DIMENSIONAL DEVELOPMENTS LTD v. ARCHID GARMENT FACTORY LTD AND OTHERS

HCMP 939/2025

[2026] HKCFI 2166

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 939 OF 2025

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J U D G M E N T

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Introduction

1.  I have before me an Originating Summons issued by the Applicant on 9 June 2025 applying for leave under sections 732 and 733 of the Companies Ordinance, Cap. 622 (“Ordinance”)  to commence on behalf of the 1^st Respondent (“Company”)  a statutory derivative action against the 2^nd to 6^th Respondents (collectively, “Respondents”). The application is opposed by the 2^nd to 6^th Respondents. The Company takes a neutral stance.

Background

2.  The Company was incorporated in Hong Kong on 23 February 1979.  Before ceasing its operations in around March 2024, the Company was in the business of trading and manufacturing garments, both by itself and through its subsidiaries in Hong Kong, Mainland China and Cambodia.

3.  Following the departure of some shareholders, the Company has been held as a family business since 1998. The parties to this dispute concern the Tse siblings, their children and their corporate vehicles.  They can be divided into two opposing camps:

(1)  Tse Yuet Yu (“Yu”)  and Tse Yat Sing (“Sing”)  hold, respectively, 70% and 30% of the Applicant’s shares.  The Applicant holds 46% of the Company’s shares.

(2)  The 2^nd Respondent (Yu’s and Sing’s brother)  and the 3^rd Respondent (2^nd Respondent’s wife)  hold, respectively, 39% and 15% of the Company’s shares.  At all material times till 7 June 2024, the 2^nd Respondent, the 3^rd Respondent, Yu and Sing were directors of the Company. Following the removal of Yu and Sing from the board of directors on 7 June 2024, the 2^nd and 3^rd Respondents have been the sole directors of the Company.  The 4^th and 5^th Respondents are sons of the 2^nd and 3^rd Respondents.  They have been employed by the Company as sales managers since, respectively, 2003 and 2005.  At the Extraordinary General Meeting of the Company on 27 August 2023 (“EGM”), it was resolved that the 4^th and 5^th Respondents would be appointed as salaried directors of the Company.  The 6^th Respondent is a private company incorporated in Hong Kong on 9 October 2012. The shares in the 6^th Respondent are held equally by the 2^nd and 3^rd Respondents, who are its sole directors.

4.  In around August 2023, the Company began to become heavily indebted.  On 27 August 2023, it was announced at the EGM that the Company’s outstanding debts amounted to some HK$155,000,000 and that its income would be insufficient to satisfy its liabilities.

5.  The Company ceased its operations in around March 2024.

6.  In December 2024, the Company commenced proceedings[1] against, inter alia, Yu and Sing alleging, inter alia, secret profits, improper emoluments, concealment of resulting losses, misappropriation of the Company’s assets, unauthorised loans, unauthorised and secret payments, and unauthorised foreign exchange speculation.  On 14 July 2025[2], upon finding that there was a triable issue as to whether Yu’s fiduciary duty to act in the interests of the Company had, at the time, been modified to include a duty to act in the interests of the Company’s creditors as a whole[3], DHCJ Jonathan Wong granted unconditional leave to Yu to defend the Company’s claim for an order demanding Yu to return to the Company forthwith the HK$2,000,000 that she had received through the impugned transactions as alleged (“Decision”).

7.  On 3 April 2025, the Applicant, through its solicitors, gave notice (“Notice”)  to the 2^nd to 6^th Respondents of an intended statutory derivative action against them.

Legal Principles

8.  Section 733(1) of the Ordinance specifies the circumstances in which the Court may grant leave for the purposes of section 732(1). The two subsections state as follows:

“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.”

“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)  an application for leave to intervene in proceedings under section 732(3), the company has not diligently continued, discontinued or defended the proceedings; 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).”

9.  As I have held in Lam Kin Chung v Soka Gakkai International of Hong Kong Ltd[4], before granting leave, the Court must be satisfied principally that the proposed proceedings raise a serious question to be tried, and that it appears to be in the Company’s interests that it be tried.  The issues are normally considered in that order.

10.  More recently, the correct approach to determining whether the two criteria are met was restated by Coleman J in Kwok Hiu Kwan v Convoy Global Holdings Ltd[5]:

(1)  As to the requirement for a serious question to be tried, the threshold is relatively low.  Therefore, the prospects of success on the claim are to be investigated only to a limited extent, and the Court should be slow to refuse leave unless the prospects are so slim that the plaintiff cannot be said to have any expectation of success.  The question is whether there can be seen prospects of success which, in substance and reality, exist.  Unless the pleaded claim is demurrable, or there are some easily demonstrated fatal flaws, the merits will not be further investigated.  At this stage, it is not the Court’s function to try to resolve conflicts of evidence or difficult questions of law: [56].

