De-etco International Ltd (in Liquidation) v. Desirable Enterprises Co Ltd and Another

Case No.HCA 3374/1990

Court

High Court CFI

Date09 Feb 1995

Judge—

Case Document

100%Judiciary

HCA003374/1990

1990, No. A3374

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HEADNOTE

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ACTION BY LIQUIDATOR OF PLAINTIFF COMPANY - LIMITATION PERIOD NOT RUN UNTIL A CALL ON UNPAID SHARES IS MADE BY THE LIQUIDATOR - CAUSE OF ACTION NOT FOUNDED ON SHAREHOLDERS AGREEMENT FOR ALLOTMENT OF SHARES - CLAIM FOR AN ACCOUNT BY A PRINCIPAL AGAINST AN AGENT BASED SOLELY ON THE FIDUCIARY RELATIONSHIP IS NOT SUBJECT TO ANY LIMITATION PERIOD UNDER THE LIMITATION ORDINANCE

1990, No. A3374

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN
	DE-ETCO INTERNATIONAL LIMITED (in Liquidation)	Plaintiff
	and
	DESIRABLE ENTERPRISES COMPANY LIMITED	1st Defendant
	DONLING ENTERPRISES LIMITED	2nd Defendant

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Coram: Hon Jerome Chan, J. in Chambers

Dates of hearing: 13 September 1994 & 9 February 1995

Date of delivery of Judgment: 9 February 1995

Date of handing down reasons: 23 February 1995

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JUDGMENT

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1. The plaintiff is a company in liquidation and the defendants are its only shareholders. The winding-up order against the plaintiff was made in 1989 and the Official Receiver was appointed liquidator in 1990. These proceedings were commenced in May 1990 by the liquidator solely against the 1st defendant for claims relating to the premises at Sunbeam Centre owned by the plaintiff in the name of the 1st defendant under a deed of trust. The defence was served in July 1990 alleging sole beneficial interest of the 1st defendant in the premises. In February 1991, the statement of claim was amended to join the 2nd defendant. About a week after that the premises was sold by the mortgagee bank with the net proceeds of sale paid into court. In March 1992, the 1st defendant amended its defence and added a counterclaim against the plaintiff for payment of rent for use of the premises, reimbursement of expenses and outgoing allegedly paid by the 1st defendant on behalf of the plaintiff, and depreciation of machinery and moulds allegedly loaned by the 1st defendant to the plaintiff at the premises.

2. In July 1992 the liquidator reached a settlement with the 1st defendant. However, an application in October 1992 for court's sanction of the proposed settlement was unsuccessful in the face of opposition from the 2nd defendant. To enable an overall resolution of the disputes between the only shareholders and creditors of the plaintiff, i.e. the defendants; it was agreed in 1993 that the 2nd defendant should take charge of and fund the action against the 1st defendant. In July 1993, the plaintiff successfully obtained sanction from the court for expanding the claims of the plaintiff against the 1st defendant to achieve the intended overall resolution of all disputes between the defendants. After delivering the requisite bond for the Official Receiver's costs in December 1993, the 2nd defendant's solicitors filed a notice of change of solicitors on 9 February 1994 to come on record as the plaintiff's solicitors.

3. On the same day, a summons was taken out on behalf of the plaintiff to seek re-amendments to the amended statement of claim to expand the claims against the 1st defendant. The proposed re-amendments were allowed save one proposed claim for return of certain items of machinery allegedly taken away by the 1st defendant sometime in May 1988. The 1st defendant is appealing against the learned master's order allowing the re-amendments to the amended statement of claim.

4. The re-amendments sought to put in issue 4 new allegations in the plaintiff's claims:-

	(i)	non-payment by the 1st defendant for the shares alloted to it in 1986;
	(ii)	failure to lend $1,021,428 to the plaintiff as agreed in the Shareholders' Agreement dated 13 September 1986;
	(iii)	an account of proceeds of sale of goods sold by the 1st defendant as the plaintiff's agent between December 1986 and October 1989; and
	(iv)	a claim on resulting trust for the proceeds of sale of the premises.

