HCMP 1791/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1791 OF 2009

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BETWEEN

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JUDGMENT ON COSTS

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1.  The substantive application in these proceedings sought leave to commence a statutory derivative action under Part IVAA of the Companies Ordinance in respect of alleged misfeasance committed against a company Luen Fat Paint Company Limited [“Luen Fat”] by Yung Lan and Lo Tak Lun. The transaction under challenge was the sale of a property of Luen Fat [“the Shop”] at $3.8 million. The provisional agreement was signed on 18 June 2009. The Applicants said the sale was conducted at a gross undervalue. As a result of developments since the commencement of the application, the transaction fell through. The purchaser did not complete on the ground that Luen Fat failed to prove an unencumbered title by reason of the challenge by the Applicants. Initially, Luen Fat regarded that as repudiation of the sale and forfeited the deposit. Luen Fat returned the deposit to the purchaser after the latter started an action to recover the same. As a result, the Applicants did not deem it necessary to proceed with the Part IVAA leave application. The outstanding issue is costs.

2.  In order to understand the arguments as to costs, it is necessary to set out some background history of the dispute. Luen Fat was a family company. Up to 24 April 2008, there were only two directors: Lo Tak Chuen and Madam Yung Lan. Yung Lan was the mother of Lo Tak Chuen. The shareholding position is more complicated. Whilst these two directors each held about 5% shareholding, Lo Tak Lun and Loo Tak Kui, two other sons of Yung Lan, each held about 3.33%, the majority shareholder was a BVI company called Yoke Consultants Limited. According to the Applicants, Lo Tak Chuen held 50,000 bearer shares of Yoke. There is a litigation in which the other three shareholders of Luen Fat claimed they are the beneficial owners of 70% shareholding in Yoke.

3.  Sadly, Lo Tak Chuen passed away on 24 April 2008 leaving behind the 1^st Applicant as his widow with two daughters. He also had a son born out of wedlock. The 1^st Applicant applied together with the 2^nd Applicant for grant of letters of administration in respect of the estate of Lo Tak Chuen in early September 2009. However, a Lo Yin Yee (sister of Lo Tak Chuen) lodged a caveat on behalf of Luen Fat in HCCA 001767 of 2009 on 24 June 2009 (6 days after the signing of the provisional agreement). Counsel for Luen Fat was unable to explain to this court why Luen Fat should have an interest in the estate and why the caveat was lodged. The caveat was only withdrawn in October 2009 after this court had raised query about the same.

4.  According to returns filed with the Company Registry, Lo Tak Lun became a director of Luen Fat on 1 May 2008. The Applicants do not accept the validity of his appointment.

5.  In late August 2009, the widow and the 2 daughters learnt about Luen Fat’s sale of the Shop through land search. Completion was to take place on 18 September 2009. They were concerned about the sale being conducted at gross undervalue. Correspondence with the solicitor for Luen Fat in the sale and Yung Lan and Lo Tak Lun in early September 2009 did not yield any assurance. They therefore sought redress by way of legal proceedings.

6.  On 14 September 2009, the court issued a limited grant of letters of administration to the Applicants authorizing them to represent the estate of Lo Tak Chuen to apply for leave under Part IVAA of the Companies Ordinance to issue a statutory derivative action in respect of the sale. On 17 September 2009, the limited grant was amended by adding an authorization to the Applicants to apply for registering themselves as members of Luen Fat.

7.  On 16 September 2009, this court heard the Part IVAA leave application. The legal team acted for Yung Lan and Lo Tak Lun (who are the 1^st and 2^nd Respondents) attended to oppose the application. At that stage, the legal team did not act for Luen Fat.

8.  The preliminary objection taken by counsel was that the Applicants had no locus to apply for leave as they were not members of Luen Fat according to the register of members kept by the company.

9.  Article 29 of Table A, adopted under Article 1 of the Articles of Association of Luen Fat, provides,

“In case of death of a member … the legal personal representatives of the deceased … shall be the only persons recognized by the company as having any title to his interest in the shares …”

10.  Articles 30 to 33 of Table A (also adopted by Luen Fat) provides the mechanism for the personal representative of the estate of a deceased member to be registered as a member. The directors have the power to decline or suspend registration as they would have had in the case of an ordinary transfer. On a refusal to register, the directors have to furnish a statement of reasons for refusal within 28 days. The personal representative can then consider making an application under Section 100 of the Companies Ordinance.

11.  Even though Mr Chan took the preliminary objection as to lack of locus on the part of the Applicants, counsel was not able to submit any ground to resist the grant of letters of administration to the Applicants. Nor did counsel advance any submission that the directors of Luen Fat had valid ground to refuse the registration of the Applicants as members.

