Chang Ching Hsin v. T.D.C. Group (H.K.) Co. Ltd and Another

HCMP 111/2021

[2022] HKCFI 1474

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 111 OF 2021

________________________

________________________

BETWEEN

________________________

Before:  Deputy High Court Judge Winnie Tsui in Court

Date of Hearing:  1 September 2021

Date of Decision:  20 May 2022

________________________

D E C I S I O N

________________________

INTRODUCTION

1.By originating summons filed on 25 January 2021, Mr Chang Ching Hsin (“Chang”), the plaintiff, applies for leave to bring a statutory derivative action in the name of T.D.C. Group (H.K.)  Co. Limited (“the Company”)  against Mr Koo Szu Hung (“Koo”)  pursuant to section 732 of the Companies Ordinance, Cap 622. 

2.Koo was not initially named as a defendant in the originating summons.  By order of Deputy High Court Judge Le Pichon dated 19 February 2021, Koo was joined as the 2^nd defendant.  The judge also gave directions for the filing of evidence.

3.The reply evidence was filed by Chang on 19 April 2021.  Pursuant to the directions, no further affirmation should be filed after that except with the leave of the court.  By amended summons dated 14 July 2021, Koo applies for leave to file his 3^rd affirmation.  That summons was returnable on the date of the substantive hearing of the originating summons.  Chang opposes the admission of the late evidence. 

4.Mr Kurt Ng, counsel for the plaintiff, complained that Koo took out the amended summons almost three months after Chang filed his reply affirmation, and with the amended summons fixed to be heard only at the substantive hearing, Chang would be deprived of an opportunity to make any reply.  Mr Ng asked for an adjournment of the hearing if Koo’s 3^rd affirmation was admitted so as to allow Chang to reply to it.  In any event, Mr Ng submitted that the new evidence contained in that affirmation would not assist the court.

5.On the other hand, Ms Elizabeth Cheung, appearing with Mr Jonathan Ng for the 2^nd defendant, contended that Koo’s application was made more than 1½ months before the substantive hearing and there was more than enough time for Chang to file any reply evidence if he so wished.  In any event, as Chang has raised new factual matters in his reply affirmation, Koo is plainly entitled to file his 3^rd affirmation to respond to those new matters.  In the course of her oral submissions on the amended summons, Ms Cheung indicated that if Chang insisted on the adjournment of the hearing in order for him to file reply evidence, Koo would not insist on relying on his 3^rd affirmation.

6.At the hearing, I directed that Koo’s latest affirmation be considered on a de bene esse basis. 

THE BACKGROUND

7.The Company was incorporated in 1993 by Mr Ting Jung Kuang and Koo, who held 80% and 20% of the shares respectively.

8.Since January 2003, Chang and Koo have become the only shareholders and only directors of the Company.  Their respective shareholdings are 46.5% and 53.5%.

9.The Company is engaged in the trading of household appliances.  Its customers include those based in the US.  These three US customers feature in the present action: Wakefern Food Corporation (“Wakefern”), Quickie Manufacturing Corporation (“Quickie”)  and Aldi Inc (“Aldi”).

10.Meanwhile, Koo has an interest in TDC (USA)  Inc (“TDC USA”).  He is its sole director.  He and his two sons are its only shareholders.

11.It is not disputed that there have been dealings between the Company and TDC USA over the years.  The present dispute is primarily over the terms of such dealings. 

12.Materially, it is Koo’s case that an agreement was made in September 2002 between Chang and Koo that the Company and TDC USA would share the profits earned from the purchase orders placed by two of TDC USA’s customers, namely Wakefern and Quickie.  The profit sharing ratio was 45% for the Company and 55% for TDC USA.  I shall refer to it as “the alleged agreement” below.  In 2003, TDC USA acquired Aldi as a new customer.  The profit sharing ratio applied to it too.  The alleged agreement was then varied orally in 2007 and 2011.  Pursuant to the first variation, the profit sharing ratio applicable to orders placed by Quickie was changed to 50% and 50%.

13.Chang denies that the alleged agreement existed. 

14.The action which Chang intends to bring against Koo in the name of the Company comprises two causes of action.  The first relates to the financial statements of the Company for the year ended 31 December 2018 and the second relates to the financial statements for the year ended 31 December 2019. The dispute over the alleged agreement lies at the heart of the latter cause of action.