(2)  Of course, when considering whether a serious question to be tried is made out, the Court is not obliged to accept whatever evidence the plaintiff chooses to place before it without any critical thinking: [57].

(3)  As to the requirement that the intended action appears to be in the interests of the company, again the threshold is low.  In most cases, if a serious question to be tried has been demonstrated, it will follow that it is prima facie in the interests of the company that proceedings are pursued (and, of course, vice versa): [58].

(4)  In assessing whether it appears to be in the interests of the company that the statutory derivative action be pursued, the Court should also take into account whether any practical benefit is likely to result.  This involves making some assessment as to whether it appears that the company stands to gain in money or money’s worth in light of the costs to be incurred.  That is not necessarily the same as a cost-benefit analysis of possible outcomes of the prospective litigation, as that assessment may not be possible with any degree of confidence or accuracy.  But the Court should be looking to see whether there is a realistic tangible and practical overall benefit which might be obtained: [59].

(5)  Section 733 provides a discretionary power for the Court to grant leave to commence a statutory derivative action.  In exercising its discretion, the Court is deciding—on the basis of the criteria laid down by statute—whether the plaintiff should exceptionally be allowed to sue in place of the company which is normally the proper plaintiff.  The questions to be asked by the Court include a consideration of whether the case is a proper case for the Court to exercise its discretion.  Part of the reason for the discretion is to act as a safeguard against vexatious and inappropriate proceedings by disgruntled members.  The Court can properly be regarded as exercising a “gatekeeping” function: [60].

(6)  If the applicant can satisfy the serious question to be tried requirement and the interests of the company requirement, the fact that he may also be engaged in broader disputes and hostile litigation with the intended defendants does not of itself give rise to an inference that the leave application is for an ulterior motive and hence an abuse of process: see, for example, Lau Wing Yan v Pacific Bulk Investment Ltd [2020] HKCFI 769 at [48]. If something is in the best interests of a company, it does not matter who the shareholders are and the state of the relationship between them: [61].

11.  Furthermore, Mr Bernard Man SC[6], acting for the Respondents, emphasised that there will be cases in which a serious question to be tried is established, but it may not be in the interests of the Company that proceedings be commenced.  For example, a $100 claim may be meritorious, but it may not be expedient to commence an action for it[7].

12.  In addition to the above principles, the Court should take into account evidence, which demonstrates that the substance of the redress which the applicant seeks to achieve is available by a means which does not require the company to be brought into litigation against its will.  For example, if the applicant can achieve the desired result in proceedings in his or her own name, it may not be in the best interests of the company to be involved in litigation at all: Wong Wai Chung and Anor v Woncorn Investment Ltd[8].

Parties’ Positions

The Applicant’s Case

13.  The starting point is the amended draft Statement of Claim appended to the Applicant’s skeleton submissions dated 22 January 2026, which sets out the claims that the Applicant wishes to bring in the name of the Company:

(1)  It is alleged that the 2^nd and 3^rd Respondents have breached their fiduciary duties by misappropriating and assisting in the misappropriation of a sum of HK$4,070,000 (“Sum”)  from the Company and retaining the same without the authority or consent of the Company (“Misappropriation Claim”).  Specifically, the Sum was withdrawn from the Company’s bank account with Nanyang Commercial Bank Ltd (“NCB”)  by a cheque dated 22 May 2024 and signed by the 2^nd and 3^rd Respondents, which was later deposited in the 2^nd Respondent’s personal bank account. In the absence of any consideration for the Sum[9], the 2^nd Respondent has been unjustly enriched and is a trustee holding the Sum for the Company[10]. Accordingly, the Company seeks an account of and the return of the Sum forthwith.

