WONG MING BUN v. WANG MING FAN AND OTHERS

HCA 1985/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1985 OF 2012

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J U D G M E N T

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Introduction

1.  The present action was commenced by Writ on 24 October 2012. As was apparent from the description of the Plaintiff in the title and the contents of the Statement of Claim, he was bringing a derivative action as a shareholder on behalf of the 4^th Defendant (“Company”). It was common ground that this was not a statutory derivative action under section 168BC of the Companies Ordinance, Cap. 32 and no leave had been obtained by the Plaintiff under that section.

2.  There were three applications before this Court:

(1) The Company’s summons to strike out the Statement of Claim on the ground that the Plaintiff had no locus standi to sue derivatively on behalf of the Company. In his written submissions, Counsel for the Company had made it abundantly clear that he did not wish to go into the substantive merits of the Plaintiff’s claim.

(2) The 1^st and 3^rd Defendants’ summons to strike out the Statement of Claim on the ground that the Plaintiff had no locus standi to sue derivatively on behalf of the Company, as well as on the merits, relying on all the grounds listed in RHC Order 18 r 19.

(3) The Plaintiff’s summons for leave to add Li Qing Long (“Li”) as the 5^th Defendant, to add to the Plaintiff’s capacity to sue in his own personal capacity and to amend the Writ and the Statement of Claim.

3.  The 2^nd Defendant (“D2”) had indicated no intention to defend the proceedings herein and was not present at the hearing.

The Plaintiff’s case as pleaded in the Statement of Claim

4.  The Company was incorporated in January 2005 under BVI laws.  Its principal asset was its majority shareholding (over 50%) in China Flavors and Fragrances Company Limited (“China Flavors”) which was listed on the main board of The Hong Kong Stock Exchange Limited in December 2005.

5.  The Plaintiff, the 1^st Defendant (“D1”), D2 and Wang Ming Qing are brothers.

6.  As at November/December 2008, the Company had six shareholders viz. the Plaintiff, D1, D2, the 3^rd Defendant (“D3”), Wang Ming Qing and Li. According to a Certificate of Incumbency, as at 8 December 2008, their shareholdings in the Company were as follows:

7.  On 7 November 2008, all the six shareholders of the Company resolved (“the 2008 Resolutions”) inter alia that shares in China Flavors, although registered in the name of the Company, would be beneficially owned by each shareholder according to the proportion of funds each of them provided to the Company and that an agreement would be entered into between the Company and those shareholders who decided to provide funds to the Company.

8.  The Plaintiff then pleaded a loan agreement dated 10 November 2008 between D1, D2 and D3 and the Company (“November 2008 Agreement”) pursuant to which D1 to D3 advanced a loan in the total sum of HK$26,500,000 (“Loan”) to the Company for the acquisition of shares in China Flavors. The Loan carried interest at 3% per month and was to be repayable within 14 days (or such other date to be agreed in writing by the parties). If by the due date, the Company could not repay the Loan with interest, then it should transfer the China Flavors shares to D1 to D3 in proportion to the individual loan amount of each of them.

9.  Between 14 and 19 November 2008, D1 to D3 duly advanced the Loan to the Company. On or about 27 November 2008, the Company used the Loan to acquire over 28 million shares in China Flavors at the average price of HK$0.92 per share.

10.  The Plaintiff went on to plead that on 1 June 2009, the six shareholders discussed a proposed announcement of China Flavors relating to the shareholding structure of the Company and the Company’s acquisition of shares back in November 2008. At the end of the discussion, they unanimously resolved (“2009 Resolution”) that their shareholdings in the Company would be adjusted by share transfers among themselves to reflect each of their relative contribution in funds, if any, prior to March 2009 to the Company to enable it to acquire shares in China Flavors. The 2009 Resolution was recorded in the minutes of a shareholders’ meeting dated 1 June 2009 (“the 2009 minutes”).

11.  The English translation of the 2009 Resolution was in these terms:

“The number of shares increased by the shareholders before 30 March 2009; issue new announcement on the shareholding percentages and the shares held by the shareholders, the number of shares and the percentages are as follows:-

1. [the Plaintiff] shareholding 89,215,509.99 shares, shareholding percentage is 31.10%;

2. [D1] shareholding 108,865,753 shares, shareholding percentage is 37.95%;

3. [D2] shareholding 29,309,030 shares, shareholding percentage is 10.22%;

4. [Li] shareholding 12,495,816.01 shares, shareholding percentage is 4.36%;

5. [D3] shareholding 15,173,687 shares, shareholding percentage is 5.29%;

6. [Qing] shareholding 31,791,204 shares, shareholding percentage is 11.08%.”