THE INTENDED ACTION AGAINST KOO

15.Chang has exhibited a draft statement of claim in his affirmation.  The intended action is to be brought in the District Court by the Company against Koo.  The case, as revealed, is as follows.

16.As a director of the Company, Koo owes to the Company various fiduciary duties, including a duty to avoid conflict of interests and a duty to act in good faith and in the best interests of the Company.  Furthermore, Koo owes to the Company various statutory duties including a duty to exercise reasonable care, skill and diligence pursuant to section 465 of the Companies Ordinance.

17.Koo was in breach of his fiduciary duties and statutory duties in that:

(1)  He failed to sign the audited financial statements of the Company for 2018 before the deadline for the filing of the 2018/2019 tax return.

(2)  He has failed or refused to sign the audited financial statements of the Company for 2019.

The 2018 financial statements

18.On 15 July 2019, Ms Amy Wong (“Wong”), an employee of the Company, sent the draft audited financial statements for 2018 to Koo for his signature for the purpose of filing the Company’s tax return before the deadline which fell on 15 August 2019. 

19.However, despite repeated reminders and without any reasonable excuse, Koo failed to sign the 2018 financial statements before the deadline (and the further extended deadline).  He only signed the same in November 2019.  As a result, the Company filed them with the Inland Revenue Department (“the IRD”)  late.

20.In about June 2020, the IRD requested the Company to explain the delay.  The Company is subject to potential penalties imposed by the IRD.

The 2019 financial statements

21.On 24 June 2020, Wong sent the draft audited financial statements for 2019 to Koo for his signature for the purpose of filing the Company’s tax return before the deadline which fell on 15 August 2020.

22.However, Koo refused to sign the 2019 financial statements.  He requested that the Company include a sum of US$24,542.56 in the statements, which represented amounts allegedly due to TDC USA under various alleged invoices issued to the Company pursuant to the alleged agreement (“the alleged amount due”).  It is however Chang’s case that:

“all or part of the Alleged Amount Due was and is at all material times not due by the [Company] to TDC USA and/or was and is non-existent and/or fabricated and/or incurred without informed consent of the [Company]”.

23.Koo’s request was hence wrongful.  It was an attempt on his part to coerce the Company to recognise the alleged amount due. In doing so, Koo placed the interests of TDC USA, in which he has an interest, before the interests of the Company.

24.The deadline for submitting the 2019 financial statements was extended by the IRD to 30 September 2020.  However, Koo still refused to sign them unless his request was entertained.

25.As a result, the Company was not able to file the 2019 financial statements with the IRD before the extended deadline.  The IRD made an assessment of the tax payable by the Company for 2019/2020 without having any regard to the 2019 financial statements.  The tax payable was assessed to be $1,491,450.  However, if the 2019 financial statements had been submitted within the deadline, the tax payable would have been $110,114 only. Hence, as a result of Koo’s refusal to sign the 2019 financial statements, the Company had to pay an additional sum of $1,381,336.

26.The Company proceeded to pay the assessed tax in compliance with the law.  Furthermore, it is prevented from making any objections to the IRD regarding the assessed tax since Koo failed and refused to, and still fails and refuses to, sign the 2019 financial statements.

27.Subsequent to the issuance of the originating summons, on 19 February 2021, the IRD charged the Company with an extra sum of $1,442,100 for the Company’s failure to submit the 2019 financial statements. Mr Ng stated in his written submissions that if leave is granted, the draft statement of claim will be revised to reflect this extra sum as part of the loss caused by Koo’s breaches of duties.

28.Accordingly, as a result of Koo’s breach of fiduciary duties and/or statutory duties, the Company has suffered loss and damage in the sum of $2,823,436 (ie $1,381,336 + $1,442,100).

29.In the prayer, the Company claims equitable compensation and/or damages, an injunction that Koo do sign the 2019 financial statements, and such other necessary and consequential orders as may be just.

KOO’S CASE

30.Koo says that the intended action is misconceived.  There was no breach of director’s duties by him.  It is not in the interests of the Company for company funds to be expended on what are clearly vexatious proceedings brought by Chang amidst his ongoing dispute with Koo over the Company’s affairs.  Since 2017 or 2018, mutual trust and confidence between Chang and Koo started to break down.  Chang should not be granted leave to bring the intended action on behalf of the Company against Koo.

