Case Document

100%Judiciary

HCMP 693/2018

[2019] HKCFI 1154

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 693 OF 2018

_______________

	IN THE MATTER of Promising Securities Company Limited (昌盛證券有限公司) (No.746052)
	and
	IN THE MATTER of section 724 of the Companies Ordinance (Cap 622)

BETWEEN

	CHAN KAM YAU (陳金友)	1^st Petitioner
	CHAN CHI HUNG (陳志鴻)	2^nd Petitioner
	and
	CHAN HUI KI TUP (陳許琪沓)	1^st Respondent
	CHEN CHING SHENG (陳卿勝)	2^nd Respondent
	TAI LAI MING (戴黎明), administratrix of the estate of CHAN HING TING (陳卿庭), DECEASED	3^rd Respondent
	WARREN SANTIAGO NG	4^th Respondent
	WONG TSZ KWAN LINDA (王子君)	5^th Respondent
	CHAN CHI FUK (陳子福)	6^th Respondent
	PROMISING SECURITIES COMPANY LIMITED (昌盛證券有限公司)	7^th Respondent

_______________

Before:

Hon Lisa Wong J in Chambers (Open to Public)

Date of Hearing:	3 April 2019
Date of Decision:	29 April 2019

_______________

D E C I S I O N

_______________

A. THE APPLICATION AND GROUNDS THEREFOR

1.Before the court is the 1^st respondent’s application, by summons dated 18 September 2018, to strike out paragraph 44 and prayer paragraph (1) of the points of claim dated 21 August 2018, insofar as they concern the 1^st respondent, for disclosing no reasonable cause of action and/or being frivolous, vexatious or otherwise an abuse of process (“Application”).

B. BACKGROUND

2.The following facts and allegations are taken from the points of claim, which I have to assume to be true in determining the Application (see paragraph 57(2) below)[1].

B1. Promising Securities Company

3.Mr CHAN Kam Yau (the 1^st petitioner) and Mr CHAN Hing Sum, the late husband Madam CHAN HUI Ki Tup (the 1^st respondent), were long-time friends.

4.The 2 gentlemen and members of their respective families had carried on business providing financial services, including securities brokerage and dealing services, under the style or name of “Promising Securities Company” (“PSC”) since April 1987.

5.PSC’s business was, for the sake of convenience, registered in Chan Hing Sum’s sole name. Nevertheless, it was established and operated as a partnership with the following partners holding shares as follows:

Partners Relationship with 1^st petitioner/Chan Hing Sum Investment (HK$) Share

1^st petitioner 600,000 24%

Madam TAI Lai Wah 1^st petitioner’s late wife 100,000 4%

Chan Hing Sum 400,000 16%

1^st respondent Chan Hing Sum’s wife 100,000 4%

Mr CHEN Ching Sheng, 2^nd respondent Chan Hing Sum’s brother 400,000 16%

Mr CHAN Hing Ting Chan Hing Sum’s brother 400,000 16%

Mr CHAN Hing Yin Chan Hing Sum’s brother 400,000 16%

Madam CHAN Hing Man Chan Hing Sum’s sister 100,000 4%

6.It is the petitioners’ case that:

(1)  Although PSC had 8 partners, it was formed on the basis of the personal relationship between the 1^st petitioner and Chan Hing Sum.

(2)  It was agreed and/or understood by all the partners of PSC that the 1^st petitioner and Chan Hing Sum were the founding and managing partners and they were jointly in charge of managing and running all the business and operation of PSC.

(3)  Since the establishment of PSC, there existed a personal relationship of mutual trust and confidence between (a) the 1^st petitioner and members of his family and (b) Chan Hing Sum and members of his family, upon which they continued to participate in the business and affairs of PSC. And it was the intention of all partners that each of the 2 families should have an equal share in PSC’s management and operation, from which neither should be excluded (“alleged fundamental relationship”).

(4)  Further or alternatively, there had been a fundamental understanding and mutual expectation between the 2 families (“alleged fundamental understanding”):

(a)  that both families would consult each other in respect of all decisions concerning the affairs of PSC, and neither would make any major decisions for or on behalf of PSC without the consent of each other;

(b)  that both families would have an equal right to participate in, and neither should be excluded from, the management and operation of PSC;

(c)  that the 1^st petitioner and Chan Hing Sum should, in particular, be treated equally, and should each take an executive role, in the management and operation of PSC and have an equal say in the making of major or strategic decisions affecting PSC’s affairs with equal status and benefits.

7.The petitioners also contend that PSC had acquired/made various assets/investments in Chan Hing Sum’s name on trust for PSC.

8.More particularly and insofar as it is material, the premises known as Office Unit C, 14/F, Wing Cheong Commercial Building, 19-25 Jervois Street, Hong Kong (“14C Office”) was purchased on about 5 March 1990 for HK$885,000 subject to a mortgage in favour of Kincheng Banking Corporation to secure banking facilities used and repaid by PSC.

