Lee Sai Nam v. Li Shu Chung and Another

HCA 1711/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1711 OF 2009

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BETWEEN

BETWEEN

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DECISION NO 4

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I. INTRODUCTION

1.This is the fourth tranche of rulings in the present action in respect of pre-trial interlocutory applications before me.  For convenience, I shall adopt the abbreviations in my earlier Decisions Nos 1, 2 and 3 handed down on 15 May 2013, 31 May 2013 and 10 January 2014 respectively (“Decision Nos 1, 2 and 3”).  This Decision, which hopefully will be the last interlocutory ruling before the Liability Trial commences in March 2014, concerns costs.

2.The outstanding issue of costs concerns claims and/or applications involving the Misappropriation Claim and the New Shares Claim.

3.In respect of the Misappropriation Claim, on 6 November 2012, FS issued the Misappropriation Claim Summons for leave to re-amend the ASOC and to amend the witness statements of the Father and Seline both filed on 20 March 2012.  The effect of these proposed amendments is to withdraw the cause of action which I have described as the Misappropriation Claim.

4.On 21 November 2012, L Chan J granted leave for the Father to withdraw the Misappropriation Claim and to re-amend the ASOC and for FS to amend their witness statements, and he adjourned the Misappropriation Claim Summons to be heard together with various other interlocutory summonses.  The RASOC and FS’ amended witness statements were filed on 30 November 2012.  At the 1^st, 2^nd and 3^rd Hearing Days, I canvassed with the parties the remaining aspects of the Misappropriation Claim Summons, ie the consequential amendments to Ken’s RAD&RAC and Joseph’s Defence following the withdrawal of the Misappropriation Claim. This was resolved on the 3^rd Hearing Day with Mr Joffe (and Mr Wou with him), counsel for KJ, and Mr Wong (now Mr Wong SC) (and Mr Kwong with him), counsel for FS, identifying and agreeing on the consequential amendments to the RAD&RAC and the AR&ADC.

5.On 3 August 2012, Ken issued a summons to strike out parts of the Father’s ASOC and FS’ AR&ADC and also parts of the witness statements of the Father and Seline pursuant to Order 18 rule 19 of the RHC.  The striking out application concerned the Misappropriation Claim and New Shares Claim. But following the Father’s withdrawal of the Misappropriation Claim, Ken subsequently amended and re-amended his striking out summons.  The re-amended summons (ie the Striking Out Summons) filed on 28 March 2013 sought to strike out corresponding parts of the updated pleadings (ie the Father’s RASOC and FS’ AR&ADC) and the updated witness statements (ie the Father’s and Seline’s amended witness statements).

6.The impugned parts of the AR&ADC and paragraphs 18-19 of Seline’s amended witness statement which Ken sought to strike out all related to the Misappropriation Claim.  The impugned parts of the RASOC, the impugned parts of the Father’s amended witness statement, and paragraphs 20-21 of Seline’s amended witness statement which Ken sought to strike out all related to the New Shares Claim.

7.On the 1^st Hearing Day, Mr Joffe made submissions on the Striking Out Summons.  On the 2^nd Hearing Day, FS applied for leave to amend the RASOC to introduce re-amendments in relation to the New Shares Claim as per the Father’s Draft Pleading supplemented by the FBP Answers.  Without objection by Ken, I granted leave for the Father to further amend the RASOC as per the Father’s Draft Pleading and for Joseph to consequentially amend his Defence with costs of and occasioned by such application to be paid by the Father to Joseph in any event to be taxed if not agreed.  As for Ken, on the 2^nd Hearing Day, I directed him to lodge and serve Ken’s Draft Pleading and to identify which parts of his proposed amendments related to inter alia the Father’s revisions in the RRASOC concerning the New Shares Claim, the Father’s withdrawal of the Misappropriation Claim, and Ken’s own proposed amendments under the Amendment Summons.

8.As explained in paragraph 4 above, by Decision No 1 handed down on 15 May 2013, I granted leave to KJ to further amend the RAD&RAC in the manner marked in purple as per Ken’s Draft Pleading, and leave to FS to consequentially amend the AR&ADC, and I also directed FS to file and serve their RAR&RADC with (a) consequential amendments pursuant to the RRAD&RRAC and (b) deletions of paragraphs 8, 10(2) (1^st sentence), 10(2A) (2^nd sentence), 10(2B), 10(2C) and 11(3A) (save for the following words: “… the Plaintiff makes no admission as to whether the 1^st Defendant used his personal financial means or Luen Tat’s financial means to fund the proceedings under HCCW 497/2009 …” (which were consequential amendments following the removal of the Misappropriation Claim).  I also struck out paragraphs 18-19 of Seline’s amended witness statements consequential upon the Father’s withdrawal of the Misappropriation Claim.

9.Mr Joffe and Mr Wong (now Mr Wong SC) also agreed that costs of and occasioned by the Misappropriation Claim Summons be paid by FS to Ken in any event to be taxed if not agreed.  But such order has not been formally granted pending the disposal of the contested issue of costs referred to in the paragraph below.

10.The remaining issue of costs in relation to the Misappropriation Claim has two aspects:

(a) Ken sought his costs of and occasioned by the Misappropriation Claim. Such costs do not concern the application for withdrawal of such claim or the consequential amendments to the pleadings and witness statements as a result of such withdrawal, which costs had already been dealt with. Ken claimed that as a result of the Father’s withdrawal of the Misappropriation Claim, he should be entitled to costs of and occasioned by such abandoned cause of action. The Father disputed this, and suggested that costs be reserved for resolution at the Liability Trial.

(b) Ken also sought costs of and occasioned by the Striking Out Summons in respect of the impugned parts of the AR&ADC (now RAR&RADC) and paragraphs 18-19 of Seline’s amended witness statement concerning the Misappropriation Claim. FS disputed this, and suggested there be no order as to such costs.

I heard submissions from Mr Joffe on this remaining costs issue at the 1^st Hearing Day, and further submissions from Mr Wong SC in opposition and Mr Joffe in reply at the hearing on 26 September 2013 (“Costs Hearing”).

11.As for the New Shares Claim, Ken sought costs of and occasioned by the Striking Out Summons in respect of the impugned parts of the RASOC, the impugned parts of the Father’s amended witness statement, and paragraphs 20-21 of Seline’s amended witness statement. FS disputed this.

12.For costs in relation to the Striking Out Summons, Mr Joffe and Mr Wong SC agreed that the impugned parts of FS’ amended witness statements would stand and fall together with the impugned parts of FS’ pleadings.  In the circumstances, it would be unnecessary to give independent consideration to Ken’s criticisms against FS’ amended witness statements since any determination as to the viability of the Misappropriation Claim and New Shares Claim as pleaded would be determinative of the corresponding witness evidence by way of witness statements.

13.Mr Joffe and Mr Wong SC also agreed that in respect of the argument on the aforesaid cost dispute, costs should follow event.  In respect of the Striking Out Summons, Mr Wong SC went on to clarify that FS would not resist KJ’s claim for costs as set out in paragraphs 10(b) and 11 above if the impugned parts in the Father’s pleadings in respect of the Misappropriation Claim and New Shares Claim were either liable to be struck out or only salvageable by further amendments thereto. In the circumstances, the crucial issue is whether or not the Misappropriation Claim and New Shares Claim as originally pleaded were viable causes of action without assistance by further amendment of pleadings.  It is only if they were that FS would escape liability for costs as sought by Ken.  However, if they were liable to be struck out or if their viability depended on further amendments of pleadings, then FS would have to bear the aforesaid disputed costs. Hence, for the purpose of this Decision, I shall focus on the original pleas.

