WELLSON SILK TRADING LTD v. CHEUNG WAI YING AND OTHERS

HCA 663/2022

[2023] HKCFI 3071

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 663 OF 2022

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JUDGMENT

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Introduction

1.  This is the Defendants’ application by summons dated 2 September 2022 (“Summons”) to strike out the Amended Statement of Claim herein (“ASOC”)[1] on the ground that:

a.  it is frivolous and/or vexatious; and/or

b.  it is an abuse of the process of the Court.

2.  The present Action is a statutory derivative action initiated by Mr Wong Wai (“Wong Wai”) by an application in HCMP 741 of 2021 (“HCMP 741”) for leave to commence an action in the name of the Plaintiff against the present Defendants. Wong Wai was at all material times and is a minority shareholder of the Plaintiff holding 2.5% of its shareholding.

3.  After the parties had filed their affirmations in support or in opposition to HCMP 741, on 6 May 2022, Linda Chan J, by consent of the parties, granted leave to Wong Wai to commence this Action in the name of the Plaintiff.

4.  On 2 June 2022, the present Action was commenced by Writ. The subject of the Plaintiff’s (or rather Wong Wai’s) complaint concerns the sale of the Properties in 2020 by the Plaintiff to the 5^th Defendant as referred to below. In the prayer for relief, the Plaintiff seeks inter alia to set aside the sale and assignment of the Properties.

Background

5.  The Plaintiff was founded by the late Mr Wong Tak Pun (“Wong Snr”) in or about 1985 and was engaged in the trading of silk fabrics and materials. The business ceased in or about 1998.

6.  By an Assignment dated 14 April 1987, the Plaintiff became the legal owner of Portion A on Roof, Hop Hing Industrial Building, No.704 Castle Peak Road, Kowloon, Hong Kong (“Roof A”). By an Assignment dated 30 June 1990, the Plaintiff became the legal owner of House No. 6, Nos. 27-29 Consort Rise, Pokfulam, Hong Kong (“House 6”) (collectively “Properties”). While the Plaintiff ceased business in 1998, it continued to hold the Properties.

7.  Wong Snr passed away in April 2016.

8.  By an agreement dated 19 June 2020, the Plaintiff agreed to sell Roof A to the 5^th Defendant at a consideration of HK$160,000. By an Assignment dated 14 July 2020, the Plaintiff assigned Roof A to the 5^th Defendant.

9.  By an agreement dated 19 June 2020, the Plaintiff agreed to sell House 6 to the 5^th Defendant at a consideration of HK$57,900,000. By an Assignment dated 7 September 2020, the Plaintiff assigned House 6 to the 5^th Defendant.

10.  According to the Plaintiff’s annual return made up to 15 November 2020, the 1^st to 4^th Defendants were all its directors. Its shareholders consisted of:

a.  The 4^th Defendant with 369,000 shares, representing 92.25% of the Plaintiff’s total shareholding.

b.  Perkinsfield Investments Limited (“Perkinsfield”) with 18,000 shares, representing 4.5% of the Plaintiff’s shareholding.

c.  Wong Wai with 10,000 shares, representing 2.5% of the Plaintiff’s shareholding.

d.  Wong Wai Ping with 1,500 shares, representing 0.375% of the Plaintiff’s shareholding.

e.  Goh Key Chuan with 1,500 shares, representing 0.375% of the Plaintiff’s shareholding.[2]

11.  According to Perkinsfield’s annual return made up to 27 November 2020, its directors were the 1^st and 2^nd Defendants. Its shareholders consisted of (i) the 2^nd and 3^rd Defendants, each holding 42.5% of its shareholding and (ii) Wong Wai holding 15% of its shareholding.[3]

12.  The 1^st Defendant is the wife of Wong Snr and the mother of Wong Wai and the 2^nd Defendant. The 3^rd Defendant is the wife of the 2^nd Defendant.

13.  The 4^th Defendant is a company incorporated in Hong Kong and wholly owned by the 2^nd and 3^rd Defendants equally. The 1^st, 2^nd and 3^rd Defendants are and at all material times were the directors of the 4^th Defendant.

14.  The 5^th Defendant is a company incorporated in Hong Kong and wholly owned by the 4^th Defendant. The 2^nd and 3^rd Defendants are and at all material times were its directors.

15.  House 6 was at all material times and is the residential address of the 1^st, 2^nd and 3^rd Defendants as well as the registered office of the 4^th and 5^th Defendants.

16.  It can be seen from the above that at all material times the Plaintiff was substantially owned by the 2^nd to 4^th Defendants, either directly or indirectly. Further, the Plaintiff’s Board consisted of and thus was controlled by the 1^st to 4^th Defendants. As directors, it goes without saying that they owed well-established fiduciary duties to the Plaintiff.

