NINA KUNG v. TAN MAN KOU AND ANOTHER

FACV No. 6 of 2004

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 6 OF 2004 (CIVIL)

(ON APPEAL FROM CACV NO. 124 OF 2003)

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J U D G M E N T

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Mr Justice Bokhary PJ:

1. An important question of company law is involved in this appeal which arises out of a petition presented under s.168A of the Companies Ordinance, Cap. 32, complaining of unfair prejudice in the conduct of a company’s affairs.  The company concerned is Chime Corporation Limited (“Chime”).  It is a company within the well-known Chinachem Group.  Like the group as a whole, Chime had been controlled by the late Mr T.H. Wang.  On 10 April 1990 Mr Wang was abducted for ransom.  Sadly he later died at the hands of his captors.  In this appeal his widow is the appellant.  I will refer to her as “the widow”.  The administrators pendente lite of Mr Wang’s estate are the respondents to the appeal.  For reasons which will appear in a moment, I will refer to them as “the petitioners”.  And from now on my references to “respondents” will be to respondents to the petition.

2. On 31 July 2001 the petitioners presented this s.168A petition seeking (i) the setting-aside of the allotments of shares in Chime made to the widow after Mr Wang’s abduction and (ii) the repayment of dividends paid on the shares so allotted.  They allege that the widow, to benefit herself at Mr Wang’s expense, took control of Chime by diluting his shareholding through those allotments. 

3. As can be seen, the loss complained of in the petition as originally presented is loss suffered directly by a shareholder, namely Mr Wang whose administrators pendente lite now petition.  Originally the petition was presented against five respondents, the widow being the first and Chime the second.  On 30 May 2002 the petitioners took out a summons for leave to amend the petition by joining another four respondents and adding further allegations and prayers for relief. 

In the courts below

4. On 6 May 2003 Kwan J permitted the joinder and some of the other amendments sought but disallowed the rest of them.  Then on 20 February 2004 the Court of Appeal (Ma CJHC and Stone J) permitted the amendments which she had disallowed.  For the reason which will be made apparent by the next sentence, I will call the amendments which Kwan J had disallowed but the Court of Appeal permitted “the CAL amendments”. The gist of the allegations made by the CAL amendments is that the widow had improperly procured Chime to advance loans totalling approximately $4.5 billion to Chinachem Agencies Limited (“CAL”), a company in which she is beneficially interested.  And the relief sought by the CAL amendments is that the widow be ordered to procure CAL to repay those loans to Chime or, further or alternatively, that the Chime directors be themselves ordered to pay to Chime whatever is outstanding under those loans.  The Chime directors are the widow and the 3^rd and 6^th to 9^th respondents.

Appeal against the CAL amendments

5. By leave of the Court of Appeal, the widow now appeals to us against their judgment permitting the CAL amendments.  Granting her such leave under the “question of law of great general or public importance” limb of s.22(1) of the Hong Kong Court of Final Appeal Ordinance, Cap 484, the Court of Appeal said this as to why they permitted the CAL amendments:

“ In so doing, this court held as a matter of principle that a shareholder was able to present [a s.168A petition] on the basis of wrongs directly committed against the company (but only indirectly committed against him) and claim for financial relief in relation to the damage suffered by the company even though he himself had not suffered any direct loss.  It was a part of our judgment that, as a matter of law, section 168A permitted relief to be claimed in the form of financial compensation in favour of the company.”

6. Whether the CAL amendments should have been permitted gives rise to a question of law.  Before stating that question, I propose to set out certain provisions of s.168A in full.  The section begins by providing as follows in subsection (1):

“  Any member of a company who complains that the affairs of the company are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members (including himself) or, in a case falling within section 147(2)(b), the Financial Secretary, may make an application to the court by petition for an order under this section.”

7. Subsection (2), dealing with what the court can do on a petition presented under the section, provides that:

“  If on any petition under this section the court is of opinion that the company's affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members, whether or not such conduct consists of an isolated act or a series of acts, the court may, with a view to bringing to an end the matters complained of -

(a)	make an order restraining the commission of any such act or the continuance of such conduct;
(b)	order that such proceedings as the court may think fit shall be brought in the name of the company against such person and on such terms as the court may so order;
(ba)	appoint a receiver or manager of the whole or a part of a company's property or business and may specify the powers and duties of the receiver or manager and fix his remuneration;
(c)	make such other order as it thinks fit, whether for regulating the conduct of the company's affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of a purchase by the company, for the reduction accordingly of the company's capital, or. otherwise.”

Question of law

8. The question of law is whether there is jurisdiction to make, on an unfair prejudice petition presented by a shareholder, an order for the payment of damages or compensation, or for the grant of restitution, to the company itself. 

Jurisdiction in the practical sense

9. Whenever a question of jurisdiction arises, it is to be remembered that the jurisdiction of a court or tribunal can mean either one of two things.  This was pointed out by Sir Richard Scott VC (as Lord Scott of Foscote then was) in Edge v. Pensions Ombudsman [1998] Ch 512 at p.519 B-C.  Jurisdiction can be a reference to “the type of case that the court or tribunal is capable of entertaining”.  Or it can be a reference to “the circumstances in which it is proper for [the court or tribunal] to entertain a case or to make a particular order”.  I would describe the first as jurisdiction in the theoretical sense and the second as jurisdiction in the practical sense.

Cases on the inter-relationship between unfair prejudice petitions and derivative actions

10. Both Mr Robin Potts QC for the widow and Mr Robert Hildyard QC for the petitioners have helpfully addressed us on a number of cases on the inter-relationship between unfair prejudice petitions and derivative actions.  I will not discuss all the cases.  But I will discuss those which, in my view, best inform, in one way or the other, the answer to be given to the question of law identified above. 

11. In Re Kong Thai Sawmill (Miri) Sdn Bhd [1978] 2 MLJ 227 the Privy Council was concerned with s.181 of the Malaysian Companies Act 1965.  Under that section shareholders could seek relief where the affairs of a company were being conducted in a manner oppressive to them or in disregard of their interests.  Their Lordships’ advice was delivered by Lord Wilberforce.  He said (at p.229 G-H, first column) that “if a case of ‘oppression’ or ‘disregard’ is made out, the section applies and it is no answer to say that relief might also have been obtained in a minority shareholders’ action”.  As it happens, however, the claim in that case failed because none of the complaints were substantiated.  So it was unnecessary for their Lordships to say anything more about the inter-relationship between such petitions and such actions.

12. Re a Company (No. 005287 of 1985) [1986] 1 WLR 281 was a case of a petition presented under s.459 of the Companies Act 1985.  At p.284 D-H Hoffmann J (as Lord Hoffmann then was) said:

“It is accepted that on the facts alleged in the petition, the truth of which, of course, remains to be tried, the petitioners would be able to mount a derivative shareholders' action of the kind exemplified by Wallersteiner v. Moir [1974] 1 W.L.R.991 against H. in order to require him to account for such of the company's assets as he may have disposed of without authority. But it is said that such an action should be commenced separately by writ and that it would not be proper to seek the equivalent relief within a petition under section 459.

