SEA HERITAGE HOLDINGS LTD v. NICE WAVE INTERNATIONAL LTD

HCMP 1294/2024

[2024] HKCFI 2891

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1294 OF 2024

____________________

BETWEEN

____________________

_____________

D E C I S I O N

_____________

A. Introduction

1.  By an Originating Summons dated 23 July 2024 (“OS”), the Plaintiff (“Sea Heritage”) applies for the following reliefs, namely:

(1) leave to commence statutory derivative action for and on behalf of the Defendant (the “Company”) against Lee Chain Cheng (“Lee”) and Navigator Prosperity Capital Co Ltd (“Navigator”) pursuant to ss 732 and 733 of the Companies Ordinance (Cap. 622) (“CO”) on the claims set out in the draft Statement of Claim exhibited to the supporting affirmation filed together with the OS;

(2) an interim order under s737(2) CO that, pending the determination of the OS, leave be granted to Sea Heritage to serve protective writ for and on behalf of the Company on the condition that Sea Heritage shall not cause such writ to be served on Lee and Navigator; and

(3) costs of Sea Heritage in making the application and bringing the proposed claim be indemnified out of the Company’s assets.

2.  Sea Heritage was at all material times and is still a member of the Company, holding 4,000 shares therein. The remaining 8,000 shares were at the material times and still are held by Navigator. Lee, nominated by Navigator, was the sole director of the Company at the material times.

3.  As stated in the draft Statement of Claim, the statutory derivative action is intended to be brought in the name of the Company against Lee and Navigator.

B. Before the Hearing

4.  Before the hearing on 12 September 2024 (“Hearing”), I received a letter dated 9 September 2024 from solicitors for Navigator, in which they made submissions and proposed directions for and on behalf of Navigator. The said letter was also copied to the solicitors for Sea Heritage and those acting for the Company.

5.  It is inappropriate to make submissions in this manner through correspondence. This is especially so when Navigator is not a party to the OS. Whilst it was open to Navigator to seek to intervene, it had not taken any steps to intervene before the Hearing.

6.  Further, I accepted submission from Mr Jonathan Ng, counsel for Sea Heritage, that there was no statutory requirement under the CO for the plaintiff to join, at the leave stage, the proposed defendants in the statutory derivative action. Indeed, there are authorities in which leave was granted to commence statutory derivative action where the alleged wrongdoer was not joined in the application for leave under s733. See for instance Pan Shi Liang v Harsen Industries Ltd [2018] HKCFI 211, G Lam J (as he then was): Liu Chun Kau Andy v Hung Lee Construction Engineering Ltd [2019] HKCFI 1269, Recorder Linda Chan SC (as she then was).

C. At the Hearing on 12 September 2024

7.  At the Hearing, Mr Martin Lau, counsel for the Company, indicated that the Company adopted a neutral position in respect of paragraphs 1 and 2 of the OS. The Company only objected to paragraph 3 of the OS, viz., that the plaintiff’s costs be indemnified by the Company.

8.  Mr Ng indicated that paragraph 3 of the OS can be adjourned and dealt with subsequently. This was not objected to by Mr Lau. In the premises, I gave a direction that paragraph 3 of the OS be adjourned sine die, with liberty to restore.

9.  During the Hearing, Mr Ng focused his submissions on paragraph 2 of the OS, viz., application for an interim order for leave to issue a protective writ.

10.  In the draft Statement of Claim, it is alleged that Lee procured the Company to enter into various agreements from October 2018 to June 2019, including the Stock Purchase Agreements in October 2018 (collectively the “Impugned Agreements”). The case is that, as a result of the Impugned Agreements, the Company transferred away its valuable assets without receiving any consideration in return.

11.  In the draft Statement of Claim, the causes of action relied upon are breaches of fiduciary duties / breaches of the duty to exercise reasonable care and skill on the part of Lee; and dishonest assistance insofar as Navigator is concerned.

12.  Insofar as the limitation periods are concerned, Mr Ng argued, which I accepted, that:-

(1) Claims for breach of fiduciary duties against directors are prima facie subject to a 6-year limitation period: s20(2) of the Limitation Ordinance (Cap 347) (“LO”); Burnden v Fielding [2018] AC 857, at §§11-12.

(2) Claims in tort (i.e. breach of the duty to exercise reasonable care and skill) are also subject to a limitation of 6 years: s4 LO.

(3) The limitation period for dishonest assistance claims is also 6 years: Cyberworks Audio Video Technology Ltd (in compulsory liquidation) v. Mei Ah (HK) Company Ltd [2020] HKCFI 398, at [89], per Coleman J.

13.  It is well settled that, under s737(2)(a) CO, the Court can, pending the determination of the application for leave, make interim orders, including an order allowing the applicant to issue protective writ for and on behalf of the company. Such interim order would be subject to the condition that the plaintiff shall not cause the writ to be served on the potential defendants without further leave of the court: Chen Pei Xiong v Convoy Global Holdings Ltd [2024] HKCFI 819, at [15], [16(5)], per Coleman J.

