WEI XING v. WILLWIN DEVELOPMENT (ASIA) CO LTD AND ANOTHER

HCMP 1104/2018

[2020] HKCFI 739

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1104 OF 2018

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D E C I S I O N

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1.  This is an application made by the plaintiff, Mr Wei Xing (“P”), under section 733 of the Companies Ordinance (Cap 622) (“Ordinance”) for leave to bring a statutory derivative action in the name of the 1^st defendant, Willwin Development (Asia) Company Limited (“WW”), against the 2^nd defendant, Mr Wei Wen (“D2”).

2.  Rather unusually, although the originating summons was filed on 20 July 2018 (“OS”), it was only until 10 September 2019 that the first directions hearing was held.  In the meantime, the proceedings were stayed pending D2’s application for security for costs, which resulted in a consent order of 10 April 2019 requiring P to pay HK$280,000 into court as security for D2’s costs of the OS.  P made the payment into court on 29 April 2019.

3.  The substantive hearing of the OS was scheduled on 15 April 2020, but was adjourned due to the general adjournment of court proceedings announced by the Judiciary.  By letters dated 3 April 2020, the parties agree that the OS is suitable for determination on paper, thereby waiving their right to an oral hearing. 

A.      BACKGROUND

4.  The following fact is taken from the Judgment of Mimmie Chan J dated 8 March 2016 in HCA 797/2012 (respectively “797 Judgment” and “797 Action”), the judgment of the Shenzhen Intermediate People’s Court dated 5 January 2018 in (2017) 粵03 民初 2540 號 (respectively “Mainland Action” and “Mainland Judgment”) or fact which is not in dispute. 

5.  P is the younger brother of D2.  Madam Hu Ying (“Ying”) is P’s wife and together with P, they controlled and owned Evolution Solution Limited (“ESL”), a Hong Kong company. 

6.  WW is a company incorporated in Hong Kong in 2004.  Its shares have been held by P and D2 as to 30% and 70% respectively.  WW engages in sale and provision of test fixtures, test systems, test equipment and test instruments for electronic and computer hardware products and the supply of related technical services (“Business”) to clients primarily outside of the Mainland^[2].

7.  Shenzhen Willwin Technology Company Limited (深圳市圖創科技有限公司) (“SWT”) was established in the Mainland in March 2007 to take over the operations then carried on by Shenzhen Willwin Industrial Company Limited (深圳市圖創實業羅湖分公司) (“SWI LH”)^[3]. SWT carried on business in Shenzhen.  D2 has 58% beneficial interest in SWT while P has 29% beneficial interest held through his father^[4]. 

8.  Until their relationship turned sour in 2011:

(1)  P, Ying and D2 were involved in the management of WW and SWT and were their officers. 

(2)  SWT carried on a business similar to that of WW, but its clientele was largely based in the Mainland, whereas WW’s clients were primarily outside the Mainland^[5]. In the 797 Action, WW/SWT produced a list which contained 54 entities said to be clients of WW (“List”), including Apple Inc (“Apple”), Cisco Systems Inc, Dell Inc, PICO Denshi (HK) Limited, SMC Pneumatics (Hong Kong) Ltd and Foxconn Assembly LLC.  These 54 entities are referred to as “Annexure A companies” in the 797 Judgment^[6].

(3)  P and D2 had been using WW and SWT (and its predecessor SWT LH) together for the business of providing test systems and equipment or instruments for electronic and computer hardware products, and related technical services.  SWT and its staff in the Mainland did a substantial part of the work under the orders received from clients^[7].

(4)  P and D2 were content with treating WW and SWT as one entity, or as related entities in one group.  They were flexible with clients as to whom they placed their purchase orders, the manner of payment or the currency in which payment was to be made.  They never objected to the treatment of the costs and expenses as reflected in WW’s financial statements, which referred to WW’s payment of sub-contracting charges^[8].

9.  In December 2011, P resigned as deputy general manager of SWT^[9]. In November 2012, P ceased to be director of WW^[10].  Ying was until December 2011 an assistant to the general manager of SWT, and a director of WW from the date of its incorporation until her resignation which took effect on 23 May 2012^[11].

