ZENG BINGSEN v NORTH STAR ELECTRONIC LTD AND ANOTHER

HCMP 1244/2025

[2026] HKCFI 4206

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1244 OF 2025

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D E C I S I O N

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INTRODUCTION

1.This is the hearing of the Plaintiff’s Amended Originating Summons dated 25 July 2025 as amended on 11 September 2025 (the “Amended OS”) seeking leave to commence statutory derivative action on behalf of North Star Electronic (Hong Kong) Limited (the “Company”) against Xu Xu Chenghui (“Xu”) (the “Intended Derivative Action”) pursuant to the draft Statement of Claim attached to the Amended OS (the “Leave Application”).

2.In the Intended Derivative Action, the Plaintiff, as a 50% shareholder of the Company (with Xu being the other 50% shareholder), complains about what appears to be a simple case of misappropriation of funds by Xu qua director.

3.However, Mr Tang for Xu submits that Xu was at all material times the sole shareholder of the Company, which was incorporated for the purposes of acquiring Tatung Mexico S.A. de C.V. (“Tatung Mexico”) and its subsidiaries TMX Logistics, Inc. (“TMX”) and TMX Technologies Inc. (“TTI”) (together, the “TMX Group”) at a total consideration of US$4 million from Tatung Co. (“Tatung Taipei”) (the “Acquisition”). The Plaintiff’s shareholding is subject to litigation.

4.The Acquisition was an investment opportunity introduced to Xu by Mr Diau Chan Hsing (“Diau”), the manager of the TMX Group.

5.The Acquisition was financed entirely by Xu through loans from his wife’s company, Zens (HK) Co., Limited (“Zens HK”).

6.The Plaintiff only became a shareholder of the Company pursuant to a fraudulent scheme (the “Scheme”) perpetrated by Diau and him on Xu, which inter alia resulted in Xu transferring 50% of the shares in the Company to the Plaintiff (the “Stolen Shares”).

7.Mr Tang submits that the Intended Derivative Action is an opportunistic attempt by Diau and the Plaintiff to exert pressure on Xu by litigating on the Company’s dime (with the benefit of an order for indemnity) and in turn thwart proceedings commenced by Xu and the Company in Texas against the Plaintiff in relation to the Scheme (the “TX Proceedings”).

8.Importantly, Xu has also commenced an action to recover the Plaintiff’s shares on the ground of fraudulent misrepresentation against the Plaintiff by Writ of Summons issued on 24 December 2025 in HCA 2354/2025 (the “Recovery Action”).

MATERIAL FACTS

9.On the facts, I note that in order to fund the Acquisition, the Company entered into a written loan agreement in the total sum of US$4,000,000 with Zens HK (the “Zens HK Loan Agreement”) on or about 15 January 2020. Zens HK was and is at all material times controlled and beneficially owned by Xu’s wife, Ms Jin Hui (“Jin”).

10.On 6 March 2020, the Company and Tatung Taipei entered into a Share Purchase Agreement in Chinese (the “Chinese SPA”) which provided that the Company would acquire the TMX Group from Tatung Taipei at a consideration of US$4,000,000.

11.At the time, Tatung Mexico’s primary asset was a plot of land in Mexico with factory premises (the “Mexico Land”), as referred to in Chinese SPA Clause 1(2) and Exhibit 3.

12.On the same date, the Company paid US$2.4 million to Tatung Taipei as the first payment of consideration under Chinese SPA Clause 4(1).

13.On Xu’s case, pursuant to Diau’s representations and advice, Xu caused the Plaintiff, Diau and himself to be appointed as directors of TMX on 11 May 2020.

14.On 14 May 2020, the Company paid US$800,000 to Tatung Taipei as the second payment of consideration under Chinese SPA Clause 4(2).

15.By supplemental agreement signed by the Company and Tatung Taipei on 26 August 2020 and 28 August 2020, respectively (the “Supplemental Agreement”), the parties agreed that US$600,000 out of the Company’s third and final payment of US$800,000 be paid to Tatung Taipei pending recovery of Tatung Mexico’s lost electricity quota.

