Case Document

100%Judiciary

HCA 1255 / 2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1255 OF 2006

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BETWEEN

	LAU WILLIAM JOHN	Plaintiff
	and
	WAN YUK LIN, ALISON	1^st Defendant
	LEE WAI SHUEN, ANGELA	2^nd Defendant
	YAU WAI KUEN	3^rd Defendant
	SKYDON DEVELOPMENT LIMITED	4^th Defendant
	CHANG CHE HANG	5^th Defendant

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Before: Deputy High Court Judge Au in Chambers

Date of Hearing: 30 June 2008

Date of Handing Down Decision: 28 July 2008

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D E C I S I O N

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I. Introduction

1. This is the Defendants’ application to strike out paragraphs 18(b) to (e), 19, 21(a) to (d) and paragraphs 2 to 6 of the prayers of the Plaintiff’s Statement of Claim (collectively “the objected parts of the Statement of Claim”) for want of a reasonable cause of action.

2. In essence, the Defendants say the Plaintiff simply has no locus to bring the claim which is based on the objected parts of the Statement of Claim, as the same is only vested in the 4^th Defendant company (“Skydon”) as a matter of law.

3. In order to properly understand the Defendants’ application, it is necessary for me to set out the gist of the Plaintiff’s pleaded claims as follows.

II. The Plaintiff’s claims as pleaded

4. Skydon is a limited company incorporated in Hong Kong, carrying on the business of providing services of conducting searches on public records. It was initially incorporated by five shareholders, including the 1^st Defendant (“Mr Wan”).

5. Since about 1990, the Plaintiff (“Mr Lau”) has become a shareholder of Skydon, and was once appointed as its director.

6. By about November 1996, Mr Lau and Mr Wan had acquired all the shareholding in Skydon from the other shareholders. As between them, Mr Lau now holds 47% of the shares, and Mr Wan 54%.

7. The 2^nd Defendant (“Ms Lee”) and the 3^rd Defendant (“Ms Yau”) were Skydon’s employees.

8. In 1998, Mr Lau and Mr Wan both resigned from being a director of Skydon, and Ms Lee and Ms Yau were then appointed as directors instead.

9. In November 2004, Mr Wan transferred to each of Ms Lee and Ms Yau 500 shares in Skydon. Mr Wan was then subsequently reappointed as a director, allegedly without the notice and consent of Mr Lau.

10. In the Statement of Claim, Mr Lau’s claims are based upon two principal separate causes of action.

11. The first one is in relation to various oral agreements (“the Agreements”), which were said be binding on Mr Lau, Mr Wan and Skydon. It is Mr Lau’s pleaded case that under the Agreements, it was agreed that Skydon should make certain payments to its shareholders and directors of monthly returns of investment, year-end dividends and other sums.

12. Mr Lau claims that Skydon was in breach of the Agreements in not making the various payments to him. It is also his claim that Mr Lau, Ms Lee and Ms Yau (as directors and shareholders of Skydon) have wrongfully failed to cause Skydon to make those payments.

13. This claim for the breach of the Agreements is not the subject matter of the present striking out application.

14. Mr Lau’s second claim, which is the subject matter of this striking out application, arises as follows.

15. It is part of Mr Lau’s pleaded case that Mr Wan, Ms Lee and Ms Yau have been in breach of their respective directors’ and fiduciary duties, and have thus caused allegedly loss and damage to Skydon. The relevant pleas in the Statement of Claim appear at paragraphs 17 to 21 as follows:

“	17.	The 1^st, 2^nd and 3^rd Defendants, as the directors of Skydon, owe the following statutory and fiduciary duties to Skydon.
		(a) Not to misappropriate money to their own use;
		(b) Act in good faith and bona fide for the benefit of Skydon;
		(c) To exercise their powers for their proper purposes;
		(d) Not to allow any conflict between their duties and their personal interest; and
		(e) To exercise a reasonable degree of care and skill to the affairs of Skydon.
	18.	In breach of the duties pleaded in paragraph 17, the 1^st 2^nd and 3^rd Defendants wrongfully:
		(a) increased the salary and monthly return of investment of the 1^st Defendant though the profit and revenue of Skydon were not significantly increased and without seeking approval of the Plaintiff;
		(b) conspired with the 5^th Defendant to misappropriate funds of Skydon and use resources of Skydon to support the operation of Green Tomato, which was set up by the 1^st and 5^th Defendants and hiding from the Plaintiff;
		(c) further or in the alternative, conspired with the 5^th Defendant to make loans to the 1^st Defendant, Green Tomato and one company called Credit on Demand Limited ("COD") out of the funds of Skydon without seeking approval of the Plaintiff;
		(d) as a result of the misappropriation as stated in paragraph 18 (b) and (c), which caused a lack of funds in Skydon so which failed to pursue one of the Skydon's claims against Micro, and further failed to enforce a summary judgment against Micro.
		(e) as a result of the misappropriation as stated in paragraph 18 (b) and (c), which caused a lack of funds in Skydon so which further failed to initiate proceedings against IAT Label Printing Company Limited and Credit Information Support Company for infringement of copyright.
	19.	By reason of the matters aforesaid, Skydon has suffered loss and damages [sic].
	20.	The breach of duties pleaded in paragraph 18 is based upon the fraud of the 1^st, 2^nd ,3^rd and 5^th Defendants or that it has been deliberately concealed from the Plaintiff.
	21.	Further or in the alternative, the 1^st, 2^nd, 3^rd and 5^th Defendants are liable to account for the assets of Skydon which they misappropriated.
		Particulars of loss and damages [sic] suffered by Skydon
		(a) Wrongful increment in salary and monthly return of investment of the 1^st Defendant. It amounts to about HK$755,050 up to March 2006 with such wrongful increment and thereafter to be assessed.
		(b) Loss of Skydon's funds as a result of unlawful transfer by the 1^st, 2^nd or 3^rd Defendants to Green Tomato, COD as well as to the 1^st Defendant which amounts to HK$782,162;
		(c) Estimated recoverable damages from Micro which amounts to around HK$4,500,000 and subject to be assessed; and
		(d) The loss of the opportunity to obtain compensations against IAT Label Printing Company Limited and Credit Information Support Company. Estimated recoverable damages from the 2 companies, which amounts to around HK$100,000 and subject to be assessed.”

16. Further, in relation to both of his claims, Mr Lau’s prayers for reliefs as pleaded in the Statement of Claim are as follows:

	“		THE PLAINTIFF CLAIMS (ON BEHALF OF HIMSELF AND/OR the 4^TH DEFENDANT) AGAINST THE DEFENDANTS:
			(1) Under paragraph 10 hereof, a declaration that the 1^st Defendant's directorship is invalid and should be annulled.
			(2) Under paragraphs 17 and 18 hereof, a declaration that the 1^st Defendant was acting in breach of trust and statutory duties in relation to the 4^th Defendant as director and that she be barred from directorship and signatory of bank accounts of the 4^th Defendant.
			(3) Under paragraphs 17 and 18 hereof, a declaration that the 2^nd and 3^rd Defendants were acting in breach of trust and statutory duties in relation to the 4^th Defendant as director and/or signatory to the company bank accounts.
			(4) Under paragraphs 4, 18 and 21, a declaration that the 1^st, 2^nd, 3^rd and 5^th Defendants are liable to damages to the 4^th Defendant in respect of each of their acts of misappropriating the funds of the 4^th Defendant;
			(5) The 4^th Defendant or alternatively the 1^st, 2^nd and/or 3^rd Defendants to pay the Loss and Damages to the Plaintiff as pleaded in paragraph 15 hereof;
			(6) The 1^st, 2^nd, 3^rd and/or 5^th Defendants to pay the Loss and Damages to the 4^th Defendant as pleaded in paragraph 21 hereof;
			(7) Interests as pleaded in paragraphs 22,23 and 24 hereof;
			(8) Costs; and
			(9) Further and other relief.”

III. The present application to strike out

17. As mentioned above, the Defendants now seek to strike out paragraphs 18(b)-(e), 19, 21(a) to (d), and prayers 2 to 6 of the Statement of Claim, on the only ground that they disclose no reasonable cause of action.

Applicable principles on striking out

18. The principles governing the Court’s exercise of its discretion to strike out a claim for want of a reasonable cause of action are well established:

(1) The Court will only strike out a claim, when it is clear and obvious that the claim as pleaded discloses no reasonable cause of action.

(2) A “reasonable cause of action” is a cause of action with “some chance of success when only the allegations in the pleading are considered”.

See: Hong Kong Civil Procedure 2008, paras 18/19/4, 18/19/6.