Non-payment for the allotment of shares

5. It is the plaintiff's case that the 1st defendant had paid for the shares allotted to it in 1986. However, in the amended statement of claim the plaintiff did not particularise the means of payment for the shares. In its counterclaim, the 1st defendant claims the machinery, tools, office equipment, moulds, spare parts and materials ("business assets") used by the plaintiff at the suit premises were properties of the 1st defendant. The re-amendment seeking to allege that the said business assets were sold by the 1st defendant to the plaintiff as payment for the allotment of shares to it is a reply prompted by the 1st defendant's counterclaim. The allegations did not become material until the 1st defendant added its counterclaim in March 1992.

6. It is the contention of the 1st defendant that since the Shareholders' Agreement stipulated subscription of shares to be made by 30 September 1986, any claim pursuant thereto would have been statute-barred by September 1992. As the application for re-amendment was only made in February 1994, almost one and a half year after the expiration of the cause of action and almost 2 years after the plaintiff became aware of the relevance of the plea, it ought to be refused in the exercise of the court's discretion. The plaintiff submits that the plea is not a claim by the 2nd defendant under the agreement, but a claim by a liquidator in the liquidation against a contributory for unpaid shares. No cause of action would have arisen in the circumstances until the liquidator makes a call on the unpaid shares. The call was made in the present case by the re-amendment.

7. The plaintiff's primary case is that the shares of the 1st defendant were paid by the sale of the said business assets to the plaintiff. However, as the 1st defendant now based a counterclaim on an allegation of ownership of such business assets at all material times, it would not have paid for the said shares in the manner the plaintiff alleged it had. It is on this "admission" of non-payment for the shares that the plaintiff made the call upon the 1st defendant. It has never been an attempt by the 2nd defendant to enforce the Shareholders' Agreement as contended by the 1st defendant. The 1st defendant's objection on grounds of the Limitation Ordinance is wholly misconceived. An amendment should be allowed if to do so could bring all issues in dispute before the court for a final resolution without any prejudice to the opposing party. The 1st defendant has not been able to demonstrate that the discretion was wrongly exercised. No prejudice would be caused to the 1st defendant save the question of costs. The vague allegation that a witness had since left the employment of the 1st defendant can hardly be sufficient in this respect. It is unclear what evidence this alleged witness can give on this, or any, issue. It is unclear why no steps has been taken to preserved his or her evidence when the counterclaim was added in March 1992. I am not satisfied that this re-amendment should be disallowed on any ground of alleged prejudice.

Failure to make the loan

8. The 1st defendant's objection is that no enforcement of the provisions of the Shareholders' Agreement for the loan is possible after the extinction of the cause of action. The plaintiff said no claim is made in respect of the loan. It is the plaintiff's case that the loan had in fact been made by the 1st defendant. The loan was covered by the sale of the said business assets in the same manner as the allotment of shares. The sole reason for making reference to the loan is to explain how the total value of the business assets had been set off against the sums due for the allotment and the loan. I am satisfied that the reference to the loan is necessary to justify the extinction of the total value of the business assets and is thus not immaterial to the issues in dispute. As no claim is made in respect of the loan, no objection can be made pursuant to any limitation period.

An account for the proceeds of sale

9. The plaintiff's claim is that the 1st defendant had been entrusted by the plaintiff, pursuant to an oral agreement, as an agent to sell the goods manufactured at the suit premises by use of the said business assets between December 1986 to October 1989 ("Agency Agreement"). It is further alleged that in breach of the implied terms of the Agency Agreement and its fiduciary duties, the 1st defendant had failed to account to the plaintiff the proceeds of sale of such goods. The 1st defendant's objection is that such a claim is again statute-barred insofar as it relates to proceeds of sale prior to 9 February 1988. The plaintiff submits the claim is for an account by an agent and the cause of action would not have accrued until a demand by the principal is made. No demand has been made by the plaintiff until the application for re-amendment. Furthermore, it is submitted that the plaintiff also founded its action for an account on a fiduciary duty. An agent holding money of his principal is in a fiduciary relationship to his principal having a duty to account. Such a duty to account is not subject to any limitation period.

