LAU WING YAN v. PACIFIC BULK INVESTMENT LTD

HCMP 315/2019

[2020] HKCFI 769

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 315 OF 2019

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HCA 379/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 379 OF 2019

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J U D G M E N T

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Introduction

1.  There is before this court an application by summons dated 18 April 2019 (“Setting Aside Summons”) in HCMP 315 of 2019 (“HCMP315”) taken out by Mr Chu Kong (“Chu”), Mr Kwong Hon Keung Gerry (“Kwong”) and Smart City Investment Limited (“Smart City”) (collectively “Defendants”) to set aside the ex parte leave granted by Mimmie Chan J on 7 March 2019 to the Applicant  Mr Lau Wing Yan (“Lau”) pursuant to section 733(1) of the Companies Ordinance, Cap 622 (“CO”) to commence and continue proceedings in the name and on behalf of Pacific Bulk Investment Limited (“Plaintiff”) against the Defendants.  The grounds of the application are that:

(1)  there is no serious issue to be tried;

(2)  there was material non-disclosure on the part of Lau at the ex parte stage; and

(3)  it is otherwise an abuse of the process of the Court.

2.  Pursuant to the leave so granted, on 7 March 2019, the Plaintiff issued a Writ of Summons with an Indorsement of Claim in HCA 379 of 2019 (“HCA379”) against the Defendants.  In the Indorsement of Claim, the Plaintiff claims against the Defendants for inter alia:

(1)  A declaration that the Defendants (or any of them) held and/or hold the 18% shareholding (“Huiyu Shares”) in 廣西惠禹粮油工業有限公司 (“Huiyu”) including any fruits, dividends and/or interests derived therefrom or any traceable substitutes (“Trust Assets”) on trust for and on behalf of the Plaintiff.

(2)  An order requiring the Defendants to forthwith return and/or transfer the Huiyu Shares and/or the Trust Assets to the Plaintiff.

(3)  An injunction restraining the Defendants from transferring, disposing of, or otherwise dealing with the Huiyu Shares and/or the Trust Assets, save for the purpose of transferring the same to the Plaintiff.

(4)  An order that the Defendants do account to the Plaintiff in relation to the Huiyu Shares and/or the Trust Assets, and an order for the payment to the Plaintiff of all sums found due on such account.

(5)  Damages and/or equitable compensation to be assessed.

3.  Also on 18 April 2019, the Defendants applied by summons in HCA379 (“Strike-out Summons”) to strike out the Indorsement of Claim on the grounds that it is frivolous, or vexatious, or otherwise an abuse of the process of the Court; alternatively, for an Order that HCA379 be dismissed or stayed on the same grounds. 

4.  This is the hearing of the Setting Aside Summons and the Strike-out Summons.

Background

5.  The main protagonists in these proceedings are Lau and Chu.  According to Lau’s 1^st affirmation dated 6 March 2019 (“Lau 1”) filed in support of the leave application, the two were previously partners and joint owners of their shipping businesses.  These included (i) the “Pacific Bulk Group”, said to have been set up by Lau in 2000, and (ii) the “BBG Group” said to have been jointly invested in by Lau and Chu in late 2009.  Since late 2013, serious conflicts arose between Lau and Chu in relation to their jointly-owned businesses, including the “Pacific Bulk Group” and the “BBG Group”.  From around January 2014, the two have entered into discussions in relation to the separation of their joint businesses. 

6.  Also since 2014, Lau and Chu or the so-called Chu’s camp have also embroiled in a large number of legal actions in Hong Kong, the BVI and Panama.  A list of these legal actions and a summary of what they are concerned with can be found in Lau 1 at [164].  It is quite obvious from the list that there has been and still is serious animosity between Lau and Chu. Suffice it to say that, as admitted in Lau 1 at [166], these legal actions are not directly relevant to the subject matter of the present proceedings. 

7.  At the corporate level, the 4 companies which feature prominently in these proceedings are (i) Topride Limited, a company incorporated in the BVI (“Topride”); (ii) the Plaintiff, a company incorporated in Hong Kong; (iii) Smart City, a company incorporated in Hong Kong; and (iv) Huiyu, a company incorporated in the PRC.

