Honlex Investment Ltd v. Hang Heung Cake Shop Co Ltd and Another

HCMP527/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 527 OF 2012

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D E C I S I O N

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1.This is an application for leave by Honlex Investment Ltd (“the applicant”) as a member of Hang Heung Cake Shop Co Ltd (“HHCS” or “the 1^st respondent”) and Hang Heung Hop Kee Investment Ltd (“HHHK” or “the 2^nd respondent”) for leave, pursuant to section 168BC of the Companies Ordinance (“the Ordinance”), to bring a derivative action on behalf of the respondents against two BVI companies named Right Guide Limited (“Right Guide”) and Brilliant Great Investment Ltd (“Brilliant”) (collectively “the corporate defendants”) and a firm of solicitors known as Raymond Chan, Kenneth Yuen & Co (“RCKY”) as well as a partner of that firm, Jerry Jim Yiu Ming (“Mr Jim”), (collectively “the legal defendants”). The corporate defendants and the legal defendants will hereafter be referred to as “the intended defendants”.

Introduction

2.The 1^st respondent, a company owned by the Cheng family and the Tsoi family was incorporated in 1981.  It was engaged in the cake-making business under the name of “Hang Heung” and is probably best known for its ‘wife’s cakes’ which Hang Heung first started manufacturing in the 1920s.  The business was founded by the father of Cheng Hung Kit (“CHK”) and the ancestors of Tsoi Chik Sang, Lawrence (“Lawrence Tsoi”).

3.From about 1987, the 1^st respondent has carried on the cake-making business in Yuen Long at a property situate at RP of Section B of Lot 1394, RP of Section D of Lot 1695 and RP of Lot 1741 (“the Property”) owned by the 2^nd respondent (also a company owned by the Cheng and Tsoi families) whose directors were also the directors of the 1^st respondent at least until April 2010.  The Property was known as the ‘Main Factory’ as that was where the 1^st respondent’s machines, essential for the manufacture of its products, have been located and the products manufactured.  The cake-making business is the main source of income for the 1^st respondent. 

4.The 1^st respondent occupied the Property from about 1987 until 1 August 2007 under various agreements made with the 2^nd respondent, a property holding company incorporated in 1979.  In August 2007, the 2^nd respondent granted the 1^st respondent a 2-year lease from 1 August 2007 to 31 July 2009 at a rent of $150,000 per month.  The occupation of the Property by the 1^st respondent was to the mutual advantage of the respondents: the 1^st respondent did not have to deal with third party landlords and the rental went to a related company.  The 2^nd respondent was the owner of the Property at the very least until July/August 2009.

5.The government granted short-term waivers of three months’ duration in relation to the use of the Property and those waivers have been continuously extended every 3 months.  The permitted user was as a bakery workshop, the fee payable not exceeding $200,000 per quarter.

6.The applicant is a company owned by the Cheng family.  CHK and several of his siblings are the shareholders and directors of the applicant.

7.At all material times, the issued share capital of the 1^st respondent was held as to 75% by the Cheng family (namely, CHK, the applicant, KT Holdings Ltd (a company owned by CHK and his wife Chung Ying Hung (“CYH”)) and Cheng Hung Kung (one of CHK’s brothers)) and as to the remaining 25% by the Tsoi family (namely, Lawrence Tsoi, his brother Choi Tsig Cheung, the estate of the late Choi Chong Ip and Fonduet Industrial Ltd, a company wholly owned by Lawrence Tsoi and his brother).

8.At all material times, and in any event between January and October 2009, CHK, CYH, KT Holdings and the applicant held approximately 72% of the issued share capital of the 2^nd respondent.  The remaining shares were held by the estate of Choi Chong Ip and Fonduet.

9.Between April 2004 and October 2009, CHK, CYH, CHK’s brother Cheng Hung Sang (“CHS”), Lawrence Tsoi and his brother were the directors of both respondents.

