WANG PENGYING (王鵬英) (suing on behalf of herself and all other shareholders in Convoy Global Holdings Limited and Convoy Finance Limited) v. NG WING FAI AND OTHERS

HCA 1479/2018

[2019] HKCFI 3074

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1479 OF 2018

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BETWEEN

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AND

HCA 1619/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1619 OF 2018

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BETWEEN

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(Heard together)

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J U D G M E N T

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Introduction

1.  These two sets of proceedings are in the form of common law derivative actions, which (as the titles identify) have been launched by the plaintiff suing on behalf of herself and all other shareholders in the relevant companies.

2.  In HCA 1479/2018, the relevant two companies are the 2^nd defendant company (“Convoy Global”), which is a company listed on the Hong Kong Stock Exchange, and the 3^rd defendant company (“Forthwise”), one of its wholly owned subsidiaries.  In HCA 1619/2018, the relevant two companies are the 3^rd defendant Convoy Global, and the 4^th defendant company (“Convoy Finance”), being another of its wholly owned subsidiaries.

3.  Other than the statements of claim dated 27 June 2018 and 11 July 2018 respectively, both of which were amended on 18 October 2019, no other pleadings have yet been filed.

4.  By summonses dated 18 December 2018, the 1^st defendant in HCA 1479/2018 (“Ng”) and the 1^st and 2^nd defendants in HCA 1619/2018 (“Ng” and “Yap” respectively) have applied to strike out the present proceedings on the asserted basis that the plaintiff has no locus standi to bring or continue the actions derivatively and/or has failed to plead and prove an arguable case of wrongdoer in control and/or actual fraud by or personal benefit to Ng and Yap.

5.  Mr José Maurellet SC, appearing with Mr Jason Yu and Ms Jasmine Cheung, as counsel for Ng and Yap, says that this is not a procedural or technical objection.  It goes to the substantive rule that the proper plaintiff for a wrong done to a company should be the company itself. It is only if a shareholder can get him or herself within the narrow confines of well-established categories that an exception can be invoked.

6.  The amendments made to the statements of claim in each action were made in the face of the strike out applications, and primarily relate to further allegations as to why it is said that Ng and Yap were and remained in de facto control over the Board of Directors of Convoy Global, essentially by pleading a conspiracy between them and the other directors – defined as the “Conspiring Directors” – so that they did not, or because they did not, exercise independent judgment and/or act independently as regards the affairs of Convoy Global.

Refusal of Interrogatories

7.  In support of the strike out applications affirmations have been filed by each of Ng and Yap, and by a number of other directors of Convoy Global.  Each of the directors’ affirmations or affidavits contains a common paragraph in which the director asserts that at all material times he or she exercised and still exercises independent judgment as regards the affairs of Convoy Global, including with respect to the complaints against Ng and Yap which comprise the subject matter of the complaints against them in the proceedings.  In the affidavit of Johnny Chen, the executive director and chairman of Convoy Global, he asserts that he exercised his independent judgment as chairman at the particular EGM in relation to the exercise of his powers under Convoy Global’s articles of association, free from the influence of Ng or others.

8.  On 16 September 2019, I heard Ng’s and Yap’s application for the withdrawal of interrogatories served by the plaintiff.  Those interrogatories served by the plaintiff concerned and surrounded those allegations of the exercise of independent judgment.  As explained by Mr Alex Fan, counsel for the plaintiff then and today, the gist of the interrogatories targeted: (1) the process and circumstances of the alleged exercise of independent judgment; and (2) the information taken into account by the relevant director when he or she allegedly exercised the independent judgment.

9.  I ordered the interrogatories to be withdrawn, as I considered that they were not necessary.  I held, first, that they were not necessary for the purposes of saving costs; rather, they would cause incurring further costs.  Secondly, it did not seem to me to be necessary for the fair disposal of the strike out application that the interrogatories be answered.  I agreed that the interrogatories were making a backdoor attempt at cross-examination, and in any event the strike out application would be determined on the evidence presented to the Court, where it would be open to one party or the other to urge caution on the Court in applying weight to a particular piece of evidence which has not yet been tested.

10.  I also thought that there was something in the reversal of burden point.  The plaintiff has voluntarily assumed the burden of establishing wrongdoer control to the standard necessary to avoid her claim being struck out.  She must be taken to have pleaded the material facts, and all the material facts, which she considers appropriate as enabling her to meet her burden.  Those assertions can be tested against contrary evidence, weighed in the usual way of an interlocutory application.

11.  In opposition to the strike out applications, the plaintiff has filed an affirmation which largely repeats the allegations made in the amended statements of claim.

12.  I have already noted that the amendments to the statements of claim in each of the actions, to which I have already made reference, were made after the issue of the strike out applications, but it may also be noted they were made after I ordered the withdrawal of the interrogatories.