8.  Back in 2018 and 2019, the undisputed registered shareholders and directors of the 4 companies were as follows:

Company	Shareholder(s)	Directors
1. Topride	Lau and Chu[1] (50%/ 50%)	Lau and Chu
2. Plaintiff	Topride (100%)	Chu and Kwong
3. Smart City	Chu (100%) (Before 7 June 2018) Plaintiff (100%) (After 7 June 2018)	Chu
4. Huiyu	Plaintiff (18%) (Before 5 June 2018) Smart City (18%) (After 5 June 2018)	Chu (among others)

Lau’s and the Defendants’ cases on the transfer of the Huiyu Shares^[2]

9.  While Lau has adduced close to 1,000 pages of affirmation and exhibits in the form of Lau 1 in support of the leave application^[3], the gist of his complaint against the Defendants is quite straightforward.  As succinctly summarised by Mr Anson Wong SC’s skeleton submissions, Lau’s case is simply this.

10.  The Plaintiff was initially held by Pacific Bulk Maritime Holdings Co Ltd (“PB Maritime”) until its entire issued shareholding was transferred to Topride on 20 May 2009. 

11.  Chu is and at all material times was a director of the Plaintiff.  In November 2015, Chu caused his close personal assistant Kwong to be appointed as his co-director, without Lau’s knowledge or consent.  Since then, Chu and Kwong have been the only 2 directors of the Plaintiff. In the Statement of Claim, Kwong is said to be accustomed to following Chu’s instructions as his agent/nominee.

12.  In or around late 2007, Lau and Chu decided to invest in Huiyu.  The Plaintiff was incorporated for the specific purpose of their investment in Huiyu.  On or around 29 November 2007, Lau/Chu procured the Plaintiff to make a payment of US$7.25 million to Huiyu, for the purposes of the said investment.  Since then, the Plaintiff became the registered and beneficial owner of the Huiyu Shares. 

13.  On 20 May 2009, PB Maritime transferred the entire shareholding in the Plaintiff to Topride and Lau was in turn allotted 1 share in Topride representing 50% of its issued shareholding. 

14.  On 5 June 2018, Chu and Kwong, as the only two directors of the Plaintiff, procured the transfer of the Huiyu Shares from the Plaintiff to Smart City (“Huiyu Share Transfer”).  In the Statement of Claim, Smart City is described as the alter ego and nominee company of Chu.  The Defendants have since admitted in Chu’s 2^nd affirmation filed in HCA379 at [4] that the Huiyu Share Transfer was not actually paid for since the consideration was only nominal at HK$1.00.  It is not in dispute that neither Topride nor Lau, being a director of Topride, were notified of the Huiyu Share Transfer. 

15.  In [134] to [138] of Lau 1, Lau claimed that Huiyu had been doing very well financially and that, from a capital contribution of RMB450 million from its shareholders, its net asset value has grown to around RMB950 million.  On the basis of Huiyu’s net asset value of around RMB950 million in 2017/2018, the value of the Huiyu Shares held by the Plaintiff would be worth around RMB171 million at the time they were transferred to Smart City in June 2018.  Lau expressed his belief that Chu and Kwong had breached their directors’ fiduciary duties to the Plaintiff by misappropriating and diverting the Huiyu Shares to Smart City. 

16.  The Defendants’ case, as summarized in Mr Stewart Wong SC’s skeleton submissions, is equally straightforward. 

17.  Smart City is a company incorporated by Chu in September 2016 who was its sole director and sole shareholder until 7 June 2018.

18.  Since the Plaintiff became a shareholder of Huiyu in 2007, there had not been any declaration or distribution of dividends despite the accumulated profits of Huiyu.  In 2017, there finally appeared to be a prospect of Huiyu declaring dividends.

