When Will A Beneficiary’s Claim For An Account Be Time-barred?

Introduction

In the recent case of Trinity Concept Ltd (In Liq) v Wong Kung Sang (黃共生) [2022] 1 HKLRD 1388, the Court of First Instance (“Court”) dismissed the defendant’s application to strike out a claim for an account on the ground that the action was not commenced within the six-year limitation period under section 20(2) of the Limitation Ordinance (Cap. 347 of the Laws of Hong Kong) (“LO”).

Background

Trinity Concept Ltd (the “Plaintiff”), a company in liquidation, brought an action against the defendants, who were two former directors of the Plaintiff (the “Defendants”). The Plaintiff claimed that the Defendants had breached their fiduciary duties by making a total of 139 payments to third parties without giving a proper explanation (the “Suspicious Transactions”). The Plaintiff sought an account, an order for delivery up of assets or payment of monies found due upon the taking of account, and alternatively equitable compensation. The Defendants contended that the Suspicious Transactions took place more than six years before the issue of the writ and therefore the present action was brought out of time and should be dismissed under section 4(2) of LO.

Decision

The Court identified the following issues that were material to the striking out application:

1.       What is the nature of the duty of a director in relation to the assets of the company;

2.       If the director is regarded as a trustee of the company’s assets, then he has a duty to account for the assets. What is the nature of a trustee’s duty to account? What protection is afforded to a beneficiary in relation to the trust assets under the trust law?

3.       Is a beneficiary’s claim for an order for an account subject to any statutory limitation period? Is his claim for further orders upon the taking of the account or for equitable compensation subject to any statutory limitation period?

4.       What is the proper approach which the court should apply in striking out application mounted by a director in the current situation?

The Defendants relied on Liu Hsiao Cheng v Wong Shu Wai [2018] 1 HKLRD 1087 (“Liu”) in support of their striking out application. The Court also considered that Liu was an important decision in the present case and set out the following analysis:

Nature of a director’s duty in relation to the company’s assets

As stated by the Court of Appeal in Liu, the directors of a company are to be treated as trustees of the company’s assets that are under their control. As such, the director(s) of a company owes fiduciary duty to the company.

Trustee’s duty to account

When it comes to determining whether statutory limitation period applies to a claim for an account, the Court will consider the nature of each claim, whereby the primary obligation of a trustee is to exercise power on behalf of and act in the best interests of the beneficiary. In order to secure a proper execution of trust, the beneficiary shall be entitled to require the trustee to restore to the trust estate any deficiency which may appear when the account is taken.

It is important to note that the beneficiary’s right to an account is an entitlement. Enshrining in the fiduciary relationship between the trustee and the beneficiary, the beneficiary does not need to prove that there has been a breach of trust in order to obtain an order for account. When considering whether to grant an order for account, the burden is on the trustee to justify any his actions.

Limitation periods in relation to an action for account and further orders

The Court held that a beneficiary’s claim for an account without any allegation of breach of trust and without seeking further orders upon the taking of account was not subject to any limitation period. However, the trustee may be able to rely on the six-year limitation period in respect of a breach of trust, subject to two exceptions under section 20(1) of the LO, such as fraud. While the claim for an account remained not subject to any limitation period, the fact that the claim for further orders was subject to the six-year limitation period would likely weigh heavily on whether the court would exercise its discretion to order an account.

Further, the Court clarified that where a trustee applied to strike out a beneficiary’s claim for an account and further orders for alleged breach of trust on the ground that the claim was time-barred, the court should first review the pleading to determine whether there was an arguable case giving rise to a duty to account. If so, the claim for account should prima facie not be struck out, and the court should then consider whether the trustee was able to demonstrate at the interlocutory stage that the claim for further orders would be time-barred. If so, then it would appear that there was good ground to strike out the claim. If the beneficiary did not have sufficient information of the trust to identify any wrongdoing, the claim should generally be allowed to proceed to trial. The trustee might raise the defence of limitation at a later stage.

The Defendants’ striking out application was dismissed because the Plaintiff did not have sufficient information to assess whether the payments were properly made. The Court was unable to conclude at the pleading stage whether there had been any breach of trust, the nature of such breach if any, and whether the Plaintiff’s claim for further orders was bound to be time-barred.

Key takeaway

The decision serves as timely reminder to company directors that they are under a duty to account for the company’s assets and prima facie there is no limitation period applicable to a beneficiary’s claim for account, even where no breach of trust or fraud is alleged.

Contributing Advisors