Applicable Principles

13.  It is a fundamental principle of company law – expressed as part of the rule in Foss v Harbottle – that where a wrong has been done to a company, it is the company itself which is the proper plaintiff.  That principle admits of certain exceptions, the exception generally relevant to derivative actions being the “fraud on the minority” exception.

14.  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.

15.  A derivative action is a procedural device invented by the courts to afford protection to minority shareholders.  Whilst procedurally there is no requirement at common law for a person seeking to sue derivatively first to obtain the leave of the court, there is nevertheless a 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: see Waddington Limited v Chan Chun Hoo (2008) 11 HKCFAR 370 at §§11-13.

16.  It is therefore necessary for a plaintiff to plead (a) that there is a viable cause of action vested in the company, and (b) that the cause of action if made good would establish a fraud on the minority, and (c) that the wrongdoers are in control of the company, and that they have prevented an action being brought in the name of the company, and that the plaintiff could not by reason of the defendants’ opposition obtain the name of the company to issue proceedings.

17.  The Waddington case, at §14 and §§17-20, makes it clear that a challenge to the plaintiff’s standing generally takes the form of an application to strike out the claim or to have the court determine as a preliminary issue that the plaintiff has no standing to sue on the company’s behalf.  By either procedural route, it is the prima facie test which is applied, in what has been described as a “halfway house for this very special type of case”, where the legal issues are sufficiently well defined for the parties to be able to argue them.

18.  The burden of proving wrongdoer in control remains with the plaintiff, even where the defendant seeks to strike out a derivative action on the ground of lack of standing: see, for example, Melvin Waxman v Li Fei Yu (unreported, HCA 1973/2012, 23 August 2013, To J) at §23.  To achieve the standard of showing a prima facie case, the party which bears the burden of proof has to adduce sufficient evidence to satisfy the court that there are reasonable grounds for believing that his case or the issue in question is well-founded, so that it becomes one fit for the tribunal of fact to adjudicate upon it.

19.  The burden of proving a prima facie case is not met simply by raising a disputed issue of fact.  But how the burden is discharged will depend upon the circumstances of the case.  If the issues in question are adequately pleaded and not contradicted by evidence filed by the parties, then the pleading alone would be sufficient proof of the prima facie case.  But even if contrary evidence has been filed by the defendant, the courts are not required to conduct a trial by affidavit, nor necessarily to call the makers of the affidavit for cross-examination.  The courts are capable of and well experienced in making provisional findings of fact on affidavit evidence in such interlocutory proceedings by testing the plaintiff’s case against documentary evidence, incontrovertible evidence, or evidence which is not in dispute.  The court can determine against the backdrop of such contrary evidence whether the plaintiff’s evidence has passed the threshold so as to make the issue or the case fit for determination by the tribunal of fact.  Hence, in an appropriate case, the court may be satisfied on the basis of the pleaded case that the prima facie test is met, irrespective whether contrary evidence has been filed by the defendant: see, for example, Melvin Waxman at §§23-26, which I referred to in my earlier decision on interrogatories in this case [2019] HKCFI 2430 at §§13-14.

20.  As to what constitutes “control”, this has been held “embraces a broad spectrum extending from an overall absolute majority of votes at one end, to a majority of votes at the other end made up of those likely to be cast by the delinquent himself plus those voting with him as a result of influence or apathy”: see Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 Ch 204, at 219E.  Indeed, this was picked up as a point in the Waddington case at first instance (unreported, HCA 3291/2003, 29 April 2005, Barma J), in a passage with which neither the Court of Appeal or the Court of Final Appeal took issue.  There, having himself quoted the passage from Prudential at 219E, Barma J went on to say:

“It seems to me that in the light of this approach to control, it is legitimate to take into account the likely effect of a failure on the part of certain shareholders to vote, just as much as it would be appropriate to take account of the fact that some shareholders will vote with the majority out of apathy, if not influence.”

21.  I agree with Mr Fan that this may be particularly apposite in the situation regarding a publicly listed company, where some account might properly be taken of the likely effect of a failure on the part of certain public shareholders to exercise a right to vote in general meeting.  This point also comes out of the first instance decision in the Prudential case [1981] 1 Ch 257, at 324B-325B, in particular at 324E.  See also at 325A, where it was accepted that the exception to the rule might apply wherever the persons against whom the action is sought to be brought on behalf of the company are shown to be able “by any means of manipulation of their position in the company” to ensure that the action is not brought by the company.  Reference can also be made to the decision of Anthony Chan J in World One Investments Ltd v Chow Cheuk Lap [2013] 3 HKLRD 701, at §35.

