ZPMC OFFSHORE SERVICE CO LTD (Formerly known as SHANGHAI ZHENHUA HEAVY INDUSTRIES SHIPPING CO LTD) v. PHILIP JEFFREY ADKINS AND OTHERS

HCMP 426/2017 & HCMP 1124/2020

(HEARD TOGETHER)

[2021] HKCFI 2660

HCMP 426/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 426 OF 2017

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AND

HCMP 1124/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1124 OF 2020

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(HEARD TOGETHER)

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D E C I S I O N

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1.  On 24 February 2017 the Applicant, ZPMC Offshore Service Co Ltd (“ZPMC”)  issued an originating summons seeking declarations that a board meeting of the 4^th Respondent (“Company”)  that took place on 14 February 2017 and resolutions purportedly passed at it, amongst other things, removing the 1^st Respondent, Philip Jeffrey Adkins (“Adkins”)  as the chief executive officer (“CEO”)  of the Company were valid and seeking orders that, amongst other things, Mr Adkins not hold himself out as the CEO. I will refer to these proceedings as “426”.

2.  Also on 24 February 2017 ZPMC applied ex parte on notice to Louis Chan J for an order prohibiting, amongst other things, Mr Adkins holding himself out as the CEO of the Company. Chan J granted the order (“Order”).  It was continued by me without opposition on 3 March 2017 and 11 April 2018.  It would appear that Mr Adkins was aware of the Order and subsequently breached it on more than one occasion.  On 24 August 2020 I granted leave for ZPMC to apply for an order of committal and an originating summons was issued on 31 July 2020 seeking an order for committal (“contempt proceedings”).  This was subsequently met with three applications issued by Mr Adkins:

(1)  A summons in 426 to strike out 426 issued on 3 March 2021.

(2)  A summons in 426 dated 9 June 2020 to discharge the Order.

(3)  A summons in the contempt proceedings seeking to set aside the leave and have the originating summons dismissed on the grounds that its prosecution would be oppressive and disproportionate in the circumstances and that there had been material non-disclosure on the leave application.

3.  On 25 August 2021 the contempt proceedings and Mr Adkins’s three summonses came on before me.  I dealt with the summons to strike out 426 first.  After hearing the summons, on 26 August 2021 I struck out 426 and discharged the Order.  Having done so I concluded that the leave to issue the contempt proceedings should be set aside and the originating summons dismissed.  It was not practical to deliver ex tempore reasons.  My reasons are set out below.

4.  The originating summons contained applications for relief pursuant to sections 728 and 729 of the Companies Ordinance, Cap 622 (“Ordinance”).  These sections along with section 730 provide, and I quote from the heading to Division 3 of Part 14, “Remedies for others’ conduct in relation to companies”. Section 729(1)  provides that a member “whose interests have been, are or would be affected by...” conduct falling within section 728(1)(a)  can seek a final injunction or a declaration.  Section 728(1)(a)(iii)  includes “a breach specified in subsection (4)”.  Subsection (4)  includes breach of a person’s fiduciary duties owed to the company in question both as a director and in any other capacity.

5.  To the extent that these sections allow a member to commence proceedings seeking relief section 729(1)  provides that the relief can include an injunction, declaring a contract to be void or voidable or damages.  The Division, therefore, is a statutory exception to the well-known Rule in Foss v Harbottle[1], which provides that the proper plaintiff in proceedings to remedy a wrong to a company is the company itself, because it is in the company that the cause of action is vested[2]. Therefore, if a director breaches his or her fiduciary duties owed to a company it is for the company to take action to remedy the breach.  Without Division 3 a member of a company incorporated in Hong Kong would not be able to take action in their own name to remedy a breach done to the company.  It would be necessary for them to bring either a common law or statutory derivative action if they could satisfy the requirements for doing so.  In the case of a statutory derivative action those requirements are set out in Division 4.  This is different to a member’s personal right to enforce a company’s constitution by, for example, taking action to prevent a breach of the articles of association.  Similarly, a member may have personal rights under a shareholder agreement against other members or the company, which can be enforced by action.  There is no suggestion that the rights ZPMC seek to exercise in 426 are in this sense personal.  The only rights relied on are those provided for in Division 3.

