CHEN LIAN TING v. ZHANG QIN AND OTHERS

HCA 2273/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2273 OF 2016

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J U D G M E N T

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1.  This action is brought by the plaintiff, as the title on the writ suggests, on behalf of himself and all other shareholders of the 5^th defendant (“Top Super”) (except the 1^st defendant) and the 6^th defendant (“HK Wise Park”).  Top Super and HK Wise Park are both companies incorporated in the British Virgin Islands.

2.  The 2^nd defendant has applied to strike out the entire statement of claim and to have the action dismissed as against him on the ground that (i) as far as Top Super is concerned, the plaintiff has not obtained leave from the BVI High Court to bring the action; and (ii) as far as HK Wise Park is concerned, no double derivative action can be brought on its behalf under BVI law.

3.  On the pleaded case, the plaintiff and the 1^st defendant are and were both 50% shareholders in Top Super.  HK Wise Park is a direct wholly owned subsidiary of Top Super.  The 2^nd defendant is said to have been a director of HK Wise Park up to January 2015.  For present purposes it is unnecessary to go into the details of the various claims against various defendants in the pleading.  Suffice it to say the following.

4.  Initially, in 2007, Top Super wholly owned HK Wise Park, which held 95% of Asiawin Industrial Ltd, which held 62.5% of a Mainland joint venture company, which in turn wholly owned Kunshan Wise Park, which was the company that ran a property development project in Kunshan, Jiangsu Province.  It is alleged that in May 2013, the 1^st and 2^nd defendants procured HK Wise Park to transfer its 95% shareholding in Asiawin to the 3^rd defendant at a nominal consideration.  Although the 3^rd defendant also agreed at the same time that HK Wise Park could repurchase the shares at a nominal consideration upon certain conditions, the terms were allegedly unfair and disadvantageous to HK Wise Park and the repurchase never took place.

5.  It is alleged that the 2^nd defendant acted in breach of his fiduciary duties and his duty of care and skill to HK Wise Park and in breach of trust in relation to HK Wise Park’s 95% shareholding in Asiawin, that HK Wise Park has suffered loss and that the 2^nd defendant is liable to it for damages or equitable compensation.  The plaintiff claims against the 2^nd defendant, on behalf of HK Wise Park, orders for accounts and inquiries, damages and equitable compensation.

6.  It is common ground that, as such, the action as against the 2^nd defendant is a “double derivative action” in the sense that the plaintiff, as a shareholder in HK Wise Park’s holding company Top Super, seeks to enforce the rights of HK Wise Park against the 2^nd defendant.

7.  It is not in dispute that under Hong Kong conflict of laws rules, whether a derivative action by a shareholder is available is a matter of substantive law, governed by the law of the place of incorporation of the company: East Asia Satellite Television Holdings Ltd v New Cotai LLC [2011] 3 HKLRD 734, paras 32–50.

8.  Whether or not leave of the court is required before a derivative action can be brought in Hong Kong in respect of a foreign company is generally a procedural question governed by the lex fori: Waddington Ltd v Chan Chun Hoo Thomas & Others (2008) 11 HKCFAR 370, para 55 per Lord Millett; see also East Asia Satellite Television at paras 45–46.

9.  However, having regard to s 184C(6)[1] of the BVI Business Companies Act 2004, the requirement in s 184C of leave from the BVI High Court before a (single) derivative action can be brought under that section is to be regarded as a substantive requirement of BVI law and a condition precedent for commencing a (single) derivative action in Hong Kong in respect of a BVI company: Wong Ming Bun v Wang Ming Fan (unrep, HCA 1985/2012, 21 January 2014), paras 36, 44, per Ng J; Novatrust Ltd v Kea Investments Ltd [2014] EWHC 4061 (Ch), paras 32–46, per Judge Pelling QC. 

10.  It seems to be accepted by both sides that as a matter of BVI law a multiple derivative action cannot be brought under s 184C. Whether or not it can be brought under the common law of BVI has not been directly decided by the BVI courts.  The position is in my view not entirely clear.