22.  Of course, on the facts of the Waddington case, those alleged to be in control held shares which were “in the range of just under 45% to just under 50%” of the publicly listed company, so it may not be surprising on those facts that little hesitation preceded Barma J concluding that those shareholders were in a position to control the company.

23.  This is perhaps an example of looking at alleged wrongdoers’ “effective as opposed to legal control of” a company’s activities: see Ronald Li-kai Chu v Deacon Te-ken Chiu [1986] HKLR 1011, at 1038E.

24.  Depending on the facts of any case, it may be necessary to look at the current controllers of the company.  This is particularly likely to arise if the company’s board of directors has been reconstituted since the time of the alleged wrongdoing.  In Shih-Hua Investment Co Ltd v Zhang Aidong[2018] HKCFI 1234, Harris J struck out an action on the basis that the board in question had been reconstituted, such that the alleged wrongdoer ceased to have any control over the company.  Harris J (at §37) rejected as wrong the submission that the reconstitution of the Board and thus the removal of control of the wrongdoer from control of the company did not cause the derivative action to infringe the rule in Foss v Harbottle.  As he put it (at §35):

“If the Board of a company is independent of the wrong-doers and able to take an informed view of the alleged claim and decide whether or not the company should pursue the claim it is not permissible for a shareholder to commence a common law derivative action.”

25.  I agree.  If the alleged wrongdoers are no longer in control of the company, one of the necessary hurdles for a claimant to bring him or herself within the exception to the rule, so as to be in a position to bring a common law derivative action, is simply not satisfied. Similarly, if there exists an independent board which is able to take an informed view, that will be fatal to establishing wrongdoer in control.

26.  In this regard, it is necessary to remember that the key issue is whether the company is being improperly prevented from bringing proceedings, as prevention of the prosecution of an action by “an appropriate independent organ” will not amount to improper prevention from bringing an action: see Smith v Croft (No 2) [1988] Ch 114, at 185B.

27.  As to the “fraud on the minority” requirement, this is not limited to fraud in the sense of Derry v Peek deceit.  As it is sometimes put, the essence of the matter is an abuse or misuse of power, so encompassing fraud in the wider equitable sense of that term.  But it is also well-established that mere negligence or even gross negligence without fraud or personal benefit to the alleged wrongdoing directors is not sufficient: see Daniels v Daniels [1978] Ch 406, at 413-414.

28.  This principle was recently reaffirmed by the English Court of Appeal in Harris v Microfusion 2003-2 LLP [2017] 1 BCLC 305. At §31, and after reviewing certain authorities, McCombe LJ held that they did not support any wider proposition that the exception to the rule in Foss v Harbottle is opened up in cases, short of deliberate and dishonest breach of duty, in the absence of personal benefit to the party allegedly in breach of duty.  Rather, he considered the extent of the relevant exception to the rule was as stated by David Richards J in Abouraya v Sigmund [2014] EWHC 277 (Ch), where at §§24-25 he said:

“[24] It is therefore the case that all the authorities on direct derivative actions have taken as a requirement that the alleged wrongdoing should result in a loss to the company and, hence, an indirect or reflective loss to the shareholders and also that the alleged wrongdoers should have personally gained from their breaches of duty.

[25] It follows, on the authorities as they stand, that financial or other loss to the shareholders, albeit normally of a reflective character, is essential to give a Claimant shareholder sufficient interest in the proceedings to make the shareholder an appropriate Claimant on behalf of the company, whether he is a member of that company or of its holding company. Equally, the authorities require that, in the absence of actual fraud or an ultra vires act, the wrongdoers should themselves have benefited from the wrongdoing. The significance of this requirement is that their breach of duty cannot be ratified by a majority vote which depends on the votes of the wrongdoers. It is essential to the exception to the rule in Foss v Harbottle that the alleged wrongdoing is incapable of lawful ratification …”

Background Facts

29.  Convoy Global is part of a corporate group engaged in the business of financial planning, insurance brokerage, asset management and moneylending in Hong Kong, Macau and China.  In May 2017, it was exposed in an article concerning the so-called ‘Enigma Network’, and the following month several of its offices were raided by the SFC.  The ICAC subsequently arrested three then directors of Convoy Global.

30.  Following these events, independent directors were appointed to reconstitute the Board on various dates from December 2017. Ng says this was part of Convoy Global’s efforts to strengthen its management and conduct investigations alongside the regulators.

31.  The two claims arise out of transactions conducted by Convoy Global or the relevant subsidiaries in 2016.  This was obviously at a time when Convoy Global had a differently constituted Board.