6.  Division 3 has to be read and understood against this background.  It would, for example, be surprising if section 729 allowed a member to commence an action for a breach of fiduciary duty by a director, which a company is quite capable of commencing.  It will be recalled that there are exceptions to the Rule in Foss v Harbottle.  The one with which practitioners are most familiar is what is commonly referred to as a “fraud on the minority”.  Put broadly the expression describes a situation in which a wrong is done to a company, which the company will not take action to remedy because the wrongdoers are in control of the company[3].  In these circumstances the common law permitted a minority to commence an action on behalf of the company to remedy the wrong done to it.  It seems to me that section 729 is intended to permit and facilitate a member to remedy a wrong, which a company cannot or will not take steps to remedy itself.  Otherwise it would be possible for both the company and a member to commence proceedings to seek, for example, to remedy a breach of fiduciary duty by a director.

7.  Section 729 avoids this possible conflict and duplication by limiting a member’s right to commence an action to situations in which his “interests have been, are or would be affected”.  This must mean interests qua member.  If a company refuses to take action to remedy damage done to a company, which impacts on the value of member’s economic interest in a company, section 729 is likely to be engaged.  If the company itself is willing and able to take the necessary action it seems to me that a member’s interests will not be impacted in a relevant way.  The principal considerations in determining whether a member’s interests are affected in a relevant way will commonly be whether: (1)  the member is likely to be worse off if the matter of which he complains is not remedied; (2)  the matter is something the company has a right to remedy; and (3)  if it is something the company has a right to remedy, the shareholder cannot cause the company to take remedial action.  In formulating a claim under Division 3 it is necessary to be alive to these distinctions and address them.  Unfortunately as I will demonstrate ZPMC was not.  It is to that subject that I now turn.

8.  The Company has three shareholders: ZPMC, which holds 51% of the Company, the 2^nd Respondent RBF HK Ltd (“RBF”), which holds 32.5% and the 3^rd Respondent Lihua Logistics Company Limited (“ZHLG”), which holds the remaining 16.5%.  The Articles provide for the Company to have seven directors of which four are appointed by ZPMC.  There were four in February 2017.  It is clear from Articles 117 to 119 and Clauses 6.13 and 6.14 of the Shareholders Agreement that it was possible for ZPMC to convene a board meeting to pass any resolution it likes other than in relation to reserved matters, albeit it may, because of the way which the Articles operate, initially have required the initial meeting of the Board to have been adjourned because the quorum requirements required a director representing each member to be present.  However, if the initial meeting was inquorate it could, as is commonly provided in articles, be adjourned for 10 days at which if any four directors were present the board meeting would become quorate. Therefore, as the wrongs of which ZPMC complain were clearly done to the Company and ZPMC could cause the Company to take action to remedy them on the face of the matter it was unnecessary for ZPMC qua member to take action.

9.  Mr Li’s two affirmations filed in support of the originating summons and the injunction application contain no explanation of why it was that ZPMC believed it was necessary to commence proceedings as a member of the Company pursuant to sections 728 and 729 rather than for the Board to cause an action in the Company’s own name to be commenced. The skeleton argument filed for the application makes no reference to this issue and is framed in a way, which suggests that counsel had overlooked it. In [23] of ZPMC’s skeleton addressing the present discharge application counsel state that it was “unreal for Adkins/RBF to suggest that ZPMC should have ‘anticipated’ such arguments at the ex parte application”.  The arguments referred to are the ones I have explained.  I quote this paragraph because it demonstrates that this point had not been recognised and had not been raised before the judge.  I disagree that it was unrealistic to expect the point to have been taken.  It was an obvious point to consider.  If the reason was that the Company could not afford to wait 10 days I would have expected this to have been explained.  The fact that it was not mentioned suggests the point was overlooked.  I note in passing that it is doubtful if this delay would have been a reason to have proceeded under Division 3 as ZPMC could have caused preparation for an application to be commenced and immediately after a meeting at which a resolution was passed authorising commencement of proceedings and ratifying the instructions to lawyers to prepare papers, the Company could have come to court.

