Leung Hoi v. Ma Koon Sik and Others

1992， No.A3054

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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Coram: Hon Woo, J in Chambers

Dates of hearing: 19^th and 20^th November 1992

Date of handing down judgment: 24^th November 1992

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JUDGMENT

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1.  This is an appeal by the 3rd defendant against Master Cannon's Order made on 13th August 1992 whereby she dismissed the summonses dated respectively 9th and 15th July 1992 as against the 3rd defendant. The summons dated 9th July 1992 was take out by the 2nd and 3rd defendants, but at the hearing before the learned Master, the 2nd defendant did not proceed with the summons and that part of the summons was simply adjourned sine die. I am therefore only concerned with the 3rd defendant's appeal and I shall deal with the matter as relates to the 3rd defendant alone.

2.  The summons dated 9th July 1992 was for striking out the plaintiff’s claim against the 3rd defendant on the ground that it discloses no reasonable cause of action or it is an abuse of process and doomed to failure on the bases that the plaintiff only alleges in the Amended Statement of Claim an agreement made between him and the 1st defendant (“the agreement”) and that there is no allegation that the 3rd defendant was a party to the agreement. The summons dated 15th July 1992 sought the vacation of the registration of the writ of summons herein as a lis pendens against the property known as No.33 Cumberland Road, Kowloon erected on New Kowloon Inland Lot No.736 (“the property”) of which the 3rd defendant is the registered owner. It is common ground that whether the vacation of the lis pendens should be ordered hinges on the success of the summons of 9th July.

The facts and the plaintiff's case

3.  For the purpose of this appeal, I will take the facts pleaded by the plaintiff as being true in order to examine the legal effect and implications.

4.  The agreement is pleaded in the Amended Statement of Claim in the following manner:-

“5. (a) On the 18th March 1992 at lunch time at a restaurant inside Landmark Central, the 1st Defendant offered orally to sell to the Plaintiff the Property subject to existing tenancy at the price of HK$17,500,000.00 by way of transferring to the Plaintiff all his and his wife's (2nd Defendant's) shares in the 3rd Defendant in which the only directors and shareholders were himself and his wife (2nd Defendant).

(b) The Plaintiff accepted orally the offer ...”

5.  It has not been pleaded that the 3rd defendant was a party to the agreement nor that the agreement had been confirmed or adopted by the 3rd defendant by conduct. This should be contrasted with the position of the 2nd defendant who is pleaded in paragraph 6(a) of the Amended Statement of Claim as having confirmed the agreement.

6.  It is common ground that the 3rd defendant is a limited company, that the only substantial asset of the 3rd defendant is the property, and that the 1st and 2nd defendants are and were at all material times the 3rd defendant's only shareholders and directors. However, there is no plea that the 1st defendant and/or the 2nd defendant in entering into the agreement were acting as agent for and on behalf of the 3rd defendant. In fact, such a plea would not be possible if the agreement was for the sale of shares in the 3rd defendant who did not have any issued shares to sell.

7.  Mr Fung very fairly conceded the following matters for the purpose of this appeal:-

(a) The agreement was made between the plaintiff and the 1st and 2nd defendants for the sale and purchase of all of the shares in the 3rd defendant owned by them.

(b) It is not alleged that the 3rd defendant was a party to the agreement.

(c) It is not alleged that the 1st and 2nd defendants ever purported to act for the 3rd defendant.

(d) The 3rd defendant， which did not own its own issued shares, could not sell the shares.

(e) There is no claim against the 3rd defendant for the sale or conveyance of the property.

8.  What is pleaded to connect the 3rd defendant with the agreement is that it has been holding the property as trustee on a bare trust for the 1st and 2nd defendants (para. 4 of the Amended Statement of Claim), that the agreement is in fact and in substance a contract whereby the 1st and 2nd defendants agreed to sell the legal and beneficial interests in the property to the plaintiff (para. 13 of the Amended Statement of Claim),-and that in truth and in fact, the 3rd defendant was and is merely the alter ego of the 1st and 2nd defendants and/or a vehicle holding the property in trust for them (para. 14 of the Amended Statement of Claim). Upon these bases, the plaintiff claims against the 3rd defendant a declaration in the same terms as paragraph 14 of the Amended Statement of Claim (“the Declaration”) and contends that the 3rd defendant is a proper party to this action.

