Hao Xiaoying v. Green Valley Investment Ltd

HCMP 1394/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1394 OF 2015

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J U D G M E N T

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1.In this application, taken out under s.733 of the Companies Ordinance, Cap. 622 (“Ordinance”), the Applicant (“Hao”) seeks (a) leave to commence a statutory derivative action against Mr Wong Yiu Lam William (“Wong”) for an account (with consequential relief) of the sum of RMB16,000,000, being compensation (“Compensation”) paid to the Respondent (“Company”) (see below), and (b) an order that his costs in pursuing the derivative action be indemnified by the Company.

2.This application is related to the one dealt by this court on 17 February 2016 (an application by Hao for inspection of the Company’s records pursuant to s.740 of the Ordinance), and is a continuation of the protracted dispute between Hao and, inter alia, Wong.  I would adopt the thumbnail sketch of the background facts set out in the decision dated 17 February 2016 on the inspection application :

“2.  Hao is a 20% shareholder of the Company. There is a history of litigations in both Hong Kong and the Mainland between Hao and the Company (and those in control of it).

3.  The Company is controlled by Mr William Yiu Lam Wong (“Wong”), Mr Huang Kwang Min (“Huang”) and Mr Lau Yan Yin (“Lau”). They are the only directors of the Company and they each own 20% of the shares in it. The other 20% shareholder is Mr Lu Jia Don (“Lu”). It should be pointed out that Wong is the only effective director of the Company since 2007 because none of the other 2 directors has any involvement in its management since then.

4.  The Company has been dormant since 2004, save for the conduct of a number of litigations in the Mainland. Some of those litigations are against Hao, his wife (“Chiu”) and Lu. Prior to becoming dormant, the Company’s only business was its investment in a Mainland joint venture company (“JV Company”) (holding 55% of its interest), which was engaged in property development in Shanghai.

5.  In simple terms, the Mainland litigations arose out of alleged wrongdoings on the part of Hao, Chiu and Lu in misappropriating the Company’s interest in the JV Company by incorporating a Canadian company with a name similar to that of the Company and transferring the 55% interest to the Canadian company. Thereafter, the profits derived from the JV Company were pocketed by those wrongdoers.

6.  There is a judgment by the Mainland court against Hao, Chiu and Lu whereby the Company’s misappropriation claim was upheld against them and they were ordered to pay damages to the Company of nearly RMB48 million with interest (“Mainland Judgment”). Their appeal against the Mainland Judgment has been rejected very recently. It is, however, suggested that there is a further appeal against the same.

7.  On 26 September 2013, this court made an order (“Order”) for production of documents against the Company in favour of Hao pursuant to s.152FA of the former Companies Ordinance, Cap 32 (the predecessor of s.740) in HCMP 837/2013. The documents related to a large sum of compensation (RMB16 million) (“1st Compensation”) received by the Company in the Mainland.

8.  However, the Order was not complied with, resulting in contempt proceedings (HCMP 1968/2014) against Wong, Huang and Lau as the Company’s directors. By a judgment dated 2 March 2015 (“Judgment”), each of them was held to be in contempt of court. I have been informed that there is an appeal against the Judgement, which is primarily concerned with the proper construction of the Order. The appeal was heard 2 weeks ago with judgment pending.

9.  The above provides a thumbnail sketch of the background of this application.  Some of the details can be found in paras 2 to 32 of the Judgment.  I do not propose to repeat them here.  This application may be seen to be a continuation of the 2013 production application. …”

3.Wong was allowed to purge his contempt by providing full explanation of the transfers and/or use of the Compensation and documents supporting the explanation.  Huang and Lau were fined for their contempt.  The primary reason for the different treatment was that, apart from the lack of participation in the management of the Company by Huang and Lau, it was undisputed that the Compensation went into the hands of Wong.

4.Two affirmations were filed by Wong to purge his contempt, dated respectively 9 March 2015 (“Wong 2^nd”) and 13 April 2015 (“Wong 3^rd”) (collectively, “Wong’s Affirmations”).

5.Wong’s Affirmations revealed that he had been using the Compensation for his personal purposes.  It is a matter which was alluded to in para 28 of the Judgment[1].  On 29 April 2015, pursuant to s.733 Hao gave notice of the present application to the Company. The Company has failed to take any action against Wong up to now.

6.The appeal against the Judgment was dismissed.

Law

7.There is no issue on the applicable principles of law and, with gratitude, I adopt with modifications the summary of the same set out in the skeleton arguments lodged by the parties as follows.

8.On an application for leave to commence statutory derivative action on behalf of a company, it is incumbent upon the applicant to satisfy the court that (see s.733(1)) :

(a)  On the face of the application, it appears to be in the interest of the company that leave be granted;

(b)  There is a serious question to be tried and that the company has not itself brought the proceedings;

(c)  The applicant has served a written notice on the company in accordance with s.733(3).

9.There is no dispute that the written notice requirement has been satisfied in this case.  The Company has not itself brought proceedings against Wong in relation to the Compensation.

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][2] 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).