Looking at the matter from a practical point of view that does not seem to me to be very convenient. It would mean separate proceedings having to be commenced by writ and separate pleadings delivered in respect of matters which would very substantially overlap, if not duplicate, the issues canvassed in the petition and affidavits under section 459. It would then be necessary for both sets of proceedings to be heard together. I would be reluctant to come to the conclusion that this form of duplication was necessary unless it was clear that the jurisdiction under sections 459 and 461 did not permit the whole matter to be dealt with upon the petition. It seems to me that although it is true that section 462(2) shows that the normal order under section 461 will be an order against the company or another member, there is no reason why the words of section 461(1) should not be given their full effect and allow the court to give relief in respect of a complaint that the company's affairs have been conducted in a manner unfairly prejudicial to the interests of members, even when this would involve giving relief against a respondent who is no longer a member. For that reason, I am not willing to strike out H. as a party to the petition.”

As can be seen, that was said in the context of a refusal to strike out.

13. Eight months later Hoffmann J decided Re Posgate & Denby (Agencies) Ltd [1987] BCLC 8, a motion for an interlocutory injunction to restrain the disposal of a substantial part of the company’s business until the hearing of a s.459 petition which sought a final injunction to restrain such disposal until the transaction had been approved by shareholders.  Dismissing the motion, Hoffmann J said this (at p.15d):

“One cannot literally ask whether damages would be an adequate remedy because s.461 does not provide for an award of damages at common law.  But the section allows the court to order various forms of financial compensation.  For example, respondents can be ordered to buy the petitioner’s shares at a price which reflects the value they would have had if the unfairly prejudicial conduct had not taken place.”

Further down same page at h, he expanded upon the nature of such financial compensation, saying:

“If I refuse the injunction and the transaction turns out on the hearing of the petition to have been unfairly prejudicial to the petitioner, he can in my judgment be fully compensated by orders which enable him to receive the value his shares would have had if the transaction had not taken place.”

14. Hoffmann J’s decision in Re a Company (No. 005287 of 1985) was discussed by Millett J (as Lord Millett then was) in Re Charnley Davies Ltd (No. 2) [1990] BCLC 760, a case of a petition presented under s.27 of the Insolvency Act 1986.  As one sees at pp783i-784a, Millett J shared Hoffmann J’s view that the availability of a derivative action did not bar s.459 relief, but added this (at p.784a-b):

“The very same facts may well found either a derivative action or a s.459 petition. But that should not disguise the fact that the nature of the complaint and the appropriate relief is different in the two cases. Had the petitioners' true complaint been of the unlawfulness of the respondent's conduct, so that it would be met by an order for restitution, then a derivative action would have been appropriate and a s 459 petition would not.”

15. Millett J’s decision is identified in Gower and Davies: Principles of Modern Company Law, 7^th ed. (2003) at pp 513-514 as an attempt to address a difficult problem.  On the one hand, there are the cases in which the courts have refused to accept that the availability of a derivative action bars an unfair prejudice petition.  But, on the other hand, there are the policies underlying the standing requirements for shareholders to bring derivative actions.  Do these policies fall away when a shareholder presents a petition instead of issuing a writ?

16. In Kumagai Gumi Co. Ltd v. Zenecon Pte Ltd [1995] 2 SLR 297 the Court of Appeal of Singapore dealt with s.216 of the Singaporean Companies Act under which shareholders could seek relief against oppression or disregard of interests.  They held that that section was wide enough to cover an order to make good loss suffered by the company.  Looking in particular at p.318 F-G, this conclusion appears to be based essentially on the view that the section is “very wide”.

17. To be contrasted with that conclusion is the one to which the Supreme Court of Ireland came in Irish Press plc v. Ingersoll Irish Publications Ltd [1995] 2 ILRM 270.  Under s.205 of the Irish Companies Act 1963 shareholders could seek relief against oppression or disregard of interests.  Blayney J, with whom the other members of the Supreme Court of Ireland agreed, said this (at pp 279-280):

“It was also submitted that the provisions of s. 205(3) were so wide that they would permit damages to be awarded. I am unable to agree. First, an award of damages would not satisfy the condition that the order be made ‘with a view to bringing to an end the matter complained of’ secondly, an award of damages is a purely common law remedy for a tort, breach of statutory duty or breach of contract, and acts of oppression would not come within any of these categories, and finally, if [the legislature] had intended to include the remedy of damages as one of the reliefs which could have been granted, there would have been no difficulty in doing so, and it is quite clear that this was not done.”

18. Reverting to the English cases, I come to Lowe v. Fahey [1996] 1 BCLC 262.  The s.459 petition there sought, among other relief, payment to the company of all such sums as may be found due to it upon the taking of an account and/or damages.  A respondent sought the striking-out of the petition as against it, arguing that the claim was a derivative one to be pursued only in a derivative action.  Dismissing the striking-out application, Deputy Judge Aldous QC said this (at p.268 a-c):

“In my judgment, where for example the unfairly prejudicialconduct involves the diversion of company funds, a petitioner is entitled as a matter of jurisdiction to seek an order under s 461 for payment to the company itself not only against members, former members or directors allegedly involved in the unlawful diversion, but also against third parties who have knowingly received or improperly assisted in the wrongful diversion. This is not to say that in a case where the only substantive relief being sought was a claim on behalf of the company against such a third party that a claimant could always proceed by petition instead of derivative action.”

19. In the Australian case of Fexuto Pty Ltd v. Bosnjak Holdings Pty Ltd [2001] 37 ACSR 672, the Court of Appeal of New South Wales acted under s.260 of their Corporations Law.  The section empowered the court to make such orders as it thought fit to relieve shareholders against oppression, unfair prejudice, unfair discrimination or conduct contrary to interests.  It was ordered that the plaintiff be bought out if it opted for a buy-out.  And the price, it was ordered, would be ascertained on the basis of certain accounts having been taken and the amounts found due having been paid to the company.  To cater for the position that would arise if the plaintiff opted not to be bought out, it was ordered that in that event those accounts would be taken and the amounts found due would be paid to the company.

20. I turn now to a Scottish case, Anderson v. Hogg 2002 SC 190, decided by the Inner House of the Court of Session.  There a shareholder petitioned under s.459 against the managing director seeking repayment by him to the company of allegedly unauthorised salary, bonus, redundancy and other payments totalling over £100,000.  The first instance judge refused relief, holding that the respondent had acted in good faith and that, even if his conduct had been unlawful to any extent against the company, it did not follow that the petitioner had been treated unfairly.  He also said that the correct procedure would have been a derivative action.  The petitioner appealed in respect of the redundancy payment.  By a 2:1 majority, his appeal succeeded to the extent of £20,000.

21. One of the appellate judges was firmly of the view (as appears at p.196H) that “even where the facts would readily have warranted a derivative action, a petition under s.459 is not barred”. 

22. But the other appellate judge forming the majority was more guarded in his view on the point, saying this (at p.200 A-C):

“No question, in my view, arises about the competency of the petition. The remedies provided by secs 459 and 461 of the 1985 Act are, however, discretionary and a question may arise as to the appropriateness of granting the prayer of the petition. It was on that basis that the Lord Ordinary indicated that, even if he had been satisfied that the payments in question demonstrated unfairness, he would not have been inclined to grant any order under sec 461. While it may be (though there are arguments either way) that the petitioner could effectively have used other means, including invoking internal company mechanisms, to advance the matters complained of, this petition proceeded without challenge to a proof before answer at which these matters were addressed in evidence and submission. It would, in my view, be highly unfortunate if at that stage (and a fortiori after the hearing of a reclaiming motion) the court were to refuse a remedy simply because alternative mechanisms might have been invoked.”