The 2018 financial statements

31.In respect of the intended claim relating to the 2018 financial statements, Koo contends that it is not in the interests of the Company to commence any proceedings as the Company has suffered no loss.  There is no dispute that the IRD has not imposed any fine on the Company in respect of the delay in the filing of the 2018 financial statements.

32.Furthermore, there is no serious issue to be tried.  It was justified for Koo not to sign the 2018 financial statements when it was Chang who had failed to provide the Company’s underlying bank statements to Koo for inspection and for verifying the contents of the financial statements.

33.The relevant chronology is as follows.

34.By emails to Wong on 11 and 12 June 2019, Koo requested copies of the Company’s monthly bank statements.

35.On 15 July 2019, Wong sent the draft 2018 financial statements to Koo and asked him to sign and return the same. However, she did not provide any bank statements to Koo.

36.On 18 July 2019, Koo repeated his request for the bank statements.  Wong sent an email to Koo on the same day.  However, she still failed to provide the bank statements.

37.By letter dated 12 August 2019, which was before the original filing deadline of 15 August 2019, Koo stated that he was not trying to deliberately delay the signing of the 2018 financial statements.  He did not sign them as he was not provided with the bank statements of the Company.  Koo then urged Chang to provide the bank statements for the 2017 and 2018 financial years within two days.  He would then verify and sign the financial statements as soon as possible.

38.Chang did not provide the bank statements as requested.

39.It was only in December 2019 when Koo was allowed to inspect the bank statements after his solicitors had sent a letter to the Company asserting his right to inspect the documents as a director.

40.In the circumstances, Koo contends that he was justified in not signing the 2018 financial statements before the IRD deadline.  He was not in breach of any of his duties owed to the Company.

The 2019 financial statements

41.In respect of the intended claim relating to the 2019 financial statements, Koo contends that the crux of the matter lies in the dispute between him and Chang over whether the alleged agreement in fact existed or not.  It is a dispute between the Company’s shareholders.  The Company’s funds should not be expended on this dispute.  In any event, there is no serious issue to be tried.

42.In Koo’s affirmations, he gave an account of his dealings with Chang dating back to the 1990’s.  The account involves two companies, YMT International Inc and YMT Overseas Ltd, which businesses, Koo says, were taken over by TDC USA and the Company respectively in 2002. Chang disputes various aspects of this account.  I do not find it necessary to recite the rival factual allegations here.  These disputes cannot be resolved at this stage. 

43.What is materially relevant for the purpose of the intended action is Koo’s allegation that he and Chang made the alleged agreement in September 2002.  Koo says that it was evidenced by a shareholders’ meeting record dated 13 September 2002 (“the shareholders’ meeting record”). It is a one-page unsigned document, with a fax header imprinted at the bottom apparently showing that the document was transmitted by fax on 13 September 2002.  The document expressly referred to a profit sharing arrangement between TDC USA and the Company in the ratio of 55% and 45%, which was applicable to orders placed by Wakefern and Quickie.

44.In his 3^rd affirmation, Koo further exhibited a fax message apparently sent by a staff of YMT Overseas to him on 10 July 2002.  It was stated in the fax that Chang drafted an agreement for Koo’s comments.  The draft agreement referred to profit sharing between the Company and TDC USA in respect of orders placed by Wakefern and Quickie.

45.Apart from the above documents dating back to 2002, Koo also relies on documents which show that before the breakdown in the relationship between Chang and Koo, the Company had recognised invoices issued by TDC USA to the Company for the payment of its share of the profits under the alleged agreement.  The alleged contemporaneous documents include various invoices and a statement of accounts in respect of the year 2018 showing that a “50% Commission” was paid by the Company to TDC USA for orders placed by Quickie.

46.In essence, Koo contends that Chang had caused the draft 2019 financial statements to be prepared in such a way that failed to include the alleged amount due, which represented the profits payable to TDC USA for the year under the alleged agreement.  Koo therefore refused to sign them.  Then Chang engineered the refusal into an alleged breach of fiduciary duty.

47.That is the reason put forward by Koo in these proceedings for refusing to sign the draft 2019 financial statements.  However, Ms Cheung submitted that for the present leave application, it is not necessary for the court to resolve the dispute over the alleged agreement. This is because the crux of Chang’s present complaint is much narrower and centres upon whether Koo has breached his director’s duties by refusing to sign the draft financial statements.

