TSE FUNG CHIU v. KWOK CHEUNG HING AND ANOTHER

HCMP 183/2019

[2019] HKCFI 2278

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 183 OF 2019

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J U D G M E N T

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I. Introduction

1.  There is before this court an application by Originating Summons dated 8 February 2019 pursuant to section 733 of the Companies Ordinance, Cap 622 (“CO”) by the Applicant Mr Tse Fung Chiu (“Applicant” or “Tse Jnr”) for leave to commence a statutory derivative action on behalf of the 2^nd Respondent (“Company”) against the 1^st Respondent Mr Kwok Cheung Hing (“Kwok Snr”). The application is opposed by both Respondents.

II.  Background

2.  The Company was incorporated in Hong Kong on 25 August 2009 and carried on the business of trading in model train toys.  According to Mr Liu on behalf of the Applicant, the Company ceased to carry on trading in May 2015.  This is not disputed.  Tse Jnr is a 50% shareholder of the Company holding 1 share.  Kwok Snr’s son, Mr Kwok Man Hei (“Kwok Jnr”) is the other 50% shareholder of the Company holding 1 share.  

3.  At the Board level, Tse Jnr’s father, Mr Tse Tsang Yao (“Tse Snr”) was the sole director of the Company from incorporation until 26 March 2014 when Kwok Snr was appointed as a director of the Company.  On 26 November 2014, Tse Snr resigned as a director.  Since then, Kwok Snr has been and is the sole director of the Company. 

4.  The Tse family and the Kwok family have fallen out with each other and the present action is essentially one of several pieces of litigation between the two viz HCMP 3349 of 2015, HCA 1320 of 2015, HCA 1777 of 2015, HCMP 2066 of 2016, HCMP 3419 of 2016, HCMP 1547 of 2018 and HCMP 2189 of 2018 (“HCMP2189”).  A brief summary of these proceedings can be found in the judgment of Madam Recorder Yvonne Cheng SC dated 16 July 2019 in HCMP2189 (“HCMP2189 Judgment”).

5.  As for HCMP2189, it was an application by Tse Jnr against Kwok Snr and the Company for an order for inspection of various documents and records of the Company under section 740 of CO.  The stated purpose of the application was that there were matters which were said to call for investigation including inter alia the HK$7 million recorded in the Company’s 2015 audited accounts as owed to Kwok Snr.  This is one of the claims in the proposed statutory derivative action against Kwok Snr.

6.  Under section 740, the Court has a discretion to order the inspection of a company’s records or documents if two requirements are satisfied viz:

a.  the application is made in good faith, and

b. the inspection is for a proper purpose.

7.  Tse Jnr’s application in HCMP2189 was dismissed by the learned Recorder.

8.  As stated in paragraph 75 of the HCMP2189 Judgment, the learned Recorder was not satisfied that Tse Jnr had demonstrated that the inspection of documents was for a proper purpose.  Specifically, in relation to the HK$7 million, the learned Recorder’s reasons and conclusion can be found at paragraphs 35 to 37 as follows:

“35. I further note that whilst the Schedule to the Originating Summons included the $7 million director’s loan as one of the ‘qualified’ items, in fact, in the 2015 Accounts, the amount was not qualified. This indicates that PH Tang was satisfied that the Company did indeed owe $7 million to Kwok Senior. It was suggested that pressure was brought to bear on PH Tang through proceedings brought by the Company, but the Company had not in fact ‘sued’ PH Tang; it had simply taken out an application for discovery of documents.

36. It is true that there is no explanation as to why the amount owed to Kwok Senior was stated as $2.7 million in the 2014 Audited Accounts. However, Ms Liu’s argument that the change was implausible must implicitly assume that the 2014 Audited Accounts were correct on this point. But there was no evidence as to whether this was the case. Rather, Tse Junior’s evidence was directed to showing that all of the $7 million loan which Kwok I said had been made by Kwok Senior had been repaid. In this regard, as explained above, I do not consider that such evidence suggests that the figure of $7 million in the 2015 Audited Accounts is a result of wrongful or undesirable conduct, or corporate mismanagement.

37. I therefore find that Tse Junior has not established that there is a sufficiently reasonable case for investigation as regards any wrongful or undesirable conduct, or corporate mismanagement, in relation to the amount of $7 million said to be due from the Company to Kwok Senior.”

