CHARLES ZHI v. SRK CONSULTING LTD AND OTHERS

HCA 2247/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2247 OF 2014

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REASONS FOR DECISION
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1.  This was an application by Lim Hosok (“D4”) by summons dated 9 January 2015 to strike out the plaintiff’s action.  At the conclusion of the hearing the plaintiff’s action against D4 was struck out with costs.  My reasons are set out below.

Factual background

2.  The plaintiff is a litigant in person. 

3.  On 5 November 2014, he issued a writ against D4 and other defendants.  It is clear from the statement of claim that the action is a common law derivative action based on the “fraud on the minority” exception.

4.  The plaintiff became a shareholder of a public company (Siberian Mining Group Company Ltd) listed on the main board of the Stock Exchange of Hong Kong (“the company”) in October 2014, only several weeks before the commencement of the action.  The company, incorporated in the Cayman Islands, is one of the defendants to the action. 

5.  In outline the plaintiff’s action may be summarised as follows.  In October 2008, the company acquired a coal mine in Russia (“the mine”) from a company called Cordia Global Ltd (“Cordia”).  Cordia is not a party to the action.

6.  The gist of the allegations made in the statement of claim is that prior to September 2008, Choi Sungmin (“D2”) caused Cordia (which allegedly he solely owned) to acquire management control of the company through nominees and warehousing some of his holdings in nominee entities.  D2 then appointed D4 an executive director of the company in September 2008.  D4 became chairman in June 2009.

7.  Meanwhile, Cordia acquired a 70% interest in the mine making an initial payment of US$2 million with the balance of US$13 million payable in late November 2008.  The balance was never paid. 

8.  In October 2008 it agreed to sell the mine to the company for US$728 million through the issuance of three tranches of convertible notes (“the acquisition agreement”).  The transaction was a Very Substantial Acquisition (“VSA”) for the purposes of the listing rules requiring the company to include a technical report in the Circular to shareholders in respect of the VSA.

9.  The company commissioned an independent review of the mine project and a technical report from SRK Consulting (Russia) Ltd (“SRK (Russia)”).  (The plaintiff had wrongly sued SRK Consulting Limited (“D1”) on the basis that it was the entity commissioned.  While D1 is no longer party to the action, SRK (Russia) has not been joined.)

10.  The plaintiff complained that SRK (Russia)’s review and technical report were defective and deficient.  He further complained that the board misled investors by publishing the technical report as a bona fide public report.

11.  The acquisition was approved at an EGM held on 16 January 2009.  The VSA was completed in May 2009 and the first tranche of US$253 million convertible notes were issued by the company to Cordia as consideration.  That was followed by a second tranche for US$32 million in 2010 and a third tranche for US$443 million.

12.  The mine is said to be worthless.  The plaintiff’s case is that the acquisition had the effect of diluting shareholder interest as well as burdening the company with an enormous debt.  The plaintiff considered the impairment to the company to be in excess of HK$5 billion.

13.  As against D4, the plaintiff seeks restitution and compensation to the company for breach of duties and for misleading the investors.

14.  A directions hearing for D4’s striking out summons was held on 4 March 2015. A timetable for the plaintiff and D4 to file further evidence was given.  However the plaintiff did not avail himself of that opportunity and chose not to file any evidence in answer to the affirmation filed in support of D4’s summons.  Accordingly, the only evidence from the plaintiff before the court is a short affirmation dated 12 January 2015 dealing inter alia with his change of name and exhibiting his identity card and a deed poll. 

Locus standi

15.  D4’s summons challenged the plaintiff’s locus to bring a common law derivative action. 

16.  Where such a challenge is made, the common law requires the plaintiff to show the requisite prima facie case.  The plaintiff has to establish not only that there exists a viable cause of action or equitable claim vested in the company which, if made good, would establish a fraud on the minority, but also control of the company by the alleged wrongdoers such as to enable them to stifle any proposed action against themselves: see Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370, at §§10‑13. 

