GE QINGFU AND OTHERS v. L & A INTERNATIONAL HOLDINGS LTD AND OTHERS

CACV 11/2019 AND CACV 16/2019
[2020] HKCA 687

(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS 11 OF 2019 AND 16 OF 2019

(ON APPEAL FROM HCMP NO 2222 OF 2016)

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(Heard together)

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J U D G M E N T

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The Court:

Introduction

1.  This is an appeal[1] brought by some of the directors (the 3^rd to 7^th defendants; “the defendants”^[2]) of a listed company, L & A International Holdings Limited (the 1^st defendant; “the Company”), against the judgment of Mr Recorder Pow, SC handed down on 17 December 2018 after trial (“the Judgment”).  The three plaintiffs brought these proceedings as shareholders of the Company by an originating summons issued pursuant to sections 728 to 730 of the Companies Ordinance (Cap 622), seeking various remedies in respect of the granting of 2 billion share options (“the Disputed Options”) by the Company in 2016 and the allotment of 1.6 billion shares (“the Disputed Shares”) to eight grantees (the 8^th to 15^th defendants^[3]) upon the exercise of the options.  The 2^nd to 7^th defendants were the directors of the Company at the material time.

2.  By the Judgment, the judge ordered the defendants^[4] to pay damages: (1) to the 1^st plaintiff in the sum of $18,669,420 with interest; and (2) to the 1^st to 3^rd plaintiffs in sums that would be ascertained upon taxation of the costs order made by Harris J on 31 August 2016, with interest.  The judge declined to grant the reliefs of declaration and injunction sought by the plaintiffs.

3.  The defendants’ primary contention in this appeal is that the order for payment of damages should be set aside because the court has no jurisdiction and no general power under sections 728 to 729 of Cap 622 to award damages on the true construction of these provisions, which should be construed in the same way as their predecessor, section 350B of the old Companies Ordinance (Cap 32).  The effect of this is that the court has no jurisdiction to award damages where there is no prospect of its granting an injunction.  As the judge has declined to grant an injunction in this instance and could not have granted any prohibitory injunction, no damages should have been awarded to the plaintiffs (“the Jurisdiction Ground”).

4.  The alternative position of the defendants is that even if there is jurisdiction to award damages, the order for damages in the sum of $18,669,420, being the payment for the purchase of 414,876,000 shares in the Company by the 1^st plaintiff, should be reduced.  The plaintiffs are at most entitled to damages to the extent of the purchase of 163,312,000 shares only ($7,349,040), and not in respect of any shares in excess, in order to reverse the dilutive effect resulting from the defendants’ breaches and to maintain the same level of shareholding in the Company at 10.21% (“the Quantum Ground”).

5.  This appeal was scheduled to be heard on 5 February 2020, but was adjourned due to the general adjournment of court proceedings announced by the judiciary for public health reasons.  We deal with this appeal on paper with the consent of the parties.  Supplemental written submissions were made by the parties in July 2020 on the invitation of the court.

Background

6.  The two broad grounds raised on appeal relate to the reliefs to which the plaintiffs are entitled and they featured in the last of the nine issues set out in the Judgment.  The defendants do not challenge the findings of fact and holdings on the other eight issues.  We will relate only such of the background matters as are necessary for a proper understanding of the questions to be resolved in this appeal.

7.  The Company was a company incorporated in Cayman Islands whose shares were listed on the Growth Enterprise Market of the Hong Kong Stock Exchange.  At the material time prior to the issue of the Disputed Shares, it had a total of 24,000,000,000 issued shares.  The 1^st plaintiff then held 2,150,448,000 shares in the Company.  Coupled with the 2^nd and 3^rd plaintiffs who each held 150,000,000 shares, together the plaintiffs held approximately 10.21% of the issued shares.

8.  On 22 July 2016, a company called Favourite Number Limited (“FNL”) wrote to the board of directors of the Company notifying them of its intention to make a voluntary conditional securities exchange and cash offer to acquire all of the issued shares in the Company.  

9.  On 29 July 2016, the 1^st plaintiff’s solicitors wrote to the Hong Kong Stock Exchange and the Securities and Futures Commission (“SFC”) stating his intention to requisition an extraordinary general meeting (“EGM”) to remove all the directors of the Company.  This letter was disclosed to the Company with the 1^st plaintiff’s consent and was known to the board since around 5 August.  

10.  On 5 August 2016, the Company made an application to the SFC for a “put up or shut up” ruling requesting a deadline to be set for FNL to announce a firm intention to make the general offer.  The SFC issued a ruling on 15 August requiring FNL to announce its intention whether to make an offer for the Company by 18 August.  Pursuant thereto, an announcement of a general offer was made on 18 August (“the General Offer”).

11.  On 22 August, the Company issued and allotted the Disputed Shares (1.6 billion shares) to the 8^th to 15^th defendants upon the exercise of an aliquot part of the Disputed Options, at a 46.67% discount to the closing price of the shares on the immediately preceding business day.  On 23 August, it issued an announcement dated 22 August stating that 2 billion share options had been granted on 22 July to ten eligible participants and that 1.8 billion share options had been accepted by grantees up to that date.

12.  According to the defendants’ contention at trial, the Disputed Options were granted by a resolution of the board of directors on 22 July 2016. In fact, the Disputed Options were granted subsequently (at a time between early and mid-August) and the board minutes were fraudulently backdated.  There were two improper purposes behind the grant of the Disputed Options and the allotment of the Disputed Shares.  One was to obstruct or defeat the General Offer.^[5]  The other was to dilute the plaintiffs’ shareholding in the Company to below 10% in order to frustrate their requisition for an EGM.^[6]

13.  On 23 August, the 1^st plaintiff’s solicitors issued a notice of requisition for an EGM (“the 1^st Requisition”).  The requisition was made by the plaintiffs who held in aggregate approximately 10.21% of the issued shares of the Company.  The plaintiffs were not aware of the issuance and allotment of the Disputed Shares when the 1^st Requisition was made.

14.  The Company issued an announcement (dated 23 August) on 24 August stating that the General Offer failed to comply with the Takeovers Code as it was not extended to the holders of the 1.8 billion Disputed Options already granted.  It also filed a next day disclosure return dated 23 August stating that it had allotted and issued 1.6 billion new shares on 22 August upon the exercise of the Disputed Options.  On the same day, the share certificates of the Disputed Shares were collected by the 8^th to 15^th defendants who took steps to sell all the Disputed Shares through open market.  It was only on the evening of 25 August that the 1^st plaintiff’s solicitors received the latest share register and were then able to identify the 8^th to 15^th defendants as the grantees of the Disputed Options.

15.  On 26 August, the plaintiffs issued the originating summons in these proceedings and applied ex parte for an urgent interlocutory injunction to restrain the 2^nd to 7^th defendants from giving effect to the Disputed Options.  Harris J directed the application to be heard inter partes on 31 August.

16.  On 27 August, the plaintiffs applied ex parte and obtained from DHCJ Kent Yee an interim injunction restraining two securities companies, namely, FP Sino‑Rich Securities and Futures Ltd (“FP Sino‑Rich”) and Emperor Securities Ltd (“Emperor”), being the 16^th and 17^th defendants in the action below, from, inter alia, disposing of the Disputed Shares until the return day on 31 August.

17.  At the return day on 31 August, upon the Company and the defendants undertaking not to implement the exercise of 200 million of the 1.8 billion share options which had been accepted but not yet exercised, and not to alter the issued share capital of the Company except with leave of the court, Harris J adjourned the plaintiffs’ application for interlocutory injunction.  He ordered the plaintiffs to pay on an indemnity basis the costs of FP Sino‑Rich (the 16^th defendant) for complying with a disclosure order made on 27 August and for attending the hearing on 31 August.

18.  On 9 September, the Company issued an announcement that no EGM would be convened pursuant to the 1^st Requisition since the plaintiffs held less than 10% of the issued share capital of the Company, taking into account the Disputed Shares in the calculations.

19.  In the light of the directors’ refusal to convene the EGM and to avoid further delay, on 8 and 9 September 2016, the 1^st plaintiff purchased an additional 414,876,000 shares in the Company at the total expense of $18,669,420.  As a result, the plaintiffs became holders of 11.19% of the diluted share capital or 11.94% of the original share capital.  On 4 October 2016, the plaintiffs issued a fresh requisition for an EGM.

20.  On 17 October 2016, an announcement was made by the offerors that the General Offer was withdrawn.

21.  The plaintiffs’ application for interlocutory injunction was heard by Ng J on 2 November 2016.  Upon the Company and the defendants giving a similar undertaking not to implement the exercise of 200 million of the 1.8 billion share options, an order was granted that the Company and the defendants be restrained from taking any steps to alter the issued share capital of the Company unless and until the Company had given the plaintiffs five working days’ prior written notice.

22.  The originating summons was amended twice and came on for trial fairly swiftly in July 2017.  Surprisingly there was no pleading directed to be filed despite various disputes of fact including allegations of fraud were raised.  There was no agreed list of issues but from the defendants’ written opening submissions the judge identified nine broad issues, the last of which was, simply, whether the plaintiffs were entitled to the reliefs sought in the originating summons.  The absence of pleadings, it seems, in part contributed to the confusion at the commencement of the trial as to what causes of action were being pursued by the plaintiffs.  In opening the trial, the plaintiffs’ former leading counsel indicated that the plaintiffs were relying on two causes of action for reliefs against the defendants: under sections 728 to 730 of Cap 622, and a common law personal claim of a shareholder against directors for breach of the constitution of the company.  Counsel made clear that the plaintiffs were not relying on the right of a shareholder to bring a derivative action.^[7]  We would add it should also be noted that the plaintiffs chose not to bring a petition for unfair prejudice pursuant to sections 724 to 725 of Cap 622.

23.  The plaintiffs’ counsel further clarified to the judge that they would only be seeking the following reliefs:^[8]

(1)  a declaration that the granting of the Disputed Options is void and of no legal effect or, alternatively, voidable; 

(2)  a declaration that any allotment of shares made pursuant to the exercise of any of the Disputed Options is void and of no legal effect or, alternatively, voidable; 

(3)  further or alternatively, the Company and/or the 2^nd to 7^th defendants do restore the shareholding structure of the Company by returning and cancelling 1.6 billion issued shares to the Company, as if the Disputed Options had never been granted or implemented and the Disputed Shares have not been issued;

(4)  further or alternatively, against the 2^nd to 7^th defendants, damages payable to the plaintiffs for losses suffered by the plaintiffs personally as a result of the granting of the Disputed Options and the wrongful allotment of the Disputed Shares.

