WANG PENGYING v. NG WING FAI AND OTHERS

HCA 1479/2018

[2019] HKCFI 3074

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1479 OF 2018

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BETWEEN

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AND

HCA 1619/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1619 OF 2018

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BETWEEN

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(Heard together)

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J U D G M E N T

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Introduction

1.  These two sets of proceedings are in the form of common law derivative actions, which (as the titles identify) have been launched by the plaintiff suing on behalf of herself and all other shareholders in the relevant companies.

2.  In HCA 1479/2018, the relevant two companies are the 2^nd defendant company (“Convoy Global”), which is a company listed on the Hong Kong Stock Exchange, and the 3^rd defendant company (“Forthwise”), one of its wholly owned subsidiaries.  In HCA 1619/2018, the relevant two companies are the 3^rd defendant Convoy Global, and the 4^th defendant company (“Convoy Finance”), being another of its wholly owned subsidiaries.

3.  Other than the statements of claim dated 27 June 2018 and 11 July 2018 respectively, both of which were amended on 18 October 2019, no other pleadings have yet been filed.

4.  By summonses dated 18 December 2018, the 1^st defendant in HCA 1479/2018 (“Ng”) and the 1^st and 2^nd defendants in HCA 1619/2018 (“Ng” and “Yap” respectively) have applied to strike out the present proceedings on the asserted basis that the plaintiff has no locus standi to bring or continue the actions derivatively and/or has failed to plead and prove an arguable case of wrongdoer in control and/or actual fraud by or personal benefit to Ng and Yap.

5.  Mr José Maurellet SC, appearing with Mr Jason Yu and Ms Jasmine Cheung, as counsel for Ng and Yap, says that this is not a procedural or technical objection.  It goes to the substantive rule that the proper plaintiff for a wrong done to a company should be the company itself. It is only if a shareholder can get him or herself within the narrow confines of well-established categories that an exception can be invoked.

6.  The amendments made to the statements of claim in each action were made in the face of the strike out applications, and primarily relate to further allegations as to why it is said that Ng and Yap were and remained in de facto control over the Board of Directors of Convoy Global, essentially by pleading a conspiracy between them and the other directors – defined as the “Conspiring Directors” – so that they did not, or because they did not, exercise independent judgment and/or act independently as regards the affairs of Convoy Global.

Refusal of Interrogatories

7.  In support of the strike out applications affirmations have been filed by each of Ng and Yap, and by a number of other directors of Convoy Global.  Each of the directors’ affirmations or affidavits contains a common paragraph in which the director asserts that at all material times he or she exercised and still exercises independent judgment as regards the affairs of Convoy Global, including with respect to the complaints against Ng and Yap which comprise the subject matter of the complaints against them in the proceedings.  In the affidavit of Johnny Chen, the executive director and chairman of Convoy Global, he asserts that he exercised his independent judgment as chairman at the particular EGM in relation to the exercise of his powers under Convoy Global’s articles of association, free from the influence of Ng or others.

8.  On 16 September 2019, I heard Ng’s and Yap’s application for the withdrawal of interrogatories served by the plaintiff.  Those interrogatories served by the plaintiff concerned and surrounded those allegations of the exercise of independent judgment.  As explained by Mr Alex Fan, counsel for the plaintiff then and today, the gist of the interrogatories targeted: (1) the process and circumstances of the alleged exercise of independent judgment; and (2) the information taken into account by the relevant director when he or she allegedly exercised the independent judgment.

9.  I ordered the interrogatories to be withdrawn, as I considered that they were not necessary.  I held, first, that they were not necessary for the purposes of saving costs; rather, they would cause incurring further costs.  Secondly, it did not seem to me to be necessary for the fair disposal of the strike out application that the interrogatories be answered.  I agreed that the interrogatories were making a backdoor attempt at cross-examination, and in any event the strike out application would be determined on the evidence presented to the Court, where it would be open to one party or the other to urge caution on the Court in applying weight to a particular piece of evidence which has not yet been tested.

10.  I also thought that there was something in the reversal of burden point.  The plaintiff has voluntarily assumed the burden of establishing wrongdoer control to the standard necessary to avoid her claim being struck out.  She must be taken to have pleaded the material facts, and all the material facts, which she considers appropriate as enabling her to meet her burden.  Those assertions can be tested against contrary evidence, weighed in the usual way of an interlocutory application.

11.  In opposition to the strike out applications, the plaintiff has filed an affirmation which largely repeats the allegations made in the amended statements of claim.