16.On 17 August 2020, the Company paid US$200,000, being the 1st tranche of the final payment to Tatung Taipei in accordance with Supplemental Agreement Clause 2(1). Tatung Mexico was not successful in recovering the electricity quota, with the result that the Company had no obligation to pay the balance of US$600,000 per Supplemental Agreement Clause 3.

17.Following the Acquisition, Tatung Mexico (1) purchased the land adjacent to the Mexico Land (the “Adjacent Land”) on the recommendation of Diau, and (2) leased its factory premises to TTE Technology, Inc. dba TCL North America (“TTE”) via a facility-service agreement dated 1 March 2021 (“TTE Lease”), with payments to be made to TMX.

18.Xu said that on or about 26 August 2021, Diau told him that he would arrange for TMX to remit US$2.8 million (US$2.5 million being funds of TMX, US$300,000 being rental payments collected by TMX in recent months) (the “Remittance”) to the Company.

19.It is said that in or around 2-3 September 2021, Diau began coaxing Xu into setting up a new holding company in Mexico (the “Newco”) to acquire the Mexico Land because when the Mexican tax bureau’s auditor imposes tax fines on Tatung Mexico (the “Alleged Tax Fine”), there would be little room for negotiation if Tatung Mexico owned real estate. Thus, to avoid the Alleged Tax Fine of US$1 million, the Mexico Land must be transferred to the Newco (the “1st Misrepresentation”).

20.When Xu told Diau that he would like his legal representatives to review the documents for the purpose of the setting up the Newco, Diau claimed that the tax bureau had already arrived and had begun its audit. In this connection, Diau asked if the Company had received US$10,000 from TMX, which was understood to be the test transaction of the Remittance. In reliance on the 1st Misrepresentation, Xu agreed to the arrangement suggested by Diau.

21.Diau caused the Remittance to be made to the Company in four tranches on 6 September 2021, 15 September 2021, 9 November 2021 and 2 December 2021, respectively.

22.After the first two remittances in or around 10 October 2021, Diau pointed to the need to prepare a promissory note (the “Promissory Note”) (among other documents) as a formality.

23.On 11 November 2021, Diau sent Xu the draft Promissory Note, claiming that it had to be signed and backdated to a date prior to the first two remittances because the tax bureau would check for compliance with company laws.

24.Xu understood that the Remittance was required for the purposes of acquiring the Mexico Land with the Newco under the arrangement, and the Promissory Note was further required to obscure the purpose of the Remittance. Xu accordingly agreed to sign the backdated Promissory Note in reliance on the 1st Misrepresentation.

25.Thus, contrary to the Plaintiff’s case, there was no oral agreement between Xu, Diau, and the Plaintiff in or around 2021 (the “Alleged Agreed Arrangement”) which provided that the Company would utilise the US$2.5M Loan to set up a Newco to acquire the Mexico Land from Tatung Mexico and that Tatung Mexico would pay rents to Newco for use of the Mexico Land which would be used for repayment of the US$2.5M Loan. In any event, any “agreement” was induced by and the product of the 1st Misrepresentation.  

26.Further, on around 19 April 2022, Diau revived the issue of the Alleged Tax Fine and represented to Xu that Xu had to exit the Group and establish a Newco to acquire the Mexico Land (the “Arrangement”); otherwise, the Alleged Tax Fine could become US$6 million in tax plus a fine of US$4 million (“2nd Misrepresentation”).

27.In light of Xu’s reluctance to carry out the Arrangement, Diau further represented to Xu that, in addition to any Alleged Tax Fine, there was a new plight in the Group’s import-export disparity, which could incur a potential fine in the tune of US$37.5 million (the “Alleged Fine”) (“3rd Misrepresentation”, together “Misrepresentations”).

28.Because of the Misrepresentations and Diau’s persistent cajoling and reassurances, Xu temporarily relinquished his shareholding and directorship at each level of the TMX Group pursuant to the Arrangement:

28.1.  In relation to the Company, Xu (1) resigned as director of the Company on 26 April 2022 and appointed Mr. Wu Guanghua (his wife’s brother-in-law) (“Wu”) as sole director on the same day, and (2) transferred 50% of the shares in the Company to each of the Plaintiff and Wu on 11 May 2022 for the notional consideration of HK$5,000, which was never actually paid, with the understanding that their holdings were only temporary.

