MING LAI SIU FUN v. TSANG HUNG KONG AND OTHERS

HCA 2057/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2057 OF 2009

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J U D G M E N T

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Introduction

1.  There are before me three summonses which I will set out in the order in which they were taken out.  Firstly, the Plaintiff’s summons dated 7 October 2009 which, amongst other things, prohibits the 1st Defendant Mr Tsang from dealing with the assets of the 2nd and 3rd Defendants pending the outcome of this action.  Next, dated 15 December 2009, is the 1st Defendant’s summons to strike out the statement of claim on a number of grounds and finally, the Plaintiff’s summons of 22 January 2010 to enter judgment in default of defence against the 1st Defendant in the face of an unless order that he file his defence no later than 15 December 2009, failing which for an order that this action be consolidated with the 2^nd Defendant’s action in which it is the Plaintiff in HCA 2740/2008.  The basis and the factual background giving rise to all of these matters will I hope become clear in the course of the succeeding paragraphs as I attempt to summarise the facts and the argument of Sir John Swaine SC, for the 1st Defendant, who has addressed me first in support of his client’s summons of 22 January 2010 and of Mr Scott SC for the Plaintiff.

2.  The most convenient order of play, as it were, is to take Mr Scott’s summons for a default judgment first because it raises a relatively clean and short point which, if successful, would put an end to the action.  Nevertheless, even if Mr Scott were to succeed I would, in the event of an appeal, propose to consider Sir John’s summons to strike out the statement of claim.  Finally, I will consider whether it would be right and/or necessary to continue the present interim injunction granted by Chu J on 16 October 2009.

The Material Facts

3.  As will become apparent, this dispute has more to do with what has been taking place on the Mainland, relating as it does to the business of the 3rd Defendant, a company incorporated in the PRC, which I will from now on refer to as Yue Kong.

4.  The 2nd Defendant is a company registered in Hong Kong.  I will refer to it as the company.  Its shareholding is equally divided between two rival factions.  The Plaintiff holds 3,600 shares [42.8%] and her brother Lai Yu Sum, 600 shares [7.1%].  Mr Tsang [1st Defendant] also holds 3,600 shares and he is supported by the remaining shareholder, Mr Stephen Yan who holds 600 shares.  The remaining 1,600 authorised shares are unissued.  All four shareholders are also directors of the company.  Mr Tsang is its chairman.  In the event of a tied vote amongst the directors, the chairman has a casting vote.

5.  The company conducts its business, which is entirely on the Mainland, through Yue Kong.  The chronology to this starts in September 2006 when Mr Tsang was informed by a Mr Wang, who is a well-connected PRC banker, that there was to be an auction of a fishery business at Taishan.  With a view to acquiring this business the company was incorporated on 6 October 2006.  The auction was held in November 2006.  Because Yue Kong was yet to be established the interested investors paid their contributions to Mr Wang so that he might bid on their behalf.  The investors and their individual contributions were as follows:

The Plaintiff’s contribution was paid through Mr Tsang’s PRC company because she did not have a PRC bank account.  As such the record does not reflect any contribution by her to bid for the fishery licence nor does it show any contribution by her in the shareholdings of Yue Kong which was incorporated on 10 January 2007, after Mr Wang had successfully bid for the fishery licence. 

6.  The capital contributed to Yue Kong by the company’s directors was RMB10.8 million which included funds used in bidding for the licence.  The company became a 90% shareholder of Yue Kong which is its only investment and business.  The remaining 10% in Yue Kong is held by Chiu Fung a PRC company which represents the interests of the PRC investors being at that stage a Mr Sun and a Mr Liu.  Under Yue Kong’s articles, its Board of Directors comprises three persons, two appointed by Chiu Fung and the other by the company.  The Chairman of the Board and its Legal Representative were to be appointed by the company pursuant to which Mr Tsang was appointed to those positions on 26 December 2006.  As such Mr Tsang obtained possession, custody/control of Yue Kong’s licences, permits, records, articles of association and other books of record.  Being appointed to those positions in Yue Kong by the company, Mr Scott submits, and I venture to think rightly so, that Mr Tsang was obliged to consult his fellow directors of the company and act according to the resolutions or instructions of its Board.

7.  This action and the related earlier action by the company against Mr Tsang [HCA 2057/2009] centre on the allegations, pleaded in great detail in both, that Mr Tsang as chairman of Yue Kong has misused his powers and position and dealt with the investors contributions to the detriment of the company and Yue Kong as well as the investors themselves save, of course, of himself. 

