Udl Holdings Ltd and Another v. Leung Yuet Keung and Another

FAMV No. 7 of 2010

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 7 OF 2010 (CIVIL)

(ON APPLICATION FOR LEAVE TO APPEAL

FROM CACV NO. 356 OF 2008)

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Between:

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DETERMINATION

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Mr Justice Ribeiro PJ:

1.The 2^nd plaintiff (“Well Raise”) acquired a dredger (“the vessel”) for HK$69.5m.  To do so, it borrowed about HK$48.65m from Nippon Credit Bank (“Nippon Credit”) which took as security, a mortgage on the vessel and an assignment of her insurances.  It also took a guarantee from the 1^st plaintiff (“UDL Holdings”).  The plaintiffs are the present applicants. 

2.The 1^st defendant was a director of both plaintiff companies.  The 2^nd defendant was a director of UDL Holdings.  They are the present respondents. 

3.Well Raise defaulted on the loan, not having repaid any of the money borrowed.  UDL Holdings defaulted on the guarantee. 

4.Nippon Credit obtained an Admiralty in rem judgment by default and an order for appraisement and sale of the vessel here in Hong Kong.  The defendants, through nominee companies, successfully bid for the vessel and purchased an assignment from Nippon Credit of pre-existing insurance claims, paying a total of HK$14.7m.  It is obvious that about US$600,000 of that sum was being offered for the insurance claims, in the light of the lower conforming bid made solely for the vessel.

5.The defendants then resold the vessel for US$3.1m to a subsidiary of Dragomar SPA (“Dragomar”), making a profit of about US$1.2m.  They also recovered US$520,778.51 in respect of the insurance claims.  In these proceedings, the plaintiffs seek to recover that profit and the insurance proceeds from the defendants.  They failed before Stone J and in the Court of Appeal.  They now seek leave to appeal on the basis that a suitably important question arises as to whether the defendants are strictly liable to account for any profits arising from the resale of the vessel and the acquisition of the insurance proceeds.  They argue that the defendants had a conflict of interest and acted in breach of their fiduciary duties as directors.

6.At the trial, the plaintiffs’ claim focussed on the allegation that the defendants had breached their fiduciary duties by misusing confidential information obtained asdirectors and by misappropriating the related corporate opportunities which they ought to have secured for the plaintiffs’ benefit.  Stone J held that the action failed on the facts.  He found that the defendants had bid for the vessel without knowing that Dragomar was interested in purchasing her, so that they had neither misused any confidential information nor diverted any corporate opportunity. 

7.In the Court of Appeal, the plaintiffs abandoned their attempt to challenge the Judge’s findings.  Their claim regarding the insurance proceeds was described as “hopeless” since the defendants had not made any profit on them, having paid US$600,000 for a payout of US$520,778.51.

8.On the present appeal, Mr John Scott SC initially sought to advance two arguments. 

(a)              First, to avoid the problems posed by Stone J’s findings, he seeks to re-cast the case as one involving the defendants’ misappropriation of Well Raise’s corporate property and contends that the defendants are under a strict duty to account for all the resulting profits.

(b)             Secondly, although Mr Scott SC started off by arguing that Well Raise’s equity of redemption in the vessel and in the insurances assigned by way of security placed a fiduciary duty on the defendants to ensure that the vessel was sold at the highest price attainable, that argument was transformed into an argument based on misuse of confidential information regarding the existence of the insurance claims acquired.  Mr Scott SC, however, very fairly, acknowledged that there are concurrent findings against there being any duty owed to the plaintiff companies by the defendants in respect of such information.  He did not pursue this second limb of his arguments.

9.The first limb is not reasonably sustainable.  The claim to recover the US$1.2m profit gained on the vessel’s resale is premised on the vessel being Well Raise’s property impermissibly acquired by the defendants.  But Well Raise had only an equity of redemption and did not own the vessel which was the subject of the judicial sale.  The equity of redemption had a substantially negative value since none of the debt of US$6m or so was repaid.  As to the insurance proceeds, on Well Raise’s default, Nippon Credit became absolutely entitled, so that in acquiring those proceeds, the defendants were again not acquiring Well Raise’s property.  The first argument therefore misidentifies the property acquired by the defendants as belonging to Well Raise. 

10.In our view, the proposed appeal is not reasonably arguable and the application must therefore be dismissed with costs.

Mr John Scott SC and Ms Catrina Lam (instructed by Messrs Michael Li & Co) for the 1st and 2nd applicants

Mr Charles Sussex SC and Ms Frances Lok (instructed by Messrs Ho & Ip) for the 1st and 2nd respondents