WONG HO KWAN AND ANOTHER v. HSIN KUANG RESTAURANT (HOLDINGS) LTD AND OTHERS

HCMP 481/2019

[2020] HKCFI 1314

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 481 OF 2019

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BETWEEN

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J U D G M E N T

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1.  This is an application made by the plaintiffs, Mr Wong Ho Kwan (“P1”) and Wong Yuen Shun Kwong Wah Hong Limited (“P2”) (together “Ps”), under section 733 of the Companies Ordinance (Cap 622) (“Ordinance”) for leave to bring a statutory derivative action in the name of Hsin Kuang Restaurant (Holdings) Limited (“Company”) against Mr Li Kwok Hung (“Li”), Mr Ching Chi Wai (“Ching”) and Mr Ho Man Che Peter (“Ho”) (collectively “Ds”) for breach of duties in causing the Company to sell its properties as per the draft statement of claim (“SOC”).

2.  The Originating Summons (“OS”) was heard before Harris J on 5 September 2019 and was adjourned sine die to allow the Company to ascertain the view of the shareholders.  The Company was ordered to issue a notice to convene an extraordinary general meeting (“EGM”) to consider a resolution on whether the shareholders are in favour of an action being brought in the name of the Company against the Ds for any breach of duty as per the SOC (“Resolution”); and “any other resolutions proposed by shareholders pursuant to the Articles of Association”. 

A. Ds’ Summons

3.  The resumed hearing of the OS was scheduled to be heard on 6 February 2020 but was adjourned due to the General Adjourned Period.  Shortly before that hearing, on 22 January 2020, the Ds issued a Summons under Order 15 rule 6 for (1) leave to be joined as defendants to the OS (“Joinder Application”); and (2) an order to set aside the Resolution and/or for the Company to procure the board to issue a notice to convene an EGM within 21 days to consider the same Resolution (“Setting Aside Application”).  

4.  The Summons is issued under Order 15 rule 6, which does not empower the Court to grant any substantive relief such as the relief sought in the Setting Aside Application.  The proper procedure for seeking a substantive relief is to issue an originating summons to claim that relief, given that:

(1) Order 102 regulates the procedure of all applications to the Court of First Instance under the statutory jurisdiction conferred by the Ordinance and the Companies (Winding-up and Miscellaneous Provisions) Ordinance (Cap 32).  Order 102 rule 2 provides that except in the case of applications made in proceedings relating to the winding up of companies or applications made pursuant to section 724 of the Ordinance, every application under the Ordinance and Cap 32 may be made by originating summons; and

(2) Order 7 rule 3 provides that “every originating summons must include a statement of the questions on which the plaintiff seeks the determination or direction of the Court of First Instance or, as the case may be, a concise statement of the relief or remedy claimed in the proceedings begun by the originating summons with sufficient particulars to identify the cause or causes of action in respect of which the plaintiff claims that relief or remedy”.  

5.  It seems to me that in making the Setting Aside Application by way of the Summons, the Ds are trying to circumvent the procedure prescribed by the relevant rules when there is no basis for them to do so. 

6.  As for the Joinder Application, I allow the Ds to be joined as the 2^nd to 4^th defendants in these proceedings as I take the view that all the allegations are directed against the Ds and, as a matter of fairness, they are entitled to be heard on the merits (or lack of it) of the intended claim (Re Gen2 Partners Inc [2012] 4 HKLRD 511 at §§26-27, per Barma J (as he then was)). 

7.  Mr Douglas Lam SC[2], counsel for the Ps, cites Re Yau Wing Company Limited, HCMP 3250/2015, unrep., 21 January 2016, where Harris J observed (at §25) that an application for joinder “should only be granted if the applicant can demonstrate that his participation is likely to be necessary to ensure that all relevant matters are put before the Court”, as where due to deadlock in the board, the company would not be able to respond substantively to the application.  Mr Lam SC submits that the Ds fail to show any justifiable reason to be joined, as they “had ample time and opportunity to make representations to the shareholders” before the Resolution was passed, and the Resolution is binding upon the Company. 

8.  I do not think the passage in Yau Wing supports Mr Lam’s submissions. The observation was made in circumstances where the putative defendant wanted to advance lengthy submissions “descending into more detail and controversy than the criteria” required to assess an application under section 732, and His Lordship reminded the parties that the threshold for establishing a serious issue to be tried is not high, and the Court would not entertain exhaustive submissions and arguments or examine the potential defence advanced by the putative defendants in any great details. 

9.  In my view, it is often proper and necessary for the plaintiff to join the “wrongdoing” directors as defendants if they are in control of the board when the section 733 application is made.  There are 2 main reasons for this. 

10.  First, in a common law derivative action, the shareholder has the conduct of the action on behalf of the company.  The company is a nominal defendant and does not take an active role in the action other than giving discovery and receiving the proceeds of any successful recovery.  The same applies to a statutory derivative action brought by a shareholder in the name of the company against the “wrongdoing” directors.  As a matter of principle, there is no reason why the company should take an active role in opposing a section 733 application, when it is not allowed to do the same in a common law derivative action.  

11.  More importantly, it may be said against the “wrongdoing” directors that their act in causing the company to oppose a section 733 application constitutes a misuse of company’s money.  This accords with the well established principle that the company’s money should not be used for the collateral purpose of defending a proposed claim against the “wrongdoing” directors. 

12.  This, of course, is not to say that the company can never take an active role in a section 733 application, as there may be circumstances where it is necessary for the company to take a stance in the application.  For example, where the plaintiff proposes to ask the company to meet or indemnify the costs of the action, or where there are matters which the “independent” directors (against whom no allegation is made) would wish to bring to the attention of the Court.  

B. Background

13.  The Company was incorporated under the former Companies Ordinance (Cap 32) on 6 March 1981.  By virtue of article 1 of the Company’s Articles of Association (“AA”), the regulations in Table A in the First Schedule to the former Companies Ordinance (1975 ed) (“Table A”) were adopted as part of its regulations. 