And the dissenting appellate judge said this (at p.202 A-D):

“Before turning to the issue of unfairness, I should say that in my opinion this is not a case in which recourse to sec 459 of the 1985 Act, or an order under sec 461, can be regarded as appropriate. If the petitioner considered that the payment of £50,000 (or at least £20,000 thereof) was unlawful, I see no reason for his not having attempted to have proceedings brought by the company for recovery of the sum in question. Even if one assumes that Mrs Hogg would wish her husband to receive the £50,000, and would vote accordingly, I see no basis for assuming that the other shareholder, Mrs Scrimgeour, owning 25 per cent of the shares, would prefer that Mr Hogg should keep the £50,000 in full: like Mr and Mrs Anderson, she might well prefer that sum to be restricted, so that more would remain for herself as a shareholder. In my opinion, these are matters which ought to be tested by ordinary means, before recourse to the courts under secs 459 and 461 of the 1985 Act. While I think it worthwhile to mention these matters, and indeed to note that the petition was not even served upon Mrs Scrimgeour or the other shareholders, I do not think it necessary or appropriate to go so far as to hold that the petition is incompetent.”

23. This brings me to the decision of the English Court of Appeal in Clark v. Cutland [2003] 2 BCLC 393.  The broad circumstances of that case may be taken from Arden LJ’s judgment where she said this (at p.396 b-d):

“So far as material, Mr Clark and Mr Cutland were equal shareholders in the company. At all material times, they were also the only directors of the company. The judge found that, without Mr Clark's knowledge, Mr Cutland had misappropriated from the company sums totalling £517,734. The exact method of his misappropriation is not material for present purposes. When the misappropriation came to light, Mr Clark commenced a derivative action on behalf of the company against the trustees to recover the moneys which had been misapplied. Later he commenced unfair prejudice proceedings under s 459 of the 1985 Act. The derivative action was in due course consolidated with the unfair prejudice proceedings but it was in the latter proceedings that relief was ultimately granted.”

Although Arden LJ spoke in that passage (and also elsewhere in her judgment) of the s.459 petition and the derivative action having been “consolidated”, I think that what might really have happened is that they were ordered to be tried at the same time.  But that would not detract from the point which I understand her to have been making.  This is that it was material that there was a derivative action as well as a s.459 petition.  Thus she pointed out (at p.397 e-f) that the trial judge had

“concluded that it was appropriate for him to treat the petition as if it were a derivative action, particularly as there was a derivative action in the background with which the petition had been consolidated”.

24. Where an unfair prejudice petition and a derivative action have been tried at the same time, no one is likely to achieve anything of substance by complaining on appeal that the trial court’s formal order had been drawn up in a form which grants the company relief in the petition rather than in the action.  Even if the appellate court were willing to entertain such a complaint, I cannot envisage it doing anything more than simply varying the form without disturbing the substance.

25. Finally in this discussion of the cases, I turn to Atlasview Ltd v. Brightview Ltd [2004] 2 BCLC 191.  There the complainants issued two sets of proceedings on identical allegations of fact.  One was a petition presented under s.459 of the Companies Act 1985 and s.27 of the Insolvency Act 1986.  And the other was an action for breach of contract.  In the course of deciding against the respondents’ application to have the petition struck out on the basis that it sought to recover reflective loss, Deputy Judge Crow said this (at p.208 c-d):

“It would also fly in the face of common sense to suggest that the court, in exercising its discretion under s 459, would necessarily decline any relief in such a case, and would require the minority shareholders instead to bring a derivative action, seeking payment to be made to the company in respect of the entire loss it had suffered: by that route, the defendant transferees would be having to make a payment to the transferor company, the bulk of which they would then recover in their capacity as majority shareholders. That hardly seems like a desirable route for compensating those who have in fact suffered the loss.”

That, if I may say so without any disrespect whatsoever to the learned Deputy Judge, may go to show that serious problems can result from impatience with a call for resort to a derivative action as well as or in lieu of an unfair prejudice petition.  When Mr Hildyard showed us that statement by the learned Deputy Judge, the problem with it was immediately pointed out by Lord Scott of Foscote NPJ.  What about the company’s creditors and, indeed, the revenue if money due to the company by-passes its coffers and goes straight into the shareholders’ pockets instead?  No satisfactory answer was forthcoming.

Foss v. Harbottle

26. So far I have not made express reference to Foss v. Harbottle (1843) 2 Hare 461 itself in which Sir James Wigram VC famously laid down the rule that, subject to certain exceptions, only the company itself can sue for a wrong done to it.  As to the operation of that rule in a context like the present, the following observation is made in Palmer’s Company Law, 25^th ed. (July 2004), Vol. 1, p.8199, para. 8.904:

“If, as seems to be the case, the courts are committed to the principles underlying the rule in Foss v. Harbottle, then it is not to be expected that they would wish to undermine those principles by permitting minority shareholders routinely to obtain by petition that which is not available in an action begun by writ.”

As to the objections generally to the circumvention of the rule in Foss v. Harbottle by the inappropriate use of an unfair prejudice petition, I need say no more than that I agree with what is said in the judgment prepared by Lord Scott which I have had the advantage of reading in draft. 

Answer to the question of law

27. Having noted the observations in Gower and Davies and in Palmer cited above and having examined the foregoing cases, I now answer the question of law in this appeal.  Is there jurisdiction to make, on an unfair prejudice petition presented by a shareholder, an order for the payment of damages or compensation, or for the grant of restitution, to the company itself?  I would not say that there is no such jurisdiction in the theoretical sense of the type of case that the court is capable of entertaining.  And even in the practical sense of the circumstances in which it is proper for the court to entertain the case or to make a particular order, I stop short of saying that there is absolutely no such jurisdiction.  I would not rule out the possibility of circumstances in which it can be seen that such an order could properly be made.  But such circumstances, even if they can arise, would in any case of complexity be rare and exceptional.

28.  No such circumstances have arisen in the present case.  Quite apart from anything else undesirable, pursuing relief in respect of the CAL loans by way of an unfair prejudice petition rather than by way of a derivative action would entail the risk of the respondents or one or more of them facing a claim for such relief in a derivative action after the petitioners had failed to obtain the same in the petition.  I hold that the CAL prayers for relief should not have been permitted.  The CAL allegations, however, were rightly permitted.  They are relevant on the question of whether there has been unfairly prejudicial conduct.  As we have seen, one of the things which a court hearing a s.168A petition is expressly empowered by the section to do is to order that proceedings be brought in the name of the company.  As it happens, the petitioners have taken the precaution of issuing and then re-newing a protective writ for a derivative action.  The court hearing the s.168A petition in the present case could, if it appears appropriate to do so, order that the CAL relief be pursued in that derivative action.

The real dispute and management of the petition

29. I am in complete agreement with what Lord Scott says as to what is the real dispute between the parties and the management that this petition requires. 

Result

30. For the foregoing reasons and those given by Lord Scott, I would allow the appeal so as to:

(a)    disallow the CAL prayers for relief (i.e. prayers 3.2 to 3.5 inclusive) while leaving the CAL allegations (i.e. paras 44.1 to 44.5 inclusive) undisturbed; and

(b)    substitute for the order as to costs made by the Court of Appeal an order nisi leaving the parties to bear their own costs here and in the courts below. 

I would direct: (i) that the order nisi become absolute 21 days after the handing down of judgment in this case unless before then the Registrar of this Court has received a written submission containing full reasons seeking some other order as to costs; and (ii) that if such a written submission is so received, procedural directions on how the costs concerned are to be dealt with be made by the Registrar, subject to her discretion to refer the question of such directions to a single Permanent Judge. 

