JONATHAN LIM v. SHE WAI HUNG AND OTHERS

HCA 391/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 391 OF 2010

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BETWEEN

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D E C I S I O N

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1.  This is an application for variation of my costs order nisi given on 6 December 2010 upon my dismissal of the plaintiff’s application for summary judgment. This application was initially made by letter within time followed by a summons filed out of time. The 1st and 2nd defendants argued that the application was made out of time. I think the application should properly have been made by a summons. But that does not affect its outcome.

2.  The plaintiff applied for summary judgment on two alternative bases.  The first basis is that he is the holder of one out of 10,000 shares of the 3rd defendant and he brought this action as a derivative action against the 1st and 2nd defendants for the benefit of the 3rd defendant. 

3.  However, the 1st and 2nd defendants challenged his entitlement to bring this action as a derivative action, the reason being that his father is the registered holder of 5,999 shares of the 3rd defendant. Though his father has been adjudged a bankrupt, his father can still exercise the voting rights attached to these shares according to the will of the trustees in bankruptcy.

4.  The 1st defendant is only the registered shareholder of 4,000 shares of the 3rd defendant.  The 3rd is therefore not in the control of the 1st defendant and/or his son, the 2nd defendant, who is not even a shareholder of the 3rd defendant.

5.  I therefore did not grant summary judgment on the ground that there is a triable issue of the plaintiff’s entitlement to bring this action as a derivative action.

6.  I also declined the plaintiff’s application for interim injunction on the ground that his loss can be adequately compensated by damages.

7.  The plaintiff’s second basis of action is to pursue his personal rights as a shareholder of the 3rd defendant.  I also did not accept this ground for the reason that any problem of management of the 3rd defendant could be sorted out by the ordinary majority of the 3rd defendant’s members in general meeting.  The details of my reasoning are in my decision given on 6 December 2010.

8.  The 1st defendant has already in his affirmation filed on 31 August 2010 pointed out that the trustees in bankruptcy of the plaintiff’s father could mobilise the 3rd defendant to sue for wrongs inflicted on it.  He in fact referred to the plaintiff’s father as the holder of 6,000 shares as he regarded the plaintiff as the nominee of his father in holding the one share of the 3rd defendant. 

9.  However, whether the plaintiff’s father is the holder of 5,999 or 6,000 shares, the point made by the 1st defendant is the same, namely the trustees in bankruptcy, being in control of the majority of the 3rd defendant’s shares, could mobilise the 3rd defendant to pursue remedies for wrongs done to it.  Hence, there is no basis for the plaintiff to bring this action as a derivative action.

10.  I therefore dismissed the plaintiff’s summons for summary judgment and made a costs order nisi requiring him to pay the costs of the application to the 1st and 2nd defendants.

11.  On 30 December 2010 I also dismissed the plaintiff’s application for leave to appeal.  I pointed out that it was for the plaintiff to show a prima facie case of his entitlement to bring a derivative action regardless of whether the issue has been raised in the defence (see Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 at paras 12 and 13 per Ribeiro PJ).

12.  I also dismissed the plaintiff’s ground of appeal to pursue his personal right as a director of the 3rd defendant as the undertakings given by the 1st and 2nd defendants to the court have made this matter non-contentious.

13.  In this application, counsel for the plaintiff referred to the defence of the 1st and 2nd defendants and submitted that the only defence raised was that the plaintiff had no locus to bring the action as he was a mere nominee of his father and had no beneficial interest in the one share of the 3rd defendant that was registered in his name.  Counsel said that the plaintiff’s Order 14 summons was issued on the basis of this defence.

14.  Counsel further submitted that the no beneficial interest defence was maintained by the 1st defendant in his affirmation in opposition.

15.  Counsel further said that it was only two days before the hearing that counsel for the 1st and 2nd defendants asserted in a skeleton submissions that the plaintiff could not maintain this action as a derivative action.

16.  Counsel thus submitted that it could not be said that the plaintiff clearly knew that there was an arguable defence whether before the issue of the Order 14 summons or when he prepared his affirmations in support and in reply.  Counsel therefore submits that the cost of the Order 14 summons should be in the cause.