19.  Huiyu’s policy was to pay dividends only into the bank account of its registered shareholder.  To facilitate the receipt of such dividends by the Plaintiff, and in light of the possibility that the Plaintiff’s bank account with HSBC might not be operative due to on-going litigation and animosity between Lau and Chu, the Huiyu Shares were transferred from the Plaintiff to Smart City on 5 June 2018, so that the dividends to be paid by Huiyu could be received by Smart City in its bank account.

20.  On 5 June 2018, Chu also executed the bought and sold note, Instrument of Transfer and Smart City’s board minutes in order to effect a transfer of Smart City’s entire shareholding to the Plaintiff. The documents were then taken to be stamped and dated on 7 June 2018.

21.  In other words, while the Huiyu Shares were transferred from the Plaintiff to Smart City, Smart City’s shares were transferred from Chu to the Plaintiff.  The Plaintiff therefore became 100% shareholder of the owner of the Huiyu Shares, instead of being the direct owner of the Huiyu Shares.

22.  There is however a dispute as to the ultimate beneficial owner of the Huiyu Shares.  On the Defendants’ case, Chu was the sole ultimate beneficial owner of the Huiyu Shares, through a chain of companies, and that remains unchanged despite the transfer.  On Lau’s case, which the Defendants deny, he was the 50% ultimate beneficial owner of the Huiyu Shares, through a chain of companies, and that also remains unchanged despite the transfer.

23.  The main thrust of the Defendants’ argument is that the Huiyu Share Transfer, which is not disputed, took place almost simultaneously with Chu’s transfer of the entire shareholding of Smart City to the Plaintiff.  Hence, the Defendants submit, the Plaintiff has not suffered any loss, prejudice or detriment while neither Chu nor Kwong has obtained any benefit from it.  In such circumstances, Lau’s claim for breach of fiduciary duties by Chu (and Kwong) is baseless and, without a serious issue to be tried, it cannot be in the Plaintiff’s interests to continue the derivative action.

Deliberation - Setting Aside Summons

No serious issue to be tried

24.  In order for Lau to obtain leave to bring the proposed statutory derivative action on behalf of the Plaintiff, he must satisfy all the conditions in section 733 of the CO.  For the present purpose, the Defendants only take issue on whether there is a serious question to be tried (“Serious Question Requirement”). 

25.  This court shall set out the relevant paragraphs ie [10]-[11] of the judgment of Kwan JA’s (as she then was) in Zhang Heng v Kingstone International Wealth Management Ltd & Ors unrep, CACV 56 of 2017, 22 September 2017, on the correct approach to the exercise of the discretion to grant leave under section 733:

“10. For leave to be granted to commence a statutory derivative action, the material requirements for present purpose are: (1) on the face of the application, it appears to be in the interest of the company that leave should be granted; and (2) there is a serious question to be tried and that the company has not itself brought the proceedings.

11. There is no dispute about the law on the correct approach regarding the exercise of discretion to grant leave. This has been covered in a number of cases, including an earlier decision of the judge mentioned in the Judgment, namely, Hao Xioying v Green Valley Investment Ltd, HCMP 1394/2015, 10 August 2016,which quoted from relevant passages of the decision of Ng J in Re Primlaks (HK) Ltd [2016] 2 HKLRD 31 and Ng J in turn drew on various decisions of judges at first instance. The relevant legal propositions have been summarised by the judge in Green Valley Investment Ltd at §§10 and 11:

‘10. On serious question to be tried:

(a) The threshold is relatively low. The prospects of the company’s success are to be investigated only to a limited extent, and the court should be slow to find against the applicant unless such prospects are so slim that the company cannot be said to have any expectation of success. See Re Primlaks (HK) Ltd, HCMP 1789/2015, unrep, 28 January 2016, §§7-8 per Ng J.

(b) At the leave stage, it is not the court’s function to try to resolve conflicts of evidence or difficult questions of law which require substantial argument and deliberation. In practice, if the applicant is able to produce a draft pleading that sets out a case with some prospect of success when only the allegations contained in the pleading are considered, the criteria will be satisfied unless the respondent can demonstrate fairly readily that there is a serious flaw in the claim and that it has no real substance. See Re Primlaks (HK) Ltd, §9.