9.  Lastly, at paragraph 81 of the HCMP2189 Judgment, the learned Recorder said she was not satisfied that the real purpose of the application was to investigate suspected misconduct or mismanagement on the part of Kwok Snr and that therefore the application was made in good faith.

10.  As for the 2 HCA actions, they have been consolidated (“Consolidated Actions”) and are still on-going.  According to paragraphs 7 and 8 of the HCMP2189 Judgment, in the Consolidated Actions, the Company claims, inter alia, that:

a.  Tse Jnr wrongly received $2.3 million from the Company and was the beneficiary of two insurance policies paid for by the Company without authorisation;

b. Tse Snr wrongly received $4.65 million from the Company and was the beneficiary of five insurance policies paid for by the Company without authorisation;

c.  Tse Snr’s wife, Madam Ng, wrongly received $750,000 from the Company; and

d. Tse Snr has taken away various documents and property of the Company.

11.  On the other hand, Tse Snr counterclaims against the Company for repayment of a total sum of $11,957,923 which he said had been lent to the Company through various payments made between 2007 and 2015.

III.  The law

12.  Statutory derivative actions are covered by Part 14, Division 4 of CO.  The relevant parts of sections 732 and 733 of CO provide:

“732. Member of company or of associated company may bring or intervene in proceedings

(1) If misconduct is committed against a company, a member of the company or of an associated company of the company may, with the leave of the Court granted under section 733, bring proceedings in respect of the misconduct before the court on behalf of the company.

(2) If, because of misconduct committed against the company, a company fails to bring proceedings in respect of any matter, a member of the company or of an associated company of the company may, with the leave of the Court granted under section 733, bring proceedings in respect of the matter before the court on behalf of the company.

(3) ...

(4) The cause of action in relation to the proceedings under subsection (1) or (2) is vested in the company. Any of those proceedings must be brought in the name of, and the relief (if any) must be sought on behalf of, the company.

...

733. Leave of Court to bring or intervene in proceedings

(1) On application by a member of a company or of an associated company of a company, the Court may grant leave for the purposes of section 732(1), (2) or (3) if it is satisfied that –

(a) on the face of the application, it appears to be in the company’s interests that leave be granted to the member;

(b) in the case of –

(i) an application for leave to bring proceedings under section 732(1) or (2), there is a serious question to be tried and the company has not itself brought the proceedings; or

(ii) ...; and

(c) except where leave is granted by the Court under subsection (5), the member has served a written notice on the company in accordance with subsection (3), and the notice complies with subsection (4).

...

(3) The written notice must be served on the company, at least 14 days before the member applies for leave in respect of the company –

(a) in the case of a company as defined by section 2(1), by leaving the notice, or by sending the notice by post to, its registered office; or

(b) in the case of a non-Hong Kong company, in a manner that the notice is sufficiently served on the company by virtue of section 803.

(4) The written notice must state –

(a) the member’s intention to apply for leave for the purposes of section 732(1), (2) or (3) in respect of the company; and

(b) the reasons for that intention.

(5) The Court may grant leave to dispense with the service of a written notice for the purposes of subsection (1)(c).”

13.  In order for the Applicant to obtain leave to bring the proposed statutory derivative action on behalf of the Company, he must satisfy all the conditions in section 733.  For the present purpose, only the following two are material:

a.  whether on the face of the application, the proposed action appears to be in the interests of the Company (“Interests of the Company Requirement”); and

b. whether there is a serious question to be tried and the Company has not itself brought the proceedings (“Serious Question Requirement”).

14.  In accordance with the Court’s usual practice, this court shall consider the two requirements in reverse order.  This is because if the Serious Question Requirement cannot be met, it would be difficult to see how it can be in the interests of the Company to commence legal proceedings against Kwok Snr which ex hypothesis are liable to be struck out: Zhang Heng v Kingstone International Wealth Management Ltd unrep., CACV 56 of 2017, 22 September 2017 at [12]; Re Li Chung Shing Tong (Holdings) Ltd [2011] 5 HKLRD 274 at [31]; Re Primlaks (HK) Ltd [2016] 2 HKLRD 31 at [6].

