Highmax Overseas Ltd and Others v. Chau Kar Hon, Quinton and Another

CACV 111/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 111 OF 2013

(ON APPEAL FROM HCMP NO. 2668 OF 2012)

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BETWEEN

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JUDGMENT

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Hon Lam VP (giving the Judgment of the Court):

1.On 6 May 2013, Deputy High Court Judge Simon Leung [“the Judge”] gave the following directions in a Beddoe application in respect of how, the 5^th Applicant, a trustee, should conduct itself in another set of proceedings:

“(1) The Companies (under the control of the Trustee) should remain neutral and confine its stance to the filing of affidavit or defence stating the material facts within their knowledge and submitting to the court’s direction as well as making discovery in HCB 549/2012 and related proceedings;

(2) The 1^st and 2^nd respondents should apply to be joined as defendants to the TIB Summons; failing which, the Trustee should be at liberty to apply for such joinder of defendants in HCB 549/2012;

(3) The 4^th applicant and the Trustee be authorised to utilise the sale proceeds of the Richburg Property, or any balance thereof, towards the payment of (a) all the Trustee’s reasonable fees and properly incurred general administration cost and expenses; and (b) all reasonable costs and expenses properly incurred in maintaining the Highmax Property, Marista Property and Goldwick Property;

(4) All reasonable costs properly incurred pursuant to (1) and (2) above shall be borne by the trust assets to be taxed on a trustee basis, if not agreed;

(5) Costs of these proceedings and those of the application by the 1^st and the 2^nd respondents be borne by the trust assets, to be taxed on a trustee basis, if not agreed;

(6) Liberty to apply.”

2.The background leading to that other set of proceedings were adequately explained by the Judge at paras 2 to 9 of the judgment of 6 May 2013:

“BACKGROUND

2. By a deed of settlement dated 4 September 2008, the respondents’ father, Chau Cham Wong Patrick (“Chau”), set up level & Square Trust, an irrevocable discretionary trust; and the respondents and their issue are the named potential beneficiaries (“the Trust”). The 5^th applicant, a Cayman Islands company, was appointed the trustee (“the Trustee”).

3. 4 landed properties owned by Chau in Hong Kong were placed with the Trust, first by way of assignments to the 1^st to the 4^th applicants, which are BVI companies set up as vehicles for holding the properties (“the Companies”), and then by the transfer of shares (by way of gift) and that of whole control of the Companies to the Trustee.

4. In accordance with the names of the Companies holding them, the properties are respectively referred to as the “Highmax Property”, “Marista Property”, “Goldwick Property” and “Richburg Property”. The assignments of the Highmax Property, Marista Property and Goldwick Property, all in the same building, predated the deed of settlement while that the Richburg Property was dated after the deed.

5. In November 2008, HCA 1868/2008 was commenced whereby Chau (and others) was sued for, among other things, misappropriation and breach of fiduciary duties. That case was transferred to become HCCL 32/2009. On 3 January 2012, judgment was entered by consent against Chau in HCCL 32/2009 for the sum of HK$132 million with interest. A Mareva injunction previously granted against Chau in September 2008 was also extended to cover the judgment debt.

6. On 27 January 2012, 3 of the Companies were ordered to be joined as the defendants in HCCL 32/2009; and the Mareva injunction above mentioned was amended so that the newly joined defendants and their respective properties (i.e., the Highmax Property, Marista Property and Goldwick Property) became subject to the injunction as well. In February 2012, the Mareva Injunction in HCCL 32/2009, by consent, was continued until judgment or further order of the court.

7. the remaining property under the Trust not subject to the Mareva injunction (i.e., the Richburg Property) was sold by the Trustee on 8 May 2012 at the price of HK$9,800,000.

8. On 16 May 2012, Chau was adjudged bankrupt in HCB 549/2012. On 12 June 2012, the joint and several trustees in bankruptcy of Chau’s estate were appointed (“the TIB”).