10.CHK attended school in China but his education could be said to be limited as he left secondary school after only completing his third year.  He has never been proficient in English and does not understand legal or commercial documents written in English.  He is a baker by trade and training and has been involved in the cake-making business of the 1^st respondent since 1963, acquiring some basic skills on how to run the business from the founders.  He has never had any formal training in law, accountancy or finance.

11.Mr Jim (a solicitor with Ford Kwan & Co at the time) was the handling solicitor for CHK in a number of commercial/property related transactions in 1997 and the acquisition of the shares of other shareholders in the respondents in 1998.  He began advising CHS and CHK as the family lawyer at about that time and since 2002 he has also been advising the respondents on various legal matters.

12.From about 2002 to June 2011 Mr Jim not only became the personal and family lawyer for CHK, CYH and CHS, he was the lawyer for the various family companies including the respondents.  He was considered a friend of the family.  In about 2002, Mr Jim joined RCKY.

13.CHK developed and reposed the utmost trust and confidence in Mr Jim and his firm.  The legal defendants became privy to personal, intimate and confidential information of the wider Cheng family, the family companies and their shareholders and directors in various capacities.  CHK trusted Mr Jim implicitly to the extent that CHK told Mr Jim several years prior to 2009 that he (CHK) would be willing to sign legal or commercial documents Mr Jim drafted as CHK trusted Mr Jim to act in his and the respondents’ best interests.

Factual background

14.On 29 July 2005 the 2^nd respondent obtained a 3-year loan of $13.5 million from Tang Ying Yip (“the Tang loan”) secured by a legal charge over the Property.

15.It is the 2^nd respondent’s case that the Tang loan was varied by an oral agreement made on a date between 29 July and 22 December 2008 that the repayment date would be fixed by way of written notice from Tang and until that event, the remaining terms and conditions of the Tang loan and mortgage would continue to apply.  No such written notice has ever been issued.

16.On 31 December 2007 the 2^nd respondent ‘borrowed’ $14 million from Wong Fung Yi (“WFY”).  The agreement between the 2^nd respondent and WFY (which was reviewed by the legal defendants acting as the 2^nd respondent’s solicitors) was in fact a sale and purchase agreement for the sale of the Property at the price of $27.5 million, the completion date being 31 March 2008 but it contained an option to terminate the agreement by repayment of the ‘deposit’ of $14 million together with an additional sum of a little under $1 million.  The 2^nd respondent maintains that the transaction was never intended to be an actual sale and purchase but simply as security for the loan.

17.During the first half of 2008, the 2^nd respondent received but rejected an offer of $40 million for the Property from a finance company (Silver Crown) represented by the legal defendants.  Earlier, in November 2007, the Property had been valued at $31,500,500 on the basis that the short term waiver would be continuously renewed.  Subsequently, in September 2009, it was valued at $33.8 million on the same basis.

18.The 2^nd respondent failed to exercise its right to terminate the WYF agreement before the scheduled completion date.  However, extensions of the completion date were obtained twice by written agreement: from 31 March to 30 April 2008 and subsequently to 31 July 2008.  The legal defendants acted for the 2^nd respondent in those matters.

19.On 22 December 2008, WFY commenced HCA2705/2008 against the 2^nd respondent for completion of the WFY agreement.  The legal defendants were instructed to oppose the action given that, for reasons already explained, it was of the utmost importance to both respondents that the 2^nd respondent should retain its title to the Property.

20.WFY succeeded in obtaining an order from Master Kwang on 15 June 2009 (“the 2009 order”) requiring the 2^nd respondent to specifically perform the WFY agreement and to discharge the Tang mortgage on or before 29 June 2009.  As WFY had already paid $14 million to the 2^nd respondent, the balance payable was only $13.5 million which was the amount of the Tang loan still outstanding.

21.Those matters form the relevant backdrop to the complaints that constitute the subject matter of the proposed derivative action.

Chronology of events

22.Faced with the 2009 order, the respondents sought advice from the legal defendants on appropriate courses of action that might avoid the alienation of the Property given its pivotal role in the viability of the businesses carried on by the respondents.

