THE BANK OF EAST ASIA (NOMINEES) LTD v. CHAN HELEN YUK CHING AND OTHERS

HCCW 291/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 291 OF 2011

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D E C I S I O N

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Introduction

1. I have before me an application issued by the Respondents to strike out paragraphs (1), (2), (3) and (4) of the prayer to the Petition filed herein on 6 September 2011 and paragraphs (1), (2), (3), (4), (5) and (6) of the prayer of the Points of Claim filed on 20 January 2013.  The Petitioner has also issued a summons for an order that a valuer be appointed to value the 7^th Respondent.  I deal first with the Respondents’ summons.

2. The paragraphs in the prayers under attack concern the accounting treatment and payment of two alleged dividends and a loan.  Paragraph (1) of the prayer seeks a declaration that a special dividend declared in November 2004 of $10,920 a share was lawful and valid and that the subsequent recording of the payments made, according to the Petitioner, as dividends as an “advance to shareholders” was wrong and the Company’s accounts should be corrected to accurately reflect the position.

3. Paragraph (2) seeks a declaration that a purported payment of an interim dividend in 2006 was unlawful as it was paid out of capital.  Paragraph (3) seeks in the alternative to paragraph (2) an order that if the interim dividend was lawful it is paid to the Petitioner.

4. Paragraph (4) concerns the treatment of a loan made in 1981 by Madam Tam to the Company, which she subsequently transferred to her children and grandchildren.  In 1984 $16,500,000 of the loan was written off and then subsequently reinstated, alleges the Petitioner, and as a consequence it contends it is entitled to be paid a proportion of that loan, namely, $4,402,200.  The Points of Claim add prayers seeking interest on the sums claimed and rectification of the books and accounts of the 7^th Respondent, Plankton Limited (“Company”).

5. The objection taken by the Respondents is that the prayers contravene the rule which prohibits a petitioner in a petition under section 168A of the Companies Ordinance recovering what is commonly called “reflective loss”, which is loss which has been caused to a company and in respect of which it can claim.

6. At the hearing before me the Respondents were represented by Ms. Rachel Lam and the Petitioner was represented by Mr. Charles Manzoni SC and Mr. Wilson Chan.

7. The background to the Petition is not of itself important and it is sufficient to summarise it.  The Company was formed in 1981 by the Tam family matriarch, Tam Lam.  It was formed with the intention of developing a property in Wanchai.  Later in 1981 Madam Tam caused some of her shares and newly allotted shares to be transferred to her children and grandchildren including Harold and his two children.  Harold died in 2005 and his shares and those of his children are held on trust.  The Petitioner is the trustee.  It takes instructions from Harold’s Wife and his children. 

8. As matters transpired the property was sold in November 2004 rather than developed.  The underlying dispute relates to how the proceeds of sale have been dealt with over the following six years.  The Respondents dispute each of the factual allegations underlying the claims in the prayers to which objection is taken.  It is not disputed by the Respondents that the matters complained of can be relied on as part of the alleged unfairly prejudicial conduct, which the Petitioner contends entitle it to relief under section 168A.  The Respondents argue, however, that the Petitioner cannot seek relief to remedy the individual complaints because they, if anything, are wrongs done to the Company and if the Petitioner wished to remedy them it should be done by a derivative action.

The Principles

9. Section 168A(2C) provides as follows:

“For the avoidance of doubt, the damages that may be ordered by the court under subsections (2)(b) and (2B) does not entitle a member, past member or then member of a specified corporation to recover by way of damages any loss that is solely reflective of the loss suffered by the specified corporation which only the specified corporation is entitled to recover under the common law.”

10. This principle has been authoritatively explained in a number of authorities:

“[a shareholder] cannot do is to recover damages merely because the company in which he is interested has suffered damages. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a ‘loss’ is merely a reflection of the loss suffered by the company.” [1]

“… where a company suffers loss caused by the breach of a duty owed both to the company and to the shareholder: … If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. …” [2]

“On the one hand the court must respect the principle of company autonomy, ensure that the company’s creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation. The problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether (to use the language of Prudential Assurance Co. Ltd v. Newman Industries Ltd (No 2) [1982] Ch 204, 223) the loss claimed is ‘merely a reflection of the loss suffered by the company’. In some cases the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of a shareholding attributable solely to depletion of the company’s assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for.” [3]

11. There is no dispute between the parties about the extent of the principle and that it prevents a petitioner claiming loss in respect of which there is a cause of action available to the company.  Where this rule is invoked as a ground for striking out the whole or part of a petition any reasonable doubt must be resolved in favour of the petitioner.

