Poon Ka Man Jason v. Cheng Wai Tao and Others

HCA 304/2011

[2019] HKCFI 938

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 304 OF 2011

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D E C I S I O N

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1.This is an application by the plaintiff for an order effectively to vary a direction previously made by this court that would prevent the 2^nd defendant (the Company) from participating at the substantive hearing of the Sanctioned Payment Summons.

2.The relevant background has been set out in a decision dated 13 April 2018 at paragraphs 3 to 20.  In substance, the plaintiff in this derivative action, has won on the question of liability.  There is an order for an account of profits to be taken.

3.D1 made a sanctioned payment of $40 million in settlement of the plaintiff’s entire claim.  At the plaintiff’s request, an EGM of D2 was convened to consider the sanctioned payment.  At the EGM, the plaintiff was told for the first time that D1 had purportedly transferred all but one of his shares in the Company to D32 and D33 (who the plaintiff says were D1’s nominees). The transfer was just five days before the EGM.

4.Relying on that purported transfer, D32 to D33 voted and a resolution was passed to accept the sanctioned payment (“the EGM resolution”).

5.D1 has, however, remained the sole director of D2 to date.  The plaintiff disputed the validity of the purported transfer.  Had there been no such transfer, D1 would not have been entitled to vote on his shares, as his interest was in conflict with that of other shareholders and the EGM resolution would have been defeated.

6.D2, under the control of D1, issued a Sanctioned Payment Summons seeking leave for the Company, alternatively the plaintiff, to accept the sanctioned payment.  This summons is due to be heard substantively on 15 April 2019.

7.On 8 February 2018, this court has directed that D2’s participation and attendance at the substantive hearing of the Sanctioned Payment Summons be excused, unless otherwise ordered by the court.

8.The remaining parties were directed to prepare a list of issues and scope of matters for cross-examination.  In the joint list of issues, subsequently submitted to the court, some of the issues, as framed by the plaintiff were disputed.  Of importance are:

Issues 3 to 5: whether the share transfer from D1 to D32 and D33 was valid, and whether it was in accordance with D2’s constitution.

Issue 10: whether Order 22, rules 15 and 18 of the Rules of the High Court, or the inherent jurisdiction of the court, allow the defendant, such as the Company, to accept the sanctioned payment or allow the court to require the plaintiff to accept the sanctioned payment against his wish.

9.D1, D3 to D31, stated that if issues 3 to 5 or 10 were allowed, then the court would be invited to make an order for the participation and attendance of D2 at the substantive hearing of the Sanctioned Payment Summons.

10.By paragraph 5 of the direction made on paper on 13 November 2018, this court directed that out of abundance of caution and at the invitation of D1, D3 to D31, the court was minded to permit D2 to participate at the hearing of the Sanctioned Payment Summons (“the direction”).

11.No order regarding the direction has been drafted up.  By a summons dated 30 January 2019, the plaintiff applied to vary the direction pursuant to Order 1B, rules 2(2), (4), (5) and (6)(a) and Order 32, rule 6 of the Rules of the High Court and the inherent jurisdiction of the court.

12.Alternatively, the plaintiff suggested that D2’s participation should only be permitted on certain conditions.  The defendants opposed this application on various procedural and substantive grounds. 

13.D2 makes clear it does not intend to take an active role in the conflict between different camps of shareholders, but wishes to address the court on issues 3 to 5 and 10.  D2 claims that it cannot rely on other defendants to protect interests of its shareholders.  See for example, paragraph 34 of Mr Nip’s submission on behalf of D2.

Procedural Objections

14.The direction was not an ex-parte order as it was made after the parties made submissions on other matters.  Order 32, rule 6 of the Rules of the High Court did not apply.  Although the parties were fully engaged in the process of making representations to the court, the direction itself was made without a summons taken out by D1, D3 to D33 and was made in the context of a discussion to settle the list of issues.

15.The plaintiff had not then sought leave to respond and the court carefully stated that it was minded to permit D2 to participate in the proceedings.  It was, in substance, an order made by the court on its own volition.

16.Unfortunately, the direction did not state the time within which a party could apply to vary it, so the default time was 14 days.  The plaintiff’s present application was made beyond time: Order 1B, rule 2(6)(b).

17.However, I do think I can invoke the inherent jurisdiction of the court to vary the direction if there are exceptional circumstances or good reasons to do so.  See HKSAR v Tin’s Label Factory Ltd (2008) 11 HKCFAR 637, §§31-32.

18.Li CJ held, amongst others, that:

“31. … the occasion when the court is reconvened to consider the reopening of a decision should be exceptional, the judge must be vigilant in not allowing an unsuccessful party to invoke this power in order to re‑argue his case. Where the judge has properly considered his original decision, it would rarely occur that he would need to re‑open it on his own motion. …

32.     … in exceptional cases where the court is reconvened, the judge must exercise great caution in determining whether to alter his original decision.  Where the judge is firmly satisfied that his previous decision was incorrect and that alteration is necessary to ensure that justice is done, alteration would be justified.  In such cases, the delay, expense and uncertainty involved in a further appeal would be avoided.”

Analysis of the Application for Variation

19.As pointed out by the defendants, there has been no material change of circumstances since the giving of the direction.  But having heard D2, I am not convinced that issues 3 to 5 require D2’s presence at the April hearing.  Those issues involve disputes between shareholders, in particular the plaintiff on the one hand and D1, D32 to D33 on the other.  D2 simply needs only to abide by the court’s order.

