HARBOUR FRONT LTD v. LEUNG YUET KEUNG AND OTHERS

HCA 1143/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1143 OF 2016

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JUDGMENT

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INTRODUCTION

1.  The plaintiff, Harbour Front Ltd (“Harbour Front”), purports to bring two common law derivative actions on behalf of two companies in which it has shares, namely Money Facts Limited (“Money Facts”) and Fonfair Company Ltd (“Fonfair”), respectively named as D4 and D5 in this action.   This form of action has been described as a “mere matter of procedure in order to give a remedy for a wrong which would otherwise escape redress”[1]. The case, in reality, is brought against Leung Yuet Keung (D1), Wong Sam Yuen (D2) and Marcon Investment Ltd (D3).[2]  For short, the action purportedly brought on behalf of Money Facts will be referred to as “the MF derivative claim” and that on behalf of Fonfair as “the FF derivative claim”. 

2.  D1 to D3, by the present application,[3] seeks to strike out the whole of the Statement of Claim (“SOC”) against them on the following grounds:  

(a) Harbour Front fails to prove its locus to sue;

(b) Harbour Front claims reflective loss;

(c) part of the claim is time-barred;[4] and

(d) the claim offends the principle of res judicata (both in the narrow and the wider sense) which amounts to abuse of the court’s process.

BACKGROUND

3.  This is yet another episode of the decade-long legal battle between two brothers, D1 and Leung Yat Tung (“YT”) , over family assets left behind by their late father [5].  The subject matter of the present action is about the control and management of Fonfair, the sole business of which is to hold a piece of land known as Yau Tong Marine Lot Nos 2, 3 and 4 (“the Yau Tong Property”) on which the former Universal Dockyard had operated.

4.  The major shareholders of Fonfair are Money Facts and Harbour Front and the minority shareholders include other D1, his siblings and Marcon [6].  Money Facts is equally owned by D1 and Harbour Front.  The corporate structure of the various companies concerned is set out in the chart annexed to this Judgment (Annex I).[7]  

5.  As aforesaid, the disputes between YT and D1 have a long and protracted history, a brief summary of which, insofar as relevant to the present action, is as follows:  

(a) Fonfair was incorporated in Hong Kong in 1980.  It used to be a wholly owned subsidiary of Universal Dockyard until the flotation of UDL Holdings Limited (“UDL”) on the Stock Exchange in 1991.  After that, Fonfair was spun off to keep the Yau Tong Property in the hands of the Leung family.  Since September 1991, Fonfair had leased the Yau Tong Property to Universal Dockyard and it was occupied by the companies in the UDL group until vacant possession was recovered by Fonfair in the latter part of 2002.

(b) On 5 June 1990, D1 and YT entered into an agreement (“the Shareholder Agreement”) by which they agreed to inject their  shares in Fonfair into a new company and they also agreed to equality of participation in the management of the new company [8].

(c) Money Facts was incorporated in Hong Kong in 1991 pursuant to the Shareholder Agreement and it was subsequently held by D1 and YT in equal shares until YT transferred his shares to Harbour Front in February 1998 with D1’s consent [9].  The only asset of Money Facts has been a majority shareholding in Fonfair and the former has no other business.  Before YT was adjudged bankrupt in 2001, he and D1 were Money Facts’ only directors [10].

(d) Harbour Front is a BVI company.  Prior to the adjudication of bankruptcy of YT on 1 March 2001, he was its sole shareholder, sole director and company secretary.  After the bankruptcy, his wife (Irene Leung) became a director [11].   Gillian Leung, a director who filed the affirmation for Harbour Front in the present case,[12] is YT’s daughter.  For the present purpose, Harbour Front can be treated as being in control by YT [13].

(e) On 1 March 2001, upon the petition of a judgment creditor, Healthy Wharf Limited (which was controlled by D1 and D2), YT was adjudged bankrupt.  Thereupon, YT ceased to be a director of Harbour Front, Money Facts and Fonfair [14].

(f) D2 was then appointed a director of Money Facts to fill the vacancy left by YT [15]. For the present purpose, at all material times D1 and D2[16] were the directors of Money Facts.[17]

(g) For the present purpose, at all material times D1 and Marcon were the directors of Fonfair. 

(h) Over the years, YT / Harbour Front had commenced numerouslitigations against D1 / D2, which were dismissed.   Only a few of them, which are relevant to this application, are outlined below.