II.  BACKGROUND

14.As regards FS’ and KJ’s respective case as originally pleaded, brief summaries can be found in paragraphs 69-90 and 91-113 of Decision No 1. I shall not repeat them here save as required.

III. COSTS – MISAPPROPRIATION CLAIM

15.In paragraphs 29-31 of the ASOC, the Father raised the Misappropriation Claim against Ken for his alleged misappropriation of funds/assets allegedly belonging to Luen Tat and/or for his alleged wrongful instruction to Luen Tat’s employees that Luen Tat would cease operations soon and it was no longer necessary for them to work for Luen Tat. The Father claimed that such wrongful conduct injured his interest in Luen Tat and/or diminished the value of his beneficial shareholdings in Luen Tat.

16.Mr Joffe agreed that although the general rule is for the court to order a plaintiff to pay the defendant’s costs upon obtaining leave to discontinue a cause of action, the court retains a wide discretion as to costs and can depart from the general rule if there are exceptional circumstances.[1]  He argued that in all the circumstances, the Father failed to show any ground let alone exceptional circumstances to depart from the usual rule.

17.Ken argued that in respect of the Misappropriation Claim, they should have the costs as sought in paragraph 10 above because such claim was an obviously unsustainable reflective loss claim.  In Waddington Ltd v Chan Chun Hoo,[2] the Court of Final Appeal affirmed the no reflective loss principle which debarred a shareholder from suing to recover a loss which was merely reflective of the loss said to be suffered by the company.

18.Here, the Father through Allied Ever was merely a shareholder of Luen Tat, so Mr Joffe submitted that he could not seek relief for alleged misconduct against the properties/assets of Luen Tat. Even if a case were made out against Ken, the proper plaintiff would have been the Liquidators who had already commenced action against Seline and Yuen Hing in HCA 1428/2012, against inter alia Richard, Ken and the Father in HCA 1952/2012, against Richard, Ken and the Father in HCA 1996/2012, and against Ken, Seline, Richard and the Father in HCA 2137/2012.

19.The Father argued that when Luen Tat was wound up pursuant to the order by Harris J dated 6 July 2010, the court made no factual findings in respect of Ken’s wrongdoings in misappropriating Luen Tat’s assets, so there would be no risk of inconsistent factual findings in HCCW497/2009 and the present action, and no risk of wasting judicial resources.[3]  Mr Wong SC submitted that the present action and HCCW497/2009 served different purposes.  The former concerned the Father’s attempt to recover his shareholdings in Luen Tat, which he claimed were held on trust for him.  The latter concerned the management and affairs of Luen Tat, and the Father succeeded in seeking the relief he prayed for when Harris J granted a winding up order to wind up Luen Tat. Mr Wong SC submitted there was no reason why the Father could not rely on matters averred in HCCW 497/2009 in the present action.

20.In my view, these arguments do not really assist the Father unless he can surmount the no reflective loss principle.  If the Misappropriation Claim is barred by such principle, now that Luen Tat has been wound up, it will be up to the Liquidators to decide whether or not to pursue and/or continue to pursue such claim against Ken.

21.Mr Wong SC argued that Ken’s reliance on the no reflective loss principle overlooked the exception that such principle might not apply when a wrongdoer had disabled the company from bringing claims against himself. He turned to Giles v Rhind [4] in support.  In particular, he relied on the following observations by Waller LJ at p 633:

“33. In Johnson v Gore Wood & Co there was no difficulty about the company having a cause of action and being able to recover on the cause of action. I also think that in the light of Lord Bingham of Cornhill’s observation, at p 36C, that it is important for the ‘court [to] be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied compensation’, it is clear that there had been nothing to stop the company continuing with its action if it had so chosen.

34. One situation which is not addressed is the situation in which the wrongdoer by the breach of duty owed to the shareholder has actually disabled the company from pursuing such cause of action as the company had. It seems hardly right that the wrongdoer who is in breach of contract to a shareholder can answer the shareholder by saying, ‘The company had a cause of action which it is true I prevented it from bringing, but that fact alone means that I the wrongdoer do not have to pay anybody.’”

Similar sentiment was expressed by Chadwick LJ at p 643 when he said that the principle laid down in Johnson v Gore Wood & Co [5] did not apply where the claim is made against:

“a wrongdoer who, in breach of his contract business, with the intention that the company should be so denuded of funds that it cannot pursue its remedy against him, and who gives effect to that intention by an application for security for costs which his own breach of contract has made it impossible for the company to provide, is entitled to defeat a claim by the shareholders on the grounds that their claim is “trumped” by the claim which his own conduct was calculated to prevent, and had in fact prevented, the company from pursuing.”

22.Mr Wong SC submitted that the above observations must be correct bearing in mind that the purpose of the no reflective loss principle was to avoid double recovery and to ensure that the company’s assets were preserved for creditors.  However, in Pico North Asia Holdings Limited v Cheung Yuk Ting Linda,[6] Fok JA (as he then was) explained that the principle is not rooted simply in the avoidance of double recovery in fact; it extends to heads of loss which the company could have claimed but has chosen not to and therefore includes the case where the company has settled for less than it might.

23.Despite Mr Wong SC’s persuasion that the Giles v Rhind exception would be relevant, I note that Lord Millett NPJ in discussing such exception in Waddington Ltd held (and other members of the court agreed) it did not exist in Hong Kong and those English authorities establishing and affirming such exception should not be followed in Hong Kong.

24.In Giles v Rhind, the company, which was in administrative receivership, brought proceedings against the wrongdoing director, who demanded and obtained an order for security for costs which successfully stifled the proceedings.  When the company discontinued the action a shareholder brought proceedings on its own behalf to recover its own loss. It was conceded that this was reflective loss, but the English Court of Appeal permitted the action to proceed since some way was needed to allow the company to recover damages despite the discontinuance of its own proceedings. Lord Millet NPJ in Waddington Ltd [7] said:

“86. …… If the company had not been in administrative receivership, the simplest course would have been to allow the shareholder to bring a derivative action. As it was, this course would not have been open, for the company was no longer under the control of the wrongdoer. But the court could have given the shareholder leave to apply to direct the administrative receiver to bring the action if the shareholder was willing to fund it. The discontinuance should not have been an obstacle to either course. There is no logic in allowing such an action where the wrongdoers are in a position to stifle any proceedings by the company, and disallowing it where they have succeeded in doing so.

87.The Court of Appeal may have assumed that the principle established in Johnson v Gore Wood & Cois not engaged where the company has lost the right to sue. But the House of Lords expressly applied the principle not only where the company had the right to sue but also where it had declined or failed to sue. There was nothing new in this. In Prudential (supra) it had been submitted that a personal action at the suit of the shareholder will lie to recover reflective loss if the company’s remedy is for some reason not pursued. The Court of Appeal countered the argument (at p.223) by posing the rhetorical question: “How can the failure of the company to pursue its remedy against the robber entitle the shareholder to recover for himself?”