32.  The claim in HCA 1479/2018 relates to the fact that between 4 February 2016 and 12 October 2016, Forthwise (as lender) advanced an aggregate loan of HK$90 million to one Forthwise Ltd (as borrower).  The claim in HCA 1619/2018 relates to the fact that on about 22 January 2016, Convoy Finance agreed to purchase the entire shareholding of Maxthree Ltd from YeChen Holdings Ltd.

Wrongdoer Control

33.  On behalf of the plaintiff, Mr Fan submits that Ng and Yap are in de facto or effective control of Convoy Global. This is in part said because (amongst other things) Ng was appointed by the Tsai family which indirectly owns the single largest shareholding in the company, and that Ng caused one director who acted as chairman at a general meeting (Johnny Chen) not to count the votes of another significant shareholder of the company.

34.  (As an aside, that other shareholder was Kwok Hiu Kwan, and Kwok’s similar allegations against the meeting chairman have been made in other proceedings HCMP 41/2018, but have been dismissed by the Companies Judge, Harris J.  Therefore, and though it is not at the forefront of his submissions, Mr Maurellet criticizes the plaintiff in these two sets of proceedings as making a collateral attack on the decision of Harris J.  I tend to agree with the criticism, but it need form no part of my reasoning.)

35.  Reliance is also placed on the fact that Ng’s remuneration package is at least 2 to 3 times higher than all other Executive Directors of Convoy Global.

36.  Also, perhaps counter-intuitively, reliance is placed by Mr Fan and the plaintiff upon the appointment of the new directors in and after December 2017.  Because the plaintiff does not accept the independence of those directors, Mr Fan has defined them as the “Allegedly Independent Directors”.  He submits that any failure to name the other wrongdoers, including those other directors, as defendants to the two actions would not preclude the finding of wrongdoers in control on the part of the existing defendants Ng and Yap.  Mr Fan’s submission is that the reconstituted board of Convoy Global, comprising those he terms as the “Allegedly Independent Directors”, would not assist Ng and Yap to negate their de facto control of Convoy Global.

37.  In part, Mr Fan says this is because none of those directors is able to give any particulars about their alleged exercise of independent judgment, even though he is forced to acknowledge that each has sworn or affirmed in a common paragraph that he or she exercised and still exercises independent judgment as regards the affairs of Convoy Global, including with respect to the complaints against Ng and Yap in relation to the Maxthree share purchase and the Forthwise loans.

38.  Mr Maurellet by way of contrast submits that it is plain that the wrongdoer in control test has not been satisfied.  He points first to the existence of an independent board.  By reference to an annex to his submissions, which summarizes the qualifications and experience of the various board members, executive and independent non-executive directors, Mr Maurellet says there can be no serious dispute that the majority of the present board is independent and able to exercise independent judgment.  He also points to the fact that out of the nine directors, leaving aside Ng himself, none of them had any relationship with Ng outside of Convoy Global.

39.  Indeed, Mr Maurellet points out that even the plaintiff has only pleaded that two of the nine directors – being Yap and Johnny Chen – are “accustomed” to following or acting in accordance with Ng’s instructions (though there is now the “conspiracy” allegation).

40.  It is also correct that with the exception of Ng and one other director, who was appointed part way through the Forthwith loans, none of the current directors had been appointed to the Board of Convoy Global at the time of the Forthwith loans and the Maxthree share transaction.  In those circumstances, it is not as if those other directors would have any incentive for ‘self-protection’.

41.  I agree that on the materials before the court, the plaintiff cannot establish a prima facie case that Ng and Yap are in control of the Board of Directors of Convoy Global.

42.  As to control at shareholder level, Mr Maurellet points out that it is the plaintiff’s own case that the controlling shareholders are not Ng himself, but rather the Tsai Brothers.  Ng’s purported status as an associate and/or nominee of the Tsai Brothers does not assist, as no allegation has been made as to why they would wish to vote their shares in a way to insulate Ng from legal action.  Mr Maurellet submits that the fact that on the plaintiff’s own case someone other than either Ng or Yap is said to have a controlling shareholding stake in Convoy Global must be fatal to her case on wrongdoer in control at the shareholder level.  I agree.

43.  On this basis, I agree that the action stand to be struck out for the plaintiff’s failure to have met the locus standi requirement of showing to the sufficient standard that Ng and Yap are wrongdoers in control.

44.  Indeed, I also agree with Mr Maurellet’s suggestion that it may have been in recognition of the fundamental problems facing the plaintiff that she previously served the request for interrogatories, and thereby resorted to what I termed “a backdoor attempt at cross-examination”, or in seeking in effect to reverse the burden that she herself has to meet.

45.  Indeed, there is an echo of that last point in Mr Fan’s continuing submission that, in the absence of any proved exercise of independent judgment on the part of those he terms the Allegedly Independent Directors, the natural conclusion would be that the control of Convoy Global remains with Ng and Yap.  In any event, I reject the logic of that submission. I would also point out the circularity, or bootstrap approach, in defining the other directors as “Conspiring Directors” as somehow showing that they were not independent, which is why they were said to have conspired with Ng and Yap.