12.  At around the same time, the Plaintiff was informed that D2 had agreed to hold the shares of Wang Ming Qing on his behalf.

13.  On or about 29 June 2009, pursuant to the 2009 Resolution and the arrangement between D2 and Wang Ming Qing, various share transfers among the shareholders took place. As a result, Qing ceased to be a registered shareholder and the % shareholding of the remaining five became as follows:

14.  The Plaintiff averred that the 2009 minutes recorded an agreement between the Company and D1 to D3 to vary the terms of the November 2008 Agreement. The Plaintiff further averred that the effect of the 2009 Resolution and the subsequent increase in D1 to D3’s shareholding in the Company was that the Company’s obligation to repay the Loan under the November 2008 Agreement had been waived or discharged. There was therefore no further obligation on the Company’s part to repay the Loan.

15.  What followed in the Statement of Claim was the Plaintiff’s complaint.

16.  On or about 1 March 2012, the Company entered into a written Supplemental Agreement with D1 to D3 (“Supplemental Agreement”).

17.  By the Supplemental Agreement, D1 to D3 purported to waive their rights to the repayment of the Loan under the November 2008 Agreement in consideration of the Company issuing new shares credited as fully paid up to them (“New shares”). Pursuant to the Supplemental Agreement, new shares in the Company were issued to them as follows (“Purported Capitalisation”):

18.  The Supplemental Agreement was purportedly approved by the Company by:

(1) two written resolutions of allthe shareholders of the Company, one in English and one in Chinese, both purportedly signed by all shareholders (the “2012 Shareholders’ Resolutions”),

(2) two written resolutions of all the directors of the Company, one in English and one in Chinese, both purportedly signed by all directors (the “2012 Board Resolutions”).

          (Collectively “the 2012 Resolutions”).

19.  New shares were indeed issued to D1 to D3 and as a result, after 1 March 2012, the Company’s shareholding structure became as follows:

	(1) Plaintiff	3,110 shares/ 28.10%
	(2) D1	4,559 shares/ 41.19%
	(3) D2	2,199 shares/ 19.87%
	(4) Li	436 shares/ 3.94%
	(5) D3	763 shares/ 6.89%

20.  In gist, the Plaintiff’s complaint in the Statement of Claim was that by reason of the 2009 Resolution and the increase in D1 to D3’s shareholding in June 2009, the repayment of the Loan had already been waived by D1 to D3. Alternatively, the Company’s obligation to repay had already been discharged. The Supplement Agreement and the issue of New shares to D1, D2 and D3 in March 2012 were thus invalid, void or voidable as they were not supported by consideration and were beyond the powers of the directors of the Company and contrary to the Articles.

21.  On 24 October 2012, the Plaintiff issued the Writ herein with the Statement of Claim endorsed. In the prayer for relief, the Plaintiff sought to rescind the Supplemental Agreement executed by the Company pursuant to the 2012 Resolutions and to declare void the 2012 Resolutions. The other reliefs claimed were essentially for the cancellation of the New shares issued to D1 to D3 and rectification of the share register.

Whether Common Law Derivative Action available to a BVI Company

22.  The present action by the Plaintiff is admittedly a common law derivative action.

23.  Mr Trehey, a practising BVI lawyer engaged by the Company, explained that the BVI had codified in statute the rights of members of a BVI company to bring a derivative action. The common law principles relating to derivative actions are now contained in section 184C of the BVI Business Companies Act 2004 (“the Act”). Any member wishing to bring an action in the name and on behalf of a BVI company must follow the procedure set out in it.

24.  Section 184C(1) of the Act provides that the BVI Court may, on the application of a member of a BVI company, grant leave to that member to:

(1) bring proceedings in the name and on behalf of that company; or

(2) intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on behalf of the company.

25.  In determining whether to grant leave under section 184C(1) of the Act, the Court must take the following matters into account:

(1) whether the member is acting in good faith;

(2) whether the derivative action is in the interests of the company taking account of the views of the company’s directors on commercial matters;

(3) whether the proceedings are likely to succeed;

(4) the costs of the proceedings in relation to the relief likely to be obtained; and

(5) whether an alternative remedy to the derivative claim is available.