Mr Justice Chan PJ:

31. I agree with the judgment of Mr Justice Bokhary PJ and the judgment of Lord Scott of Foscote NPJ.

Mr Justice Ribeiro PJ:

32. I agree with the judgment of Mr Justice Bokhary PJ and the judgment of Lord Scott of Foscote NPJ.

Mr Justice Mortimer NPJ:

33. I agree with the judgment of Mr Justice Bokhary PJ and the judgment of Lord Scott of Foscote NPJ.

Lord Scott of Foscote NPJ:

The background

34. This appeal, notwithstanding that it is merely an interlocutory appeal against an order giving leave to amend a pleading, has raised an issue both of general importance and of difficulty.  The issue is as to the scope of the orders that can properly be made on petitionsunder ss 168A(1) and (2) of the Companies Ordinance, Cap. 32.  The proposed amendment, refused at first instance by Kwan J but allowed by the Court of Appeal (Ma CJHC with whose judgment Stone J agreed), sought an order requiring a monetary payment (some $4.5 billion) to be made to the company, Chime Corporation Ltd (“Chime”) by the principal respondent to the petition (Mrs Wang) and other respondents.  Chime’s affairs, so it is alleged, are being or have been conducted in a manner unfairly prejudicial to the interests of Mr Wang (now presumed to be dead) or of those now entitled to succeed to his interests. 

35. The issue has been formulated by Mr Potts QC, in his written skeleton submissions to this Court on behalf of Mrs Wang, as follows :

“whether [s. 168A] confers jurisdiction upon the Court to make … an order for the payment of damages or compensation or for the grant of restitution by a respondent to the petition to the company.”　

Mr Hildyard QC, for the petitioners, the joint administrators pendentelite of Mr Wang’s estate, broadly accepted this formulation of the issue.  But I would, for my part, express it rather differently.  The issue in this case is not, I think, whether the court, in exercise of its s.168A jurisdiction, can order a respondent to make a monetary payment, or to make some other form of restitution, to the company, but, rather, whether the court can, on a s.168A petition, deal with and dispose of a cause of action for damages or restitution that is vested in the company and, if it can do so, in what circumstances it should do so. 

36. There are three allegations, and consequential claims for relief, to be found in the petition that raise this issue.  Only one is the subject of this appeal but the point at issue needs to be considered in relation to each of them. 

(i)   It is alleged that a loan of some $4.5 billion was procured by Mrs Wang and her co-directors of Chime to be made by Chime to Chinachem Agencies Ltd (“CAL”) at some time between 1990 and 2000.  This loan was, it is alleged “made for a collateral and/or improper purpose and/or was not made in the best interests of Chime and/or was made in breach of the directors’ fiduciary duties to Chime”.  This is a clear and unequivocal allegation of a wrong to Chime that, if the allegation is well-founded, would entitle Chime to a cause of action for damages against the delinquent directors.  If CAL had been complicit in the breach of duty, Chime would have a cause of action also against CAL.  And, in any event, Chime could claim repayment of the loan from CAL and sue CAL on the debt.  But the petition seeks anorder that MrsWang, and the other directors, “be ordered jointly and severally to pay to Chime the $4.5 billion loan” as well as to pay, in effect, damages to Chime for loss caused to Chime by the making of the loan (see paras (3.2) and (3.3) of the amended petition).  Leave to amend the petition so as to make this allegation and claim the relief to which I have referred was refused by Kwan J but granted by the Court of Appeal. 

 (ii)  An amendment allowed by Kwan J, whose order to that effect of 6 May 2003 was not appealed, alleges that MrsWang and her co-directors of Chime had improperly caused Chime to incur legal costs in participating in the interlocutory proceedings in the petition “beyond that which is necessary or expedient in the interest of Chime as a whole”.  It is alleged that in consequence they, the directors, “are liable to repay to Chime the costs incurred by Chime by reason and/or on account of such improper participation”.  This, too, is an unequivocal allegation of a breach of duty owed by the directors to Chime and a request that the directors be ordered to pay to Chime the loss thereby caused. 

(iii)  An amendment allowed by Kwan J by an order of 17 June 2004, made in reliance on the principles expressed by Ma CJHC in his interlocutory judgment of 20 February 2004 which is now under appeal, alleged that in the period 1990 to 2000 excessive directors’ remuneration waspaid to MrsWang and other directors not only by Chime but also by five specified subsidiaries of Chime.  It is alleged that these payments constituted “a misappropriation of assets to which Chime (directly or through its subsidiaries) was entitled …”.  The relief claimed includes an order that the recipients of the allegedly excessive remuneration “be ordered to repay to the said companies such portion of the remuneration which is found to have been paid and/or received … which the court considers to have been excessive or otherwise unfairly prejudicial”.  This amendment, too, asserts breaches of duty to the respective companies and seeks orders for compensatory payments to be made to the companies. 

37. There are a few other features of the petitionin its current state to which I should draw attention.

(i)     The main allegation in the petition in its original form was that MrsWang had utilized the control of Chime that in her husband’s absence she had been able to exercise, first, by bringing about the passing of resolutions at general meetings of Chime the effect of which was to dilute Mr Wang’s shareholding in Chime from 56.67%to 0.09% and to increase her own shareholding correspondingly and, second, by then bringing about the payment to herself of very substantial sums in the form of dividends from Chime attributable to the increased shareholding that she had obtained for herself.  The allegation is that this allotment of shares to herself was not only unfairly prejudicial to Mr Wang but was also unlawful in being in breach of Chime’s Articles of Association, in particular Article 35 of Table A under which a similar number of shares should have been offered also to Mr Wang.  It is to be noted that, according to para. 31 of the petition,MrsWang paid Chime a total sum of $1.5 billion for the allotment of the shares.  So, whatever the rights or wrongs of the allotment as between the shareholders, the allotment constituted a substantial injection of additional share capital into Chime. 

(ii)     The petition, as amended pursuant to Kwan J’s order of 17 June 2004, sought an order against CAL for repayment to Chime of the $4.5 billion loan.  But CAL is not a party to the petition.  Moreover, theeffect the repayment would have on the business of the Chinachem group as a whole and whether, objectively speaking, the repayment would be in the interest of Chime is not known. 

(iii)     None of the five subsidiaries, whichallegedly paid excessive remuneration to directors and to whichrepayment of the excessive amount is sought, is a party to the petition.  None is a party to the proceedings in which misappropriation of its assets is alleged and repayment to it of the amount of the misappropriation is sought. 

38. There is some associated litigation that warrants mention

(i)     At the time of Mr Wang’s disappearance, 19,998 ‘A’ shares in Chime stood in the name of Mr Tai Ching Ping (“Mr Tai”).  Shortly thereafter Mr Tai transferred the shares to Mrs Wang.  There is a current issue as to whether Mr Tai held the shares on trust for Mr Wang or for Mrs Wang.  This issue is the subject of a separate action between the s.168A petitioners and Mrs Wang.  But the issue is raised also in the petition in which the transfer of the shares to Mrs Wang is pleaded as an example of her conduct unfairly prejudicial to Mr Wang.

(ii)    On 31 July 2003 the petitioners issued a writ (HCA 2836 of 2003), by way of derivative action, making the same allegations against Mrs Wang regarding the loan to CAL as those alleged in the amendments allowed by the Court of Appeal.  The writ has not been served.  It has been described as a “protective” writ, intended to be proceeded with only if this appeal should succeed.

