Timmerton Company Inc v. Li Kwok Po David

HCA 663/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 663 OF 2012

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BETWEEN

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D E C I S I O N

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1.This is the application of the plaintiff’ (“Timmerton”) for summary judgment against the 1^st defendant, the executors of the estate of the late Dr Mong Man Wai (“the Executors”), for US$142,059,308.25 with interest. The Executors adopt a neutral stance. The 2^nd and 3^rd defendants (“Cynthia” and “David”), who are directors of Timmerton, have filed an acknowledgment of service dated 5 June 2012 indicating that they do not contest the proceedings. This leaves the 4^th and 5^th defendants (“Madam Wong” and “Perlie”) to oppose the present application.

A. BACKGROUND

A1. Dr Mong and his families

2.Dr Mong was a very successful businessman.  He was the founder of the Shun Hing group of companies, which carried on the business of, among other things, distributing electric products under National, Panasonic and other brand names.  The holding company of the Shun Hing group is Shun Hing Holdings Company Limited (“SHH”).

3.Dr Mong and his first wife, Madam Yang Hsueh Chi (“Madam Yang”), had 5 children[1] (“the Children” collectively) born between 1959 and 1971.  The two eldest of the Children are Cynthia and David.  The others are Viola, Stephen and Josephine.

4.In 1989, Dr Mong met Madam Wong.  In December 1994, their daughter, Perlie, was born.

5.In 2001, Madam Yang commenced divorce proceedings against Dr Mong.  The decree absolute was granted on 28 January 2002.  Madam Yang’s claim for ancillary relief was settled in September the same year when Dr Mong paid her a lump sum of HK$1 billion.

6.After the divorce, Dr Mong and Madam Wong got married in August 2005.

7.Dr Mong died on 21 July 2010, leaving a vast estate.

B2. Timmerton

8.Timmerton is a company incorporated by Dr Mong in Liberia in June 1979.  It was at all material times and still is the offshore holding company of SHH.

9.The evidence on the identity of the shareholders of Timmerton is not entirely clear.  It is Madam Wong’s evidence that she verily believed that at the death of Dr Mong, his estate held no less than 30% in Timmerton with the rest held by the Children.  David did not specifically dispute this point in his affirmations filed in support of the present application. The report of Timmerton’s forensic accountant, PWC, dated 17 December 2010 did not give any information on Timmerton’s shareholding.  According to the report dated 2 October 2012 prepared by Deloitte, the forensic accountant engaged by Madam Wong and Perile, after the death of Dr Mong, Cynthia and David became the majority shareholders of Timmerton.  This point is not specifically denied by David either.

10.Timmerton’s directorship over the years is as follows :

Dr Mong	Between 29/10/1979 until his death on 21/7/2010
Madam Yang	Between 29/10/1979 until her resignation on 2/10/2002
David	Since 29/10/1979
Cynthia	Since 12/10/1988
Stephen	Between 15/9/2010 until his resignation on 7/12/2010
Patrick Sun	Since 7/12/2010

A3. Shareholding in SHH

11.At the time when SHH was incorporated in October 1979, Dr Mong and Madam Wong each held one share as subscriber.  On 21 January 1980, SHH issued 800 shares to Timmerton and 99 shares each to Dr Mong and Madam Yang.  By a declaration of trust of the same date, Dr Mong and Madam Yang stated that they held the 100 shares in SHC on trust for Timmerton.  Later in 1980, 99,000 additional shares in SHH were created and allotted to Timmerton.

12.In the 1980s, Dr Mong set up a discretionary trust, Huge Surplus Trust, in the BVI (“HS Trust”) to hold half of the shares in SHH.  In 1989, the shareholding of SHH was as follows :

Timmerton	99,800 shares
Dr Mong	100 shares
Madam Yang	100 shares
HS Trust	100,000 shares

13.In 1994, Timmerton transferred 100 shares in SHH to David.  David’s case is that he holds the shares on trust for Timmerton pursuant to a declaration of trust dated 2 June 1994.

14.In about 2001, the share structure of SHH underwent further changes.  An additional 800,000 shares were created with 400,000 allotted to the HS Trust and 400,000 to a new BVI company by the name Timmerton Company Inc (“Timmerton BVI”).  Madam Yang transferred her 100 shares to Timmerton on 16 June 2001.  The shareholding in SHH became thus :

Timmerton	99,800 shares
Dr Mong	100 shares
David	100 shares
Timmerton BVI	400,000 shares
HS Trust	500,000 shares

15.In short, SHH was then held between Timmerton, 10% (giving effect to the declarations of trust by Dr Mong and David in its favour), Timmerton BVI, 40%, and HS Trust, 50%.  The shareholding in SHH remains the same to date.

