LIU FUN LAM v. EXPRESS ENGINEERING & TRADING CO. LTD AND ANOTHER

HCMP 160/2025

[2025] HKCFI 6018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 160 OF 2025

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J U D G M E N T

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Introduction

1.  The Plaintiff owns 50% of the issued shares of Express Engineering & Trading Co. Ltd (“Company”). He has issued a summons seeking leave pursuant to section 732 of the Companies Ordinance, Cap. 622, to commence a statutory derivative action in the name of the Company against Henry Lee and his Son Ken Lee.  Henry Lee owns the remaining 50% of the Company’s issued shares.  Henry Lee was added as a 2^nd Defendant on 25 February 2025 by a joint application by consent by the Plaintiff and Henry Lee.  The Plaintiff and Henry Lee are the only directors of the Company.

2.  Between October 2020 and November 2023 Henry Lee’s Son Ken Lee was also a director and a shareholder of the Company.  During this period Ken Lee owned 40% of the Company’s shares, which he transferred to his Father on 30 November 2023 having resigned as a director on 27 November 2023.  In short, the claim that the Plaintiff wishes to pursue is that in early November 2023 Ken Lee established another company, Express Engineering Services Company Ltd with the involvement of his Father Henry, which he intended to use to divert business away from the Company in breach of their duties as directors of the Company. The details of the claim are set out in the draft statement of claim that has been produced by the Plaintiff’s lawyers in support of the application.

Legal Principles

3.  The principles governing applications under section 732 are well established.  They are summarised in Lam Kin Chung v Soka Gakkai International of Hong Kong Ltd (No. 2)[1]at [5]:

“Section 733(1) specifies the circumstances in which the court may grant leave for the purposes of section 732(1). The two subsections state as follows:

‘732. Member of company or of associated company may bring or intervene in proceedings

(1) If misconduct is committed against a company, a member of the company or of an associated company of the company may, with the leave of the Court granted under section 733, bring proceedings in respect of the misconduct before the court on behalf of the company.

…

733. Leave of Court to bring or intervene in proceedings

(1) On application by a member of a company or of an associated company of a company, the Court may grant leave for the purposes of section 732(1), (2) or (3) if it is satisfied that—

(a) on the face of the application, it appears to be in the company’s interests that leave be granted to the member;

(b) in the case of—

(i) an application for leave to bring proceedings under section 732(1) or (2), there is a serious question to be tried and the company has not itself brought the proceedings; or

(ii) an application for leave to intervene in proceedings under section 732(3), the company has not diligently continued, discontinued or defended the proceedings; and

(c) except where leave is granted by the Court under subsection (5), the member has served a written notice on the company in accordance with subsection (3), and the notice complies with subsection (4).’

Before granting leave the court must, therefore, be satisfied principally that the proposed proceedings raise a serious issue to be tried, and that it appears to be in the Company’s interests that it be tried. The issues are normally considered in that order. The correct approach to determining whether they have been satisfied has been considered in a number of authorities and I do not understand the principles to be controversial. They have been most recently summarised by the Court of Appeal in Zhang Heng v Kingstone International Wealth Management Limited:[2]

‘11. There is no dispute about the law on the correct approach regarding the exercise of discretion to grant leave. This has been covered in a number of cases, including an earlier decision of the judge mentioned in the Judgment, namely, Hao Xioying v Green Valley Investment Ltd, HCMP 1394/2015, 10 August 2016, which quoted from relevant passages of the decision of Ng J in Re Primlak (HK) Ltd [2016] 2 HKLRD 31 and Ng J in turn drew on various decisions of judges at first instance^[3]. The relevant legal propositions have been summarised by the judge in Green Valley Investment Ltd at §§10 and 11:

“10. On serious question to be tried:

(a) The threshold is relatively low. The prospects of the company’s success are to be investigated only to a limited extent, and the court should be slow to find against the applicant unless such prospects are so slim that the company cannot be said to have any expectation of success. See Re Primlaks (HK) Ltd, HCMP 1789/2015, unrep, 28 January 2016, §§7-8 per Ng J.