12. There is also an established limitation on the extent to which a petitioner can rely on misconduct, as opposed to mismanagement, by officers of a company as constituting unfair prejudice in a petition issued under section 168A.  The following principles emerge from a consideration of the authorities:

(1) If the essence of the complaint being made is of director’s misconduct, rather than of director’s mismanagement, the proper vehicle for seeking and obtaining relief would usually be a derivative action, rather than a section 168A petition: Re Charnley DavieLtd (No 2) [4] (Millett J); Re Chime Corporation [5] §§47-48 (Lord Scott NPJ); Waddington Ltd v. Chan Chun Hoo [6] §77 (Lord Millett NPJ).

(2) The very same facts may provide the foundation for both a derivative action and a section 168A petition.  Indeed, directors’ acts of misconduct may well provide the requisite evidence to establish a charge of unfairly prejudicial management.  See: Hollington, Shareholders’ Rights, 6^th edn, §§7‑12, 7-66 to 7-68; Joffe, Minority Shareholders, 4^th edn, §§7.182 to 7.187, 7.196; Re Charnley Davies Ltd supra [7] (Millett J); A R Evans Capital Partners Limited v Novel Alternative Investment Limited [8] §77 (Barma J).

(3) Therefore, in order to ascertain whether a complaint is one of misconduct or mismanagement, it is not enough simply to look at the acts complained of.  Instead, it is necessary to look at the nature of the complaint and the relief sought.  As Millett J explained In Re Charnley Davies supra at 783f‑h:

“In my judgment the distinction between misconduct and unfairly prejudicial management does not lie in the particular acts or omissions of which complaint is made, but in the nature of the complaint and the remedy necessary to meet it…If the whole gist of the complaint lies in the unlawfulness of the acts or omissions complained of, so that it may be adequately redressed by the remedy provided by law for the wrong, the complaint is one of misconduct simpliciter… It is otherwise if the unlawfulness of the acts or omissions complained of is not the whole gist of the complaint, so that it would not be adequately redressed by the remedy provided by law for the wrong.”

In Re Shun Tak Holdings supra, Kwan J explained at §35:

“…the key to the [misconduct/mismanagement distinction] is not just to look at the nature of the complaint…It is to look at the nature of the complaint together with the relief sought. If the whole gist of the complaint is misconduct and the objective of the litigation is to seek redress for the company for the misconduct, then it is squarely a case within derivative action territory...”

13. It determining whether or not a particular claim is inconsistent with these principles it is, therefore, necessary to consider not only the factual complaint but the relief that is sought.  The authorities recognise that matters which constitute breach of duty by a director may be relied on as unfair prejudice by a petitioner so long as they form part of a broader complaint.  If they constitute the whole of the complaint they are more appropriately and efficiently remedied by a derivative action.  Similarly, if such matters are the basis of a claim for relief that could be sought in a derivative action generally a derivative action is the correct process by which to pursue the relief. 

14. In paragraphs 18 and 19 her judgment in Re Shun Tak Holdings Ltdibid Kwan J explained that the principles applicable in a strike out application on the basis that a case is advanced, which is properly brought as a derivative action, are the same as those that generally apply in applications to strike out unfair prejudice petitions, namely:

(1) The court will assume that the facts alleged in the petition and supporting evidence are correct;

(2) The burden is on the applicant to prove that it is a plain and obvious case for a striking out as the case is bound to fail; and

(3) It is inappropriate to strike out a petition based on a pleading point that can be remedied.

The Present Case

15. The Respondents do not object to the Petitioner including amongst the matters relied on as constituting unfair prejudice the complaints about the special dividend, the interim dividend and the treatment of the loan originally made to the Company by Madam Tam.  Their objection is to the inclusion of relief to address each of those complaints.  I shall deal with each complaint in turn.

