Tan Man Kou and Another v. Chime Corporation Ltd and Others

CACV000124/2003

CACV124/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 124 OF 2003

(ON APPEAL FROM HCMP NO.4146 OF 2001)

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Coram : Hon Ma CJHC & Stone J in Court

Date of Hearing: 21 October 2003

Date of Judgment: 20 February 2004

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J U D G M E N T

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Hon Ma CJHC :

The Petition

1.By a Petition presented on 31 July 2001, the Petitioners, who are the joint administrators pendente lite of the estate of Wang Teh Huei ("Mr Wang") seek relief under section 168A of the Companies Ordinance ("the Ordinance") on the basis that the affairs of a company, Chime Corporation Limited ("Chime") have been conducted in a manner unfairly prejudicial to the interests of Mr Wang as a shareholder. A number of Respondents were joined in the Petition, chief among them Mr Wang's wife, Nina Kung Wang ("Mrs Wang").

2.In support of the original Petition (I shall refer to the proposed amendments presently), the Petitioners rely on the following facts and matters:-

(1) Mr Wang was kidnapped on 10 April 1990 and has not been seen since.

(2) On 6 May 1999, Mr Wang's father (Wang Din Shin) applied for leave to swear to the death of Mr Wang. This was granted by Yam J on 22 September 1999. By order of the court on 15 March 2000, joint administrators pendente lite were appointed. Leave was granted to the joint administrators on 16 June 2001 to present the Petition, and the Petitioners now do so under section 168A(5) of the Ordinance.

(3) Until his disappearance, Mr Wang was the majority shareholder and a director of Chime. He was effectively in control of the company. Chime's issued share capital comprised both A and B shares, both being of equal rank despite different par values. The pleaded particulars show that from being the majority shareholder for both the A and B shares in the company prior to his disappearance (and therefore in control), the present day position is that while Mr Wang (through the Petitioners who are the registered shareholders) is still the majority shareholder for the A shares, Mrs Wang is overwhelmingly the majority shareholder in the B shares, and now controls Chime. In terms of numbers, she holds 2000 A shares (out of 30,000) and 15,012,000 B shares (out of 15,030,000). In addition, Mrs Wang also claims a beneficial entitlement to 19,998 of the A shares registered in the Petitioners' name. The effect of Mrs Wang's claims to the A shares and her holding in the B shares, in percentage terms, is that while Mr Wang held 56.67% of the issued share capital of Chime prior to his disappearance, the present position (if Mrs Wang is correct) is that only 0.09% remains in his name. Mrs Wang is thus in complete control of the company.

(4) It is this share dilution, with the loss of effective control and beneficial interest in Chime, that is the gravamen of the Petition. The principal allegation in this context is that the share dilution, in the form of the allotment of 15 million B shares in Chime to Mrs Wang in August or September 1990, had as its sole or dominant purpose the benefiting of Mrs Wang to the detriment of Mr Wang's interests. The allotment is said to be in breach of Chime's Articles of Association, done for improper or collateral purposes and in breach of the fiduciary duties of the company's directors. The directors at the relevant time included Mrs Wang herself, her brother Mr Kung Yan Sum ("Mr Kung") and her sister-in-law Madam Liu Yuan Chun ("Madam Liu").

(5) The other factual allegation in the Petition in support of the share dilution claim is Mrs Wang's claim to beneficial entitlement of the 19,998 A shares registered in the Petitioners' name . At one stage she had accepted that Mr Wang was beneficially entitled to the shares but she has since resiled from this position without prejudice to her claim that the shares were transferred to the Petitioners by order of court made on 12 June 2001.

(6) Following the allotment of the 15 million B shares to Mrs Wang in 1990, and her claim to the 19,998 A shares, it would appear that from the time of the allotment in 1990 up to 30 June 1998, dividends have been received by Mrs Wang amounting to some $1,494,489,801.

3.The original Petition claimed principally as relief:-

(1) the setting aside of the allotment of the 15 million B shares;

(2) an account of the benefits, by way of dividends or otherwise, accruing to Mrs Wang on account of these 15 million B shares;

(3) an order that Mrs Wang do pay to the Petitioners all sums due following the said account.

4.At this stage it may assist to identify the Respondents to the original Petition in greater detail. They were the company itself (1st Respondent), Mrs Wang (2nd Respondent), Mr Kung (3rd Respondent), Forum Ever Limited and Focus Profit Limited (respectively the 4th and 5th Respondents). The latter two Respondents are British Virgin Islands registered companies and hold, respectively, 3,000 A and B shares in Chime.

5.On 2 May 2002, Chime applied to strike out a part of the Petition. On 30 May 2002, the Petitioners also applied for leave to amend. Both summonses were heard by Kwan J on 7 January 2003, together with the Petitioners' summons to strike out the 2 May 2002 summons as an abuse.

