MYERS MANAGEMENT CONSULTING LTD v. TOPMIX (INTERNATIONAL) CO LTD

DCCJ 3051/2014
DCCJ 3052/2014
DCCJ 3053/2014
DCCJ 3054/2014
(Heard Together)

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3051 OF 2014

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IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3052 OF 2014

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IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3053 OF 2014

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IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3054 OF 2014

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REASONS FOR DECISION

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Introduction

1.  These are four identical applications each in DCCJ 3051 to 3054 of 2014 (“the DCCJ Actions”) whereby Wong Luen Hang and Tsui Kwok So (“the Interveners”) apply to be added as interveners for the purpose of defending on behalf of the Defendants therein and for the default judgments entered against the Defendants to be set aside.  Myers Management Consulting Ltd (“the Plaintiff”) objects to these applications on the grounds that the Interveners do not have the proper and necessary locus to be joined and that the Interveners have not shown the necessary grounds to justify the setting aside of the default judgments.  The Defendants, under the control of shareholders/directors other than the Interveners, have not taken part in the applications, despite having been given notice of the applications.

Background facts

2.  Topmix (International) Company Limited (“TICL) and Topmix Industrial Limited (“TIL) (collectively “the Defendants”) were engaged in the business of production and sale of carbon fibre automobile body parts.  The Interveners held 50% of the shares in each of the Defendants.  The remaining 50% were held by Chan Yuk Lung and Chan Yuk Wai, who are brothers (“the Chan brothers”).  The Interveners are father-in-law and son.  Prior to 25 March 2006, the Chan brothers and Tsui Kwok So (“Tsui”) were the directors of the Defendants.

3.  As a result of disputes between Tsui and the Chan brothers, the Chan brothers removed Tsui from the board of directors of both Defendants on 25 March 2006.  Since then, the Chan brothers have assumed complete control of both Defendants.

4.  Since 2007, there has been on-going litigation in the form of common law derivative actions between the Interveners and the Chan brothers concerning the Defendants

5.  In mid-January 2015, the Interveners discovered that the Plaintiff was petitioning for the winding up of the Defendants on the basis of outstanding judgment debts that were allegedly owed by the Defendants to the Plaintiff as a result of default judgments obtained in November 2014 in the DCCJ Actions.

6.  The Interveners allege that the Chan brothers have been secretly engineering a scheme to bring about the demise of the Defendants by wrongfully stripping the Defendants of their assets and business; and causing the Plaintiff to obtain default judgments against the Defendants and petition to wind them up on the basis of some sham transactions.

7.  Accordingly, the Interveners now seek to intervene in the DCCJ Actions, apply to set aside the default judgments and be granted leave to defend the DCCJ Actions against the Plaintiff on behalf of the Defendants.

The Plaintiff’s claim

8.  The Plaintiff is a BVI company incorporated in 2011.  It alleged that it entered into agreements with the Defendants to provide consultancy services through its sub-contractors, commencing on 1 January 2012 for a period of two years for a total contract sum of HK$7.2 million.  Personnel were deployed to the offices, shops and factory of the Defendants in Hong Kong and China and it claimed to have expended great effort and time in doing so.

9.  It was claimed that the Defendants started to delay in making payment of service fees commencing from early 2013.  Between late 2013 and July 2014, the Plaintiff issued several demand letters to the Defendants to request payment of the sums due.  Legal proceedings were commenced against the Defendants on 8 August 2014 to recover the overdue sums and default judgment was obtained by the Plaintiff on 10 November 2014 pursuant to Order 13 of the Rules of District Court (RDC) as a result of the Defendants’ failure to give any notice of intention to defend. When the debt continued to remain unpaid, the Plaintiff presented a winding up petition against the Defendants in the High Court on 2 January 2015.

The Common Law and Statutory Derivative Action Regimes in Hong Kong

10.  The most special feature in this case is that the Interveners are applying to intervene under common law instead of section 732(3) of the Companies Ordinance (Cap 622)(“the CO”).  Whilst there are express provisions allowing the Interveners to do so under the Companies Ordinance, the Interveners chose to make their applications to intervene under common law.  The requirements and procedures for minority shareholders to bring, as well as to intervene in, actions on behalf of the company have been clearly laid down in statute (sections 731 to 738 of the CO).  In contrast, the position under common law is much less clear, and that was exactly why the statutory derivative action regime was introduced (see paragraph 105, Report of the Bills Committee on Companies (Amendment) Bill 2003 dated 18 June 2004 (“the Legco Brief”)).

