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Is it necessary for the beneficiary of a debt under a trust to join the trustee as a party to a petition to wind up a company?

2020-08-31

Introduction

In Re China Cultural City Limited [2020] HKCFI 1598, the Court of First Instance held that it is not necessary for a beneficiary of a debt under a trust to join the trustee as a party to a petition to wind up a company, although generally a beneficiary under a trust cannot sue in relation to trust property in his own name without joining in the trustee outside the context of winding up.


Background

China Cultural City Limited (the “Company”) was set up in 1993 by the Government of the People’s Republic of China (the “Government”) through its then Liaison Office in Hong Kong, in collaboration with the owner of Chinluck Performance Limited (“Chinluck”). 50% of the Company was owned by Chinluck and the other 50% was held by nominees on behalf of the Government. The Government’s interest in the Company is represented by Xin Wenhua (Hong Kong) Development Company Limited (“Xin Wenhua”) through a number of individuals who worked for it from time to time, including Pang Ching, Wang Kejing, Zeng Qinghuai and Huang Peibin.

The two camps had then fallen out and the Company was deadlocked. Xin Wenhua decided that the way to resolve the impasses is for it to initiate a winding-up.

A petition (the “Petition”) was subsequently presented by Shun Wo Yuen Limited (“Shun Wo Yuen”) to wind up the Company on the grounds of insolvency. Shun Wo Yuen relied on non-payment of a statutory demand for a debt of HK$113,208,628 (the “Debt”), which was assigned to Shun Wo Yuen by Xin Wenhua. The Petition was opposed by Chinluck.

Shun Wo Yuen’s case was that the Debt consisted of loans to the Company advanced on behalf of the Government. The loans were later transferred by equitable assignment from Pang to Zeng to Wang, and then Wang executed a declaration of trust in respect of his interest in Xin Wenhua, after which Xin Wenhua assigned its interest in the loans to Shun Wo Yuen by way of a legal assignment.


Shun Wo Yuen’s standing to the Petition

Chinluck contended, among other things, that it was necessary for Pang, as the holder of the legal interest in the Debt, to be joined as a party to the Petition because all that was transferred to Shun Wo Yuen was an equitable interest in the Debt. Essentially, Chinluck argued that Shun Wo Yuen could not issue the Petition because all that could have been assigned to Shun Wo Yuen was the interest held by Xin Wenhua, which was an equitable interest in the Debt that Wang held on trust for Xin Wenhua. As Shun Wo Yuen was just a beneficiary holding equitable interest but not the legal owner holding legal interest of the Debt under a trust, Pang was a necessary party to the Petition.

It is settled law that generally it is the trustee who must sue in relation to trust property, instead of a beneficiary under a trust. Even in the exceptional circumstances such as breach of trust or conflict of interest on the part of the trustee where a beneficiary under a trust may bring an action in his own name in relation to the trust property, the trustee must be joined as a defendant or as a party: Vandepitte v Preferred Accident Insurance Corporation of New York [1933] 1 AC 70 (PC). At issue is whether the same principle applies in the insolvency context, i.e. whether it is necessary for a beneficiary under a trust to join the trustee as a party to a petition to wind up a company.

Citing the English decision in Re Steel Wing Company Limited [1921] 1 Ch 349, Harris J held that an equitable assignee of a debt is entitled to present a petition and it is not necessary to join the trustee. The main reason why an assignee of part of a debt is required to join all parties interested in the debt in an action to recover the part assigned to him is because the Court cannot adjudicate completely and finally without having such parties before it. The absence of such parties may result in the debtor being subjected to future actions in respect of the same debt, and moreover might result in conflicting decisions being arrived at concerning the same debt. However, this reasoning does not apply to a winding-up petition. After a winding-up order has been made, the Court in all cases when it is necessary will investigate, adjudicate upon, and settle the petitioner’s debt as well as the debts of other creditors. In other words, a winding-up order does not affect the legal rights of the creditors or the company. The reason why an equitable assignee of a debt has to join in the assignor is absent in a winding-up situation.

The defence of Chinluck thus failed and a winding-up order was made against the Company.


Conclusion

It is now clear that a beneficiary of a debt under a trust alone could present a winding-up petition against a company without joining the trustee. In reaching this conclusion, the Court seemingly regarded an equitable assignee of a debt and a beneficiary of a debt under a trust as the same, at least in the winding-up context, and gave weight to the factor that the rights of all parties interested in the debt will be completely and finally settled once and for all when the debt is adjudicated upon in the winding up process.




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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2020


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