11.  I recognise that there are statements by Michel JA in the Eastern Caribbean Court of Appeal’s decision in Microsoft Corporation v Vadem Ltd (BVIHCVAP2013/0007) that lend support to the 2^nd defendant’s contention in this case, eg the reference in para 13 to “the fact that BVI law does not permit double derivative proceedings”.  As explained in the Hong Kong Court of Appeal’s decision in Waddington (which I shall further refer to later) at para 160, however, the point whether the common law multiple derivative action was abrogated by s 184C did not arise in Microsoft. Further, it may be noted that the appeal in Microsoft was apparently argued in April 2013 and it is not clear whether the ground‑breaking decision of Briggs J of the English High Court in Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] EWHC 348 (Ch); [2013] Ch 551 on the effect of s 260 of the (UK) Companies Act 2006 which has some similarity to s 184C of the BVI Act — handed down on 2 February 2013 — had been drawn to the Court of Appeal’s attention.  Fort Gilkicker has since been followed in other first instance decisions in England.

12.  Mr Chan on behalf of the 2^nd defendant argued that Fort Gilkicker is to be distinguished on the ground that s 260 of the (UK) Companies Act 2006 is not in pari materia with s 184C of the BVI Act.  Mr Hui who appeared for the plaintiff contended in contrast that s 260(2) is equivalent to s 184C(6).

13.  As far as this jurisdiction is concerned, this question of BVI law has been considered by the Court of First Instance in Waddington Ltd v Chan Chun Hoo Thomas & Others (unrep, HCA 3291/2003, 13 December 2013), in which Recorder P Fung SC came to the finding of fact that as a matter of BVI law, s 184C did not abrogate the common law right of a shareholder to institute and maintain a multiple derivative action: see paras 96–124.  The Court of Appeal affirmed that finding (unrep, CACV 10/2014, 20 May 2016), at paras 137–161.

14.  Mr Hui argued that by virtue of s 59(2) of the Evidence Ordinance (Cap 8), this finding is not only admissible for proving BVI law for the purpose of these proceedings but is to be taken as correctly representing the position in BVI law unless the contrary is proved. Mr Chan responded that the question of BVI law was not “determined” in Waddington because it was unnecessary in that case to decide the matter, given that both the Recorder and the Court of Appeal held that the 1^st defendant there was barred from raising the point that multiple derivative actions were not permitted in BVI law.

15.  It is unnecessary for me to decide whether s 59(2) applies to that finding because this is simply a striking out application.  It is sufficient for present purposes to say that, having regard to the reasoning of Recorder P Fung SC and the Court of Appeal in Waddington, it is, to put it at the lowest, impossible in my view for the 2^nd defendant to show that the plaintiff has no more than a fanciful prospect of proving at trial that multiple derivative action remains permissible under the common law of BVI.

16.  I may add that the view of BVI law taken in Waddington seems to be consistent with the decision of Eder J of the BVI High Court in Iu Chung v Greater Achieve Ltd (Claim No BVIHC (Com) 140 of 2015) on 28 June 2016.  In that case, the company in which the plaintiffs held shares and its direct wholly‑owned subsidiary whose assets were allegedly misappropriated by the wrongdoers were both BVI companies.  The statement of claim pleading a double derivative claim was struck out on various grounds.  The relevant ground for present purposes was stated in paras 15 and 16 of the decision, where Eder J said:

“15. … That assertion is disputed — but even if it were right, it would not give the Claimants a right to sue unless they obtained permission for a double derivative action.

16. Here, the Claimants have neither applied for nor obtained permission to bring a double‑derivative claim, and it is now too late for them to do so.  In my judgment, this is a further reason why the SOC should be struck out.”

17.  It seems to me that the judge had at least assumed that a double derivative action was possible in BVI law.  The source of the requirement of permission referred to by Eder J is not clear from the decision and (assuming it is not s 184C) it is at least arguable that it is a procedural requirement not applicable to a multiple derivative action brought in Hong Kong.

18.  For these reasons, I conclude that the 2^nd defendant has not shown that it is plain and obvious that multiple derivative actions are not permissible in BVI law or that to bring a multiple derivative action in relation to HK Wise Park it is necessary as a matter of substantive law for the plaintiff to obtain the prior permission of the BVI High Court.  The application to strike out must therefore be dismissed.