11.  In Hong Kong, unlike most other jurisdictions, even after the introduction of the statutory derivative action regime in 2006, the common law regime still remains in place. Section 732(6) of the CO (and its predecessor section 168BC(4) of the old Companies Ordinance (Cap 32)) provides that:-

“Subject to section 736, this Division does not affect any common law right of a member of a company, or a member of an associated company of a company, to bring proceedings on behalf of the company, or intervene in any proceedings to which the company is a party.”

12.  Mr. Justice Ribeiro PJ gave a helpful description of the procedural aspects of the common law derivative action regime in Hong Kong in paragraphs 13 to 14 of Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370:-

“13. The derivative action is a procedural device invented by the courts to afford protection to the minority. Procedurally, there is no requirement at common law for a person seeking to sue derivatively first to obtain the leave of the court. But it does not follow from this that there is no threshold requirement to be met by the plaintiff. Substantively, such an action is only permitted where it can prima facie be shown that there exists a viable cause of action or equitable claim vested in the company which, if made good, would establish a fraud on the minority; as well as control of the company by the alleged wrongdoers such as to enable them to stifle any proposed action against themselves.

14. The time-honoured practice at common law is for the plaintiff to issue proceedings “on behalf of himself and the other shareholders other than the defendants”, naming the company on whose behalf the proceedings are brought as one of the defendants. A challenge to the plaintiff’s locus generally takes the form of an application by the relevant defendants to strike out the claim or to have the court determine as a preliminary issue that the plaintiff has no locus to sue on the company’s behalf. The issue of standing can also arise in other procedural contexts, such as an application to add a party or to amend a pleading so as to introduce a derivative action. It is in such a context that the court has to consider whether the self-appointed derivative plaintiff should be permitted to proceed with the action by way of exception to the proper plaintiff rule.”

13.  Upon introducing the statutory derivative regime, most jurisdictions completely abolished the common law regime (see, for examples, section 260(2) of the UK Companies Act 2006 and section 236(3) of the Australia Corporations Act 2001).

14.  The rationale of the Administration for preserving the common law regime was stated in the Legco Brief at paragraph 127:-

“According to the Administration, Hong Kong is unique in the sense that there are a large number of companies incorporated outside Hong Kong but controlled by Hong Kong residents. The proposed SDA will apply to Hong Kong incorporated companies and non-Hong Kong companies. For companies incorporated outside Hong Kong, the law of the place of incorporation governs the right of a shareholder to bring a CDA. There may be different rules of internal management in the law of the place of incorporation compared with those applying to Hong Kong incorporated companies. To abolish the common law right in respect of non-Hong Kong companies might deprive shareholders of those companies of rights otherwise available to them. Hence, it is considered more desirable not to abolish the CDA, thereby giving shareholders one more option to commence an action on behalf of companies.”

15.  In Waddington v Chan Chun Hoo, supra, Lord Milett NPJ commented that such reasoning seems to be faulty (paragraph 55) and Mr Justice Ribeiro PJ also proposed to abolish the common law derivative action regime.  He said (at para 32):-

“The co-existence of both the statutory and common law regimes is unusual in an international context and is a source of confusion and complication. It would appear to be appropriate for the statutory regime to replace the common law derivative action altogether. This question deserves to be addressed by the Administration and the Legislature as soon as possible.”

16.  Despite such comments from the highest judicial authorities in Hong Kong, the Administration has continued to preserve the common law regime in the new CO, which came into effect last year (see section 732(6) referred to above).

The lack of precedents on the common law right to intervene

17.  The Interveners clearly have express right to apply to intervene and defend on behalf of the Defendants under section 732(3) of the CO.  And there are numerous reported cases in which minority shareholders brought proceedings on behalf of the company at common law.  However, there does not appear to be any precedent whereby a minority shareholder was allowed to intervene to defend an action on behalf of the company at common law, which is what the Interveners are asking me to allow them to do.