17.  It can also be seen from the above that at all material times the 5^th Defendant was wholly owned by the 2^nd to 4^th Defendants, either directly or indirectly, and controlled by them.

The Plaintiff’s case

18.  The Plaintiff’s principal complaint is that the 1^st to 4^th Defendants wrongfully in breach of their fiduciary duties to the Plaintiff:

a.  caused the Plaintiff to sell the Properties to the 5^th Defendant without proper disclosure of their conflict of interest: paras 10-18 ASOC;

b.  caused the Plaintiff to sell the Properties to the 5^th Defendant at an undervalue of HK$9.05 million (HK$8.45 million for House 6 and HK$0.6 million for Roof A): paras 20-21 ASOC;

c.  caused the Plaintiff to sell the Properties to the 5^th Defendant on payment terms favourable to the 5^th Defendant: paras 22-24 ASOC.

19.  It is pleaded in paras 13 and 28 of the ASOC that, at all material times, the 5^th Defendant was the 1^st to 4^th Defendants’ vehicle to fulfil their scheme to wrongfully divert the Properties to a company under their control and for their benefit.

20.  The relevant paragraphs of the ASOC are reproduced here for ease of reference.

No proper disclosure

“11. …prior to the said sale of House no. 6, none of the Defendants nor the board of the Plaintiff gave any notice to the shareholders that the board of the Plaintiff had come to a decision to dispose of House no. 6. No explanation was ever given by any of the Defendants as to why it was necessary for the Plaintiff to sell House no. 6.

…

15. Prior to the said sale of Hop Hing Roof A, none of the 1^st to 4^th Defendants nor the board of the Plaintiff gave any notice to the shareholders that the board of the Plaintiff had come to a decision to dispose of Hop Hing Roof A. No explanation was ever given by any of the 1^st to 4^th Defendants as to why it was necessary for the Plaintiff to sell Hop Hing Roof A.

16. Prior to the said sale of House no. 6 and Hop Hing Roof A, it was not known that the 1^st to 4^th Defendants were related to and in control of 5^th Defendant. In particular, it was not known that the 1^st Defendant, the 2^nd Defendant and the 3^rd Defendant were personally interested in the sale of the said properties of the Plaintiff.

17. As directors of the Plaintiff, the 1^st Defendant, the 2^nd Defendant and (those in control of) the 4^th Defendant knew or ought to have known that they ought to have declared their interest in the 5^th Defendant before approving or causing the Plaintiff to enter into the agreements with the 5^th Defendant for the sale of House no. 6 and Hop Hing Roof A. It is not aware that the 1^st Defendant to the 4^th Defendants or any of them had declared their interest in connection with the aforesaid matter.

18. The Plaintiff says that by reason of the manner of the holding the shares of the 5^th Defendant through the 4^th Defendant, the 1^st Defendant, the 2^nd Defendant and the 3^rd Defendant had devised a scheme and it was to conceal their personal interest in the said sale of House no. 6 and the Hop Hing Roof A.

…

31. Throughout the 1^st to 4^th Defendants have concealed and continued to conceal the true nature of the said sale and purchase agreements and the advantages obtained.”

Sale at undervalue

“20. The consideration stated under the agreement for House no. 6 was HK$57,900,000.00. The value of House no. 6 at open market was HK$66,350,000.00 at the date of the said the Sale and Purchase Agreement entered between the Plaintiff and the 5^th Defendant. The contracted consideration was below the market value of the Property by HK$8,450,000.00. which is approximately 12.74% below the fair market value.

21. The consideration stated under the agreement for the Hop Hing Roof A was HK$160,000.00. The value of Hop Hing Roof A at open market was HK$760,000.00 at the date the Sale and Purchase Agreement. The contracted consideration was below the market value of the Hop Hing Roof A by HK$600,000.00 which is approximately 78.94% below the fair market value.”

Sale of House 6 on terms favourable to the 5^th Defendant

“22. Further, under the sale and purchase agreement for House no. 6 the Defendants caused the Plaintiff to agree with Best Trend the following payment terms which is found under the Third Schedule of the said sale and purchase agreement of House no. 6 :-

Schedule

Date	Amount (HK$)	Purpose
19 June 2020	5,790,000.00	deposit paid on the SPA (10%)
10 July 2020	13,027,500.00	1st further deposit (22.5%)
11 August 2020	13,027,500.00	2nd further deposit (22.5%)
11 September 2020	13,027,500.00	3rd further deposit (22.5%)
12 October 2020	13,027,500.00	balance payable on completion (22.5%)

23. The above payment terms were irregular and did not follow convention without good cause. It is averred that the said payment terms were favourable to the 5^th Defendant without justification; the said payment terms allow the 5^th Defendant to raise the necessary funds at ease and if necessary with loans from the Plaintiff.

