ASHOK KODUMAL HEMNANI v. PRIMLAKS (HK) LTD

HCMP 1789/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1789 OF 2015

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J U D G M E N T

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Introduction

1.  There is before this court an application by Mr Ashok Kodumal Hemnani (“Applicant”) for leave to commence a statutory derivative action on behalf of Primlaks (HK) Limited (“Company”). The application is opposed by Mr Hui who confirmed in court that he acts on behalf of the 6 intended defendants of the proposed action viz Mr Ramchand Kodumal Hemnani (“Ramchand”), Mr Raj Kodumal Hemnani (“Raj”), Mr Anil Ram Hemnani (“Anil”), Mr Ravi Ram Hemnani (“Ravi”), Oriental Properties LLC and Primlaks Holding Company (Panama) Inc (“Primlaks Holding”). According to Mr Lung on behalf of the Applicant, the Company is in a deadlock, both at the board level and at the shareholders level. The Company did not appear at the hearing.

2.  The Company was incorporated on 7 September 1973. The Applicant is a member of the Company holding 25% of its shareholding. Ramchand is a member of the Company holding the remaining 75%[1]. The Applicant and Ramchandare the Company’s only directors. According to the Applicant, the Company is “balance‑sheet” insolvent.

3.  It should be apparent from their names that the Applicant and the other Hemnanis are part of the same family. For the present purpose, Ramchand, Raj and the Applicant are among the 1^st generation of the Hemnanis while Anil and Ravi, sons of Ramchand, belong to the 2^nd generation.

The Law

4.  Statutory derivative actions are covered by Part 14, Division 4 of the Companies Ordinance, Cap. 622 (“CO”). Sections 732 and 733 of CO provide:

“732. Member of company or of associated company may bring or intervene in proceedings

(1) If misconduct is committed against a company, a member of the company or of an associated company of the company may, with the leave of the Court granted under section 733, bring proceedings in respect of the misconduct before the court on behalf of the company.

(2) If, because of misconduct committed against the company, a company fails to bring proceedings in respect of any matter, a member of the company or of an associated company of the company may, with the leave of the Court granted under section 733, bring proceedings in respect of the matter before the court on behalf of the company.

(3) …

(4) The cause of action in relation to the proceedings under subsection (1) or (2) is vested in the company. Any of those proceedings must be brought in the name of, and the relief (if any) must be sought on behalf of, the company.

…

733. Leave of Court to bring or intervene in proceedings

(1) On application by a member of a company or of an associated company of a company, the Court may grant leave for the purposes of section 732(1), (2) or (3) if it is satisfied that –

(a) on the face of the application, it appears to be in the company’s interests that leave be granted to the member;

(b) in the case of –

(i) an application for leave to bring proceedings under section 732(1) or (2), there is a serious question to be tried and the company has not itself brought the proceedings; or

(ii) …; and

(c) except where leave is granted by the Court under subsection (5), the member has served a written notice on the company in accordance with subsection (3), and the notice complies with subsection (4).

…

(3) The written notice must be served on the company, at least 14 days before the member applies for leave in respect of the company –

(a) in the case of a company as defined by section 2(1), by leaving the notice, or by sending the notice by post to, its registered office; or

(b) in the case of a non-Hong Kong company, in a manner that the notice is sufficiently served on the company by virtue of section 803.

(4) The written notice must state –

(a) the member’s intention to apply for leave for the purposes of section 732(1), (2) or (3) in respect of the company; and

(b) the reasons for that intention.

(5) The Court may grant leave to dispense with the service of a written notice for the purposes of subsection 1(c).”

5.  In order for the Applicant to obtain leave to bring the proposed statutory derivative action on behalf of the Company, he must satisfy all the conditions in section 733. For the present purpose, only the following two are material:

(1) whether on the face of the application, the proposed action appears to be in the interests of the Company (“Interests of the Company Requirement”); and

(2) whether there is a serious question to be tried and the Company has not itself brought the proceedings (“Serious Question Requirement”).

6.  This court shall consider the two requirements in reverse order. This is because, if the Serious Question Requirement cannot be met, it is difficult to see how it can be in the interests of the Company concerned to commence legal proceedings which ex hypothesis are liable to be struck out: Re Li Chung Shing Tong (Holdings) Ltd [2011] 5 HKLRD 274 at [31]; Veron International Limited v RCG Holdings Limited & ano unrep.; HCMP3210/2013; 20 July 2015; Ng J.

