LIU HSIAO CHENG v. WONG SHU WAI AND OTHERS

HCA 1278/2013

[2019] HKCFI 115

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1278 OF 2013

________________________

（by original action）

________________________

（by counterclaim）

________________________

________________________

D E C I S I O N

________________________

INTRODUCTION

1.  On 29 July 2016, Master J Wong made 2 orders, namely:

(1)  “the Amendment Order” - granting leave to the 1^st Defendant (by original action) and the Plaintiff (by counterclaim) (“Wong”) to amend his discovery summons dated 12 October 2015 (“the Discovery Summons”) pursuant to an amendment summons dated 21 April 2016 (“the Amendment Summons”); and

(2)  “the Discovery Order” - ordering the Plaintiff (by original action) and the 1^st Defendant (by counterclaim) (“Liu”) to make discovery of 2 classes of documents more particularly described below under the Discovery Summons as amended.

2.  By a Notice of Appeal dated 11 August 2016, Liu appealed against the Amendment Order and Discovery Order to a Judge in Chambers (“the Appeal”).  The Appeal first came before me on 9 March 2017. However, the hearing on that date was utilized to hear a strike out summons issued by Liu on 3 March 2017 (“the Strike Out Summons”), which was also listed to be heard on 9 March 2017. The hearing of the Appeal was adjourned pending the court’s decision on the Strike Out Summons.  On 17 March 2017, I handed down my decision on the Strike Out Summons (“the Strike Out Decision”).  That decision went on appeal to the Court of Appeal as CACV 92/2017.  The Court of Appeal handed down its decision on 7 February 2018 (“the CA Decision”) reversing the Strike Out Decision.

3.  The Appeal came back before me on 19 December 2018.  This is my decision on the Appeal.

THE DISCOVERY ORDER

4.  A brief outline of this case can be found in Mr Justice Anthony Chan’s decision delivered on 21 August 2015 when dealing with a previous application by Liu to strike out Wong’s Amended Counterclaim and related paragraphs of the Amended Defence (reported as Liu Hsiao Cheng v Wong Shu Wai [2015] 4 HKLRD 766, at paragraphs 4 to 7), which I do not propose to repeat in this decision.  For the purpose of this decision, I shall continue to use the expressions and abbreviations as defined in the Strike Out Decision.

5.  As stated in paragraph 3.4 of the Skeleton Argument of Mr Paul Lam, SC (for Wong) dated 17 December 2018, Wong’s counterclaim against Liu is based on the following facts or allegations:

(1)  It was agreed between Liu and Wong that they would share the profits out of the Tobacco Business and the Zimbabwe Businesses on a 50-50 basis.

(2)  Of the 6 Zimbabwean Companies, Golden Driven Investments (Private) Ltd is the corporate vehicle for the Tobacco Business, whereas the other 5 are the corporate vehicles for the Zimbabwe Businesses.

(3)  It was agreed that GDIL would take the role of a “financial hub” for the Tobacco Business and the Zimbabwe Businesses.

(4)  Funds coming from 4 sources all belonging to GDIL in the region of HK$477 million were transferred to accounts in Zimbabwe specifically designated by Liu.

(5)  The transfers were remitted to Liu for the purposes of the Tobacco Business and the Zimbabwe Businesses pursuant to his requests for funds.

(6)  Particulars of the relevant remittances are set out in Appendix A to the Re-Amended Defence and Counterclaim (“Appendix A”), and the purported reasons given by Liu for the requested funds are set out in Appendices A-1 to A-11.

(7)  Most of the accounts designated by Liu to which the remittances were made were unknown to Wong.  Liu has full control of the funds remitted to Zimbabwe, and Wong relied on Liu to manage those funds.

(8)  Wong’s case is that Liu never reported on how any of the funds were actually used or applied, and accordingly Liu is liable to account to GDIL for those funds.

6.  The following averments in the Re-Amended Defence and Counterclaim are relevant for the purpose of the present Appeal:

“11. Since around 2005, [Wong] invested in other businesses in Zimbabwe via the following corporate vehicles, all of which were managed by Liu in Zimbabwe, (the companies described below are hereinafter collectively referred to as ‘the Zimbabwe Businesses’):

(a) Golden Manor Properties (Private) Limited (‘GMPL’) – Incorporated in Zimbabwe on 18 March 2005 with Liu, Shen, WSW and TYY as the directors. GMPL was formed to run a real estate investment business in Zimbabwe.

(b) Gold Driven Tobacco (Private) Limited (‘GD Tobacco’) – Incorporated in Zimbabwe on 2 March 2006. The purpose of GD Tobacco was to operate the cigarette business in addition to the Tobacco Business. The difference between the aforementioned cigarette business and the Tobacco Business was that the cigarette business involved the finished product (ie completed packs of cigarettes) whereas the Tobacco Business only sold the raw tobacco without the packaging work involved in wrapping the tobaccos into cigarettes.

(c) Golden Mushrooms (Private) Limited – Incorporated in 2005 to operate a mushroom processing business.

(d) Golden Brick Enterprise (Private) Limited – Incorporated on 1 June 2005 to operate a brick manufacturing business.

(e) Global Diamond Enterprise (Private) Limited – Incorporated on 1 December 2010 in Zimbabwe to operate a diamond trading business.

13. Ultimately, no profits were ever split from the Zimbabwe Businesses as any revenue generated were subsequently remitted to Zimbabwe pursuant to Liu's funding requests.

14. GDIL has become the financial hub of the Tobacco Business and the Zimbabwe Businesses through its funding of the said companies' expenditures in Zimbabwe and receipt of sale proceeds from the Tobacco Business and Zimbabwe Businesses in Hong Kong in the manner explained below.

15. In respect of the Tobacco Business and the Zimbabwe Businesses:

(a) From time to time, Liu would make requests for funds in writing (such as by email or written requisition signed by Liu or Shen) or orally through the telephone. In most cases, Liu would provide specific bank accounts for [Wong] to transfer the funds, many of which were unknown to [Wong]. Insofar as written requests are concerned, they are evidenced by emails or written requisition forms. The remaining transfers of funds were made pursuant to Liu's oral requests made over the telephone. The particulars of funds transferred to Zimbabwe pursuant to Liu’s requests for funds are set out in ‘Appendix A’ hereto.

(b) To meet Liu’s requests, [Wong] would arrange the funds to be transferred to the accounts specifically provided by Liu. Although most of the accounts provided by Liu were unknown to [Wong], [Wong] did not question Liu as, at that material time, he trusted Liu.

(c) The funds were transferred through GDIL, FH, FHI or [Wong]'s personal accounts. In certain occasions and for reasons only known to Liu, Liu would specifically request the funds to be transferred from FH or FHI. The total sums remitted to Zimbabwe and expenses paid by FH and FHI for GDIL during the Relevant Period are particularized in ‘Appendix D’ hereto.

16. From 25 July 2003 (the date of GDIL’s incorporation) to 31 March 2013 (‘the Relevant Period’):

(a) A total sum of HK$447,636,928.67 was remitted by [Wong] (through GDIL, FH, FHI or [Wong]'s personal accounts) to Zimbabwe for the Tobacco Business and the Zimbabwe Businesses.

(b) Out of the said sum remitted to Zimbabwe, HK$367,533,244.16 were telegraphic transfers made pursuant to Liu's said written requests and HK$80,103,684.51 pursuant to Liu's verbal requests as particularised in Appendix A hereto.

(c) The said funds remitted to Zimbabwe came from 4 sources.

32     (e) As pleaded above, Liu made requests for funds from time to time and he had full control of the funds remitted to Zimbabwe.

(f) [Wong] relied on Liu to manage the said funds in Zimbabwe. Until disputes arose between him and Liu, he believed that Liu would use the funds honestly and for proper purposes, and had never asked Liu to provide any accounts.

125. As pleaded above, Liu has, in breach of his fiduciary duties to GDIL, refused and/or failed to produce any financial information in relation to the Tobacco Business and the Zimbabwe Businesses in Zimbabwe. In the premises, Liu is liable to give an account of the funds remitted to Zimbabwe in the total sum of HK$447,636,928.67. Insofar as such an account may reveal that he has misappropriated any part of this sum, he is liable to repay the same and account for the profits made out of the same.”

7.  Liu’s responses to Wong’s allegations are, in summary, as follows:

(1)  Liu is the sole owner of the Zimbabwe Businesses.  He denies any investment or involvement by Wong in relation thereto (see paragraph 17 of the Amended Reply to Re-Amended Defence and Counterclaim).

(2)  Liu denies that he made any funds requests over the telephone, and otherwise does not admit having made the written funds requests.  Liu also does not admit that he received the HK$447 million, and avers that the remittances as particularised in Appendix A were approved and arranged by Wong (see paragraphs 21, 22 and 120 of the Amended Reply to Re-Amended Defence and Counterclaim).