15.  Since both counsel rely on Kwan JA’s judgment in Zhang Heng v Kingstone International Wealth Management Ltd, this court shall set out the relevant paragraphs ie [10] - [11] in that judgment on the correct approach to the exercise of the discretion to grant leave under section 733:

“10. For leave to be granted to commence a statutory derivative action, the material requirements for present purpose are: (1) on the face of the application, it appears to be in the interest of the company that leave should be granted; and (2) there is a serious question to be tried and that the company has not itself brought the proceedings.

11. There is no dispute about the law on the correct approach regarding the exercise of discretion to grant leave. This has been covered in a number of cases, including an earlier decision of the judge mentioned in the Judgment, namely, Hao Xioying v Green Valley Investment Ltd, HCMP 1394/2015, 10 August 2016,which quoted from relevant passages of the decision of Ng J in Re Primlaks (HK) Ltd [2016] 2 HKLRD 31 and Ng J in turn drew on various decisions of judges at first instance. The relevant legal propositions have been summarised by the judge in Green Valley Investment Ltd at §§10 and 11:

‘10. On serious question to be tried:

(a) The threshold is relatively low. The prospects of the company’s success are to be investigated only to a limited extent, and the court should be slow to find against the applicant unless such prospects are so slim that the company cannot be said to have any expectation of success. See Re Primlaks (HK) Ltd, HCMP 1789/2015, unrep, 28 January 2016, §§7-8 per Ng J.

(b) At the leave stage, it is not the court’s function to try to resolve conflicts of evidence or difficult questions of law which require substantial argument and deliberation. In practice, if the applicant is able to produce a draft pleading that sets out a case with some prospect of success when only the allegations contained in the pleading are considered, the criteria will be satisfied unless the respondent can demonstrate fairly readily that there is a serious flaw in the claim and that it has no real substance. See Re Primlaks (HK) Ltd, §9.

11. As regard the interest of the company:

(a) Again, the threshold is low. In deciding whether it is prima facie in the interest of the company for leave to be granted, the court should have regard to the fact that “there should not be a trial within a trial and the court should not be forced to enter into the merits of claims where there are serious disputes”. See Re Primlaks (HK) Ltd, §21.

(b) If a “serious question to be tried” has been demonstrated, in most cases it will follow that it is prima facie in the interest of the company that proceedings are pursued. See Re Primlaks (HK) Ltd, §§20-21.

(c) In assessing whether it appears to be in the interest of the company that the derivative action be pursued, the court ought to take into account whether any practical benefit is likely to result, even in circumstances where it may be clear that, eg, a director has breached his duties to the company.  This essentially involves assessing whether it appears that the company stands to gain in money or money’s worth in light of the costs which will have to be incurred.  See Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 at [56] to [60] per Palmer J; Pang Yong Hock v PKS Contracts Services Pte Ltd [2005] 2 LRC 72 at [21] per Tay Yong Kwang J (giving the judgment of the Singaporean Court of Appeal).’”

IV.  Deliberation

16.  InRe Primlaks (HK) Ltd at [11], this court said:

“11. In considering this requirement, the starting point is the draft Statement of Claim which sets out the causes of action the Applicant seeks to bring in the name of the Company. ...”

17.  This court has considered the revised draft Statement of Claim (“SOC”) relied upon by Tse Jnr.  The most glaring thing that one would immediately notice is that its title is the same as the present proceedings which names Tse Jnr as the Plaintiff and the 2 Respondents herein as Defendants.  This is of course contrary to the nature of statutory derivative actions in general and specifically section 732(4) of CO which provides that the proceedings must be brought in the name of the Company.  This is an irregularity which can be rectified but it does reflect badly on the pleader of the SOC for the sloppiness.

18.  This court now turns to the body of the SOC in which 4 claims have been pleaded against Kwok Snr on the basis that he had acted in breach of his duties to the Company.