(2)  It is alleged that the 2^nd and 3^rd Respondents have further breached their fiduciary duties by wrongfully causing the Company to pay for the monthly mortgage instalments and outgoings of the following properties: (a)  Flat C, 45/F, Tower 1, The Riverpark, 8 Che Kung Miu Road, Tai Wai, Hong Kong, together with carparking space No. R145 at The Riverpark (“45C”)  and (b)  carparking space No. R123 at The Riverpark (“R123”)  without the authority or consent of the Company (“Mortgage Claim”).  According to the Applicant, 45C was acquired by the 6^th Respondent—which was incorporated precisely for the purpose of this acquisition—by way of a mortgage loan from Standard Chartered Bank Ltd (“SCB”)and the profits distributed by the Company to the 2^nd and 3^rd Respondents in around October 2012.  Similarly, R123 was acquired by the 4^th and 5^th Respondents by way of the same distribution of profits[11]. In the circumstances, the Company seeks restitution and/or repayment of all sums[12] that it has previously paid in respect of such outgoings and monthly mortgage instalments.

(3)  The 4^th Respondent holds 13 units on the 12/F of Block A at The Sensok Town (永樂城), No. 262 Street 598, Sangkat Phnom Penh Thmey, Khan Sensok Phnom Penh (“Cambodian Property”)  on trust for the Company.  As such, the Company seeks (“Cambodian Property Claim”):

(i)  a declaration that the 4^th Respondent holds the Cambodian Property on trust for the Company solely and the Company is solely entitled to all the proceeds of sale in the event of the Cambodian Property being sold;

(ii)  an account of all income generated by the Cambodian Property from the 4^th Respondent and payment to the Company of such sums forthwith;

(iii)  an order directing the 4^th Respondent to sell the Cambodian Property at a reserve price to be determined by the Court in accordance with the reasonable market value of the Cambodian Property forthwith; and

(iv)  an account of all proceeds of sale of the Cambodian Property and payment up of such proceeds to the Company upon its sale by the 4^th Respondent.

(4)  It is alleged that the 2^nd and 3^rd Respondents have breached their fiduciary duties by causing the Company to continue employing the 4^th and 5^th Respondents at a monthly salary of HK$47,500 (per person)  for no proper purpose and notwithstanding the cessation of the Company’s operations in around March 2024 (“Continued Employment Claim”).  In the circumstances, the Company seeks an order directing the 2^nd and 3^rd Respondents to cause the Company to terminate the 4^th and 5^th Respondents’ employment with the Company forthwith and to repay the salaries previously paid by the Company to the 4^th and 5^th Respondents up to the date of their termination.

(5)  It is alleged that the 2^nd and 3^rd Respondents have further breached their fiduciary duties by causing the Company to repay its creditors selectively (“Selective Repayment Claim”).  After the removal of Yu and Sing as directors of the Company, the 2^nd and 3^rd Respondents caused the Company to repay only SCB and China CITIC Bank Ltd (“CITIC”)  whose loans were secured against 45C, and not NCB or Dah Sing Bank Ltd (“Dah Sing”)  whose loans were secured against properties registered in the name of Yu and Sing.  Accordingly, the Company seeks an order directing the 2^nd and 3^rd Respondents to cause the Company to repay the loans owed to NCB and Dah Sing by way of instalments along with the repayments owed to SCB and CITIC.

14.  Mr CY Li SC[13], acting for the Applicant, submitted that in light of the above there are several serious questions to be tried.  It is, therefore, in the interests of the Company that the proposed proceedings be pursued.  In particular, he submitted that succeeding in the above claims would result in the Company recovering substantial sums, including the Sum under the Misappropriation Claim, the monthly mortgage instalments for 45C and the outgoings for both 45C and R123 under the Mortgage Claim, the rental income of the Cambodian Property under the Cambodian Property Claim, and the salaries of the 4^th and 5^th Respondents under the Continued Employment Claim.  Such recovery, says the Applicant, would materially improve the Company’s financial position by allowing it to discharge a significant portion of its outstanding debts.

The Respondents’ Case

15.  Mr Man submitted that there is no serious question to be tried and that pursuing the proposed proceedings will not be in the interests of the Company.  The Originating Summons should be dismissed accordingly.

16.  In respect of the Misappropriation Claim, it is submitted that the Sum was not misappropriated. Instead, it was withdrawn as a precautionary measure and was, in any event, eventually returned or spent for the purposes of the Company.

(1)  The Respondents claim that Yu had unilaterally withdrawn HK$2,000,000[14] from the Company’s account with NCB without informing the 2^nd or 3^rd Respondents.  Thus, the Sum was withdrawn as a precaution to prevent Yu from further withdrawing from the Company’s account, at least until Yu was removed as a director of the Company such that she would no longer have access to the Company’s online banking facilities.