14.  In May 1981, the Company purchased the properties at the Restaurant on Upper Ground Floor, Kwai Sing Centre, 1 Wo Yi Hop Road, Kwai Chung (“UG Property”) at HK$34,950,000.  In November 1981, the Company further acquired Shops Nos 93-95 on G/F, Kwai Sing Centre, 412 Castle Peak Road, Kwai Chung (“GF Property”) at HK$3,256,540.  The UG Property and GF Property together are referred to as “Properties”. 

15.  The UG Property was used to operate a restaurant from 1991 to 1998 and thereafter was let to tenants, and the current tenant uses it to operate a nursing home.  The GF Property was initially used for storage and from 2010, was let to the same tenant which operates a nursing home at the UG Property.

16.  According to the annual return made up to 6 March 2019, being the latest annual return in the evidence:

(1) the Company has 161,000 issued shares, which are held by 104 shareholders;

(2) the Ps hold 21,800 shares (13.54%): P1 holds 4,000 shares and P2 holds 17,800 shares.  P2 is the single largest shareholder; and

(3) the Ds are shareholders: Ho holds 8,000 shares (4.97%), Li holds 2,500 shares (1.55%) and Ching holds 2,000 shares (1.24%).

17.  From at least 2014, the Company had 4 directors, namely the Ds and Mr Woo Chu (“Woo”) (who holds 3,000 shares).  They were (and still are) permanent directors and the only members of the Management Committee (“MC”). 

18.  Under article 21 of the AA, which was amended in January 1985, “the Directors shall delegate to the [MC] and the [MC] shall be deemed to have the power of general management and other powers which the Directors may exercise on behalf of the Company”.  In other words, the power of management has been vested in, and can only be exercised by the MC but not the board unless the MC becomes ineffective.

19.  At the EGM held on 26 July 2014, a special resolution was passed by the shareholders to the effect that the Properties would be sold at a target price of not less than HK$500 million (“July 2014 Resolution”).  The actual wordings are:

“將本公司物業：（一）新界葵涌葵星中心商場地下93，94，95號舖位，地下高層舖位 ... 委托測量師行及 「孖士打律師行」公開招標出售，其中葵星中心物業目標價不低於港幣五億元。” (underlined added)

20.  Pursuant to the July 2014 Resolution, the Company engaged professional surveyors and Messrs Johnson Stokes & Master (“JSM”) to sell the Properties by public auction, but no offer near the target price of HK$500 million was received.  Thereafter, the Company received an expression of interest to buy the Properties at HK$280 million.

21.  At the EGM held on 15 October 2014, it was resolved that:

“(一) 不接納十月十五日意向書洽購價港幣二億八千萬元。

(二) 仿效領匯做法，委託世邦魏理仕作出物業評估，委托第一太平重新進行私人招標。

(三) 由股東選出三位代表（趙裕生，阮偉儀，梁永德）與程志偉董事，胡珠董事、李國雄董事組成委員會，協助進行招標工作。有關物業招標對外簽署協議需由委員會表決通過。

(四) 繼續委託孖士打律師行處理招標事宜及監管售樓後款項分配。

(五) 七月二十八日股東會所訂之五億意向價維持不變。

(六) 開標後開股東大會決定，價高者得，股東優先。” (underlined added)

(collectively “October 2014 Resolution”)

22.  It is Ps’ case that the July 2014 Resolution and the October 2014 Resolution (together “2014 Resolutions”) had the effect of imposing a limit on the power of the directors in selling the Properties in that the Company could only sell the Properties at a minimum price of HK$500 million (“Minimum Price Requirement”). 

23.  During the private tender process, the Company received one offer to purchase the Properties at around HK$100 million.  The offer was not accepted. 

24.  By a provisional agreement for sale and purchase dated 17 September 2018 (“PSPA”) signed by Li on behalf of the Company and Jetca Limited (“Jetca”), it was agreed, inter alia, that:

(1) the Company would sell, and Jetca would purchase, the Properties at the price of HK$338 million;

(2) formal sale and purchase agreement (“SPA”) would be signed by 28 September 2018 and completion would take place on 28 February 2019; and

(3) the PSPA “is a binding contract. 此乃必買必賣合約”. 

25.  Ms Phoebe Lau signed as agent on behalf of Midland Realty (Shops II) Limited (“Agent”) on the PSPA.  She caused the PSPA to be registered against the Properties on 20 September 2018.

26.  On 18 September 2018, Woo was told by a staff about the PSPA and he directed the staff not to accept the deposit tendered by Jetca.  Woo then informed P1 about the PSPA, and they both complained to Li that he had no authority to enter into the PSPA and that the selling price was too low, whereupon Li promised to make arrangement to cancel the PSPA. 

27.  At Woo’s request, a letter dated 4 October 2018 jointly signed by him and Li was sent to the Agent, stating that as no resolution had been passed by the board or the general meeting in respect of the PSPA, the Company decided to cancel the sale.  P1 then met with Ching and expressed his objection to the sale, and stated that if the directors had any urgent financial need, he could consider acquiring their shares by reference to the selling price of the Properties under the PSPA.  