10.  Another indication that insufficient thought had been given to how, if at all, Division 3 applied is the failure to refer to section 730.  Section 730(1)  provides:

“The Court may grant an interim injunction or interim damages, or both, on the terms and conditions that it thinks fit pending the determination of an application under section 729(1)  or (2).”

Clearly the application should have been made under this section, but it was not.  Mr Joffe submitted that this of itself meant that the Court did not have jurisdiction to make the Order.  I disagree.  The fact that the relevant section was not mentioned does not mean of itself that the Court did not have jurisdiction, but it does illustrate that the application had not been thought through properly.  I intend no disrespect to Louis Chan J, but perhaps a judge with greater familiarity with company law would have spotted the point.  For myself, I doubt if I would have granted such an order unless it could have been explained why the Company had not commenced the action, which on the basis of the evidence I doubt if counsel would have been able to do so satisfactorily.

11.  It is uncontroversial that I should only strike out 426 if I am satisfied that it is plain and obvious that the originating summons and statement of claim do not disclose a reasonable cause of action.  The originating summons simply recites the relief that is sought.  The statement of claim that is dated 27 April 2018 in my view is clearly demurrable. It was necessary for it to plead (1)  the breaches that it was alleged had affected ZPMC’s interests; and (2)  how the breaches affected ZPMC’s interests. The statement of claim mentions neither.  The focus of the statement of claim is on demonstrating that valid resolutions were passed removing Mr Adkins as CEO.  There are references in various paragraphs to events following the meeting, which occurred between 14 February 2017 and 23 February 2017, which demonstrate that Mr Adkins did not accept the validity of the resolutions passed on 14 February 2021. There is, however, no reference to what fiduciary duties it is alleged Mr Adkins breached or, as I have said, how this affected ZPMC’s interest in a way, which justified it seeking relief under Division 3.  It seems to me that the statement of claim did not disclose a cause of action and further that it would appear from the evidence before me filed by ZPMC that it could not demonstrate that its interests had been affected in a relevant way.

12.  After he had commenced his oral submissions Mr Wong produced a draft amended statement of claim.  The suggested amendments do not address the “interest” point at all.  So far as the breaches of duty are concerned it is alleged that Mr Adkins broke his fiduciary duty as both director and CEO by refusing to accept the resolution of 14 February 2021. It is difficult to see what fiduciary duties Mr Adkins owed as an employee, whose employment had been terminated.  The Company may well have been entitled to enjoin him from holding himself as CEO after his employment had been terminated, but this does not involve fiduciary duties.  It may be open to argument that as a director Mr Adkins was under a fiduciary duty not to act in a way, which was inconsistent with a lawful resolution of the Board, although no authority has been cited to me in support of this proposition, but the cause of action vests with the Company.  Unless it can be shown that the Company would not act to remedy the adverse consequences of the alleged breach it follows in my view that the relevant interest cannot be demonstrated and in any event even in the draft amendment it is not pleaded how ZPMC’s interests are affected.

13.  I will, therefore, strike out HCMP 426 of 2017. It follows that the Order is also discharged.

14.  This takes me to the applications made by Mr Adkins in the contempt proceedings.  On 3 March 2021 he issued a summons for the leave that I had granted on 24 August 2020 to be set aside on the following grounds:

(1)  Prosecution of the contempt proceedings would be disproportionate and excessive given that the Order was a legal nullity and/or liable to set aside; and

(2)  material non-disclosure in the leave application concerning the failure to bring to the Court’s attention the defence to the claim that I have addressed when dealing with the strike out application.