10.  Since 2012, the 2 brothers have been embroiled in over 10 litigations in Hong Kong and in the Mainland. 

11.  The 797 Action was commenced in May 2012.  It was brought in the names of WW and SWT against P, ESL and Ying.  It was (then) P’s case that he did not owe any duties to WW and SWT, particularly after he had ceased to be their director and he denied that WW had any business, clients or confidential information as claimed or that he had transferred, diverted or passed off any Business of WW^[12].

12.  The trial of the 797 Action took place from 3 November 2014 to 4 November 2015 and lasted for over 20 days.

13.  On 8 March 2016, the 797 Judgment was handed down.  Mimmie Chan J found in favour of WW on its claim for breach of fiduciary duties and duties of confidence, dishonest assistance, passing off and accounts^[13].

14.  On 18 July 2016, the Shenzhen Louhu District Court (深圳市羅湖區人民法院) accepted P’s application for compulsory liquidation of SWT.  On 20 December 2016, the same Court appointed a liquidation committee to take charge of SWT.  Despite repeated requests of D2, the liquidation committee did not commence proceedings against P^[14].

15.  On 29 November 2017, D2 (qua equity holder of SWT) commenced the Mainland Action against, inter alios, P and Apple for misusing the confidential information of SWT and diverting the clients and business of SWT to other entities^[15]. It was alleged, inter alia, that (1) by 2011, SWT had provided substantial product testing services to 54 clients, most of which were internationally renowned companies; and (2) P, who had been responsible for production, operations and overall management of SWT, abused his position by misusing confidential information of SWT for the benefit of ESL and another company and diverting the business of SWT to such companies^[16]. 

16.  The Mainland Action was summarily dismissed by the Shenzhen Court on the ground that as an equity holder, D2 did not have the right to bring the proceedings on behalf of SWT which had been under liquidation; and D2 could not complain about the inaction of the liquidation committee as the persons in control of SWT (including D2) had failed to cooperate with the liquidation committee in taking control over the assets and records of SWT^[17].

17.  The account taking exercise in the 797 Action took place before Master J Wong from 18 March 2019 to 29 November 2019.  In his Decision dated 8 April 2020, Master J Wong ordered (1) P, ESL and Ying to pay US$500,749.03, being 83% of the profits for diversion of business; (2) P to pay US$12,678 and RMB3,000 to WW, being the ICS receivables; (3) interest and costs against P, ESL and Ying. 

18.  Against the above background, P seeks leave to bring a statutory derivative action in the name of WW against D2 for compensation or account of profits by reason of his breach of fiduciary duties and duty of confidence owed to WW. 

B.      APPLICABLE PRINCIPLES

19.  The principles governing application under sections 732 – 733 of the Ordinance are well established and have been conveniently summarised in Re Primlaks (HK) Ltd [2016] 2 HKLRD 31 at §§7 – 9 per Ng J and Lam Kin Chung v Soka Gakkai International of Hong Kong Ltd (No 2) [2018] 2 HKLRD 769 at §5 per Harris J.  In short, P has to satisfy the Court that:

(1)  it appears to be in the company’s interests that leave be granted to the member.  In this regard, if a serious issue to be tried is shown, it will normally be in the interest of the company to pursue the proceedings as the fruit of any judgment to be obtained will be paid to the company;

(2)  there is a serious question to be tried, which is a low threshold.  In considering the prospect of the company’s success, the Court will consider the allegations set out in the draft statement of claim.   It is only if the defendant can demonstrate fairly readily that there is a serious flaw in the claim or that the claim has no real substance such that the company cannot be said to have any expectation of success that the Court will find against the plaintiff;;

(3)  the company has not itself brought the proceedings; and

(4)  a written notice has been served on the company in accordance with section 733(3) and the notice complies with section 733(4).   

20.  Further guidance was given by the Court of Appeal in Zhang Heng v Kingstone International Wealth Management Ltd & Ors, CACV 56/2007, unrep., 22 September 2017, where Kwan JA said:

(1)  In considering whether there is a serious issue to be tried, the Court is not obliged to accept whatever evidence the plaintiff chooses to place before it without any critical thinking, and can test the allegations against undisputed facts and contemporaneous documents (at §17).

(2)  The ability of the company to bear the costs of the action is not directly relevant to whether or not it is in the interests of the company to grant leave if the applicant is prepared to bear the costs of the statutory derivative action in the first instance.  For the same reason, it is not necessary to form a view on the financial resources of the company (at §30).

