PACIFIC BULK INVESTMENT LTD v. CHU KONG AND OTHERS

HCA 379/2019

[2022] HKCFI 1716

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 379 OF 2019

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D E C I S I O N

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1.  This is the second contested interlocutory application which this court has to deal with during this month relating to the raft of litigations between the Lau Camp and the Chu Camp: see the earlier Decision dated 23 May 2022 ([2022] HKCFI 1419 (“Decision”)). The previous application was made by the Lau Camp. In this application, the Chu Camp seeks a stay of these proceedings pending the determination of HCA 228/2017.

2.  This is a statutory derivative action by Mr Lau Wing Yan on behalf of Pacific Bulk Investment Ltd (“PBI”) against Mr Chu Kong and others alleged to be associated with him in respect of alleged misappropriation of assets belonging to PBI which was committed in breach of fiduciary duties. The assets in question were an 18% shareholding in a Mainland company called Huiyu (“Huiyu Shares”), which were acquired by PBI in 2007 at the cost of US$7.25 million. The funds for the acquisition were provided by Pacific Bulk Maritime Holdings Co Ltd (“PB Maritime”) and PBI was solely owned by it. In 2010, there was an additional share subscription by PBI and the funds for the same, US$4,112,600, were provided by CK Assets Ltd (“CKA”).

3.  This application by the Chu Camp is premised on the ground that there is a common issue in this case and HCA 228/2017 (which is to be tried with HCA 1431/2015), namely, the ownership of PB Maritime. The Chu Camp says that Chu was the sole beneficial owner of PB Maritime and the funds provided to PBI by CKA also belonged to him beneficially. Staying this action pending the resolution of HCA 228/2017 will result in saving of costs as well as the court’s resources because the determination of the common issue may lead to the disposal of this action.

4.  There is no dispute over the applicable legal principles: see Re Hsin Chong Construction Co Ltd[2021] HKCFI 1295, [39]-[40] and Luen Tat Watch Band Manufacturer Ltd v Li Sin Man Seline, unrep, HCA 1428/2012, 25 July 2014, [40]-[42].

5.  I regret to say that I am far from convinced over the merits of this application. This action was one of 25 proceedings on foot between the two Camps which was considered by this court at a global CMC which took place on 23 March 2021: see Decision, [3] to [5]. During the global CMC, it was agreed by the two Camps that this action should not be stayed.

6.  I reiterate the observation made in the Decision, [15], that neither Mr Lau nor Mr Chu has shown any enthusiasm in having their disputes resolved by the court expeditiously. There is no adequate explanation by Chu as to why he is changing the stance he adopted at the global CMC that this action should proceed in parallel with HCA 228/2017. The suggestion in his evidence that it is attributable to the change of advising counsel is difficult to understand when the same junior counsel represented the Chu Camp at the global CMC.

7.  This application fortifies the above observation. It appears to this court that, instead of pressing forward to resolve their disputes, the parties, with their considerable resources, are keen to engage in adversarial manoeuvres with the belief that some advantage over the other side may be gained. Staying this action will simply allow it to be delayed. It is no coincidence that the last application was made by the Lau Camp in relation to proceedings brought against them by the Chu Camp (HCCW 352/2014). In this application, the roles are reversed.

8.  As regards the overlapping of issue between this action and HCA 228/2017, I agree with the analysis of Mr Joffe, who appears with Mr McLeish for PBI, that whilst the ownership of PB Maritime is a common issue to both proceedings, it is unlikely that the resolution of this issue will dispose of this action. It should be noted that the ownership of the funds provided by CKA is not an issue in HCA 228/2017.

9.  It is common ground that the Chu Camp has advanced two defence in this action: (i) the impugned transfers were of an internal nature resulting in no detriment to PBI; and (ii) in any event, the funds used to acquire the Huiyu Shares were provided by PB Maritime, which was owned by Chu, and thus there could have been no misappropriation by the Chu Camp.

10.  In respect of the funds provided by CKA, PBI says that it is not relevant to the defence raised in this action and makes no admission to the same.

11.  If the common issue is resolved against the Chu Camp, this action will simply proceed on the internal transfers defence. Given the litigious nature of the two Camps, I see little likelihood of a compromise even if the Chu Camp has lost on the common issue.

12.  If the common issue is resolved in favour of the Chu Camp, it is unlikely for the Lau Camp to abandon this action. Being the beneficial owner of PB Maritime would not have entitled Chu to do what he liked with it assets. He had neither legal nor beneficial ownership over PB Maritime’s assets.

13.  For these reasons, I dismiss the stay application. I shall hear the parties on costs.

Mr Victor Joffe QC and Mr Robin McLeish, instructed by DLA Piper Hong Kong, for the Plaintiff

Mr John Hui, instructed by Sit, Fung, Kwong & Shum, for the 1^st to 3^rd Defendants

HCA 379/2019

[2020] HKCFI 2825

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 379 OF 2019

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J U D G M E N T

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A. Introduction

1.  These proceedings are in the form of a statutory derivative action.  They were commenced by Lau Wing Yan (“Lau”) for and in the name of the plaintiff company (“PBI”).  Though I shall continue to refer to the plaintiff as “PBI”, I do not lose sight of the fact that these are derivative proceedings commenced by Lau.  The proceedings are brought against Chu Kong (“Chu”) and Kwong Hon Keung, Gerry (“Kwong”) and Smart City Investment Ltd (“Smart City”) (Chu and Smart City together, “Defendants”).  It seems that these proceedings are one part of a dispute giving rise to many sets of proceedings between Chu and Lau, arising from their previous business collaboration in the shipping industry.

2.  These particular proceedings concern the alleged misappropriation and/or wrongful conversion of certain shares (“Huiyu Shares”).  The claim was commenced by Writ dated 7 March 2019, with the benefit of leave granted by Mimmie Chan J in HCMP 315/2019.  It is relevant to note that an application to set aside that leave was refused by Ng J on 14 May 2020 (“Ng J Judgment”).

3.  By the Indorsement of Claim on the Writ, PBI claims inter alia:

(1)  a declaration that the Defendants (or any of them) held and/or hold the 18% shareholding – being the Huiyu Shares – in 廣西惠禹粮油工業有限公司 (“Huiyu”) including any fruits, dividends and/or interests derived therefrom or any traceable substitutes (“Trust Assets”) on trust for and on behalf of PBI;

(2)  an order requiring the Defendants forthwith to return and/or transfer the Huiyu Shares and/or the Trust Assets to PBI;

(3)  an injunction restraining the Defendants from transferring, disposing of, or otherwise dealing with the Huiyu Shares and/or the Trust Assets, save for the purpose of transferring the same to PBI;

(4)  an order that the Defendants do account to PBI in relation to the Huiyu Shares and/or the Trust Assets, and an order for the payment to PBI of all sums found due on such account;

(5)  damages and/or equitable compensation to be assessed.

4.  On 8 March 2019, Mimmie Chan J also granted an Injunction Order, the details of which can be set out below.  One of the summonses now before the Court is PBI’s application by summons dated 8 March 2019 (“Continuation Summons”) to continue the Injunction Order until Judgment in the action or further order.  The lengthy time taken for the Continuation Summons to come on for substantive argument will be explained below.

5.  The other summons now before the Court is Smart City’s Summons dated 25 September 2020 (“Transfer Summons”), which seeks leave to execute all acts necessary and incidental to the transfer of the Huiyu Shares and the balance of certain proceeds derived from the sale of or other dealings with them, from Smart City to PBI.

6.  This morning, PBI has been represented by Mr Anson Wong SC, leading Mr Martin Kok; Chu and Smart City have been represented by Mr José Maurellet SC, leading Mr Kevin Hon and Ms Jasmine Cheung.  As a result of these Counsel’s usual industry, I have been provided with both primary and reply submissions by both sides.