24. The said terms of payment are solely for the benefit of the Defendants and not in the interest of the Plaintiff; the 1^st Defendant, the 2^nd Defendant and the 3^rd Defendant are not in any no gainful employment nor any of them are engaged in any business to which the 5^th Defendant would be financially supported to engage in purchasing House no. 6 and the Hop Hing Roof A. Further, it is not shown that the 4^th Defendant or the 5^th Defendant had any significant resources.”

Dishonesty of the 3^rd and 4^th Defendants

“30. Insofar as the 3^rd Defendant and 4^th Defendant are concerned, in addition to the aforesaid breach of their fiduciary duty as a director of the Plaintiff, it is averred that by approving and causing the Plaintiff to enter into the said sale and purchase agreements with the 5^th Defendant for House no. 6 and Hop Hing Roof A, the 3^rd Defendant in herself and (through the 4^th Defendant) had acted dishonestly and in the knowledge that the said sale and purchase agreements were made in breach of the duties of the 1^st to 4^th Defendants to the Plaintiff.”

21.  In addition, the Plaintiff also complains that the 1^st to 4^th Defendants had incurred expenditures including but not limited to travelling, medical, entertainment and other expenses from the resources of the Plaintiff without justification other than to benefit themselves: para 32 of the ASOC.

Deliberation

22.  The applicable principles are uncontroversial and they can be reduced to a few propositions:

a.  Striking out a plaintiff’s claim should only be done in “plain and obvious” cases.

b.  The claim must be “obviously unsustainable”, the pleadings “unarguably bad” and it must be “impossible, not just improbable, for the claim to succeed” before the Court will strike out a claim.

c.  There should be no trial upon affidavits. Disputed facts are to be taken in favour of the plaintiff.

d.  Where the legal viability of a cause of action is sensitive to the facts or requires a minute and protracted examination of the documents and facts of the case, an order to strike out should not be made.

China Medical Technologies, Inc & Ors v The Bank of East Asia Limited [2023] HKCFI 2156 at [11]

23.  In Mr Chung’s Submissions under the section “Frivolous and/or vexatious”, he first sets out some trite quotations on the meaning of “frivolous or vexatious” including inter alia that a proceeding is “frivolous” when it is not capable of reasoned argument, without foundation or where it cannot possibly succeed and a proceeding is “vexatious” when it is oppressive and/ or lacks bona fides: Hong Kong Civil Procedure 2023 Vol.1 para 18/19/7 at p 550.

24.  Then, Mr Chung purports to elaborate on his reasons as to why the present Action comes within the expression “frivolous or vexatious” by a few short paragraphs. As it is difficult to comprehend, let alone summarise, those reasons, this court shall directly quote from his Submissions.

25.  First, 37, 38 and 40 of Mr Chung’s Submissions on no proper disclosure of interests by the 1^st to 4^th Defendants.

“37. Given the background of the Plaintiff, and the family nexus among the parties and all shareholders of the Plaintiff, it is submitted that it is a plain and obvious case that this derivative action against the Defendants carries no substance and the claims are on its [sic] face so manifestly misconceived; the Plaintiff and/or more specifically Wong Wai, knew and/or ought to have known if he has gone about the matter seriously.

38. The Defendants have not done anything contrary to their respective fiduciary duties as directors of the Plaintiff. The alleged non-disclosure of interests in the meeting document of the Plaintiff in substance is only a matter of technicality; as a matter of fact, the interests of respective parties in each of the 4^th and 5^th Defendants were and are well acknowledged and recognised.

…

40. The Defendants, at all material times, were and are the full broad [sic] of directors of the Plaintiff and own 96.075% interest in the Plaintiff, they were and are authorised and empowered to manage the Plaintiff including selling the Properties. There was no issue of non-disclosure of interest as alleged, the Plaintiff has suffered no damages from the sale and purchase of the Properties.”

26.  These submissions contain not reasons but only bare assertions. It is nowhere clear from Mr Chung’s Submissions what evidential and/or legal support there is for these bare assertions that this derivative action carries no substance or that the claims are manifestly misconceived to the knowledge of Wong Wai.