16. Ms. Lam argued that the claim in respect of the special dividend was directed to remedying a breach of duty owed by the directors to the Company and thus concerned misconduct.  Further, although not a claim for payment it was akin to a claim for reflective loss because it had an impact on the value of the Petitioner’s shares in the Company.  I disagree.

17. Assuming that the Petitioner is correct and the Company’s accounts are altered to reflect the correct treatment of the payment made to the Petitioner of $29,134,560 I cannot see why it would have any impact of the net asset value of the Company and Ms. Lam was not able to advance one when asked.

18. Prayers (6) and (7) seek orders that the Respondents or the Company purchase the Petitioner’s shares.  There is no objection to these orders, and neither could there be, and the calculation of the value of the Petitioner’s shares would involve a determination of the very issue that prayer (1) addresses and a recasting of the accounts if determined in the Petitioner’s favour.  In fact for this reason prayer (1), and indeed the other prayers with which I am concerned, are strictly unnecessary as Mr. Manzoni accepted in argument.

19. Ms. Lam argued that prayers (2) and (4) are objectionable for the same reasons as prayer (1).  Again I disagree.  The Respondents say that the Petitioner was the only shareholder who actually received what it characterises as a “special dividend”, but which they say was actually a loan, and this was the reason that it did not receive the subsequent “interim dividend”.  Resolving these issues involve an accounting exercise which necessarily has to be undertaken if the complaint of unfair prejudice is made out and either prayer (6) or (7) are engaged.  It does not involve a claim for reflective loss.

20. The same types of objection are taken in respect of prayer (4) and in my view they are misconceived for the reasons I have previously given.  I, therefore, dismiss the Respondents summons with costs to the Petitioner.

Valuation summons

21. The Petitioner has issued a summons seeking the appointment of an expert valuer to value the Company on the terms set out in a detailed schedule appended to the summons.  Broadly what is proposed is that the valuer produces different valuations based on the parties’ alternative positions in respect of the dividends and the loan.  However, as I understand what is proposed it does not involve the valuer producing valuations for all possible permutations of findings.

22. The reason the Petitioner has made the application is this.  The Respondents had agreed in principle to buy the Petitioner’s shares.  The stumbling block in reaching an agreement is, as the Petitioner sees it, the method by which a valuation of the Company is to be conducted.  In particular there is an issue concerning whether all documents provided to a valuer should be provided to the other party.

23. The Petitioner invites me to adopt a similar approach to that adopted by Le Pichon J in Re Forecast Nominee Ltd [9] and order a valuation at this stage on the assumption that:

“Its availability [of a share valuation] could conceivably encourage a resolution of the present dispute. Even if no settlement is reached and the petition were not to come on for some time, the valuation could always be updated by way of a supplemental report. In these circumstances, there is every advantage in granting the application: not to order a valuation now would only prolong the dispute.”[10]

24. Mr. Manzoni submitted that this was consistent with the underlying objectives of the CJR in RHC O1A r1. Although Mr. Manzoni did not put it like this, what is proposed is that a valuation that will almost certainly become necessary at some point, should be undertaken now and that insofar as it might be a little more costly because it has to take into account more variables then would be the case after trial that is more than balanced by the saving in costs if the case settles as a result and also the saving in judicial resources.  There is obvious substance to this argument.

25. The Respondents oppose this summons.  They say that things have moved on since they originally proposed to purchase the Petitioner’s shares and that at present that offer is not on the table.  Ms. Lam submitted that ordering an early valuation remains unorthodox and given the fact that various factual permutations have to be considered it is unduly expensive and premature.  I agree.  It seems to me that the mere fact that the Respondents’ current position is that they are not currently interested in buying the Petitioner’s shares takes a lot of the force out of the argument that a valuation will increase the chance of settlement.  This is speculation.  Presumably the parties all have some idea what the Company is worth and are capable of making simple adjustments to the accounts to take into account the Petitioner’s claims.  Presumably there is more between them than valuation issues; there is a genuine difference of opinion over the Petitioner’s claims.  It does not seem to me in the circumstances that it is appropriate to order a valuation at this stage that would be more expensive than a valuation after trial in the face of objections from the Respondents.

26. I, therefore, dismiss the Petitioner’s summons with costs to the Respondents.