17.  Counsel further said that this should be so particularly when my decision in refusing injunctive relief was premised on the undertakings of the 1st and 2nd defendants not to hold out as directors of the 3rd defendant.  Counsel may be right on this, but the offers of undertakings by the 1st and 2nd defendants were made in the affirmation of the 1st defendant filed on 31 August 2010.  Hence, that was not a matter that needed consideration since then or at the hearing on 3 December 2010. 

18.  Counsel further asked for costs be to the plaintiff for two issues that had been abandoned by the 1st and 2nd defendants at the hearing, namely the reliance on a nominee shareholding defence and the defence under section 157 of the Companies Ordinance for validating the acts of the 1st and 2nd defendants.

19.  Alternatively, counsel seeks a percentage of the plaintiff’s costs to be paid by the 1st or 2nd defendants, or that the 1st and 2nd defendants should be deprived of part of their costs to reflect the abandonment of these two issues.  However, these two issues did not take up any significant amount of time at the hearing.

20.  More importantly, on the question of whether the 1st and 2nd defendants have in the 1st defendant’s affirmation challenged the plaintiff’s entitlement to bring this action as a derivative action, I will refer to paragraph 12 of the 1st defendant’s affirmation as follows:

“12. Jonathan is not a minor shareholder of the company, nor is Juliano. Jonathan has no locus to sue us at all. After the declaration of the bankruptcy of Juliano, all the properties including his 6,000 shares in the company should be vested to the trustees in bankruptcy of Juliano. Any wrongs allegedly committed by Pang and me should be actionable by the company if the trustee deems fit.”

21.  I think this paragraph has clearly suggested that the trustees in bankruptcy are in control of the majority of shares rather than the 1st defendant.  The reference to 6,000 shares rather than 5,999 shares reflected the 1st defendant’s desire to maintain his nominee shareholder defence, but that has not eclipsed the point that the trustees in bankruptcy are in control of the majority of shares and the 1st defendant is not in control. 

22.  In any case, it is for the plaintiff to establish his entitlement to bring this action as a derivative action.  It is wrong for the plaintiff to assume that if this point is not being taken by the 1st and 2nd defendants, the court would then have no concern about it.  This attitude is wholly misconceived. 

23.  It is an abuse of process for a minority shareholder to bring a derivative action without showing its entitlement to do so.  The Order 14 summons based on a derivative action was doomed from the start, even without any challenge by the 1st and 2nd defendants.  The alternative basis for summary judgment also failed at the latest on 31 August 2010 upon the filing of the 1st defendant’s affirmation. 

24.  In the premises, I see no basis to vary the costs order nisi.  I therefore dismiss the application.

25.  I also order the plaintiff to pay the 1st and 2nd defendants the costs of this application, and I will now assess the amount summarily.

Mr Norman Nip, instructed by Messrs Fairbairn Catley Low & Kong, for the Plaintiff

Ms Stephanie Yan, instructed by Messrs Benson Li & Co., for 1st, 2nd and 3rd Defendants

HCA 391/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 391 OF 2010

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BETWEEN

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D E C I S I O N

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1.  This is an application for leave to appeal against my decision given on 6 December 2010. I dismissed the plaintiff’s application for summary judgment with costs. This application is made under section 14AA of the High Court Ordinance and Order 59, rule 2B of the Rules of the High Court. Section 14AA(4) provides:

“(4) Leave to appeal for the purpose of subsection (1) shall not be granted unless the court hearing the application for leave is satisfied that—

(a) the appeal has a reasonable prospect of success; or

(b) there is some other reason in the interests of justice why the appeal should be heard.”

2.  This application is made on the basis of a reasonable prospect of success in the appeal under subsection (4)(a).  A reasonable prospect of success under subsection (4)(a) means a prospect that is more than fanciful but without having to be probable (see SMSE v KL [2009] 4 HKLRD 125 at para 17).

3.  The plaintiff brought the action on two alternative bases.  The first is that it is a derivative action for the benefit of the 3rd defendant.  The second is a personal claim for the plaintiff’s own benefit. 

