JONATHAN LIM v. SHE WAI HUNG AND OTHERS

HCA 391/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 391 OF 2010

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BETWEEN

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D E C I S I O N

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1.  This is an application for leave to appeal against my decision given on 6 December 2010. I dismissed the plaintiff’s application for summary judgment with costs. This application is made under section 14AA of the High Court Ordinance and Order 59, rule 2B of the Rules of the High Court. Section 14AA(4) provides:

“(4) Leave to appeal for the purpose of subsection (1) shall not be granted unless the court hearing the application for leave is satisfied that—

(a) the appeal has a reasonable prospect of success; or

(b) there is some other reason in the interests of justice why the appeal should be heard.”

2.  This application is made on the basis of a reasonable prospect of success in the appeal under subsection (4)(a).  A reasonable prospect of success under subsection (4)(a) means a prospect that is more than fanciful but without having to be probable (see SMSE v KL [2009] 4 HKLRD 125 at para 17).

3.  The plaintiff brought the action on two alternative bases.  The first is that it is a derivative action for the benefit of the 3rd defendant.  The second is a personal claim for the plaintiff’s own benefit. 

4.  In Waddington Limited v Chan Chun Hoo (2008) 11 HKCFAR 370 at paras 12 and 13, Ribeiro PJ said:

“12. It follows that where a wrong is alleged to have been done to a company and a minority shareholder purports to bring a derivative action on the company’s behalf, it is incumbent on the shareholder to show that the general “proper plaintiff” rule is displaced and that the case falls within the relevant exception. 

13. The derivative action is a procedural device invented by the courts to afford protection to the minority.  Procedurally, there is no requirement at common law for a person seeking to sue derivatively first to obtain the leave of the court.  But it does not follow from this that there is no threshold requirement to be met by the plaintiff.  Substantively, such an action is only permitted where it can prima facie be shown that there exists a viable cause of action or equitable claim vested in the company which, if made good, would establish a fraud on the minority; as well as control of the company by the alleged wrongdoers such as to enable them to stifle any proposed action against themselves.”

5.  The plaintiff is the holder of one of 10,000 shares of the 3rd defendant.  His father is the holder of 5,999 shares of the 3rd defendant and is the majority shareholder of the 3rd defendant.  The 1st defendant is the holder of the remaining 4,000 shares.  The plaintiff’s father was adjudged a bankrupt on 26 March 2009.  He can only exercise the voting rights under those shares as directed by the trustees in bankruptcy.

6.  I have already set out the background of the action and the grounds for not giving the plaintiff summary judgment in my decision of 6 December 2010 and will not repeat them here.  One of the reasons for my decision is that there is a triable issue on whether the plaintiff is entitled to bring this action as a derivative action as there is no evidence that the 3rd defendant is in the control of the 1st and 2nd defendants, the alleged wrongdoers.  The plaintiff’s father is still the majority shareholder of the 3rd defendant and there is no evidence that the trustees in bankruptcy have acted in any biased or improper manner in relation to the affairs of the 3rd defendant.

7.  The plaintiff in his proposed grounds of appeal says that the 1st and 2nd defendants have not pleaded this ground in their defence and, hence, it is not open to me to decide the application for summary judgment on this ground.

8.  I disagree.  The threshold is there for the plaintiff to overcome whether it is in the defence or not.  In any case, I cannot ignore this issue as the evidence and argument have already been set out in the 1st defendant’s affidavit and the written submissions of his counsel.  I also have the undertaking of the 1st and 2nd defendants to amend the defence to include this challenge within two weeks from today.  I do not see any merit in this proposed ground of appeal.

9.  The next ground is that the board of the 3rd defendant has been extinguished by the bankruptcy of the plaintiff’s father.  However, it is open to the plaintiff to apply under section 114B of the Companies Ordinance for an order of the court that a meeting of the 3rd defendant be held to appoint more directors to the board.  It is therefore open to the plaintiff to constitute a new and proper board for the 3rd defendant, and the board can then decide what to do to redress the wrongs, if any, inflicted on it.

10.  The next ground is that the trustees are in a position of conflict of interest because they are paid by the 1st defendant who is the only creditor of the plaintiff’s father, and they are biased because they are not backing this action and there is not even a letter written by them showing their disapproval of the misconduct of the 1st and/or 2nd defendant committed to the 3rd defendant.

11.  I do not think the mere fact that the 1st defendant is the only creditor of the plaintiff’s father and the trustees are paid by him, if not by the assets of the plaintiff’s father, would thereby put the trustees into a situation of conflict or a situation that they would exercise the shareholders’ rights of the plaintiff’s father in managing the 3rd defendant’s affairs in favour of the 1st defendant.

12.  Regarding their indication that they are not backing this action, there is no evidence on how the 3rd defendant, in incurring costs for this action, would benefit from it.  The evidence is that the 3rd defendant’s only asset was a factory in the mainland and that factory had been transferred to another company that the plaintiff’s father had an interest, and the transfer was at nil consideration.  The main purpose of this action is to stop the legal proceedings brought in the name of the 3rd defendant in the mainland for recovering that factory to the 3rd defendant.  I do not think the trustees’ refusal to back this action without more can be said to be improper or biased. 

13.  Regarding the failure of the trustees to express disapproval to the conduct of the 1st and 2nd defendants in holding a meeting of the 3rd defendant and appointing themselves as directors, the Official Receiver had also been notified about these matters but had also made no response.  Since the 3rd defendant has stopped its business from March 1999 and had been divested of its only substantial asset in November 2006, it is doubtful if any action by the Official Receiver or the trustees in bankruptcy in relation to these irregularities would be beneficial to the collection of assets of the plaintiff’s father.  I do not think this so-called inaction by the trustees can be regarded as evidence of bias or improper conduct.

14.  Apart from these matters from which I am asked to infer bias or misconduct of the trustees, there is no other evidence of bias or misconduct.  Counsel for the plaintiff, however, submitted that there is no such evidence only because the challenge by the defendants to the plaintiff’s entitlement to bring the derivative action was only made two days before the hearing and, hence, there was no opportunity to adduce the evidence. 

15.  I disagree that this challenge was only raised two days before the hearing.  However, even if it were so, the burden and the threshold to show that the 3rd defendant is in the control of wrongdoers is for the plaintiff to overcome.  He has to justify his entitlement to bring the derivative action in the statement of claim and his affirmation in support of the application for summary judgment.  Hence, I do not think he can complain that the challenge was made too late.

16.  On his personal claim, his proposed ground of appeal is that he is still a director of the 3rd defendant, and he complains that I should have made a declaration in his favour in the application for summary judgment.  However, the 1st and 2nd defendants accept that he is still a director of the 3rd defendant.  There is therefore no basis for the court to grant any declaration when there is no dispute.

17.  In the premises, I do not think the plaintiff has any reasonable prospect of success in the proposed appeal.  I therefore dismiss this appeal with costs, and I also certify the matter fit for one counsel.