26.  Section 184C(3) of the Act provides that leave to bring or intervene in proceedings may be granted under section 184C(1) only if the Court is satisfied that:

(1) the company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or

(2) it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders or members as a whole.

27.  Section 184C(6) of the Act provides that except as provided in this section, a member is not entitled to bring or intervene in any proceedings in the name of or on behalf of a company.

28.  Mr Justice Bannister QC in Nigel Gray v Allan Leddra and Pro-Flex Packaging Co Limited BVIHC (COM)79 of 2011, handed down on 4 April 2012, set out the position on derivative actions under BVI law as follows:

“A derivative action requires permission under section 184C. In considering whether to grant permission, the Court here is mandated to take into account a number of important considerations. The Court may not give permission unless it is satisfied that the company itself does not intend to make the claim and that it is in the interests of the company that conduct of the proceedings should not be left to the company or to a majority of its board or of its members. These conditions are of so stringent a nature that in my judgment it is an abuse of the process to attempt to mount a derivative claim without the consent of the Court under section 184C. If that permission is granted, then it seems to me that it is a matter of case management whether the derivative claim is prosecuted as part of unfair prejudice proceedings or is tried together with them or separately, but to attempt to bring such a claim without permission is, in my judgment, an abuse.”

29.  The learned Judge was clearly of the view that it would be an abuse of process to mount a derivative claim without the consent of the Court under the Act.

30.  For these reasons, Mr Trehey further opined that if this Action were to be brought in the BVI without first obtaining leave of the BVI Court, it would be liable to be struck out as an abuse of process.

31.  It did not appear the Plaintiff disputed Mr Trehey’s opinion correctly represented the legal position under BVI laws. The real question for this court was whether BVI law or Hong Kong law governed the Plaintiff’s locus standi to mount a derivative action.

32.  In Johnson The Conflict of Laws in Hong Kong 2^nd Ed. p 592, the legal position was summarised as follows:

“The ability to bring a derivative action in Hong Kong is a matter for the law of the place of incorporation of the company, though it is also necessary to comply with Hong Kong procedural requirements for the bringing of such actions.”

33.  In East Asia Satellite Television (Holdings) Ltd. v New Cotai LLC [2011] 3 HKLRD 734, the disputes arose out of a joint venture between the Plaintiff and the 1^st Defendant to develop a hotel, retail and entertainment complex on the Cotai Site in Macao. The 4^th Defendant, a Macanese company, was the grantee of the Cotai Site. It was owned as to 96% by the 3^rd Defendant and as to 4% by the 2^nd Defendant. The 3^rd Defendant was wholly owned by the 2^nd Defendant. By a share Purchase Agreement, the Plaintiff sold 40% of its shares in the 2^nd Defendant to the 1^st Defendant. Subsequently, the Plaintiff brought inter alia a derivative action, on behalf of the 2^nd to 4^th Defendants, against the 1^st Defendant and its directors for dishonest assistance and conspiracy.

34.  The leading judgment was given by Tang ACJHC (as he then was) with whom Fok JA and Chu JA agreed. The parts of the judgment which were germane to the present discussion read as follows:

“32. A common issue in the multiple derivative actions is whether it is the law of the place of incorporation (lex incorporationis) or lex fori which governs whether a derivative action is available...

…

34. …[Lawrence Collins J] said at page 1284 para. 50 of his judgment [in Konamaneni v Rolls Royce Industrial Power (India) Ltd. [2002] 1 WLR 1269] :

[50]… If it had arisen for decision I would have held that the law of the place of incorporation governs. That is because the basic rule is that the shareholders had no direct rights, as Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 makes clear. Although for purely English domestic purposes, the exceptions to the rule have been regarded as a procedural device, I do not consider that in the international context their real nature is procedural. They confer a right on shareholders to protect the value of their shares by giving them a right to sue and recover on behalf of the company. It would be very odd if that right could be conferred on the shareholders of a company incorporated in a jurisdiction which had no such rule, and under which they had acquired their shares.

