LIU MAN HAU SIMON v. CHAN KAI WING AND ANOTHER

HCMP 1903/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1903 OF 2007

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J U D G M E N T

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1.  This is an application by Mr Liu Man Hau Simon (“Mr Liu”), a shareholder and director of MyWay Limited (“the Company”), seeking leave to continue HCA 1924/2007 (“the Action”) on behalf of the Company, pursuant to section 168BC of the Companies Ordinance (Cap. 32).  Mr Liu also seeks an indemnity from the Company in respect of all costs that he has incurred, or may in future incur, in pursuing the Action on the Company’s behalf.

2.  The application is opposed by the 1^st Respondent, Mr Chan Kai Wing (“Mr Chan”).  The Company, which is the 2^nd Respondent to the application, has taken no part in the application.

3.  Mr Liu and Mr Chan are the only shareholders of the Company, each holding 50% of its issued shares.  They are also its only directors.  The Company’s business involves the provision of online education services to primary and secondary schools in Hong Kong and Macau through websites operated by it, known as MyEnglishPal and MyChinesePal.  Schools that subscribe to the services provided by the Company (and their students) are able to access online educational programs through such websites.  The subscription period is one year, commencing in August or September each year, in line with the academic year in Hong Kong and Macau.  Subscribing schools are generally contacted in July or August in each year with a view to obtaining renewals of their subscriptions.

4.  According to Mr Liu, he discovered in August 2007 that a number of schools which were clients of the Company had been approached by a company called KEA EdTech Company Limited (“KEA”), and that KEA had requested such schools to renew their subscriptions to MyChinesePal with KEA.  Mr Liu obtained copies of some such requests to renew from some of the schools, and says, with some justification, that KEA’s invitations to renew sent by KEA appeared quite similar to those which the Company had issued in the past.

5.  Further, Mr Liu noticed from such invitations that two of the representatives of KEA named in the letters had until recently been employees of the Company.  These were Ms Elsa Tsang (“Ms Tsang”) and Ms Michelle Hung (“Ms Hung”).  Ms Tsang (who was said to be the girlfriend of Mr Chan), had left the Company in about June 2007, while Ms Hung had given notice of her intention to resign from her employment with the Company at the end of July 2007, to take effect from the end of August 2007.

6.  Mr Liu says that he was alarmed by these discoveries, and considered that they amounted to passing off by KEA, by representing, through the use of online computer programs with the same names as those used by the Company for its products, the request for renewal of existing subscriptions (which were with the Company and not KEA), and the use of a chop containing the words “MyChinesePal” on the letters, that it was associated with the Company and was offering the products developed by the Company for subscription by the schools it had approached.  Mr Liu says that he has been informed by some of the schools that they have subscribed for the services offered by KEA in the belief that they were dealing with the Company, and that the Company has accordingly lost business which it would otherwise have obtained, thus suffering loss and damage as a result of the alleged passing off.

7.  At about the same time as Mr Liu made these discoveries, on 28 August 2007, Mr Chan presented a petition under sections 168A and 177(1)(f) of the Ordinance, seeking an order for the winding-up of the Company on the just and equitable ground, or, alternatively, an order requiring Mr Liu to purchase Mr Chan’s shares in the Company.

8.  The background to Mr Chan’s petition is that although it seems that the Company had operated successfully for a period of time after its incorporation, from about late 2006 or early 2007, differences arose between Mr Liu and Mr Chan in relation to the operation of the Company.  Each says that the other is at fault for this.  However, it seems that by about June or July 2007, Mr Chan was prepared to purchase Mr Liu’s shares in the Company.  This proposed purchase eventually fell through, and, again, each blames the other for this.  Thereafter, they remained unable to cooperate in relation to the Company’s business, and Mr Chan presented his petition in HCCW 392/2007.

9.  In my view, the allegations underlying the petition are not of particular relevance to the determination of this application.

10.  Having discovered what appeared to him to be wrongful conduct on the part of KEA, Ms Tsang and Ms Hung, Mr Liu sought to find out more about KEA.  He believes that KEA is associated with Mr Chan (a suggestion which Mr Chan denies), because two directors of KEA (a Ms Yung and a Mr Z.H. Liu) were named as intended directors of the Company to be appointed following the purchase of Mr Liu’s shares in the Company by Mr Chan, and because Mr Chan’s signature appears closely to resemble the authorised signature of a corporate director of KEA called Amazing Mind Investments Limited, which is not a company incorporated in Hong Kong.  As I have noted, Mr Chan denies being associated with KEA.  He also denies any association with Amazing Mind.