6.The present appeal arises from Kwan J's decision in relation to the amendment summons. On the striking-out summons, the judge struck out that part of the relief sought by the Petitioners for an order that there be payment made by Mrs Wang to the Petitioners of all sums due after the taking of the account of the benefits she had received following the allotment of the 15 million B shares. The judge found that any payment should be made only to the company and not the Petitioners. Leave was, however, given to the Petitioners to amend this part of the relief by making reference to the company instead of to them. The abuse summons was dismissed by the judge. There is no appeal from the judge's decision upon either the striking-out or the abuse summonses.

7.I now turn to the Petitioners' application for leave to amend.

The amendments sought by the Petitioners

8.In the amendment summons dated 30 May 2002, apart from relatively insignificant amendments, the Petitioners sought leave to introduce the following facts and matters:-

(1) The joinder of Madam Liu, Joseph Leung Wing Kong, Chan Kam Por and Li Kwok Ki as 6th to 9th Respondents. These persons are, together with Mr Kung and Mrs Wang, the present directors of Chime.

(2) In further support of the assertion that the affairs of the company have been conducted in a manner unfairly prejudicial to Mr Wang, leave was sought to plead that after his disappearance, during the period from 10 April 1990 to 30 June 2000, Mrs Wang procured Chime to advance to a company called Chinachem Agencies Limited ("CAL") funds totalling $4.5 billion. It is said that CAL was a company in which Mrs Wang was beneficially interested, and that the advance was on an unsecured, interest-free basis with no repayment date and that it was made for no apparent commercial purpose. The sum of $4.5 billion is said to amount to over 57% of Chime's net assets and approximately 70% of its total retained profits for 2000. It is alleged that in all the circumstances the loan of $4.5 billion had the effect of benefiting Mrs Wang to the detriment of Mr Wang's interests.

(3) The specific relief claimed in relation to the $4.5 billion loan is pleaded as follows:-

"(3.2) That an account be taken of the interest, at a commercial rate to be determined by the Court, and/or such other charges and/or benefits which ought to have accrued to Chime by reason of and upon the HK$4.5 billion loan, such sums to be calculated from the date of each such advance forming part of the HK$4.5 billion loan and continuing until the date of repayment.

(3.3) That Madam Wang, Mr Gong, Madam Liu and the Seventh, Eighth and Ninth Respondents be ordered jointly and severally to pay to Chime such sums as are found to be owing to Chime pursuant to the account detailed in paragraph 3.2 above.

(3.4) That Madam Wang be ordered to procure CAL to repay to Chime the HK$4.5 billion loan.

(3.5) Further or alternatively that, Madam Wang, Mr Gong, Madam Liu and the Seventh, Eighth and Ninth Respondents be ordered to jointly and severally to pay to Chime the HK$4.5 billion loan, alternatively such sums outstanding from CAL to Chime as are not repaid pursuant to paragraph 3.3 above."

(4) Complaint is now also made in relation to Chime's own participation in the Petition. The company's participation is said to be improper and an order is sought that the directors of Chime be asked, jointly and severally, to repay to Chime all sums found to be improperly incurred in the defence of the Petition.

Kwan J's decision on the amendment summons

9.Kwan J disallowed the amendments relating to the CAL loan (see paragraphs 8(2) and (3) above). It is from this part of her decision that the Petitioners now appeal.

10.The reasons for disallowing these amendments were essentially as follows:-

(1) The complaint made in relation to the CAL loan was in reality one of misconduct by Mrs Wang towards Chime and the true nature of the relief sought by the Petitioners was compensation to the company rather than any remedy personal to the shareholder concerned. This being so, the only appropriate way to bring proceedings in respect of these complaints was by way of derivative action (having to come within the exception to the Rule in Foss v Harbottle) and not by way of petition under section 168A of the Ordinance.

(2) In arriving at this conclusion, the judge relied on the principle of company autonomy. She said that even though requiring the Petitioners to bring separate proceedings in a derivative action would lead to inconvenience and additional costs, these considerations could not override the principle of company autonomy. As I understand the judge's reasoning, she was saying that as the gist of the complaints made against Mrs Wang was her misconduct and the only relief sought was restitution to the company, the only proper person to bring proceedings was Chime itself, and that the only way in which this could be done in the present instance was by way of derivative action.

(3) The judge referred to a number of authorities relevant to section 168A, principally the decision of Millett J in Re Charnley Davies Ltd (No.2) [1990] BCLC 760. As to the principle of company autonomy, meaning the need to keep separate the personality of a company from its shareholders so that where a company suffers loss only that company may sue for such loss and its shareholders cannot, the judge referred to the well known case of Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1982] 1 Ch 204.

