YUEN TAK SUNG v. SEA DRAGON FOOD LTD

HCMP 1721/2018

[2018] HKCFI 2471

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1721 OF 2018

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D E C I S I O N

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1.  The applicant and the intended 1st defendant are the only shareholders and directors of the Respondent (“the Company”).  They are now in dispute with one another and it is therefore the position that, at the board level and at the shareholders level, the Company is deadlocked.

2.  The intended 2nd defendant is the son of the intended 1st defendant.  The intended 2nd defendant was also at one time an employee of the Company.

3.  The intended 3rd defendant is a limited company incorporated by the intended 2nd defendant.

4.  The applicant’s case is that the intended defendants engaged in competition with the Company and that was a breach of duty.  It is also said that the intended defendants made use of confidential information of the Company and also committed passing off in the competitive activities complained of.

5.  I am satisfied that the relatively low threshold of serious issue to be tried is made out.

6.  The next question, therefore, is whether the proposed derivative action is in the interest of the Company.  I was not provided with any costs estimate of the proposed action and the particulars for the sum claimed are somewhat sparse.  I invited Miss Choy’s submission on the question and she submitted that the sums are nonetheless sizable and is supported by the sworn evidence of her client, who is relatively close to the Company.

7.  In these circumstances, I am prepared to hold that the proposed action would be in the interest of the Company because of the various mechanisms that I will come to shortly to ensure that the intended 1st defendant can make submissions on the merits of the action and/or the costs position of the Company if he is so advised.

8.  The next condition for statutory derivative action is whether the Company has itself brought proceedings.  It is plain that the Company has not itself brought proceedings in the present case.

9.  I therefore turn to the next condition which is the service of written notice in accordance with section 733(3) of the Companies Ordinance.  The first submission made by Miss Choy is that the target of such service should not be the Company, but should be the intended 1st defendant because of the deadlock that I have referred to earlier.  I am persuaded that that is indeed true and hence the relevant service should be on the intended 1st defendant.

10.  However, Miss Choy accepted that the period of service contemplated under section 733(3) is 14 days before the actual application for leave, that is, the issuance of the originating summons.  She further accepted rightly that there was no such service even on the intended 1st defendant because the service on him was done on 16 October, whilst the originating summons in question was issued earlier on 12 October.

11.  Even if the company is deadlocked and the relevant service should be on the intended 1st defendant rather than the company, I am of the view that this provides no justification to shorten the period of service.  But as I indicated in the discussion between Bar and Bench, I am anxious not to unnecessarily incur further costs in this application.  Accordingly, I will grant an order for leave expressly providing for liberty for the intended 1st defendant to apply to set it aside if so advised, and this is intended to create no res judicata against him.

12.  In other words, it is contemplated that if he is so advised and he applies within the prescribed period to set aside this order, he is at liberty to argue this matter de novo such that there can be no complaint that the lateness of the service on him has caused him any injustice.

13.  Another question that I canvassed with counsel was what should happen to the costs of the company should the proposed action fail.  After much discussion, and I am grateful to the assistance of counsel and her team, we have arrived at a position where the applicant accepts that the costs of the proposed action should be at large.  In other words, it is open to the intended 1st defendant to contend later that the costs of the company should be borne by the applicant.

14.  For the avoidance of doubt, my understanding is that insofar as costs of the company are concerned, that is something that the intended 1st defendant can make submissions either within the 28 days that I will come to in a moment, or at any later stage when the costs of the company are to be argued under the reservation of liberty to restore the originating summons.

15.  The last question is the costs of the application today.  I was concerned about why the applicant should get costs in whatever event, because if the action ultimately fails it is not easy to see why the applicant should get costs of today because ex hypothesi that would be a situation where the applicant has caused and procured the initiation and prosecution of proceedings which turn out to be unmeritorious.

16.  To that, Miss Choy submitted that the applicant has met the statutory threshold and that should be sufficient for a costs order to be granted in the applicant’s favour for the costs of today.

17.  I also note from a case referred to in Miss Choy’s skeleton, namely, Ferrari SPA v F&S Express Limited [2005] 4 HKLRD 743 that Kwan J, as she then was, also ordered that costs of the application for leave be to the applicant without any provision as to liberty to vary should the action fail.

18.  In these circumstances, in particular given that I am going to give leave to the intended 1st defendant to apply to vary this order if so advised, I will accede to Miss Choy’s submission that the cost of the application be to the applicant.

19.  For the reasons above, I would:

(1)   grant leave in terms of paragraph 1 of the originating summons such that I grant leave to commence the statutory derivative action;

(2)   order that the applicant’s costs for the originating summons, including and up to the costs of today, be indemnified out of the company’s assets;

(3)   order that costs of the applicant and the company in the intended derivative action be reserved with liberty to restore the originating summons;

(4)   order that service of the written notice for the purposes of section 733(1)(c) of the Companies Ordinance be dispensed with;

(5)   make no order as to costs of the applicant’s summons for dispensation of service dated 16 October 2018; and

(6)   give liberty to the intended 1st defendant to apply to set aside the whole or any part of this order within 28 days of service of this order on him.