7.  In broad overview, Mr Wong seeks an order that the Injunction Order be continued until Judgment or further order, and submits that the Transfer Summons is not ‘ripe’ for argument as evidence is incomplete.  On the other hand, Mr Maurellet submits that the Injunction Order and the Continuation Summons are essentially no longer necessary, so that the only real live matter is that of costs.  He also submits that the Transfer Summons ought to be uncontroversial.

B.      Background

8.  The real protagonists in the action are Lau and Chu, who were previously partners and joint owners of their shipping businesses.  These included (i) the “Pacific Bulk Group”, said by Lau to have been set up by him in 2000, and (ii) the “BBG Group” said to have been jointly invested in by Lau and Chu in late 2009.  Since late 2013, serious conflicts arose between Lau and Chu in relation to their jointly-owned businesses, including the “Pacific Bulk Group” and the “BBG Group”.  From around January 2014, the two have entered into discussions in relation to the separation of their joint businesses.

9.  Also since 2014, Lau and Chu or the so-called Chu’s camp have also become embroiled in a large number of legal actions in Hong Kong, the BVI and Panama.  It is quite obvious from the list of actions that there has been and still is serious animosity between Lau and Chu.  However, those legal actions are not directly relevant to the subject matter of the present proceedings.

10.  At the corporate level, the four companies which feature prominently in these proceedings are (i) PBI, a company incorporated in Hong Kong; (ii) Topride Limited, a company incorporated in the BVI (“Topride”); (iii) Smart City, a company incorporated in Hong Kong; and (iv) Huiyu, a company incorporated in the PRC.

11.  PBI is a wholly-owned subsidiary of Topride, which is in turn 50% owned by Lau (subject to the claim by Chu that he has always been the 100% beneficial shareholder of Topride).  As such, Lau claims to be beneficial owner of 50% of PBI.  PBI was incorporated on 15 November 2007, for the purpose of the investment in Huiyu.  Initially, PBI was held by Pacific Bulk Maritime Holdings Co Ltd (“PB Maritime”) until its entire issued shareholding was transferred to Topride on 20 May 2009.  Lau was in turn allotted 1 share in Topride representing 50% of its issued shareholding.

12.  On or around 29 November 2007, Lau/Chu procured PBI to make a payment of US$7.25 million to Huiyu, for the purposes of the investment.  Since then, PBI became the registered and beneficial owner of the Huiyu Shares.  It is PBI’s case that it has retained the beneficial ownership of the Huiyu Shares up to the present date.

13.  Chu is and at all material times was a director of PBI.  In November 2015, Chu caused his close personal assistant Kwong to be appointed as his co-director, Lau says without his knowledge or consent. Since then, Chu and Kwong have been the only two directors of PBI.  In the Statement of Claim filed on 21 August 2019, Kwong is said to be accustomed to following Chu’s instructions as his agent/nominee.

14.  In 2018 and 2019, the undisputed registered shareholders and directors of the four companies were as follows:

Company	Shareholder(s)	Directors
1. Topride	Lau and Chu (50%/ 50%)	Lau and Chu
2. PBI	Topride (100%)	Chu and Kwong
3. Smart City	Chu (100%) (Before 7 June 2018) PBI (100%) (After 7 June 2018)	Chu
4. Huiyu	PBI (18%) (Before 5 June 2018) Smart City (18%) (After 5 June 2018)	Chu (among others)

15.  On 5 June 2018, Chu and Kwong, as the only two directors of PBI, procured the transfer of the Huiyu Shares from PBI to Smart City (“Huiyu Share Transfer”). In the Statement of Claim, Smart City is described as the alter ego and nominee company of Chu.  The Defendants admit that the Huiyu Share Transfer was not actually paid for since the consideration was only nominal at HK$1.00.  It is not in dispute that neither Topride nor Lau, being a director of Topride, were notified of the Huiyu Share Transfer.  It is on that basis that Lau claims the Huiyu Share Transfer constituted an unauthorised transfer of the Huiyu Shares belonging to PBI.

16.  Lau claims that Huiyu had been doing very well financially and that, from a capital contribution of RMB450 million from its shareholders, its net asset value has grown to around RMB950 million. On the basis of Huiyu’s net asset value of around RMB950 million in 2017/2018, the value of the Huiyu Shares held by PBI would be worth around RMB171 million at the time they were transferred to Smart City in June 2018. Lau expresses his belief that Chu and Kwong had breached their directors’ fiduciary duties to PBI by misappropriating and diverting the Huiyu Shares to Smart City.

17.  This is also in the context that Lau says he has discovered that Chu apparently made substantial misappropriations and dissipations from the “Pacific Bulk Group” and the “BBG Group”, as well as from another group of companies, the “CMC Group”.  These matters have given rise to the various litigation previously mentioned.

18.  On the Defendants’ side of the case, it is said that since PBI became a shareholder of Huiyu in 2007, there had not been any declaration or distribution of dividends despite the accumulated profits of Huiyu.  In 2017, there finally appeared to be a prospect of Huiyu declaring dividends.  Huiyu’s policy was to pay dividends only into the bank account of its registered shareholder.  To facilitate the receipt of such dividends by PBI, and in light of the possibility that PBI’s bank account with HSBC might not be operative due to on-going litigation and animosity between Lau and Chu, the Huiyu Shares were transferred from PBI to Smart City on 5 June 2018, so that the dividends to be paid by Huiyu could be received by Smart City in its bank account.

19.  Chu says that, on 5 June 2018, he also executed the bought and sold note, Instrument of Transfer and Smart City’s board minutes in order to effect a transfer of Smart City’s entire shareholding to PBI.  The documents were then taken to be stamped and dated on 7 June 2018.  In other words, he says that while the Huiyu Shares were transferred from PBI to Smart City, Smart City’s shares were transferred from Chu to PBI.  PBI therefore became 100% shareholder of the owner of the Huiyu Shares, instead of being the direct owner of the Huiyu Shares.

20.  In that regard, Mr Wong points out that it is noteworthy that at all material times until as late as 12 March 2019 (even after commencement of these proceedings), Chu still remained shown on the company registry records, and so was held out, as the sole director and sole shareholder of Smart City.  Mr Wong says that cannot reasonably be explained as mere “oversight”, as Chu suggests, when Chu was perfectly able to file a Form NR1 in relation to Smart City’s change of registered office in September 2018.

21.  There is also a dispute as to the ultimate beneficial owner of the Huiyu Shares.  On the Defendants’ case, Chu was the sole ultimate beneficial owner of the Huiyu Shares, through a chain of companies, and that remains unchanged despite the transfer.  On Lau’s case, which the Defendants deny, he was the 50% ultimate beneficial owner of the Huiyu Shares, through a chain of companies, and that also remains unchanged despite the transfer.

22.  The main thrust of the Defendants’ argument is because the Huiyu Share Transfer took place almost simultaneously with Chu’s transfer of the entire shareholding of Smart City to PBI, so PBI has not suffered any loss, prejudice or detriment while neither Chu nor Kwong has obtained any benefit from it.  As Mr Maurellet put it in oral argument, the situation was in effect a decision by the board of PBI to place the Huiyu Shares into a wholly-owned subsidiary, to avoid a perceived problem in relation to the receipt of the Dividends.  Albeit that there was a short period when the shares of Smart City were not yet moved from Chu to PBI, that period ought to be irrelevant to the analysis.

23.  On about 28 November 2018, Smart City received dividends from Huiyu of US$524,193.76 (“Dividends”).  Those Dividends form part of the proceeds derived from the Huiyu Shares, and so Lau claims beneficial ownership of them.  The Defendants’ own disclosure shows that by early 2019 around 30% of the Dividends had already been depleted, having allegedly been expended on certain “ordinary business expenses” of Smart City. Those expenses are predominantly, say the Defendants, salary and MPF and rent.

