SHUN HING ELECTRONIC HOLDINGS LTD AND ANOTHER v. WONG PUI FAN

HCA 664/2012 & HCA 2417/2014

(Heard Together)

[2018] HKCFI 2065

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 664 OF 2012

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2417 OF 2014

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D E C I S I O N

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1.  The late Dr Mong was a well-known businessman in Hong Kong. He was the founder of the Shun Hing group of companies (Group), a successful business empire which built its fortune on the sole distributorship of electrical appliances manufactured by the Matsushita Group of Japan. Such appliances were sold under the brand names of “National”, “Panasonic”, “Rasonic” and “JVC”. The 1^st Plaintiff in HCA 664/2012 (SHHC) was the flagship company of the Group and the ultimate holding company of, inter alia, the 2^nd to 4^th Plaintiffs in that action (SHEH, SHET and SHTEC).

2.  By HCA 664/2012, the Plaintiffs seek to recover from the estate of Dr Mong (Estate) a total sum in excess of HK$872 million which is alleged to have been wrongly taken from the Plaintiffs by Dr Mong in breach of his fiduciary duties as director of these companies.  The 1^st Defendants are the Executors of the Estate, and the remainder of the Defendants are the beneficiaries of the Estate. 

3.  The 2^nd and 3^rd Defendants (Cynthia and David) are the children of Dr Mong from his first marriage.  The 4^th Defendant is the widow of Dr Mong (Madam Wong), and the 5^th Defendant (Perlie) is the daughter of Dr Mong and Madam Wong. 

4.  A summary of the background of this case (1^st Action), as well as that of HCA 2417/2014 (2^nd Action) which was an action by SHEH and SHET against Madam Wong, can be found in paras 2 to 11 of a Decision of this court dated 30 September 2016. 

5.  By that Decision, the 2^nd Action was struck out as unsustainable and therefore frivolous.  The matter was taken on appeal, which was unsuccessful.  However, leave was granted by the Court of Appeal to the Plaintiffs to make an application for leave to amend the Statement of Claim to advance a proprietary tracing claim (hitherto the claim was a personal one based on knowing receipt).

6.  Hence, there is before this court an Amended Summons filed by SHEH and SHET in the 2^nd Action on 6 October 2017 for leave to file and serve a fresh Statement of Claim (SOC Summons).  In addition, (a) Madam Wong had filed a Summons on 1 December 2017 for a stay of the 2^nd Action pending the disposal of the 1^st Action (Stay Summons); (b) the Plaintiffs had filed a Summons on 23 March 2018 in both the 1^st Action and the 2^nd Action for them to be heard and tried together (Heard Together Summonses); and (c) a Summons filed on 29 June 2018 by Madam Wong and Perlie for the pleas concerning breach of fiduciary duty and/or breach of trust in the 1^st Action to be struck out (Strike Out Summons). 

Strike Out Summons

7.  It is logical to deal with this application first.  The allegations of breach of fiduciary duty (Allegations) are the cornerstone for both the 1^st and 2^nd Actions as reformulated in the new Statement of Claim (there is, in the former, an alternative claim for repayment of loans against the Estate).  In simple terms, in the 1^st Action it is alleged that “Unauthorised Transfers” amounting to over HK$872m had been withdrawn by Dr Mong in breach of fiduciary duty[1].  Such Transfers were made without the approval or consent of the Plaintiffs’ Boards of Directors, and they were effected for the dominant purpose of benefiting Dr Mong and/or third parties nominated by him.  Consequently, the Plaintiffs are entitled to recover the same by way of, inter alia, an inquiry and account, tracing and/or equitable compensation[2].

8.  In the new Statement of Claim proposed for the 2^nd Action (NSOC), SHEH and SHET repeated the Allegations in terms as pleaded in the 1^st Action[3] and alleged that Madam Wong had “received and retained” 3 Unauthorised Transfers which totalled HK$280m such that she is, inter alia, liable to account for those sums to SHEH and SHET.

9.  On behalf of Madam Wong, Mr Chang SC (appeared with Ms Po) submitted that the Allegations are unsustainable or have has no real prospect of success on account of :

(a)   amendments made by the Plaintiffs in the Re-Re-Re-Amended Reply in the 1^st Action (Reply) which effectively negate their claim that the Unauthorised Transferred were made by Dr Mong without the Plaintiff’s consent or approval or in breach of fiduciary duty;

(b)   incontrovertible evidence in the unqualified Audited Financial Statements (FS), the Written Representations of the Plaintiffs’ directors made to the Auditors and the relevant entries in the accounting books and records of the Plaintiffs is that all the “Unauthorised Withdrawals” had during the lifetime of Dr Mong and even thereafter been treated and affirmed as “loans”, and no proprietary interest could be asserted in respect of monies transferred under such loans.