24.  The judge found that the Disputed Options were not granted on 22 July 2016 as alleged by the defendants but were devised by them at a time between early and mid‑August 2016.  They devised a scheme to present a false case that the board of directors had already resolved to grant the Disputed Options to the grantees prior to receiving intimation of FNL’s intention to make the General Offer, and prepared false and disingenuous documentation for that purpose.  The defendants had breached their fiduciary duties by causing the Company to grant the Disputed Options and to allot the Disputed Shares for the two improper purposes as mentioned above.  He rejected the evidence given by or on behalf of the defendants in its entirety.  These findings are not challenged on appeal.  There is apparently no dispute that where the defendants are found to have breached their fiduciary duties owed to the Company as directors (section 728(4)(b) of Cap 622), this constituted a breach for the purpose of section 728(1)(a)(iii) and the court may order remedies under section 729.^[9]

25.  The judge did not permit the plaintiffs to run the case of a “common law personal claim of a shareholder”, as this, being raised only on the second day of the trial, was too late and prejudicial to the defendants.^[10] 

26.  The judge accepted the defendants’ submission that declaratory relief should not be granted as no useful purpose would be served, given that the Disputed Options had been granted and exercised, and the Disputed Shares had been allotted by the Company to the grantees who had sold those shares to third party purchasers in open market.  The declaratory relief sought would adversely affect the rights of innocent subsequent purchasers who had not been joined in the proceedings and had not been afforded an opportunity to make submissions.^[11]

27.  The judge also accepted the defendants’ submission and declined to grant a mandatory injunction requiring them to restore the original shareholding structure by buying 1.6 billion shares in the market and returning them to the Company for cancellation, as the plaintiffs could be adequately compensated by way of damages in the amount they spent on the purchase of additional shares and the mandatory injunction was unnecessary and unwarranted for the effective protection of their rights.  The judge’s primary concern was to redress the harm done to the plaintiffs’ personal legal rights.  The injunction sought was to redress the dilution of the shareholding but this was not a derivative action brought on behalf of all the shareholders, and it would not be appropriate to grant injunctive relief on the basis of protecting the rights of other persons not parties to these proceedings.^[12]

28.  As for damages, the judge found that the 1^st plaintiff suffered a loss of $18,669,420 which was caused by the breach of fiduciary duties of the defendants, and this also applied to the costs of FP Sino‑Rich the plaintiffs were ordered to pay on 31 August.^[13]  He rejected the defendants’ contention that the claim for damages cannot be entertained on jurisdictional grounds.^[14]  

29.  We proceed below to deal in turn with the two contentions on this appeal, being the Jurisdiction Ground and the Quantum Ground.

The Jurisdiction Ground

(1)     The provisions of sections 728 to 730

30.  Sections 728 and 729 are found in Part 14 of Cap 622, which is headed “Remedies for Protection of Companies’ or Members’ Interests”.  Part 14 groups the provisions concerning shareholder remedies under the old Cap 32 into a distinct part of the new legislation.  There are five divisions in Part 14: Division 1 (section 722: “Preliminary”); Division 2 (sections 723 to 727: “Remedies for Unfair Prejudice to Members’ Interests”); Division 3 (sections 728 to 730: “Remedies for Others’ Conduct in relation to Companies etc”); Division 4 (sections 731 to 738: “Derivative Action for Remedies for Misconduct against Companies etc”); and Division 5 (sections 739 to 743: “Members’ Inspection of Company’s Records”).

31.  It is important to bear in mind that our legislation has provided for a panoply of remedies for the protection of the interests of companies and their members.  In approaching the remedies provided in Division 3, it is pertinent to have regard to available remedies in other divisions in Part 14.  

32.  Further, to arrive at the proper meaning and effect of section 729(1), it is, in our opinion, for reasons explained later, necessary to examine the legislative history of the relevant provisions and their antecedents.

33.  The full provisions in Division 3 read as follows:

“ 728. Application of section 729

(1) Section 729 applies if, in relation to a company—

(a) a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute—

(i) a contravention of this Ordinance;

(ii) a default relating to a contravention of this Ordinance; or

(iii) a breach specified in subsection (4); or

(b) a person has refused or failed, is refusing or failing, or is proposing to refuse or fail, to do an act or thing that the person is required by this Ordinance to do.

(2) Section 729 also applies if, in relation to a company—

(a) a person had engaged, was engaging or was proposing to engage, before the commencement date^[15] of this section, in—

(i) conduct that constituted or would constitute a contravention of the predecessor Ordinance and that would also constitute a contravention of this Ordinance;

(ii) conduct that constituted or would constitute a default relating to a contravention of the predecessor Ordinance and that would also constitute the same default relating to a contravention of this Ordinance; or

(iii) conduct that constituted or would constitute a breach specified in subsection (4); and

(b) the engagement or proposal still subsists.

(3) Section 729 also applies if, in relation to a company—

(a) a person had refused or failed, was refusing or failing, or was proposing to refuse or fail, before the commencement date of this section, to do an act or thing that the person was required by the predecessor Ordinance to do;

(b) the person is also required by this Ordinance to do the act or thing; and

(c) the refusal, failure or proposal still subsists.

(4) The breach specified for the purposes of subsection (1)(a)(iii) or (2)(a)(iii) is—

(a) a breach of the person’s fiduciary duties owed to the company in any capacity other than as a director of the company;

(b) a breach of the person’s fiduciary or other duties as a director of the company owed to the company; or

(c) a breach of the company’s articles.

(5) In this section, a reference to a default relating to a contravention of this Ordinance or the predecessor Ordinance is a reference to—

(a) an attempt to contravene the Ordinance;

(b) aiding, abetting, counselling or procuring another person to contravene the Ordinance;

(c) inducing or attempting to induce, whether by threats, promises or otherwise, another person to contravene the Ordinance;

(d) being in any way, directly or indirectly, knowingly concerned in, or a party to, a contravention of the Ordinance by another person; or

(e) conspiring with others to contravene the Ordinance.

729. Court may order remedies

(1) The Court may, on application by a member or creditor of the company whose interests have been, are or would be affected by the conduct or by the refusal or failure, do any or all of the following—

(a) grant an injunction, on the terms that the Court thinks fit—

(i) in the case of section 728(1)(a) or (2), restraining the person from engaging in the conduct or requiring the person to do any act or thing; or

(ii) in the case of section 728(1)(b) or (3), requiring the person to do any act or thing;

(b) order the person to pay damages to any other person;

(c) declare any contract to be void or voidable to the extent specified in the order.

(2) The Court may, on application by the Financial Secretary under section 879(4) or (5), do any or all of the following—

(a) grant an injunction, on the terms that the Court thinks fit—

(i) in the case of section 728(1)(a) or (2), restraining the person from engaging in the conduct or requiring the person to do any act or thing; or

(ii) in the case of section 728(1)(b) or (3), requiring the person to do any act or thing;

(b) order the person to pay damages to any other person;

(c) declare any contract to be void or voidable to the extent specified in the order.

(3) The Court may grant an injunction under subsection (1)(a)(i) or (2)(a)(i) restraining a person from engaging in a conduct—

(a) whether or not it appears to the Court that the person intends to engage again, or to continue to engage, in the conduct;

(b) whether or not the person has previously engaged in the conduct; and

(c) whether or not there is an imminent danger of substantial damage to any other person if the person engages in the conduct.

(4) The Court may grant an injunction under subsection (1)(a) or (2)(a) requiring a person to do an act or thing—

(a) whether or not it appears to the Court that the person intends to refuse or fail again, or to continue to refuse or fail, to do the act or thing;

(b) whether or not the person has previously refused or failed to do the act or thing; and

(c) whether or not there is an imminent danger of substantial damage to any other person if the person refuses or fails to do the act or thing.

(5) To avoid doubt, a person is not entitled to recover, by way of damages under subsection (1)(b) or (2)(b), any loss that solely reflects the loss suffered by the company that only the company is entitled to recover under the common law.

730. Provisions supplementary to section 729

(1) The Court may grant an interim injunction or interim damages, or both, on the terms and conditions that it thinks fit pending the determination of an application under section 729(1) or (2).

(2) The Court may discharge or vary an injunction granted under subsection (1) or section 729(1) or (2).”

(2) Section 350B of the previous Companies Ordinance

34.  The predecessor of sections 728‑730 of the present Companies Ordinance is section 350B of the previous Companies Ordinance (Cap 32), which was added by the Companies (Amendment) Ordinance 2004. 

35.  Significant changes in company law were proposed in the Companies (Amendment) Ordinance 2004 in relation to shareholders’ remedies.[16] They included a new power for the court to authorise members of a company to inspect its records;[17] the reform of the remedy for unfair prejudice by, in particular, the extension of the remedy to a past member and the addition of a power to order payment of damages to a member or past member;[18] the introduction of a new regime of statutory derivative action;[19] and a new provision (viz section 350B) enabling a member or creditor or the Financial Secretary to apply for an injunction to restrain conduct constituting a contravention of the Companies Ordinance or breach of director’s duties.[20] 

36.  These proposed changes have their origin in the Corporate Governance Review: A Consultation Paper on proposals made in Phase I of the Review published by the Standing Committee on Company Law Reform (“SCCLR”) in July 2001.  This was part of the review exercise undertaken by the SCCLR at the request of the Financial Secretary, following the SCCLR’s recommendation[21] to reject fundamentally the recommendations of a consultants’ report for the reform of company law commonly called the “Pascutto Report”.[22]

37.  Section 350B, in particular, was enacted pursuant to the recommendation of the SCCLR (then chaired by Rogers JA) in its Consultation Paper in chapter 19 where, after making proposals in relation to other shareholders’ remedies in earlier sections, it was stated:

“ Background

19.01 The SCCLR also considered whether additional powers of the court might be useful to help address current practical difficulties in enforcing the duties of directors, connected persons or controlling shareholders under statute or case law. The SCCLR thus considered whether the courts should have general powers:-

(a) to grant injunctions,

(b) to grant orders as to costs.

General power to injunct

19.02 The SCCLR proposes that the court should have a general power, on application by an affected person or a relevant authority, to grant an injunction against any contravention of the Companies Ordinance or any breach of fiduciary duties. This should extend to any attempt to contravene such provisions or attempted breach of any of the directors’ duties. The court should be entitled on the application of any person, in respect of whose interests have been, are or would be affected by the conduct, to grant an injunction. This should be on such terms as the court thinks appropriate, restraining the person from engaging in the conduct and, if in the opinion of the court it is desirable to do so, requiring that person to do any act or thing. The power of the court to grant an injunction restraining a person from engaging in conduct should be exercisable:-

(a) whether or not it appears to the court that the person intends to engage again, or to continue to engage, in conduct of that kind;

(b) whether or not the person has previously engaged in conduct of that kind; and

(c) whether or not there is an imminent danger of substantial damage to any person if the first‑mentioned person engages in conduct of that kind.

The court should, either in addition to or in substitution for the grant of the injunction, also have the power to order that person to pay damages to any other person.