8.  As constituted this action is a derivative action pitched at two levels on behalf of the company at one level and of its subsidiary Yue Kong at the other.  It is brought by the Plaintiff on her behalf and the other shareholders in the company, except Mr Tsang, and on behalf of Yue Kong, on the basis that Mr Tsang is in control of the company and of Yue Kong.  The earlier action by the company is brought on the contrary basis that Mr Tsang is not in control of the company.  This important feature will need further discussion by me presently.  In both actions, the relief sought by the Plaintiff in this action and the company in the other is to the same purport and effect.

The Case as Pleaded

9.  Given the nature of the applications before me, it is necessary to describe the pleaded allegations against Mr Tsang.  The statement of claim dated 7 October 2009 is in the bundle of court documents pages 1-33.  It is helpful to begin by extracting from the statement of claim the allegations of Mr Tsang’s wrongdoing and breaches of duty and then, as briefly as possible, consistent with the need to make the case intelligible for the purposes of the judgment, to describe what it is that Mr Tsang is said to have done wrong and his replies to those allegations.

10.  The summary of the case against him is contained in five sub-paragraphs of paragraph 14 of the statement of claim [Court Documents/11]:

“14.   In breach of the fiduciary duties and other duties owed by Tsang to the Company and Yue Kong as their directors, Tsang:

(a)   Refused and/or failed to ensure that Yue Kong’s acknowledged and recorded in it books and records the capital contributed to it on behalf of the Company;

(b)   Perpetrated an unlawful scheme to obtain control himself of Yue Kong;

(c)   Sold or attempted to sell Yue Kong’s assets at an undervalue;

(d)   Refused to comply with various board resolutions and shareholders’ resolutions passed by the Company to remove him as the director cum Legal Representative of Yue Kong; and

(e)   Remained in wrongful control of the Company and Yue Kong in furtherance of his unlawful scheme and other wrongdoing.”

11.  Following his appointment to the board of Yue Kong, Mr Tsang was active in its management, he of all of the four shareholders of the company being the most closely connected and concerned with the bidding process for the fishery licence, the establishment of Yue Kong and the bringing together of the investors.

12.  It is not necessary to go into the allegations in the sort of detail that appear in the statement of claim nor in Mr Scott’s and Sir John’s written arguments.  These would be matters for the trial judge should a trial take place.  The most helpful way in which to set out a narrative of events by taking in the alleged wrongdoings of Mr Tsang is to address the facts from the point of view of the summons to strike out the statement of claim.  In that way only the essential elements of the case need to be recited rather than the entire and to a great extent disputed case of the Plaintiff.

13.  The Plaintiff says that Mr Tsang has not been forthcoming to the investors about their contributions in Yue Kong in terms of how he has treated those contributions and declines to disclose Yue Kong’s actual capital position.  Mr Tsang says that his contribution has been HK$2.4 million.  The Plaintiff has contributed RMB4 million.  She says that he had the duty to pay it through a properly recognised channel, which he did not and which gave rise to problems with the mainland authorities in allowing Yue Kong to be registered as a foreign-owned company due to Mr Tsang not being able to provide “proof of capital” which I will need to describe more fully in a moment.  Further to this, he has not accounted to the Plaintiff for her capital contribution nor has he informed her of what has become of it.

14.  The next category of complaint is that he allowed the capital contributions of the mainland investors, Mr Sun and Mr Liu, to be treated differently from the other investments without informing the others of what he had allowed to happen.  Mr Sun and Mr Liu had expressed concern about their money, which had been paid-in by them as part of Yue Kong’s capital.  What Mr Tsang allowed to happen was that he treated these contributions as loans to Yue Kong with the result that what should have been Yue Kong’s capital became a liability owed by it to Mr Sun and Mr Liu.

15.  In relation to “proof of capital”, Mr Tsang has said that because the capital contributions for the establishment of Yue Kong did not come from foreign bank accounts but from PRC accounts, it could not be “proved” that the investment was from outside the PRC.  As a result, a second round of capital injection was required from the investors.  Because the mainland investors were unwilling to provide further capital, he repaid their initial investment to them, treating it as loans by them to Yue Kong.  The Plaintiff says that this is a deliberate ploy on his part which would leave him as the only apparent shareholder in Yue Kong and therefore in a position to take over the fishery business owned by it as well as the real estate that it also owns.

16.  A final complaint in relation to Yue Kong is the allegation that Mr Tsang has misappropriated HK$800,000 of its capital.  He says that he had overpaid and was merely taking back the overpayment.  The Plaintiff supports her case on this by saying that Mr Tsang is quite unable to point to any overpayment by him in Yue Kong’s accounts.  It is submitted on her behalf that this is an example of Mr Tsang keeping the investors in Yue Kong in the dark as to what has been going on and seeking to profit from that.