HCCW 880/2001 & HCCW 246/2002 (“the 2004 Judgment” [18])

(i) Harbour Front petitioned for the winding up of Money Facts and Fonfair on just and equitable grounds.  The two petitions were dismissed by Kwan J (as she then was) after trial.  There was no appeal to the 2004 Judgment and so the following key findings stand:

(i) Money Facts and Fonfair were quasi-partnerships between D1 and YT (and since YT’s shares in these two companies were transferred to Harbour Front, between D1 and Harbour Front).   Harbour Front was entitled to equality of participation in the business, which should not be altered without good reason.[19]

(ii) Harbour Front was excluded by D1 from the control and management of Money Facts and Fonfair.  However, the exclusion was justified because:

(1) YT was an undischarged bankrupt and there was sufficient reason to think that YT would indirectly take part in or be concerned in the management of the companies if his nominees were appointed director [20];

(2) In YT’s bankruptcy proceedings, both Cheung J (as he then was) [21] and the Court of Appeal [22] took the view that the alleged transfer of YT’s shares in Money Facts and Fonfair to Harbour Front would fall within s 49 of Cap 6 such that they were liable to be set aside [23]; and

(3) YT / Harbour Front committed breaches of the Shareholders Agreement [24] which caused the breakdown of trust and confidence [25].  First, from September 1998 to December 1999, almost all the rental income received by Fonfair from Universal Dockyard Limited was misappropriated by YT into the account of YT Leung Trading (wholly owned by YT) [26].  Further, since December 1999, Universal Dockyard Limited was allowed by YT / Harbour Front to remain in possession of the Yau Tong Property without payment of rent.  YT / Harbour Front persistently failed to enforce the tenancy agreement made by Fonfair with Universal Dockyard Limited and even actively thwarted Fonfair’s attempts to recover a judgment debt against Universal Dockyard Limited for arrears of rent.

(iii) The relief to wind up Money Facts and Fonfair on the just and equitable ground was refused because Harbour Front did not come to court with clean hands [27].

HCA 1937/2007 [28] (“the 2007 Derivative Action”)

(j) In 2007, Harbour Front commenced a derivative action on behalf of Money Facts and Fonfair, against D1 and D2. 

(k) In the Indorsement, Harbour Front pleaded that D1 and D2 acted in breach of their fiduciary duties by failing / refusing to act in the best interests of Fonfair / Money Facts.   Harbour Front also sought an injunction restraining D1 and D2 from commencing / continuing any litigation or arbitration in the name of Fonfair / Money Facts.

(l) Harbour Front’s application for interim injunction was dismissed with costs by Suffiad J [29].

(m) The 2007 Derivative Action was discontinued by consent on 10 November 2008, with costs to D1 and D2 [30].

HCA 1598/2008 [31]

(n) In 2008, Harbour Front (based on the Shareholders Agreement) again applied for an interim injunction to restrain the directors of Money Facts (D1 and D2) from voting on behalf of Money Facts in the 2008 AGM of Fonfair. 

(o) The application was dismissed by Recorder Kwok SC on the ground that it was an abuse and that the claim was frivolous and vexatious.

(p) Harbour Front’s application for an interim injunction pending appeal against the decision of Recorder Kwok SC was refused by Kwan J.  That was because Harbour Front remained in breach of the Shareholders Agreement and made no reparation of the losses suffered by Fonfair as a result of its misconduct in the misappropriation of rental income and the thwarting of Fonfair’s attempts to recover the judgment debt against Universal Dockyard Limited.  It was also an attempt to re-litigate the matters raised in HCA 1937/2007 [32].

(q) Harbour Front’s application to the Court of Appeal for an interim injunction was also dismissed with costs ordered against it on indemnity basis [33].

HCCW 111/2015 [34] & HCCW 116/2015 [35]  (“the 2015 Petitions”)

(r) In 2015, Harbour Front again petitioned for the winding up of Money Facts and Fonfair on just and equitable grounds. 

(s) The 2015 Petitions were made in circumstances which Harbour Front has still failed to make reparation of the losses suffered by Fonfair as a result of Harbour Front’s misconduct as found by the Court.  These Petitions are contested and the proceedings are ongoing in the Companies Court.  

(t) In the 2015 Petitions, Harbour Front objected to the validation of the renewal of the lease of the Yau Tong Property by Fonfair. The objection, however, was dismissed by Harris J [36].

THE SOC

6.  There are several features of the SOC which are of note.  Firstly, the present case is said to be a derivation action and not a personal claim by Harbour Front.  However, Harbour Front’s locus to make the FF derivative claim and the MF derivative claim is being challenged by D1 to D3.

7.  The second thing to note about the SOC is its length: it consists of 29 pages divided into over 90 paragraphs.  However, its length and verbosity are the antitheses of clarity and sufficiency.  In fact, its paragraphs are so convolutedly arranged that those which are said to pertain to the same head of claim are very often scattered all over the places,with the result that it is difficult to decipher which paragraphs relate to which claim and to which company. 

8.  Thirdly, the SOC has caused some embarrassment to the defence in that, but for the clarifications made by Mr Lam at the Court’s request, it would be very confusing as to which paragraphs Harbour Front says are pleaded facts constituting a cause of action and which paragraphs are merely “background”, as Mr Lam so labels them [37]. The confusion had caused D1 to D3 to advance arguments to seek to strike out of those parts of the SOC which Mr Lam now confirms do not in fact constitute any claim against anyone.