Fraud or Personal Benefit

46.  Mr Fan for the plaintiff relies on various matters about the Forthwise transactions which he says make them highly suspicious and commercially unjustified.  He says the plaintiff’s primary position is that Ng was in deliberate and dishonest breach by advancing the loans and entering the loan agreements (so that no requirement of personal benefit arises), and the alternative case is that Ng was in breach by acting negligently.

47.  As to the Maxthree share transaction, Mr Fan points to alleged grossly inflated consideration, and the absence of a moneylending business license.  On that basis he says, and indeed it is pleaded, that the transaction was not and could not have been negotiated or entered into bona fide.  Hence, it is pleaded that the “inference is irresistible that material advantages, bribes, and/or secret profits should have been offered and conveyed by [Yap] to [Ng] or vice versa, when purportedly negotiating and entering into” the transaction.

48.  As to the negligence elements, Mr Fan suggests there was at least the turning of a blind eye to the various circumstances, which might constitute sufficient knowledge as a tell-tale sign of some dishonesty.

49.  Again, with respect, I reject the logic in the pleaded case.  First, I have already pointed out that mere negligence or even gross negligence without fraud or personal benefit to the alleged wrongdoing directors is not sufficient to comprise the fraud on the minority requirement.  Secondly, I agree with Mr Maurellet that there is really no basis for suggesting fraud, dishonesty or personal benefit.  Indeed, other than the rather extraordinary leap of logic suggested to constitute the “irresistible inference”, there is no plea that these were self-dealing transactions.  Ng has denied receiving any personal benefit, and I do not think that the plaintiff has adduced any real evidence of any substance to rebut that denial.

50.  Indeed, I am minded to echo the observations and use of language by Harris J in the (not entirely unconnected) decision in Convoy Global v Cho Kwai Chee Roy[2018] HKCFI 2111, that the plaintiff’s allegations can be described as “a fog of conjecture, speculation and suspicion”.

Conclusion and Result

51.  In the circumstances, I do not accept that the plaintiff has established on evidence a prima facie case either that (a) Ng and Yap are wrongdoers in control of Convoy Global, and hence Forthwise and Convoy Finance, or that (b) there has been a fraud practised by Ng and Yap against Convoy Global, and hence Forthwise and Convoy Finance.

52.  I therefore order that both actions in HCA 1479/2018 and HCA 1619/2018 be struck out.

53.  I see no reason why the costs should not follow the event.  Therefore, the plaintiff will pay to Ng and Yap the costs of the action.  As the companies were essentially nominal parties, and I excused their attendance today, I make no order as to their costs.

54.  As to the costs of Ng and Yap, I am persuaded that the circumstances of the case, the seriousness of the allegations, and the scope of the arguments justify a certificate for two Counsel.

Mr Alex Fan, instructed by Siao, Wen and Leung, for the plaintiff in both cases

Mr Jose Maurellet, SC, Mr Jason Yu and Ms Jasmine Cheung, instructed by Chiu & Co., for the 1^st defendant in both cases and the 2^nd defendant in HCA 1619/2018

The 2^nd and 3^rd defendants in HCA 1479/2018 and the 3^rd and 4^th defendants in HCA 1619/2018 are excused

HCA 1619/2018

[2019] HKCFI 2430

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1619 OF 2018

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R U L I N G

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Introduction

1.  This is the 1^st and 2^nd defendants’ application made by summons dated 5 June 2019, seeking the withdrawal of interrogatories without order served on them by the plaintiff on 22 May 2019.  The application is made pursuant to RHC Order 26 rule 3, and comes about in the following circumstances.

2.  These proceedings are in the form of a common law derivative action, which (as the title identifies) has been launched by the plaintiff suing on behalf of herself and all other shareholders in the two companies which are the 3^rd and 4^th defendants.  The 3^rd defendant is a company listed on the Hong Kong Stock Exchange, and the 4^th defendant is one of its wholly owned subsidiaries.

3.  Other than the statement of claim dated 11 July 2018, no other pleadings have yet been filed.  In the statement of claim, the plaintiff pleads that the 1^st defendant was in control of the 3^rd defendant because (amongst other things) he was appointed by the Tsai family which indirectly owns the single largest shareholding in that company, and that the 1^st defendant caused one director who acted as chairman at a general meeting not to count the votes of another significant shareholder on the company.  (As an aside, I am informed that that other shareholder’s similar allegations against the meeting chairman made in other proceedings have been dismissed by the Companies Judge.)