(2)  After the removal of Yu as a director of the Company on 7 June 2024, the balance of HK$2,782,052.10 was returned to the Company on 27 June 2024. The remaining balance of HK$1,287,947.90 was spent for the purposes of the Company, such as settling the salaries of its employees, its auditing and accounting fees, and the monthly mortgage instalments and outgoings for 45C of which the Respondents claim the Company is its beneficial owner.

17.  As to the Mortgage Claim, Mr Man submitted that 45C and R123 are held on trust for the Company.  It is, therefore, entirely unobjectionable for the Company, as the beneficial owner of 45C and R123, to bear their expenses.

(1)  Further and more fundamentally, Mr Man argued that the Applicant’s claim as presently formulated is not in the best interests of the Company.  If the Applicant’s claim prevails, it follows that 45C and R123 are not held on trust for the Company.  At best, the Company has a claim for the monthly mortgage instalments in respect of 45C, which amount to approximately HK$23,221,562.48, and other outgoings in respect of both 45C and R123.  By contrast, if the Respondents’ claim prevails, the Company will be beneficially entitled to the total equity value of both 45C and R123, which is in the region of HK$50,000,000[15].

(2)  The Respondents complain that the Applicant’s change of tack amounted to an abuse of process[16]. In the Notice dated 3 April 2025 and its draft Statement of Claim which was exhibited to Yu’s affirmation dated 5 June 2025, the Applicant pleaded as an alternative to the Mortgage Claim that 45C and R123 belonged to the Company beneficially and the Company is entitled to seek, inter alia, an account and payment up of the net proceeds upon the sales of 45C and R123. This alternative claim was, however, abandoned in the amended draft Statement of Claim appended to the Applicant’s skeleton submissions dated 22 January 2026. No explanation has been provided by the Applicant.

(3)  The Respondents also complain that a large proportion of the Mortgage Claim is time-barred.  By analogy with claims for breach of trust under section 20(2) of the Limitation Ordinance, Cap. 347, claims for breach of fiduciary duty against a director are prima facie subject to a 6-year limitation period[17]. Since the Originating Summons was taken out on 9 June 2025, it is submitted that no claim lies in respect of any payments prior to 9 June 2019. Relatedly, the Respondents submit that the Applicant’s delay[18] in taking actions against the Respondents in respect of the Mortgage Claim only helps to highlight its lack of substance.

18.  With regard to the Cambodian Property Claim, the Respondents do not dispute that the Cambodian Property and, therefore, the rental income received therefrom are held on trust by the 4^th Respondent for the Company.

(1)  However, it is argued that the 4^th Respondent did not fail to account to the Company.  According to the account already provided by the 4^th Respondent, through his solicitors, to the Company on 15 October 2025, the Cambodian Property was running at a net loss of US$5,157.36 between September 2024 and September 2025, such that there was simply nothing to be paid to the Company in respect of the rental income received from the Cambodian Property.

(2)  The Respondents also argue that it is otiose for the Applicant to commence a statutory derivative action to compel the sale of the Cambodian Property.  After all, there is no dispute that the Company’s assets, including those in Cambodia, should be sold for the purposes of paying off its debts and winding down its affairs.

19.  As to the Continued Employment Claim, the Respondents argue that the cessation of the Company’s operation does not automatically put an end to the Company’s affairs.  The Company’s affairs still have to be tended to and the 4^th and 5^th Respondents—who have worked for the Company for over 20 years and were responsible for the Company’s operations in, respectively, Cambodia and Myanmar—are best positioned to handle the winding down of its affairs, particularly the sale of its overseas properties.

(1)  In any event, the Respondents contend that the employment of the 4^th and 5^th Respondents is a matter of commercial judgment with which the Court should be slow to intervene.  Indeed, the Company has resolved (with Yu’s and Sing’s agreement)  at the EGM held on 27 August 2023 in anticipation of the winding down of the Company’s affairs that the 4^th and 5^th Respondents were to “follow up on all of the Company’s accounts and transactions” and would be appointed as salaried directors “responsible for following up on all subsequent matters” relating to the Company.

(2)  Separately, the Respondents submit that the amount recoverable[19] under the Continued Employment Claim is minimal compared to the costs which will be incurred, if not the costs which have already been incurred, in pursuing this Claim.  Hence, it is hardly in the interests of the Company to pursue the Continued Employment Claim.