88. The facts of the present case do not bring it within measurable distance of the exception described in Giles v Rhind. But Barma J went further and held that the supposed exception does not exist, and I respectfully agree with him. The case has been followed in England at first instance in Perry v Day [2005] 2 BCLC 405 and referred to without enthusiasm by the Court of Appeal in Day v Cook [2002] 1 BCLC 1 and Gardner v. Parker [2004] 2 BCLC 554. But in all these cases the court was bound by the decision in Giles v Rhind. In my opinion Giles v Rhind and Perry v Day were wrongly decided and should not be followed in Hong Kong.” (my emphasis)

25.In any event, I am of the view that the present position did not bring the Misappropriation Claim within the Giles v Rhind exception. Mr Wong SC submitted that when the present action commenced in August 2009, Ken as the wrongdoer was in control of Luen Tat in that he was the sole director and his corporate vehicle Joesh held 51% shareholding in Luen Tat, and the Father and/or his corporate vehicle Allied Ever were unable to bring proceedings in the name of Luen Tat. Mr Wong SC suggested the Father was therefore entitled to raise the Misappropriation Claim, which explained why Ken did not mount any striking out application until after Harris J wound up Luen Tat on 6 July 2010 in HCCW497/2009 and the Liquidators were appointed (ie when Ken ceased to have control of Luen Tat).  The Striking Out Summons was issued only on 3 August 2012 upon such change of circumstances.  But in my view, even if Ken was in control of Luen Tat at the material time, no explanation was forthcoming as to why the Father through his corporate vehicle Allied Ever as minority registered shareholder of Luen Tat could not have applied to bring derivative action on behalf of Luen Tat against Ken.  A more drastic course of action was to apply to wind up Luen Tat and allow the Liquidators to bring action against Ken on behalf of Luen Tat for the benefit of the creditors of the company as they see fit.  This latter course of action was what eventually happened. In all the circumstances, the Giles v Rhind exception would not have assisted the Father.

26.But that is not the end of the matter for Mr Wong SC still had a bagful of arguments to say that the no reflective loss principle was inapplicable.

27.First, Mr Wong SC submitted Ken failed to highlight that his counterclaim for the balance of his profit share up to November 2008 and for the cumulative profits of the Group as from 1 December 2008 (which Ken said wholly belonged to him) that he would pursue at trial was a mirror image of his defence to the Misappropriation Claim.  He claimed it would be unfair for Ken to say the Father could not claim for the monies/assets Ken misappropriated whilst Ken was able to and did claim that such monies/assets belonged to him in his counterclaim, and there was no reason for the Father to pay for part of the cause of action relating to the Misappropriation Claim.

28.The short answer to this proposition is that the Father was of course entitled to defend the counterclaim, and after the Liability Trial the Father might well recover costs of the counterclaim if his defence contentions were upheld by the court.  But at this stage pending trial, there was no certainty that Ken would eventually be allowed costs of his counterclaim.  In any event, the Father’s defensive entitlement to oppose the counterclaim and to seek costs in respect of such defence would not translate into a right to bring an offensive attack to pursue the Misappropriation Claim if such claim was reflective of the loss said to be suffered by Luen Tat.  The Misappropriation Claim pleaded that Ken’s wrongful conduct “injured [the Father’s] interest in Luen Tat and/or diminished the value of [the Father’s] beneficial shareholdings in Luen Tat”,[8] but Ken’s counterclaim for his profit shares was a personal claim and not a claim via Luen Tat.  I agree with Mr Joffe that the Misappropriation Claim as pleaded is reflective loss par excellence in that such plea acknowledged that the alleged misappropriation of Luen Tat’s monies/assets was neither the Father’s personal loss nor injury to his personal assets.

29.Mr Wong SC then argued that the Father’s claim was based on a trust in his favour over 100% shareholding of Luen Tat and his personal right to decide how to distribute profits.  In my view, whilst the Father’s overall claim for declarations as to his ownership of the shares in Luen Tat and Pak Tat and for orders to transfer such shares held by KJ back to him might well be based on such contentions, the Misappropriation Claim was wholly different in that it sought monetary relief and/or equitable compensation for reflective loss.  It was Luen Tat that had the right to recover its monies/assets which had been misappropriated, and once recovered it would be a matter of debate between the Father and KJ to be resolved at the Liability Trial as to whether or not the Father had a personal right to decide how to distribute the profits of Luen Tat.  Even a 100% beneficial shareholder of Luen Tat (as the Father claimed himself to be) could not overcome the corporate personality to seek recovery of Luen Tat’s monies/assets so that he could distribute Luen Tat’s profits as he saw fit.

30.In his written submissions, Mr Wong SC referred to the proposition in Johnson v Gore Wood & Co that where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so) even though the loss is a diminution in the value of the shareholding.  At the Costs Hearing, Mr Wong SC said he would not rely on such proposition.  But since Mr Joffe canvassed this in his submissions, I will deal with it briefly.

31.In Johnson v Gore Wood & Co, Lord Bingham of Cornhill said as follows:[9]

“…… (1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company’s assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. …… (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. …… (3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by a breach of duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other ……

These principles do not resolve the crucial decision which a court must make on a strike-out application, whether on the facts pleaded a shareholder’s claim is sustainable in principle, nor the decision which the trial court must make, whether on the facts proved the shareholder’s claim should be upheld. On the one hand the court must respect the principle of company autonomy, ensure that the company’s creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation. The problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether …… the loss is “merely a reflection of the loss suffered by the company”. In some cases the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of the shareholding attributable solely to depletion of the company’s assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for. At the strike-out stage any reasonable doubt must be resolved in favour of the claimant.” (my emphasis)

It was suggested that the above principles in Johnson v Gore Wood & Co were not affected by the Court of Final Appeal decision in Waddington Ltd. Mr Wong SC also referred to Waller LJ’s observations in Giles v Rhind [10] which reiterated the aforesaid second and third principles in Johnson v Gore Wood & Co.

32.Again, the short answer is that, for the reasons set out in paragraph 28 above, I do not see the present situation as falling within the second proposition that Luen Tat had suffered a loss but had no cause of action to sue for recovery of such loss.  Plainly, Luen Tat would have been entitled whether by derivative action before it was wound up or via the Liquidators after it was so wound up to seek recovery of such loss. In my view, whilst there is no quarrel with the principles in Johnson v Gore Wood & Co, it would not assist in the present case.

33.Secondly, Mr Wong SC argued that Ken had failed to discharge the burden that Luen Tat had an identical cause of action covering exactly the same claim as the Misappropriation Claim. Mr Wong SC added that in considering whether such burden was discharged, likely defences should be taken into account.  Mr Wong SC further submitted that since Ken’s pleadings did not identify any cause of action belonging to Luen Tat, and Ken’s stance (as evident from his counterclaim) was that Luen Tat did not have any such cause of action, the no reflective loss principle would not apply.

34.Mr Wong SC cited Shaker v Al-Bedrawi.[11] But in that case, Peter Gibson LJ accepted that if the claim is for an account that is in substance a claim to monies to which the company has a claim against the wrongdoer, such claim would be barred under the no reflective loss principle, and it matters not that the causes of action are different or the company has not yet brought proceedings.[12] The learned judge went on to say that the no reflective loss principle:

“83. …… does not preclude an action brought by a claimant not as a shareholder but as a beneficiary under a trust against a trustee for a profit unless it can be shown by the defendants that the whole of the claimed profit reflects what the company has lost and which it has a cause of action to recover. As the Prudential principle is an exclusionary rule denying a clamant what otherwise would be his right to sue, the onus must be on the defendants to establish its applicability. Further, it would not be right to bar the claimant’s action unless the defendants can establish merely that the company has a claim to recover a loss reflected by the profit, but that such claim is available on the facts. If in the present case it can be shown that the $6 million was misappropriated from ANA Inc or unlawfully distributed so that ANA Inc was entitled to the whole of the $6 million, we would accept that the Prudential principle applied to bar Mr Shaker’s action.