A4. The Will

16.Dr Mong made a will dated 13 June 2007 and a codicil dated 14 April 2008 (collectively “the Will”).  Under the Will, the Executors were named as the executors of his vast estate.  Cynthia is bequeathed a sum of HK$100 million, David, among other things, all the shares beneficially held by Dr Mong in Timmerton, Timmerton BVI and SHH.  Madam Wong and Perlie are named as the residuary legatees.  It is their case that if Timmerton’s claim against the Executors succeeds, it will effectively wipe out their entitlement under the Will.

B. THE PLEADED CASE

B1. Timmerton’s claim

17.Timmerton pleaded that as director, Dr Mong owed fiduciary duties to Timmerton :

(1) to act bona fide in the best interests of Timmerton;

(2) to act for proper purposes;

(3) not to act for purposes collateral to the purposes conferred by the articles of Timmerton;

(4) to act as a trustee in respect of all the assets of Timmerton;

(5) not to make a profit out of his trust;

(6) not to place himself in a position in which there was a conflict between his duties to Timmerton and his personal interests; and

(7) to disclose all relevant information to and/or obtain the informed consent of the board of directors of Timmerton before causing, procuring or permitting Timmerton to enter into a transaction in which he was personally interested and/or from which he would derive a benefit.

18.However, Dr Mong had, in breach of his various fiduciary duties as director, wrongfully transferred Timmerton’s property, in the form of funds and shares to himself or other parties nominated by him between May 2002 and April 2009 (“the Tainted Transfers”) as follows :

	Date	Particulars(as shown on General Ledger of Timmerton)	Recipient/ Transferee	Amount(USD)
1	28/05/02	Fund transfer to Dr Mong	Dr Mong	72,806.29
2	29/05/02	Fund transfer to Dr Mong	Dr Mong	67,676.88
3	28/06/02	Fund transfer to Dr Mong	Dr Mong	128,205.13
4	03/10/02	Fee paid on behalf of Dr Mong (transfer to Messrs Hampton, Winter & Glynn and Munros)	Messrs Hampton, Winter & Glynn	76,923,106.41
5	07/10/02	Fee paid on behalf of Dr Mong - Winston Chu & Company	Winston Chu & Company	2,977,738.46
6	07/10/02	Fee paid on behalf of Dr Mong - Winston Chu & Company	Winston Chu & Company	188,553.85
7	07/10/02	Fee paid on behalf of Dr Mong  (Hampton, Winter & Glynn and Munros - Escrow A/C)	Hampton, Winter & Glynn and Munros - Escrow A/C	51,282,051.28
8	09/12/02	Fund transfer to Dr Mong’s HSBC A/C	Dr Mong	10,463,666.09
9	09/12/02	Fund transfer to Dr Mong’s HSBC A/C	Dr Mong	26,003,603.90
10	30/04/09	Transfer all shares in Wealth Management Hong Kong Ltd (“Fortis”) to Dr Mong	Dr Mong	5,437,524.50
11	30/04/09	All MNF in Fortis transferred to Dr Mong	Dr Mong and/or Madam Wong	3,507,125.55
12	30/04/09	Transfer all shares in Fortis to Dr Mong	Dr Mong and/or Madam Wong	1,345,883.29
13	Various	Miscellaneous payments of below HK$ 1million to 3rd parties on behalf of Dr Mong		8,606.80
			Total	178,406,548.43

19.Each of the Tainted Transfers was made for Dr Mong’s or his nominees’ personal benefit.  They were all made by Dr Mong in breach of his fiduciary duties in that :

(1) none of the payments or transfers was made bona fide in the best interests of Timmerton;

(2) the late Dr Mong was in a position of actual conflict between his duties to Timmerton on the one hand and his private interests in his personal capacity on the other;

(3) the assets of Timmerton, namely cash and shares in the Tainted Transfers in respect of which the late Dr Mong and/or third parties nominated by him received the benefit, were used in a manner contrary to the best interests of Timmerton and were surrendered for no consideration and/or no commercial benefit for Timmerton;

(4) the assets of timmerton were applied by the late Dr Mong to benefit himself and/or third parties nominated by him at the expense of and to the detriment of Timmerton;

(5) the Tainted Transfers were made for improper or collateral purposes, namely to benefit the late Dr Mong and/or third parties nominated by him;

(6) Timmerton received no commercial benefit or consideration for the Tainted Transfers; and

(7) in benefiting himself and/or third parties nominated by him, the late Dr Mong acted in a manner which was inconsistent with his duties as trustee in respect of the assets of Timmerton.

