WANG PENGYING (王鵬英) (suing on behalf of herself and all other shareholders in Convoy Global Holdings Limited and Convoy Finance Limited) v. NG WING FAI AND OTHERS

HCA 1619/2018

[2019] HKCFI 2430

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1619 OF 2018

________________________

________________________

________________________

R U L I N G

________________________

Introduction

1.  This is the 1^st and 2^nd defendants’ application made by summons dated 5 June 2019, seeking the withdrawal of interrogatories without order served on them by the plaintiff on 22 May 2019.  The application is made pursuant to RHC Order 26 rule 3, and comes about in the following circumstances.

2.  These proceedings are in the form of a common law derivative action, which (as the title identifies) has been launched by the plaintiff suing on behalf of herself and all other shareholders in the two companies which are the 3^rd and 4^th defendants.  The 3^rd defendant is a company listed on the Hong Kong Stock Exchange, and the 4^th defendant is one of its wholly owned subsidiaries.

3.  Other than the statement of claim dated 11 July 2018, no other pleadings have yet been filed.  In the statement of claim, the plaintiff pleads that the 1^st defendant was in control of the 3^rd defendant because (amongst other things) he was appointed by the Tsai family which indirectly owns the single largest shareholding in that company, and that the 1^st defendant caused one director who acted as chairman at a general meeting not to count the votes of another significant shareholder on the company.  (As an aside, I am informed that that other shareholder’s similar allegations against the meeting chairman made in other proceedings have been dismissed by the Companies Judge.)

4.  By summons dated 18 December 2018, the 1^st and 2^nd defendants have applied to strike out the present proceedings on the asserted basis that the plaintiff has no locus standi to bring or continue the action derivatively and/or has failed to plead and prove an arguable case of wrongdoer in control.

5.  There is a similar set of proceedings in HCA 1479/2018, in which the plaintiff has brought another common law derivative action relating to another wholly-owned subsidiary of the 3^rd defendant. An application has also been made to strike out those proceedings.  Currently, the two strike out applications have been listed to be heard by me over two days in October 2020, though it may be that the hearing dates can be brought forward.

6.  In support of the strike out application in these proceedings an affirmation has been filed by each of the 1^st and 2^nd defendants, and by a number of other directors of the 3^rd defendant.  Each of the directors’ affirmations or affidavits contains a paragraph in which the director asserts that at all material times he or she exercised and still exercises independent judgment as regards the affairs of the 3^rd defendant, including with respect to the complaints against the 1^st and 2^nd defendants which comprise the subject matter of the complaints against them in these proceedings (and in HCA 1479/2018).  In the affidavit of the executive director and chairman of the 3^rd defendant, he asserts that he exercised his independent judgment as chairman at the particular EGM in relation to the exercise of his powers under the 3^rd defendant’s articles of association, free from the influence of the 1^st defendant or others.

7.  The interrogatories served by the plaintiff concern and surround those allegations of the exercise of independent judgment. As explained by Mr Alex Fan, counsel for the plaintiff, the gist of the interrogatories targets: (1) the process and circumstance of the alleged exercise of independent judgment: and (2) the information taken into account by the relevant director when he or she allegedly exercised the independent judgment.

8.  Mr José Maurellet SC, with Ms Jasmine Cheung, counsel for the 1^st and 2^nd defendants, submit that the interrogatories should be withdrawn for any of three reasons, either individually or cumulatively, being: (1) the interrogatories are premature and inappropriate; (2) in the context of the strike out application, the plaintiff cannot be allowed to improve her pleaded case through the interrogatories, and further, the interrogatories would effectively reverse the burden of proof, and would not assist in deciding the strike out application; and (3) the third parties whose knowledge are the subject of the interrogatories cannot be compelled to answer the interrogatories, nor can the 1^st and 2^nd defendants be compelled to procure them to do so.

Applicable Principles

9.  A derivative action is a procedural device invented by the courts to afford protection to minority shareholders.  Whilst procedurally there is no requirement at common law for a person seeking to sue derivatively first to obtain the leave of the court, there is nevertheless a 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: see Waddington Limited v. Chan Chun Hoo (2008) 11 HKCFAR 370 at §13.

10.  It is therefore necessary for a plaintiff to plead that the wrongdoers are in control of the company, and that they have prevented an action being brought in the name of the company, and that the plaintiff could not by reason of the defendants’ opposition obtain the name of the company to issue proceedings.

11.  The principles applicable to a challenge on the lack of standing by a plaintiff to commence a common law derivative action are well-established: see, for example, Liquidation Committee of Foshan Hongda Development Limited v. East Legend Investment Ltd [2009] 1 HKLRD 169 at §18.  The challenge cannot be raised by way of a defence, and it must be raised at the outset or when it comes to the attention of the court or of the defence in the course of the proceedings.  Once the issue has been raised, it must be decided.  It would be wrong to allow the action to go on without deciding the issue of standing, because the defendant will not have a further chance to challenge the issue.  Once it is clear that an action is improperly constituted, it must be brought to an end either by way of dismissal, striking out or stay.

