CHU KONG v. UP PROFIT LTD

HCMP 305/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 305 OF 2016

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D E C I S I O N

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Application

1.  This is an application by the Applicant, Chu Kong (“Mr Chu”) for leave to commence a statutory derivative action (“Intended Derivative Action”) against Wat Fung Ying (“Ms Wat”), the sole director of Up Profit Limited (“Company”) pursuant to sections 732 and 733 of the Companies Ordinance,Cap 622 (“Ordinance”).

Background

2.  The immediate factual background can be quickly summarised:-

(1)  The Company is wholly owned by Sun Harvest Holdings Limited, a BVI company (“Sun Harvest”).  Sun Harvest is in turn owned by Mr Chu and a Mr Lau (“Mr Lau”) equally.  Mr Chu and Mr Lau were business partners before they later fell out.

(2)  It appears undisputed that the Company’s sole purpose is to hold a property in Hong Kong (“Property”).  When Mr Chu and Mr Lau were still on good terms, the Property was used to provide shared office space for them.

(3)  Ms Wat is said to be a “nominee” director.

(4)  Mr Chu alleges that after he and Mr Lau fell out the Property should have been leased or sold.  Instead, Ms Wat (Mr Chu says) allowed the Property to be occupied by Mr Lau to the exclusion of Mr Chu.  Accordingly, Mr Chu alleges that Ms Wat is in breach of her director’s duties towards the Company.

Relevant Legal Principles

3.  The applicable legal principles are well established:

(1)  Mr Chu has to demonstrate that (a) on the face of the application, it appears to be in the company’s interests that leave be granted: section 733(1)(a) of the Ordinance;and (b) there is a serious issue to betried: section 733(1)(b)(i) of the Ordinance.

(2)  The threshold in respect of both of these requirements is low.  An applicant is not required to establish a prima facie case, and the prospects of success of the intended claim are to be investigated only to a limited extend.  The court is slow to find against an applicant unless his prospects are so slim he cannot be said to have any prospect of success.[1]

(3)  As to whether the Intended Derivative Action is in the interests of the Company, again the threshold is low. A claim is prima facie in the interest of the company if there is a serious issue to be tried.[2] The court will also consider whether any practical benefit is likely to result.[3]  

4.  Separately, written notice has to be served under section 733, unless leave to dispense with service is granted under section 733(5).  As I have explained in paragraph 9(d) of Yu Yuchuan v China Shanshui Investment Company Limited[4],the purpose of the written notice is to allow the company to consider whether to contest or acquiesce to the application.  In the present case Mr Chu sought leave to dispense with service, on the ground that the Company was well aware of this application.  Mr Alder for the Company did not object.  I granted leave pursuant to section 733(5) of the Ordinance.

 Serious Issue to be tried

5.  Mr Chu’s case is simple: he alleges that Ms Wat should have rent out or sold the Property.  Instead, Ms Wat has preferred Mr Lau by allowing him to have exclusive possession of the Property after Mr Chu and Mr Lau fell out.

6.  I am inclined to agree with Mr Wong, SC (appearing with Mr Michael Lok for the applicant) that Mr Chu’s Intended Derivative Action raises a serious issue to be tried.  It is seriously arguable that a company director such as Ms Wat is under a duty properly to realise the economic value of the Property, whether by renting it out or by sale.

7.  Mr Alder for the Company did not seriously dispute this proposition.  Nonetheless, he raised two major objections relating to the merits of the case, and two other points relating to Mr Chu’s entitlement to commence the Intended Derivative Action.

8.  Firstly, on the merits, Mr Alder suggests that:

(1)  The Company may be holding the Property and the rental income on resulting trust for Sea Premier Ltd and Topride Ltd (two companies owned by Mr Chu and Mr Lau equally).  This is because they financed the purchase of the Property in the first place.

(2)  Ms Wat is a “nominee” director.  Accordingly, she can only act with the joint consent of Mr Chu and Mr Lau.  Relatedly, it is also suggested that the present condition of the Property is caused by the uncooperative attitude of Mr Chu: in particular, it is alleged that Mr Chu had previously insisted that the Property must not be sold without the consent of the board of directors of Sun Harvest, and that Mr Chu had refused to discuss the rental arrangements with Mr Lau in a constructive manner.

9.  I am not persuaded that these two points are sufficient to defeat Mr Chu’s application for leave:

(1)  As 1 have said, the threshold of “serious issue to be tried” at this stage is low.  Unless it can be shown that the applicant has no realistic prospect of success, the court will not rule against him at the leave stage.

(2)  In any event, the resulting trust point cannot be a complete answer to Mr Chu’s Intended Derivative Action. It is trite law that the presumption of resulting trust is not irrebuttable.  It is perfectly possible for the Company to rebut this presumption in the Intended Derivative Action.  This issue is inherently fact‑sensitive and I am not prepared to dismiss Mr Chu’s application on this point summarily solely on affidavit evidence.