4.  In Waddington Limited v Chan Chun Hoo (2008) 11 HKCFAR 370 at paras 12 and 13, Ribeiro PJ said:

“12. It follows that where a wrong is alleged to have been done to a company and a minority shareholder purports to bring a derivative action on the company’s behalf, it is incumbent on the shareholder to show that the general “proper plaintiff” rule is displaced and that the case falls within the relevant exception. 

13. The derivative action is a procedural device invented by the courts to afford protection to the minority.  Procedurally, there is no requirement at common law for a person seeking to sue derivatively first to obtain the leave of the court.  But it does not follow from this that there is no threshold requirement to be met by the plaintiff.  Substantively, such an action is only permitted where it can prima facie be shown that there exists a viable cause of action or equitable claim vested in the company which, if made good, would establish a fraud on the minority; as well as control of the company by the alleged wrongdoers such as to enable them to stifle any proposed action against themselves.”

5.  The plaintiff is the holder of one of 10,000 shares of the 3rd defendant.  His father is the holder of 5,999 shares of the 3rd defendant and is the majority shareholder of the 3rd defendant.  The 1st defendant is the holder of the remaining 4,000 shares.  The plaintiff’s father was adjudged a bankrupt on 26 March 2009.  He can only exercise the voting rights under those shares as directed by the trustees in bankruptcy.

6.  I have already set out the background of the action and the grounds for not giving the plaintiff summary judgment in my decision of 6 December 2010 and will not repeat them here.  One of the reasons for my decision is that there is a triable issue on whether the plaintiff is entitled to bring this action as a derivative action as there is no evidence that the 3rd defendant is in the control of the 1st and 2nd defendants, the alleged wrongdoers.  The plaintiff’s father is still the majority shareholder of the 3rd defendant and there is no evidence that the trustees in bankruptcy have acted in any biased or improper manner in relation to the affairs of the 3rd defendant.

7.  The plaintiff in his proposed grounds of appeal says that the 1st and 2nd defendants have not pleaded this ground in their defence and, hence, it is not open to me to decide the application for summary judgment on this ground.

8.  I disagree.  The threshold is there for the plaintiff to overcome whether it is in the defence or not.  In any case, I cannot ignore this issue as the evidence and argument have already been set out in the 1st defendant’s affidavit and the written submissions of his counsel.  I also have the undertaking of the 1st and 2nd defendants to amend the defence to include this challenge within two weeks from today.  I do not see any merit in this proposed ground of appeal.

9.  The next ground is that the board of the 3rd defendant has been extinguished by the bankruptcy of the plaintiff’s father.  However, it is open to the plaintiff to apply under section 114B of the Companies Ordinance for an order of the court that a meeting of the 3rd defendant be held to appoint more directors to the board.  It is therefore open to the plaintiff to constitute a new and proper board for the 3rd defendant, and the board can then decide what to do to redress the wrongs, if any, inflicted on it.

10.  The next ground is that the trustees are in a position of conflict of interest because they are paid by the 1st defendant who is the only creditor of the plaintiff’s father, and they are biased because they are not backing this action and there is not even a letter written by them showing their disapproval of the misconduct of the 1st and/or 2nd defendant committed to the 3rd defendant.

11.  I do not think the mere fact that the 1st defendant is the only creditor of the plaintiff’s father and the trustees are paid by him, if not by the assets of the plaintiff’s father, would thereby put the trustees into a situation of conflict or a situation that they would exercise the shareholders’ rights of the plaintiff’s father in managing the 3rd defendant’s affairs in favour of the 1st defendant.

12.  Regarding their indication that they are not backing this action, there is no evidence on how the 3rd defendant, in incurring costs for this action, would benefit from it.  The evidence is that the 3rd defendant’s only asset was a factory in the mainland and that factory had been transferred to another company that the plaintiff’s father had an interest, and the transfer was at nil consideration.  The main purpose of this action is to stop the legal proceedings brought in the name of the 3rd defendant in the mainland for recovering that factory to the 3rd defendant.  I do not think the trustees’ refusal to back this action without more can be said to be improper or biased. 

