GRASBERG CAPITAL ASIA LTD v. HUCHUN JOSEPH YUNG

HCMP 727/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 727 OF 2014

____________

____________

______________________________

REASONS FOR DECISION
______________________________

Introduction

1. This is the hearing of the Defendant’s application by summons filed on 17 October 2014 to strike out the Plaintiff’s application by originating summons issued on 27 March 2014 seeking an order of committal against the Defendant (the “Striking Out Summons”).

2. Chan Ying Lok Samson (“Samson”) and Creative Apex Holdings Limited (“Creative Apex”) are the only shareholders of Grasberg Capital Asia Limited (“Grasberg”), each holding one share in the company. The Defendant (“Joseph”) is the sole shareholder and director of Creative Apex, a company incorporated in the British Virgin Islands (“BVI”).

3. Samson complained that Joseph and others committed a fraud against Grasberg.  Understandably, he could not obtain a resolution to enable Grasberg to commence action against Joseph.  On 29 April 2013, Samson, suing on behalf of himself and all other shareholders in Grasberg other than Creative Apex, obtained a Mareva injunction order under an intended action in High Court against Joseph and seven others, not including Grasberg (the “Injunction Order”). Subsequently, in the same capacity, Samson commenced a derivative action against Joseph, Grasberg and seven other defendants in HCA 724/2013 (the “Main Action”).  The Injunction Order was subsequently continued until trial or further order of the court.

4. On 30 December 2013, Samson secured a resolution in a members’ meeting in the absence of Creative Apex authorising Grasberg to continue the Main Action and another action, HCA 900/2013; ratifying all the acts done by Samson in those two actions; and giving Samson full authority to give instructions on behalf of Grasberg to its legal representatives in connection with the conduct of the two actions.  On 10 December 2014, Samson sought leave in the Main Action to substitute Grasberg as the plaintiff.  That application is contested by Joseph and is to be set down for argument.

5. On 21 February 2014, Samson issued a statement under the Main Action, together with his verifying affirmation dated 5 September 2013, seeking leave to issue committal proceedings against Joseph for various breaches of the Injunction Order.  On 13 March 2014, this court granted Samson’s application. 

6. On 27 March 2014, pursuant to the leave granted, Grasberg issued an originating summons in this proceeding in its own name as the plaintiff instead of Samson’s, applying for Joseph’s committal (the “Committal Summons”). 

7. On 15 October 2014, Joseph issued the Striking Out Summons seeking to strike out Grasberg’s Committal Summons.  On 15 December 2014, I ordered the Striking Out Summons to be heard immediately before the hearing of the Committal Summons.

8. On 28 April 2015, I dismissed Joseph’s Striking Out Summons.  Hereunder are my reasons for the decision.

Grasberg’s application for filing of affirmation

9. Upon reading the skeleton argument of counsel for Joseph, Grasberg issued a summons dated 21 April 2015 to seek leave to file an affirmation in reply exhibiting, amongst other correspondence, the resolution of 30 December 2013. 

10. At the hearing, Mr Wong, counsel for Joseph, objected to the late filing of the affirmation.  As the documents sought to be introduced are Grasberg’s resolution and correspondence between the parties’ solicitors which are relevant to the striking out application and the affirmation was occasioned by an issue as to the issue of Grasberg’s authority raised by Mr Wong’s skeleton argument, I can see no reason for not allowing the affirmation to be filed.  I offered an adjournment to Mr Wong for filing of evidence in reply, but he declined the offer, saying it was unnecessary.  Accordingly, I allowed the application and reserved costs. No evidence having been filed to challenge the validity of the resolution, the resolution is deemed to have been regularly and validly passed.

The application to strike out

11. Mr Wong advanced only one ground for striking out the Committal Summons, which is that the summons was issued without leave of the court as required under Order 52 rule 2(1) of the Rules of the High Court.  His argument is that although leave had been granted to Samson, the Committal Summons was issued by Grasberg and Grasberg could not use the leave granted to another to prosecute this action.  He argues that proper application has to be made to enable Grasberg to substitute Samson as the applicant, just as what Samson had initiated in the Main Action, which application is still pending.  He referred to Capital Source Holdings Limited & Climax Sources Holdings Limited[1], in which Louis Chan J dismissed an application for an order of committal because of the applicant’s failure to apply for leave.

12. In reply, Mr D’Souza, counsel for Grasberg, argues that the distinction between Samson suing as the plaintiff in a derivative action and Grasberg suing in its own capacity is artificial.  Alternatively, his fall back position is that if Grasberg is not the proper plaintiff, Grasberg would apply to amend the Committal Summons by substituting Samson as the applicant.