9.  At the request of the Court, on 13 March 2017, Mr Lam submitted a “Table of Claims”, also annexed to this Judgment [38], dissecting and re-grouping various paragraphs of the SOC into the following heads of claim [39]:

In respect of Head of claim	the FF derivative claim	the MF derivative claim
(1)   The Misappropriation Claim [40]:
•	D1 and Marcon, as directors,allowed D1 to misappropriate Fonfair’s rental income by the reconciliation.	D1 and D2, as directors, allowed D1 to misappropriate Fonfair’s rental by the reconciliation.
(2)   The Exclusion Claim [41]:
•	D1 and Marcon, as directors, wrongfully excluded Harbour Front from the management of Fonfair after late 2014/‌early 2015.	D1 and D2, as directors, wrongfully excluded HarbourFront from the management of Money Facts after late 2014/‌early 2015.
•	Money Facts (through the agency of D1 and D2?), as Fonfair’s shareholder, also [wrongfully?] voted in favour of excluding Harbour Front from the management of Fonfair [42].
(3)   The Rejection of Offers Claim [43]:
•	D1 and Marcon, as directors, wrongfully rejected offers from Harbour Front and others to purchase the Yau Tong Property.	D1 and D2, as directors, wrongfully rejected offers from Harbour Front and others to purchase the Yau Tong Property.
(4)   The Mismanagement Claim [44]:
•	D1 and Marcon, as directors, breached their fiduciary duty by failing to find tenants for Fonfair.	D1 and D2, as directors, breached their fiduciary duty by failing to find tenants for Fonfair.
(5)   The Dividend Claim [45]:
•	D1 and Marcon, as directors, breached their fiduciary duty by failing to declare dividends to Fonfair’s shareholders.	D1 and D2, as directors, breached their fiduciary duty by failing to declare dividends to Fonfair’s shareholders including Money Facts.

RELEVANT LEGAL PRINCIPLES

10.  In any action in which a wrong is alleged to have been done to a company, the proper claimant is the company itself.  This is known as “the Rule in Foss v Harbottle [46] ”.

11.  If the company is unwilling or unable to claim for these losses, then the shareholders will be prejudiced unless they can bring their own claim. However, it is said in the leading case of Prudential Assurance v Newman [47] that:

“ … what [a shareholder] cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a ‘loss’ is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only ‘loss’ is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent shareholding.”

12.  In Johnson v Gore Wood & Co [48], it is made clear that the principle preventing recovery of reflective loss applies not only to diminution in value of members’ shares but also to loss of dividends and to claims by employees or creditors.  

13.  The existence of the rule is justified by the need both to prevent double recovery and to provide protection for the company’s creditors, who might be prejudiced if the shareholder’s claim were to succeed. Thus, it is said in Johnson v Gore Wood & Co [49] that:

“ If the shareholder is allowed to recover in respect of [reflective] loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company’s creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder.”

14.  Since the “the Rule in Foss v Harbottle” could do injustice to minority shareholders, common law has developed several exceptions to the rule, amongst those is the ‘derivative action’, which allows a minority shareholder to bring a claim on behalf of the company.  This applies in situations of when (i) the alleged wrong or breach of duty was committed by directors and is incapable of being ratified by a simple majority of the members; and (ii) the alleged wrongdoers are in control of the company. 

15.  The following legal principles for bringing common law derivative actions, which are helpfully summarized by Ms Lok in her written submissions, are fairly accepted by Mr Lam:

(a) As the locus of Harbour Front to sue derivatively on behalf of Money Facts and Fonfair is challenged, the burden is on Harbour Front to establish a prima facie case that:

(i) each of the companies is entitled to the relief claimed; and

(ii) the action falls within a recognized exception to the rule in Foss v Harbottle.

See Waddington Ltd v Chan Chun Hoo Thomas [50].

(b) In respect of (a)(ii) above:

(i) normally, the complaining shareholder must establish that the company has suffered from acts which are either of a fraudulent character or ultra vires the company’s power: Wong Ming Bun v Wang Ming Fan [51].

(ii) “Fraud” in this context means deliberate and dishonest breaches of duty, or where the alleged wrongdoing resultin a loss to the company and that the alleged wrongdoers personally gained from their breaches of duty at the expense of the company and the other shareholders.  It was not sufficient to simply allege that there had been a breach of fiduciary duty or an abuse / misuse of power: Harris v Microfusion 2003-2 LLP [52].

(c) It is clear from Waddington, supra, that where the plaintiff’s locus is challenged in a derivative action, the burden to prove the plaintiff’s locus to sue lies firmly on the plaintiff and disputed facts are not assumed in the plaintiff’s favour[53].  See also Charles Zhi v SRK Consulting Ltd [54].