48.Koo says that he was not in breach because he had made a proposal to Chang that the conflicting views on the alleged amount due held by the two of them as directors should be recorded in the financial statements by way of an explanatory note.  On that basis, he was prepared to sign the statements.  However, Chang unreasonably refused to accede to the request.  In the circumstances, there was plainly no breach on Koo’s part given that he had refused to sign as the statements did not reflect a true and fair view of the Company’s financial position.

49.The relevant chronology is as follows.

50.By letter dated 24 July 2020, Koo’s solicitors pointed out, among other things, that the amounts of 16 invoices issued by TDC USA to the Company had not been included in the item “Amounts due to a related company” appearing in the draft financial statements and stated that Koo would approve and sign them after the Company had addressed his questions.

51.In his email response on 27 July 2020, Chang not only refused to answer Koo’s questions, he also accused Koo of making up the complaints.

52.By email reply by Koo’s solicitors’ of the same date, it was explained that Koo became aware of some errors in the draft financial statements and therefore requested their rectification as soon as practicable.

53.On 13 August 2020, Koo’s solicitors again requested that the alleged amount due be included in the draft financial statements but said that there should be a reduction of the amount as TDC USA was willing to amend the amount of one of the invoices.  Alternatively, they proposed that the auditor could include a note to reflect the different views held by the two directors on the amended invoice. 

54.By letter dated 18 August 2020, Chang refused to accede to the request and accused Koo of being in breach of his director’s duties by forcing the Company to unconditionally admit a disputed debt to a third party.

55.On 19 August 2020, Koo’s solicitors made the same request to the auditors.  There was no response to that request.

56.On 28 August 2020, Koo’s solicitors wrote to the Company, reiterating that Koo did not intend to force the Company to admit liability to pay the alleged amount due.  They pointed out that the disputed invoices had to be reflected in the financial statements and an explanatory included to record the fact that the directors had different views on the disputed invoices so as to reflect the true financial position of the Company in compliance with the Companies Ordinance.

57.Further correspondence followed in which Koo reiterated his request.  This included an email sent by him to Chang on 7 October 2020.  He attached his proposed amendments marked in red to the draft financial statements, which read:

“The directors of the Company have not come to consensus on the amount due to the related company. The difference in the amount is HK$112,075 (i.e. US$14,542.56).”

58.In the email, Koo assured Chang that the inclusion of the above amendments would not prevent the Company from disputing the alleged amount due in the future.  He wrote:

“我認為審計報告就這些有爭議的invoices作出全面記錄較為穩妥，他日若我和Steve能就相關爭議作進一步溝通，無論結論如何，因公司已於此審計報告上留有空間，日後爭議解決後再作修正，對公司而言是不會有損失的。”

59.Notwithstanding Koo’s continuous attempt to resolve the deadlock, Chang did not respond favourably to the proposal.

60.In the circumstances, Koo says that it is entirely reasonable for him to refuse to sign the draft financial statements for 2019 when he considered that it did not reflect a true and fair view of the Company’s financial position.  That was the only reasonable thing a prudent director could have done.  Furthermore, he acted reasonably by putting forward the proposal to include a note in the statements to reflect the dispute between the directors in an attempt to resolve the impasse.  In the proposal, he repeatedly made it clear that the inclusion would not prevent the Company from later disputing the alleged amount due.

61.Hence, it cannot be contended that Koo was in breach of his director’s duties in relation to the 2019 financial statements.

CHANG’S REPLY

62.Chang’s reply to Koo’s case is as follows.

The 2018 financial statements

63.It is not correct for Koo to say that he had refused to sign the 2018 financial statements because the Company had failed to provide him with the bank statements of 2018.

64.What happened was that Koo only made the request for the 2018 bank statements for the first time on 12 August 2019.  Before that, he had been requesting the bank statements of 2017 only and he expressly made the request for his own tax purpose in the US.  Chang relies on the following contemporaneous correspondence in support.

65.In his email to Wong on 11 June 2019, Koo forwarded an email from his US accountant and said that the US IRS required him to produce certain bank statements of the Company for the year of 2017.  Koo therefore asked Wong to provide these bank statements to his US accountant.