28.2.  In relation to Tatung Mexico, Xu (1) resigned as director of Tatung Mexico on or about 2 May 2022, with the Plaintiff being subsequently appointed as sole director and (2) transferred his ten Series B-1 shares in Tatung Mexico to Wu on or about 6 May 2022.

28.3.  In relation to TMX, Xu resigned as director of TMX in or around 5 June 2022, with Mr Salvador Enrique (Diau’s nominee) appointed.

29.On or about 26 July 2024, Xu discovered the falsity of the Misrepresentations from a telephone call with Mr Zhao Dali, the General Manager of TTE, that the authorities had never raised any issue of tax fines.

30.Further, Xu discovered that Clause 3(b)(iii) of the TTE Lease provided that any fines imposed by authorities shall be borne by TTE, such that even if the risks of the Alleged Tax Fine and the Alleged Fine were credible (which is denied), the TMX Group would not be liable in any event.

31.Thereafter, Xu took steps to re-take control of the TMX Group.

31.1.  Upon Xu’s request, Wu agreed to and did (1) re-appoint Xu as director of the Company on 20 May 2024 and resign as nominee director on the same day, and (2) return the 5000 shares of the Company to Xu on 31 May 2024.

31.2.  Xu made a similar request to the Plaintiff (through Diau), which was refused by the Plaintiff. On 9 September 2025, Xu’s solicitors Messrs. King & Wood Mallesons (“KWM”) issued a demand letter to the Plaintiff and Diau but received no positive response (the “9 Sep Letter”).

32.Mr Tang for Xu submits that this was too little, too late. Xu discovered that Diau and the Plaintiff had successfully plundered the Company in or around 2023 by stripping it of the Mexico Land and the Adjacent Land at a substantial undervalue:

32.1.  On 23 March 2023, the Mexico Land was transferred to Everstar Enterprise, S.A. de C.V. (“Everstar Enterprise”), a company controlled by Li, at the transfer price of US$6.5 million; and

32.2.  On 2 June 2023, the Adjacent Land was transferred to Fullstar Enterprise, S.A de C.V. (“Fullstar Enterprise”), another company controlled by Li, at a transfer price of US$1.2 million.

32.3.  Notably, the Plaintiff entered into the relevant sale and purchase agreements for the above transfers on behalf of the seller Tatung Mexico.

33.A valuation report of the Mexico Land and the Adjacent Land dated 19 October 2025 and 22 September 2025, respectively, showed their respective commercial values at the time of transfer to be approximately US$12 million and US$1.6 million. In other words, the Mexico Land and the Adjacent Land were sold at an undervalue of US$5.5 million and US$400,000, respectively.

34.On 12 May 2025, the Company and Xu commenced proceedings on behalf of the TMX Group in relation to the Scheme against inter alios the Plaintiff and Diau in Texas (the “TX Court”), viz the TX Proceedings. The Company and Xu also sought injunctive relief by way of ex parte Temporary Restraining Order (“TRO”) and temporary or permanent injunction. The TRO was granted by the TX Court on 16 May 2025.

35.On 12 June 2025, TMX filed its Plea to the Jurisdiction and Response in Opposition to Plaintiff’s Request for a Temporary Injunction in the Proceedings (“TMX’s Plea to the Jurisdiction”), supported by the Plaintiff’s affidavit, which contended that, inter alia, Xu lacked standing to bring the derivative action against TMX because Xu was neither shareholder or director of the Company since 26 April 2022, and his re-appointment as director on 20 May 2024 was ineffective. The same stance was repeated by the Plaintiff on several occasions in the TX Proceedings.

36.On 18 June 2025, TMX counterclaimed within the TX Proceedings against the Company for, inter alia, breach of contract due to the Company’s failure to repay the Promissory Note upon maturity (“TMX Counterclaim”). Although the TMX Counterclaim was notionally made against the Company, TMX made numerous allegations against Xu’s conduct as director which substantially overlap with the Intended Derivative Action.