11.In evaluating these reasons, it is necessary to consider the true nature of a petition brought under section 168A of the Ordinance, the requirements of such a petition, the limitations of the relief available and the inter-relationship between proceedings under section 168A and derivative actions.

Ought leave to amend have been given?

12.In the present appeal from Kwan J's decision, Mr Robert Hildyard QC and Mr Ambrose Ho SC appear for the Petitioners. Mr Robin Potts QC and Mr Godfrey Lam appear for Mrs Wang, and Mr Bernard Man appears for the 3rd and 6th to 9th Respondents.

13.In my view, the amendments sought to be made by the Petitioners regarding the CAL loan should be permitted. The conclusion I have reached is that it is not apparent to the court at this stage that the amendments sought in relation to the CAL loan (including the relief) in themselves are so unarguable that leave should not be given for such matters to be fully canvassed at the hearing of the Petition. For my part, therefore, I would allow the present appeal.

14.I begin with the law. The starting point is to identify the relevant context. Here, the context in which the relevant legal issues fall to be considered is the situation where wrongs have been committed to a company and a shareholder seeks redress for such wrongs. In other words, no direct wrong is committed against the shareholder (unlike the share dilution allegation in the present case wherein the shareholder does have a direct complaint) but only an indirect one. In this situation the shareholder cannot bring an action to claim in respect of any loss he may have suffered, for this would be reflective loss and hence not actionable:- see Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1, at 35D-36E, 61G-67C. The shareholder can, however, bring derivative proceedings on behalf of the company as an exception to the Rule in Foss v Harbottle, providing that he satisfies the stringent requirements regarding such proceedings. As Lord Millett said in Johnson v Gore Wood at 61H:

"A company is a legal entity separate and distinct from its shareholders. It has its own assets and liabilities and its own creditors. The company's property belongs to the company and not to its shareholders. If the company has a cause of action, this is a legal chose in action which represents part of its assets. Accordingly, where a company suffers loss as a result of an actionable wrong done to it, the cause of action is vested in the company and the company alone can sue. No action lies at the suit of a shareholder suing as such, though exceptionally he may be permitted to bring a derivative action in right of the company and recover damages on its behalf: see Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, 210." (emphasis added)

15.This of course is a manifestation of the principle of company autonomy, to which the judge referred. This, however, does not greatly assist in the present case, wherein the critical question is:- To what extent is a shareholder able to launch section 168A proceedings for indirect wrongs?

16.Sections 168A(1) and (2) state as follows:-

"(1) Any member of a company who complains that the affairs of the company are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members (including himself) or, in a case falling within section 147(2)(b), the Financial Secretary, may make an application to the court by petition for an order under this section.

(2) If on any petition under this section the court is of opinion that the company's affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members, whether or not such conduct consists of an isolated act or a series of acts, the court may, with a view to bringing to an end the matters complained of -

(a) make an order restraining the commission of any such act or the continuance of such conduct;

(b) order that such proceedings as the court may think fit shall be brought in the name of the company against such person and on such terms as the court may so order;

(ba) appoint a receiver or manager of the whole or a part of a company's property or business and may specify the powers and duties of the receiver or manager and fix his remuneration;

(c) make such other order as it thinks fit, whether for regulating the conduct of the company's affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of a purchase by the company, for the reduction accordingly of the company's capital, or otherwise."

17.Purely as a matter of statutory construction, it can immediately be seen that before any question of relief arises, a petitioner must first demonstrate that the affairs of the relevant company have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members, including himself. These are the requirements specifically set out in section 168A(1). This is not the same as mere misconduct, for while misconduct or unlawful conduct may provide evidence of unfairly prejudicial management, the primary requirement is to demonstrate that the affairs of a company had been conducted in a manner unfairly prejudicial to the members as a whole or in part:- see Charnley Davies Ltd (No.2), at 783 d-e.

18.As Hoffmann LJ said in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, at 19a, "Not only may conduct be technically unlawful without being unfair: it can also be unfair without being unlawful". The key, I think, is to concentrate on what section 168A(1) expressly stipulates as being the requirement for liability under that section, namely, that the affairs of the company have been conducted in an unfairly prejudicial manner. This concept is to be judged against those standards of fair dealing that shareholders legitimately can expect. The concept of fairness must also be seen in the context of a commercial relationship, that is, by reference to the articles of association of the company:- see Re Saul D Harrison & Sons plc at 17i.

19.As for indirect losses caused to shareholders, the concept of unfairly prejudicial management is sufficiently wide to encompass this. Indeed, one of the primary objectives of section 168A is precisely to enable shareholders to seek relief from the court in situations where there is no direct loss but only reflective loss. This is clear from the numerous authorities wherein the equivalent of section 168A relief was granted, or at least thought to be arguable, in circumstances where indirect loss had been caused to the shareholder concerned. That this must be so is also evident from those authorities that recognize the overlap between section 168A petitions and derivative actions. In Charnley Davies, Millett J says at 784, "The very same facts may well found either a derivative action or a s459 petition". Section 459 of the Companies Act 1985 is the equivalent in the UK to section 168A. See also the judgment of Hoffmann J in Re a Company (No.005287 of 1985) [1986] 1 WLR 281.