28.  At the MC meeting held on 27 October 2018 (“MC Meeting”), which was attended by all directors, 2 staff (Mr Tse Siu Shan and Ms Chung Yin Chau) and Mr Kenneth Sit (a solicitor):

(1) Li said that he signed the PSPA at the airport, after the Agent had played a recorded conversation during which Ching said he agreed to sell the Properties for HK$338 million, and he repeatedly emphasised that it was only provisionally signed and should not be taken as confirmed yet;

(2) Ching said that he did not know that the Agent recorded their conversation, and that he and Li only told the Agent that if the offer was raised to HK$338 million, there would be further negotiation;

(3) Woo said that he had heard about an approach by another buyer’s agent indicating a willingness to make a higher offer, but was deterred by the registration of the PSPA against the Properties.  Some shareholders disagreed with the selling price, and considered that claim must be made against the Agent and requested any sale of the Properties to be resolved at a shareholders meeting;

(4) the directors considered 3 valuation reports prepared by Multiple Surveyors Limited (“MSL”), AG Wilkinson & Associates (“AGW”) and Jones Lang LaSalle’s (“JLL”), which assessed the value of the Properties as at October 2018 at HK$420 million, HK$343 million and HK$410 million respectively;

(5) Kenneth Sit explained to the directors that the median valuation of the Properties was HK$391 million, and the selling price under the PSPA represented a 13.55% discount of such median valuation.  According to the usual practices in the property market, a discount of no more than 15% is generally acceptable;

(6) it was resolved by the Ds as majority (with Woo objecting) to accept the sale of the Properties on the terms proposed by the Agent;

(7) it was further resolved by all the directors to amend the aforesaid resolution, such that (a) the Company should look for a “better purchaser” for the Properties by 19 November 2018, (b) Li be authorised to instruct solicitors to enter into a conditional agreement with such purchaser, and (c) Woo’s son would look for a purchaser who would be willing to pay a higher price for the Properties until 19 November 2018 and, if no agreement could be reached with such purchaser, the Company would continue with the process of selling the Properties to Jetca; and

(8) Kenneth Sit reminded the directors that Jetca might commence proceedings against the Company if the PSPA were cancelled, and it might take half a year to resolve the proceedings during which the Properties could not be sold.  The directors believed that there was still a chance for other potential buyers to make offer.

29.  A few days later, P1 approached the Agent to find out more about the PSPA and was told that the PSPA was a binding contract and Jetca would certainly claim against the Company if it did not proceed with the sale, given that it had already paid stamp duty of HK$40 million. 

30.  Shortly afterwards, P1 met with Ching to complain about the PSPA and stated that he would not make any offer to buy the shares of the Company as there were certain contractual obligations which obliged the Company to make payments to various companies on a monthly basis.

31.  By a letter dated 29 November 2018 addressed to the board, Messrs TC Foo & Co (“TCF”) complained that the PSPA was executed in contravention of the Minimum Price Requirement and demanded the board to rescind or cancel the sale to Jetca. 

32.  In the meantime, the Company did not receive any offer to purchase the Properties at a price higher than HK$338 million.  On 10 December 2018, Ching on behalf of the Company signed the SPA with Jetca for the sale of the Properties, which was stamped the next day. 

33.  By a further letter dated 20 December 2018 to the board, TCF reiterated that the sale of the Properties was made in breach of the Minimum Price Requirement and the directors’ fiduciary duties, and demanded the directors to provide a full explanation of their conduct within the next 5 days.  No response was received from the directors. 

34.  At the annual general meeting of the Company held on 27 December 2018, the shareholders approved the audited financial statements of the Company for the year ended 31 March 2018 (“2018 Accounts”). The sale of the Properties was not raised or discussed at the meeting. 

35.  Completion took place on 28 February 2019 whereupon the Properties were assigned to Jetca.  On 11 March 2019, the shareholders were notified that the Company had declared a dividend of HK$2,000 per share to the shareholders.  This amounted to HK$322 million, representing 95.3% of the selling price of the Properties.

36.  On 12 March 2019, TCF served a notice on the Company in accordance with section 733(3) of the Ordinance which stated, inter alia, that the board was controlled by the Ds and, as such, it was impossible for any board or shareholders resolution to be passed to commence legal proceedings to recover damages and/or equitable compensation against the Ds in relation to their breach of duties owed to the Company; and the Ps intended to apply for “an order that costs of the intended application for leave and the Intended Action be paid out of the Company’s assets”. 

37.  As stated above, pursuant to the Order of Harris J, the Company issued a notice dated 11 October 2019 to convene an EGM to be held on 29 October 2019.  The SOC was enclosed to the notice.  Prior to the EGM, both the Ps and the Ds made representations to the shareholders in that:

(1) the Ps provided TCF’s letter dated 18 October 2019 to all shareholders and enclosed a Chinese translation of the SOC and a valuation report dated 11 June 2019 which stated that as at 17 September 2018 (date of the PSPA), the market value of the Properties was HK$428 million, which was considerably higher than the selling price under the PSPA.  It was stated that the reason for the Ps to bring the application was to protect the shareholders’ interest and to claim against the persons responsible for the sale; and

(2) the Ds also sent a letter dated 23 October 2019 to all shareholders, recounting the fact that the Company had not for over 4 years been able to secure any buyer for the Properties.  According to the valuation obtained by the Company for the purpose of preparing the 2018 Accounts, the market value of the Properties was HK$331 million.  The selling price of HK$338 million was not far from the 3 valuation reports subsequently obtained by the Company.  Nevertheless, the directors unanimously agreed that the Company would try to find a better offer within the next 3 weeks failing which the Properties would be sold to Jetca.  The proceeds of sale were distributed to the shareholders.  As it transpired, after completion of the sale, the economy and property market suffered a substantial downturn and the shareholders should be happy about being able to sell the Properties at a high price.  

38.  At the EGM held on 29 October 2019 (“2019 EGM”), which was attended by shareholders holding 103,495 shares (representing 64.28% of issued shares), the Resolution was passed by 61,379 shares, being 59.31% of the shares held by the shareholders present and voting at the meeting. 