24.  On the other hand, Mr Wong submits that such an explanation is patently implausible.  Both PBI and Smart City were essentially asset-holding companies, holding the Huiyu Shares, and all operational business of Huiyu was conducted at Huiyu level in the PRC. Further, the salary and MPF purportedly related to employment contracts signed by Chu and Kwong as employees of Smart City, when it is inherently implausible for Chu (and Kwong) to be engaged in full-time employment with Chu’s own nominee company.  The rent was also paid to a company apparently owned or controlled by Chu or his family, so benefited him or his family personally.  Mr Wong describes the movement of these various funds as dissipation of the Dividends. On their face, the movement of those funds do not strike me as being readily consistent with simply ‘parking’ the Dividends with a wholly-owned subsidiary of PBI to avoid a potential problem with their receipt by PBI.  Anyway, Mr Wong reminds me that the pleaded case is that the whole arrangement was a ‘scheme’ to divert the Dividends, and that part of them were diverted to Chu directly and indirectly for no commercial purpose.

C.      Procedural History

25.  As already indicated, these proceedings were commenced on 7 March 2019.  On that day, Lau applied for and obtained leave from Mimmie Chan J in HCMP 315/2019 to commence proceedings in PBI’s name against the Defendants.  The Writ in these proceedings was issued on the same day.

26.  Mimmie Chan J also granted the proprietary ex parte Injunction Order against Chu and Smart City, restraining them from disposing of, dealing with or otherwise diminishing the value of (a) the Huiyu Shares, and/or (b) any dividends and/or interests arising from the Shares, and/or proceeds derived from the sale of and/or any other dealings in the Shares (“Proceeds”) and/or all such money or assets in Chu’s and/or Smart City’s possession, power or control which represent the traceable proceeds, fruits or substitutes of the Shares and/or Proceeds (“Traceable Assets”) (the Huiyu Shares, Proceeds and Traceable Assets together, “Huiyu Assets”).

27.  At the return date hearing on 15 March 2019, Chu and Smart City gave undertakings (“Undertakings”) in lieu of the Injunction Order, as contained in the Order of G Lam J of that date.  The Undertakings included that Chu and Smart City would not “directly or indirectly dispose of, deal with or otherwise diminish the value of” the Huiyu Shares, the Proceeds and/or the Traceable Assets.  Chu also undertook to provide, and subsequently provided, information about the Huiyu Shares and the Proceeds.

28.  On 18 April 2019, the Defendants took out applications seeking to set aside the ex parte leave to commence the present proceedings and/or to strike out the present proceedings.

29.  On 27 August 2019, Ng J directed that the Continuation Summons be adjourned sine die with liberty to restore after the determination of the Defendant’s set aside and strike out applications.  On the same day, he heard the argument on those applications.

30.  By the Ng J Judgment dated 14 May 2020, Ng J dismissed those applications, with costs.  In so doing, Ng J held, inter alia:

(1)  there was at least a serious issue to be tried in relation to PBI’s claim that Smart City holds the Huiyu Shares, including the Trust Assets (which he defined as any fruits, dividends and/or interests derived from those shares or any traceable substitute) on trust for PBI as well as its claim for their re-transfer from Smart City back to PBI;

(2)  there was also a serious issue to be tried in relation to PBI’s claim that Chu and Kwong have been in breach of their fiduciary duties to PBI by making the Huiyu Shares Transfer; and

(3)  contrary to the submissions made for the Defendants, there was no material non-disclosure, and there was no abuse of process.

31.  Mr Maurellet recognises those points, but submits that it is important to appreciate that at the time, Ng J was dealing with relatively high thresholds that had to be established by the Defendants on the applications to set aside leave to commence derivative proceedings and to strike out the claim.  For his part, Mr Wong points out that the only grounds for suggesting that the Injunction Order should be discharged or not continued, as put forward in Chu’s evidence, were those grounds previously fully argued before, and rejected by, the Court in the Ng J Judgment.  There is no basis, says Mr Wong, upon which the Defendants can now seek to re-argue those points so as to resist the continuation of the Injunction Order.

32.  PBI had in the meantime filed its Statement of Claim almost a year earlier on 21 August 2019.  The Defendant’s Defence was filed on 30 July 2020.

33.  In any event, it was the Defendants who took the initiative on 6 August 2020 to seek restoration of the hearing for the Continuation Summons.

34.  The Transfer Summons was issued on 25 September 2020.  It seeks leave to transfer the Huiyu Shares and the balance of the “Proceeds” from Smart City to PBI, notwithstanding the previous Undertakings given.  It is for that reason that the Defendants say, albeit only for the first time in Mr Maurellet’s skeleton submissions, that there is no need to continue the Undertakings and they should be discharged.

D.      Circumstances leading to Transfer Summons

35.  Mr Maurellet submits that the Transfer Summons comes about in the following circumstances.

36.  In around mid-May 2020, Citibank requested Lau and Chu to supply to it relevant information to comply with Know Your Client requirements.  Because Lau failed to do so, Chu says this could potentially lead to a suspension of the operation of Smart City’s Citibank accounts.  Chu then explored the possibility of transferring the Huiyu Shares and the balance of the Proceeds to PBI’s bank account with HSBC.

37.  On 16 June 2020, Chu’s then solicitors requested Lau, via his solicitors (“DLA”), to consent to the transfer of the Huiyu Shares to PBI.  On 29 June 2020, DLA wrote back not to give consent, but with a series of queries and demands, including seeking justification for the proposal.  Further correspondence followed on 17 and 22 July 2020 which failed to lead to any agreement.

38.  In the meantime, on 15 July 2020, the board of directors and other shareholders of Huiyu indicated on a preliminary basis that there was no objection to the transfer of the Huiyu Shares from Smart City to PBI.

39.  It was only on 18 September 2020 that DLA sent a letter to Chu’s solicitors (“SFKS”) indicating that Lau would agree to the transfer of the Huiyu Shares and balance of the Proceeds from Smart City to PBI, but subject to a number of conditions.  Chu’s counter-proposal on 23 September 2020, simply to transfer the Huiyu Shares without condition, led to the response from DLA the following day, 24 September 2020, emphasising the consent would be subject to the proposed conditions.

40.  As a result, the Transfer Summons was issued on 25 September 2020.

E.      Applicable Principles

41.  The principles relating to the grant or continuation of an interlocutory injunction are well-established.  They are broadly that (1) there should be a serious issue to be tried and (2) the balance of convenience should lie in favour of granting or continuing the injunction.

42.  The principles applicable to the grant of a proprietary injunction are also well-established.  They include that (1) there is property which is bona fide the subject matter of the cause or matter; (2) something ought to be done for the security of the property, which may involve showing that damages may not be an adequate remedy; (3) there is no need to show risk of dissipation (unlike an application for a Mareva injunction); (4) even if there is delay in making the application which might lead to a refusal of a freezing injunction, a proprietary injunction may nevertheless be granted; (5) an enquiry into the relative merits of rival claims is not necessary; (6) in respect of the merits of the claim, the party seeking the preservation order need only show that there is a serious issue to be tried on the merits.

43.  There is also no strict requirement for an undertaking as to damages where the Court grants a proprietary injunction (or preservation order) albeit that the Court may require such an undertaking where the circumstances warrant.

F.      The Continuation Summons

44.  Ng J has already held that there is a serious issue to be tried in relation to PBI’s claims that (1) Smart City holds the Huiyu Shares, including the Trust Assets, on trust for PBI as well as its claim for the re-transfer from Smart City back to PBI, and (2) Chu and Kwong have been in breach of their fiduciary duties to PBI by making the Huiyu Share Transfer.

45.  Hence, Mr Wong submits that PBI at least has triable proprietary claims against the Defendants in relation to the Huiyu Shares and/or their proceeds/substitutes, by the imposition of a constructive trust or the equitable remedy of an account.  Mr Wong, of course, submits that it is not open to the Defendants to have a ‘second bite at the cherry’ to seek to re-litigate those matters at this hearing.  Mr Wong further submits that the Ng J Judgment also disposes of two specific points on the substantive merits raised by the Defendants relating to, they say, (a) Lau’s lack of any equitable entitlement to the Huiyu Shares and the investment, and (b) the absence of any real change in the equitable ownership of the Huiyu Shares.