“Wrongful Withdrawal (the Alleged $7M Loan due to Kwok Senior)”[1] (“1^st Claim”)

19.  The gist of the complaint is that in the Company’s 2015 audited accounts dated 27 March 2018 signed by Kwok Snr as sole director, the amount stated to be due from the Company to Kwok Snr was substantially increased from HK$2.7 million in the financial year 2014 to HK$7 million in the financial year 2015.  This HK$7 million was described as the “Alleged $7M Loan” in the 1st affirmation of Tse Jnr ("Tse 1") and the SOC (“$7M Loan”).  In correspondence, Kwok Snr’s solicitors had already substantiated the $7M Loan by reference to 7 payments of HK$1 million each to the Company by either Kwok Snr or companies beneficially owned by him or his family members viz Gold Star International Holdings Limited (“GSIHL”), Ausyear Limited (“Ausyear”) and Sino Resources (Hong Kong) Limited (“Sino”) between March 2012 and January 2014 as follows:

	Date	Amount (HK$)	Payer
1.	8-3-2012	1 million	GSIHL
2.	18-5-2012	1 million	Ausyear
3.	17-8-2012	1 million	Sino
4.	16-10-2012	1 million	Kwok Snr
5.	20-11-2012	1 million	Kwok Snr
6.	14-1-2013	1 million	Ausyear
7.	20-1-2014	1 million	GSIHL
	Total:	7 million

20.  Whilst Mr Liu submitted at paragraph 22 of his skeleton submissions that the Applicant “does not accept” the HK$7 million was a loan from Kwok Snr to the Company, there is in fact no denial of the $7M Loan in Tse 1 or the SOC.  In response to a question from this court at the hearing, Mr Liu changed his stance and said his client was prepared to take the HK$7 million as a loan from Kwok Snr to the Company.

21.  Indeed, it is difficult to see how Tse Jnr can deny the existence of the $7M Loan.  This is because it was stated in paragraph 40 of Tse 1 and pleaded in the SOC that the $7M Loan had been fully repaid, or rather, over repaid by HK$900,000.  The relevant paragraphs of the SOC read:

“49. In fact, the Alleged $7M Loan were all repaid by MGML[2] to Kwok Senior.

50. The particulars of MGML’s Repayment of the Alleged $7M Loan to Kwok Senior are set out hereunder:

Date of Repayment	Amount	Cheque No.	Payee
9-3-2012	$1,000,000	565210	GSIHL
4-6-2012	$1,000,000	565330	GSIHL
28-8-2012	$1,000,000	565218	GSIHL
14-11-2012	$1,000,000	565572	Kwok Senior
12-12-2012	$1,000,000	549223	Kwok Senior
6-11-2013	$100,000	095010	Kwok Senior
3-12-2013	$100,000	095062	Ausyear Limited
3-1-2014	$100,000	095101	Ausyear Limited
25-11-2014	$2,600,000	Debit Advice	Kwong Senior
Total:	$7,900,000

51. ... These HK$7.9M repayments were not disputed by OLN[3] at all. There was an over repayment to Kwok Senior at least in the sum of HK$900,000.00.

...

53. The Alleged $7M Loan due to Kwok Senior stated in 2015 Audited Statements is incorrect called for investigation bearing in mind that (a) 2015 Audited Statements were signed by Kwok Senior as the sole director, (b) 2015 Audited Statements were prepared by PH Tang, they could produce 2015 Audited Statements without other party’s control.

...

55. It is further revealed in MGML’s Audited Financial Statements for 2016 and 2017 that the alleged loan by Kwok Senior was reduced from HK$7,000,000.00 in 2015 to HK$5,656,850.00 in 2016 and 2017 (Note 9 at page 13 of the Audited Financial Statements for 2016). It shows that Kwok Senior further withdrew HK$1,343,150.00 (i.e. HK$7,000,000.00 less HK$5,656,850.00) from MGML’s account in Kwok Senior’s favour for the satisfaction of the Alleged $7M loan. Despite JYJL’s request for explanation by way of JYJL’s letters dated 31^st December 2018 and 3^rd January 2019, Kwok Senior did not provide an explanation.

56.       In the premises, Kwok Senior has made Wrongful Repayments in the total sum of HK$2,243,150.00 (i.e. over repayment of HK$900,000.00 and wrongful payment of HK$1,343,150.00.).”

22.  Kwok Snr, in his affirmation in opposition (“Kwok 1”), maintained the HK$7 million were indeed owed by the Company to him as at the 2015 financial year end (as stated in the 2015 audited accounts) and denied any misappropriation of the Company’s funds.