20.The more controversial question which is directly raised in the present appeal is when it would or would not be appropriate to launch section 168A proceedings when there also exists the possibility of instituting derivative proceedings? The Respondents' position is the present case is that the Petitioners' sole remedy is to pursue a derivative action (which in fact they have done, a protective writ having been issued) and not a section 168A petition in relation to the CAL loan. I revert to this argument later in this judgment.

21.Once a petitioner establishes the requisite components of liability under section 168A(1), the question of the appropriate relief then arises. The various types of relief set out in section 168A(2)(a)-(c) give the court the widest powers, most notably within the following words in section 168A(2)(c): "make such other order as it thinks fit, ... or otherwise". These words are wide and are not to be construed ejusdem generis with those preceding it:- see Bader v Weston [1967(1)] SA 134 at 147 (Cape Provincial Division). This case dealt with section 111 bis of the Companies Act in South Africa. The terms of that section bear much similarity to section 168A(2). The court is able not only to regulate a company's affairs for the future but also to give relief for past acts, even isolated ones:- see Koy Holdings Corp. v Spider Knitters Ltd [1998] 1 HKLRD 788, at 790E-F.

22.It must, however, be emphasized that the width of the relief which the court can grant under section 168A(2) is circumscribed by the requirement that any relief must be "with a view to bringing to an end the matters complained of". These words highlight the true nature of a section 168A petition, which is that it is intended to provide relief for unfairly prejudicial management and not just misconduct.

23.The words "with a view to bringing to an end the matters complained of" are not to be found within the corresponding legislation in the United Kingdom. Section 461(1) of the Companies Act 1985, however, states:

"(1) If the court is satisfied that a petition under this Part is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of."

24.Mr Potts submits that by reason of the absence of those words in the UK legislation, the cases from the United Kingdom should therefore be cautiously applied. He supports the remarks to this effect contained in Kwan J's Decision at paragraph 47. There, reference was made to the decision of Kaplan J in Prime Aim International Ltd v Cosmos-Pavis International Ltd & Ors [1994] 2 HKC 545.

25.With this premise, Mr Potts then referred to the Irish case of Irish Press plc v Ingersoll Irish Publications Ltd [1995] 2 IRLM 270, for the proposition that the relief sought by the Petitioners in relation to the CAL loan amounted to the payment of damages or compensation to Chime and this, as a matter of principle, was not permitted as a relief under section 168A. In particular, reliance was placed on Irish Press plc for the principle that damages could not be awarded under section 168A since this remedy could not be "with a view to bringing to an end of the matters complained of". The learned judge referred to Irish Press plc in paragraph 47 of her Decision.

26.With respect, I am unable to agree with the scope of the Respondents' propositions:-

(1) Purely as a matter of construction, the width of the words in section 168A(2) are such as to include the award of financial compensation as being a possible remedy. True it is that any remedy, financial compensation or otherwise, must be with a view to bringing to an end the matters complained of, but as a matter of principle I fail to see why an award of financial compensation should automatically be excluded. To take a classic example where a section 168A petition is appropriate: the majority shareholder of a company who controls it 'milks' the company for his personal benefit to the obvious prejudice of the other shareholders. It is not clear why the court should in such a case be restricted to making an order restraining all future acts of 'milking' the company (see section 168A(2)(a)) but should not be able to order financial compensation to be paid to the company in respect of past misdeeds. It seems to me that an order for payment to the company of any 'milked' amounts may arguably bring an end to the matters complained of in the same way as, say, an injunction under section 168A(2)(a) would similarly operate. Whether it would in any given case will depend on the facts after trial, but as a matter of principle, I do not see why the remedy is or should be unavailable.

(2) Authority supports such a conclusion. In Charnley Davies, Millett J was clearly of the view that a court could award damages under section 27 of the Companies Act 1985 (the equivalent provision to section 459 where administration orders are in place):- see 773i-774a. In Re a Company (No.005287 of 1985), Hoffmann J refused to strike out a petition under section 459 of the Companies Act 1985 even though there was a claim for relief in the form of one of the respondents having to account for payments made without authority. In Lowe v Fahey [1996] 1 BCLC 262 at 268, Deputy Judge Charles Aldous QC said:

"In my judgment, where for example the unfairly prejudicial conduct involves the diversion of company funds, a petitioner is entitled as a matter of jurisdiction to seek an order under s 461 for payment to the company itself not only against members, former members or directors allegedly involved in the unlawful diversion, but also against a third parties who have knowingly received or improperly assisted in the wrongful diversion."