(3)  The threshold for the interest of the company is low.  For this purpose, the Court will consider whether the potential wrongdoers are worth suing, and whether the costs of the litigation would outweigh any potential benefit to be gained (at §31).

C.      DISCUSSION

21.  There is no dispute that WW has not brought the intended claim and the notice requirement under section 733(3) – (4) has been complied with. 

22.  The issues I have to decide are:

(1)  whether the intended claim raises a serious issue to be tried; and

(2)  if yes, whether it is in the interests of WW to pursue such claim. 

C1.    Serious issue to be tried

23.  In contending that there is a serious issue to be tried, P relies on a 7-page draft statement of claim (“draft SOC”) in which it is alleged that:

(1)  in the 797 Judgment, the Court held that the Annexure A companies are the clients of WW (§12);

(2)  in the 起訴狀 filed by D2 in the Mainland Action (“Mainland SOC”), D2 stated that SWT had a clientele of 54 companies.  P claims that these 54 were the Annexure A companies, which D2 had transferred to SWT.  As SWT was under the sole control of D2, WW and P were not aware of this diversion of business until the same was disclosed in the Mainland Action (§§13 – 15);

(3)  D2 breached his fiduciary duties owed to WW.  In the “particulars of breach” pleaded, only general allegations on diversion of the Annexure A companies and “maturing future projects” from WW to SWT have been pleaded (§16); and

(4)  D2 breach his duty of confidence in that “By reason of the specialized, complex and technical nature of the Business, [D2] could not have carried out its business without the wrongful disclosure and/or misusing by [D2] of the confidential information of [WW]”.  Similar speculative plea appears under “particulars of breach” (§19).    

24.  I am not satisfied that P has raised a serious issue to be tried in respect of the intended claim.   

25.  First, the draft SOC is demurrable. 

(1)  In respect of the alleged diversion of business, there is a complete lack of material facts or particulars one would expect to see in a claim of this nature.  The draft SOC does not tell the reader when the alleged diversion of business took place, which of the Annexure A companies were allegedly transferred from WW to SWT, and what particular business was diverted from WW to SWT. 

(2)  As for the alleged breach of duty of confidence, the entire plea is speculative, without any material fact or particulars pleaded.

26.  P claims that he is unable to plead the material facts and particulars of the 2 causes of action owing to his being “completely ousted from the management of [WW]” and being denied access to information on the Company’s business and operation from mid 2011^[18].  I do not accept this assertion, as it is inconsistent with the Court’s findings in the 797 Judgment that P ceased to be deputy general manager of SWT and director of WW in December 2011 and November 2012 respectively.  Moreover, given that the brothers have since 2012 been embroiled in many litigations over the same companies, it is inconceivable that P would not during the process have had access to information and documents about WW and SWT.  In any event, such assertion (even if established) does not provide an excuse for failing to plead the requisite material facts and particulars in support of the intended causes of action.   

27.  Second, the 2 causes of actions are premised on P’s allegations that (1) there was a clear delineation of clients between WW and SWT, (2) SWT could not carry on the same business as that of WW, and (3) SWT misused confidential information of WW for the benefit of SWT.  Such allegations are inconsistent with the Court’s findings, in the 797 Judgment, that (i) the nature of the Business carried on by WW was very similar if not identical to that of SWT, (ii) the brothers had treated WW and SWT as one entity without any distinction between their clients, staff and functions, and (iii) they were flexible with clients as to which entity they placed their purchase orders.  In light of the manner in which the brothers had operated the business of WW and SWT, the mere fact that some of the Annexure A companies have placed orders with SWT would not without more give rise to a breach of fiduciary duties on the part of D2 even if he was in control of both companies at the relevant times. 

28.  Third, as is clear from §§12 – 15 of the draft SOC and the submissions of P’s counsel, the alleged diversion of business was based entirely on what is said to be D2’s own pleadings filed in the 797 Action (“797 SOC”) and the Mainland SOC.  I do not think either pleadings support P’s contention:

(1)  In the 797 SOC, the allegations were made in the context of the business jointly operated by WW and SWT and the duties owed by P to both companies.  More importantly, in respect of the Business and the Annexure A companies, it was WW/SWT’s pleaded case that they were the business and clients of WW or alternatively, the business and clients of SWT^[19]. This is consistent with the Court’s finding that the brothers had dealt with the business and clients of WW and SWT as if they were one entity. 