12.  I have already noted that the amendments to the statements of claim in each of the actions, to which I have already made reference, were made after the issue of the strike out applications, but it may also be noted they were made after I ordered the withdrawal of the interrogatories.

Applicable Principles

13.  It is a fundamental principle of company law – expressed as part of the rule in Foss v Harbottle – that where a wrong has been done to a company, it is the company itself which is the proper plaintiff.  That principle admits of certain exceptions, the exception generally relevant to derivative actions being the “fraud on the minority” exception.

14.  Where a wrong is alleged to have been done to a company and a minority shareholder purports to bring a derivative action on the company’s behalf, it is incumbent on the shareholder to show that the general “proper plaintiff” rule is displaced and that the case falls within the relevant exception.

15.  A derivative action is a procedural device invented by the courts to afford protection to minority shareholders.  Whilst procedurally there is no requirement at common law for a person seeking to sue derivatively first to obtain the leave of the court, there is nevertheless a threshold requirement to be met by the plaintiff.  Substantively, such an action is only permitted where it can prima facie be shown that there exists a viable cause of action or equitable claim vested in the company which, if made good, would establish a fraud on the minority, as well as control of the company by the alleged wrongdoers such as to enable them to stifle any proposed action against themselves: see Waddington Limited v Chan Chun Hoo (2008) 11 HKCFAR 370 at §§11-13.

16.  It is therefore necessary for a plaintiff to plead (a) that there is a viable cause of action vested in the company, and (b) that the cause of action if made good would establish a fraud on the minority, and (c) that the wrongdoers are in control of the company, and that they have prevented an action being brought in the name of the company, and that the plaintiff could not by reason of the defendants’ opposition obtain the name of the company to issue proceedings.

17.  The Waddington case, at §14 and §§17-20, makes it clear that a challenge to the plaintiff’s standing generally takes the form of an application to strike out the claim or to have the court determine as a preliminary issue that the plaintiff has no standing to sue on the company’s behalf.  By either procedural route, it is the prima facie test which is applied, in what has been described as a “halfway house for this very special type of case”, where the legal issues are sufficiently well defined for the parties to be able to argue them.

18.  The burden of proving wrongdoer in control remains with the plaintiff, even where the defendant seeks to strike out a derivative action on the ground of lack of standing: see, for example, Melvin Waxman v Li Fei Yu (unreported, HCA 1973/2012, 23 August 2013, To J) at §23.  To achieve the standard of showing a prima facie case, the party which bears the burden of proof has to adduce sufficient evidence to satisfy the court that there are reasonable grounds for believing that his case or the issue in question is well-founded, so that it becomes one fit for the tribunal of fact to adjudicate upon it.

19.  The burden of proving a prima facie case is not met simply by raising a disputed issue of fact.  But how the burden is discharged will depend upon the circumstances of the case.  If the issues in question are adequately pleaded and not contradicted by evidence filed by the parties, then the pleading alone would be sufficient proof of the prima facie case.  But even if contrary evidence has been filed by the defendant, the courts are not required to conduct a trial by affidavit, nor necessarily to call the makers of the affidavit for cross-examination.  The courts are capable of and well experienced in making provisional findings of fact on affidavit evidence in such interlocutory proceedings by testing the plaintiff’s case against documentary evidence, incontrovertible evidence, or evidence which is not in dispute.  The court can determine against the backdrop of such contrary evidence whether the plaintiff’s evidence has passed the threshold so as to make the issue or the case fit for determination by the tribunal of fact.  Hence, in an appropriate case, the court may be satisfied on the basis of the pleaded case that the prima facie test is met, irrespective whether contrary evidence has been filed by the defendant: see, for example, Melvin Waxman at §§23-26, which I referred to in my earlier decision on interrogatories in this case [2019] HKCFI 2430 at §§13-14.

20.  As to what constitutes “control”, this has been held “embraces a broad spectrum extending from an overall absolute majority of votes at one end, to a majority of votes at the other end made up of those likely to be cast by the delinquent himself plus those voting with him as a result of influence or apathy”: see Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 Ch 204, at 219E.  Indeed, this was picked up as a point in the Waddington case at first instance (unreported, HCA 3291/2003, 29 April 2005, Barma J), in a passage with which neither the Court of Appeal or the Court of Final Appeal took issue.  There, having himself quoted the passage from Prudential at 219E, Barma J went on to say:

“It seems to me that in the light of this approach to control, it is legitimate to take into account the likely effect of a failure on the part of certain shareholders to vote, just as much as it would be appropriate to take account of the fact that some shareholders will vote with the majority out of apathy, if not influence.”