See also the Scottish case of Anderson v Hogg [2002] SLT 354. In Re Posgate v Denby (Agencies) Ltd [1987] BCLC 8, at 15, Hoffmann J referred to the powers of the court to order financial compensation under section 461 of the 1985 Act.

(3) Although I recognize the fact that the equivalent legislation in the United Kingdom does not contain the words "with a view to bringing to an end the matters complained of", I would not discount the UK cases as being irrelevant. I note that in Re Bird Precision Ltd [1986] 1 Ch 658, at 669D-E, Oliver LJ said that the object of the legislation (the Court of Appeal in that case dealing with section 75 of the Companies Act 1980, the predecessor to sections 459 and 461 of the 1985 Act) was to confer on the court a very wide jurisdiction to do what was considered fair and equitable in all the circumstances "in order to put right and cure for the future the unfair prejudice that the petitioner has suffered at the hands of the other shareholders of the company". Put thus, the effect of the UK legislation in terms of the purpose of the relief available under the legislation may not differ so much, if at all, from our section 168A. In my view, the authorities from the UK are persuasive. It is interesting to note, however, that in the Singapore case of Kumagai Gumi Co Ltd v Zenecon Pte Ltd & Ors [1995] 2 SLR 297, at 316, LP Thean JA remarked that the English provisions (to which I have referred) were narrower than the corresponding Singapore ones by reason of the presence in those provisions of the limiting words "with a view to bringing to an end the matters complained of". The learned judge did, nevertheless, go on to consider whether an order for financial compensation came within the Singapore provisions. He held that it did. I have some reservations about whether the relevant provisions in Singapore (which are similar to our section 168A) are indeed narrower than the UK provisions:- see Re Bird Precision Ltd. Perhaps it does not greatly matter since the Court of Appeal in the Kumagai Gumi case did regard the Singapore provisions as being sufficiently wide to enable an order for financial compensation to be made, and in any event I agree with the following words of LP Thean JA at 318F-H:

"In our opinion, there is a limitation on the order which the court can make under s 216. The order to be made must be made 'with a view to bringing an end or remedying the matters complained of' and we agree that 'the matters complained of' mean matters rightly complained of. Nevertheless, subject to this limitation, the jurisdiction to make an order under that section is very wide. Much depends on the matters complained of and the circumstances prevailing at the time of [the] hearing."

(4) In Irish Press plc, the Supreme Court of Ireland had to apply s.205 of the Companies Act 1963 (of Ireland). The relevant provisions of that section were as follows:-

"(1) Any member of a company who complains that the affairs of the company are being conducted or that the powers of the directors of the company are being exercised in a manner oppressive to him or any of the members (including himself) or in disregard of his or their interests as members, may apply to the court for an order under this section.

...

(3) If, on any application under subs.(1) or subs.(2) the court is of opinion that the company's affairs are being conducted or the directors' powers are being exercised as aforesaid, the court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit, whether directing or prohibiting any act or cancelling or varying any transaction or for regulating the conduct of the company's affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and in the case of a purchase by the company, for the reduction accordingly of the company's capital, or otherwise." (emphasis added)

(5) On one reading of the case, the court appears to have held that an award of damages or compensation for loss resulting from oppression could never be a relief that could be granted, since it could not satisfy the condition that any relief must be "with a view to bringing to an end the matters complained of": see 279-280. I am not sure that the court intended to be quite so adamant about excluding the remedy of financial compensation from the ambit of possible heads of relief. It did, in fact, recognize that in some circumstances, financial compensation was possible:- see 278-279 referring to Scottish Co-Operative Wholesale Society v Meyer [1959] AC 324, at 369. In addition, it should be appreciated that on the facts of Irish Press plc, it was held that an award of damages would not be "with a view of bringing to an end the matters complained of"; that had been satisfied by the order for a buy-out that had been made:- see 278. On the facts, therefore, of the case before the Irish Court of Appeal, any order for damages would not have satisfied the necessary condition. I would observe that this conclusion was not surprising given the nature of the oppression that was found to have existed:- see 275.

(6) Nevertheless, it may be unproductive to over-analyze this authority. In my view, it does not support the proposition for which Mr Potts prays it in aid. If it does, the case is contrary to other more compelling authorities and does not sit comfortably with the language of section 168A(2). Mr Hildyard for his part surmised that the Court of Appeal in that case may have relied too much on a passage from Gower's Principles of Modern Company Law (4th edition):- see 280, which passage no longer represents the views of the authors of the 5th or the current edition of the textbook. In my view this is a valid submission. I also note that in section 205(1) of the Irish Companies Act, the reference to the affairs of the company being conducted in an oppressive manner is in the present tense:- see the highlighted words above. Section 168A(1) by contrast refers to the affairs of the company "being or have been conducted" in an unfairly prejudicial manner. Although the judgment in Irish Press plc does not specifically highlight this aspect, it may be that the wording of the statute influenced the way in which the court regarded the question of damages.