11. As regard the interest of the company:

(a) Again, the threshold is low. In deciding whether it is prima facie in the interest of the company for leave to be granted, the court should have regard to the fact that ‘there should not be a trial within a trial and the court should not be forced to enter into the merits of claims where there are serious disputes’. See Re Primlaks (HK) Ltd, §21.

(b) If a ‘serious question to be tried’ has been demonstrated, in most cases it will follow that it is prima facie in the interest of the company that proceedings are pursued. See Re Primlaks (HK) Ltd, §§20-21.

(c) In assessing whether it appears to be in the interest of the company that the derivative action be pursued, the court ought to take into account whether any practical benefit is likely to result, even in circumstances where it may be clear that, eg, a director has breached his duties to the company. This essentially involves assessing whether it appears that the company stands to gain in money or money’s worth in light of the costs which will have to be incurred. See Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 at [56] to [60] per Palmer J; Pang Yong Hock v PKS Contracts Services Pte Ltd [2005] 2 LRC 72 at [21] per Tay Yong Kwang J (giving the judgment of the Singaporean Court of Appeal).’” (emphasis added)

26.  First, Lau/the Plaintiff submit that, since the transfer of the Huiyu Shares from the Plaintiff to Smart City was for no consideration, a presumption of resulting trust would have arisen in favour of the Plaintiff.  The trust arises by operation of law to give effect to a presumption that the Plaintiff did not intend Smart City to take the Huiyu Shares beneficially: Snell’s Equity 23^rd Ed para 25-003; Prest v Petrodel Resources Ltd & Ors [2013] 2 AC 415 at [49](Lord Sumption).  However, this presumption can be rebutted by proof that the Plaintiff did in fact intend Smart City to take the Huiyu Shares as beneficial owner: Snell’s Equity 23^rd Ed para 25-003; Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 708. 

27.  In this regard, the evidence is at best ambiguous as to whether there was any intention on the part of the Plaintiff, acting by Chu and Kwong, to pass the beneficial interests in the Huiyu Shares to Smart City.   Chu rather cryptically deposed in his 1^st affirmation filed in HCMP315 (“Chu 1”) at para 7(2) that “There had never been any real change in the equitable ownership of the Huiyu Shares”.  Indeed, in Chu’s 1^st affirmation filed in HCA379 (“Chu 1A”) at para 8, he said “Subsequent to the Transfers, the Plaintiff has still been in full ownership and control of the Huiyu Shares.”

28.  In these circumstances, it seems to this court that there must be at least a serious issue to be tried in relation to the Plaintiff’s claim that Smart City holds the Huiyu Shares, including the Trust Assets, on trust for it as well as its claim for their re-transfer from Smart City back to the Plaintiff.

29.  Second, the Defendants submit that almost simultaneously with the Huiyu Shares Transfer, Smart City became a wholly owned subsidiary of the Plaintiff and that, in place of the Huiyu Shares which the Plaintiff previously directly held, it was given full ownership of Smart City.  In Chu’s 7^th affirmation filed in HCA379 (“Chu 7”) at para 25, Smart City was said to have no business operations save for those in relation to the Huiyu Shares.  Thus, the Defendants submit the Plaintiff has been given an asset with exactly the same value, even though the transfer was for no consideration.

30.  In this court’s view, the Defendants’ said submission ignores one of the most fundamental principles of company law ie a shareholder of a company has no legal or beneficial interests in the company’s assets: Macaura v Northern Assurance Co Ltd [1925] AC 619 at 626‑7. Hence, as a matter of law, the mere fact that the Plaintiff owns 100% of Smart City does not mean that it also owns, legally or beneficially, Smart City’s assets ie the Huiyu Shares. 