4.  By summons dated 18 December 2018, the 1^st and 2^nd defendants have applied to strike out the present proceedings on the asserted basis that the plaintiff has no locus standi to bring or continue the action derivatively and/or has failed to plead and prove an arguable case of wrongdoer in control.

5.  There is a similar set of proceedings in HCA 1479/2018, in which the plaintiff has brought another common law derivative action relating to another wholly-owned subsidiary of the 3^rd defendant. An application has also been made to strike out those proceedings.  Currently, the two strike out applications have been listed to be heard by me over two days in October 2020, though it may be that the hearing dates can be brought forward.

6.  In support of the strike out application in these proceedings an affirmation has been filed by each of the 1^st and 2^nd defendants, and by a number of other directors of the 3^rd defendant.  Each of the directors’ affirmations or affidavits contains a paragraph in which the director asserts that at all material times he or she exercised and still exercises independent judgment as regards the affairs of the 3^rd defendant, including with respect to the complaints against the 1^st and 2^nd defendants which comprise the subject matter of the complaints against them in these proceedings (and in HCA 1479/2018).  In the affidavit of the executive director and chairman of the 3^rd defendant, he asserts that he exercised his independent judgment as chairman at the particular EGM in relation to the exercise of his powers under the 3^rd defendant’s articles of association, free from the influence of the 1^st defendant or others.

7.  The interrogatories served by the plaintiff concern and surround those allegations of the exercise of independent judgment. As explained by Mr Alex Fan, counsel for the plaintiff, the gist of the interrogatories targets: (1) the process and circumstance of the alleged exercise of independent judgment: and (2) the information taken into account by the relevant director when he or she allegedly exercised the independent judgment.

8.  Mr José Maurellet SC, with Ms Jasmine Cheung, counsel for the 1^st and 2^nd defendants, submit that the interrogatories should be withdrawn for any of three reasons, either individually or cumulatively, being: (1) the interrogatories are premature and inappropriate; (2) in the context of the strike out application, the plaintiff cannot be allowed to improve her pleaded case through the interrogatories, and further, the interrogatories would effectively reverse the burden of proof, and would not assist in deciding the strike out application; and (3) the third parties whose knowledge are the subject of the interrogatories cannot be compelled to answer the interrogatories, nor can the 1^st and 2^nd defendants be compelled to procure them to do so.

Applicable Principles

9.  A derivative action is a procedural device invented by the courts to afford protection to minority shareholders.  Whilst procedurally there is no requirement at common law for a person seeking to sue derivatively first to obtain the leave of the court, there is nevertheless a 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: see Waddington Limited v. Chan Chun Hoo (2008) 11 HKCFAR 370 at §13.

10.  It is therefore necessary for a plaintiff to plead that the wrongdoers are in control of the company, and that they have prevented an action being brought in the name of the company, and that the plaintiff could not by reason of the defendants’ opposition obtain the name of the company to issue proceedings.

11.  The principles applicable to a challenge on the lack of standing by a plaintiff to commence a common law derivative action are well-established: see, for example, Liquidation Committee of Foshan Hongda Development Limited v. East Legend Investment Ltd [2009] 1 HKLRD 169 at §18.  The challenge cannot be raised by way of a defence, and it must be raised at the outset or when it comes to the attention of the court or of the defence in the course of the proceedings.  Once the issue has been raised, it must be decided.  It would be wrong to allow the action to go on without deciding the issue of standing, because the defendant will not have a further chance to challenge the issue.  Once it is clear that an action is improperly constituted, it must be brought to an end either by way of dismissal, striking out or stay.

12.  Having said that, the point in the Foshan case concerned authority to sue, rather than standing for a common law derivative action turning on the issue of wrongdoer control, with which this case is more concerned.  The Waddington case, at §14 and §§17-20, makes it clear that a challenge to the plaintiff’s standing generally takes the form of an application to strike out the claim or to have the court determine as a preliminary issue that the plaintiff has no standing to sue on the company’s behalf.  By either procedural route, it is the prima facie test which is applied, in what has been described as a “halfway house for this very special type of case”, where the legal issues are sufficiently well defined for the parties to be able to argue them.

13.  The burden of proving wrongdoer in control remains with the plaintiff, even where the defendant seeks to strike out a derivative action on the ground of lack of standing: see, for example, Melvin Waxman v Li Fei Yu (unreported, HCA 1973/2012, 23 August 2013, To J) at §23.