84. However, for the reasons already given, that has not been, and cannot be without a trial be shown. It is possible that at least part of the $6 million was lawfully taken by Mr Bedrawi. Accordingly we respectfully disagree with the conclusion of the judge that the Prudential principle applies to prevent Mr Shaker proceeding against Mr Bedrawi in relation to the proceeds of sale.” (my emphasis)

35.Mr Wong SC also referred to Perry v Day [13]in which Rimer J said:

“…… I recognise that when, in litigation such as this, the court has to determine whether the company had its own claim against the wrongdoer, it is not concerned to conduct any sort of notional trial of the alleged claim. But, whilst I have no developed argument on this point, my provisional view is that it must at least be satisfied on the evidence whether or not the company had a claim which was likely to succeed, an exercise which involves considering not just the case which the company could have made, but the defences which could have been raised to it.”

36.In Pico North Asia Holdings Limited, the defendants applied to strike out the statement of claim on the ground that such claim offends against the no reflective loss principle. In that case, it was suggested that the losses claimed by the plaintiff might well be greater than those recoverable by the companies in the derivative action, so the plaintiff’s claim was unlikely to be merely reflective of the companies’ loss.  Fok JA (as he then was) said as follows:

“44. It is important to note that an essential difference between Shaker’s case and Perry v Day is that in those cases no derivative claim had yet been advanced. Hence, in those cases, the courts were speculating as to what the company’s claim against the relevant defendants might be. Here, the Derivative Action has been commenced and API and AHI’s case against the defendants fully pleaded.

45.Furthermore, in Shaker’s case it was not part of the plaintiff’s case that the abstraction of monies from the company was in breach of his duty to the company or an unlawful distribution or otherwise involved a breach of duty by Mr Al-Bedrawi to the company (see per Peter Gibson LJ at §60). In those circumstances, the court held that the defendants had to satisfy the court that it was the inevitable conclusion from the facts which were admitted or agreed to be assumed that the abstraction of monies was a breach of duty by Mr Al-Bedrawi to the company.

46.Similarly, in Perry v Day, the company had no cause of action against Mrs Day for the relevant loss (see §69).

47.That is to be contrasted with the position here where, in the Derivative Action, it is pleaded that the very same conduct complained of by the plaintiff in this action constitutes breaches of fiduciary duty owed by the defendants to API and AHI and that, by reason of such breaches, those companies have suffered loss and damage (see AmSoc in Derivative Action §§78-81). In this context, assuming the facts pleaded in the Derivative Action are established, I do not think the dictum of Laskin J in Canadian Aero Service Ltd v O’Malley (1973) 40 DLR (3rd) 371 at p.382, relied upon by Mr Burns, would lead to the conclusion that the activities complained of did not constitute a breach of fiduciary duty on the part of the defendants as a director and former director respectively of API and AHI.

48.I therefore do not accept that this, fourth, point advanced on behalf of the plaintiffs demonstrates that the no reflective loss principle cannot operate in this case.  On the contrary, I am satisfied that it has been demonstrated clearly by the defendants that the loss sought to be claimed by the plaintiff in this action is purely reflective of loss suffered by API and AHI, which loss is being claimed by those companies in the Derivative Action. A comparison of the claims made in this action and the Derivative Action shows, in my opinion, that the claims are for the same loss.”

37.In Shaker, there was concern whether at the stage of the preliminary issue it was an inevitable conclusion on the facts and on an issue over foreign law that the whole of the claimed profits reflects what the company has lost, and given such doubt it would not be right to bar the claimant’s claim.  But Peter Gibson LJ recognised that if it can be shown that the misappropriated monies were from the company or the company was entitled to those monies, the no reflective loss principle would apply to bar the claimant’s claim. I do not find Perry to be saying anything different in this respect even though this authority must be viewed with caution since the Court of Final Appeal held that Perry was wrongly decided and should not be followed in Hong Kong.

38.Turning to the present situation, it is a far cry from the uncertain situation in Shaker. For reasons explained in paragraph 28 above, the Misappropriation Claim as pleaded plainly shows that Luen Tat would have a cause of action in respect of such claim, and if it had been brought by the Liquidators or in a derivative action before it was wound up, it would have extinguished the Misappropriation Claim.

39.I am also unable to accept Mr Wong SC’s submission that one looks to the alleged wrongdoer’s defence allegations to determine whether the shareholder’s claim falls foul of the no reflective loss principle.  If that were the case, the no reflective loss principle can be easily circumvented whenever the wrongdoer denies liability or wrongdoing.  In my view, it is only when the alleged reflective loss claim itself inherently causes some anxiety or when the issue of whether or not the alleged loss is reflective loss depends on how the evidence turns out that one may argue against the applicability of the no reflective loss principle.  If the defence merely denies wrongdoing without alleging any factual underpinning that goes to the question of whether or not the loss claimed is reflective of the loss said to be suffered by the company, its relevance to the issue is doubtful.

40.It must be remembered that there are two aspects of costs arising out of the withdrawal of and the application to strike out the Misappropriation Claim that are in issue.  I agree with Mr Joffe that for the former costs it is not for Ken to establish the applicability of the no reflective loss principle but for the Father to justify why costs would not follow event.  For the latter costs, Mr Joffe submitted that in a striking out application or trial of preliminary issue, one would focus on the pleadings or agreed/admitted facts.  He referred to the passage in Johnson v Gore Wood & Co set out in paragraph 31 above in which Lord Bingham of Cornhill drew a distinction between a strike out application when one turned to the pleadings and a trial when one turned to the evidence.  This is also borne out in Shaker which concerned determination of a preliminary issue in which “unusually” the court heard some oral evidence, [14] in Perry which concerned a preliminary issue as to whether the claimant’s loss merely reflected loss caused to the company in respect of which Rimer J heard a limited amount of oral evidence and assumed that certain allegations of facts in the particulars of claim were capable of being proved at trial, and in Pico North Asia Holdings Ltd which concerned a striking out application.[15]  Here, as explained in paragraph 28 above, the Father’s own pleadings made it abundantly clear that the Misappropriation Claim was a claim reflective of Luen Tat’s loss.

41.Ultimately, the question here is whether the Misappropriation Claim is sustainable or not.  I have no doubt that it infringed the no reflective loss principle, and as such there was no reasonable cause of action and it had been appropriately withdrawn.  It was also liable to be struck out. In this respect, I can do no better than to refer to Lord Millett’s speech in Johnson v Gore Wood & Co where he said as follows:[16]

“…… If the shareholder is allowed to recover such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company’s creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder. ……” (my emphasis)[17]

42.On such basis, there is no sufficient reason why the Father should not bear the costs sought by KJ under paragraph 10 above. However, for completeness, I will mention some other points raised by counsel.

43.Ken argued that the Father had plenty of warning as to the fundamentally misconceived nature of the Misappropriation Claim, and there was no excuse for not arresting such erroneous claim earlier than 21 November 2012 when it was formally withdrawn:

(a) In KJ’s Listing Questionnaire dated 12 April 2012, KJ had already indicated their intention to challenge the Father’s locus to sue Ken in respect of the Misappropriation Claim.

(b) The Father applied by summons dated 10 May 2012 to re-amend the ASOC by adding further particulars of misconduct[18] and a further sub-paragraph which stated that the Father repeated the wrongful conduct and/or breach of fiduciary duties on Ken’s part as already pleaded in the AR&ADC.[19]

(c) By a letter dated 15 May 2012, KJ Solicitors wrote to FS Solicitors to inform them that Ken would oppose such summons on the basis inter alia that it was trite under the principles in Waddington Ltd that the Father as a shareholder of Luen Tat was barred from suing to recover an alleged loss which was merely reflective of the loss allegedly suffered by Luen Tat, and specifically he was barred from recovering damages for a diminution in the value of his shares. KJ Solicitors stated that the Father held the shares in Luen Tat through Allied Ever, and similar allegations were made by the Father through Allied Ever pursuant to section 168A of the Companies Ordinance Cap 32 in HCCW 497/2009.