23.On or about 30 June 2009, the directors of the respondents were called to a meeting at the offices of RCKY.  At that meeting, Mr Jim produced what has been referred to as the June 2009 Internal Document (“the Internal Document”).  It was a handwritten Chinese document running to 3 full pages of closely written script and dense with detail.  

24.According to CHK, Mr Jim procured the signatures of CHK, CYH and CHS to the Internal Document on the basis that the transaction was a mortgage or security: it was presented to them as an arrangement whereby $26 million would be immediately forthcoming and another $11 million would be available for use by the 1^st respondent. Upon repayment of the $26 million, the 2^nd respondent would be able to redeem the Property but until then the 1^st respondent would have to pay “rent” to Brilliant.  The fact that the Property would actually be sold and transferred to a third party was not mentioned.  The signatories were not given time to read or understand the document.  Nor did they appreciate that RCKY would then proceed to act for other entities involved in the matters/acts envisaged by the Internal Document.

25.While described as minutes of an EGM of the 2^nd respondent and signed by CHK, CYH and CHS as directors pursuant to advice from the legal defendants, the Internal Document contained detailed recitals, inter alia, of the Tang loan and mortgage, the WYF agreement, HCA 2704 and recorded resolutions purportedly passed by the shareholders “to deal with operational issues”.  Effectively, it provided for the implementation of an arrangement or scheme, the main components of which comprised:

(a)   a transfer by Tang of the Tang mortgage to Right Guide upon repayment of the Tang loan together with 2 months of outstanding interest as well as a sum of $800,000 said to have been a personal loan made to CHS;

(b)   the sale of the Property by Right Guide as mortgagee to Brilliant for $35 million;

(c)    requisitions of title would be made by Brilliant pending completion regarding excessive illegal structures and overdue license fees, etc;

(d)   a supplemental agreement would then be entered into by Right Guide and Brilliant (to forestall a damages suit by Brilliant for damages for breach of contract and bad title) that would

• reduce the sale price from $35 million to $15 million; and
• result in Brilliant making a separate payment of $11 million to RCKY for distribution to various individuals and entities as extensively set out in the Internal Document.

26.Notably, such payments provided for the payment of the fees of RCKY for acting for the corporate defendants in various contemplated events, namely:

(a)  the sale of the Property by the 2^nd respondent to Brilliant;

(b)  a 3-year licence/tenancy agreement of the Property by Brilliant to the 1^st respondent at a rent or license fee of $250,000 per month; and

(c)  an option agreement to be entered into by the shareholders of the 2^nd respondent with the shareholders of Brilliant so that the former would be able to buy (via a company known as Excel Bumper) 49% of the shares in Brilliant upon the terms set out in the Internal Document (“the option”).

For convenience, those three events will hereafter collectively be referred to as “the Transaction”.

27.In the 2 weeks or so after that meeting, the following documents came into being:

(a)  the Tang Deed of Transfer dated 30 June 2009;

(b)  an agreement dated 15 July 2009 made between Brilliant and the 2^nd respondent (“the Consent”) whereby the 2^nd respondent allegedly consented to the transfer of the Tang mortgage to Right Guide and to Right Guide’s sale to Brilliant in consideration of (i) the monies paid to Tang for the Tang transfer (including Tang’s legal fees and CHS’ loan which were paid by Brilliant at the direction of Right Guide) and (ii) the payment of the sums therein further recited totalling approximately $12.3 million; and

(c)  a licence agreement dated 15 July 2009 made between Brilliant and the 1^st respondent whereby a 3-year licence was granted to the latter for $250,000 a month plus all outgoings in relation to the use and occupation of the Property (“the Licence Agreement”).

28.The legal defendants acted for Right Guide in relation to the transfer of the Tang mortgage and then for Brilliant in the sale of the Property by Right Guide.

29.After WFY became aware of the sale of the Property, on 11 August 2009, she commenced proceedings (HCA 1741/2009) against the legal defendants, the 2^nd respondent, CHK and the corporate defendants claiming that the Tang transfer and the sale to Brilliant were for the purpose of avoiding the 2009 order.

