent that the 1^st defendant’s costs after 3 February 2017 shall be paid by Anthony on an indemnity basis and there be interest on such costs at the rate of 5% above the judgment rate.

71.Mr Barlow seeks to set aside the costs order of the judge as subsequently varied. His primary submission is that had the judge correctly tried and determined the case, he would have ordered the 1^st defendant to pay Anthony’s costs. His secondary submission is that where Ho had abrogated her core trustee’s duties and was held to have breached her duty to inform and should be responsible for all that followed between 1987 and 2001, the judge should have ordered her to pay Anthony’s costs. His tertiary submission is that Ho had committed misconduct or litigation misconduct in keeping the 2 Trusts secret from the beneficiaries, supporting Eric in the Revocation Proceedings, turning a blind eye to Eric’s questionable management of HEL/HICL despite being put on inquiry since 2001, refusing to recognize or perform her duties as trustee, refusing to transfer to Anthony the HEL/HICL shares to which he was beneficially entitled, and failing to assist the court to further the underlying objectives in Order 1A rule 1 of the Rules of the High Court and to progress this action.

72.Mr Yin submitted that the costs order nisi has been superseded by the order of 12 April 2022 and there is no appeal from the latter order, so the judge’s costs order must be left to stand.

73.A notice of appeal was lodged in respect of the Judgment and the costs order nisi, seeking costs of this appeal and below. We do not think it necessary to further amend the notice of appeal upon the judge’s variation of the costs order nisi.

74.We reject all the contentions of Mr Barlow on costs. There is no basis to interfere with the judge’s exercise of discretion on costs of this action. Nor is there any reason to depart from the rule that costs should follow the event.

75.We order Anthony to pay the costs of the 1^st defendant of this appeal.

Mr Barrie Barlow SC and Mr Chan Pat Lun, instructed by Oldham, Li & Nie, for the Plaintiff (Appellant)

Mr Michael Yin, instructed by B C Chow & Co, for the 1^st Defendant (Respondent)