46.  I agree.  In any event, on my assessment of the materials, I would reach entirely the same conclusions.  Therefore, I accept that there are at least serious issues to be tried on PBI’s proprietary claims against Chu and Smart City.

47.  To be fair, Mr Maurellet does not really argue much about the merits of the claims (whilst at the same time making a general denial that there are merits).  Insofar as there are points, which might smack of an attempt to re-argue matters rejected by Ng J (including the suggestion that there was material non-disclosure and a lack of merit), I also reject them.

48.  Mr Maurellet’s argument focuses rather on whether there is any need for the continuation of the Injunction Order.  It is in that regard that the Transfer Summons comes into play, and that seems to me also to be potentially relevant generally to the overall balance of convenience.  I note that other than by reference to the Transfer Summons, Mr Maurellet does not really raise any issue on the balance of convenience, and certainly none is raised in the evidence.

49.  Suffice it to say at this point – and leaving aside the Transfer Summons – I would be persuaded that the balance of convenience points in favour of the continuation of the Injunction Order.

G.      The Transfer Summons

50.  Mr Wong submits that the Transfer Summons has no bearing on PBI’s application on the Continuation Summons.  This is because Chu and Kwong are and remain the only directors of PBI.  Therefore, unless restrained by the Injunction Order, the Defendants would be in a position to misappropriate or divert the Huiyu Assets, regardless of whether they are held in the name of PBI or Smart City.  This is what gives rise to the proposed conditions for consenting to the transfer back to PBI.  Mr Wong does say that there is no objection to an order in the terms of the Transfer Summons, so long as the Injunction Order is, or the Undertakings are, continued.

51.  But Mr Maurellet submits that the Transfer Summons ought to be uncontroversial, as it proposes transferring the Huiyu Shares and the Proceeds (or the remainder of them) to PBI itself, so could not prejudice PBI.  He points out that PBI is agreeable in principle to the transfer, although it has requested a number of conditions.  It is because of Smart City’s proposal to transfer the Huiyu Shares to PBI that Mr Maurellet submits that the Injunction Order should no longer be continued on the simple ground that its basis has fallen away.  For the same reason, he says there is no need to continue the Undertakings, which should be discharged.

52.  Mr Maurellet says this complies with a common sense proposition, for which no authority is really necessary (though he cites one), that it would be wrong in principle to allow an interim injunction to remain in place for any longer than it should be.  By way of analogy, the standard form of Mareva injunction expressly provides that the order will cease to have effect if the defendant provides security by paying the sum in question into court.

53.  Here, where the basis of the Injunction Order is to protect the Huiyu Shares and the Proceeds – which PBI contends are its property which should ultimately be returned to it – Mr Maurellet submits that, on the transfer of them back to PBI, there is no longer any basis for either the Injunction Order or the Undertakings to be continued.  He says that should PBI consider there to be any need to restrain the Defendants from transferring away those assets after they have been transferred back to PBI, then PBI would need to apply for a quia timet injunction and satisfy the relevant thresholds.  Mr Maurellet goes on to submit that it is not clear why PBI is making ‘a mountain out of a mole hill’ by proposing what he calls various unnecessary conditions.

54.  Mr Maurellet also emphasises that the Injunction Order is a purely proprietary injunction based upon PBI’s proprietary claim in respect of the Huiyu Assets.  So, he says, as the Huiyu Assets will be taken out of the hands of the Defendants, the substratum of the Injunction Order has been lost.  Mr Maurellet refers to my decision in Sky Motion Holdings Ltd v China Create Capital Ltd[2019] HKCFI 2408 at §31, where I identified that since the purpose of a proprietary injunction is to preserve the very property over which the plaintiff makes proprietary claim, any such injunction would only be in respect of such property in the hands of the defendant.  So, he says with some apparent force, had the Huiyu Assets been in PBI’s own hands at the time it applied for the ex parte Injunction Order, it obviously would not have obtained that order in the first place.  Further, where the Undertakings were given in lieu of the Injunction Order, they should also be discharged.

55.  In his reply submissions and orally this morning, Mr Maurellet has emphasised the difference between a proprietary injunction, which is the basis of the Injunction Order, and a different form of injunction by which there might be interference in the management or affairs of a company.  He refers to the trite proposition that it would be only in rare circumstances that the Court would interfere with the management of a company, so that if Lau wished to do so – here to prevent Chu and Kwong managing PBI and dealing with its assets as they think appropriate in the exercise of their management powers – he would have to satisfy a high threshold to persuade any Court to interfere.

56.  The nub of Mr Maurellet’s submissions is that once the Shares and Dividends (or that part of the Dividends as has not yet been dissipated) have been put back into PBI, it then falls to the board of PBI to decide how to deal with them.  As he emphasises, managerial decisions are for the board to make in good faith, as the board considers commercially appropriate.  So, if the assets are put back into PBI, any proprietary issue simply falls away.  If Lau considers some other form of injunctive relief is appropriate, he must address that form of relief on the much higher threshold.

57.  But it seems to me that Mr Maurellet’s recognition of the possibility of a further injunction application identifies the crux, which arises from the fact that the Defendants do not admit liability on the specific relief sought in relation to the Huiyu Assets, and where the relevant liability issues remain at large for the trial of these proceedings.  Nor do I think it is quite so easy to brush aside history.  Whilst, on one view, it might be said that the Transfer Summons proposes to put the position back as it was, I do not think one can lose sight of the history as to why it is that proposal arises at all.  As Mr Wong submits, there is no “loss of substratum” for the injunction.  It is further correct that this is no typical quia timet situation, because the Court has been satisfied (now twice) that there is at least a serious issue to be tried that the wrongful acts have already been committed. Indeed, it does not seem to me to be correct for the Court now to proceed on the basis that there will be good faith dealing on a proper commercial basis with PBI’s assets, when the Court has previously been satisfied that there is at least a serious issue to be tried that that is not what has happened or is happening.

58.  I also agree that too close an analogy with the situation of a Mareva injunction is inappropriate.  In that situation, the injunction ceases to operate because the monies claimed are secured by the appropriate amount being paid into court.  In this case, what the Defendants propose is to transfer the assets from one entity they control to another entity they control.  They refused the proposal for the funds held by Smart City to be paid into court.

59.  Indeed, it is precisely from the fact that they do control PBI that Lau sought leave, and the Court granted leave, for the commencement of these statutory derivative proceedings.  That fact is what seems to me to take this case out of the ordinary case relating to a proprietary claim with an ancillary proprietary injunction.

60.  That is why the Injunction Order is properly framed as restraining Chu and Smart City from disposing of, dealing with or otherwise dismissing the value of the Huiyu Shares, “regardless of whether those shares are held in the name of [Smart City] or in the name of any party acting directly or indirectly upon [Chu’s or Smart City’s] instructions”.  As already pointed out, the Undertakings also dealt with both direct and indirect action.  In this case, PBI acts directly or indirectly upon their instructions, hence the derivative proceedings.  So, the Injunction Order as framed continues to be effective over Chu and Smart City even if the Huiyu Assets (or most of them) are transferred back to PBI.

61.  On the basis that there is a serious issue to be tried that PBI was an investment vehicle for Chu and Lau, and that it had no other real operative business, it is difficult to see why the management of PBI would do anything other than hold the Huiyu Shares, and perhaps distribute the Dividends to the ultimate beneficial investors.  In any event, if PBI is alleged to have suffered some losses as a result of the continuation of the Injunction Order there is a cross-undertaking in damages.