19.03   The SCCLR considered that the availability of general powers to award injunctions (without needing to come under the unfair prejudice provisions) could help to prevent potential breaches of the law.  Such cases would not involve the need for considerable evidence and costs.  The SCCLR proposes that the courts should be given a wider power to restrain directors or other persons from entering into transactions in breach of the law under the Companies Ordinance or in relation to beaches or potential breaches of fiduciary duties.”

A footnote appearing at the end of §19.02 referred to section 1324 of the Corporations Law[23] of Australia, which later became section 1324 of the Corporations Act 2001 (Cth).

38.  For ease of reference and comparison, we set out the full provisions of section 1324:

“ 1324 Injunctions

(1) Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:

(a) a contravention of this Act; or

(b) attempting to contravene this Act; or

(c) aiding, abetting, counselling or procuring a person to contravene this Act; or

(d) inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or

(e) being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or

(f) conspiring with others to contravene this Act;

the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first‑mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.

(1A) For the purposes of subsection (1):

(a) a contravention of this Act affects the interests of a creditor or member of a company if the insolvency of the company is an element of the contravention; and

(b) a company’s contravention of:

(i) paragraph 257A(1)(a) (share buy‑back not to prejudice ability to pay creditors); or

(ia) paragraph 256B(1)(b) (share capital reduction not to prejudice ability to pay creditors); or

(ii) paragraph 260A(1)(a) (financial assistance for share acquisition not to prejudice company or shareholders or ability to pay creditors);

affects the interests of a creditor or member of the company; and

(c) a company’s contravention of paragraph 256B(1)(a) (fair and reasonable test for share capital reduction) affects the interests of a member of the company.

This subsection does not limit subsection (1) in any way.

(1B) If the ground relied on in an application for an injunction is conduct or proposed conduct of a company or other person that it is alleged constitutes, or would constitute:

(a) a contravention of paragraph 256B(1)(a) or (b), section 257A or paragraph 260A(1)(a); or

(b) a contravention of a provision of this Act involving the insolvency of the company because of:

(i) the company making a reduction of its share capital to which Division 1 of Part 2J.1 applies; or

(ii) the company buying back its shares; or

(iii) the company giving financial assistance to which Part 2J.3 applies;

the Court must assume that the conduct constitutes, or would constitute, a contravention of that paragraph, section or provision unless the company or person proves otherwise.

(2) Where a person has refused or failed, is refusing or failing, or is proposing to refuse or fail, to do an act or thing that the person is required by this Act to do, the Court may, on the application of:

(a) ASIC; or

(b) any person whose interest have been, are or would be affected by the refusal or failure to do that act or thing;

grant an injunction, on such terms as the Court thinks appropriate, requiring the first‑mentioned person to do that act or thing.

(3) Where an application for an injunction under subsection (1) or (2) has been made, the Court may, if the Court determines it to be appropriate, grant an injunction by consent of all the parties to the proceedings, whether or not the Court is satisfied that that subsection applies.

(4) Where in the opinion of the Court it is desirable to do so, the Court may grant an interim injunction pending determination of an application under subsection (1).

(5) The Court may discharge or vary an injunction granted under subsection (1), (2) or (4).

(6) The power of the Court to grant an injunction restraining a person from engaging in conduct may be exercised:

(a) whether or not it appears to the Court that the person intends to engage again, or to continue to engage, in conduct of that kind; and

(b) whether or not the person has previously engaged in conduct of that kind; and

(c) whether or not there is an imminent danger of substantial damage to any person if the first‑mentioned person engages in conduct of that kind.

(7) The power of the Court to grant an injunction requiring a person to do an act or thing may be exercised:

(a) whether or not it appears to the Court that the person intends to refuse or fail again, or to continue to refuse or fail, to do that act or thing; and

(b) whether or not the person has previously refused or failed to do that act or thing; and

(c) whether or not there is an imminent danger of substantial damage to any person if the first‑mentioned person refuses or fails to do that act or thing.

(8) Where ASIC applies to the Court for the grant of an injunction under this section, the Court must not require the applicant or any other person, as a condition of granting an interim injunction, to give an undertaking as to damages.

(9) In proceedings under this section against a person the Court may make an order under section 1323 in respect of the person.

(10) Where the Court has power under this section to grant an injunction restraining a person from engaging in particular conduct, or requiring a person to do a particular act or thing, the Court may, either in addition to or in substitution for the grant of the injunction, order that person to pay damages to any other person.”

39.  The relevant report of the Bills Committee[24] for the Bill that became the Companies (Amendment) Ordinance 2004 showed that section 350B was enacted to implement the proposal of the SCCLR so as to confer on the court a general power to award injunctions which could help to prevent potential breaches of the law.

40.  The Companies (Amendment) Ordinance 2004 was enacted on 22 July 2004 and section 350B^[25] came into force on 15 July 2005,[26] providing as follows:^[27]

“ 350B. Injunctions

(1) Where a person (‘the first‑mentioned person’) has, in relation to a specified corporation, engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute—

(a) a contravention of this Ordinance;

(b) an attempt to contravene this Ordinance;

(c) aiding, abetting, counselling or procuring another person to contravene this Ordinance;

(d) inducing or attempting to induce, whether by threats, promises or otherwise, another person to contravene this Ordinance;

(e) his being in any way, directly or indirectly, knowingly concerned in, or a party to, a contravention of this Ordinance by another person;

(f) conspiring with others to contravene this Ordinance;

(g) a breach of his fiduciary duties owed to the specified corporation in any capacity other than as a director of the specified corporation; or

(h) a breach of his fiduciary or other duties as a director of the specified corporation owed to the specified corporation,

the court may, on the application of the Financial Secretary, or of a member or creditor of the specified corporation whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the court considers appropriate, restraining the first‑mentioned person from engaging in the conduct and, if in the opinion of the court it is desirable to do so, requiring the first‑mentioned person to do any act or thing.

(2) The power of the court to grant an injunction restraining the first‑mentioned person referred to in subsection (1) from engaging in the conduct mentioned in that subsection may be exercised—

(a) whether or not it appears to the court that he intends to engage again, or to continue to engage, in that conduct;

(b) whether or not he has previously engaged in that conduct; and

(c) whether or not there is an imminent danger of substantial damage to any other person if he engages in that conduct.

(3) Where a person (‘the first‑mentioned person’) has, in relation to a specified corporation, refused or failed, is refusing or failing, or is proposing to refuse or fail, to do an act or thing that the first‑mentioned person is required by this Ordinance to do, the court may, on the application of the Financial Secretary, or of a member or creditor of the specified corporation whose interests have been, are or would be affected by the refusal or failure to do that act or thing, grant an injunction, on such terms as the court considers appropriate, requiring the first‑mentioned person to do that act or thing.

(4) The power of the court to grant an injunction requiring the first‑mentioned person referred to in subsection (1) or (3) to do an act or thing may be exercised—

(a) whether or not it appears to the court that he intends to refuse or fail again, or to continue to refuse or fail, to do that act or thing;

(b) whether or not he has previously refused or failed to do that act or thing; and

(c) whether or not there is an imminent danger of substantial damage to any other person if he refuses or fails to do that act or thing.

(5) Where the court considers appropriate, it may grant an interim injunction on such terms and conditions as it thinks fit pending determination of an application under subsection (1) or (3).

(6) The court may discharge or vary an injunction granted under subsection (1), (3) or (5).

(7) The court may, either in addition to or in substitution for the grant of the injunction under subsection (1) or (3), order the first‑mentioned person referred to in subsection (1) or (3) to pay damages to any other person.

(8) For the avoidance of doubt, the damages that may be ordered by the court under subsection (7) does not entitle a person to recover by way of damages any loss that is solely reflective of the loss suffered by a specified corporation which only the specified corporation is entitled to recover under the common law.”

41.  The provision to note in particular about section 350B is sub‑section (7) (its Australian counterpart being section 1324(10)), which provides that the court may, in addition to or in substitution for the grant of the injunction, order the person in question to pay damages to any other person.  The wording of this provision has been changed as now found in Division 3 of Part 14 of the new Companies Ordinance.

42.  It seems to us clear for the reasons below, as was the general understanding, that section 350B(7), which granted the court a power to award damages, was not intended to create an entirely free‑standing right or cause of action on the part of members and creditors of a company for damages for themselves arising out of breaches of duties to the company.  It was, instead, an auxiliary provision, conferring a discretionary power to award damages in addition to or in substitution for an injunction where the court had jurisdiction to grant injunctive relief.

(1)  Subsections (1) to (6) of section 350B all concern the power to grant an injunction, which is plainly the principal subject matter of the section, as the heading of the section “Injunctions” indicates.  Subsection (7) provides that the court “may, either in addition to or in substitution for the grant of the injunction” order the person to pay damages to any other person.  That is a time‑honoured phrase which may be traced back to the United Kingdom’s Lord Cairns’ Act[28] on which section 17 of the High Court Ordinance (Cap 4) is also based.[29] Although s 350B(7) did not follow section 17 exactly by beginning with such words as “where the court has jurisdiction to grant an injunction …”, the language of section 350B suggests that, as with the power under Lord Cairns’ Act, subsection (7) was indented to add “damages” to the remedies available to enable the court to do complete justice where the discretionary remedy of an injunction was inappropriate or inadequate.

(2)  The SCCLR’s consultation paper, referred to above, which is admissible as an aid to construction of section 350B,[30] suggests that the section was proposed to help prevent potential breaches of the law by providing the court with a general power to grant injunctions through a less burdensome and costly procedure.  Damages was also referred to as an ancillary remedy “in addition to or in substitution for” an injunction.[31]

(3)  Section 1324 of the Corporations Act of Australia, expressly referred to in the consultation paper, and on which section 350B was closely modelled, had by then generally been construed in Australia as conferring a discretionary power of the court to grant injunctions and to award damages in lieu, rather than to give some general right to damages.[32]

(4)  There was no indication in the consultation paper or in other materials in the legislative history of section 350B that it was intended to create a free‑standing right on the part of a member or creditor of a company to sue for damages for any person arising out of breaches of duties to the company.  Conversely, the fact that the Ordinance was amended at the same time to introduce a new regime of statutory derivative action and a new power to award damages as part of the unfair prejudice remedy, is an indication to the contrary, for those changes would be largely otiose if section 350B(7) created a separate and independent right of action for damages.

(5)  Section 350B(8), as a doubt-avoidance provision to preclude recovery by any person of damages for loss solely reflective of the loss suffered by the company, was added as a Bills Committee stage amendment, replicating the equivalent addition in section 168A(2C) where the addition originated.[33]  This subsection did not evince any intention for the damages provision in section 350B(7) to be anything other than an ancillary enabling provision in the nature of section 17 of the High Court Ordinance.

