TONG KIN HING v. AUTRON MAURITIUS CORPORATION AND OTHERS

HCA 1961/2009

in the high court of the

hong kong special administrative region

court of FIRST INSTANCE

ACTION no. 1961 of 2009

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REASONS FOR JUDGMENT

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1.  This was a derivative action brought by the plaintiff on behalf of the sixth defendant, of which he is a 20% shareholder.  The other 80% of the shares are held by the first defendant, which is a company incorporated in Mauritius.  The first defendant is a wholly owned subsidiary of the second defendant, which is incorporated in Australia and listed on Stock Exchanges in Singapore and Australia.

2.  There were two applications before the court.  The first was an application on behalf of the plaintiff for an injunction to restrain the third, fourth and fifth defendants who, together with the plaintiff himself, are directors of the sixth defendant, from causing the sixth defendant to grant loans or transfer money to the first or second defendants or any subsidiaries unless all existing loans are repaid.  The other application was an application by first to fifth defendants that the action be struck out on the basis that the plaintiff did not have standing to bring the present derivative action and, secondly, that the action was frivolous, vexatious and/or otherwise an abuse of the process of the court.  Although no reference was made in the summons to the question of the statement of truth, required under Order 41A of the Rules of the High Court, argument was addressed in respect of that.

3.  At the conclusion of the hearing of these applications this action was struck out on the ground that it was an abuse of the process of court and an order nisi of costs on an indemnity basis was made in favour of the first to fifth defendants with a certificate for two counsel.

4.  Although, in common with many other cases, there was a plethora of papers, the relevant facts lie in a comparatively small compass.  The sixth defendant was said to be engaged in the business relating to the provision of electronics manufacturing services and manufacturing of electronic parts.  It had, itself, 2 wholly owned subsidiary companies.  The first defendant acquired its 80% shareholding in the sixth defendant in about June 2007.  Around that time the plaintiff was appointed the managing director and executive director of the sixth defendant.

The allegations of breach of duty

5.  The first allegation of breach of duty made against the third to fifth defendants is that those defendants granted what are referred to as the “Autron Loans” which were said to have not been in the best interests of the sixth defendant but were in the sole interests of the second defendant and/or its group of companies.  It is said that in so granting the said loans the third to fifth defendants neglected and or compromised the interests of the sixth defendant.  It is also said that in granting those loans the third to fifth defendants acted in breach of their fiduciary and/or or common law duties as directors of the sixth defendant.  The Autron Loans are set out in Schedule A to the statement of claim.  They consist of a list of 51 separate loans made between the period of 18 September 2007 to 1 September 2009.

6.  The concluding sub-paragraph of paragraph 15 of the statement of claim reads:

“In further breach of their respective fiduciary duties and/or other duties as directors of the Company, and despite the Plaintiff’s repeated verbal requests and demands, Lim, Tan and Lee have persistently refused and/or failed to demand and/or procure the repayment of the Autron Loans or any part thereof to the Company.”

7.  The second allegation of breach of duties is that the sixth defendant obtained a loan, referred to as the “HSBC Loan” in June 2009 which, under the terms of that loan, was to be applied only for the sixth defendant’s general commercial purposes.  In short it is said that the proceeds of that loan were used to repay, in part, a loan referred to as the RBS Loan, which it transpires is a loan which was taken out in order to purchase the shares of the sixth defendant.

8.  What was not disclosed in the statement of claim was that almost all of the 51 loans were approved by the plaintiff himself.  Indeed, some 49 out of the 51 remittance vouchers were signed by the plaintiff.

9.  Whereas it is alleged in paragraph 11(e) of the statement of claim that the third and fourth defendants had been acting in conflict of interest when the loans were granted, the plaintiff himself had signed the 2007 and 2008 Directors' Reports in which it had said that there had been no conflict of interest by any of the directors.

10.  Most importantly, there has emerged, following the exchange of the various affirmations between the parties, the fact that the plaintiff did agree to the granting of the Autron Loans, although he still disputes the last three loans which were made and he has tried to indicate that, following a letter dated 11 March 2009, control of the financial operations the sixth defendant were no longer in his hands.  Importantly, in paragraph 11 of the third affirmation of the plaintiff, which was filed on 9 October 2009, the plaintiff stated:

“As I have acknowledged in my first Affirmation, I agreed to the granting of loans to Autron using the Company’s cash.  However, I agreed to such loans on the condition that such loans should not be excessive, and should not affect the Company’s own financial position and that the total outstanding loans due from Autron should not be more than its entitlement to its share dividends to be distributed by the Company each year.”

11.  That was closely followed by what was said in relation to the letter of 11 March 2009 in paragraph 16 of the same affirmation where the plaintiff said:

“Therefore, from 11 March 2009 onwards, right after my first objection to granting any further loans to Autron ...”

12.  In paragraph 32, the plaintiff said, again, that he had agreed to the granting of loans to Autron.  That is rather different from the way he had tried to put it in his first affirmation, when he said he had tolerated the granting of loans.  He had put the matter on the basis that the third to fifth defendants had voting control and “even if (he) had a different view or objections” it would have made no difference.