10.  There is no dispute over the accounting material or the Representations made by the directors. However, the Plaintiffs’ pleaded case is that, before Dr Mong’s death, the relevant entries concerning the Unauthorised Transfers in the FS did not reflect the truth and were inaccurate.

11.  It is undisputed or indisputable that what happened in this case was that Dr Mong was using the companies in the Group and a related entity, Timmerton Co Inc (a Liberian company), which were all largely owned by him, as treasury or depository for various matters, including his personal affairs.  However, it will be seen below that Dr Mong also put his own funds into the companies. 

12.  In respect of the Unauthorised Transfers, various payments made for Dr Mong by the 2^nd to 4^th Plaintiffs were accounted for as due from SHHC to them.  Those payments and the payments made by SHHC for Dr Mong were in turn accounted for as due from Timmerton to SHHC.

13.  The above can be illustrated with reference to the FS of SHHC for the financial years of 2006 to 2010.  In the balance sheets of the years 2006 to 2009, the Unauthorised Transfers were booked as “amounts due from shareholders”, “amounts due from related companies” or “long term receivable from related parties”.  In the corresponding notes, particulars of the loans, which were interest free, unsecured and without fixed repayment terms, were disclosed pursuant to s.161B of the Companies Ordinance, Cap 32[4] (Ordinance).  Timmerton was stated to be the borrower. 

14.  In the balance sheet of 2010 (made after Dr Mong’s death in July 2010), the Unauthorised Transfers were still booked as “long term receivables from related parties”.  In the corresponding note, again particulars were disclosed pursuant to s.161B of the Ordinance.  However, a sum of just under HK$508m was described as loans to Dr Mong.  It was further stated that: “The amounts are interest free, unsecured and in the opinion of the directors will be settled after the administration of the estate of the deceased director is finalized”.

15.  In the Re-Re-Re-Amended Defence of Madam Wong and Perlie filed in the 1^st Action (Defence), they complained that it was only after Dr Mong’s death that a different treatment appeared in the 2010 FS in respect of part of the Unauthorised Transfers.  The new treatment was termed “Reversals” (Defence, §§37A-37B).   

16.  Hand in hand with the FS, there were detailed Representations made by the directors.  As an example, in the Representations made by the directors of SHHC dated 9 November 2010 to the Auditors :

(1)   They acknowledged their responsibilities on the fair presentation of the consolidated financial statements and provided particulars of what they had done for that purpose (§1);

(2)   They were responsible for, inter alia, the keeping of proper and reasonably accurate accounting records, which enabled them to ensure that the consolidated financial statements complied with the Ordinance; the safeguarding the assets of the Group and for the prevention and detection of fraud and other irregularities (§2);

(3)   All the accounting records made available to the Auditors and all the transactions undertaken by the Group had been properly reflected and recorded in those records (§3);

(4)   There had been no violations or possible violations of laws or regulations which would affect the consolidated financial statements (§6);

(5)   There was no material contingent or potential liabilities except those provided for in the consolidated financial statements (§8);

(6)   There was no material transactions that has not been properly recorded in the accounting records (§9);

(7)   There was no material changes that had occurred subsequent to 31 March 2010 which would require adjustments to the consolidated financial statements (§21);

(8)   They knew of no additional facts applicable to the consolidated financial statements that had not been disclosed to the Auditors (§22);

(9)   All reasonable steps had been taken to ensure that the consolidated financial statements comply with s.161B of the Ordinance (§23).

17.  Before going to s.161B, it should be pointed out that at the material times, Dr Mong, David and Timmerton were the directors of SHHC.  David was in fact a director of all the Plaintiffs.  Each of the FS for the 5 financial years of SHHC mentioned above was signed by David.  In addition, he signed each set of the Representations relating to the FS.

18.  It should also be mentioned that after Dr Mong’s death, Timmerton, under the directorship of David and Cynthia, had refused to repay the loans owed to SHHC.

19.  To complete the factual picture, the 3 alleged Unauthorised Transfers received by Madam Wong, respectively, HK$30m on 28 November 2008, HK$50m on 12 January 2009 and HK$200m on 23 April 2009, were all booked as loans in the FS.  Both before and after the death of Dr Mong, ie, in the FS for the years 2009 and 2010, the first 2 sums were booked as loans owed by Timmerton.  The last sum was booked as a loan to Dr Mong in the FS 2010. 

20.  S.161B of the Ordinance stipulated a requirement for companies to disclose loans to a director, which were prohibited under s.157H(2) unless the same were approved by the company in general meeting pursuant to s.157HA(2). 

21.  S.157I(1) and (5) are important.  They provided that :

“(1) A person who receives from a company a sum paid in pursuance of a transaction or arrangement entered into in contravention of section 157H shall be liable to repay that sum to the company forthwith, ...

…

(5) …, section 157H shall not of itself invalidate any transaction or arrangement entered into in contravention of that section.”