11.  On 30 August 2007, Mr Liu caused notices to be sent to primary and secondary schools in Hong Kong and Macau notifying them that KEA was not related to the Company and was not authorised to receive any payments on its behalf.  The following day, he instructed Messrs Johnson Stokes & Master (“JSM”) to write to KEA, Ms Tsang and Ms Hung demanding that they cease seeking subscriptions for the Company’s on-line educational programs, and compensate the Company for any losses that it may have suffered.  The letter also stated that if KEA, Ms Tsang and Ms Hung failed within seven days to agree to do these things, legal proceedings would be issued against them without further notice.

12.  Mr Liu says he also informed Mr Chan of these developments, and sought clarification as to Mr Chan’s relationship with KEA.  Nothing having been heard from Mr Chan or KEA, Ms Tsang and Ms Hung, he instructed JSM to write to Mr Chan’s solicitors to inform them that he proposed that the Company should issue legal proceedings against KEA, Ms Tsang and Ms Hung.  JSM did so on the morning of 10 September 2007, requesting Mr Chan’s comments, if any, by 1:00 pm the same day (some three hours after their letter was sent to his solicitors).  A response was received by fax from Mr Chan’s solicitors at 12:59 pm, stating that Mr Chan considered that legal action should only be taken after the matter had been considered and resolved upon by the board of the Company.  An enclosure which was said to explain the situation was not in fact attached.  The response did not come to the attention of the handling solicitor at JSM until sometime in the afternoon, after the writ in HCA 1924/2007 had been issued.  The statement of claim alleged that KEA had been guilty of passing off, by representing that it was the owner of the websites through with the Company provided its on-line educational programs, and by misleading potential users of the programs into thinking that the programs being offered were those of the Company.  It went on to allege that Ms Tsang and Ms Hung were in breach of their duties to the Company by causing or assisting KEA in its activities of passing off and by seeking to divert the Company’s business to KEA.

13.  Thereafter, on 13 September 2007, Mr Chan demanded the withdrawal of HCA 1924/2007 on the ground that the action was “entirely without merit”.  No explanation of why Mr Chan took this view was given.  In the light of Mr Chan’s stance, on 19 September 2007, Mr Liu served notice pursuant to section 168BD of the Ordinance of his intention to take out the present application.

14.  The difference of opinion between Mr Chan and Mr Liu as to the merits of pursuing HCA 1924/2007 evidently came to the attention of the defendants to those proceedings, because on 25 September 2007, they issued a summons seeking to strike the action out on the ground that it had not been brought with the authority of the Company.  That striking out application has been stayed pending the outcome of these proceedings.

15.  Thereafter, on 27 September 2007, Mr Chan’s solicitors asked Mr Liu for a legal opinion as to the merits of the Company’s claim in HCA 1924/2007, so that Mr Chan could consider whether or not he should withdraw his objection to its commencement.

16.  On 4 October 2007, Mr Liu took out the Originating Summons in these proceedings.

17.  On about 27 October 2007, Mr Chan disclosed for the first time a licence agreement between the Company and KEA which purported to grant to KEA a licence to market the Company’s on-line educational programs.  The licence agreement was dated 15 August 2007, and was signed, on behalf of the Company, by Mr Chan.  It is not suggested that it was approved by the Company’s board, but Mr Chan says that he and Mr Liu had in the past entered into agreements on behalf of the Company without board approval, and that they each had authority to act on behalf of the Company.

18.  This application is based on the provisions of Part IVAA of the Companies Ordinance, which were introduced to enable shareholders to bring proceedings, or intervene in proceedings, on behalf of companies of which they are members, in certain specified situations.  Although headed “Statutory Derivative Actions”, the procedure created by this Part enables shareholders to participate in proceedings in which their companies are or may become involved that go beyond those that would fall within the scope of the traditional derivative action as it is known to company lawyers, which are typically cases involving claims brought by a shareholder on behalf of a company against its directors or officers where the alleged wrongdoers are in control of the company, which is therefore unable to act against them on its own behalf.  Under the statutory provisions, actions by or against the Company by third parties, unrelated to its management are covered as well (see section 168BB(1) of the Ordinance).