66.By email from Wong to Koo on 18 July 2019, Wong reminded Koo that the deadline for submitting the 2018 financial statements to the IRD was 15 August 2019 and asked Koo to sign the report.  Wong also mentioned that Koo’s request for bank statements was taken care of by Chang but Chang did not understand why Koo needed the 2017 bank statements.

67.On 19 July 2019, Koo replied to Wong:

“Regarding to the why need the 2017 bank statement, it is requested by IRS USA, we cant ask IRS why they need the bank statement from Jan to Dec. and this been explained to you by email 6/10.”

68.It can therefore be seen from the correspondence that at the time Koo requested only the 2017 bank statements and he did so for his own US tax purposes, but not for the purpose of reviewing the 2018 draft financial statements.  Koo is now shifting his case to try to put the blame on Chang for his own refusal to sign the 2018 financial statements.

The 2019 financial statements

69.As regards the 2019 financial statements, first of all, Chang denies that the alleged agreement existed and hence the alleged amount due, as contended by Koo, was in fact not due.

70.Chang raises a number of queries over the shareholders’ meeting record produced by Koo.  The record does not appear to be valid minutes of a shareholders’ meeting.  It was not signed.  The time and place of the meeting was not stated.  It is unclear on the face of the document what resolutions were passed.  Furthermore, at the time, Chang was not even a shareholder or director of the Company.  The shareholders at that time were Ting and Koo. 

71.I should point out here that in his 3^rd affirmation, Koo explained that he invited Chang to join the Company in June 2002 and at that time Chang was very anxious to have an agreement in place on the profit sharing arrangement and that was why the two of them reached the alleged agreement before Chang formally became a shareholder of the Company.

72.Chang further denies that there was any oral variation to the alleged agreement in 2007.  What happened was that in 2007, the Company agreed that TDC USA could share 50% of the Company’s profits for the time being after deduction of various sums.  But this agreement did not apply to subsequent years and Koo was fully aware of that.

73.It is Chang’s case that the business relationship between the Company and TDC USA was very simple – the Company would engage TDC USA to communicate with its clients in the US and TDC USA would accept purchase orders from the Company’s clients on its behalf.

74.As to Koo’s proposal to include a note in the financial statements stating that the directors held different views on the item “Amounts due to a related company”, it was the auditors’ advice that the proposal has no basis and is against the norm.  The advice was that there was no basis to include third party’s invoices into an audited report unless it had been agreed by the directors.  If the proposed note was included, the IRD would simply have no idea based on which of the two directors’ views to assess the tax.  Any financial statements prepared with conflicting views would not give a true and fair view of the financial position of the Company. 

75.In his 3^rd affirmation, Koo said that the auditors’ advice was never mentioned in his correspondence with Chang and it was only in Chang’s reply affirmation that for the first time he cited the auditors’ advice as the reason for Chang’s refusal of his proposal.

LEGAL PRINCIPLES

76.The principles governing applications under section 732 of the Companies Ordinance are well-established.  The plaintiff has to satisfy the court the following:

(1)  It appears to be in the company’s interests that leave be granted to the member.  In this regard, if a serious issue to be tried is shown, it will normally be in the interests of the company to pursue the proceedings as the fruit of any judgment to be obtained will be paid to the company.

(2)  There is a serious question to be tried.  This is a low threshold.  In considering the prospect of the company’s success, the court will consider the allegations set out in the draft statement of claim.  The prospects are to be investigated only to a limited extent.  It is only if the defendant can demonstrate fairly readily that there is a serious flaw in the claim or that the claim has no real substance such that the company cannot be said to have any expectation of success that the court will find against the plaintiff.  In the investigation, the court is not obliged to accept whatever evidence the plaintiff chooses to place before it without any critical thinking.

(3)  The company has not itself brought the proceedings.

(4)  A written notice has been served on the company in accordance with section 733(3)  and the notice complies with section 733(4).

77.For the above principles, see, eg, Re Primlaks (HK)  Limited [2016] 2 HKLRD 31 at paras 7 to 9, per Ng J; Lam Kin Chung v Soka Gakkai International of Hong Kong Limited (No 2) [2018] 2 HKLRD 769 at para 5, per Harris J; Liu Chun Kau Andy v Hung Lee Construction Engineering Limited [2019] HKCFI 1269 at para 9, per Linda Chan J; and, more recently, Kwok Hiu Kwan v Convoy Global Holdings Limited [2021] HKCFI 814 at paras 54 to 62, per Coleman J. 

