CHEUNG HING v. WAH FUNG FOREST RESOURCES LTD

HCMP 2433/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO2433 OF 2012

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D E C I S I O N

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1. I have before me a re-re-amended originating summons (“RRAOS”) originally issued on 29 October 2012 whereby the plaintiff, Mr Cheung Hing (“Cheung”), seeks leave to bring certain statutory derivative actions in the name of the company, Wah Fung Forest Resources Ltd (“the Company”), and to defend an existing action on behalf of the Company in which it is a defendant.

2. The dispute has arisen from an agreement between Cheung and Mr Wong Chor Cheung (“Wong”) to acquire a property for investment, namely, 3^rd Floor and Garage Space B1 on Ground Floor, 23 Plantation Road, Hong Kong (“Property”).  The way in which the acquisition was carried out was that the Company, in which Cheung and Wong are equal shareholders, was used to purchase the Property.  Cheung alleges that, over the years, Wong has, without Cheung’s knowledge or consent, caused various directors to be appointed to the Company’s board, caused the Company to charge the Property to obtain various loans and caused the Company to enter into or to purport to enter into various tenancy agreements letting the Property.  The procedural history of the matter is, however, complicated and this dispute has spawned a plethora of legal proceedings.

3. One of the results of the procedural complications is that the application for leave to bring a statutory derivative action, taken out in October 2012, should have come before the court for determination only now, in 2015.  As I am only concerned with the question of leave, however, it is unnecessary to go into the fine details of the various existing and intended proceedings. 

4. The Company takes a neutral stance and has made no submission on Cheung’s application.  For his part, Mr Chen, appearing for Wong who has intervened in this application, has originally in his skeleton argument lodged two days ago indicated that leave should be given in relation to, inter alia, the proceedings referred to in paragraphs (1) and (5) of the Originating Summons.  At the commencement of the hearing today, however, Mr Chen, on instructions, sought to withdraw those concessions and to oppose the application in relation to those two paragraphs.  Such withdrawal is sought through no fault on the part of the legal advisers, since the skeleton argument was filed after it had been explained to Wong and with his consent.  The concession was sought instead apparently simply because Wong had changed his mind.  No reason has been given by Wong for the change of stance.  The result was that although Wong seeks to oppose those two paragraphs now, no skeleton argument has been filed to notify the other side and the court of the points that would be taken.  That is wholly unsatisfactory.  I nevertheless heard Mr Chen’s submissions in opposition de bene esse and he very sensibly kept them succinct.  In the end, I consider that I should refuse to allow the concessions to be withdrawn but, as I shall presently explain, I do not think it would matter to the result even if the concessions were permitted to be withdrawn.

5. Cheung’s applications may be outlined as follows.  First, Cheung alleges that Wong has misappropriated rental income received in respect of the Property and seeks leave to bring a statutory derivative action in the name of the Company against Wong for recovery of such rental and for damages (see paragraphs (1)(i) and (5) of the RRAOS). 

6. Secondly, Cheung alleges that Wong has wrongfully caused the Company to create charges or purported charges over the Property (1) in favour of Dah Sing Bank Limited under a deed of mortgage dated 22 August 2000, (2) in favour of Hong Kong Finance Limited under a “Second Legal Charge” apparently executed on 18 November 2013, (3) in favour of Marcellotino Limited under a “Third Mortgage” and “Rental Assignment” apparently executed on 4 September 2014, and (4) in favour of Good Brothers Limited under a mortgage apparently executed on 25 August 2014, and obtained loans as a result.  Cheung seeks leave to bring a statutory derivative action in the name of the Company against Wong for an order for Wong to account for the use of the loans and all monies advanced or otherwise obtained, for damages, and for an order that Wong do repay all sums due under those charges and secure the release of those charges (see paragraphs (1)(ii) & (iii) and (5) of the RRAOS). 