19.  For present purposes, the most immediately relevant statutory provisions are sections 168BB and 168BC.  These provide as follows:-

“168BB.  Application

(1)     This Part applies to –

(a)  the bringing of proceedings in respect of misfeasance committed against a specified corporation;

(b)  the bringing of proceedings in respect of any matter where a specified corporation fails to bring proceedings in respect of such matter by reason of misfeasance committed against the specified corporation; and

(c)  the intervention in proceedings in respect of any matter where a specified corporation fails to diligently continue, discontinue or defend the proceedings in respect of such matter by reason of misfeasance committed against the specified corporation,

where in relation to the proceedings brought or intervened in, the cause of action or right to continue, discontinue or defend those proceedings, as the case may be, is vested in the specified corporation and relief, if any, is sought on behalf of the specified corporation.

(2)     In this section, “misfeasance” … means fraud, negligence, default in compliance with any enactment or rule of law, or breach of duty.”

“168BC.          Members may bring or intervene in proceedings

(1)     A member of a specified corporation may, with the leave of the court granted under subsection (3) –

(a)  bring proceedings before the court on behalf of the specified corporation; or

(b)  intervene in any proceedings before the court to which the specified corporation is a party for the purposes of continuing, discontinuing or defending those proceedings on behalf of the specified corporation.

(2)  …

(3)  The court may, on the application of a member of a specified corporation, grant leave for the purpose of subsection (1) if the court is satisfied that –

(a)  it appears to be prima facie in the interest of the specified corporation that leave be granted to the applicant;

(b) if the applicant is applying for leave to bring proceedings under subsection (1)(a), there is a serious question to be tried and the specified corporation has not itself brought the proceedings;

(c)  if the applicant is applying for leave to intervene in proceedings under subsection (1)(b), the specified corporation has not diligently continued, discontinued or defended those proceedings; and

(d)  except where leave is granted by the court under section 168BD(4), the member has served a written notice on the specified corporation in accordance with section 168BD.”

20.  Section 168BD requires two weeks’ notice of intention to make an application under section 168BC to be served on the company in respect of which the application is to be made.  As I have noted, this was done in this case by Mr Liu on 19 September 2007.

21.  Section 168BI is also relevant.  This section provides the court with power to make, at any time, orders in respect of costs incurred or to be incurred in respect of the application for leave, or of the proceedings to be brought or intervened in by the member, the specified corporation or any other party to the application or proceedings.  Mr Liu relies on this section to seek an order that the Company should indemnify him for any costs that he may incur in respect of the application and HCA 1924/2007.

22.  Mr Wong, resisting the application, put forward a number of arguments as to why leave should be refused.  As a fall back position, he contended that even if I should come to the view that leave for Mr Liu to intervene in HCA 1924/2007 should be granted, I should not (at least at this stage) make an order that would have the effect of requiring the Company to indemnify Mr Liu in respect of all the costs that he might incur in connection with that action.

23.  Mr Wong suggested first that given that a winding up petition had been presented against the Company, the effect of sections 181 and/or 186 of the Ordinance was that all proceedings involving the Company should (or at least could) be stayed.  I do not think that this is right.  It is clear that each of those sections, on their terms, relates to actions or proceedings against a company.  They are therefore not apt to cover the present situation, where the Company is itself bringing the proceedings.

24.  Mr Wong then suggested that the provisions of section 168BB and 168BC were intended to deal with the situation where the proposed action by the company was to be brought against its directors or officers, but where there might be difficulty in establishing the existence of a prima facie case of wrongdoer control.  He contended that the powers conferred on the court by those sections were not so much directed at cases in which the claim was against third parties who were outsiders to the Company, and that in those cases, a rebuttable presumption against such proceedings being in the interest of the company should be read into the provisions, along the lines of such a presumption which has been enacted in similar legislation in other jurisdictions such as Australia.

25.    It is true that in certain Australian legislation, it is expressly provided that where a company’s board has decided against pursuing proceedings against third parties, it is rebuttably presumed that it would not be in the interests of the company concerned to bring such proceedings.  However, no such presumption has been enacted in Hong Kong’s legislation.  Moreover, it seems to me that it is not correct to seek to limit the scope of sections 168BB and 168BC to what might be termed the classic derivative action by a shareholder against wrongdoers who are officers or insiders so far as the company is concerned.  The terms of section 168BB(b) and (c) make it clear that the statutory derivative action created by Part IVAA of the Ordinance is not so limited.  I therefore do not think that the court should be predisposed against the grant of leave in cases in which the claim involves outsiders, rather than directors or officers of the company who are alleged to have been guilty of some breach of duty owed to the company.

26.  Mr Wong also suggested that it was necessary for a misfeasance claim to form part of the claim that was sought to be advanced on behalf of the company, and that where there had been a failure to take proceedings, the proposed claim should include a claim that such a failure involved misfeasance on the part of one or more of the company’s officers.  Again, I see no reason to think that this is required to form part of the proposed claim.  What is required by section 168BB(b) and (c) is no more than that the failure to bring proceedings, or to conduct them diligently, involves misfeasance on someone’s part.