13.  Regarding the failure of the trustees to express disapproval to the conduct of the 1st and 2nd defendants in holding a meeting of the 3rd defendant and appointing themselves as directors, the Official Receiver had also been notified about these matters but had also made no response.  Since the 3rd defendant has stopped its business from March 1999 and had been divested of its only substantial asset in November 2006, it is doubtful if any action by the Official Receiver or the trustees in bankruptcy in relation to these irregularities would be beneficial to the collection of assets of the plaintiff’s father.  I do not think this so-called inaction by the trustees can be regarded as evidence of bias or improper conduct.

14.  Apart from these matters from which I am asked to infer bias or misconduct of the trustees, there is no other evidence of bias or misconduct.  Counsel for the plaintiff, however, submitted that there is no such evidence only because the challenge by the defendants to the plaintiff’s entitlement to bring the derivative action was only made two days before the hearing and, hence, there was no opportunity to adduce the evidence. 

15.  I disagree that this challenge was only raised two days before the hearing.  However, even if it were so, the burden and the threshold to show that the 3rd defendant is in the control of wrongdoers is for the plaintiff to overcome.  He has to justify his entitlement to bring the derivative action in the statement of claim and his affirmation in support of the application for summary judgment.  Hence, I do not think he can complain that the challenge was made too late.

16.  On his personal claim, his proposed ground of appeal is that he is still a director of the 3rd defendant, and he complains that I should have made a declaration in his favour in the application for summary judgment.  However, the 1st and 2nd defendants accept that he is still a director of the 3rd defendant.  There is therefore no basis for the court to grant any declaration when there is no dispute.

17.  In the premises, I do not think the plaintiff has any reasonable prospect of success in the proposed appeal.  I therefore dismiss this appeal with costs, and I also certify the matter fit for one counsel.

HCA 391/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 391 OF 2010

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BETWEEN

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________________________

D E C I S I O N

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1.  This is an application for summary judgment by the plaintiff. The plaintiff seeks in the statement of claim various declarations and injunctions. He now wants summary judgment for the relief. His case is that the appointments of the 1st and 2nd defendants as directors of the 3rd defendant are irregular. The 1st and 2nd defendants should be enjoined from acting as such and they should terminate the appointment of certain lawyers in the Mainland that they had engaged on behalf of the 3rd defendant.

Background

2.  The 1st defendant is the father of the 2nd defendant.  They accept that their appointments are irregular and are willing to undertake not to hold themselves out or act as directors of the 3rd defendant in Hong Kong or the Mainland, but they are not prepared to terminate the appointment of the Chinese lawyers.  They also say that this action is fundamentally flawed as the plaintiff has no locus standi to bring this action and it should therefore be struck out.

3.  The cause of this dispute can be traced back to sometime in July 1993, if not earlier.  The 3rd defendant was incorporated on 8 July 1993.  Its two subscriber shares were then acquired by the plaintiff and his father, Juliano Lim (“JL”).  It was then operated as a quasi partnership between JL and the 1st defendant.  The 1st defendant was appointed a director of the 3rd defendant on 31 March 1995.  The plaintiff transferred his subscriber share to the 1st defendant on 4 December 1995 at nil consideration.

4.  On 5 December 1995, 5,999 shares were allotted to JL and 3,999 shares to the 1st defendant.  From then on, JL and the 1st defendant were the 3rd defendant’s shareholders holding 6,000 and 4,000 shares respectively.  The 1st defendant resigned as a director on 19 May 1997.  He signed a provisional sale and purchase agreement with JL on 29 May 1997 to sell his 4,000 shares to the 1st defendant at HK$4 million.  They made a formal agreement for the sale on 4 July 1997.  The sale was later aborted because JL did not pay the consideration to the 1st defendant.

5.  On 28 July 1997, JL transferred one share to the plaintiff.  The 1st and 2nd defendants say that this share was and is held by the plaintiff as a nominee for JL.  They gave the reason that the Companies Ordinance at that time required at least two shareholders for a private company and JL transferred one share to the plaintiff to hold as JL’s nominee as JL was preparing to take over the 1st defendant’s 4,000 shares as well.