(3)  Liu claims that there are numerous errors in Appendix A; and that, subject to his non-admission, it appears that the remittances were for the purpose of funding tobacco purchases and the Tobacco JV[1]’s operations, and buying certain machinery for the cigarette, bricks and diamond businesses, ie some of the Zimbabwe Businesses (see paragraphs 21 and 22 of the Amended Reply to Re-Amended Defence and Counterclaim).

8.  The discovery sought by Wong relates to his complaint that Liu has failed to account for the sum of HK$447,636,928.67 remitted by Wong to Zimbabwe upon the alleged requests of Liu.  The relevant remittances are summarised in Appendix A, and further details of those remittances are set out in Appendices A-1 to A-11.  Numerous individual transactions are listed in Appendices A-1 to A-11.

9.  Originally, in the Discovery Summons, Wong sought discovery of 3 classes of documents as set out in paragraphs 1, 2 and 3 of the Schedule thereto.  By the Amendment Summons, Wong sought to abandon paragraph 2 and qualify the scope of the discovery sought under paragraph 3 of the Schedule.

10.  On 29 July 2016, Master J Wong, after a contested hearing, made the following orders, namely:

(1)  the Amendment Order, granting Wong leave to amend the Discovery Summons; and

(2)  the Discovery Order, requiring Liu to (a) file and serve within 42 days an affidavit stating whether he has in his possession or has at any time had in his possession custody or power the documents mentioned below, and if such documents have been but are not now in his possession custody or power, stating when Liu parted with the same and what has become of them; and (b) within 14 days thereafter produce for inspection by Wong, through his solicitors, the said documents, and permit Wong’s solicitors to peruse the same and take copies thereof or make notes of their contents, and be supplied with copies thereof on payment of proper charges -

“1. Corporate documents of the following companies incorporated in the Republic of Zimbabwe since their incorporation, including but not limited to (i) the Certificate of Incorporation; (ii) Particulars of Directors / Secretary / Principal Officers; and (iii) Return of Allotment (save and except those documents exhibited as WSW-21 and WSW-22 to the 1^st Defendant’s 3^rd Affirmation, and those already disclosed in the Plaintiff’s List of Documents as described in paragraph 32 of the same affirmation):

(a) Gold Driven Investments (Private) Limited

(b) Golden Manor Properties (Private) Limited

(c) Gold Driven Tobacco (Private) Limited

(d) Golden Mushrooms (Private) Limited

(e) Golden Brick Enterprises (Private) Limited

(f) Global Diamond Enterprise (Private) Limited

(collectively, the ‘Zimbabwean Companies’)

2. All transaction records, receipts, invoices, business agreements, bank statements and audited/unaudited financial statements of each of the Zimbabwean Companies since their incorporation insofar as they relate to (i) the receipt of any part of the funds constituting the HK$447,636,928.67 remitted to Zimbabwe by or on behalf of GDIL (as particularised in Appendix A to the Amended Defence and Counterclaim); and (ii) the usage, application or any disposition of the same”

(hereinafter referred to as “the Class 1 Documents” and “the Class 2 Documents” respectively).

11.  Liu now appeals against the Amendment Order and Discovery Order.

DISCUSSION

(i)  The Class 2 Documents

12.  I shall first consider the Class 2 Documents, which constitutes the main battle ground between the parties.  Under paragraph 2 of the Discovery Order, Liu is required to make discovery of not only documents relating to the “receipt” of the funds constituting the HK$447,636,928.67 remitted by or on behalf of GDIL to Zimbabwe, but also the “usage, application or any disposition the same”.  In my view, Wong is entitled to discovery of the former, but not the latter, for the following reasons.  First, it is important to note that what Wong is claiming against Liu is for an “account simpliciter” without alleging any breach of duty on the part of Liu (see paragraphs 8, 43 and 45 of the CA Decision).  There is presently no claim by Wong to recover any trust property from Liu (see paragraphs 43 to 49 of the CA Decision).

13.  In paragraph 33 of the CA Decision, the Court of Appeal stated that Wong’s claim against Liu in paragraph 125 of the Re-Amended Defence and Counterclaim is a “a claim arising from the allegations that Liu was a de facto director exercising control over the company’s assets.  Seen in that light, it is a claim based on a pure equitable right as in the case of a claim by a beneficiary against a trustee for an account.”  At paragraph 36, the Court of Appeal further stated as follows:

“Whilst we have reservation if it is appropriate to include that sentence at the end of paragraph 125, we agree with Mr Lam that as the pleadings stand there is no properly advanced claim based on misappropriation of any part of such sum and an account of profit. The prayer does not seek such relief and the further orders that the court may give should be confined to the usual orders to be made upon the taking of an account like directions for falsifying the accounts or surcharges.”

14.  The sentence at the end of paragraph 125 of the Re-Amended Defence and Counterclaim referred to by the Court of Appeal is the following:

“Insofar as such an account may reveal that [Liu] has misappropriated any part of this sum, he is liable to repay the same and account for the profits made out of the same.”

15.  In order to make out his claim for an account, what Wong needs to establish at the trial will be that Liu was a de facto director of GDIL, and received, or had control of, the company’s assets in or by virtue of his capacity as de facto director of GDIL (see paragraphs 25 to 31 of the CA Decision).  It is not necessary for Wong to prove that Liu has misapplied or misappropriated GDIL’s assets in order to maintain his claim for an account.

16.  While I consider that documents relating to the “receipt” of the funds constituting the HK$447,636,928.67 remitted by or on behalf of GDIL to Zimbabwe are relevant and, prima facie, discoverable by Liu, I do not consider the documents relating to the “usage, application or any disposition the same” to be relevant to Wong’s claim against Liu as currently advanced.  In this regard, for the purpose of discovery, “[t]he fact that an issue is raised in the pleadings is not determinative as to whether it relates to a matter in question.  Discovery is not required of documents which relate to irrelevant allegations in pleadings which even if substantiated could not affect the result of the action” (see Allington Investments Corp v First Pacific Bancshares Holdings Ltd, CACV 179/1994 (unreported, 8 February 1995), per Nazareth VP).

17.  Second, I consider the scope of the discovery sought, to the extent that it requires Liu to disclose “[a]ll transaction records, receipts, invoices, business agreements, bank statements and audited/unaudited financial statements of each of the Zimbabwean Companies since their incorporation insofar as they relate to … the usage, application or any disposition of the [HK$447,636,928.67]” to be too wide and oppressive, and would not be proportional to the issue which has to be determined at the trial, namely, whether Liu ought to be required to give an account of the funds allegedly remitted by or on behalf of GDIL to Zimbabwe upon his requests.

18.  I shall now briefly deal with a number of points raised by Liu in support of the Appeal.

(1)  Liu has stated on oath that “the documents requested are no longer in his possession or custody”, because Wong had commenced an action in the Zimbabwe High Court and obtained an order for the appointment of a Provisional Judicial Manager, Ms Grimmel, to seize control of the Zimbabwean Companies.  According to Liu, on or about 17 March 2014, Ms Grimel and a group of people raided and took control of an office in Harare, Zimbabwe, for 4 days during which they seized all the books and records and certain computer diskettes of (4 of the) the Zimbabwean Companies. Although Liu has since obtained an order from the High Court of Zimbabwe to rescind the appointment of the Provisional Judicial Manager, he has not been able to recover the documents from Ms Grimmel (see paragraphs 46 to 51 of Liu’s 2^nd Affirmation filed on 21 January 2016).  On the other hand, Wong has produced some clear evidence to contradict Liu’s assertions, including an affirmation made by Ms Grimmel and some contemporaneous documents generated in legal proceedings in Zimbabwe to show that only 16 stock sheets were taken, and Ms Grimmel had invited the legal representatives of the relevant companies to collect the 16 stock sheets following the rescission of her appointment but no one came to collect them.  Both Mr Lam and Mr Wou have referred me to the judgment of Kwan JA (within whom Fok JA, as he then was, agreed) in Wong Kar Gee Mimi v Severn Villa Ltd [2012] 1 HKLRD 887.  At paragraph 51, Kwan JA stated that the oath of a party giving discovery is generally conclusive, “unless the court can be satisfied – not on a conflict of affidavits, but either from the documents produced or from anything in the affidavit made by [that party], or by any admission by him in the pleadings, or necessarily from the circumstances of the case – that the affidavit does not truly state that which it ought to state”, and that a heavy burden lies on a party who seeks to challenge the veracity of the other party’s oath (in that case regarding “redaction”).  While I should not conduct a mini-trial on affidavit evidence or make any finding of fact upon disputed evidence, it cannot be disputed, on the face of documents produced by Liu, that Ms Grimmel was appointed as Provisional Judicial Manager of only 4 of the 6 Zimbabwean Companies.  Accordingly, Liu’s explanation that he no longer has possession, custody or power of the relevant documents is clearly incomplete and unsatisfactory.  In such circumstances, I consider that Liu ought to be required make an affidavit as directed by the Master to clearly set out and explain which companies’ documents, and what documents, have allegedly been seized by the Provisional Judicial Manager, and what has happened to the documents of the other two Zimbabwean Companies (namely, Golden Manor Properties (Private) Limited and Golden Mushrooms (Private) Limited) which were not placed under provisional judicial management.

