Read the full judgment text of CACV 16/2020 & CACV 17/2020 on BabelCite. This Court of Appeal judgment was delivered on 28 January 2021 before Kwan VP, Cheung JA and Yuen JA.
Company law – common law derivative action – threshold requirements – fraud on the minority exception to Foss v Harbottle – wrongdoer in control – board-level and shareholder-level control – plaintiff as shareholder of Convoy Global Holdings Limited (a Cayman-incorporated company listed on the Main Board of the Stock Exchange of Hong Kong) sues on behalf of herself and all other shareholders in two common law derivative actions, claiming that Ng (an executive director and Group President) breached fiduciary duties owed to two wholly owned subsidiaries, Forthwise International and Convoy Finance, in respect of (a) four unsecured, interest-free loans of HK$90 million advanced by Forthwise International to Forthwise Ltd (a newly incorporated Hi-Fi dealership unrelated to the group) which were later agreed to be converted into 46% of Forthwise Ltd's shares, and (b) the January 2016 purchase by Convoy Finance of Maxthree Ltd (owning Artley Finance (HK) Limited and Hong Kong Credit Corporation Limited) from Yehchen Holdings Ltd for a consideration of HK$24.63 million later increased to HK$36.42 million, paid to Yap (a director of Artley and HKCC) rather than to the vendor – whether the plaintiff established a prima facie case of wrongdoer in control – court holds no: at board level, only Yap and Johnny Chen were pleaded to be accustomed to follow Ng's instructions, and the reconstituted board members appointed after the December 2017 ICAC arrests had no self-protection incentive; the plaintiff's assertions of Ng's de facto control were bare, circular and unsupported by evidence, and contradicted by the directors' affirmations of independent judgment; at shareholder level, the alleged controlling shareholders are the Tsai Family, not Ng, and there is no allegation the Tsai Family would vote to insulate Ng or are complicit in his alleged breaches – appeals dismissed – obiter discussion of the scope of the fraud on the minority exception – whether the 'personal benefit to wrongdoers' requirement in Harris v Microfusion should be followed – Yuen JA (with Kwan VP's agreement) would not adopt the personal benefit requirement and would prefer the 'voting for proper purpose test', asking whether the majority's vote to release the directors was a bona fide exercise of voting power for the proper purpose of the company, drawing on Allen v Gold Reefs of West Africa Ltd and reflecting the legislative approach in s.734(3) of the Companies Ordinance (Cap 622) – but no basis to interfere with the judge's finding that at most there was a prima facie case of negligence, not of deliberate and dishonest breach of duty, applying the subjective test for honesty from Re Regentcrest Plc v Cohen and the disciplined approach to inferences of fraud in Kwok Hiu Kwan v Convoy Global and HKSAR v Lee Ming Tee – plaintiff ordered to pay costs of the 1st Defendant in CACV 16/2020 and of the 1st and 2nd Defendants in CACV 17/2020, with a certificate for three counsel.
Legal issues: Whether plaintiff established a prima facie case of wrongdoer in control · Scope of the 'fraud on the minority' exception under Foss v Harbottle · Whether there is a prima facie case of deliberate and dishonest breach of fiduciary duty
Outcome: Appeals dismissed; the plaintiff has failed to establish the threshold requirement of wrongdoer in control for a common law derivative action under the fraud on the minority exception to Foss v Harbottle.
Cites 8 cases