The Defendants’ submissions

19. Mr Maurellet, counsel for the Defendants, submits that Mr Lau simply has no locus to bring a claim against any of the Defendants based on the objected parts of the Statement of Claim. His reasons are as follows:

(1) It is trite that the pleaded fiduciary and directors’ duties of Mr Wan, Ms Lee and Ms Yau are all duties that are owed to Skydon but not Mr Lau personally: Hollington on Shareholders’ Rights (4^th ed), paras 4-01, 4-04, pp 35, 38.

(2) All the losses pleaded in these paragraphs of the Statement of Claim relate to assets belonging to Skydon. They are losses suffered by the company, but not Mr Lau.

(3) It is well established under the Foss v Harbottle rule that, as a matter of law, the proper plaintiff to bring such a claim against the directors for these losses is the company, that is, Skydon, but not Mr Lau as a shareholder: Shareholders’ Rights, supra, p 93.

(4) It is only in exceptional circumstances, such as fraud on the minorities by those in control of the company, that a shareholder can bring a derivative action on behalf of the other shareholders to claim against its directors for wrongdoing to recover losses suffered by the company: Prudential v Newman Industries (No 2) [1982] Ch 204 (CA), 210D-211C.

(5) However, to constitute a properly pleaded derivative action, the claimant shareholder must plead the following:

(a) The action is brought on behalf of himself and all other shareholders other than the wrongdoers. Mr Maurellet relies on Joffe, Minority Shareholders (2^nd ed), para 1.98, (3^rd ed), para 1.39.

(b) The relief claimed in the prayer is a relief for the company rather than for the plaintiff himself. Mr Maurellet relies on Hollington, supra, para 6-46; Appendix 3, pp 363-364.

(c) The wrongdoers are in control of the company and that they have prevented an action being brought in the name of the company, and that the plaintiff could not by reason of the defendants’ opposition obtain the name of the company to issue proceedings. Counsel relies on Birch v Sullivan [1958] 1 All ER 56, 58H-59A per Harman J.

(6) Mr Maurellet submits that, in relation to the objected parts of the Statement of Claim, Mr Lau has failed to plead any of the above specific matters required by the law to support a derivative action.

(7) As such (and Mr Maurellet further submits), if Mr Lau purports to make a derivative claim against the Defendants, these parts of the pleading are clearly defective, and should be struck out.

20. Alternatively, Mr Maurellet contends that:

(1) It is also trite principle that a shareholder cannot, in his personal capacity, recover loss which is merely reflective of the loss suffered by the company: Landune International v Cheung Chung Leung [2006] 1 HKLRD 39, para 19, p 43E-G per Yuen JA, applying Johnson v Gore Wood (No 1) [2002] 2 AC 1 and Prudential Assurance Co Ltd v Newman Industries Ltd (No. 2) [1982] Ch 204.

(2) In the present case, the losses pleaded by Mr Lau in the object parts of the Statement of Claim are losses only reflective of that suffered by Skydon. They are not losses suffered by Mr Lau in his own personal capacity. Thus, if Mr Lau’s plea is to mount a personal claim for these losses, he simply has no locus to do so.

Mr Lau’s submissions

21. Mr Liu, counsel for Mr Lau, confirms that Mr Lau is bringing a derivative action for the claim based on the objected parts of the Statement of Claim.

22. He however submits that the objected parts of the Statement of Claim should not be struck out for the following reasons:

(1) There is no authority to support the proposition that in bringing a derivative action, a plaintiff must state expressly in the title to the proceedings that he is suing for and on behalf of the other shareholders, although it is preferable to do so. As long as it is clear from the body of the pleading that the plaintiff is suing in a derivative capacity, it is not defective.

(2) In the present case, the complained paragraphs show clearly to a reasonable objective reader that that part of the claim is a derivative one, brought on behalf of Skydon against the delinquent directors. Mr Liu in particular relies on paragraph 22 of the Statement of Claim, which pleads “[t]he Plaintiff (on behalf of Skydon) is entitled to claim interest on the respective sums…”.

(3) Further, by reading together with the following parts of the Statement of Claim, Mr Liu submits that it is also reasonably clear that Mr Lau is alleging (and thus pleading) that the other Defendants directors were in control of Skydon which prevented Skydon from bringing a claim or lending its name to Mr Lau to claim against them:

“	10.	… By conspiring with the 2^nd and 3^rd Defendants, the 1st Defendant was subsequently re-appointed as a director of Skydon without giving the Plaintiff any notice.
	11.	In November 2004, just seven days prior to the Annual General Meeting of Skydon, the 1^st Defendant transferred 500 shares each to the 2^nd and 3^rd Defendants so that the 1^st Defendant could perform wrongdoings by virtue of their directorships, as particularized below.
	12.	The Plaintiff was since then entirely ignored and/or excluded from the decision making of Skydon in any event.”

