ZHI CHARLES v. JANG SAM KI AND OTHERS

HCA 1151/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1151 OF 2014

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D E C I S I O N

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1.  There are 2 strike out applications before the court taken out by respectively the 1^st to 7^th defendants (“D1-7”) and the 13^th defendant (“D13”) seeking to have this common law derivative action dismissed against them. 

2.  This derivative action was issued by the plaintiff (“Zhi”), who owns certain shares in the 14^th defendant (“SMG”), on behalf of SMG.  SMG was incorporated in Cayman Islands and is listed on the Hong Kong Stock Exchange. 

3.  The 1^st to 6^th defendants are the current directors of SMG.  The 7^th defendant was formerly a director of SMG.  D13 is the current auditor of SMG.

4.  Zhi’s complaints in this action appear to center around SMG’s acquisition of a coal mine in Russia from the 12^th defendant in 2008.  The consideration for the mine consisted of 3 tranches of convertible notes in excess of US$700 million.  It is alleged by Zhi in the Amended Statement of Claim (“ASOC”), inter alia, that the acquisition of the mine was a fraudulent enterprise, and a disguised reverse-takeover of SMG by the 12 defendant.  In the prayer to the ASOC, Zhi seeks, inter alia, to have the convertible notes rescinded. 

5.  It should be pointed out that the 1^st to 6^th defendants were only appointed to SMG’s board of directors in February 2014, well after the mine acquisition and the issuance of the 3^rd convertible note.  The same can be said in respect of D13 who was appointed as auditor of SMG in May 2014. 

6.  Both D1-7 and D13 seek to strike out the ASOC on the grounds that it discloses no reasonable cause of action and is an abuse of process of the court. 

7.  I believe that there are 2 arguments advanced by these defendants which are unanswerable by Zhi.

8.  Firstly, there is no dispute that these proceedings were not issued with the leave of the Cayman Islands Grand Court. It has been held in a recent authority that a shareholder’s entitlement to bring derivative action is a matter of substantive law governed by the law of the place of incorporation : see Wong Ming Bun v Wand Ming Fan [2014] 1 HKLRD 1108, §36.  There is no dispute that under Cayman Islands law leave of the court is a prerequisite for the continuation of a derivative action.  In the premises, this action is defective. 

9.  Secondly, there is no evidence filed by Zhi in answer to the strike out applications.  It has been said by the highest court in Hong Kong that a plaintiff must show a prima facie case, when his locus to sue derivatively is challenged, that the company is entitled to the relief claimed and that the action falls within an applicable exception to the rule in Foss v Harbottle : see Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370, §§10-20.

10.  In another recent authority concerning a strike out application over a derivative action, it was held that : “The term prima facie case or prima facie evidence just means sufficient evidence to pass the judge so as to make the issue fit for determination by the tribunal of fact. To achieve that standard, the party which bears the burden of proof has to adduce sufficient evidence to satisfy the court, sitting as the tribunal of law, that there are reasonable grounds for believing that his case or the issue in question is well founded so that the issue becomes one which is fit for the tribunal of fact to adjudicate on.” (see Melvin Waxman v Li Fei Yu & Ors, HCA 1973/2012, unrep, 23 Agust 2013, §25). 

11.  I am unable to see how Zhi can discharge his burden of showing a prima facie case without filing any evidence. 

12.  In respect of the absence of leave from the Grand Court, Zhi submitted that he has been labouring under the belief that it was unnecessary, having previously received professional advice on similar cases.  However, he asks for an opportunity to make the necessary application to the Grand Court in order to rectify the defect. 

13.  The evidence on Cayman Islands law before the court does not say definitively whether it is now too late to apply for leave to sanction this action.  However, looking at Order 15 rule 12A of the Grand Court Rule, it appears that such an application remains open. 

14.  In so far as the absence of leave is concerned, I am inclined to allow Zhi an opportunity to make the necessary application to the Grand Court to rectify the defect in question.  Indeed, both the summonses before the court envisage a stay of proceedings to allow Zhi such an opportunity. 

15.  As regards the lack of evidence in opposition, Zhi is aware of the 2 sets of directions made by the court on 1^st and 14^th April 2015 regarding the filing of evidence by the parties for purposes of these applications.  He has frankly accepted that there is no good reason not to have complied with those directions.  However, he submitted that a substantial amount of evidence has been filed by him in these proceedings, which demonstrates a prima facie against the defendants in question, and he seeks an a further opportunity to file evidence to oppose these applications.

16.  I should mention that in his skeleton arguments, Zhi has put forward a substantial amount of “evidence”.  However, those materials are difficult to understand and the relevance of the same to the cases against the defendants in question is not entirely plain. 

17.  I am not inclined to allow Zhi further opportunity to file evidence to oppose these applications.  Quite apart from the unfairness to the defendants in question, I am not impressed by the merits of his allegations against them. D1-6 and D13 all came into the picture well after the purchase of the Russian mine had been concluded.  Zhi’s complaint against these defendants is one of negligence. It is reasonably well-established that it is an essential element of a derivative action based on negligence that the wrongdoer has personally benefited from the act complained of.  Mr Zhi has not been able to demonstrate this element of personal benefit.  I should add that there is considerable force in the submission of Mr Ng, appearing for D13, that the ASOC does not contain a properly constituted claim against D13. 

18.  Although the case against D7 is more serious (going beyond that of negligence), there is again a missing essential element in the case against him, namely, the control of company on the part of the alleged wrongdoer.  Mr Zhi has not been able to show that D7 is in control of SMG so that he is in a position to stifle a claim against him by SMG. 

19.  For these reasons, the ASOC must be struck out and this action dismissed as against the 1^st to 7^th and 13^th defendants.  The costs of this action, including the strike out applications, be borne by Zhi in favour of these defendants, to be taxed if not agreed. 

20.  In light of the defective nature of these proceedings, and notwithstanding the absence of application by the other defendants, I make an order that these proceedings be stayed pending leave from the Cayman Islands Grand Court to Zhi to continue this action.  I also grant liberty to apply.