35. In Base Metal Trading Ltd v shamurin [2005] 1 WLR 1157, 1176, Arden LJ said at para. 68:

[68] Another example of a matter governed by the law of the place of incorporation is the determination of the circumstances as a matter of substantive law in which the shareholders can bring actions on behalf of the company (often called ‘derivative’ actions): See Konamaneni. …

…

37. With respect, as Lawrence Collins J said, a derivative action is a procedural device, which confers a right on shareholders to protect the value of their shares by giving them a right to sue or recover on behalf of the company.  It is true that the cause of action asserted is the company’s.  But a stranger to the company would not have the right to bring an action in the name of the company.  Nor a beneficial owner (as opposed to a legal owner) of shares.  The right to bring a derivative action is an incident of the legal ownership.”  

35.  In the end, the Court of Appeal’s conclusion, at para 50 of the judgment, was that “it is not arguable that the right to bring a multiple derivative action is not governed by the law of the place of incorporation”.

36.  This court is bound by the Court of Appeal decision in East Asia Satellite Television (Holdings) Ltd. v New Cotai LLC.  The legal position is clear - whether a shareholder can commence a derivative action in the name and on behalf of the company is a matter of substantive law, and is governed by the law of the place of incorporation ie lex incorporationis. In the present case, this question is governed by BVI law. Under BVI law, a shareholder can only commence a derivative action in the name and on behalf of the company with leave of the BVI Court. No leave has been obtained. The action as presently constituted is defective.

37.  The Plaintiff submitted that leave from a BVI Court was not required but that submission was directly contradicted by the passage of Bannister J’s judgment in Nigel Gray v Allan Leddra and Pro-Flex Packaging Co Limited BVIHC, supra.

38.  Indeed, the authorities cited by the Plaintiff to this court support, rather than detract from, the legal propositions set out and/or quoted in East Asia Satellite Television (Holdings) Ltd. v New Cotai LLC.

39.  In Base Metal Trading Ltd v Shamurin [2005] 1 WLR 1157 Arden LJ said at paras 67 and 68:

“67. The principle of conflicts of law that the law of the place of incorporation applies to matters of substantive company law has been applied by the English courts. For instance, when a company incorporated abroad was in liquidation here, the English courts applied the law of the place of incorporation to the question of entitlement to surplus assets: see In re Banque des Marchands de Moscou (Koupetschesky) [1958] Ch 182…

68. Another example of a matter governed by the law of the place of incorporation is the determination of the circumstances as a matter of substantive law in which the shareholders can bring actions on behalf of the company (often called "derivative" actions): see Konamaneni v Rolls Royce Industrial Power (India) Ltd [2002] 1 WLR 1269. The question whether a shareholder has a right to bring a derivative action may have to be distinguished in future from the question whether the shareholder has satisfied any procedural rules from bringing a derivative claim, for example by serving prior notice on the company. My provisional view is that these are matters of procedural law for the lex fori…”

40.  In Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370, Lord Millet NPJ was of a similar view:

“55. Section 168BC of the Companies Ordinance adopts the course which has been taken in England since 1994 but with two significant differences. First, in applying for leave the plaintiff is not required to establish a prima facie case but only that there is a serious question to be tried. Secondly, by preserving the common law action it appears to have made the requirement to obtain the leave of the court optional. It seems that this may have been intended to cater for overseas companies. But it is not necessary to preserve the common law of Hong Kong in order to cater for such companies; such law is not even relevant to them. If the question whether a derivative action is available is a question of substantive law, as the Bills Committee thought (following statements to this effect in Konamaneni v Rolls Royce (India) Ltd [2002] 1 WLR 1269 at p.1284 and Base Metal Trading Ltd vShamurin [2005] 1 WLR 1157 at p.1176 (CA), then it is governed by the law of the place of incorporation. The same law also governs the company's indoor management. Neither question is governed by the common law of Hong Kong; both are governed by the law, whether statutory or common law, of the overseas jurisdiction.” (emphasis added)

41.  Similarly, this court is bound by the Court of Final Appeal’s decision in Waddington Ltd v Chan Chun Hoo.

42.  To conclude, it would appear to this court that the legal position has been accurately summarised in the passage of Johnson The Conflict of Laws in Hong Kong 2^nd Ed. quoted above ie the ability to bring a derivative action in Hong Kong is a matter for the law of the place of incorporation of the company, though it is also necessary to comply with Hong Kong procedural requirements for the bringing of such actions.

43.  Pausing here to take stock of the situation, I would make three observations.

44.  First, it was not in dispute that no leave from the BVI Court had been obtained by the Plaintiff. Second, there was no suggestion from the Plaintiff, or any authority in support, that leave from the BVI Court could be obtained retrospectively after a derivative action had long been commenced. Third, no authority has been shown to this court in support the proposition that such retrospective leave, even if permissible under BVI law, could be obtained, not from the BVI Court, but from a Hong Kong court, if and when the Plaintiff saw fit to apply for it in order to rectify any defects in the present action.

