廣東摩德娜科技股份有限公司 v. 摩德娜科技(香港)有限公司
Read the full judgment text of HCA 1615/2021 on BabelCite. This High Court CFI judgment was delivered on 5 May 2023.
1. This is the combined hearing of two similar applications (“ Applications ”) taken out by Modena Machinery (International) Limited ( “Modena Inter”):
Cites 6 cases
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HCA 1615/2021 & HCMP 367/2022 [2023] HKCFI 1173 HCA 1615/2021 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1615 OF 2021 _______________________
_______________________ HCMP 367/2022 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 367 OF 2022 _______________________
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________________ J U D G M E N T ________________ Introduction 1.This is the combined hearing of two similar applications (“Applications”) taken out by Modena Machinery (International) Limited (“Modena Inter”):
2.The Applications are supported by 3 affirmations of Benjamin Chan (“B Chan”), the sole director of Modena Inter (“Chan 1”, “Chan 2” and “Chan 3” respectively). 3.In Chan 2 at para 19, B Chan stated that “if the Court is of view that it is necessary and appropriate, Modena Int will give an undertaking to indemnify Modena HK for any adverse costs order(s) made in the Action.” 4.The Applications are opposed by 廣東摩德娜科技有限公司 (“Modena GD”) and Modena HK. Background 5.The HCA was commenced by Writ on 26 October 2021. The Plaintiff is Modena GD while Modena HK is the Defendant. Modena GD is a PRC company and the 100% shareholder of and thereby controls Modena HK. 6.Modena GD’s has the following shareholders:
7.From establishment to June 2016, B Chan was the legal representative and chairman of the board of Modena GD. From June 2016 to 13 March 2021, B Chan was the legal representative, chairman of the board and general manager of Modena GD. From 14 March to 4 April 2021, Li Zhan Hua was the acting legal representative, chairman of the board and general manager of Modena GD. On 5 April 2021, B Chan was removed from all positions in Modena GD by the board which was confirmed by a shareholders’ resolution dated 5 July 2021. 8.As for Modena HK, from incorporation in 2009 until 16 March 2021, B Chan was its sole director. On 17 March 2021, B Chan was removed as director while Ms Young Won Ken (“Young”) was appointed in his place. From 16 May 2021 onwards, Young and Mr Chen Jun Peng ( 陳俊鵬 ) are the 2 directors of Modena HK. 9.Since the ouster of B Chan, there have been ongoing fights over the control of Modena GD among its shareholders, and in turn the control of Modena HK. 10.By reason of its 100% shareholding, Modena GD controls the composition of Modena HK’s board of directors. When asked by this court at the hearing, Mr Chan frankly accepted that at the time of the Writ in the HCA, the board members of Modena HK were appointed by Modena GD. Similarly, the current board members of Modena HK were also appointed by Modena GD. Indeed, at para 34 of Young’s affirmation, she stated on 5 December 2021, Modena HK’s board of directors had resolved to appoint her to act on behalf of Modena HK in the HCA. 11.Quite apart from the fact that in the HCA, the same group of majority shareholders are in control of the Plaintiff ie Modena GD and the Defendant ie Modena HK, there are a number of rather unusual features of the HCA which should be pointed out at this juncture. 12.First, presently, Messrs Benny Kong & Tai only acts for Modena HK in the OS (in order to resist it) but not in the HCA. The reason given for this anomaly is that an Acknowledgment of Service in the HCA (“AS”) had been filed by B Chan on behalf of Modena HK on 3 November 2021 and a notice to act for Modena HK had been filed by Jun He Law Offices, solicitors for Modena Inter, on 29 November 2021 (“Notice to Act”). 13.Second, in her affirmation in opposition to the OS, Young claimed to reserve the right of Modena HK to apply to set aside the AS and the Notice to Act on the basis that they were invalid as, according to Modena HK’s case, B Chan was no longer a director when he filed the AS. At least as at the hearing, it did not appear Modena HK, on the instructions of Young, had done so. 14.Third, Modena GD’s claim in the HCA appears simple enough. It claims that since 2009, it has sold numerous ceramics production equipment to Modena HK who had failed to pay the outstanding purchase price for them. It is pleaded in the Statement of Claim that Modena HK had acknowledged liability in its 2019 Financial Statements of Modena HK. As at 30 September 2021, the outstanding amount owed by Modena HK was around HK$63.7 million. Particulars of that amount can be found in a table annexed to the Statement of Claim which set out a large number of items/invoices between 17 January 2020 and 30 September 2021. 