(2)  In so far as it is suggested that the documents in question are the properties of the Zimbabwean Companies, not of Liu, and therefore they are not in his possession custody or power for the purpose of discovery, it is significant that Liu has never said in his 2^nd Affirmation that he does not have possession custody or power of the relevant documents because he is a mere director or shareholder of the companies.  His position, as mentioned above, is that the documents are “no longer” in his possession, custody or power because they were seized by the Provisional Judicial Manager and have not been returned by her (see paragraph 51 of Liu’s 2^nd Affirmation).  There is, I consider, an implicit admission by Liu that he did have possession custody or power of the documents until they were allegedly seized by the Provisional Judicial Manager.  It is also relevant that the Zimbabwean Companies are, apparently, under the management and control of Liu.  In such circumstances, I consider that the Master is correct to require Liu to make an affidavit in the terms as set out in paragraph 10(2) above.

(3)  Liu’s point about limitation has now been disposed of by the CA Decision.

(4)  Liu’s objection that the issue of whether the relevant funds were properly utilized in the best interests of the Zimbabwean Companies must fall within the exclusive jurisdiction of the Zimbabwe court (see paragraph 41 of Liu’s 2^nd Affirmation) is misconceived, because the issue to be determined in the Hong Kong proceedings is not whether the funds were used for some improper purposes, but whether Liu is under an obligation to give an account of the funds belonging to GDIL which came under his control.

(5)  Liu’s argument that the discovery sought by Wong is a “fishing expedition” has no merits because the documents relating to the “receipt” of the funds are part of the primary evidence in support of Wong’s claim for an account to be rendered by Liu.

(6)  Lastly, Liu’s argument based on “confidentiality” has likewise no substance.  Although confidentiality is a factor which the court may take into account in the exercise of its discretion whether to order discovery and when determining the scope of the discovery, it is not a bar to the court making an order of discovery of documents which are relevant to the issues in the proceedings and necessary for the fair disposal of those issues.  Further, it appears that Wong, his wife and/or his alter ego (FCK International Company Ltd) are directors and 50% shareholders of the Zimbabwean Companies and, on one view of the matter, those companies were incorporated to carry out joint venture businesses of Liu and Wong.  Moreover, the documents which I consider Liu ought to disclose relate to the receipt of funds paid by or on behalf of GDIL, on whose behalf the present derivative action is brought by Wong by way of counterclaim.  In these circumstances, I do not consider the alleged confidentiality to be a good reason or ground to refuse to order Liu to give discovery.

19.  In all, in respect of the Class 2 Documents, I would narrow down the scope of discovery to be given by Liu as follows –

“All transaction records, receipts, invoices, business agreements, bank statements and audited/unaudited financial statements of each of the Zimbabwean Companies since their incorporation insofar as they relate to the receipt of any part of the funds constituting the HK$447,636,928.67 remitted to Zimbabwe by or on behalf of GDIL (as particularised in Appendix A to the Re-Amended Defence and Counterclaim)”.

(ii)  The Class 1 Documents

20.  The Class 1 Documents go to the question of the ownership and control of the Zimbabwean Companies.  They are relevant to the issue of whether Liu made the alleged funding requests, and whether Wong caused the funds to be remitted to the accounts designated by Liu because he thought they were required for the purposes of the Tobacco Business and Zimbabwe Businesses, and are necessary for the fair dispose of that issue.  Liu’s contention that the documents (or some of the documents) in question are in the public domain (which is disputed by Wong), or that Wong himself has copies of the documents (or some of the documents), is not a ground to refuse to make the discovery order sought.

DISPOSITION

21.  For the above reasons, I allow the Appeal to the extent of limiting the scope of the discovery in respect of the Class 2 Documents as mentioned in paragraph 19 above, but otherwise dismiss the Appeal.  The Amendment Order shall stand, but the Discovery Order shall be varied accordingly.

22.  On the question of costs, in view of the fact that Liu is only partially successful in the Appeal, I make an order that he shall have 50% of the costs of the Appeal, to be taxed if not agreed.  In so far as the costs before the Master are concerned:

(1)  In relation to the Amendment Summons, the Master’s order that there be no order as to the costs of that summons shall stand.

(2)  In relation to the Discovery Summons as amended, the Master made an order that Liu was to pay half of Wong’s costs, including the costs of the hearing on 29 April 2016 and 29 July 2016 and all costs reserved, with certificate for counsel.  Even taking into account the limitation on the scope of the discovery in respect of the Class 2 Documents as mentioned in paragraph 19 above, I consider the costs order made by the Master to be fair and reasonable, and I do not propose to vary it.

23.  Lastly, in relation to the costs of the hearing on 9 March 2017, it will be recalled that it was originally fixed for hearing both the Appeal and the Strike Out Summons.  I am told by counsel that they had one brief covering both matters.  For the benefit of the Taxing Master, I direct as follows:

(1)  50% of counsel’s brief for the hearing on 9 March 2017 shall be attributed to the Appeal, and 50% to the Strike Out Summons; and

(2)  the soli;citors’ costs of attending the hearing on 9 March 2017, which only dealt with the Strike Out Summons, shall be attributed to that summons.

HCA 1278/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1278 OF 2013

____________

（by original action）

____________

（by counterclaim）

____________

__________________

D E C I S I O N

__________________

INTRODUCTION

1.  The main legal issue which arises for my determination is whether Section 4(2) of the Limitation Ordinance, Cap 347, prescribing a limitation period of 6 years for an action for an account has application to a claim by a principal against a fiduciary for an account of the properties of the principal which have been received by, or come under the control of, the fiduciary.  This legal issue arises in the following circumstances.

2.  Paragraph 125 the Re-Amended Defence and Counterclaim of Wong (the 1^st defendant by original action and the plaintiff by counterclaim) states as follows:-

“As pleaded above, Liu has, in breach of his fiduciary duties to GDIL, refused and/or failed to produce any financial information in relation to the Tobacco Business and the Zimbabwe Businesses in Zimbabwe. In the premises, Liu is liable to give an account of the funds remitted to Zimbabwe in the total sum of HK$447,636,928.67. Insofar as such an account may reveal that he has misappropriated any part of this sum, he is liable to repay the same and account for the profits made out of the same.”

3.  Particulars of the alleged remittances, totalling HK$447,636,928.67, are given in Appendices A to A-11 to the Re‑Amended Defence and Counterclaim.  As one can see from those Appendices, some of the remittances were made prior to 12 July 2007, being the date which was 6 years prior to the date of commencement of this action.

4.  By a summons dated 3 March 2017, Liu (the plaintiff by original action and the 1^st defendant by counterclaim) applies to strike out paragraph 125 of the Re-Amended Defence and Counterclaim to the extent of any alleged remittances made on or before 12 July 2007.

5.  The basis of the strike out application, according to Mr Wou (counsel for Liu), is that Wong’s claim for an account, to the extent that it relates to remittances made on or before 12 July 2007, would be time barred by virtue of Section 4(2) of the Limitation Ordinance.  In what follows, references to sections shall, unless otherwise expressly indicated, be references to the sections of the Limitation Ordinance.

6.  Mr Lam SC (for Wong)’s answer to the strike out application is twofold:-

(1)   Section 4(2) does not apply to Wong’s claim for an account against Liu because it is a claim for equitable relief under Section 4(7).

(2)   In the alternative, Wong’s claim can be regarded as a claim to recover trust property or the proceeds thereof within the meaning of Section 20(1)(b) and therefore no period of limitation prescribed by the Limitation Ordinance shall apply to it.

BRIEF BACKGROUND

7.  The pleadings in this case are very lengthy and complicated.  For the purpose of disposing of the present strike out application, it is not necessary for me to set out in full the respective pleaded cases of the parties.  I would gratefully adopt paragraphs 4 to 7 of Anthony Chan J’s decision delivered on 21 August 2015 when dealing with a previous application by Liu to strike out Wong’s Amended Counterclaim and related paragraphs of the Amended Defence (reported as Liu Hsiao Cheng v Wong Shu Wai [2015] 4 HKLRD 766) for a brief outline of their respective cases, as follows:-

“4. This is yet another case where former business partners are locked in a legal battle. According to the pleadings filed in this action, Wang and Liu were good friends and they became partners in various business ventures in Zimbabwe. The businesses were conducted via corporate vehicles. The main venture was a tobacco business involving millions of dollars.

5. Liu commenced this action as a common law derivative action (‘CLDA’) against, inter alia, Wong as follows:

(a)  Gold Driven Investments Ltd (‘GDIL’) is a Hong Kong company.  This was the corporate vehicle with which the tobacco trading was conducted;

(b)  Half of the shares in GDIL are held by Liu and his wife, Shen Luan.  The other half is held by Wong and his wife, Tsoi Yu Yu.  The 4 shareholders are also the only directors of GDIL.  The wives are merely nominees of their husbands;

(c)  Wong is in control of GDIL;

(d) Liu is claiming on behalf of all shareholders of GDIL except Wong and his wife;

(e)  Liu alleges that Wong had, inter alia, breached his fiduciary duties to GDIL by committing various wrongful acts. Such acts primarily concern money belonging to GDIL.