9.Further, after Hong Kong Exchanges and Clearing Limited (“HKEX”) was listed on The Stock Exchange of Hong Kong Limited (“SEHK”) on 27 June 2000, Chan Hing Sum as the registered sole proprietor of PSC was allotted 1,610,000 shares in HKEX (“HKEX Shares”). In about 2001, 410,000 shares of the HKEX Shares were sold to acquire the following shares (“Trust Stocks” collectively) through Chan Hing Sum’s securities accounts on trust for PSC:

(1)  10,000 shares in Cheung Kong Limited;

(2)  10,000 shares in CK Hutchison Holdings Limited; and

(3)  31,367 shares in The Hongkong and Shanghai Banking Corporation Limited.

10.Also, in about 2002, as former holders of convertible notes through an investment of HK$50,000 made by PSC in about 1989 or 1990, Chan Hing Sum as trustee for PSC became entitled to 2,574,000 shares of and in Stockmartnet Holdings Limited (“SHL Shares” and included in “Trust Stocks”).

B2. The Company

B2.1 Formation

11.In about 2001, it became necessary for PSC to be incorporated in order to continue its business and operation under the then forthcoming new securities trading regulations.

12.According to the petitioners, it was agreed by all the partners of PSC that all the assets and capital of PSC should be injected into the new company to be formed to continue the business and operation of PSC on the basis of the alleged fundamental relationship and the alleged fundamental understanding.

13.In consequence, the 7^th respondent (“Company”) was incorporated as a private company with limited liability under the then Companies Ordinance (Cap 32) (“Old CO”) on 2 February 2001.

14.It is the petitioners’ case that the Company has been (and remains) a quasi-partnership company based upon the alleged fundamental relationship and the alleged fundamental understanding, which continued to be put into effect. For some years, the business of the Company was conducted harmoniously and with consultation between the 1^st petitioner and Chan Hing Sum, representing their respective families and based upon their personal relationship of mutual trust and confidence.

B2.2 Share capital and shareholding

15.After several increases of capital and allotments of shares, by about October 2008, the issued share capital of the Company was HK$30 million divided into 30,000,000 ordinary shares of HK$1 each, all of which had been issued and were fully paid up or credited as fully paid and held by the 1^st petitioner and Chan Hing Sum and members of their respective families in percentages which, the petitioners say, ultimately correspond with the two families’ interests in PSC as follows:

PSC Company

1^st petitioner’s family (holding 28% shares in PSC and then in the Company) 24% by 1^st petitioner Same

4% by Tai Lai Wah (late wife of 1^st petitioner) 4% by Mr CHAN Chi Hung (2^nd petitioner) who is 1^st petitioner and Tai Lai Wah’s son

Chan Hing Sum’s family (holding 72% shares in PSC and then in the Company) 16% by Chan Hing Sum and 4% by 1^st respondent (his wife) 20% by Chan Hing Sum

16% by 2^nd respondent Same

16% by Chan Hing Ting Same

16% by Chan Hing Yin 16% by Mr Warren Santiago NG (4^th respondent), Chan Hing Yin’s son

4% by Chan Hing Man 4% by Madam WONG Tsz Kwan Linda (5^th respondent), Chan Hing Man’s daughter

16.Prior to 20 March 2017, the issued shares of the Company were held as follows:

Member Number of shares Percentage of shareholding

1^st petitioner 7,200,000 24%

2^nd petitioner 1,200,000 4%

1^st respondent (to whom Chan Hing Sum’s shares were transferred on 28 October 2015 after his death) 6,000,000 20%

The 2^nd respondent 4,800,000 16%

The estate of Chan Hing Ting, of which his widow, Madam TAI Lai Ming (3^rd respondent) is the administratrix 4,800,000 16%

4^th respondent 4,800,000 16%

5^th respondent 1,200,000 4%

30,000,000 100%

B2.3 Directorship and management

17.The Company’s board has since 2002 been made of the following directors:

Period Directors Remarks

3 January 2002 –
9 August 2004 1^st petitioner
Chan Hing Sum
Chan Hing Ting
2^nd Respondent

10 August 2004 –
1 September 2004 1^st petitioner
Chan Hing Sum
Chan Hing Ting 2^nd respondent resigned as director.

2 September 2004 –
15 December 2004 Chan Hing Sum
Chan Hing Ting 1^st petitioner temporarily resigned as director.

16 December 2004 –
14 September 2013 1^st petitioner
Chan Hing Sum
Chan Hing Ting 1^st petitioner was re-appointed as director.