13. There is no dispute that the Main Action is a derivative action commenced by Samson on behalf of Grasberg.  Mr D’Souza rightly referred me to Wallersteiner v Moir (No. 2)[2] in which Lord Denning stated the rationale behind a derivative action as follows:

“It is a fundamental principle of our law that a company is a legal person, with its own corporate identity, separate and distinct from the directors or shareholders, and with its own property rights and interests to which alone it is entitled. If it is defrauded by a wrongdoer, the company itself is the one person to sue for the damage. Such is the rule in Foss v Harbottle (1843) 2 Hare 461. The rule is easy enough to apply when the company is defrauded by outsiders. The company itself is the only person who can sue. Likewise, when it is defrauded by insiders of a minor kind, once again the company is the only person who can sue. But suppose it is defrauded by insiders who control its affairs – by directors who hold a majority of the shares – who then can sue for damages? Those directors are themselves the wrongdoers. If a board meeting is held, they will not authorise the proceedings to be taken by the company against themselves. If a general meeting is called, they will vote down any suggestion that the company should sue them themselves. Yet the company is the one person who is damnified. It is the one person who should sue. In one way or another some means must be found for the company to sue. Otherwise the law would fail in its purpose. Injustice would be done without redress.”

Lord Denning continued at 391B-D:

“I am glad to find this principle well stated by Professor Gower in Modern Company Law, 3^rd ed (1969), p. 587, in words which I would gratefully adopt:

“Where such an action is allowed, the member is not really suing on his own behalf nor on behalf of the members generally, but on behalf of the company itself.  Although … he will have to frame his action as a representative one on behalf of himself and all the members other than the wrongdoers, this gives a misleading impression of what really occurs.  The plaintiff shareholder is not acting as a representative of the other shareholders, but as a representative of the company …  In the United States … this type of action has been given the distinctive name of a ‘derivative action,’ recognising that its true nature is that the individual members sues on behalf of the company to enforce rights derived from it.’ ”

  (Emphasis underlined)

14. In Waddington Ltd v Chan Chun Hoo[3], Lord Millett NPJ adopted in similar terms what Lord Denning had stated above in relation to the nature of common law derivative action at paragraph 47 and affirmed at paragraph 51 of his judgment that a derivative action was in reality an action on behalf of the company.  He said:

“47.  A company is a legal entity separate and distinct from its members.  It has its own assets and liabilities and its own creditors.  The company’s property belongs to the company and not to its shareholders.  If the company has a cause of action, this represents a legal chose in action which represents part of its assets.  Accordingly, where a company suffers loss as a result of an actionable wrong done to it, the cause of action is vested in the company and the company alone can sue.  This is the first rule in Foss v. Harbottle (1843) 2 Hare 461.  No action lies at the suit of a shareholder suing as such, though exceptionally he may be permitted to bring a derivative action in right of the company and recover damages on its behalf: see Wallersteiner v. Moir (No.2) [1975] 1 QB 373 CA at p.390; Prudential Assurance Co. Ltd v. Newman Industries Ltd (No.2) [1982] Ch 204 CA (“Prudential”) at p.210; Johnson v. Gore Wood & Co.[2002] 2 AC 1 at p.61 et seq.

51.  … The minority shareholders were permitted to bring an action against the wrongdoers without the leave of the court, joining the company as defendant in order to receive any damages that might be awarded: see Menier v. Hooper’s Telegraph Works(1874) 9 Ch App 350.  Since the company was a defendant it could not also be a plaintiff, and accordingly the action was traditionally framed as an action by the plaintiff “on behalf of himself and all other shareholders in the company except the defendants”.  In reality, as everyone appreciated, the action was brought on behalf of the company in which the cause of action was vested.  This form of action was described by Lord Davey in Burland v. Earle [1902] AC 83 at p.93 as a “mere matter of procedure in order to give a remedy for a wrong which would otherwise escape redress”. 

  (Emphasis underlined)

It is therefore well settled law by the highest authority of our land that a shareholder suing in a derivative action is suing on behalf of the company which is the real plaintiff in the action.

