CHUNG KENG v. PEARL ORIENTAL OIL LTD

HCMP 1795/2018

[2019] HKCFI 1743

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1795 OF 2018

________________

	IN THE MATTER of Pearl Oriental Oil Limited (東方明珠石油有限公司)
	and
	IN THE MATTER of sections 732(1) and 733 of the Companies Ordinance (Cap 622)

________________

BETWEEN
	CHUNG KENG (鍾鏗)	Applicant
AND
	PEARL ORIENTAL OIL LIMITED	Respondent
	(東方明珠石油有限公司)

________________

Before:

Hon Harris J in Chambers

Date of Hearing:	2 May 2019
Date of Decision:	2 May 2019

______________________

D E C I S I O N

______________________

The Application

1.  I have before me an Originating Summons issued on 22 October 2018 by Mr Chung Keng (“Mr Chung”), a shareholder in the respondent company Pearl Oriental Oil Limited (“the Company”).    The Company is listed on the main board of the Stock Exchange of        Hong Kong Limited (“HKEx”).  By the Originating Summons, Mr Chung seeks leave pursuant to section 732(1) and 733 of the Companies Ordinance (Cap 622), for leave to commence in the name of the Company a statutory derivative action against two of its directors, namely Ms Fan Amy Lizhen (“Ms Fan”) and Mr Tang Yau Sing (“Mr Tang”).

2.  The claims that Mr Chung wishes the Company through the statutory derivative action to pursue is described in a draft statement of the claim, exhibited to the Originating Summons.  That draft has subsequently been amended in a number of respects and the revised draft exhibited to one of the Mr Chung’s affirmations.

3.  The relief sought in the statement of claim is for a declaration that the two defendants breached their duties in respect of         six claims which I shall describe later, damages in respect of those  

claims and finally an order that the appointment of three independent non-executive directors on 3 October 2018, be set aside.  In summary the six claims are:

(1)   A proposed placement considered in June 2018 was abandoned.

(2)   The relocation of the Company’s office.

(3)   The failure to settle employees outstanding wages.

(4)   Unjustified refusal of a proposed loan by Mr Chung in the absence of reasonable alternatives.

(5)   Refusal to convene a special general meeting (“SGM”) in respect of resolutions to remove directors.

(6)   The appointment of Directors lacking the requisite experience.

4.  The Company has appointed an Independent Board Committee (“IBC”).  The IBC has filed an affirmation of Ms Lyn Jialian (“Ms Lyn”) on behalf of the IBC.  The IBC opposes leave in respect of the first three claims.  It adopts a neutral position in respect of the last three, although it has provided quite detailed observations on them.

5.  The principles by reference to which the court determines application of this sort are largely uncontroversial.  They have most recently been summarised by Court of Appeal in [11] and part of [18] of the decision in Zhang Heng v Kingstone International Wealth Management Ltd [1]:

“11. There is no dispute about the law on the correct approach regarding the exercise of discretion to grant leave. This has been covered in a number of cases, including an earlier decision of the judge mentioned in the Judgment, namely, Hao Xioying v Green Valley Investment Ltd, HCMP 1394/2015, 10 August 2016, which quoted from relevant passages of the decision of Ng J in Re Primlak (HK) Ltd [2016] 2 HKLRD 31 and Ng J in turn drew on various decisions of judges at first instance[2]. The relevant legal propositions have been summarised by the judge in Green Valley Investment Ltd at §§10 and 11:

‘10. On serious question to be tried:

(a) The threshold is relatively low. The prospects of the company’s success are to be investigated only to a limited extent, and the court should be slow to find against the applicant unless such prospects are so slim that the company cannot be said to have any expectation of success. See Re Primlaks (HK) Ltd, HCMP 1789/2015, unrep, 28 January 2016, §§7-8 per Ng J.

(b) At the leave stage, it is not the court’s function to try to resolve conflicts of evidence or difficult questions of law which require substantial argument and deliberation. In practice, if the applicant is able to produce a draft pleading that sets out a case with some prospect of success when only the allegations contained in the pleading are considered, the criteria will be satisfied unless the respondent can demonstrate fairly readily that there is a serious flaw in the claim and that it has no real substance[3]. See Re Primlaks (HK) Ltd, §9.