15.Fourth, despite the apparent simplicity of the pleaded claim and the fact that no Defence has been filed in the HCA, Modena GD has not sought to obtain any judgment against Modena HK in the HCA. Nor was there any application to set aside the AS and the Notice to Act and to enter judgment in favour of Modena GD. This was put to Mr Chan. His answer was to the effect that everything became a standstill as a result of the AS and the Notice to Act, his client’s energy was focused on other proceedings and the onset of the fifth wave of COVID. Deliberation The Law 16.The relevant sections of the Companies Ordinance, Cap. 622 (“CO”) are as follows. 17.Section 732(3):
18.Section 733:
19.In explaining the equivalent provisions in the predecessor ordinance, i.e. s.168BB and 168BC of Cap. 32, in Re Myway Ltd [2008] 3 HKLRD 614, Barma J (as he then was) observed:
Viable Defence and Interest of the Company 20.In relation to Modena HK’s intended Defence in the HCA, Mr Dawes SC refers this court to a number of paragraphs in B Chan’s affirmations. 21.First, in Chan 1 at para 9(8), he affirmed that the amounts booked in the accounts of Modena HK as liabilities were recorded for the purpose of inter alia satisfying the Mainland China’s restrictions for transferring funds from Hong Kong into Mainland China. The amounts did not reflect the actual liability owed by Modena HK to Modena GD. 22.Second, in Chan 2 at para 20, he further elaborated on Modena HK’s intended Defence, the gist of which is as follows:
23.At the hearing, Mr Chan for Modena GD raised 2 points: (i) whether Modena Inter has raised a viable Defence and (ii) whether it would be in the interest of Modena HK to defend HCA at all. 24.On the 1st point, Mr Chan heavily relied upon the 2019 Financial Statements of Modena HK signed by B Chan as its sole director on 20 October 2020. Suffice it to say that (i) the balance sheet showed an amount due to immediate holding company ie Modena GD of close to HK$600 million, (ii) Note 9 stated the amount due to immediate holding company was repayable on demand and (iii) Note 12 showed Modena HK had certain transactions with Modena GD for the purchase of goods to the tune of HK$245 million, which transactions were said to have been entered into in the normal course of business. It should however be pointed out that the 2019 Financial Statements were qualified by the auditors for the company’s failure to prepare consolidated financial statements as required under section 9 of the HKFRS. 25.It is understandable for Mr Chan to place heavy reliance on the 2019 Financial Statements of Modena HK (as well as the previous ones). But Mr Dawes SC’s point is that the intended Defence raised by Modena Inter on behalf of Modena HK involves disputes of facts going to the true nature and accuracy of the relevant accounting records and challenging the quantum of Modena GD’s claim in HCA. Further, he pointed out to this court that according to Chan 2, there had never been any funds transferred from Modena HK to Modena GD by reference to the sales invoices issued. If that allegation by B Chan is clearly wrong, it could very easily have been put right by Modena GD or Modena HK by producing documentary evidence of the payments of the invoices issued. But there are none. 26.Ultimately, as the passages quoted from Re Lucky Money Ltd shows, the present application should not be allowed to be a trial run for an Order 14 application, which battled will be fought later. Of course, if it is now shown there is plainly no arguable defence, then the Applications should be dismissed on the basis that it would not be in the interest of Modena HK. But on the totality of the evidence, this court is unable to say, at this stage, there is plainly no arguable defence. 27.On the 2nd point ie about the interest of Modena HK, the nub of Mr Chan’s submission is that Since B Chan’s ouster, by reason of his various court applications and intermeddling into the affairs of Modena HK, its bank accounts have been suspended, resulting in the freezing of approximately HK$120 million in deposits. Consequently, Modena HK has not been able to repay its debts to Modena GD which has in turn caused significant cash flow problems for Modena GD: affirmation of Young at para 47 and affirmation of He BiaoCheng (“He”) at paras 69 and 70. In this sense, the interest of Modena GD and the interest of Modena HK are aligned and are seriously affected. 