18.  I am rather hesitant to do so without precedent.  After the adjourned hearing on 10June 2015, I asked counsel on both sides to search for such precedent.  After two weeks of diligence counsel came back and informed me that not one such precedent was found in the whole common law world.  The only case that counsel could refer me to in which a minority shareholder was allowed to intervene to defend, Re Lucky Money Limited HCMP No 505 of 2006 (unreported, 18 July 2006), is a case under section 168BC of the old Companies Ordinance, ie, a case within the statutory scheme.

Arguments against the right to intervene under common law

19.  Ms Ho for the Plaintiff argues that as there is already an express statutory framework available to an aggrieved shareholder who seeks to apply for leave to intervene on behalf of the company under section 732(3) of the CO, this should be the only method that grants a member the right to intervene on behalf of a company.  The absence of any case authority allowing intervention under common law seems to support her argument.  Moreover, given the availability of this provision, the inherent jurisdiction of the District Court, as provided in section 48 of the District Court Ordinance (Cap 336), cannot be invoked to confer the same right since it should only be sparingly used, such as where there is a procedural lacuna: Lin Ming v Chen Shu Quan [2013] 2 HKLRD 288.

20.  It is also noteworthy that not only is Hong Kong unique in preserving the common law derivative action, unlike the provisions in UK, Hong Kong is also special in that in the statutory provisions, the right to intervene to defend on behalf of the company is expressly provided for.  Such right is not mentioned in the UK Companies Act 2006.

21.  This may potentially be an argument in favour of the Plaintiff as it seems that the UK legislature had not deemed it necessary to legislate for the statutory right to intervene to defend, thus implying that there was no such common law right.

22.  Secondly, Ms Ho argues that leave should not be granted because the Interveners do not fall within the scope of O 15 r 6(2)(b) of the RDC, which deals with the court’s power to join parties to proceedings.

23.  O 15 r 6(2)(b) provides that:-

“(2) Subject to the provision of this rule, at any stage of the proceedings in any cause or matter the Court may on such application –

(b) order any of the following persons to be added as a party, namely –

(i) any person who ought to have been joined as a party or whose presence before the Court is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon, or

(ii)     any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter.”

24.  Ms Ho argues that neither limb is applicable because the Interveners are mere shareholders and not the parties to the agreements.  Their interest is a mere commercial interest, rather than a direct one, in the outcome of the proceedings.  Such interest is reflective in nature, which does not confer rights on the shareholders of a company against a third party.

25.  Upon the above analysis, she concludes that there is no legal basis to support the Interveners’ application to be granted leave to intervene.

26.  Impressive as those arguments are, I cannot agree with the conclusion.  While the analysis of O 15 r 6(2)(b) may be correct, I do not think that this particular rule is directly relevant or even necessary in this application. As regards the existence of the common law to intervene for minority shareholders, it seems the answer is to be found from the wordings of the CO itself.

Is there a common law right to intervene and how is it exercised?

27.  On a careful reading of the relevant provisions in the CO, I am compelled to the conclusion that the common law right to intervene to defend does exist or is deemed to have existed.

28.  Section 732(6) of the CO expressly mentions the common law right to intervene in proceedings (in addition to bringing proceedings):-

“Subject to section 736, this Division does not affect any common law right of a member of a company, or a member of an associated company of a company, to bring proceedings on behalf of the company, or intervene in any proceedings to which the company is a party.”

Also, section 733(2)(b) states that:-

“(2) The Court may refuse to grant leave if it is satisfied that –

(a) in the case of an application for leave to intervene in proceedings under section 732(3), the member has, in the exercise of any common law right, intervened in the proceedings in question to which the company is a party.”

And section 736(1)(b) states that:-

“(1) This section applies if –

(b) After the Court grants leave to a member of a company, or of an associated company of a copy, for the purposes of section 732(3), the member, in the exercise of any common law right, intervenes in the proceedings in question to which the company is a party.”