(d) In paragraph 62 of the written submissions dated 20 July 2012 by FS’ counsel for the global CMC before Harris J on 25 July 2012, it was said that “bearing in mind that liquidators have already been appointed, with a view to save the Court’s resources and to obtain an early trial date, the Father, as a matter of effective case management, is now agreeable not to argue these misappropriation claims at trial”.

(e) By a letter dated 23 August 2012 (ie after the issuance of the original Striking Out Summons) to KJ Solicitors, FS Solicitors confirmed that the Father indicated at the global CMC that he would withdraw the summons.

(f) On 6 September 2012, Master Ho granted an order by consent for the Father’s summons to be withdrawn.

44.Ken argued that the Striking Out Summons was necessary and proper since the Misappropriation Claim remained alive until its formal withdrawal at the hearing before L Chan J on 21 November 2012, and Ken had to meet such claim until it was formally withdrawn.  At the hearing on 21 November 2012, harking back to paragraph 43(d) above, the Father confirmed that he was not minded to pursue the Misappropriation Claim at trial “bearing in mind that liquidators have been appointed [for Luen Tat], …… and as a matter of effective case management”. It was suggested that the eventual withdrawal of the Misappropriation Claim and the proposal to re-amend the ASOC to put such withdrawal into effect were plainly attempts made to pre-empt the Striking Out Summons which was also before L Chan J and to avoid an adverse costs order.  Mr Joffe submitted that this was borne out by a comparison of the impugned parts of the ASOC and the parts now removed by amendments initiated by the Father. He argued that these machinations by the Father would not aid his attempt to escape liability to pay costs for his erroneous claim when he chose to turn a blind eye to the grounds advanced by Ken for the Striking Out Summons based on the no reflective loss principle and the warnings given by Ken.  Mr Joffe said that Seline mischaracterised Ken’s reliance on the no reflective loss principle as an abuse of process for the Father to make a similar claim in the present action when the Father made the same misappropriation complaints in HCCW 497/2009.[20]

45.Mr Wong argued that it was only as a result of change in circumstances (ie the winding up of Luen Tat and the appointment of the Liquidators) and the Father’s wish to have an early trial date given his poor health and the complexity of the Misappropriation Claim (which would involve forensic accounting and be better pursued by the Liquidators) that he decided not to pursue the Misappropriation Claim in the present action. As explained above, the Father through his counsel informed Harris J at the global CMC on 25 July 2012 that he intended to drop the Misappropriation Claim.  But a week later on 3 August 2012 Ken issued the Striking Out Summons that targeted inter alia the Misappropriation Claim. In the 5^th affirmation of Seline filed on 10 October 2012, she claimed it was difficult to understand why Ken would bother to issue the Striking Out Summons on 3 August 2012 when the Father had made clear by counsel’s written submissions for the global CMC that the Misappropriation Claim would not be pursued at trial.  The Father claimed that the Striking Out Summons in respect of the Misappropriation Claim was wholly unnecessary and opportunistic (given the unequivocal indication by the Father of dropping such claim), and was intended to cause delay and generate costs. Indeed, upon leave being granted for withdrawal of the Misappropriation Claim by L Chan J on 21 November 2012, the Father was able to and did set the present action down for trial and thereafter obtained a trial date.

46.Ken said (and I agree) it could not be right to say the Misappropriation Claim was withdrawn because the Liquidators had been appointed and the Father had health and age concerns. In fact, the Liquidators were appointed in July 2010, long before the global CMC in July 2012 and the withdrawal of the Misappropriation Claim in November 2012.  Yet when FS made their witness statements in March 2012, it was plain that the Father was still determined to pursue the Misappropriation Claim. Even in May 2012, the Father by the summons referred to in paragraph 43(b) above was still determined to add particulars and pleas to bolster the Misappropriation Claim by proposing to re-amend the ASOC.  The Father only abandoned such summons in August 2012 and withdrew the Misappropriation Claim in November 2012.

IV.  COSTS – NEW SHARES CLAIM

47.In paragraph 22 of the RASOC, it was averred that in/around 1995 Ken and Richard restructured the shareholding in Luen Tat “with the approval of [the Father]” in that:

(a) the authorised capital of Luen Tat was increased “by creating an additional 1,000 “new ordinary shares” of HK$100 each”;

(b) the existing 15,000 ordinary shares which were held by Ken and Richard “on trust for and on behalf of [the Father]” be converted to “5% non-voting deferred shares”;

(c) 51 “new ordinary shares” be allotted to Joesh (wholly owned and controlled by Ken) and 49 “new ordinary shares” be allotted to Full Moon (a BVI company wholly owned and controlled by Richard); and

(d) no consideration was paid by Full Moon.

48.In paragraph 23 of the RASOC, it was asserted that “[for] the avoidance of doubt, …… at all material times, each of the aforesaid “new ordinary shares” …… were held on trust for and on behalf of [the Father] since their creation”.

49.Mr Joffe submitted that paragraph 23 of the RASOC and the pleas for consequential reliefs in paragraphs 40-41 of the RASOC were liable to be struck out since there was insufficient and/or incomplete plea for a trust claim.  He reminded that the Father introduced substantial new amendments to his pleadings after the 1^st Hearing Day, and that they were necessary amendments in order to make good the New Shares Claim. In my view, it is unnecessary for me to dwell on the recent amendments because the issue before me is whether the New Shares Claim as originally pleaded was sustainable. If it were not or if it were only salvageable by further amendments to the pleadings, then Ken would be entitled to costs of the Striking Out Summons in respect of the New Shares Claim.

50.There is no dispute over the trite principles for striking out applications. Hong Kong Civil Procedure 2014 provides inter alia as follows:[21]

“…... It is only in plain and obvious cases that the court should exercise its summary powers to strike out …… any pleading under this rule. …… Disputed facts were to be taken in favour of the party sought to be struck out. Nor should the court decide difficult points of law in striking out proceedings. The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out. …… The mere fact that the case is weak and not likely to succeed is no ground for striking it out ……

It is for the party seeking to strike out …… pleading to demonstrate that the case is a plain and obvious one in which the other party’s claim is bound to fail. ……

…… This rule also empowers the court to amend …… any pleading.  If a statement of claim does not disclose the cause of action relied on, an opportunity to amend may be given, ……  However, unless there is reason to believe that the case can be improved by amendment, leave will not be given.  Or where the amendments would be far-reaching and so radical as to amount to a totally new pleading which would probably provoke a fresh application to strike out, the correct course is to strike out. ……”

51.Pursuant to Order 18 rule 19(2) of the RHC, the court will not consider any affirmation evidence to decide whether the pleadings disclose any reasonable cause of action.  A reasonable cause of action means a cause of action with some chance of success where only the allegations in the pleadings are considered.[22]

52.Mr Joffe contended that the creation of trust required inter alia:[23]

(a) There be intention to create a trust and the essentials for such creation are: (i) property or rights capable of being subjected to the trust, (ii) a declaration of, or disposition on, trust by a person competent to create a trust, or an obligation for valuable consideration to create a trust, (iii) certainty of property and objects so that the trust is administratively workable; and (iv) compliance with the statutory requirements regarding evidence, the rule against remoteness and the rule against perpetuities.

(b) There be property or interest in property which a person can, at law and in equity, transfer or assign, or dispose of inter vivos, which is the subject matter of the trust.

(c) The objects of a trust must be indicated with sufficient precision, for a valid trust must be one in which the court can control and execute.

(d) There be a beneficiary or beneficiaries of the trust.