17.  Having regard to what she was able to discover about the way in which Mr Tsang was conducting himself in Yue Kong’s affairs, she attempted to have him removed from his directorships and as Yue Kong’s Legal Representative by acting through the company in Hong Kong.  A directors meeting of the company was convened on 4 August 2008 during which it was resolved to remove Mr Tsang as chairman and director of the company and to appoint the Plaintiff in his place.  Mr Tsang did not comply with this resolution and so on 10 December 2008, another meeting of the board of directors of the company was held when a resolution was passed removing Mr Tsang from his positions as director and legal representative of Yue Kong.  He ignored this resolution as well.  In the course of this dispute between the two rival factions, Mr Tsang also attempted to convene a meeting of his own of the company’s board, it is said with a view to frustrate the Plaintiff in trying to remove him from his positions.

18.  There is a serious allegation made against Mr Tsang that during the course of the calling of these board meetings and contested board resolutions, Mr Tsang has attempted to sell a substantial part of Yue Kong’s real estate assets in Taishan for nearly RMB7.9 million which, according to the Plaintiff’s valuer, was at a considerable undervalue of just over RMB4 million.  It is alleged that he had sought to do so by means of a fabricated directors’ resolution of Yue Kong and, of course, without informing the other board members.  This it is said was to raise sufficient cash to repay the mainland investors’ capital contributions which he had designated as loans by them.  In so doing, he would become the only shareholder of Yue Kong and in a position to grab Yue Kong for himself which included the fishery business with its licences and the remaining real property assets that it held.

19.  In the event, that sale did not take place because the would-be purchaser did not pay as he had agreed to.  Notwithstanding the falling through of that sale, Mr Tsang found another purchaser for these assets.  It was the discovery of all of this and the failed attempts to have him removed from the company’s and Yue Kong’s boards because of his refusal to comply with the board resolutions that the Plaintiff started an action in the High Court for the purposes of obtaining orders restraining Mr Tsang from acting as a director of Yue Kong and ordering him to deliver up the documents and articles of Yue Kong and to carry out the necessary procedures to remove himself as a director of Yue Kong and as its legal representative and, in his place, to appoint the Plaintiff to those positions.

20.  In that action, Mr Tsang questioned the validity of the company’s board resolutions authorising the bringing of the action against him.  He issued a summons to have the action struck out.  Fung J ordered the separate trial of the issue as to the authority to sue and pending that hearing he stayed the action.  This feature figures very significantly in Mr Tsang’s summons to strike out the statement of claim in this action and I will return to this aspect when I consider the argument on it.

21.  Complaint is then made that following the stay of the action before Fung J pending resolution of the preliminary issue, Mr Tsang purported to sell Yue Kong’s assets at a gross undervalue to a new buyer.  When it was discovered that this sale had taken place this action was started in derivative form to put an end to Mr Tsang’s activities.  Having started this action an interlocutory injunction was sought and obtained from Chu J on 16 October 2009 [Court Document Bundle 44-45].  The material part of the injunction is as follows:

“The 1^st Defendant shall not, whether by himself, by companies which he controls, his associates, servants, employees, agents or otherwise howsoever, deal with or otherwise dispose of the assets of the 2^nd and 3^rd Defendants of a value over HK$50,000 (or its equivalent in other currencies), unless otherwise directed by the Court;”

And so, it is this order which holds the position pending the outcome of these three summonses.

22.  From that relatively brief narrative of the material events, I now turn to the individual summonses in the order that I had indicated in paragraph 2 above.

Judgment in Default of Defence

23.  The chronology can be stated shortly.  The writ was served on 13 October 2009 at the offices of Mr Tsang’s solicitors, Messrs To and Lam.  An acknowledgement of service was filed giving notice of intention to defend on 20 October.  The deadline for service of the defence was on 24 November 2009.  On 20 November, a time summons was taken out upon which Master Ko made an unless order in these terms:

“unless by 4:00 p.m. on 15^th December 2009 the 1^st Defendant do file and serve the Defence, the Plaintiff be at liberty to apply for judgment for the reliefs claimed in the Statement of Claim.”

On 15 December, Mr Tsang’s solicitors, instead of filing a defence, took out a summons under Order 12 r.8 and 18 r. 19 to strike out the statement of claim. 

24.  Sir John’s response is to say that the course adopted by Mr Tsang’s solicitors is the correct one.  He relies on O.12 r.8(1) and (2) which is to the effect that where a defendant is challenging the jurisdiction of the court over him, which he is in this case as I will consider presently, a Defendant should not file a defence lest it be construed as a submission by him to the court’s jurisdiction and that in circumstances where the Defendant has taken out a summons to strike out the statement of claim, the Plaintiff’s solicitors should not have taken out their summons to enter judgment in default of defence. 