29.  Hence, although I could not find any discussion on the common law right to intervene in the consultation papers or Legco Brief when the statutory derivative action regime was introduced, it is apparent from these provisions that the drafters of the bill and the legislature acknowledged that there did exist in the common law the right to intervene and defend on behalf of a company which right was supposed to be replaced or supplemented by section 732(3) and other related provisions of the Companies Ordinance (or its predecessor).  Accordingly, I could not deny the Interveners such right.

30.  Same as the right to bring derivative claim at common law, the Interveners do not actually need to seek leave from me to intervene.  As explained in Tan Eng Guan v Southland Company Ltd [1996] 2 HKC 100 (per Godfrey JA, para 6) and Waddington v Chan Chun Hoo, supra, when a common law derivative claim was brought by a minority shareholder, it is up to the company, the majority shareholder or the defendant to such a claim to apply to court to challenge the locus standi of the minority shareholder.  In this case, the summons and all related documents have been served on the Defendants.  In fact, I was told that the Chan brothers were present in court at the hearing.  But they chose not to participate in this application and make any submissions to me.  Hence there was no challenge to the Interveners’ locus from the Defendants or their directors/shareholders and there is no ground for me to deny the Interveners’ common law right to intervene.

31.  I should perhaps add that although the Legco Brief stated that the preservation of common law derivative action was to cater for overseas companies, the final enacted provisions do not make any distinction in this regard between Hong Kong and overseas companies.  Hence, I could not deny minority shareholders of Hong Kong companies of their common law right the existence of which the statue has apparently acknowledged.

Was it necessary to engage the common law regime?

32.  The above discussion would not have been necessary if the Interveners have chosen to apply for intervention under section 733 of the Companies Ordinance (though the application would have to be made in the High Court because of the definition of “Court” in the CO).  Mr Tang for the Interveners maintains that as a matter of law the Interveners do not need to justify their choice (between common law and statute) and in any event because of the urgency of the matter, it was thought that the common law route (even though entailing a higher hurdle and less clear procedures) would serve the Interveners’ interests better.

33.  Whilst I have to agree with Mr Tang that as a matter of law he did not need to justify his choice, I have considerable reservation about the procedural need to engage the common law derivative action regime because of the urgency of the matter.  In one of the early cases in which the statutory derivative action regime was engaged in Hong Kong, an application for leave to commence derivative action was made ex parte at the same time as an application for Mareva injunction.  The court was expressly asked to dispense with the normal notice requirement under the predecessor of section 733(5) (see Illustrious Assets Ltd v Lu Chung Chun and others [2008] 3 HKLRD 432, Lu Sen Moon Hwa v Lu Chung Chun [2010] 3 HKLRD 651.)  The statutory regime, when engaged properly, did not seem to have created any problems in urgent cases.

Setting aside the default judgments

34.  Since it has been established that the Interveners are entitled to intervene on behalf of the Defendants, the next question is whether the default judgments should be set aside.

35.  O 13 r 9 of the RDC gives the court power to set aside or vary any judgment entered in default of notice of intention to defend on such terms as it thinks fit.

36.  In order to set aside a regular default judgment, the applicant must satisfy the court that he has a real prospect of success, rather than merely an arguable defence.  This has been well established in a line of cases following Alpine Bulk Transport Co Inc v Saudi Eagle [1986] 2 Lloyd’s Rep 221and was summarized in Premier Fashion Wears Ltd & Anor v Chow Cheuk Man & Anor [1994] 1 HKLRD 377 at paragraph 45:-

“This I believe, shows that for the purposes of O 13 r 9 it is generally not sufficient for a defendant merely to show an arguable defence, although that alone would justify leave to defend being given under O 14. A defendant who seeks to set aside a regular judgment must at least show that his case has a real prospect of success. To do so he must satisfy the court that his case, and the evidence he has adduced in support of it, carries some degree of conviction. It seems to me that unless potentially credible affidavit evidence from the defendant has demonstrated a real likelihood that he will succeed on fact, he cannot have shown that he has a real prospect of success.”

37.  Mr. Tang argues that the case before me is not the normal type of default whereby the defendant or its legal representative overlooked some procedural deadlines or committed other technical errors. Hence, the Apline test may not be strictly applicable. Yet, he maintains that even if the Apline test is to be applied, his case could still easily pass the hurdle. As will be seen from my conclusion, I do not find it necessary to distinguish the default in this case from the “normal” ones to which Apline applies.