Analysis

12.With respect, this is an open and shut case.  Wong must be liable to account for the use of the Company’s money, and to repay any profit made in doing so.  The only argument advanced by Mr Chan on Wong’s behalf is that a detailed account had been given in Wong 3^rd on the flow of funds in his various bank accounts after receiving the Compensation, and that Wong had in fact repaid to the Company on 20 November 2013 more than the equivalent of what he had received.  It was therefore argued that a further account would only yield the same information, and not serve any practical purpose.

13.I am unable to accept the above submissions.  First of all, it is not the function of this application to examine the details of the rights and wrongs.  Suffice it to say that part of the Compensation, a total sum of RMB 4.7 million, was received by Wong in cash in 2009.  He alleged in Wong 2^nd that the money was lent to a friend as an interest free loan.  On the face of such evidence, the Company has lost the use of the money for 4 years and has not been compensated for the same.  There is no reason to believe that the account given in Wong’s Affirmations is conclusive.  I am not satisfied that this application is of no practical benefit to the Company.

14.In the premises, I am satisfied that this application should be granted.  I make an order in terms of para 1 of the Originating Summons dated 8 June 2015 with the amendment that the intended proceedings should be substantially in the form of the draft Statement of Claim attached to the Originating Summons.

Conduct of the derivative action

15.This hearing was adjourned on 18 February 2016 because of the court’s concern whether Hao should have the conduct of the intended action, and the parties were given the opportunity to explore other alternatives.

16.In respect of the above concern, there is clearly animosity between Hao and Wong given the years of bitter legal battles.  As noted in para 25 of the decision dated 17 February 2016 :

“I have little doubt that Hao has also the agenda to put as much pressure as he can on the Company and Wong, probably with the hope to secure a favourable settlement over the Mainland proceedings. …”

17.However, the parties are in agreement that there is no other alternative.  This court lacks the power to order that the intended action be conducted by, eg, a solicitor appointed for the purpose.  I am grateful to Mr Chan and Mr Dawes SC, who appeared for Hao with Mr Man, for having assisted the court on the relevant statutory provisions, namely, ss.731-738 of the Ordinance.  In addition, I have been referred to a number of authorities which shed some light on this issue: Swansson v R A Pratt Properties Pty Ltd & Anr [2002] NSWSC 583, §41; Lewis v Nortex Pty Ltd (in liq) [2006] NSWSC 768, §5; Wishart v Castlecroft Securities Ltd [2010] BCC 161, §33; Re Lucky Money Ltd, HCMP 505/2006, unrep, 18 July 2006, §46; and Hawksford v Hawksford [2005] NSWSC 463, §76.

18.With respect, the observation of Palmer J made in para 5 of Lewis v Nortex Pty Ltd (in liq) should be quoted :

“However, it is not the law that a plaintiff is prevented from bringing a cause of action against another by the sole consideration that he or she is motivated by ill will against the defendant. A prima facie good cause of action does not become an abuse of process merely because the plaintiff harbours ill will against the defendant: the action, if prima facie a good one, will only be an abuse of process if it is prosecuted for an ulterior purpose, i.e., to achieve an end for which it is not designed: … .”

19.Despite my misgivings about Hao’s motive in making this application, I am not prepared to go so far as holding that this is an abuse of process given the fact that the Company is entitled to recourse against Wong for the use of its money.

20.In the premises, Hao should have the conduct of the derivative proceedings.

Costs of the derivative action

21.Pursuant to s.738(3) of the Ordinance, the court may only make an order requiring the Company to indemnify Hao against the costs to be incurred by him in bringing the derivative action if it is satisfied that he is acting in good faith in, and has reasonable grounds for, making this application. 

22.There is also a requirement that before the court can make such an order, there must be evidence as to the company’s ability to pay the costs of the proposed derivative action as at the time that leave is sought: see Re F & S Express Ltd [2005] 4 HKLRD 743, §28. There is no issue in this regard given the evidence that the Compensation had been repaid to the Company by Wong.

23.For two reasons, I agree with Mr Chan that the court should not make an order now for the Company to indemnify Hao on the costs of the derivative action.  Firstly, Hao is indebted to the Company to the tune of RMB 47.7 million.  Secondly, the manner in which he conducts the derivative proceedings is likely to shed light on his good faith, and thus relevant to the decision in question. 

24.I adopt the course taken in Re Lucky Money Ltd, §59, ie, to defer this decision and grant liberty to apply. 

Costs of this application

25.The Company is under the sole management of Wong.  It should be said that Wong is clearly in a position where his personal interest conflicts with that of the Company.  His resistance to this application has failed.  He is fortunate that he has not been joined as a party to this application so that a costs order can be made against him personally.

26.In these circumstances, the appropriate order is that the costs of these proceedings be borne by the Company on an indemnity basis and payable forthwith, such costs be in the cause of the intended derivative proceedings.

27.Last but not least, I am grateful to counsel for their assistance in these matters.

Mr Victor Dawes SC and Mr James Man instructed by Tony Kan & Co, for the applicant

Mr Derek J Y Chan, instructed by Fan Wong & Tso, for the respondent