(d) In a strike out application based solely upon Order 18, rule 19, the burden is on the defendant to show a plain and obvious case to strike out the claim.  But plain is not the same as simple, and obvious is not the same as short.  If a careful reading of thestatement of claim does not indicate clearly what the nature of the claim is, then a court can, and probably will order it to be struck out: Cheung Chui Sou-ying v The Personal Representatives of Cheung Yuk-luen alias Wilson Cheung Deceased & Ors [55].

16.  Apart from the above, I note that for the “fraud on the minority exception” to the Rule in Foss v Harbottle to apply, actual fraud is plainly sufficient to bring the alleged wrongdoing within the scope of that exception.  Actual fraud includes deliberate and dishonest breaches of duty.  An ultra vires act is also sufficient.  However, mere negligence itself would not be sufficient unless it is coupled with personal benefit on the part of the wrongdoer: Abouraya v Sigmund [56].

17.  Mr Lam submits first that “equitable fraud”, such as a breach of fiduciary duty, would also be sufficient for the purpose of the “fraud on a majority” exception.  Secondly, he submits that it remains arguable whether this necessarily requires showing personal benefit to the wrongdoer and he cites Estmanco (Kilner House) Ltd v Greater London Council [57] in support of his contention. 

18.  With respect, I am unable to accept the second part of Mr Lam’s submission which has been firmly rejected in Harris v Microfusion 2003-2 LLP, supra. In that case, McCombe LJ, giving the judgment of the Court of Appeal, explained that Estmanco (Kilner House) Ltd had not in fact done without the requirement of a personal gain on the part of the wrongdoer.  In the latter case, a derivative action was taken against the majority shareholder for stultifying the purpose for which the company was formed in order that the majority might gain a personal benefit, albeit political rather than financial, which was disadvantageous to the minority.  It was held that what the majority did with their voting power may constitute a “fraud on the minority”.  To that extent it was on all fours with Daniels v Daniels [58] in which Templeman J (as he then was), after reviewing previous case authorities, derived the following principle:

“ … a minority shareholder who has no other remedy may sue where directors use their powers, intentionally or unintentionally, fraudulently or negligently, in a manner which benefits themselves at the expense of the company.” (Emphasis supplied)

19.  McCombe LJ said that the law in relation the “fraud on a minority exception” has been accurately stated in the judgment of David Richards J in Abouraya v Sigmund [59] where His Lordship held that in the absence of actual fraud or an ultra vires act, the wrongdoers should themselves have benefited from the wrongdoing so that their breach of duty could not be ratified by a majority vote which depended on the votes of the wrongdoers. 

20.  I note also that since the procedural device of derivative actions has evolved so that justice can be done for the benefit of the company, whoever comes forward to start the proceedings must be doing so for the benefit of the company and not for some other purpose.  It follows that the court has to satisfy itself that the person coming forward is a proper person to do so.  In Nurcombe v Nurcombe [60], Lawton LJ, citing with approval Gower, Modern Company Law [61], which said:

“ The right to bring a derivative action is afforded the individual member as a matter of grace. Hence the conduct of a shareholder may be regarded by a court of equity as disqualifying him from appearing as plaintiff on the company’s behalf. This will be the case, for example, if he participated in the wrong of which he complains.”

The above approach was followed in Konamaneni v Rolls Royce Industrial Power (India) Ltd [62]. 

21.  As mentioned above, Templeman J in Daniels v Daniels noted that derivative action may be available to a minority shareholder “who has no other remedy”.  The fact that there is an alternative remedy is a factor to be taken into account when considering whether to allow a derivative action to proceed.  Thus, in Barrett v Duckett[63]  Peter Gibson LJ said:

“The shareholder will be allowed to sue on behalf of the company if he is bringing the action bona fide for the benefit of the company for wrongs to the company for which no other remedy is available. Conversely if the action is brought for an ulterior purpose or if another adequate remedy is available, the court will not allow the derivative action to proceed.”

22.  I am fully aware that there should be no trial on affidavits; that the jurisdiction should not be exercised if it requires a minute and protracted examination of the documents and facts of the case in order to see whether the plaintiff really has a cause of action; and where an application to strike out involves a prolonged and serious argument, the Court should, as a general rule, decline to proceed with the argument.

23.  Lastly, I am alive to the principle that striking out should be the last resort and if a pleading, though defective, is capable of being remedied by provision of further and better particulars, then an order for amendment should be made instead: Pak Win Investment Ltd v Chung Yuet Sheung Lorrain [64].