C. Discussion

39.  The principles governing application under section 733 of the Ordinance are well established and have been sufficiently stated by Ng J in Tse Fung Chiu v Kwok Cheung Hing & anor [2019] HKCFI 2278 at §§13-15:

(1) the applicant must satisfy all the conditions in section 733 of the Ordinance, that is, the interests of the company requirement and serious question to be tried requirement (§13);

(2) in accordance with the Court’s usual practice, the Court shall consider the 2 requirements in reverse order.  This is because if the serious question to be tried requirement cannot be met, it would be difficult to see how it can be in the interests of the company to commence proceedings (§14);

(3) the serious question to be tried requirement is a relatively low threshold.  The prospects of success are to be investigated only to a limited extent, and the Court would be slow to find against the applicant unless such prospects are so slim that the company cannot be said to have any prospect of success; and

(4) as regards interests of the company, if a serious question has been demonstrated, in most cases it will follow that it is prima facie in the interests of the company that proceedings are pursued.  However, the Court should take into account whether any practical benefit is likely to result.  This involves assessing whether it appears that the company stands to gain in light of the costs to be incurred;

(5) the company has not itself brought the proceedings; and

(6) a written notice has been served on the company in accordance with section 733(3) and the notice complies with section 733(4). 

40.  There is no dispute that the last 2 requirements are met. 

C1. Effect of the Resolution

41.  I first consider the relevance and effect of the Resolution passed at the 2019 EGM on the application.

42.  Mr Lam SC submits that general meeting of members represents the source of ultimate authority within the company structure (Shackleton on the Law and Practice of Meetings, 14^th ed, §12-01).  If issues have been sufficiently explained to members and they reach a well informed decision, considerable weight would be given to their views (Lam Kin Chung v Soka Gakkai International of Hong Kong Ltd (No 2) [2018] 2 HKLRD 769 at §16 per Harris J).  It is proper for the Court to take into account the view of the independent shareholders as to whether a derivative action should be commenced, and the Court would disregard their votes if it is satisfied that they were cast in favour of the defendant directors in order to support them rather than for the benefit of the company, or if there is a substantial risk of that happening (Smith v Croft (No 2) [1988] Ch 114 at 185E-186F, per Knox J).  As it was the Company’s own proposal to convene an EGM to gather the shareholder’s view on the application and the shareholders had by a “clear majority” decided that it would be in the Company’s interest to take legal action against the Ds, the Court should be slow to deviate from the wishes of the shareholders.  Further, given that the Company has by the Resolution confirmed its agreement to bring the intended claim, “it is only fair for the Company to compensate all the costs which the [Ps] may incur in pursuing the derivative action on its behalf”.

43.  Mr Jose Maurellet SC[3], counsel for the Company, emphasises the distinction between a resolution by which members express a view on a matter which has no legal effect, and one which does have a precise legal consequence such as ratification of an unauthorised transaction, as discussed in Lam Kin Chung, §§8-12, 16-17 per Harris J.  He submits that in this case, “the Resolution was framed in a way so that members expressed a view on a matter without any stipulated legal consequence”.  Thus, the Court is required to consider if a serious issue to be tried is established irrespective of the members’ view as expressed in the Resolution, which was a separate condition to be established by the Ps.  

44.  Ms Rachel Lam SC[4], counsel for the Ds, submits that the Resolution ought to be set aside or given little to no weight, as it was passed by the shareholders after the following “three crucial misleading statements [had been] made to the shareholders”:

(1) if the Resolution was passed to commence the action against the Ds and compensation awarded to the Company, the shareholders who voted against the Resolution should not be entitled to any share of the compensation;  

(2) in the past, there had been improper sales of the Properties by the Company or its sister companies at low prices to suspicious purchasers which might be controlled or owned by the Ds; and

(3) Ho was not a permanent director or a properly registered director, and he had been unlawfully included at the MC Meeting to ensure that the sale of the Properties would be approved.  

45.  In my judgment, the Resolution is irrelevant to the serious question to be tried requirement, which is an issue to be determined by the Court.  The view of the shareholders, as expressed in the Resolution, is a factor which the Court would take into account in considering the interests of company requirement.  In many cases it may even be determinative of the issue, as the shareholders, being the persons entitled to share in the proceeds of any successful recovery in the intended claim, are the best judges of whether it is in the interest of the company to pursue the claim. 

46.  However, I do not accept that merely because the Company has by the Resolution confirmed its agreement to bring the intended claim, the Court should order the Company to indemnify the Ps of all the costs incurred or to be incurred in pursuing the intended claim.  This is because:

(1) The Ps only need to establish a serious issue to be tried, which is not a high threshold.

(2) The shareholders were not asked to consider, let alone approve, the Company indemnifying the Ps with their costs incurred and to be incurred in pursuing the intended claim.  As Mr Lam SC is at pain to emphasise[5], it was open to all shareholders to put forward any resolution for the shareholders to consider at the 2019 EGM.  Had the Ps wished to seek an indemnity from the Company to cover their past and future costs, they could have proposed a resolution for that purpose.  It would have been incumbent upon the Ps to place before the shareholders documents and information relevant to the issue of indemnity including the merits of the claim, the amounts of past and future costs in pursuing the claim and the pros and cons in pursuing such claim.  Had these documents and information been provided to the shareholders for their consideration, the shareholders would have been able to reach a fully informed view and decided whether, taking into account the costs and risk of paying adverse costs to the Ds, they still consider that it would be in the interests of the Company to pursue the claim.

(3) At the hearing before Harris J, the Company had already made clear that it objected to providing any indemnity for the Ps’ costs on the grounds that (a) it would “not be a responsible use of the [Company’s] resources to embark on the proposed litigation”[6]; (b) the question of indemnity should be deferred when the outcome of the action is known or the position is clearer[7]; and (c) the Ps have not assessed the likely costs to be incurred in pursuing the action, and there are concerns that the costs of the action could be disproportionate[8].