15 September 2013 –
20 May 2016 1^st petitioner
Chan Hing Ting Chan Hing Sum passed away on 15 September 2013.

21 May 2016 –
25 May 2016 1^st petitioner Chan Hing Ting passed away on 21 May 2016

26 May 2016 –
9 November 2016 1^st petitioner
2^nd petitioner

10 November 2016 –
17 November 2016 1^st petitioner
2^nd petitioner
3^rd respondent
Madam CHAN Chi Fuk (6^th respondent), 2^nd respondent’s daughter

18 November 2016 –
27 February 2017 1^st petitioner
Madam TAI Sau Man (2^nd respondent’s wife)
6^th respondent 2^nd petitioner was removed and replaced by Tai Sau Man as director (see paragraph 39 below).

28 February 2017 –
31 August 2017 1^st petitioner
Tai Sau Man
6^th respondent
Mr MAK Chi Leung

1 September 2017 to present 6^th respondent
Tai Sau Man
Mak Chi Leung 1^st petitioner was not re-elected as director (see paragraph 35 below).

18.It is to be noted that the 1^st petitioner was, save for the period between 2 September and 15 December 2004 a director of the Company from its incorporation until 1 September 2017, while the 2^nd petitioner occupied such a position between 26 May and 18 November 2016.

B2.4 Business

19.From 2004 onwards, the Company took over and continued the business of PSC. Since 2 January 2004, the Company has been

(1) registered with the Securities and Futures Commission (“SFC”) with a Type 1 Licence for dealing in securities, and has been providing various financial services including brokerage services for securities, traded on SEHK; and

(2) an exchange participant under HKEX in place of PSC.

20.The following individuals have/had been licensed as the Company’s responsible officers (“RO”) / representatives with the SFC:

Name Licensed position(s)

1^st petitioner RO

2^nd petitioner RO (27.6.2016 – 30.12.2016)
Representative (13.6.2005 – 30.12.2016)[2]

Mak Chi Leung RO (since 13.12.2016)[3]
Representative (since 19.11.2016)

Shum Yiu Fai RO (since 3.1.2017)
Representative (since date not pleaded)[4]

1^st respondent Representative

2^nd respondent Representative

Ho Wai Man Representative

Kong Ting Representative

Ng Chit Kuen Representative

B2.5 Assets

21.As stated in paragraph 12 above, all the partners of PSC agreed to inject all the assets and capital of PSC into the Company which, the petitioners say, included the 14C Office and the Trust Stocks registered in the name of Chan Hing Sum on trust for PSC so that, after the incorporation of the Company, Chan Hing Sum became the trustee of these properties for the Company.

22.In addition to the above-mentioned Trust Stocks, in about April 2010, Chan Hing Sum, as trustee for the Company, through subscribing to an open offer, acquired 514,800 more SHL Shares, thereby increasing the SHL Shares held by him on trust for the Company to 3,088,800 shares. The petitioners reckon that as at the death of Chan Hing Sum, there should still be 367,545 SHL shares (included in “Trust Stocks”) under his name as trustee for the Company.

B2.6 Chan Hing Sum’s death & breakdown of trust & confidence

23.Chan Hing Sum and Chan Hing Ting passed away on 15 September 2013 and 21 May 2016 respectively.

24.The petitioners observe a complete breakdown of mutual trust and confidence between the 2 Chan families since Chan Hing Sum’s death, for which they blame the 1^st to 6^th respondents.

B2.7 Petitioners’ complaints of wrongdoings by respondents

25.More particularly, they complain about the following ways in which the affairs of the Company have been and are being conducted by the 1^st to 6^th respondents which, they claim, is unfairly prejudicial to their interests as members of the Company.

B2.7.1 1^st respondent’s misappropriation of Company’s assets

26.First of all, it would be recalled it is the petitioners’ case that the 14C Office and the Trust Stocks under Chan Hing Sum’s name beneficially belong to the Company. They allege that after Chan Hing Sum’s death, the 1^st respondent, as administratrix, has in the course of the administration of Chan Hing Sum’s estate, treated the 14C Office and the Trust Stocks as parts of such estate and refused and/or failed to transfer them back to the Company despite repeated requests and demands, thereby misappropriating the same.

27.It was only after the presentation of the Petition herein that the 1^st respondent, by her solicitors’ letter dated 6 July 2018, indicated, on a without admission of liability basis, she was ready, willing and able to transfer the legal title of the 14C Office and the Trust Stocks to the Company forthwith on condition that the Company should bear all the costs and expenses of the transfers. The same offer is repeated in paragraph 10(3) of the 1^st respondent’s written submissions.

B2.7.2 Reduction of Company’s revenue by 1^st, 2^nd and/or 3^rd respondents

28.Secondly, it had been the policy and practice of the Company to charge a commission of at least 0.2% on each and every trade of stocks by its customers.

29.In about June 2016, without the approval or knowledge of either of the petitioners or the Company’s board of directors, the 1^st, 2^nd and/or 3^rd respondents had caused or procured a change to the Company’s computer settlement system to reduce the commission charged by the Company for trades under the securities accounts of members of Chan Hing Sum’s family and their clients from 0.2% to 0.1–0.15%, thereby causing loss and damage to the Company.