30.On about 23 April 2010, the 5 directors of the respondents (mentioned in §9 above) were allegedly removed as directors.  

31.Those currently in control of the respondents also claimed that the shares of the Cheng family and their companies (including the applicant) in the 2^nd respondent had been transferred in December 2009 to Easy Global Ltd, Wealth Highlight Ltd and Get Rich Asia Ltd (“the 3 BVI Companies”) and that CHK’s shares in the 1^st respondent had been transferred to Tasty Catering Group Ltd (“Tasty”) and Federal Management Ltd (“Federal”).  Such transfers are disputed, culminating in HCA  1137/2011 brought by CHK, CYH, CHS and KT Holdings in July 2011.  The court was informed that the applicant who is not yet a party is to become a party.

32.In March 2011, Brilliant commenced HCA 395/2011 against the 1^st respondent to recover unpaid license fees, mesne profits and vacant possession and obtained a default judgment which was later set aside.

33.Throughout May 2011, the control and management of the respondents gave rise to heated disputes: Tasty and Federal claimed to be the new management of the 1^st respondent while the 3 BVI Companies claimed to be the 2^nd respondent’s new management.  When Mr Jim appeared to side with the new management, CHK ceased seeking legal advice from the legal defendants and in June 2011 a new firm, Boase, Cohen & Collins (“BCC”) was retained to represent the respondents.

34.On 28 June 2011, representatives of Tasty and Federal attended the main shop of the 1^st respondent and took over the management, control and premises of the respondents.

35.On 6 July 2011, WFY, Brilliant and the 2^nd respondent entered into a Settlement Agreement under which, upon Brilliant paying $23.7 million to WFY, the WFY agreement would be cancelled with immediate effect and the 2009 order in respect of the Property set aside.  The 2009 order for specific performance was set aside by an order of Master Yu dated 14 July 2011.

36.On CHK’s application in July 2011 for an injunction in HCA 1137, the application was adjourned to a date to be fixed upon Tasty and Federal’s undertakings, including an undertaking that all the money received in the 1^st respondent’s business be used for the business.  Tasty and Federal were at this stage already in control of the 1^st respondent and its premises.

37.In late July 2011, Brilliant applied for summary judgment against the 1^st respondent in HCA 375.  BCC invited Tasty and Federal to deal with HCA395 as they were in control and under an obligation to maintain the status quo.  However, Master Kwang granted summary judgment on 5 December 2011 (“the 2011 order”), finding the defence raised by the 1^st respondent incredible.  

38.None of the matters outlined in §§14 to 36 above was raised by way of defence at that hearing.  Further, in response to the master’s query, those currently representing the 1^st respondent claimed (incorrectly) that there was no dispute concerning the 1^st respondent’s shares.  It is the applicant’s case that those currently in control of the 1^st respondent did not defend the claim diligently.

39.BCC ceased to represent the respondents in early August 2011 when David Wong & Co (“DWC”) took over as the respondents’ solicitors.  DWC refused to supply the documents in HCA 395 to Robertsons, the applicant’s solicitors despite the latter’s request but did inform them that a notice of appeal had been filed.

40.In March 2012, Robertsons sent DWC a letter informing the latter of the grounds that should be put forward for the appeal.  Shortly afterwards, Tasty and Federal sought to withdraw the 1^st respondent’s appeal and applied for a stay of execution.  The applicant applied to intervene in HCA 395 but was not successful.

41.The appeal which was scheduled to be heard on 29 March 2012 was withdrawn but the judge refused the stay application.

42.On 18 April 2012, Brilliant leased the Property to Hang Heung (Holding) Ltd (“Holding”) for 3 years.  Holding shares common directors with Tasty and Federal.  Holding granted a 3-year licence to the 1^st respondent.  At about this time Chan Chi Keung and Chan Yiu Shing who are respectively the majority shareholders of Tasty and Federal became directors of Brilliant.