15. The Main Action was commenced by Samson suing on behalf of himself and all other shareholder(s) in Grasberg other than Creative Apex, which is the alter ego of Joseph.  The causes of action propounded in the statement of claim are vested in Grasberg, and any relief or damages claimed are claimed on behalf of Grasberg.  Although the ex parte application for leave to issue committal proceeding was made by Samson without specifying that it was made on behalf of himself and all other shareholder(s) in Grasberg, it was made under the Main Action.  It must therefore have been made by Samson also in that capacity.  Leave must also have been granted to him in that capacity.  Having obtained leave on behalf of Grasberg, there is nothing inappropriate for Grasberg to issue the Committal Summons in its own name pursuant to that leave granted, now that a proper resolution has been passed to authorise it to carry on with the proceedings.  This is not the case of an applicant using the leave obtained by another totally alien to him under different factual circumstances to enable him to prosecute under different circumstances not previously disclosed to the court when granting that leave.  There is no real change in the plaintiff or the party.  There is no need for any procedure to be taken to substitute Grasberg as the applicant for leave to issue committal proceedings.  It is appropriate and proper for the proceedings under the Committal Summons to be continued under the name of Grasberg.  

16. Mr D’Souza draws further support for his argument by drawing an analogy from the scenario in the English Court of Appeal case in Prudential Assurance Co Ltd v Newman Industries Ltd and Others (No. 2)[4].  In that case, the Court of Appeal said:

“Vinelott J permitted the action by the plaintiffs [ie the minority shareholders] on behalf of Newman [ie the company] to proceed, and there was no appeal from that decision. In the result he found that Newman was entitled as against Mr Bartlett and Mr Laughton [ie the wrongdoers] to damages for conspiracy and breach of fiduciary duty, and he directed an inquiry as to damages subject to a stay in case of an appeal. Thereafter, Newman had three choices, subject to the operation of the stay. First, it might do nothing. In this case the plaintiffs would be entitled, if they so desired, to issue a summons to proceed with the inquiry. Secondly, Newman might decide for some proper reason, assuming that a proper reason might exist, and duly resolve at a proper board or general meeting, to proceed no further with the claim against Mr Bartlett and Mr Laughton. In this event, assuming that the resolution of the board or of the company in general meeting was in all respects proper, the plaintiffs would be unable to proceed with the inquiry because a valid release could be pleaded by Mr Bartlett and Mr Laughton. Thirdly, Newman might adopt the order which the plaintiffs had obtained on its behalf and pursue the inquiry accordingly. This would occasion no procedural problem nor even any special procedural steps. Any party, plaintiff or defendant, can issue a summons to proceed upon an order. It would not be necessary for Newman to apply to be made a plaintiff, or to start a fresh action and rely upon the principle of res judicata, as was suggested at one time in the course of the argument. The order has been made. Newman is a party to the action. Newman can enforce the order. If this course were adopted, the rule in Foss v. Harbottle is irrelevant. The rule has no room to operate where the company itself is proceeding with an action, or to enforce a judgment, pursuant to a valid board company resolution.”

  (Emphasis underlined)

17. By analogy, Mr D’Souza argues that Grasberg can, just as did the plaintiff in that case, decide to do nothing, in which case, Samson can continue to pursue the committal proceedings on Grasberg’s behalf, or to decide, as it did in the present case, to adopt the leave Samson obtained on its behalf and pursue the committal proceedings.  He further argues that in that latter scenario, as suggested by the English Court of Appeal, no procedural step need to be taken as Grasberg itself is already a party to the proceedings and leave has already been granted.  Grasberg is simply proceeding with an action or an application pursuant to a valid board resolution.

18. Mr Wong seeks to distinguish Prudential Assurance from the present case by arguing that the options were given to the plaintiffs in that case because the newly constituted board which took over control of the company from the wrongdoers considered the inquiry would not be in the best interest of the company.  With respect, that is a distinction which has no bearing to the principle propounded by the court.  I agree with Mr D’Souza’s submission.

19. Mr Wong also raised other queries.  He queried why Samson in his own capacity applied for leave to issue committal proceedings on 21 February 2014 when the resolution had already been passed authorising Grasberg to continue the proceedings.  He also queried why the application was made on 21 February 2014 using Samson’s verifying affirmation dated 5 September 2013.  These queries lead to nowhere.  I do not find it necessary to deal with them.

Conclusion

20. For the above reasons, I find it appropriate and proper for the proceedings under the Committal Summons to be continued under the name of Grasberg.  There is no need for any procedural steps to be taken to enable Grasberg to continue with the committal proceedings as application for leave had been made by and granted to Samson on behalf of Grasberg.  There is no need for Grasberg to resort to the fall back position of amending the Committal Summons to substitute Samson as the applicant.  For the above reasons, I dismiss the Defendant’s Striking Out Summons with costs reserved.