10. The 1st defendant submits that the cause of action founded on contract for an account should arise forthwith upon each sale of the plaintiff's goods and the receipt of the proceeds of sale thereunder. Nevertheless, it concedes that there is no allegation pleaded by the re-amendment when the 1st defendant was to account to the plaintiff for the said proceeds of sale. In the premises, it is the final contention of the 1st defendant that in the circumstances, the agent should account within a reasonable time. When an agent is to account to his principal for the proceeds of goods entrusted for sale is primarily to be governed by the agreement between the parties. In the absence of any agreement an agent is bound to account to his principal for such receipts upon demand. There appears to be some support in the authorities that the right to an account accrues when the person sought to be made accountable obtains possession or control of the plaintiff's property or property to which the plaintiff has some claim (see Knox v. Gye (1872) L.R. 5 H.L. 656, Noyes v. Crawley (1878) 10 Ch.D. 31 and Baarton v. N. Staffs. Ry. (1888) 38 Ch.D. 458). However, the position of an action for an account is governed by s.4(2) of the Limitation Ordinance. Notwithstanding when the cause of action arose, an action for an account can not be brought "in respect of any matter which arose more than 6 years before the commencement of the action". Our provision (which was modelled on the 1939 Act) has not been up-dated by provisions similar to s.23 of the Limitation Act 1980 fixing the limitation period with reference to the time limit applicable to the claim which is the basis of the duty to account.

11. Sir Robert Megarry V.-C. in Tito v. Waddell (No.2) [1977] Ch 106 at 250-251 held, obiter, that:-

	"(3) Account. The law of limitation in relation to actions for an account seems to be in a curious state. An action for an account lay at common law, and section 3 of the Limitation Act 1623 laid down a six years' period of limitation for 'actions of account.' However, the procedure in Chancery, and in particular the machinery for taking accounts, was so superior that by the 18th century the common law action for an account had come to be superseded by equitable proceedings for an account. Bills in Chancery for an account did not directly fall within the term 'actions of account' in section 3 of the Act of 1623, and so any application of the six years' period to them had to be by way of analogy.
	In that state of affairs the Limitation Act 1939 came into force. Section 2(2) provided that 'An action for an account shall not be brought in respect of any matter which arose more than six years before the commencement of the action.' If that had stood alone, the matter would have been simple. There would have been nothing to prevent the six years' period from applying both to an equitable action for an account (for by section 31(1) 'action' has a very wide meaning) and also, if anyone sought to revive it, to a common law claim. However, there is also section 2(7) of the Act:

'This section shall not apply to any claim for specific performance of a contract or for an injunction or for other equitable relief, except in so far as any provision thereof may be applied by the court by analogy in like manner as the corresponding enactment repealed by this Act has heretofore been applied.'

	If the effect of section 2(7) is that an equitable claim for an account, being a 'claim ... for other equitable relief,' is excluded from section 2(2), the result is that section 2(2) is left to apply the six years' period only to the obsolete common law claim for an account. However, it may then be said that the second limb of subsection (7) allows the six years' period of subsection (2) to be applied by analogy to equitable claims for an account; for prior to the Limitation Act 1939 this is what equity did: see. e.g. Knox v. Gye (1872) L.R. 5 H.L. 656, 674, per Lord Westbury. On that footing, Parliament's scheme for dealing with equitable claims for an account seems to be first, to appear by subsection (2) to subject them to the express six years' period; then to appear to exclude them from that period by the first limb of subsection (7); and finally, by the second limb of subsection (7), to subject them to a six years' period by analogy, despite their exclusion from the express six years' period.
	This tortuous scheme of indirection is one that I should be reluctant to attribute to Parliament. After all, subsection (2) is a subsection which deals solely and expressly with actions for an account. If the intention was to make it apply to both legal and equitable actions for an account, it would have been simple enough to say so, with perhaps the addition of a few words to subsection (7) to make the word 'equitable' in subsection (2) prevail over it.
	My reluctance to attribute to Parliament an intention to legislate expressly for the obsolete and only circuitously for the effective is increased by the way in which the court dealt with section 2(7) in Poole Corporation v Moody [1945] K.B. 350. There, in relation to a power of sale, the subsection was treated by the Court of Appeal solely as a provision which excluded the operation of section 2 in claims for equitable relief, without any mention of the possibility of it applying the section by analogy. The omission is pointed: indeed, the quotation of section 2(7) that is set out in the footnote on p.351 gives only the first half of the subsection and omits altogether the second half, which deals with application by analogy. This is done despite the mention in argument on p.353 of equitable applications of the statute by analogy in the same breath as a reference to subsection (7). I may add that I do not see any grounds for escape by saying that 'other equitable relief does not include an equitable action for an account.
	I find this matter indeed puzzling. My difficulty is increased by the consideration that if, as I have held, no six years' period applies to the claim for equitable compensation, and there is no plea of laches which bars the claim, there may be items of claim beyond the six years which are not barred but to which the six years' period for an account would apply. However, I think the answer may be along the following lines. In so far as the claim to an account is ancillary to the claim for equitable compensation, the application of the Act and the doctrine of laches to the ancillary claim ought to be the same as its application to the substantive claim. Thus it seems clear that where a claim against a person in a fiduciary position is not barred by lapse of time, he must account without limit of time: see Halsbury's Laws of England, 3rd ed., vol.24 (1958), p.282. If, contrary to what I have held, there is a time limit in the present case, I would hold that neither directly nor by analogy does section 2 of the Act of 1939 impose any time limit on the claim to an account that is not imposed on the substantive claim for equitable compensation.
	The upshot is that if the plaintiffs' claim were otherwise valid, I would hold that it is not barred by any statutory period of limitation, either directly or by analogy. Though subject to the equitable doctrine of laches, it is not barred by laches either, since laches has not been pleaded.
	I should add that this discussion of the subject has been of regrettable length; I can only say that it became longer in the execution than I foresaw when I first embarked upon it. I do not think that I need deal with the further plea by the plaintiffs that if any period of limitation would otherwise apply, section 19(1)(b) of the Act of 1939 would exclude it on the footing of trust property or its proceeds being still in possession of the trustee or converted to the use of the trustee.