9.  The plaintiff seeks specific performance of the agreement together with declaratory, injunctive and other relief against the 1st and 2nd defendants. Mr Fung argued that the Declaration sought against the 3rd defendant that it was the alter ego of the other defendants and a bare trustee holding the property in trust for them was in support of and supplemental to the relief sought against the 1st and 2nd defendants. He said that the Declaration connected the 3rd defendant with the relief sought against the other defendants. However, he had not argued that if and when the 1st and 2nd defendants were held by the court to be liable to perform the agreement by way of transferring all their shares in the 3rd defendant to the plaintiff, the 3rd defendant would be bound to convey the property as a bare trustee to the plaintiff. Anyhow, he submitted that even if no declaratory relief was sought against the 3rd defendant or the Declaration would not be made, and further even if the plaintiff had no separate cause of action against the 3rd defendant, the 3rd defendant was still a proper party in all the circumstances of this case by virtue of Order 15, rule 6(2)(b)(ii) of the Rules of the Supreme Court.

10.  For the consideration of this appeal, I have borne in mind that only in a plain and obvious case that the plaintiff should be debarred from proceeding with the action and that the court will not strike out a claim if there is any serious point of law to be tried.

Bare trusteesip

11.  A company has a separate corporate existence and is a legal personality separate from its shareholders. In Salomon v. Salomon [1897] AC 22, at p.30 Lord Halsbury, L.C. said:-

“... it seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are.”

12.  Regarding whether the company was an agent or trustee of Salomon, its promoter and shareholder, and other shareholders, Lord Herschell said at p.42:-

"It is to be observed that both Courts· [the trial court and the Court of Appeal] treated the company as a legal entity distinct from Salomon and the then members who composed it, ... Under the circumstances, I am at a loss to understand what is meant by saying that A. Salomon & Co., Limited, is but an 'alias' for A. Salomon. It is not another name for the same person; the company is ex hypothesi a distinct legal person. As little am I able to adopt the view that the company was the agent of Salomon to carry on his business for him. In a popular sense, a company may in every case be said to carry on business for and on behalf of its shareholders; but this certainly does not in point of law constitute the relation of principal and agent between them or render the shareholders liable to indemnify the company against the debts which it incurs.”

After referring at p.50 to the trial judge's view that "the company was Mr Salomon in another form", that he (Salomon) "used the name of the company as an alias" and that he "employed the company as his agent"， Lord Macnaghten said at p.51 thus:-

"The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them."

Lord Davey also said at p.56-57:-

"I am at a loss to see... in what way the company became an agent or trustee for the appellant, except in the sense in which every company may loosely and inaccurately be said to be an agent for earning profits for its members, or a trustee of its profits for the members amongst whom they are to be divided. There was certainly no express trust for the appellant; and an implied or constructive trust can only be raised by virtue of some equity. I took the liberty of asking the learned counsel what the equity was, but got no answer. ... If ... the company was formed for an unlawful purpose... or, if the appellant has committed a fraud or misdemeanour ..., he may be proceeded against civilly or criminally; but how either of those states of circumstances creates the relation of cestui que trust and trustee, or principal and agent, between the appellant and respondents, is not apparent to my understanding."

13.  In Macaura v. Northern Assurance [1925] AC 619, where the question in issue was whether a person who owned almost all the shares in a company had an insurable interest in the timber owned by the company, Lord Sumner said at p.630:-

"He owned almost all the shares in the company, and the company owed him a good deal of money, but, neither as creditor nor as shareholder, could he insure the company's assets. The debt was not exposed to fire nor were the shares, and the fact that he was virtually the company's only creditor, while the timber was its only asset, seems to me to make no difference. He stood in no 'legal or equitable relation to' the timber at all. He had no 'concern in' the subject insured. His relation was to the company, not to its goods, and after the fire he was directly prejudiced by the paucity of the company's assets, not by the fire."