11. As regard the interest of the company:

(a) Again, the threshold is low. In deciding whether it is prima facie in the interest of the company for leave to be granted, the court should have regard to the fact that “there should not be a trial within a trial and the court should not be forced to enter into the merits of claims where there are serious disputes”. See Re Primlaks (HK) Ltd, §21.

(b) If a “serious question to be tried” has been demonstrated, in most cases it will follow that it is prima facie in the interest of the company that proceedings are pursued. See Re Primlaks (HK) Ltd, §§20-21.

(c) In assessing whether it appears to be in the interest of the company that the derivative action be pursued, the court ought to take into account whether any practical benefit is likely to result, even in circumstances where it may be clear that, eg, a director has breached his duties to the company. This essentially involves assessing whether it appears that the company stands to gain in money or money’s worth in light of the costs which will have to be incurred. See Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 at [56] to [60][4] per Palmer J; Pang Yong Hock v PKS Contracts Services Pte Ltd [2005] 2 LRC 72 at [21] per Tay Yong Kwang J (giving the judgment of the Singaporean Court of Appeal).’

…

18. First, the judge erroneously approached the case on the narrow basis whether the business undertaken by Kingstone Advisors fell within the original scope of business of Kingstone Wealth as agreed between Zhang and Shum,   in effect treating the agreement on the original scope of business as an agreement to restrict the scope of business of Kingstone Wealth without any possibility of expansion.  Second, the evidence is not all one way, as Mr Hu had contended.  Third, in light of the evidence which suggest the contrary, as pointed out by Mr Man, one is driven to think that the judge could not have applied the correct test, namely, that the threshold is relatively low, that one has to bear in mind the prospects of the company’s success are investigated only to a limited extent, and that the court should be slow to find against the applicant unless his prospects are so slim that the company cannot be said to have any expectation of success.”

6.  I would emphasise these criteria mean exactly how they are described.  Unless the statement of the claim is demurrable or it can be demonstrated quickly that the proposed claim or claims are based on fundamental mistakes, the serious question criteria will be satisfied.  The court should not be faced, as in the present case, with 100 pages of affirmation evidence.  The applicant needs to do little more than briefly summarise the background to the application and confirm that he or she believes the draft statement of claim to be true.  The evidence filed by the company should be limited to identifying errors, not arguing the claim.

7.  Given the position taken by the IBC on behalf of the company, it is only necessary to address the first three claims.

8.  The first of these relates to the non-payment of wages and the alleged failure of the directors to address the payment issue and the need to raise finance in order to make the outstanding payments.

9.  It seems to me that the allegation of breach of duty reaches the necessary threshold and Mr Dawes did not actively dispute this.     The Company’s objection falls under the second criteria, namely whether it is in the interests of the company to pursue the claim given that there is currently no evidence of tangible financial benefit in so doing.

10.  Mr Wong on behalf of Mr Chung fairly accepted that this might be correct if this was the only claim that was being pursued.    He argued, however that the action will proceed in any event, the issue has to be accessed in the broader contact of the entire action.     If he submitted, the claim is capable of bolstering the other claims it has a sufficiently tangible potential benefit to make it in the Company’s interests to allow this claim to be advanced, I agree.

11.  The next contentious claim relates to the relocation of the office.  The Company says this is purely a matter of commercial judgement.  The Company has given its reasons for incurring the costs of moving at about HK$5 million at a time when it faced acute financial problems.  The reasons for the move apparently was a request by a potential investor in the Company that the Company’s office be moved closer to his own location.  That investment did not materialise, but that argues Mr Dawes, does not alter the character of the decision under attack.

12.  Although this is an unusual claim to wish to pursue, I agree with Mr Wong that it cannot be ruled out at this stage that the decision was so poor that is passes from that category of decisions with which the Court will not interfere into that category of gross-mismanagement that constitutes a breach of section 465(1) of the Companies Ordinance (Cap 622).

