CY FOUNDATION GROUP LTD v. CHENG CHEE TOCK THEODORE AND OTHERS

HCMP 680/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 680 OF 2011

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J U D G M E N T

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1.  This was an application by the 1^st, 2^nd, 3^rd and 5^th Defendants for a direction that these proceedings should continue as if begun by writ, and that pleadings should be served.

2.  I think as a matter of case management it would be preferable to have pleadings so that the issues are clearly defined and so that the court and the parties will know precisely what the issues are between the parties.  It may be that, once the issues are defined, it will prove necessary to call very little evidence.  If that is the case, that may mean that the proceedings can be dealt with in a rather shorter period of time than if evidence needs to be called and cross‑examination needs to be undertaken.

3.  But it does seem to me that, given the way in which the matter has developed, and the matter in which the battle lines have now been drawn as they have emerged through the course of the various affirmations and the various submissions at the hearings that we have had on this matter over the last two or three months since it was kicked off, that there is a fairly fundamental divergence of approach to the matter as between the Plaintiffs and the Defendants.

4.  The Plaintiffs rely simply on the principles of Re Hydrosan, in which it was stated that a company’s funds should not be expended on shareholder disputes either by the company itself participating in the proceedings or by funding one or other side of the rival camps of shareholders involved in the dispute.

5.  Viewed in the context of Re Hydrosan, it is easy to see why the company takes the view that this is a simple case so far as it concerns the costs that Mr Cheng and Ms Yung incurred in relation to the section 168A proceedings, as a straightforward application of the Hydrosan principles would, as Mr Wong for the Defendants accepted, suggest that the Plaintiffs do indeed have a strong case.

6.  However, Mr Wong says that the position is not quite as simple as that, and that it is necessary to consider whether or not the Defendants are in a position to invoke and rely upon Article 166 of the company’s Articles of Association, which provides an indemnity to directors, the secretary and other officers of the company in respect of any costs, actions, charges, losses, damages and expenses which they may incur or sustain as a result of any act done by them in connection with the execution of their duty or supposed duty in their respective roles as director or officer.

7.  Mr Wong has identified four conditions that need to be satisfied before Article 166 can be relied upon.  These are: first, that the person seeking to rely on it is in fact a director or officer of the company; secondly, that they were acting in relation to an affair of the company in relation to a particular matter which has given rise to an action or some costs, charges, loss, damage or expense to them; thirdly, that they should not have been guilty of acting in that matter with wilful negligence, wilful default or dishonesty; and fourthly, that the indemnity should come out of the assets and profits of the company.  Perhaps the last of these matters is not likely to be a matter of any real controversy, but I can see that there may be some scope for dispute as to the other three conditions.

8.  Mr Lam, who appears for the Plaintiffs, has sought to suggest that there is, in reality, no great difference between the parties and no real issue between them on any of these matters.  He says, for example, that the company accepts that Mr Cheng was a director, and that Ms Yung was an officer, at the relevant time.  However, as Mr Wong has pointed out, while it is accepted that Mr Cheng is and was a director, as far as Ms Yung’s status is concerned, although it is now said that it is accepted that she was an officer of the company at the relevant time, it does appear in evidence that has been filed on behalf of the company so far in these proceedings that an issue may arise as to whether or not she was acting in that capacity or acting within the scope of her office in relation to the matters in respect of which the funding by the company of her legal expenses is complained of.

9.  As for the question whether the matters were affairs of the company, there also appears to be a difference in emphasis between the parties in that Mr Lam has advanced the view that the relevant matter is the section 168A proceedings, which he says cannot constitute an affair of the company.  That may well be right; but on the other hand, Mr Wong says that the relevant question is whether or not any of the complaints raised in the section 168A proceedings, whether they be for the purpose of securing some form of interim relief such as the appointment of receivers, or for the purpose of obtaining substantive relief, related to matters that were acts done by Mr Cheng and Ms Yung in their conduct of the affairs of the company as directors or officers of the company.  Mr Wong says that if they were, then the bringing of the section 168A proceedings would constitute an action that arose, at least in part, out of the conduct of their role as such director or officer, thereby giving rise to an arguable case for indemnity under Article 166.

10.  In relation to the question of wilful default, fraud, dishonesty or wilful negligence, it does seem that at least in relation to the 17th floor transaction which figured largely in the 168A proceedings and is also the subject of criminal proceedings against Mr Cheng that are pending, that the question may arise, although it is likely that the outcome of that question will turn largely on the result of the criminal proceedings.

11.  In those circumstances, it does seem to me that it would be desirable for the sake of clarity and definition of the issues in this set of proceedings that pleadings should be framed.  I do not think that this should cause any great difficulty from the Plaintiffs’ point of view, since their case, as they frame it and as they have indicated it will be put forward, is relatively simple.

12.  However, it seems to me that sharper definition of the issues is likely to be obtained by seeing how the Defendants put their case as to why they say they bring themselves within Article 166, and seeing from the Plaintiffs’ reply the extent to which the matters that the Defendants rely upon as bringing themselves within the scope of Article 166 are the subject of dispute.

13.  It seems to me that it is only by doing this that it will be possible for the court and the parties to see with some clarity what the live issues are, and what matters will require to be dealt with in evidence.

14.  It may be that at the end of the pleadings process, when one is able to stand back and take an overview of the pleadings, one will find that there are, in truth, few live issues that will need evidence to be called to deal with.  But even if that is what the outcome is, it seems to me that if that does happen, the framing of pleadings in this matter will have had a benefit in that it will have brought one to a position in which one is able to see that the amount of evidence actually required at the trial is relatively limited.

15.  If that proves not to be the case, and the scope of the evidence at the trial is in fact rather wider than one might at present anticipate, it seems to me that to have pleadings prepared in this matter will equally be beneficial for the conduct of these proceedings.

16.  For those reasons, it does seem to me that it would be desirable, notwithstanding that there have been a number of affirmations filed in these proceedings, for directions to be given for the matter to be dealt with by directing that pleadings be filed.

17.  A timetable has been proposed by the Defendants which will result in the pleadings being completed within a period of some three months from now, and I shall hear Mr Lam as to whether that is a realistic timetable from his clients’ point of view.