20.Mr Nip refers to the need for D2 to address the court on interpretation of certain articles of the company.  With respect, that interpretation is something to be dealt with by the two opposing camps of shareholders anyway. Mr Nip is unable to point to anything additional which only D2 could address, but not the relevant defendants and the plaintiff.  I do not see the need for D2 to be present, as regards issues 3 to 5.

21.Next is issue 10, which the parties describe as ‘jurisdictional challenge’.  The plaintiff’s case, on affirmation, is that the Sanctioned Payment Summons was wholly misconceived. Neither rule 15 nor 18 of Order 22 enable a co‑defendant to accept sanctioned payments made to the plaintiff or compel the plaintiff to accept a sanctioned payment.

22.This part of the plaintiff’s case arguably did not form part of paragraphs 7(a) to (c) of Shiu-1^st, but only first appeared in paragraph 8 of Poon-2^nd dated 19 April 2018, after the court has directed that D2’s participation be excused.

23.It seems to be a jurisdictional challenge which does not depend on which shareholder was in the right and which was in the wrong.  Ms Linda Chan, SC, for the plaintiff, has explained that this is simply to argue the construction of Order 22, rules 15 and 18.  She claims that the court has no jurisdiction to allow a defendant to accept a sanctioned payment since those rules only refer to acceptance by a plaintiff.  This is a legal point which can be addressed by any of the opposing camp of defendants.

24.I do accept, as a matter of general principle, that whilst the company is a nominal defendant, and should not take an active part in the proceedings, it is not an incontrovertible rule that the company may never participate in what started off as a derivative action.  Mr Nip has referred me to the case of Waddington Ltd v Chan Chun Hoo Thomas & ors [2019] 1 HKLRD 271, 5 December 2018, Chow J, where the company applied for payment out of moneys in court.

25.From paragraph 44 of Mr Nip’s written submission, it appears that all that D2 wants to advance, is that it was acting independently in taking out the Sanctioned Payment Summons to give effect to the EGM resolution.  D2 could not simply rely on representations from the defendants’ camp when the Company also has interests of other minority shareholders who are not parties to protect.

26.Without disrespect, D2’s stance is nothing beyond stating the obvious primary facts.  Whether D2 is bound to give effect to the EGM rests on resolution of issues 3 to 5.  The so‑called jurisdiction point is a question of interpretation of the rules which the plaintiff’s camp and the defendants’ camps have to address anyway.  In fact, leave was first granted to D32 and D33 to be joined as parties to support the Sanctioned Payment Summons.

27.More importantly, D1, D3 to D31, have not referred me to my decision dated 13 April 2018, when they invited me to consider letting D2 participate at the substantive hearing for the Sanctioned Payment Summons.  At the hearing which led to that decision, D2 was already excused from attendance and participation.  Paragraph 46 of that decision, in effect, contained in substance what is issue 10.

28.The plaintiff’s stance has not changed on issue 10.  D2 has never, since the decision of 13 April 2018, seen fit to apply to participate at the Sanctioned Payment Summons hearing.

29.Mr Nip’s certificate as to estimates of hearing time for the substantive hearing indicated that D2 would need to spend only about 5 minutes on each witness, just in case cross-examination is needed.  The time to address the court, if allowed to participate on issue 10, is probably not more than half an hour’s oral submission, in my estimation.

30.D2’s participation would not derail the substantive hearing of the Sanctioned Payment Summons.  However, these are not good reasons to let D2 incur costs for an unnecessary attendance.

31.The court does not favour issue-based applications or unnecessary interlocutory applications.  However, taking all circumstances into account, I do find that the court has mistakenly been over cautious in allowing the Company to participate on issues which have not been newly raised by the plaintiff, and which will be dealt with by the opposing camps of defendants anyway, at the substantive hearing.

32.It would be unjust to require D2 to incur costs in an unnecessary attendance, especially since the plaintiff represents about one‑third of the shareholding.

33.I do find that all these factors, taken together, to be exceptional circumstances which require this court to vary the decision which was then made without hearing the plaintiff.

34.I therefore make an order in terms of paragraph 1 of the plaintiff’s summons.

35.As to costs, as a matter of principle, costs should follow the event. All the defendants should bear the costs of the plaintiff.  However, as stated before, if D2 were to bear costs, effectively the plaintiff representing about 1/3 of the shareholding, will have to bear 1/3 of the costs.

36.Since D1, D3 to D31, D32 and D33 have admittedly supported D2 at this hearing and counsel admitted that those defendants ought also to bear part of the costs, I make an order nisi that D1, D3 to D31, D32 and D33 should bear the costs of the plaintiff with certificates for two counsel.

37.There shall be summary assessment of costs of the plaintiff on the papers on 4 March 2019.  A cost statement is to be filed and served by the plaintiff on 27 February 2019, before close of business.  Grounds in opposition are to be filed and served by 4 pm on 1 March 2019.  I also give liberty to the plaintiff to apply for personal costs, wasted costs or other appropriate costs orders, if so advised, against persons behind D2, the Company, who instigated this opposition within 28 days after judgment in the Sanctioned Payment Summons is handed down.

Ms Linda Chan SC leading Mr Thomas Wong, instructed by T H Koo & Associates for the plaintiff

Mr Lee Tung Ming, instructed by T K Tsui & Co, for the 1^st, 3^rd to 31^st defendants

Mr Norman Nip, instructed by Anthony Siu & Co, for the 2^nd defendant

Mr CY Li SC leading Mr Lawrence Cheung, instructed by Lau Chan & Ko, for the 32^nd and 33^rd defendants