22.  I can now turn to the relevant part of the Reply, namely, para 15B, which set out the Plaintiffs’ case in answer to the accounting material and Representations relied upon in the Defence :

“The Plaintiff Companies further aver as follows:

(1) Since the incorporation of Timmerton in 1979, the Plaintiff Companies have started to book transactions that related to members of the First Family (predominantly concerning the late Dr Mong) against Timmerton. To the best of the recollection of the Plaintiff Companies, such booking treatment involved both debit entries against and credit entries in favour of Timmerton, in that while withdrawals from the Plaintiff Companies for the benefit of the members of the First Family would be booked as a debt owing from Timmerton (as opposed to such member(s) of the First Family), there were also instances whereby the late Dr Mong would settle expenses and make payments using his personal funds for the benefit of the Plaintiff Companies and these were booked as a credit in favour of Timmertion;

(2) As a consequence, from the perspective of the Plaintiff Companies and in their accounting treatment, and for the sake of convenience and practicality, the “Timmerton Account” operated as a current account for the First Family (predominantly the late Dr Mong) without the need to create separate accounts for each and every member (the “Initial Treatment”);

(3) Prior to 1997/1998, the payments made by the late Dr Mong for the benefit of the Plaintiff Companies exceeded the withdrawals from the Plaintiff Companies for the benefit of the First Family. The “Timmerton Account” therefore consistently showed a credit in favour of Timmerton;

(4) It was only until around April 2006 that significant withdrawals were made by the late Dr Mong from the Plaintiff Companies (approximately HK$41.6 million for the purchase of certain Treble Fortune shares and the withdrawal of HK$280 million between May 2008 and January 2009), as particularised in Schedules 3B and 3C (namely transfers dated 27/4/2006, 23/5/2008 and 28/11/2008) to the Statement of Claim. In accordance with the Initial Treatment, these withdrawals were booked against Timmerton. Similarly, the 3 Alleged Payments were booked against Timmerton in accordance with the Initial Treatment;

(5) The Plaintiff Companies had never considered whether Timmerton would have the financial capability to repay any amount recorded as due from it to the Plaintiff Companies pursuant to the Initial Treatment, because it was the Plaintiff Companies’ expectation that the late Dr Mong would resolve the matter prior to his death by making appropriate accounting adjustments and/or payments by himself. After all, the late Dr Mong had full knowledge of the transactions in question and that Timmerton did not receive such funds from the Plaintiff Companies.

(6) As a result, prior to the death of the late Dr Mong, the Plaintiff Companies did not need to consider, and had in fact not considered, whether the actions of the late Dr Mong constituted breaches of fiduciary duties and/or whether the Accounting Treatment (including the Initial Treatment) was appropriate;

(7) The late Dr Mong nonetheless passed away on 21^st July 2010 without resolving the issue in a way that was in accordance with the expectation of the management of the Plaintiff Companies as pleaded above;

(8) Upon the death of Dr Mong, Timmerton refused to acknowledge its (alleged) indebtedness regarding those transactions in 2009/10 towards the Plaintiff Companies as reflected by the corresponding debit entries in the “Timmerton Account”. In the meantime, the Plaintiff Companies complied with the late Dr Mong’s 2 memos to SHTEC and SHET both dated 24^th July 2009 and booked the 3 Alleged Payments against SHEH as pleaded in paragraph 16(3) below (the “Subsequent Treatment”);

(9) Notwithstanding the Initial Treatment and the Subsequent Treatment, neither Timmerton nor SHEH received any part of the funds as represented by the corresponding debit entries in the accounts of the Plaintiff Companies. Paragraph 19 of the Statement of Claim is repeated; and

(10) As to withdrawals from the Plaintiff Companies other than the 3 Alleged Payments, these were booked against Timmerton in accordance with the Initial Treatment and no accounting reversal has yet been carried out.”

23.  The arguments advanced by Mr Chang are quite simple.  On the incontrovertible evidence, the Unauthorised Transfers were loans, both before and after Dr Mong’s death, to either Timmerton or Dr Mong.  There is no basis to suggest that there was any breach of fiduciary duty on the part of the latter.

24.  Further, the ownership of loan monies would pass to the recipient: see Tang Ying Loi v Tang Ying Ip [2015] 1 HKLRD 712, §98 and Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd (2015) 18 HKCFAR 364, §§43 and 47.  The recipient is free to use the monies as he sees fit.  There is therefore no basis for any tracing claim arising from the loans. 

25.  On behalf of the Plaintiffs, Mr Lam SC (appeared with Ms Seto) reminded the court of the high threshold which Madam Wong and Perlie have to satisfy in a strike out application.  The strike out power of the court is only exercised in plain and obvious cases.  The court will not conduct a mini-trial on affidavits.  The burden is on the applicant to show that the pleaded case is impossible, not just improbable, to succeed: Hong Kong Civil Procedure 2018, vol 1, rubric 18/19/4.  In Hutchvision Asia Ltd v Asia Television Ltd [1993] 2 HKC 510 at 514G-H, Godfrey J (as he then was) observed that experience showed that cases which appeared to be certainties might surprisingly failed, and vice versa.