27.  In this case, it is clear from Mr Liu’s evidence that he is contending that the failure of Mr Chan to agree to the bringing of HCA 1924/2007 involves misfeasance, or a breach of duty, by Mr Chan.  The basis for that allegation is that in Mr Liu’s view, the bringing of that action is for the benefit of the Company and is in its interests.  Thus, in refusing to cooperate in approving the proceedings, Mr Chan is not acting in the best interests of the Company, and is thus guilty of misfeasance for the purposes of the statutory provisions.

28.  In my view, having regard to the terms of section 168BC, which make it clear that all that is required for the grant of leave is that it should be shown on a prima faciebasis that the grant of leave would be in the interests of the Company, it is neither appropriate nor necessary to establish this element to a particularly high standard.  This accords with the approach of Kwan J in two recent decisions on section 168BC, namely Re F & S Express Ltd [2005] 4 HKLRD 743, and Re Lucky Money Ltd (unreported, HCMP 505/2006, 18 July 2006).

29.  In Re F & S Express Ltd Kwan J said, at paragraphs 17 and 18 of her judgment:-

“17.   As Palmer J had commented upon in Swansson v R A Pratt Properties Pty Ltd & Anor (2002) ACSR 313 at p.324 para 55, there is a significant distinction between a requirement that the proposed action is  in the interests of the company and a requirement that the proposed action may be, or appears to be, or is likely to be in the interests of the company.  In jurisdictions with legislative requirements of the latter kind, the courts have taken the view that the best interests of a company need be considered only in a prima facieway.

18.    In Bellman & others v Western Approaches Ltd (1981) 130 DLR (3d) 193 at p.201, the British Columbia Court of Appeal drew a similar distinction between the two kinds of requirements and held that where the court has to be satisfied the proposed action would appear to be in the interests of the company, what is sufficient at the stage of granting leave is that “an arguable case be shown to subsist”.  …”

30.  In Re Lucky Money Ltd Kwan J had this to say at paragraphs 40 to 42 of her judgment:-

“40.   Kwong Ian is required only to show that its intended intervention in the Jinfu Action is prima faciein the interests of the Lucky Companies.  This burden is not a high one.  It is not required to show its conduct of the defence is in the interests of the company, unlike the legislative requirement in Australia, or that it is acting in good faith, unlike the legislative requirement in Australia, Canada and Singapore.

41.    The good faith requirement was removed in an earlier version of the bill considered by the Bills Committee of Legislative Council.  The idea is 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.

42.    Mr Liang submitted in reliance on decisions in Canada and Singapore it must be shown that the defence sought to be conducted by the applicant is legitimate or arguable.  This application is not a trial run for an Order 14 application, this battle will be fought elsewhere.  In my view, the threshold to be surmounted by the applicant should be low.  If it is show there is plainly no arguable defence, it would not prima facie be in the interest of the company to give leave to a party to conduct its defence. …”

31.  I agree with this approach, and do not think that it is necessary for an applicant to do more than establish on a prima faciebasis that the proposed action, or his proposed intervention, is in the interests of the company concerned.  In considering whether or not this is made out, the court should not attempt to resolve the underlying dispute.

32.  If, as I think, this is what the court is required to do in the context of section 168BC, what should be the approach to the requirement in section 168BB that the company’s failure to take action, or to pursue the proceedings or their defence diligently, be due to misfeasance?  I have come to the conclusion that this question should be approached in much the same way.  If the court is satisfied that it is, prima facie, in the interests of the company for leave to be granted, it would appear to follow that it would correspondingly involve a failure to act in the best interests of the company not to take the steps for which leave is to be granted.

33.  That said, I think that it should be borne in mind that there is a difference between whether or not a company has a prima facie case in respect of proceedings that an applicant wishes to bring on its behalf, or a prima facie defence to proceedings that an applicant wishes to defend on its behalf, and the question of whether or not it is prima facie in its interests to bring or defend them.  The latter enquiry is, I think, a wider one, that would involve consideration of factors beyond the merits of the proceedings alone.

34.  I turn therefore to consider whether or not it appears prima facie to be in the interests of the Company that it should continue with the prosecution of HCA 1924/2007.  Mr Wong submitted that it was not, having regard to the following factors:-

(1)     The Company’s claim, as pleaded, was defective since it failed to plead the manner in which the goodwill that the Company had to establish to support its claim of passing off was acquired.

