Wong Wai Chung and Another v. Woncorn Investment Ltd
Read the full judgment text of HCMP 1313/2020 on BabelCite. This High Court CFI judgment was delivered on 13 June 2022.
1. By an originating summons of 27th August 2020 (“ the Originating Summons ”), the Applicants (individually, “ Wai Chung ” and “ Wai Tak ”) seek leave to commence proceedings on behalf of Woncorn Investment Limited (“ the Company ”) against Wong Ying Chi Alta (“ Alta ”) and Chiu Wong Fat Chi Ava (“ Ava ”) (collectively, “ the Sisters ”), to seek ( inter alia ):
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HCMP 1313/2020 [2022] HKCFI 1680 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 1313 OF 2020 ______________
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______________ D E C I S I O N ______________ A. INTRODUCTION 1.By an originating summons of 27th August 2020 (“the Originating Summons”), the Applicants (individually, “Wai Chung” and “Wai Tak”) seek leave to commence proceedings on behalf of Woncorn Investment Limited (“the Company”) against Wong Ying Chi Alta (“Alta”) and Chiu Wong Fat Chi Ava (“Ava”) (collectively, “the Sisters”), to seek (inter alia):
2.Essentially, the Applicants are dissatisfied with the fact that Alta has been living at the Flat, that both Alta and Ava have been using the Carparks, that Alta and Ava have not been paying rent or expenses for their use and occupation of the Properties, and that they have not agreed to the proposals for sale of the Properties. B. THE UNDISPUTED FACTS 3.The following facts are undisputed. 4.Wai Chung, Wai Tak, Alta, Ava, and Wong Mei Chi (“Mei Chi”) are siblings (“the Siblings”). They are the children of Yu Lai Yung (“Mother”). 5.The Company was incorporated on 12th November 1985 by two nominee companies each holding one share. These two shares were transferred to Mother on 27th December 1985. On 19th December 1985, Mother was allotted a further 1,998 shares, and each of the Siblings was allotted 1,000 shares. 6.Mother passed away in August 2013. After the grant of probate of Mother’s estate, on 12th November 2015, the 2,000 shares originally held by Mother were divided amongst equally amongst the Siblings and transferred to them. At this point in time, each of the Siblings held 1,400 shares. Subsequently, on 17th July 2017, Mei Chi transferred all of her shares to Ava, so that Ava held 2,800 shares. The shareholding structure has not changed since then. 7.At all material times, Wai Chung, Alta and Ava were the directors of the Company. 8.The land on which Sunpeace Court was built had originally been held by two companies which essentially belonged to Mother’s parents and their children (including Mother). After Sunpeace Court was completed in about 1985, Mother caused the Company to be incorporated, and the Company acquired the Properties in February 1986. 9.Mother and Alta moved into the Flat in 1986. Wai Tak moved in as well in 2003. He moved out in 2016, but kept his personal belongings inside his room, and also kept his keys to the Flat. He has continued to use the address of the Flat for correspondence purposes. 10.From the time of the first board meeting of the Company on 19th December 1985, board meetings and general meetings of the Company were held at the Flat. The Siblings at all times had access to the Properties and were aware that Mother, Alta and Wai Tak were living there. The Company has been paying the utility expenses, management fees, government rent and rates, repairs and maintenance costs through the Company’s bank accounts for over thirty-four years. 11.After Mother passed away, there were several shareholders’ meetings and board meetings of the Company at which the issue of whether the Properties should be sold was discussed:
C. THE PRINCIPLES ON AN APPLICATION UNDER S.733 CO 12.There is no dispute as to the principles to be applied in the present case. 13.Statutory derivative actions are governed by Part 14, Division 4 of the Companies Ordinance, Cap.622 (“CO”). 14.Section 732 CO provides that:
15.Section 733 CO provides that:
16.Thus on an application for leave to commence statutory derivative action on behalf of a company, the applicant has to satisfy the court that:
See Hao Xiaoying v Green Valley Investment Ltd, unreported, HCMP 1394/2015, 10th August 2016, at [8] (Anthony Chan J). 17.The principles as to “serious question to be tried” and “interest of the company” were summarised in Hao Xiaoying at [10] and [11], cited with approval in Zhang Heng v Kingstone International Wealth Management Limited and ors, unreported, CACV 56/2017, 27th September 2017 at [11]:
18.The court will usually consider the issue of “serious question to be tried” first, because if this requirement is not satisfied, it would be difficult to see how it could be in the company’s interest to bring a derivative action. See Zhang Heng, supra, at [12] (Kwan VP). 19.There should be evidence enabling the court to form a conclusion as to whether the substance of the redress which the applicant seeks to achieve is available by a means which does not require the company to be brought into litigation against its will. For example, if the applicant can achieve the desired result in proceedings in his or her own name, it may not be in the best interests of the company to be involved in litigation at all. See Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 at [59]. 20.The same facts may found either a derivative action or proceedings for unfair prejudice. The distinction between misconduct and unfairly prejudicial management does not lie in the particular acts or omissions of which complaint is made, but in the nature of the complaint and the remedy necessary to meet it. If the whole gist of the complaint lies in the unlawfulness of the acts or omissions complained of, so that it may be adequately redressed by the remedy provided by law for the wrong, the complaint is one of misconduct. It is otherwise if the unlawfulness of the acts or omissions complained of is not the whole gist of the complaint, so that it would not be adequately redressed by the remedy provided by law for the wrong. See Re Charnley Davies Ltd (No.2) [1990] BCLC 760 at 783e-g (Millett J, as he then was), applied in Re Chime Corp Ltd (2004) 7 HKCFAR 546 at [47]-[48] and Re Shun Tak Holdings Ltd [2009] 5 HKLRD 743 at [35]. D. SERIOUS QUESTION TO BE TRIED D1. Claims lack particularisation 21.The writ proposed to be issued against the Sisters was framed in general terms, with no statement of claim endorsed. Four items of relief were proposed to be sought against the Sisters, as follows.
22.Ms Tina Mok, counsel for the Applicants, filed a skeleton argument stating that the claims which the Applicants intended to bring against the Sisters as directors in the name of the Company were as follows.
23.The formulation of the three claims essentially mirrored, with some adaptations, the contents of paragraphs 47, 51 and 53 of the Affirmation of Wong Wai Chung of 25th August 2020 (“Wai Chung 1st”), which was the substantive affirmation filed in support of the Originating Summons. 24.When asked to particularise the breaches of fiduciary duty complained of, Ms Mok submitted that these consisted of the following.
D2. Claim alleging conflict of interest 25.It would appear that the Applicants seek to complain that the Sisters placed themselves in a position of conflict between their personal interest and their duty to the Company. 26.This aspect of the “no-conflict” rule was described in Snell’s Equity, 34th ed., at paragraph 7-018 as follows:
27.However, it is not clear what duty is said to have been owed to the Company which is in conflict with the Sisters’ interest (beyond the assertion of a general duty to act in good faith and in the interest of the Company). Based on the skeleton and submissions as described above, I have considered whether it might be said that there is a duty on the Sisters to vote in favour of a sale of the Properties or otherwise to procure a sale of the Properties, which duty might conflict with their personal interest. 28.The starting point must be that the directors of a company do not necessarily have a duty to procure the sale of the company’s property. Whether there is such a duty will depend on the facts. In the present case, it is undisputed that the audited financial statements of the Company over the years,[1] signed by Alta and Wai Chung, have stated that the Company’s principal activity, inter alia, was “long term property holding” and that the Properties were classified as “non-current assets”. Paragraph 50 of Wai Chung 1st itself stated that the Company was a vehicle to hold assets, including the Properties, and did not carry on any business for profit. It could therefore not be said that there was any duty on the Sisters to procure a sale of the Properties by reason of any business activities of the Company. 29.Paragraph 47 of Wai Chung 1st reads:
30.Section E of the affirmation recounts a number of general meetings and board meetings of the Company subsequent to Mother’s death at which the Properties were discussed. Different views were expressed by the shareholders and directors at different times. For example, at the EGM of 24th June 2015, Wai Chung was in favour of retaining the Properties but requiring anyone who lived there to pay expenses. None of the meetings resulted in any resolutions regarding the disposition of the Properties, save for the board meeting of 9th November 2018, and the EGM of 29th November 2018, at both of which the proposal for sale of the Properties was not passed. I do not see how any of the matters which transpired at these meetings could be said to give rise to a duty on the part of the Sisters to procure a sale of the Properties. 31.Even if I am wrong in my view that the Applicants have not identified any conflict of interest and duty, there will not be any such conflict where a principal has given his free and fully informed consent to enable the fiduciary to prefer his own interest: Snell, supra, at paragraph 7-019; Virgo, The Principles of Equity and Trusts, 4th ed., at p.459. In the present case, it is the Applicant’s own evidence, as set out in the 2nd Affirmation of Wong Wai Chung dated 24th December 2020 (“Wai Chung 2nd”), that:
32.In other words, the Applicants’ own evidence is that the Company consented to the Siblings to live in, or use, the Properties – to prefer their own interest over any duty to the Company. 33.The Applicants say, however, that any such consent ended upon Mother’s death. Mr Wong submitted, and I agree, that the reasoning given for this cannot stand. It would be for the Company to withdraw its consent, but there has been no such board or shareholders’ resolution of the Company to effect such a withdrawal. The acquiescence could not be negated simply because of the fact that Mother passed away, or that the Sisters were majority shareholders and directors (contrary to the suggestion in paragraph 33 of Wai Chung 2nd). At most, it could be said that Wai Chung and Wai Tak have withdrawn their own consent, but that is not the same thing as the Company’s withdrawal of consent. Furthermore, their conduct is equivocal as to whether even their own consent has truly been withdrawn, since Wai Tak continues to keep his personal belongings at the Flat, and to keep his keys and use of the Flat as a correspondence address. D3. Claim alleging failure to act in good faith and in the interest of the Company 34.The Applicants say that the Sisters failed to act in good faith and in the interest of the Company as their failure to deliver vacant possession of the Properties prevented the Properties from being rented out or sold, and the rental income or sale proceeds from being shared amongst the shareholders of the Company. 35.However, it is not clear why it is being said that it is in the interest of the Company to sell or rent the Properties. As noted above, the Company engaged in the activity of long term property holding, so the sale of the Properties would be contrary to this activity. There was never any resolution by the board (or the shareholders) that the Properties should be sold or rented out (indeed, it does not appear that renting was even discussed). 36.Ms Mok submitted that it was in the interest of the Company to sell or rent the Properties now because the Company made a loss in the years ending 31st December 2011, 31st December 2013, 31st December 2014, and 31st December 2018. It is difficult to understand why it is now said (in 2022) to be in the interest of the Company to sell or rent the Properties when the history is that all along, there have been occasions when the Company made a loss. Ms Mok submitted that it was because the board had resolved on 9th October 2017 and 23rd August 2018 that distributions should be made, so that if the Properties were not sold the Company would suffer losses. However, the Company is a not profit-making company, and not in the business of selling or renting out properties, but rather, a property holding company. Furthermore, on the logic of Ms Mok’s argument, the Company’s losses were caused by the decisions to make distributions rather than the Sisters’ failure to deliver vacant possession of the Property. 37.In respect of the complaint that the Sisters have prevented the Property from being rented out, I further note that in any event, there is no claim in the proposed writ for any relief that the Property should be rented out. 38.It is notable that the formulation of the complaint in the Applicants’ skeleton argument focuses on the fact that the Sisters’ refusal to deliver vacant possession prevented potential rental income or sale proceeds from being shared among the shareholders – in other words, the complaint is that the shareholders, rather than the Company, were prevented from enjoying the benefits of renting or sale of the Property. I will return to this point below. 39.The Applicants also say that the Sisters failed to act in good faith and in the interest of the Company as they failed to pay rent and expenses for their occupation and use of the Properties. 40.Mr Wong submits that the undisputed evidence is that all along, prior to Mother’s death and indeed even for some time thereafter, all the directors and shareholders of the Company knew and acquiesced in the fact that Mother and some of the Siblings (including the 2nd Applicant Wai Tak) occupied the Properties without payment of rent. The relevant paragraphs from Wai Chung 2nd are set out above at paragraph 31. It was not until the EGM of 29th November 2018 that Wai Tak raised a query as to Alta’s occupation of the Properties without paying rent – to which Alta pointed out that Wai Tak was also occupying the Properties without payment in that he had left his things in the Flat. 41.Mr Wong submitted that on the principle of In re Duomatic [1969] 2 Ch 365, the Company should be taken as having agreed to such an arrangement as if the shareholders had resolved the same in a general meeting. A director’s act which might otherwise be a breach of his fiduciary duty to the company is not such a breach if the shareholders, with full knowledge, have agreed to it, either expressly or tacitly: see Tam Po Kei v Tam Bo Kin [2011] 1 HKLRD 537 at [67], [107], [108]. 42.Ms Mok did not seek to argue that the principle had no application to the facts if they were as characterised by Mr Wong. Rather, she submitted that the Company had only agreed to let Mother occupy the Properties, and Mother then granted a licence to her children to occupy the Properties, which licence must have terminated upon her death. However, this characterisation of the facts is not supported by the evidence relied on by Ms Mok.