45.  In these circumstances, and given this court’s conclusion as to the legal position under BVI law, the Company’s and the 1^st & 3^rd Defendants’ applications to strike out the Statement of Claim on the ground of locus standi must succeed.

Striking out on the merits

46.  As I said earlier, in the prayer for relief, the Plaintiff was seeking to rescind the Supplemental Agreement, declare void the 2012 Resolutions and cancel the New shares issued to D1 to D3.

47.  I have already summarized the Plaintiff’s pleaded case in the Statement of Claim. I should now set out what the evidence revealed as undisputed or indisputable facts.

48.  First, the 2009 Resolution was indeed unanimously approved by all the six shareholders of the Company, as recorded in the 2009 minutes. But there was no record in the 2009 minutes, whether directly or indirectly, of an agreement between the Company and D1 to D3 to vary the terms of the November 2008 Agreement, as pleaded in the Statement of Claim. There was simply no reference to the November 2008 Agreement or the Loan in the minutes.

49.  Second, the 2012 Shareholders’ Resolutions. There was no dispute that it was indeed unanimously approved and signed by all the five shareholders of the Company viz. the Plaintiff, D1 to D3 and Li. The 2012 Shareholders’ Resolutions were inter alia in these terms:

“IT IS NOTED that :

(1) the Company entered into [the November 2008 Agreement] with Wang Ming Fan, Wang Ming You and Qian Wu (collectively, the “Lenders”) dated 10 November 2008 whereby the Lenders agreed to provide a loan in the amount of HK$26,500,000(the “Loan”), of which HK$19,000,000 shall be provided by Wang Ming Fan, HK$1,700,000 shall be provided by Wang Ming You and HK$5,800,000 shall be provided by Qian Wu (the “Individual Loan Amount”), to the Company for acquiring the issued shares of China Flavors and Fragrances Company Limited (“China Flavors”);

(2) the Company applied the amount of the Loan to acquire 28,804,349 shares of China Flavors on 27 November 2008 and in accordance with the Individual Loan Amount, each of the Lenders shall have effective interest in the below number of acquired shares of China Flavors;

Name of Lender	No. of acquired shares of China Flavors
Wang Ming Fan	20,652,174
Wang Ming You	1,847,827
Qian Wu	6,304,348

(3) as at the date of this written resolution, the Company has not repaid any part of the Loan. The Company proposed to enter into a supplemental agreement to the Loan Agreement (the “Supplemental Agreement”) with the Lenders whereby the Lenders shall waive the Company’s repayment of the Loan in consideration of the capitalization of the Loan (the “Capitalization”) by the Company issuing new shares (the “New Shares”) credited as fully paid to the Lenders in the following proportion with reference to the Individual Loan Amount:

Name of Lender	No. of New Shares
Wang Ming Fan	764
Wang Ming You	69
Qian Wu	234

(4) as a result of the proposed Capitalization and issue of New Shares, the respective shareholding interest of the shareholders of the Company will be as follows:

Name of Shareholder	No. of Company’s Shares (%)
Wang Ming Fan	4,559 shares (41.20%)
Wang Ming You	2,199 shares (19.87%)
Wong Ming Bun	3,110 shares (28.11%)
Qian Wu	763 shares ( 6.89%)
Li Qing Long	436 shares ( 3.94%)
	_______________________
Total	11,067 shares (100.00%)

A copy of the signed Loan Agreement and the draft Supplemental Agreement have been circulated to all Shareholders for consideration.

RESOLUTIONS

IT IS RESOLVED that:

(1) the terms and conditions of the Capitalization are fair and reasonable and in the best interest of the Company and are hereby confirmed and approved;

(2) the form and substance of the Supplemental Agreement be and is hereby approved and any one of the directors of the Company be authorised to sign the Supplemental Agreement and to affix the common seal thereon (if necessary) and to perform the Supplemental Agreement;

(3) a total of 1,067 New Shares be issued and allotted as fully paid up at par to the Lenders in the proportion stated above in consideration of the Lenders waiving the repayment of the Loan and any amount outstanding under the Loan Agreement…”

50.  Third, the 2012 Directors’ Resolutions were similarly unanimously approved and signed by all the five directors of the Company viz. the Plaintiff, D1 to D3 and Li.  It was in substantially the same terms as the 2012 Shareholders Resolutions.