12.  Since it appeared to be a matter of time and formality for the Applicants to procure their registration as members, the court did not consider it right to dismiss the application for Part IVAA by the Applicants on the ground of lack of locus at the hearing on 16 September. At the same time, the court did not consider it appropriate to grant leave at that stage. Instead, the court gave a direction under Section 168BG(1)(d) of the Companies Ordinance for the appointment of an independent surveyor to report to the court on the fair market value of the Shop. The application for leave to commence a statutory derivative action was adjourned in the meantime. Directions were also given on the filing of evidence.

13.  On the strength of the amended limited grant of letters of administration, the Applicants applied to be register as members of Luen Fat on 17 September 2009. In a letter dated 21 September 2009, Yung Lan and Lo Tak Lun as directors of Luen Fat wrote back saying that they did not find themselves in a position to deal with the Applicants’ request at that stage. They invited the Applicants to proceed with their application for proper Letters of Administration for the estate of Lo Tak Chuen. That invitation did not mention anything about the withdrawal of the caveat lodged by Luen Fat.

14.  It is not clear as to the reason why Yung Lan and Lo Tak Lun did not regard the amended limited grant as a sufficient authorization from the court to accept their position as personal representative of the estate for the purpose of securing their registration as members of Luen Fat. The court enquired with counsel for Yung Lan and Lo Tak Lun at the hearing on 11 November 2009 (by then the same legal team also acted for Luen Fat, as explained below) and counsel was unable to tell the court why Yung Lan and Lo Tak Lun took such a stance.

15.  Despite invitation from solicitors for the Applicants to clarify, Yung Lan and Lo Tak Lun wrote back on 9 October 2009 saying that there was no room for further clarification and asked the Applicants to treat what was said in their letter of 21 September 2009 as the statement of reason for rejection.

16.  Thus, the Applicants were driven to take out proceedings under Section 100 of the Companies Ordinance in HCMP 2094 of 2009 on 16 October 2009. By a consent summons of 23 October 2009, Luen Fat agreed to an order for the rectification of its register of members and an order to that effect was made by Barma J on 27 October 2009.

17.  Thus, when the matter came back to this court on 11 November 2009, the Applicants were registered as members and the preliminary objection as to locus has gone.

18.  Before I come to the submissions of the parties on costs, I should recite other developments between 16 September and 11 November. Pursuant to the direction of this court, the independent surveyor was appointed by the Registrar. On 6 October 2009, the independent surveyor reported to the court that the market value of the Shop as at the date of contract (18 June 2009) was $5,307,000. In other words, the sale price of $3.8 million was, according to the independent surveyor, $1,507,000 below market value.

19.  The sale was aborted on 18 September 2009 with the purchaser refusing to complete in the wake of the present proceedings. After some initial hassle (and the filing of a claim by the purchaser in High Court Action No. 2048 of 2009), parties to the sale agreed to cancel it and the deposit was returned to the purchaser. A consent order was made in the High Court Action on 3 November 2009. The Applicants were notified of the settlement on 5 November 2009.

20.  To that extent, the Applicants achieved what they set out to do, viz. preventing the sale from going through without involving any liability on the part of Luen Fat towards the purchaser. Hence there was no need to proceed with the application for Part IVAA leave. Upon learning of the settlement with the purchaser, solicitors for the Applicant wrote to solicitors for Yung Lan and Lo Tak Lun asking whether the matter could be disposed of by a consent summons providing that the Applicant’s costs be indemnified by Luen Fat. At the same time, solicitors for Yung Lan and Lo Tak Lun wrote to solicitor for the Applicants pointing out that in view of settlement with the purchaser, Luen Fat did not suffer any loss and there was no justification to proceed with the leave application. They invited the Applicants to discontinue the proceedings with no order as to costs.

21.  Parties did not reach any agreement on costs. On 11 November 2009, the matter was argued before this court. Mr Chan informed the court at the hearing that in addition to Yung Lan and Lo Tak Lun, he also appeared on behalf of Luen Fat. The court was concerned that there might be a conflict of interest between Luen Fat on the one hand and Yung Lan and Lo Tak Lun on the other hand.

22.  To be fair to Mr Chan, he was under the impression that since the Applicants only sought indemnity of costs from Luen Fat, Yung Lan and Lo Tak Lun were not at risk as to costs. But Mrs Tong, acting for the Applicants, also sought an order that Yung Lan and Lo Tak Lun shall fully indemnify Luen Fat of its liability as to costs. In any event, this court has an unfettered discretion as to costs irrespective of the position adopted by the parties. In the end, Mr Chan informed this court that he would not advance any submission as to how the discretion should be exercised in the event that the court finds that Yung Lan and Lo Tak Lun should be liable for costs of the Applicants whilst at the same time also holds that Luen Fat could be liable to indemnify the Applicants under Section 168BI of the Companies Ordinance.