43.  The judge below took the view that the statutory power to award damages under section 350B was “parasitic to the Court having power to grant an injunction under the section”,[34] a view with which we agree subject to the discussion below.  As we understand their submissions, this reading of section 350B is not disputed by the plaintiffs’ counsel.  On the contrary, their contention is that there are substantive changes wrought by sections 728‑730 of the new Ordinance specifically to “expand” the nature of the court’s powers and “in particular, to free it from the several limitations previously contained in the repealed s. 350B”.

44.  There had not been many court decisions relating to section 350B.  In Re Tysan Holdings Ltd [2013] 4 HKC 425, the section was, inter alia, relied upon by a shareholder in an application for an injunction to restrain the directors of a listed company from performing an agreement entered into by the company to sell part of its shareholding in a subsidiary to a third party.  It was held that the court had power under section 350B to grant an interim injunction to restrain the act said to constitute a breach of the directors’ fiduciary duties pending the commencement of separate proceedings.[35] No case has been drawn to our attention in which damages had been claimed or awarded under section 350B(7). 

(3)     The enactment of sections 728‑730 of the present Companies Ordinance

45.  The new Companies Ordinance (Cap 622), enacted on 12 July 2012, is the product of the exercise known as the “Companies Ordinance Rewrite”.  In particular, sections 728‑730 are the product of the rewrite of section 350B.

46.  Commencing that exercise, topical public consultations were conducted via three consultation papers[36] issued between 2007 and 2008, with consultation conclusions published between 2008 and 2009.  These consultations did not touch on the existing section 350B or, indeed, shareholders’ remedies generally.

47.  In December 2009, the first phase consultation on a draft bill began, with a consultation paper covering certain Parts, including Part 14, of the consultation draft bill.[37] The consultation conclusions were published in August 2010.  Part 14 of the consultation draft, headed “Remedies for Protection of Companies’ or Members’ Interests”, was the Part that eventually evolved into Part 14 of the new Ordinance.  Clauses 14.8–14.10 were in substantially the same form as now found in sections 728‑730.  The accompanying consultation paper stated that Part 14 grouped the existing provisions concerning shareholder remedies under the Ordinance into a distinct part of the bill, which included (a) unfair prejudice remedy (section 168A); (b) injunction order (section 350B); (c) statutory derivative action (sections 168BA‑168BK); and (d) court order for inspection of company records (sections 152FA‑152FE).  Whilst the consultation paper highlighted three “significant changes” in that Part, none of them related to what is now in sections 728‑730.  In May 2010, the second phase consultation on a draft bill, covering the remaining Parts, was issued,[38] with the consultation conclusions published in October 2010. 

48.  The blue bill — the Companies Bill — was gazetted in January 2011.  In relation to what was to become sections 728‑730, the Explanatory Memorandum in the Bill stated (at §156):

“ Division 3 deals with an injunction restraining conduct that constitutes contravention of the resulting Ordinance or that constitutes a breach of fiduciary or other duties owed to the company or non‑Hong Kong company. Clause 717 sets out the situations to which clause 718 applies. Clause 718 provides for the Court of First Instance’s powers to grant an injunction. The powers are exercisable on application by an affected person or the Financial Secretary. Clause 719 is supplementary to clause 718.”

49.  The Bill was introduced into the Legislative Council on 26 January 2011.  A Bills Committee was set up in the Legislative Council which held 44 meetings between 25 February 2011 and 5 June 2012.  It can be seen from the legislative materials that no major policy objectives or major changes were highlighted in relation to sections 728‑730.[39]  On the contrary, according to a Bills Committee paper, Comparison Table for Part 14 — Remedies for Protection of Companies’ or Members’ Interests, subject to a few identified changes, the relevant provisions in the Bill were presented as representing existing law, ie “restating an existing section in the CO … without change in substance, although the actual wording may be different from the existing section as improvements are made to the drafting language and style”.[40] The changes identified included modification to cover conduct prior to the commencement of the new Ordinance, a new provision to empower the court to declare a contract void or voidable, and a new power to grant interim damages.  That paper was issued by the Financial Services and the Treasury Bureau and the Companies Registry, which formed what was known at that time as the Companies Bill Team, which was responsible for preparing draft drafting instructions for the draftsmen.[41]  As such, it seems to us to be a statement made by responsible officials of the Government in relation to the bill in the Legislative Council, and admissible in order to identify the purpose of the legislation: HKSAR v Cheung Kwun Yin (2009) 12 HKCFAR 568, §14.

50.  The Bill was eventually passed into law on 12 July 2012 and came into force on 3 March 2014.  Section 350B has, however, since remained in what is now known as the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32), with subsection (1)(g) and (h) deleted, in parallel to sections 728 to 730 of the new Ordinance, and has effect in respect of contraventions of Cap 32.

51.  The defendants have in addition referred to the Briefing Notes on Part 14 issued by the Companies Registry in January 2013 but since it in no way informed the legislative history of the Ordinance, it should, with respect, be disregarded in the present exercise.

52.  As highlighted during the legislative process, under the new law:

(1)  The power of the court is augmented to include the power to declare any contract to be void or voidable to the extent specified in the order: section 729(1)(c).

(2)  The power to grant interim remedies is expanded to include “interim damages”: section 730(1).

(3)  The new section 729 is specified to apply in relation to conduct engaged in before the commencement date of the new law if the conduct still subsists: section 728(2) & (3).

53.  Counsel for the plaintiffs submit that there were three other changes in the new law that extended the ambit of the old regime.  First, they submit that the new law was extended to deter breaches of fiduciary duties.  This is not correct since the old section 350B(1)(g) and (h) already covered such breaches.  They have simply been moved to section 728 of the new Ordinance.[42]

54.  Secondly, it is submitted that the law was changed to extend the ambit of the provisions to breaches of the company’s articles (see section 728(4)(c)).  This is only partially correct.

(1)  First, section 5B of the old Ordinance, from which section 728 was in part derived, already provided that a member of a company could bring proceedings to restrain the doing of an act in contravention of section 5B(1), which stipulated that a company whose objects were stated in its memorandum should not do anything that was not authorised by its memorandum and should not exercise any power which was expressly excluded or modified by its memorandum or articles, contrary to such exclusion or modification.  Under the new Ordinance there is no longer any memorandum of association, and any provision in a company’s memorandum is to be regarded as a provision of its articles (section 98(1)).  So the old section 5B(2) has been subsumed into sections 728‑730. 

(2)  Secondly, pursuant to an earlier recommendation of the SCCLR in February 2000 to revise the law to give every shareholder a personal right to sue to enforce the terms of the memorandum and articles of association,[43] section 23 of the old Companies Ordinance was amended in 2003[44] so as to provide expressly, inter alia, that the articles should be enforceable by a member against the company and against each other member.[45]  Even under the old Ordinance, an injunction could therefore prima facie be available at the suit of a member to enforce compliance with the articles, though any such remedy would still be subject to the “irregularity principle”.[46]

(3)  There is nevertheless a change effected by sections 728‑730 in relation to breach of articles, since, among other things, even a creditor and the Financial Secretary may now, at least in theory, complain about such a breach.

55.  The third change, the plaintiffs submit, is that the new regime extended the court’s jurisdiction or powers by enabling it to grant “any or all” of the three types of order in section 729(1).  In particular, the award of damages under section 729(1)(b) is no longer a substitute for or supplement to an injunction as it was under section 350B, but a general power exercisable by the court as it thinks fit.  It is on this point where the parties join issue. 

(4)     Relevant meaning and effect of section 729(1)

56.  Section 729(1) provides that the court “may”, on application by a member or creditor of the company whose interests have been, are or would be affected by the conduct in question, do “any or all” of three things, namely, grant an injunction, order the person concerned to pay damages to any other person, and declare any contract to be void or voidable.

57.  Taking into account that section 729 is worded differently from section 350B and, in particular, that the words used are “any or all” instead of “either in addition to or in substitution for the grant of the injunction”, the judge below took the view that “the change of legislative framework and the removal of these words unmistakably show that section 729 is a new piece of legislation not to be shackled by its predecessors or forerunners”.  He considered the wording of section 729 to be unambiguous and that there was no need, and indeed it would be wrong, to resort to extrinsic evidence to establish legislative intention.  He concluded that the court’s power to award damages is not parasitic on the power of granting an injunction.[47]  In the judge’s view, damages can be awarded to any person who has suffered a pecuniary loss as a result of the conduct in question, whenever the court finds it “just and proper” to do so.[48]

58.  The defendants’ arguments on appeal on the Jurisdiction Ground are essentially the same as those put before the judge.^[49]  In essence, it is submitted that notwithstanding the omission in section 729 of the phrase “either in addition to or in substitution for the grant of the injunction” found in section 350B(7), it is not the legislative intent to alter the scope of the statutory remedy in relation to the availability of damages, and that sections 728 and 729 should be interpreted in a manner similar to the old section 350B and the equivalent Australian provision, in line with the principle that the courts are reluctant to attribute to the legislature an intention to make a radical change to the law by way of a side‑wind.^[50]

59.  The plaintiffs, in contrast, support the judge’s construction.  They submit that the task of the court is to ascertain the intention of the legislature as expressed in the language of the statute, and that given the unambiguous terms of section 729(1), further inquiry beyond the text of the provision is unnecessary and, indeed, illegitimate.

60.  The proper starting point in statutory interpretation is to look at the relevant words or provisions having regard to their context and purpose: Leung Chun Ying v Ho Chun Yan Albert (2013) 16 HKCFAR 735 at §12.  In interpreting a statute, the court’s task is to ascertain the intention of the legislature as expressed in the language of the statute.  This is an objective exercise. The court is not engaged in an exercise of ascertaining the legislative intent on its own but is seeking the meaning of the words which the legislature used: HKSAR v Cheung Kwun Yin (2009) 12 HKCFAR 568 at §11.

61.  The modern approach is to adopt a purposive interpretation. Words are given their natural and ordinary meaning unless the context or purpose points to a different meaning.  Context and purpose are considered when interpreting the words used and not only when an ambiguity may be thought to arise.  The context of a statutory provision should be taken in its widest sense and includes the other provisions of the statute and the existing state of the law: HKSAR v Cheung Kwun Yin at §§12, 13.

62.  The purpose of a statutory provision may be evident from the provision itself.  Examples of materials that may be referred to in order to ascertain the purpose of the statutory provision are: the explanatory memorandum to the bill, the recommendations of a report that are to be implemented by the legislation, a statement made by the responsible government official in the legislature in relation to the bill: HKSAR v Cheung Kwun Yin at §14.  The use of extrinsic material is for a limited purpose, not for the purpose of construing the words of the statute, but to enable the court to understand the context in which the statute was enacted and the mischief at which it was aimed.  This is not the same as treating the statements of the executive about the meaning and effect of the statutory language as reflecting the will of the legislature: Director of Lands v Yin Shuen Enterprises Ltd & Anor (2003) 6 HKCFAR 1 at §§21, 22.