37.On 9 November 2025, without hearing oral submissions and evidence and with no more than a paragraph’s worth of reasons, the TX Court granted TMX’s Plea to the Jurisdiction and dismissed the TX Proceedings (the “TX Court Order”). The TMX Counterclaim was withdrawn on 12 November 2025.

38.On 8 December 2025, the Company filed a Motion for Retrial, which is essentially an appeal against the TX Court Order.

39.On 29 September 2025, TMX served a statutory demand on the Company based on the Promissory Note (the “SD”).

40.The SD was followed by a winding up petition presented by TMX on 22 October 2025 (the “Winding Up Petition”). The Plaintiff was the director of TMX who made the affidavit verifying the Winding Up Petition.

APPLICABLE PRINCIPLES TO THE LEAVE APPLICATION

41.The legal principles in this area of the law are well established. Mr Wong for the Plaintiff rightly refers this Court to Lam Kin Chung v Soka Gakkai International of Hong Kong Limited (No.2) [2018] 2 HKLRD at §5, per Harris J.

42.Anthony Chan J. (as he then was) in Hao Xiaoying v Green Valley Investment Limited, unrep, HCMP 1394/2015, 10 August 2016, at §§10-11 succinctly set out the following legal principles:

“10. On serious question to be tried:

(a) The threshold is relatively low. The prospects of the company’s success are to be investigated only to a limited extent, and the court should be slow to find against the applicant unless such prospects are so slim that the company cannot be said to have any expectation of success. See Re Primlaks (HK) Ltd, HCMP 1789/2015, unrep, 28 January 2016, §§7-8 per Ng J.

(b) At the leave stage, it is not the court’s function to try to resolve conflicts of evidence or difficult questions of law which require substantial argument and deliberation. In practice, if the applicant is able to produce a draft pleading that sets out a case with some prospect of success when only the allegations contained in the pleading are considered, the criteria will be satisfied unless the respondent can demonstrate fairly readily that there is a serious flaw in the claim and that it has no real substance. See Re Primlaks (HK) Ltd, §9.

11. As regard the interest of the company:

(a) Again, the threshold is low. In deciding whether it is prima facie in the interest of the company for leave to be granted, the court should have regard to the fact that “there should not be a trial within a trial and the court should not be forced to enter into the merits of claims where there are serious disputes”. See Re Primlaks (HK) Ltd, §21.

(b) If a “serious question to be tried” has been demonstrated, in most cases it will follow that it is prima facie in the interest of the company that proceedings are pursued. See Re Primlaks (HK) Ltd, §§20-21.

(c) In assessing whether it appears to be in the interest of the company that the derivative action be pursued, the court ought to take into account whether any practical benefit is likely to result, even in circumstances where it may be clear that, eg, a director has breached his duties to the company. This essentially involves assessing whether it appears that the company stands to gain in money or money’s worth in light of the costs which will have to be incurred. See Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 at [56] to [60][2] per Palmer J; Pang Yong Hock v PKS Contracts Services Pte Ltd [2005] 2 LRC 72 at [21] per Tay Yong Kwang J (giving the judgment of the Singaporean Court of Appeal).”

43.In addition, Section 733 of the Companies Ordinance, Cap.620 provides a discretionary power for the Court to grant leave to commence a statutory derivative action. This includes the consideration whether the case is a proper case for the Court to exercise its discretion. Part of the reason for the discretion is to act as a safeguard against vexatious and inappropriate proceedings by disgruntled members. The Court can properly be regarded as exercising a “gatekeeping” function: Sea Heritage Holdings Ltd v Nice Wave International Ltd [2024] HKCFI 2891 at §20(6).

ANALYSIS AND DETERMINATION

44.I am considered the parties’ submissions, and I am of the view that the Leave Application should be refused for the following reasons.

45.First, I am of the view that, based on the undisputed facts, there is a very serious, legitimate and credible case that the Plaintiff holds the 50% shares in the Company for Xu.