(2)  As for the List relied on by D2 at the trial of the 797 Action, it did not state that all the Annexure A companies were exclusively clients of WW.  Rather, the companies were described as “direct clients” of WW, end users, suppliers or direct clients of SWT and the same company could fall into more than one categories in the List. 

(3)  In the Mainland SOC, although reference was made to 54 clients, there was no averment to the effect that those clients were the Annexure A companies.  Indeed, all the allegations concerned the period when P (and Ying) was still responsible for the management of WW and SWT. They had nothing to do with the period after P had ceased to be involved in the management.    

29.  Fourth, it is not in dispute that D2’s interest in WW is 70% while his interest in SWT is 58%.  It makes no sense for D2 to divert business from a company in which he has a higher interest (WW) to a company in which he has lower interest (SWT) or to misuse confidential information of WW for the benefit of SWT.  This is particularly so when SWT has since July 2016 been put into liquidation such that it cannot continue to carry on its business.     

30.  Mr Poon Siu Bunn, counsel for WW and D2, submits that the intended claim has no prospect of success given that P, who will be the main witness of the intended claim, has shown himself to be an incredible witness in light of the following undisputed matters:

(1)  P had been held to be in contempt for having acted in breach of an Anton Pillar order and an injunction order granted in the 797 Action, and he refused to purge his contempt (see Willwin Development (Asia) Company Limited v Wei Xing & Ors, HCMP 2946/2014, unrep., 12 October 2015 and 30 May 2016);

(2)  P’s testimony in the 797 Action was rejected by the trial Judge and he was found to be an incredible witness^[20];

(3)  P was found to be an unreliable, incredible and evasive witness during the account taking exercise^[21]; and

(4)  P was found to have diverted business from WW to his companies, and was liable to pay US$514,000 to WW.

31.  I can see the force of the above points, which may cast doubt on whether P is acting in good faith in seeking to pursue the intended claim, but I do not think they are relevant to the question whether P has raised a serious issue to be tried in respect of the 2 causes of action pleaded in the draft SOC.  Such question does not depend on the good faith or credibility of P. 

C2.    Interests of WW   

32.  Even if, contrary to my holding, P has raised a serious issue to be tried in respect of the 2 causes of action pleaded in the draft SOC, I would still refuse to give leave to P to bring the intended claim on the basis that it would not be in the interests of WW for the claim to be pursued.  There are 3 reasons for this. 

33.  There is no indication in the draft SOC on the quantum of the claim.  Mr Poon points out that according to the purchase orders adduced by P, the total purchase prices only amounted to slightly over RMB200,000.  This is not surprising, given that the period during which P had no involvement in WW or SWT’s business could only have been from December 2012 to July 2016 when SWT was put into liquidation.  If one takes into account the expenses incurred in generating such revenue, the profits or compensation which can be claimed against D2 would be much lower.  I do not think it would be in the interests of WW to incur substantial costs in pursuing an action with such level of recovery.   

34.  Moreover, P has not agreed to fund the costs of the intended claim or to indemnify WW for any liability to pay adverse costs if the claim fails.  In this regard, there is undisputed evidence to show that P has since 2014 been impecunious, such that he would not have the means to fund the legal costs of the intended claim. This includes:

(1)  P’s admission in his affirmation filed in the 797 Action that by October 2014, he (and Ying) had already sold all their properties and spent all their savings;

(2)  the US$514,000 he is adjudged liable to pay to WW;

(3)  the taxed and assessed costs payable to WW and D2 in the respective amounts of HK$2,690,000 and HK$1,430,000; and

(4)  the costs of the trial of 797 Action and the account taking exercise, which D2 estimates to be around HK$7,000,000 upon taxation.

35.  It is difficult to see how P can assert that it would be in the interest of WW to pursue the intended claim or that such claim has a prospect of success when he is not prepared to fund the costs of the intended claim in the first instance or to indemnity WW of any liability it may incur in pursuing such claim.   

36.  For the above reasons, I dismiss the OS.  I make a cost order nisi that P shall pay the costs of WW and D2, to be assessed by way of gross sum assessment.  WW and D2 have submitted a statement of costs claiming HK$154,812, which is very reasonable.  Nevertheless, I will give P an opportunity to provide his comments on the statement of costs, if any, within 3 days of this Decision.