6.  The 3rd defendant’s business was in electroplating of spectacle frames.  It had a factory in the Mainland called Kwai Chung Gold Loop Spectacles Processing Factory.  The 3rd defendant’s only substantial business was to operate the factory.  Since May 1997, JL diverted the 3rd defendant’s business in the operation of the factory to one Gold Loop Electroplating and Metal Finishing Company Limited (“Gold Loop”).  Gold Loop was formed by JL and five other Hong Kong residents. JL was the major shareholder of Gold Loop before his bankruptcy.

7.  The 3rd defendant used to be a quasi partnership between JL and the 1st defendant.  Despite the abortion of the sale of shares by the 1st defendant to JL, the 1st defendant was still excluded from the management of the 3rd defendant.  The 3rd defendant also formally ceased business in March 1999.  The 1st defendant still holds 4,000 or 40 per cent of the shares of the 3rd defendant.

8.  In 2001, the 1st defendant presented a petition under section 168A of the Companies Ordinance against JL and the plaintiff, alleging that they had conducted the affairs of the 3rd defendant in a manner unfairly prejudicial to the 1st defendant’s interest.  The 1st defendant prayed for an order that both JL and the plaintiff should purchase his 4,000 shares.  By a judgment dated 27 February 2004, Kwan J (as she then was) ordered JL alone to purchase the 1st defendant’s 4,000 shares at a price to be fixed and to be valued as at 18 May 1997.  The plaintiff was not required to join in the purchase as Kwan J found that his involvement in the 3rd defendant was minimal and he had made no or no substantial contribution to the capital of the 3rd defendant.  The price was fixed by Kwan J on 26 November 2007 at HK$2,730,453.45.

9.  On 11 November 2006, JL and the plaintiff passed a board resolution of the 3rd defendant transferring the 3rd defendant’s entire interest in the factory to Gold Loop at nil consideration.

JL’s bankruptcy

10.  JL did not pay any purchase price to the 1st defendant as ordered by Kwan J and the 1st defendant commenced bankruptcy proceedings against him on 26 March 2009.  He was declared bankrupt on 3 June 2009 and thus ceased to be a director of the 3rd defendant.

The EGM called by the 1st defendant

11.  On 12 July 2009, the 1st defendant issued a notice to the plaintiff and the Official Receiver notifying them that an EGM of the 3rd defendant would be held on 12 August 2009.

12.  The notice stated that JL had, because of his bankruptcy, ceased to be a director of the 3rd defendant.  The 1st defendant therefore proposed to convene an EGM to discuss the election of new members of the board, to constitute a new board, to annul the board’s decision made on 11 November 2006, and to annul the transfer agreement made between the 3rd defendant and Gold Loop of the same day, to authorise the 1st defendant to be the representative of the factory in Shenzhen and to apply to the authorities to restore the name of the factory.

The appointments by the 1st defendant and the legal action in the Mainland

13.  On 12 August 2009, the 1st defendant purportedly convened the EGM and purported to annul the board’s decision of 11 November 2006 and the transfer agreement of the same day, to appoint the 1st defendant as the representative of the factory and to authorize the application to restore the name of the factory.  The 1st defendant also signed the minutes in the purported capacity of a director. 

14.  On the same day, the 1st defendant, in the purported capacity of a director of the 3rd defendant, signed and filed a notice of change of directors at the Companies Registry, notifying the cessation of JL and the plaintiff as directors and his appointment as a director.

15.  On 27 August 2009, the 1st defendant, in the purported capacity of a director of the 3rd defendant, signed another notice and filed it with the Companies Registry, notifying the cessation of appointment of the then Company Secretary and the appointment of his son, the 2nd defendant, as a director from 12 August 2009.

16.  On 27 August 2009, the 1st and 2nd defendants in their purported capacities as directors of the 3rd defendant signed the annual return of the 3rd defendant.

17.  On 1 September 2009, they signed and filed a notice and changed the registered office of the 3rd defendant to another address.

18.  On 14 September 2009, the 1st defendant, in the purported capacity of a director, signed and filed another notice with the Companies Registry, notifying the appointment of the 2nd defendant as the Company Secretary of the 3rd defendant.

19.  On 19 November 2009, the 1st defendant, in the purported capacity of the person in charge of the 3rd defendant, signed a statement of claim for the 3rd defendant to commence a legal action against Gold Loop in the People’s Court at Longgan District, Shenzhen of the Mainland, claiming for the restoration of the 3rd defendant’s interest in the factory.