23.  Kwok Snr’s explanations for the payments of HK$1,343,150.00 and HK$7.9 million and their use were as follows.

24.  First, the $7M Loan was only partially repaid by the Company to him in the sum of HK$1,343,150.00 in the financial year 2016.  This partial repayment was reflected in the Company’s 2016 audited accounts and reduced the amount owed by the Company to him to HK$5,656,850.  The balance remains outstanding.[4]

25.  Second, regarding the HK$7.9 million alleged by Tse Jnr to be repayment of the $7M Loan, Kwok Snr admitted the Company’s payment of this sum to him or his companies but disputed the money was used to repay the $7M Loan.  In Kwok 1, he explained in detail that:

a.  3 sums of HK$1 million each were paid by the Company in March, June and August 2012 to GSHIL for onward transmission, via intermediaries, to the Company’s main supplier in the PRC in payment of debts owed by the Company.  The onward transmission all took place shortly after the receipt of the money by GSHIL.

b. The remaining HK$4.9 million were partial repayment of earlier loans made by Kwok Snr to the Company in the total sum of HK$5,025,000 (“Earlier Loans”)[5].  The earlier Loans were made by 5 cheques issued in 2009 and 1 cheque issued in 2012, by Kwok Snr, his son and his companies as follows:

	Date	Amount (HKD)
1.	7 September 2009	10,000
2.	15 October 2009	800,000
3.	16 November 2009	2,400,000
4.	23 December 2009	590,000
5.	23 December 2009	225,000
6.	27 April 2012	1,000,000
	Total:	5,025,000

26.  Regarding Kwok Snr’s case on the use of the HK$3 million to pay the Company’s main supplier in the PRC, that is also supported by contemporaneous documentation ie customer advices the dates of which were very close to the dates of the first 3 alleged repayments of HK$1 million each as pleaded in the SOC.  The amounts shown in the customer advices matched exactly the 3 alleged repayments ie HK$1 million.  There is no suggestion that these contemporaneous documents are forged. 

27.  As for the Earlier Loans, in response to a question from this court at the hearing, Mr Liu told this court that the existence of the Earlier Loans was not in dispute.  In any event, the Earlier Loans, like the $7M Loan, were supported by contemporaneous documentation ie the cheques issued to the Company.  Further, apart from a bare denial, there is nothing in the second affirmation of Tse Jnr (“Tse 2”) to explain what the 6 cheques were for, if they were not loans to the Company. 

28.  So the long and short of it all is that, on the evidence, Kwok Snr has lent a total of HK$12.025 million to the Company by payments made in 2009, 2012, 2013 and 2014 but as at 31 March 2015 ie the cut-off date of the 2015 audited accounts, he was only repaid HK$4.9 million (HK$7.9 million minus HK$3 million).  The balance due to him was in fact HK$7.125 million.  If anything, the 2015 audited accounts have understated the amount due from the Company to him, not the other way round.

29.  On the other hand, Tse Jnr’s pleaded case that the HK$7.9 million were used to repay the $7M Loan is nothing but a bare assertion and Mr Liu has not been able to point to this court any contemporaneous correspondence or other documentation in support of his case. 

30.  Further, in this court’s view, Tse Jnr’s pleaded case is highly improbable. 

31.  First, of the $7M Loan to the Company, the 1^st payment of HK$1 million was made by GSIHL on 8 March 2012.  Yet, as pleaded in paragraph 50 of the SOC, the Company immediately repaid GSIHL HK$1 million the next day on 9 March 2012.  In response to a question from this court at the hearing, Mr Liu admitted that there was no explanation in the evidence why that was so.  Similar observations can be made in relation to the 2^nd payment of HK$1 million made by Ausyear on 18 May 2012 and the 2^nd alleged repayment of HK$1 million to GSIHL on 4 June 2012 as well as the 3^rd payment and the 3^rd alleged repayment.  

32.  Out of the $7M Loan, HK$6 million were lent to the Company between March 2012 and January 2013.  Obviously, the Company was cash-strapped during that period.  If so, why would the Company repay the $7M Loan in such a hurry? There was no answer to this in either Tse 1 or Tse 2.

33.  Second, there is also no explanation in the evidence why the Company should repay HK$7.9 million to Kwok Snr for the $7M Loan.  There is no suggestion in the SOC that the extra HK$900,000 was interest.  As pleaded in the SOC, it was simply an overpayment, period.