43.Hang Heung Development Limited (“Development”), Holding and Hang Heung Group (“Group”) were incorporated in September/October 2011.  Crystal Lai, a director and shareholder of Tasty and one of the persons currently in control of the 1^st respondent being an alleged director thereof, is a founding member of Development, Holding and Group.  Those companies have no relationship with either of the respondents whose boards have never authorized or sanctioned the use of the name “Hang Heung” by any third party.

44.The Companies Registry changed Development’s name to “Company Registration Number 1665230 Limited” in May 2012 when it failed to comply with a change of name direction.

45.Holding and Group changed their names to “Woh Yat (Holding) Limited” and “Who Yat Group Limited” respectively in July 2012 pursuant to the Registrar’s change of name direction.

Locus standi

46.An application under section 168BB can only be brought by a member of the specified corporation.  For present purposes, a member is a person whose name is registered on the register of members.  While it is accepted that the applicant is a member of the 1^st respondent, Mr Liang who represents those currently in control of the respondents, submitted that the applicant is unable to prove that it is a registered member of the 2^nd respondent because there is extant a bona fide dispute as to who the members are.

47.In this context, the Articles of Association of the 2^nd respondent are relevant.  Articles 6 and 7 provide as follows:

“Article 6

Save as herein otherwise provided, [HHHK] shall be entitled to treat the registered holder of any shares as the absolute owner thereof, and accordingly shall not, except as ordered by a Court of competent jurisdiction, or as by Ordinance required, be bound to recognise any equitable or other claim to, or interest in such shares on the part of any other person.

Article 7

The Directors may decline to register any transfer of shares without assigning any reason therefor.”

Article 17 from Table A at the time of the 2^nd respondent’s incorporation is applicable and reads:

“Article 17

The instrument of transfer of any share shall be executed by or on behalf of the transferor and transferee, and the transferor shall be deemed to remain a holder of the share until the name of the transferee is entered in the register of member in respect thereof.”

48.Those currently in control of the 2^nd respondent rely on the exercise of powers of sale by the pledgee of, inter alia, the applicant’s shares in the 2^nd respondent but the legal effect of that has yet to be resolved: HCA 1137 is still at an early stage.  Mr Liang also prayed in aid the wording of article 17 of Table A which refers to the instrument of transfer being executed by or “on behalf of the transferor”.

49.Further, Mr Liang sought to derive support from the 2011 Annual Return of the 2^nd respondent dated 19 October 2011 and submitted to the Companies Registry on 25 October 2011 as establishing that the 3 BVI companies have become registered members in place of, inter alia, the applicant.  However, as §7 of the first affirmation filed by Lai Cheuk Ting Crystal on behalf of those currently in control of the respondents shows, it was not accepted for registration because of the ongoing litigation.

50.The thrust of CHK’s evidence is that neither he nor the applicant has ever executed any transfer of their shares in the 2^nd respondent to the 3 BVI Companies (being the third to fifth defendants in HCA 1137).  It is also his evidence that while the register has been misplaced, his name and that of the applicant did appear on the register of members.  Those currently in control of the 2^nd respondent have not produced any transfer by the applicant of its shares.  Not only is the actual register not in evidence, there is no evidence of the entry of the 3 BVI Companies on the register.  In those circumstances, article 17 of Table A can be of no assistance to the 3 BVI Companies.

51.In my view, having regard to the articles of the 2^nd respondent set out above and the available evidence, unless and until it is demonstrated that the applicant is no longer on the register of the 2^nd respondent, the court is bound to proceed on the basis that the applicant is still registered as a member.  Accordingly, as matters stand and unless and until it is held otherwise when HCA1137 is finally resolved, I am satisfied that the applicant is a member of the 2^nd respondent and has the requisite standing to make this application.

The requirements for granting leave

52.Section 168BC(3) sets out three requirements which must be satisfied:

(1)  it is prima facie in the interests of the company that leave be granted;

(2)  there is a serious question to be tried and the company has not itself brought proceedings against the intended defendants; and

(3)  written notice has been served in accordance with section 168 BD or alternatively the court has granted leave to dispense with the written notice.