26.  Mr Lam submitted that while the FS should present a true and fair view of the Plaintiffs’ financial affairs, whether they are in fact true and accurate is a question of fact depending on the circumstances of the case.  Mr Lam further submitted that para 15A of the Reply must be read together with para 15B and para 16 of that pleading.

27.  In para 15A, the Plaintiffs pleaded that the Reversals were intended to, and did, reflect the true and accurate nature of the transactions in question; the relevant entries in the FS or the Representations made by the directors as pleaded in paras 35A and 35B of the Defence were inaccurate and did not reflect the true position.  The reasons why they were inaccurate were then pleaded in para 15B.

28.  Para 16 of the Reply pleaded, inter alia, that the Reversals were to reflect the true and accurate nature of the transactions. 

29.  Mr Lam submitted that, eg, whether the Plaintiffs’ explanations about the accounting material will be accepted are clearly factual issues, which are incapable of, or unsuitable for, summary determination in a striking out application.

30.  Quite fairly, Mr Lam accepted that there was no bar to a company granting a loan to a director provided that the relevant provisions of the Ordinance had been complied with.

31.  With skill and fairness on both sides, the arguments were narrowed down to, firstly, whether the loans were approved by the directors.  If the loans were approved, I fail to see any basis for contending that Dr Mong had acted in breach of fiduciary duty.  Indeed, Mr Lam accepted that if the loans were properly authorised, there would not be any breach of fiduciary duty. 

32.  With respect, in the face of the incontrovertible evidence, namely, the FS, the Representations and the continued treatment of the Unauthorised Transfers as loans, it is very difficult to understand how it can be maintained that the loans were not approved by the directors.    

33.  This brings me to the 2^nd point in the arguments, the alleged “expectation” that “Dr Mong would resolve the matter prior to his death by making appropriate accounting adjustments and/or payments by himself” (para 15B(5) of the Reply), which is the kernel of the Plaintiffs’ case on why the evidence relied upon by Madam Wong and Perlie is inaccurate.  I am inclined to agree with Mr Chang that, on its face, such an expectation tends to fortify the proposition that the loans were approved by the directors.  The directors must have known of and agreed to the loans with the expectation that the matters would later be “resolved” by Dr Mong, otherwise there nothing to call for an expectation.  In any case, I have unable to see how the expectation contradicts the incontrovertible evidence. 

34.  Reading para 15B in conjunction with paras 15A and 16 as suggested by Mr Lam, I am unable to see any valid reason why the loans had not been approved by the directors.

35.  Whilst I agree that factual disputes are for trial, there is evidence from the Plaintiffs before the court which had been advanced in opposition to the strike out.  Surprisingly, there is not a word of evidence from David.  Instead, a director of SHET, Mr Tam, provided the evidence.  Mr Tam was also the Financial Controller of the Group since 1^st September 1999 (para 14(1) of Reply).  He should know about the “expectation” and be able to provide some evidence on it.  However, the evidence of Mr Tam was confined to a regurgitation of the Plaintiffs’ pleadings, the formulation of which, with respect, was plainly assisted by lawyers. 

36.  Starkly, this court is asked by the Plaintiffs to have a trial on the “accuracy” of the FS and the Representations whilst advancing no evidence or valid reason on why they do not mean what they say. The court does not lose sight of the obligation of litigants to put all their cards on the table facing up.  It would be wrong to allow this case to go to trial in these circumstances. 

37.  Mr Lam also argued that the General Meetings of the shareholders[5] (GM) which adopted the FS would not suffice for purpose of ratifying the Unauthorised Transfers due to the stringent requirements for ratification (see Re Styland Holdings Ltd (No 2) [2012] 2 HKLRD 325). 

38.  I agree with Mr Chang that the argument was premised on the assumption of breach of fiduciary duty having been committed by Dr Mong, therefore requiring the ratification by shareholders. 

39.  As mentioned above, if the loans were approved by the directors (there is no evidence or reason to believe that they were not), there is no basis for the assumption. 

40.  Mr Lam further argued that the GM would not satisfy the requirement under s.157HA(2) which provided that: “Section 157H does not prohibit a private company … from doing anything that has been approved by the company in general meeting”.  In particular, it was submitted that the loans were already granted at the time of the GM, and therefore a ratification by the shareholders as opposed to adopting the FS would be required.  No authority was cited in support of the submissions.

41.  Firstly, I am unable to see why s.157HA(2) should be so construed.  I agree with Mr Chang that the approval by the company in general meeting could be a process (as opposed to an isolated act) where the loan was granted, reported in the FS, laid before the GM and approved by the shareholders. 