At 626-627, Lord Buckmaster said:-

"Now, no shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. He is entitled to share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up."

14.  The normal rule is that a company does not hold property as an agent or trustee for its members and a fortiori it does not hold property as agent or trustee for its directors. If the 3rd defendant is treated as holding the property as a bare trustee for the 1st and 2nd defendants, they would be entitled to demand the conveyance of the property to them with the effect of depriving the 3rd defendant and therefore its creditors of this only substantial asset for payment of its debts, and with impunity from liability for any possible breach of fiduciary duties on their part as directors towards the 3rd defendant or for misappropriation of the 3rd defendant's assets. Neither the creditors of the 3rd defendant, nor a liquidator in the case of a winding up, could in such a case lay hands on the property or make any claim against the 1st and 2nd defendants.

15.  Wing Lung Bank Limited ("the Bank") has advanced loans to the 3rd defendant on security of the property (see para. 4(i) of the Amended Statement of Claim). If the 3rd defendant is a bare trustee of the property, then the interest in the property that could have accrued to the Bank would theoretically be the bare legal interest. But for the fact that the Bank is or may be protected by registration of its interest on the land register, the 1st and 2nd defendants as beneficiaries under the bare trust would be able to obtain the legal and beneficial interests in the property from the 3rd defendant free from the Bank's interest.

16.  It is also pleaded in paragraph 4(i) of the Amended Statement of Claim that the funds of the 3rd defendant were provided by the 1st and 2nd defendants. These funds appear on the 3rd defendant's accounts as shareholders' advance. Factually, therefore, there cannot be a resulting trust in the property in favour of the 1st and 2nd defendants because despite the fact that they might have paid part of the purchase money for the property on behalf of or through the 3rd defendant, the money paid by them has been treated as a loan to the 3rd defendant which contradicts any resulting trust.

17.  Further, no claim is made against the 3rd defendant for the conveyance of the property to the plaintiff. There is therefore no support or reason for joining the 3rd defendant as the bare trustee of the property. Even if the 3rd defendant is ruled to be the bare trustee, where the plaintiff does not seek to have the 3rd defendant convey the property to him, such ruling would simply be futile.

Alter ego

18.  Paragraph 14 of the Amended Statement of Claim pleades that in truth and in fact, at all material times, the 3rd defendant was and is merely the alter ego of the 1st and 2nd defendants and/or a vehicle holding the property in trust for them. As Miss Eu rightly pointed out, the two alternative pleas of "alter ego" and "trusteeship" are contradictory. If the 3rd defendant is the same as the 1st and 2nd defendants, its shareholders and directors, it cannot at the same time be a trustee for them. The "alter ego" concept takes away the ground from under the feet of "trusteeship". In other words, “alter ego” destroys the separate personality of the 3rd defendant, and without such separate personality, it cannot be a trustee which is a legal entity separate from the beneficiaries. I have already referred to various passages in Salomon v. Salomon ibid. I need only refer to another passage in the opinion of Lord Halsbury at p.31:-

"I observe that the learned Judge (Vaughan Williams J.) held that the business was Mr Salomon's business, and no one else's, and that he chose to employ as agent a limited company; and he proceeded to argue that he was employing that limited company as agent, and that he was bound to indemnify that agent (the company). I confess it seems to me that that very learned judge becomes involved by this argument in a very singular contradiction. Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr Salomon. If it was not， there was no person and no thing to be an agent at all; and it is impossible to say that at the same time that there is a company and there is not."