B2.7.3 Exclusion of petitioners from Company’s management

30.Thirdly, with regard to the 1^st petitioner, without his consent or knowledge or approval of the Company’s board of directors, the 1^st to 5^th respondents procured the Company to:

(1) appoint Mak Chi Leung as a licensed representative and then a RO of the Company with the SFC on about 19 November 2016 and 13 December 2016 respectively; and

(2) hire Shum Yiu Fai as a licensed representative of the Company on about 3 January 2017 and later appoint him as a RO too.

Mak Chi Lung and Shum Yiu Fai’s appointments without any prior consultation with the 1^st petitioner are said to infringe the alleged fundamental relationship and the alleged fundamental understanding.

31.In the meantime, on about 21 November 2016, 1^st to 5^th respondents installed at least 4 closed–circuit televisions (“CCTVs”) at the office of the Company. The petitioners were concerned that the CCTVs were to keep the 1^st petitioner under surveillance.

32.Then, on about 29 December 2016, the 6^th respondent who had just been appointed as a director of the Company on 10 November 2016 applied in such capacity to the SFC to revoke and cancel the 1^st petitioner’s registration as a RO of the Company but such an application was refused by the SFC.

33.In about January 2017, the 2^nd and 6^th respondents procured and/or caused the Company not to pay any commission to the 1^st petitioner and locked his computer thereby denying the 1^st petitioner access to same and preventing him from conducting any trading for his clients.

34.On about 9 January 2017, the 1^st to 5^th respondents, led by the 2^nd and 6^th respondents, further changed the locks to the main entrance of the office of the Company and prevented the 1^st petitioner from having free access to the office of the Company.

35.On 1 September 2017, at the annual general meeting of the Company (“1.9.2017 AGM”), the 1^st to 5^th respondents, who jointly hold 72% of the Company’s shares, voted against the re-election of the 1^st petitioner as a director of the Company thereby excluding him from taking part in the management of the Company.

36.The 2^nd petitioner was not in any better situation. He joined the Company as an account executive in 2005. On about 13 June 2005, he was registered as a licensed representative of the Company with the SFC. On 26 May 2016, he was appointed as a director of the Company after the death of Chan Hing Ting. On 27 June 2016, he was also registered as a RO of the Company with the SFC.

37.However, on about 14 October 2016, the 1^st to 5^th respondents signed a written requisition for an extraordinary general meeting (“proposed EGM”) pursuant to s 566 of the Companies Ordinance (Cap 622) (“CO”) for the passing of resolutions:

(1)  to revoke the 2^nd petitioner’s appointment as an executive director and secretary of the Company;

(2)  to appoint the 2^nd, 3^rd and 6^th respondents as executive directors of the Company; and

(3)  to appoint the 6^th respondent as secretary of the Company.

38.Then, on 18 November 2016, at about 4:30 pm, the 6^th respondent, who had just been made a director on 10 November 2016 and who according to the petitioners was acting in concert with the 1^st to 5^th respondents, called for a shareholders’ meeting on the same day (“18.11.2016 Meeting”), the agenda for which was issued to the shareholders only about 2 hours before the meeting, for the following purposes:

“Considering the report of the directors for the year ended 31 December 2015 signed by the chairman of the board of directors on 27 April 2016 and the independent auditor’s report to the members of the Company and the financial statements for the year ended 31 December 2015 made by Ting Ho Kwan & Chan CPA Limited dated 27 April 2016”; and

“Other ordinary businesses of the Company in accordance with Table A[5] and the Articles”.

39.At the 18.11.2016 Meeting, the 6^th respondent suddenly proposed a re-election of the directors. The 1^st, 2^nd and 3^rd respondents (holding 52% shares) voted for the motion and resolved not to re-elect the 2^nd petitioner as director of the Company and appointed Tai Sau Man (wife of the 2^nd respondent) in his place.

40.The petitioners contend that the 18.11.2016 Meeting was convened and conducted in breach of the CO and Article 52 of Table A[6] in that:

(1) It was convened without giving 21 days’ notice to the shareholders or obtaining the shareholders’ unanimous consent for the shorter notice in breach of Article 52.

(2) The shareholders were not given any notice that the meeting would consider the replacement of the 2^nd petitioner by Tai Sau Man as director of the Company, in breach of Article 52 as well as s 462(4)[7] of the CO.

41.The petitioners further rely on s 578(1)[8] of the CO to argue that the resolution for the replacement of the 2^nd petitioner by Tai Sau Man as director of the Company was invalid and void because the shareholders were not given 28 days’ notice in respect of the proposal of such resolution.

42.On 30 December 2016, the 2^nd petitioner’s employment with the Company as a licensed representative and RO was also terminated with immediate effect.

43.In the circumstances, the petitioners say that they have been wrongfully excluded from taking part in the management of the Company, in breach of the alleged fundamental relationship and the alleged fundamental understanding.