42.  Secondly, non-compliance of those provisions did not equate to breach of fiduciary duty.  The consequences had been set out in s.157I.  In particular, the director granted the loan would be liable to repay it to the company forthwith, but the non-compliance would not invalidate any transaction or arrangement entered into in contravention of s.157H (see para 21 above).  In other words, the remedy of the company would be a personal one against the director who received the loan.

43.  Thirdly, Mr Chang had referred this court to the dicta of Harris J in Tam Po Kei v Tam Bo Kin (No 1) [2011] 1 HKLRD 537, §67 where the learned Judge referred to the Duomatic principle in the context of a solvent company whose directors and shareholders accepted that one director and shareholder could treat the company as his creature and use its assets as his own :

“… If as a matter of fact the directors and shareholders of a company accept that one director and shareholder can treat a solvent company as his creature and use its assets as his own it seems to me difficult to characterise what would in different circumstances be breach of duty as such for the reason that the parties have agreed expressly or, perhaps as in the present case, tacitly that the best interests of a company are what the dominant shareholder decides and therefore there has not been a failure to act in the best interests of the company or to neglect the company’s interests. This can be analysed in terms of what represents the interests of a particular company, the act being ratifiable or in terms of estoppel depending on the precise facts. This accords with common sense because it is both artificial and unfair to suggest that if directors and shareholders accepted, or would have if they had been asked at the time, that a particular act was unobjectionable years later a shareholder can come forward and argue that the act analysed conventionally is in breach of fiduciary duty. An act that would have been authorised if directors and shareholders had been alive to the need for formal approval by the board or the company, but was not, can be treated as approved and therefore lawful by virtue of the Duomatic principle. It was explained by Neuberger J (as he then was) in EIC Services Ltd v Phipps [2003] 1 WLR 2360, paras 121-122, in the following way:

[121] This principle, on which the first and second defendants rely, is named after Re Duomatic Ltd [1969] 2 Ch 365, and it has been expressed in slightly different ways in different cases. In Duomatic itself, Buckley J said at p 373 :

[W]here it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.

In Parker & Cooper Ltd v Reading [1926] Ch 975, the principle was expressed in these terms by Astbury J at p 984:

[W]here the transaction is intra vires and honest … it cannot be upset if the assent of all the corporators is given to it. I do not think it matters in the least whether that assent is given at different times or simultaneously.

More recently Meagher JA in Herman v Simon (1990) 8 ACLC 1094 at p 1096 described the principle as:

a doctrine that formalities may be disregarded if they have been waived by all shareholders acting in concert who want the same substantial result.

[122] Although the principle has been characterised in somewhat different ways in different cases, I do not consider that that is because its nature or extent is in doubt or the subject of debate.  The difference in language is attributable to the fact that the principle will have been expressed by reference to the particular facts of the case.  The essence of the Duomatic principle, as I see it, is that, where the articles of a company require a course to be approved by a group of shareholders at a general meeting, that requirement can be avoided if all members of the group, being aware of the relevant facts, either give their approval to that course, or so conduct themselves as to make it inequitable for them to deny that they have given their approval.  Whether the approval is given in advance or after the event, whether it is characterised as agreement, ratification, waiver, or estoppel, and whether members of the group give their consent in different ways at different times, does not matter.”

44.  There is a ring of commonality between the facts of that case and the present, and considerable force in Mr Chang’s submission that it is inconceivable that any shareholder[6] or director would have objected to the loans to Timmerton or to Dr Mong.  Whilst Mr Lam accepted that the Duomatic Principle might apply to this case, he submitted that it is not a foregone conclusion. 

45.  I have dealt with this application on the basis of the Plaintiffs’ pleaded case.  It is therefore unnecessary to rule on the Doumatic principle.

46.  For these reasons, I am in no doubt that the Plaintiffs have no viable case on breach of fiduciary duty (and the same is frivolous), and the relevant part of the Statement of Claim, namely, paras 20 to 26 and prayer for relief (1) to (8) should be struck out.

47.  It must follow that the SOC Summons should be dismissed.

48.  The above decision has rendered it unnecessary to deal with the limitation arguments, the Stay Summons and the Heard Together Summonses.  However, out of deference to the submissions made, I shall deal with them succinctly below.

Limitation

49.  It is common ground that the court is to apply a 3-stage test for determining whether an amendment should be barred by reason of limitation (see Shenzhen Futaihong Precision Industry Co Ltd & Ors v BYD Company Ltd & Ors, unrep, CACV 63 & 76/2017, 18 July 2018, §74, namely :

(1)   Stage 1: Is it reasonably arguable that the opposed amendments are outside the applicable limitation period?  If not, then the amendments fall to be considered in accordance with the general principles governing amendment applications.