15.  The fact that I have struck out the underlying proceedings calls into question whether or not I should allow the contempt proceedings to go ahead.  On the one hand it is argued by ZPMC that Mr Adkins clearly and knowingly breached the Order, this is fundamentally objectionable and the Court should allow the contempt proceedings to proceed because it is desirable that the Court determines the proceedings with a view to protecting the integrity of the Court’s process and respect for the law.  On the other hand Mr Joffe argued further prosecution would be disproportionate for the following reasons and leave should be set aside bringing the contempt proceedings to an end:

(1)  If 426 is struck out, the breach is technical and allowing the contempt proceedings to continue would be disproportionate and oppressive.

(2)  The contempt proceedings were brought to harass Mr Adkins rather than protect ZPMC’s interests.

(3)  As a consequence of RBF activating the buyout provisions in the Shareholders Agreement, RBF will inevitably cease to have an interest in the affairs of the Company.  This goes to utility and proportionality.

(4)  ZPMC’s delay in enforcing the injunction and progressing 426.

16.  Mr Wong is, of course, correct that orders of the court must be complied with.  This is emphasised in the judgment of Sir Gerard Brennan NPJJ in Kao, Lee & Yip v Koo Hoi Yan[4], in a passage in which he quotes from the decision of Romer LJ in Hadkinson v Hadkinson[5]:

“26. … As Romer LJ said in Hadkinson v Hadkinson [1952] P 285, 288 in a passage approved by the Privy Council in Isaacs v Robertson [1985] AC 97, 101-102:

‘It is the plain and unqualified obligation of every person against, or in respect of whom, an order is made by a court of competent jurisdiction, to obey it unless and until that order is discharged.’”

17.  It does not, however, follow from this that all cases of failure to comply justify contempt proceedings being pursued.  This is explained in two authorities.  The first is the decision of Lord Briggs sitting at first instance in Re Sectorguard Plc v Dienne Plc[6]. He says this in [44]–[47]:

“44. It is now well established, in the light of the new culture introduced by the CPR, and in particular with the requirements of proportionality referred to in CPR 1.1(2)  as part of the overriding objective, that it is an abuse of process to pursue litigation where the value to the litigant of a successful outcome is so small as to make the exercise pointless, viewed against the expenditure of court time and the parties’ time and money engaged by the undertaking: see Jameel v. Dow Jones & Co [2005] QB 946 per Lord Phillips at paragraphs 54, 69 and 70 (conveniently extracted in note 3.4.3.4 on page 73 of the 2009 White Book).

45. The concept that the disproportionate pursuit of pointless litigation is an abuse takes on added force in connection with committal applications. Such proceedings are a typical form of satellite litigation, and not infrequently give rise to a risk of the application of the parties’ and the court’s time and resources otherwise than for the purpose of the fair, expeditious and economic determination of the underlying dispute, and therefore contrary to the overriding objective as set out in CPR 1.1. The court’s case management powers are to be exercised so as to give effect to the overriding objective and, by CPR 1.4(2)(h)  the court is required to consider whether the likely benefit of taking a particular step justifies the cost of taking it. Furthermore, paragraph 5 of the Contempt Practice Direction makes express reference to the court’s case management powers in the context of applications to strike out committal proceedings.

46. It has long been recognised that the pursuit of committal proceedings which leads merely to the establishment of a purely technical contempt, rather than something of sufficient gravity to justify the imposition of a serious penalty, may lead to the applicant having to pay the respondent’s costs: see Adam Phones v. Goldschmidt (supra)  per Jacob J at 495 to 6, applying Bhimji v. Chatwani [1991] 1 All ER 705. Jacob J concluded, by reference to that case:

‘Since that judgment the Civil Procedure Rules have come into force. Their emphasis on proportionality and on looking at the overall conduct of the parties emphasises the point that applications for committal should not be seen as a way of causing costs when the defendant has honestly tried to obey the court’s order.’