53.Mr Joffe submitted there could not be any trust in respect of the 51 “new ordinary shares” in favour of the Father as pleaded or at all, so the New Shares Claim was doomed to fail and was liable to be struck out. He argued that looking at paragraphs 22-23 of the RASOC the Father failed to plead any declaration of trust or any material facts that would justify the bare (and inadequate) assertion that the shares were or had ever been held on trust for the Father.  It was said that such lacunae were not addressed in the pleadings or in the affirmation evidence filed for the Striking Out Summons; Seline’s 5^th affirmation merely stated that she did not understand Ken’s application.

54.Mr Wong SC submitted that the reason why Seline did not understand Ken’s application to strike out the New Shares Claim was because notwithstanding the requirements in paragraph 5 of Practice Direction 19.1, Ken failed to disclose the basis of his complaint of no reasonable cause of action until Mr Joffe’s written submissions for the Striking Out Summons were served.  Mr Wong SC complained that this was unacceptable since litigation was not about “playing a game of snakes and ladders”,[24] especially in light of the underlying objectives after the Civil Justice Reform.[25]

55.Mr Joffe referred to my Reasons for Decision in Ng Fui v Kam Chi Ming & ors[26] in which I said that non-compliance with Practice Direction 19.1 should not prevent the court from striking out a claim (or counterclaim in that case) or anything in such pleading if a case for striking out was plain and obvious, but in that case the other party did not take issue over any lack of notification pursuant to Practice Direction 19.1.  Here, even though Mr Wong SC raised complaint, he was able to put in written submissions and to fully address Mr Joffe’s arguments. In my view, there is no substantive prejudice or concern arising from these procedural issues, but it does not mean that in another case the court will smile kindly on procedural default if it causes concern or prejudice.

56.I agree with Mr Wong SC that in a striking out application it would inappropriate to take a blinkered view of paragraphs 22-23 of the RASOC without reading the pleading as a whole, especially when Ken had to show that it was a plain and obvious case for striking out.  For the reasons set out below, I am unable to say that the New Shares Claim was doomed to fail.

57.Mr Wong SC argued (and I accept) that one could not take a narrow view of the “new ordinary shares” and “5% deferred voting shares” allotted upon the restructuring of Luen Tat’s shareholdings in 1995 without putting such allotment in the contextual background as pleaded in paragraphs 8-22 of the RASOC that set out the history of how a trust arose in respect of all shareholdings in Luen Tat.

58.I set out below Mr Wong SC’s useful summary of the relevant pleas in the RASOC:

(a) As a result of a copyright dispute with the manufacturer of “Charles Jourdan” goods in/about 1986, the Father and Mother arranged for Ken and his wife to hold all Luen Tat shares on trust for the Father and to act in accordance with the Father’s instructions. The Father averred that at all material times, he “did have the intention to create and did constitute a trust over the shares in Luen Tat in favour of himself and retains beneficial ownership over the entire shareholdings in Luen Tat. The same was made known and/or declared to [Ken and his wife] at the time of transferring the above shares to them respectively”.[27] The Father further averred that at all material times, Ken and his wife “also understand and understood that they are and were merely trustees holding the shares in Luen Tat for and on behalf of [the Father] and that they had no beneficial interest in those shares”.[28]

(b) In May 1993, at the Father’s instructions, 49% of the shares of Luen Tat was transferred to Richard for no consideration. As a result, Ken and Richard respectively held 51% and 49% of Luen Tat’s shares in trust for the Father.

(c) In 1995, with the Father’s approval, Ken and Richard restructured Luen Tat’s shareholdings for tax planning and emigration purpose so that the existing ordinary and unallotted shares were converted to “5% non-voting deferred shares”, and 51 and 49 “new ordinary shares” were allotted to Joesh (Ken’s corporate vehicle) and Full Moon (Richard’s corporate vehicle) respectively.

(d) All shares of Luen Tat, including the “5% non-voting deferred shares” and the 51 and 49 “new ordinary shares” held by Ken and Richard respectively were held on trust for the Father.

59.In my view, it is at least arguable on the pleadings that the 51 “new ordinary shares” held by Ken’s corporate vehicle Joesh was not something completely new that came into existence in 1995 separate and distinct from the original trust in favour of the Father.  Upon reviewing the RASOC as a whole, whilst the New Shares Claim could have been more clearly worded to put the matter beyond any doubt, it does not mean that the existing pleas were so defective that the Father’s case was unknown.  I agree with Mr Wong SC that the reality (as evident from the RASOC as a whole) was that the 51 and 49 “new ordinary shares” were derived from the pre-existing 51/49 trust arrangement between the Father on one hand and Ken and Richard on the other hand.  Since Ken did not argue that the original trust was not a good plea, it is, in my view, at least arguable on the pleadings that the purpose of the restructuring under the Father’s approval was to render the original Luen Tat shares useless and to issue a new lot of shares to the corporate vehicles of Richard and Ken in the same ratio to reflect the original trust arrangement simply for the purpose of tax planning and emigration. There was no suggestion on the pleadings that the original trust over Luen Tat shares had ceased, and it must be arguable on the pleadings that Ken through Joesh continued to hold 51% shareholding in Luen Tat for the Father after the restructuring, which arrangement was still based on the trust that was created way back in 1986. In the circumstances, I am not persuaded that the lack of a plea of fresh declaration of trust is fatal.

60.I bear in mind Mr Wong SC’s reminder that the “new ordinary shares” of Luen Tat had voting rights, so if the Father could not claim back the 51 “new ordinary shares” the necessary implication would be the trust over Luen Tat’s shareholdings would be defeated and Ken would become the majority shareholder controlling 51% voting rights in Luen Tat following a restructuring which the Father approved merely for tax planning and emigration purpose, which in turn was against the whole thrust of the pleas and the reliefs sought in the RASOC.  It is a necessary plank of the Father’s case, which I am persuaded Ken must know from the detailed pleadings, that the “new ordinary shares” were imbued with a trust in the Father’s favour.

61.On such basis, there is no need for me to consider the following legal propositions which Mr Wong SC relied on to bolster his contention that no express declaration of trust was required in respect of the 51 “new ordinary shares” of Luen Tat, but I shall deal with them briefly since they had been canvassed in arguments before me:

(a) any property acquired by trustees by reason of their legal ownership of trust property or by reason of the trusteeship must be held by them as trustee only;[29]

(b) the fruit of the original trust property will be held  by the trustee as part of the agreed express trust since “[the] trust fund comprises not just the trust property originally owned by the trustee as trustee but all the fruits from time to time thereof (including interest payments, rents, dividends from shares or bonus issue of shares) ……”;[30]

(c) subsequent authorised additions or authorised substituted property subsequently acquired by the trustee on behalf of the trust forms part of the subsisting trust fund;[31]

(d) beneficiaries are entitled to claim that the trust fund comprises any property purportedly acquired by the trustee for himself from his sale or exchange of trust property or even, it seems, from his misuse of his position as trustee (eg secret commissions or bribes);[32]

(e) an asset may be added to the trust if it is acquired by the trustee qua trustee, even if it may not be the fruit of original trust property or its substitute, eg if an agent who agreed to acquire a property on behalf of his principal acquires it in his own name he becomes trustee of it for his principal, and the principal can acquire a proprietary interest in the asset even though the principal had no pre-existing interest in the asset, and the asset was, in the first instance, acquired by the agent with his own money.

62.In relation to (a)-(b) above, Oliver LJ in Swain v Law Society[33] said as follows:

“ It seems to me, therefore, …… that what one has to do is to ascertain first of all whether there was a fiduciary relationship, and if there was, from what it arose and what, if there was any, the trust property was; and then to inquire whether that of which an account is claimed either arose, directly or directly, from the trust property itself or was acquired not only in the course of, but by reason of, the fiduciary relationship.