(2)   Stage 2: If the answer to (1) is yes, do the proposed amendments seek to add or substitute a “new cause of action”?  If not, then again the amendments fall to be considered in accordance with general principles.

(3)   Stage 3: If the answer to (2) is yes, does the new cause of action arise out of the same or substantially the same facts as are already in issue in the existing claim?  If not, the amendments cannot be allowed.  If yes, then the court retains a discretion to allow or refuse the amendments in accordance with general principles.

50.  There is no dispute over the questions under the first 2 stages.  The proprietary claim contained in the NSOC is raised for the first time in August 2017 in relation to alleged transfers which dated back to 2009, and is clearly outside the 6-year limitation period (see s.20(2) of the Limitation Ordinance, Cap 347).  Further, the proprietary claim is clearly a new cause of action.

51.  The argument here is confined to whether the new cause of action arises out of the same or substantially the same facts as are already in issue in the existing claim.  Both sides had referred the court to its previous Judgment in Sun Focus Investment Ltd v Tang Shing Bor & Anr, unrep, HCA 538/2007, 22 January 2013 where the dicta of Moulin Global Eyecare Holdings Ltd (in liq) v Olivia Lee Sin Mei [2013] 1 HKLRD 744 were applied. 

52.  The focus here is whether in defending the new cause of action Madam Wong would be required to embark upon investigating a claim against her which arises out of facts which she would not previously have been concerned to investigate (see Sun Focus, p.9E-L).  In the NSOC, the proprietary claim is based on the same allegations of breach of fiduciary duty on the part of Dr Mong as advanced in the old knowing receipt claim.  The only material difference is that the nature of the claim is now one which requires no knowledge of the breach by Madam Wong.

53.  Mr Chang made an innovative submission by arguing that under the old claim Madam Wong was only required to tackle the knowledge element and was successful in striking it out.  I am unable to agree that the test is such a narrow one.  If Madam Wong had failed to strike out the old claim, it is unlikely for her to admit the breach of fiduciary duty.  That is reflected by her defence in the 1^st Action where the breach of fiduciary duty is hotly contested. 

54.  In fairness, the new claim is nothing more than an additional cause of action based on the same facts.  It may be said that it is fortuitous that the cause of action was not previously relied upon.  I see no prejudice made out on the evidence or any ground not to exercise my discretion to allow the amendment, and I would have done so if that decision were required. 

Stay Summons and Heard Together Summonses

55.  These Summonses are the two sides of the same coin.  Given the overlap between the 1^st and the 2^nd Actions, and the fact that Madam Wong and Perlie are carrying the burden of defending the 1^st Action, I see no good reason not to have the Actions tried together.  Not doing so would inevitably result in further delay to the resolution of these matters which go back many years.  I also agree with Mr Lam that to stay the 2^nd Action would tantamount to having a split trial of liability and quantum, which is not justified. 

Conclusions

56.  The breach of fiduciary duty claim in the 1^st Action is struck out as indicated above.  The SOC Summons is dismissed.  No order is made in respect of the Stay Summons and Heard Together Summonses.  I make an order nisi that the costs of and occasioned by the Strike Out Summons and the SOC Summons, including those of the hearing be to Madam Wong and Perlie with a certificate for 2 counsel, to be taxed if not agreed.

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

HCA 664/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 664 OF 2012

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HCA 2417/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2417 OF 2014

________________________

________________________

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D E C I S I O N

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1.  There are 3 Summonses before the court in relation to 2 connected actions – HCA 664/2012 (“1^st Action”) and HCA 2417/2014 (“2^nd Action”).

Background

2.  These actions arose after the late Dr William Mong (“Mong”) passed away in July 2010.  Many people in Hong Kong would have heard about Mong.  He was a self-made billionaire, who started trading in electrical and electronic products in 1953.  He developed an exclusive business relationship with the Matsushita group of Japan (which later became Panasonic Corporation), a well-known maker of electrical appliances under various brand names including “National”, “Panasonic”, “Rasonic” and “JVC”. 

3.  Mong conducted his business via various companies under the Shun Hing Group, which was founded by him.  The plaintiffs in the 1^st Action are members of this group.  The 1^st defendants are the executors of Mong’s estate (“Estate”).  They are taking a neutral stance in this action.  The 2^nd and 3^rd defendants (“Cynthia” and “David”) are Mong’s daughter and son under his first marriage[1], which was dissolved in January 2002.  The 3^rd and 4^th defendants are respectively the widow (“Wong”) and daughter (“Perlie”) of Mong.  For reason which will become obvious, neither Cynthia nor David is contesting this action. 