53.As regards (3) above, the applicant has not complied with section 168BD in that the application was made on 22 March 2012, less than 14 days after service of the notice.  However, I consider this an appropriate case to dispense with the 14-day requirement since the intended defendants now have had several months to consider the bases set out in the notice.  From a practical perspective, the purpose of the notice (which is to allow a respondent the opportunity to decide to contest or acquiesce) has been achieved.

54.As regards the other 2 requirements, it is common ground that the threshold is ‘low’. See Tsang Way Lun Wayland v Grand Field Group Holdings Ltd, unreported, HCMP 1059/2008, 26 February 2009 at §21.  With that in mind, I propose first to consider whether there are serious questions to be tried and if so whether it would be in the interests of the respondents for leave to be granted.

Are there serious questions to be tried?

55.The substantive complaints arising from the matters set out in §§14 to 45 above are set out in a lengthy draft statement of claim.  Their case may be summarised as follows:

(1)   The Transaction was an abuse of the trust and confidence placed in the legal defendants by the respondents.  The respondents’ ‘consent’ to the Internal Document was not “informed consent” because the legal defendants failed to fully disclose all material facts (for example, that they were or would be acting for the corporate defendants in relation to the matters contemplated in the Transaction and would be remunerated therefore); the legal defendants did not explain that the likely result would be contrary to the intentions and wishes of the respondents as regards the Property; and they failed to exercise all due diligence to achieve the best deal for the respondents in that the sale appeared to be at a substantial undervalue.

(2)   There was actual or presumed undue influence of the legal defendants (who were the respondents’ solicitors at the material time) over the respondents in relation to the Internal Document, the Consent and the Licence Agreement in that concealment of material facts prevented the directors from making informed decisions.

(3)   Brilliant had actual or constructive notice of the undue influence exercised by the legal defendants that would entitle the respondents to set aside the Consent and the Licence Agreement.  Brilliant must have known of the components of the scheme in detail given the contents of the Internal Document as well as the probable financial situation of the respondents having regard to the detailed list of payments in the Consent.  Since the legal defendants acted for Brilliant in relation to the Consent and the Licence Agreement, their knowledge of the matters within (2) above may be imputed to Brilliant.

(4)   The Transaction, the respondents’ consent to the Internal Document, the Consent and the Licence Agreement were obtained by the unconscionable dealing of the legal defendants and Brilliant.  The respondents were under a special disability in dealing with the legal defendants and Brilliant in that material facts relating to the Transaction and of the acts contemplated by the Internal Document had been concealed from them and the legal defendants and Brilliant knew that the respondents had been put in a position of necessity as a result of the 2009 order.  The legal defendants had actual notice while Brilliant had actual or constructive notice of such and acted with impropriety through exerting undue influence on the respondents.  

(5)   The sale of the Property to Brilliant was not made in good faith and /or was irregular and improper in that the sale by Right Guide as mortgagee appeared to be at a substantial undervalue.  Further it is evident from the Internal Document that the sale was neither at arm’s-length nor made in good faith but was pre-arranged, indicative of mala fides, collusion, and/or equitable/constructive fraud exercised on the respondents.

(6)   The legal defendants breached their fiduciary duties owed to the respondents by acting for conflicting principals without the informed consent of both principals.

(7)   The legal defendants acted in breach of the express and implied terms of the retainer between them and the respondents through their conduct at the 30 June meeting and by procuring the respondents’ directors to sign/execute the Internal Document, the Consent and the Licence Agreement.

56.Mr Liang’s principal response was that the transactions involving Right Guide and Brilliant were part of a deal that allowed the respondents to “significantly ameliorate the consequences of [the 200 order]”.  He assessed the effect of the 2009 order as equivalent to compelling the 2^nd respondent to sell at $12.5 million below the highest valuation.