21.  I agree with Mr Fan that this may be particularly apposite in the situation regarding a publicly listed company, where some account might properly be taken of the likely effect of a failure on the part of certain public shareholders to exercise a right to vote in general meeting.  This point also comes out of the first instance decision in the Prudential case [1981] 1 Ch 257, at 324B-325B, in particular at 324E.  See also at 325A, where it was accepted that the exception to the rule might apply wherever the persons against whom the action is sought to be brought on behalf of the company are shown to be able “by any means of manipulation of their position in the company” to ensure that the action is not brought by the company.  Reference can also be made to the decision of Anthony Chan J in World One Investments Ltd v Chow Cheuk Lap [2013] 3 HKLRD 701, at §35.

22.  Of course, on the facts of the Waddington case, those alleged to be in control held shares which were “in the range of just under 45% to just under 50%” of the publicly listed company, so it may not be surprising on those facts that little hesitation preceded Barma J concluding that those shareholders were in a position to control the company.

23.  This is perhaps an example of looking at alleged wrongdoers’ “effective as opposed to legal control of” a company’s activities: see Ronald Li-kai Chu v Deacon Te-ken Chiu [1986] HKLR 1011, at 1038E.

24.  Depending on the facts of any case, it may be necessary to look at the current controllers of the company.  This is particularly likely to arise if the company’s board of directors has been reconstituted since the time of the alleged wrongdoing.  In Shih-Hua Investment Co Ltd v Zhang Aidong [2018] HKCFI 1234, Harris J struck out an action on the basis that the board in question had been reconstituted, such that the alleged wrongdoer ceased to have any control over the company.  Harris J (at §37) rejected as wrong the submission that the reconstitution of the Board and thus the removal of control of the wrongdoer from control of the company did not cause the derivative action to infringe the rule in Foss v Harbottle.  As he put it (at §35):

“If the Board of a company is independent of the wrong-doers and able to take an informed view of the alleged claim and decide whether or not the company should pursue the claim it is not permissible for a shareholder to commence a common law derivative action.”

25.  I agree.  If the alleged wrongdoers are no longer in control of the company, one of the necessary hurdles for a claimant to bring him or herself within the exception to the rule, so as to be in a position to bring a common law derivative action, is simply not satisfied. Similarly, if there exists an independent board which is able to take an informed view, that will be fatal to establishing wrongdoer in control.

26.  In this regard, it is necessary to remember that the key issue is whether the company is being improperly prevented from bringing proceedings, as prevention of the prosecution of an action by “an appropriate independent organ” will not amount to improper prevention from bringing an action: see Smith v Croft (No 2) [1988] Ch 114, at 185B.

27.  As to the “fraud on the minority” requirement, this is not limited to fraud in the sense of Derry v Peek deceit.  As it is sometimes put, the essence of the matter is an abuse or misuse of power, so encompassing fraud in the wider equitable sense of that term.  But it is also well-established that mere negligence or even gross negligence without fraud or personal benefit to the alleged wrongdoing directors is not sufficient: see Daniels v Daniels [1978] Ch 406, at 413-414.

28.  This principle was recently reaffirmed by the English Court of Appeal in Harris v Microfusion 2003-2 LLP [2017] 1 BCLC 305. At §31, and after reviewing certain authorities, McCombe LJ held that they did not support any wider proposition that the exception to the rule in Foss v Harbottle is opened up in cases, short of deliberate and dishonest breach of duty, in the absence of personal benefit to the party allegedly in breach of duty.  Rather, he considered the extent of the relevant exception to the rule was as stated by David Richards J in Abouraya v Sigmund [2014] EWHC 277 (Ch), where at §§24-25 he said:

“[24] It is therefore the case that all the authorities on direct derivative actions have taken as a requirement that the alleged wrongdoing should result in a loss to the company and, hence, an indirect or reflective loss to the shareholders and also that the alleged wrongdoers should have personally gained from their breaches of duty.