If it is found as a result of that inquiry both that there is a fiduciary relationship and that the fiduciary has derived from it a profit which has not been made available to his beneficiary, the it matters not that that profit is one achieved openly and in the utmost good faith nor, in the absence of consent, that it has been fully and frankly disclosed: the principle of equity is inflexible and the fiduciary must hold it for the benefit of the person for whom his fiduciary duty was undertaken or assumed.”

63.Indeed, in Underhill and Hayton, Law Relating to Trusts and Trustees, it is said as follows:[34]

“Often the constructive trust is imposed to vindicate fundamental equitable rights under an express and resulting trust and to give effect to the settlor’s intentions (as agreed to expressly or impliedly by the trustee as a core incident of his office) that the original trust property and subsequent additions to it and the fruits thereof and property subsequently replacing such property (in the rightful operation of the trust or, if accepted as beneficial by the beneficiaries, even in the wrongful operation of the trust, as whether proceeds of sale of trust property are used purportedly to augment the private patrimony of the trustee) are to be held as the trust fund for the beneficiaries. Indeed, …… it seems more correct to regard the substituted property as continuing to be held by the trustee as part of the agreed express or resulting trust property, so the court declares simply that the trustee holds the relevant property on the terms of the express or resulting trust ……”

64.In relation to (e) above, Mr Wong SC relied on the observations of the English Court of Appeal in FHR European Ventures LLP & ors v Mankarious & ors,[35] a case which explored the question of what would be the appropriate remedy against an agent who has received a secret commission from the seller of property which his principal bought at a price negotiated on his behalf by the agent.  In that case, there was no dispute that where an agent was engaged to purchase property on behalf of his principal but purported to acquire it on his own account, he held the targeted property thus acquired on a (true) constructive trust for his principal.[36]  Lewison LJ held that this line of authorities showed that “the principal can acquire a proprietary interest in an asset acquired by his agent, even though the principal had no pre-existing proprietary interest in the asset, and the asset was, in the first instance, acquired by the agent with his own money”.[37]  Sir Terence Etherton reviewed the authorities which he said showed “the mere fact that the fiduciary obtains the benefit from a third party, or obtains a benefit that could never be or would never be obtained by the principal, or that the principal has obtained what he or she wanted or intended from the opportunity, is not necessarily a bar to a constructive trust of the benefit wrongly obtained by the fiduciary by taking advantage of the opportunity. ……”[38]

65.In the earlier Privy Council case from Hong Kong, Attorney-General for Hong Kong v Reid, their Lordships cited with approval the following extra-judicial speech by Lord Millet:[39]

“[The fiduciary] must not place himself in a position where his interest may conflict with his duty. If he has done so, equity insists on treating him as having acted in accordance with his duty; he will not be allowed to say that he preferred his own interest to that of his principal. He must not obtain a profit for himself out of his fiduciary position. If he has done so, equity insists on treating him as having obtained it for his principal; he will not be allowed to say that he obtained it for himself. He must not accept a bribe. If he has done so, equity insists on treating it as legitimate payment intended for the benefit of the principal; he will not be allowed to say that it was a bribe.”

66.Before I deal with Mr Wong SC’s propositions, I note Mr Joffe’s complaint that these arguments were newly introduced in Mr Wong SC’s supplemental submissions dated 15 April 2013 (ie some time after his original written submissions dated 19 March 2013) in breach of paragraph 7 of Practice Direction 5.4.  But given the substantial adjournment between the 3^rd Hearing Day and the Costs Hearing, I cannot see how Ken could be said to be prejudiced in his response to Mr Wong SC’s submissions in this respect.  As I see it, it is the merits of the arguments that matter.

67.Mr Wong SC argued that the conditions for creation of trust set out in paragraph 52 above were prerequisites for the creation of new express trusts, but there was no such requirement for additions to a subsisting trust, ie fruits of property already on trust or arising from the trusteeship by operation of law, and it would not be right to require a declaration of trust to be made every time a new property was added to the trust. Here, Ken and Richard restructured Luen Tat’s shareholdings (through the exercise of their trustees’ powers as registered shareholders of Luen Tat). The acquisition of the 51 “new ordinary shares” by Ken in such circumstances would be sufficient to establish that such shares were either the fruits of the original trust property or additional property acquired under his trusteeship and/or trustee’s duties, such that those shares were held on trust for and on behalf of the Father in addition to the “5% non-voting deferred shares” of Luen Tat.  Mr Wong SC submitted the fact that the “new ordinary shares” were issued by Luen Tat was neither here nor there.

68.It does not appear from Mr Joffe’s submissions that he was disagreeing with the aforesaid legal propositions, but his response was that they were not applicable to the present situation or the impugned pleadings did not meet the necessary requirements to satisfy those legal propositions.

69.Mr Joffe argued that the RASOC did not expressly state that the “new ordinary shares” of Luen Tat were allotted in accordance with the original trust arrangements.  He said that the plea in paragraph 12(1) of the RASOC in relation to the original trust did not aver that the original trust covered all shares in Luen Tat.  But in my view, the whole thrust of the above legal propositions is to deal with after-acquired properties being either the fruits of property already on trust or acquisitions by the trustee by reason and in virtue of his fiduciary office.  It cannot be expected that the original express trust would deal with or cover such after-acquired properties. In any event, the RASOC did plead the original trust covered all shares of Luen Tat since between Ken and his wife they held all such shares on behalf of the Father.

70.Mr Joffe next argued in any event it was pleaded that Ken and his wife “undertook to hold their respective shares in Luen Tat transferred to them on trust for and on behalf of [the Father]” (my emphasis), and the “new ordinary shares” of Luen Tat were allotted and not transferred, so there was no plea that tied the original trust arrangement with such subsequent allotment of shares to Joesh and Full Moon.  Mr Joffe said this was important because for a trust to be created the trust property (ie subject matter of a trust) must be certain, definite and belong to the settlor, which prerequisites could not be established on the averments in the RASOC.  Mr Joffe went on to say the “new ordinary shares” were created by Luen Tat, and there was no evidence or plea that the Father acquired interest in such shares, or such shares ever belonged to the Father in law or equity.  To be the creator/settlor of the alleged trust, the Father had to plead that he was capable at law or in equity of alienating, transferring, assigning or otherwise disposing of any property or an interest in the property inter vivos.[40]

71.Mr Joffe further argued there was nothing in the RASOC that in implementing the restructuring of Luen Tat’s shareholdings and in acquiring the “new ordinary shares”, Ken and Richard were exercising their trustees’ power as registered shareholder of Luen Tat or acting under the instruction or direction of the Father. There was no express averment that Ken used the trust property (ie the old Luen Tat shares) to acquire new trust property (ie the 51 “new ordinary shares”).

72.In my view, the New Shares Claim as pleaded in the RASOC viewed through the prism of the above legal propositions cannot be said to be completely unsustainable and unarguably bad.  Mr Joffe’s contentions set out in paragraph 70 above focused on the requirements for creation of trust, but when one considers the fruit of the original trust or property acquired by the trustee by reason or in virtue of his office, it is at least arguable that the acquisition of such property need not be in the same manner as how the original trust property was settled in the first place.  More significantly, according to the original trust as pleaded by the Father, Ken and Richard held the Luen Tat shares as trustee only and they had no beneficial interest in the ownership of Luen Tat as shareholders.  The restructuring of Luen Tat’s shareholdings was expressly pleaded to be for the purpose of tax planning and emigration made with the Father’s approval.  Nowhere was it suggested that the original trust had ceased, and this is bolstered by the reliefs sought by the Father in the RASOC. On the Father’s pleaded case, the involvement of Ken and Richard in the implementation of the restructuring (given they had no beneficial interest in Luen Tat or in its shares) must be by reason of and in virtue of their fiduciary office as trustees (ie legal owners of the Luen Tat shares).  That being the case, then notwithstanding that the mechanism of the restructuring was by allotment of the “new ordinary shares” to Joesh and Full Moon in the same ratio as between Ken and Richard as for the old shares (which restructuring was known and approved by the Father), it is, in my view, arguable on the pleadings that the “new ordinary shares” were additional or substituted property still imbued with the original trust.