46.Mr Tang is correct that the Plaintiff does not dispute that no consideration was paid for the subject shares, and the consideration on the Instruments of Transfer and Bought and Sold Notes for the subject shares dated 11 May 2022 was simply notional. Where shares are transferred for no or notional consideration, a presumption of resulting trust would have arisen in favour of the transferor. This presumption can be rebutted by proof that the transferor did in fact intend for the transferee to take the shares as beneficial owner. As such, a resulting trust is presumed to have arisen in favour of Xu with respect to the subject shares.

47.I agree that, on the present facts, the Plaintiff is unable to rebut this presumption. In the reply evidence, the Plaintiff did not directly address the allegation that the subject shares are held on resulting trust.

48.The Plaintiff said that Xu did not take issue with his shareholding in the Company before the Leave Application was taken out on 25 July 2025 and Xu only did so in the 9 Sep Letter after the Leave Application was taken out, and Xu failed to produce any evidence in support of his demand to return his shareholding in the Company in response to correspondence from the Plaintiff’s solicitors Messrs. Fung, Wong, Ng & Lam LLP Solicitors (“FWNL”).

49.Further, the Plaintiff has caused at least a total sum of RMB3,000,000 to be transferred to Jin for his shareholding in the Company between 27 May 2020 and 5 June 2020 (the “RMB3M Transfer”), with the remainder paid by Diau.

50.I am of the view that the fact that Xu had not taken issue with the Plaintiff’s shareholding in the Company prior to the Leave Application is neither here nor there when Xu’s claim is supported by the contemporaneous evidence and within the limitation period. Similarly, the forensic point that Xu did not produce evidence in response to FWNL’s demands is irrelevant given that Xu has now adduced the relevant evidence in these proceedings.

51.On the RMB3M Transfer, I am of the view it is pertinent that the Plaintiff chose not to articulate the underlying transaction or reason for this transfer or explain how it relates to the transfer of his shareholding in the Company 11 May 2022, when the RMB3M Transfer took place nearly 2 full years earlier in May to June 2020.

52.I accept Mr Tang’s submission that the RMB3M Transfer stands in stark contrast to the rationale presented in the Plaintiff’s 1st Affirmation, where he claimed to have funded half of the purchase price of the Acquisition in the sum of US$2,000,000 in or around May 2020 and contributed to the share capital of the Company in equal shares on incorporation.

53.Further, even if the RMB3M Transfer can be considered to have been part of the US$2,000,000 which the Plaintiff contributed to the Acquisition, the Plaintiff’s failure to (1) account for the balance and (2) particularise the terms of the alleged agreement for his acquisition of the 50% of the shareholding of the Company is fatal to the utility of the RMB3M Transfer in rebutting the presumption.

54.Thus, I am of the view that that is the end of analysis. The Plaintiff is precluded from voting against the will of Xu as the cetui que trust, and must therefore ratify the pleaded breaches in accordance with Xu’s wishes: Qiyang Ltd v Mei Li New Energy Ltd [2016] 4 HKLRD 790 §38 (To J); Re Dalny Estates Ltd [2018] 1 HKLRD 409 §27 (Godfrey Lam J. (as he then was)).

55.Secondly and importantly, Mr Tang is correct in identifying that in the §11 of the draft Statement of Claim, the Plaintiff pleads three specific breaches.

(1)  Xu failed to use the US$2.5M Loan to implement the Alleged Agreed Arrangement (“Alleged Implementation Breach”);

(2)  Xu failed to cause the Company to repay the US$2.5M Loan by the maturity date of 31 December 2022 (“Alleged Repayment Breach”); and

(3)  Xu misappropriated the US$2.5M Loan by transferring the same to Zens HK (“Alleged Misappropriation Breach”, together “Alleged Breaches”).

56.The timing of these Alleged Breaches has not been particularised in the draft Statement of Claim, but that is crucial. I agree with Mr Tang that based on the present pleadings, irrespective of the existence of the Scheme, the Plaintiff has no prospect of establishing any of the Alleged Breaches due to two fundamental obstacles. First, insofar as the Alleged Breaches took place after 26 April 2022, Xu cannot be liable for them since he had resigned on that date. Xu could only have owed duties as de jure director prior to his resignation on 26 April 2022: China Shanshui Cement Group Ltd v Zhang Caikui [2025] HKCFI 1868 §§48-49, 65-66, 71-72, 89-90, 98-101, 107-108 (Coleman J). After 26 April 2022, Xu could only have owed duties as de facto or shadow director, neither of which is asserted in the draft Statement of Claim.