34.  It is true that on the Serious Question Requirement, the threshold is relatively low and the prospects of the company’s success are to be investigated only to a limited extent.  But however low the threshold may be, the applicant still has to cross it and however limited the investigation of the company’s success may be, the court still has to investigate it.

35.  As observed by Kwan JA in Zhang Heng v Kingstone International Wealth Management Ltd at [17], in considering whether a serious question to be tried has been made out, the court is not obliged to accept whatever evidence the applicant chooses to place before it without any critical thinking.  

36.  Applying critical thinking to Tse Jnr’s evidence and testing it against the undisputed facts and contemporaneous documents, this court is of the firm view that there is no serious question to be tried in relation to the 1^st Claim. 

37.  Mr Liu’s submissions on the “Interests of the Company Requirement” are premised on the Applicant being able to satisfy the “Serious Question Requirement” and that if successful, the claims pleaded in the SOC would result in payment made to the Company. 

38.  Since the Applicant fails the “Serious Question Requirement”, it naturally follows that it is not in the interests of the Company to pursue the 1^st Claim. No leave should therefore be given.

“Director’s Remuneration” (“2^nd Claim”)

39.  The gist of the complaint is that in the 2016 and 2017 audited accounts, director’s remuneration of HK$300,000 (ie $25,000 per month) and mandatory provident fund contributions of HK$15,000[6] were recorded for each of the 2 years.  These were unlawful payments by Kwok Snr, acting as sole director of the Company, to himself since there were no shareholders’ resolutions passed in the Company’s general meeting for those years. 

40.  Article 14(a) of the Company’s Articles of Association provides:

“14. (a) The Directors shall be paid out of the funds of the Company remuneration for their services such sum (if any) as the Company may by ordinary resolution from time to time determine.”

41.  Similarly, Reg. 78 of Table A, which the Company has adopted, provides:

“78. The remuneration of the directors shall from time to time be determined by the company in general meetings. ...”

42.  Kwok Snr does not dispute that there were no shareholders’ resolutions authorizing the payment of remuneration to him as sole director in the 2 years in question[7]. What he is saying is that when Tse Snr was the sole director and when Tse Snr and himself were co-directors of the Company, Tsr Snr alone or both of them have always received remuneration from the Company notwithstanding the lack of shareholders’ resolutions to that effect and he was merely following the same practice. 

43.  That argument might have a chance of success if Kwok Snr can pray in aid the Re Duomatic[8] principle and can show the 2 shareholders of the Company viz Tse Jnr and Kwok Jnr both agreed the practice should continue in the financial years 2016 and 2017.  But there is no evidence that Tse Jnr has agreed to that - on the contrary, it is reasonably clear that Tse Jnr has not, hence the 2^nd Claim. 

44.  Mr Brown submits that his client can and has prayed in aid Article 15 of the Company’s Articles of Association which provides:

“15. The Directors may award extra remuneration out of the funds of the Company (by way of salary, commission or otherwise as the Directors may determine) to any Director who performs services which in the opinion of the Directors are outside the scope of the ordinary duties of a Director.” (emphasis added)

45.  In this regard, by a Board resolution passed on 25 March 2015, it was resolved that, pursuant to Article 15, Kwok Snr be rewarded with extra remuneration of HK$25,000 per month from March 2015 for conducting investigation and preparing for any possible litigation against Tse Snr and Tse Jnr for their suspected misappropriation and misallocation of company funds.  In Kwok 1 at paragraphs 52 to 54, Kwok Snr has explained in detail the heavy workload that he, as sole director, had to bear since 2015 even though the Company had ceased any trading business operations in May 2015, including in particular the handling of all the litigation between the Company and the Tse family in order to claim back the money they had unjustifiably taken from the Company.

46.  Unsurprisingly, in Tse 2, Tse Jnr disagreed that those works were outside the scope of the ordinary duties of a director.  But as Mr Brown rightly points out, Tse Jnr’s opinion is irrelevant for the purpose of Article 15 - it is the opinion of Kwok Snr as the sole director of the Company which matters. 