25.  The summons to strike out the statement of claim is in the court documents bundle at pages 53 to 58. The summons, its relevant parts for these purposes being contained in paragraphs 1 to 4, is in proper form setting out the grounds relied on.  I do not propose to repeat here what is in the summons, which is there to be read but, for the purposes of the argument, it is essential to understand the bases of the summons which, if Mr Scott is right, means that this summons is not one that can stand under O.12 r.8 because the various grounds relied on in it relate to the merits of the action and should be raised in a defence which should have been forthcoming no later than 15 December, in which circumstances, in the absence of a defence, he is entitled to his judgment.

26.  The first ground for the strike out relates to the bringing of the first action [HCA 2740/2008] at the behest of the Plaintiff in this action, by the company raising the same or substantially the same issues as in this action.  In respect of that first action, the point is taken that Fung J has ordered the determination, as a preliminary issue, of whether the Plaintiff was properly authorised in relation to the company to direct the bringing of that action.  The determination of that issue in the Plaintiff’s favour would mean that she is in control of the company and therefore that this first action is properly constituted and can proceed.  In such circumstances, this present action, which proceeds on the basis that Mr Tsang is in control of the company and of Yue Kong, will become otiose and cannot be brought in its present form as a derivative action by the Plaintiff who pleads that she and her co-shareholders, save for Mr Tsang, are not in control of the company.  It is submitted by Sir John that she cannot have it both ways and must be required to elect.  She either proceeds with the earlier action and withdraws this one or, abandons the earlier action and can then proceed in this one.  She cannot be seen or allowed to be proceeding with two mutually inconsistent actions.  She will need to elect.  The bringing of this action whilst the other remains afoot is an abuse of process.

27.  The second ground contained in paragraph 3 of the summons [page 53, Court Documents Bundle] considerably overlaps with the first ground, although this time directed at specific paragraphs of the statement of claim.  

28.  The final substantive ground is directed specifically to the nature of this action being derivative in form and to the relief sought under it.  It is said that on a proper analysis, the action as constituted is bound to fail.

29.  Mr Scott submits that in taking out a summons under O.12 r.8, those advising Mr Tsang have fundamentally misunderstood the nature of an O.12 r.8 application.  By making such a misconceived application Mr Tsang is abusing the court’s process.  If Mr Scott is right then the notion that a defendant wishing to challenge the court’s jurisdiction should not file a defence lest he be taken to be submitting to the court’s jurisdiction has no place in the present circumstances.  It is this which I now need to examine.

30.  The procedure envisaged by O.12 r.8 is that a person wishing to challenge the court’s jurisdiction is required to apply within the time limited for service of a defence.  So far so good insofar it is accepted that time for the filing of the defence expired on 15 December on which date this summons was issued.  The bases upon which such a challenge may be mounted appear in rule 8(1), (2) and (2a).  They are the following:

“8.1 (1)  A defendant who wishes to dispute the jurisdiction of the court in the proceedings by reason of any such irregularity as is mentioned in rule 7 or on any other ground shall give notice of intention to defend the proceedings and shall, within the time limited for service of a defence, apply to the Court for

(a) an order setting aside the writ or service of the writ on him, or

(b) an order declaring that the writ has not been duly served on him, or

(c) the discharge of any order giving leave to serve the writ on him out of the jurisdiction, or

(d) the discharge of any order extending the validity of the writ for the purpose of service, or

(e) the protection or release of any property of the defendant seized or threatened with seizure in the proceedings, or

(f) the discharge of any order made to prevent any dealing with any property of the defendant, or

(g) a declaration that in the circumstances of the case the court has no jurisdiction over the defendant in respect of the subject-matter of the claim or the relief or remedy sought in the action, or

(ga) an order staying the proceedings, or

(h) such other relief as may be appropriate.

(2)   A defendant who wishes to argue that the Court should not exercise its jurisdiction in the proceedings on one or more of the grounds specified in paragraph (2A) or on any other ground shall also give notice of intention to defend the proceedings and shall, within the time limited for service of a defence, apply to the Court for —

(a) a declaration that in the circumstances of the case the Court should not exercise any jurisdiction it may have, or

(b)   an order staying the proceedings, or

(c) such other relief as may be appropriate, including the relief specified in paragraph 1(e) or (f).

 (2A)  The grounds specified for the purposes of paragraph (2) are that —

(a) considering the best interests and convenience of the parties to the proceedings and the witnesses in the proceedings, the proceedings should be conducted in another court.

(b) the defendant is entitled to rely on an agreement to which the plaintiff is a party, excluding the jurisdiction of the Court, and

(c) in respect of the same cause of action to which the proceedings relate, there are other proceedings pending between the defendant and the plaintiff in another court.”