51.  Fourth, the Supplemental Agreement, also dated 1 March 2012, unambiguously stated in its recital that the Company had not yet repaid the Loan and agreed to do so by way of issuing new shares to D1 to D3 in proportion to the amount of the loan made by each of them with interest. It also set out the post-capitalisation shareholding of the five shareholders of the Company which corresponded with what was set out in the 2012 Resolutions.

52.  Fifth, thereafter, the Company allotted the New shares to D1 to D3 and the share certificates were executed by D2 as a director of the Company pursuant to the mandate in the 2012 Resolutions.

53.  Sixth, on 5 March 2012, China Favors’ board of directors convened and resolved that it should issue an announcement on the new shareholding structure of the Company and an announcement (“the Announcement”) was issued on the same day. On or about 23 March 2012, China Flavors published its Annual Report for 2011. The shareholding of the five shareholders of the Company as disclosed in the Annual Report again corresponded with what was stated in the 2002 Resolutions, the Supplemental Agreement and the Announcement.

54.  The long and short of it all was this - the evidence overwhelmingly suggested that as at March 2012, the Company had still not repaid the Loan to D1 to D3 and hence all the directors/shareholders of the Company, including the Plaintiff himself, agreed to issue the New shares as repayment. What the Plaintiff was now trying to do was to disown and annul legal documents that he had previously signed ie the 2012 Shareholders Resolutions and 2012 Directors Resolutions, as well as to challenge the accuracy of other contemporaneous documents which were consistent with the 2012 Resolutions ie the Supplemental Agreement, the Announcement and the 2011 Annual Report of China Flavors. In so doing, the Plaintiff was also seeking to disavow the facts recorded in some of those documents ie as at March 2012, the Company had still not repaid the Loan to D1 to D3 and agreed to issue the new Shares as repayment.

55.  The Plaintiff did provide an explanation in his 2^nd Affirmation filed in these proceedings. His explanation was

“9. 2012 Shareholders’ Resolutions and 2012 Directors’ Resolutions (the “2012 Resolutions”)”

…

(c) It was shortly prior to June 2012 that I first became aware of this purported capitalisation in March 2012. Since then, I have pressed for inspection of the 4^th Defendant’s books to no avail. Until around June 2012 I had never seen the 2012 Resolutions (copies or original documents) and it was only on 4 May 2013 that I was allowed to inspect originals of these documents.

(d) Having now seen the original documents, I confirm that my signature appears on them. However, I do not recall the circumstances in which these documents came to be signed by me. I do not recall reading them before signing them, nor do I recall anyone alerting me to its contents or explaining them to me…

(e) Further, I do not recall having seen the Supplemental Agreement (a copy or the original document) before around June 2012, nor do I recall any board meetings approving it.”

56.  The Plaintiff also said he had not attended the board meetings of China Flavors approving the Announcement or the 2011 Annual Report.

57.  Nevertheless, on the Plaintiff’s own evidence, he confirmed he did sign the 2012 Resolutions albeit he could not recall the circumstances in which he signed them. He just did not recall reading them before he signed them. These without more were not grounds to vitiate a valid legal document at all.

58.  Parties of full age and ordinary understanding will be held to documents which they have chosen to sign unless there is a recognised legal basis for concluding that their apparent consent has been vitiated; or that reliance on that document by some other person falls into some category of unconscionable conduct justifying relief in equity. That the person signing does not know its contents is wholly immaterial. The  vitiating factors at common law includes fraud, mistake, misrepresentation, non est factum, duress, undue influence and lack of mental capacity. However, to disown a signed legal document, facts constituting the particular vitiating factor relied on must be pleaded and established by the evidence: Ming Shiu Chung v Ming Shiu Sum (2006) 9 HKCFAR 324 per Ribeiro PJ at paras. 84 & 87. 

59.  Further, it is well established that the law requires a plaintiff to show a prima facie case, when his locus to sue derivatively on behalf of the company is challenged, that the company is entitled to the relief claimed and the action falls within a recognized exception to the rule in Foss v Harbottle ie where a wrong has been done to a company, it is the company itself which is the proper plaintiff: Ribeiro PJ in Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 at paras. 10 - 12.  Normally, in derivative actions, the complaining shareholder must establish that the company has suffered from acts which are either of a fraudulent character or ultra vires the Company’s power: Burland v Earle [1902] AC 83.