47.  Against the background at which the 2019 EGM was held, the shareholders were entitled to assume that the costs (and any adverse costs which might be payable to the Ds) in pursuing the intended claim would be borne by the Ps.  This accords with the general position that a plaintiff in a minority shareholder’s action is just like any other litigant: he is personally liable to his own costs and is exposed to risk of being ordered to pay the taxed costs of any defendant.  He cannot recoup his costs out of the company’s assets without a court order, which will only be made if the action is properly and reasonably brought and prosecuted and the plaintiff has acted reasonably in bringing the action (Wallersteiner v Moir (No 2) [1975] QB 373 at 399C, 399F, 403E-F, per Buckley LJ).  

48.  I turn to Ms Lam SC’s submissions.  In my view, there is absolutely no basis for the Ds to ask the Court to set aside the Resolution.

49.  First, as a matter of law, a resolution passed at a general meeting duly convened, constituted and conducted in accordance with the Company’s constitution is binding upon the Company and all the shareholders.  This is enshrined in section 562 of the Ordinance.  Although Ms Lam SC contends that the Court can or should set aside the Resolution passed in circumstances where some shareholders had said something which was misleading, she is unable to cite any authority in support of her contention.  Her reliance on CAS (Nominees) Ltd & Ors v Nottingham Forest plc & Ors [2002] BCC 145, at §72 is misplaced.  In CAS (Nominees), Hart J was merely stating the principle that “a circular to shareholder must give a fair, candid, and reasonably full explanation of the purpose for which the meeting is called”.  This is because a notice which convenes a general meeting, to be valid, must (amongst others): “state with sufficient fullness the purpose of the meeting” and “be clear, honest, unambiguous and definite” (Shackleton on the Law and Practice of Meetings, 14^th ed, §5-02).  An invalid notice which falls foul of these requirements render the meeting and the resolution passed thereat to become invalid.  This principle has nothing to do with a resolution passed at a duly convened, constituted and conducted meeting.

50.  Second, if and to the extent that the shareholders consider that there are matters which warrant the shareholders to reconsider the resolution passed at the previous general meeting, they can requisition the board to convene a general meeting to allow all the shareholders to reconsider the resolution passed and, if necessary, to rescind such resolution (Shackleton on the Law and Practice of Meetings, 14^th ed, §7-34).  In this case, the Ds are 3 out of the 4 directors, they could have procured the board to convene another EGM to reconsider the Resolution.  This has never been done. 

51.  Third, given the summary nature of a section 733 application, it is clearly inappropriate for any party to ask the Court to examine the minute details of who had said what during a meeting or whether the statements made at that meeting were fair or misleading. 

52.  Fourth, as stated in §37 above, prior to the 2019 EGM, both the Ps and the Ds have had the opportunity to explain their views on the intended claim to the shareholders.  They were able to speak at the 2019 EGM.  If the alleged misleading statements are “either fundamentally misconceived and/or baseless allegations”, as Ms Lam SC suggests, it would have been open to Li (who was the Chairman of the meeting) to require the speaker to correct, clarify or substantiate the statements or caution the shareholders about the veracity of the statements if there was a proper basis to do so.  This has never been done by Li or indeed, any other shareholders who attended the 2019 EGM.

53.  Fifth, it is clear that the Ds would not be able to discharge the burden of proving that the shareholders who voted for the Resolution had been influenced by the alleged misleading statements.  This is because shareholders (unlike directors) were entitled to exercise their voting right in accordance with their own considerations or interests, and they did not have to explain why they voted in the way they did. 

54.  The Setting Aside Application is no more than an ill-conceived attempt to impugn the Resolution and is wholly devoid of merit.  The application does not assist the resolution of the real issues but only serves to waste the parties’ costs and the Court’s time. 

C2. Serious issue to be tried

55.  In the SOC, two causes of actions are pleaded. 

56.  Under the first cause of action, the Ps allege that in approving the sale of the Properties on the basis of the terms under the PSPA, the Ds acted in breach of their fiduciary duties in that:

(1) Li entered into the PSPA without any authority from the board or the shareholders of the Company, and he procured the Company to enter into the SPA for the improper purpose of condoning his own misconduct in entering into the PSPA without authority (§29(1), (4) of SOC);

(2) the Ds procured the Company to enter into the SPA in breach of the 2014 Resolutions which imposed the Minimum Price Requirement on the sale of the Properties (§§29(2), 30(1) of SOC); and

(3) the Ds procured the Company to sell the Properties at an undervalue of HK$338 million (§§29(3), 30(2) of SOC).

57.  Although the Ps pleaded this as a breach of fiduciary duties, in effect, the cause of action is want of authority on the part of the Ds in selling the Properties.  This is acknowledged by Mr Lam SC at the hearing.  The plea about sale at an alleged undervalue is not supported by any particulars, and in any event does not constitutes a cause of action for breach of fiduciary duties. 

58.  Mr Lam SC submits that the directors are under a duty to comply with the directions given by the shareholders by way of a special resolution, relying on the following:

(1) Regulation 67 of Table A, which provides that:

“The business of the company shall be managed by the directors…subject, nevertheless, to any regulation of these articles, to the provisions of the Ordinance, and to such regulations, being not inconsistent with the aforesaid regulations or provisions, as may be prescribed by the company in general meeting.” (underlined added)

(2) In Tang Kam-yip v Yau Kung School [1986] 3 HKLR 448, Sir Alan Huggins VP observed (at 456A) that an article similar to regulation 67 allows shareholders to control the acts of directors by way of special resolution (if the direction is inconsistent with the original articles), or by way of ordinary resolution (if the direction is consistent with the original articles).  

(3) In Marshall’s Valve Gear Co Ltd v Manning, Wardle & Co Ltd [1909] 1 Ch 267, Neville J held (at 274) that “the majority of the shareholders in the company at a general meeting have a right to control the action of the directors so long as they do not affect to control it in a direction contrary to any of the provisions of the articles which bind the company”.