[25] It follows, on the authorities as they stand, that financial or other loss to the shareholders, albeit normally of a reflective character, is essential to give a Claimant shareholder sufficient interest in the proceedings to make the shareholder an appropriate Claimant on behalf of the company, whether he is a member of that company or of its holding company. Equally, the authorities require that, in the absence of actual fraud or an ultra vires act, the wrongdoers should themselves have benefited from the wrongdoing. The significance of this requirement is that their breach of duty cannot be ratified by a majority vote which depends on the votes of the wrongdoers. It is essential to the exception to the rule in Foss v Harbottle that the alleged wrongdoing is incapable of lawful ratification …”

Background Facts

29.  Convoy Global is part of a corporate group engaged in the business of financial planning, insurance brokerage, asset management and moneylending in Hong Kong, Macau and China.  In May 2017, it was exposed in an article concerning the so-called ‘Enigma Network’, and the following month several of its offices were raided by the SFC.  The ICAC subsequently arrested three then directors of Convoy Global.

30.  Following these events, independent directors were appointed to reconstitute the Board on various dates from December 2017. Ng says this was part of Convoy Global’s efforts to strengthen its management and conduct investigations alongside the regulators.

31.  The two claims arise out of transactions conducted by Convoy Global or the relevant subsidiaries in 2016.  This was obviously at a time when Convoy Global had a differently constituted Board.

32.  The claim in HCA 1479/2018 relates to the fact that between 4 February 2016 and 12 October 2016, Forthwise (as lender) advanced an aggregate loan of HK$90 million to one Forthwise Ltd (as borrower).  The claim in HCA 1619/2018 relates to the fact that on about 22 January 2016, Convoy Finance agreed to purchase the entire shareholding of Maxthree Ltd from YeChen Holdings Ltd.

Wrongdoer Control

33.  On behalf of the plaintiff, Mr Fan submits that Ng and Yap are in de facto or effective control of Convoy Global. This is in part said because (amongst other things) Ng was appointed by the Tsai family which indirectly owns the single largest shareholding in the company, and that Ng caused one director who acted as chairman at a general meeting (Johnny Chen) not to count the votes of another significant shareholder of the company.

34.  (As an aside, that other shareholder was Kwok Hiu Kwan, and Kwok’s similar allegations against the meeting chairman have been made in other proceedings HCMP 41/2018, but have been dismissed by the Companies Judge, Harris J.  Therefore, and though it is not at the forefront of his submissions, Mr Maurellet criticizes the plaintiff in these two sets of proceedings as making a collateral attack on the decision of Harris J.  I tend to agree with the criticism, but it need form no part of my reasoning.)

35.  Reliance is also placed on the fact that Ng’s remuneration package is at least 2 to 3 times higher than all other Executive Directors of Convoy Global.

36.  Also, perhaps counter-intuitively, reliance is placed by Mr Fan and the plaintiff upon the appointment of the new directors in and after December 2017.  Because the plaintiff does not accept the independence of those directors, Mr Fan has defined them as the “Allegedly Independent Directors”.  He submits that any failure to name the other wrongdoers, including those other directors, as defendants to the two actions would not preclude the finding of wrongdoers in control on the part of the existing defendants Ng and Yap.  Mr Fan’s submission is that the reconstituted board of Convoy Global, comprising those he terms as the “Allegedly Independent Directors”, would not assist Ng and Yap to negate their de facto control of Convoy Global.

37.  In part, Mr Fan says this is because none of those directors is able to give any particulars about their alleged exercise of independent judgment, even though he is forced to acknowledge that each has sworn or affirmed in a common paragraph that he or she exercised and still exercises independent judgment as regards the affairs of Convoy Global, including with respect to the complaints against Ng and Yap in relation to the Maxthree share purchase and the Forthwise loans.

38.  Mr Maurellet by way of contrast submits that it is plain that the wrongdoer in control test has not been satisfied.  He points first to the existence of an independent board.  By reference to an annex to his submissions, which summarizes the qualifications and experience of the various board members, executive and independent non-executive directors, Mr Maurellet says there can be no serious dispute that the majority of the present board is independent and able to exercise independent judgment.  He also points to the fact that out of the nine directors, leaving aside Ng himself, none of them had any relationship with Ng outside of Convoy Global.

39.  Indeed, Mr Maurellet points out that even the plaintiff has only pleaded that two of the nine directors – being Yap and Johnny Chen – are “accustomed” to following or acting in accordance with Ng’s instructions (though there is now the “conspiracy” allegation).

40.  It is also correct that with the exception of Ng and one other director, who was appointed part way through the Forthwith loans, none of the current directors had been appointed to the Board of Convoy Global at the time of the Forthwith loans and the Maxthree share transaction.  In those circumstances, it is not as if those other directors would have any incentive for ‘self-protection’.