Suspicious circumstances surrounding the plaintiff’s claims

38.  As stated above in paragraph 8, the Plaintiff is a BVI company incorporated in 2011 to provide business consultancy services to the Defendants.  Pursuant to an alleged written agreement dated 1 December 2011, the Plaintiff agreed to provide business and management consultancy services to the Defendants respectively for a period of 2 years from 1 January 2012 to 30 December 2013 for a total sum of $7.2 million.

39.  The Plaintiff further alleged that both Defendants had entered into an accounting service contract with them, whereby the Plaintiff agreed to provide management accounting services to each company for 1 year from 1 April 2013 to 31 March 2014 for a total sum of $360,000.

40.  In the evidence and submissions of the Interveners, numerous suspicious circumstances surrounding the entering into of the consultancy and accounting services agreements and the obtaining of default judgments have been raised.  It suffices for me to set out some of the more salient ones.

41.  The owner/controller of the Plaintiff, Ng Chun Kai (“NCK”), is a childhood friend of the Chan brothers.  He admitted in his affirmation that he has known the Chan brothers for many years.  The Plaintiff was a BVI company that was incorporated a few days prior to the entering into of the consultancy agreements.  Neither the Plaintiff nor NCK had any track record of providing business consultancy services. NCK had no tertiary education or other professional qualifications.  Investigators engaged by the Interveners found that actually NCK worked as a construction site worker or contractor, working day-in day-out at construction sites. 

42.  NCK alleged that in fact he wholly sub-contracted the consultancy work to one Lam Kwok Kin (“LKK”).  LKK was found by investigators to be not having a full time job and his main day-time activity was to drive his wife to the Shatin Jockey Club to attend work there.

43.  The Interveners, having been involved in the Defendants’ business in the past, found it unbelievable that such business justified a $7.2 million consultancy service contract.  The two companies made a combined profit of around HK$4 million only in 2011, and had been losing substantial money since then. In any event, if such consultancy services were really justified, the Defendants should have carefully selected and engaged well known consultancy companies with good track records, rather than NCK and/or LKK. For a contract sum of $7.2 million, the Defendants should have many choices.

44.  Faced with such serious allegations, the Plaintiff retorts by applying to file a 2^nd Affirmation of NCK on the first day of the hearing.  In it, NCK said “I believe that the content of the Investigation Report … and the conclusions drawn by Mr. Tsui … are completely oppressive, not probative, not material and completely irrelevant to the issues in the present Application….”  He did not go on to say that the findings of the Investigation Report were untrue.  He also said he “[do] not have knowledge of the content of the other investigative reports” on the people and companies to whom he had sub-contracted his substantial consultancy contracts.

45.  In his affirmation, NCK did not produce any evidence of the expertise possessed by him or LKK apart from an Apprenticeship Certificate in Vehicle Panel Beater issued in 1980 by the Commissioner for Labour to LKK.  Nor did he produce any records of work done under the consultancy agreements for the Defendants.

46.  As mentioned above, the Chan brothers, whilst fully aware of this application, also chose not to say anything about the Interveners’ allegations even though they are serious attacks on their integrity.  Although it may appear strange for them to support the Plaintiff’s case, they had in fact done so by allowing the default judgment to be entered against the Defendants. And it would not be unreasonable to expect them to defend their own integirty and explain the justifications for their decisions to engage the Plaintiff and the need to procure such consultancy services for the Defendants.

Conclusion and costs

47.  In the circumstances, whilst I do not need to form any definite view on the disputes between the Interveners, the Chan brothers and the Plaintiff, I am of the view that the Interveners have passed the threshold for me to exercise my discretion under Order 13 rule 9 of the RDC to set aside the default judgments against the Defendants.

48.  In case my decision to set aside the default judgments would cause any prejudice to the Plaintiff, I order that costs of this application be in the costs of the DCCJ Actions, with certificate for counsel, so that if the Plaintiff would eventually succeed in its case against the Defendants, it would recover the costs of this application from the Defendants or the Interveners.