12. The obiter was affirmed by Harman J. in A.G. v. Cocke [1988] Ch 414 at 421:-

"I had cited to me by Mr. Heath most interesting authorities under the Act of 1939. He particularly took me to Sir Robert Megarry V.-C.'s judgment in Tito v. Waddell (No. 2) [1977] Ch. 106, 250B-251B; but, although that was upon a somewhat different section to the present form of section 23 of the Act of 1980, the Vice-Chancellor, at p.251E-G, comes to a conclusion, which I think is the same as the conclusion I have come to, that a claim to an account simpliciter based upon a fiduciary relationship and nothing more is not barred by any period of limitation. The observation in that case was obiter because he had held there was no fiduciary relationship arising."

13. Harman J. observed in Cocke that if the duty to account is based on the fiduciary relationship it is not a claim caught by any provision in the limitation Acts, be it the 1939 or 1980 Act. Though the re-amendment complained of a "breach of fiduciary duty", it is not a claim basis on a breach of trust. It is a claim for an account based simply on the relationship of principal and agent, and alleged terms of agreement implied as a matter of law by that relationship. It would appear that any pleading of implied terms is superfluous in the light of the authorities. A plea of the relationship and a failure to account is all that would be required to found a claim for an account based on such relationship.

14. By reason of the aforesaid, Mr. Chang's other submissions do not fall to be decided. The claim for account being one based simply on the relationship of principal and agent, it is not subject to any limitation period. The 1st defendant's objection founded on an alleged limitation period must fail.

Claim on the proceeds of sale of the premises

15. The essence of the re-amendment is to replace the plea of a trust on the premises with a plea of a trust on the net proceeds of sale of the premises. The sale of the premises by the mortgagee bank occurred after the statement of claim was first amended. The plaintiff's claim under the re-amendment traces the trust property into the money paid into court under the forced sale of the premises by the mortgagee. The 1st defendant's complaint that it constitutes a new cause of action is wholly without merits.

16. By reason of the aforesaid, none of the objections raised by the 1st defendant to the proposed re-amendments to the amended statement of claim can be upheld. The appeal was therefore dismissed. Costs of the appeal had been dealt with on 13 September 1994 and 9 February 1995 with reasons delivered ex tempore, and will not be repeated here.

	(J. Chan)
	Judge of the High Court

Representation:

Photocopying this Headnote is not allowed

Mr Denis Chang, Q.C. leading Mr Chan Chi Hung, inst'd by M/s Jesse H.Y. Kwok & Co., for Respondent/Plaintiff

Mr Shaw of M/s McKenna & Co. for Appellant/1st Defendant