41.  I agree that on the materials before the court, the plaintiff cannot establish a prima facie case that Ng and Yap are in control of the Board of Directors of Convoy Global.

42.  As to control at shareholder level, Mr Maurellet points out that it is the plaintiff’s own case that the controlling shareholders are not Ng himself, but rather the Tsai Brothers.  Ng’s purported status as an associate and/or nominee of the Tsai Brothers does not assist, as no allegation has been made as to why they would wish to vote their shares in a way to insulate Ng from legal action.  Mr Maurellet submits that the fact that on the plaintiff’s own case someone other than either Ng or Yap is said to have a controlling shareholding stake in Convoy Global must be fatal to her case on wrongdoer in control at the shareholder level.  I agree.

43.  On this basis, I agree that the action stand to be struck out for the plaintiff’s failure to have met the locus standi requirement of showing to the sufficient standard that Ng and Yap are wrongdoers in control.

44.  Indeed, I also agree with Mr Maurellet’s suggestion that it may have been in recognition of the fundamental problems facing the plaintiff that she previously served the request for interrogatories, and thereby resorted to what I termed “a backdoor attempt at cross-examination”, or in seeking in effect to reverse the burden that she herself has to meet.

45.  Indeed, there is an echo of that last point in Mr Fan’s continuing submission that, in the absence of any proved exercise of independent judgment on the part of those he terms the Allegedly Independent Directors, the natural conclusion would be that the control of Convoy Global remains with Ng and Yap.  In any event, I reject the logic of that submission. I would also point out the circularity, or bootstrap approach, in defining the other directors as “Conspiring Directors” as somehow showing that they were not independent, which is why they were said to have conspired with Ng and Yap.

Fraud or Personal Benefit

46.  Mr Fan for the plaintiff relies on various matters about the Forthwise transactions which he says make them highly suspicious and commercially unjustified.  He says the plaintiff’s primary position is that Ng was in deliberate and dishonest breach by advancing the loans and entering the loan agreements (so that no requirement of personal benefit arises), and the alternative case is that Ng was in breach by acting negligently.

47.  As to the Maxthree share transaction, Mr Fan points to alleged grossly inflated consideration, and the absence of a moneylending business license.  On that basis he says, and indeed it is pleaded, that the transaction was not and could not have been negotiated or entered into bona fide.  Hence, it is pleaded that the “inference is irresistible that material advantages, bribes, and/or secret profits should have been offered and conveyed by [Yap] to [Ng] or vice versa, when purportedly negotiating and entering into” the transaction.

48.  As to the negligence elements, Mr Fan suggests there was at least the turning of a blind eye to the various circumstances, which might constitute sufficient knowledge as a tell-tale sign of some dishonesty.

49.  Again, with respect, I reject the logic in the pleaded case.  First, I have already pointed out that mere negligence or even gross negligence without fraud or personal benefit to the alleged wrongdoing directors is not sufficient to comprise the fraud on the minority requirement.  Secondly, I agree with Mr Maurellet that there is really no basis for suggesting fraud, dishonesty or personal benefit.  Indeed, other than the rather extraordinary leap of logic suggested to constitute the “irresistible inference”, there is no plea that these were self-dealing transactions.  Ng has denied receiving any personal benefit, and I do not think that the plaintiff has adduced any real evidence of any substance to rebut that denial.

50.  Indeed, I am minded to echo the observations and use of language by Harris J in the (not entirely unconnected) decision in Convoy Global v Cho Kwai Chee Roy [2018] HKCFI 2111, that the plaintiff’s allegations can be described as “a fog of conjecture, speculation and suspicion”.

Conclusion and Result

51.  In the circumstances, I do not accept that the plaintiff has established on evidence a prima facie case either that (a) Ng and Yap are wrongdoers in control of Convoy Global, and hence Forthwise and Convoy Finance, or that (b) there has been a fraud practised by Ng and Yap against Convoy Global, and hence Forthwise and Convoy Finance.

52.  I therefore order that both actions in HCA 1479/2018 and HCA 1619/2018 be struck out.

53.  I see no reason why the costs should not follow the event.  Therefore, the plaintiff will pay to Ng and Yap the costs of the action.  As the companies were essentially nominal parties, and I excused their attendance today, I make no order as to their costs.

54.  As to the costs of Ng and Yap, I am persuaded that the circumstances of the case, the seriousness of the allegations, and the scope of the arguments justify a certificate for two Counsel.