6.   Wong makes a counterclaim against Liu.  The counterclaim also takes the form of a CLDA.  In the Amended Counterclaim, apart from repeating his Amended Defence, Wong pleaded that:

(a)  Liu and Shen hold 50% of the shares in GDIL. Wong counterclaims on behalf of the shareholders of GDIL except Liu and Shen;

(b)  Liu was under fiduciary duties to GDIL;

(c)  Liu had breached his fiduciary duties by reason of 3 wrongful acts, and for which he is liable to give an account and/or pay damages.  The 3 wrongful acts are pleaded in paras 125, 126 and 127 respectively:

(i) Liu failed to account for the sum of HK$447,636,928.67 remitted by Wong to Zimbabwe;

(ii) In March 2012, Liu caused part of the sale proceeds of the ‘Tobacco Business’[1] in the total sum of US$3,356,100 to be transferred to an unknown account instead of the account of GDIL;

(iii) Liu failed to cause Wonderful International (a company beneficially owned by Liu and his wife) to return a total sum of US$1,213,157.50 to GDIL.

7.   In respect of the first alleged wrongful act committed by Liu, Wong has pleaded in the Amended Defence that:

(a)  GDIL was incorporated for the Tobacco Businesses in Zimbabwe;

(b)  GDIL would also be responsible for funding the other ‘Zimbabwe Businesses’[2];

(c)  GDIL became the financial hub for the Tobacco Business and the Zimbabwe Businesses.  Wong would arrange funds to be transferred to various accounts according to the instructions of Liu;

(d) Liu made requests for funds from time to time and had full control of the funds remitted to Zimbabwe.  Wong relied on Liu to manage those funds with the belief that Liu would use the funds honestly and for proper purposes.  He had never asked Liu to provide any accounts for the funds;

(e)  From 25 July 2003 to 31 March 2013, a total sum of HK$447,636,928.67 was remitted by Wong, through various entities, to Zimbabwe accordingly. Most of the money came from the income of GDIL paid by China Tobacco (one of its trading partners);

(f)  Since about early November 2011, Liu has failed to provide an account for the funds remitted to Zimbabwe despite Wong’s repeated requests.”

8.  Although Wong has since further amended his Amended Defence and Counterclaim, the substance of his case has, I understand, remained the same.

9.  I am told by the parties that there is a dispute as to whether Liu is a properly appointed director of GDIL.  Nevertheless, it does not appear to be in issue that, for the purpose of the present application, Liu is, and at all material times was, at least a de facto director of GDIL.

10.  There is one other matter that I should allude to before discussing the issue of limitation.  Although it is pleaded in paragraph 125 of the Re-Amended Defence and Counterclaim that Liu has, in breach of his fiduciary duties to GDIL, refused and/or failed to produce any “financial information in relation to the Tobacco Business and the Zimbabwe Businesses”, the substance of Wong’s complaint, as explained or clarified by Mr Lam, is that Liu has failed to provide information relating to the “use” or “application” of the funds remitted to Zimbabwe at his requests.  I believe that Liu understands that this is the case that has been raised by Wong against him, notwithstanding the fact that it could have been more clearly pleaded in paragraph 125.  For the purpose of this application, I shall read paragraph 125 as explained or clarified by Mr Lam.  If necessary, paragraph 125 can be amended accordingly.

Section 4(2) has no direct application to wong’s claim for an account

11.  Section 4(2) states as follows:-

“An action for an account shall not be brought in respect of any matter which arose more than 6 years before the commencement of the action.”

12.  Mr Wou relies upon this subsection to contend that Wong’s claim for an account, in so far as the relevant remittances were made more than 6 years prior to the commencement of this action (ie those made on or before 12 July 2007), is time barred.

13.  Mr Lam argues, however, that the application of Section 4(2) is subject to Section 4(7), which provides as follows:-

“This section shall not apply to any claim for specific performance of a contract or for an injunction or for other equitable relief, except in so far as any provision thereof may be applied by the court by analogy in like manner as the corresponding enactment contained in the Limitation Act 1980 (1980 c. 58 U.K.) is applied in the English Courts.”

14.  Mr Lam further argues that a claim for an account would be for “equitable relief” for the purpose of Section 4(7) if the duty to account arises from a violation of an underlying right which is equitable in nature.  Support for this approach can be found in the decision of Mr Recorder Fok SC (as he then was) in Hollywood Shopping Centre Owners Committee Limited v The Incorporated Owners of Wing Wah Building Mongkok Kowloon, HCA 1582/2007 (23 April 2008). That case concerned a dispute between (i) the incorporated owners of a building and (ii) the agent/manager of a shopping centre forming part of the building over the title to, and right to use, an external canopy of the building.  The agent/manager claimed that it had acquired title to the canopy by way of adverse possession, whereas the incorporated owners counterclaimed that the agent/manager did not have title to the canopy nor the right to use it as it had done (for the purpose of affixing advertising boards).  The incorporated owners further raised a counterclaim for (inter alia) an account and inquiry in respect of the agent/manager’s profits from the use of the canopy for the advertising boards in breach of the relevant DMC.

15.  One of the defences raised by the agent/manager was that the counterclaim for an account was time-barred under Section 4(3), which provides that: “An action upon a specialty shall not be brought after the expiration of 12 years from the date on which the cause of action accrued …”.

16.  The learned Recorder held that the incorporated owner’s claim for an account was a claim for equitable relief and therefore Section 4(3) had no application to the claim.  At paragraphs 36 and 37 of his decision, the learned Recorder stated as follows:-

“36 Furthermore, Mr Lam submitted that the Defendant’s claims in paragraphs (a) to (c) of the prayer for relief in the counterclaim were in the nature of claims for injunctive relief and that its claims for an account and inquiry in paragraphs (d) to (g) of the prayer were claims for equitable relief in the circumstances. Hence, he submitted, s.4(7) of the Limitation Ordinance must apply and there is no question of the counterclaim being time‑barred.

37 I think Mr Lam is correct in his characterisation of the nature of the Defendant’s counterclaims as being equitable.  Although Mr Wong submitted that the action for an account of profits was developed by the common law, it is clear that equity also recognised this concept and, in order to determine the nature of a claim for an account, it is necessary to look at the underlying right which has been violated.  Here, the Defendant’s claim is for breach of the DMC and, on the authority of Incorporated Owners of Man Hong Apartments v. Kwong Yuk Ching (see the passage quoted at paragraph 34 above and see also p.122E of the judgment), that is an equitable claim.”

17.  I pause to observe that the learned Recorder did not, in that case, go on to consider whether the limitation period under Section 4(3) could be applied by analogy “in like manner as the corresponding enactment contained in the Limitation Act 1980 … is applied in the English Courts” under Section 4(7). 

18.  The learned Recorder did not do so probably because his attention was drawn by counsel for the incorporated owners to the following statement of Mayo VP in Incorporated Owners of Man Hong Apartments v Kwong Yuk Ching [2001] 3 HKC 116, at 123H-I:-

“Equally s.4(7) specifically excludes actions for injunction and other equitable relief from the operation of the section.

There also can be no question of the statutes of limitation having any application by analogy as the claim here for breach of the terms of the DMC are in no way equivalent to any common law right of action.”

19.  Since I am not dealing with a case of breach of DMC, the correctness of the above view expressed by Mayo VP does not arise for consideration.  I shall, however, have to come back to the application of the statute of limitations by analogy later in this decision.

20.  In the present case, Mr Lam submits that Wong’s claim for an account against Liu is for “equitable relief” because it is based on the latter’s fiduciary duty, as a director or de facto director of GDIL, to account to GDIL for monies belonging to GDIL which were remitted by Wong to Zimbabwe pursuant to his requests and came under his control.

21.  I accept Mr Lam’s submission that Wong’s claim for an account is for equitable relief, and therefore Section 4(2) has no direct application to it.

Section 4(2) applies, by “analogy”, to Wong’s claim for an account

22.  It does not necessarily follow, however, that Section 4(2) can have no application to Wong’s claim for an account, because Section 4(2) may apply “by analogy in like manner as the corresponding enactment contained in the Limitation Act 1980 … is applied in the English Courts” under Section 4(7) (“the Analogy Exception”).

23.  The meaning and effect of the Analogy Exception is a matter of some difficulties.  It was considered by Megarry VC in Tito v Waddell (No 2) [1977] 1 Ch 106 at 250-251 in the context of the equivalent Section 2(7) of the Limitation Act 1939.  I do not propose to quote the whole analysis of the Vice-Chancellor in this decision.  It suffices for me to refer to his conclusion at 251E-G, as follows:-

“I find this matter indeed puzzling… However, I think the answer may be along the following lines. In so far as the claim to an account is ancillary to the claim for equitable compensation, the application of the Act and the doctrine of laches to the ancillary claim ought to be the same as its application to the substantive claim. Thus it seems clear that where a claim against a person in a fiduciary position is not barred by lapse of time, he must account without limit of time: see Halsbury's Laws of England , 3rd ed., vol. 24 (1958), p. 282. If, contrary to what I have held, there is a time limit in the present case, I would hold that neither directly nor by analogy does section 2 of the Act of 1939 impose any time limit on the claim to an account that is not imposed on the substantive claim for equitable compensation.