20.Dr Mong was liable, among other things, as constructive trustee for the property covered by the Tainted Transfers.  Such liability now falls on his estate after his death.

21.According to its accounting records, Timmerton owed a sum of US$36,347,240.18 to Dr Mong, for which Timmerton gave credit, thereby reducing the net sum claimed to US$142,059,308.25.

22.Timmerton has no direct claim against the Cynthia, David, Madam Wong and Perlie.  But as beneficiaries of Dr Mong’s estate, they were joined as proper and necessary parties to the action pursuant to the order of the master dated 17 May 2012.  As parties, they may then defend the claim on behalf of the estate, in circumstances where the Executors wish to avoid assuming personal liability for costs in defending the claim herein by taking a neutral stance in the proceedings.

23.I pause to note that it is not disputed that the transfers made to various law firms in October 2002 in fact represented the settlement sum paid by Dr Mong to Madam Yang in the divorce proceedings.  David was fully aware of those transfers at the time.  As will be seen below, it is certainly reasonably arguable that Cynthia knew about those payments as well.

B2. Defence filed by Madam Wong and Perlie

24.In their joint defence filed on 27 July 2012, Madam Wong and Perlie pleaded, among other things, that each and every payment made to Dr Mong to the persons nominated by him was duly authorized by Timmerton and/or approved by all the shareholders.

B3. Third party notices

25.At the same time when they filed their defence, Madam Wong and Perlie also served third party notices on Cynthia, David and Madam Yang, seeking an indemnity against them should Timmerton’s claim against the estate succeed.  Cynthia and David are liable because they had acted in breach of their fiduciary duties as directors to Timmerton in connection with the Tainted Transfers.  Madam Yang is liable because she was the ultimate recipient of the sum of HK$1 billion caused to be transferred to her by Dr Mong.

C. DISCUSSION

26.Timmerton took out the present application for summary judgment in August 2012.

C1. Application misconceived

27.Under Order 14, rule 1(2)(b), Rules of the High Court[2], the summary jurisdiction does not apply to an action which includes a claim by the plaintiff based on an allegation of fraud.  The latest appellate authority on the scope of this exclusionary rule is Pacific Electric Wire & Cable Co Ltd v Harmony Ltd [3] and A-1 Business Ltd v Chau Cham Wong Patrick [4].

28.In Pacific Electric Wire & Cable Co Ltd, Rogers VP said :

“19. The wording of O 14 r 1(2)(b) makes quite clear that what is excluded is an action where there is a claim which is based on an allegation of fraud. Two matters are clear from that. The first is that there may be one or more claims in the action and the rule envisages that one of the claims may not be based on an allegation of fraud but another may be. In those circumstances it is clear that an application for summary judgment under O 14 will not lie. Secondly, the rule is not confined to excluding actions in which one of the claims is a claim for damages for fraud, what is excluded is any action where there is a claim in respect of which the underlying allegations on which the claim in respect of which the underlying allegations on which the claim is based constitute an allegation of fraud. It is clear the if r 1(2)(b) applies there is no jurisdiction for the court to entertain an application for summary judgment.”

After analyzing the relevant authorities, his Lordship went to say :

“31. In my view, … although the claims made in the case may be framed in respect of constructive trust, resulting trust and money had and received, the claims in the action are based on allegation of fraud that include deliberate dishonesty. … [The] allegations of the concealment of facts from the plaintiff when there was a duty to disclose, and the connivance at the preparation of false financial statements and accounts would be clear allegations of fraud.

32. In my view, it is no answer to the challenge in this case that the provisions of O 14 r 1(2)(b) exclude this action, to say that the plaintiff can proceed on one or other or all of the three causes of action, namely resulting trust, constructive trust and money had and received, for the simple reason that the necessary allegations which are made by the plaintiff include allegations of fraud.”