43.Mr Wong further submitted that whilst it was, and is, always open to the Company to revoke such acquiescence, there has been no decision of the Company which in law constitutes such revocation. Mother’s death could not amount to a revocation by the Company. Nor could the mere fact that two of the minority shareholders, Wai Tak and Wai Chung, had changed their minds. I agree. D4. Claim alleging misappropriation and wrongful possession of Company’s assets 44.The Applicants’ third claim relies on the same allegations as those already considered under their second claim, namely the complaint that the Sisters failed to deliver vacant possession of the Properties and failed to pay rent and expenses for occupation of the same. 45.Given the views I have expressed above in relation to the second claim, it follows that there is no serious question to be tried as regards the third claim. D5. Claim for payment and delivery up of vacant possession 46.It also follows from my views above that there is no serious question to be tried as regards the second and third items of relief sought in the proposed writ: an order for payment of sums by reason of the Sisters’ breaches of duty to the Company, and an order that the Sisters deliver vacant possession of the Properties to the Applicant. D6. Claim for order that sisters procure sale of Properties 47.Quite apart from my views above, even if there was any breach of duty by the Sisters to the Company, it would not follow that the Sisters have a positive obligation to procure the sale of the Properties. No explanation was given as to the legal basis for this claim. D7. No serious question to be tried 48.I have borne in mind that in considering the issue of whether there is a serious question to be tried, the threshold to be applied is relatively low. Nevertheless, on the undisputed evidence, and without having to resolve any difficult questions of law, I have concluded that the Applicants have not demonstrated that their proposed claim involves any serious question to be tried. E. COMPLAINT IS MISMANAGEMENT RATHER MISCONDUCT 49.Having gone through the proposed writ and claims as formulated by the Applicants, it will be seen that what is complained of is not so much misconduct as mismanagement. Paragraph 4 of the proposed writ is revealing. It shows that what the Applicants ultimately want is a sale of the Properties. However, even if could be said that the Sisters were in breach of some sort of duty owed to the Company, the Applicants have not demonstrated why an order that the Sisters procure the sale of the Properties is an available or appropriate remedy for such breach. As Millett J said in Re Charnley Davies Ltd (No.2) [1990] BCLC 760, the alleged unlawfulness of the Sisters’ acts is not the whole gist of the complaint and would not be adequately redressed by the remedy provided by the law for the wrong. 50.The undisputed evidence is that it was agreed by all, including the Company, that Mother, Alta and Wai Tak could live at the Flat. This was so not only prior to Mother’s death, but for some years thereafter: Wai Tak continued to live in the Flat until 2016 (and even thereafter kept his room, his belongings in the room, his keys, and the use of the Flat as a correspondence address), and the issue of Alta paying rent for her occupation was only raised at the EGM of November 2018. What the Applicants wanted to do was change the agreed status quo, but their proposals were not accepted, and they could not prevail as they were in the minority both at the shareholder and board level. The complaint is therefore one of mismanagement and not of misconduct. 51.The point is further highlighted by the complaint against Ava.
52.No submission was made by Ms Mok as to whether the Applicants might achieve their desired result (of a sale of the Properties) by alternative proceedings in their own name, which would avoid having to bring the Company into litigation against its will. 53.Finally, as mentioned earlier, it is telling that in the Applicants’ skeleton, the complaint of the Sisters’ breach of duties of good faith and to act in the interest of the Company focuses on the shareholders being deprived of rental income or sale proceeds. F. INTEREST OF THE COMPANY 54.I have found that there is no serious question to be tried. I am also not satisfied that this is a case where there is no other appropriate means by which the Applicants can obtain the substance of the redress sought. In the circumstances, I am not satisfied that it would be in the interest of the Company to grant leave to commence the proposed action. G. NOTICE UNDER S.733(5) CO 55.Mr Wong submitted that no proper notice as required under s.733(1)(c) CO was served on the Company. The notice that was served on 4th August 2020 only made a complaint about the Sisters’ failure to deliver vacant possession of the Properties, but not about their failure to sell or rent the Properties. 56.Ms Mok did not seek to defend the adequacy of the notice or to apply for leave for dispensation of the notice pursuant to s.733(5) CO. 57.In the circumstances, the lack of notice is an additional reason to refuse leave at least in relation to paragraph 4 of the proposed writ, and the other paragraphs insofar as they seek to rely on a breach of duty to sell or rent out the Properties. H. DISPOSITION 58.I dismiss the Originating Summons. I further make a costs order nisi that the Applicants pay to the Company the costs of and occasioned by the proceedings, to be taxed if not agreed.
Miss Tina Mok, instructed by Tsang, Chan & Woo Solicitors & Notaries, for the 1st and 2nd Plaintiffs Mr Adrian Wong, instructed by Tsang, Chan & Wong, for the Respondent [1] The statements for the years ending 31st December 2010 to 31st December 2019 were adduced in evidence. |
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