23.  Section 168BI gives the court the power to make any order it considers appropriate about the costs incurred or to be incurred in relation to an application for leave or any proceedings brought or intervened in, or to be brought or intervened in. Since the Applicants did not proceed with the leave application in view of developments since the issue of the application, we are only concerned with costs incurred in relation to the application for leave. Unlike the situations in Re F & S Express Ltd [2005] 4 HKLRD 743 and Re Lucky Money Limited HCMP 505 of 2006 where the court granted leave to minority shareholders to bring and intervene in other proceedings respectively, the subject matter which gave rise to this application had been resolved. Thus there is no reason why the court should not decide the question of costs now.

24.  Based on an Australian authority, Mr Chan accepted that the court’s discretion is at large, not being confined by the statutory prescription under Section 168BI. The case is Foyster v Foyster Holdings (2003) 44 ACSR 705. It was a decision on Section 242 of the Corporations Act which is similar (though not exactly the same) in terms to our Section 168BI(1). At para.12, Barrett J said,

“The section empowers the court to make ‘any orders it considers appropriate about the costs’ of the persons to whom it refers.  The court is thus free to approach matters with which the section deals unconfined by statutory prescriptions and by reference to the discretions that apply in the ordinary course in deciding applications for costs.  Furthermore, there does not appear to me to be any basis on which the section can be regarded as intended to cover the field in any restrictive way warranting a conclusion that there may be no order as to costs in relation to a section 237 application except as the section allows.”

25.  Subject to one rider discussed below, I agree with that construction of the phrase “any order it considers appropriate” in Section 168BI(1). In other words, though Section 168BI(2) refers to the option of indemnity of costs of a member from the assets of the company, it is not the only option available to the court in making an order for costs under Section 168BI(1).

26.  In the present context, I see no reason why as a matter of jurisdiction the court could not consider ordering costs of the Applicants being paid by Yung Lan and Lo Tak Lun directly or vice versa (as opposed to being confined to indemnification from the assets of Luen Fat). This seems to accord with the understanding of Kwan J (as she then was) in Lucky Money even though on the facts of that case, Her Ladyship did not deem it appropriate to exercise the discretion at that stage. See also the decision of Barma J in Liu Man Hau Simon v Chan Kai Wing HCMP 1903 of 2007, 21 April 2008.

27.  The only rider arises from Section 168BI(3) which provides,

“The court may only make an order about costs (including the requirement as to indemnification) under this section in favour of the member if it is satisfied that the member was acting in good faith in, and had reasonable grounds for, making the application …”

There is no equivalent to this subsection in Section 242 of the Corporations Act in Australia.

28.  Does this subsection impose an additional requirement before the court can make whatever type of order for costs in favour of the member making an application for leave under section 168BC? In Re F & S Express Ltd [2005] 4 HKLRD 743, Re Nice & Well Ltd HCMP 2148 of 2008, 11 Dec 2008 and Re Grand Field Group Holdings Ltd [2009] 3 HKC 81, Kwan J (as she then was) considered whether the applicant satisfied Section 168BI (3) before she exercised her discretion on the costs of an applicant. I see no reason for departing from this approach.

29.  On the question of good faith, I will also apply the same approach of Kwan J (as she then was) in Re F & S Express Ltd [2005] 4 HKLRD 743 at para.27. On the materials before this court, there is nothing to suggest that the Applicants were not acting out of a legitimate concern for the good management of Luen Fat. As explained below, they had a reasonable basis for asserting that the sale of the Shop was conducted as a gross undervalue and this is supported by the report of the independent surveyor appointed by the court. The purpose of the intended derivative action was to protect the interest of Luen Fat. I find that the requirement of good faith was satisfied.

30.  Did the Applicants have reasonable grounds for making the leave application? There is a conflict in the valuation evidence. The Applicants obtained a valuation report stating that the market value of the Shop was $7.1 million. On the other hand, Lo Tak Lun produced a valuation report (which was not obtained at the time of the sale and not referred to at the time when the solicitors challenged the sale before the launch of the application) stating that the market price of the Shop was $3.9 million. The independent surveyor appointed by the court reported that the market value of the Shop was $5,307,000.