19.  Mr Fung.cited to me a number of authorities in support of piercing the corporate veil of the 3rd defendant which is an exception to the general rule of separate legal corporate personality. There is a good summary of various cases where the courts applied this exception to the general rule in Palmer's Company Law, 24th Ed., paras. 18-22 and 18-23. Most of those cases show that the court lifted the corporate veil when the facts warranted it. Justice was the basis for those courts to apply the exception, though it manifested in many permutations such as to prevent or avoid illegality, fraud or evasion, or otherwise an anomaly or injustice or inequity would result. Mr Fung relied heavily on the case of Harold Elliott and H. Elliott (Builders) Ltd. v. Pierson [1948] 1 Ch. 452, where the plaintiff agreed personally to sell a business to the defendant together with the freehold premises of a company over which the plaintiff had absolute control. The defendant opposed to specific performance on the ground that the company was not a party to the contract and that the plaintiff had no direct legal or beneficial interest in the premises. At p.456, Harman J. said:-

"The law is that a vendor who has or can compel the assurance of all necessary interests in the subject-matter of the sale may enforce the contract. ..."

On that basis, the learned judge granted specific performance against the defendant.

20.  Mr Fung argued that Harold Elliott was very similar to the present action and urged me to adopt the same approach to lift the corporate veil. However, the agreement is conceded to be one for the sale of the shares and it is not alleged in any way that the 3rd defendant had any of its issued shares to sell. There are no circumstances, evidence or authorities shown by Mr Fung upon which the 3rd defendant should be made liable to the acts of the 1st and 2nd defendants. No inequity is alleged. Nowhere is it pleaded that the 1st and 2nd defendants were acting as agents for the 3rd defendant. Moreover, it is not shown how the 1st and the 2nd defendants or either of them have used or will use the 3rd defendant as a shield or device to avoid selling their shares pursuant to the agreement. The incorporation or acquisition of a private limited company to hold a landed property purchased or to be purchased by the shareholders is nothing out of the ordinary, and if I may say so, a very common practice in Hong Kong. The mere fact that the shareholders in litigation have absolute control of the company which has no other business activity than dealing in and with the landed property being its sole asset does not ipso facto justify the court to depart from the general principles enunciated in Salomon v. Salomon.

21.  Mr Fung was not able to point to any fact which can at the present stage give rise to any threat or risk that the property will be disposed of or dealt with in a way detrimental to the plaintiff prior to the determination of the dispute between him and the 1st and 2nd defendants. He merely posed a rhetorical question that if the 3rd defendant had no intention to get rid of the property, why did it apply to have the claim against it struck out and the lis pendens vacated? I am afraid that this is but a lame attempt to shift the burden of justifying the application of the exception to the general rule of separate corporate personality to the 3rd defendant. Without entering into the realm of speculation or even imagination, there is not a shred of material that would justify the court to undertake an investigation of whether the corporate veil should be lifted. This basis of the plaintiff’s case in support of maintaining the action against the 3rd defendant therefore fails.

The agreement in substance a sale of the property

22.  Although Mr Fung submitted that for the purpose of examining the Amended Statement of Claim whether it discloses any cause of action against the 3rd defendant I should not look at any evidence, I will look at the evidence filed by the parties in order to help find any justification for a possible claim against the 3rd defendant. It is clear from the evidence that the purpose of the agreement was to buy the property. Mr Fung， however, confirmed that the plaintiff’s case was that the agreement was for the purchase of the entirety of the shares in the 3rd defendant owned by the 1st and 2nd defendants and not the property. The agreement to purcahse the shares has nothing to do with the 3rd defendant. There is no privity of contract, nor does the 3rd defendant have any issued share in itself to sell. This ground therefore does not add anything to the plaintiff's case, save to underlie its motive behind joining the 3rd defendant which will be dealt with later.

23.  In the circumstances, I conclude that it is plain and obvious that there is no cause of action against the 3rd defendant.