47.  In his skeleton submissions, Mr Liu really has no answer to Mr Brown’s point - he merely reiterates Tse Jnr’s opinion that those works were not outside the scope of the ordinary duties of a director and makes a bare assertion that properly construed, Article 15 would have been intended to cover remuneration only for work outside the ordinary duties of a director on a “case-by-case basis” without explaining clearly what “case-by-case basis” is supposed to mean. 

48.  In this court’s view, Mr Liu has not shown he is able to challenge Kwok Snr’s reliance on Article 15.  If so, it seems to this court that there is no serious question to be tried in relation to the 2^nd Claim either and shall so rule.

49.  Even if this court’s view on the “Serious Question Requirement” is wrong, this court has no doubt that the Applicant cannot satisfy the “Interests of the Company Requirement”. 

50.  In assessing whether it appears to be in the interests of the company that the derivative action be pursued, the court ought to take into account whether any practical benefit is likely to result, even in circumstances where it may be clear that e.g. a director has breached his duties to the company: Hao Xioying v Green Valley Investment Ltd at [11(c)] quoted above.

51.  Mr Liu’s submissions on the “Interests of the Company Requirement” are premised on the claims pleaded in the SOC which, if successful, would result in payment to the Company.  In relation to the 2^nd Claim, the amount claimed is a mere HK$630,000, or HK$525,000 if Kwok Snr’s evidence is eventually accepted.  But as noted earlier in this Judgment and as reflected in the Company’s 2017 audited accounts, the sum of HK$5,656,850 remains due and owing from the Company to Kwok Snr.  If leave is granted to the Applicant to commence statutory derivative action against Kwok Snr for the 2^nd Claim, Kwok Snr would in all probabilities assert a defence of set-off to which there is really no answer by the Company.  Hence, this court cannot see any practical benefit to the Company by granting leave to pursue the 2^nd Claim.  Quite the contrary, the Company stands to face the prospects of an adverse costs Order against it if leave is granted and the proposed statutory derivative action is commenced against Kwok Snr for the 2^nd Claim.

52.  To conclude, this court is not satisfied that the Applicant has met the “Interests of the Company Requirement”.  For this reason also, no leave should be given.

“Unlawful Payment of Rental and Rates” (“3^rd Claim”)

53.  According to the Company’s audited accounts from incorporation to the 2017 financial year, as well as its Annual Return as at 25 August 2018, its registered office is and has always been at Block D, 4/F., Houston Industrial Building, 32-40 Wang Lung Street, Tsuen Wan, New Territories (“Property”).  The land search records show that the registered owner of the Property is and since 2006 has been Omega Company Limited (“Omega”) which, on Kwok Snr’s uncontradicted evidence, is owned by Mr Wan Tak Choi, a personal friend of his.  For a number of years, the Property had been provided to the Company for its use rent-free by virtue of a private arrangement between Kwok Snr and Mr Wan as detailed in Kwok 1. 

54.  The gist of the present complaint is that the 2016 and 2017 audited accounts show the Company had incurred office rental expenses and rates in the sums of HK$543,760 and HK$316,785 respectively for its use of the Property, totalling HK$860,545.  At paragraph 68 of the SOC, it was pleaded that as the Company had ceased to carry on trading business in May 2015 and the Company’s documents were alleged to have been lost, it was not necessary to occupy the Property.  At paragraph 71 of the SOC, it was further pleaded that in making payment for the rental and rates for the Property, Kwok Snr was in breach of his duty to refrain from self-dealing or entering into engagements in which his duties may conflict with his personal interest. At paragraph 71A of the SOC, it was further pleaded that Kwok Snr was not acting bona fide in the best interest of the Company by deciding that it should pay rent to Omega.

55.  In this court’s view, the 3rd Claim is misconceived.   

56.  The fact that the Company has ceased to carry on trading business does not mean it does not require an office.  According to the 2016 and 2017 audited accounts, the Company still had substantial amounts of trade receivables to recover and trade and other payables to pay.  The Company also had to manage a number of legal proceedings, as set out in paragraph 4 above.  As far as the Consolidated Actions commenced in 2015 against the Tse family members are concerned, they are still on-going.  

57.  Unless the Company owned an office, which it did not, it had to lease one if its director Kwok Snr considered office space was required.  In the present case, the Company has been occupying the Property since incorporation.  It is only reasonable for the Company to continue to do so, rent-free only if Omega/Mr Wan were prepared to indefinitely offer it to the Company on that basis, but otherwise rent had to be paid.  In these circumstances, it is difficult to see the basis on which the Applicant can legitimately complain about the expenses for office rental and rates.