47.  Committal proceedings are an appropriate way, albeit as a last resort, of seeking to obtain the compliance by a party with the court’s order (including undertakings contained in orders), and they are also an appropriate means of bringing to the court’s attention serious rather than technical, still less involuntary, breaches of them.  In my judgment the court should, in the exercise of its case management powers be astute to detect cases in which contempt proceedings are not being pursued for those legitimate ends.  Indications that contempt proceedings are not so being pursued include applications relating to purely technical contempt, applications not directed at the obtaining of compliance with the order in question, and applications which, on the face of the documentary evidence, have no real prospect of success.  Committal proceedings of that type are properly to be regarded as an abuse of process, and the court should lose no time in putting an end to them, so that the parties may concentrate their time and resources on the resolution of the underlying dispute between them.”

18.  Baker J refers to Sectorguard in Navigator Equities Limited, Vladimir Anatolevich Chernukhin v Oleg Vladimirovich Deripaska[7]. The relevant paragraphs are as follows:

“138. A contempt application may be struck out if brought for an improper purpose. Indeed, as it was put by Briggs J, as he was then, in Sectorguard plc v Dienne plc [2009] EWHC 2693 (Ch)  at [53], contempt proceedings in relation to alleged breaches of an injunction or undertaking may be struck out as abusive if brought ‘otherwise than for the legitimate motive of seeking enforcement [of the injunction or undertaking], or bringing to the court’s attention a serious rather than purely technical contempt’. Thus, for example;

(i)  ‘The court should be astute to detect when contempt proceedings are not being pursued for legitimate aims’, per Hamblen J, as he was then, in PJSC Vseukrainskyi Aktsionernyi Bank v Maksimov [2014] EWHC 4370 (Comm)  at [22].

(ii)  ‘There is an obvious need to guard carefully against the risk of allowing vindictive litigants to use such proceedings to harass persons against whom they have a grievance, whether justified or not …’, per Moore-Bick LJ in KJM Superbikes Ltd v Hinton [2009] 1 WLR 2406 at [17].

(iii)  Most simply, ‘an application must not be brought for an illegitimate purpose’, per Sir Michael Burton in Super Max v Malhotra [2019] EWHC 2711 (Comm)  at [10].

In my judgment, contrary to a submission by Mr Mill QC to which he was perhaps driven by his client’s decision not to provide any evidence, the cases have in mind the claimant/applicant’s actual (subjective)  motive or purpose, not (or not only)  a purely objective question whether there might be said to be some proper purpose for the pursuit of a contempt charge.

139. By ‘purely technical contempt’, Briggs J appears to have had in mind simply the question of seriousness (by reference to the nature of the obligation broken or the consequences of the particular breach): see Sectorguard at [46]-[47], and the phrase ‘contempt … of a technical nature’ as used by Hamblen J in his main judgment in Maksimov [2014] EWHC 3771 (Comm)  at [129], the judgment cited in (ii)  above being the costs judgment that followed. In Absolute Living Developments Ltd (in liquidation)  v DS7 Ltd et al. [2018] EWHC 1717 (Ch)  at [36(3)(a)], Marcus Smith J read rather more into Briggs J’s terminology than that. Mr Mill QC argued that this was an unjustified gloss and, with respect, that it was wrong and should not be followed. It is not necessary to take a view on that in this judgment.

…

143. A further consequence is that the claimant/applicant pursues a contempt charge as much as quasi-prosecutor serving the public interest as it does as private litigant pursuing its own interests in the underlying dispute. The claimant/applicant needs to understand that; and if it is legally represented, as here, the legal representatives need to understand that their role as officers of the court is acutely pertinent, even if (to repeat)  the process is not to be equated with a private prosecution in a criminal court. Thus, it appears to have struck Teare J as obvious in the long-running Ablyazov litigation that the quasi-prosecutorial role of the claimant/applicant in pursuing a contempt charge means its proper function is to act generally dispassionately, to present the facts fairly and with balance, and then let those facts speak for themselves, assisting the court to make a fair quasi-criminal judgment: JSC BTA Bank v Ablyazov [2012] EWHC 237 (Comm)  at [15].