20.  On 20 November 2009, the 1st and 2nd defendants held a purported board meeting of the 3rd defendant, whereby the 1st defendant appointed himself the official representative of the 3rd defendant, authorised himself to sign a Power of Attorney on behalf of the 3rd defendant and resolved to commence legal action in the 3rd defendant’s name against Gold Loop.

21.  The 1st defendant also signed a Power of Attorney to appoint certain lawyers of the Mainland as the 3rd defendant’s legal representatives in the legal action.  As a result, the 3rd defendant has commenced an action against Gold Loop in the Mainland.

The admission of irregularities by the 1st and 2nd defendants

22.  The 1st and 2nd defendants however admitted that the meeting on 12 August 2009 was irregular as there was no requisite quorum required by Article 23 of the 3rd defendant’s Articles of Association.  Article 23 provides:

“For all purposes, the quorum for all general meetings shall be two members personally present and holding either in his own right or by proxy at least fifty-one per cent of the paid-up capital of the Company, and no business shall be transacted at any General Meeting unless the requisite quorum be present at the commencement of the business.”

23.  The 1st and 2nd defendants further admitted that the plaintiff had never resigned as a director of the 3rd defendant and he had never appointed the 1st or 2nd defendant as the 3rd defendant’s director or appointed the 2nd defendant as the Company Secretary. 

24.  The 1st and 2nd defendants are also not relying on section 157 of the Companies Ordinance to argue for the validity of their acts.

Application for summary judgment

25.  The plaintiff then, in his capacity as a shareholder holding one share of the 3rd defendant, commenced this action against the 1st and 2nd defendants.  The 3rd defendant is also sued because the plaintiff intends this action to be a derivative action for the benefit of the 3rd defendant.  Alternatively, he brings this action in his personal capacity to enforce his contract with the 1st defendant by virtue of their being the shareholders of the 3rd defendant.

26.  The plaintiff in this application for summary judgment seeks declarations that the 1st and 2nd defendants are not and have not been the directors of the 3rd defendant since their purported appointments, the 1st defendant is and was not the official representative of the 3rd defendant, the plaintiff is and was still a director of the 3rd defendant, and for the invalidity of the board meeting held by the 1st and 2nd defendants and the resolution made thereat and the Power of Attorney.

27.  The plaintiff also seeks injunctions to restrain the 1st defendant from holding himself out and acting as a director of the 3rd defendant and as against the 2nd defendant in respect of the offices of director and Company Secretary of the 3rd defendant.

28.  In case the court should give the plaintiff leave to defend, the plaintiff would seek alternative remedies under Order 29 rule 1 of the Rules of the High Court for the above-mentioned injunctions and an injunction that the 1st and 2nd defendants and/or the 3rd defendant should within seven days terminate the said Power of Attorney which appointed the Mainland lawyers for the 3rd defendant until the trial of this action or until further order.  It seems that the plaintiff is very keen to stop the 3rd defendant’s legal action in the Mainland against Gold Loop.

The defendants’ challenge of the plaintiff’s locus standi

29.  The 1st and 2nd defendants are defending the action and opposing the application for summary judgment or for interim relief under Order 29 rule 1.  They challenge the locus standi of the plaintiff, being the shareholder of one out of 10,000 shares of the 3rd defendant.  They say that JL is still the registered holder of 5,999 shares. It is open to the 3rd defendant to pursue for itself the remedies now sought by the plaintiff purportedly on its behalf.  Hence, the plaintiff cannot institute this action as a derivative action for the 3rd defendant.  They say that the plaintiff should have caused JL’s trustees in bankruptcy, who control the voting right of JL’s 5,999 shares, to agree to the bringing of this action.  Since the 1st defendant only controls 40 per cent of the 3rd defendant’s shares, he is not in control of the 3rd defendant.  JL’s trustees in bankruptcy have enough voting power to decide in a general meeting whether the 3rd defendant should commence this action against the 1st and 2nd defendants.  It is not open to the plaintiff, who owns one share only, to start this action.