59.  Mr Lam SC submits that in the present case, the power of the directors is “restricted” by the 2014 Resolutions, which are binding upon them.  If and to the extent that the 2014 Resolutions are inconsistent with any regulations in the AA (and Table A), they “override” such regulations.

60.  I am unable to accept Mr Lam SC’s submissions. 

61.  First, as Mr Maurellet SC submits, regulation 67 of Table A has no application to the Company, given that article 2 of the AA provides that in case of conflict between the regulations in Table A and the AA, the regulations in the AA prevail.  As stated in §18 above, article 21 of the AA provides that the powers of the directors shall be delegated to and exercisable by the MC.

62.  Second, even if (which I do not think it is correct) regulation 67 of Table A applies to the Company, it is clear that it only applies to any “regulations” prescribed by the company in general meeting.  The reference to “regulations” is the regulations contained in Table A[9], the AA or any new regulation approved by a special resolution at the general meeting.  The latter is based on the power of the shareholders, under section 88 of the Ordinance, to alter any articles/regulations of the Company by passing the requisite special resolution at the general meeting.  I do not think either the July 2014 Resolution or the October 2014 Resolution can be characterised as a “regulation” prescribed by the shareholders at general meeting. 

63.  As regards Tang Kam-yip, Mr Maurellet SC submits that the Court of Appeal merely affirmed the general principle that unless otherwise provided by the articles, it is for the directors (rather than the members) to manage the affairs of the company, and the directors are not bound to comply with the directions of the shareholders.  Nor can the shareholders control the acts of the directors who are empowered by an article which does not contain language to limit their power (at 454D-E, 460E-G, 461D-462A).  The passages in Tang Kam-yip relied on by Mr Lam SC (at 456A-B, 464I-J) were obiter.  I agree. 

64.  Third, as a matter of law where there is an effective board, the shareholders cannot in general meeting usurp the powers of the board (John Shaw & Sons (Salford) ltd v Shaw [1935] 2 KB 113 at 134 per Greer LJ; 143 per Slesser LJ).  It is only if the board is ineffective that the power delegated to the directors reverts to the person or persons who delegated such power, namely the company in general meeting (Breckland Group Holdings Ltd v London & Suffolk Properties and others (1988) 4 BCC 542 at 545-547; Miracle Chance Ltd v Ho Yuk Wah [1999] 3 HKC 811 (CA) at 815C-F).  As there is no suggestion that the MC was ineffective, it was not properly open to the shareholders (or the board) to usurp or interfere with the powers delegated to the MC by purporting to pass the 2014 Resolutions even if such Resolutions on their face had the effect of limiting the power of the MC from approving the PSPA.  

65.  Fourth, if I were wrong in holding that the shareholders could not by the 2014 Resolutions limit the power of the MC in approving the sale of the Properties, I agree with Mr Maurellet SC that the 2014 Resolutions (at their highest) only had the effect of regulating the tender sale process by prescribing the minimum price by public tender and, subsequently, the intended price by private tender.  Indeed, this is acknowledged by the Ps as they pleaded (1) an alternative case that the 2014 Resolutions set a “target price” of HK$500 million, which the directors should “use their best endeavour” to achieve (§14(2) of SOC); and (2) the tender process ended when the final offer received by the Company was rejected (§17 of SOC). 

66.  While at the time of signing the PSPA, Li had not been authorised by the MC to do so, that would not give rise to a cause of action for want of authority as the MC subsequently passed a resolution unanimously to approve the Company entering into the SPA with Jetca if Woo’s son was unable to obtain a better offer for the Properties by 19 November 2018.  This constituted a ratification of the PSPA signed by Li without authority of the MC.   

67.  For the above reasons, I do not think that the Ps have raised a serious issue to be tried in respect of the cause of action for breach of fiduciary duties as pleaded in the SOC. 

68.  The second cause of action is alleged breach of duty of care, skill and diligence owed to the Company in that:

(1) Li failed to procure the Company “to make any endeavour to achieve the HK$500 million selling price in its sale of the Properties” (§31(1) of SOC);

(2) Ching and Ho failed to cause the Company to rescind the PSPA entered into by Li without authority from the board or the shareholders and/or at a consideration substantially lower than the Minimum Price Requirement; and failed to procure the Company to claim against Li for the loss suffered by the Company in failing to rescind the PSPA (§32(1)-(2) of SOC); and

(3) the Ds failed to procure the Company to achieve the price of HK$500 million when selling the Properties; and procured the Company to enter into the SPA to sell the Properties at an undervalue of HK$338 million (§§31(2), 32(3)-(4) of SOC).

69.  So far as want of authority is concerned, I repeat the points in §§58-66 above.  

70.  The duties of reasonable care and skill owed by a director were stated by Romer LJ in Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, at 427-429, in this way:

“… in discharging the duties of his position … a director must, of course, act honestly; but he must also exercise some degree of both skill and diligence. To the question of what is the particular degree of skill and diligence required of him, the authorities do not, I think, give any very clear answer. It has been laid down that so long as a director acts honestly he cannot be made responsible in damages unless guilty of gross or culpable negligence in a business sense … I confess to feeling some difficulty in understanding the difference between negligence and gross negligence … There are, in addition, one or two other general propositions that seem to be warranted by the reported cases: (1) A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. A director of a life insurance company, for instance, does not guarantee that he has the skill of an actuary or a physician. … it is perhaps only another way of stating the same proposition to say that directors are not liable for mere errors of judgment. (2) A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so. (3) In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.” (underlined added)

71.  Similar test for duty of care and skill is now stated in section 465 of the Ordinance which provides:

“(1) A director of a company must exercise reasonable care, skill and diligence.

(2) Reasonable care, skill and diligence mean the care, skill and diligence that would be exercised by a reasonably diligent person with—

(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and

(b)   the general knowledge, skill and experience that the director has.”

