HONGKONG ZHONGXING GROUP COMPANY LTD v. GRAND FIELD GROUP HOLDINGS LTD

HCMP 3278/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3278 OF 2013

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J U D G M E N T

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1.  On 5 December 2013 the Plaintiff, which is a shareholder in the Defendant, issued an originating summons seeking an order under section 168BC of the former Companies Ordinance, cap. 32, for an order permitting it to pursue a statutory derivative action against two former directors, Tsang Wai Lun Wayland and Kwok Wai Man Nancy (together the “Tsangs”). The Defendant is incorporated in Bermuda and is listed on The Stock Exchange of Hong Kong Limited. On 24 September 2014 the Plaintiff filed a summons to amend the originating summons to refer to sections 732 and 733 of the new Companies Ordinance, cap. 622, and in the alternative to seek leave to intervene in the action, HCA 2471 of 2008, that the Defendant had commenced against the Tsangs (“Action”).

2.  Shortly prior to the matter coming on for argument before me the Defendant undertook to proceed with the Action with due expedition.  The Plaintiff was willing to accept the undertaking.  The only issue remaining for argument was that of costs.  The relevant background can be summarised as follows.  The Tsangs were both convicted of two offences of conspiracy and one of dealing with property known or believed to represent the proceeds of an indictable offence in the District Court in March 2010 after a lengthy trial.  They appealed to the Court of Appeal.  The Court of Appeal quashed the first conviction but not the other two in November 2012.  In August 2013 the Tsangs sought leave to appeal to the Court of Final Appeal and leave was granted on 15 August 2013 in respect of the third conviction only.

3.  The Defendant says that as it explained in correspondence between solicitors in April and May 2013 that it was waiting for the outcome of the appeal before the Court of Appeal, which was successful, to decide whether to proceed with the Action.  The Defendant says that the Plaintiff was premature in issuing the originating summons.  It also says that the application was simply unnecessary.  The Defendant is incorporated in Bermuda which recognises common law derivative action, but does not have a statutory derivative action procedure or any statutory or procedural mechanism for approving a proposed common law derivative action.  The appropriate course was simply for the Plaintiff to commence a common law derivative action if it was unhappy with the Defendant’s conduct of the matter, which would have avoided the costs of the present application.

4.  In my view the position is as follows.  It is correct that on 8 May 2013 in reply to a letter from the Plaintiff’s solicitors dated 12 April 2013 the Defendant’s solicitors wrote stating that they understood the Tsangs had lodged an appeal and that they were awaiting the outcome of that appeal.  At that time I accept this was not unreasonable.  However, the contents of the remainder of the letter are tendentious and suggest a lack of enthusiasm for pursuing the Action.  The Defendant took no action after leave to appeal was refused by the Court of Appeal in respect of the second conviction for conspiracy to defraud and their response to the application was, until very shortly before the hearing, to contest it on the grounds that it was not in the Defendant’s interests to pursue it.  In my view this indicates that the Plaintiff’s position, namely, that the Defendant did not wish to prosecute the Action was reasonable as was their decision in the circumstances to issue the originating summons.

5.  The second matter raised by the Defendant is the necessity of the application at all.  Ms. Lau submitted that Ng J’s decision in Wong  Ming Bun v Wang Ming Fan [1] establishes that the procedural requirements to be satisfied before a derivative action can be commenced are those of its place of incorporation.  In the present case it is common ground that Bermuda only has a common law derivative action available to shareholders and, therefore, the proper course was for the Plaintiff to commence a common law derivative action.  I disagree.  Wong Ming Bun concerned a company incorporated in the British Virgin Islands.  The British Virgin Islands has codified the right of a shareholder to bring a derivative action.  Section 184C(1) of the BVI Business Companies Act 2004 provides a procedure for leave to commence such an action to be obtained by the court.  Ng J held that as the ability to bring a derivative action in Hong Kong in respect of a company incorporated overseas is a matter of the law of its place of incorporation[2] it was necessary for the plaintiff shareholder to obtain the consent of the BVI court.  It had not been.  Ms. Lau’s argument assumes that import of this conclusion is that a prospective plaintiff shareholder can only use the Hong Kong statutory derivative action procedure if something similar is available in the company’s place of incorporation in which case the approval has to be obtained there not Hong Kong.  In my view this is not correct.  In my view what Ng J has found is that a shareholder must establish that he could commence the proposed action in its place of incorporation and this involves establishing that he has done what the law of the place of incorporation requires him to do before commencing the action.  If there is nothing that law of the place of incorporation requires him to do before commencing proceedings it does not follow that a Hong Kong statutory derivative action is not available.

6.  During the argument before me on this issue reference was made by both counsel to a sentence in the decision of Ribeiro PJ in Waddington at 392I where he says this: The question of whether the leave of the court is required is a procedural question governed by the lex fori.  There was some debate concerning whether the decision in Wong Ming Bun was consistent with this.  It seems to me that the answer to this issue is probably, I do not have to decide it in the present case, as follows.  The first question is whether or not a shareholder has done what is required in the place of incorporation before commencing a derivative action.  That  is the issue considered in Wong Ming Bun.  The second issue is whether Hong Kong law requires him to do anything more.  If he wishes to bring a common law derivative action the answer is no.  He has, however, the option of bringing a statutory derivative action and if he wishes to do so he must comply with the requirements of the Companies Ordinance.  If he has already obtained in the place of incorporation a similar approval to that to be found in sections 732 and  733 in practice an application before this Court is likely to be uncontroversial.

7.  In these circumstances in my view the costs of the originating summons should be paid by the Defendant to the Plaintiff on a party and party basis, with a certificate for one counsel.