27.  Second, paras 39 and 41 of Mr Chung’s Submissions on sale at an undervalue.

“39. Concerning the alleged sale and purchase of the Properties at undervalue, even if Wong Wai’s alleged claim is put to the highest, i.e. the damages of the Plaintiff was HK$9,050,000.00 plus interest, as stated in paragraph 31 above, such alleged damages has been fully settled by the contribution of the Defendants as stated in paragraph 33 above.

…

41. In the Amended Statement of Claim at paragraphs 27 to 30 …, the allegation pertinent to the breach of director’s duty against the Defendants is that they sold the Properties at undervalue and the non-disclosure of interest. In that, there is no allegation that the 1^st to 4^th Defendants could not sell the Properties to 5^th Defendant. As the alleged difference in price has been fully replenished by the Defendants to the Plaintiff, it is submitted that it is not in the interest of the Plaintiff to compel the Defendants to caused [sic] and/or procure to nullify the conveyance of the Properties and assign the Properties back to the Plaintiff…”

28.  The payment of HK$9,050,000 plus interest to the Plaintiff requires some explanation.

29.  What happened, according to the first affirmation of the 2^nd Defendant in this Action and para 33 of Mr Chung’s Submissions, was that, without admitting liability for any wrongdoing, the 1^st to 3^rd Defendants decided to contribute to the amount of the undervaluation alleged by Wong Wai in the sale of the Properties and paid it back to the Plaintiff. Wong Wai’s allegation is supported by a valuation report by BMI Appraisals dated 28 September 2020 on House 6 and another one by Prudential Surveyors (Hong Kong) Limited dated 15 December 2020 on Roof A. The amount of undervaluation was HK$9,050,000.00 on the basis of the 2 reports.

30.  Together with interest at half judgment rate in the sum of HK$609,594.52 (as to which there is no explanation as to how and for what period the interest element was calculated), the sum total of the 1^st to 3^rd Defendants’ contribution was HK$9,659,594.52. This sum was paid by cheque and deposited into the Plaintiff’s bank account on 10 May 2022. Wong Wai’s solicitors were notified on the same day by letter.

31.  Mr Chung submits that the undervaluation concerning the sale of the Properties to the 5^th Defendant has been fully replenished to the Plaintiff and it is not in the interest of the Plaintiff to continue the present Action and to set aside the sale and the assignment of the Properties.

32.  This court does not agree. First, it is not at all clear that the payment to the Plaintiff of HK$9,050,000 plus interest (the calculation of which is obscure) is sufficient to cover the Plaintiff’s monetary claim for damages arising from the sale at an undervalue. Second, even for the sake of argument that it is sufficient to cover the Plaintiff’s claim for damages, the Plaintiff still has other claims as set out in the prayer for relief which must be addressed. For instance, instead of damages, the Plaintiff may opt for an Order to set aside the assignment of the Properties to the 5^th Defendant on the basis of no proper disclosure to all the shareholders and that the sales terms were wholly favourable to the 5^th Defendant and not in the interest of the Plaintiff.

33.  It is trite law that the 1^st to 4^th directors, as fiduciaries, may not put themselves in a position where their interest and duty conflict. Under common law, disclosure to and informed consent by the shareholders at a general meeting are necessary to avoid a breach of fiduciary duties where such a conflict exists: Poon Ka Man Jason v Cheng Wai Tao (2016) 19 HKCFAR 144 at [74]; Aberdeen Ry Co v Blaikie (1854) 1 Macq 461 at 471, (1854) 23 LT 315 at 316; Imperial Mercantile Credit Association v Coleman (1871) 6 Ch App 558 at 567-8; Snell’s Equity 34^th Ed. para 7-015. Sale of the Properties to the 5^th Defendant at an undervalue without proper disclosure to and informed consent by the shareholders of the Plaintiff is precisely such a conflict situation.

34.  Mr Brian Wong, counsel for the Plaintiff, also refers this court to the following passage in the Judgment of Recorder Jason Pow SC in Yuen Wai Yee v Li Kwok Hung & Ors unrep., [2021] HKCFI 2543 at [8]:

“8. It is trite and not in dispute between the parties that the “no conflict rule” and rule against secret profits are of inflexible and stringent nature. No director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and a resolution at a general meeting approves of his so doing. There is no answer that the profit is of a kind which the company could not itself have obtained, or that no loss is caused to the company by the gain of the director. The rules governing fiduciary duties are so strict and inflexible that it does not depend on the extent of the adverse interest of the director, the fairness or unfairness of the transaction, or the genuineness of the transaction…”(emphasis added)

35.  At para 33 of the ASOC, it is pleaded that “[b]efore the commencement of the present action enquiries were made to the Defendants for the disclosure of the records and documents relating to the said sale of House no. 6 and Hop Hing Roof A. However, despite such requests were being made, the Defendants have failed and/or refused to respond to the enquiries.”

