HOTUNG INVESTMENT (CHINA) LTD v. ERNST & YOUNG (A FIRM) AND OTHERS

FAMV No. 24 of 2013

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 24 OF 2013 (CIVIL)

(ON APPLICATION FOR LEAVE TO APPEAL FROM CACV NO. 271 OF 2011)

_____________________

Between:

	HOTUNG INVESTMENT (CHINA) LIMITED	Plaintiff (Applicant)
	and
	ERNST & YOUNG (A FIRM)	1st Defendant (1st Respondent)
	HILLHEAD LIMITED	2nd Defendant (2nd Respondent)
	HO YAU HOO RONALD	3rd Defendant (3rd Respondent)

_____________________

Appeal Committee: Chief Justice Ma, Mr Justice Ribeiro PJ and Mr Justice Tang PJ

Date of Hearing and Determination: 16 December 2013

Date of Reasons for Determination: 23 December 2013

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REASONS FOR DETERMINATION

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Mr Justice Ribeiro PJ :

1. The Court of Appeal[1] ordered this action to be struck out, holding that even if it was otherwise viable, it was time-barred under the Limitation Ordinance.[2]

2. Mr Eric Edward Hotung (“EEH”) transferred 10,002 shares (representing a 50% interest) in Hotung Enterprises Limited (“HEL”) as well as three shares in the plaintiff company to the 2^nd defendant (“Hillhead”) as trustee to hold the same on trust for EEH’s three daughters Mara, Sheridan and Gabrielle (together “the beneficiaries”).  EEH created a mirror-image trust in favour of three sons including Sean Hotung.  Hillhead is a service company owned and controlled by the 1^st defendant (“E&Y”), the well-known firm of accountants.  The 3^rd defendant (“Ronald Ho”) was a partner in E&Y and a nephew of EEH. 

3. HEL held 93.75% of the shares in the plaintiff and the plaintiff owned a plot of land in the New Territories (“the land”). Adjacent to it was another plot (“the adjacent plot”), twice its size, owned by Hotung Estates Ltd (“HEst”) which was wholly owned and controlled by EEH.  On 28 December 1998, the plaintiff sold the land to HEst for $17.5 million.  The plaintiff alleges that it was a sale at a gross undervalue since its book value was $23,857,308 and, when sold combined with the adjacent plot on 17 April 2000, realized $550 per sq ft or an attributable value of $67,546,902.50. 

4. The plaintiff alleges that such sale was the product of a breach of fiduciary duty by two of the plaintiff’s directors, namely Joseph Gregory Hitselberger (“JGH”) and Song Fok Tek Frank (“SFT”). EEH, also a director of the plaintiff, declared his interest and did not vote at the board meeting.  This action, however, does not involve any claim against JGH or SFT.  It is brought against Ronald Ho, alleging that he is liable for rendering dishonest assistance to JGH and SFT in their breach of fiduciary duty.  The other defendants are sued as vicariously liable for Ronald Ho’s conduct.

5. The plaintiff’s case is that Ronald Ho’s acts of dishonest assistance consisted of false representations made to the beneficiaries in a letter dated 29 April 1998, which he is alleged to have drafted, stating that HEL rather than HEst intended to acquire properties in the New Territories; that new HEL shares had to be issued; and that executed blank transfer forms covering those shares as well as an enclosed indemnity in favour of Hillhead, had to be provided by the beneficiaries. 

6. The plaintiff pleads that:

“... the effect of such false representations by [Ronald Ho] was to mislead Mara, Gabrielle and Sheridan that HEL and the plaintiff were being properly managed in their best interests, causing them to refrain from immediately asserting their beneficial rights and/or inquiring into the plaintiff’s affairs which they otherwise likely would have done upon having just learnt of their beneficial interest in the plaintiff, and which could have exposed the sale of the NT Properties at a gross undervalue.”