17.  While the plaintiff relied on the statement in Hong Kong Civil Procedure 2015 at 18/19/4 that disputed facts must be taken in favour of the party sought to be struck out, that principle is only applicable to a strikeout under Order 18, rule 19.  It is clear from Waddington that in a case where the plaintiff’s locus is challenged in a derivative action, the burden lies firmly on the plaintiff and disputed facts are not assumed in the plaintiff’s favour.

18.  The insuperable difficulty for the plaintiff in the present case was his failure to file any evidence in support of his case.  The onus was on the plaintiff to produce sufficient evidence to support the key elements of his case.  At a minimum, there has to be evidence to show that:

(1) SRK (Russia)’s technical report was “faulty and deficient”;

(2) the then board was controlled by D2, the alleged wrongdoer; and

(3) the alleged wrongdoer profited from his wrongdoing. 

19.  Credible evidence has to be led and disputed facts are not resolved in the plaintiff’s favour.  As that has not been done, it followed that the plaintiff was unable to discharge the burden of proof.

Leave to bring a derivative action

20.  As earlier noted, the company was incorporated in the Cayman Islands.  D4 has filed evidence to show that derivative actions brought on behalf of a Cayman Islands company require leave of the Cayman court.  The relevant provisions are to be found in Order 15, rule 12A of The Grand Court Rules (1995) Revised Edition (“the Cayman rule”).

21.  Under paragraphs (4) and (5) of the Cayman rule, the application for leave must be issued within 21 days after the relevant date.  That was stated as being the later of the date of service of the statement of claim and the date when notice of intention to defend was given provided that where more than one notice of intention to defend is given, that date shall be the date when the first notice was given.

22.  It is accepted that no such leave has been obtained.  The plaintiff sought to contend that as some of the defendants had not yet acknowledged service of the statement of claim he was not out of time.  However the plaintiff did not provide any basis for such a reading of the Cayman rule. 

23.  Cayman law applies because “the ability to bring a derivative action in Hong Kong is a matter for the law of the place of incorporation of the company”: see Johnston, The Conflict of Laws in Hong Kong, 2^nd edn, at 592. 

24.  The correctness of that statement was considered by Ng J in Wong Ming Bun v Wang Ming Fan [2014] 1 HKLRD 1108, at §§32‑42 who concluded that it accurately summarised the legal position.

25.  As Ng J noted in his judgment, the court is bound by the Court of Appeal decision in East Asia Satellite Television (Holdings) Ltd v New Cotai LLC [2011] 3 HKLRD 734 which held that whether a shareholder can commence a derivative action in the name and on behalf of the company is a matter of substantive law and is governed by the law of the place of incorporation.  It is also bound by the decision of the Court of Final Appeal in Waddington.  

26.  In that case, Lord Millett NPJ explained his observation that it is not necessary to preserve the common law of Hong Kong in order to cater for overseas companies and that such law was not even relevant to them thus (at §55):

“If the question whether a derivative action is available is a question of substantive law, as the Bills Committee thought (following statements to this effect in Konameneni v Rolls-Royce (India) Ltd [2002] 1WLR 1269 at p. 1284 and Base Metal Trading Ltd v Shamurin [2005] 1 WLR 1157 at p. 1176 CA), then it is governed by the law of the place of incorporation.”

27.  Accordingly, as no leave has been obtained from the Cayman court, this court is bound to strike out the action as against D4.

Application for leave to file further evidence

28.  The plaintiff sought leave to file evidence to substantiate his case and an opportunity to ‘put his house in order’ on the basis that he has the relevant documents but as a layman he did not appreciate the need to substantiate his allegations and implying that retrospective leave could be obtained from the Cayman court.  He also complained that D4’s skeleton was not served on him until the late afternoon of the day for its service and suggested that he was thereby prejudiced.

29.  Leave was refused.  A litigant in person has to abide by court procedures and orders. The fact of being a litigant in person is no reason for being accorded indulgence that a court would not have granted to a represented party.  

30.  In any event, it has not been shown that the late service of D4’s skeleton (even assuming that to be the case) caused the plaintiff any prejudice.  First, there is no basis for the suggestion that retrospective leave could be obtained from the Cayman court. Second, the plaintiff’s failure to substantiate his case by adducing the necessary evidence was not caused by the alleged late service.