144. I agree that should be the approach, at all events in a case like the present (which is all that matters for this judgment)  where any private litigation interest the claimants may have had in the enforcement of Mr Deripaska’s Undertaking was spent before they launched their contempt application in November 2019. Indeed, I infer from the chronology, reinforced by Mr Chernukhin’s failure to give evidence to explain his thinking, that the claimants deliberately chose to wait until the Navio buyout had been completed and paid for by Mr Deripaska before launching the attempt to have him committed for contempt.

145.  The only proper purpose that might be served by issuing and prosecuting the contempt application, in those circumstances, was so as to invite the court in the public interest to identify, pronounce and punish, if appropriate, an historic contempt.  The contempt application ought to have been pursued dispassionately by the claimants as parties with no interest in the outcome.  It was instead pursued in aggressive, partisan fashion, as if it were just the latest round in this long-running, ‘no-holds barred’, commercial litigation wrestling match.  That was especially inappropriate where, without doubt, Mr Deripaska had been very much on the wrong end of the dispute to date, with adverse findings, including as to his honesty in certain respects in relation to the dispute and the proceedings arising out of it, both from the arbitrators and also in the Section 67 Proceedings.  His was therefore a paradigm example of a case where an alleged contemnor needed the protection of a scrupulously careful and even-handed prosecution of the charge against him.”

19.  What these decisions demonstrate is that in the present litigation culture the decision whether or not to allow contempt proceedings to be prosecuted for failure to comply with a civil court order involves a balancing of various considerations.  This includes the utility of the contempt proceedings.  If an order is still relevant and a party requires compliance with it to protect their interests, commonly contempt proceedings will be justified in order to enforce compliance and secure respect for the order and the court.  Ulterior motive and attempts to use the contempt process to exert pressure is another consideration and where it can be demonstrated to be present will militate against granting leave.  The seriousness of the contempt will always be a very important consideration.  Maintaining respect for the court and its process is essential if the system of justice is to operate effectively.  Breaches of orders are not to be treated lightly.  That having been said the seriousness needs to be assessed in the context of the other considerations.  If the court is of the view, for example, that ultimately it is unlikely that it would impose a serious penalty and the order is not necessary in order to protect the applicant’s rights the court is more likely to refuse leave even if the court recognises that there appears to have been a knowing breach of an order.

20.  In the present case I have struck out 426 and I am of the view that the Order should not have been granted.  There is no reason to think that the Order is of any current relevance or necessity.  It is more than four years since the Order was granted and 15 months since the last incidence of alleged breach by Mr Adkins.  So far as the alleged breaches of the Order are concerned they relate to reference to him as CEO in the audited financial statements for 2017 and 2018, which are relatively technical breaches as the Company is private.  The other breaches referred to in [28] of the statement in support of the leave application relate to Mr Adkins holding himself out as CEO of a subsidiary of the Company on a number of occasions between September 2018 and November 2019.  In addition in an exchange of emails in May 2020 with Mr Li of ZPMC Mr Adkins insisted that he is still the CEO of the Company.

21.  ZPMC have taken little action to progress 426.  On 21 January 2020 its inactivity required it to serve notice of intention to proceed.  The parties are currently in a process, which will probably result in ZPMC selling its shares to RBF and possibly ZHLG.  ZPMC’s interest in pursuing the contempt proceedings is unclear.  Mr Adkins suggests that it is part of a strategy intended to improve its commercial position.  Be that as it may, after this length of time there seems little to be achieved by allowing the contempt proceedings to go ahead particularly as the alleged breaches occurred sometime ago.

22.  Although Mr Adkins’s failure to comply with the Order is unsatisfactory and I may have taken a different view if the Order had been obtained properly, in the circumstances I take the view that leave should be set aside and the contempt proceedings discontinued.  I will make a costs order nisi in respect of the application to strike out 426 and discharge the Order, that ZPMC pay Mr Adkins’s costs with a certificate for two counsel, such costs to be taxed forthwith if not agreed.  So far as the contempt proceedings are concerned I set aside the leave to commence the proceedings and dismiss the originating summons.  I will make no order as to costs to reflect what I consider to be Mr Adkins’s failure to respect the Order.