CONSIDERATION

(1)   The Misappropriation Claim

History

24.  Ironically, this head of claim has its origin in the misappropriation by YT of the funds of Fonfair which YT has yet to fully account for.  The following background fact is taken from the Judgment of Deputy High Court Judge To (as he then was) in Fonfair Company Ltd v Universal Dockyard Ltd [65]:

“ 4. The Property, formerly owned by the Defendant, was leased back to the Defendant and the rental income from 1991 to 1996 was applied towards mortgage repayments of the loan taken out bythe Plaintiff from Hongkong and Shanghai Banking Corporation Limited (hereinafter called ‘HSBC’) for payments to the Defendantto facilitate the spin-off of the Plaintiff. This arrangement continueduntil November 1996 when a loan of $30 million was obtained from the Standard Chartered Bank (hereinafter called ‘SCB’) against the Plaintiff’s assets to discharge the HSBC loan. The proceeds were then distributed between [D1] and [YT] in accordance with the ratio of their shareholding in the Plaintiff. [D1] and [YT] became responsible for the monthly repayment of the SCB loan. From then on, with the Plaintiff having been freed from the burden of making mortgage repayments, the rental income net of incidentals became available for distribution to the Plaintiff’s shareholders, i.e. effectively to [YT] and [D1] in the approximate ratio of 2 to 1. [YT], who had the management of the Plaintiff, overdrew in favour of himself. This led to the appointment of an independent accountant firm, Messrs Lau & Au Yeung Certified Public Accountants Limited (hereinafter called ‘Messrs Lau & Au Yeung’) to review the accounts of the Plaintiff. As a result, itwas revealed that [YT] had overdrawn from the Plaintiff’s account $2,652,363, while [D1] had been underpaid $1,988,432. The reconciliation account prepared by Messrs Lau & Au Yeung was accepted by both [YT] and [D1]. On 27 November 1997, the Plaintiff duly paid [D1] the amount which he had been underpaid, while [YT] was required to refund the amount overdrawn.

5. In view of the misappropriation by [YT], it was agreed thatMessrs Lau & Au Yeung be engaged to administer the accounts ofthe Plaintiff whereas the administration of the lease of the Property to the Defendant be managed by [D1] to avoid further conflict of interest with [YT] representing both the Plaintiff as landlord and the Defendant as tenant at the same time. That agreement, however, was never implemented due to lack of cooperation from [YT]. That was the position towards the end of 1997.

…

13.   Since the safeguards agreed in November 1997 were not implemented, for the period up to December 1999 almost all the rental income received by the Plaintiff from the Defendant was misappropriated by [YT] into the account of YTL Limited [66] as shown in the account movement record.  Thereafter, the mis­appropriation took a different form by [YT] simply allowing the Defendant to continue in occupation of the Property without making any rental payment.  On 7 January 2000, [D1] raised the question of distribution of the rental income with [YT] at a meeting, but failed to obtain a satisfactory answer from him.  He wrote to [YT] again on 14 January 2000 demanding the issue be addressed.  Again [YT] did not respond.  Then on his instruction, his solicitors,Messrs. KF Wong & Co., issued a notice to [YT] and other directors of the Plaintiff to convene a meeting to consider demanding full payment by YTL Limited of misappropriated funds; commencinglegal proceedings against YTL Limited and against the Defendant to enforce the landlord’s rights under the tenancy agreement in respect of the Property; and engaging Messrs Lau & Au Yeung as independent accountant to receive and administer all future income of the Plaintiff in accordance with the terms of the Shareholders Agreement.  [YT] and Fire Full [67] refused to attend the meeting, which collapsed due to insufficient quorum.”

25.  I am alive that YT and Harbour Front are separate legal entities and the present action only concerns Harbour Front as the plaintiff.  Therefore, the debts that owed by YT to Fonfair are not the same as debts owed by Harbour Front.  However, this does not necessarily mean that Harbour Front owes no liability to Fonfair. 

26.  As mentioned before, YT’s shares in Fonfair and Money Facts were transferred to Harbour Front in February 1998 and Kwan J found that from then onwards D1 and Harbour Front were in quasi-partnership by virtue of the Shareholder Agreement.  In the 2004 judgment, Kwan J listed out a series of misconduct committed by Harbour Front regarding the occupation by Universal Dockyard [68] of the Yau Tong Property which she found constituted a breach of the Shareholder Agreement [69].  Her Ladyship concluded as follows:

“ 87. It could be seen from the above that Harbour Front had notonly objected to Fonfair’s petition to wind up Universal Dockyardbut had actively assisted the latter to resist the petition and to thwartFonfair’s attempts to recover the judgment debt for arrears of rent,which had grown to HK$8.5 million with interest at the time of the hearing in March 2003. In doing so, Harbour Front had changed its stance from asserting that there was no prospect of recovery against Universal Dockyard to justify incurring legal expenses to the opposite position that Universal Dockyard had a positive assetvalue to justify its investment in that company. … I also reject thesubmission that the misconduct of YT Leung should have nothingto do with Harbour Front for present purpose. As I have stated at the outset, I have not considered the allegations of misconduct of YT Leung before Harbour Front became a shareholder in the two companies in February 1998. Thereafter, YT Leung’s position in the two companies was by virtue of his being a representative of Harbour Front.