13.  The final claim is more complicated because it concerns a prospective private placement, which commenced in June 2018 and was abandoned in early August, following a special general meeting on 27 June at which the shareholders failed to approve an extension of   the general mandate.  The Company says that this was subsequently followed by a decision of HKEx on 1 August 2018 indicating that in the circumstances HKEx would not approve the listing of new shares.

14.  Mr Chung says that this is a misleading description of what took place.  He explains in his evidence that Ms Fan continued with her attempt to find a placing after the SGM and those attempts ceased before the Exchange wrote with its decision on 1 August 2018.

15.  Mr Chung’s characterization of the complaint is that Ms Fan was trying to procure a placement to friends and when this fell through she used the mandate issue and subsequently the Exchange’s decision, as an excuse for not entertaining Mr Chung’s offer to subscribe for shares which might have affected her control of the Company.  Given the Company’s financial difficulties, there is no reason why, says Mr Chung, negotiation could not have progressed in tandem with steps to obtain shareholder and HKEx approval to a firm offer from an independent third party to invest.

16.  It seems to me that this claim is at least arguable.  Mr Dawes argued as he had in a case of the claim in respect of non-payment of wages, that even if I took this view, there was no tangible benefit to the Company, other than possibly recovering wasted costs.  In my view this in conjunction with the support the claim tends to lend to the other claims based on breach of duty is sufficient to satisfy the second criteria.

17.  This leaves the question of the costs of the action. Mr Wong invited me to order that the costs be indemnified by the Company. In my view before doing so, it is desirable given the Company’s financial statement for the Court to be provided with information about its current financial position.  I will therefore adjourn this issue with liberty to apply. I direct that the Company file and serve evidence within 28 days of its current financial position and its projected financial position for the period from the 1 July 2018 to 30 June 2020.  Mr Chung can consider whether to seek an indemnity.  If follows from what I have said that       I will order that the derivative action be commenced in the form of the most recent draft of the statement of the claim.

18.  There is one further tangential matter that I wish to address.  As I have already indicated one of the claims concerns the suitability of three new independent non-executive directors.  One of these is the deponent to the principle affirmation filed by the Company in opposition to these claims that I have described.

19.  The deponent is Ms Lyn.  The only information the Company or the Court has about Ms Lyn is that set out in a draft pleading which is taken from a public announcement produced by the Company in a circular dated the 3 October 2018, concerning the appointment of both a new executive director and new independent non-executive directors.  This announcement states that “Ms Lyn, aged 20, graduated from The University of California−Irvine”. Putting to one side the obvious question whether given her age Ms Lyn had graduated from the University at the date of the announcement, it is entirely unclear from the information contained in the announcement that Ms Lyn had requisite experience to be appointed as an independent non-executive director of a company listed on the main board of the Exchange.  The announcement goes on to tell shareholders that a formal service agreement has been entered into between Ms Lyn and the Company and she will receive a directors’ fee of HK$120,000 per annum.  It also informs the reader that she has been appointed as a member of the audit committee of the Company.

20.  This suggests that Ms Lyn has met the criteria set out in Rule 3.13 of the Listing Rules.

21.  Section 465 of the Companies Ordinance (Cap 622), imposes statutory duties of care on directors. Sub-section (2) provides “reasonable care, skill and diligence mean the care, skill and diligence that would be exercised by a reasonably diligent person with−the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and the general knowledge, skill and experience that the director has”.  These are similar to these duties at common law and one would expect the directors of a Hong Kong listed company to meet them regardless of where the Company is incorporated in Bermuda.

22.  It seems not unreasonable to assume that the general knowledge and experience that Ms Lyn is likely to have is negligible and she could not realistically be expected to meet the standard imposed on a director by statute and common law.

23.  The Listing Rules also deal expressly with what is expected by the Exchange of directors of a listed company in Hong Kong.      I quote from Rule 3.09:

“Directors of the listed issuer must satisfy the Exchange that they have the character, experience and integrity and are able to demonstrate the standard of competence commensurate with their position as directors of the listed issuer. The Exchange may request further information regarding the background, experience, other business interests or character of any director or proposed director of a listed issuer.”