The Declaration

24.  Mr Fung also relied on Order 15, rule 16 that no action shall be open to objection on the ground that a merely declaratory judgment or order is sought thereby to persuade me that the 3rd defendant is joined as a party for the Declaration. As I said above, there are at present plainly no circumstances or equity to justify lifting the corporate veil for the court to grant the Declaration or any part of it to the plaintiff, either that the 3rd defendant is the alter ego of the 1st and 2nd defendants, or that it is a bare trustee. Further, Miss Eu made a valid point that if the 3rd defendant was declared to hold the property as a bare trustee and at the same time the plaintiff obtained the entirety of the shares in it by way of specific performance of the agreement for the sale of the shares against the 1st and 2nd defendants, the plaintiff would be paying the purchase money for little value. The court of course will not do anything knowing that it will lead to an absurdity. But even if this point is treated as merely a matter of semantics, the absence of any material for the court to lift the corporate veil will surely disentitle the plaintiff from obtaining the Declaration. It follows that the 3rd defendant cannot be a proper party for the purpose of seeking the Declaration which will not be granted. In Terrian Ltd. & Ors. v. Oriental Peer Co. Ltd. [1988] 1 HKLR 246, at p.251I-J, Clough, J.A. said:-

"If the court can properly grant such a declaration against the applicants there can be no ground for striking out the amended counterclaim against the applicants and the joinder issue falls away. If, on the other hand, the court cannot properly grant the relevant declaration, the amended counterclaim against the applicants should be struck out and the court should not permit the joinder of the applicants to continue solely for the purpose of maintaining a claim for a declaration which the court cannot properly make against the applicants."

The 3rd defendant a proper party?

Order 15, rule 6(2)(b)(ii) provides as follows:-

"(2) Subject to the provision of this rule, at any stage of the proceedings in any cause or matter the Court may on such terms as it thinks just and either on its own motion or on application -

(a) order any of the following persons to be added as a party, namely-

(ii) any person between whom and any party to the cause of matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter.”

25.  Mr Fung argued that the question of bare trusteeship or alternatively "alter ego" was one that existed between the 3rd defendant and the plaintiff relating to or connected with the relief of specific performance of the agreement and injunction claimed against the 1st and 2nd defendants, and that it was just and convenient for that question to be determined as between the 3rd defendant and the plaintiff and all the parties to the action. For the reasons I have given above, I think that the questions of trusteeship and "alter ego" only exist, if at all, for being demolished.

26.  Even if these alleged questions still exist, I am not persuaded that it is either just or convenient for them to be so determined as the matter presently stands. Miss Eu pointed out, and I think rightly again, that the relief claimed by the plaintiff against the 1st and 2nd defendants is mainly for specific performance of the agreement. If the plaintiff succeeds, he will get all the shares; if he failes, the 1^st and 2^nd defendants retain the shares. In either case, the Delcaration against the 3^rd defendant now sought and question whether the 3^rd defendant is the alter ego of the other defendants or holding the property as a bare trustee for them are irrelevant. If the injunction sought in the prayer of the Amended Statement of Claim against the 1^st and 2^nd defendants is a permanent injunction, once specific performance is ordered, whether the Declaration is granted or whether the 3^rd defendant is a party to the proceedings would be academic. Order 15, rule 6(2)(b)(ii) does not assist the plaintiff.

27.  Mr Fung further relied on T.S.B. Private Bank International S.A. v. Chabra and Anr. [1992] 1 WLR 231 in support of his contention that even if there was no cause of action nor any relief sought against the 3rd defendant, the 3rd defendant was still a proper party in this action because of the circumstances of this case. In T.S.B., the plaintiff claimed against the defendant (later to become the 1st defendant) for failure to honour a guarantee for the repayment of a loan. The plaintiff obtained a Mareva injunction which restrained the 1st defendant from removing out of the jurisdiction or otherwise disposing of, in particular, the assets of the sale of certain business assets belonging to a company in which he was the majority shareholder. The company was not a party to the guarantee. The court of its own motion ordered the company to be joined as the 2nd defendant and granted another Mareva injunction against it is terms similar to the injunction made against the 1st defendant. The application by the 2nd defendant to strike out the writ against it on the ground that no cause of action was disclosed and to set aside the Mareva injunction failed. The facts of the case are exceptional which justified Mummery, J. to deal with it in an exceptional way. To name but a few of those facts: the 1st defendant had left England for India for good but his whereabouts were not known or·disclosed to the plaintiff, whether his former residence in England was still owned by the 2nd defendant was not clear, and whether he still retained his majority shareholding in and therefore control of the 2nd defendant was also suspect. The learned judge was of the view that if the injunction against the 1st defendant was inadequate to protect the plaintiff from the risk that assets vested in the 2nd defendant might become unavailable to satisfy the judgment obtained against the 1st defendant, an injunction should be made against the 2nd defendant to prevent it from dissipating assets (see p.242D of the report).

