LAU KONG SING v. LAI CHUNG WING AND OTHERS

HCA 98/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 98 OF 2005

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J U DG M E N T

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Introduction

1.  In this matter the 5^th and 6^th Defendants are applying to strike out the action against them, under Order 18 rule 19 of the Rules of the High Court and also under the court’s inherent jurisdiction, because it is said to disclose no reasonable cause of action.

2.  The Plaintiff is a one-third beneficial shareholder in a group of companies being the 7^th to the 15^th Defendants inclusive with the 1^st and 2^nd Defendants who own the remaining two-thirds.  The 3^rd and 4^th Defendants are their sisters who currently reside on the Mainland.  The action is a dispute between the Plaintiff and the 1^st and 2^nd Defendants as the shareholders of the Defendant group of companies.  The 5^th and 6^th Defendants, whose application this is, were the auditor and company secretary respectively of the companies.  The 5^th Defendant being the auditor of the 7^th to the 12^th and the 15^th Defendant, and the 6^th Defendant was secretary of the 8^th to the 11^th and 15^th Defendant.

3.  Although the pleadings are long and detailed I am able to reduce the matter to its essentials without in anyway detracting from the substance of the Plaintiff’s case.  He says that he has been removed as a director of the 7^th to the 15^th Defendants.  He also complains that the shares in the 8^th to the 10^th and the 15^th Defendant, which were registered in his name but held on trust by him for the 7^th Defendant, have been transferred to the 2^nd Defendant.  The motive for all of this was to remove him from the management of the group of companies because he had found out that the 1^st and 2^nd Defendants had been misappropriating the companies’ funds.

4.  This is therefore a dispute between shareholders in which the 5^th and 6^th Defendants say they have no involvement and have no desire to participate in.  Nevertheless, the Plaintiff has pleaded that they are wrongfully complicit in his removal from his directorships and the transfer of his shares, as trustee, to the 2^nd Defendant.

5.  The 5^th and 6^th Defendants contend that whatever they did in terms of the preparation and execution of documents which had the effect of removing the Plaintiff from his directorships and the transfer of his shareholding, as trustee, were done qua auditor and company secretary, and no more, on properly issued instructions from the majority shareholders of the group of companies.  Accordingly, they should not be vexed by proceedings such as these which should only be conducted between the disputing shareholders themselves.

The Pleaded Case against the 5^th and 6^th Defendants

6.  This involves a very serious series of allegations against these two Defendants, as professional men, that they had conspired together with the first two Defendants to injure the Plaintiff in respect of his rights in relation to the group of companies.  This they did by unlawful means or, alternatively by lawful means carried out unlawfully.  Rather than set out the allegations here in full it is sufficient to refer to the paragraphs in the Statement of Claim where they appear, which are paragraphs 5(g), 9, 33(o), (p), (r), (u), (y), 44 and 45 [see Bundle A 14, 16, 37-40 and 45].  The case is said to arise from a number of duties which are cast on these two Defendants by virtue of their respective positions as auditor and secretary which appear in paragraph 29 (the 5^th Defendant) [Bundle A 30-32] and 30 (the 6^th Defendant) [Bundle A 32-34].

7.  The claim against these two Defendants is articulated as a conspiracy between them and the first two Defendants, with their part comprising the giving of advice and the drawing up of a plan to remove the Plaintiff.  This the 5^th and 6^th Defendants put into effect by preparing and issuing the requisite notices of meeting and minutes to remove the Plaintiff.  The so-called “plan” is set out in a fax dated the 4^th December 2004 [Bundle B 165-199] which sets out the procedural steps to be carried out and the various documents which give effect to that procedure.  The documents are self explanatory on their face and require no further elaboration by me here.  This fax was sent, inter alia, to the Plaintiff’s secretary who then passed it on to him.  This openness by these two Defendants, who had been responsible for its preparation, is a matter that they rely on as demonstrating their disinterest in the outcome and as evidence that whatever they did was pursuant to their professional duty and instructions from the majority shareholders, the 1^st and 2^nd Defendants.  The relevant references to the Statement of Claim in this regard are at paragraphs 44 and 45 [Bundle A 45] and in the Further and Better Particulars paragraphs 2, 24(1) (b) and (c), 24(3) and (4) and 85 [Bundle A 82, 94-99 and 127-128].