Serious Question Requirement

7.  The threshold of the Serious Question Requirement is relatively low: Re F&S Express Ltd [2005] 4 HKLRD 743 at [21]; Re Grand Field Group Holdings Ltd [2009] 3 HKC 81 at [21]; Re Li Chung Shing Tong (Holdings) Ltd supra at [32]; Re China Shanshui Investment Company Limited unrep.; HCMP360/2015; 17 March 2015; Harris J at [8]; Veron International Limited v RCG Holdings Limited & ano at [24].

8.  In Re Li Chung Shing Tong (Holdings) Ltd supra at [33], Harris J observed:

“…in ascertaining whether or not there is a “serious question to be tried”, the prospects of the plaintiff’s success are to be investigated only to a limited extent, and the court should be slow to find against the plaintiff unless his prospects are so slim that he cannot be said to have any expectation of success. I am reminded, in this regard, of Megarry VC’s oft-cited explanation in Mothercare Limited v Robson Books Ltd [1979] FSR 466, in which he said, at 474:

‘… the prospects of the plaintiff’s success are to be investigated to a limited extent, but they are not to be weighed against his prospects of failure. All that has to be seen is whether the plaintiff has prospects of success which, in substance and reality, exist. Odds against success no longer defeat the plaintiff, unless they are so long that the plaintiff can have no expectation of success, but only a hope. If his prospects of success are so small that they lack substance and reality, then the plaintiff fails; for he can point to no question to be tried which can be called ‘serious’, and no prospect of success which can be called ‘real’.” (emphasis added)

9.  At this stage, it is not the Court’s function to try to resolve conflicts of evidence or difficult questions of law which require substantial argument and deliberation.  In practice, if the applicant is able to produce a draft pleading that sets out a case with some prospect of success when only the allegations contained in the pleading are considered, the criteria will be satisfied unless the respondent can demonstrate fairly readily that there is a serious flaw in the claim and that it has no real substance: Re China Shanshui Investment Company Limited supra at [9] per Harris J.

10.  I agree and would adopt this approach.

11.  In considering this requirement, the starting point is the draft Statement of Claim which sets out the causes of action the Applicant seeks to bring in the name of the Company. As summarized in Mr Lung’s skeleton submissions, three claims are put forward on behalf of the Company against the intended defendants: 

(1) A conspiracy claim (“Conspiracy”) against the intended defendants for devising and implementing a scheme to injure the Company by unlawful means and which did injure and cause loss to it.

(2) On the same facts, a claim against Ramchand for breach of fiduciary duties as the Company’s director.

(3) A claim against Primlaks Holding for a declaration (“Declaration”) that a commercial property in Car Po Commercial Building, Central, Hong Kong (“Commercial Property”) is held by it on trust for the Company. The  grounds relied upon are that the purchase of the Commercial Property was funded by the Company and the common intention of the 1^st generation Hemnanis ie  Ramchand, the Applicant and their 5 brothers that Primlaks Holding would eventually transfer the Commercial Property to the Company.

12.  The Applicant claims that but for the Conspiracy and Ramchand’s breach of fiduciary duties, the Company would have remained solvent while a residential property in Hong Kong registered in the name of the Company and the Commercial Property would have been released from their respective legal charges.

13.  In the prayer for relief, the Company claims (i) damages against the 1^st to 5^th intended defendants; (ii) equitable compensation against Ramchand for breach of fiduciary duty towards the Company; (iii) the Declaration alternatively damages for breach of trust against Primlaks Holding.

14.  In terms of evidence, the underlying facts in support of the proposed claims are set out an affirmation of the Applicant dated 24 July 2015 filed in these proceedings. While the affirmation may or may not have set out all the evidence available to the Applicant in establishing the claims, there is no requirement that, at the leave stage, he is under a duty to do so.

15.  This court has carefully considered the draft Statement of Claim[2] and it does appear that the Applicant has shown a serious question to be tried with some prospects of success. But before coming to a final decision, this court shall first turn to Mr Hui’s submissions in opposition.

16.  Mr Hui’s written submissions in opposition consist of only 3 short paragraphs. For ease of reference, they are reproduced below.

“30. It will be shown that there is no serious question to be tried. As to “in the interests” of the Respondent – that is a matter for [Primlaks Holding], as it is the 100% ultimate beneficial owner of the Respondent.

31. Ashok has been economical with the truth where he states that he does not “… stand to benefit from any of the proceeds of the litigation apart from…” [§20]. According to his Statement of Claim, Ashok and his family have been and are residing in a residential property, Apartment No.D14, 14/f, Woodland Heights, 2D Wong Nai Chung Gap Road (plus car parking space) (“the Residential Property”), held legally and beneficially by the Respondent [§§21 &22, SOC]. It could also be advanced that Ashok and member(s) of his family have use of a commercial property, Units 1004‑1006, 11/F, plus car parking space at Car Po Commercial Building, 37‑43 Pottinger Street, No.18-20 Lyndhurst Terrace (the “Commercial Property”), legally and beneficially owned by PHCPI. The true picture is that if the Respondent were managed properly, Ashok and his family would most likely be denied use of the Residential Property and the Commercial Property.