The explanatory note to rules 7 and 8 explains that:

“The policy underlying rr.7 and 8 is that a defendant should not be regarded as having submitted to the jurisdiction of the court by reason only of the fact that he appeared in the proceedings for the purpose of (1) contesting the jurisdiction of the court, (2) asking the court to dismiss or stay proceedings on the ground that the dispute in question should be submitted to arbitration or to the determination of the courts of another country, or (3) to protect, or obtain the release of, property seized or threatened with seizure in the proceedings … The new r.8(2) enables a defendant to apply to the court for a declaration that in the circumstances of the case the court should not exercise its jurisdiction.  The bases for an application under r.8(2) include that, considering the best interests and convenience of the parties and witnesses, the proceedings should be conducted in another court.”

[Hong Kong Civil Procedure 2010, page 182] Mr Scott argues that on its true construction, O.12 r.8 is all about challenges to the court’s jurisdiction on the basis that the dispute should be brought in another court.  The most frequently encountered challenges being those in which it is said that the Hong Kong court is forum nonconveniens or where jurisdiction is conferred by statute in another court or jurisdiction.

31.  When one analyses the challenges raised in Mr Tsang’s summons these are substantive going to the merits of the claim and not to the court’s jurisdiction to hear them.  In such circumstances, the correct course is either to take the point at trial, having pleaded it in the defence or, under O.18 r.19 which is the other basis of the summons.

32.  The complaint that the Plaintiff lacks the locus to bring a double derivative action cannot be a ground to challenge the court’s jurisdiction to hear the case.  It goes to the merits.  Equally, the fact that there is in existence an earlier action based on the same or substantially the same grounds does not go to the court’s jurisdiction to hear the case.

33.  I consider that Mr Scott’s analysis for O.12 r.8 having no application to this matter is the correct one and this part of the summons must therefore fall away.  The only means by which these challenges can be ventilated by Mr Tsang is either at trial or under O.18 r.19 on the ground that the pleaded case taken at its highest is bound to fail or, at all events, those specific paragraphs of the statement of claim that have been identified in the summons.  The rule can be engaged “at any stage of the proceedings” which should be done promptly and as a rule before the pleadings have closed [Hong Kong Civil Procedure 2010, 18/19/3, page 393].  In view of the fact that the summons was issued before the expiry of the time allowed for the filing of the defence under Master Ko’s order, I am satisfied that this amounts to compliance with O.18 r.19 and that as a matter of convenience, this should be heard and disposed of before the defence is filed.  If the summons succeeds to the full extent that is asked for there will be no need for a defence.  If it fails, I can no doubt extend time for the defence to be filed following this judgment.

34.  In view of this, there can be no justification for the entering of judgment in default of defence.  This part of Mr Scott’s summons will therefore be dismissed.  I will leave over the question of consolidation of the two actions to be considered after I have decided the application under O.18 r.19.

The O.18 r.19 Application

35.  Mr Scott has emphasised the steepness of the gradient which faces an applicant seeking an order striking out a pleading.  The relevant cases which stand as authority under this rule are at 18/19/4, pages 394-5, HKCP 2010.  The note there says that the jurisdiction is only for plain and obvious cases:

“There should be no trial upon affidavit.  Disputed facts were to be taken in favour of the party sought to be struck out.  Nor should the court decide difficult points of law in striking out proceedings.  The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out.”

See Francesca Ha v Tsai Kut Kan (No. 1) [1982] 1 HKC 382 CA.  I do not propose to refer to the other cases in the note because their purport is clear and is largely captured in the passage which I have just referred to.

36.  The first ground relied on in the summons to strike out concerns the bringing of the first action by the company at the behest of the Plaintiff in this action on the basis that she possessed the authority to act on behalf of the company.  As I have already said the action before me is predicated on the contrary basis that it is Mr Tsang who is in control hence the need to bring a derivative action.  Sir John submits that it is abusive of the court’s process to concurrently run these two actions which are diametrically opposed to each other on their factual foundation.  The Plaintiff must be forced to elect and if she does not, which she is not disposed to do, then the court must do it for her by striking out this action.

37.  Reliance is placed on the fact that having brought the first action, which faltered as a result of Fung J’s decision to direct the trial of whether the Plaintiff had authority to cause the company to bring the action, the Plaintiff has put that action to one side and started this fundamentally inconsistent action on the critical issue of who has control of the company and Yue Kong.  She has done so, it is said, in a rather unattractive way in circumstances where she caused an appeal to be brought against Fung J’s direction of a preliminary issue only to abandon that appeal and start this action.

38.  The second part to this aspect of the case is at para.3 of the summons which seeks to strike out parts of the statement of claim being those which fundamentally overlap with the basis of the claim in the first action, this paragraph being more focused on the specific aspects of this action which are said to be abusive by virtue of their overlap with what is asked for in the first action.