(iii)    And, finally, I should mention the probate proceedings instituted by Mrs Wang for the purpose of obtaining probate of an alleged will of Mr Wang under which she is named as the beneficiary entitled to his estate.  Under an earlier will Mr Wang’s father (Mr Wang Snr) is named as the sole, or main, beneficiary of the estate.  At first instance and in the Court of Appeal Mrs Wang failed to establish her will.  But an appeal is, as I understand it, due to be heard in this Court sometime next year. 

I can now return to the main issue on this appeal. 

Section 168A

39. There is no doubt about the width of the statutory language of s.168A(2).  The court may, with a view to bringing to an end the matters complained of, grant an injunction (para. (a)), or order a derivative action to be brought (para. (b)), or appoint a receiver or manager of the company (para. (ba)), or

“(c)

make such other order as it thinks fit, whether for regulating the conduct of the company’s affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of a purchase by the company, for the reduction accordingly of the company’s capital, or otherwise.”

The view has been expressed in relation to ss 459 and 461 of the United Kingdom’s Companies Act 1985, under which the court “may make such order as it thinks fit for giving relief in respect of the matters complained of” (s.461(1)), that “… the greatest possible flexibility was intended by the legislature to be given to the courts” (per Lindsay J in Re Little Olympian Each-Ways Ltd [1994] 2 BCLC 420 at 424).  Lindsay J said that the history of the legislation, from s.210 of the Companies Act 1948 down to ss 459 and 461 of the 1985 Act, was :

“… at least consistent with there having been engendered in the legislature by 1985 a sense that the thing to do was to give a very wide jurisdiction and to let the courts get on with it.”　

The same could perhaps be said of s.168A. 

40. The fact, however, that the terms of a statute create or confer a jurisdiction in very wide terms does not necessarily mean that the courts have an unlimited jurisdiction to make any orders that are within the wide statutory terms.  This point was made by Pickford LJ in Guaranty Trust Company of New York v Hannay [1915] 2 KB 536.  The point arose out of an issue as to whether the court had jurisdiction to grant an injunction to restrain the institution or continuance of proceedings in a foreign court (see p.556).  At p.563 Pickford LJ said this

“The word ‘jurisdiction’ and the expression ‘the Court has no jurisdiction’ are used in two different senses which I think often leads to confusion.  The first and, in my opinion, the only really correct sense of the expression that the Court has no jurisdiction is that it has no power to deal with and decide the dispute as to the subject-matter before it, no matter in what form or by whom it is raised.  But there is another sense in which it is often used, i.e., that although the Court has power to decide the question it will not according to its settled practice do so except in a certain way and under certain circumstances.” 　

The same point was made by Diplock LJ in Garthwaite v. Garthwaite [1964] P 356.  He referred at p.387 to the distinction drawn by Pickford LJ.  He said :

“In its narrow and strict sense, the ‘jurisdiction’ of a validly constituted court connotes the limits which are imposed upon its power to hear and determine issues between persons seeking to avail themselves of its process by reference (1) to the subject-matter of the issue or (2) to the persons between whom the issue is joined or (3) to the kind of relief sought, or to any combination of these factors.  In its wider sense it embraces also the settled practice of the court as to the way in which it will exercise its power to hear and determine issues which fall within its ‘jurisdiction’ (in the strict sense) or as to the circumstances in which it will grant a particular kind of relief which it has ‘jurisdiction’ (in the strict sense) to grant, including its settled practice to refuse to exercise such powers, or to grant such relief in particular circumstances.” 　

41. It goes without saying that, unless under s.168A the courts have jurisdiction, in the strict sense, to entertain complaints of conduct which constitutes common law or equitable wrongdoing against the company and to grant the company the remedy to which it would be entitled if it had sued the wrongdoer for the wrongdoing in question, the prosecution of such a complaint in a s.168A petition in order to obtain such a remedy should not be allowed.  But the converse does not necessarily follow.  It should not be enough, in my opinion, to show that the court has jurisdiction in the strict sense.  It should be necessary also to show that the claim for the remedy in question is one that, as a matter of proper practice, the court should, if the relevant underlying allegations are made good, grant.  Edge v Pensions Ombudsman [2000] Ch 602 is illustrative of the point, s.146(1) of the Pension Schemes Act 1993 conferred on the ombudsman power to “investigate and determine any complaint” made to him by, among others, members of occupational pension schemes and to “investigate and determine any dispute of fact or law which arises in relation to such a scheme” (emphasis added).  On an appeal to the High Court from a determination made by the pensions ombudsman under the section one of the issues that arose was whether the ombudsman had had jurisdiction to determine the particular dispute that had been referred to him and to make the particular order thereon that he had made.  The Court of Appeal at p.643 cited with approval the following passage from the judgment which I had given at first instance in allowing the appeal from the ombudsman :

“In its strict sense a reference to the jurisdiction of a court or tribunal is a reference to the type of case that the court or tribunal is capable of entertaining.  A reference to the jurisdiction of a court or tribunal is, however, often a reference to the circumstances in which it is proper for a tribunal to entertain a case or to make a particular order.”　

The Court of Appeal held that the investigation and determination that the ombudsman had embarked upon was one that, properly advised, he should not have undertaken.  They said :

“We do not hold that, in the strict sense, there was absence of jurisdiction to entertain the complaint; rather, that the ombudsman, in the exercise of his discretion, should have declined to do so.”  (p.642H)　

42. Whether or not a court hearing an “unfair prejudice” petition has jurisdiction in the strict sense to order a respondent against whom a breach of duty to the company has been established to pay compensation, or to make restitution, to the company, there is no doubt at all that in many cases the jurisdiction to do so has been assumed, that many orders of that sort have been made and that it is highly convenient that they should have been made.  A good example is in Re A Company (No. 005287 of 1985) [1986] 1 WLR 281.  The company was a family company the shares in which were held by members of the family.  One of them, H, acquired a controlling interest and, according to the other shareholders, conducted the company’s affairs in a manner unfairly prejudicial to their interests.  They said he had made, or had caused to be made, various payments of the company’s money to himself without authority and in breach of his duty to the company.  A s.459 petition was launched.  The relief sought included an order that H repay to the company the payments that had been made to him without authority.  The judge, Hoffmann J (as he then was), referred to s.461(1) under which the court if satisfied that the petition is well founded, may make “such order as it thinks fit for giving relief in respect of the matters complained of” and commented that :

“Those words appear to give the widest possible discretion.”　

Hoffmann J noted also that the facts alleged in the petition would, if true, have enabled the petitioners to mount a derivative action in the company’s name for the repayment of the company’s money that had been paid to H without authority and commented on the argument that the petitioners should have sought the order for repayment in a separate derivative action rather than in the unfair prejudice petition.  He said :

“Looking at the matter from a practical point of view that does not seem to me to be very convenient.  It would mean separate proceedings having to be commenced by writ and separate pleadings delivered in respect of matters which would substantially overlap.”  (p.284)　

43. In para. 9.40 of the United Kingdom Law Commission’s Consultation Paper on Shareholders’ Remedies (Paper No. 142) the authors noted that :

“A number of successful cases have been brought under section 459 on the basis that there has been a deliberate diversion of a company’s business by those in control to another business owned by them, or that there has been misappropriation of company assets.  These cases illustrate the fact that proceedings are brought under section 459 to obtain a personal remedy for what are effectively breaches of fiduciary duty.”