The upshot is that if the plaintiffs’ claim were otherwise valid, I would hold that it is not barred by any statutory period of limitation, either directly or by analogy.  Through subject to the equitable doctrine of laches, it is not barred by laches either, since laches has not been pleaded.”

24.  In other words, where the equitable claim for an account is ancillary to another equitable claim, the limitation period applicable to the other claim will also apply to the claim for an account.  On the other hand, if there is no limitation period applicable to the other equitable claim, the claim for an account would likewise not be subject to any limitation period.  These having been said, the claim for an account would still be subject to the equitable doctrine of laches.

25.  The Analogy Exception was considered in a more recent decision of the English Court of Appeal in Gwembe Valley Development Co Ltd (in receivership) v Koshy (No 3) [2004] 1 BCLC 131. That case concerned a claim by a company against its director to account for secret profits arising from his breach of the “no profit” rule and his dishonest breach of fiduciary duty.  The question arose as to whether the action for an account of profits was barred by the Limitation Act 1980. 

26.  The following provisions of the Limitation Act 1980 are relevant for the purpose of the present discussion:-

“21(1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action – (a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or (b) to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use.

21(3) Subject to the preceding provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a limitation period is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued …

23 An action for an account shall not be brought after the expiration of any time limit under this Act which is applicable to the claim which is the basis of the duty to account.

36(1)  The following time limits under this Act … shall not apply to any claim for specific performance of a contract or for an injunction or for other equitable relief, except in so faras any such time limit may be applied by the court by analogy in like manner as the corresponding time limit under any enactment repealed by the Limitation Act 1939 was applied before 1st July 1940.”

27.  It can be seen immediately that the above provisions of the Limitation Act 1980 are similar to the corresponding provisions in our Limitation Ordinance save that we do not have the equivalence of Section 23 of the Act.

28.  Delivering the judgment on behalf of the English Court of Appeal, Mummery LJ summarized the applicable principles as follows:-

“111 In the light of those cases, in our view, it is possible to simplify the court's task when considering the application of the 1980 Act to claims against fiduciaries. The starting assumption should be that a six year limitation period will apply - under one or other provision of the Act, applied directly or by analogy - unless it is specifically excluded by the Act or established case-law. Personal claims against fiduciaries will normally be subject to limits by analogy with claims in tort or contract (1980 Act s 2, 5; see the Seguros case [2000] 2 All ER (Comm) 787, [2001] 1 WLR 112). By contrast, claims for breach of fiduciary duty, in the special sense explained in Mothew, will normally be covered by section 21. The six-year time‑limit under section 21(3), will apply, directly or by analogy, unless excluded by subsection 21(1)(a) (fraud) or (b) (Class 1 trust).

112   In the present case, it is clear that these principles were applicable to a director in Mr Koshy's position. He had ‘trustee-like responsibilities’ in the exercise of the powers of management of the property of GVDC and in dealing with the application of its property for the purposes, and in the interests, of the company and of all its members. In our view, accordingly, the claim for an account, if it was based on a failure in the exercise of those responsibilities, was within the scope of section 21. It was in principle subject to a six-year time-limit under section 21(3). The question is whether it was excluded under either of the two statutory exceptions in section 21(1)(a) and (b).”

29.  On the facts of that case, the English Court of Appeal further held that:-

(1) the action for an account of profits against the director was an action, or was treated for limitation purposes as analogous to an action, for “fraud or fraudulent breach of trust” within Section 21(1)(a) of the 1980 Act;

(2) no limitation period would apply to such action; and

(3) acting on the analogy of the statutory provision in Section 21(1)(a) of the 1980 Act, the court of equity before 1 July 1940 would hold that there was no limitation period applicable to the cause of action against the director (see paragraph 161 of the judgment).

30.  It can be seen that under both the Limitation Act 1939 and the Limitation Act 1980, the English courts have adopted the approach that in determining whether the statute of limitations can apply by “analogy” to an action for an account in equity, one has to ask whether the underlying cause of action giving rise to the duty to account is itself subject to any time limit as prescribed by the statute of limitations.

31.  This approach does not, however, provide an answer to the applicability of the statute of limitations by analogy in a situation where the action for an account is not dependent on proof of any breach of substantive duty, or is not ancillary to another equitable claim.  For example, a fiduciary is under a general duty to account without the need to prove any breach of fiduciary duty.  This general duty of a fiduciary to account, and its relationship to remedies which may flow from the account rendered by the fiduciary, were explained by Lord Millet NPJ in Libertarian Investments Ltd v Thomas Alexej Hall (2013) 16 HKCFAR 681, as follows:-

“167 It is often said that the primary remedy for breach of trust or fiduciary duty is an order for an account, but this is an abbreviated and potentially misleading statement of the true position. In the first place an account is not a remedy for wrong. Trustees and most fiduciaries are accounting parties, and their beneficiaries or principals do not have to prove that there has been a breach of trust or fiduciary duty in order to obtain an order for account. Once the trust or fiduciary relationship is established or conceded the beneficiary or principal is entitled to an account as of right. Although like all equitable remedies an order for an account is discretionary, in making the order the court is not granting a remedy for wrong but enforcing performance of an obligation.

168 In the second place an order for an account does not in itself provide the plaintiff with a remedy; it is merely the first step in a process which enables him to identify and quantify any deficit in the trust fund and seek the appropriate means by which it may be made good. Once the plaintiff has been provided with an account he can falsify and surcharge it. If the account discloses an unauthorised disbursement the plaintiff may falsify it, that is to say ask for the disbursement to be disallowed. This will produce a deficit which the defendant must make good, either in specie or in money. Where the defendant is ordered to make good the deficit by the payment of money, the award is sometimes described as the payment of equitable compensation; but it is not compensation for loss but restitutionary or restorative. The amount of the award is measured by the objective value of the property lost determined at the date when the account is taken and with the full benefit of hindsight.

169 But the plaintiff is not bound to ask for the disbursement to be disallowed. He is entitled to ask for an inquiry to discover what the defendant did with the trust money which he misappropriated and whether he dissipated it or invested it, and if he invested it whether he did so at a profit or a loss. If he dissipated it or invested it at a loss, the plaintiff will naturally have the disbursement disallowed and disclaim any interest in the property in which it was invested by treating it as bought with the defendant’s own money. If, however, the defendant invested the money at a profit, the plaintiff is not bound to ask for the disbursement to be disallowed. He can treat it as an authorised disbursement, treat the property in which it has been invested as acquired with trust money, and follow or trace the property and demand that it or its traceable proceeds be restored to the trust in specie.”

32.  Wong’s claim against Liu for an account, as I understand it, is based on the simple fact that (i) Liu is a fiduciary vis-à-vis GDIL, and (ii) assets belonging to GDIL have (allegedly) come under his control.  I have not been referred to any authority by counsel on whether the limitation period of 6 years prescribed by Section 4(2) can be applied, by reliance upon the Analogy Exception, to a bare claim by a company against its director/de facto director for an account of the properties or assets belonging to the company which have come into the hands or under the control of its director/de facto director.

33.  As a matter of principle, I consider that Section 4(2) can be so applied to such a claim.  That seemed to be the position in England prior to the Limitation Act 1939, as recognized by Megarry VC in Tito v Waddell (No 2). At page 250 of the law report, the Vice Chancellor referred to an old case called Knox v Gye (1872) LR 5 HL 656.  In that case, the House of Lords (by a majority) held that an action for an account of profits in a partnership was time-barred by applying the statute of limitations by analogy.

34.  At pages 673 to 675 of the law report, Lord Westbury stated as follows:-

“That a Court of Equity will not, after the lapse of six years without acknowledgment, decree an account between a surviving partner and the estate of a deceased partner has been long settled by various decisions… The general principle was laid down as early as the case of Lockey v. Lockey, where it was held that where a Court of Equity assumes a concurrent jurisdiction with Courts of Law no account will be given after the legal limit of six years, if the statute be pleaded… because a Court of Equity, in affording such a remedy and giving such an account, would act by analogy to the Statute of Limitations. For where the remedy in Equity is correspondent to the remedy at Law, and the latter is subject to a limit in point of time by the Statute of Limitations, a Court of Equity acts by analogy to the statute, and imposes on the remedy it affords the same limitation. This is the meaning of the common phrase, that a Court of Equity acts by analogy to the Statute of Limitations, the meaning being, that where the suit in Equity corresponds with an action at Law which is included in the words of the statute, a Court of Equity adopts the enactment of the statute as its own rule of procedure. But if any proceeding in Equity be included within the words of the statute, there a Court of Equity, like a Court of Law, acts in obedience to the statute. I have no doubt, therefore, of the Statute of Limitations being a bar to the whole of the relief sought by the Appellant as executor of Thistlethwayte.