39.  Mr Scott replies by submitting that when Mr Tsang decided to frustrate the Plaintiff and the company in the first action by asking for and obtaining Fung J’s ruling directing the trial of a preliminary issue which had the effect of holding up any chance of effective relief, whilst continuing to sell off Yue Kong’s assets at an undervalue, it became essential to change tack and sue on the basis contended for by Mr Tsang which is that it is he who controls the company and Yue Kong.  The Plaintiff’s motives have been and are genuine and in no way oblique.  She seeks a determination as quickly as she can in the company’s and Yue Kong’s interests and, of course, of her interests as a shareholder.

40.  Mr Scott accepts, as he must of course, the obvious irredeemable inconsistency between the two actions which he is now seeking to have consolidated.  He says that by consolidation, the court will have the full range of the dispute before it.  It will listen to the evidence on control and decide which is the appropriate cause of action to proceed on.  He relies on the fact that it is common for a party to plead alternative cases which are mutually inconsistent with each other and it will be for the court, having heard the case out, to decide which, if either, of the two is the correct one.

41.  For my part, I find this approach entirely compelling and persuasive.  As matters presently stand, it is only this action that is being pressed on the court under which Chu J has granted an injunction which has the effect of preventing any further damage being done to the interests of the company, Yue Kong and their shareholders.  If this action were to survive the third limb of the strike out application and is consolidated with the first action, it then becomes a matter of case management as to the best way to proceed with the consolidated actions.  I would have thought that, almost inevitably, the preliminary issue would have to be determined first of all.  By determining this first, the court and the parties will be able to concentrate on the action found to be competent as a result of the ruling.  If, by way of example, the judge rules that the Plaintiff was not in a position to authorise the bringing of the first action then that action would fall away leaving this action as the basis of the litigation.  In due course an appropriate costs order would need to be made to reflect the various rights and wrongs caused by the consolidated actions.

42.  And so, whilst the two actions are mutually inconsistent, in my judgment it is not abusive to proceed with this action whilst the other remains afoot.  The Plaintiffs, in both actions, are entitled to put forward the alternative cases on a consolidation, have the court first determine which is the valid one and then proceed on that with appropriate costs orders being made to reflect this way of proceeding.  Accordingly and insofar as they encompass this complaint, the second and third paragraphs of the strike out summons must stand dismissed.

Is a Double Derivative Action Available in These Circumstances?

43.  It is this which is the substantial argument before me, comprising paragraphs 1 and 4 of the summons.  Sir John has helpfully set out the submission in the skeleton argument.  The starting point to all of this is the Court of Final Appeal’s decision in Waddington Ltd v Chan Chun Hoo [2008] 11 HKCFAR 370.  The principles can be shortly stated.  Where an alleged wrongdoer is in control of both the holding company and its subsidiaries and commits fraud on the subsidiaries a multiple derivative action is available in Hong Kong.  The Plaintiff is required to show a prima facie case of, in this case, her locus to sue derivatively on behalf of the company.  She needs to show a viable cause of action by the company which, if proved, will establish a fraud on the minority.  She also needs to show control of the company by the wrongdoers which will have the effect of defeating any action against them.  Lastly, any loss in the share value sustained by reason of loss occasioned by the company, “reflective loss”, is not recoverable by the wronged shareholder personally.

44.  Adopting those principles, Sir John has proposed three hurdles which the Plaintiff must overcome in order to maintain the presently constituted derivative action.  Firstly, prime facie that Mr Tsang is in control of the 2nd Defendant [the company], secondly, prima facie, that he controls Yue Kong and lastly, that under the law of the place of incorporation of Yue Kong [the PRC] there is a right to bring a derivative action.

45.  Sir John submits that failure at any one hurdle will be fatal to the action.  He submits, as he needs to on what is an O.18 r.19 application, that the Plaintiff has no prospect of success.  It is in this regard that the burden on Mr Tsang becomes a telling one.

46.  It is convenient to take each of these hurdles in turn as Sir John has advanced them.

Mr Tsang in Control of the Company

47.  This really is a repetition of the argument in support of putting the Plaintiff to an election as to which action she is to proceed on that I have previously referred to.  In the first action, the Plaintiff adopted the stance that by virtue of the board resolution of the company on 4 August 2008, she became chairman of the company’s board.  As a result of her casting vote, she was able to outvote Mr Tsang and Mr Yan and so authorise the company’s action in the first action.  It is submitted that in view of the fact that the first action remains extant that this must continue to her position, as it is in another pending action in the PRC.  At the risk of being unduly repetitive, the current action is, of course, constituted on the basis that it is Mr Tsang who is in charge of the company.

48.  Insofar as it is submitted that the Plaintiff must elect on her mutually inconsistent actions, I am against Sir John for the reasons that I have already provided.