72.  The issue is whether the Ds’ act in approving the PSPA can be said to be negligent having regard to their general knowledge, skill and experience that may reasonably be expected of a person carrying out the function as directors of the Company.  In my judgment, the matters pleaded in the SOC do not give rise to a serious issue to be tried in respect of a cause of action based on breach of duty of care and skill, for the reasons explained below. 

73.  First, there is no suggestion that in approving the PSPA, the Ds acted dishonestly or for any collateral or improper purpose or that the PSPA was not an arm’s length transaction.  This is important as the market value of the Properties is essentially the product of market forces and represents the price at which a buyer is willing to pay and a seller willing to accept in an arm’s length transaction.  This is the commonly accepted view of the property surveyors, as reflected in the HKIS Valuation Standards published by the Hong Kong Institute of Surveyors, which defines “market value” as:

“the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion”.

74.  Mr Lam SC does not really dispute this.  He submits that “the valuation reports and evidence as to the actual response from the market are materials which the Court will consider at the trial”[10]. 

75.  The market’s response on the value of the Properties, which is not in dispute, includes:

(1) The Company has since at least July 2014 been trying to sell the Properties through the assistance of experienced property surveyors and agents, but has not been able to obtain any offer near the price of HK$500 million.  The highest offer which could be obtained was the one offered by Jetca, which exceeded the next highest price stated in the “expression of interest” received by the Company in October 2014 by HK$58 million. 

(2) Despite Woo’s suggestion that there were buyers willing to offer more than HK$338 million for the Properties, which led to the MC’s decision not to enter into the SPA with Jetca until 19 November 2018, and entrusted Woo’s son (a licensed asset management representative) to look for buyers who would purchase the Properties on better terms, no such buyer could be identified by Woo’s son (or, indeed any directors). 

(3) Mr Lam SC casts doubt on the MC’s decision in giving 3 weeks to find alternative buyers on the basis that the PSPA imposed a binding obligation on the Company to sell the Properties.  However, it is not in dispute that at the time when Li signed the PSPA, he made clear to the Agent that the PSPA was “only provisionally signed” and should not be taken as confirmed yet.  This is corroborated by the joint letter issued by Li/Woo to the Agent (see §27 above) and the fact that both the Agent and Jetca allowed the Company not to enter into the SPA by 28 September 2018 (i.e. the date stipulated in the PSPA for signing the SPA).

(4) Although P1 said that the selling price of HK$338 million was an undervalue and he was willing to purchase the Ds’ shares on the basis of such valuation, he did not proceed with the purchase.  If the selling price to Jetca were indeed an undervalue, I would expect the Ps to have offered to purchase the Properties at the same or even slightly higher price so as to make a profit from the purchase.  It was open to Ps to do so as they did not owe any duties to the Company.  The fact that the Ps did not take that course is very telling and shows that they did not believe that the Properties had a market value of HK$338 million, let alone HK$500 million.

76.  I do not agree with Mr Lam SC’s contention that the valuations arrived at by the valuers can be regarded as the “actual response” from the market.  They were opinions expressed by the surveyors based on their assessment of the market value of the Properties, taking into account various comparable transactions in the past and the adjustments they made to reflect the difference in time of the transaction and attributes of the Properties.  It would be wrong to regard the surveyors’ opinions as the price at which a buyer would in fact be willing to pay for the Properties. 

77.  If, contrary to my view, the valuations prepared by surveyors can be regarded as “actual response” from the market or that they are matters which should be taken into account in assessing whether the Ds could reasonably approve the sale of the Properties to Jetca for HK$338 million, the position would be as follows. 

78.  Mr Maurellet SC submits that where, as here, the Court is concerned with a negligence claim against a person who is alleged to have acted in breach of the standard of reasonable care and skill, the approach is to allow for a margin of differing opinion and even error:

(1) In considering whether there is a serious issue to be tried in respect of an alleged breach of duties on the part of the directors in entering into an agreement to sell an asset, the Court would consider whether the price agreed by the board was within the range of prices a board of a company might be expected to consider acceptable even if less than ideal (Kwok Hiu Kwan v Convoy Global Holdings Ltd & Ors [2018] HKCFI 1729, §19, per Harris J). 

(2) Similarly, in the context of a claim against a valuer, a claimant must show that the valuer’s conclusion “was one that no reasonably competent practitioner exercising reasonable care could have reached”, and it is a necessary condition of liability that the final result of the valuation was outside the permissible “bracket” (Jackson & Powell on Professional Liability, 8^th ed, 2017, §§10-71 to 10-75).

(3) In the same vein, in the context of a claim against a mortgagee for breach of duties in failing to obtain the best price reasonably obtainable for the mortgaged property, where the mortgagee took advice from a valuer, the valuer will not breach its duty of care if its valuation falls within an acceptable margin of error.  So a mortgagee will not breach its duty if, in the exercise of its power to sell the mortgaged property, its assessment falls within an acceptable margin of error (Michael v Miller [2004] 2 EGLR 151 at §§135-138, per Jonathan Parker LJ). 

79.  Mr Lam SC does not dispute the above principles. He submits that only the 3 valuations considered by the directors at the MC Meeting are relevant as those valuations were specifically considered at the MC Meeting.  I disagree.  The valuations obtained by the Company for the purpose of preparing audited accounts for the years ended 31 March 2017 and 2018 are also, if not more, relevant.  According to those valuations, the market values of the Properties as at 31 March 2017 and 31 March 2018 were HK$331,260,000 and HK$338,150,000 respectively, which was almost the same as the selling price to Jetca. 