B2.7.4 Dilution of petitioners’ shareholdings

44.In about February/March 2017, the 6^th respondent convened an extraordinary general meeting of the Company, which took place on 20 March 2017 (“20.3.2017 EGM”). Despite strenuous opposition from the petitioners, a resolution was passed to, inter alia, increase the share capital of the Company (then at HK$30,000,000 divided into 30,000,000 ordinary shares of HK$1 each) by HK$35,000,000 divided into 140,000,000 new of HK$0.25 each which, if fully allotted, will result in a dilution of the petitioners’ total shareholding in the Company from 28% to 4.9%.

45.It was also resolved at the 20.3.2017 EGM to give the directors of the Company the discretion to make offers from time to time to allot up to 3,650,000 newly issued shares to each of the 6^th respondent (the 2^nd respondent’s daughter) and Mr CHEN Wah Chung Walter (the 2^nd respondent’s son).

46.It is the petitioners’ contention that the Company has no need for funding and that the increase of issued share capital and allotments had no proper commercial basis or purpose and was merely an attempt to dilute the petitioners’ shareholdings in the Company to the advantage of the 1^st to 6^th respondents.

B2.7.5 Denial of access to financial information, failure to account and siphoning off company assets

47.On about 4 May 2017, the 6^th respondent convened another shareholders’ meeting at which she indicated that the SFC was minded to impose a fine of HK$3.5 million against the Company and that, notwithstanding a previous all-inclusive agreed fee of HK$600,000, the Company’s solicitors charged an extra fee of HK$4 million in handling the matter with the SFC.

48.On or about 10 May 2017, the 1^st, 2^nd and 6^th respondents jointly caused and/or procured the issuance of a cashier order of HK$4 million in favour of such solicitors in addition to an earlier payment of HK$600,000.

49.The petitioners are dissatisfied with the lack of proper account for the payments of HK$4.6 million to the Company’s solicitors which, they say, are substantial and excessive as professional fees.

50.Further or alternatively, despite repeated requests, the 1^st to 6^th respondents have failed and/or refused to provide the petitioners with the ledgers and accounting and financial documents in relation to the Company’s business.

51.As the 1^st to 5^th respondents owns and controls more than half of the issued capital of the Company (72%, to be precise) and the 2^nd respondent’s wife (Tai Sau Man) and daughter (6^th respondent) control the board of directors of the Company, the petitioners see no action that can be effectively taken for obtaining any remedy or relief in the name of the Company without the concurrence of the 1^st to 6^th respondents (“respondents” collectively).

C. THE RELIEFS SOUGHT BY THE PETITIONERS

52.Against this background, on 9 May 2018, the petitioners presented an unfair prejudice petition under ss 724 and 725 of the CO against the respondents and joining the Company as the 7^th respondent (excluded from “respondents”) so that it would be bound.

C1. Under the petition

53.The petitioners initially claimed the following accounts and orders under the petition:

(1)  accounts by the respondents for all losses and damages suffered by the Company as a result of (a) the refusal to account for 14C Office and the Trust Stocks; (b) the payments or dispositions which they had procured to be made for their own benefit or other than for the Company’s proper purpose; and (c) their misconducts complained of in the petition;

(2)  an order that shares of the Company be valued as at 1 October 2016, alternatively the date of the petition, or any other date as the court shall deem fit, without any discount and taking into account the amounts so accounted for by the respondents together with compound interests on the amounts all or any of the respondents may be found liable to account to the Company, and on the basis of the present issued and paid-up capital of the Company;

(3)  an order that all or any of the respondents purchase all of the petitioners’ shares representing 28% shareholding of and in the Company at the value so assessed or otherwise as assessed by the court;

(4)  such further or other relief and/or directions as the court may see fit; and

(5)  costs.

C2. Under the points of claim

54.Then, pursuant to the directions given by Mr Justice Peter Ng on 14 June 2018, the petitioners filed and served points of claim in which the prayer paragraphs were revised to the following:

“(1)  An Order for the Company or all the 1^st to 6^th Respondent (sic) or any of them to pay damages to the Petitioners by reason of their interests being unfairly prejudiced by the conduct of the Company’s affairs or by the act or omission complained of hereinabove together with any interest thereon at such rate and for such period as the Court shall deem just.

(2)  An order that the shares of the Company be valued as such a date as the Court considers appropriate without any discount and taking into account such circumstances and matters as the Court shall deem just.

(3)  An Order that all the 1^st to 6^th Respondents or any of them be ordered to purchase the Petitioners’ shares in the Company at such price to be valued as aforesaid or at such other price as the Court shall deem just.

(4)  Such other order may be made as the Court thinks fit.

(5)  Interest including, if the Court deems appropriate, compound interest.

