Equitable actions for accounts of monies subject to six-year limitation period by analogy

The Court of First Instance in Hong Kong has held that the six year limitation period specified in section 4(2) of the Limitation Ordinance (Cap.347) (LO) applies, by analogy, to an equitable claim by a company against its director(s) for accounts of company assets which have come into the hands of the director(s).  This is important because otherwise there would be no specific limitation period and the general equitable principle of "laches" would apply.

Background

Wong and Liu were each a director and 50% shareholder of GDIL (the Company).  Over a period of some 10 years, various sums of Company money were remitted to Zimbabwe at Liu's request.  The moneys were purportedly used to operate certain of the Company's businesses.  Wong brought a common law derivative action against Liu to account for those Company monies.

Liu applied to have Wong's application struck out as regards remittances made more than six years ago.  He did so on the basis of section 4(2) of the LO, which provides that:

"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."

Wong resisted the application on the basis of section 4(7) of the LO, which provides that section 4 of the LO–

"… 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" [Emphasis added]

Wong argued that his action for an account was "equitable relief" for the purposes of section 4(7) because any duty to account for the monies arose from the breach of an equitable duty – i.e. the fiduciary duty owed to the Company by its directors.  

Ruling

Chow J agreed with Wong that his claim for an account of the monies was a claim for equitable relief.  As such, section 4(7) meant that section 4(2) of the LO could not relieve Liu from liability unless section 4(2) could be applied by analogy.  However, His Lordship also held that was the case.  He found section 4(2) could be applied "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".

Chow J noted the general the approach of the English courts when deciding whether statutory limitation periods apply "by analogy" to actions for account in equity.  This approach is to ask whether the underlying cause of action giving rise to the duty to account is itself subject to any statutory time limits.

Wong's claim was not based on any such underlying cause of action: a fiduciary (such as a director) is under a general duty to account without the need to prove any breach of fiduciary duty.  Rather, the information obtained from the fiduciary giving an account of monies could be a means by which a beneficiary company could determine whether any breach of duty has taken place.

Given that a common law action for account is time barred at six years by the LO, and in the absence of an underlying cause of action which is itself subject to a statutory time limit in the present case, the judge held that section 4(2) would apply by analogy.  Accordingly, Wong's action for an account was time barred in so far as it related to remittances made more than six years earlier.

Comment

Cases in which director and shareholders fall out and bring similar actions against each other are relatively common.

The provision in section 20(1)(b) LO that–

"No period of limitation prescribed by this Ordinance shall apply to an action by a beneficiary under a trust, being 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."

may lead to a false sense of security in such cases.  Although that section applies to a director as it does to a trustee (and indeed was pleaded in the alternative in the present case), if a plaintiff is unable to allege actual breach of duty without further information, he will be time-barred from obtaining an order for an account to obtain that information more than six years after the conduct in question took place. 

If you wish to discuss, please contact Gareth Thomas, Dominic Geiser, Joanna Caen or your usual Herbert Smith Freehills contact.

Gareth Thomas
Gareth Thomas
Partner, Head of Commercial Litigation, Hong Kong
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+852 2101 4025
Dominic Geiser
Dominic Geiser
Partner, Hong Kong
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+852 2101 4629
Joanna Caen
Joanna Caen
Senior Consultant
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+852 2101 4167

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