62.  Mr Maurellet criticises some of the conditions proposed by PBI.  But it seems to me quite a lot of the argument is beside the point, or constitute ships passing in the night.

63.  Mr Maurellet first says it is unnecessary for the acceptance of the transfer as being conditional on being without prejudice to PBI’s rights in the proceedings, when the Defendant’s case has all along been that the transfer does not constitute an admission of liability to the underlying claim.  As he puts it, just because what Smart City proposes to do, “for independent and legitimate reasons”, coincides with one form of relief sought by PBI does not mean that the Defendants admit liability.  But I agree with Mr Wong that the reservation of existing rights by PBI is not really a condition as such, and in any event makes sense when the Defendants continue to contest liability.

64.  A similar point arises in relation to the reservation of rights to claim against the Defendants for any losses arising out of either the initial transfer or the proposed (re-)transfer of the Huiyu Shares.  Of course, Mr Maurellet is right when he says that as a matter depending on whether it is later proven that the Defendants’ initial transfer was wrongful.  So it might be asked what was the problem in agreeing or recognising that reservation (whether it be condition or not).

65.  Nor, contrary to Mr Maurellet’s submission, was it really a condition precedent that Lau insisted on being informed of the precise steps to be taken in relation to the proposed transfer of the Huiyu Shares.  What Lau’s solicitors suggested was simply that the parties should come to an agreement as to how the proposed transfers were to be effected as a matter of practicality and logistics.  This strikes me as a sensible attempt to remove the scope for future argument, by agreeing a procedure in advance of it being performed.

66.  As to arguments on costs, as conditions for the proposed transfer, Mr Maurellet submits that the costs of the transfer should for the moment be borne by PBI, unless it is later proven that the Defendants’ initial transfer from PBI to Smart City was wrongful.  He says that insisting on the Defendants’ bearing costs now presupposes that they were at fault which is a matter yet to be determined.  On the other hand, Mr Wong says that given the Defendants’ position is that the ultimate relief sought by Lau would be “duly addressed” by the proposed transfers, it logically and necessarily follows that the Defendant should bear the costs as the unsuccessful party.

67.  However, I think it maybe the costs questions fall better to be dealt with separately in relation to the costs arguments on the submissions.

68.  But, by way of conclusion on the Transfer Summons, I do not accept that it provides the ‘answer’ to the Continuation Summons.  Nor do I think that it provides the circumstances in which the Injunction Order or the Undertakings simply ‘fall away’.

69.  Of course, it might be thought helpful and appropriate that the Huiyu Shares and such of the Proceeds and Traceable Assets as remain in the hands of, or under the control of, Chu and Smart City be put back into PBI as soon as possible.  In reality, because Chu (or Chu and Kwong) control both Smart City and PBI, they do not need Lau’s consent to put back those assets.  That could be done entirely without prejudice to all parties’ competing contentions in these proceedings.

70.  So long as there is adequate protection afforded to the assets after transfer back to PBI, it seems to me that it is sensible that those assets are transferred back.  Therefore, I would grant leave to permit the transfer.

71.  As to the costs of the transfer, it seems to me that they should be paid by the Defendants in the first instance, though I direct that those costs remain subject to any further order in these proceedings once the issues are determined at any trial (unless otherwise dealt with by prior agreement between the parties).

H.      Overall Consideration

72.  In addition to being satisfied as to sufficient merits in the claim, I have in mind the usual test of considering where the lower risk of injustice lies, should the decision on the interim application relating to an injunction turn out to be wrong.

73.  As already stated, these are derivative proceedings.  They were commenced with the leave of the Court, and the attempt to discharge that leave was firmly rejected.  They are derivative proceedings precisely because the Defendants retain control over PBI.  Even after transfer of assets back to PBI, they remain under the control of the Defendants, and might properly be regarded as being in their hands.  Mr Maurellet’s own submission that it is up to the directors to decide how to deal with PBI’s assets makes that clear.

74.  I am satisfied that, absent the continuation of the Injunction Order, PBI would remain at risk of having the Huiyu Assets again misappropriated or diverted away from it.  If the transfer back to PBI is not accompanied by appropriate and meaningful protection, it simply does not meet the concern prompting the application for, and the grant of, the Injunction Order.

75.  It is also clear that the proceeds still held by Smart City are not the entirety of the traceable assets or their substitutes flowing from the Huiyu Shares.  In particular, they do not include that part of the Dividends already dissipated, and over which PBI maintains its proprietary and tracing claims.

76.  Now that it is clear that the Defendants also wish to be discharged from the Undertakings, that makes the situation one pointing even more clearly in favour of the continuation of the Injunction Order.

77.  As I have said, whilst there is great sense in putting back the various assets into PBI – for which I would grant leave – I do not think that, if done, it removes the need for the Injunction Order, or the Undertakings in its stead.  Therefore, on the assumption that the Undertakings are no longer on offer, and in any event, it seems to me appropriate that the Injunction Order should be continued until trial or further order.

78.  It is, of course, necessary to make the order with the proviso that, for the avoidance of doubt, Smart City should be permitted forthwith to transfer the Huiyu Shares and/or proceeds derived from the sale of and/or any other dealings in the Huiyu Shares (ie. the Proceeds) currently in Smart City’s Citibank bank accounts in the total amount of HK$1,029,076.20 and US$244,124.01 to PBI.

79.  I shall also add to the Injunction Order the words “directly or indirectly” after the reference to “1^st and 3^rd Defendants” in the introductory words of the restraint, so as to make clear the intended terms of the injunction.

I.       Costs

80.  It seems to me that, in the circumstances I have described above, costs should follow the event.  Therefore, I order the Defendants to pay PBI’s costs of the Continuation Summons.

81.  As to the Transfer Summons, whilst I have granted the leave sought by that summons, I have not granted it on the basis put forward by the Defendants.  The essence of why there was a disagreement between the parties, and why the question of leave has arisen, essentially arises on the disagreement relating to the Continuation Summons.  Therefore, it seems to me that the costs consequences really follow those of the Continuation Summons.  That means that either there should be no order, or the Defendants should pay PBI’s costs of the Transfer Summons.  In the exercise of my discretion, I order the latter.

82.  Costs are ordered to be taxed if not agreed, and to be payable forthwith with Certificate for two Counsel.

HCMP 315/2019

[2020] HKCFI 769

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 315 OF 2019

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HCA 379/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 379 OF 2019

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J U D G M E N T

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Introduction

1.  There is before this court an application by summons dated 18 April 2019 (“Setting Aside Summons”) in HCMP 315 of 2019 (“HCMP315”) taken out by Mr Chu Kong (“Chu”), Mr Kwong Hon Keung Gerry (“Kwong”) and Smart City Investment Limited (“Smart City”) (collectively “Defendants”) to set aside the ex parte leave granted by Mimmie Chan J on 7 March 2019 to the Applicant  Mr Lau Wing Yan (“Lau”) pursuant to section 733(1) of the Companies Ordinance, Cap 622 (“CO”) to commence and continue proceedings in the name and on behalf of Pacific Bulk Investment Limited (“Plaintiff”) against the Defendants.  The grounds of the application are that:

(1)  there is no serious issue to be tried;

(2)  there was material non-disclosure on the part of Lau at the ex parte stage; and

(3)  it is otherwise an abuse of the process of the Court.

2.  Pursuant to the leave so granted, on 7 March 2019, the Plaintiff issued a Writ of Summons with an Indorsement of Claim in HCA 379 of 2019 (“HCA379”) against the Defendants.  In the Indorsement of Claim, the Plaintiff claims against the Defendants for inter alia:

(1)  A declaration that the Defendants (or any of them) held and/or hold the 18% shareholding (“Huiyu Shares”) in 廣西惠禹粮油工業有限公司 (“Huiyu”) including any fruits, dividends and/or interests derived therefrom or any traceable substitutes (“Trust Assets”) on trust for and on behalf of the Plaintiff.