80.  At the MC Meeting, the directors considered the 3 valuations prepared by MSL, AGW and JJL which opined that the market value of the Properties was HK$420 million, HK$343 million and HK$410 million respectively.  The directors had the benefit of the advice provided by solicitor who opined that a discount of 15% from the median valuation was consistent with market practices.  There is no suggestion in the SOC that the advice rendered by the solicitor was in any way incorrect or unreasonable or that the directors could not reasonably rely on such advice.  Nor is there any suggestion that in exercising their judgement to approve the PSPA and the SPA, the directors exercised their judgement unreasonably.  Putting the Ps’ case to the highest, the most that can be said against the directors was that there was a margin of error in their judgement.  As the authorities discussed at §78 above show, that is not enough to sustain a cause of action for breach of duty of care and skill. 

81.  It is also relevant to note that the Ps have not alleged that in approving the Company to enter into the SPA if no better offer could be obtained within the next 3 weeks, Woo acted in breach of his duty of care and skill.  It is difficult to see how the Ps can claim that no competent director exercising reasonable care and skill could have reached the decision as the Ds at the MC Meeting when Woo also reached the same decision.  

82.  Lastly, Mr Maurellet SC submits that the SOC discloses no viable claim for loss because:

(1) In the SOC, the only relief sought is compensation for the difference between the price sold and the “market price” (§33 of SOC).  If the Properties were in fact sold at market value, the loss suffered from any breach of duty would be nominal. 

(2) The substantial variance between the various valuations, including 2 further valuations adduced by the Ps and the Ds which valued the Properties at HK$428 million[11] and HK$340 million[12] respectively, show that it is wholly unreliable to value the Properties in a theoretical vacuum. 

(3) A far more reliable indication of value is the result of actual marketing efforts.  Where there is direct evidence of lack of offers for an asset after reasonable attempts to sell have been made by a reputable agent is “highly persuasive if not conclusive evidence” of its value and is “far more persuasive” than a valuer’s opinion (Ludsin v Maggs [2015] BPIR 59, §23).  Similarly, in Super Master v Chung Nam, CACV 117/2004, 18 May 2005, Le Pichon JA upheld the observation of the judge below that where there was no willing purchasers, an expert valuation would be merely “theoretical”, and the defendant “had done all could reasonably have been expected to do to obtain the best price for the shares”. 

(4) The undisputed fact shows that despite serious marketing effort from July 2014 onwards, the Company has not been able to identify any offer higher than the price at which the Properties were sold to Jetca[13].

83.  This is a different way of putting the same points discussed in §§73-76 above.  I agree that for the reasons articulated by Mr Maurellet SC, the SOC discloses no viable claim for loss. 

84.  I am not satisfied that there is a serious issue to be tried in respect of a claim against the Ds for breach of duty of care and skill as pleaded in the SOC.

C3. Interest of the Company

85.  In light of my conclusion that there is no serious issue to be tried, it follows that it would not be in the interest of the Company to pursue the claim against the Ds as per the SOC. 

86.  Even if, contrary to my holding, the SOC raises a serious issue to be tried in respect of the claims pleaded against the Ds, I do not consider that it is appropriate, at this stage, to require the Company to indemnify the Ps with the costs of the application incurred and the costs to be incurred in pursuing the claim for the following reasons.

87.  Section 738(3) provides that the Court may only make an order about costs including the requirement as to indemnification in favour of the member if it is satisfied that the member was acting in good faith in, and had reasonable grounds for, making the application and bringing the derivative action. As matter now stands, I am unable to conclude that the Ps were acting in good faith or that they had reasonable grounds for bringing the claim.  The appropriate course would be to reserve costs (see Re Lucky Money Limited HCMP 505/2006, 18 July 2006, §§58-59; Re Nice & Well Limited HCMP 2148/2008, 11 December 2008, §10).  

88.  Mr Lam SC submits that the Company should compensate all the costs which the Ps may incur in pursuing the claim on its behalf, given that the Company has by the Resolution confirmed its agreement to bring the derivative action.  I disagree.  As stated in §§46-47 above, it was open to, but the Ps did not, ask the shareholders to consider the question of indemnity.

89.  In any event, as Mr Maurellet SC submits, the issue of indemnity is normally deferred when the outcome of the intended action is known or when the position is clearer (Tang Siu Choi v Man Lung [2018] HKCFI 125, §29, per Ng J; Re Grand Field Group [2009] 3 HKC 81, §§50-54, per Kwan J (as she then was)).  This is particularly so where, as here, the Ps have not provided the likely costs of the action, the amount of likely recovery is uncertain, and there is concern that the costs of the action would be disproportionate (Stainer v Lee [2011] 1 BCLC 537, at §56, per Roth J).  I agree. 

D. Disposition

90.  I therefore make the following order:

(1) leave to the Ds to be joined as the 2^nd to 4^th defendants in these proceedings;

(2) the Setting Aside Application is dismissed; and

(3) the OS is dismissed.

91.  I make a costs order nisi that:

(1) the Ps do pay the costs of and occasioned by the OS to the Company, on a party to party basis with certificate for 2 counsel;

(2) the Ds do pay the costs of and occasioned by the Ds’ Summons dated 22 January 2020 to the Ps and the Company on an indemnity basis; and

(3) the above costs to be assessed by way of gross sum assessment.  The party seeking costs shall lodge and serve their statement of costs within 5 days of this Decision, and the paying party do provide their comments within 5 days thereafter.

92.  My tentative view is that the Ds should be required to pay the costs of the Ds’ Summons on an indemnity basis, as I consider the Setting Aside Application to be wholly without merit and constitutes a “satellite” litigation.  Although the Ds succeed in their Joinder Application, all the submissions made are directed to the Setting Aside Application which they fail. There is therefore no proper basis to apportion the costs of the Ds’ Summons. 

93.  Although I consider that as a matter of principle the Company, being under the control of the Ds, should not take an active role in opposing the application, I do not think the involvement of the Company in this case is improper or unnecessary, given that the Ps only named the Company as defendant in the OS; and no objection has been taken by the Ps against the stance taken by the Company. To the contrary, the Ps’ position is that the Ds should not be allowed to participate in the proceedings.