24.  The implication is that the Exchange must have approved the appointment of Ms Lyn.  It will be appreciated that it is of some concern to me as the High Court judge responsible for the portfolio of cases involving corporate governance that it could possibly be thought that a 20 years old with no work experience could satisfy these criteria and reasonably be expected to contribute to the maintenance of the standard of corporate governance to be expected of a listed company and which I would expect the investing public to expect.  If it is possible for a company to obtain from the Exchange approval of the appointment of Ms Lyn it goes some way to explain why the Companies Court rather too frequently encounters examples of inadequate corporate governance by Hong Kong listed companies.

25.  I will be sending a copy of this decision to HKEx and           I would hope that it will look into this matter.

Costs

26.  So far as costs are concerned it is not in dispute that the Applicants’ costs should be paid by the company with a certificate for two counsel.  Mr Lok on behalf of the applicant asked that I order that the costs be assessed on a higher than normal standard.  His reasons for doing so fall into two parts.  First that despite at the first hearing of the originating summons before Recorder Wong, which resulted in a reported decision which records quite clearly the Recorder as explaining to the Company, the relevant tests when giving the Company leave to file evidence in response to the application, the Company filed substantial evidence which served to increase significantly Mr Chung’s costs.

27.  It does seem to me that the evidence that has been filed by the Company demonstrates that proper regard has not been given to the Recorder’s guidance concerning what need to be said or not said about the merits of the application and that to some degree this will have increased the Applicants’ costs as it made the application unnecessarily complicated and invited more substantial evidence in reply than might otherwise has been served.  I think the issue is whether or not it is likely that the impact on costs is such as to justify of itself that the costs be taxed on a common fund basis or on an indemnity basis.

28.  It seems to me that on balance it does not.  To the extent that the costs has been increased they will be recoverable by the Applicant from the Company on taxation in any event.

 
 

	(Jonathan Harris)
	Judge of the Court of First Instance High Court

  

Mr William Wong SC, Mr Michael Lok and Ms Jasmine Cheung, instructed by Sit, Fung, Kwong & Shum for the applicant

Mr Victor Dawes SC, and Mr Val Chow, instructed by Dentons Hong Kong LLP, for the respondent

HCMP 1795/2018

[2018] HKCFI 2564

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1795 OF 2018

_____________

	IN THE MATTER of PEARL ORIENTAL OIL LIMITED (東方明珠石油有限公司)
	and
	IN THE MATTER of sections 732(1) and 733 of the Companies Ordinance, Cap 622

_____________

BETWEEN
	CHUNG KENG (鍾鏗)	Applicant
and
	PEARL ORIENTAL OIL LIMITED (東方明珠石油有限公司)	Respondent

_____________

Before: Mr Recorder Stewart Wong SC in Chambers

Date of Hearing: 14 November 2018

Date of Decision: 20 November 2018

__________________

D E C I S I O N

__________________

1.  By Originating Summons dated 22 October 2018, the applicant, a registered shareholder of the respondent, applies for leave, under sections 732(1) and 733 of the Companies Ordinance[1], for him to commence, in the name of the respondent, a statutory derivative action against two of its directors, Ms Fan Amy Lizhen (樊麗真) and Mr Tang Yau Sing (鄧有聲) (“the prospective defendants”). They were at the material times two of the three directors of the respondent.

2.  According to the draft statement of claim exhibited to the Originating Summons, the applicant is concerned by the following acts or omissions (which I shall call “complaints”) of the prospective defendants (referred to therein as “the Defendants”), and which are said to constitute breaches of fiduciary and statutory duties owed to the respondent (referred to as “the Company” therein):

“ (a) The dubious circumstances surrounding the execution and sudden termination of the Proposed Placing (as defined below) when the Defendants failed to secure placees of their own choosing to receive the shares under the said placing exercise;

(b) The insistence on relocating the Company’s office premises in the absence of commercial justifications and despite the lack of sufficient funding;

(c) The failure to settle outstanding wages of employees;

(d) Despite the above, the refusal, for no apparent reason, to accept the proposed loan offered by [the applicant] where the Company has no reasonable alternatives to secure funding;

(e) Worse still, the reinforcement of their positions as directors by (i) refusing to convene a Special General Meeting in respect of resolutions to remove existing directors; and (ii) the appointment of directors lacking in required experience and qualifications.”

