Tan Eng Guan and Another v. Southland Co Ltd and Others

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Coram: Hon. Nazareth, V.P., Godfrey & Liu, JJ. A.

Dates of hearing: 6, 7, 8 & 9 February 1996

Date of handing down judgment: 5 March 1996

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JUDGMENT

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Godfrey, J.A.:

Introduction

1. These are defendants' appeals from an order of Rogers, J. made on 23 June 1995, whereby he ordered that judgment be entered against those defendants for damages and interest to be assessed, and in some cases for an account, in respect of a number of claims made against those defendants by the plaintiffs in their statement of claim in the action. The summons on which this order was made was taken out by the plaintiffs pursuant both to 0.14 r. I of the Rules of the Supreme Court (summary judgment) and O.27 r.3 (judgment on admissions). It does not appear from the judge's order on which of these alternatives he proceeded; but a reading of his judgment suggests that he proceeded on the ground that, in his view, the defendants against whom he was proposing to order that judgment be entered plainly had no defence to the claim made against them, i.e. he proceeded under O.14 r. 1, rather than under O.27 r.3. The defendants against whom judgment was ordered to be entered now appeal, on a number of grounds with which I shall deal in turn; but it will be convenient first to summarise the facts.

The facts

2. The facts may be summarised, for present purposes, as follows. The plaintiffs, and the individual defendants, are all members of the same family. In 1965, a number of family members, possessed of substantial funds, caused the 1st defendant, Southland Company, Ltd ("the company") to be incorporated as a property investment company. The plaintiffs are each legally entitled to a small minority interest in the company (and each of them claims to be beneficially entitled to a greater interest). The company, although cash rich and very well able to do so, has never paid a dividend. The individual defendants, who are on any footing legally and beneficially entitled to the majority interest, and who control the company, have used the company's money to make interest-free, unsecured, loans to the corporate defendants in which they (but not the plaintiffs) were interested; and, in some cases, similar though smaller loans to themselves. The loans have all now been repaid, with interest at prime rate; but it is said, for the plaintiffs, that the loans were unlawful and that the company is entitled to further compensation from the defendants. It is said, for the defendants, that having regard to the family background, this is not right; that the various loans were made to reciprocate the financial support given by the individual defendants, or some of them, to the company in former times, when it was the company that was in need of such assistance; that the plaintiffs are volunteers, who acquired their shares by way of gift, and have themselves made no contribution to the family companies; that, the loans having been repaid with interest at prime rate, that is or should be the end of the matter; and that, anyway, the majority shareholders are lawfully entitled so to decide.

The litigation

3. In these circumstances, the plaintiffs have taken out proceedings (1) for the determination of their claim to be, together, beneficially entitled to a greater interest in the company ("the trust action"); (2) for winding-up of the company, on the "just and equitable" ground (the affairs of the company having been conducted, so it is said, in a manner unfairly prejudicial to the plaintiffs ("the winding-up petition"); and (3) by way of derivative action, for the defendants to compensate the company for its losses caused by their (alleged) breaches of fiduciary duty and to account to the company for any profit they may have made thereby.

The grounds of objection to the judge's order

4. The grounds on which the defendants object to the judge's order may be summarised as follows:

5. I shall deal with these grounds of objection to the judge's order in the order in which I have set them out above.

6. The wrong of which the plaintiffs complain in this action is not a wrong done to them personally, but a wrong done to the company. This is, then, what is called a "derivative" or, perhaps more descriptively, a "minority shareholders" action. It is clear that, in certain circumstances, the court will entertain a derivative action brought by minority shareholders for the benefit of a company for compensation for wrongs done to that company by those in control of it, despite the general rule (see Foss v. Harbottle (1843) 2 Hare 461) that the only proper plaintiff in an action in respect of a wrong alleged to be done to a company is the company itself. But, as soon as one starts to inquire into the question precisely what those circumstances are, darkness descends. The authorities are unclear and, sometimes, inconsistent. So difficult is the question that the Court of Appeal, in England and Wales, has said that:

(See Prudential Assurance v. Newman Industries (No. 2) [1982] Ch. 204, C.A., at p.221H-222A) Following this, and the subsequent case of Smith v. Croft (No. 2) [1988] Ch. 114, provision has been made in England and Wales, in the Rules of the Supreme Court there applicable, under which a plaintiff in a derivative action must apply to the court for leave to continue the action in every case where a defendant to such an action has given notice of intention to defend: see O.15 r.12A of those Rules. We have no such rule, at any rate, not yet, in Hong Kong. But it is, in my judgment, plain beyond argument that only in the most rare circumstances, if ever, can it be appropriate for the plaintiff in a derivative action to invite the court to make an order for summary judgment. Certainly, the present is not a suitable case for summary judgment. Before us, days of argument were spent upon a consideration, aided by copious citation of authorities, of what the circumstances are in which a derivative action can be maintained, and whether such an action could be maintained on the facts of this case. This was profoundly unsatisfactory. Such questions are best dealt with, as has now been recognised in England and Wales, by the trial of a preliminary issue whether the plaintiffs ought to be allowed to maintain a derivative action at all; failing that, it is only at the trial of the action that that issue can properly be considered. It is wholly wrong to attempt to deal with the issue on an application for summary judgment, the only legitimate object of which is to prevent a defendant who has plainly no defence to the action against him from delaying an inevitable judgment. For these reasons, I have no doubt that the judge ought to have refused to entertain the application made to him, in this derivative action, for summary judgment and that, accordingly, this appeal must be allowed. Although, therefore, it is unnecessary for me to give any further consideration to the other grounds of objection to the judge's order to which I have referred, I propose to deal with each of them shortly, in the hope that this judgment may prove to be of some use to practitioners in relation to the other matters canvassed before us.

7. The procedure for summary judgment is not available in "an action which includes a claim by the plaintiff based on an allegation of fraud": see O.14 r.1(2)(b) of the Rules of the Supreme Court. The comparable exclusionary rule in England and Wales was abrogated on 1 June 1992; but, as pointed out at 14/1/1 of the Supreme Court Practice 1993:

8. It had been held in England and Wales that the exclusion was directed at and confined to actions based on a claim founded on fraud as strictly defined in Derry v. Peek (1889) 14 App. Cas. 337, namely, a false representation made knowingly without belief in its truth. But it was difficult to perceive any justification for requiring a plaintiff to prove, at trial, a claim based on Derry v. Peek fraud, alone of forms of dishonesty, and, if the rules were to be reformed, the choice was either (a) to exclude from the scope of O.14 any claim based on any form of dishonesty; or (b) to remove the exclusion altogether. In England and Wales, the latter course was chosen. However this may be, it was pointed out to us that, in Hong Kong, the narrow construction of the exclusionary rule adopted in England had not been followed by Barnett, J. in Peninsula Fur Trading Ltd v. George Chen, HCA 3550/1987, 14 March 1988, unreported; nor by Kaplan, J., in Skink Ltd v. Comtowell Ltd [1994] 2 HKLR 26. In both of these cases, it was decided at first instance that, for the purposes of the local O.14 r.1(2)(b), allegations of dishonesty were to be equated with allegations of fraud. In the latter case, Kaplan, J. said (at p.37):

9. I think we should take this opportunity to give the guidance which Kaplan, J. invites. For my part, I would hold that the approach of Barnett, and Kaplan, JJ. was not correct. We are here concerned with the construction of words in our local rules identical with those (originally) contained in the rules in force in England and Wales, and authoritatively construed by the Court of Appeal there. I think it unwarranted, and undesirable, for such identical procedural rules to be construed in different ways in, on the one hand, England and Wales, and on the other hand, Hong Kong. There is no difference in the subject matter, or local conditions, which would warrant any such distinction. What ought to be considered here is whether we should go down the path taken in England and Wales, and remove the (narrowly construed) exclusion altogether, or whether we should enlarge the scope of the exclusion, so as to preclude the use of O.14 in all cases of dishonesty as well as fraud strictly so-called. Upon this question, which is one of policy, I express no opinion. While the exclusion in question remains in force in Hong Kong, I would construe it narrowly, in accordance with the English authorities. It follows that, since the present case is not one in which the claim of the plaintiffs is a claim for damages for fraud, it is not caught by the exclusion. The fact that the expression "fraud on a minority" is the expression commonly used to describe the circumstances in which the court will entertain a derivative action does not make such an action an action founded on fraud strictly so-called. Accordingly, I would reject this ground of objection to the judge's order.