(6)  An Order that the 1^st to 6^th Respondents be ordered to pay the costs of the Petitioners.” (emphasis added)

55.Prayer paragraph (1) is the subject-matter of the Application. So is paragraph 44 of the points of claim which echoes prayer paragraph (1):

“By reason of the matters aforesaid, the Petitioners pray to the Court for reliefs under section 724 of the Companies Ordinance (Cap. 622) and the Company or the 1^st to 6^th Respondent (sic) ought to be ordered to pay damages to the Petitioners by reason of their interests being unfairly prejudiced by the conduct of the Company’s affairs or by the act or omission complained of hereinabove.” (emphasis added)

D. GROUNDS FOR STRIKING OUT

56.The 1^st respondent contends that these parts of the points of claim disclose no reasonable cause of action and/or are frivolous, vexatious or otherwise an abuse of process against her on 2 grounds:

(1) The court would not, in an unfair prejudice petition, entertain the petitioners’ claim for damages against the 1^st respondent, which claim (if any) ought to have been prosecuted by way of a derivative action (“Ground 1”).

(2) In any event, such damages claim is barred by the principle against reflective loss (“Ground 2”).

E. THRESHOLD FOR STRIKING OUT

57.It is trite and not in dispute that in an application to strike out an unfair prejudice petition:

(1)  The burden is on the applicant to establish that it is plain and obvious that the petition is bound to fail and hence an abuse of the process of the court.

(2)  The court will assume the facts alleged by the petitioner in the petition and the supporting affidavits (if any) to be correct.

(3)  The petition should not be struck out on a pleading point if the deficiency can be cured by amendment.

See, for example, Re Shun Tak Holdings Ltd [2009] 5 HKLRD 743, per Susan Kwan J (as she then was) at [19] and Re Plankton Ltd, HCCW 291/2011, unreported, 11 April 2014, per Harris J at [14].

F. GROUND 1 MISCONCEIVED

58.I have set out all the prayer paragraphs of the points of claim in full and further put emphasis on certain parts of paragraph 44 and prayer paragraph (1) to show and highlight the fact that, by the points of claim, the petitioners are not seeking damages or any other relief for the Company itself (as the petitioners in Re Chime Corp Ltd (2004) 7 HKCFAR 546 and Re Shun Tak Holdings Ltd [2009] 5 HKLRD 743 did). The petitioners are claiming, inter alia, damages against the respondents and/or the Company for themselves.

59.As I understand it, a derivative action (whether at common law or under statute), is a form of action by which a minority shareholder can assert a cause of action that is vested in the company to recover damages or other reliefs for and on behalf of the company. Hence, I have great difficulty with, and do not accept, the 1^st respondent’s suggestion under Ground 1 that the petitioners ought to have prosecuted their personal claim for damages by way of a derivative action.

60.Before I leave Ground 1, Mr Jonathan Chang (leading Mr Martin Ho), counsel for the 1^st respondent, has complained in his oral submission in court that the petitioners had not raised their damages claim in the petition. If that is the problem, the petition could be amended to make it align with the points of claim.

G. GROUND 2

G1. Relevant statutory framework for award of damages in unfair prejudice petitions

61.Turning then to Ground 2, insofar as it is material, s 724(1) of the CO provides that:

“The Court may exercise the power under section 725(1)(a) and (2) if, on a petition by a member of a company, it considers that—

(a) the company's affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of one or more members (including the member); or

(b) an actual or proposed act or omission of the company (including one done or made on behalf of the company) is or would be so prejudicial.”

62.This brings us firstly to s 725(2)(b) which empowers the court to “make any order that it thinks fit for giving relief in respect of the matter mentioned in section 724(1)(a) or (b)”.

63.Without limiting s 725(1), s 725(2)(b) expressly allows the court to

“order the company or any other person to pay any damages, and any interest on those damages, that the Court thinks fit to a member of the company whose interests have been unfairly prejudiced by the conduct of the company’s affairs or by the act or omission.” (emphasis added)

64.The only statutory restriction to an award of damages in favour of a member of a company under s 725(2)(b) is that laid down under s 725(5), which is that such member is not entitled to recover, by way of damages “any loss that solely reflects the loss suffered by the company that only the company is entitled to recover under the common law”, which restriction is a statutory indorsement of the reflective loss principle.

65.Hence, under s 725(2)(b), the court is expressly empowered to award damages to any member of the company but the claim for damages is subject to the restriction under the reflective loss principle as set out in s 725(5).

G2. Issue

66.So the question is whether it is incurably plain and obvious that none of the petitioners’ abovementioned complaints could, as a matter of law and/or fact, ground an award of damages against the 1^st respondent in favour of the petitioners personally. Only if so should paragraph 44 and prayer paragraph (1) of the points of claim be struck out as against the 1^st respondent.

G3. Distinquishing between 2 types of loss

67.In answering this question, one has to distinguish between 2 different types of loss complained of by the petitioners:

(1) loss suffered directly by the Company; and

(2) loss caused to the petitioners that does not solely reflect the loss suffered by the Company.

