GUARDIAN PROPRIETARY LTD v. LU JUN AND OTHERS

HCMP923/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 923 OF 2011

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D E C I S I O N

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1. The applicant seeks leave by a re-amended originating summons issued under sections 168BB and 168BC of the Companies Ordinance to commence a derivative action on behalf of the 3rd respondent against the 1st respondent and a company controlled by him, the 2nd respondent.

2. The application first came on before Mr Justice Chung on 21 December 2011.  The application was adjourned because counsel for the 1st and 2nd respondents, Mr Jonathan Wong, who again appeared on behalf of them before me, pointed out to the court that the person at that time named as the applicant, Madam Yu Qi, was not a member of the company.  Her 85 per cent interest in the company was held on trust for her by a company called Guardian Proprietary Limited.

3. On 8 February 2012, Master Ko gave the applicant leave to amend the originating summons to change the name of the applicant to the present applicant, Guardian Proprietary Limited.

4. It might immediately seem surprising that an application to convene a derivative action would be brought by a person who is in ultimate control of 85 per cent of the issued shares of the subject company.  It was not immediately apparent to me from reading the evidence what the explanation might be, and at the commencement of the hearing I asked Mr Brian Wong, who appeared for the applicant, a number of questions.

5. As a result it transpired, it not being entirely clear from the evidence, that the 3rd respondent has one director, a company called Exceeder China Services Limited, which is controlled by Madam Yu Qi.  The shareholding in the 3rd respondent is now held 15 per cent by the 1st defendant in his own name; 84 per cent by a nominee company, FC Proprietary Limited, on behalf of Madam Yu; and 1 per cent by a company, Potala Management Limited, which is associated with Madam Yu.

6. It would seem self-evident that in the circumstances Madam Yu, the de facto majority shareholder of the company, would have no difficulty in procuring the company, namely the 3rd respondent, to commence the legal proceedings envisaged by the present application.  In other words, this application is not a case of a minority shareholder trying to get leave to bring a derivative action against those in control of the company, it would appear to be the complete opposite.

7. Understandably in these circumstances I taxed Mr Brian Wong on why the application was felt necessary.  He told me that his instructions were that his client, by whom he meant Madam Yu, wished to have the court’s sanction to the commencement of the proposed proceedings. 

8. My impression is that to the extent that Madam Yu has some concerns about commencing the present proceedings, they arise from the fact that there are afoot other proceedings between the relevant parties and in those proceedings there have already been two successful applications for injunctions to prevent her taking certain action in relation to the conduct of the affairs of the company.

9. That may be, but I am unable to see that there is any justification for seeking leave to commence the proposed action, pursuant to section 168BB and section 168BC in the present case, and for that reason I dismiss the application.  It does not seem to me that in the circumstances there is any reason to spend time dealing with a number of peripheral issues that were raised by Mr Jonathan Wong in relation to the application.

(Discussion re costs)

10. I will deal with costs in the following way.  It seems to me that the application is clearly misconceived and in those circumstances it is appropriate that the costs incurred by the 1st and 2nd respondents are paid at least up to a certain point in time, which I will deal with in more detail later, on an indemnity costs basis.

11. As I have already mentioned, this matter came on first on 21 December 2011.  A point at that hearing was raised concerning the identity of the applicant but the 1st and 2nd respondents did not, on that occasion, and indeed they did not expressly do so on this occasion, identify the problem which has led to me dismissing the present application.

12. Mr Jonathan Wong told me that the reason that the 1st and 2nd respondents have not expressly raised the question of the applicant’s control of the company was because they did not think it was appropriate to assist the applicant and effectively to tell Madam Yu how best to conduct the litigation.

13. I do not think that that was an unreasonable position for them to adopt and I can certainly understand the tactical reasons which would have led them to have reached that decision. However, it does seem to me that as a consequence it would be fair to order that the costs incurred up to and including the hearing on 21 December 2011 be paid by the applicant to the 1st and 2nd respondents on an indemnity basis. However, after that date they should be taxed and paid on a normal party and party basis.