9. On 22 October 2012, the TIB took out a summons in the bankruptcy proceedings seeking to avoid the assignments of the properties by Chau to the Companies on the following grounds (“the TIB Summons”):

(1) The Assignments were sham and Chau remains the beneficial owner of the properties held by the Companies as bare trustees.

(2) the assignments were made at the time when Chau was insolvent and for the purpose of putting the properties beyond the reach of his creditors.

(3) The assignments were transactions at undervalue and therefore void pursuant to section 49 of the Bankruptcy Ordinance, Cap 6.”

3.The 1^st and 2^nd Respondents appealed against the order of the Judge.  They contended in their Notice of Appeal that the Judge should have directed the trustee to defend the TIB Summons and all the reasonable costs properly incurred in such defence shall be borne by the trust assets.

4.The 1^st and 2^nd Respondents did not make any application to be joined as defendants to the TIB Summons.  The trustee took out a summons on 23 May 2013 to join them as parties in the TIB Summons.   That application for joinder was opposed by the TIB and the 1^st and 2^nd Respondents.  Before it was decided by a Judge hearing HCB 549 of 2012, in view of the opposition, the trustee taking the view that enough opportunity has been give to the 1^st and 2^nd Respondents to be joined, agreed to withdraw the summons by a consent summons dated 10 October 2013.  A consent order to such effect was made on 15 October 2013. 

5.At the hearing of the appeal on 23 January 2014, submissions of counsel were heard primarily on the questions of whether the Judge had adopted the correct approach and procedure in coming to his decision. After the hearing, in the course of deliberation, by reason of the judgment of Recorder Shieh of 10 May 2013 in HCB 549 of 2012 (which parties had referred in the course of the hearing), this court was alerted to a fundamental issue which ought to be determined before this appeal could be decided.  By a letter of 29 January 2014, the court drew the attention of the parties to the issue.  The issue was set out as follows:

“In the course of deliberation, the court notes, as it is apparent from the judgment of Recorder Shieh of 6 May 2013, that the trustee had not yet been joined as a party to the TIB Summons as the matter stood before Deputy High Court Judge Simon Leung at the time of the Beddoe application. The court further notes that the trust assets are the shares in Chrisland Global Limited [“Chrisland”] as opposed to the landed properties (or the sale proceeds of the same) held by the 4 respondent companies to the original TIB summons. Chrisland held the shares in another company Sinomart International Limited [“Sinomart”] which in turn held the shares of these 4 respondent companies. The trustee could not usurp the role of the directors of these companies in the management of their affairs, including the defence of the TIB summons. The directors of these companies should exercise their management power in accordance with their duties, which is owed to the companies as opposed to the beneficiaries. In the context of companies facing claims exceeding their assets, the directors should have regard to the interest of the shareholders and creditors as a whole. The directors would also need to consider whether there are financial resources for the companies to resist the TIB summons bearing in mind that the assets of the companies are frozen by a Mareva injunction. It is not suggested that the trust could have independent financial means to fund the litigation and the trustee is not seeking direction to use independent fund for that purpose. It is questionable whether it is appropriate to exercise the Beddoe jurisdiction in such circumstances.”

6.The appeal was therefore re-listed for hearing. Further submissions were put in by counsel before the resumed hearing on 16 May 2014.

7.Though we accept under Order 85 a trustee can apply to court for directions in respect of the administration of trust, the court has no power to direct how the property holding companies (viz the 1^st to 4^th Applicants) who are not trustees in the context of the trust in question to act in response to the TIB summons.  As observed by this court, that must be a matter for the directors of these companies bearing in mind the financial position of the companies and the interest of their respective shareholders and creditors as a whole.  The court does not have the power to grant pre-emptive protection to directors in respect of their decisions on the affairs of the companies.  The joinder of these 4 applicants to the Originating Summons is inappropriate.