(2)  An order requiring the Defendants to forthwith return and/or transfer the Huiyu Shares and/or the Trust Assets to the Plaintiff.

(3)  An injunction restraining the Defendants from transferring, disposing of, or otherwise dealing with the Huiyu Shares and/or the Trust Assets, save for the purpose of transferring the same to the Plaintiff.

(4)  An order that the Defendants do account to the Plaintiff in relation to the Huiyu Shares and/or the Trust Assets, and an order for the payment to the Plaintiff of all sums found due on such account.

(5)  Damages and/or equitable compensation to be assessed.

3.  Also on 18 April 2019, the Defendants applied by summons in HCA379 (“Strike-out Summons”) to strike out the Indorsement of Claim on the grounds that it is frivolous, or vexatious, or otherwise an abuse of the process of the Court; alternatively, for an Order that HCA379 be dismissed or stayed on the same grounds. 

4.  This is the hearing of the Setting Aside Summons and the Strike-out Summons.

Background

5.  The main protagonists in these proceedings are Lau and Chu.  According to Lau’s 1^st affirmation dated 6 March 2019 (“Lau 1”) filed in support of the leave application, the two were previously partners and joint owners of their shipping businesses.  These included (i) the “Pacific Bulk Group”, said to have been set up by Lau in 2000, and (ii) the “BBG Group” said to have been jointly invested in by Lau and Chu in late 2009.  Since late 2013, serious conflicts arose between Lau and Chu in relation to their jointly-owned businesses, including the “Pacific Bulk Group” and the “BBG Group”.  From around January 2014, the two have entered into discussions in relation to the separation of their joint businesses. 

6.  Also since 2014, Lau and Chu or the so-called Chu’s camp have also embroiled in a large number of legal actions in Hong Kong, the BVI and Panama.  A list of these legal actions and a summary of what they are concerned with can be found in Lau 1 at [164].  It is quite obvious from the list that there has been and still is serious animosity between Lau and Chu. Suffice it to say that, as admitted in Lau 1 at [166], these legal actions are not directly relevant to the subject matter of the present proceedings. 

7.  At the corporate level, the 4 companies which feature prominently in these proceedings are (i) Topride Limited, a company incorporated in the BVI (“Topride”); (ii) the Plaintiff, a company incorporated in Hong Kong; (iii) Smart City, a company incorporated in Hong Kong; and (iv) Huiyu, a company incorporated in the PRC.

8.  Back in 2018 and 2019, the undisputed registered shareholders and directors of the 4 companies were as follows:

Company	Shareholder(s)	Directors
1. Topride	Lau and Chu[1] (50%/ 50%)	Lau and Chu
2. Plaintiff	Topride (100%)	Chu and Kwong
3. Smart City	Chu (100%) (Before 7 June 2018) Plaintiff (100%) (After 7 June 2018)	Chu
4. Huiyu	Plaintiff (18%) (Before 5 June 2018) Smart City (18%) (After 5 June 2018)	Chu (among others)

Lau’s and the Defendants’ cases on the transfer of theHuiyu Shares^[2]

9.  While Lau has adduced close to 1,000 pages of affirmation and exhibits in the form of Lau 1 in support of the leave application^[3], the gist of his complaint against the Defendants is quite straightforward.  As succinctly summarised by Mr Anson Wong SC’s skeleton submissions, Lau’s case is simply this.

10.  The Plaintiff was initially held by Pacific Bulk Maritime Holdings Co Ltd (“PB Maritime”) until its entire issued shareholding was transferred to Topride on 20 May 2009. 

11.  Chu is and at all material times was a director of the Plaintiff.  In November 2015, Chu caused his close personal assistant Kwong to be appointed as his co-director, without Lau’s knowledge or consent.  Since then, Chu and Kwong have been the only 2 directors of the Plaintiff. In the Statement of Claim, Kwong is said to be accustomed to following Chu’s instructions as his agent/nominee.

12.  In or around late 2007, Lau and Chu decided to invest in Huiyu.  The Plaintiff was incorporated for the specific purpose of their investment in Huiyu.  On or around 29 November 2007, Lau/Chu procured the Plaintiff to make a payment of US$7.25 million to Huiyu, for the purposes of the said investment.  Since then, the Plaintiff became the registered and beneficial owner of the Huiyu Shares. 

13.  On 20 May 2009, PB Maritime transferred the entire shareholding in the Plaintiff to Topride and Lau was in turn allotted 1 share in Topride representing 50% of its issued shareholding. 

14.  On 5 June 2018, Chu and Kwong, as the only two directors of the Plaintiff, procured the transfer of the Huiyu Shares from the Plaintiff to Smart City (“Huiyu Share Transfer”).  In the Statement of Claim, Smart City is described as the alter ego and nominee company of Chu.  The Defendants have since admitted in Chu’s 2^nd affirmation filed in HCA379 at [4] that the Huiyu Share Transfer was not actually paid for since the consideration was only nominal at HK$1.00.  It is not in dispute that neither Topride nor Lau, being a director of Topride, were notified of the Huiyu Share Transfer. 

15.  In [134] to [138] of Lau 1, Lau claimed that Huiyu had been doing very well financially and that, from a capital contribution of RMB450 million from its shareholders, its net asset value has grown to around RMB950 million.  On the basis of Huiyu’s net asset value of around RMB950 million in 2017/2018, the value of the Huiyu Shares held by the Plaintiff would be worth around RMB171 million at the time they were transferred to Smart City in June 2018.  Lau expressed his belief that Chu and Kwong had breached their directors’ fiduciary duties to the Plaintiff by misappropriating and diverting the Huiyu Shares to Smart City. 

16.  The Defendants’ case, as summarized in Mr Stewart Wong SC’s skeleton submissions, is equally straightforward. 

17.  Smart City is a company incorporated by Chu in September 2016 who was its sole director and sole shareholder until 7 June 2018.

18.  Since the Plaintiff became a shareholder of Huiyu in 2007, there had not been any declaration or distribution of dividends despite the accumulated profits of Huiyu.  In 2017, there finally appeared to be a prospect of Huiyu declaring dividends.

19.  Huiyu’s policy was to pay dividends only into the bank account of its registered shareholder.  To facilitate the receipt of such dividends by the Plaintiff, and in light of the possibility that the Plaintiff’s bank account with HSBC might not be operative due to on-going litigation and animosity between Lau and Chu, the Huiyu Shares were transferred from the Plaintiff to Smart City on 5 June 2018, so that the dividends to be paid by Huiyu could be received by Smart City in its bank account.

20.  On 5 June 2018, Chu also executed the bought and sold note, Instrument of Transfer and Smart City’s board minutes in order to effect a transfer of Smart City’s entire shareholding to the Plaintiff. The documents were then taken to be stamped and dated on 7 June 2018.

21.  In other words, while the Huiyu Shares were transferred from the Plaintiff to Smart City, Smart City’s shares were transferred from Chu to the Plaintiff.  The Plaintiff therefore became 100% shareholder of the owner of the Huiyu Shares, instead of being the direct owner of the Huiyu Shares.

22.  There is however a dispute as to the ultimate beneficial owner of the Huiyu Shares.  On the Defendants’ case, Chu was the sole ultimate beneficial owner of the Huiyu Shares, through a chain of companies, and that remains unchanged despite the transfer.  On Lau’s case, which the Defendants deny, he was the 50% ultimate beneficial owner of the Huiyu Shares, through a chain of companies, and that also remains unchanged despite the transfer.

23.  The main thrust of the Defendants’ argument is that the Huiyu Share Transfer, which is not disputed, took place almost simultaneously with Chu’s transfer of the entire shareholding of Smart City to the Plaintiff.  Hence, the Defendants submit, the Plaintiff has not suffered any loss, prejudice or detriment while neither Chu nor Kwong has obtained any benefit from it.  In such circumstances, Lau’s claim for breach of fiduciary duties by Chu (and Kwong) is baseless and, without a serious issue to be tried, it cannot be in the Plaintiff’s interests to continue the derivative action.

