Ming Lai Siu Fun v. Tsang Hung Kong and Others

HCMP 1141 /2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 1141 OF 2010

(ON AN INTENDED APPEAL FROM HCA NO. 2057 OF 2009)

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BETWEEN

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Before: Hon Le Pichon and Yuen JJA in Court

Date of Hearing: 11 August 2010

Date of Handing Down Judgment: 17 September 2010

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J U D G M E N T

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Hon Le Pichon JA:

1.This is an application by the first defendant for leave to appeal an order of Deputy High Court Judge Carlson of 30 April 2010. The judge having refused leave to appeal on 2 June 2010, the first defendant took out a summons for leave which Rogers VP dismissed on 7 July 2010. The first defendant applies to this court for a reconsideration of that determination pursuant to Order 59, rule 2A(7) and (9).

2.In the proceedings below, there were three summonses before the judge: (1) the plaintiff’s summons seeking an injunction to restrain the first defendant from dealing with the assets of the second and third defendants pending the outcome of the action; (2) the first defendant’s summons to strike out the statement of claim; and (3) the plaintiff’s summons to enter judgment in default of defence, failing which for an order that HCA 2057/2009 be consolidated with the second defendant’s action HCA 2740/2008.

3.The judge granted the injunction, dismissed the striking out summons, declined to enter judgment against the first defendant but made an unless order that the first defendant file a defence by 22 May 2010 and ordered consolidation.

4.The second defendant (“BEI”) is a company registered in Hong Kong.  The first defendant is its chairman.  The plaintiff’s camp and the first defendant’s camp hold an equal number of shares in BEI.  The third defendant (“YK”) is a company incorporated in the PRC.  The directors of BEI made capital contributions to YK and BEI became a 90% shareholder of YK which is its only investment and business.  The remaining 10% is held by a PRC company representing PRC interests which was entitled under the articles to appoint two of the three board members, the third to be appointed by BEI.  The first defendant was BEI’s appointee to the board of YK and is its chairman and legal representative.

5.In broad outline, HCA 2057 concerns allegations against the first defendant, inter alia, that as chairman of YK he had misused his powers and position and misappropriated and/or inappropriately dealt with YK’s assets by seeking to dispose of them at an undervalue and that capital contributions made by BEI’s shareholders to YK have not been acknowledged or properly recorded in its books.  In short, it is alleged that the first defendant is in breach of his fiduciary duties to YK and the plaintiff seeks redress on behalf of YK.

6.The plaintiff is not a shareholder of YK but only of its parent, BEI.  As earlier noted, YK is a PRC company and therefore PRC law is engaged.  The question that the strike out summons raises is novel and one of considerable complexity: whether a “double” or “multiple” derivative action is available to a shareholder where the company wronged (in this instance, YK) is a foreign company (in this instance, a PRC company).

7.The contentions of the parties on this issue are summarized in §§56 to 61 of the judgment.  The judge refused to strike out the statement of claim, observing that:

“62. ... There is no doubt that this area of the law is not one that is easy to resolve as a matter of interpretation of the facts and in relation to what is a proper analysis of the effect of Konamaneni and Base Metal ...”

8.An analogous question arose in Konamaneni and others v Rolls-Royce Industrial Power (India) Ltd and others [2002] 1 WLR 1269, but in the context of the governing law of derivative actions of foreign companies on an application for leave to serve out of the jurisdiction.  The foreign law involved in that case was the law of India.  As it was accepted that there was no material difference between English and Indian law on derivative actions, no difficulty arose.  Had there been a difference, a difficult choice of law question would have arisen, namely, whether the matter should be governed by the lex fori or the law of the place of incorporation.

9.Sir John Swaine SC who appeared for the first defendant relied on observations Lawrence Collins J made in that case on the supposition that he had had to decide the choice of law question.  Obviously, those observations could be no more than obiter, quite apart from any debate as to the scope and effect of that decision.  The first defendant also relied on Base Metal Trading Ltd v Shamurin [2005] 1 WLR 1157, 1176 and the remarks of Lord Millett in the Court of Final Appeal’s decision in Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 at §55 as supporting the view that it is the law of the place of incorporation that governs.