A footnote to this paragraph gives the interesting statistic that “41% of 156 petitions filed in 1994-1995 involved such allegations”. 

44. A few other recent cases are worth mentioning.  Lowe v Fahey [1996] 1 BCLC 262 was a s.459 case in which one of the allegations was that the allegedly delinquent directors had diverted the company’s business and assets to another company in which they were interested.  The relief sought included an order that the directors and their company be ordered to repay to the victim company “all sums that might be found to be due to it and/or … damages”.  An application was made to strike out the petition on the ground that it was being used as a vehicle to bring a derivative action.  The strike out application was dismissed.  Charles Aldous QC, sitting as a deputy judge in the Chancery Division of the High Court, said this :

“… where for example the unfairly prejudicial conduct involves the diversion of company funds, a petitioner is entitled as a matter of jurisdiction to seek an order under s.461 for payment to the company itself not only against members, former members or directors allegedly involved in the unlawful diversion, but also against third parties who have knowingly received or improperly assisted in the wrongful diversion.  This is not to say that in a case where the only substantive relief being sought was a claim on behalf of the company against such a third party that a claimant could always proceed by petition instead of derivative action.”

45. Clark v Cutland [2003] 2 BCLC 393 is a decision of the Court of Appeal in England in which an order appears to have been made in a s.459 petition for the repayment to the company of money improperly misappropriated.  The value of the case as an authority on the jurisdiction point is, however, reduced by the circumstance that a derivative action in the name of the company for the recovery of the money had also been commenced and had been, as Arden LJ put it, “consolidated with the unfair prejudice proceedings …”.  But the order for repayment had, she said, been granted in the s.459 proceedings (see para. 2 of her judgment).  Arden LJ is highly experienced in the company law field and it is noteworthy that she plainly thought that it did not matter in the least whether the order for repayment to the company had been made in the derivative action or in the s.459 proceedings. 

46. Atlasview Ltd v Brightview Ltd [2004] 2 BCLC 191 was a case in which both a s.459 petition and a breach of contract action with identical factual allegations had been instituted.  Mr Jonathan Crow, sitting as a deputy judge in the Chancery Division, held that although a shareholder in an ordinary action for damages could not recover his “reflective” loss as a shareholder that had been caused by a wrong to the company in which he held the shares (see Prudential Assurance Co. Ltd v Newman Industries Ltd (No. 2) [1982] 1 Ch 204), that loss could be recovered via a s.459 petition.  He said :

 “The fact that the impugned conduct might give rise to a cause of action at the suit of the company does not mean that it is incapable also of giving rise to unfair prejudice : nor does it necessarily preclude the court from awarding financial compensation to the petitioners in satisfaction of their claim.”

He went on :

“In deciding on the appropriate form of relief, the trial judge will no doubt be astute to ensure that the B shareholders do not achieve double recovery by receiving financial compensation directly from the A shareholders and also retaining their B shares in Brightview in circumstances where the company is able (if it is) to recover in respect of the same loss.”  (para. 63 of his judgment)

The deputy judge was plainly of the view that it was obvious that the court’s jurisdiction on a s.459 petition would enable the court to order payment to the company of the compensation to which the company would at law have been entitled in a derivative action.  Whether the judge was right in holding also that s.459 enabled an order to be made for the payment by the wrongdoers of part of that compensation to the petitioners seems to me, if I may say so, highly questionable.  An order for payment or transfer of a part of the company’s assets to the petitioning shareholders is, I would think, an order that could only properly be made in a winding-up of the company, or as a distribution of the company’s profits, or as part of a reduction of the company’s capital (see s.168A(2)(c)).  Otherwise the interests of the company’s creditors would be at risk.  However, it is not necessary for present purposes to decide that point and the deputy judge’s judgment certainly stands as yet another authority for the width of the court’s jurisdiction, in a strict sense, on a s.168A petition.  

47. Mr Potts QC, submitting on behalf of the appellants that the court’s jurisdiction under s.168A ought not to be held to enable a petitioning shareholder to obtain an order for compensation to be paid to the company, relied very heavily on the decision of Millett J (as he then was), in Re Charnley Davies Ltd (No. 2) [1990] BCLC 760.  Millett J was concerned to distinguish between proceedings where the complaint was of unfairly prejudicial conduct of the company’s affairs and proceedings where the complaint was of breaches of duty to, or other misconduct actionable by, the company.  The distinction, he said, “does not lie in the particular acts or omissions of which complaint is made, but in the nature of the complaint and the remedy necessary to meet it”.  He went on :

“If the whole gist of the complaint lies in the unlawfulness of the acts or omissions complained of, so that it may be adequately redressed by the remedy provided by law for the wrong, the complaint is one of misconduct simpliciter.  There is no need to assume the burden of alleging and proving that the acts or omissions complained of evidence or constitute unfairly prejudicial management of the company’s affairs.  It is otherwise if the unlawfulness of the acts or omissions complained of is not the whole gist of the complaint, so that it would not be adequately redressed by the remedy provided by law for the wrong.  In such a case it is necessary to assume that burden, but it is no longer necessary to establish that the acts or omissions in question were unlawful, and a much wider remedy may be sought.”  (p.783)

As Hoffmann LJ (as he then was) was later to say in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at p.19 :

“Not only may conduct be technically unlawful without being unfair : it can also be unfair without being unlawful.” 

Millett J in Re Charnley Davies concluded that the essence of the petitioners’ complaint was not the unlawfulness of the respondent’s conduct, but its unfairness and its prejudicial disregard of their interest.  They wanted to be bought out, not to achieve payment of compensation to the company : “They wanted relief from mismanagement, not a remedy for misconduct” (p.784).  Millett J did not question the court’s jurisdictional ability on an unfair prejudice petition to make an order for payment of compensation, or for restitution to be made, to the company.  What he did question, and in my respectful opinion rightly so, was the propriety of seeking such an order on an unfair prejudice petition if the essence of the complaint was not of mismanagement of the company but of misconduct by the director.  In such a case, a derivative action was, in his view, the appropriate vehicle for relief. 

48. Mr Hildyard QC, for the petitioners, respondents to this appeal, was, in my opinion, correct in submitting that Millett J’s judgment in Re Charnley Davies did not support the proposition that the court on a s.168A petition lacked jurisdiction, in the strict sense, to make an order for payment to the company of compensation that could have been obtained by the company in a derivative action.  But I think Mr Potts QC was correct in submitting that if the essence of the complaint being made was of director’s misconduct, rather than of director’s mismanagement, Millett J’s judgment stands as authority for the proposition that the proper vehicle for seeking and obtaining such relief would be a derivative action, rather than a s.168A petition.

49. On these authorities, as well as a matter of principle, I conclude that there would be jurisdiction, in the strict sense, on the hearing of this s.168A petition for the court to grant the relief sought under the amendments regarding the CAL loan that were allowed by the Court of Appeal.  But I do not regard that conclusion as disposing of the issue raised by this appeal.  The issue is whether it would proper for the court on this petition to try, in effect, whatever cause of action Chime might have against Mrs Wang and the other directors for causing Chime to make the $4.5 billion loan to CAL and, if the allegations of their wrongdoing are established, to order them to make the payments to Chime that are due in respect of that cause of action. 