(4) In the premises, Mr Liu submits that Mr Lau has sufficiently pleaded what are required under the law to support a derivative action under the objected parts of the Statement of Claim.

(5) Insofar as the complained prayers are concerned, since Mr Lau is also claiming personally on those parts of the claim which concern breaches of the Agreements, by pleading the words “on behalf of himself and/or the 4^th Defendant [Skydon]”, it is also reasonably clear (as submitted by Mr Liu) to an objective reader that Mr Lau is claiming on behalf of himself for reliefs relating to those claims based on the paragraphs other than paragraphs 17 to 22 of the Statement of Claim, and on behalf of Skydon for reliefs relating to paragraphs 17 to 22. The prayers as pleaded are (further submitted by Mr Liu) not clearly or obviously defective as alleged, and should not be struck out.

Discussion

23. I agree with Mr Liu’s submissions that the authority does not support that a plaintiff bringing a derivative action must state expressly in the title to the proceedings that he is claiming for and on behalf of the company, insofar as the same is made clear in the body of the pleading and all the correct parties are joined:

(1) In Wallersteiner v Moir (No 2) [1975] AB 373, 391d-f, Lord Denning MR did not find an omission in stating “suing on behalf of himself and all the other shareholders” in the title to a derivative counterclaim objectionable. The Master of Rolls in fact went on to say that it was right that no suggestion was made to amend the title and that no objection had been taken on the form of proceeding.

(2) I also do not think paras 1.38 and 1.39 of Minority Shareholders (3^rd ed), cited and relied on by Mr Maurellet for the Defendants, go so far as to suggest that for every derivative claim, the title to the proceedings must state expressly that the plaintiff is suing for and on behalf of the other shareholders. All they suggest is that it is usually so stated, and is advisable to do so. The relevant parts of these commentaries are as follows:

	“		… Further, the title will usually state that the claimant is suing on behalf of himself and all other shareholders in the company (other than any defendants who are shareholders), for example, the format might be: …
			…
			Under previous case law, it was held that provided that all the correct parties have been joined and the defendants raise no objection, omission of the claimant’s representative capacity from the title to the proceedings is irrelevant [Wallersteiner (No.2) is cited in support]. (emphasis added)

24. In the premises, I do not think the Mr Lau’s claim based on the objected parts of the Statement of Claim should be struck out for the reason that he has not stated in the title he is suing on behalf of himself and all the other shareholders of Skydon. It is also pertinent to note that in the present claim, the only other shareholder (i.e., Mr Wan) is alleged by Mr Lau to be a wrongdoer. I do not think it is suggested that Mr Lau should plead in the title that he is also suing on behalf of Mr Wan.

25. On the other hand, subject to my above view on the title to derivative proceedings, I accept the principles submitted by Mr Maurellet set out in paragraphs 19 and 20 above, on what are the necessary matters and facts that should be pleaded in a derivative claim. I regard these principles as well established, and are not subject to any serious challenge.

26. Applying these principles, I further accept Mr Maurellet’s submissions that the derivative claim as presently pleaded is defective, in that it has failed to plead to the effect that the personal Defendants have prevented an action being brought in the name of Skydon, and that the Mr Lau could not by reason of the personal Defendants’ opposition obtain the name of Skydon to issue proceedings.

27. I reject Mr Liu’s submissions that by objectively reading together with paragraphs 10 to 12 of the Statement of Claim, Mr Lau has effectively pleaded the above. These three paragraphs, objectively read with the rest of the pleading, refer to the directors’ concerted conducts to perpetuate the alleged breaches the Agreements. I cannot read into these paragraphs a plea that these directors have acted to prevent Skydon from suing them, or they have opposed Mr Lau in obtaining the name of the company to issue proceedings. One should not be left with guesswork in reading the pleading.

28. I therefore agree with Mr Maurellet that these complained paragraphs of the Statement of Claim are defective in pleading the derivative claim, and are prima facie liable to be struck out.