88. I find that it was due to the misconduct of Harbour Front that there was a breakdown in the relationship of mutual trust and confidence. In the circumstances, Harbour Front cannot assert its right of equal participation in the management of Money Facts and Fonfair.  So for this reason as well, whether singly or cumulatively with one or both of the other grounds that I have considered earlier, Harbour Front has failed to make out a case of wrongful exclusion from management.”

Harbour Front has not yet settled the damages in respect of the aforesaid breach [70].

Present assertions

27.  As regards the present action, between 2008 and 2014, Messrs Lau & Au Yeung CPA carried out another reconciliation exercise for Fonfairsimilar to the one done in 1997 [71]and Interim Reports were prepared [72].  The reasons for this second reconciliation exercise is said to be “YT’s Misappropriation ofFonfair’s assets” and “wrongdoings in breach of the Shareholders Agreement”.  The latter would include a reference to the wrongdoings of Harbour Front (after it had become a shareholder of Fonfair since February 1998) committed through YT as itsrepresentative.  There is no dispute that in Fonfair’s “Director’s Report and Financial Statements” [73], the drawdowns by D1 were booked as debts owed by D1 to the company.  It is D1’s case that the debts would not be credited to him until those reconciliation accounts are finalized and agreed [74].

28.  Harbour Front has all along refused to accept the contents of the Interim Reports and it consistently refers to the second reconciliation exercise (conducted between 2008 and 2014) as D1’s “self-help” measures.  By the present action, Harbour Front alleges that D1 misappropriated assets of Fonfair by overdrawing in favour of himself as against Harbour Front.  

The MF derivative claim

29.  As pointed out by Ms Lok, Harbour Front purports to claim under this head the same alleged loss, namely Fonfair’s rental income, twice — one by Money Facts and the other by Fonfair.  This is exactly the kind of situation where the Rule in Foss v Harbottle is designed to avoid.

30.  However, as regards the MF derivative claim it is hopeless bad as a claim for reflective loss.  This is because even according to Harbour Front’s pleading the loss is said to be that of Fonfair, not Money Facts as one of its shareholders.  All the evidence points to this conclusion[75] and there is nothing to suggest the otherwise.  As such, Fonfair would be the proper claimant.  Furthermore, the loss of Money Facts, if any, would only be the diminution in the value of its shareholding, which reflected the deprecation nor depletion of the assets of Fonfair (ie, the rental income).  As a result, this claim should be dismissed: Global Bridge Assets Ltd v Sun Hung Kai Financial Ltd [76].

The FF derivative claim

31.  As submitted by Ms Lok, there are a number of difficulties regarding the FF derivative claim:

(i) the paragraphs of the SOC which Harbour Front seeks to rely upon [77]for this head lack clarity asto what is being alleged.  The confusion is illustrated by the allegation that MoneyFacts assisted the misappropriation by D1 (whilst this is also said tobe a derivative action bought for the benefits of Money Facts) [78].  The defence is left to guess instead of being told explicitly what case it is asked to meet. 

(ii) It appears that Harbour Front is contending that any potential repayments for which it would be liable have, as a matter of fact, already been fully settled by D1’s “self-help” measures [79]. However, as submitted by Ms Lok, in order to show that D1 had overdrawn, Harbour Front has to acknowledge how much it owed Fonfair (by way of damages or otherwise) before that there could be any set-off.  This, Harbour Front has consistently failed to do.  Thus, there is ambiguity as to by how much, Harbour Front says, D1 had overdrawn.

32.  On the whole, I find that Harbour Front’s claim in this regard is woefully ambiguous and contradictory which is graphically illustrated by Harbour Front’s assertion that Money Facts assistedthe misappropriation by D1.  Besides, Harbour Front’s claim is also ill-defined. Firstly, there is a lack of material averment as to how much D1 is alleged to have mis­appropriated from Fonfair.  Secondly, given that it is trite that a shareholder has generally no right to dividends from the company, Fonfair does not owe Harbour Front anything by not paying the latter dividends.  Furthermore, if there were to be any set-off, it should be between Harbour Front and D1[80]. Thus, it is difficult to see how there could be any set off, whether at common law or in equity, between any dividends which are said to be owed to Harbour Front by Fonfair and the amount allegedly misappropriated by D1 from Fonfair.  In short, even assuming (without deciding the point) that Harbour Front’s pleadings under this head were capable of being remedied, they would require substantial amendments and further particulars. 