(7) Lastly, Mr Potts referred also to the fact of the existence of the remedy in section 168A(2)(b) as somehow supportive of his arguments. I fail to see the force of this submission. The availability of an order that proceedings may be brought in the name of a company against such person or on such terms as the court may order, is perhaps the right order to make in certain circumstances, but it is by no means the only order that the court can make under section 168A(2). I have earlier commented upon the width of that provision.

27.Returning to the facts pleaded in relation to the CAL loan, it is readily apparent that the Petitioners' allegations support the main complaint that after Mr Wang's disappearance in April 1990, Mrs Wang simply took over Chime and, together with the directors of that company, has operated it for her own benefit. In the original Petition, the only pleaded instance of this was the benefit Mrs Wang received from dividends. The amendments relating to the CAL loan provide another instance wherein it is alleged Mrs Wang has benefited herself after taking over the company. An interest free loan, absent provision of security, to an entity in which Mrs Wang insists she is beneficially interested and without there being any commercial purpose for the loan, raises legitimate concerns. It certainly enables an arguable case to be presented on the basis that the affairs of Chime have been conducted in an unfairly prejudicial manner. $4.5 billion is a massive amount of money and represents a very sizeable part of Chime's assets.

28.Indeed, I do not understand Mr Potts really to be contesting this aspect; at the least, he appeared to accept that it was legitimate to plead the fact of this loan. Instead, the focus of his objections was the relief sought in relation to this CAL loan:- see paragraph 8(3) above. Applying the principles herein outlined, however, the relief sought by the Petitioners clearly is arguable and in my view it is equally clear that leave to amend should be granted.

29.In my judgment, it is important to place in context the Petitioners' complaints about the CAL loan, which is relied on as a part of the Petitioners' general complaint that Mrs Wang took over Chime completely after her husband's disappearance, and thereafter has used the company as a vehicle for her personal benefit. This was more than just harming the company per se; these alleged acts were done in complete disregard of Mr Wang's erstwhile interests in the company. This is not dissimilar to the situation of Mrs Wang being alleged to have 'milked' the company, first by seizing control of Chime when she was previously but a minority shareholder, and then by taking advantage of this control by benefiting from dividends and being able to secure (with the assistance presumably of the other directors in Chime) a $4.5 billion loan to a company in which she had a substantial interest. One of the prayers for relief sought in the Petition includes the repayment of dividends received by Mrs Wang and as a matter of principle there is no dispute that the Petitioners may be able to obtain this type of financial relief, the only caveat being that any repayment should be made to the company and not to them. Also not to be overlooked is the first category of relief sought, that is, the setting aside of the allotment of the B shares. In my view, the relief which the Petitioners seek regarding the CAL loan should be seen in the same light, namely, that arguably it may put an end (in part) to the matters complained of.

30.It strikes me as essential to view the Petition as a whole in order to see how each component fits into the general picture. Mr Potts effectively asks that the complaint in relation to the CAL loan should be seen in isolation. I do not, with respect, agree with this approach; in fact I disagree strongly. Nevertheless, even if it be correct, in my judgment the nature of the complaint and the relief sought regarding the CAL loan still 'fits' within the ambit of section 168A. Given that the essence of the allegation against Mrs Wang is that she has taken over the company and, in the position of the controlling shareholder, has used it for her benefit, she and her co-directors are now asked to terminate and to redress the prejudice that hitherto has been caused to Mr Wang's interests. The point can be further tested in this way. Supposing that Mrs Wang was still actively making loans to CAL in like circumstances (interest free, without security, for no apparent commercial purpose other than her own benefit), I would think it at least arguable that relief by way of an injunction would be granted under section 168A(2)(a). This being the case, one is hard pressed to think of a cogent reason why financial compensation should not arguably (for it ought not be forgotten that we are here dealing with an application for leave to amend) be permitted in reparation for past misdeeds and as a means of bringing those misdeeds to an end.

31.It must of course be accepted that the pleaded facts as regards the CAL loan can give rise to a claim by the company, and therefore may conceptually form the basis of a derivative action. I have earlier (in paragraph 19 above) referred to some authorities which recognize the evidence of an overlap between section 168A proceedings and derivative actions. Mr Potts' argument, which the judge accepted, was that in the present case it was inappropriate to institute section 168A proceedings, not even arguably so, in relation to the CAL loan. In other words, that the only proper and appropriate way for the Petitioners to seek any remedy regarding this loan was by way of derivative action.