32. In short, Ashok stands to lose, if he fails to prevent the Respondent from functioning properly.” (emphasis added)

17.  Mr Hui’s submission that there is no serious question to be tried is nothing but a bare assertion. At the hearing, Mr Hui made a bold assertion that there is no serious question to be tried because “the alleged facts do not exist” and that “there is a total lack of evidence”. He also boldly submitted that the claims put forward in the derivative action “are not and will not be supported by anything like sufficient evidence” – in effect making a prediction of the future course of the derivative action.

18.  This court does not accept Mr Hui’s submissions, or rather, assertions. In my judgment, the Company’s prospects of success can hardly be described as “so slim that [it] cannot be said to have any expectation of success”: Re Li Chung Shing Tong (Holdings) Ltd supra at [33] quoted above.

19.  In these circumstances, this court rules that the Applicant has satisfied the Serious Question Requirement.

Interests of the Company Requirement

20.  The fact that the Applicant has satisfied the Serious Question Requirement goes a long way in surmounting the threshold presented by this Interests of the Company Requirement.

21.  In Re Li Chung Shing Tong (Holdings) Ltd supra, Harris J made the following observations:

“21. It is now well-established in Hong Kong that the threshold for the ‘interest of the company’ criterion is low. In deciding whether it is prima facie in the interest of the company for leave to be granted, the court should have regard to the fact that ‘there should not be a trial within a trial and the court should not be forced to enter into the merits of claims where there are serious disputes’: see Re Lucky Money Ltd (unrep., HCMP 505/2006 [2006] HKEC 1379), per Kwan J at para. 41; see also Re MyWay Ltd [2008] 3 HKLRD 614, per Barma J at para. 31.

….

26. I accept that in most cases if a “serious question to be tried” has been demonstrated it will follow that it is primafacie in the interests of the company that proceedings are pursued and the converse, of course, will also be true. In this context the “serious question to be tried” criterion can be viewed as a bench mark indicating whether or not it is likely to be in the interests of the company that proceedings are pursued and, in my view, this is how Kwan J’s judgments in both Re Grand Field Group Holdings and Re F & S Express are to be read.

….

28. In cases in which the board of the company has made a bona fide commercial decision that it is not in the interests of the company that proceedings are commenced generally the court will be slow to override that decision…” (emphasis added)

22.  In the present case, there is no evidence that the Company’s board has considered whether the proposed derivative action is or is not in the interests of the Company. The Company’s two directors, the Applicant and Ramchand, 1^st defendant in the proposed derivative action, obviously could not come to any agreement on it.

23.  Mr Lung submits that a successful prosecution of the claims will enure to the benefit of the Company and may enable it to stave off liquidation. This court accepts the first half of his submissions – it is obviously true that a successful prosecution of all or some of the claims will lead to recovery for the Company and benefit it. Whether or not the Company can stave off liquidation is too early to say. In any event, the evidence on the Company’s financial health (or lack of it) is not available.

24.  Mr Hui’s submission (quoted in paragraph 16 above) that the interests of the Company is a matter for Primlaks Holding, its alleged 100% ultimate beneficial owner, is utterly misconceived as a matter of law. Ever since Salomon v A Salomon & Co Ltd [1897] AC 22, the principle that a company is a separate legal entity from its shareholders has been so well‑entrenched that it is rare to hear submissions to the contrary, and it is even rarer to see a departure from it in a court of law. Section 733(1)(a) requires the Court to be satisfied that, on the face of the application, it appears to be “in the company’s interests” for leave to be granted, not in the company’s shareholder’s interests.

25.  The claim that Primlaks Holding is the 100% beneficial owner of the Company is a contentious matter (since the Applicant who claims he is 25% legal and beneficial shareholder of the Company) and is not apt for determination in this application. 

26.  In these circumstances, this court has no difficulty rejecting Mr Hui’s submission and rules that the “Interests of the Company Requirement” has been satisfied.

Disposition and costs

27.  In my judgment, this is an appropriate case to grant leave under section 733 of CO. There shall be an order in terms of paragraph 1 of the Originating Summons dated 24 July 2015.

28.  Paragraph 2 of the Originating Summons, concerning the Applicant’s costs in bringing the statutory derivative action, is adjourned sine die, with liberty to restore.

29.  Regarding the costs of this application, in the absence of agreement within 14 days, the parties are directed to go before a listing officer and set the case down for oral submissions on costs (1/2 hour reserved).

30.  General liberty to apply.