14.  In this connection, Mr Lau also helpfully drew my attention to a subsequent decision of Coleman J in Chen Pei Xiong v Convoy Global Holdings Ltd [2024] HKCFI 1568, [98]-[100]. His Lordship held that such interim order granted for the issue of the protective writ may be revoked in due course, such that the protective writ can be treated as never having been issued. Alternatively, if that is not possible, then it is open to the court to direct that the writ must not be served, and it will expire at the end of its period of validity without any possible extension of validity.

15.  Having considered the parties’ submissions, I agreed with Mr Ng that such interim order was protective in nature and would cause no prejudice to the Company, Navigator and Lee. I was satisfied that the claims of the Company as set out in the draft Statement of Claim may be time-barred in October 2024. On the other hand, if the interim order under paragraph 2 of the OS was refused, it would cause prejudice. Further, should it subsequently appear to me that leave should not be granted to Sea Heritage to commence the statutory derivative action, I could either make a fresh order overturning the leave granted for issue of the protective writ, or make a further direction that the writ must not be served: Chen Pei Xiong [2004] HKCFI 1568, at [98] per Coleman J.

16.  Thus, at the Hearing, I granted Sea Heritage leave under paragraph 2 of the OS, subject to the condition that the writ would not be served pending the determination of Sea Heritage’s application for leave to commence the statutory derivative action.

17.  As the Hearing was a call-over hearing with 30 minutes reserved, Mr Ng did not make any submissions on paragraph 1 of the OS. Given the Company’s neutral position, Mr Ng proposed, which I agreed, that the matter be dealt with on paper. I thus gave directions for the filing of written submissions.

D. Leave to commence the statutory derivative action

18.  On 26 September 2024, Sea Heritage filed and served written submissions in support of its application for leave under paragraph 1 of the OS.

19.  On 3 October 2024, the Company’s solicitors wrote to the Court, confirming that, having considered Sea Heritage’s written submissions, the Company still adopted a neutral position and made no further submissions.

20.  The principles on the grant of leave to bring a statutory derivative action are well established. They are discussed by Coleman J in Kwok Hiu Kwan v Convoy Global Holdings Ltd [2021] HKCFI 814,
§§54-62. Insofar as the present case is concerned, those principles may be summarized as follows:-

(1) The applicant must satisfy the two material conditions in s733 CO, namely that (a) there is a serious question to be tried and the company has not itself brought the proceedings, and (b) on the face of the application, the intended action appears to be in the interests of the company: §55.

(2) As to the requirement for a serious question to be tried, the threshold is relatively low. Therefore, the prospects of success on the claim are to be investigated only to a limited extent, and the Court should be slow to refuse leave unless the prospects are so slim that the plaintiff cannot be said to have any expectation of success. The question is whether there can be seen prospects of success which, in substance and reality, exist. Unless the pleaded claim is demurrable, or there are some easily demonstrated fatal flaws, the merits will not be further investigated. Certainly, at this stage, it is not the Court’s function to try to resolve conflicts of evidence or difficult questions of law: §56.

(3) However, when considering whether a serious issue to be tried is made out, the Court is not obliged to accept whatever evidence the plaintiff chooses to place before it without any critical thinking: §57.

(4) As to the requirement that the intended action appears to be in the interests of the company, again the threshold is low. In most cases, if a serious question to be tried has been demonstrated, it will follow that it is prima facie in the interests of the company that proceedings are pursued (and, of course, vice versa): §58.

(5) In assessing whether it appears to be interest of the company that the statutory derivative action be pursued, the court should also take into account whether any practical benefit is likely to result. This involves making some assessment as to whether it appears that the company stands to gain in money or money’s worth in light of the costs to be incurred. That is not necessarily the same as a cost-benefit analysis of possible outcomes of the prospective litigation, as that assessment may not be possible with any degree of confidence or accuracy. But the court should be looking to see whether there is a realistic tangible and practical overall benefit which might be obtained: §59.

(6) Ultimately, s733 provides a discretionary power for the Court to grant leave to commence a statutory derivative action. In exercising its discretion, the Court is deciding – on the basis of the criteria laid down by statute – whether the plaintiff should exceptionally be allowed to sue in place of the company which is normally the proper plaintiff. The question to be asked by the Court includes the consideration whether the case is a proper case for the Court to exercise its discretion. Part of the reason for the discretion is to act as a safeguard against vexatious and inappropriate proceedings by disgruntled members. The Court can properly be regarded as exercising a “gatekeeping” function: §60.

21.  Having considered the draft Statement of Claim and in light of the low threshold for granting leave to commence the statutory derivative action (as discussed in Kwok Hiu Kwan above):-

(1) I am satisfied that there are serious issues to be tried as to whether Lee was in breach of the fiduciary duties in procuring the Company to enter into the Impugned Agreements; and whether that caused loss and damage to the Company; and whether Navigator was liable for dishonest assistance, bearing in mind the guidance from Coleman J that merits and prospect of success on the claim are to be investigated to a limited extent.

(2) In the circumstances, I am satisfied that it is in the interest of the Company to bring the statutory derivate action as per the draft Statement of Claim. I shall make an Order in terms of paragraph 1 of the OS.

22.  I thank counsel for their assistance.

Hearing on 12 September 2024

Written Submissions