7. As regards these two intended derivative claims, in his skeleton argument, Mr Chen accepted that leave ought to be granted. Despite Wong seeks to withdraw that concession, I am satisfied that there are clearly serious issues to be tried and that it appears to be prima facie in the interest of the Company to grant leave.  Wong alleges that the use of the rental and loan proceeds was made with the consent of Cheung and for their joint benefit.  Cheung flatly denies those allegations.  It is not for the court to conduct a mini-trial at this stage.  That is not the purpose of the requirement for leave.  In my view, the requirements of s 168BC of the old Companies Ordinance (Cap 32) (which governs this application), which impose a relatively low threshold (see eg Re Li Chung Shing Tong (Holdings) Ltd [2011] 5 HKLRD 274 per Harris J), are satisfied and it is an appropriate case in which to grant leave.

8. Thirdly, according to information obtained from the Land Registry, the Property was let to Jinrong (HK) International Development Holdings Limited (“Jinrong”) under (1) a tenancy agreement dated 16 February 2009 for two years, (2) another tenancy agreement dated 31 May 2011 for two years to 31 August 2013 renewable for another two years, and (3) a further tenancy agreement dated 30 August 2013 for two years. The latest tenancy agreement of 2013 in particular contains provisions suggesting that, instead of paying the specified monthly rent of $80,000, Jinrong may set off the rent against a debt in the nature of agreed damages owed by the Company to Jinrong in relation to a paper products project in the Mainland. For reasons I have already given, I have on Cheung’s request adjourned the hearing of the relevant paragraph, namely, paragraph (2) of the RRAOS, sine die with liberty to restore.

9. Fourthly, Cheung seeks leave to defend High Court Action No. 814 of 2010 on behalf of the Company (paragraph (3) of the RRAOS).  That action was brought by one Hui Shu Leung (“Hui”) against the Company for a declaration that Hui has a beneficial interest in the Property and for an account of income and profits in respect of the Property.  Hui’s statement of claim alleges that he had agreed with Wong that, in return for some “partial payments of the mortgage loan”, Hui acquired an interest in the Property.  Cheung suspects that Hui is simply a nominee of Wong and fears that unless he is allowed to defend the Company on its behalf, judgment may be entered by collusion against it.  Cheung had previously tried to act for the Company and while that attempt had failed for procedural reasons, the deputy Judge described his motive as “perfectly laudable” (HCA 814/2010; 25 June 2012, at §16).  On behalf of Wong, Mr Chen consents to leave being granted to Cheung to defend the action on the Company’s behalf.  I shall give leave accordingly.

10. Fifthly, Cheung seeks leave to bring a statutory derivative action in the name of the Company to “remove” five persons as directors of the Company (paragraph (4) of the RRAOS).  He contends that those five persons were mere puppets of Wong and had been invalidly appointed without notice to himself.

11. Mr Chen submits that since Cheung complains the appointments were invalid because of breaches of the articles of association such as failure to give notice, and since the articles are both a contract between the Company and each member and between the members themselves, Cheung has a direct personal cause of action which he is free to pursue on his own.  Mr Chen expressly accepts that the cause of action for declaratory relief that the appointments of the five directors are invalid vests also in Cheung.  For this reason, he submits, the court should not exercise its discretion to grant leave for a statutory derivative action to be brought.

12. In contrast, Mr But submits that because the five persons in question are not members of the Company, they are not bound by the articles, and that any declaratory relief sought by Cheung can only be sought against the Company and will not be binding on those directors.  With respect, I cannot accept this submission.  The reference to “removal” in the relief sought is a misnomer.  What Cheung really complains of is that the directors had not been validly appointed because the requirements of the articles were not complied with.  Complaints of this kind are in my experience redressed by declaratory relief, possibly coupled with injunctive relief, on a personal action brought by the member.  The essence of the complaint is not a wrong done to the Company, in respect of which the cause of action would primarily belong to the Company.  Not surprisingly, Mr But has not been able to point to any precedent for a derivative action being brought for such relief.  Cheung is still a 50% shareholder in the Company.  S 168BC(6) specifically preserves the right of a member to bring proceedings “on his own behalf in respect of his personal right”.  On this footing I see no reason why leave should be given to bring a derivative action in respect of this complaint.

13. In the originating summons Cheung also seeks orders relating to the indemnification of costs to be incurred in the various claims and in defending HCA 814/2010 on behalf of the Company.  This part of the application was, with the consent of both parties, adjourned sine die with liberty to restore.

14. I shall now hear counsel on costs and any other consequential matters.

(Submissions on costs)

15. Costs reserved.