29.In A-I Business Ltd, another division of the Court of Appeal applied Pacific Electric Wire & Cable Co Ltd.  There, the plaintiff brought an action against its directors for breach of their fiduciary duties by misappropriation of assets, including a transfer by one of the defendants of almost CHF 20 million in sale proceeds from the plaintiff’s account to his own account to reduce his indebtedness of a personal loan.  The defence was that the transfer was a dividend payment from the plaintiff to him.  In answer, the plaintiff claimed that the defence involved a fabrication of documents to create a fictitious declaration of dividend with legitimacy.  The plaintiff then applied for summary judgment, which was refused.  The plaintiff appealed.  In dismissing the appeal, Cheung JA said :

“15. I agree with the Judge that the plaintiff’s claim based on misappropriation cannot be viewed in isolation and divorced from the plaintiff’s response to the defence that the transfer was for a legitimate purpose. In order to establish that the transfer was a misappropriation of the plaintiff’s assets, the plaintiff clearly has to address the defence and this clearly will involve an allegation of dishonesty on the part of the defendants. In substance, allegations of fraudulent conduct are involved in the plaintiff’s claim and this is caught by the exclusion rule.

…

18. Second, I accept that a claim based on breach of fiduciary duty resulting in a duty to account may not necessarily involve dishonesty, but each case is based on its own facts. …

…

20. Even if one is to view the case strictly from the plaintiff’s claim, the plaintiff’s pleaded case also clearly involves allegations of dishonesty and hence fraudulent acts. This is apparent from the plea that the transfer was made for an improper purpose, namely to benefit the first defendant personally; the security granted by the first defendant for his personal loan from DBS was also made for an improper purpose, namely, to benefit the first defendant and the concealment by the defendants of the documents relating to the security.

21.     Accordingly the case is within the exclusion rule and the Judge was correct to rule against the plaintiff.”

30.Here, it can be readily seen that underlying Timmerton’s pleaded case and the various forms of relief prayed for are the very serious allegations that in breach of fiduciary duties as director, Dr Mong had committed wrongful and deliberate acts of misappropriation that were lacking in probity, honesty and good faith for his and his nominee’s own personal benefit, thereby causing loss and damage to Timmerton exceeding US$178 million.  Timmerton’s application for summary judgment falls squarely within the fraud exception.  The exclusionary rule applies with full force.

31.Perhaps recognizing that he had an insurmountable hurdle to overcome, Mr Hunsworth for Timmerton, in his submissions, expressly disavowed any allegation of dishonesty against Dr Mong.  He submitted that Dr Mong had simply failed to complete the corporate procedure required to authorize the Tainted Transfers.  Absent the proper corporate procedure, the Tainted Transfers were unauthorized.  Dr Mong and now his estate must now make good the loss suffered by Timmerton.  His and his estate’s liability is not dependent on any dishonesty on Dr Mong’s part.  With respect, I do not think Mr Hunsworth’s submission can salvage Timmerton’s application for summary judgement at all.

32.For one thing, Mr Hunsworth’s submission deviates from Timmerton’s pleaded case fundamentally.  In fact, it is not even its pleaded case.  And it is trite that the court will not grant summary judgment on a non-pleaded claim.  More importantly, Mr Hunsworth’s submission will not bring Timmerton’s within the summary jurisdiction any way.  For even assuming that that is part of Timmerton’s pleaded case, the other parts of its claim are still caught by the fraud exception.  It is not open to Timmerton to elect not to proceed with the claim based on fraud and to ask for judgment on an alternative claim not based on fraud.  The exclusionary rule would still apply : Kays Impex Corp (HK) Ltd v Arbuthnot Export Services[5], followed in Pacific Electric Wire & Cable Co Ltd v Harmony Ltd[6].

33.Timmerton’s application is wholly misconceived. It must be dismissed on this ground alone.

C2. Not a case for Order 14 anyway

34.What I have said is sufficient to dispose of Timmerton’s application.  Just for completeness, I will say a few words on the merits of the application.  Even assuming that the exclusionary rule is not engaged, this is evidently not a case for Order 14. For as rightly submitted by Mr Chang, SC, for Madam Wong and Perlie, the evidence before the court has given rise to numerous triable issues that can only be resolved at trial[7]. For present purposes, I only need to highlight two matters, which form the basis of the principal defence put forward by Madam Wong and Perlie on behalf of Dr Mong’s estate.

35.The first matter is figuratively referred to as the “treasury” point in Mr Chang’s submission. 