(b) At the leave stage, it is not the court’s function to try to resolve conflicts of evidence or difficult questions of law which require substantial argument and deliberation. In practice, if the applicant is able to produce a draft pleading that sets out a case with some prospect of success when only the allegations contained in the pleading are considered, the criteria will be satisfied unless the respondent can demonstrate fairly readily that there is a serious flaw in the claim and that it has no real substance^[4]. See Re Primlaks (HK) Ltd, §9.

11. As regard the interest of the company:

(a) Again, the threshold is low. In deciding whether it is prima facie in the interest of the company for leave to be granted, the court should have regard to the fact that “there should not be a trial within a trial and the court should not be forced to enter into the merits of claims where there are serious disputes”. See Re Primlaks (HK) Ltd, §21.

(b) If a ‘serious question to be tried’ has been demonstrated, in most cases it will follow that it is prima facie in the interest of the company that proceedings are pursued. See Re Primlaks (HK) Ltd, §§20-21.

(c) In assessing whether it appears to be in the interest of the company that the derivative action be pursued, the court ought to take into account whether any practical benefit is likely to result, even in circumstances where it may be clear that, eg, a director has breached his duties to the company.  This essentially involves assessing whether it appears that the company stands to gain in money or money’s worth in light of the costs which will have to be incurred.  See Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 at [56] to [60]^[5] per Palmer J; Pang Yong Hock v PKS Contracts Services Pte Ltd [2005] 2 LRC 72 at [21] per Tay Yong Kwang J (giving the judgment of the Singaporean Court of Appeal).”

12. The court would usually consider the serious question requirement first, because if this requirement is not satisfied, it would be difficult to see how it could be in the company’s interest to bring a derivative action.  This was the approach adopted by the judge.”

4.  Section 738 gives the court the discretionary power to make an order about the costs to be incurred in relation to any proceedings brought under section 732.  Sub-section (2) provides that such an order may require the company to indemnify a member against the costs incurred or to be incurred in bringing a derivative action.  The court may only make such an order in favour of a member if it is satisfied that the member is acting in good faith and had reasonable grounds for bringing the proceedings. In Swansson v RA Pratt Properties Pty Ltd & Anor[6], Palmer J expressed the view that these criteria (although said in the context of the Australian legislation) would generally require consideration of two questions.  The first whether the applicant honestly believed there was a good cause of action, which had reasonable prospects of success.  Secondly, whether the action is brought for a collateral purpose.

5.  Section 738(3) requires the court to consider the applicant’s bona fides and the reasonableness of bringing the application and commencing a substantive derivative action.  However, if section 733(1) is satisfied on the face of the matter it suggests that the application and the proceedings are brought in good faith and have a reasonable prospect of success.  I do not think that section 738(3) can sensibly be read as imposing on an applicant a burden if he wishes to obtain a costs indemnity of demonstrating that the claim is stronger than required by section 733(1) and Mr Yam did not so argue.

6.  As explained in Re Soka Gakkai International of Hong Kong Limited[7]:

“13. The starting point must be that the Court has decided that the statutory criteria in section 733 have been satisfied, namely, that it appears to be in the Company’s interests that leave be granted and that a serious question to be tried has been demonstrated. Normally, if a company has the liquid assets available to fund the derivative action without an undue negative impact on its planned operations, as I find to be the present case, indemnity will be given in terms the Court considers appropriate…” (Emphasis added)

7.  Insofar as “good faith” is concerned, the position must be assumed, leave having been granted, that the application was made in good faith and on reasonable grounds: Re Soka Gakkai International of Hong Kong Limited[8]at [15].