3.  An affirmation was made by the applicant on 22 October 2018 in support of his application.  It was, however, not filed or served until 9 November 2018, a few days before the hearing.

4.  On 24 September 2018, solicitors for the applicant sent a letter to the directors of the respondent, which is said to constitute a formal notice under section 733(1)(c) that the applicant intended to apply for leave to commence a statutory derivative action on behalf of the respondent against the prospective defendants (“the Notice”).  The complaint stated therein was that the prospective defendants did not acceptthe offer of a loan from the applicant, ie complaint (d) in the draft statement of claim.  The other complaints were not mentioned.  The respondent has not replied to this letter.

5.  At the first hearing of the Originating Summons before me on 14 November 2018, Mr Michael Lok, appearing for the applicant with Ms Jasmine Cheung, asks me to grant leave straight away.  He says that the threshold for the grant of leave under section 733 is low and the allegations contained in the draft statement of claim give rise to, at the very least, serious issues to be tried. 

6.  Mr Val Chow, who appears for the respondent, submits that this application should be dismissed for non-compliance with section 733(1)(c), because only one of the complaints set out in the draft statement of claim was stated in the Notice, but the requirements under section 733(4) is that the Notice must set out in full the reasons for the intention to apply for leave. 

7.  Further, if I am not minded to dismiss the Originating Summons because of the alleged defect regarding the Notice, Mr Chow submits that I should not grant substantive relief (namely leave to commence a derivative action) right away because:

(1) An independent board committee (“the Committee”) was appointed by the respondent to consider the issues raised in the draft statement of claim and what action the respondent ought to take, and should be given a chance to consider the allegations and decide what to recommend to the board, and to file evidence in opposition if it considers appropriate.  The Committee was only formed on 5 November 2018 and the evidence of the applicant in support was only served on 9 November 2018.  Mr Chow says that the respondent should respond to the evidence, rather than merely the allegations contained in the draft statement of claim;

(2) There are possibilities that the control of the respondent would change, because (i) there is an upcoming special general meeting (“SGM”) on 29 November 2018 where shareholders will consider whether to pass resolutions to remove seven of the current eight directors of the respondent; (ii) a winding-up petition and an application for provisional liquidator are pending before the Court in Bermuda (where the respondent was incorporated).  In such scenarios, Mr Chow says, the respondent would no longer be in control of the prospective defendants, and a derivative action cannot be brought or continued in relation to a company in liquidation.[2]  However, I am told that there is no hearing date fixed for the matters in Bermuda.

8.  Mr Lok submits that the Notice is adequate.  The applicant has stated the reason for the intention to apply for leave, namely that the prospective directors had been acting in breach of their duties owed to the respondent.  The complaints are merely grounds or particulars.  He cites a judgment of Belinda Ang Saw Ean J of the High Court of Singapore, TeoSeng Hoe (alias Tew Seng Hoe) v IDV Concepts Pte Ltd [3], which in turn cited a judgment of Nemetz CJBC of the British Columbia Court of Appeal in Bellman v Western Approaches Ltd [4] in support of the proposition that a failure to specify each and every cause of action in such a notice does not invalidate the notice as a whole, if the directors are reasonably notified of the intention to apply for leave.  If necessary, he asks for a dispensation under section 733(5).