31.  Further, the evidence is unclear whether 100% shareholding of Smart City is or will continue to be of exactly the same value as the Huiyu Shares since it is unclear whether Smart City had actual liabilities which would adversely affect the value of the Huiyu Shares at the time of the transfer or potential liabilities which might affect the value of the Huiyu Shares in the future.  Lau is not, and at the material time was not, a director of Smart City and had/has little knowledge of its business or financial affairs as well as its actual, potential or future liabilities.  By unilaterally taking the Huiyu Shares away from the Plaintiff and replacing them with 100% shareholding of Smart City, the Defendants have imposed on the Plaintiff an unwarranted risk which has no actual or apparent benefit to the Plaintiff; indeed, none has been suggested by the Defendants.  Hence, on the evidence, this court is not satisfied with the Defendants’ assertion that the Plaintiff has not suffered any loss, prejudice or detriment while neither Chu nor Kwong has obtained any benefit from the Huiyu Shares Transfer.  That is something which should be investigated at trial, if any, and not on affidavit evidence.

32.  In the premises, it seems to this court that there must also be a serious issue to be tried in relation to the Plaintiff’s claim that Chu and Kwong have been in breach of their fiduciary duties to the Plaintiff by the Huiyu Shares Transfer. 

33.  To conclude, given the relatively low threshold of the Serious Question Requirement, this court is not satisfied on the evidence that the prospects of success of the Plaintiff’s claims are so slim that the Plaintiff cannot be said to have any expectation of success.  That is sufficient to deal with the Serious Question Requirement.

34.  For the sake of completeness, regarding the other condition under section 733 ie whether on the face of the application, the proposed action appears to be in the interests of the Plaintiff (“Interests of the Company Requirement”), it would be futile even if the Defendants were to take serious issue with it.  This is because if a “serious question to be tried” has been demonstrated, in most cases it will follow that it is prima facie in the interest of the company that proceedings are pursued: Re Primlaks (HK) Ltd [2016] 2 HKLRD 31 at [20]‑[21].  In para 52 of the Defendants’ skeleton submissions, the only reason put forward that it is not in the interests of the Plaintiff to pursue the derivative action is because of the baseless nature of its claims and that no loss has been occasioned to the Plaintiff.  As can be seen from the discussion above, this court is not satisfied, for the present purpose, that the Plaintiff’s claims are baseless or that it has suffered no loss such that there is no issue to be tried.  Hence, this court is also satisfied that the “Interests of the Company Requirement” has also been met.

Material non-disclosure

35.  In the Defendants’ skeleton submissions, it is submitted that there are at least three issues that ought to have been properly disclosed by Lau when making his ex parte application.

36.  In this court’s view, none of the three issues are material.

37.  First, the Defendants submit that there is at the very least a genuine dispute about Lau’s ownership and/or interest in the Plaintiff, and through the Plaintiff, the Huiyu Shares.

38.  But, as stated above, it is a most fundamental principle of company law that a shareholder of a company has no legal or beneficial interest in the company’s assets.  Prior to the Huiyu Shares Transfer, Lau was a 50% registered shareholder of Topride which, in turn, was a 100% shareholder of the Plaintiff which, in turn, owned the Huiyu Shares.  From a layman’s point of view, it might be thought that Lau can loosely be described as the 50% ultimate beneficial owner of the Huiyu Shares.  But legally speaking, Lau did not even own Topride’s assets ie the Plaintiff, let alone the Plaintiff’s assets ie the Huiyu Shares.  Hence whether or not there is a genuine dispute about Lau’s ownership and/or interest in the Plaintiff, and through the Plaintiff, the Huiyu Shares is irrelevant to the Plaintiff’s claim to its own assets ie the Huiyu Shares and whether the Plaintiff’s directors were in breach of their fiduciary duties.

39.  Second, the Defendants submit that Lau has not attempted to make any inquiry about the apparent change of ownership in the Huiyu Shares, notwithstanding his obvious ability to contact the Board of Huiyu. Had he conducted proper investigation, it would have been clear that the Huiyu Shares remained within the chain of companies owned by Topride, albeit now through Smart City.