68.These fall into the first category:

(1)  first, the misappropriation of the 14C Office and the Trust Stocks;

(2)  second, the reduction in the commission levied by the Company on certain trades; and

(3)  third, the unexplained payment of what appeared to be an excessive amount for legal fees to the Company’s solicitors.

69.In opposing the Application, I do understand Mr Kenny C P Lin, counsel for the petitioners, to be suggesting that the petitioners could themselves recover any damages for these losses which were suffered by the Company and in respect of which the Company can claim. However, as summarised by Harris J in Re Plankton Ltd, supra, at [12(2)][9], directors’ acts of misconduct may provide the requisite evidence to establish a charge of unfairly prejudicial management.

70.Rather, Mr Lin focuses the court’s attention on the second category of losses which, insofar as the 1^st respondent has been expressly pleaded as being implicated, are the exclusion of the petitioners from the management of the Company, i.e. the non re-election of the 1^st petitioner as director at the 1.9.2017 AGM and the removal of the 2^nd petitioner as director at the 18.11.2016 Meeting.

71.In support, Mr Lin refers to and relies on Wootliff v Rushton-Turner [2018] 1 BCLC 48, in which the petitioner presented an unfair prejudice petition under s 994[10] of the Companies Act 2006 (“2006 Act”) which also claimed relief for his loss of income for the remaining term under a service contract under he was employed as the chief executive officer of the company, which he said was wrongfully terminated. The respondents applied to have the wrongful dismissal head of claim struck out.

72.Mr Registrar Briggs was not referred to any authority that dealt directly with a challenge to a claim for wrongful dismissal in the context of an unfair prejudice petition. He was, however, taken to J&S Insurance & Financial Consultants Ltd [2014] EWHC 2206, in which one of the grounds for petition was exclusion without remuneration. In that case, Mark Cawson QC sitting as a deputy High Court judge made a buy-out order but dismissed the claim in respect of loss of income “as a matter of discretion” because the facts of the case did not require the court to compensate the petitioner for his loss of remuneration in order to remedy the unfairness. There appears to have been no argument as to whether or not the court could entertain a claim for wrongful dismissal when hearing the petition for unfair prejudice, although Mr Registrar Briggs read the deputy judge’s decision on the claim for compensation for loss of salary (breach of contract) as one on the facts and not on jurisdictional grounds. See [25]-[26]. I pause to observe that we face no jurisdictional doubt given the court’s express power to award damages to a petitioning member under s 725(2)(b) subject only to the principle against loss.

73.In refusing to strike out in Wootliff despite the novelty of the point, Mr Registrar Briggs surveyed and reviewed the authorities[11] from which he observed at [24], [27], [28], [29], [34], [35] and [37] that:

(1)  The inquiry into whether the affairs of a company have been or would be conducted in a manner that is unfairly prejudicial to member is always fact sensitive.

(2)  The court has a wide discretion under s 996 of the 2006 Act in relation to the relief it may give to a successful petitioner Section 996 of the Companies Act 2006 by providing that the court may make such order as it thinks fit for giving relief in respect of the matters complained of.

(3)  A shareholder’s right in the context of an unfair prejudice petition may be wider or greater than just his rights qua shareholder. Much will depend on the arrangements between the shareholders and the company, and how closely the interests of members in other capacities are connected to the company.

(4)  In the context of a quasi-partnership, the exclusion from management and breach of employment rights may be grounds for unfair prejudice.

(5)  As the language of s 996 is so wide, it cannot be said it shuts out relief for compensation for breach of a service agreement.

(6)  However, a petitioner will have to show that his service contract with the company may a reflection of the overall relationship and the interests of members. When the evidence is heard the court may or may not treat the separateness of the petitioner as member and the petitioner as employee as excluding him from relief for the relief sought.   It may demonstrate that the petitioner as member and employee ‘formed part (and an essential part) of the arrangements entered into for the venture to be carried on’ by the company. If the evidence favours the petitioner this will overcome the objection that the petitioner is not pursuing the claim qua member.

74.The points of claim in this case advances a case of quasi-partnership based upon a personal relationship of trust and confidence between the 2 Chan families with equal rights to management and operation participation on the part of the 1^st petitioner and members of his family. If accepted at trial, the exclusion from management may well open the door to relief.

75.In answer, Mr Chang firstly stresses that the 1^st respondent only inherited the shares in the Company presently under her name from the estate of Chan Hing Sum, although he has also fairly drawn the court’s attention to her interest as a partner of PSC. As a partner of PSC, the 1^st respondent would have been, on the petitioners’ pleading, one of the parties to the alleged fundamental relationship and the alleged fundamental understanding (see paragraph 6 above). She was, however, not a shareholder of the Company when it was first formed. It has been suggested that she therefore could not have been a party to the alleged fundamental relationship and the alleged fundamental understanding as continued by the shareholders of the Company. I think much will depends on the intention of the first shareholders of the Company - whether they intended the alleged fundamental relationship and the alleged fundamental understanding to bind just themselves or the shares they held, which is a matter for trial.

