LEE CHI YUEN ARCTIC v. YUANZHI INTERNATIONAL TRADING CO LTD

HCMP 1654/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1654 OF 2013

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J U D G M E N T

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1.  By this originating summons, the applicant seeks leave to intervene and defend 2 actions on behalf of Yuanzhi International Trading Co Ltd. (“the Company”).

2.  I am satisfied as to service of the originating summons on the Company and, at my directions, on the only other director and shareholder Lau Siu Ming (“Lau”).  It is appropriate to proceed with hearing of this originating summons on an expedited basis.

The legal principles

3.  Under sections 168BC(1) and (3) of the Companies Ordinance, Cap 32:

“(1) A member of a specified corporation or of a related company of a specified corporation may, with the leave of the court granted under subsection (3)—

(a) bring proceedings before the court on behalf of the specified corporation; or

(b) intervene in any proceedings before the court to which the specified corporation is a party for the purposes of continuing, discontinuing or defending those proceedings on behalf of the specified corporation.

…

(3) The court may, on the application of a member of a specified corporation or on the application of a member of a related company of a specified corporation, grant leave for the purpose of subsection (1) if the court is satisfied that—

(a) it appears to be prima facie in the interest of the specified corporation that leave be granted to the applicant;

(b) [inapplicable];

(c) if the applicant is applying for leave to intervene in proceedings under subsection (1)(b), the specified corporation has not diligently continued, discontinued or defended those proceedings; and

(d)   except where leave is granted by the court under section 168BD(4), the member has served a written notice on the specified corporation in accordance with section 168BD.”

4.  Under section 168BD of the Companies Ordinance:

“(1) Subject to subsection (4), a member of a specified corporation, or of a related company of a specified corporation, shall serve a written notice on the specified corporation at least 14 days before he applies for leave under section 168BC(3) in respect of the specified corporation.”

5.  In respect of the “prima facie in the interest” requirement, it has been held that “the best interests of a company need be considered only in a prima facie way”.  The burden is not a high one.  It is not required to show its conduct of the defence is in the interests of the company.  What is required to be proved at this stage is that  “an arguable case be shown to subsist”: Re F&S Express Ltd [2005] 4 HKLRD 743at 746 E-H, Kwan J (as she then was); Re Lucky Money HCMP 505/2006, 18 July 2006,at para 40, Kwan J (as she then was).

6.  The court should not attempt to resolve the underlying dispute at this stage.  It would suffice if, on the face of it, it would be in the interests of the company to defend the proceedings: Re Myway Ltd [2008] 3 HKLRD 614,para 28-31, Barma J (as he then was).

7.  There is a difference between whether or not a company has a prima facie defence to the proceedings that an applicant wishes to defend on its behalf and the question of whether or not it is prima facie in its interests to defend them: Re Myway Ltd, at para 33.

Actions against the Company

8.  The Company was incorporated in Hong Kong in 2007.  From 31 March 2010, the applicant and Lau had each become equal shareholders and the only directors of the Company.  The business was one of trading of copper rods.  The operation of the Company was primarily managed by Lau.

9.  On 6 October 2011, an action (“the 2011 action”) was commenced by a supplier, Taihan Global Holdings Ltd (“TGH”) against Lau, the Company and other defendants.  The causes of action were, amongst others, fraud, breach of fiduciary duties and constructive trust.  The claim is for damages in the region of US$38m.  The Company has been subject to a Mareva injunction restraining it from disposing of assets up to the value of TGH’s claim.

10.  All the defendants, including the Company, have been defending the claim.  Lau initially denied all allegations against him.

11.  In 2013, things took a turn when Lau decided not to defend the 2011 action.  On 22 May 2013, judgment was entered, by consent, against him as a result of a settlement agreement whereby the plaintiff agreed not to enforce the judgment against him. 