63.  Whatever be the policy and purpose of the statutory provision, the court cannot give a meaning to words in a statute which those words are incapable of bearing.  That the statutory language must be interpreted in the light of its context and purpose should not be seen as a judicial licence to ignore or refuse to give effect to the words which the legislature has chosen to use.  When construing a statute, the court is an interpreter not a legislator: T v Commissioner of Police (2014) 17 HKCFAR 593 at §§12, 195, 278.

64.  To see whether section 729(1) is intended to have the effect the judge attributed to it, it is necessary to construe it in its proper context.  That context includes the whole corpus of company law including both statute law and common law.  When it comes to the question of shareholders’ remedies, the legislature does not paint on an empty canvas but one that is marked with “fundamental principle[s] of company law”[51] such as the rule in Foss v Harbottle[52](which prescribes that, subject to certain exceptions, only the company itself can sue for a wrong done to it), as well as various established remedies, including the derivative action, which have been devised within the structure of company law.  Sections 728‑730 themselves are found in Part 14 of the Ordinance which has 5 divisions, namely, Division 1 on preliminaries, Division 2 on remedies for unfair prejudice to members’ interests, Division 3 containing sections 728‑730, Division 4 on derivative actions, and Division 5 on members’ inspection of company’s records.

65.  With the construction placed on it by the judge, section 729 would in our opinion represent a fundamental change in the law.  It would afford an independent cause of action for any affected member or creditor to sue a director for, inter alia, breach of duty to the company or to sue any other person, for, inter alia, breach of fiduciary duty to the company, to recover damages for himself, the company, or indeed “any other person”. 

66.  Construed as providing a general free‑standing avenue for claims for damages by shareholders and creditors against directors or other persons for breach of duties, even though the duties are ostensibly duties owed to the company, section 729 would have the effect of recognising a duty owed in parallel by such persons to shareholders and creditors generally, contrary to the well‑established principle that directors or other agents of a company do not as such owe fiduciary duties to the shareholders or creditors of the company: Percival v Wright [1902] 2 Ch 421; Peskin v Anderson [2001] 1 BCLC 372, §§30 & 33; Spies v The Queen (2000) 201 CLR 603, §§93‑95.  This principle is not only a corollary of the foundational doctrine of the separate legal personality of a company,[53] but has also been said to be supported by a number of policy considerations, including the risk of over‑exposing directors to a multiplicity of actions by shareholders: see Sharp v Blank [2015] EWHC 3220 (Ch), §9(3).  So far as actions arising out of contravention of the Ordinance are concerned (section 728(1)(a)(i)), the judge’s construction would have the effect of recognising a private law claim for damages for breach of statutory duty simpliciter in relation to each provision of the Companies Ordinance,[54] irrespective of the principles generally governing the tort of breach of statutory duty.[55]  The only express limitation left would be section 729(5) — the principle against recovery of reflective loss,[56] which henceforth would have to carry the entire burden of guarding the floodgates, subject to the apparently discretionary rubric of “just and proper” proposed by the judge.

67.  Such a wide construction of section 729 would moreover all but abolish the rule in Foss v Harbottle and render the derivative action wholly otiose, as any member may, without leave, bring proceedings against a director for breach of duty to the company and seek an order for damages to be paid to the company.  It would be most surprising for the legislature to have spent eight sections in the next Division to re‑enact the elaborate provisions that regulate the statutory derivative action[57] and expressly to preserve the common law derivative action[58] (which was the specific subject matter of prior public consultation[59]), if it had intended to create, by section 729, a free‑standing, independent cause of action invocable in the way suggested by the plaintiffs.

68.  It is true that under section 168A(2)(b) of the old Ordinance (see now section 725(2)(b) of Cap 622), damages had, since the amendment in 2004, been made expressly available on a petition invoking the unfair prejudice remedy.  When enacted, it had no explicit equivalent in the unfair prejudice remedy in the UK, Singapore and Australia.^[60]  However, proceedings for relief against unfair prejudice are generally brought by a shareholder against other shareholders, and upon a petition the court has a wide discretion under section 725(1) in relation to the relief it may give to a successful petitioner.  So far as damages for the member himself is concerned, the juridical basis for the remedy is unfair prejudice to his interests as a member, not breach of duty to the company or to himself, and the damages may indeed be ordered against the company.  Damages may not be ordered under section 725(2)(b) in favour of the company, and where a petitioner seeks to obtain orders for payment of sums to the company for wrongs done to it, the use of the unfair prejudice remedy to circumvent the rule in Foss v Harbottle has been held to be an abuse of process: Re Chime Corporation Ltd (2004) 7 HKCFAR 546, §§26 & 63; Waddington, §77; Re Shun Tak Holdings Ltd [2009] 5 HKLRD 743, §§39‑42. 

69.  Read on its own, section 729(1) seems to suggest that, where it applies, the court may, on application, and without any limitation, do any or all of three things: grant an injunction, order damages, or declare any contract void or voidable.  While “may” and “any or all” are on their face words of wide import, having regard to the broader context discussed above, the scope of the power to order “damages” is in our view highly unclear. Are the damages ordered damages for breach of duty to the company, or damages for “affecting” the “interests” of the applicant member or creditor, or damages in lieu of an injunction that the court declines to grant?  If and insofar as they encompass damages to be paid to the company, how can that be reconciled with the requirements for a derivative action in Division 4?  Can a creditor also bring an action for damages to be paid to the company?  Does the section confer a general “discretion” to award damages, even though discretionary damages is a highly anomalous concept?[61]  If so, on what basis is any such discretion to be exercised? 

70.  These uncertainties are heightened when one has regard to the legislative history of sections 728 to 730 referred to above.  In the plaintiffs’ written submissions, a pertinent question was posed (though their primary position was that it did not arise): what was section 350B’s mischief that caused the legislature to make the relevant change?  The only “mischief” one could identify behind the relevant change of wording was that the language of section 350B was thought not “modern” enough.  There is simply nothing that referred to any mischief in the power to award damages being ancillary to the jurisdiction to grant an injunction, as was the position under section 350B.  There is nothing that referred to any substantive change being intended by the modernisation in language. 

71.  While we warn ourselves against creating uncertainty as to the scope and ambit of apparently plain words, we do have the gravest doubt that we should, based on the phrase “any or all”, ascribe an intention to the legislature to make these fundamental changes in one fell swoop.  We can find nothing to support it in the history and purpose of the legislation.  As the above summary shows, the Ordinance is not a piece of legislation conceived and drafted from scratch, but the product of a “Rewrite”. As stated in the Legislative Council Brief upon the introduction of the Companies Bill into the legislature, the four main purposes sought to be achieved by the Rewrite were enhancing corporate governance, ensuring better regulation, business facilitation, and modernising the law.  Specifically, the fourth main purpose was explained as follows:[62]

“ We seek to modernise the company law to meet the needs of the business community and public expectation. We will retire antiquated concepts that no longer serve any useful purposes such as par value of shares. We will also modernise the language and re‑arrange the sequence of some of the provisions in a more logical and user‑friendly order so as to make the CB more readable and comprehensible. …” (footnote omitted)

Substantially the same explanations were given orally by the Secretary for Financial Services and the Treasury in moving the second reading of the Bill when it was introduced into the Legislative Council on 26 January 2011.[63]

72.  The long title of the Ordinance, viz “An Ordinance to reform and modernise Hong Kong company law, to restate part of the enactments relating to companies, to make other provision relating to companies, and to provide for incidental and connected matters”, shows that it is an amalgam of reform and restatement.  While the Rewrite Project was not solely an exercise in consolidation, it seems to us to be at least in part analogous in nature where it represented an attempt to restate the law in modernised language. 

73.  What falls for consideration now is of course the power under the new statute, not the old one, and examination of the legislative antecedents of the provisions in a consolidating statute is in general to be resisted, but such recourse is permissible where there is genuine doubt and real difficulty regarding the meaning and effect of the statute, for there is a presumption that a consolidation statute (in so far as it merely re‑enacts) does not alter the substance of the law.  Thus it has been said that recourse may be had to the previous provision where the new statute’s “wording is ambiguous and its ambit obscure”, or “when there is a real and substantial difficulty or ambiguity which classical methods of construction cannot resolve”: see Farrell v Alexander [1977] AC 59, 73B-C, 84C‑H and 97B‑C; Bennion on Statutory Interpretation (7^th ed), Section 24.7.  In In re Spence, deceased [1990] Ch 652 at 660F, it was said that the (UK) Legitimacy Act 1976 was a consolidating Act and that there was therefore “a strong presumption that it was not intended to change the law”, with the result that the words “whenever born” were interpreted to mean “whether born before or after the commencement of this Act” which was the wording of the previous statute.  In Westminster City Council v Clarke [1992] 2 AC 288, the House of Lords noted that the Housing Act 1985 was a consolidating statute and so a section that would otherwise appear to confer the status of “secure tenant” on a licensee must be interpreted as doing so only if the licence conferred exclusive possession.  It was said that as the section in question was a consolidating measure, in redrafting the previous provision in the form of the new section “the draftsman had no power to alter the law”.[64]

74.  Given the obscurities that to our mind exist with respect to the ambit of section 729(1)(b) as described above, it seems to us legitimate to find guidance in the predecessor provision which section 729 was (so far as relevant) merely intended to restate in different language and style.  Although there is no different legislative process for consolidating statutes in Hong Kong as there is in the United Kingdom,[65] the same interpretive approach in our view applies.

75.  It may be noted that it has been held in England that the approach applicable to consolidation statutes is appropriate also in relation to the product of the Tax Law Rewrite Project there.  In R (Derry) v Revenue and Customs Commissioners [2019] UKSC 19, whilst agreeing with the view that earlier legislative versions should not be referred to in the absence of ambiguity in the new law, Lady Arden JSC said (at §86):

“ [The Income Tax Act 2007] is not a pure or ‘straight’ consolidation Act. However, as the Explanatory Notes cited by Lord Carnwath JSC confirm, it is not (except for the minor changes) intended to change the law. That is a matter which the courts must in my judgment respect when interpreting the new legislation. In this regard it is of some significance in interpreting consolidation statutes that they receive less Parliamentary scrutiny than other primary legislation. The respect to which I have referred for giving effect to Parliament’s intention where it is possible to do so is often expressed in terms of a presumption, in relation to consolidating statutes, that Parliament did not intend to change the law.”

It seems to us this applies a fortiori here in relation to the Companies Ordinance, where it was represented to the Legislative Council that other than the changes identified, the provisions merely restated existing law in different language and drafting style without change in substance. 