28.  In the present action, the plaintiff has not adduced any evidence to show any risk if and when it succeeds against the 1st and 2nd defendants in obtaining the entirety of the issued shares in the 3rd defendant that the property will have been disposed of, nor has it in fact laid any sufficient basis for seeking an interlocutory injunction against the disposal of the property. There is not the slightest similarity between the facts here and those in T.S.B. I therefore conclude that the 3rd defendant is neither a proper nor a necessary party in these proceedings.

Motive

29.  The purpose of or the motive behind the plaintiff's joining the 3rd defendant and seeking the Declaration against it is, as frankly admitted by Mr Fung, to ensure that before the determination of the claim against the 1st and 2nd defendants, the property will remain intact and that the 3rd defendant will not dispose of it or create any encumbrance against it. Such an end could be achieved by many ways; the obvious one is to apply for an interlocutory injunction against the 1st and 2nd defendants as the 3rd defendant's only shareholders and directors from appointing any-new directors and from permitting the 3rd defendant to dispose of or create any encumbrance against the property. Miss Eu contended correctly, however, that for the time being no application for such an injunction is made and that there is no basis for such an injunction because, apart from other reasons like balance of convenience, etc. which the court would have to consider, there is presently no evidence to show that the property is intended or threatened to be diposed of. Even if an application is made for an interlocutory injunction, it will usually be granted on the condition that the plaintiff gives an undertaking as to damages. It would be unfair and unjust to allow the 3rd defendant to remain as a party at the present stage without any basis shown for such an injunction to be granted and without anyone giving any undertaking as to damages. Nor is it convenient for the 3rd defendant to remain in this action without any solid ground that an application for such an injunction will be made against it.

The lis pendens

30.  The claim against the 1st and 2nd defendants for specific performance of the sale of shares in my view also does not affect any interest in the property (see Thian's Plastics Industrial Co. Ltd. and Ors. (No.2) v. Tin's Chemical Industrial Co. Ltd. and Anr. [1971] HKLR 249, 253-4). There is plainly no sound basis for the Declaration sought against the 3rd defendant. Without the Declaration, there cannot have been any legitimate ground or justification for the registration of the writ herein as a lis pendens against the property.

Conclusions

31.  For all the above reasons, it is plain and obvious that none of the plaintiff's grounds in support of its purported claim against the 3rd defendant, the Declaration, the contentions to retain the 3rd defendant as a party in this action and to maintain the lis pendens has any merit. I would accordingly allow the appeal and strike out the plaintiff’s claim and action against the 3^rd defendant. I further order that the lis pendens against the property be vacated after the expiration of the time prescribed by the Rules of the Supreme Court for an appeal to be made against this judgment. I also make an order nisi that the 3^rd defendant’s costs of the summonses, of this action, of this appeal and before the learned Master be paid by the plaintiff to the 3^rd defendant, to be taxed if not agreed.

32.  As this judgment may be of interest to other legal practitioners, unless any of the parties in this action notifies the court of any objection within 14 days hereof, I would have a copy of it lodged with the Supreme Court Library.

Miss Audrey Eu (on the instructions of Messrs. Charles S.C. Yeung & Co.) for the 3^rd defendant (appellant).

Mr Patrick Fung (on the instructions of Messrs. Leong, Lam & Co.) for the plaintiff (respondent).