13.  In short what can be said in this case is that beyond peradventure all the Autron Loans that were made both up to and including 9 March 2009 and beyond were made not in breach of the duties of the third to fifth defendants but in accordance with the agreement of all the director and its shareholders, including the plaintiff.  In so saying I have considered the matter solely on the undisputed facts and admissions of the parties.  It is difficult to understand that the plaintiff’s position is any better in relation to the last three transactions.  He was prepared to sign all, save 2, of the payments vouchers and the most he did was to space the payments to match the sixth defendant’s cash flow.

14.  Quite simply, on these facts alone, this derivative action based on the statement of claim had to be struck out as an abuse.  If there was a cause of action in respect of the loans made by the sixth defendant to the first and/or the second defendants, the plaintiff was in the same, if not worse, position as regards culpability as the other directors.  He had approved the loans; he had signed the transfer documents.  There is not not one contemporary document indicating that he objected to them.  What is worse he now agrees that there was an agreement that those loans should be made.  Whether that was subject to conditions, matters not.  If a derivative action were to be brought the plaintiff himself would have to be a defendant.  That would be a nonsense.  It only needs to be added that although an attempt was made to rely on the last three loans, it can be said that the plaintiff, himself, also signed the payment voucher in respect of one of those loans amounting to US$50,000 and in respect of the other two loans the contemporary documents show that the plaintiff was well aware that they would be made and do not show him as objecting to them.

15.  Whether or not the plaintiff could reformulate his case based on legitimate complaints, whether as a derivative action or an action under section 168A of the Companies Ordinance, Cap. 32 is a matter for the plaintiff.  That, cannot be a ground for permitting the plaintiff to continue with proceedings which were commenced to a substantial extent on what is now admitted to have been a false basis.

16.  Mr Harris SC, who appeared on behalf of the plaintiff, conceded that the statement of claim was defective but argued that the plaintiff should be given an opportunity to amend.  Quite apart from the fact that that would be wholly inappropriate given the nature of the important allegations in the statement of claim, question was raised under the new rule Order 41A.  That has been adopted as part of the civil justice reform.  A pleading is now required to be verified by a statement of truth. 

17.  The important point is that the statement of claim was presented on the basis that all the Autron Loans were arranged by the third to fifth defendants in breach of their fiduciary duties, when in truth all but 2 of them, if not those as well, were agreed to as part of an arrangement made between all relevant parties right at the beginning.  Although, in one respect it may be looked upon as suppression of fact rather than a deliberate misstatement, the effect of that suppression makes the allegation in the statement of claim false.

18.  Order 41A Rule 9 provides;

“(1) Proceedings for contempt of court may be brought against a person if he makes, or causes to be made, a false statement in a document verified by a statement of truth without an honest belief in its truth.”

19.  Hence the seriousness of the statement of truth cannot be brushed aside.  It may not be an affidavit or an affirmation but the Rules themselves treat the statement with similar seriousness.  The requirement of a statement of truth is important.  Its purpose is to focus the mind of the relevant party and to deter sloppy or speculative pleadings and prevent dishonest cases being put forward.  It is a very important part of the Court’s process in applying the Rules.  In this respect, as much as in any other, the requirement serves to help the Court and the parties to achieve the underlying objectives which are set out in Order 1A Rule 1 of the Rules of the High Court:

“The underlying objectives of these rules are-

(a)        to increase the cost-effectiveness of any practice and procedure to be followed in relation to proceedings before the Court;

(b)        to ensure that a case is dealt with as expeditiously as is reasonably practicable;

(c)        to promote a sense of reasonable proportion and procedural economy in the conduct of proceedings;

(d)        to ensure fairness between the parties;

(e)        to facilitate the settlement of disputes; and

(f)         to ensure that the resources of the Court are distributed fairly.”

20.  In my view, when faced with a situation where a pleading has been verified in circumstances where it has been demonstrated that the verification should never have been made, the Court should be very slow to permit any amendment to that pleading.  If the part of the pleading that is defective is the central part of a claim then the Court may well consider that the pleading should struck out and the party left to whatever course is open to him in bringing new proceedings.  It is a matter of discretion and in exercising that discretion the Court recognises that the primary aim in exercising its powers is to secure the just resolution of disputes in accordance with the substantive rights of the parties.  Hence, there can be no hard and fast rule, but the onus lies heavily on the party in default.

21.  In this case I consider that the pleading was so defective that it is not a matter of simple amendment; it is a matter of reconstituting any claim.  As already noted, if the action is struck out, the plaintiff can commence any further proceedings which he is advised to bring.  Any refusal of amendment will not deprive him of a remedy to which he may ultimately show he is entitled.  Having broken faith with the court by failing to observe what is now a fundamental rule designed to achieve the objectives of the Court process he is in no position seek the indulgence of being allowed to reconstitute the present action rather than having to start anew.