28.This court does not wish to play down the disruptive effect of the freezing of Modena HK’s bank accounts but according to He, that was due to B Chan’s allegedly unjustified court applications and intermeddling into the affairs of Modena HK. Those events no doubt form the backdrop to the animosity between the majority camp and the minority camp of shareholders of Modena GD but this is not the occasion to resolve who is right and who is wrong. The short point is that according to He’s affirmation, the various banks’ decisions to freeze Modena HK’s accounts had already been taken well before present Applications - there is no suggestion that the success or otherwise of the present Applications will somehow alter the banks’ decisions one way or another. 29.At para 4.2 of Young’s affirmation, it is suggested that the present Applications are simply another attempt to abuse the Court’s process in order to inter alia to continue to paralyze the finance of Modena HK and to injure the financial situation of Modena GD. If the Applications are allowed, B Chan will be able to use Modena HK’s funds to purportedly defend the HCA. In particular, Young claims in para 49 of her affirmation that:
30.Presently, apart from a bare assertion, there is no further explanation as to how the costs of defending the HCA could be borne by Modena HK if the Applications are allowed. Allowing the Applications will only enable Modena Inter to derivatively defend the HCA on behalf of Modena HK, but would not give authority to Modena Inter to act on behalf of Modena HK in any other respects. Nor would it allow Modena Inter access to Modena HK’s money to fund the defence of the HCA. 31.As stated by Harris J in Re Li Chung Shing Tong (Holdings) Ltd. [2011] 5 HKLRD 274 at [42]:
32.It should be noted that in that case, the reliefs sought by the applicants included:
33.In the present case, no such indemnity is sought in the OS or the HCA Summons. Further, Modena Inter is even prepared to indemnify Modena HK for any adverse costs order(s) made in the HCA. 34.As alluded to by Harris J, this court can grant the Applications if Modena Inter is prepared to bear in the first instance the costs. 35.Further, if the proposed defence should turn out to be as unmeritorious and as lack of bona fide as Mr Chan is at pains to point out in his skeleton, Modena GD could well have it struck out or seek summary judgment; either way it could then proceed to enter judgment for the substantive claim as well as costs of the action by reason of Modena Inter’s offer of indemnity for adverse costs order. 36.The other points about the interest of Modena HK can be dealt with briefly. 37.First, given Modena GD’s total control of Modena HK, especially the placing of the conduct of its defence in the HCA on Young, it is just common sense that it would be in the interest of Modena HK, as a separate legal entity, to rid itself of the involvement of the party suing it. The conflict of interest of Modena GD is glaring. 38.Second, it can be seen from paras 6 to 10 of Young’s affirmation that the current management of Modena HK is quite prepared to accept Modena GD’s factual narrative in support of its claim: (i) Modena HK acted as Modena GD’s trading vehicle; (ii) through Modena HK, the products developed by Modena GD were sold to overseas buyers; (iii) Modena HK bought goods from Modena GD for onwards resale but would not immediately pay for them; and (iv) as of 31 July 2022, close to HK$100 million was due to Modena GD. 39.Indeed, it can be seen from para 3.2 of Young’s affirmation that she, on behalf of Modena HK, was prepared to make an admission as to liability in the HCA if by so doing is in the interest of Modena HK which, as Mr Chan puts it, is aligned with that of Modena GD. At Section E3, Young was prepared to affirm that the intended Defence raised by Modena Inter on behalf of Modena HK is “obviously devoid of merits”, when she was only a director of Modena HK in March 2021, after the ouster of B Chan. 40.Again, the conflict of interest of the current management of Modena HK is glaring. But the more important question is this: given its total control, Modena GD could simply have caused Modena HK to pay up instead of commencing the HCA. Further, once the HCA was commenced on 26 October 2021, it would not be too difficult for Modena GD to arrange Modena HK to immediately give an Acknowledgment of Service in the HCA not contesting liability, before B Chan had a chance to do so on 3 