(2)     The Company’s claim was most unlikely to succeed having regard to the licence agreement which it had granted to KEA.

(3)     The Company’s claims against Ms Tsang and Ms Hung were weak.

(4)     The licence to KEA having been terminated shortly after the commencement of the action by the Company, the damages recoverable were likely to be very limited, and were likely (if any damages were recovered at all) to fall within the jurisdictional limit of the District Court, so that the costs involved in pursuing the proceedings were likely to be largely irrecoverable.

(5)     The Company’s financial position was such that it was unlikely to have sufficient funds to pursue the proceedings to a conclusion.

35.  Despite these arguments, I have come to the view that it is nonetheless prima facie in the Company’s interests to grant leave to Mr Liu to intervene in the proceedings on its behalf.

36.  I do not think that the pleading point is a particularly strong one.  Even if the statement of claim might benefit from amendment, it seems to me that so long as there is an underlying claim that appears to have prospects of success, and which it would prima facie be in the interests of the Company to bring, it would be preferable to grant the leave sought so that the applicant is able to take such steps as may be necessary to put the claim onto an appropriate footing.

37.  So far as the point concerning the licence is concerned, the validity and effectiveness of the licence is very much in dispute.  The relatively late disclosure of the licence, is a matter which I think gives rise to legitimate concerns on the part of Mr Liu.  The existence of a valid licence might well have been a complete answer to the Company’s claims of passing off by KEA, and improper conduct by Ms Tsang and Ms Hung.  That being so, it is surprising that it should not have been disclosed by any of them in answer to the warning letter sent by JSM on the Company’s behalf at the end of August 2007.  Similarly, it is surprising that it should not have been referred to by Mr Chan at an early stage.  Mr Chan was asked to agree to the bringing of the proceedings in HCA 1924/2007.  The obvious answer to have given to this suggestion would have been to reply that the Company had no good claim, as it had granted a licence to KEA to deal in its programs.  But this was not done until late October 2007.  Mr Chan did not mention it when the possibility of proceedings was first raised in late August 2007.  Nor did he mention it in September 2007, either when disagreeing with the institution of the High Court action, or when asking for a written opinion as to the merits of the claim.  In these circumstances, I think that there is scope for Mr Liu and the Company to call for the alleged licence to be closely scrutinised and to proceed with the action in the meantime.  As I understand Mr Liu’s case, it is that the entering into of the licence agreement on behalf of the Company constituted a breach of duty by Mr Chan, of which KEA was aware, having regard to its apparent connection with Mr Chan.  I do not think that the possibility of Mr Liu establishing such a connection can be dismissed, having regard to the matters which he has referred to in his evidence.

38.  This is not, of course, to say that the action against KEA will succeed at the end of the day – however, it does seem to me that at this stage, at least, it is not possible to say that it is clearly doomed to fail.

39.  So far as the claims against Ms Tsang and Ms Hung are concerned, I can see some force in Mr Wong’s submission.  However, I am not prepared to say that there are no prospects of the Company succeeding in the claims against them.

40.  In the circumstances, and bearing in mind the relatively low threshold to be crossed, it does seem to me that it would, prima facie, be in the Company’s interests to bring or continue the proceedings against KEA and the other defendants.

41.  Mr Wong’s remaining points appear to me to go more to the question of whether or not the Company should be required at this stage to indemnify Mr Liu against all the costs that he may incur in pursuing HCA 1924/2007 on its behalf.  I would, I think, accept that it is not clear at this stage what amount of damages the Company might be awarded should it succeed in its claims, and that there is at least a possibility that such damages as may be awarded might fall within the jurisdictional limit of the District Court.

42.  Having regard to this, and having regard also to the fact that the Company does not appear to have sufficient funds available to it to fund HCA 1924/2007 in its entirety, it seems to me that it would not be appropriate at this stage to direct that the Company should indemnify Mr Liu for all the costs that he might incur in pursuing the proceedings on its behalf.  Given the various permutations of the possible outcomes, both in relation to liability and to the level of costs recoverable, I think that it would be preferable to defer consideration of the question of whether, and if so, to what extent, the Company should be required to indemnify Mr Liu in respect of any costs that he might incur until a later stage in the proceedings, after the position on these matters has become clearer.

43.  Thus, while I would make an order in terms of paragraph 1 of the Originating Summons, I decline to make the order sought by paragraph 2 thereof.

44.  So far as costs are concerned, having regard to the fact that the application has been partially successful, I propose to make an order nisi that Mr Chan should pay Mr Liu half of his costs of this application, to be taxed on the party and party basis if not agreed.