(3)  In the same vein, the “nominee director” argument is not a complete answer to Mr Chu’s claim.  A director, “nominee” or not, owes duties (including fiduciary duties) to the company.  In particular, a director (including a “nominee” director) is obliged to exercise his or her own independent judgment.  The “nominee” nature of Ms Wat’s directorship may not be a complete defence to the Intended Derivative Action.

(4)  Likewise, Ms Wat was not bound by the (allegedly unhelpful and uncooperative) view of Mr Chu.  She was obliged to exercise her own judgment.

(5)  I note that Ms Wat in her affirmation seems to suggest that she was seeking to maintain the status quo in light of the disputes between Mr Chu and Mr Lau.  Nonetheless, whether, if this were to be established, it constituted an appropriate exercise of her independent judgment is a matter for trial.

10.  In addition, Mr Alder raised two points which go to Mr Chu’s entitlement to bring the Intended Derivative Action:

(1)  First, Mr Alder suggested that Mr Chu does not make the present application in good faith.  He argued that the Intended Derivative Action is no more than a tactic by Mr Chu to put pressure on Mr Lau, and there is no genuine desire to pursue Ms Wat. One factor relied upon by the respondent is Mr Chu’s alleged previous threats of legal action made against other employees of Mr Lau.

(2)  Secondly, he argued that Mr Chu should have resorted to unfair prejudice or just and equitable winding up proceedings, rather than commencing a derivative action against Ms Wat.  He suggests that the root of the problem is the breakdown of the cooperation between Mr Lau and Mr Chu.

11.  As to the first objection, I am not prepared to make any definitive finding on the motive of Mr Chu solely on the basis of affidavit evidence. In particular, even if Mr Chu had previously threatened to bring legal action against the other employees of Mr Lau, it appears from the evidence that the alleged threat had not been carried out.

12.  As to the second objection, the alleged breach of director’s duties on the part of Ms Wat is no doubt “misconduct” referred to in section 732(1) of the Ordinance, which is defined in section 733 to mean “fraud, negligence, breach of duty, or default in compliance with any Ordinance or rule of law”.  I, of course, appreciate that allegations of misconduct are also sometimes raised in unfair prejudice proceedings: Yu Yuchuan v China Shanshui Investment Company Limited [5],at [44]-[45].  This does not mean, however, that Mr Chu should be compelled or confined to unfair prejudice proceedings when the essence of the complaints relate to Ms Wat’s alleged misconduct.

13.  It is perhaps relevant that the unfair prejudice (or just and equitable winding-up) claim can only be brought by Mr Chu at the level of Sun Harvest, which is incorporated in the British Virgin Islands.  Mr Alder has not explained the jurisdictional basis for section 725 of the Ordinance or section 327 of Companies (Winding Up and Miscellaneous Provisions) Ordinance,Cap 32applying tojust and equitable winding-up petitions issued under either Ordinances against a foreign incorporated company.

14.  I am therefore satisfied that the Intended Derivative Action gives rise to a serious issue to be tried.

Interests of the Company

15.  Normally, when it is established that the intended claim discloses a serious issue to be tried, then it follows that it would be in the company’s interests for leave to be granted.

16.  In the present case, Mr Wong highlights two further factors, namely, the declining property market, and the fact that the Property is subject to an outstanding mortgage in the excess of HK$10 million.  The point being that Ms Wat should have been considering whether a sale was prudent.

17.  Mr Alder, on the other hand, emphasises two technical points:-

(1)  First, he pointed out that Ms Wat has entered into a nominee director agreement.  The agreement provides that Ms Wat is to be indemnified in respect of “all actions ... which may be made against [Ms Wat] directly or indirectly by reason of [her] acting as Director of the Company or by reason of any act, deed, matter or thing done or omitted ”.  Mr Alder therefore argues that the Intended Derivative Action is “ultimately pointless”, as Ms Wat would be entitled to recover the judgment sum from, among others, Mr Chu.

(2)  Secondly, he argues that there is no evidence to suggest that Ms Wat would be able to satisfy the potential judgment made against her.

18.  The short answer to the first objection (assuming that the indemnity would be engaged) is that the true test is whether the Intended Derivative Action is in the interests of the Company, rather than Mr Chu.  That Mr Chu may have nothing to gain is of itself beside the point.

19.  Further, the argument ignores the fact that the indemnity in the nominee director agreement does not cover “any act, deed, matter or thing done or omitted in contravention of the laws of Hong Kong ... or in contravention of any lawful directions or instructions given by me to the Nominee”.  It, therefore, seems at least highly arguable that any finding of breach of duty would exclude the application of the indemnity.

20.  As to the second objection, there is also no evidence to suggest that Ms Wat would not be able to satisfy the judgment or any part thereof.

21.  In these circumstances I am of the view that on balance the Intended Derivative Action is in the interests of the Company.

Conclusion and Costs

22.  Accordingly, I am satisfied that leave to commence the Intended Derivative Action should be granted.

23.  As to the costs of this application, I made an order nisi that the costs be costs in the cause in the Intended Derivative Action.