7. The central allegation is therefore that Ronald Ho dishonestly assisted in the breach of fiduciary duty by deflecting the beneficiaries from interfering with the impugned sale.[3]  When asked what was meant by the pleading’s contention that, but for the false representations, the beneficiaries would have “asserted their beneficial rights” leading to exposure of the wrongful sale, Ms Audrey Eu SC[4] accepted that it postulated that, but for Ronald Ho’s misrepresentations, the beneficiaries would have caused Hillhead as their trustee to take action, by means of a derivative action as shareholder in HEL and/or the plaintiff, to prevent or to seek relief against the improper sale.

8. Ronald Ho denies many of the primary facts alleged but since this is a striking-out application based on limitation, the question is whether, assuming that a viable cause of action is disclosed, the action is nonetheless bound to fail as time-barred under the Ordinance.

9. It was not in dispute in the Court of Appeal that the limitation period for dishonest assistance claims is six years.[5]  Since the Writ was issued on 26 November 2009, and since the acts of dishonest assistance are alleged to have occurred on 29 April 1998, the action is prima facie statute-barred since the asserted claim accrued well before 26 November 2003.  The plaintiff seeks, however, to establish that it is reasonably arguable that the claim falls within section 26(1)(a), (1)(b) and (3) of the Ordinance,[6] in that facts relevant to its right of action based in fraud (the abovementioned central allegation) were deliberately concealed from it by Ronald Ho, postponing the running of the limitation period until the plaintiff discovered or could with reasonable diligence have discovered those facts.

10. There was uncontroverted evidence showing that, at the latest by 2002 and 2003, the beneficiaries knew or could with reasonable diligence have discovered all the matters said to have been concealed from them by Ronald Ho’s misrepresentations.  On that basis, even with a section 26 postponement, the limitation period would have expired before the Writ was issued. 

11. The plaintiff seeks to escape the consequences of such evidence by arguing that in law, the relevant knowledge was not the knowledge of the beneficiaries but that of their brother Sean who, they argue, did not acquire knowledge relevant to section 26 until 2007 when he took control of the plaintiff and ejected the wrongdoer directors.  It is argued that until they were ejected, no steps could have been taken to enable appropriate action by the plaintiff.

12. That contention contradicts the pleaded case referred to above.  As we have noted, the substance of the dishonest assistance alleged is that, by his false representations, Ronald Ho deflected the beneficiaries from acting sooner and thereby enabled the delinquent directors to proceed with the impugned sale without interference from them.  The premise is necessarily that, but for those false representations, they could and would have caused the plaintiff to take action in good time. 

13. The argument that the beneficiaries, even though armed with the requisite knowledge, could have done nothing to enable the plaintiff to take action, robs the central allegation of dishonest assistance of any basis.  It renders the alleged misrepresentations inconsequential, constituting no assistance to the directors’ breach of fiduciary duty since, on the present hypothesis, the beneficiaries could not have interfered with the wrongdoing in any event.

14. There is no allegation that Ronald Ho made any false representations or otherwise committed any wrongful acts in relation to Sean Hotung, so that the time of his discovering the alleged breach of fiduciary duty by the directors has no relevance to the present action.

15. Finally, it is submitted for the plaintiff that leave to appeal should be granted to enable it to rely on section 20 of the Limitation Ordinance as applying to persons liable for dishonest assistance, excluding them from any limitation defence.  For that argument to succeed, the Court would have to overrule its decision in Peconic.[7]  Ms Eu SC calls in aid a decision of the English Court of Appeal[8] which declined to follow that decision.  While the English decision is entitled to great respect, we do not consider the existence of a different analysis leading to a different conclusion by another court a sufficient ground for the grant of leave.

16. Accordingly, we refused leave and ordered the plaintiff to pay the costs of the application.

(Geoffrey Ma)	(R.A.V. Ribeiro)	(Robert Tang)
Chief Justice	Permanent Judge	Permanent Judge

Ms Audrey Eu SC and Mr Gregory Leung instructed by Tam, Pun & Yipp for the applicant

Mr Benjamin Yu SC and Mr Bernard Man instructed by Simmons & Simmons for the respondents