57.Mr Liang arrived at that figure by comparing the net proceeds under 2 scenarios.  Taking the highest valuation of the Property of $40 million (the offer from Silver Crown), after discharging the Tang loan of $13.5 million (ignoring interest), the sale would have resulted in net proceeds of $26.5 million.  Under the 2009 order, the Tang loan would have to be discharged from the much lower purchase price under the WFY agreement of $27.5 million, resulting in net proceeds of $14 million.  The difference ($26.5m - $14m) is $12.5 million.

58.Mr Liang reasoned that the ‘deal’ encompassed not only the Internal Document and the matters/acts contemplated by it but also the Settlement Agreement made 2 years later amongst WFY, Brilliant and the 2^nd respondent (see §35 above).  The Achilles’ heel of the reasoning is the fact that the Settlement Agreement simply never featured as part of the overall arrangement or scheme contemplated by the Internal Document.  While the intended defendants knew of the WFY agreement, there is no evidence that they ever sought to cut a deal with WFY.  What precipitated the Settlement Agreement was HCA 1741 which the intended defendants strenuously resisted for almost 2 years.

59.In any event, as submitted by Mr Hew, counsel for the applicant, the applicant’s case is not that what has happened is worse than under the 2009 order.  Rather, the complaints are about abuse of confidence, undue influence, unconscionable dealing, breach of duty by Right Guide as mortgagee, breach of fiduciary duty and of their retainer by the legal defendants.

60.Given the low threshold, I do not consider that it can be said that there is no serious question to be tried in respect of each of the complaints made by the applicant.  I am of the view that an arguable case is made out in respect of each of the complaints set out in the §55.

61.I now turn to consider whether it would be in the interests of the respondents to sue the intended defendants. The draft statement of claim seeks an array of remedies.  That is hardly surprising given the nature of numerous complaints being made.  Depending on which (if any) of the complaints succeed at the end of the day, the relief may include:

(i)    a declaration that the sale to Brilliant was null and void, declarations in relation to the sale of the Property being at an undervalue, and HHHK/HHCS (as the case may be) not being bound by the Internal Document, the Consent and the Licence Agreement;

(ii)   rescission of the Transaction, the Internal Document, the Consent, the Licence Agreement;

(iii)   even on the basis that the sale is not set aside, the 2^nd respondent may be entitled to an account of sums due from Right Guide for what it should have received if the sale is found to be at an undervalue;

(iv)   an account of profits by the intended defendants if the claim for equitable/constructive fraud is made out;

(v)   an account for profits and/or equitable compensation as against the legal defendants for breach of fiduciary duty;

(vi)   damages as against the legal defendants for breach of contract and negligence.

62.Mr Liang submitted that the 2011 order made in HCA 395 (which ordered the 1^st respondent to deliver vacant possession of the Property to Brilliant, pay the overdue licence fees and mesne profits) “might raise an issue estoppel” against any rescission of the Licence Agreement and the sale of the Property.  This is neither the appropriate time nor place to delve into the question of issue estoppel save to say it is far from a foregone conclusion that issue estoppel applies in the circumstances of this case.  Mr Liang’s submission recognises that it is only a possibility and not a certainty.

63.It was also said that the Settlement Agreement is binding on the 2^nd respondent because of Lawrence Tsoi’s signature on its behalf.  In his affirmation dated 10 August 2012, Mr Tsoi gave an account (at §§43-45) of the circumstances in which his signature appeared on a piece of paper that eventually constituted the signature page of the Settlement Agreement where the 2^nd respondent’s signature appears.  However, in a written declaration dated 4 October 2012, Mr Tsoi gave a different account.  The inconsistent versions can only be resolved at trial but even if the Settlement Agreement is binding and rescission is not available, that does not mean that the 2^nd respondent has no other remedies: there is nothing to preclude it from pursuing Right Guide or the legal defendants.

64.While it is possible that not all the complaints may prevail at the end of the day, I have little doubt that there is a prime facie case and that it would be in the interests of the respondents to bring proceedings against the intended defendants.

Orders

65.I will grant the applicant leave to bring a statutory derivative action on behalf of the respondents in the terms as sought in paragraph 2 of the amended originating summons.