30.  On the question of control, counsel for the 1st and 2nd defendants referred to Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 at paras. 12 and 13 citing Barrett v Duckett [1995] 1 BCLC 243 at 249h to 250c, Prudential Assurance v Newman Industries (No. 2) [1982] Ch. 204, Smith v Croft (No. 2) [1988] Ch. 114 at 184-185.  Counsel also raised the pertinent question of whether a claim for the benefit of the 3rd defendant is being improperly stifled by the 1st and/or 2nd defendants (see Shareholders’Rights by Robin Hollington, 5th edn. at paras. 6-12 and 6-25). 

31.  The trustees of JL have also made it clear that they do not support this action.

32.  Counsel for the plaintiff in reply submitted that JL’s trustees in bankruptcy were appointed by the 1st defendant, being the only creditor of JL who has filed a proof of debt.  Counsel therefore further submitted that the trustees would exercise their powers and privileges for the benefit of the 1st defendant.  It would therefore be highly unlikely that they would vote in favour of commencing proceedings against the 1st and 2nd defendants even if the matter were put to vote in a general meeting.

33.  However, counsel for the 1st and 2nd defendants rightly referred to Re Peregrine Investments Holdings Ltd [1998] 2 HKLRD 670 at p.679, B-D, where Le Pichon J (as she then was) said that:

“Administrators, liquidators, receivers, trustees in bankruptcy or other officers (office holders) are fiduciaries charged with the duty of protecting, getting in, realizing and ultimately passing on to others assets and properties which belong not to themselves but to creditors or beneficiaries of one kind or another. They are appointed because of their professional skills and experience and they are expected to exercise proper commercial judgment in the carrying out of their duties. Their fundamental obligation is a duty to account, both for the way in which they exercise their powers and for the property which they deal with.”

Decision on the plaintiff’s claim of derivative action

34.  The trustees exercise their professional skills and experience in the use of their power for the benefit of the 1st defendant qua creditor of JL only.  They are neither the mouthpieces nor puppets of the 1st defendant.  The trustees’ acts and decisions in administering JL’s estate are also subject to challenge in court by way of appeal under section 83 of the Bankruptcy Ordinance, Cap. 6.  There is no evidence that JL’s trustees in bankruptcy have acted in any biased or improper manner in relation to the affairs of the 3rd defendant.

35.  In light of the above, I find that there is a triable dispute over the plaintiff’s entitlement to start this action as a derivative action for the 3rd defendant.

Decision under Order 29 rule 1

36.  Furthermore, there is no suggestion that if the plaintiff, being the shareholder of one out of 10,000 shares of the 3rd defendant, should succeed in this action after trial, he would not be adequately compensated by damages for any loss caused to him by the refusal of any injunction now.  I also cannot see how he could not be adequately compensated by damages (see American Cyanamide Co. v Ethicon Ltd [1975] AC 396 and para. 29/1/11 of Hong Kong Civil Procedure 2001).

37.  I therefore would not grant any relief summarily on the basis that this is a derivate action.

Analysis and decision of the plaintiff’s personal claim

38.  I now consider whether I should grant the plaintiff relief on the basis that this is a personal action by him against the 1st and 2nd defendants.  He relies on section 23(1) and (1A) of the Companies Ordinance, which provide:

“(1) Subject to the provisions of this Ordinance, the memorandum and articles shall, when registered, have effect as a contract under seal-

(a) between the company and each member; and

(b) between a member and each other member,

and shall be deemed to contain covenants on the part of the company and of each member to observe all the provisions of the memorandum and articles.

(1A) Without limiting the generality of subsection (1), the memorandum and articles shall, when registered, be enforceable by the company against each member and by a member against the company and against each other member.”

39.  Counsel for the plaintiff submitted that the plaintiff wants the affairs of the 3rd defendant to be conducted in accordance with the Articles of Association.  Counsel further submitted that the plaintiff has been deprived of his right to receive notice of meetings and to attend and vote at meetings.  Counsel said that this is a deprivation of a proprietary right.