4.  In the 1^st Action, the plaintiffs claim against Mong for alleged breach of fiduciary duties and breach of trust during the subsistence of his directorship in those companies by diverting monies (in the region of HK$872 million) belonging to the plaintiffs to himself and/or third parties nominated by him (“Unauthorised Transfers”).  It is contended, alternatively, that the Unauthorised Transfers constituted loans from the plaintiffs to Mong[2]. Upon his death, such liability fell upon the Estate, which is represented by the 1^st defendants.  All the other defendants are joined because they are the beneficiaries of, and thus have an interest in, the Estate.

5.  At a high level of generality, Wong and Perlie[3] oppose the plaintiffs’ claim on the basis that there was an agreement between, inter alia, the plaintiffs and Mong that the latter’s liabilities towards the former would be shouldered by other entities, including one Liberian company known as Timmerton Co Inc (“Timmerton”).  Wong and Perlie rely upon the fact that in the plaintiffs’ audited financial statements (“FS”) over many years Mong’s alleged liabilities to the plaintiffs were consistently booked against those other entities as their liabilities.  Wong and Perlie say that the subsequent reversals of those accounting entries by the plaintiffs after Mong’s death, ie, booking the withdrawals of funds against Mong, are improper[4]. 

6.  The reversals of the accounting entries are not in dispute.  The plaintiffs say that the reversals accurately reflect the true nature of the transactions in question.

7.  The 2^nd Action was initiated by 2 of the plaintiffs of the 1^st Action (“SHEH” and “SHET”).  These 2 companies claim against Wong for knowing receipt of 3 sums (out of the Unauthorised Transfers) totalling HK$280 million.  It is alleged that out of the monies wrongfully diverted away from SHEH and SHET by Mong, Wong received HK$280m with the requisite knowledge[5].

8.  Wong has filed what appears to be a “holding Defence” in the 2^nd Action, in which she referred to the 1^st Action and made no admission to both the issues of receipt of the HK$280m and her knowledge.  However, she specifically denies that she was put on notice (of any wrong) and denies any basis for the claim against her[6]. 

9.  Under Mong’s Will dated June 2007, he provided generously to David and Cynthia.  The latter had been given HK$100m, whilst the former had received the shares of a number of companies, including (i) a BVI company called Timmerton Co Inc (“Timmerton BVI”) which owns 40% of the shares in Shun Hing Holdings Co Ltd (“SHH”) (the 1^st plaintiff in the 1^st Action and the holding company of the Shun Hing Group); and (ii) Mong’s 30% interest in Timmerton (the other 70% are held by the children of Mong’s first marriage).  By virtue of such gifts, David has become the largest single shareholder of both Timmerton and SHH.  It appears that these companies are now controlled by David, which may explain why, after the Mong’s death, Timmerton (which owns 10% of SHH) has refused to acknowledge the debts owed to the Shun Hing companies in accordance with the FS.

10.  Wong and Perlie are entitled to the residue of the Estate, which includes a landed property in Shek O valued at about HK$1 billion. 

11.  It appears from the particulars of the Unauthorised Transfers[7] that Mong was using the resources of the Shun Hing companies freely, eg, substantial amounts of expenses of a personal nature were paid by the companies on Mong’s behalf.  On the other hand, the FS and the related written representations to the auditors by the directors suggest that everything was above board and had passed the scrutiny of the auditors.  However, what had transpired many years ago are now put under the microscope of company lawyers. 

The Summonses

12.  In chronological order, they are as follows :

(a)  Wong’s Summons dated 6 April 2016 in the 2^nd Action for strike out or stay of proceedings or alternatively for limiting the discovery (“1^st Summons”);

(b)  A Summons dated 21 April 2016 of the plaintiffs in both Actions seeking an Order that the 1^st Action and the 2^nd Action be heard and tried together and to compel Wong to make discovery in the 2^nd Action (the “2^nd Summons”); and

(c)  Wong’s Summons dated 23 August 2016 in relation to the 1^st Action such that the pleas concerning breach of fiduciary duty and/or breach of trust be struck out (“3^rd Summons”).

13.  In the course of the hearing, Mr Chang SC, appearing for Wong with Ms Po and Mr Yuen, had abandoned the 3^rd Summons.  This court is therefore only concerned with the 1^st and 2^nd Summonses.  If the 2^nd Action is stuck out under the 1^st Summons, the 2^nd Summons would become redundant.

Knowing receipt

14.  The arguments here rest within a narrow compass: whether SHEH and SHET have a viable claim that Wong had knowledge of the alleged breach of fiduciary duty or trust on Mong’s part. It is undisputed that in the absence of such a viable claim the 2^nd Action cannot stand.  The relevant plea is contained in para 17 of the SOC as follows :

“17. The Defendant received the Unauthorised Transfer Sums with knowledge of the following facts which put her on inquiry as to the source of the Unauthorised Transfer Sums and the Deceased’s authority (or the lack thereof) to transfer the same to her :-

PARTICULARS OF KNOWLEDGE

(1) Each of the Unauthorised Transfer Sums was transferred by the Deceased to the Defendant in addition to the household expenses which the Deceased regularly gave the Defendant every 2 to 3 months in the range of HK$300,000 to HK$600,000 (“the Household Expenses”).