Deliberation - Setting Aside Summons

No serious issue to be tried

24.  In order for Lau to obtain leave to bring the proposed statutory derivative action on behalf of the Plaintiff, he must satisfy all the conditions in section 733 of the CO.  For the present purpose, the Defendants only take issue on whether there is a serious question to be tried (“Serious Question Requirement”). 

25.  This court shall set out the relevant paragraphs ie [10]-[11] of the judgment of Kwan JA’s (as she then was) in Zhang Heng v Kingstone International Wealth Management Ltd & Ors unrep, CACV 56 of 2017, 22 September 2017, on the correct approach to the exercise of the discretion to grant leave under section 733:

“10. For leave to be granted to commence a statutory derivative action, the material requirements for present purpose are: (1) on the face of the application, it appears to be in the interest of the company that leave should be granted; and (2) there is a serious question to be tried and that the company has not itself brought the proceedings.

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 Primlaks (HK) Ltd [2016] 2 HKLRD 31 and Ng J in turn drew on various decisions of judges at first instance. 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. 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] 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).’” (emphasis added)

26.  First, Lau/the Plaintiff submit that, since the transfer of the Huiyu Shares from the Plaintiff to Smart City was for no consideration, a presumption of resulting trust would have arisen in favour of the Plaintiff.  The trust arises by operation of law to give effect to a presumption that the Plaintiff did not intend Smart City to take the Huiyu Shares beneficially: Snell’s Equity 23^rd Ed para 25-003; Prest v Petrodel Resources Ltd & Ors [2013] 2 AC 415 at [49](Lord Sumption).  However, this presumption can be rebutted by proof that the Plaintiff did in fact intend Smart City to take the Huiyu Shares as beneficial owner: Snell’s Equity 23^rd Ed para 25-003; Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 708. 

27.  In this regard, the evidence is at best ambiguous as to whether there was any intention on the part of the Plaintiff, acting by Chu and Kwong, to pass the beneficial interests in the Huiyu Shares to Smart City.   Chu rather cryptically deposed in his 1^st affirmation filed in HCMP315 (“Chu 1”) at para 7(2) that “There had never been any real change in the equitable ownership of the Huiyu Shares”.  Indeed, in Chu’s 1^st affirmation filed in HCA379 (“Chu 1A”) at para 8, he said “Subsequent to the Transfers, the Plaintiff has still been in full ownership and control of the Huiyu Shares.”

28.  In these circumstances, it seems to this court that there must be at least a serious issue to be tried in relation to the Plaintiff’s claim that Smart City holds the Huiyu Shares, including the Trust Assets, on trust for it as well as its claim for their re-transfer from Smart City back to the Plaintiff.

29.  Second, the Defendants submit that almost simultaneously with the Huiyu Shares Transfer, Smart City became a wholly owned subsidiary of the Plaintiff and that, in place of the Huiyu Shares which the Plaintiff previously directly held, it was given full ownership of Smart City.  In Chu’s 7^th affirmation filed in HCA379 (“Chu 7”) at para 25, Smart City was said to have no business operations save for those in relation to the Huiyu Shares.  Thus, the Defendants submit the Plaintiff has been given an asset with exactly the same value, even though the transfer was for no consideration.

30.  In this court’s view, the Defendants’ said submission ignores one of the most fundamental principles of company law ie a shareholder of a company has no legal or beneficial interests in the company’s assets: Macaura v Northern AssuranceCo Ltd [1925] AC 619 at 626‑7. Hence, as a matter of law, the mere fact that the Plaintiff owns 100% of Smart City does not mean that it also owns, legally or beneficially, Smart City’s assets ie the Huiyu Shares. 

31.  Further, the evidence is unclear whether 100% shareholding of Smart City is or will continue to be of exactly the same value as the Huiyu Shares since it is unclear whether Smart City had actual liabilities which would adversely affect the value of the Huiyu Shares at the time of the transfer or potential liabilities which might affect the value of the Huiyu Shares in the future.  Lau is not, and at the material time was not, a director of Smart City and had/has little knowledge of its business or financial affairs as well as its actual, potential or future liabilities.  By unilaterally taking the Huiyu Shares away from the Plaintiff and replacing them with 100% shareholding of Smart City, the Defendants have imposed on the Plaintiff an unwarranted risk which has no actual or apparent benefit to the Plaintiff; indeed, none has been suggested by the Defendants.  Hence, on the evidence, this court is not satisfied with the Defendants’ assertion that the Plaintiff has not suffered any loss, prejudice or detriment while neither Chu nor Kwong has obtained any benefit from the Huiyu Shares Transfer.  That is something which should be investigated at trial, if any, and not on affidavit evidence.

32.  In the premises, it seems to this court that there must also be a serious issue to be tried in relation to the Plaintiff’s claim that Chu and Kwong have been in breach of their fiduciary duties to the Plaintiff by the Huiyu Shares Transfer. 

33.  To conclude, given the relatively low threshold of the Serious Question Requirement, this court is not satisfied on the evidence that the prospects of success of the Plaintiff’s claims are so slim that the Plaintiff cannot be said to have any expectation of success.  That is sufficient to deal with the Serious Question Requirement.

34.  For the sake of completeness, regarding the other condition under section 733 ie whether on the face of the application, the proposed action appears to be in the interests of the Plaintiff (“Interests of the Company Requirement”), it would be futile even if the Defendants were to take serious issue with it.  This is because 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: Re Primlaks (HK) Ltd [2016] 2 HKLRD 31 at [20]‑[21].  In para 52 of the Defendants’ skeleton submissions, the only reason put forward that it is not in the interests of the Plaintiff to pursue the derivative action is because of the baseless nature of its claims and that no loss has been occasioned to the Plaintiff.  As can be seen from the discussion above, this court is not satisfied, for the present purpose, that the Plaintiff’s claims are baseless or that it has suffered no loss such that there is no issue to be tried.  Hence, this court is also satisfied that the “Interests of the Company Requirement” has also been met.

Material non-disclosure

35.  In the Defendants’ skeleton submissions, it is submitted that there are at least three issues that ought to have been properly disclosed by Lau when making his ex parte application.

36.  In this court’s view, none of the three issues are material.

37.  First, the Defendants submit that there is at the very least a genuine dispute about Lau’s ownership and/or interest in the Plaintiff, and through the Plaintiff, the Huiyu Shares.

38.  But, as stated above, it is a most fundamental principle of company law that a shareholder of a company has no legal or beneficial interest in the company’s assets.  Prior to the Huiyu Shares Transfer, Lau was a 50% registered shareholder of Topride which, in turn, was a 100% shareholder of the Plaintiff which, in turn, owned the Huiyu Shares.  From a layman’s point of view, it might be thought that Lau can loosely be described as the 50% ultimate beneficial owner of the Huiyu Shares.  But legally speaking, Lau did not even own Topride’s assets ie the Plaintiff, let alone the Plaintiff’s assets ie the Huiyu Shares.  Hence whether or not there is a genuine dispute about Lau’s ownership and/or interest in the Plaintiff, and through the Plaintiff, the Huiyu Shares is irrelevant to the Plaintiff’s claim to its own assets ie the Huiyu Shares and whether the Plaintiff’s directors were in breach of their fiduciary duties.

39.  Second, the Defendants submit that Lau has not attempted to make any inquiry about the apparent change of ownership in the Huiyu Shares, notwithstanding his obvious ability to contact the Board of Huiyu. Had he conducted proper investigation, it would have been clear that the Huiyu Shares remained within the chain of companies owned by Topride, albeit now through Smart City.

40.  It seems to this court that the point is first and foremost a criticism of Lau’s failure to make proper inquiries.  However, there is little explanation in the Defendants’ skeleton submissions what should have prompted Lau to make such inquiries with the Board of Huiyu in the first place.  Nor is there any explanation as to why such inquiries were something which should reasonably have been made prior to the ex parte application. 