66.Mr Hew seeks the court’s directions pursuant to section 168BG and has elaborated them in paragraph 2 of a draft order submitted for that purpose which reads:

“(1) Messrs David Wong & Co do provide copies of all papers and documents relevant to HCA395/2011 and the conduct of HCA395/2011 to the Applicant’s solicitors within 14 days of this order;

(2) The Respondents, and parties claiming to be officers of the Respondents (including Tasty Catering Ltd and Federal Management Ltd in relation to the 1^st Respondent, and Easy Step Global Ltd, Get Rich Asia Ltd and Wealth Highlight Ltd in relation to the 2^nd Respondent) do provide copies of all papers and documents relevant to HCA395/2011 and the conduct of HCA395/2011 to the Applicant’s solicitors within 14 days of this order; and

(3) That there be liberty for the Applicant to apply for further orders, including those directing the Respondents, and parties claiming to be officers of the Respondents (including Tasty Catering Ltd and Federal Management Ltd in relation to the 1^st Respondent, and Easy Step Global Ltd, Get Rich Asia Ltd and Wealth Highlight Ltd in relation to the 2^nd Respondent) to do, or not to do, any act, including provision by the Respondents or officers of such information or assistance as the Court may think fit for the purpose of the fresh action.”

67.I consider those directions reasonable and I will make an order in terms.

68.I have already indicated that this is an appropriate case for dispensing with service of the written notice required by section 168BD(1) and make an order to that effect.

69.The applicant seeks an indemnity as to the costs of (1) the statutory derivative action and (2) this application to be paid out of the respondents’ assets.

70.Section 168BI (3) provides that the court may only make an order about costs, including the requirement as to indemnification, in favour of the applicant if it is satisfied that the applicant was “acting in good faith in, and had reasonable grounds for, making the application, or bringing ... the proceedings”.  I am satisfied that the requirement of good faith is met in the present case.  There is nothing that suggests that the applicant was not acting out of a legitimate interest in the welfare of the respondents or that some ulterior motive exists for bringing the derivative action other than for the purpose of recovering loss and damage of the respondents.  Accordingly, costs should follow the event and the applicant should have the costs of the leave application on an indemnity basis.  I make an order nisi of costs to that effect.

71.As regards the request for indemnification as to the costs for bringing the statutory derivative action, even if the court were satisfied as to good faith, there must be evidence as to the company's ability to pay costs of the proposed derivative action as at the time that leave is sought. See Re F & S Express Ltd [2005] 4 HKLRD 743.

72.The evidence as to the financial condition of the respondents is far from satisfactory and as will become apparent, this has been caused by those currently in control of the respondents.  In §86 of his written submissions, Mr Liang stated that the 1^st respondent only had cash of less than $1.5 million as on 31 May 2012, while the 2^nd respondent only had cash of $2240 as on 31 March 2010.

73.This application was adjourned part-heard on 31 October 2012.  The applicant obtained a statement from the Bank of China showing that as at 17 September 2012, there was a balance in excess of $4.6 million in the 1^st respondent’s account maintained with the bank.  That statement was sent to DWC with a covering letter on 2 November 2012.  In an attempt to explain the situation, Crystal Lai sought to file her fifth affirmation when the hearing resumed on 5 November.  As regards the position of the 2^nd respondent, the only evidence consists of the assertion made in the written submissions and an unsigned copy of the 2010 accounts which CHK disputes.

74.Those currently in control of the respondents are responsible for the unsatisfactory state of evidence in this regard.  They had every opportunity of providing the court with the information needed given the request for indemnification made in the amended originating summons and again at the outset of the hearing when Mr Hew presented this court with a draft order.

75.In the circumstances I consider it appropriate to make a limited order for indemnification at this stage.  I will order that the applicant be indemnified as to the costs of bringing the statutory derivative action up to and including the close of pleadings.  At that stage, the matter can be reviewed.

Mr Hew Yang Wahn, instructed by Robertsons, for the applicant

Mr Liang Alfred W, instructed by David Wong & Co, for the 1^st and 2^nd respondents