36.  Para 33 is denied by the Defendants in their Defence at para 20. But that denial is to no avail for the purpose of this application since disputes facts are to be taken in favour of the Plaintiff. Then, the Defendants also pleaded in para 20 of their Defence that no member of the Plaintiff, not being a director, shall have a right to inspect such documents,[4] impliedly accepting there was no disclosure of the relevant documents and information to Wong Wai.

37.  All in all, this court is not satisfied that the Plaintiff’s case is not capable of reasoned argument, without foundation or cannot possibly succeed. Nor is this court satisfied that it is oppressive or lacks bona fides.

38.  Mr Chung’s submissions under the section “Abuse of the process of the Court” are no better.

39.  Paras 43 and 44 of his Submissions again contain not reasons but only bare assertions that the present Action is a clear case of abuse of the process of the Court for the purpose of serving the ulterior motive of Wong Wai and his grudge against his brother viz the 2^nd Defendant and his mother viz the 1^st Defendant at the expenses of the Plaintiff.

40.  On these bare assertions, this court cannot be satisfied that the present Action should be struck out as an abuse of process.

41.  Lastly, under the section “Fraud and dishonesty have not been pleaded with particulars”, Mr Chung submits that the Plaintiff has made bare allegations as to the financial resources of the Defendants in support of its claim of fraud, referring to the ASOC at paras 23 to 26. He further submits that the Plaintiff’s allegations are no more than speculation.

42.  It is trite that allegations of fraud and dishonesty must be pleaded distinctly and with the utmost particularity. In Three Rivers DC v Bank of England (No 3) [2003] 2 AC 1, at [184], Lord Millet made the following observations on how fraud and dishonesty should be pleaded and particularised:

“184 It is well established that fraud or dishonesty… must be distinctly alleged and as distinctly proved; that it must be sufficiently particularised; and that it is not sufficiently particularised if the facts pleaded are consistent with innocence: see Kerr on Fraud and Mistake, 7^th ed (1952), p 644; Davy v Garrett (1878) 7 Ch D 473, 489; Bullivant v Attorney General for Victoria [1901] AC 196; Armitage v Nurse [1998] Ch 241, 256. This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest…” (emphasis added)

43.  The ASOC is not a particularly well-drafted pleading. But as far as this court can see, para 23 (read together with para 22) only refers to the irregular payment terms regarding the sale of House 6 which were said to be favourable to the 5^th Defendant to enable it to raise funds at ease. Para 24 alludes to the lack of gainful employment or significant financial resources of the Defendants in order to support the 5^th Defendant’s purchase of House 6 and Roof A.

44.  Presently, it is unclear whether the pleas at paras 23 and 24 are being deployed by the Plaintiff to support its claim at para 26 that the sale of the Properties “could not represent a genuine sale” or indeed what the phrase “could not represent a genuine sale” is supposed to mean. Does it mean the sale of the Properties was a sham ie there was no sale at all? Does it mean the 5^th Defendant had no money to pay and did not pay the purchase price of the Properties to the Plaintiff such that the assignment of the Properties to the 5^th Defendant was in fact a giveaway? Or does it simply mean the sale of the Properties was at an undervalue as reflected in the plea in para 26 that “the price obtained for the said two properties did not reflect the price the Plaintiff would have obtained in the open market”?

45.  Faced with such ambiguities, instead of making assumptions, the prudent thing to do is to ascertain whether the Plaintiff is actually pleading fraud and dishonesty in those paragraphs and against whom. Depending on the answer, the Defendants can then, if so advised, request for particulars of the fraud and dishonesty of each of the Defendants so accused in light of Three Rivers DC v Bank of England (No 3) supra. Once the ambiguities are cleared, the Defendants can decide on the next step upon advice. Instead of doing the above, they have jumped the gun in striking out the ASOC on the ground that fraud and dishonesty have not been pleaded with particulars.

46.  As this court sees it, the only distinct plea of dishonesty which can be found in the ASOC is at paragraph 30 of the ASOC quoted above concerning the dishonesty of the 3^rd and 4^th Defendants. The plea is completely lacking in particulars. This court would have no hesitation in striking out that paragraph if no particulars are forthcoming if so requested by the Defendants. But that is not what the Defendants are seeking in the Summons.

47.  All in all, this court is of the view that the application to strike out the ASOC is entirely without merits.

Disposition and costs order nisi

48.  The Summons is hereby dismissed.

49.  There shall be an Order nisi that costs of the Summons be to the Plaintiff, to be taxed if not agreed, and paid by the Defendants forthwith, certificate for counsel.