JUDITH ANN GREENBERC AND ANOTHER v. RICHARD RUND

1988, No. A6953

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. The 1st plaintiff and the defendant are the only directors and equal shareholders in Core Resource (Hong Kong) Ltd. , the 2nd plaintiff. Following a breakdown in the relationship of the 1st plaintiff and the defendant, a number of injunctions were obtained by the 1st and 2nd plaintiffs against the defendant upon an ex parte application made on the 21st October 1988 that restrained the defendant, inter alia, from assaulting or molesting the 1st plaintiff and the employees of the 2nd plaintiff or interfering with the activities of the business. A further order, restraining the defendant from disposing of his shareholding in the 2nd plaintiff otherwise than in accordance with the Memorandum and Articles of Association was also made. Pursuant to the undertaking given to the Court upon the ex parte application a writ was issued on behalf of the 1st and 2nd plaintiffs on the 22nd October 1988 claiming the injunctions, the subject matter of the order made on the previous day, together with a claim for damages for breach of the defendant's fiduciary duty as a director of the 2nd plaintiff. The claim for damages in breach of fiduciary duty only relates to the 2nd plaintiff for no duty is owed in this respect by an individual shareholder to another shareholder.

2. On the 9th November 1988, I dismissed an application by the defendant to discharge the injunctions made in favour of the 2nd plaintiff. The defendant had submitted that no cause of action had been shown on which the injunctions could have been granted and that the 2nd plaintiff, being a limited company, was not a proper party to the proceedings. However, there was no application before me at that stage to strike out the 2nd plaintiff whilst there is authority for the proposition that an interim injunction may be obtained before an action has been sanctioned by the directors.

3. I now have before me a summons issued on behalf of the defendant to strike out the name of the 2nd plaintiff as a party on the grounds that the action was commenced without its authority. The evidence reveals a c lassie case of deadlock between the 1st plaintiff and the defendant, but it appears that the defendant wishes to extricate himself from the company by selling his shares to the 1st plaintiff in accordance with the provisions of the Articles of Associaton. Mr Stone, Counsel for the defendant submitted that as no resolution had been passed authorising the 1st plaintiff to give instructions to her solicitors to institute proceedings on behalf of the 2nd plaintiff, the 2nd plaintiff cannot be a proper party to the action unless the case comes within one of the exceptions to the rule in Foss v. Harbottle [1843 ]2 Hare 461. In order to justify such proceedings by way of a derivative action it must be established that the company has acted illegally or ultra vires or there has been a fraud on a minority or where acts committed are unfair and oppressive against the minortiy.

4. Mr Thomas, Q.C. , for the plaintiffs replied by submitting that the 2nd plaintiff is a proper party by reason of the fact that the 1st plaintiff acted on behalf of the company as an agent of necessity. There is no doubt that if the evidence of the 1st plaintiff is accepted, she was acting at the relevant time as the managing director whilst the defendant was taking little or no part in the activities of the 2nd plaintiff. His conduct, if the 1st plaintiff's evidence is to be believed, was directed towards bringing about a destruction of the business. In those circumstances Mr Thomas submitted that in her capacity as de facto managing director, the 1st plaintiff as an agent of necessity was not only in a position to give instructions to institute proceedings on behalf of the company to restrain the defendant's conduct, but would have been failing in her duty as a director if she had not done so. In support of his argument, Mr Thomas referred me to the essential conditions applicable to create an agency of necessity which are set out in Goff and Jones on Restitution, 3rd Edn. at pages 334 and 335, which summarised read as follows:-

5. I have no doubt that the 1st plaintiff acted bona fide in the best interests of the company as a matter of urgency and that in the circumstances it was impossible to obtain a resolution to authorise the proceedings in view of the deadlock between her and the defendant. However, having regard to the rule in Foss v. Harbottle, I am satisfied that the correct procedure, if there is a good cause of action for the 1st plaintiff to sue on her own behalf as a minority shareholder, is to join the company as the 2nd defendant. Accordingly, I am unable to accept the submission made by Mr Thomas that the action was properly constituted by joining the company as the 2nd plaintiff. The 2nd plaintiff must, therefore, be struck out.

6. I will hear the parties, upon the other applications referred to in the summons, and costs.