SAI KUNG P.L.B. (MAXICAB)(No.1 & 2) CO LTD v. HIEW MOO SIEW AND OTHERS

HCA 2554/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2554 OF 2006

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D E C I S I O N

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Introduction

1.  This is the decision on the trial of preliminary issues.

2.  The plaintiff (“the respondent”) commenced this action in November 2006 claiming various sums from the defendants (together with related relief).  The pleading alleges in gist that the defendants have abused their positions and/or powers in misappropriating or misusing the respondent’s funds/properties thereby obtaining secret profits and causing loss to the respondent.

3.  The defendants deny the allegations.

This Application

4.  This application (taken out by the 1^st to 4^th defendants (“the applicants”)) is factually based on a consent order made on 20 June 2006 (about 5 months before the commencement of this action) in HCMP 852/2005, a petition presented pursuant to s. 168A, Companies Ordinance (Cap. 32) (respectively “the 2006 order” and “the Petition”).

5.  The Petition was presented by 7 shareholders of the respondent.  The defendants therein included the applicants and the respondent.  The 2006 order was in the nature of a Tomlin order.

6.  It is the applicants’ case in this application the matters raised in this action are the same as those (or at least based on the same facts relied upon) in the Petition.  They say that this can be shown by a comparison of the pleadings in the two proceedings and the respondent’s intention to re-use in this action almost all of the evidence used in the Petition.

7.  The applicants contend that the dispute in the Petition has been settled by way of the 2006 order (subsequently the consenting parties have duly performed their obligations thereunder).  Accordingly, the applicants argue that the complaints raised in this action fall within the doctrine of res judicata and/or are an abuse of the court’s process.

8.  They rely in particular on three additional matters:-

(a) the Petition specifically sought (by way of relief) to have derivative proceedings brought on the respondent’s behalf against the applicants;

(b) by February 2006, the petitioners succeeded in ousting the applicants from the management of the respondent. Since then, most of the petitioners have been appointed to the respondent’s board instead;

(c) by March 2006, the petitioners already have in their possession an “independent” report stating the amount of loss and damage said to have been suffered by the respondent.

9.  The applicants say that in these circumstances, it is clear the petitioners and the respondent “warehoused” this action in June 2006 (the time of the 2006 order) without the applicants’ knowledge.

The Respondent’s Case

10.  The respondent contends that this application has no substance.

11.  First, it points out the 2006 order never states that there was a full and final settlement among all consenting parties of all claims and matters raised in the Petition.

12.  More important, it says a proper understanding of the proper scope of a s. 168A petition will show that:-

(1) the relief sought in this action could not have been obtained in the Petition;

(2) the respondent was not truly a party to the Petition.

13.  In this connection, reliance is placed in particular on the Court of Final Appeal’s decision in Re Chime Corp. Ltd. (2004) 7 HKCFAR 546.  The court disallowed an amendment to a petition brought pursuant to s. 168A to allege the controlling director improperly procured the company to advance loans to her own company and to seek repayment of the loans.

14.  The passages in the said decision referred to herein include para. 27, 41 and 61 to 63 (Bokhary PJ and Lord Scott NPJ):-

“… Is there jurisdiction to make, on an unfair prejudice petition … an order for the payment of damages or compensation, or for the grant of restitution, to the company itself? I would not say that there is no such jurisdiction in the theoretical sense … I would not rule out the possibility of circumstances in which it can be seen that such an order could properly be made. But such circumstances, even if they can arise, would in any case of complexity be rare and exceptional”;

“… It should not be enough, in my opinion, to show that the court has jurisdiction in the strict sense. It should be necessary also to show that the claim for the remedy in question is one that, as a matter of proper practice, the court should, if the relevant underlying allegations are made good, grant. …”;

“Although for the reasons I have given the court has jurisdiction, in the strict sense, to make the orders sought … it would not, in my opinion, be proper for the court on this petition to entertain what would, in effect, be Chime’s action against the directors for their breach of duty in causing the loan to be made. If there is misconduct it can be established in a derivative action. If the court, on hearing the petition, thinks that a derivative action prosecuting this alleged misconduct should be brought, it can make an order to that effect under s.168A(2)(b). …

As a general rule, in my opinion, the court should not in a s.168A petition make an order for payment to be made by a respondent director to the company unless the order corresponds with the order to which the company would have been entitled had the allegations in question been successfully prosecuted in an action by the company (or in a derivative action in the name of the company). … Nor, in my opinion, should the court allow a prayer in the petition for payment by the respondent director of compensation or of restitution to the company to stand unless it is clear at the pleading stage that a determination of the amount, if any, of the director’s liability at law to the company can conveniently be dealt with in the hearing of the petition. In any other case, in my opinion, if the allegations against the director are proper to be relied on as evidence of unfairly prejudicial conduct, the appropriate relief to be sought would be an order under s.168A(2)(b) for a derivative action to be brought for the recovery of the sum legally due. …

Moreover, the use of a s.168A petition in order to circumvent the rule in Foss v. Harbottle (1843) 2 Hare 461 in a case where the nature of the complaint is misconduct rather than mismanagement is, in my opinion, an abuse of process … ” (emphasis supplied).

Reference is also made to similar remarks in Waddington Ltd. v. Chan Chun Hoo Thomas & Others (2008) 11 HKCFAR 370, para. 77 and Re Shun Tak Holdings Ltd. [2009] 5 HKLRD 743, para. 21 to 38.  The court in Waddington Ltd. said:-

“… Unfair prejudice proceedings are concerned to bring mismanagement to an end; derivative actions are concerned to provide a remedy for misconduct … ”.

15.  As regards para. 12(2) above, the respondent says it was joined in the Petition purely as a nominal defendant.  This is also how the courts consider to be the role of a company joined in a petition involving disputes between shareholders: Re a Company, ex parte Johnson [1992] BCLC 701; In re C.G. & L. Investment Ltd. and Wyatt Estates Ltd. [1993] 1 HKLR 107.  In the Petition, there was no lis between the respondent and the other defendants therein: see also Re Shun Tak Holdings Ltd., para. 70.

16.  Hence, the doctrine of res judicata has no application and there is no other valid reason to say this action (or any part of it) is an abuse of the court’s process.

Conclusion and Reasons Therefor

17.  It is implicit in the respondent’s case (summarized above) that the matters raised in this action are the same as those (or at least based on the same facts relied upon) in the Petition.  I have borne this in mind in determining this application.

18.  I agree with the respondent that both this action and the Petition are (at least) factually complicated.  The re-amended statement of claim is over 60 pages long and contains over 120 paragraphs.  The facts averred to date back to before 1981; the relevant period spans over some 7 years (1999 to 2006).  Various breaches are alleged.  The trial is scheduled to last for 32 days.

19.  Further, I agree with the respondent that, in order to succeed in this application, the applicants in effect have to show it is proper to lift the corporate veil (because otherwise the petitioners and the respondent are different legal entities) and/or the respondent has been acting in bad faith.  I also agree that there is no valid basis for concluding that such is the case.

20.  In these circumstances, I agree with the respondent’s case summarized in para. 11 to 16 above.

21.  Accordingly, this application is dismissed.

Costs Order Nisi

22.  There is no apparent reason to depart from the usual rule that costs should follow the event.  There will accordingly be a costs order nisi pursuant to Ord 42 r 5B(6) that the costs of this application be paid by the applicants to the respondent to be taxed if not agreed with certificate for two counsel.