40.  It seems to this court that the point is first and foremost a criticism of Lau’s failure to make proper inquiries.  However, there is little explanation in the Defendants’ skeleton submissions what should have prompted Lau to make such inquiries with the Board of Huiyu in the first place.  Nor is there any explanation as to why such inquiries were something which should reasonably have been made prior to the ex parte application. 

41.  As explained above, it is no answer to the Plaintiff’s trust claim that almost simultaneously with the transfer of Huiyu Shares to Smart City, Smart City became a wholly owned subsidiary of the Plaintiff so that, in place of the Huiyu Shares which the Plaintiff previously directly owned, it was given full ownership of Smart City.  In this court’s view, that fact is not something which would have been relevant to Mimmie Chan J’s assessment of Lau’s ex parte application.  The fact that the Defendants now raise this point in support of its submission that there is no serious issue to be tried is neither here nor there—the point is an unmeritorious one and has been rightfully dismissed by this court.

42.  Third, the Defendants submit that Lau has misleadingly painted a picture of Chu’s alleged low commercial morality in Lau 1—all the while failing to fairly draw the court’s attention to the committal proceedings which he and his camp were involved in, which involved the undisputed fact of false evidence and fabricated documents.  At the very least, the animosity between the parties ought to have been highlighted so that the court could appreciate the possibility of Lau having ulterior motives in seeking leave.

43.  To start with, the animosity between Lau and Chu has been more than sufficiently highlighted in Lau 1 at para 164 when he listed out the large number of legal actions between the two.  Further, as far as the committal proceedings are concerned, Lau is not involved in the said proceedings and he in fact has disclosed the existence of the committal proceedings commenced by Chu against inter alia certain employees of the Pacific Bulk Group at paras 164(e) and 168 of Lau 1.  But most important of all, this court cannot see how the committal proceedings could be material to the subject matter of the derivative action—no attempt was made by the Defendants to explain their relevance in their skeleton submissions. 

Abuse of process

44.  This ground can be disposed of swiftly.

45.  Firstly, this court has already held that there are serious issues to be tried and that on the face of the application, the proposed action appears to be in the interests of the Plaintiff.  If so, it is difficult to envisage in what circumstances it can appropriately be said that the leave application is an abuse of process such that the court should refuse to exercise its discretion to grant leave.

46.  In Tremendous Success Holdings Ltd & Anr v Sinosoft Technology Group Ltd & Ors unrep, HCA 2345/2013, HCA 1613/2013 & HCA 2423/2013, DHCJ A Yip SC, 11 July 2016, the learned Deputy Judge, at [387] and [396], appeared to accept the argument that a plaintiff who brought a derivative action not in the interests of the company but for an ulterior motive could be such a circumstance.  However, there must be “strong and convincing” arguments in support of the conclusion that the plaintiffs were driven by ulterior motives other than for the benefit of the company in question: see [414].

47.  On the evidence, this court is not satisfied that Lau was driven by ulterior motives in seeking leave to institute a derivative action against the Defendants.  In the Defendants’ skeleton submissions, all they could submit in terms of ulterior motives is set out in a handful of paragraphs which can conveniently be reproduced here for ease of reference:

“63. When the Court takes into account the animosity between the parties, as set out in Section B above, it is apparent that this application is grounded, at least in part, on the intention of Lau to undermine Chu’s commercial integrity and standing by making (further) unfounded allegations of misappropriation and breach of fiduciary duty.

64. Ultimately, this is another offshoot of the dispute between business partners… There is no real benefit to the Company in bringing this claim (if any). In contrast, Lau appears to be driven by ulterior motives, which ought to be a reason the Court decides to set aside leave given.

65. In addition, the present action (and in particular the Injunction Order and subsequent Undertakings) offer Lau a ‘shortcut’ to various documents of Huiyu…which are not accessible to him as part of discovery in HCA 228/2012.