31.  The court cannot resolve such conflict in the context of a Part IVAA application. But I do not think one can assert at this stage that the valuation obtained by Lo Tak Lun must prevail. Further the court can take other matters into account to see whether there are reasonable grounds for the application. The widow’s company is a tenant operating a business at the Shop. She said that there had not been any inspection of the Shop by the purchaser before the signing of the agreement for the sale.

32.  Lo Tak Lun asserted that the sale was to facilitate Luen Fat’s acquisition of another property at Kai Fuk Industrial Centre. Even if that were the real reason for the sale, it did not warrant a sale at a gross undervalue. Further, I fail to understand why Lo Tak Lun and Luen Fat could not explain how it was in the interest of Luen Fat to enter into the sale when the solicitors for the widow and the daughter challenged it in early September. Even up to now, Lo Tak Lun did not produce any evidence as to the proposed acquisition of the other property and explain why it was in the interest of Luen Fat to do so.

33.  As observed by Barma J in Liu Man Hau Simon v Chan Kai Wing HCMP 1903 of 2007, 21 April 2008 at paras.31 to 33, at the leave stage the court should only examine whether it is prima facie in the interest of the company to pursue the derivative claim. And as far as the merit of the intended derivative claim is concerned, Section 168BC(3) only requires the court to be satisfied that there is a serious question to be tried.

34.  Putting aside the question of locus (which I shall examine later), given my view as to the reasonableness of their concern about the sale and the report of the independent surveyor, and the lack of reasonable response from those in control of the management of Luen Fat to the letters from the solicitors for the widow and daughters in early September regarding the sale, I hold that the Applicants did have reasonable ground to lodge the Part IVAA application and continue with the same until the settlement of the purchaser’s claim for return of deposit.

35.  As mentioned, upon learning of the settlement of the purchaser’s claim, the Applicants acted properly in confining the application to the question of costs.

36.  Turning to the question of locus. Mr Chan submitted that since the Applicants had not yet been registered as members, they had no locus to launch the application and therefore should not be entitled to recover costs under Section 168BI (3). Counsel referred to several authorities holding that since a company should not have regard to equitable interest in shares, only a person registered as a member can commence a derivative action. I do not doubt the correctness of these authorities. But none of the authorities deals with a situation like the present one: even though the Applicants were not registered as members when the application for leave was issued, by the time when the court came to decide on the matter they were duly registered as members.

37.  The Applicants were registered as members as from 29 October 2009. But counsel said this could not assist regarding costs incurred prior to that date. I have recited the history leading to the registration of the Applicants as members of Luen Fat. From the history, it is quite plain that as from their appointment as co-administratrices of the estate of Lo Tak Chuen under the amended limited grant, the directors of Luen Fat had no valid ground to resist their application for registration as members. The events leading to the order of Barma J in HCMP 2094 of 2009 clearly demonstrate the lack of good faith on the part of Yung Lan and Lo Tak Luen in refusing the application for registration. Be that as it may, prior to the amendment of the limited grant on 17 September 2009, Mr Chan said the Applicants had not established their title as personal representatives of the estate of Lo Tak Chuen as regards membership in Luen Fat.

38.  In my judgment, the answer to counsel’s submission depends on whether the court should insist on the perfecting of the title of an applicant as member before allowing an application under Part IVAA to be filed or whether it is sufficient that an applicant can show he or she has become a member by the time the court makes the order granting leave under Part IVAA.

39.  It should be noted in neither case would there be any infringement of the principle that a person who bring a derivative action must be a member of the company. In the statutory context, Section 168BC(1) permits a member, with the leave of the court, to bring proceedings on behalf of the company. So long as an applicant satisfied the court that he or she has become member by the time when leave is granted, the derivative action will be brought by a member.

40.  Is there anything in the statutory scheme which mandates that the applicant must be a member at the time when the application for leave is filed as opposed to the time when the application is heard? Counsel did not refer me to any. As far as I can see, there are two statutory provisions that might be relevant. Section 168BC(3) says the court may grant leave “on the application of a member”. Though this may be relied upon to suggest that the application must be made by a member, I do not think it is conclusive. Since it refers to the granting of leave by the court, it is consistent with a construction that it suffices if the applicant has become a member when leave is granted (as opposed to the time when leave is sought by filing the application).

41.  Section 168BD(1) requires the service of written notice by a member at least 14 days before the application for leave and this is one of the matter that the court has to be satisfied under Section 168BC(3)(d). If this is mandatory, I will agree that as a matter of construction the applicant must be a member when he or she files the application. But this is not a mandatory requirement because Section 168BD(4) gives the court the power to dispense with service of such notice. In the present case, I have granted such dispensation.