12.  Having said that, the point in the Foshan case concerned authority to sue, rather than standing for a common law derivative action turning on the issue of wrongdoer control, with which this case is more concerned.  The Waddington case, at §14 and §§17-20, makes it clear that a challenge to the plaintiff’s standing generally takes the form of an application to strike out the claim or to have the court determine as a preliminary issue that the plaintiff has no standing to sue on the company’s behalf.  By either procedural route, it is the prima facie test which is applied, in what has been described as a “halfway house for this very special type of case”, where the legal issues are sufficiently well defined for the parties to be able to argue them.

13.  The burden of proving wrongdoer in control remains with the plaintiff, even where the defendant seeks to strike out a derivative action on the ground of lack of standing: see, for example, Melvin Waxman v Li Fei Yu (unreported, HCA 1973/2012, 23 August 2013, To J) at §23.

14.  The burden of proving a prima facie case is not met simply by raising a disputed issue of fact.  But how the burden is discharged will depend upon the circumstances of the case.  If the issues in question are adequately pleaded and not contradicted by evidence filed by the parties, then the pleading alone would be sufficient proof of the prima facie case.  But even if contrary evidence has been filed by the defendant, the courts are not required to conduct a trial by affidavit, nor necessarily to call the makers of the affidavit for cross-examination.  The courts are capable of and well experienced in making provisional findings of facts on affidavit evidence in such interlocutory proceedings by testing the plaintiff’s case against documentary evidence, incontrovertible evidence, or evidence which is not in dispute.  The court can determine against the backdrop of such contrary evidence whether the plaintiff’s evidence has passed the threshold so as to make the issue or the case fit for determination by the tribunal of fact.  Hence, in an appropriate case, the court may be satisfied on the basis of the pleaded case that the prima facie test is met, irrespective whether contrary evidence has been filed by the defendant: see, for example, Melvin Waxman at §26.

15.  The applicable principles in relation to interrogatories are well known.  They have been summarised in a number of cases including Lee Nui Foon v. Ocean Park Corp (No 2) [1995] 2 HKC 395, at 396-399.  Interrogatories must relate to a matter in question between the parties.  They must be necessary either (a) for disposing fairly of the cause or matter, or (b) for saving costs.  They must not be fishing, and must not be oppressive.  They must not be prolix, but should be precise.  They must not be questions which go to the evidence the opposing party intends to adduce, nor questions which require an answer which is a matter of opinion.  Interrogatories must not be effectively asking for documents or discovery.

16.  In the exercise of its wide and unfettered discretion, the key consideration for the court is the factor of necessity: see Kao Lee & Yip (a firm) v. Donald Koo Hoi-Yan (unreported, HCA 8847/1993, 26 February 2002, Ma J) at §7(3).

17.  At §7(5) in the same case Ma J (as he then was) cited with approval, and drew special attention to, one of the yardstick considerations identified by Colman J in Det Danske Hedeselskabet v. KDM International plc [1994] 2 Lloyd’s Rep 534, at 537.  That yardstick was that requests for information ascertainable by cross-examination at the trial are inappropriate unless the party questioning can establish that it is essential for the proper preparation of his case that such information is made available to him before trial, in the sense that if the matter is left until cross-examination at the trial that party will, or probably will, be irreparably prejudiced in the conduct of the trial.

18.  Because of their nature, interrogatories are rarely allowed before filing of the defence, and often consideration of interrogatories is delayed until after exchange of witness statements.  The content of witness statements might make interrogatories superfluous.  Interrogatories are not an automatic step in any proceedings, and must serve a clear litigation purpose, which is unlikely to be identified at an early stage before discovery and exchange of witness statements.

19.  It is trite that only parties to proceedings, not witnesses nor other third parties, may be compelled to answer interrogatories.  A party is not bound, and cannot be compelled, to procure information from third parties, except his servants or agents.  On the other hand, the party is bound to give all the information which he personally possesses at the time he is interrogated, from whatever sources or persons it has been derived.

Prematurity

20.  Mr Maurellet submits that in this case, where no defence has yet been filed, let alone discovery or exchange of witness statements, the service of interrogatories is plainly premature.  Further, he submits, there are no unusual circumstances which might justify a departure from the normal rule that interrogatories follow discovery and witness statements.

21.  In response, Mr Fan submits that the words “cause or matter” in Order 26 should be construed broadly, and that the “matter in question” in the current context is the application to strike out the plaintiff’s claim for lack of standing.  As the interrogatories arise from the directors’ affirmations filed in support of the strike out application, and as the question of standing must be determined now that it has been raised, he says the interrogatories are not premature.

22.  I agree.  In the context of the issue of standing, even if it is not ‘now or never’, the issue certainly arises for consideration and determination on the relevant test now.  If the interrogatories are otherwise appropriate and necessary, the timing of their issue is not a basis to order their withdrawal.

Necessity

23.  Subject to the points I have made on timing, I agree with Mr Maurellet’s submission that striking out applications in common law derivative actions are not somehow special in nature so as to justify a different approach to interrogatories.  Though each case will depend upon its own circumstances, so that some factors may have greater weight in some circumstances than in others, the principles applicable to the consideration of interrogatories are general principles.