33.  I now turn to the more fundamental question of locus.  Since Harbour Front’s the locus is challenged, the pleadings will not be assumed in Harbour Front’s favour (as in an ordinary striking out application) and the burden is on the latter to show a prima facie case of misappropriation by D1.  

34.  I take into account the evidence before me including (but not limited to) the fact that: (i) the reconciliation exercise from 2008 onwards has not been agreed to by Harbour View; (ii) there had been drawings by D1 from Fonfair; (iii) the only other director of Fonfair, Macron, is a company controlled by D1; and (iv) there had not been any dividends declared by the directors so that neither Money Facts nor Harbour View is able to obtain any share of Fonfair’s profit.  However, in my judgment the FF derivative claim is neither proper nor justified.  My reasons are as follows.

35.  Firstly, I am unable to be satisfied that Harbour Front has met the threshold requirement of showing a prima facie case for this head of claim so as to enable it to bring the derivative action against either D1 or Marcon.  There is no evidence of any actual fraudor an ultra vires act by D1 or Macron.  Whilst D1 was able to draw funds fromFonfair, the funds were only booked as “debts” owed by D1 which are still assets of Fonfair.  In the circumstances, it is difficult to see how it can be said that D1 had benefited himself at the expense of Fonfair: see Harris v Microfusion 2003‑2 LLP, supra.  Fonfair suffers no loss by not paying dividends to its shareholders.

36.  Secondly, I am satisfied that Harbour View has another remedy available including a petition for winding up.  In fact, this is exactly what Harbour View is seeking to do in the Companies Court in the 2015 Petitions which are based on the same grounds as those being relying upon in the present action.  The nature of the dispute about the reconciliation exercise is eminently a suitable issue to be dealt with in the context of the winding up proceedings and should be dealt with there.  Bearing in mind that a multiplicity of actions basing on the same facts should be avoided if possible, I am unable to see any justifications for Harbour Front to bring the present derivative actions when there is an extant winding up proceedings.  Moreover, the fact that D1 is opposing the 2015 Petitions is not to the point.  This is to compare with the situation in Barret v Duckett & Ors[81]. In that case, Barrett, who took out a derivative action against the directors, opposed the petition by Duckett to wind up the company.  That, however, did not prevent the Court of Appeal from striking out the derivative action, one of the bases being that winding-up would be an alternative remedy.

37.  Thirdly, since derivative action is afforded as a matter of grace, it should not be granted to a member who is not the proper person to bring the action: Nurcombe v Nurcombe, supra.  In my view, however, Harbour Front does not come with clean hands in that it has persistently refused to acknowledge how much it had misappropriated from Fonfair.  Besides, given all the background including the fact that the claim has its history beginning with YT’s own misappropriation and Harbour Front’s misconduct against Fonfair both of which are yet to be fully settled, it is improbable that Harbour Front would be able to exercise independent and unbiased judgment when conducting an action on Fonfair’s behalf: see Barrett v Duckett & Ors[82].

38.  I am of the view that any one of the three grounds above would be sufficient to strike out the FF claim under this head, not to say the presence of all three.

(2)   The Exclusion Claim

39.  This is about various factual allegations made by Harbour Frontrelating to the annual general meeting (“AGM”) of Fonfair and Money Facts held on 12 December 2014 [83] and the extraordinary general meeting (“EGM”) held on 6 March 2015 relating to the alleged management by D1 of Fonfair’s affairs which, it is said, led to financial loss.  It is alleged therefore that D1 had no better right to manage Fonfair to the exclusion of Harbour Front [84]. On this basis, it is further alleged that the directors had acted in breach of their fiduciary duty owed to the companies [85].

40.  With respect, whilst I can see how the present allegations, if substantiated, might afford Harbour Front a personal action against D1 based on the Shareholder Agreement, I am unable to see how they can affordHarbour Front a derivative action against anyone, whether on behalf of Fonfair or Money Facts.  This is because even if a company has suffered as a result of the mismanagement by its directors, that fact alone does not entitle a shareholder to bring a derivative action against the directors, there being no pleadings that any of the directors had benefited either from the alleged mismanagement or the exclusion of Harbour Front.  A bare allegation of breach of fiduciary duty will not be sufficient: Harris v Microfusion 2003‑2, LLP, supra.   

41.  As regards the contention that Money Facts had participated (as a shareholder of Fonfair) by voting for the wrongful exclusion of Harbour Front, it is misconceived as Harbour Front is at the same time also seeking to sue on behalf of Money Facts.

42.  Moreover, as pointed out by Ms Lok, one of the contentions in the 2015 Petitions is precisely whether Harbour Front has rectified its past breach under the Shareholders Agreement, without which it is not entitled to participate in the management of the companies, as found by the Court in the 2004 Judgment.  I am unable to see any justifications for Harbour Front to bring the present derivation actions to try to litigate on issues which have already been the subject matter of the on-going winding-up proceedings.