49.  The fact is that it is very much Mr Tsang’s position that indeed he is in control of the company due to the invalidity of the resolution of 4 August 2008 which purported to remove him from the company’s board.  Sir John says that the Plaintiff is not entitled to rely on this assertion by Mr Tsang in the previous action and rely on it in this action when her primary position is that she is the person in control of the company.

50.  Mr Scott submits that, as I have already related, that the Plaintiff is entitled to run alternative cases, which submission I have upheld and indicated how these alternative pleas could be case-managed by consolidation and the trial of the preliminary issue as identified by Fung J.

51.  Secondly, as matters presently stand on the ground, Mr Tsang is exercising or seeking to exercise de facto control.  He ignores the board resolutions and the Plaintiff if she was to obtain any injunctive relief, which she has, could only do so in this action, Fung J having stayed the earlier action to await resolution of the preliminary issue.

52.  It strikes me that the court has to adopt a practical position when faced with a fast moving commercial situation.  Mr Tsang is asserting control of the company and is acting as if such is the case.  The Plaintiff is entitled to come to court and place all the facts before it, which she has done.  Whatever may be her primary position of de jure control by her, she is entitled to come as she has against this background of fact and ask the court for its assistance.  For my part as pleaded and against these facts, I am satisfied that prima facie, at all events, she can show sufficient control by Mr Tsang from which to ground a derivative action.  Accordingly, she has cleared this first hurdle.

Second Hurdle — Is There a Prima Facie Case That Mr Tsang Controls Yue Kong?

53.  The core argument of the Plaintiff on this issue is that Mr Tsang refuses to give up his position as chairman and as legal representative of Yue Kong.  The position of legal representative of the company in PRC company law is a very significant one.  It is the legal representative who authenticates the company’s acts and gives legal validity to its action.  The Plaintiff’s PRC legal opinion is that in order to bring about a change of legal representative, the document registering the name of the new legal representative must be signed by the outgoing one and submitted to the relevant PRC authority.  Without Mr Tsang’s cooperation, which is not forthcoming, he cannot be removed save, presumably, by order of a competent PRC court.  Unless and until Mr Tsang either relinquishes his appointment voluntarily or by court order, he is in a position to continue to enter into transactions that will legally bind Yue Kong.

54.  This ability on the part of Mr Tsang is the very essence of control.  Notwithstanding what other orders may have been obtained in the PRC, his continuation in the position of legal representative must afford sufficient evidence of control for the purposes of this action.  The same overall picture presents itself in the case of Yue Kong as it does of the company in Hong Kong with, on this occasion, the added status of legal representative.  There is in my view abundant prima facie evidence of control at this level too as Mr Tsang resists the Plaintiff and her faction to remove him from control and so, I am content to proceed on the basis that the second hurdle has also been overcome.

55.  Even though I am satisfied that the necessary elements of prima facie control in respect of both companies have been made out, it is also worth observing that at the most basic level on this evidence when faced with the difficult task presented by O.18 r.19, Mr Tsang has fallen well short of showing that there is no prospect of the Plaintiff succeeding on these issues.  On either basis, Mr Tsang must fail. 

Third Hurdle — Double Derivative Action Not Available Under PRC Company Law.

56.  Sir John founds his submission on the evidence of his mainland legal expert, Mr Zhao who says that in PRC law, there is available a cause of action referred to as a “Shareholders Representative Action” which is similar to a derivative action but that there is no provision for a multiple or double derivative action, such as this one (para.33 of Mr Zhao’s opinion).  The explanation for this is because if a person only has an indirect interest in a company, the right to bring an action must be specifically provided for by statute or regulation and Chinese law has no such provision for a shareholder of a holding company to exercise any rights in its subsidiary.  Such indirect rights do not exist.  The opinion of Mr Zhao has not been contradicted by any legal opinion from the Plaintiff.

57.  This being the apparent state of the law in the PRC, Sir John submits that I am required to apply PRC law being the law of incorporation of Yue Kong. (See Konamaneni v Rolls Royce (India) Ltd [2002] 1 WLR 1269 and Base Metal Trading Ltd v Shamurin [2005] 1157).  If that is so then this action as it is constituted is an incompetent one, is bound to fail and ought to be struck out.

58.  Mr Scott disagrees with that analysis and on the effect of Konamaneni which was concerned with the governing law of derivative actions of foreign companies on an application under RHC O.11 for service out.  This concerned procedural law and not substantive law, which I must apply in deciding this application.  This question was dealt with by Lord Millet in Waddington supra at para.55.  He said this:

“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 v Shamurin [2005] 1 WLR 1157 at p.1176 CA), then it is governed by the law of the place of incorporation.”