9.  Mr Lok also suggests that the respondent, who is still under the control of the prospective directors and those they appointed, is employing delaying tactics, in particular the appointment of the Committee. Having been served with the draft statement of claim on 23 October 2018, the respondent ought to, but has failed to, plead or respond to it, and only appointed the Committee on 5 November 2018.  It has not suggested that the allegations in the draft statement of claim have no prospect of success. He also queries the independence, expertise and qualifications of the members of the Committee.  He emphasises that their very appointment as directors is a subject of complaint (see complaint (e) above).  He also suggests that there is no reason to wait to see if the possibilities for change of control happen.

10.  I shall deal with the question of the adequacy of the Notice first.

11.  Section 733 provides as follows:

“ (1) On application by a member of a company or of an associated company of a company, the Court may grant leave for the purposes of section 732(1), (2) or (3) if it is satisfied that—

(a) on the face of the application, it appears to be in the company’s interests that leave be granted to the member;

(b) in the case of—

(i) an application for leave to bring proceedings under section 732(1) or (2), there is a serious question to be tried and the company has not itself brought the proceedings; or

(ii) an application for leave to intervene in proceedingsunder section 732(3), the company has not diligentlycontinued, discontinued or defended the proceedings; and

(c) except where leave is granted by the Court under subsection (5), the member has served a written notice on the company in accordance with subsection (3), and the notice complies with subsection (4).

(2) The Court may refuse to grant leave if it is satisfied that—

(a) in the case of an application for leave to bring proceedings under section 732(1) or (2), the member has, in the exercise of any common law right, brought proceedings on behalf of the company in respect of the same cause or matter; or

(b) in the case of an application for leave to intervene in proceedings under section 732(3), the member has, in the exercise of any common law right, intervened in theproceedings in question to which the company is a party.

(3) The written notice must be served on the company, at least 14 days before the member applies for leave in respect of the company—

(a) in the case of a company as defined by section 2(1), by leaving the notice at, or by sending the notice by post to, its registered office; or

(b) in the case of a non-Hong Kong company, in a manner that the notice is sufficiently served on the company by virtue of section 803.

(4) The written notice must state—

(a) the member’s intention to apply for leave for the purposes of section 732(1), (2) or (3) in respect of the company; and

(b) the reasons for that intention.

(5) The Court may grant leave to dispense with the service of a written notice for the purposes of subsection (1)(c).”

12.  As Mr Chow points out, the legislation in Singapore, ie section 216A(3) of the Companies Act[5], only requires the complainant to give notice to the directors of the company of his intention to apply to the court for leave to bring a derivative action, but there is no requirement (like section 733(4)(b)) to give reasons for the intention.  I therefore do not find Teo Seng Hoe or Bellman to be of assistance in considering the scope and requirements of section 733(4)(b).

13.  In Re Up Profit Limited [6], Harris J said:

“ As I explained in paragraph 9(d) of Yu Yuchuan v China ShanshuiInvestment Company Limited, the purpose of the written notice isto allow the company to consider whether to contest or acquiesce to the application.”

14.  In Fong Wai Lyn Carolyn v Airtrust (Singapore) Pte Ltd [7], Judith Prakash J said:

“ Counsel for Ms Kao, Mr Davinder Singh SC, contended that this notice requirement served to give the directors a chance to consider a response to the complaint provided in the notice. I accepted Mr Singh’s suggested rationale as it provided both practical and commercial sense. If the company would be willing to pursue the complaint on its own, the leave application would become redundant, and no further legal costs would be incurred or wasted in dealing with the issue of whether leave ought to be granted.”

15.  Despite the difference between the Companies Ordinance and the Singapore legislation as I pointed out above, I find this explanation of the rationale by Judith Prakash J also apposite in Hong Kong, and is consistent with what Harris J said.

16.  The purpose of a notice under section 733(4) being to allow the company concerned to consider what to do with the complaints, in my judgment the notice, when giving the reasons for the intention to apply for leave, must include sufficient details and particulars of each of the complaints.  Such details are part and parcel of the reasons to be given.  What constitutes sufficient details and particulars must be a question of fact in each case, the test being whether the directors as reasonable commercial persons, with their knowledge of the company’s affairs, would be in a position, when reading the notice, to make a proper informed decision on how to respond.  Otherwise, I do not see how such a notice can fulfill its intended purpose.

