Does a beneficiary of a debt under a trust have standing to bring a winding up petition against a company?

29 July 2020

As a general rule, a beneficiary under a trust does not have standing to bring an action in his own name in respect of the trust property. An important exception is the Vandepitte procedure, named after the Privy Council decision in Vandepitte v. Preferred Accident Insurance Corporation of New York [1933] 1 AC 70 (PC), by which the beneficiary may bring an action in special circumstances such as breach of trust or conflict of interest on the part of the trustee, but only if the trustee is joined or before the court.

The question therefore arises as to whether the same principles apply to a beneficiary of a debt under a trust who intends to present a winding up petition against the corporate debtor. In Re China Cultural City Limited [2020] HKCFI 1598 (22 June 2020), the Court of First Instance reviewed the relevant authorities and held that joinder of the trustee is not a necessary precondition to the beneficiary’s right to present a winding up petition.

The factual context

Shun Wo Yuen Limited (the “Petitioner”) issued a winding up petition (the “Petition”) against the subject company, China Cultural City Limited (the “Company”), on the grounds of insolvency relying on non-payment of a statutory demand for HK$113,208,628 (the “Debt”). The Debt had been assigned to the Petitioner by its parent company Xin Wenhua (Hong Kong) Development Company Limited (“Xin Wenhua”). The Petition was opposed by one of the two shareholders of the Company, Chinluck Performance Limited (“Chinluck”).

The Company was set up in 1993 by the Government of the People’s Republic of China (“Government”) through its then Liaison Office in Hong Kong, in collaboration with the owner of Chinluck in order to promote Chinese culture. Chinluck owned 50% of the Company; the other 50% was held by nominees on behalf of the Government.  

The two camps had fallen out and the Company entered a state of deadlock. Xin Wenhua decided that the way to resolve the impasse was for it to initiate a winding-up through the Petitioner.

It was the Petitioner’s case that Xin Wenhua represented the Government’s interest in the Company through a number of nominees who worked for it from time to time, including a Mr. Pang, Mr. Zeng and Mr. Wang. The Debt consisted of advances to the Company which were made on behalf of the Government, and recorded as loans from the nominees representing Xin Wenhua’s interest.

Over the years, the loans were transferred by equitable assignment from Mr. Pang to Mr. Zeng to Mr. Wang. Then, Mr. Wang executed a declaration of trust in respect of his interest in the Debt in favour of Xin Wenhua, and Xin Wenhua effected a legal assignment of its interest in the Debt to the Petitioner.  

Does a beneficiary of a debt under a trust have standing to present a winding up petition?

Chinluck attempted to dispute the Debt on a number of grounds. Of particular interest was Chinluck’s submission that the Petitioner did not have standing to present the Petition against the Company because it was only a beneficiary (and not the legal title holder) of the Debt under a trust, and the trustee had not been joined to the winding up proceedings.

In this regard, it is well settled that a beneficiary under a trust does not have standing to bring an action in respect of the trust property in his own name. An exception to this rule is the Vandepitte procedure, by which the beneficiary may bring an action in special circumstances such as breach of trust or conflict of interest on the part of the trustee, but only if the trustee is joined or before the court. The effect of the Vandepitte procedure is explained by Lord Templeman in Hayim v. Citibank NA [1987] 1 AC 730 (PC) at 747C-D & 748F-G:

… when a trustee commits a breach of trust or is involved in a conflict of interest and duty or in other exceptional circumstances a beneficiary may be allowed to sue a third party in the place of the trustee. But a beneficiary allowed to take proceedings cannot be in a better position than a trustee carrying out his duties in a proper manner…

… a beneficiary has no cause of action against a third party save in special circumstances which embrace a failure, excusable or inexcusable, by the trustees in the performance of the duty owned by the trustees to the beneficiary to protect the trust estate or to protect the interests of the beneficiary in the trust estate”.

As for the rationale behind the requirement of joinder of the trustee, the learned authors in Lewin on Trusts (20th Ed., Vol. 2) at §47-012 explain:

Where a beneficiary brings a derivative action in his own name, then the trustees must be joined as defendants. The need for joinder of the trustees is not merely a procedural matter, nor merely to ensure that the trustees are bound by the judgment or to avoid multiplicity of actions. The need for joinder has a substantive basis since the beneficiary has a personal right to sue and is suing on behalf of the estate, or more accurately the trustee”.

Chinluck sought to argue that the aforesaid principles also applied to a winding up petition presented by the beneficiary of a debt under a trust. On the facts, Mr. Wang executed a declaration of trust of his interest in the Debt in favour of Xin Wenhua. This made Mr. Wang the trustee or legal title holder and Xin Wenhua the beneficiary of the Debt. Although Xin Wenhua then executed a legal assignment of the Debt to the Petitioner, Chinluck argued that necessarily all that could have been assigned to the Petitioner was the interest that Xin Wenhua itself held, which was an equitable interest in the Debt that Mr. Wang held on trust for it. That being the case, Chinluck contended that the Petitioner did not have standing to present the Petition because the trustee had not been joined to the winding up proceedings.  

The main obstacle to Chinluck’s argument was the decision in re Steel Wing Company Limited [1921] 1 Ch 349, which established that an equitable assignee of a debt need not join the assignor or legal title holder in order to have standing to present a winding-up petition. P O Lawrence J explained that the 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, as P O Lawrence J went on to explain, this reasoning does not apply to a winding up petition. After a winding up order has been made, the liquidator will investigate, adjudicate upon and settle the petitioner’s debt as well as the debts of other creditors. In other words, the winding up order does not prevent the debt from being settled completely once and for all. There is therefore no policy reason for requiring the petitioner or equitable assignee to join the assignor to the winding up proceedings.

re Steel Wing has been cited with approval by the Privy Council in Parmalat Capital Finance Ltd v. Food Holdings Ltd [2009] 1 BCLC 274 at §§6-8 per Lord Hoffmann.

To counter the above, Chinluck sought to rely on the decision in Re Chung Kong Materials (JV) Limited [2019] HKCA 788 (15 July 2019), where the Court of Appeal upheld the decision of the Court of First Instance to dismiss a winding up petition on the basis that, on the evidence, it was triable as to whether the petitioner was the equitable assignee of the debt; and that, even if the petitioner was an equitable assignee of the debt, it should in any event have joined the assignor to the proceedings. Harris J found that Re Chung Kong Materials was of no assistance to Chinluck because: (1) the Court of Appeal did not have the benefit of being referred to the English decisions dealing specifically with the necessity of a beneficiary joining a trustee when presenting a winding up petition; and (2) the Court of Appeal was influenced by the fact that the assignee’s title was questionable.  

Applying the reasoning in re Steel Wing, Harris J found that it was not necessary for the Petitioner to join the trustee, and so Chinluck’s defence failed and a winding up order should be made.

Takeaway points

Re China Cultural City Limited is authority for the fact that a beneficiary of a debt under a trust has standing to present a winding up petition against a company without joining the trustee, and that the policy concerns underpinning the general rule prohibiting a beneficiary to bring an action in his own name without the participation of the trustee, do not apply to winding up petitions. In this respect, the Court apparently took the view that no meaningful distinction can be drawn between an equitable assignee of a debt and a beneficiary of a debt under a trust. In both cases, all the claims of the company’s creditors can be dealt with conclusively in the liquidation process.

Christopher Chain and Jasmine Cheung acted for the Petitioner.

John Hui and Howard Wong acted for the Opposing Contributory.

      

 

Back to listing