GREAT GENIUS INDUSTRIAL LTD v. LG CORPORATION LTD AND OTHERS

HCMP 203/2020

[2020] HKCFI 2890

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 203 OF 2020

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J U D G M E N T

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1.  By Originating Summons dated 9 March 2020, the plaintiff applies for leave under section 732(1) and (2) of the Companies Ordinance[1] to commence, on behalf of the 1^st defendant (“the Company”), an action in the Court of First Instance against the 2^nd to the 4^th defendants (respectively “De Groot”, “Wong” and “Lexington”, and collectively “the defendants” by which term I do not include the Company).

2.  The Originating Summons originally named the Company as the only defendant.  By leave granted by Linda Chan J on 6 April 2020, De Groot, Wong and Lexington were added as defendants.

3.  According to a draft Statement of Claim which sets out the proposed causes of action on which the plaintiff seeks leave to pursue on behalf of the Company against the defendants:

(1)  The plaintiff was at all material times and is controlled by Fung Kin Ip Johnny (“Fung”) and his wife, Chan Wai Yi (“Chan”).

(2)  Lexington was at all material times and is controlled by De Groot and his wife, Wong, through a company called Lexington Marketing Limited.

(3)  The plaintiff and Lexington each holds 50% of the shares in the Company.  The two couples were and are the directors of the Company.

(4)  The Company is the registered proprietor of a Hong Kong Short-term Patent No 1253655 (“the HK Patent”) for an invention being “A Resealable Drinking Straw” (“the Straw”) as well as the applicant for patents for the same invention in the United States (“the US”), China, the United Kingdom (“the UK”) and Taiwan, and for utility model protection in Japan.

(5)  Fung was the sole inventor of the Straw.

(6)  In essence, it was agreed that the plaintiff would continue to produce the Straw and other products (together, “the Products”), while Lexington would market them.  The plaintiff would sell the Products to the Company at cost and the Company would sell them with at least a 15% marked-up. The profits so earned by the Company would be shared by the plaintiff and Lexington equally as shareholders.  This is called the agreed modus operandi (or, in the affirmation of Fung, “the Arrangement”), and was recorded in an email of 12 January 2019 (“the Email”). Subsequently, a further commission fee of 3% (on the selling price to customers), subject to various conditions, for Lexington was also agreed.  (I would remark here the pleaded modus operandi is not very clear but it would appear that the plaintiff’s case is that any orders obtained by Lexington through its marketing efforts were to be referred to, and taken by, the Company and not by Lexington itself.)

(7)  The implied obligations of the defendants under the agreed modus operandi included rendering to the Company a true and full account of all of the sales of the Straws achieved, paying over to the Company the gross sale price achieved on the sale of each Straw, and not to exploit “the Patent”[2], otherwise than authorised by the Company.

(8)  The complaints of the plaintiff against the defendants are under three heads:

(a)  Lexington had been selling Straws to customers (including but not limited to customers in Japan and the US, one of which was called Hip Products LLC (“Hip”) with which the Company had entered into a distribution agreement) without reference to the Company.  De Groot and Wong had breached their fiduciary duties owed to the Company as directors. It is also alleged that Lexington dishonestly assisted De Groot and Wong in their breaches of fiduciary duties and knowingly received the profits from the sale of Straws derived from such breaches.

(b)  Infringement of the HK Patent: the plaintiff refers to sales of the Straws under invoice no 19021, and to Hip under Lexington quotation number Q190628-03.  The plaintiff also refers to the “making, stocking and putting on the market of Straws, made in accordance with the invention described in the Patent” by the defendants by themselves or by procuring third parties to do so, and the “continued manufacture, keeping and sale of such Straws in the ordinary course of the Defendant’s business” but without particulars.  This is a claim against all three defendants, although similar allegations of dishonest assistance and knowing receipt by Lexington of the acts of infringement of De Groot and Wong are also pleaded.

(c)  Breach of confidence: the plaintiff refers to a “3D technical drawing” (“the Drawing”) of the Straw which was “required” for its manufacturing.  The Drawing was communicated to the defendants for limited purposes and they had a duty to keep it confidential.  It is alleged that the defendants unlawfully disclosed the Drawing to third parties to set up a production line for the Straws at another factory.  This is also a claim against all three defendants, although similar allegations of dishonest assistance and knowing receipt by Lexington of the acts of De Groot and Wong are also pleaded. 

4.  The defendants’ case is set out by De Groot in his second and third affirmations:

(1)  The Company was a simple joint venture to develop and sell silicone products, with no formal written joint venture or shareholders agreement between the parties.

(2)  The only agreement between the parties, apart from the corporate structure of the Company, was that for the sale of any product developed by the Company, it would receive a sum equivalent to a 15% mark-up of the production cost.  The Company would not have its own staff. Lexington would handle the daily operations of the Company, and would receive a commission equivalent to 3% of the sale price of the products of the Company that were sold to customers introduced by it.  If a sale by the Company was introduced by the plaintiff, the latter would also receive a 3% commission.

(3)  It is denied that there was the agreed modus operandi as alleged, or that the Email (which was not copied to him or Wong and the last email in the chain was said to be subject to further review by the shareholders) represents any binding agreement between the parties.  There was no supply or distribution agreement between the plaintiff and Lexington on products developed by the Company, nor was there any agreement that the plaintiff was to be the exclusive manufacturer of any such products.

(4)  There had been direct orders between the plaintiff and Lexington without the involvement of the Company.

(5)  The Straw was developed from the joint efforts of the plaintiff and Lexington, with the relevant tooling costs reimbursed by the Company, but it would be difficult to patent.

(6)  For sales of the Straws by Lexington not sourced through the Company, it did pay a 15% mark-up.  The plaintiff, however, did not pay the 15% mark-up for the products that it sold.

(7)  The HIP quotation did not materialise into a sale.  On the other hand, Fung did try to contract with HIP directly for the sale of the Straws.

5.  In reply, Fung essentially denies the aforesaid allegations of De Groot.

6.  Since the Company is equally split between the two camps at board and shareholders levels, it is obvious that no resolution could be passed for the Company to pursue any alleged causes of action it may have against any of the defendants.  Hence this application by the plaintiff.

7.  Section 733 provides as follows:

“ (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)  an application for leave to intervene in proceedings under section 732(3), the company has not diligently continued, discontinued or defended the proceedings; 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).

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

(a)  in the case of an application for leave to bring proceedings under section 732(1) or (2), the member has, in the exercise of any common law right, brought proceedings on behalf of the company in respect of the same cause or matter; or

(b)  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.

(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 at, 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),