17.  I do not accept Mr Lok’s submission that the reason is the alleged breach of fiduciary and statutory duties, with the details being outside the scope ofthe reason and need not be included.  If he is right, then a bare allegation of breach of fiduciary duty arguably suffices, which cannot be correct, as the company would not be in a position to consider how to respond at all.

18.  I would therefore hold that the Notice is inadequate in so far as the applicant is seeking leave to commence a derivative action for any of the complaints, save for complaint (d).  The Notice is adequate for complaint (d).

19.  Mr Chow asks me to dismiss this application on this ground.  I do not see how I can do so in so far as the applicant is seeking leave for the respondent to sue on complaint (d). 

20.  Regarding the other complaints, in my judgment I should accede to Mr Lok’s application and grant a dispensation under section 733(5).  Such dispensation is not required to be obtained before the application for leave is made: see Re China ShanshuiInvestment Co Ltd [8]. Even though Harris J in that case gave urgency as the reason for not making the application for dispensation before the applicationfor leave, I do not read the section, or his decision, as restricting the grant of dispensation in such circumstances to cases of urgency.  Section 733(1)(c) in its terms allow the dispensation to be granted any time before leave to commence a derivative action is granted.  In my judgment, the question is whether in all the circumstances, including in particular the intended purpose of a notice under section 733(4), and any likely prejudice or wastage of costs one way or another in granting or refusing dispensation, it is just to grant dispensation, whenever the application for dispensation is made before grant of leave to commence a derivative action.

21.  I am of the view that a dispensation ought to be granted in this case for the other complaints, and I so order:

(1) As I said above, the notice is adequate for complaint (d);

(2) Under section 733(3), the respondent is given 14 days to consider whatever complaints the applicant has.  It is not the respondent’s case had such a notice been given, it would have agreed to take action against the prospective defendants itself rendering a leave application unnecessary. Rather, having been served with the draft statement of claim containing details of all the complaints on 23 October 2018, at the hearing on 14 November 2018 before me, 22 days later, the respondent has not, according to Mr Chow, decided what to do.  It would therefore have made no difference whether the original letter mentions and contains full details of all the complaints – it is unlikely that the respondent would have responded by the time of the issue of the Originating Summons. The failure to mention and to give full details of the other complaints is therefore in this sense immaterial.  It would be quite pointless, and a complete waste of time and costs, for me to dismiss the leave application for the other complaints (while preserving it for complaint (d)), for the whole process of giving notice for the other complaints to start afresh.  In the meantime, it is still open to the respondent to agree to take action on the complaints itself directly and if it does, the question of costs of this application can be addressed accordingly.

(3) I see no prejudice to the respondent in granting dispensation.  The prejudice alleged by Mr Chow in his skeleton relates, in my judgment, to the attempt by the applicant to obtain substantive relief at this hearing, rather than to a grant of dispensation;

(4) Mr Chow says that an application for dispensation ought to be made properly, supported by an affidavit.  However, I see no such requirements under section 733(5).  The question is whether there are already sufficient materials before the court to consider the exercise of its discretion under section 733(5).  If there is no, or no sufficient, materials then of course the application will fail.  But if there are already sufficient materials for me to exercise my discretion properly, then I can and should do so, provided there is no injustice to the company concerned. I can see no such injustice as I am able to decide the question of dispensation on undisputed facts.

22.  I therefore exercise my discretion under section 733(5) to grant leave to dispense with the service of a notice for the complaints stated in the draft statement of claim for the purpose of section 733(1)(c). 

23.  The next question is whether I should decide whether to grant leave to the applicant to commence the derivative action now, as Mr Lok contends.

24.  In Re China Shanshui Investment Co Ltd, Harris J said:

“ 7. In determining whether or not to grant leave under section 733, the principal matters that the court is concerned with are:

(1) whether the proposed action appears to be in the interests of the company; and

(2) whether there is a serious question to be tried.