14.  The burden of proving a prima facie case is not met simply by raising a disputed issue of fact.  But how the burden is discharged will depend upon the circumstances of the case.  If the issues in question are adequately pleaded and not contradicted by evidence filed by the parties, then the pleading alone would be sufficient proof of the prima facie case.  But even if contrary evidence has been filed by the defendant, the courts are not required to conduct a trial by affidavit, nor necessarily to call the makers of the affidavit for cross-examination.  The courts are capable of and well experienced in making provisional findings of facts on affidavit evidence in such interlocutory proceedings by testing the plaintiff’s case against documentary evidence, incontrovertible evidence, or evidence which is not in dispute.  The court can determine against the backdrop of such contrary evidence whether the plaintiff’s evidence has passed the threshold so as to make the issue or the case fit for determination by the tribunal of fact.  Hence, in an appropriate case, the court may be satisfied on the basis of the pleaded case that the prima facie test is met, irrespective whether contrary evidence has been filed by the defendant: see, for example, Melvin Waxman at §26.

15.  The applicable principles in relation to interrogatories are well known.  They have been summarised in a number of cases including Lee Nui Foon v. Ocean Park Corp (No 2) [1995] 2 HKC 395, at 396-399.  Interrogatories must relate to a matter in question between the parties.  They must be necessary either (a) for disposing fairly of the cause or matter, or (b) for saving costs.  They must not be fishing, and must not be oppressive.  They must not be prolix, but should be precise.  They must not be questions which go to the evidence the opposing party intends to adduce, nor questions which require an answer which is a matter of opinion.  Interrogatories must not be effectively asking for documents or discovery.

16.  In the exercise of its wide and unfettered discretion, the key consideration for the court is the factor of necessity: see Kao Lee & Yip (a firm) v. Donald Koo Hoi-Yan (unreported, HCA 8847/1993, 26 February 2002, Ma J) at §7(3).

17.  At §7(5) in the same case Ma J (as he then was) cited with approval, and drew special attention to, one of the yardstick considerations identified by Colman J in Det Danske Hedeselskabet v. KDM International plc [1994] 2 Lloyd’s Rep 534, at 537.  That yardstick was that requests for information ascertainable by cross-examination at the trial are inappropriate unless the party questioning can establish that it is essential for the proper preparation of his case that such information is made available to him before trial, in the sense that if the matter is left until cross-examination at the trial that party will, or probably will, be irreparably prejudiced in the conduct of the trial.

18.  Because of their nature, interrogatories are rarely allowed before filing of the defence, and often consideration of interrogatories is delayed until after exchange of witness statements.  The content of witness statements might make interrogatories superfluous.  Interrogatories are not an automatic step in any proceedings, and must serve a clear litigation purpose, which is unlikely to be identified at an early stage before discovery and exchange of witness statements.

19.  It is trite that only parties to proceedings, not witnesses nor other third parties, may be compelled to answer interrogatories.  A party is not bound, and cannot be compelled, to procure information from third parties, except his servants or agents.  On the other hand, the party is bound to give all the information which he personally possesses at the time he is interrogated, from whatever sources or persons it has been derived.

Prematurity

20.  Mr Maurellet submits that in this case, where no defence has yet been filed, let alone discovery or exchange of witness statements, the service of interrogatories is plainly premature.  Further, he submits, there are no unusual circumstances which might justify a departure from the normal rule that interrogatories follow discovery and witness statements.

21.  In response, Mr Fan submits that the words “cause or matter” in Order 26 should be construed broadly, and that the “matter in question” in the current context is the application to strike out the plaintiff’s claim for lack of standing.  As the interrogatories arise from the directors’ affirmations filed in support of the strike out application, and as the question of standing must be determined now that it has been raised, he says the interrogatories are not premature.

22.  I agree.  In the context of the issue of standing, even if it is not ‘now or never’, the issue certainly arises for consideration and determination on the relevant test now.  If the interrogatories are otherwise appropriate and necessary, the timing of their issue is not a basis to order their withdrawal.

Necessity

23.  Subject to the points I have made on timing, I agree with Mr Maurellet’s submission that striking out applications in common law derivative actions are not somehow special in nature so as to justify a different approach to interrogatories.  Though each case will depend upon its own circumstances, so that some factors may have greater weight in some circumstances than in others, the principles applicable to the consideration of interrogatories are general principles.

24.  In the context where the plaintiff says she wishes to interrogate the directors so as to avoid being deprived of a fair chance to refute their allegations, Mr Maurellet submits that the plaintiff is making an impermissible attempt to try to cross-examine by the back door, without making an application for cross-examination.  It is, he says, tantamount to requiring the defendant to prove the independence of the board, rather than requiring the plaintiff to prove wrongdoer in control, which impermissibly reverses the burden.  Indeed, he submits that the plaintiff is in effect asking the defendants to render positive assistance to her to resist the strike out application by answering the interrogatories, which is clearly impermissible and could not be necessary for disposing fairly of the strike out application.