66. It is submitted that the Court ought to take into account the juridical advantage offered to Lau by reason of this application, and the possibility that these proceedings are commenced with an ulterior motive to, inter alia, gain access to documents ‘through the backdoor’ as well as further harass Chu.” (emphasis added)

48.  As submitted by Mr Anson Wong SC, which this court agrees, if Lau could satisfy the Serious Question Requirement and the Interests of the Company Requirement, the mere fact that Lau and Chu were and are engaged in broader disputes and hostile litigation is not evidence from which this court can readily infer that the leave application was for an ulterior motive and hence an abuse of process.  Nor would it suffice for the Defendants to assert that there is a mere “possibility” that these proceedings are commenced with an ulterior motive.  Lastly, the possibility that Lau may gain a “juridical advantage” if the Defendants are ordered to give discovery of documents in the derivative action is not evidence at all that the leave application was for an ulterior motive.  Whether any discovery of documents is to be ordered against the Defendants in the derivative action is not up to Lau—it is subject to adjudication by the court.

49.  To conclude, in this court’s view, there is little, if any, evidence from which the court can infer ulterior motive and hence abuse of process on the part of Lau in making the leave application.  Further, the submissions made by the Defendants can hardly be regarded as “strong and convincing” arguments.  For these reasons, this ground of “abuse of process” must also be rejected.

Conclusion

50.  For the above reasons, the Setting Aside Summons must be dismissed.

Deliberation - Strike-out Summons

51.  The legal principles governing a striking out application are well-established and uncontroversial.  Suffice it for this court to recite a few familiar propositions.

(1)  It is only in plain and obvious cases that the Court should exercise its summary power to strike out—the onus to demonstrate this is on the party applying.

(2)  There should be no trial on affidavit and disputed facts are to be taken in favour of the party sought to be struck out.

(3)  The claim must be obviously unsustainable, the pleadings[4] unarguably bad and that it must be impossible, not just improbable, for the case to succeed before the Court would strike out.

(4)  A proceeding is frivolous when it is not capable of reasoned argument, without foundation, or where it cannot possibly succeed. A proceeding is vexatious when it is oppressive and/or lacks bona fides.

(5)  To decide that a litigant has been frivolous or vexatious and thus has abused the process of the Court is a serious finding to make, for it will generally involve bad faith on his part and one would expect the discretion to be sparingly exercised.

(6)  If an action is not launched with the genuine object of obtaining the relief claimed, but in order to achieve some collateral purpose or for an ulterior motive, that would prima facie be an abuse of process.

52.  In this case, the basis of the Defendants’ Strike-out Summons is substantially the same as their Setting Aside Summons[5].  This can be seen by comparing the Defendants’ skeleton submissions in support of the Strike-out Summons with those in support of the Setting Aside Summons. 

53.  Essentially, the Defendants rely on the fact that, almost simultaneously with the Huiyu Shares Transfer, Smart City became a wholly owned subsidiary of the Plaintiff and thus the Plaintiff has been given an asset with exactly the same value.  Therefore, they submit that there was no misappropriation of the Huiyu Shares, the Plaintiff has not suffered any prejudice, loss or detriment as a result of the Huiyu Shares Transfer and Chu and Kwong have derived no benefit or gain at all from it.  These arguments have been summarized above under the section “No serious issue to be tried” and rejected by this court.  The submission that the Plaintiff’s claim cannot possibly succeed must fail.

54.  The Defendants next submit that the commencement of the derivative action is for an ulterior motive and an abuse of process.  These arguments have also been summarized above under the section “Abuse of Process” and equally rejected by this court.

55.  For the above reasons, this court is far from satisfied that the Defendants have demonstrated that the Indorsement of Claim is frivolous, vexatious, or otherwise an abuse of the process of the Court.  The Strike‑out Summons must also be dismissed.

Disposition and costs order nisi

56.  The Setting Aside Summons and the Strike-out Summons are hereby dismissed.  There shall be an order nisi that costs of the Setting Aside Summons be to the Applicant in HCMP 315/2019 and costs of the Strike-out Summons be to the Plaintiff in HCA 379/2019, to be taxed if not agreed, and paid by the Defendants forthwith, certificate for two counsel.

57.  Lastly, this court thanks counsel on both sides for their helpful assistance.