Your Lordships will no doubt recollect that in the observations I have made with regard to the adoption of the statute by a Court of Equity, I refer to those well-known expressions of Lord Redesdale, in which he distinguishes between the cases where a Court of Equity acts in analogy to the statute, and where it acts in obedience to the statute. Where a Court of Equity frames its remedy upon the basis of the Common Law, and supplements the Common Law by extending the remedy to parties who cannot have an action at Common Law, there the Court of Equity acts in analogy to the statute; that is, it adopts the statute as the rule of procedure regulating the remedy it affords.”

35.  In Gwembe Valley Development Co Ltd, Mummery LJ stated, at paragraph 81, that the effect of Section 36 of the Limitation Act 1980 (equivalent to our Section 4(7)) was to preserve the cases in which a court of equity would have applied the statutory limitation periods by analogy, as explained by Lord Westbury in Knox v Gye.

36.  In all, I am of the view that the limitation period of 6 years under Section 4(2) can be applied by analogy to the present claim by Wong for an account against Liu.  That being the position, his action for an account, in so far as it relates to remittances made on or before 12 July 2007, would be time-barred.

SECTION 20(1)(b) HAS NO APPLICATIONto Wong’s claim for an account

37.  I can dispose of Mr Lam’s alternative argument based on Section 20(1)(b) briefly.  I do not see that Wong’s claim can be regarded as an action “to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use”.  Granted that this subsection has application to a director as it does to a trustee (see Lewin on Trusts, 19^th Ed, paragraph 44-077), Mr Lam accepts that Wong is unable to allege, at this stage, that Liu has misappropriated any asset or property belonging to GDIL.  Hence, in paragraph 125 of Re-Amended Counterclaim, it is pleaded that insofar as the account sought may reveal that Liu has misappropriated any part of the monies, Liu is liable to repay the same and account for the profits made out of the same.

38.  In other words, Wong’s claim for an account is the first step which may lead to further remedies against Liu.  This would be entirely consistent with what Lord Millet said in paragraph 168 of his judgment in Libertarian Investments Ltd, ante.  It is not, however, a claim for recovery of trust property belonging to GDIL or the proceeds thereof in the possession of Liu.

39.  Mr Lam reminds the court that a pleading should not be struck out save in a plain and obvious situation.  I agree.  However, the limitation point raised by Mr Wou is a short point of law.  Although it is by no means an easy one, I do not consider that any useful purpose will be served by postponing its determination, there being no suggestion that further evidence may be adduced at the trial which could be relevant to its proper resolution.

DISPOSITION

40.  For the above reasons, I hold that the claim for an account in paragraph 125 of the Re-Amended Defence and Counterclaim, to the extent that it relates to remittances made on or before 12 July 2007, is time-barred.  Since the parties have not addressed me on the question of whether the striking out of the entries relating to remittances made on or before 12 July 2007 in Appendices A to A-11 would or may have any impact on other pleas in the Re-Amended Defence and Counterclaim, I shall leave it to the parties to agree on the form of the order to give effect to this decision, with liberty to apply in the event of disagreement.

41.  The parties are agreed that the costs of the strike out application should follow the event. Accordingly, Wong shall pay Liu the costs of and occasioned by the strike out summons dated 3 March 2017, to be assessed on a party and party basis if not agreed, with certificate for counsel.  In view of the fact that the hearing on 9 March 2017 was originally fixed for the hearing of Liu’s Notice of Appeal dated 11 August 2016 and there could be some issues regarding the proper apportionment of counsel’s brief fee for the hearing, I shall postpone the assessment of the costs, which I intend to do summarily, to the next hearing when the Notice of Appeal comes before me.

HCA 1278/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1278 OF 2013

________________________

(by original action)

________________________

 (by counterclaim)

________________________

_______________

D E C I S I O N

_______________

1. By a Summons dated 16 October 2014, the plaintiff (who is the 1^st defendant by Counterclaim) (“Liu”) applied to strike out the entire Amended Counterclaim and related paragraphs of the Amended Defence of the 1^st defendant (and plaintiff by Counterclaim) (“Wong”) pursuant to O 18, r 19, RHC on the ground that they disclose no reasonable cause of action.

2. By an Order dated 12 February 2015 (“Order”), Master Chow struck out paras 125 and 127 of the Amended Counterclaim and awarded Liu 80% of his costs.

3. Wong now appeals against the Order and Liu cross-appeals to strike out also paras 43(f), 43(g) and 94(c)(i) of the Amended Defence and para 126 of the Amended Counterclaim. 

Background

4. This is yet another case where former business partners are locked in a legal battle.  According to the pleadings filed in this action, Wang and Liu were good friends and they became partners in various business ventures in Zimbabwe.  The businesses were conducted via corporate vehicles.  The main venture was a tobacco business involving millions of dollars. 

5. Liu commenced this action as a common law derivative action (“CLDA”) against, inter alia, Wong as follows :

(a)   Gold Driven Investments Ltd (“GDIL”) is a Hong Kong company.  This was the corporate vehicle with which the tobacco trading was conducted;

(b)   Half of the shares in GDIL are held by Liu and his wife, Shen Luan.  The other half is held by Wong and his wife, Tsoi Yu Yu.  The 4 shareholders are also the only directors of GDIL.  The wives are merely nominees of their husbands;

(c)   Wong is in control of GDIL;

(d)   Liu is claiming on behalf of all shareholders of GDIL except Wong and his wife;

(e)   Liu alleges that Wong had, inter alia, breached his fiduciary duties to GDIL by committing various wrongful acts. Such acts primarily concern money belonging to GDIL.

6. Wong makes a counterclaim against Liu.  The counterclaim also takes the form of a CLDA.  In the Amended Counterclaim, apart from repeating his Amended Defence, Wong pleaded that :

(a) Liu and Shen hold 50% of the shares in GDIL. Wong counterclaims on behalf of the shareholders of GDIL except Liu and Shen;

(b) Liu was under fiduciary duties to GDIL;

(c) Liu had breached his fiduciary duties by reason of 3 wrongful acts, and for which he is liable to give an account and/or pay damages.  The 3 wrongful acts are pleaded in paras 125, 126 and 127 respectively:

(i) Liu failed to account for the sum of HK$447,636,928.67 remitted by Wong to Zimbabwe;

(ii) In March 2012, Liu caused part of the sale proceeds of the “Tobacco Business”[1] in the total sum of US$3,356,100 to be transferred to an unknown account instead of the account of GDIL;

(iii) Liu failed to cause Wonderful International (a company beneficially owned by Liu and his wife) to return a total sum of US$1,213,157.50 to GDIL.

7. In respect of the first alleged wrongful act committed by Liu, Wong has pleaded in the Amended Defence that :

(a) GDIL was incorporated for the Tobacco Businesses in Zimbabwe;

(b) GDIL would also be responsible for funding the other “Zimbabwe Businesses”[2];

(c) GDIL became the financial hub for the Tobacco Business and the Zimbabwe Businesses.  Wong would arrange funds to be transferred to various accounts according to the instructions of Liu;

(d) Liu made requests for funds from time to time and had full control of the funds remitted to Zimbabwe.  Wong relied on Liu to manage those funds with the belief that Liu would use the funds honestly and for proper purposes.  He had never asked Liu to provide any accounts for the funds;

(e) From 25 July 2003 to 31 March 2013, a total sum of HK$447,636,928.67 was remitted by Wong, through various entities, to Zimbabwe accordingly. Most of the money came from the income of GDIL paid by China Tobacco (one of its trading partners);

(f) Since about early November 2011, Liu has failed to provide an account for the funds remitted to Zimbabwe despite Wong’s repeated requests.

Issues

8. Mr Lam SC, who appeared for Wong, has identified 3 issues at the beginning of this hearing.  Those issues were agreed by Mr Wou, who appeared for Liu.  However, in the course of Mr Wou’s submissions, it became clear that the arguments here are limited to 2 issues.  They concern the requirements for a CLDA, namely, (a) whether Liu “controls” GDIL such that he can stifle any suggestion of an action by GDIL against him; and (b) whether it must be shown that Liu had derived personal benefits from the wrongdoings alleged against him.

9. This strike out application is premised solely on the ground that there is no reasonable cause of action.  No evidence is admissible.  The court shall look at the pleading alone and decide whether, on the assumption that the facts as pleaded are true, it discloses a reasonable cause of action.  It is only in a plain and obvious case that a claim should be struck out.

Amendments to the Amended Counterclaim

10. Before dealing with the issues, it should be noted that Mr Lam has accepted that there are deficiencies in the Amended Counterclaim in respect of (a) the allegations concerning Liu’s breach of fiduciary duties and (b) the allegations over the sum of HK$447,636,928.67 in para 125 in that they concern, in addition to the Tobacco Business, also the Zimbabwe Businesses.

11. Mr Lam informed the court that voluntary particulars will be provided to remedy the 1^st deficiency.  As regards the 2^nd, I give leave for the remedial amendment. 