8.  The rationale was further explained by Recorder Linda Chan SC (as she then was) in Liu Chun Kau Andy v Hung Lee Construction Engineering Limited[9], at [25]:

“25. In the present case, the evidence shows that the Company has HK$2,000,000 currently held by WL. This is in addition to the cash deposits of approximately HK$1,000,000 kept in the bank accounts of the Company as at May 2019. As the plaintiff is bringing the action on behalf and for the benefit of the Company, it seems to me that as a matter of fairness, the plaintiff should be entitled to the protection of an order to indemnify him of the costs incurred and to be incurred in the derivative action up to and including the close of pleadings. Upon close of pleadings, the court would be in a better position to decide whether the indemnification should be further extended.” (Emphasis added)

9.  A similar approach was taken by Recorder Jason Pow SC in Yuen Wai Yee v Li Kwok Hung and Ors[10]:

“24. As for the application for an order of indemnification of costs pursuant to Section 738(3) of the Ordinance, the relevant considerations have been set out in the decision of Recorder Linda Chan SC (as she then was) in Liu Chun Kau Andy v Hung Lee Construction Engineering Limited, [2019] HKCFI 1269 at §24. Since I have concluded, at least at this stage, that Yuen has established a rather strong prima facie case against Ds, the bringing of the derivative action would appear to be for the Company’s benefit. In similar view as the learned Recorder, I consider that as a matter of fairness, Yuen should be entitled to the protection of an order to indemnify her of the costs that would be incurred in bring the derivative action up to and including the close of pleadings. Thereupon, the Court would be in a better position to decide whether or not further indemnification should be ordered.” (Emphasis added)

10.  Once the court is satisfied that section 733 is satisfied and leave granted generally the good faith criteria will be satisfied.  I am not aware of a case in which leave has been granted but a costs order refused because the court was not satisfied that the member was acting in good faith.  Generally, this requirement will be satisfied as a natural corollary of the application for leave having been successful.  I would have thought that in practice leave would only be granted, but a costs order refused, because the court was not satisfied that the member is acting in good faith, if the company or a person with locus to appear demonstrated that the leave was sought for a collateral purpose.  This is not, however, what Mr Yam argued and Ken Lee’s evidence does not suggest a collateral purpose.

11.  The difficulty with the 2^nd Defendant’s objection that the application is not brought in good faith is that he and his Son have a good defence to the claim.  This is a roundabout way of saying that it is not in the interests of the Company that leave is granted.  The 2^nd Defendant is asserting that the claim is so misconceived the application cannot have been commenced in good faith.  It does not seem to me that as formulated this is a sustainable argument as the 2^nd Defendant has clearly stated that he does not oppose leave being granted.  To countenance such an argument would amount to reformulating the “good faith” test into one which required a plaintiff, which has established that it is in a company’s interests that leave be granted to go further if an order is sought that he is indemnified for the costs of the intended action, and to demonstrate something like a strong prospect of success.  This is inconsistent with the criteria that the authorities have developed for determining whether leave should be granted.  I, therefore, reject the argument that an order should not be made indemnifying the Plaintiff for the costs of bringing the derivative action, which it is not controversial that he should be given leave to do.

12.  What the 2^nd Defendant can properly argue is that the costs order should be structured in such a way that it does not cause irreparable damage to the Company.  The most practical way of assessing this is to grant leave to the Petitioner to seek an indemnity when he can provide details of the costs of the derivative action and an assessment can be made of the impact on the Company of an order that indemnifies the Petitioner.  This is consistent with the approach in the authorities[11].  I will, therefore, direct that paragraphs 3 and 4 of the Originating Summons be adjourned sine die with liberty to restore.  Paragraph 3 can be restored when the Petitioner is able to provide a detailed costs estimate and this can be considered taking into account the assets of the Company that can be expected to be available to indemnify the Petitioner for those costs over time.

13.  I will make an order in the terms of paragraph 1 of the Originating Summons.

14.  So far as the costs of the Originating Summons is concerned, what was originally sought was that the costs be paid to the Plaintiff out of the assets of the Company.  The draft order I was handed at the hearing sought the same order.  In advance of the hearing the Court was sent a statement of costs for a summary assessment.  I summarily assess the costs at HK$195,000 and make a costs order nisi that they be paid out of the assets of the 1^st Defendant.