SINOSTATE ENTERPRISES LTD AND OTHERS v. KINGS PARADISE LTD AND OTHERS

HCA 1664/2020

[2024] HKCFI 1752

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1664 OF 2020

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BETWEEN

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DECISION

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1.  There are three sets of applications before me.

2.  The first set of applications consists of parallel applications by the 2^nd Defendant on the one hand and the 3^rd to 5^th Defendants on the other, to strike out the Plaintiffs’ claims against them, unless the Plaintiffs engage legal representatives to file Notices to Act on their behalf within 7 days.

3.  This set of applications is premised on RHC Order 5, Rule 6. That provides:

“(2) A body corporate may not begin or carry on any such proceedings in the Court otherwise than by a solicitor except —

(a) as expressly provided by or under any enactment; or

(b) where leave is given under paragraph (3) for it to be represented by one of its directors.

(3) (a) An application by a body corporate for leave to be represented by one of its directors shall be made ex parte to a Registrar and supported by an affidavit, made by the director and filed with the application, stating and verifying the reasons why leave should be given for the body corporate to be represented by the director.

(b) The relevant resolution of the board of the body corporate authorizing the director to appear on its behalf if leave is granted shall be exhibited to the affidavit.

(4) No appeal shall lie from an order of the Registrar under paragraph (3) giving or refusing leave.

4.  Although the Plaintiffs were legally represented when they commenced these proceedings, their solicitors ceased to act for them. The Plaintiffs have accordingly not been legally represented for many months now. The Plaintiffs have twice applied to the Registrar for leave to be represented by a director in these proceedings. But the Registrar has refused leave on both occasions.

5.  In my view, Order 5 Rule 6 is clear. The Plaintiffs may only carry on these proceedings if they are represented by solicitors. If they are not so represented and have not secured the necessary leave from the Registrar to be represented by a director, then the Court cannot hear their claims. This is regardless of the merits of the Plaintiffs’ claims (upon which I express no view). Consequently, I make an Order in the following terms:

“Unless the Plaintiffs cause legal representatives to file a Notice to Act in these proceedings by 4.30 pm on Tuesday 16 July 2024, the Plaintiffs' claims against the 2^nd, 3^rd, 4^th, and 5^th Defendants will be struck out without further order, with the costs of the Plaintiffs’ actions against the 2^nd, 3^rd, 4^th and 5^th Defendants to be paid by the Plaintiffs to the aforesaid Defendants.”

6.  The second set of applications consists of parallel applications by the 2^nd Defendant on the one hand and the 3^rd to 5^th Defendants on the other for security for costs, if the Plaintiffs’ applications against them proceed.

7.  In my view, it would not be appropriate to order security for costs in the circumstances of these proceedings. In effect, the two factions in these proceedings (the Plaintiffs of the one part and the Defendants of the other) accuse each other of misappropriating company assets or otherwise acting to the detriment of the Plaintiff companies. Without a trial, it is not possible to determine what precisely has happened in relation to the conduct of the Plaintiffs’ business and the disposition of its assets. It is possible that by reason of the acts of one or other faction or both, the Plaintiffs funds have been wrongly depleted. I cannot at this stage rule out the possibility that requiring security will stifle legitimate claims by the Plaintiff companies. Consequently, the applications for security for costs are dismissed.

8.  The third application before me is an application by Mr Andrew Ko Kao to conduct the Plaintiffs’ claims in a representative capacity as a statutory derivative action within section 732 of the Companies Ordinance (Cap 622). That section provides:

“Member of company or of associated company may bring or intervene in proceedings:

(1) If misconduct is committed against a company, a member of the company or of an associated company of the company may, with the leave of the Court granted under section 733, bring proceedings in respect of the misconduct before the court on behalf of the company.

(2) If, because of misconduct committed against the company, a company fails to bring proceedings in respect of any matter, a member of the company or of an associated company of the company may, with the leave of the Court granted under section 733, bring proceedings in respect of the matter before the court on behalf of the company.

(3) If, because of misconduct committed against the company, a company fails to diligently continue, discontinue or defend proceedings, a member of the company or of an associated company of the company may, with the leave of the Court granted under section 733, intervene in the proceedings before the court for the purpose of continuing, discontinuing or defending those proceedings on behalf of the company.

(4) The cause of action in relation to the proceedings under subsection (1) or (2) is vested in the company. Any of those proceedings must be brought in the name of, and the relief (if any) must be sought on behalf of, the company.

(5) The right to continue, discontinue or defend any proceedings intervened in under subsection (3) is vested in, and the relief (if any) must be sought on behalf of, the company.

(6) Subject to section 736, this Division does not affect any common law right of a member of a company, or a member of an associated company of a company, to bring proceedings on behalf of the company, or intervene in any proceedings to which the company is a party.

(7) This section does not prevent a member of a company, or of an associated company of a company, from bringing proceedings in respect of the company, or intervening in any proceedings to which the company is a party, on the member’s own behalf in respect of any personal right.

9.  Mr Kao is a director of the 1^st, 2^nd and 3^rd Plaintiffs. He is a shareholder of the 3^rd Plaintiff. He previously applied to the Registrar in these proceedings to represent the Plaintiffs as director. As noted, the Registrar refused his applications.

10.  This is not an appropriate case for a statutory derivative action. The Plaintiff companies have not failed to bring proceedings. They have clearly commenced proceedings. The problem is that the Plaintiff companies are currently not legally represented contrary to Order 5 Rule 6. Mr Kao is in effect seeking to circumvent the requirement of legal representation by recourse to section 732. A statutory derivative action cannot be used to circumvent the requirement of legal representation in Order 5 Rule 6. Mr Kao’s application for leave to bring a statutory derivative action is therefore refused.

11.  There will be provisional cost orders (that is, cost orders nisi) as follows:

(1) As against the Plaintiffs, the 2^nd and 3^rd to 5^th Defendants are to have their costs of the strike out applications.

(2) As against the 2^nd and 3^rd to 5^th Defendants, the Plaintiffs are to have their costs of the applications for security for costs.

(3) As against Mr Kao, the 2^nd and 3^rd to 5^th Defendants are to have their costs of the application for leave to intervene by way of a statutory derivative action.

(4) All costs are to be taxed if not agreed, in any event.