32.In her Decision, the judge refers to passages from the judgment of Millett J in Charnley Davies. I set out in full the relevant passages at 783e-784c:-

" Counsel for the petitioners asked: 'If misconduct in the management of the company's affairs does not without more constitute unfairly prejudicial management, what extra ingredient is required?' In my judgment 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. It is a matter of perspective. The metaphor is not a supermarket trolley but a hologram. 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 simpliciter. There is no need to assume the burden of alleging and proving that the acts or omissions complained of evidence or constitute unfairly prejudicial management of the company's affairs. 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. In such a case it is necessary to assume that burden, but it is no longer necessary to establish that the acts or omissions in question were unlawful, and a much wider remedy may be sought.

A good illustration of the distinction is provided by Re a company (No 005287 of 1985) [1986] BCLC 68. In that case the petitioners, who were minority shareholders, alleged that the respondent, who was the majority shareholder, had disposed of the company's assets in breach of his fiduciary duty to the company and in a manner which was unfairly prejudicial to the interests of the petitioner. Hoffmann J refused to strike out the petition, holding that the fact that the petitioners could have brought a derivative action did not prevent them seeking relief under s 459.

Again, I respectfully agree. The very same facts may well found either a derivative action or a s 459 petition. But that should not disguise the fact that the nature of the complaint and the appropriate relief is different in the two cases. Had the petitioners' true complaint been of the unlawfulness of the respondent's conduct, so that it would be met by an order for restitution, then a derivative action would have been appropriate and a s 459 petition would not. But that was not the true nature of the petitioners' complaint. They did not rely on the unlawfulness of the respondent's conduct to found their cause of action; and they would not have been content with an order that the respondent make restitution to the company. They relied on the respondent's unlawful conduct as evidence of the manner in which he had conducted the company's affairs for his own benefit and in disregard of their interests as minority shareholders; and they wanted to be bought out. They wanted relief from mismanagement, not a remedy for misconduct."

33.These extracts from the judgment of Millett J, obiter in nature, were in the context of a claim against the administrator of a company who was alleged to have been negligent in failing to obtain the best price for the sale of the company's business (an insurance broking business in Yorkshire). It was a claim for professional negligence. Having found on the facts that the administrator was not negligent, Millett J went on to consider the question whether, even if negligence had been established, this was sufficient without more to establish a claim of unfair prejudice under section 27 of the Companies Act 1986 (the equivalent of section 459, but in relation to administrations). In dealing with this aspect, the learned judge considered it necessary to look at the true nature of unfair prejudice petitions and how such proceedings differed in nature to derivative actions.

34.The Respondents placed great reliance upon this part of Millett J's judgment. The contention was that as the gist of the Petitioners' complaint was the unlawfulness of the acts of Mrs Wang and the other directors of Chime, and that effectively they were seeking restitution for the company, a derivative action was the only proceeding that was appropriate, and that a section 168A petition was not. Mr Potts said, rightly, that the Petitioners were not seeking a remedy such as a buy-out. Reliance was also placed on the judgment of Deputy Judge Aldous QC in Lowe v Fahey at 268:-

"Lindsay J, after reviewing the relevant authorities (including the decision of Hoffmann J), concluded that as a matter of jurisdiction the language of s 461(1), which states that the court 'may make such order as it thinks fit for giving relief in respect of the matters complained of' confers a very wide jurisdiction. I agree. I shall not repeat his analysis leading to such conclusion. In my judgment, where for example the unfairly prejudicial conduct involves the diversion of company funds, a petitioner is entitled as a matter of jurisdiction to seek an order under s 461 for payment to the company itself not only against members, former members or directors allegedly involved in the unlawful diversion, but also against third parties who have knowingly received or improperly assisted in the wrongful diversion. This is not to say that in a case where the only substantive relief being sought was a claim on behalf of the company against such a third party that a claimant could always proceed by petition instead of derivative action." (Emphasis added)

35.The precise relationship between section 168A and derivative proceedings is an issue still much discussed. The overlap is of course recognized but the question remains as to when it would be appropriate to institute derivative proceedings only but not a section 168A petition? This question is the subject matter of learned textbook commentary:- see, for example, Gower's and Davies' Principles of Modern Company Law (5th edition) at 513-516.

36.I decline at this stage to venture a concluded view on this issue for, as I have emphasized, the court presently is dealing solely with an application for leave to amend, and in my view this issue is not demurrable on its face. Moreover, even assuming that the judgment in Charnley Davies is authority for the proposition that where the complaint is merely one of unlawfulness so that restitution is the only real remedy and thus only derivative proceedings are permitted (and I am far from sure that Millett J intended this to be the stark principle that the Respondents now assert), it is inapplicable in the present case. The gist of the Petitioners' complaint in the Petition is the unfair prejudice caused to Mr Wang by Mrs Wang having taken over Chime and having used it for her own purposes. The restitution or financial compensation that is claimed is but part and parcel of the overall relief sought by the Petitioners in relation to this unfairly prejudicial conduct by Mrs Wang and the other directors. To paraphrase Millett J's words in Charnley Davies, at 784 b-c, the Petitioners rely on the Respondents' unlawful conduct as evidence of the manner in which they (and in particular Mrs Wang) had conducted the company's affairs for her own benefit and in disregard of Mr Wang's interests as a shareholder. In these particular circumstances it strikes me as a singular waste of time and entirely unnecessary procedural obstacle to require the Petitioners to claim financial compensation within separate derivative proceedings, and in this connection, I would echo the approach of Hoffmann J in Re a Company (No.005287 of 1985).