8.Mr Douglas Lam, appearing for the Applicants, contended that even though the trustee (the 5^th applicant) was not a party to the TIB summons at the time when the application was heard by the Judge, and the trust assets were the shares in Chrisland as opposed of the properties held by the 4 companies, as trustee it still owed a duty to the beneficiaries of the trust to protect the value of the trust assets.  Citing Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515 at 532 and Lewin on Trusts 18^th Edn paras 34-49 to 50, counsel submitted that as the trustee is able to exert significant control over the holding companies, it would be no answer to a claim in the default in the management of the companies leading to a loss in value of its shareholding to say that the management of the companies had been left to the directors.

9.Whilst this analysis may be correct as a matter of law, in our view it is of no avail to the Applicants in this appeal.  The application before the Judge was not brought on the basis of seeking directions on the discharge of the Barlett duty. Neither side addressed the Judge on how the Barlett duty would impact upon the conduct of the trustee in the wake of the TIB Summons against the four holding companies. Further, we do not think the discharge of the Bartlett duty could warrant a trustee to come to court to seek Beddoe direction in terms of the dispute over assets not directly held by the trust without regard to the interposition of the corporate structure.  Even if the trustee has full control over the shares of a company which holds the relevant assets, much depends on the views of the directors upon whom the primary responsibility to manage the company is vested.  It has to be borne in mind that as a matter of company law, the court will not normally interfere with managerial decisions of the board: see MKGWH v RKSH [2011] HKFLR 220, whether by way of actual interference with the board’s decision or by way of making order for appointment or removal of directors.  If such directors have come to a reasonable view on the matter, it is difficult to see why the court should direct the trustee to remove such directors and to procure another course of action to be taken.

10.This must be a relevant consideration, particularly in light of paragraph 3 of the First  Schedule of the Trust Deed which provides,

“3. TRUSTEES NOT BOUND TO INTERFERE IN BUSINESS OF COMPANY IN WHICH TRUST INTERESTED

(a) The Trustees may in their absolute and uncontrolled discretion retain all or any of the shares or any other rights or interests in or over any proprietary or private company the stock shares or debentures of which shall at any time or from time to time form part of the Trust Fund or any life insurance policy(ies) transferred or payable to the Trust Fund (hereinafter such proprietary or private company or insurer of such policy(ies) called “the Company” which expression shall include the Company, any other company controlled by the Company, any company with which the Company is merged or amalgamated and any other company which is controlled by such Company) for so long as the Trustees may think fit.

(b) (i) The Trustees shall not be bound or required to exercise any control the Trustee may have over or to interfere in or become involved in the administration management or conduct of the business or affairs of the Company and in particular (but without prejudice to the generality of the foregoing) the Trustees shall not be bound or required to exercise any voting powers or rights of representation or intervention conferred on the Trustee by any of the shares in respect of, or as an insurance policyholder of, the Company.

(ii) The Trustees shall be entitled to leave the administration management and conduct of the business and affairs of the Company to the directors, officers and other persons authorised to take part in the administration management or conduct thereof and the Trustees shall not be bound or required to supervise such directors, officers or other persons so long as the Trustees shall not have knowledge of any dishonesty or misappropriation of moneys on the part of the Company’s directors or officers or any other person relating to such business and affairs on the part of any of them.

(iii) Until such time as they have knowledge to the contrary, the Trustees may assume at all times that the administration management and conduct of the business and affairs of the Company is being carried on competently honestly diligently and in the best interests of the Trustees in their capacity as shareholder or howsoever it is interested therein or with respect thereto. The Trustees may also assume until such time as they have knowledge to the contrary that persons appearing to be or who act as the directors officers and other persons authorised to take part in the aforesaid administration management and conduct are duly appointed and authorised.

(iv) the Trustees shall not in the absence of knowledge to the contrary be bound or required at any time to take any steps at all to ascertain whether or not the assumptions contained in this sub-regulation 3(b)(iii) hereof are correct.