76.  The plaintiffs drew attention to the well‑established principles that words may not, without clear necessity, be read into a statute in the process of construction; nor can a statutory provision be attributed a meaning which its language, understood in the light of its context and purpose, is incapable of bearing.[66] These principles do not, in our view, preclude us from giving effect to section 729(1) in accordance with the meaning that its predecessor bore.  The wording of section 729(1) stands as it is, in all its apparent generality, but, for the reasons we have endeavoured to set out, the entire admissible context requires a limitation to be applied in the exercise of the powers it confers, so that the order for damages in section 729(1)(b) is to be treated as supplementary or substitutive in nature, to be granted in addition to or in substitution for an injunction.  Such constraints on otherwise apparently unfettered powers are not uncommon in the law; see eg the core requirements laid down by the cases that need to be satisfied for the court to exercise its apparently unlimited power to wind up unregistered companies.[67]

77.  The plaintiffs’ submission seems to us to suggest that a fundamental change of the law had been casually effected without any consultation, without anyone’s attention being drawn to it among over 900 clauses in the Bill, and without so much as a mention in any documents one could find in relation to the entire Rewrite process.  In our respectful opinion, this is not something that the court should readily accept.

78.  Contrary to the plaintiffs’ submission, the approach we prefer does not deny the entitlement of the legislature to abrogate or reduce any fundamental principle of common law, but assumes that the legislature would not do so except on a considered basis.  As has been stated, it is “a principle of legal policy that law should be altered deliberately rather than casually, and that Parliament should not change either common law or statute law by a sidewind, but only by measured and considered provisions”: Bennion on Statutory Interpretation (6^th ed), Section 269 at p 741,[68] applied by the Court of Final Appeal in HKSAR v Leung Chun Kit Brandon (2018) 21 HKCFAR 298, §57; see also Medical Council of Hong Kong v Chow Siu Shek (2000) 3 HKCFAR 144, 158; Town Planning Board v Town Planning Appeal Board (2017) 20 HKCFAR 196, §48(1).  “The more fundamental the change, the more thoroughgoing and considered should be the provisions by which it is implemented”: Bennion (7^th ed), p 703; Safeway Stores plc v Tate [2001] QB 1120, 1132.

79.  For these reasons, therefore, the use of the phrase “any or all” does not in our view suggest any legislative intent to subvert basic principles of company law.  As between injunction and damages, injunction remains the primary remedy, to which damages is an adjunct which may be granted in addition to or in substitution for an injunction.  We note that the view is also taken in Lo & Qu, Law of Companies in Hong Kong (3^rd ed), §10.253, that sections 728‑730 should be interpreted in a similar manner to the old section 350B, as “there did not appear to be any legislative intention to substantively alter the scope of the statutory remedy in relation to the availability of damages”; see also Kwan et al, Company Law in Hong Kong: Practice and Procedure 2020, §8.138. 

(5)     Application of section 729(1)

80.  What then are the consequences flowing from the recognition that the power to award damages under section 729(1) is adjunctive to the power to grant an injunction?  Based on Australian authorities on section 1324 of the Corporations Act, the defendants advance the following propositions regarding the powers under section 729(1):

(1)  The purpose of the statutory provision is to prevent the relevant breaches of law, duty or articles.  The remedies are therefore “forward‑looking”.  Injunctive relief is only available on a preventative basis. 

(2)  Damages are only awarded as pecuniary substitutes for injunctive relief.  Damages are only available if injunctive relief was available at the time of the action.

(3)  Injunctive relief could not be sought as an artifice to sneak in a compensatory claim through the back door.

81.  In the present case, the defendants submit that prohibitory injunctive relief was not available because the wrongful conduct had been completed by the time of the action, in that all the Disputed Shares had been sold in the open market as at the date of the action (26 August 2016).  Mandatory injunctive relief, it is submitted, was not available either because it was parasitic on the availability of prohibitory injunctive relief.  The mandatory injunction for the defendants to buy back an equivalent number of shares for cancellation would be a remedy for past loss and not the proper subject of injunctive relief.

82.  It seems to us that the principles governing the power to order the payment of damages under section 729(1)(b) and (2)(b) will have to be worked out by the courts case by case.  The jurisprudence under section 17 of the High Court Ordinance and section 1324 of the (Australian) Corporations Act and similar statutes in other jurisdictions[69] may provide useful reference but cannot be directly applied without careful consideration.

83.  For our part, we would accept that the jurisdiction to award damages under section 729 depends on the availability of injunctive relief as at the time of institution of suit.  Where damages are given in lieu of an injunction, they are given to provide substitutive monetary compensation for losses flowing from the decision not to grant an injunction.  As such they are intended for cases where the court has jurisdiction to entertain an application for injunction in the first place. The relevant time for assessing this should be the time when the plaintiff first invokes the court’s jurisdiction: Morris‑Garner v One Step (Support) Ltd [2019] AC 649, §45.  Where that requirement is satisfied, the fact that after that date and before the court gives judgment, the circumstances have so developed that injunctive relief is no longer available, may be purely adventitious and does not negate the jurisdiction. 

84.  As has been said in relation to the equivalent power under Lord Cairns’ Act, the question is whether, at the date of the writ, the court could have granted an injunction, not whether it would have done: Jaggard v Sawyer [1995] 1 WLR 269, 284H-285C, per Millett LJ.  By way of jurisdiction the court is concerned with the title to injunctive relief or, in other words, the existence of the ingredients that would enable the court, if it thought fit, to exercise its power of granting an injunction: Ferguson v Wilson (1866) LR 2 Ch App 77 at 91, per Cairns LJ.  This requirement is not concerned with factors which go only to the exercise of the discretion of the court as to whether or not to grant an injunction. 

85.  Does this “jurisdictional requirement”, as the defendants put it, preclude an award of substitutive damages in the present case?  Proceedings were begun on 26 August 2016 when the plaintiffs made an ex parte (on notice) application before Harris J for an interlocutory injunction and filed their originating summons in the action.  At that time, the originating summons sought, as final orders, inter alia, a declaration that any allotment made pursuant to the exercise of the Disputed Options was void or voidable and an injunction to restrain the Company and its directors (ie the 2^nd to 7^th defendants) from recognising or giving effect to any disposition or exercise of rights or power in relation to the 1.8 billion shares derived from the options.

86.  After subsequent amendment and re‑amendment, by the time of the trial, the originating summons still sought the declaration, but no longer sought an injunction to restrain recognition of any shares. Instead, an order was sought that the 2^nd to 7^th defendants do restore the shareholding structure of the Company by acquiring 1.6 billion shares from the market and returning them to the Company for cancellation (in return for payment by the Company of the corresponding subscription monies).

87.  It transpired that very soon after the Disputed Shares were issued, the grantees deposited them into two brokers, namely, FP Sino‑Rich and Emperor, on 24 and 25 August 2016,[70] and that, apart from 1 million shares sold by the 8^th defendant and 10 million shares sold by the 15^th defendant on 24 August 2016 (representing only 0.6875% of all the Disputed Shares), all of the Disputed Shares were sold by the grantees (the 8^th to 15^th defendants) on 25 August 2016.[71]

88.  However, as is well known, settlement of trades conducted through the Stock Exchange of Hong Kong did not take place instantaneously but two trading days after the trade date.  In other words, for the sales effected on 25 August 2016 for the vast majority of the shares in question, the settlement date was 29 August (Monday).  The evidence available confirms that this process, commonly known as “T+2”, means that the settlement date “represents the time at which ownership is transferred as a result of the sale and purchase” and the “change in shareholding will be reflected in CCASS Shareholding search of the Hong Kong Exchange on the Settlement Date”.[72]

89.  In the light of these facts, the defendants’ assertion that as at the date of the commencement of the action, it was “impossible” for any prohibitory injunction to be granted in respect of the Disputed Shares, does not in our opinion bear scrutiny.

90.  In their supplemental submissions, the defendants argue that this point is not open now as it was never raised by the plaintiffs in the proceedings below.  We do not think this is right.  The plaintiffs’ position throughout was that there was no relevant jurisdictional restriction, which was accepted by the judge.  There was no concession by the plaintiffs or finding by the judge that the court had no jurisdiction on the facts of this case to grant an injunction at the time when proceedings were commenced.  The parties had been content to run their respective cases on the basis of the evidence available below.  In light of our approach to the application of section 729, it would be necessary for the court to be satisfied that there was indeed no jurisdiction to grant an injunction before it could dismiss the plaintiffs’ claim as contended for by the defendants, there being no suggestion by either side that the question should be remitted to the Court of First Instance.

91.  Based on the evidence available, there is no dispute on the primary facts.  As at 26 August 2016, the Disputed Shares were still in the grantees’ accounts with the two brokerages.  The sales entered into on 25 August had yet to be completed.  Ownership in the shares had not yet changed hands.  It was then still open to the court to grant an injunction against the grantees and brokers to restrain disposition of the shares by way of settlement and completion of the sales[73] and an injunction under section 729 against the defendants (as directors of the Company) to restrain them from recognising or giving effect to the Disputed Shares.  If the court granted an injunction at that time to restrain disposition of those shares, the selling brokers could not, without causing a breach of the injunction, transfer title to the shares covered, and might as a result, under the rules of the Stock Exchange, come under an obligation to the buying brokers to pay monetary compensation unless they could fulfil the sales with shares sourced elsewhere.  The selling brokers would then, no doubt, look to the grantees as their principals for indemnification.  Of course the court could instead decide, in its discretion, not to grant the above injunction on the ground of the effects such as these it might have on the brokers and on the third party purchasers. But this, in our view, would simply be an instance where the court as a matter of discretion refused injunctive relief.  Far from showing that the court had no jurisdiction, it would give rise to an occasion for the court to consider ordering damages in lieu.

92.  The defendants submit that the affirmations stated that all the 1.6 billion shares had been “irreversibly” sold on 24 and 25 August 2016.  Of course the sales were “irreversible” as between the seller and the buyer, in the sense that they were not conditional or voidable.  But they did not denude an injunction of any possible subject matter and did not, in our view, show that a prohibitory injunction could not have been granted as at 26 August 2016.  This is quite different from the situation in Ferguson v Wilson, supra, where the court held it had no power to order damages in lieu of specific performance of a contract for the allotment of shares, since all the un‑allotted shares had been allotted before the action and there was no longer any “subject matter whereon the decree of the Court can act”.  In this case, as the affirmations show, the shares had not yet passed to the purchasers.  To the extent that the affirmations, by the word “irreversibly”, purported to opine on the reach of an injunction, they were of little weight if not inadmissible.

93.  In fact, as the plaintiffs point out, on 27 August 2016, albeit without knowledge of the sales entered into on 24and 25 August, they had obtained ex parte from DHCJ Kent Yee an interim injunction restraining the two brokers[74] from “taking any step to implement any instructions or directions to deal with …, dispose of (whether by way of transfer, sale, encumbrance or any other means), or diminish the value of” the Disputed Shares, until the return day on 31 August 2016.  The fact that the injunction was obtained only as against the two brokers and that it was subsequently not continued by Harris J on the return day does not mean that there was no jurisdiction to grant a prohibitory injunction against the defendants when proceedings were commenced. 