37.Having come to this view there is, strictly speaking, no need to go further. Nevertheless, in the context of the interplay between section 168A proceedings and a derivative action I would venture the following general observations:-

(1) If a set of facts enable proceedings to be taken out either by way of derivative action or by way of a section 168A petition, then both types of proceeding are permissible. I fail to see why a party should be denied relief under section 168A, providing he is able to establish the basic requirements of sections 168A(1) and (2), solely on the basis that derivative proceedings are also possible. As Lord Wilberforce said in Kong Thai Sawmill (Miri) Sdn. Bhd. v Ling Beng Sung (1978) 2 MLJ 227, at 229:-

" There are three particular points of direct relevance in the present appeal. First, it is claimed by the appellants that the section is not a substitute for a minority shareholders' action and, specifically, that many if not most of the matters complained of would properly form the subject of such an action. Their Lordships agree with this in part. Relief cannot be sought under section 181 merely because facts are established which would found a minority shareholders' action: the section requires (relevantly) 'oppression' or 'disregard' to be shown, and these are not necessary elements in the action referred to. But if a case of 'oppression' or 'disregard' is made out, the section applies and it is no answer to say that relief might also have been obtained in a minority shareholders' action. To the extent that the appellants so contend their Lordships do not accept their argument." (emphasis added)

(2) As Millett J recognized in Charnley Davies (see above), the same set of facts may found either a derivative action or unfair prejudice petition. The nature of the two proceedings is of course different, but if the facts properly fit within either type of proceedings, again I do not see why a party should be compelled to choose between one type of proceedings to the exclusion of the other. In my view this explains the decisions made in In Re a Company (No.005287 of 1985), Lowe v Fahey and the decision of Rogers JA in Koy Holdings Corp. v Spider Knitters Ltd.

(3) The very recognition of an overlap between the two types of proceedings assumes that a party can institute either. One of the objects of section 168A or similar legislation is to enable the stringent and technical requirements in derivative proceedings to be avoided:- see paragraph 206 of the Jenkins Committee Report 1962 that led to the enactment of section 75 of the Companies Act 1980 in the UK; Re Saul D Harrison & Sons plc at 18.

(4) Of course, the ability to institute either section 168A or derivative proceedings is a different question to that faced by the court when both types of proceeding are in existence. In such circumstances the court may, as a matter of case management, consolidate both matters or order that they be heard at the same time or, as in Cooke v Cooke [1997] BCC 17, the court may decide to stay one set of proceedings.

Conclusion

38.I would allow the Petitioners' appeal and give leave to amend the Petition by the addition of paragraphs 26.1, 44.1-44.5, 45 and Prayers 3.2-3.5 of the draft Amended Petition annexed to the said summons for leave to amend dated 30 May 2002. To this extent, I would set aside paragraph 3(a)(i) of Kwan J's order dated 6 May 2003. Whether the Petitioners can actually establish the alleged unfairly prejudicial management and if so, the relief that will follow, remain matters for the substantive hearing of the Petition.

39.As to costs, I make an order nisi as follows:-

(1) Costs of this appeal be to the Petitioners, to be paid by the 2nd, 3rd and 6th to 9th Respondents in any event, such costs to be taxed if not agreed.

(2) As to the costs incurred below, the costs of and occasioned by the said amendments are to be to the 2nd and 3rd Respondents in any event, save for the costs of and in relation to the hearing on 7 January 2003 insofar as such hearing dealt with the application for leave to amend dated 30 May 2002, which costs are to be paid by the 2nd and 3rd Respondents to the Petitioners in any event, all such costs to be taxed if not agreed.

40.I thank counsel on all sides for their considerable assistance.

Hon Stone J :

41.I have had the opportunity of reading in draft the judgment of Ma CJHC. I agree and have nothing to add.

Representation:

Mr Robert Hildyard, QC & Mr Ambrose Ho, SC, instructed by Messrs Clifford Chance for Petitioners

Mr Robin Potts, QC & Mr Godfrey Lam, instructed by Messrs Baker & McKenzie for 2nd Respondent

Mr Bernard Man instructed by Messrs Ford, Kwan & Co for 3rd, 6th - 9th Respondents- 2 -