8.  The allegation that comes from this is that the Defendants either knew or ought to have known that the Plaintiff’s removal as director and shareholder of the companies would prevent him from knowing the true financial position of the business of the companies and also exclude him from their management.  The other allegation which follows from the previous one is that once the Plaintiff knew of the 1^st and 2^nd Defendants plans and the part played by the 5^th and 6^th Defendants, the 5^th and 6^th Defendants refused to comply with his demand to resign from their positions and address his requests which he characterises as a “deliberate delay in order to assist the 1^st and 2^nd Defendants in their completion of company procedures for the removal of the Plaintiff”.  See the Further and Better Particulars paragraph 24(4)(g)-(i) [Bundle A 98-99].

The Argument in Support of the Striking Out

9.  It is convenient to rehearse the submissions of Mr Jat Sew-tong S.C..  He accepts, as he must, that the court will only strike out a claim in plain and obvious cases.  Mr Jat submits that what the case comes to is that because the 5^th and 6^th Defendants prepared the necessary notices, minutes and advised on the procedure they must have acted in concert with the 1^st and 2^nd Defendants.

10.  There are two types of actionable conspiracy one being to use unlawful means and the other being to injure by use of lawful means.  In the latter it must be shown that the predominant intention is one to injure the Plaintiff.  [Clerk & Lindsell (18^th Edition) paras. 24-116 and 24-117].  The Plaintiff’s case is that both types of conspiracy are present here and therefore available to him.

Unlawful Means

11.  These appear from paragraph 26 of the Further and Better Particulars [Bundle A 99-100].  Three matters are, in particular, relied on.  Firstly, the concealment of the alleged misappropriation of the company group’s funds by the first two Defendants.  Mr Jat’s response is to say that this had nothing to do with the 5^th and 6^th Defendants.  Their position is that of a firm of professional advisors, in this case providing accountancy and company secretarial services.  It would be a very serious matter indeed for professional men to be drawn into litigation of this sort because they have provided routine professional services at the request of the majority shareholders of a company.  Such an allegation is one that can only be actionable in this type of matter against the alleged perpetrators, being the 1^st and 2^nd Defendants.  Secondly, there is a plea in Schedule D of the Statement of Claim [Bundle A 62-77] that these two Defendants committed “a series of wrongful acts in removing the Plaintiff as director and shareholder”.  The wrongful act is particularised as preparation of the notice for the EGM to remove the Plaintiff as director of the 7^th Defendant.  This notice is described as “unlawful” and invalid because it failed to comply with the relevant notice provisions under the Companies Ordinance.  Mr Jat submits that the notice was sufficient under section 157B and section 116C.  See Bundle B/23, B/30 and B/47 but, even assuming that the notice was short, that could only be “invalid”, as opposed to being “unlawful”.  A third matter relied on by the Plaintiff is what is said to be a “deliberate delay in refusing to file a defence to the action”.  This Mr Jat submits can never amount to an unlawful act.  The Plaintiff’s assertion is that this was part of a delaying tactic intended to assist the co-conspirators, the 1^st and 2^nd Defendants.

12.  If these be the allegations, Mr Jat submits that they cannot be said to amount to overt acts capable of supporting a conspiracy with anybody, let alone, the 5^th and 6^th Defendants.

Conspiracy to Injure

13.  If the Plaintiff cannot show a case on conspiracy based on the use of unlawful means then he is left with trying to show he has a case of showing that these two Defendants are party to a conspiracy to injure by lawful means.  Motive or intention becomes important.  Mr Jat starts with a pleading point that the Plaintiff has not expressly pleaded that if the means were lawful the predominant intention was to injure the Plaintiff.  Provided there is a case, short of that averment, I would allow the Plaintiff to amend his Statement of Claim to include that allegation and so any shortcoming of this type would not be a decisive one.

14.  The main allegation relied on against the two Defendants is that they refused to resign as auditor and company secretary respectively when called upon to do so by the Plaintiff.  In the Further and Better Particulars para 24(4) (g)-(i) [Bundle A/98] it is asserted that this refusal was a deliberate attempt to delay.  Mr Jat’s response is to say that at best this can only be said to be a highly equivocal allegation.  This delay in resigning can certainly be viewed as an indication by the Defendants that they had done nothing wrong.  Their resignation eventually came in March 2005 in order to avoid being drawn into a dispute between shareholders.

15.  This action, being derivative on behalf of the companies, the Plaintiff is, in the ultimate analysis, required to show that these two Defendants had acted in concert with the 1^st and 2^nd Defendants to remove the Plaintiff from his position as director and shareholder in order to injure the companies.  Mr Jat submits that given their disinterested position as professionals, instructed by the majority shareholders, it is quite untenable to suggest that the Plaintiff has a reasonable cause of action against them.  They should no longer be troubled by proceedings of this sort and the Plaintiff should be restricted to his action against the other Defendants if he is able to make out his case.