36.Timmerton was and is a family company established and funded by Dr Mong in 1979 as an investment vehicle for the purpose of, inter alia, holding the shares of SHH.  It is common ground that from the date of its incorporation up to 2002, Timmerton did not keep proper accounting records.  Timmerton’s management re-constructed a set of management accounts covering that period which was, as PWC readily recognised, based on very limited information.  Deloitte noted that even on the face of the re-constructed account, the purported balance sheet of Timmerton as at 31 March 2002, there was a cash balance of approximately US$172 million, which was consistent with the monies deposited into the bank accounts prior to 31 March 2002 and with the cash balance accumulated in the preceding years.  The same balance sheet showed that as at 31 March 2002, Timmerton owed Dr Mong a sum of US$4,285,655.22, which was later adjusted to US$39,558,789.47.  There is considerable force in Mr Chang’s submission that it is inherently improbable, indeed inconceivable, that anyone other than Dr Mong would have directly or indirectly provided the money or accumulated the relevant funds.  The issues concerning the source, treatment, status, right of disposition or ownership of the relevant funds naturally arose. 

37.I agree with with Mr Chang that it is not a simple case, as Mr Hunsworth has tried to portray, of whether or not Dr Mong or his estate is liable for taking assets out of the company which belonged to Timmerton and over which he had no right of use or disposition.  The more fundamental question is whether the funds or other assets withdrawn or transferred belonged to Timmerton at all, or were they in fact assets held on Dr Mong’s behalf as aforesaid and could be used or disposed of as he might direct.  If this question is resolved in favour of Dr Mong, there is no question of any breach or misappropriation. Dr Mong was entitled to act as he did.  There was simply no question of any lack of authority either.

38.Plainly, this “treasury” defence is not one which can be resolved summarily on affidavit.

39.The second matter concerns the knowledge, approval or rectification of the Tainted Transfers.

40.At the material time of the actual payments pursuant to the divorce settlement in October 2002, the board of directors of Timmerton consisted of three directors, namely, Dr Mong, David and Cynthia. David was the one who in writing approved and authorized the two applications to the banks for remittance of HK$600 million and HK$400 million respectively in favour of Dr Mong’s solicitors in the divorce proceedings for the purpose of settling the ancillary relief payment to Madam Yang.  It is plainly reasonably arguable that Cynthia, the eldest child in the family and who had been a director of Timmerton since 1988, was aware of such payments as well.

41.Further, by virtue of the positions of David and Cynthia as long-standing directors of Timmerton, and having regard to their duties as directors including the duty to supervise the activities of other directors and duties of care with regard to the assets of Timmerton, it is reasonably arguable that each of David and Cynthia must have had actual knowledge or ought to have known of all the Tainted Transfers, particularly, when there is no evidence showing either of them had even raised any objection to any of the Transfers, whether at the time or subsequently. 

42.Both David and Cynthia are shareholders of Timmerton, along with their siblings.  Both of them had also assisted Dr Mong with his business at the Shun Hing Group.  It is reasonably arguable that the other siblings have left it to David and Cynthia to look after their interest as shareholders of Timmerton given their management role in Timmerton and the active part they played in Dr Mong’s business. 

43.I accept Mr Chang’s submission that the express and/or implied approval of David and Cynthia for the Tainted Transfers could, on a reasonably arguable basis, be regarded as the consent of all the shareholders of Timmerton.  Even absent any formal resolution in a general meeting, Dr Mong’s breach of duty as director, even if proved, may be ratified with the consent of all shareholders : Re Duomatic Ltd.[8]

44.These matters about knowledge, approval and rectification can only be determined at trial.

E. DISPOSITIONS

45.Timmerton’s application for summary judgment is dismissed.

46.Costs should follow the event.  I also take the view that Timmerton’s application is an abuse of process.  It is caught by the exclusionary rule.  It is evidently not an appropriate case for summary judgment any way.  There is simply no basis whatsoever to proceed under Order 14.  Timmerton should be visited with indemnity costs.  I therefore make an order nisi that Timmerton do forthwith pay Madam Wong and Perlie costs, including all costs reserved, to be taxed on an indemnity basis if not agreed.

Mr N Hunsworth, of Mayer Brown JSM, for the plaintiff

The attendance of the 1^st defendant was excused

Mr Denis Chang SC leading Ms Po Wing Kay, instructed by CWL partners, for the 4^th and 5^th defendant