(v) Without prejudice to the generality of the foregoing the Trustees shall not be bound or required to:-

a) exercise any rights or powers (whether as a shareholder debenture holder policyholder or otherwise howsoever) enabling it to appoint or elect or to remove a director officer or other person authorised to take part in the administration management or conduct of the business or affairs of the Company and in particular shall not be bound to take any steps to see that any of the Trustees or any officers or nominees of the Trustees become a director or other officer of the Company;

b) exercise any power to require the payment of a dividend or other distribution of profit and whether of an income or capital nature.

(vi) No Beneficiary or person who may be entitled hereunder shall be entitled in any way whatsoever to compel control or forbid the exercise or the exercise in any particular manner of any powers discretions or privileges (including any voting rights) conferred on the Trustees by reason of any shares or other rights of whatsoever nature in over or with respect to the Company.

(vii) In the absence of knowledge of any dishonesty or misappropriation of moneys on the part of the directors, officers or other persons authorised to take part in the administration, management or conduct of the Company, the Trustees shall not be liable in any way whatsoever for any loss to the Company or the Trust Fund or the income thereof arising from any act or omission of the directors officers or other persons taking part (whether or not authorised) in the administration management and conduct of the business or affairs of the Company referred to in sub-regulations 3(b)(i) hereof (whether or not any such act or omission by any such foregoing persons shall be dishonest fraudulent or negligent).

(viii) The provisions contained in this sub-clause (b) shall apply equally to any shares or participation in or over the Company which are comprised at any time in the Trust Fund.

(c) (i) In the absence of knowledge of dishonesty or misappropriation of moneys or the maladministration of the Company, the Trustees shall not be bound or required to obtain or to seek in any way whatsoever to obtain any information regarding the administration management or conduct of the business or affairs of the Company from the persons involved in the administration management or conduct or from the shareholders or other persons interested therein or any other matter relating to the Company referred to herein.

(ii) The Trustees may assume that such information as is supplied to them by any person relating to the Company is accurate and truthful unless the Trustees shall have knowledge to the contrary and in the absence of such knowledge the Trustees may not be bound or required at any time to take any steps at all to ascertain whether or not the information is accurate and truthful.

(iii) The Trustees may not be liable in any way whatsoever for any loss sustained by the Trust Fund or the income thereof arising from the Trustees not taking all or any possible steps to obtain any information referred to in Regulation 3(c)(i) hereof or to verify the accuracy and truthfulness of such information as is supplied to the Trustees.

(iv) No Beneficiary or person who may become entitled hereunder shall be entitled to compel the Trustee to take any steps to obtain any information referred to in Regulation 3(c)(i) hereof or to verify the accuracy and truthfulness of such information as is supplied to the Trustees.”

11.The first directors of the 4 property holding companies were the Respondents.  However, on 28 August 2008, upon the setting up of the trust, they resigned and a company called Abraxas International Limited [“Abraxas”], a wholly-owned company of the TMF Group, became the director for Highmax, Marista and Goldwick.  The Respondents also resigned as directors of Richburg on 19 September 2008 and Abraxas also became the director for this company.  

12.Relying on Lewin on Trusts 18^th Edn para.21-123, Mr Lam submitted that because of the trustee’s relationship with the directors, it can be said that the trustee did not leave the affairs of the holding companies to independent directors and this clause may not protect the trustee from claims by the beneficiaries for mismanagement of their affairs.

13.Even so, there cannot be any claims if the directors acted with proper regards to the interest of the companies. As explained earlier, in that event, the trustee would have no basis to intervene and the court would not authorise any intervention in the context of an application under Order 85.  

14.In the present case, the more pertinent question is not whether these companies should oppose the TIB summons.  Because most of their assets were subject to Mareva injunctions, the only identifiable potential resource for funding the litigation appears to be the sale proceeds of the Richburg property.  Such proceeds are also subject to an injunction granted in the context of the TIB summons granted on 10 May 2013.  For the reasons given in his judgment, Recorder Shieh SC refused to permit such proceeds to be used for the purposes of funding any opposition in the TIB summons.