10.In the present case, the first defendant filed ‘expert evidence’ in the form of an opinion from a Chinese lawyer regarding derivative actions under the laws of the PRC although no directions had been sought nor given by the judge for the filing of such evidence.  Nevertheless, it seems that the first defendant was allowed to refer to that evidence at the hearing below.  The plaintiff, for her part, did not file any expert evidence of her own nor, it seems, did she raise any objection as such at the hearing to the first defendant’s reliance on its expert evidence.

11.The judge refused leave to appeal because he did not consider that those matters could be resolved in a summary manner in that they are “questions of real substance raising difficult and novel points of law”.  In other words, from a case management perspective, the trial judge considered that it would neither be appropriate nor satisfactory to decide such difficult and novel questions summarily.

12.Mention has already been made of the rather unsatisfactory and irregular state of the expert evidence.  Looked at objectively and on any view, the materials presently available cannot be said to be complete, such as would constitute a proper basis upon which novel and complex issues of law can be resolved.  The trial judge clearly was best placed to form a view as to whether they needed full investigation and trial.  In refusing leave to appeal, Rogers VP stated:

“In my view the judge has correctly approached the matter in his decision on 2 June 2010 and I would not give leave.”

In other words, this court should not interfere with what, essentially, is a matter of case management.

13.Under Order 1A, rule 2(2) of the Rules of the High Court introduced by the Civil Justice Reform, it is stated that:

“In giving effect to the underlying objectives of these rules, the Court shall always recognise that the primary aim in exercising the powers of the Court is to secure a just resolution of disputes in accordance with the substantive rights of the parties.”

Rule 4 enjoins the court to manage cases actively and under sub-clause (2) active case management includes:

“(c) deciding promptly which issues need full investigation and trial and accordingly disposing summarily of the others;”

14.While the first defendant clearly has an arguable case and may ultimately succeed, that is not the only consideration when it comes to granting leave for interlocutory appeals.  For my part, I am not persuaded that “a just resolution” of the issues can be achieved and the correct answers arrived at, based solely on what the court has been shown as the available evidence and legal authority.  This court should be slow to differ from the judge who was seized of the issues and who considers that they should go to trial.  Accordingly, I would refuse leave to appeal.

Hon Yuen JA:

15.This is a summons for leave to appeal a Judgment of Deputy Judge Carlson given on 30 April 2010 in HCA2057/2009.  The judge dismissed the 1^st Defendant’s summons to strike out part of the Plaintiff’s claim, refused the Plaintiff’s summons for judgment in default of defence and gave the 1^st Defendant leave to file his defence out of time.  The judge also continued an interlocutory injunction obtained by the Plaintiff and made an order consolidating the action with another action, HCA2740/2008, involving some of the same parties.

16.At the heart of the matter now is the strike-out application.  Leave to appeal was refused by the judge on 2 June 2010 and by Rogers VP on 7 July 2010.  Leave is now sought from this court pursuant to Order 59 rule 2A(7) Rules of the High Court.

17.It is common ground that leave should be given if the applicant can show a reasonable prospect of success on appeal, in other words, if the 1^st Defendant can show a reasonable prospect that part of the Plaintiff’s claim should be struck out. That part can be summarized in the following way.

Plaintiff’s claim on behalf of Yue Kong

18.The Plaintiff alleges in HCA 2057/2009 that the 1^st Defendant, a  director and the registered Legal Representative of the 3^rd Defendant company Yue Kong (“YK”), has been guilty of various wrongful acts i.e. turning YK’s equity into debts, misappropriating YK’s money, failing to comply with rules that YK “prove its capital”, selling its assets at an undervalue etc.  The Plaintiff alleges that the 1^st Defendant was therefore in breach of his fiduciary duties to YK and she seeks redress from the court on behalf of YK.

19.However the Plaintiff is not a shareholder of YK.  She is only a shareholder of the 2^nd Defendant company Billion Express Industrial Ltd (“BEI”), which holds 90% of YK.

20.Of course it has now been definitively established as the common law of Hong Kong that if a shareholder of a company can prove prima facie that a wrong has been done to the company’s subsidiary, and that the wrongdoer is in control of the company and its subsidiary, the shareholder can bring a “double” or even a “multiple” derivative action against the wrongdoer (Waddington Ltd v Chan Chun Hoo [2008] 11 HKCFAR 370).