25.  Mr Fan submits that the plaintiff has properly pleaded her case that the wrongdoers are in control of the 3^rd defendant and the relevant subsidiaries.  Hence the strike out application will focus on testing whether that pleading has made out a prima facie case.  He points to the fact that the affidavits/affirmations leading to the interrogatories were filed by the 1^st and 2^nd defendants themselves.  Hence the factual issue of the alleged exercise of independent judgement by those directors was in fact first raised by the defendants.  The interrogatories are to seek particulars of the circumstances under which it is said independent judgement was exercised, to enable the plaintiff properly to respond to such allegations.  Mr Fan says that is not to reverse the burden of proof.

26.  However, it seems to me that the interrogatories are not necessary.  First, they cannot be necessary for the purposes of saving costs; rather, they would cause incurring further costs.  Secondly, it does not seem to me to be necessary for the fair disposal of the strike out application that the interrogatories are answered.  I agree that the interrogatories are making a backdoor attempt at cross-examination, and in any event the strike out application will be determined on the evidence presented to it.  It is open to one party or the other to urge caution on the court in applying weight to a particular piece of evidence which has not yet been tested, if it has not yet been tested.

27.  There also seems to me to be something in the reverse of burden point.  The plaintiff has voluntarily assumed the burden of establishing wrongdoer control to the standard necessary to avoid her claim being struck out.  She must be taken to have pleaded the material facts, and all the material facts, which she considers appropriate as enabling her to meet her burden.  Those assertions can be tested against contrary evidence, weighed in the usual way of an interlocutory application.

28.  It is correct that the issue of standing needs to be determined at this stage, and perhaps once and for all.  The court will therefore have to resolve opposing or contrary evidence adduced by the parties, but it can do so in the usual way.  But I do not think that means interrogatories are necessary for the fair disposal of the issue.

29.  There is a question as to whether or not standing is in reality a preliminary issue, as the strike out applications raise that as an alternative procedural route to dealing with standing.  As I have already mentioned, those two routes are well-established alternatives.  If so, perhaps there is some greater weight that this is part of the trial of the action, albeit a part that seeks to determine whether or not there should in fact be a real trial of the action or whether it should be stopped now as unsustainable.  But if that is so, that seems to me to point away from something which is designed in effect either to avoid or preface the type of cross-examination that would happen at a trial.  Indeed, if one assumes the alternate approach of a preliminary issue, that seems to me to bring the matter of standing into the more normal territory where interrogatories would only very rarely be ordered in advance of discovery and witness statements.

30.  For these reasons, in the absence of demonstration of necessity, I would order the withdrawal of the interrogatories.

Persons Interrogated

31.  I agree with Mr Fan that the interrogatories are directed at the 1^st and 2^nd defendants.  They are clearly not directed to the directors, the makers of the affidavits/affirmations asserting the exercise of independent judgment.

32.  However, none of those directors is a servant or agent of either of the 1^st or 2^nd defendants.  Therefore, as is accepted on behalf of the plaintiff, none of them can be compelled to provide information, nor can the defendants be required to obtain the information from them.  Of course I accept, that if either of the 1^st and 2^nd defendants has relevant knowledge, the source of that knowledge does not matter.

33.  The interrogatory is directed at each individual director’s exercise of judgment, which he or she asserts was independent.  Plainly, the knowledge of how each director exercised judgment, against what circumstances, and what he or she took into account in doing so, lies at least primarily with that director.

34.  This action has been commenced in the context of a listed company with a large number of directors.  Against a pleading which, as Mr Fan has identified, invites an inference of wrongdoer in control, it is unsurprising that the other directors have simply been asked in general terms to state whether or not they exercised their judgement independently.  Even though the affidavits/affirmations of the directors were adduced by the 1^st and 2^nd defendants, I think it highly unlikely that any director has already told either of the 1^st or 2^nd defendants precisely in what way and by reference to what factors that director purported to exercise his or her judgment.

35.  In other words, to seek to interrogate the 1^st or 2^nd defendants about somebody else’s state of mind – not least, to the level of detail identified by the interrogatories – seems likely to be an exercise in futility.

36.  For this additional reason, I would order the withdrawal of the interrogatories.

Costs

37.  I see no reason why costs should not follow the event, and I not that though a flag was waved Mr Maurellet has not pursued costs on a higher than standard basis, which I would not have allowed anyway.  The costs of this application will be paid by the plaintiff to the 1^st and 2^nd defendants, without certificate for two counsel.  I will summarily assess costs on paper.

Mr Alex Fan, instructed by Siao, Wen And Leung, for the plaintiff

Mr Jose Maurellet, SC and Ms Jasmine Cheung, instructed by Chiu & Co, for the 1^st and 2^nd defendants

The 3^rd and 4^th defendants excused from court attendance