MYERS MANAGEMENT CONSULTING LTD v. TOPMIX (INTERNATIONAL) CO LTD

DCCJ 3051/2014
DCCJ 3052/2014
DCCJ 3053/2014
DCCJ 3054/2014
(Heard Together)

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3051 OF 2014

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DECISION

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Introduction

1.  This is an application for leave to appeal against my order on 23 June 2015, whereby I granted leave to the 1^st intervener and 2^nd intervener (“the Interveners”) to intervene in four actions DCCJ 3051 to 3054 of 2014 (“the DCCJ Actions”) for the purpose of conducting the defence for and on behalf of the defendants in the DCCJ Actions, and set aside the default judgments dated 10 November 2014 entered for the plaintiff against the defendants.

2.  The facts of the case have been set out in my Reasons for Decisions dated 6 July 2015 (the “Reasons”).  In short, the plaintiff allegedly entered into consultancy service contracts with the defendants for a total sum of HKD 7.2 million for a period of two years.  As the services fees became due and remained unpaid for months, the plaintiff commenced legal proceedings against the defendants and obtained default judgments as a result of the defendants’ failure to give any notice of intention to defend.  The plaintiff later presented a winding up petition against the defendants as the judgment debt remained unpaid.

3.  The Interveners applied to be added as interveners in the proceedings for defending on behalf of the defendants in the DCCJ Actions and setting aside the default judgments.  The Interveners alleged that the DCCJ Actions were a conspiracy between the majority shareholders of the defendants and the plaintiff to bring about the demise of the defendants to cover up their wrongdoings and breaches of their directors’ duties.

4.  As explained in the Reasons, I examined the language of the Companies Ordinance (Cap 622) (“the CO”) and came to the view that the common law right to intervene in proceedings was expressly confirmed to co-exist with the statutory right to intervene under the CO.  Further, I noted a number of suspicious, and unanswered (or insufficiently answered) facts surrounding the entering of the default judgments and decided that the defendants had a real prospect of success in the DCCJ Actions and thus met the threshold for setting aside the default judgments.

5.  The broad ground for appeal is that I erred in deciding that the common law right to intervene in proceedings exists, and thus the Interveners should not have standing to intervene in the present action and hence the default judgments should not be set aside.

Does the common law right to intervene exist?

6.  Mr Man argues that it does not.  He faces the seemingly insurmountable hurdle that, as explained in the Reasons, the statue has expressly acknowledged, in a number of provisions in the CO, the existence of such right.  He tackles this hurdle on two fronts.  First, he argues that a statue cannot create a right at common law.  Those provisions in the CO would at best mean that the legislature acknowledged or believed that there did exist in the common law such a right.  However, the acknowledgement or belief of the lawmakers cannot be taken to mean that the common law right does exist in the first place.  Whether a particular common law right exists is a matter of precedent.  It does not depend on the view of the lawmakers, who only make the law but not interpret the law.  Mr Man said it should be incumbent on the Interveners to persuade the court why the alleged common law right does exist by reference to the common law jurisprudence, and the Interveners have failed to do so.  It would be recalled, as I mentioned in the Reasons, that no precedent on the existence of this common law right has been cited to the court.  

7.  Mr Man cited the House of Lords case of West Midland Baptist (Trust) Association (Inc) V Birmingham Corporation [1970] AC 874 as an illustration that the legislature could be wrong in its assumption of the state of the common law in enacting a statute.   Without going into details of the case, it suffices to cite a passage from the judgment of Lord Reid at 898F: “… But the mere fact that an enactment shows that Parliament must have thought that the law was one thing does not preclude the courts from deciding that the law was in fact something different. This has been stated in a number of cases including Inland Revenue Commissioners v Dowdall, O’Mahoney & Co. Ltd. [1952] A.C. 401….”

8.  Hence, he argues, my reliance on the wording of the CO to infer the existence of the common law right to intervene is misplaced.

9.  In support and in furtherance of this primary argument, Mr Man points out that there are a number of authorities supporting the proposition that the common law right to bring derivative action is confined to actions against insiders only, not third parties.  The authorities he cited include Iesini v Westrip Holdings Ltd [2009] EWHC 2526, para 74 (referring to Lord Denning’s judgment in Wallersteiner v Moir (No.2) [1975] QB 373), Re Myway Ltd [2008] 3 HKLRD 614 para 25 and p 730 of Ford’s Principles of Corporation Law (14^th edn, 2010).  If these authorities support the proposition that there is no right to bring derivative action against third parties, as opposed to insiders such as directors and officers of the company, then a fortiori, there would not be a right to intervene and defend an action brought by a third party against the company.

Should leave be given?

10.  Mr Man’s arguments are attractive on the face.  Yet, on my part, I am not entirely convinced.

11.  As I said in the Reasons, the lack of precedent gave me a lot of hesitation in acknowledging the existence of the common law right to intervene.  However, this is not conclusive and is overcome by the very clear wordings in the CO acknowledging the existence of such right.  I believe the court should be able to acknowledge the existence of a common law right if it is a logical deduction from recognised principles even though there does not exist a clear precedent.  The common law right to bring derivative action is a recognition that the court could and should make exception to the majority rule if required by justice.  It is hard to see why the same should not apply when the company is a defendant rather than the plaintiff.  Even if, as Mr Man argues, the wordings of the CO do not create such a right, they are a clear support of such logical deduction.

12.  Mr. Tang for the Interveners argues that the Court of Final Appeal in Waddington Ltd  v Chan Chun Hoo [2009] HKC 381 did exactly that – acknowledging the existence of the right to bring multiple derivative action without any precedent. I may not entirely agree with Mr. Tang on this as Wallersteiner v. Moir (No.2) [1975] 1 QB 373 could possibly be regarded as such a precedent (see para 62 of the CFA judgment in Waddington), though it seems to me the CFA reached its conclusion (on the existence of the common law right to bring multiple derivative action) based more on principles and logic than precedents.

13.  As to the proposition that the common law right of derivative action could only be used against insiders, even if Mr Man is right, in this particular case, the Intervener’s challenge of the default judgments is in reality a claim against the majority shareholders, that they conspired with the plaintiff to harm the company.  If the Interveners succeed in their claim, the plaintiff would be liable for dishonest assistance to the majority shareholders.  I doubt very much if the common law principles regarding derivative action should be so circumscribed as to bar such a claim.

14.  It should also be noted that even if the plaintiff succeeds in its eventual appeal, the parties may have just gone around a full circle as the Interveners always have the option to apply for intervention under the CO instead of relying on the common law.

15.  The above are factors militating against the grant of leave.  Yet I must recognise that the arguments put forward by Mr Man are not entirely implausible.  The points argued are difficult and novel.  Mr. Tang’s heavy reliance on Waddington reminds me that the CFA gave leave to appeal on the issue of the multiple derivative action under common law. It would be presumptuous of me to think that the Reasons would be the last word on the issue of the common law right to intervene.

16.  The existence or not of the common law right to intervene goes to the root of the Interveners’ standing.  It is not a matter of discretion.  It is a matter of law.  As the Interveners have deliberately chosen not to rely on their express statutory rights, they would have to face the legal challenge to their standing mounted by the plaintiff based on the uncertainty of the common law on this issue.  To obtain leave, what Mr Man needs to show is just a “reasonable prospects of success”, which was characterised in SMSE v KL [2009] 4 HKLRD 125 by Le Pichon JA as “more than fanciful” without having to be “probable”.  In the circumstances, I should grant leave to the plaintiff.  I also order that costs of this application be in the cause of the appeal with certificate for counsel.