73.In respect of the proposition drawn from FHR European Ventures LLP that a beneficiary could acquire proprietary interest in an asset even though such beneficiary had no pre-existing interest in the asset and the asset was acquired by the trustee with his own money, Mr Joffe submitted it was not so pleaded in the RASOC either as a proposition of law or fact. Mr Joffe reminded that the 51 “new ordinary shares” of Luen Tat were issued not to Ken but to Joesh (which was a separate legal person even though it might be controlled by Ken), and it was not pleaded that Joesh held those shares on trust for the Father. Mr Joffe submitted that FS were well aware of the concept of separate legal personality,[41] and this could not be brushed aside by saying that Joesh and Full Moon were Ken’s and Richard’s corporate vehicles.  Further, it was not pleaded that the Father had proprietary interest in such shares.  Unlike the group of cases discussed in FHR European Ventures LLP in which the principal instructed the agent to acquire property for him, there was no averment in the RASOC that the Father expressly instructed Ken or Joesh to acquire the 51 “new ordinary shares” for him, and Mr Joffe submitted it would be nonsensical to rely on implied instructions.

74.I am not persuaded that this is necessarily the only view on the pleadings. It was expressly pleaded that the restructuring of the Luen Tat shareholdings was made with the Father’s approval for tax planning and emigration purpose. It is at least arguable that the restructuring exercise was carried out by Ken and Joseph qua trustee without disturbing the underlying original trust even though the result of such restructuring was that the shareholdings were held in another form, ie the “new ordinary shares” held through Joesh and Full Moon. That being the case, the various express averments suggested by Mr Joffe arguably are counsel of perfection rather than necessary pleas.

75.Mr Wong SC next argued that in any event it was unnecessary to plead any express words constituting a trust when it was clear that Ken received the 51 “new ordinary shares in a fiduciary capacity”. He relied on David Lyell v John Lawson Kennedy[42]in support.  In that case, the agent collected rent for the principal, and after she passed away the agent continued to receive rent as before without telling the tenant of the principal’s death.  The agent claimed the monies on his own account 12 years later. The Earl of Shelborne said as follows:[43]

“…… A man who receives the money of another on his behalf, and places it specifically to an account with a banker ear-marked and separate from his own moneys, though under his control, is in my opinion a trustee of the fund standing to the credit of that account. For the constitution of such a trust no express words are necessary; anything which may satisfy a Court of Equity that the money was received in a fiduciary character is enough. It is not requisite that any acknowledgment of such a trust should be made to the cestui que trust or his agent; to whomsoever made it is evidence against the trustee.”

76.Mr Joffe submitted that David Lyell did not support Mr Wong SC’s proposition because it did not deal with a pleading issue. It was held in that case that no express words were necessary to establish a trust, which was quite different from saying that as a matter of pleading it was unnecessary to set out clearly the basis of the trust.  I agree with Mr Joffe’s reading of David Lyell, but it does not detract from what I have considered to be sufficient pleas for the New Shares Claim in answer to the striking out application.

77.Mr Joffe further argued that it was Ken’s case that the trustee of Ken’s trust (BNP Paribas) took into account his request and not that of any other person to subscribe the 51 “new ordinary shares” in Luen Tat for consideration.[44]  In paragraph 21B of the RAD&RAC, KJ expressly pleaded as follows (which, Mr Joffe suggested, showed that consideration had been paid for the 51 “new ordinary shares”):

“Consistent with [Ken’s] beneficial ownership of 51% stake in Luen Tat, [Ken] was the settlor of the said Ken Li’s Trust and BNP Paribas Jersey Trust Corporation Limitd (formerly known as BNP Jersey Trust Corporation Limited), acting as trustee, took into consideration requests of only [Ken] bit not any other person. On 31 March 1995, the said trustee, upon [Ken’s] request, subscribed for consideration 51 new ordinary shares in Luen Tat that were issued and allotted as part of the capital restructuring scheme.”

Further, the RASOC did not suggest that Ken (like Richard) obtained his 51 “new ordinary shares” in Luen Tat for no consideration, and although the Father denied the existence of Ken’s trust (without setting out the grounds), he stopped short of denying that Ken through BNP Paribas subscribed his 51 “new ordinary shares” for consideration.[45]

78.On the other hand, Mr Wong SC submitted that other than possibly payment of the par value of the 51 “new ordinary shares” of Luen Tat, the alleged consideration was not identified in Ken’s pleadings or affirmation evidence.  Anyway, the Father could not have pleaded the issue of consideration since he had no knowledge/evidence of the same. I agree with Mr Wong SC that to make out a viable trust claim in respect of the New Shares Claim it is not necessary for the Father to plead that no consideration was paid for the 51 “new ordinary shares” of Luen Tat.  Following on my analysis above, it is arguable on the pleadings that the subscription for such shares were nothing but part and parcel of the restructuring exercise to achieve tax planning and emigration purpose without altering the underlying trust arrangement in which Ken and Richard held 51% and 49% of Luen Tat’s shareholdings for the Father. Even if consideration (eg payment of par value of the shares) were provided upon subscription of the 51 “new ordinary shares” of Luen Tat, it is still arguable that it would not negate the existence of the trust arrangement between the parties or make Ken/Joesh beneficial owner of those shares.

79.In all the circumstances, I am not persuaded that it is plain or obvious that the New Shares Claim should be struck out, and I am convinced that Ken clearly knew the Father’s case all along.

V.  CONCLUSION

80.I therefore grant the following orders:

(a) the Father do pay Ken’s costs of and occasioned by the Misappropriation Claim (including the argument on costs of such claim);

(b) the Father do pay Ken’s costs of and occasioned by the Striking Out Summons in respect of the impugned parts of the AR&ADC in paragraph 2 of such summons and paragraphs 18-19 of Seline’s amended witness statement for the Misappropriation Claim (including the argument on costs of such application);

(c) Ken do pay the Father’s costs of and occasioned by the Striking Out Summons in respect of (i) the impugned parts of the RASOC in paragraph 1 of such summons, (ii) the impugned parts of the Father’s amended witness statement in paragraph 3 of such summons, and (iii) paragraphs 20-21 of  Seline’s amended witness statement for the New Shares Claim (including the argument on costs of such application);

(d) the costs awarded in (a)-(c) above shall include all costs reserved (if any) and shall be taxed in any event if not agreed with certificate for two counsel.

Mr William Wong SC and Mr Alan Kwong, instructed by D S Cheung & Co for the plaintiff by original action and 1^st and 3^rd defendants by counterclaim

Mr Victor Joffe and Mr Jean Paul Wou, instructed by Stevenson Wong & Co, for the 1^st and 2^nd defendants by original action and the plaintiff by counterclaim

21 March 2013

Ms Frances Lok, instructed by Christine M Koo & Ip, for the 4^th defendant by counterclaim

26 September 2013

Mr Wong Chor Wan, of Christine M Koo & Ip, for the 4^th defendant by counterclaim