94.  On behalf of the plaintiffs Mr Barlow SC has also referred to the undertakings given by the Company and the defendants on 31 August 2016, but they related only to the 200 million share options which had not yet been exercised.  These undertakings are not relevant for present purposes. For the above reason, however, it seems to us the jurisdictional requirement was satisfied.

95.  The plaintiffs also, as an alternative ground, submit that the judge’s award of damages could be justified as an order for damages in lieu of the grant of a mandatory injunction requiring the defendants to acquire shares from the market and transfer them to the Company for cancellation.  The judge, proceeding on his view that damages was an independent remedy under section 729, considered that such damages would be an adequate remedy for the plaintiffs and therefore declined in his discretion to grant the mandatory injunction sought.[75] 

96.  In response, the defendants submit that where prohibitory injunctive relief is not available, the court may not give mandatory injunctive relief.  They submit that the mandatory injunction prayed for would be a remedy for a past breach and an artifice for the purpose of slipping in a compensatory claim.  The authorities relied upon by the defendants seem to us, however, to concern very different situations. 

97.  In Australian Securities and Investments Commission v Cassimatis (No 9) [2018] FCA 385, the directors of the company in question had breached their duty of care (codified in section 180(1) of the Corporations Act 2001 (Cth)) by allowing the company to run a model of giving financial advice which contravened provisions of the Act, putting the company at risk of losing its financial services licence.  The ASIC, as the regulator, brought an action against the two sole shareholders and executive directors for declarations of contravention, pecuniary penalties under the Act, orders for disqualification from management of corporations, as well as an injunction under section 1324 to restrain each respondent from holding a financial services licence and from providing financial services for a period of 10 years.  On these facts, Dowsett J of the Federal Court of Australia saw no basis for construing section 1324 as authorising the grant of an injunction restraining conduct beyond that identified as the contravention which triggered the operation of the section in the first place, particularly when the conduct sought to be restrained would be otherwise lawful.[76]  It was in that context that the learned judge observed (at §124):

“ In my view, s 1324(1) authorises the injunctive restraint of unlawful conduct, particularly that described in subparas 1324(1)(a)‑(f). If such an order is made, then the Court may also order that the relevant person do certain things. Section 1324(2) authorizes an injunction compelling the performance of acts required under the Act. In my view, s 1324 as a whole empowers the Court to restrain unlawful conduct, to make supplementary orders in support of any such restraint and to compel the discharge of statutory obligations. It does not provide a general power to restrain lawful action, or to compel conduct where there is no lawful obligation to perform such conduct.”

98.  It may also be noted that whereas section 1324(1) of the Australian Act provides (as does section 350B(1) of Cap 32 in similar terms) that the court may grant an injunction “restraining the first‑mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing”, section 729(1)(a)(i) of the Ordinance provides that the court may grant an injunction “restraining the person from engaging in the conduct or requiring the person to do any act or thing”.  Even on the wording of section 350B(1), however, a mandatory injunction had been granted on its own to redress a breach of director’s duty: Re PAL Active Ltd (unrep, HCMP 2001/2008, 30 October 2009), though that was a case where the breach of duty consisted in the failure by the director to take steps for the deregistration of a subsidiary in the Mainland.

99.  In Re Colorado Products Pty Ltd (in prov liq) (2014) 101 ACSR 233, the plaintiffs made a large number of complaints about misrepresentations and misconduct by the defendants in relation to the company, and brought a claim, inter alia, for compensation under section 1317H of the Corporations Act, contending that if that claim failed, they could nonetheless obtain damages under section 1324(10) in substitution for an injunction prayed for (though it is not clear what the injunction sought would restrain).  Black J of the New South Wales Supreme Court held that since the company had ceased to trade and subsequently entered into provisional liquidation, and there was no relevant continuing conduct, it did not seem to him that the application for injunctive relief was “of substance, as distinct from an artifice to seek to create a basis to recover damages under s 1324(10) of the Corporations Act”.[77] 

100.  Since a prohibitory injunction could in our view have been ordered at the time of the action, and there was therefore jurisdiction to order damages in lieu, it is unnecessary for us to consider whether the order for damages could also be based on the mandatory injunction sought by the plaintiffs and we prefer not to express a concluded opinion on that question. 

101.  A further submission made by the defendants, relying on McCracken v Phoenix Constructions (Qld) Pty Ltd (2012) 289 ALR 710, needs to be dealt with.  It is submitted that even if damages could be awarded in lieu of an injunction, such damages should be awarded as monetary compensation for the Company.  An order to pay damages to the plaintiffs being certain members of the Company would not be a substitute for the injunctive relief. 

102.  McCracken is a case where a creditor of the company in question sued the sole director of the company for damages under section 1324(1) of the Corporations Act, alleging that the director had, in breach of his duties as codified in the Act, caused the company to agree to an amendment of an agreement it had with the director’s wife, thereby abandoning its interest under the agreement in certain units for development and thus diminishing its assets.  The plaintiff had originally sought an injunction to require the director to cause his wife to transfer to the company the real property alleged to have been diverted from the company but, as the company was subsequently wound up and the director’s wife made bankrupt, the only live claim became that against the director for damages under section 1324(10).  The Queensland Court of Appeal, reversing the trial judge and dismissing the plaintiff’s claim, stated, inter alia, as follows (at §30, footnote omitted):

“ In the case of a contravention of the Act, the subsection may be seen as conferring power to award damages only as a substitute remedy, or supplementary remedy, for an injunction to remedy, or partly remedy, the adverse effect upon interests which are protected by the provision of the Act which has been contravened.  In this case, for example, the claimed injunction required Mr McCracken to cause Mrs McCracken to transfer to the company the real property which was alleged to have been diverted from the company by Mr McCracken’s contravention of the duty he owed under s 182(1). Such an injunction, if it were effective, would appropriately have remedied the adverse effect upon the company’s interests which are protected by s 182(1) (as is evidenced also by Pt 9.4B of the Act).  If the injunction could not be granted, a substitute remedy would be to award damages in favour of the company by way of compensation for the irretrievably lost property; if only part of the property could be returned to the company pursuant to an injunction, a supplementary remedy (damages “in addition” to the injunction) might provide compensation for the value of the part of the property irretrievably lost as a result of the contravention.  An award of damages in favour of the respondent creditor would not be a substitute or supplementary remedy for the claimed injunction in that way.”

103.  The loss complained of by the plaintiff in McCracken was the loss of assets in the company with which the plaintiff’s contractual claim against the company could be satisfied.  The court considered that the creditor’s claimed loss was merely derivative of the company’s recoverable loss.[78]  Similarly, a complaint by a member about a breach of duty to the company causing loss to the company which has in turn led to a diminution in the value of the member’s shares would not be a proper basis for ordering damages in favour of the member.  It would appear that such claims would likewise fail in Hong Kong, because section 729(5) expressly precludes recovery of damages by other persons for reflective loss and, in any event, the principle of reflective loss is part of the general law of Hong Kong.[79]

104.  Complaints about wrongful allotment of shares, however, seem to us to be special and warrant closer examination in this regard, because the loss caused may not necessarily be suffered solely by the company.  In the English case of Re Sherborne Park Residents Co Ltd (1986) 2 BCC 99,528, an estate management company in which 30 flat‑owners held one share each proposed to issue about 2,000 new shares to be allotted to the members in proportion to their contribution to the service charge, which would be a different proportion from one flat, one share.  One of the flat‑owners complained, alleging that the real motive for the issue was to alter the balance of voting power in the company.  Holding that the complaint was not derivative in nature, Hoffmann J said:[80]

“ Although the alleged breach of fiduciary duty by the board is in theory a breach of its duty to the company, the wrong to the company is not the substance of the complaint. The company is not particularly concerned with who its shareholders are. The true basis of the action is an alleged infringement of the petitioner’s individual rights as a shareholder. The allotment is alleged to be an improper and unlawful exercise of the powers granted to the board by the articles of association, which constitute a contract between the company and its members. … An abuse of these powers is an infringement of a member’s contractual rights under the articles.”

105.  The personal interests of shareholders in such cases have also been recognised in the South Australian case of Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 14 ACLR 569, where King CJ said (at p 575):

“ Diminution of voting power stands on a fundamentally different footing from other detriments resulting from abuse of power by directors. A member’s voting rights and the rights of participation which they provide in the decision‑making of the company are a fundamental attribute of membership and are rights which the member should be able to protect by legal action against improper diminution.”

106.  The same view has been adopted in Hong Kong, where a member has been recognised to have standing to apply in his own right for an injunction against a wrongful issue of shares aimed at diminishing his voting power or for an order setting it aside: Kwok Shun On v Wong Sai Wing & others [2001] 3 HKLRD 811, §§37‑38 (Yuen J); Wong Kam San v Yeung Wing Keung [2007] 2 HKLRD 267 at §76(c) (Lam J); Re Bank of East Asia Ltd [2015] 4 HKC 137, §14 (Harris J); see also Tsang Wai Lun Wayland v Chu King Fai [2009] 5 HKLRD 105, §§80‑89 (Reyes J).  By the same token, an injunction sought by a member to restrain a wrongful allotment would in substance be (at least in part) a remedy in the favour of the member rather than the company.

107.  Although these cases do not concern damages and counsel have not been able to find any case in which a member has been held entitled to damages from directors for wrongful allotment of shares,[81] the cases illustrate that there can be a real loss suffered by a member as a result of a wrongful allotment of shares separate from and independent of any damage that is suffered by the company.  Compensation for the member may be rationalised in terms of an infringement by the company of his contractual rights under the articles which was procured by the improper actions of the directors who managed its affairs.

108.  What loss has been suffered respectively by a company and by a member as a result of a wrongful allotment of shares is not easy to assess and will be highly sensitive to the facts of each case.  Take a simple stylised example.  A company with a total of 1,000 issued shares has assets of $1,000.  A member holding 100 shares has a 10% stake in the company worth $100.  If the directors, for an improper purpose, cause 250 new shares to be issued to a third party for $1 each, the company will have $1,250 in assets.  The company has not suffered any obvious loss (assuming the new shares have been issued for the best price reasonably obtainable).  The member’s 100 shares are still worth $100 but represent a reduced stake of 8%; he has not suffered any “value dilution” but a “voting power dilution” or “stake dilution”.  How the loss of voting power from 10% to 8% may be compensated in monies can potentially be a difficult question.  If the member then acquires 25 shares from another shareholder, his stake will return to 10% but his holding will now be worth $125.  On the other hand, if the 250 new shares have instead been issued at an undervalue (say, below the average net asset value of $1 each), there will in addition be “value dilution” for existing members, but this may also constitute a loss for the company in so far as it has lost the shortfall in subscription monies for which the new shares should have been allotted.