42.  Hence, I find nothing in the statutory scheme to prevent the court from entertaining an application by a person in the process of becoming a member, so long as he obtains a dispensation under Section 168BD (4) and successfully becomes a member by the time the court grants leave.

43.  As a matter of principle, I do not see any justification for holding that an applicant must have perfected his or her title as member before an application for leave can be made. Though not directly on point, some support can be drawn from the decision of Kwan J (as she then was) in Ng Wai Ling v Chan Ping Fai Ricky [2009] 2 HKC 514. That was a case in which where the petitioner sought relief under Section 168A as well as just and equitable winding up. The proceedings were issued before the executrix had obtained the grant of probate. The respondent applied to strike out the petition. As far as Section 168A proceedings were concerned, Section 168A(5) expressly provided that such a personal representative can apply for relief. Kwan J (as she then was) held that the same applied to the just and equitable winding up aspect of the petition as well. Her Ladyship explained the rationale at para.17,

“… a number of steps would still have to be taken before these petitions are ready to be set down for trial.  And … there is no indication that the petitioner’s entitlement to probate would be contested.  It is only a question of time when probate would be granted to her.  If the 1^st respondent has asked for a stay of the winding-up petitions … I would not have granted a stay of the petitions at this early stage of the proceedings when there is nothing to suggest the petitioner might not succeed in obtaining probate.”

44.  That case was about the position of an executrix. I readily appreciate that the position of an intended administratrix is not the same. This was highlighted by Kwan J at para.11 of that judgment. The position of an intended administratrix before a grant in any form is set out at para.8-10 of Williams, Mortimer & Sunnucks Executors, Administrators and Probate, 19^th Edn.

45.  However, the Applicants had obtained a limited grant on 14 September 2009 which conferred title on them to commence the present proceedings. Thus it cannot be suggested that they did not have title to represent the estate at the hearing on 17 September 2009. What Mr Chan argued is that they had not become a member at that stage. Once the limited grant of 14 September 2009 had been issued, in the absence of any valid objection by the directors it was only a matter of time and formality that their status as members was registered. Even though an amendment was made on 17 September, it is unimaginable that the court having decided to grant title to the Applicants to commence the Part IVAA proceedings would withhold authority to procure their registration as members in order to perfect their title for the purpose of such proceedings.

46.  Thus, this is a case where the rationale of Kwan J can appositely be applied, albeit in a different context. The Applicants could not commence a statutory derivative action until they got leave from this court. As things stood on 17 September 2009, this court deemed it necessary to obtain a report from an independent surveyor. The Respondents also sought leave to file further evidence. There was ample time for the Applicants to perfect their title as members during the interim. As demonstrated by subsequent developments, the Respondents did not have any ground to resist the registration of the Applicants as members. And they did become members by the time when the matter came back to this court on 11 November 2009.

47.  To hold otherwise would enable those in control of the board (in many cases they would also be the putative defendants in the intended derivative action) to delay the legal process against them on technical grounds. I do not see any reason why the statutory scheme should be construed in a manner facilitating that.

48.  I find that the requirements in Section 168BI (3) have been satisfied.

49.  But for the cancellation of the sale, in view of the report of the independent surveyor, the court would have granted leave to the Applicants to commence a derivative action under Part IVAA. Mr Chan contended that in view of the cancellation of the sale, Luen Fat had not suffered any damages and leave should not be granted. Even assuming he were right[1], it does not follow that the Applicants were not entitled to seek costs of the application. The sale was aborted as a result of the challenge by the Applicants. The application had indeed served its purpose.

50.  Once the locus objection is resolved in favour of the Applicants, the Respondents simply have no valid ground to resist costs. The only question is whether the Applicants’ costs should be borne by Luen Fat or the persons in control, viz. Yung Lan and Lo Tak Lun.

51.  The history of the matter shows clearly that Yung Lan and Lo Tak Lun were taking every possible step to pre-empt the Applicants’ challenge to the sale. They did not offer any explanation for the issue of the caveat by Luen Fat shortly after the signing of the provisional agreement, the lack of response to the queries raised by the solicitors in early September, the unreasonable refusal to register the Applicants as members despite the limited grant. Instead, they instructed counsel to take an objection based on locus and lack of damages suffered by Luen Fat. These submissions are rejected by this court. I do not see any reason why they should not bear the costs consequence personally.

52.  In the circumstances, bearing in mind the relevant matters under Order 62 Rule 5, I order Yung Lan and Lo Tak Lun to bear the costs of the Applicants in this application, such costs is to be taxed if not agreed. Further, insofar as Luen Fat is liable to pay to the solicitors any costs in respect of the hearing of 11 November 2009, I order Yung Lan and Lo Tak Lun to pay such costs personally.