What Mr Scott gets from that passage is that Lord Millet was referring to a hypothetical question and not suggesting that the conflict of laws principle in Konamaneni represents substantive company law in Hong Kong.  The other matter which Mr Scott draws attention to is that in Waddington, the court made no reference to the requirement that multiple derivative actions need to be available in the place of incorporation of the company concerned.

59.  Mr Scott further submits that, even if he is wrong in suggesting that the question of whether a multiple derivative action must be available in the country of incorporation is merely procedural and not a matter of substantive Hong Kong law, in this case there is no need for a double derivative action to be available under PRC law.  He analyses the matter in this way.  There are two levels of subsidiary.  The “upper level” is the company incorporated in Hong Kong and the “lower level” is Yue Kong in the PRC.  The nature of a multiple derivative action is that the minority shareholder sues on behalf of the innocent minority at each level of the group of companies.  In this action, the Plaintiff sues on behalf of the innocent shareholders of the company and of Yue Kong.  And so, as this action is constituted in the case of Yue Kong at the “lower level” it is a single derivative action brought on behalf of the company against Mr Tsang the alleged wrongdoer in control of Yue Kong.  There is no question of a double derivative action being started in the PRC and so, whether PRC law allows multiple derivative actions is irrelevant to this case.

60.  In such circumstances, Mr Scott’s dual approach comes to this.  Firstly, that Sir John has not been able to show, as a matter of substantive Hong Kong law, that multiple derivative actions must be available in the PRC in order to sustain a multiple derivative action in Hong Kong and, that in any event, if that is the state of the law in Hong Kong, that on a true analysis this is not in fact a multiple derivative action which is being sought to be brought in the PRC.

61.  Finally, and very much in the context of an O.18 r.19 application, Mr Scott submits that the cases show that applications such as these are not the occasion to ventilate and decide novel or difficult points of law.

62.  In my judgment, it is this aspect which must in the final analysis provide the answer to this striking out application.  There is no doubt that this area of the law is not one that is easy to resolve as a matter of interpretation of the facts and in relation to what is a proper analysis of the effect of Konamaneni and Base Metal as to whether in Konamaneni in particular the court was on an Order 11 application merely limiting itself to what was procedural law as opposed to going as far as to say that it was laying down a principle of substantive English law.  And this also in the context of the decision in Waddington which, as Ms Scott rightly describes it, is a new and groundbreaking case amongst the English common law jurisdictions.

63.  These difficult questions which in my judgment are readily arguable both ways must inevitably also impact on the question of whether the Plaintiff’s claim is in fact one for “reflective loss” only and as such not recoverable.  This in my judgment must await the decision of all the other issues which I have been referring to in the course of this judgment and therefore at this stage it is not possible to say that the claim is illusory or irrecoverable.  Therefore, this as well must be allowed to proceed to trial.

64.  The arguments as they have been presented to me are in my judgment highly arguable either way.  It simply cannot be said that as constituted this action is one that is bound to fail.  It should be allowed to proceed to trial and for this reason, this limb of the strike out summons must also stand dismissed.

Leave to File a Defence

65.  Mr Tsang having failed to strike out the action must now face up to the requirement to file a defence as to which he is subject to Master Ko’s unless order requiring him to do so by 15 December 2009.  In view of the fact that he was entitled to apply as he did to strike out the statement of claim and that application was in no way frivolous, raising as it did the serious questions posed by Sir John in relation to multiple derivative actions which I have just been considering, I will grant an extension of time for Mr Tsang to file his defence.  I will do so on the same “unless” terms ordered by Master Ko.  The defence must be filed within 21 days from the date of this judgment.

The Continuation of the Injunction

66.  It seems to me that the issue is barely arguable.  The purpose of Chu J’s order was to hold the position and to preserve as best as can be devised under the order, the assets of Yue Kong.  Clearly, there is a serious issue to be tried between the parties and the balance of convenience overwhelmingly favours the granting and in this case the continuation of the injunction which will now remain in place until the trial or further order.

Consolidation

67.  RHC O.4 r.9 prescribes that where some common question of law or fact arises in both actions (in these two cases) or the rights or relief claimed are in respect of or arise out of the same transaction or series of transactions, the court may order consolidation [see HKCP 2010, page 60-61].

68.  It seems to me that the case against Mr Tsang, pleaded as it is in the alternative in these two actions, against a common factual background should be consolidated.  Good case management requires that there be an early resolution of the preliminary issue directed by Fung J.  Once that is done the parties will know where they stand.  I propose that directions should be sought at an early date for the hearing of that issue.

Costs

69.  Save perhaps for the continuation of the injunction, the argument has by no means been clear-cut.  I do not propose to make orders nisi at this stage but instead I will ask the parties to provide me with written submissions on costs.  Mr Tsang should go first and I will ask that his solicitors provide their submissions on his behalf within 14 days and the Plaintiff will reply within 14 days after that.