(2) The value of each of the Unauthorised Transfer Sums was substantially and significantly larger than the Household Expenses which the Defendant received from the Deceased from time to time.

(3) The Unauthorised Transfer Sums, in the total amount of HK$280,000,000, were transferred to the Defendant within a short period of 5 months.

(4) The Defendant had never received such a large sum of HK$280,000,000 from the Deceased within 5 months.

(5) The Deceased was the founder of the Shun Hing Group, and had the power to withdraw monies from the companies within the Group. Having regard to the substantial amounts involved, it was highly likely that the sums came from companies within the Shun Hing Group.

(6) The Defendant never gave consideration for any of the Unauthorised Transfer Sums; and had no right to receive any monies from any of the companies within the Shun Hing Group.”

15.  On behalf of the SHEH and SHET, Mr Lam SC (appearing with Mr Lung and Ms Seto) relied on the CFA authority of Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (2010) 3 HKCFAR 479 for the requisite mental element for knowing receipt (see §§62, 127, 134 and 135).

16.  For completeness, in paras 18 to 21 of the SOC it is alleged that Wong should have made inquiries on (a) the source of the HK$280m and (b) Mong’s authority to make those payments to her; that she turned a blind eye regarding the source of the funds and the requisite authority to transfer them to her; that it was irrational for her to assume or believe that Mong had the requisite authority; and that it is unconscionable for Wong to retain the benefit of the funds. 

17.  It should also be pointed out that para 8 of the SOC pleads as follows :

“At all material times, the Defendant was not a shareholder, director, officer, business associate, or otherwise involved in or related to the business operations, of any of the companies in the Shun Hing Group, including the Plaintiff Companies.”

18.  In addition to the pleas in the SOC, there is uncontroverted evidence that Mong was a man of immense wealth.  As an indication of his wealth, he paid his ex-wife HK$1 billion to settle the ancillary relief claim.  The 3 payments in question were all made by way of cheque from Mong’s personal bank account.  They were, according to para 11 of the SOC, made on 2 December 2008, 4 February 2009 and 27 April 2009.  Mong was very ill in early 2009 and he died in July 2010 at the age of 82.

19.  Given the timing of these payments, it is plain common sense that they were made with the view to secure the future of Wong and Perlie, who was about 15 years old at the time[8].

20.  With respect, I have great difficulty understanding the basis for the second sentence in para 17(5) of the SOC.  By that plea, it is alleged that because the sums given to Wong were substantial, it was highly likely that they came from the Shun Hing companies.  First of all, all 3 payments came from Mong’s personal account.  Secondly, it is the plaintiffs’ own case that Wong had no involvement with any of the companies in the Shun Hing Group.  Thirdly, it is an empty assertion with no identifiable basis.

21.  I am unable to agree with Mr Lam that the court is, for purpose of the present strike out application, bound to accept the pleaded case of SHEH and SHET.  I see no reason to accept an untenable plea. The whole point of the present exercise is to strike out such pleas. 

22.  Despite Mr Lam’s attractive submissions, I am unable to see any reason why the receipt of HK$280m from her immensely wealthy husband during a period of 5 months at the time when he was very ill would have raised any suspicion on Wong’s part, let alone the suspicion that he might have misused the money of his companies.

23.  If the case of SHEH and SHET is taken to its logical conclusion, every time when a wife receives an unusually substantial gift from her immensely rich husband, she will have to inquiry if he had committed a wrong against his company.  There is no support in either common sense or law for such proposition. 

24.  I agree with Mr Chang that there is no merit in the 2^nd Action.  It is accepted that an obviously unsustainable case is liable to be struck out as frivolous (see Hong Kong Civil Procedure 2016, vol 1, pp 451-452, 18/19/8).  I am satisfied that the requisite threshold has been met and the 2^nd Action is accordingly struck out.

Conclusions

25.  The 2^nd Action is struck out.  I make an order nisi that the costs of that action, including the costs of the 1^st Summons, be to Wong with a certificate for 2 counsel.  However, the costs of the affirmations of Mr Raymond Lo filed on 6 April 2016 and 8 July 2016 are disallowed.  It is generally inappropriate for a solicitor to give evidence on behalf of his lay client: see UES International (HK) Ltd v Maritima Maruba SA, HCA 632/2011, 19 November 2013, §§13-17.

26.  The 2^nd Summons be dismissed with an order nisi that the costs of the Summons be to Wong with a certificate for 2 counsel.  For the reason stated above, the costs of Mr Lo’s Affirmation filed on 8 July 2016 are disallowed. 

27.  The 3^rd Summons be dismissed with an order nisi that the costs of the Summons be to the plaintiffs with a certificate for 2 counsel.