10. By orders made on 15 June 1994, Rogers, J. had ordered that the trust action, the winding up petition, and this action should all be heard by the same judge and listed for hearing at the same time. It does not appear that any party to the litigation objected to this course; but I am not prepared to hold that the plaintiffs thereby forfeited the right, given to a plaintiff by O.14, to apply for summary judgment on the ground that the defendants had no defence to the action. Nothing in O.14 precludes the plaintiff from making an application under that order at any stage of the action, although it will rarely be appropriate to do so, as here, more than a year after the commencement of the proceedings. I would not be prepared to hold that the judge was bound to dismiss the plaintiffs' application for summary judgment simply on the ground that he had given previous directions as to the future conduct of the action which were, or might be, considered to be inconsistent with an application for summary judgment.

11. The defendants (other than the 7th and 8th defendants) procured the company to grant interest-free loans to companies associated with them, and in some cases to themselves. The loans were unsecured, a point stressed by counsel for the plaintiffs, but it seems to me that it would have made no difference even if they had been secured. On the face of it, the acts of the defendants in question, in procuring the making of these loans, were breaches of fiduciary duty. But the loans have all been repaid, with interest at prime rate. In these circumstances, I have no doubt that the defendants were entitled to leave to defend the action for the purpose of demonstrating that there was no outstanding breach of fiduciary duty for which they were accountable. That is what they contend; and, whether right or wrong, they ought not to have been shut out at this stage of the action from advancing that defence. I would allow the appeal on this ground also.

12. This point is closely associated with the last; if there is nothing for which the defendants remain accountable to the company, and the court is of the opinion that they acted honestly and reasonably, there is no reason why the court should not excuse the individual defendants from the breaches of fiduciary duty which they may have committed. If, on the other hand, they remain accountable to the company, then it is, in my judgment, unthinkable that the court would grant them relief. However, I have no doubt that the question of whether relief ought or ought not to be granted to those defendants is a question which can only be properly considered at (or, possibly, after) the trial of the action; it was accordingly wrong to give summary judgment against those defendants without affording them an opportunity to raise this defence at such a trial. I would allow the appeal on this further ground as well.

13. It was conceded before us that the order of the judge cannot stand in that it does not make clear for what breaches of duty the various defendants were answerable and in that it seeks to hold the defendants liable both (1) for the damage suffered by the company through the loss of the opportunity to use the funds more profitably than on an unsecured loan with interest at prime rate and (2) to give an account of the profits the defendants (and their associated companies) are said to have made as a result of the loans. No particulars are given of the loss said to have been suffered; and no particulars are given of the gains said to have been made. I would reject the submission made on behalf of the plaintiffs that it is open to the plaintiffs at this stage to elect for an account of profits and abandon the rest of the judge's order. Once again, the situation is profoundly unsatisfactory. The points which would have to be considered in this connection are quite unsuitable for summary determination. They need to be considered properly, at the trial of the action, when the plaintiffs can make any election they may need to make. The order made by the judge cannot be allowed to stand.

Conclusion

14. The defendants' appeals must be allowed and the judge's order set aside. I propose that the costs of the defendants of the plaintiffs' summons to the judge for summary judgment, and the costs of the defendants of this appeal, be taxed (if not agreed) and paid by the plaintiffs to the defendants.

Liu, J.A.:

15. I agree.

Nazareth, V.P.:

16. I also agree that, for the reasons given by Godfrey, JA., the appeal must be allowed. It also seems to me that the defendants should have their costs of the plaintiffs' summons to the judge for summary judgment and their costs of this appeal.

17. I would only add, in regard to the 'fraud' point, that I prefer not to express any view upon and to reserve for future argument (if not first resolved by appropriate amendment) the construction of O 14 r 1(2)(b) of our Rules of the Supreme Court, which I think was not sufficiently addressed before us.

18. The appeal is accordingly allowed, the order of Rogers, J. set aside, the plaintiffs' summons of the 30th January 1995 dismissed and there will be an order nisi that the defendants have the costs indicated.

Representation:

Mr. Robert Tang Q.C., Mr. Edward Chan Q.C. & Mr. Benjamin Yu Q.C. (M/s. Philip T.F. Wong & Co.) for 1st-4th, 9th-10th & 12th Appellalnts/2nd-5th, 10th-11th & 13th Defendants

Mr. Michael Thomas Q.C. & Mr. John Yan (M/s. Winston Chu & Co.) for 6th-7th Appellants/7th-8th Defendants

Mr. Denis Chang Q.C. & Mr. Winston Poon (M/s. Fairbairn Catley Low & Kong) for Respondents/Plaintiffs