12.  The 2011 action has reached the discovery stage.  There are 6 summonses to be heard in September 2013.

13.  On 14 March 2013, another action (“the 2013 action”) was commenced by TGH and another company (who has later withdrawn as a plaintiff) against the applicant and the Company, amongst others.  This new action was based on the evidence of Lau after he has changed his stance.  The defence is due to be filed on 19 July 2013.

14.  In the 2013 action, an application for interim Mareva injunction has been dismissed by me.  The substantive hearing has been fixed for hearing on 4 September 2013.

15.  Additionally, as the plaintiffs are suing over a similar subject matter as in the 2011 action, the applicant takes the view that the 2013 action amounted to an abuse of process.  There is a strike-out action due to be heard on 12 November 2013.

Reasons for intervention

16.  In the 2011 action, the firm of solicitors on record for the Company is Messrs. YT Szeto & Co.  However, Messrs YT Szeto & Co was instructed at a time when Lau was still defending.  That firm may now be faced with a situation of conflict.  Lau is no longer taking any action to defend the Company.

17.  For the 2013 action, beyond filing an acknowledgement of service, the Company is unable to instruct solicitors for lack of a valid board resolution. In 2 hearings (for the interim injunction call-over and discovery), the Company was treated as absent.

18.  Paragraph 10 of the Company’s articles provides that the quorum for the transaction of business at any general meeting, when the company has more than one member, is two.

19.  Paragraph 31 of the Company’s articles provides that the quorum for meeting of the directors, when the company has more than one director, is two.

20.  By a letter dated 14 May 2013, the applicant has sought the cooperation of Lau to authorize the applicant to have conduct of the defence on behalf of the Company.  However, Lau did not agree.

21.  There is thus a deadlock at the member and board level, hence this application.

The “prima facie in the interest of the company” requirement

22.  The factual matrix surrounding the 2 actions are similar and complex. The applicant and all other defendants seriously dispute the claims in both actions.

23.  The 2011 action is fairly advanced and will have its first CMC on 7 October 2013.  As Lau has consented to judgment against himself, clearly he has no desire to defend the Company.

24.  That the 2013 action has an arguable defence can be seen from the affirmation of the applicant in the 2013 action in opposition to the Mareva injunction.  If the Company does not have representation, judgment may be entered in default of defence in the 2013 action.

25.  I am satisfied that it will prima facie be in the interests of the Company to be given the opportunity to defend itself against a substantial claim based on evidence of an admitted fraudster.

The requirement that “the company has failed to diligently defend the action”

26.  Due to the deadlock in the Company and Lau having totally changed his position, the Company is unable to take action to defend itself.  Lau refused to cooperate as can be seen from his response to the applicant’s letter dated 14 May 2013.  The allegations made therein by Lau against the applicant are not those that can be resolved in these proceedings and the claims made by Lau therein may not even justifiably be made by him personally.

27.  Messrs YT Szeto & Co will be unable to take instructions to defend the Company when Lau and the applicant are at loggerheads.

28.  In the 2013 action, the Company simply cannot proceed beyond the acknowledgement of service.

29.  I am satisfied that this requirement has been met.

The requirement for written notice

30.  Written notice has been given by the applicant to the company by leaving at its registered office on 20 June 2013.  I am satisfied that this notice has satisfied the requirement of section 168BD(1).  Neither the Company nor Lau has appeared before me today.

Costs

31.  The applicant does not presently seek to be indemnified by the Company for legal costs in defending the actions due to the subsisting Mareva injunction and lack of information of the Company’s means or its ability to meet the applicant’s costs.  In line with F&S Express Ltd and Jone Son Ltd v New Asia Optical Co Ltd HCMP 1302/2011, 10 August 2011, Harris J, I therefore reserve this question with liberty to apply at a later stage.

Order

32.  I am satisfied that the requirements of section 168BC(1) and (3) of the Companies Ordinance have been satisfied.  I give leave to the applicant to intervene and represent the Company in the 2 actions.  There will be an order in terms of paragraphs 1-6 of the originating summons.  Costs will be reserved with liberty to apply.

33.  I thank Mr Zimmern for his assistance.