57.Mr Wong for the Plaintiff argues that Xu was reappointed as the Company’s director on 20 May 2024, such that he would have re-assumed the director’s duties and be liable for the Alleged Breaches from that point onwards. However, I agree that the Plaintiff is estopped from doing so by virtue of his position in the TX Proceedings that Xu was not validly reappointed a director of the Company from 20 May 2024. It is an abuse of process to take inconsistent positions in different proceedings, including foreign proceedings: X v Y [2025] HKCFI 4796 §§36-37 (Chan JA). This principle applies equally to factual allegations and legal positions: Re Minloy Ltd [2020] HKCFI 2215 §§30-34 (Linda Chan J).

58.Thus, Xu cannot be liable for any Alleged Breaches after 26 April 2022, and in particular, the Alleged Repayment Breach, which could only have occurred on or after 31 December 2022 (viz the maturity date of the Promissory Note.

59.It follows that to succeed; the Plaintiff would have to show that the Alleged Breaches took place in the period prior to Xu’s resignation on 26 April 2022 (the “Relevant Period”). However, as Mr Tang rightly points out, during that period, Xu was indisputably the sole shareholder of the Company, such that the Alleged Breaches would have been ratified by virtue of the Duomatic principle. It is the Plaintiff’s case that he became a member of the Company since 11 May 2022, and before that Xu was the sole shareholder. In other words, on either parties’ case Xu was both the sole director and sole shareholder of the Company during the Relevant Period.

60.Thus, even if the Alleged Breaches were made out, they would have been ratified by virtue of the Duomatic principle, which may operate to exonerate a director for breach of director’s duty. In particular, when shareholders with full knowledge of the relevant facts consent to the directors’ conduct, that conduct would not amount to a breach of fiduciary duty: Shun Hing Holdings Co Ltd v Li Kwok Po David [2020] HKCA 309 §§45-46 (Lam VP).

61.Xu was both the sole shareholder and director of the Company during the Relevant Period. In transferring the US$2.5M Loan from the Company to Zens HK (viz the Alleged Misappropriation Breach), Xu qua sole shareholder must have manifested his consent to (1) the Alleged Misappropriation Breach and (2) the Alleged Implementation Breach, because if the US$2.5M Loan is transferred to Zens HK, it could no longer be used for the purpose of setting up a Newco to acquire the Mexico Land from Tatung Mexico, viz the Alleged Agreed Arrangement.

62.This point has particular force in the present case because the Plaintiff is now seeking to retrospectively hold Xu liable for alleged breaches of directors duties during the Relevant Period, when during that period the Company was simply the alter ego of Xu which Xu was entitled to treat as his creature and use its assets as his own: Tam Po Kei v Tam Bo Kin [2011] 1 HKLRD 537 §67 (Harris J).

63.Thirdly and fundamentally, in my judgment it is not in the interest of the Company to allow this derivative action to proceed given that this is in substance a dispute on the ownership of the shares of the Company. It is established law that to allow an applicant to proceed in the company’s name and with its resources to resolve what is really a shareholders’ dispute is not in the interests of the company: Great Genius Industrial Ltd v LG Corporation Ltd [2020] HKCFI 2890 §§25-26 (Stewart Wong SC). This is a fortiori in the present case, which is effectively an ownership dispute between Xu and the Plaintiff – if Xu is correct, the Plaintiff would not even be a member of the Company.

64.In my view, it is not in the best interest of the Company to duplicate legal proceedings when the core dispute in the Intended Derivative Action (viz the purpose of the US$2.5M Loan and the existence of the Alleged Agreed Arrangement) is inseparable from the core dispute in the Recovery Action (viz the existence of the Misrepresentations, which will in turn affect whether the Plaintiff is rightfully a member of the Company). If the Misrepresentations are made out in the Recovery Action, the subject shares would have to be returned to Xu, such that (1) the Plaintiff would have no locus to sue in the Intended Derivative Action, or (2) Xu could immediately ratify of all the Alleged Breaches (without prejudice to the argument above that they had already been ratified).