DISCUSSION

78.I am satisfied that there is a serious issue to be tried in respect of the two intended claims in relation to the 2018 and 2019 financial statements.

Serious issue to be tried

79.In respect of the 2018 financial statements, the crux of the dispute is whether it was justified for Koo not to sign the financial statements before the deadline.  The issue is why he did not do so. Koo says that the Company had failed to produce the 2017 and 2018 bank statements for him to check and he was therefore not in a position to verify the draft financial statements.  On the other hand, Chang contends that Koo had only been trying to get hold of the 2017 bank statements for his own US tax purpose and there was no justification for his refusal to sign the 2018 financial statements.

80.This is a factual dispute.  The contemporaneous correspondence exchanged between the parties at the time appears to show that before 12 August 2019, ie just a few days before the filing deadline, Koo had indeed been asking for the 2017 bank statements only.  It seems plain to me that Chang has shown at least a serious issue to be tried that Koo had refused to sign the 2018 financial statements without any reasonable excuse.

81.In respect of the 2019 financial statements, I consider that the intended claim turns on whether the alleged agreement and the alleged oral variation in 2007 existed.  If so, it means that Koo was justified in requesting the alleged amount due to be included in the draft financial statements in the first place. 

82.This is plainly a factual dispute.

83.It is notable that Koo is able to produce what appears to be contemporaneous documents in support of his case on the alleged agreement, namely the shareholders’ meeting record.  The fax header appearing on that document shows that it was a document which came into existence in September 2002.  On its face, the shareholders’ meeting record expressly referred to a profit sharing ratio of 55% and 45% between TDC USA and the Company.  On the other hand, Chang denies the alleged agreement.  He has raised a number of queries on the document, as set out in para 70 above.  In my view, the queries are legitimately raised and warrant a proper investigation.  This includes assessing the veracity of Koo’s explanation why the alleged agreement was reached even before Chang formally became a shareholder of the Company.  In the absence of any further investigation, the court is not in a position to make any definitive findings on the shareholders’ meeting record and the alleged agreement. 

84.Koo also relies on a number of invoices issued by TDC USA and the statement of account for 2018 to prove the existence and execution of the alleged agreement.  Chang’s position is that there were dealings between the Company and TDC USA but the terms of the dealings were not as alleged by Koo. 

85.In my view, the conflict is not one which can be summarily decided one way or the other at this stage.  On their face, the documents relied on by Koo are arguably in support of his case.  However, their content is not such as to enable me to decide on the true nature of the dealings between the Company and TDC USA which spanned over many years after 2002.    

86.In a leave application, the task of the court is a limited one.  The prospect of the intended claim is only investigated to a limited extent.  Here, the parties have put forward opposite factual accounts of the dealings between the Company and TDC USA.  Chang’s version of events raises at least a serious issue to be tried.  At this stage, it is simply not possible for me to conclude that the intended claim has no real substance such that the Company cannot be said to have any expectation of success.

87.As I understand it, it is Ms Cheung’s submission that there is indeed no need to resolve the factual issue concerning the alleged agreement in the present leave application. 

88.In the discussion which took place between Chang and Koo in 2020, Koo made the proposal that the financial statements should include a note setting out that the directors held different views and if the note was incorporated, he would proceed to sign the statements.  Furthermore, he repeatedly confirmed to Chang that the inclusion of the note would not prevent the Company from later disputing the alleged amount due.  Ms Cheung submitted that this is what a prudent director would have done in the face of the impasse.  Hence, by putting forward the proposal, Koo was not in breach of his duties to the Company.  

89.I do not agree that the intended claim turns solely (or primarily)  on the reasonableness of Koo’s proposal.  Chang’s position is clearly stated in the draft statement of claim.  He contends that the alleged amount due was not due at all and/or was “fabricated and/or incurred without informed consent of the [Company]”.  If, factually, that is proved, it would follow that Koo’s insistence of including the alleged amount due or incorporating the proposed note was wrongful.  In doing so, he was arguably placing the interests of TDC USA before the interests of the Company. 