24.  In the context where the plaintiff says she wishes to interrogate the directors so as to avoid being deprived of a fair chance to refute their allegations, Mr Maurellet submits that the plaintiff is making an impermissible attempt to try to cross-examine by the back door, without making an application for cross-examination.  It is, he says, tantamount to requiring the defendant to prove the independence of the board, rather than requiring the plaintiff to prove wrongdoer in control, which impermissibly reverses the burden.  Indeed, he submits that the plaintiff is in effect asking the defendants to render positive assistance to her to resist the strike out application by answering the interrogatories, which is clearly impermissible and could not be necessary for disposing fairly of the strike out application.

25.  Mr Fan submits that the plaintiff has properly pleaded her case that the wrongdoers are in control of the 3^rd defendant and the relevant subsidiaries.  Hence the strike out application will focus on testing whether that pleading has made out a prima facie case.  He points to the fact that the affidavits/affirmations leading to the interrogatories were filed by the 1^st and 2^nd defendants themselves.  Hence the factual issue of the alleged exercise of independent judgement by those directors was in fact first raised by the defendants.  The interrogatories are to seek particulars of the circumstances under which it is said independent judgement was exercised, to enable the plaintiff properly to respond to such allegations.  Mr Fan says that is not to reverse the burden of proof.

26.  However, it seems to me that the interrogatories are not necessary.  First, they cannot be necessary for the purposes of saving costs; rather, they would cause incurring further costs.  Secondly, it does not seem to me to be necessary for the fair disposal of the strike out application that the interrogatories are answered.  I agree that the interrogatories are making a backdoor attempt at cross-examination, and in any event the strike out application will be determined on the evidence presented to it.  It is open to one party or the other to urge caution on the court in applying weight to a particular piece of evidence which has not yet been tested, if it has not yet been tested.

27.  There also seems to me to be something in the reverse of burden point.  The plaintiff has voluntarily assumed the burden of establishing wrongdoer control to the standard necessary to avoid her claim being struck out.  She must be taken to have pleaded the material facts, and all the material facts, which she considers appropriate as enabling her to meet her burden.  Those assertions can be tested against contrary evidence, weighed in the usual way of an interlocutory application.

28.  It is correct that the issue of standing needs to be determined at this stage, and perhaps once and for all.  The court will therefore have to resolve opposing or contrary evidence adduced by the parties, but it can do so in the usual way.  But I do not think that means interrogatories are necessary for the fair disposal of the issue.

29.  There is a question as to whether or not standing is in reality a preliminary issue, as the strike out applications raise that as an alternative procedural route to dealing with standing.  As I have already mentioned, those two routes are well-established alternatives.  If so, perhaps there is some greater weight that this is part of the trial of the action, albeit a part that seeks to determine whether or not there should in fact be a real trial of the action or whether it should be stopped now as unsustainable.  But if that is so, that seems to me to point away from something which is designed in effect either to avoid or preface the type of cross-examination that would happen at a trial.  Indeed, if one assumes the alternate approach of a preliminary issue, that seems to me to bring the matter of standing into the more normal territory where interrogatories would only very rarely be ordered in advance of discovery and witness statements.

30.  For these reasons, in the absence of demonstration of necessity, I would order the withdrawal of the interrogatories.

Persons Interrogated

31.  I agree with Mr Fan that the interrogatories are directed at the 1^st and 2^nd defendants.  They are clearly not directed to the directors, the makers of the affidavits/affirmations asserting the exercise of independent judgment.

32.  However, none of those directors is a servant or agent of either of the 1^st or 2^nd defendants.  Therefore, as is accepted on behalf of the plaintiff, none of them can be compelled to provide information, nor can the defendants be required to obtain the information from them.  Of course I accept, that if either of the 1^st and 2^nd defendants has relevant knowledge, the source of that knowledge does not matter.

33.  The interrogatory is directed at each individual director’s exercise of judgment, which he or she asserts was independent.  Plainly, the knowledge of how each director exercised judgment, against what circumstances, and what he or she took into account in doing so, lies at least primarily with that director.

34.  This action has been commenced in the context of a listed company with a large number of directors.  Against a pleading which, as Mr Fan has identified, invites an inference of wrongdoer in control, it is unsurprising that the other directors have simply been asked in general terms to state whether or not they exercised their judgement independently.  Even though the affidavits/affirmations of the directors were adduced by the 1^st and 2^nd defendants, I think it highly unlikely that any director has already told either of the 1^st or 2^nd defendants precisely in what way and by reference to what factors that director purported to exercise his or her judgment.

35.  In other words, to seek to interrogate the 1^st or 2^nd defendants about somebody else’s state of mind – not least, to the level of detail identified by the interrogatories – seems likely to be an exercise in futility.

36.  For this additional reason, I would order the withdrawal of the interrogatories.

Costs

37.  I see no reason why costs should not follow the event, and I not that though a flag was waved Mr Maurellet has not pursued costs on a higher than standard basis, which I would not have allowed anyway.  The costs of this application will be paid by the plaintiff to the 1^st and 2^nd defendants, without certificate for two counsel.  I will summarily assess costs on paper.