76.Secondly, Mr Chang is not contending that the petitioners’ loss of offices as directors is not actionable in damages. Instead, he says that the monetary compensation is not to be paid by the respondents including the 1^st respondent but should come out of the Company (notwithstanding that the Company has not actually been served by the petitioners as directors by reason of the 1^st to 5^th respondents’ resolutions). His rationale is that the purpose of an award of damages is to put the petitioners back in the positions they would have been in had their appointments as directors of the Company not been terminated. And they would have continued to receive directors’ emoluments from the Company. I believe counsel has taken the compensatory principle of the remedy of damages too literally and technically. What would restore the petitioners back to the positions they would have been in is an award of damages equivalent to the directors’ emoluments they have lost, not the fact that the Company pays such damages.

77.To illustrate this with an example from a different context, a tortfeasor cannot be heard to oppose an award of damages for loss of earnings in a personal injury claim (which has the aim of putting the injured party back in the position he would have been in had he not been injured) by saying that the injured person should have received his lost earnings from his employer.

78.In the present case, while it may be said that the resolutions that removed / did not re-elect the petitioners as directors were acts of the Company in the technical sense, if one has regard to substance over form, what caused such resolutions was the 1^st to 5^th respondents’ votes.

79.Ground 2 also fails.

H. DISPOSITION

80.For these reasons, I dismiss the Application.

81.I also make an order nisi that the 1^st respondent should pay the petitioners’ costs of and occasioned by the Application, which if not agreed, should be taxed on a party and party basis with a certificate for counsel for the hearing on 3 April 2019.

	(Lisa Wong)
	Judge of the Court of First Instance

Mr Kenny C P Lin, instructed by Simon C W Yung & Co, for the petitioners

Mr Jonathan Chang and Mr Martin Ho, instructed by Charles Yeung, Clement Lam Liu & Yip, for the 1^st respondent

[1] Anyway, the 1^st respondent has not, in support of the Application, filed or relied on any affidavit evidence raising any facts to the contrary.

[2] Both positions were terminated as set out in paragraph 42 below.

[3] Appointments as set out in paragraph 30(1) below.

[4] Appointments as set out in paragraph 30(2) below.

[5] Referring to Table A in the First Schedule to the Old CO (“Table A”) which was incorporated by article 1 of the Company’s Articles of Association.

[6] Which provided:

“An annual general meeting and a meeting called for the passing of a special resolution shall be called by 21 days’ notice in writing at the least… The notice shall be exclusive of the day on which it is served or deemed to be served and of the day for which it is given, and shall specify the place, the day and the hour of meeting and, in case of special business, the general nature of that business, and shall be given, in manner hereinafter mentioned or in such other manner, if any, as may be prescribed by the company in general meeting, to such persons as are, under the regulations of the company, entitled to receive such notices from the company:

Provided that a meeting of the company shall, notwithstanding that it is called by shorter notice than that specified in this regulation, be deemed to have been duly called if it is so agreed (a) in the case of a meeting called as the annual general meeting, by all the members entitled to attend and vote thereat…”

[7] Which provides that special notice is required of a resolution to remove a director or to appoint somebody in place of a director so removed at the meeting at which the director is removed.

[8] Which reads “If by any provision of this Ordinance special notice is required to be given of a resolution, the resolution is not effective unless notice of the intention to move it has been given to the company at least 28 days before the meeting at which it is moved.”

[9] Citing Hollington, Shareholders’ Rights, 6^th edn, §§7 12, 7-66 to 7-68; Joffe, Minority Shareholders, 4^th edn, §§7.182 to 7.187, 7.196; Re Charnley Davies Ltd (No 2) [1990] BCLC 760, per Millett J (as he then was) at 782i-783e & 784a; and A R Evans Capital Partners Limited v Novel Alternative Investment Limited HCMP 1255/2011, unreported, 15 June 2012, per Barma J (as he then was) at [77].

[10] The English equivalent of s 724(1) of our CO.

[11] Namely, Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, Re Saul D Harrison & Sons plc [1995] 1 BCLC 14; Re Guidezone Ltd [2000] 2 BCLC 321; Re a Company (No 00477 of 1986) [1986] BCLC 376; O’Neill v Philips [1999] UKHL 24, [1999] 2 BCLC 1; Parkison v Eurofinance Group Ltd [2001] 1 BCLC 720; Shepherd v Williamson [2010] EWHC 2375, [2010] All ER (D) 142 (Oct); Croly v Good [2010] 2 BCLC 569; J&S Insurance & Financial Consultants Ltd, supra; Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 26, [2008] 1 BCLC 468; R&H Electric Ltd v Haden Bill Electrical Ltd [1995] 2 BCLC 280; Re Charnley Davies Ltd (No 2) [1990] BCLC 760; Lowe v Fahey [1996] 1 BCLC 262; and Re Little Olympian Each-Ways Ltd [1994] 2 BCLC 420.