43.  Based on the above, I am of the view that both the MF derivative claim and the FF derivative claim under this head should be struck out. 

(3)   The Rejection of Offers Claim

44.  The basis of this head of claim is said to be misfeasance and/or breach of fiduciary duty.

45.  With respect, I am difficulties seeing how the directors could be guilty of misfeasance or fiduciary duty by merely not accepting offers from a shareholder or an outsider for the purchase of the company’s assets. 

46.  In any event, any loss as pleaded would be that of Fonfair.  Hence, the MF derivative claim is in my judgment bad for seeking a reflective loss.

47.  As regards the FF derivative claim, it has not been pleaded that any of the directors had benefited from not accepting any offers to purchase the Yau Tong Property and a bare allegation of breach of fiduciary duty is not sufficient for the purpose of bringing a derivative action. 

48.  In the circumstances, I am of the view that both the MF derivative claim and the FF derivative claim under this head should be struck out.

(4)   The Mismanagement Claim

49.  It is about the alleged failure by D1 to deal with and find suitable tenants which, Harbour Front says, led to financial loss suffered by Fonfair.  The matters complained of are said to have occurred between 2007 and 2009.  Moreover, as far as the tenancy with Kwong Wing is concerned, it was one of the subject matters in the 2007 Derivative Action which, as noted above, was discontinued by consent on November 2008, with costs to D1 and D2 [86].

50.  With respect, I am unable to see how the matters complained ofunder this head, even if established, could amount to a “fraud on the minority” which justifies a derivative action.  I note that it has not been pleaded that the directors had derived any benefits from the alleged wrongdoings.

51.  In addition, the MF derivative claim is hopelessly bad as a claim for reflective loss. 

52.  In the circumstances, I am of the view that both the MF derivative claim and the FF derivative claim under this head should be struck out.

53.  As an additional remark, I note that the present complaint in relation to the Kwong Wing tenancy had been one of the subject matters that Harbour Front had complained about in the 2007 Derivative Action.  This can be seen in the affirmation filed on Harbour Front’s behalf on that occasion [87].   As mentioned above, Harbour Front’s application for interim injunction was dismissed with costs by Suffiad J after an inter-parte hearing.  As such, I am inclined to agree with Ms Lok’s submission that Harbour Front’s present assertion in relation to Kwong Wing would be an abuse violating the wider principle of Henderson v Henderson as considered in Johnson v Gore Wood & Co.  However, in view of my ruling relating to this head already given above, it is unnecessary for me to make any ruling on the issue of res judicata. 

(5)   The Dividend Claim

54.  This is connected with the Misappropriation Claim.  It is alleged that Fonfair would have funds from its rental income for paying dividends to its shareholders but for D1’s alleged misappropriation, that D1 had contravened Fonfair’s mechanism for declaring dividend and that D1 and D2had wrongfully manufactured a situation in which Money Facts had received no income from dividends leading to D1 lending funds to Money Facts, with interest charged at 12% per annum.  

55.  As regards the FF Derivative claim, with respect, I am unable to see what Fonfair is claiming and how it can be a claimant.  This is because Fonfair has suffered no loss by not paying dividends to its shareholders.

56.  As regards the MF derivative claim, with respect, I agree with the following submissions of Ms Lok that:

(1) There is no proper claim in the body of the SOC claiming dividends for Money Facts.  None of the paragraphs [88] relied on by Harbour Claim form a claim for dividends.

(2) Even assuming there is a claim for dividends, it lacks material averments.  When was Fonfair said to be obliged to declare dividends and for how long?   There might also be limitation issues depending on what is claimed.

(3) It is trite that there is no entitlement to dividends.  For the sake of argument, if it is Harbour Front’s case that it is entitled to distribution of dividends under the Shareholders’ Agreement, then it should sue the contracting parties in the Shareholders Agreement (namely D1) for breach of that Agreement.   Neither Money Facts nor Fonfair was a party to the Shareholders Agreement.   It ought to be a claim by Harbour Front in contract, not a derivative action by the companies against their directors.

57.  In view of the above, the MF derivative claim and the FF derivative claim under this head should be struck out. 

58.  As regards the complaints about D1 charging interest on loans, it has not been put forward as a claim in the Table of Claims prepared by Mr Lam but is only characterized as a loss under the Mismanagement Claim and the Dividend Claim.  Since I have ruled that those the latter two claims fall apart, the “Interest Plea” cannot have a life of its own. 

CONCLUSION

59.  Based on the above discussions, all the claims as contained in the SOC and as identified in the Table of Claims are struck out.   The remaining paragraphs of the SOC including the prayers which are not relied upon as a claim must also go.  The result is that the SOC is struck out in its entirety.

COSTS

60.  In view of the result, I make an order nisi that Harbour Front should pay the costs of the defendants, to be taxed if not agreed.

Annex I

Annex II