XCHRX PRIME AIM INTERNTIONAL LIMITED v. COSMOS-PAVIS INTERNATIONAL LIMITED AND OTHERS

1994, No. A3155

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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HEADNOTE

Practice & Procedure - whether derivative action should be struck out on the grounds that it duplicated the complaints made in an earlier petition presented under section 168A of the Companies Ordinance - whether this section covers claims for restitutionary relief - comparison with section 461 of Companies Act 1985 - whether matter so clear that derivative action should be struck out - RESULT : Appeal allowed - action allowed to continue - the parties should apply to Companies Judge for an order that the 2 matters be dealt with together to save time and costs.

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J U D G M E N T

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1. This is the Plaintiff's appeal against the decision of Mr. Registrar Betts, given on 20th May 1994, that the Writ of Summons and Statement of Claim in this Action be struck out and that the Plaintiff do pay the 2nd and 3rd Defendants' costs.

2. The Defendants' summons, dated 3rd May 1994, asserted that the said Writ of Summons and Statement of Claim be struck out, alternatively that the said Action be stayed on the basis that it was scandalous, frivolous or vexatious or was otherwise an abuse of the process of the Court as it was substantially a duplication of HCMP No. 4156 of 1993 being pursued by the same Plaintiff against the same Defendants over the same subject matter.

3. The factual background underlying this appeal is straightforward :

FACTUAL BACKGROUND

Petition No. 4156 of 1993

4. On 3rd December 1993, pursuant to section 168A of the Companies Ordinance (Cap.32), the Plaintiff issued Petition No. 4156 of 1993 as against three Defendants, namely Cheung Lee (1), Gold River Computer Company Limited (2) and Cosmos-Pavis International Limited (3) ("the Company"). The said Petition was amended on 9th February 1994.

5. The basis of the Petition was that the 1st and/or 2nd Defendants had conducted the affairs of the Company in a manner unfairly prejudicial to the interests of the Plaintiff, a 50% shareholder in the Company.

6. The remedies sought in the said Petition included, inter alia, orders for injunctive reliefs, orders for disclosure of certain documents and an order that the Plaintiff should purchase the 1st Defendant's shares in the said Company.

Action No. 3155 of 1994

7. On 6th April 1994, the Plaintiff commenced this derivative action as against the same three Defendants (although, rather confusingly, listed in a different order). The basic factual allegations are substantially the same as those set out in Petition No. 4156 of 1993. The relief sought does however differ and can be summarised as a variety of restitutionary claims by the Plaintiff on behalf of the Company as against the 2nd and 3rd Defendants.

The issue

8. I have heard oral submissions from Mr. Andrew Cheung, Counsel for the Plaintiff and Mr. Thomas Lai, Counsel for the Defendant.

9. The point at issue is short, namely, whether, in order to claim restitutionary relief on behalf of the Company, the Plaintiff should have commenced a separate derivative action as against the Defendants or whether restitutionary relief could and/or should have been included within the Plaintiff's claim under section 168A of the Companies Ordinance (Cap. 32), that is, within Petition No. 4156 of 1993.

10. I have been referred at length to section 168A of the Companies Ordinance (Cap. 32) and in particular to section 168 (2) (a) - (c):

"(2) If on any petition under this section the court is of the opinion that the company's affairs are being conducted in a manner unfairly prejudicial to the interests of some part of the niembers, whether or not such conduct consists of an isolated act or a series of acts, the court may, with a view to bringing to an end the matters complained of -

(a). make an order restraining the commission of any such act or the continuance of such conduct;

(b) order that such proceedings as the court may think fit shall be brought in the name of the company against such person and on such terms as the court may so order;

(c) make such other order as it thinks fit, whether for regulating the conduct of the company's affairs in the future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of a purchase by the company, for the reduction accordingly of the company's capital, or otherwise,..."

11. Mr. Cheung, for the Plaintiff, argued that the wording of section 168A(2) (a) - (c) was not sufficiently wide to include an order for the restitutionary relief sought by the Plaintiff in this Action. He sated that section 168(2) (b) was persuasive evidence that section 168A had not been designed to enable a Plaintiff to seek a wide variety of remedies under this particular section of the Companies Ordinance. In addition, he contrasted the wording of section 168A of the Companies Ordinance with the wording of section 459-461 of the Companies Act 1985, in particular, section 461 :

"(1) If the court is satisfied that a petition under this Part is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of.

(2). Without prejudice to the generality of subsection (1), the court's order may -

(a) regulate the conduct of the company's affairs in the future,

(b) require the company to refrain from doing or continuing an act complained of by the petitioner or to do an act which the petitioner has complained it has omitted to do,

(c) authorise civil proceedings to be brought in the name of and on behalf of the company by such person or persons and on such terms as the court may direct,

(d) provide for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of a purchase by the company itself, for the reduction of the company's capital accordingly."

I was also referred to two English Authorities :

(i) Re Charnley Davies Limited [1990] BCC 605; and

(ii) Re a Company [1986] 1 WLR 281.

12. In relation to the latter case, the facts in the petition before the Court would have enabled the petitioners to mount a derivative shareholder's action. Hoffman J., (as he then was) determined that it would not be convenient to commence such an action separately by writ and statement of claim, but that such relief could be sought in the petition:

"It seems to me that although it is true that section 462(2) (sic) shows that the normal order under section 461 will be an order against the company or another member, there is no reason why the words of section 461(1) should not be given their full effect..."

13. Mr. Cheung submitted that the wording of section 461 of the Companies Act 1985 was much wider and more intelligible than the wording of section 168A of the Companies Ordinance (Cap. 32) and that relevant English authorities should be treated with care.

14. Mr. Lai, Counsel for the 2nd and 3rd Defendants, argued that the wording of section 168A was wide enough to include an order for restitutionary relief. I was not, however, referred to any authorities in support of this proposition.

15. He further argued that should the Plaintiff be correct, that is, should it be necessary for a Plaintiff to issue both an Action and a Petition, he parties would be put in the absurd position of being involved in two separate sets of proceedings which very substantially overlapped, if not duplicated, each other.

In addition, I have looked at relevant sections in both :

(i) Hong Kong Company Law, Stott 4th Edition, 1992, pp. 139-141; and

(ii) Company Law in Hong Kong, Wallace 2nd Edition, 1990,pp. 243-244.

16. Neither are helpful on this point, namely the scope of section 168A of the Companies Ordinance (Cap. 32).

17. It is only in plain and obvious cases that an action should be struck out. In my judgment, this is not a case in which the Plaintiff's claim is "obviously unsustainable'. The wording of section 168A of the Companies Ordinance (Cap. 32) is not so clear as to render it plain and obvious that Plaintiff was abusing the process of the Court in issuing the writ and statement of claim in this action.

18. I therefore allow the appeal.

19. I am, however, aware of the potential for wasted time and expense should the Action and the Petition proceed independent of one another. I shall therefore order that both sets of proceedings be listed for an early interlocutory hearing before the Companies Judge to allow him to consider how best to proceed and perhaps to order that both proceedings be heard together with a consequent saving in time and cost.

20. The Plaintiff will have the costs of the appeal including the costs below.