Control

12. This is the only ground pleaded in the Defence to Amended Counterclaim of Liu in support of the contention that Wong is not entitled to sue :

(a) Wong, together with his wife, hold 50% of the shares in GDIL;

(b) Liu was never in control of GDIL;

(c) Wong made no attempt to cause or procure GDIL to sue in its own name.

13. The issue here is the control of voting power in the general meeting of the GDIL.  The critical question is whether Liu is in a position to prevent the company from suing in its own name.

14. In para 122(a) of the Amended Counterclaim, Wong pleaded that :

“As pleaded above, Liu and Shen (being Liu’s nominee according to Liu) hold 50% shares in GDIL.”

15. Mr Wou accepted that in a deadlock situation, the requirement of control can be satisfied as a matter of law. 

16. This concession was rightly made.  In Anglo-Eastern (1985) Ltd and Anr v Karl Knutzand Ors [1988] 1 HKLR 322 at 329E-F, the Court of Appeal held that, although strictly speaking there are no minorities in a deadlocked company, there is no good reason why a CLDA cannot be brought in such a case.  In such circumstances, the shareholder who has committed the wrongful act is in control of the company in the negative sense that he can prevent the company from taking action (see Glass v Atkin [1968] 1 O.R. 90-93).  As Briggs J observed in Universal Project Management Services Ltd v Fort Gilkicker [2013] Ch 551, §§18 & 54, “wrongdoer control” will arise where the aggrieved members and the wrongdoers are in 50/50 control, such that either may prevent the company from suing.

17. However, Mr Wou argued that the control element has not been satisfied when Wong did not call for a meeting to discuss an action by GDIL against Liu. 

18. There is an usual feature in this argument.  Mr Wou is relying upon an ambiguity in Wong’s pleading as to whether Liu’s wife is merely his nominee (see para 14 above).  Further, Liu’s plea that the wives are nominees has been denied in para 27 of the Amended Defence.  Hence, the foundation of Mr Wou’s argument, that Liu’s wife is not merely his nominee, is contrary to Liu’s own pleaded case. 

19. In answer, Mr Lam said that there is no legal requirement that, before commencing a CLDA, a member must first make an attempt to procure the company to sue in its own name.  Further, he argued that such an attempt would have been futile. 

20. Furthermore, Mr Lam submitted that Wong and Liu are in the same position in this respect.  If Liu is entitled to bring a CLDA against Wong, it is impossible to understand how, at the same time, he can assert that Wong is not so entitled.  There is no averment in Liu’s pleading that he had tried but failed to procure GDIL to bring an action against Wong. 

21. I agree with Mr Lam that there is no legal requirement that in a deadlock situation, the aggrieved member is required to try to procure the company to take action against the wrongdoer.  Such an act would be futile.  It follows that there is no requirement for such a plea in a CLDA. 

22. The issue is boiled down to whether the deadlock has been sufficiently pleaded by Wong.  The way in which Wong’s case has been formulated is not entirely satisfactory.  The averment could, and should, have been pleaded without ambiguity.  Indeed, the ambiguity is inconsistent with the unequivocal manner in which the deadlock point has been made by Mr Lam. However, the deficiency here does not constitute a plain and obvious case to justify a strike out. 

23. On the other hand, the deficiency should be remedied, and for which purpose Wong should take advantage of the opportunity to amend his pleading (see para 11 above).  I extend the leave to amend to cover this deficiency.

Fraud for the purpose of CLDA

24. The analysis of the 2^nd issue (see para 8 above) should start with an examination of the element of fraud which gives rise to a CLDA.  In Anglo-Eastern (1985) Ltd, supra, at pp 327C-328H, the Court of Appeal held that, in the context of a CLDA, fraud is not limited to common law fraud; it includes fraud in the wider equitable sense.  There is no doubt that fraud in the present context includes breach of fiduciary duty (see Universal Project Management Services Ltd, supra, §§18 & 54).

25. Mr Wou did not quarrel with the proposition that breach of fiduciary duty is a specie of fraud which can be relied upon in a CLDA.  Therefore, prima facie, the Amended Counterclaim is properly constituted. 

26. The controversy is boiled down to Liu’s contention that to properly constitute a cause of action under a CLDA there must be a plea that the wrongdoer has received some personal benefits by reason of the acts complained of. 

27. This argument cannot apply to para 127 because Wong has pleaded in that paragraph that the monies in question were received by Wonderful International, which is a company beneficially owned by Liu and his wife.

28. The legal question here is whether it is an essential element in a CLDA based on breach of fiduciary duties that the wrongdoer is in receipt of benefits by reason of his wrong.

29. Mr Wou’s argument is based on the following dicta by Templeman J in Daniels v Daniels [1978] Ch 406 at 413H-414B (the dicta was cited in Anglo-Eastern (1985) Ltd, supra, at p 327G-I) :

“The authorities which deal with simple fraud on the one hand and gross negligence on the other do not cover the situation which arises where, without fraud, the directors and majority shareholders are guilty of breach of duty which they owe to the company, and that breach of duty not only harms the company but benefits the directors. In that case it seems to me that different considerations apply. If minority shareholders can sue if there is fraud, I see no reason why they cannot sue where the action of the majority and the directors, though without fraud, confers some benefit on those directors and majority shareholders themselves. It would seem to me quite monstrous – particularly as fraud is so hard to plead and difficult to prove – if the confines of the exception to Foss v Harbottle 2 Hare 461 were drawn so narrowly that directors could make a profit out of their negligence.”

Templeman J further held at p 414D:

“… a minority shareholder who has no other remedy may sue where directors use their powers, intentionally or unintentionally, fraudulently or negligently, in a manner which benefits themselves at the expense of the company.”

30. Acting in the best of tradition of the Bar, this court’s attention has been drawn by Mr Lam to a recent English first instance judgment which supports Liu’s argument.  In Abouraya v Sigmund& Ors [2014] EWCH 277 (Ch), David Richards J[3] held in §25 as follows :

“Equally, the authorities require that, in the absence of actual fraud or an ultra vires act, the wrongdoers should themselves have benefitted from the wrongdoing. The significance of this requirement is that their breach of duty cannot be ratified by a majority vote which depends on the votes of the wrongdoers. It is essential to the exception to the rule in Foss v Harbottle that the alleged wrongdoing is incapable of lawful ratification …”

31. Mr Lam submitted that, as a matter of Hong Kong law, it is not plain and obvious that receipt of personal benefits is an essential element in a CLDA based on breach of fiduciary duties by a director for the following reasons.

32. Firstly, there appears to be no Hong Kong authority which has considered the correctness of such proposition.  I am unable to accept the contrary suggestion by Mr Wou relying upon a dictum in CS Low Investment Ltd & Ors v Freshfields (a firm) [1991] 1 HKLR 12 at 25I :

“… the plaintiffs did not have a cause of action based on breach of fiduciary duty unless they were able to plead (and later prove) an actual conflict of duty and not merely a theoretical one, with resulting loss.”

33. With respect, that was not a case of CLDA.  It was one where the plaintiffs sued their ex-solicitors for negligence and breach of fiduciary duty arising from alleged conflict of interest.  This authority has no bearing on the legal issue in question. 

34. I also disagree with Mr Wou that in citing the dicta of Templeman J the Court of Appeal in Anglo-Eastern (1985) Ltd agreed with the proposition that in order to constitute a valid CLDA the breach of fiduciary duty relied upon must have resulted in profit made by the wrongdoer.  That point was not in issue in the case before the Court of Appeal.  The proposition derived from Daniels v Daniels which the Court approved was that fraud in the context of CLDA included fraud in the wider equitable sense (see p 328A-F). 

35. I agree with Mr Lam that Liu’s argument on the requirement of profit does not sit well with p 328I-J of Anglo-Eastern (1985) Ltd.

36. For completeness, I do not find any assistance on the other authorities relied upon by Mr Wou[4] for the purpose of resolving the present issue.

37. Secondly, Mr Lam relies on Minority Shareholders : Law, Practice and Procedure by Joffe QC and others,5th edn, §2.15(a), where the learned authors expressed doubts over the judgment in Abouraya, supra, on the point in question :

“… Equitable fraud, such as a breach of fiduciary duty, has also long been held to be sufficient. It was, however, held by David Richards J in Abouraya that even in the case of equitable fraud (although not in the case of actual fraud) it is necessary to show some personal benefit to the wrongdoer. It is, with respect, far from clear that a breach of fiduciary duty, which, at any rate in the case of a breach of a director’s duties under CA 2006, s 172 (which requires him to act in a way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole) requires an intentional act or omission on the part of the wrongdoer, should be equated with mere negligence for this purpose. This runs counter to the strictness with which the courts generally seek to hold to account those in a fiduciary position. The court has a discretion whether or not to permit derivative claims to continue in any event: the imposition of the requirement that the wrongdoer (as opposed to a third party) should have benefited personally as well as that the company must have suffered loss runs counter to the purposive reasoning underpinning Waddington Ltd v Chan Chun Hoo Thomas and Fort Gilkicker that a wrong should not be left without a remedy. If, however, some ‘benefit’ to the wrongdoer personally is a requirement, such benefit need not be a financial benefit but can be construed in wide terms. …”

38. Relying on the above commentary, Mr Lam submitted that it is highly arguable that the requirement of personal benefit should be confined to cases where the cause of action is negligence, but not fraud or breach of fiduciary duty.  He pointed out that Daniels v Daniels was a case concerning gross negligence (p 413F).