The facts as pleaded and the nature of this petition

50. The facts regarding the loan to CAL are at this stage unclear.  This Court can do no other than to proceed on the basis of the facts alleged in the petition, as at present pleaded, and such other facts as are undisputed or indisputable.  The loan was, it is pleaded, made in the period between 10 April 1990, the date of Mr Wang’s disappearance, and 30 June 2000.  The petitioners, or their predecessors in office, were appointed to represent Mr Wang’s estate on 15 March 2000.  In the period preceding their appointment Mrs Wang had purported to act on Mr Wang’s behalf by virtue of a power of attorney dated 7 November 1963.  Under an order granted by Yam J on 22 September 1999 Mr Wang was to be presumed to be dead.  The efficacy of the power of attorney, assuming its prior validity, would thereupon have come to an end. 

51. The $4.5 billion loan by Chime to CAL is pleaded to have been interest free and unsecured.  The pleading says that the loan was :

 “… a disproportionate sum to lend unsecured and without interest or defined repayment terms and was made for no proper or any commercial purpose.”  (para. 44.4.3 ibid)

52. A decision as to whether the making of this very substantial loan was a breach by the directors of their duty to Chime would require an investigation by the court into the following matters, as well no doubt as into others -

(i)   the relationship between Chime, CAL and the other companies in the Chinachem group whose activities may have been funded by these funds;

(ii)   the actual use to which the funds were put by CAL;

(iii)  the interest of Chime, directly or indirectly, in the commercial success of CAL or the companies whose activities were thus funded;

(iv)  the financial and/or commercial policy of Chime which led to the making of this loan for the purposes for which it was in the event used by CAL.

53. The cost of litigation in which the investigation of such matters is necessary in order to resolve the issues that arise, and its effect on the day to day management of Chime and the Chinachem group, will be, and probably already has been, horrendous.  An independent board of directors of Chime – if there were one – might very plausibly complain that the pursuit of Chime’s alleged cause of action against its directors for their alleged misconduct in procuring or allowing this loan to be made would be highly damaging to Chime and to the commercial and financial health of the Chinachem group.  So, on what basis can it be contended that the amendments are proper ones to be allowed to be included in the petition? 

54. Mr Hildyard QC’s answer is that the advancing of the funds to CAL is an important part of the unfairly prejudicial conduct of Mrs Wang and the other directors in their management of Chime on which his clients, the petitioners, rely in their s.168A petition.  Since they cannot be barred from relying on that conduct as part of their case, and since a judicial investigation of that conduct may show that breaches of duty to Chime in the advancing of the funds were indeed committed, they are, submits Mr Hildyard QC, entitled to ask the court to exercise the jurisdiction, in the strict sense, that it has by making the orders sought. 

55. I am in profound disagreement with that approach.  First, this dispute between the petitioners and Mrs Wang is not, in my judgment a dispute, primarily, if at all, about management of Chime’s affairs.  It is primarily a dispute about proprietary rights.  The petition itself is topsy-turvy.  It is based on the proposition that the various things that have happened and that are complained about were unfairly prejudicial to Mr Wang’s estate.  Mrs Wang, it is said, was concerned to “advance her own interest at the expense of the Estate” (para. 26 of the Re-Amended Petition).  But what is “the Estate”?  The petitioners themselves have no beneficial interest in the “Estate”.  They are merely administrators pendente lite.  The current probate proceedings will in due course decide to whom “the Estate” belongs.  There are two, and as I understand it only two, possible results of those proceedings.  One possible result is that Mrs Wang will be established as the beneficial owner of the estate.  In that event the proposition that she was concerned to advance her own interest at the expense of the estate will become meaningless.  The s.168A petition will be pointless and an inexcusable waste of money, time and the judicial resources of Hong Kong.  The other possibility is that Mr Wang Snr will be established as the beneficial owner of the estate.  He will have become the testamentary successor to Mr Wang’s interests in Chime and the Chinachem group.  Let me, therefore, consider the s.168A petition on that hypothesis. 

56. The first relevant allegation in the petition relates to the 19,998 A’s shares in Chime that were vested in Mr Tai and, after Mr Wang’s disappearance, were transferred to Mrs Wang.  As I have explained, a separate action is on foot to determine whether Mr Tai held the shares on trust for Mrs Wang or for Mr Wang.  This action, too, will be pointless if Mrs Wang is entitled to Mr Wang’s estate but at least the issue is a narrowly defined one that can be resolved reasonably quickly and conveniently in the existing action.  The issue about the beneficial ownership of the ‘A’ shares has nothing whatever to do with the management of Chime.  If Mrs Wang fails in that action, she will have to transfer the relevant ‘A’ shares to the petitioners – or to whoever become the personal representatives of Mr Wang’s estate – and will be accountable to the estate for the benefits she has derived from the shares since their wrongful transfer to her.  There is nothing here that should concern a s.168A petition. 

57. Next there is the allegation that Mrs Wang unlawfully procured the issue to herself of 15 million ‘B’ shares in Chime, thereby diluting Mr Wang’s shareholding and correspondingly increasing her own.  On the hypothesis on which I am proceeding, namely, that it is Mr Wang Snr who is entitled to succeed to Mr Wang’s shareholding in Chime, there seems to me no prospect whatever of Mrs Wang retaining against him all the 15 million shares.  If the allotment is not set aside it seems to me quite obvious that she would have to transfer to him one-half of the shares on payment by him to her of one-half of the sums paid by her to Chime on the allotment.  She would likewise be accountable for one-half of the dividends she had received in respect of those shares but would be entitled to be credited with a commercial rate of interest on the allotment moneys that, on this hypothesis, she had paid on shares to the allotment to which Mr Wang was entitled.  I think it is reasonable to represent the complaint relating to the allotment of the ‘B’ shares as a complaint about unfairly prejudicial management of Chime.  It is the question of remedy that may be problematic and difficult.  The allotment took place in August 1990 some four or five months after Mr Wang’s disappearance.  In the trauma of the kidnapping and its aftermath the conduct of the affairs of Chime and the Chinachem group obviously had to go on.  The allotment represented an injection of new share capital into Chime of $1.5 billion.  The pleaded complaint about the allotment was not that Chime and its group had no commercial need for the money or that the money was not used for genuine commercial purposes.  It is that the allotment should not have been made so as to alter the control, as between Mrs Wang and Mr Wang, of Chime.  That is a complaint that does not necessarily require the allotment to be set aside and it may be contrary to the interests of Chime (and therefore contrary to the interests of Mr Wang Snr) that it should be set aside. 

58. Then there are the allegations about misappropriations from Chime and its specified five subsidiaries said to be constituted by the payment of excessive remuneration to Mrs Wang and the other directors.  The relief sought asks the court to rule as to the amount of remuneration that the directors ought to have been paid and to order them to repay the excess.  Whether these claims are properly included in the petition is not before this Court on this appeal but it seems to me very clear that the resolution of the issue should await a determination in the probate proceedings as to who is entitled to succeed to Mr Wang’s interests in Chime. 

59. Finally there is the allegation that the directors have committed breaches of their duty to Chime in causing Chime to participate actively, and it is said unnecessarily, in the interlocutory proceedings in the petition.  This is a bit rich.  The petitioners have taken it upon themselves to assert in the petition allegations that, if true, would establish breaches of duty by Mrs Wang and other directors to Chime and to claim payment to Chime of the compensation attributable to those breaches of duty and therefore said to be due to Chime.  The petitioners are, in effect, using the petition in order to prosecute derivative actions allegedly vested in Chime.  They are doing so without any apparent regard to the damage that the litigation and its huge complexity may cause to Chime and its business.  And at the same time they are complaining that Chime is not adopting a neutral stance in the litigation. 