58.  As for the allegation of self-dealing and conflict of interest on the part of Kwok Snr, there is a bare assertion in the SOC that Omega and/or Mr Wan have held the Property for the benefit of Kwok Snr since 2006 but no evidence in support.  Apart from that bare assertion, there is also no evidence that Kwok Snr was related to Omega or had derived any profit from the rent payable by the Company to Omega.  The allegation of conflict of interest suffers from the same flaw.

59.  To conclude, the 3^rd Claim is so seriously flawed that, in this court’s view, it has no real substance.  There is therefore no serious question to be tried and it also follows that it is not in the interests of the Company to pursue this claim.  No leave should be given.

“Alleged Loans by Kwok Senior’s Controlled Company to MGML” (“4^th Claim”)

60.  The 4^th Claim relates to an item in the Balance Sheet of the 2017 audited accounts.  Under “Current liabilities”, there was an entry of “Loans from a related company” in the sum of HK$499,500. Under note 7 “Finance costs”, HK$49,500 were recorded as “Interest on other loans”.  According to note 10, “Loans from a related company” were unsecured and had no fixed repayment terms.  Interest was charged at the rate of 36% p.a.. The lender of the loan in question was Sino, one of Kwok Snr’s companies, which had lent HK$1 million to the Company in 2012 and which constituted part of the $7M Loan.

61.  The gist of the present complaint was pleaded at paragraphs 74, 77 and 78 of the SOC as follows:

“74. As MGML had cash deposit of HK$3,954,792 in 2016 and MGML ceased to carry on any business in 2016 and 2017, HK$49,500.00 interest expenses were incurred unnecessarily which was detrimental to MGML’s interest. Kwok Senior’s Controlled Company was unjustly gained.

...

77. In entering into the purported loan agreement for MGML with Kwok Senior’s Controlled Company, Kwok Senior was in breach of the duty of refraining from self-dealing or entering into engagements in which his duties may conflict with his personal interest.

78. In the premises, Kwok Senior shall be liable to pay to MGML a sum of HK$49,500.00 as damages being the MGML’s payment for interest wrongfully caused by Kwok Senior.”

62.  While it is true that the Company had cash of HK$3,954,792 as at 31 March 2016, that was only part of the financial picture.  The 2017 audited accounts showed that the bulk of the cash was used up in that financial year, leaving a balance of HK$79,768 as at 31 March 2017. At paragraph 61 of Kwok 1, Kwok Snr had explained that the HK$3.9 million odd were used to repay loans due to Modern Gala International Limited and to refund a deposit to one Li Pei Fa for an allotment of shares which failed, while the rest was for payment of legal fees and miscellaneous expenses.

63.  As stated above, the Company still had to manage a number of legal proceedings which of course required funding.  Kwok Snr had explained in Kwok 1 why the Company found it difficult to borrow from normal channels e.g. banks or finance companies.  But his explanation apart, all one has to do is look at some of the figures in the 2017 audited accounts in order to understand the Company’s difficulties: it had (i) zero revenue and a mere HK$22 of bank interest income, (ii) legal and professional expenses of HK$946,876, and (iii) net liabilities and accumulated losses of HK$6,501,244.  It would be really surprising if banks and other legitimate financial institutions were willing to lend any sum to the Company.

64.  Mr Brown submits that the 4^th Claim is misconceived.  This court agrees.  The Company was cash-strapped but could not obtain finance from other channels.  Kwok Snr was in fact acting against his own interest when he procured Sino to lend to the Company, taking the risk that the Company might not be able to pay Sino back.  As it turns out, according to Kwok 1, as of now, neither the principal sum of HK$499,500 nor the HK$49,500 have been repaid. 

65.  To conclude, this court is of the view that there is no serious question to be tried and it is not in the interests of the Company to pursue this claim.  No leave should be given.

V.  Disposition and costs order nisi

66.  The Originating Summons is hereby dismissed.  There shall be an order nisi that costs be to the Respondents, to be taxed if not agreed, and paid by the Applicant forthwith, certificate for counsel.