41.  As explained above, it is no answer to the Plaintiff’s trust claim that almost simultaneously with the transfer of Huiyu Shares to Smart City, Smart City became a wholly owned subsidiary of the Plaintiff so that, in place of the Huiyu Shares which the Plaintiff previously directly owned, it was given full ownership of Smart City.  In this court’s view, that fact is not something which would have been relevant to Mimmie Chan J’s assessment of Lau’s ex parte application.  The fact that the Defendants now raise this point in support of its submission that there is no serious issue to be tried is neither here nor there—the point is an unmeritorious one and has been rightfully dismissed by this court.

42.  Third, the Defendants submit that Lau has misleadingly painted a picture of Chu’s alleged low commercial morality in Lau 1—all the while failing to fairly draw the court’s attention to the committal proceedings which he and his camp were involved in, which involved the undisputed fact of false evidence and fabricated documents.  At the very least, the animosity between the parties ought to have been highlighted so that the court could appreciate the possibility of Lau having ulterior motives in seeking leave.

43.  To start with, the animosity between Lau and Chu has been more than sufficiently highlighted in Lau 1 at para 164 when he listed out the large number of legal actions between the two.  Further, as far as the committal proceedings are concerned, Lau is not involved in the said proceedings and he in fact has disclosed the existence of the committal proceedings commenced by Chu against inter alia certain employees of the Pacific Bulk Group at paras 164(e) and 168 of Lau 1.  But most important of all, this court cannot see how the committal proceedings could be material to the subject matter of the derivative action—no attempt was made by the Defendants to explain their relevance in their skeleton submissions. 

Abuse of process

44.  This ground can be disposed of swiftly.

45.  Firstly, this court has already held that there are serious issues to be tried and that on the face of the application, the proposed action appears to be in the interests of the Plaintiff.  If so, it is difficult to envisage in what circumstances it can appropriately be said that the leave application is an abuse of process such that the court should refuse to exercise its discretion to grant leave.

46.  In Tremendous Success Holdings Ltd & Anr v Sinosoft Technology Group Ltd & Ors unrep, HCA 2345/2013, HCA 1613/2013 & HCA 2423/2013, DHCJ A Yip SC, 11 July 2016, the learned Deputy Judge, at [387] and [396], appeared to accept the argument that a plaintiff who brought a derivative action not in the interests of the company but for an ulterior motive could be such a circumstance.  However, there must be “strong and convincing” arguments in support of the conclusion that the plaintiffs were driven by ulterior motives other than for the benefit of the company in question: see [414].

47.  On the evidence, this court is not satisfied that Lau was driven by ulterior motives in seeking leave to institute a derivative action against the Defendants.  In the Defendants’ skeleton submissions, all they could submit in terms of ulterior motives is set out in a handful of paragraphs which can conveniently be reproduced here for ease of reference:

“63. When the Court takes into account the animosity between the parties, as set out in Section B above, it is apparent that this application is grounded, at least in part, on the intention of Lau to undermine Chu’s commercial integrity and standing by making (further) unfounded allegations of misappropriation and breach of fiduciary duty.

64. Ultimately, this is another offshoot of the dispute between business partners… There is no real benefit to the Company in bringing this claim (if any). In contrast, Lau appears to be driven by ulterior motives, which ought to be a reason the Court decides to set aside leave given.

65. In addition, the present action (and in particular the Injunction Order and subsequent Undertakings) offer Lau a ‘shortcut’ to various documents of Huiyu…which are not accessible to him as part of discovery in HCA 228/2012.

66. It is submitted that the Court ought to take into accountthe juridical advantage offered to Lau by reason of this application, and the possibility that these proceedings are commenced with an ulterior motive to, inter alia, gain access to documents ‘through the backdoor’ as well as further harass Chu.” (emphasis added)

48.  As submitted by Mr Anson Wong SC, which this court agrees, if Lau could satisfy the Serious Question Requirement and the Interests of the Company Requirement, the mere fact that Lau and Chu were and are engaged in broader disputes and hostile litigation is not evidence from which this court can readily infer that the leave application was for an ulterior motive and hence an abuse of process.  Nor would it suffice for the Defendants to assert that there is a mere “possibility” that these proceedings are commenced with an ulterior motive.  Lastly, the possibility that Lau may gain a “juridical advantage” if the Defendants are ordered to give discovery of documents in the derivative action is not evidence at all that the leave application was for an ulterior motive.  Whether any discovery of documents is to be ordered against the Defendants in the derivative action is not up to Lau—it is subject to adjudication by the court.

49.  To conclude, in this court’s view, there is little, if any, evidence from which the court can infer ulterior motive and hence abuse of process on the part of Lau in making the leave application.  Further, the submissions made by the Defendants can hardly be regarded as “strong and convincing” arguments.  For these reasons, this ground of “abuse of process” must also be rejected.

Conclusion

50.  For the above reasons, the Setting Aside Summons must be dismissed.

Deliberation - Strike-out Summons

51.  The legal principles governing a striking out application are well-established and uncontroversial.  Suffice it for this court to recite a few familiar propositions.

(1)  It is only in plain and obvious cases that the Court should exercise its summary power to strike out—the onus to demonstrate this is on the party applying.

(2)  There should be no trial on affidavit and disputed facts are to be taken in favour of the party sought to be struck out.

(3)  The claim must be obviously unsustainable, the pleadings[4] unarguably bad and that it must be impossible, not just improbable, for the case to succeed before the Court would strike out.

(4)  A proceeding is frivolous when it is not capable of reasoned argument, without foundation, or where it cannot possibly succeed. A proceeding is vexatious when it is oppressive and/or lacks bona fides.

(5)  To decide that a litigant has been frivolous or vexatious and thus has abused the process of the Court is a serious finding to make, for it will generally involve bad faith on his part and one would expect the discretion to be sparingly exercised.

(6)  If an action is not launched with the genuine object of obtaining the relief claimed, but in order to achieve some collateral purpose or for an ulterior motive, that would prima facie be an abuse of process.

52.  In this case, the basis of the Defendants’ Strike-out Summons is substantially the same as their Setting Aside Summons[5].  This can be seen by comparing the Defendants’ skeleton submissions in support of the Strike-out Summons with those in support of the Setting Aside Summons. 

53.  Essentially, the Defendants rely on the fact that, almost simultaneously with the Huiyu Shares Transfer, Smart City became a wholly owned subsidiary of the Plaintiff and thus the Plaintiff has been given an asset with exactly the same value.  Therefore, they submit that there was no misappropriation of the Huiyu Shares, the Plaintiff has not suffered any prejudice, loss or detriment as a result of the Huiyu Shares Transfer and Chu and Kwong have derived no benefit or gain at all from it.  These arguments have been summarized above under the section “No serious issue to be tried” and rejected by this court.  The submission that the Plaintiff’s claim cannot possibly succeed must fail.

54.  The Defendants next submit that the commencement of the derivative action is for an ulterior motive and an abuse of process.  These arguments have also been summarized above under the section “Abuse of Process” and equally rejected by this court.

55.  For the above reasons, this court is far from satisfied that the Defendants have demonstrated that the Indorsement of Claim is frivolous, vexatious, or otherwise an abuse of the process of the Court.  The Strike‑out Summons must also be dismissed.

Disposition and costs order nisi

56.  The Setting Aside Summons and the Strike-out Summons are hereby dismissed.  There shall be an order nisi that costs of the Setting Aside Summons be to the Applicant in HCMP 315/2019 and costs of the Strike-out Summons be to the Plaintiff in HCA 379/2019, to be taxed if not agreed, and paid by the Defendants forthwith, certificate for two counsel.

57.  Lastly, this court thanks counsel on both sides for their helpful assistance.