39. Thirdly, Mr Lam relies on the principle that the burden is on a director of a company who is in receipt of the company’s property to account for the same.  In Gillman & Soame Ltd v Henry Young [2007] EWHC 1245 (Ch), Deputy Judge Robert Miles QC held at §82 :

“I should say something about the burden of proof. Where a person in a fiduciary position receives property of his principal the burden is on him to account … This principle applies to company directors as it does to trustees … It is, therefore, for GSL to prove that Mr Young received a particular payment from the company; but where it does so, it is for him to show that the payment was proper.”

40. Fourthly, Mr Lam submitted that if Liu’s argument were correct, it would mean that there will be no remedy against a wrongdoer in control of a company who has committed a breach of fiduciary duty by refusing to account for property that he has received from the company, unless the other members of the company know (and can prove) that he has derived benefit from such wrong.  It is against common sense that a wrongdoer who is clever in hiding the whereabouts of the company’s property would be in a better position than one who is not so successful in such exercise.

41. For the present purpose, it is unnecessary for the court to come to any conclusion on the legal issue in question.  It suffices if the point is arguable.  I agree with Mr Lam’s submissions set out in para 38 above.  Indeed, I find considerable force his submissions on this legal issue.

42. In the course of his submissions, Mr Wou has shifted the emphasis of his argument to a requirement of loss suffered by the company as a result of the breach of fiduciary duty by the wrongdoer.  The argument relies heavily upon Heyting v Dupont & Anr [1964] 1 WLR 843.  It was a case involving a derivative action over an alleged misfeasance by the defendant in failing to exploit an invention of the company.  The holding can be found in the headnotes :

“Held, that even if a minority shareholder could sue for damages on behalf of a company against a majority shareholder-director on the ground of misfeasance without alleging fraud or ultra vires, nevertheless the misfeasance relied upon must have caused real damage to the company and since in the present case it was plain on the pleadings that the company was in such a state of paralysis that it could not have successfully exploited the invention, it had suffered no such damage, and, therefore the action failed in limine.”

43. First of all, this argument cannot apply to both paras 126 and 127 of the Amended Defence (see para 6 above).

44. In respect of the very large sum of money pleaded in para 125, Wong does not know where the monies had gone.  However, it is pleaded that “…  Insofar as such account may reveal that [Liu] has misappropriated any part of this sum, he is liable to repay the same and account for the profits made out of the same.”

45. Heyting, supra, must be properly understood.  The 2 bases which gave rise to the claim for damages in that case were described by Court of Appeal as respectively “chimerical” and “a visionary claim”.  I agree with Mr Lam that this case did not lay down any principle on what is or is not an essential requirement for a CLDA. 

46. In any case, Liu’s argument must be considered in the context that Wong does not know where the very substantial sum of money had gone because Liu had refused to discharge his duty to account for the same. Wong is therefore unable to aver any loss to GDIL.  It cannot be right that GDIL should therefore be left with no remedy.  To hold otherwise would permit Liu to take advantage of his own wrong. 

47. In the premises, I cannot agree that this is a plain and obvious case for a strike out. 

Lengthy pleadings

48. I cannot conclude this decision without mentioning the state of the pleadings.  The Amended Statement of Claim (“ASOC”) is 54-page document, excluding the 1 page statement of truth and the appendix. There are 117 paragraphs in that document. 

49. With respect, the ASOC is a very unhelpful document.  The length of it and the amount of evidence contained make it very difficult for the reader to discern the real issues in Liu’s case.  I shall desist from saying more about the ASOC because the following order was made at the beginning of this hearing after giving an opportunity to Mr Wou to address the matter :

(1) Plaintiff to file and serve a 2-page summary (in font size 13 with double-line spacing) of his case within 7 days;

(2) An index be added to the ASOC;

(3) No costs is allowed for the ASOC without an order;

(4) Liberty to the plaintiff to apply in respect of (3) above.

50. The Amended Defence and Counterclaim of Wong is also a very lengthy document of 59 pages and 129 paragraphs.  The sheer length and details have rendered it a very unhelpful document.  Such a document simply does not fulfil the function of a pleading. However, it may be said that the length of Wong’s pleading is much dictated by the length of the ASOC.  I have also ordered the filing of a 2-page summary by Wong and the addition of an index to his pleading.

51. In Li Tak Yee Samuel v Societe Generale Bank and Trust & Anr,unrep, HCA 2478/09, 16 April 2013, paras 3 to 7, this court made the following observations about lengthy pleadings (footnote omitted) :

“Pleadings

3. Before I set out the background to this case, I feel obliged to ventilate, with respect, my disapproval of the state of the pleadings. I should make it clear that the pleadings before this court do not bear the name of any of the counsel who appeared in this hearing.

4. I agree with Mr Man, who appeared for Soc Gen, that this is actually a simple case. However, anyone who has read the 41-page Consolidated Statement of Claim (“SOC”) would not think so. It is very difficult to see how that document serves the purpose of identifying the real issues in the case in a straightforward manner so that the defendants are clear as to the case they have to meet and that the court will be assisted in the just and expeditious determination of the action. Little regard was paid to the rules of pleadings – much evidence is contained in the SOC (eg, paras 17 and 32), it is repetitive (eg, paras 23 and 28) and it contains irrelevant allegations (eg, para 29). Para 29 may be seen as serving to embarrass Soc Gen.

5. The Defence of Soc Gen (“Defence”) runs to 52 pages and 200 paragraphs. It started with an “overview” section so that the readers might not get hopelessly lost in the details. In fairness, one may say that the length of the Defence was dictated in large part by the SOC. Nevertheless, it is very difficult to see how the SOC and the Defence properly serve the function of pleadings. It is a reflection of the unhelpfulness of those documents that in the course of the hearing counsel from both sides had found it difficult to identify to the court the relevant pleas on a number of issues.

6. Prolixity in pleadings is not only against the rules and unhelpful to the court, given that pleadings are the foundation on which the litigation proceeds it is easy to see that it leads to wastage of resources and delay. An obvious example is that a lengthy pleading can be followed by an extensive request for further and better particulars thereof.

7.   Further, neither the SOC nor the Defence has fulfilled any of the underlying objectives enshrined in O.1A, r.1.  It would not be right for such state of affairs to be tolerated.  I can well understand that a party who is at the receiving end of an unhelpful pleading is reluctant to challenge it by way of a strike out application because of the costs and time ramifications.  However, such a party should not hesitate to argue when it comes to costs that (a) no costs should be awarded for the unhelpful pleading and/or (b) the offender should bear the consequence of any increase in costs due to his pleading.”

52. Regrettably, unhelpfully lengthy pleadings remain a common feature in litigation in this jurisdiction.  It is the duty of the court to exercise control over its process and to weed out costs wasting practices.

53. Pleadings are meant to be succinct documents which readily inform the readers of the issues in the case.  In order to produce such a document, the drafter is required to have fully digested the facts of his case, researched the applicable law and properly conceptualized his case.  Only when the groundworks have been done, the material facts can be identified. 

54. It cannot be over emphasized that pleadings are the roadmaps for the litigation.  Unless they fulfil the function of identifying the issues, much time and costs would be wasted.  As an example, pleadings are usually the first set of documents which the court will consider in an interlocutory application for the purpose of understanding the issues in the case.  Unhelpfully lengthy pleadings would take up a great deal more of the court’s time without serving much useful purpose.  Bluntly put, reading such a document is often a waste of time. 

55. On the part of the party at the receiving end of an unhelpful pleading, he should not regard himself as entirely free from responsibility if he fails to take reasonable measure to avoid the waste of resources.  Answering prolixity with prolixity is not reasonable.  He can raise the issue with the offending party and, if that falls upon deaf ears, may apply to strike out the pleading in question.

56. There is a duty on the court to further the underlying objectives enshrined in O 1A, r 1, and to actively manage cases for such purpose (O 1A, r 4).  Where there is a need to enforce the rules of pleadings and to prevent waste of resources, the court would not hesitate in taking the appropriate actions.

Conclusions

57. For the reasons explained above, I allow Wong’s appeal and make an order in terms of Wong’s Notice of Appeal dated 18 February 2015, save that, to reflect the need to remedy various deficiencies in his pleading, I make an order nisi that Wong is to have 80% of his costs here and below payable forthwith with a certificate for counsel.  Such costs are to be taxed if not agreed. 

58. I dismiss Liu’s Notice of Appeal dated 25 February 2015 with a costs order nisi in Wong’s favour.

59. Last but not least, I am grateful to counsel for their assistance.