15.Thus, the stark reality is that there is simply no financial resource available to support any opposition to the TIB summons.  There is no suggestion that the trust fund has other means to fund such litigation. Mr Scott SC (appearing for the Respondents together with Mr Lynn) accepted that the trustee has no obligation to use its own resources (beyond those in the trust fund) to finance the litigation of the holding companies.

16.It is primarily a matter for the directors of Richburg to decide what stance Richburg should adopt in the TIB summons and whether any steps could be taken by Richburg to procure funding for legal representation to oppose the TIB summons (if that were the stance they adopted).   As far as the trustee (viz the 5^th Applicant) is concerned, it has no direct management power in the affairs of Richburg.  It can only seek to interfere with the decisions of the board of Richburg through Abraxas.  As mentioned, the court has no Beddoe jurisdiction over Abraxas or Richburg and it has no power to direct how Abraxas should conduct the business of Richburg as its director.  The same applies to the three other holding companies.

17.Though technically speaking, the Trustee could come to court to ask for directions under Order 85 with regard to how its voting power in terms of the constitution of the board of Chrisland should be exercised, whether the court would entertain such an application depends on the context of the matter.  In light of the decision of Recorder Shieh (against which there has not been any appeal), there is no escape from the reality that the trust simply has no resource to fund the litigation against the TIB summons. In such circumstances, we do not think it would serve any meaningful purpose by entertaining an Order 85 application by the trustee to authorise its intervention in the affairs of the holding companies through the exercise of its voting power in Chrisland on the basis of the Bartlett duty.              

18.The matter had proceeded on a very different basis before the Judge.  There was no prayer for the determination as to how the trustee should discharge its own duty as trustee in terms of intervention in the affairs of Chrisland with a view to be involved with the decisions of the director of the 4 property holding companies in respect of the TIB summons.  Nor did the Judge focus on the practical problem as to the lack of financial resource and the protection already offered by paragraph 3 of the First Schedule.  The Judge decided the matter as if he had the power to direct how the four property holding companies should act in the TIB summons.  For reasons given above, that is a wrong premise. 

19.Mr Lam belatedly suggested in footnote 3 of his written submissions of 7 May 2014 that paragraph 1 of the Originating Summons should be read as “a determination as to whether the trustee should procure the Companies to adopt a neutral stance”.  This would not be a straightforward Beddoe application and it is a different question from the one posed before the Judge.  Had the question been framed in the way as now suggested, the court should ask for evidence as regards the stance adopted by the director of the 4 property holding companies and the bases of their decisions before it can properly decide what directions should be given.  If lack of financial resource is given as the reason for not taking active part in the TIB summons, it is difficult to see any justification for intervention by the trustee unless it has access to funds not available to the companies.  In respect of the contention of the Respondents that the trustee should procure the holding companies to resist the TIB Summons, the court will also need to examine what were the actual steps it is proposed that the trustee should take to intervene in the affairs of these companies and whether there was financial resource to support such an exercise. 

20.By reason of the manner in which the matter was argued before the Judge, he did not focus on these issues in his judgment.  This court is not minded to take this task upon itself in view of the apparent futility of the exercise.

21.For these reasons, we allow the appeal and set aside the order made by the Judge.

22.As for costs, neither party could be said to be successful.  By this appeal, the Respondents wish to reverse the order of the Judge and seek an order directing the trustee to take part in the TIB summons.  For the reasons given, this is wholly inappropriate.  In the circumstances, we would make an order nisi that each party shall bear his own costs in the appeal. We would not disturb the costs order below. We would also order the trustee’s own costs be paid from the trust fund, to be taxed on trustee basis.

Mr Douglas Lam and Miss Eva Leung (appeared on 16 May 2014), instructed by K & L Gates, for the 1^st to the 5^th Applicants (the 1^st to the 5^th Respondents)

Mr John Scott, SC and Mr Andrew Lynn, instructed by Michael Li & Co, for the 1^st and the 2^nd Respondents (the 1^st and the 2^nd Appellants)