21.The difficulty however with applying that principle in this case is this – YK is a company incorporated in the PRC where the common law does not apply. This foreign element brings conflicts principles into play.

22.It has been held in a number of English cases that the issue whether a director is in breach of his duty of care to a company is resolved according to the law of the company’s place of incorporation (Base Metal Trading Ltd v Shamurin [2005] 1 WLR 1157 at para. 69).  And it has also been held that the law of that place is the governing law when an English court considers whether a derivative action can be brought (Konamaneni v Rolls Royce Industrial Power (India) Ltd [2002] 1 WLR 1269; Base Metal).

23.In Konamaneni, Lawrence Collins J (as he then was) held that since there was no material difference between English law and Indian law on derivative actions, no issue arose in that case, but if there had been a difference, he would have held that the governing law is the law of the place of incorporation (India).  That was because, in an international context, a person bringing a derivative action is asserting substantive rights, not procedural rights (para. 50).

24.Similarly in Base Metal, Arden LJ held that the question whether a shareholder had the right to bring a derivative action was a matter of substantive law governed by the place of incorporation, whereas the question whether a shareholder has satisfied procedural rules for bringing a derivative claim was governed by the lex fori (para.68).

25.Based on the law set out in those cases, the 1^st Defendant sought to strike-out those parts of the statement of claim where the Plantiff was seeking relief on behalf of YK.  The 1^st Defendant adduced an   expert opinion on PRC law, to the effect that unlike a single derivative action, a double derivative action is not permitted under PRC laws: Zhao Xue Ming’s Legal Opinion, 15 December 2009.  (I should mention that although the strike-out summons referred only to the ground of no reasonable cause of action, Mr Zhao’s Legal Opinion was referred to the judge without objection from the Plaintiff.  Leading Counsel for the Plaintiff has confirmed this).  The Plaintiff did not adduce any expert evidence to contradict Mr Zhao’s Opinion.

26.In other words, if the Plaintiff had brought her double derivative action on behalf of YK in a PRC court applying PRC law, she would fail under the law in force there.  Can she nevertheless bring such a claim on behalf of YK in Hong Kong?  The 1^st Defendant says the answer must be “No” and for that reason he is seeking to strike out that part of the statement of claim.

27.The Plaintiff argues that Lawrence Collins J’s holding was obiter and there has not been a definitive judgment on the issue whether the right to bring a derivative action is a substantive right or a procedural right.  If the former, it is governed by the law of the place of incorporation i.e. the PRC, and if the latter, it is governed by the lex fori, i.e. HK.  Mr Scott refers to Lord Millett’s use of what he calls hypothetical language in Waddington (para. 55) in support of his contention that the law is not established, but it seems to me that in that passage Lord Millett was addressing the question why s.168BC Companies Ordinance preserved the common law of derivative actions.  Was it preserved for overseas companies only?     He held that s.168BC did not preserve common law derivative actions for overseas companies, because the common law of Hong Kong on derivative actions is not relevant to such overseas companies – as the issue whether a derivative action is available is a question of substantive law, which is governed by the law of the place of incorporation (at p392 H-I).

28.The issue is – since the alleged wrong has been done to YK, does the Plaintiff have locus standii to bring an action on its behalf?  As Lord Millett held in Waddington (para.70), the term “double” or “multiple” derivative action is deceptive - at the end of the day, it remains a single action of the company that has suffered the wrong (YK).  The law of its place of incorporation governs its rights against a wrongdoer director.  The question whether an action on behalf of YK can be brought only by its shareholder (BEI), or also by a shareholder (the Plaintiff) of BEI, although expressed as a question whether the Plaintiff has locus standii, ultimately depends on the substantive rights of the shareholders of YK, which is governed by the law of its place of incorporation.  And the expert evidence is that PRC law does not permit multiple derivative actions.

29.It seems to me in view of the above, that the strike-out is not so unarguable that leave to appeal should be refused and I would grant leave.

Hon Le Pichon JA:

30.Since the applicant has failed to convince a majority of the court that there should be leave to appeal, the application for leave is therefore refused.

Mr John Scott SC, Mr William Wong & Mr John Hui, instructed by Messrs Anthony Siu & Co., for the Plaintiff/Respondent

Sir John Swaine SC & Mr Simon Chiu, instructed by Messrs To Lam & Co., for the 1^st Defendant/Applicant