90.Therefore, the existence of the alleged agreement cannot be divorced from the alleged breach of duties on the part of Koo.  If the alleged agreement did not exist, it would appear that there was no basis for TDC USA to issue the invoices in question and for Koo to suggest to reflect the alleged amount due in the financial statements in the first place. It would also be difficult for Koo to maintain that he was being reasonable when he made the proposal to include an explanatory note. 

91.Analysed this way, the dispute concerning the alleged agreement is an issue which needs to be resolved in the intended claim.  I therefore reject Ms Cheung’s submission in this regard.

92.Lastly, Ms Cheung submitted that statutory derivative action is not a suitable avenue to resolve a shareholder dispute: Great Genius Industrial Limited v LG Corporation Limited [2020] HKCFI 2890 at paras 25 to 26.  She contended that the present dispute is a dispute between Koo and Chang as shareholders over the profit sharing arrangement and hence the Company’s name and resources should not be used in resolving this dispute.

93.I do not agree with the submission.  As Mr Ng correctly put it, the intended claim is based on the alleged breach of director’s duties on the part of Koo.  It is directed at his misconduct vis-à-vis the Company, which has resulted in it suffering a loss.  It is therefore suitable for Chang to invoke the mechanism of derivative action to pursue Koo. 

The other requirements

94.I have concluded above that there is a serious issued to be tried in respect of both intended causes of action against Koo. In my view, it follows that it will be in the interests of the Company to pursue the intended action. 

95.In respect of the cause of action concerning the 2018 financial statements, it is not disputed that up to now the IRD has not imposed any penalty on the Company for the late filing.  Koo therefore contends that the Company has suffered no loss and it is therefore not in the interests of the Company to bring the intended claim. 

96.On the other hand, in the draft statement of claim, it is pleaded that Koo’s failure to sign the 2018 financial statements before the deadline has led to the Company being subject to “potential penalties imposed by the IRD”.  In this regard, I accept Mr Ng’s submission that in assessing damages for breach of fiduciary duties, the loss is assessed at the time of the judgment and any post-breach changes would be taken into account: Libertarian Investments Ltd v Hall (2013)  16 HKCFAR 681 at paras 90 to 91.  Hence, in light of the potential penalties, it cannot be said at this stage that it is not in the interests of the Company to bring the claim.

97.In respect of the cause of action concerning the 2019 financial statements, the claim for Koo’s breach of duties amounts to $2,823,436 and, if upheld, the sum is payable to the Company.  It is therefore in the interests of the Company to bring this claim against Koo.

98.I am also satisfied that the other requirements for granting leave are satisfied.  The Company has not itself brought proceedings against Koo.  The written notice required under section 733 has also been served.

99.For the above reasons, I hold that leave should be granted to Chang to bring the intended statutory derivative action against Koo.

100.I should add that the evidence contained in Koo’s 3^rd affirmation does not assist him to resist the leave application.  If anything, it reinforces the conclusion that the factual disputes can only be resolved after further investigation.  No leave should be granted for its admission.

Costs

101.Chang has succeeded in obtaining leave.  He should have costs of the originating summons. which should be paid out of the Company’s assets.

102.As to whether the costs incurred and to be incurred in the derivative action should be indemnified out of the Company’s assets, the court may defer the question of indemnification until the outcome of the derivative action is known or when the position is clearer: Tang Siu Choi v Man Lung Textiles Limited [2018] HKCFI 125 at para 29.  I consider that this would be the proper approach in this case. There will be liberty to apply for that purpose.

CONCLUSION

103.I make the following orders:

(1)  Leave be granted to Chang to commence a derivative action in the name of the Company against Koo in respect of the matters described in the draft statement of claim exhibited as “CCH-2” to Chang’s affirmation dated 15 January 2021 with amendments on quantum as set out in paras 27 to 28 above.

(2)  The costs of and occasioned by the originating summons be paid to Chang out of the assets of the Company in the first instance.  The costs are to be taxed if not agreed. 

(3)  There be liberty for Chang to apply for the costs incurred and to be incurred by him in bringing the derivative action to be indemnified out of the assets of the Company or be borne by Koo personally.

(4)  Leave to file Koo’s 3^rd affirmation be refused.  The costs of his amended summons be to Chang.

Mr Kurt Ng, instructed by Ling & Lawyers, for the plaintiff

The 1^st defendant was not represented and did not appear

Ms Elizabeth Cheung and Mr Jonathan Ng, instructed by Fred Kan & Co, for the 2^nd defendant