20.  In respect of the Selective Repayment Claim, the Respondents submit that it was entirely reasonable for the 2^nd and 3^rd Respondents to only repay SCB and CITIC because Yu and Sing had already been repaying NCB and Dah Sing since July 2024 with the rental income received from certain land in Cambodia which was held on trust by Sing for the Company.  It cannot be seriously suggested, say the Respondents, that the selective repayment of SCB and CITIC was made with the intention of protecting the 2^nd and 3^rd Respondents whilst putting Yu and Sing in jeopardy, given that Yu, Sing, 2^nd and 3^rd Respondents are joint personal guarantors of all of the above loans.

(1)  In any case, the Respondents contend that the question as to which creditor to pay is plainly a matter of commercial judgment.  For a breach of fiduciary duty to be made out, the Court must be satisfied that the 2^nd and 3^rd Respondent’s decision to only repay SCB and CITIC went beyond a mere error of commercial judgment and was one which no reasonable director could have reached.  The test, the Respondents submit, is a high one[20].

(2)  The Respondents further submit that even if a breach of fiduciary duty is made out, the Applicant has not demonstrated any loss (or potential loss)  to the Company especially where the loans owed to NCB and Dah Sing have actually been repaid.  Hence, it is hardly in the interests of the Company to bring a claim for a breach that causes no loss to the Company.

21.  Given the precarious financial position that the Company finds itself in, Mr Man submitted that it is positively detrimental to the Company (and its creditors)  for the Applicant’s intended claims to be pursued, the costs of which are likely to exceed the amount of any sums recovered even in the event that the Applicant is successful.  In fact, Mr Man submitted that the Company is likely to be insolvent[21], although no evidence has been adduced to that effect.  Where a company is insolvent or nearing insolvency, it is submitted that the interests of the company are in reality the interests of the creditors[22].  In this connection, it was brought to my attention that there is no evidence or explanation as to why it is right for the Company’s resources to be used to finance the litigation when there is already a large number of unpaid creditors.

Discussion

Misappropriation Claim and Mortgage Claim

22.  Central to these two claims is the question of whether or not 45C and R123 belong to the Company or to the 2^nd and 3^rd Respondents.  The Respondents say the properties belong to the Company and this is why they caused the Company’s money to be used to pay expenses including mortgage repayments.  The Applicant argued before me that the Company does not own the properties, although it was its original alternative case that it did.  As it seems quite clear that the Company will be better off if it owns the properties and accepts that the payments the Applicant wishes to claim are expenses properly to be borne by the Company, I asked Mr Li if its clients understood the financial import of its claim as in its present form it makes no commercial sense to pursue it.  Mr Li assured me that it did.  As I explained earlier before granting leave I need to be satisfied that it is in the Company’s best interests that leave is given.  I am not.  On the contrary, I am satisfied that the contrary is the case.  Therefore, although I agree that there is viewed in a narrow legal sense a serious question to be tried I am not persuaded that leave should be granted in respect of these two claims.

Cambodian Property Claim

23.  At the hearing, it was agreed between the parties that the Cambodian Property Claim need not be pursued insofar as the Respondents undertake that they would cause the Cambodian Property to be sold within such time as the parties agree.

Continued Employment Claim

24.  This dispute seems to boil down to a commercial judgment about whether or not it was necessary for the Company to employ the 4^th and 5^th Respondents in order to close its operations after it ended its garment business.  This is largely a matter of commercial judgment.  It is entirely unsurprising that some staff had to be retained to close accounts and manage the realisation of the Company’s assets.  There is no obvious reason why choosing the 4^th and 5^th Respondents falls outside the range of reasonable choices or why they should be expected to continue working for a lower salary.  It may be that a serious question to be tried could have been framed, based on a claim that they were employed longer than was necessary, but this is not the case that has been advanced.  The formulation of the claim and the supporting evidence have the hallmarks of animosity rather than a realistic complaint, which it will be in the interests of the Company to pursue. I am not satisfied that a serious question to be tried has been demonstrated such that it is in the Company’s interests that the claim proceeds.

Selective Repayment Claim

25.  It is pleaded that the 2^nd and 3^rd Respondents owed a fiduciary duty to the Company to repay loans secured against properties owned by two shareholders (Yu and Sing).  The pleaded case in my view is demurrable.  The 2^nd and 3^rd Respondents owed no such fiduciary duty to the Company.  The claim is misconceived, seemingly conflating what may be a complaint that Yu and Sing have against the Company with the 2^nd and 3^rd Respondents’ fiduciary duties to the Company.

Disposition

26.  I dismiss the Originating Summons.  I make a costs order nisi that the Applicant pays the costs of the proceedings including any reserved costs to the Respondents.  In respect of the hearing before me, I make an order that there be a certificate for two counsel.