40.  Kwan J said in paras. 44 and 48 of Re Hong Kong Sailing Federation [2010] 1 HKLRD 801:

“44. However, there exists another line of cases which showed that in certain circumstances, in connection with matters which could be regarded as procedural, an individual shareholder is allowed to bring an action against the company to protect his rights under the constitution, without having to subordinate his rights to the wishes of the majority. Examples of this line of cases to enforce personal rights of shareholders are Pender v Lushington (1877) 6 Ch D 70 (the right to have the votes on the shares counted and recorded at a general meeting despite the distribution of the shares among some nominee shareholders); Wood v Odessa Waterworks (1889) 42 Ch D 636 (the right to have a dividend paid in the manner specified by the articles of association); Kaye v Croydon Tramways [1898] 1 Ch 358 and Baillie v Oriental Telephone & Electric Co. Ltd [1915] 1 Ch 503 (the right to proper notice of meetings to consider a special resolution); Edwards v Halliwell [1950] 2 All ER 1064 (the right to have a decision taken in the way prescribed by the articles, which required a two-thirds majority on a ballot vote).

…

48. The work I find to be of the most assistance is the article of Drury entitled ‘The Relative Nature of a Shareholder’s Right to Enforce the Company Contract’ [1986] CLJ 219, in which the learned author discussed the differentiation between the line of cases which disallowed an individual shareholder to sue in respect of ratifiable internal procedural irregularities applying the rule in Foss v Harbottle, and cases which allowed an individual shareholder to sue to enforce personal rights, usually of a proprietary nature. Merely categorising a right as personal right does not provide a wholly satisfactory solution. The author suggested a possible explanation to chart this borderline between cases where the rule in Foss v Harbottle applies and cases where the rule does not prevent an individual shareholder from suing. The pertinent question he posed is ‘whether a particular dispute is appropriate for determination by an ordinary majority’ (at 240). The exposition at pp. 240-241 reads as follows:

‘If one concentrates on this question, it is possible to view many of the cases where the courts have given a negative answer as ones involving a situation where one group of shareholders has endeavoured to get its way without going through the correct dispute-resolution machinery. There are many instances where this machinery involves obtaining something other than an ordinary resolution. It may be that, in order to produce a settlement of a particular dispute, what is required is a special resolution, or even a special resolution which is held to be for the benefit of the company as a whole. If an attempt is made to impose a solution without going through the correct process, then an individual shareholder is permitted to come to court to seek a remedy. The automatic ordinary majority barrier of Foss v Harbottle is not appropriate in these circumstances to confine the dispute.

There are several other types of situation which can be recognised as inappropriate for reference to an ordinary majority.  Colin Baxter [1983] CLJ 96 has made a very perceptive contribution to analysing the cases from a similar standpoint.  He argues that there is no difficulty in recognising a case for judicial action.  He says that,  ‘[S]uch a case arises if, and only if, (1) a dispute situation has arisen in which it is impossible or impracticable for the members of the body to sort things out for themselves, and (2) there is something that the court can do about it.’  He argues that the law will not bother about irregularities at meetings unless there is a chance that they have influenced the result of a vote, and that in addition intervention must be appropriate.  Baxter suggests that an individual shareholder may seek judicial intervention in three types of situations which, transposed into the terminology of this article, are those where it is inappropriate to refer the matter for adjudication by an ordinary majority.’”

41.  Since JL’s trustees in bankruptcy are in control of 5,999 out of 10,000 shares of the 3rd defendant and there is no evidence that they will not act responsibility towards the management of the 3rd defendant’s affairs, I take the view that the matters subject to this action can well be sort out by the determination of an ordinary majority of the 3rd defendant’s members in general meeting.  I therefore would not grant any remedy to the plaintiff on the basis that this action being personal to him as he has not shown his entitlement to bring it in his person right.

Dismissal of summons and costs order nisi

42.  Since the 1st and 2nd defendants have raised the issue of the plaintiff’s locus standi right at the start of this application, I think it was wrong for the plaintiff to have maintained the application.  I therefore dismiss it with a costs order nisi that the plaintiff do pay the 1st and 2nd defendant’s costs of this application forthwith. I also certify the matter fit for one counsel.  I now proceed to assess the costs payable by the plaintiff to the 1st and 2nd defendants summarily and on a nisi basis.