60. If the petition is looked at in the round its topsy-turvy nature becomes apparent.  Chime and the Chinachem group, of which CAL is a part, is like the goose that lays the golden eggs.  The real issue in this litigation is who owns the goose.  Once it is known who owns the goose it will be known who is entitled to the golden eggs.  This petition is asserting, in effect, that Mrs Wang has appropriated to herself some of the golden eggs.  That may turn out to be true, but whether it matters depends on who owns the goose.  The dispute has been dressed up as a dispute about how the goose has been managed.  But the real dispute is not about management of the goose.  It is about ownership of the goose and its golden eggs. 

The amendments regarding the CAL loan

61. Although for the reasons I have given the court has jurisdiction, in the strict sense, to make the orders sought (other than the order against CAL which is not a party to the petition) it would not, in my opinion, be proper for the court on this petition to entertain what would, in effect, be Chime’s action against the directors for their breach of duty in causing the loan to be made.  If there is misconduct it can be established in a derivative action.  If the court, on hearing the petition, thinks that a derivative action prosecuting this alleged misconduct should be brought, it can make an order to that effect under s.168A(2)(b).  It could also, if persuaded it were a convenient course to adopt, order that the petition and the derivative action be tried together. 

62. As a general rule, in my opinion, the court should not in a s.168A petition make an order for payment to be made by a respondent director to the company unless the order corresponds with the order to which the company would have been entitled had the allegations in question been successfully prosecuted in an action by the company (or in a derivative action in the name of the company).  If the order does not so correspond then, either the company will have received less than it is entitled to, in which case it will be entitled to relitigate the issue in an action against the director for the balance, or the company will have received more than it was entitled to, in which case a clear injustice to the director will have been perpetrated.  Nor, in my opinion, should the court allow a prayer in the petition for payment by the respondent director of compensation or of restitution to the company to stand unless it is clear at the pleading stage that a determination of the amount, if any, of the director’s liability at law to the company can conveniently be dealt with in the hearing of the petition.  In any other case, in my opinion, if the allegations against the director are proper to be relied on as evidence of unfairly prejudicial conduct, the appropriate relief to be sought would be an order under s.168A(2)(b) for a derivative action to be brought for the recovery of the sum legally due.  It would be proper for the company to express its views as to whether it would be in its interests for such an action to be brought. 

63. Moreover, the use of a s.168A petition in order to circumvent the rule in Foss v Harbottle (1843) 2 Hare 461 in a case where the nature of the complaint is misconduct rather than mismanagement is, in my opinion, an abuse of process.  In Prudential Assurance Co. Ltd v. Newman Industries Ltd (No. 2) [1982] 1 Ch 204 a personal action by a shareholder against the allegedly delinquent directors for the diminution in the value of the shareholder’s shares attributable, it was said, to the loss that had been caused to the company by the alleged wrongdoing, had been commenced.  In the personal action the same allegations were made against the directors as were made in the accompanying derivative action brought by the same shareholder in the name of the company to recover for the company the amount of its loss.  The Court of Appeal said this, at pp 223-224 :

 “The plaintiffs in this action were never concerned to recover in the personal action.  The plaintiffs were only interested in the personal action as a means of circumventing the rule in Foss v. Harbottle.  The plaintiffs succeeded.  A personal action would subvert the rule in Foss v. Harbottle and that rule is not merely a tiresome procedural obstacle placed in the path of a shareholder by a legalistic judiciary.  The rule is the consequence of the fact that a corporation is a separate legal entity.”

In expressing their conclusions on the many issues raised by the Prudential case the Court of Appeal said that :

“The problems involved in this case were caused by the fact that the Prudential [The shareholder] were the wrong plaintiffs.”  (p.225)

 The circumvention of the rule in Foss v. Harbottle by the inappropriate use of an unfair prejudice petition would be open to the same objections.  In Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at p.18, Hoffmann LJ said that :

 “Enabling the court in an appropriate case to outflank the rule in Foss v. Harbottle was one of the purposes of [s.459].”  (emphasis added)

 The outflanking would not, in my opinion, be appropriate unless the criterion suggested in para. 62 were met. 

64. The criterion suggested in paragraph 62 for allowing derivative action relief to be claimed in a s.168A petition cannot be met in the present case at least so far as the CAL loan relief is concerned.  So I would disallow the amendments in paras 3.2, 3.3, 3.4 and 3.5 of the prayer for relief in the petition as amended pursuant to the order of the Court of Appeal. 

65. As to the amendments in the body of the petition relating to the CAL loan, i.e. paras 44.1 to 44.5 inclusive, I regard these amendments as permissible on the footing that they relate to management conduct that, if it is true that the $4.5 billion was used for the benefit of companies in which Mrs Wang but not Mr Wang was interested, could be represented as conduct unfairly prejudicial to the interests of Mr Wang or, now, his estate. 

Management of the petition

66. This petition cries out for firm and effective case management.  For the reasons I have given, sensible case management decisions cannot be come to until it is known to whom the estate of Mr Wang belongs.  If it turns out that it belongs to Mr Wang Snr, Mrs Wang will have to take a decision as to whether she can resist a demand by Mr Wang Snr to be placed in the same shareholding position relative to Mrs Wang as Mr Wang was in prior to his being kidnapped.  Mr Wang Snr will have to take a decision whether he wants to reverse the additional capitalisation of Chime that the allotment of the ‘B’ shares represented.  He will not wish, I imagine, to adopt a course which would be damaging to Chime.  And he must realise that if he presses for the allotment to be reversed Chime will have to repay the $1.5 billion allotment consideration that was paid by Mrs Wang. 

67. Moreover, the prosecution of the complaint relating to the CAL loan, whether done via a derivative action or in the petition, would involve an expenditure in time and resources for the parties, including Chime, of a quite exorbitant extent.  It would also make demands on the judicial resources of Hong Kong that it would be unreasonable for any litigant to expect to be met unless it were plainly necessary in the interests of justice for that to be done. 

68. In these circumstances, in my opinion, there is everything to be said for a stay of the petition until the probate proceedings have reached a conclusion.  At that point, and not until that point, sensible conclusions about the progress of the petition can be reached. 

Conclusion

69. In the circumstances, and for the reasons I have tried to explain, I would allow the appeal to the extent indicated in paragraph 64 above.  I would set aside the order for costs made by the Court of Appeal and make the order nisi and the directions proposed by Mr Justice Bokhary PJ.

Mr Justice Bokhary PJ:

70. We are unanimous.  The appeal is allowed so as to:

(a)    disallow the CAL prayers for relief (i.e. prayers 3.2 to 3.5 inclusive) while leaving the CAL allegations (i.e. paras 44.1 to 44.5 inclusive) undisturbed; and

(b)    substitute for the order as to costs made by the Court of Appeal an order nisi leaving the parties to bear their own costs here and in the courts below. 

It is directed: (i) that the order nisi become absolute 21 days after the handing down of judgment in this case unless before then the Registrar of this Court has received a written submission containing full reasons seeking some other order as to costs; and (ii) that if such a written submission is so received, procedural directions on how the costs concerned are to be dealt with be made by the Registrar, subject to her discretion to refer the question of such directions to a single Permanent Judge.