109.  The defendants have not contended on this appeal that substitutive damages can never be awarded under section 729(1) in favour of any person other than the company.  Indeed section 729(5) would be otiose if that were so.  In the special circumstances of wrongful allotment of shares causing a “stake dilution” for a member, we are satisfied that we should accept that, in Hong Kong, under section 729(1), damages may be ordered to be paid to a member as a substitute for a prohibitory injunction at his behest restraining the wrongful conduct.  We would affirm the judge’s decision to order damages to be paid as an order of substitutive compensation for the plaintiffs in lieu of injunction.  We would therefore dismiss the challenge mounted on the Jurisdiction Ground.

Quantum Ground

110.  There is no dispute that prior to the allotment and issue of the 1.6 billion Disputed Shares, the Company had a total of 24 billion issued shares, of which the plaintiffs held, in aggregate, 2,450,448,000 shares, representing approximately 10.21% of the issued shares.[82]

111.  On 22 August 2016, the Company issued and allotted 1.6 billion Disputed Shares, purportedly upon the exercise of the Disputed Options, to the 8^th to 15^th defendants.

112.  On 5 September 2016, the 1^st plaintiff purchased 414,876,000 shares from the market at the aggregate price of $18,669,420.  In his affirmation, the 2^nd plaintiff stated:[83]

“ In light of the Directors’ refusal to convene the EGM and to avoid any further delay in convening an EGM, on 8 and 9 September 2016,[84] the 1^st Plaintiff purchased 414,876,000 shares in the Company. Consequently, the Plaintiffs now hold 11.19% of the diluted share capital (or 11.94% of the original share capital prior to the Purported Allotment). As the Plaintiffs hold more than 10% of the paid up capital of the Company, they are clearly entitled to requisition an EGM. …”

113.  The judge accepted that the purchase of shares “was done to ensure that [the plaintiffs] could maintain a ‘more than 10%’ shareholding in the Company (by reason of the issuance of the Disputed Shares thereby increasing the issued share capital of the Company) so as to further their intention to raise requisition for EGM”.[85]

114.  At trial, the plaintiffs claimed that the losses suffered by them personally as a result of the defendants’ breach of duties included the money spent by the 1^st plaintiff in purchasing 414,876,000 shares in the Company.  In his Judgment at §108, the judge said:

“ Counsel for D3 to D7 submitted that in order to bring Ps’ percentage shareholding to the same 10.21%, P1 only needed to purchase another 163,312,000 shares. He therefore submitted that Ps are only entitled to claim for damages in respect of the purchase of 163,312,000 shares instead of 414,876,000 shares. Senior Counsel for Ps submitted that causation is established because P2 was not challenged in cross‑examination as to his evidence that P1 purchased the 414,876,000 shares ‘in the light of the directors’ refusal to convene the EGM’. I agree with her submission that this piece of unchallenged evidence has provided sufficient causative nexus on balance of probabilities. I therefore find that P1 suffered a loss of HK$18,669,420 which was caused by the breach of fiduciary duties by D3 to D7 in causing the grant of the Disputed Options; causing the subsequent allotment of the Disputed Shares; and using the diluted share capital as a basis for rejecting Ps’ entitlement to requisition for an EGM.”

115.  We are not called upon in this appeal to examine the potentially difficult question (mentioned above) of assessing precisely what loss was caused to the plaintiffs in terms of dilution, but only the defendants’ argument that the correct measure of damages is the expense incurred in purchasing 163,312,000  shares[86] instead of 414,876,000  shares.  By acquiring 163,312,000 shares the plaintiffs would have restored their stake to the original 10.21%.[87]  On behalf of the defendants, Mr Lam and Mr Chan submit that the judge failed to apply the compensatory principle, that is to say, that the party wronged is to be put in the same position as if the wrong had not occurred.  They submit that rules of causation comprise both factual causation, which requires that the loss must not have occurred but for the wrong, and legal causation, where the emphasis is on whether the chain of causation has been broken by a supervening act.  They submit that the   judge neglected to consider legal causation.  By purchasing 414,876,000 shares, the 1^st plaintiff acquired 251,564,000 more shares than were necessary to restore his position.  The judge’s award would leave the 1^st plaintiff with a windfall of 251,564,000 shares obtained at the defendants’ expense.  It is submitted that this is not a question of remoteness or mitigation but ascertaining the loss resulting from the breach, to which the reasonableness of the plaintiffs’ decision to acquire 414,876,000 shares is irrelevant.

116.  On behalf of the plaintiffs, Mr Barlow SC and Ms Leung submit that the defendants did not challenge the plaintiffs’ evidence at trial that they reasonably believed they needed to purchase the 414,876,000 shares in order to overcome the defendants’ refusal to convene the EGM, due to the plaintiffs’ alleged shareholding shortfall.  Reliance is placed on Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, particularly at §96, which in turn quotes a passage from the judgment of McLachlin J in Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 at 556 which includes the following sentence:

“ The plaintiff will not be required to mitigate, as the term is used in law, but losses resulting from clearly unreasonable behaviour on the part of the plaintiff will be adjudged to flow from that behaviour, and not from the breach.”

Counsel submit that the judge found that the plaintiffs had spent $18,669,420 to purchase 414,876,000 shares, accepted the reasonableness of the plaintiffs’ belief when making that expenditure which, but for the defendants’ breaches, would not have been incurred, and found that the expenditure was caused by those beaches.  They submit that the defendants are now in reality attempting to challenge these findings of fact.

117.  It is unnecessary for the purpose of this appeal to decide generally whether the principles applicable to the assessment of damages ordered to be paid under section 729(1)(b) to a member of a company, rather than the company itself to which the duty is owed, are the same as the principles governing an award of equitable compensation for breach of trust or fiduciary duty, or instead follow the rules relating to damages for breach of contract or tort at common law, or the principles governing the award of substitutive damages under section 17 of the High Court Ordinance.  At common law, damages are assessed on a compensatory basis by reference to the position the plaintiff would have been in if the obligation had not been breached: Livingstone v Rawyards Coal Co (1880) 5 App Cas 25, 39; Keep Point Development Ltd v Chan Chi Yim & others (2003) 6 HKCFAR 160, §§25‑27; Bunge SA v Nidera BV [2015] UKSC 43, §14.  Likewise, in the case of equitable compensation for breach of fiduciary duty, it is imperative to ascertain the loss, for “equitable compensation must be limited to the loss flowing from the trustee’s acts in relation to the interest he undertook to protect”: Libertarian, §92, quoting from Canson at p 551f.  Where restoration in specie is not possible, the restorative approach to equitable compensation, like common law damages, seeks to put the plaintiff “in as good a position pecuniarily as that in which he was before the injury”: Nocton v Lord Ashburton [1914] AC 932, 952; Libertarian, §§85, 87.

118.  In the present case, the breach of duty to the Company — the wrongful allotment of shares — did not cause a loss of property to the plaintiffs as such, since their own shares were intact, but its direct result was to expand the Company’s issued share capital and reduce the plaintiffs’ relative interests in the Company, from approximately 10.21% to 9.57%.[88] If the plaintiffs had thereupon done nothing, damages for this injury might in principle have to be assessed on the basis of the difference in value between their previous 10.21% stake and their 9.57% stake afterwards, taking into account that a holding of less than 10% does not carry with it the right to requisition a general meeting under the Company’s articles.  The plaintiffs, however, acting not unreasonably as is common ground, went to the market to purchase shares to increase their shareholding.  The defendants do not dispute that such an exercise might be seen as a step to replace, repair or restore the plaintiffs’ property or a step taken in mitigation of damage, the expense of which is recoverable as a proper measure of the loss.

119.  But it seems to us that on principle the plaintiffs can only claim the cost of restoring their property to what it was before, ie a 10.21% stake. The expense of acquiring further shares which brought their shareholding beyond that proportion is, objectively viewed, an expense for improving the plaintiffs’ position.  Even if the plaintiffs behaved reasonably or prudently in purchasing such further shares or reasonably believed it was necessary for them to do so, it does not transform that expenditure into a loss.

120.  The evidence that the plaintiffs purchased all 414,876,000 shares “in light of the directors’ refusal to convene the EGM” is, in our view, insufficient to support the plaintiffs’ claim in full.  It simply means that, but for the defendants’ breach, the plaintiffs would not have bought shares on the market.  The defendants’ acts gave occasion for the 1^st plaintiff to acquire shares on the market.  But it does not follow that the entire expense incurred, regardless of the number of shares bought, is therefore attributable as a loss caused by the defendants.  Beyond the price of the shares required to restore the plaintiffs’ original shareholding proportion, the money spent was paid in exchange for additional shares which, prima facie, had the same value as the money paid for them.  To that extent the plaintiffs’ money was transformed (reversibly, one may add) into shares they owned but there is nothing shown to have been lost.  That additional outlay cannot, with respect, properly be characterised as a “loss”.  In simply relying on the occasion for the loss as showing sufficient causal nexus, the judge, in our respectful opinion, fell into error. 

121.  The defendants’ counsel also pray in aid the “rule of betterment” which requires additional benefits obtained as a result of taking reasonable steps to mitigate loss to be brought into account in the calculation of damages: Dimond v Lovell [2002] 1 AC 384, 401H‑402A. They argue that the plaintiffs had a choice to acquire just 163,312,000 shares to achieve mitigation, but if the plaintiffs purchased 414,876,000 shares and claimed the full price as the cost of mitigation, then they must give credit for 251,564,000 shares which were additional benefits obtained by them in that exercise: Lagden v O’Connor [2004] 1 AC 1067, §34.  Valuing these additional benefits at their market price, the result is that the plaintiffs can recover only the expense incurred in purchasing 163,312,000 shares. This seems to us to be an alternative and, in this case, arithmetically equivalent, way of looking at the matter, but we prefer the simpler approach of saying that the plaintiffs cannot claim the whole cost of purchasing 414,876,000 shares as their loss in the form of the cost of mitigating the dilution damage caused by the wrongful allotments.

122.  For these reasons, we would allow the appeal on the Quantum Ground.  There is no dispute that the prorated expense for purchasing 163,312,000 shares was $7,349,040 out of the total of $18,669,420.  We would accordingly substitute an order for damages in that amount.

Disposition

123.  For the foregoing reasons, the defendants’ appeal is allowed to the extent that the judge’s order for damages in the sum of $18,669,420 is set aside and substituted with an order for damages in the sum of $7,349,040.

124.  We shall deal with costs here and below on the basis of written submissions to be lodged, by the defendants within 14 days hereof, by the plaintiffs within 14 days thereafter, and by the defendants in reply within 7 days thereafter.