65.As a matter of practical reality, there is no issue on limitation. It is in the best interest of the Company to stand aside and lead the Recovery Action proceed and unfold itself. Then the Company can decide what action, if any, to take, at that stage.

66.Similarly, in Kwok Hiu Kwan v Convoy Global Holdings Ltd [2021] HKCFI 814, Harris J held that the derivative action was not in the best interest of the company because, inter alia, the various points sought to be taken in the derivative action “will be canvassed and, so far as necessary, determined in various sets of proceedings including the Main Action”. Further, it was undesirable from a case management perspective for the derivative action to be brought alongside such proceedings: §125.

67.Fourthly, as a matter of judicial discretion, given the pending Winding-Up Petition, the Company will only incur unnecessary and wasted expenses to pursue the Intended Derivative Action when the same will come to an end by the time the winding up order is made against the Company, at which point all costs incurred by the Company in the meantime would be wasted. This cannot be in the interest of the Company.

68.I agree that the contention that the Winding Up Petition and the Intended Derivative Action are not “alternative remedies” is no answer to this consideration.

69.Fifthly, Mr Tang also relies on the Plaintiff’s ulterior motive. However, for the present purposes, I do not find it necessary to resolve this discrete issue one way or the other save that I am of the view that there is merits in Mr Tang’s submission that given the Plaintiff’s stance that the Company should be wound up, in commencing the Intended Derivative Action, the Plaintiff betrays his regard for the Company’s resources and its interests.

70.For the reasons stated above, I will dismiss the Leave Application. Hence, I do not find it necessary to deal with the Case Management Stay. But if I were wrong with my decision on the Leave Application, I would have definitely granted the Case Management Stay. It promotes procedural economy and avoids unnecessary waste of judicial resources pursuant to the underlying objectives under O.1A RHC. Given the identity of parties between the two sets of proceedings, the Recovery Action would likely have the effect of finally disposing of the Intended Derivative Action. In such circumstances, any prior determination of the Intended Derivative Action would be academic and entirely wasted. Case management stays have been granted in such circumstances: see e.g. Lok Man Sin v Lam Chi Wing [2019] HKCFI 56 §§21-22, 28 (Eugene Fung SC (as he then was)).

71.Further, absent a stay, there is a risk of parallel proceedings and a risk of inconsistent findings between the Recovery Action and the Intended Derivative Action.

72.Additionally, a stay in favour of the Recovery Action is consistent with the fact that where membership and standing is disputed, the Court ought to fashion an appropriate case management solution, having regard to the overriding objective of dealing with cases justly and at proportionate cost. This may include staying proceedings on terms that the issue of standing be resolved first: Re Contingent & Future Technologies Ltd [2024] BCC 223 §§85.3-85.4, 85.7 (in the context of an unfair prejudice petition).

73.The fact that the Plaintiff is a registered member of the Company does not necessarily preclude such a challenge: (See: Shi Jiu Xing v Hong Kong A-Sun Group Co., Limited [2023] HKCFI 1852; Qiyang Ltd v Mei Li New Energy Limited [2016] 4 HKLRD 790).

DIPOSITION

74.For all the reasons stated above, the Leave Application is dismissed.

75.I also make a costs order nisi that the Plaintiff is to pay the costs of and occasioned by the Leave Application to the 2nd Defendant forthwith, Xu, on a party to party basis, if no agreement can be reached. with costs to Xu. This costs order nisi should be made absolute within 14 days from the date herein unless an application is taken out to vary the same within the 14-day period.

76.Finally, I like to thank Mr Wong and Mr Kwok for the Plaintiff and Mr Tang for the 2nd Defendant for their very able assistance and comprehensive submissions.

Mr Joseph Wong and Mr Jonathan Kwok, instructed by Fung, Wong, Ng & Lam LLP Solicitors, for the Applicant

Mr Danny Tang, instructed by King & Wood Mallesons, for the 2nd Respondent