FERRARI S.P.A. v. F & S EXPRESS LTD

HCMP 2675/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2675 OF 2005

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D E C I S I O N

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1.  This is an originating summons in expedited form taken out under section 168BC(1) of the Companies Ordinance, Cap. 32, seeking leave to bring a statutory derivative action in the name of F & S Express Limited (“the Company”).

2.  Part IVAA in Cap. 32, which deals with statutory derivative actions, came into operation on 15 July 2005.  This is the first application of the kind to be brought to court.

3.  The originating summons was served on the Company, but it has not appeared today.  There is no opposition from the Company.  Nevertheless, I need to be satisfied that the applicant, Ferrari S.P.A. (“the applicant”) has fulfilled each of the relevant requirements in section 168BC(3) for leave to be granted to bring a statutory derivative action.

4.  I will first set out the relevant background.

5.  The Company was incorporated in Hong Kong as a private company.  There are 3 shareholders at present, each holding one-third of the shares.  The applicant is a shareholder.  Li Pui Lam (“Li”) is another shareholder, he is also a director.

6.  The Company is a joint venture vehicle formed by the 3 current shareholders for the purpose of operating under the name “Ferrari Express” for the transportation of high value jewellery and precious stones, as part of an international network of freight forwarding and logistics services operated by the applicant around the world.  Each of the shareholders has the right to participate in the management of the Company.

7.  Li holds 88% of the shares in another company known as Security Cares Consultancy Ltd (“Security Cares”).  Ng Kwok Piu (“Ng”) holds 8.8% shares in Security Cares and is the operations manager.

8.  The applicant intends to bring a statutory derivative action against Li, Security Cares and Ng.

9.  In 2002, Li caused the Company to purchase 3 secondhand armoured trucks from Security Cares at HK$1.5 million.  The applicant says the price was plainly excessive; further, Li had failed to disclose his substantial interests in Security Cares to the Company.

10.  Between 2001 and 2002, Li caused the Company to pay Ng a total of HK$1,353,970.00.  All the cheques were signed by Li.  Ng has no known connection to the business of the Company.  The applicant says he was not entitled to receive any sums from the Company.

11.  On 30 September 2005, the applicant’s solicitors wrote to Li’s solicitors and raised, inter alia, the above concerns, but no response was received.

12.  On 22 November 2005, the applicant gave 14 days’ notice to the Company under section 168BD, stating that it intends to seek leave under section 168BC to commence a statutory derivative action against Li, Security Cares and Ng after 14 days from the date of the letter, as regards the excessive price paid for the trucks and the cash payments to Ng.

13.  On 5 December 2005, Li’s solicitors informed the applicant’s solicitors he is unable to provide a substantive reply to the earlier letter of 30 September 2005 until an independent accountant has looked into the Company’s accounts, and asked the applicant’s solicitors to withhold action for 21 days.

14.  This originating summons was issued on 6 December 2005, on expiry of the 14-day period in the notice.

15.  Mr Maurellet for the applicant has referred me to cases decided in Canada, Australia and Singapore, as these jurisdictions have legislative provisions similar to our new provisions.

16.  I would echo what Palmer J said in Swansson v R A Pratt Properties Pty Ltd and Another (2002) 42 ACSR 313 at 320 paragraph [35], that at this early stage in the development of the law on statutory derivative actions, it would be unwise to endeavour to state compendiously the considerations to which the court would have regard in determining if each of the requirements in section 168BC(3) is fulfilled, particularly as there is no effective opposition to the present application.  It would be better to confine myself strictly to the fact situation in this case when I come to consider each of the statutory requirements, as “the law will develop incrementally as different factual circumstances come before the courts.”

The first requirement – if it appears to be prima facie in the interest of the Company that leave should be granted to bring the statutory derivative action

17.  As Palmer J had commented upon in Swansson, supra. at page 324, paragraph [55], there is a significant distinction between a requirement that the proposed action is in the interests of the company and a requirement that the proposed action may be, or appears to be, or is likely to be in the interests of the company.  In jurisdictions with legislative requirements of the latter kind, the courts have taken the view that the best interests of a company need be considered only in a prima facie way.

18.  In Re Bellman and Western Approaches Ltd 130 DLR (3d) 193 at 201, the British Columbia Court of Appeal drew a similar distinction between the two kinds of requirements and held that where the court has to be satisfied the proposed action would appear to be in the interests of the company, what is sufficient at the stage of granting leave is that “an arguable case be shown to subsist”.  See also the cases in Singapore which has similar legislative provision (Teo Gek Luang v Ng Ai Tiong [1999] 1 SLR 434 at 438E to H, paragraph 14; Agus Irawan v Toh Tech Chye & Others [2002] 2 SLR 198 at 202G to 203B).

19.  Here, I am satisfied from the draft statement of claim and the complaints raised in the letter of 30 September 2005, which had gone unanswered, there is disclosed an arguable case and, on the face of it, it would be in the interests of the Company to pursue the intended defendants to recover its loss and damage.  It is not apparent that the applicant can achieve recovery of the loss and damage of the Company without court proceedings.

The second requirement - if there is a serious question to be tried and the Company has not itself brought the proceedings against the intended defendants

20.  The latter part of the requirement is clearly satisfied, as the Company has not brought any recovery proceedings against Li, Security Cares or Ng.

21.  To ascertain if there is a serious question to be tried, the court “will not normally enter into the merits of the proposed derivative action to any great degree”, and the applicant has “the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction” (Swansson, supra. at 318, paragraph [25]).

22.  I hold that this requirement is also satisfied.

The third requirement – if the applicant has served a notice on the Company in accordance with section 168BD

23.  This requirement is also satisfied.

24.  This is an appropriate case to grant leave to commence a statutory derivative action and I so order.

25.  The applicant seeks an order that its costs of the leave application be indemnified out of the assets of the Company and its costs in the derivative action yet to be incurred are also to be indemnified out of the Company assets.

26.  Under section 168BI(3), the court may only make an order about costs, including the requirement as to indemnification, in favour of the applicant if it is satisfied that the applicant was “acting in good faith in, and had reasonable grounds for, making the application, or bringing … the proceedings”.

27.  I have no problem about ordering the applicant’s costs in the leave application to be indemnified out of the Company assets.  Costs should follow the event.  I am also satisfied that the additional requirement of good faith in section 168BI(3) is fulfilled.  There is nothing to suggest that the applicant was not acting out of a legitimate interest in the welfare and good management of the Company, or that its purpose for bringing the derivative action is other than for the purpose of recovering loss and damage of the Company.

28.  I decline to order the applicant’s costs in bringing a statutory derivative action to be indemnified out of the assets of the Company at this stage.  The costs involved might or might not be substantial.  There is no evidence as to the Company’s ability to meet such costs.  As stated in Swansson, supra at 326, paragraph [75], before the court can make such an order, there must be evidence as to the company’s ability to pay the costs of the proposed derivative action as at the time that leave is sought.

29.  Under section 168BI(1), the court may, at any time, including on granting leave under section 168BC(3), make an order it considers appropriate about the costs incurred or to be incurred by the applicant in relation to the statutory derivative action to be brought.

30.  I give leave to the applicant to restore its application to be indemnified as to its costs in the statutory derivative action, if and when it has filed evidence on the Company’s ability to pay such costs.