60.  In the present case, neither the Statement of Claim nor the draft Amended Statement of Claim contained any allegation of fraud. In so far as it contained an allegation that the issue of the New shares was ultra vires, the answer lied in the Duomatic principle.

61.  In re Duomatic Ltd [1969] 2 Ch 365 at 373, Buckley J said:

“where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.”

62.  Subsequently, Neuberger J (as he then was) summarised the principle in the following terms in EIC Services Ltd v Phipps [2003] 1 WLR 2360 at paragraph 122:

“The essence of the Duomatic principle, as I see it, is that, where the articles of a company require a course to be approved by a group of shareholders at a general meeting, that requirement can be avoided if all members of the group, being aware of the relevant facts, either give their approval to that course, or so conduct themselves as to make it inequitable for them to deny that they have given their approval. Whether the approval is given in advance or after the event, whether it is characterised as agreement, ratification, waiver, or estoppel, and whether members of the group give their consent in different ways at different times, does not matter.”

63.  While the re Duomatic Ltd. principle does admit of exceptions, none of them were shown to apply in the present case.

64.  To conclude, this court was of the view that there was no prima facie case of fraud, ultra vires or indeed any other basis to suggest that a wrong had been done to the Company such as to entitle the Company (or the Plaintiff suing on its behalf) to vitiate the 2012 Resolutions, the Supplemental Agreement or the issue of the New shares to D1 to D3 in March 2012. In these circumstances, this court has come to the conclusion that the Statement of Claim ought to be struck out on the merits.

Amendments to the Statement of Claim

65.  The principal amendments relied on the same facts as contained in the Statement of Claim, but added a plea that the 2009 Resolution constituted in law a legally binding agreement (“2009 Shareholders’ Agreement”) whereby in consideration of their agreement to adjust their shareholdings in the Company, none of them would be entitled to ask the Company for repayment of any funds previously made available to the Company for acquiring shares in China Flavor. This agreement was made for the benefit of the Company. Accordingly, the Plaintiff, in his personal capacity as shareholder and a party to the 2009 Shareholders’ Agreement, prayed for a declaration that the 2012 Shareholders Resolutions were made in breach of the 2009 Shareholders’ Agreement. 

66.  The Plaintiff relied on the case of Snelling v Snelling [1973] 1 QB 87 in saying that the additional pleas and the additional prayer for declaratory relief were legally sustainable. Submissions were made by Mr  Pow SC at the hearing that Snelling v Snelling were clearly distinguishable and did not assist the Plaintiff.

67.  It was not necessary to decide whether or not the additional pleas and the additional prayer were legally sustainable. This court would proceed on the assumption that they were.

68.  This court recognizes that it is a guiding principle of cardinal importance on the question of amendment that, generally speaking, all such amendments ought to be made “for the purpose of determining the real question in controversy between the parties to any proceedings or of correcting any defect or error in any proceedings”. This court is also deeply conscious that the primary aim in exercising its powers under the Rules of the High Court is to secure the just resolution of disputes in accordance with the substantive rights of the parties.

69.  However, given this court’s conclusion that the original derivative action ought to be struck out, it would be inappropriate to grant leave to amend so as to enable the Plaintiff to tack a personal cause of action on a defective derivative action. Ex hypothesis, there was no more derivative action for the personal action to tack on. Further, there was no justification to retain the Company as a party in a derivative sense. Lastly, there would be no prejudice to the Plaintiff in disallowing him to do so. The derivative action could not be saved by the amendment. Nor would the amendment affect the incidence of costs in connection with the striking out applications. If so advised, the way forward for the Plaintiff would be to commence a fresh action to pursue whatever rights he may have in his own personal capacity and seek an adjudication of those rights in that fresh action.

70.  For these reasons, this court would not be prepared to exercise its discretion to grant leave to amend.

Disposition and costs order nisi

71.  Accordingly, this court would:

(1) allow the Company’s summons;

(2) allow the 1^st and 3^rd Defendants’ summons;

(3) dismiss the Plaintiff’s summons;

(4) make an order nisi that costs of all three summonses should follow the event, to be taxed if not agreed, with certificate for two counsel.

72.  Lastly, I thank counsel for their helpful submissions.

(Peter Ng) Judge of the Court of First Instance High Court