November 2021. None of that was done. 41.To conclude, looking at the matter in the round, and given the low threshold for the interest of the company criterion[4], this court is of the view that it is in the interest of Modena HK that leave be given to Modena Inter to derivatively defend the HCA on its behalf. Failure to defend diligently by misconduct 42.This requirement is met. The short answer is the passage from Re Myway Ltd at [32] quoted above: if the Court is satisfied that it is, prima facie, in the interests of the company for leave to be granted, which this court is so satisfied, then it would correspondingly involve a failure to act in the best interests of the company not to take the steps for which leave is to be granted. 43.Indeed, that is the accepted position of Mr Tsang. At paras 42 and 43 of his skeleton, he submits that whether Modena Inter has shown that Modena HK has failed to diligently defend the HCA depends on whether Modena Inter has raised an arguable defence to the Action. Since the Proposed Defence advanced by Modena Inter is unarguable, it follows that Modena HK cannot have failed to diligently defend the HCA by refusing to raise the Proposed Defence. A similar submission is made by Mr Tsang at para 46 in relation to misconduct. Written Notice requirement 44.On 3 January 2022, Jun He Law Offices sent a notice pursuant to s 733(3) CO to Modena HK at its address at Room C, 2/F, Wing Tat Commercial Building, 121-125 Wing Lok Street, Central, Hong Kong. 45.Young, at para 55 of her affirmation, does not appear to dispute that address, according to record, was the address of Modena HK’s company secretary viz Group Motion Secretarial Services Limited ("Group Motion”), which was also the registered office of Modena HK. What Young seems to be saying is that she had attempted to file a Notice of Change of Address of registered office on 14 July 2021 while Group Motion had attempted to file a Notice of Resignation on 16 July 2021. Shortly afterwards, the Companies Registry returned those forms to her as a result of another High Court action, with the result that the records of Modena HK’s registered office remain unchanged. 46.On these facts, it is difficult to see how it can be denied that written notice has been served on Modena HK at its registered office, as required by s 733(3) of CO. All that Young can say in her affirmation at para 55.1 is that neither she nor Chen Jun Pang had personally received the notice. 47.In any event, no useful purpose will be served going into the question whether personal receipt by the directors of a company is a necessary requirement of s 733(3) of CO or the submissions of Mr Tsang as to whether the notice is defective. The primary purpose of s 733(3) is to give a company notice of a proposed application so that it can consider whether or not to contest it or acquiesce in it: Re New-Asia Optical Co. Ltd. unrep., HCMP 1302/2011, 10 August 2011, Harris J at [12]. Given that Modena HK has been served with the OS and the HCA Summons and its Board have decided to and did contest the Applications, it seems to this court wholly appropriate to give leave to dispense with service of the written notice under s 733 (5) CO. Disposition and costs order nisi 48.For all the above reasons, the Applications are hereby allowed. 49.For the avoidance of doubt, the grant of the Applications is on the basis that Modena Inter would shoulder the costs of defending the HCA in the first instance and upon the undertaking of Modena Inter to indemnify Modena HK for any adverse costs order(s) made in the HCA. 50.There shall be an Order nisi that costs of the Applications be to Modena Inter, to be taxed if not agreed, and paid by Modena GD and Modena HK forthwith, certificate for 2 counsel.
Mr Isaac Chan and Mr Francis Chung, instructed by M/s Chung & Kwan, for the Plaintiff in HCA 1615/2021 Mr Victor Dawes, SC and Mr Martin Wong, instructed by M/s Jun He Law Offices for the Intended Intervener in HCA 1615/2021 and the Plaintiff in HCMP 367/2022 Mr Johnathan H.Y. Tsang, instructed by M/s Benny Kong & Tsai, for the Defendant in HCMP 367/2022 [1] There is a dispute between Modena Inter and Modena GD as to the actual shareholding of Modena Inter and the public. However, such dispute is immaterial for the present purpose. [2] See fn 1 above. [3] “In this Division-
[4] Described as “well-settled” in Re Li Chung Shing Tong (Holdings) Ltd. [2011] 5 HKLRD 274 at [21] and in Re Primlaks (HK) Ltd. [2016] 2 HKLRD 31 at [21]. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under HCA 1615/2021