The Plaintiff’s response

16.  Mr Mak, for the Plaintiff, reminds me that in addition to the fact that this jurisdiction should only be exercised in plain and obvious cases and, therefore, sparingly, the fact that a case is weak and, as a result, is not likely to succeed is not a ground for striking it out.  The provisions of Order 18 rule 19 are clear in this regard.

17.  The case, as put by Mr Mak, is that by virtue of what they had done the two Defendants had put themselves into a position where there was a conflict of interest between their duty to the company and their instructions from two of the directors and shareholders (the 1^st and 2^nd Defendants), as well as to the Plaintiff the other director and shareholder.  They knew that this was a dispute between the three of them, who were in effect quasi-partners, with the 1^st and 2^nd Defendants guilty of misappropriating as much as $26 million which was then covered up by the removal of the Plaintiff from his position in the companies which prevented him from having access to the company records.  Mr Mak also submits that the nature of the Plaintiff’s action is both derivative, on behalf of the company and, personal because by his removal from his positions he was also deprived of monthly emoluments from the companies.

The Analysis

18.  It is plain for that when faced with the situation where prima facie the 5^th and 6^th Defendants were providing the usual services that auditor/accountants and company secretaries provide, which they will be consulted about and instructed on by a company’s director, the Plaintiff in this case will need to demonstrate the existence of a particular feature in the case that shows the Defendants to have knowledge of the ulterior mischievous purpose of their instructions and, that in performing the tasks that they were assigned, they did so with a view to advancing that purpose.  It is this which would take them outside the normal instruction of professional men to do work on behalf of a company on instructions from a body of its directors, even if they be at loggerheads with some of the other directors.  Such disputes would be resolved internally by the company or group of companies in General Meeting.  Ultimately it is the majority that will prevail subject to any recourse that the minority may have in the Companies Court.

19.  Mr Mak submits that this is a case where the 5^th and 6^th Defendants did have knowledge of the unlawful behaviour of the 1^st and 2^nd Defendants and knowing what they did they nevertheless performed their professional work which facilitated the 1^st and 2^nd Defendants’ objectives.  This knowledge, he submits, comes from the fact that one Andrew Wong, a professional partner of the 5^th and 6^th Defendants, who was friendly with the 1^st and 2^nd Defendants had arranged for them to be instructed in this matter.  As such Andrew Wong would have been aware of the internal dispute between the Plaintiff and the first two Defendants and that, through Wong, the 5^th and 6^th Defendants would also have come by this information.  They, as did Wong, knew of the Plaintiff’s one third interest and that what they were instructed to do was to bring about his removal from access to the company records and therefore deprive him of knowledge or at least continuing knowledge of the groups management.

20.  Give this state of affairs, a conflict of interest would have arisen between their duty to the company and their instructions on behalf of one side of the dispute (the 1^st and 2^nd Defendants).  Their position became completely untenable.  They should have withdrawn but on the contrary they proceeded to carry out their instructions, a description of which I have already given, by drawing up the requisite documents which terminated the Plaintiff’s position in the companies.

Conclusion

21.  In my judgment an examination of the Statement of Claim and its Further and Better Particulars, does not support the case which Mr Mak seeks to establish.  The action against these two Defendants is doomed to failure and should therefore be struck out as disclosing no reasonable cause of action.  The reality of the pleaded case does no more in establish a case of professional man performing professional tasks of the sort that is commonplace amongst auditor/accountants and company secretaries.  The Plaintiff has gone a defendant too far, if I can express it in that way, in seeking to bring into this action two disinterested professional man as parties to a conspiracy allegedly involving the Plaintiff’s fellow directors and shareholders.  Mr Jat’s analysis is in my view unanswerable and these two Defendants should no longer be at risk in the action.  The claim against them will accordingly be struck out with costs.  In ruling in this way I am also satisfied that the fact these two Defendants did not resign until after the bringing of the proceedings against them should not leave them exposed to a claim for costs.  It was perfectly reasonable for them to defer resignation until the moment of their actual resignation, which was after service of the writ.  They had always retained the confidence of the majority shareholders and if any issue arises as to this it seems to me that this is a matter between the Plaintiff and the remaining individual Defendants particularly the 1^st and 2^nd Defendants.  Having resigned the 5^th and 6^th Defendants are no longer involved and should never have been joined in the first place.