8. The threshold in respect of both these criteria is low.  As Lord Millett notes at paragraph 55 of his judgment in Waddington Ltd v Chan Chun Hoo ‘in applying for leave the plaintiff is not required to establish a prima facie case but only that there is a serious question to be tried.’  Consistent with this in assessing applications for leave the prospects of success are to be investigated only to a limited extent; and the court should beslow to find against the applicant unless his prospects are so slim that he cannot be said to have any expectation of success.  At this stage it is not the court’s function to try to resolve conflicts of evidence or difficult questions of law, which require substantial argument and deliberation.  In practice, if the applicant is able to produce a draft pleading that sets out a case with some prospect of success when only the allegations contained in the pleading are considered, the criteria will be satisfied unless the respondent can demonstrate fairly readily that there is a serious flaw in the claim and that it has no real substance.  In most cases, if a ‘serious question to be tried’ has been demonstrated, it is likely to appear to be in the company’s interests to bring proceedings.”   

25.  Citing Ng J in Re Primlaks (HK) Ltd [9], Anthony Chan J said in Re Green Valley Investment Limited [10] :

“ On serious question to be tried:

(a) The threshold is relatively low. The prospects of the company’s success are to be investigated only to a limited extent, and the court should be slow to find against the applicant unless such prospects are so slim that the company cannot be said to have any expectation of success. See Re Primlaks (HK) Ltd, HCMP 1789/2015, unrep, 28 January 2016, §§7–8 per Ng J.

(b) At the leave stage, it is not the court’s function to try to resolve conflicts of evidence or difficult questions of law which require substantial argument and deliberation.  In practice, if the applicant is able to produce a draft pleading that sets out a case with some prospect of success when only the allegations contained in the pleading are considered, the criteria will be satisfied unless the respondent can demonstrate fairly readily that there is a serious flaw in the claim and that it has no real substance. See Re Primlaks (HK) Ltd, §9.”

26.  The existence of a threshold, no matter how low, does mean that it is possible in a given case for the company to show that it is below the threshold.  As stated in the above judgments, if a company can demonstrate fairly readily that there is a serious flaw in the claim and that it has no realsubstance, or it cannot be said to have any expectation of success, then no leave should be granted.  I do not think that I can deny the respondent the opportunity to so demonstrate, if it so desires, with proper evidence, even with the limited extent to which a court should examine the evidence, and given that the evidence of the applicant was only served on 9 November 2018.  I agree with Mr Chow that the respondent should be allowed to respond to the evidence, rather than merely the allegations contained in the draft statement of claim.  If, as I direct below, the respondent is given 28 days to file evidence, that wouldbe sufficient for it to decide how to respond to this application as well (see §7(1) above).  I regard the 42 days asked for by Mr Chow to be too long. 

27.  Mr Lok is not able to show me any urgency in dealing with this application substantively now, which can or may be addressed by an immediate grant of leave.  He says that because of the alleged mismanagement the listing status of the respondent may be endangered, butthis is not a matter which can be addressed by grant of leave to commence a derivative action.

28.  I should add that I do not accept Mr Chow’s argument based on possible change of control of the respondent (§7(2) above).  These are mere possibilities which may or may not happen, in particular for the Bermudan proceedings which have no dates yet.  No doubt if leave is granted and then control of the respondent changes, appropriate arrangements can be made of the future conduct of the derivative action.

29.  I therefore give the following directions:

(1) The respondent do have leave to file and serve evidence in opposition within 28 days from the date of this Order;

(2) The applicant do have leave to file and serve evidence in reply within 21 days thereafter;

(3) No further evidence be filed without leave of the Court;

(4) The Originating Summons be adjourned for substantive argument with one day reserved, in consultation with one counsel’s diaries on each side;

(5) Costs (including costs of the hearing on 14 November 2018) be reserved.

30.  I thank counsel for assistance.

	(Stewart Wong SC)
	Recorder of the High Court

Mr Michael Lok and Ms Jasmine Cheung, instructed by Sit, Fung, Kwong & Shum, for the applicant

Mr Val Chow, instructed by Dentons Hong Kong LLP, for the respondent