29. Insofar as prayers 2 to 6 of the Statement of Claim are concerned, I also accept Mr Maurellet’s submissions that, as presently pleaded, they relate to reliefs which only Skydon is entitled to claim. Thus, the plea that Mr Lau is also claiming “for himself” (whether in additional or alternative to Skydon’s claim) for these reliefs is unsustainable. They are therefore also prima facie liable to be struck out.

30. However, as a fall back, in the course of the hearing Mr Liu for Mr Lau provides to this Court a draft Amended Statement of Claim. Mr Liu then submits that if the Court is to conclude that there are defects in the objected parts of the Statement of Claim, they can in any event be remedied by the following proposed amendments to paragraph 19 and the prayers in the draft:

“	19.	By reason of the matters aforesaid, Skydon has suffered loss and damages [sic]. The Plaintiff could not, by reason of the 1^st, 2^nd and 3^rd Defendants [sic] opposition, obtain the name of Skydon to issue proceedings against the 1^st, 2^nd 3^rd and 5^th Defendants.
		…
		THE PLAINTIFF CLAIM (ON BEHALF HIMSELF AND/OR the 4^TH DEFENDANT) AGAINST THE DEFENDANTS:
		(1) …
		(2) …
		(3) …
		(4) …
		(5) The 4^th Defendant or alternatively the 1^st, 2^nd and/or 3^rd Defendants do pay the Loss and Damages to the Plaintiff as pleaded in paragraph 15 hereof;
		(6) …
		(7) Interests as pleaded in paragraphs 22, 23 and 23 hereof;
		(8) …
		(9) …
		THE PLAINTIFF CLAIMS (ON BEHALF OF HIMSELF) AGAINST THE DEFENDANTS:
		(1) The 4^th Defendant or alternatively the 1^st, 2^nd and/or 3^rd Defendants to pay the Loss and Damages [sic] to the Plaintiff as pleaded in paragraph 15 hereof;
		(2) Interests as pleaded in paragraphs 23 and 24 hereof;
		(3) Costs; and
		(4) Further and other relief. ”

31. Mr Liu therefore alternatively seeks leave to amend the Statement of Claim in the above manner, and submits that there should thus be no striking out of any parts of the Statement of Claim as amended.

32. Mr Maurellet accepts (I believe rightly so) that with the proposed amendments to paragraph 19 and the prayers of the Amended Statement of Claim, the derivative claim no longer falls foul of the principles governing a proper plea.

33. In the premises, I believe the proper course for me to do is that I would not strike out the Statement of Claim as sought by the Defendants, but grant leave to Mr Lau to amend paragraph 19 and the prayers of the Statement of Claim in the above proposed manner.

IV. Conclusion

34. For the above reasons, I would grant leave to Mr Lau to amend paragraph 19 and the prayers of the Statement of Claim in the manner as set out in above. In light of the amendments, I also make no order under the Defendants’ striking out Summons.

Costs

35. As explained above, if not because of these amendments, the Defendants would have been successful in their application to strike out the objected parts of the Statement of Claim. Further, the proposed amendments (with other various amendments proposed to be made to the Statement of Claim, which are not relevant to the present application) were only provided to the Defendants’ solicitors by way of Mr Lau’s Summons dated 28 June 2008, two days before this hearing. This could not have saved the Defendants’ costs that have been incurred, including Counsel’s fee, for this hearing.

36. In all the circumstances, I believe it is just and fair that Mr Lau should pay the Defendants’ costs of their striking out Summons.

37. The Defendants asks for their costs to be grossly assessed at $117,860.00. Mr Liu for Mr Lau submits that they should be reduced to $93,800.00. In my view, $93,800.00 is still on the high side for costs incurred in relation to a simple application as this one. However, since Mr Lau has through counsel accepted that this represents costs reasonably incurred by the Defendants, I therefore grossly assess the Defendants’ costs to be in the sum of HK$93,800.00 and further order that Mr Lau should pay the Defendants’ costs of this application the said sum.

(Thomas Au)
Deputy High Court Judge

Mr. Liu, Jerome C.W., instructed by Messrs Tam, Pun & Yipp for Plaintiff.

Mr. Maurellet, Jose-Antonio, instructed by Messrs Blank Rome for 1^st to 5^th Defendants.

Cites 2 cases

Cases cited in this judgment

Cheung Chi Wai v. Cheung Chung Leung

[2006] 1 HKLRD 39

High Court CFI31 Jul 2009

Lau, William John v. Wan Yuk Lin, Alison and Others

HCA 1255/2006

High Court CFI02 Sep 2011

Other Judgments in This Case