HOU HSIAO BING v. CHINA TECHNOLOGY SOLAR POWER HOLDINGS LTD

HCMP 1880/2019

[2020] HKCFI 2957

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1880 OF 2019

_____________

_____________

_____________

____________________

JUDGMENT

____________________

Introduction

1.  This is an application for leave to intervene in HCA 3017/2016 (“the Action”) in which the Respondent to this application (“the Company”) is the Plaintiff. The Defendants to the Action are:

1.1  the 1st Defendant, Zeng Xiangyi (“Zeng”), formerly an executive director, nominated by the 3rd Defendant, Li Allan (“Li”)

1.2  the 2nd Defendant, Wang Dalang (“Wang”), also formerly an executive director, nominated by the 4th Defendant, Ren Baogen (“Ren”);

1.3  the 3rd Defendant, Li, formerly an executive director and the former chairman of the Company’s board, and

1.4  the 4th Defendant, Ren, who was a shareholder of the Company until June 2016.

2.  The Applicant is a founding member of the Company; he now holding 7% of its issued shares and was formerly, until 26 August 2019, an executive director. He served as chairman of the board of directors from 5 August 2002 until 6 April 2011.

3.  The Company is a limited company incorporated in the Cayman Islands and is listed on the GEM board of the Hong Kong Stock Exchange.

4.  The claim in the Action concerns the December 2010 purchase by the Company of shares in China Technology Development Corporation (“CTDC”), a BVI company listed on the Nasdaq Capital Market which is alleged to have been unauthorised and outside the scope of the Company’s ordinary scope of business (“the Alleged Unauthorised Transaction”). Amongst the pleaded causes of action is a claim against all defendants for fraudulent conspiracy.

COMPANIES ORDINANCE, SECTIONS 732 & 733

5.  for the purpose of the present application, sections 732(1) & (3) and section 733(1) are material.

6.  Sections 732(1) & (2) of the Ordinance are in the following terms:

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

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

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

7.  Section 733(1) of the Ordinance is in the following terms:

“Leave of Court to bring or intervene in proceedings

(1) On application by a member of a company or of an associated company of a company, the Court may grant leave for the purposes of section 732(1), (2) or (3) if it is satisfied that—

(a) on the face of the application, it appears to be in the company’s interests that leave be granted to the member;

(b) in the case of—

(i) an application for leave to bring proceedings under section 732(1) or (2), there is a serious question to be tried and the company has not itself brought the proceedings; or

(ii) an application for leave to intervene in proceedings under section 732(3), the company has not diligently continued, discontinued or defended the proceedings; and

(c)  except where leave is granted by the Court under subsection (5), the member has served a written notice on the company in accordance with subsection (3), and the notice complies with subsection (4).”

8.  It was not suggested on behalf of the Company that it was not in its interests to continue with the prosecution of the Action or that the claims in the action are in any way unmeritorious. The only issue is whether or not there has been a failure to diligently pursue the proceedings and, if there has been, whether it is in the interests of the Company for the Applicant to be given leave to continue the proceedings on behalf of the Company in place of its board of directors.

PROCEDURAL CHRONOLOGY

9.  The writ in the Action was issued on 18 November 2016 (just before the expiry of the limitation period). it was amended on 1 September 2017 to correct or amend the address of Ren.

10.  In October 2017, whilst still a director of the Company, the Applicant applied under section 732 of the Companies Ordinance for leave to intervene in the proceedings on account of the Company’s failure to take any meaningful steps to serve the writ on the defendants (“the Applicant’s 1st Application for Intervention”).

11.  On 26 October 2017, the Company applied for leave to serve the writ out of the jurisdiction on Wang and Ren in the PRC. That application was granted on 2 February 2018;

12.  On 10 November 2017, the Company filed its Statement of Claim (which was settled by counsel) and served it on Li and Zheng.

13.  Li and Zheng filed and served their respective defences on 13 December 2017 and 4 January 2018 respectively.

14.  On 23 February 2018, Li applied to strike out the Action on the grounds of a lack of a reasonable cause of action against him.

15.  On 10 April 2018, the Company appointed the Applicant as its sole representative to handle the Action on the Company’s behalf.

16.  On 14 May 2018, the mainland judicial authorities informed the Company by letter that they were or had been unable to serve the writ on Wang and Ren.

17.  On 25 June 2018 the Company applied for substituted service on Wang and Ren by way of newspaper advertisement in the PRC.

18.  On 11 July 2018, the Company filed its Reply to Zeng’s Defence.

19.  In September 2018, the Applicant’s 1st Application for Intervention was withdrawn.

20.  On 21 September 2018, on the Company’s application, the validity of the writ was extended for 12 months.

21.  On 11 October 2018, the Company filed and served its Amended Statement of Claim pursuant to leave granted on 10 October 2018, resulting in the withdrawal of Li’s strike out application.

22.  Li and Zeng filed their respective Amended Defences on 20 November 2018 and 20 December 2018 respectively.

23.  On 17 January 2019, the Company filed its Amended Reply to Zeng’s Amended Defence.

24.  On 10 May 2019, the Master refused to order substituted service by newspaper advertisement in the PRC. Negotiations between the Department of Justice (“DOJ”) and the Chinese Supreme Peoples Court (“CSPC”) then ensued on this issue but, according to the Company, no agreement has yet been reached.

25.  The AGM of the Company took place on 26 August 2019. The Applicant was not re-elected as a director and in early September 2019 his appointment as sole representative as regards the conduct of the Action was revoked. He was replaced by Ms. Hu Xin, a director of the Company.

26.  On 11 October 2019, an order was obtained from the court, again extending the validity of the writ for another 12 months.

27.  By 28 October 2020, there had still been no agreement between the DOJ and the CSPC on substituted service and accordingly, the Company again applied to the court for the extension of the validity of the writ.

28.  On 29 October 2020, the Company’s solicitors wrote to the DOJ enquiring as to the progress of the consultations between the DOJ and the CSPC.

THE COMPANY’S EXPLANATION FOR THE DELAY IN PROGRESSING THE ACTION

29.  The Company maintains that the major cause of the delay in progressing the Action has been the difficulty in serving Wang and Ren in the PRC which, it says, has largely been a matter beyond the Company’s control, depending, as it does, on agreement being reached between the DOJ and the CSPC.

30.  The Company points to the fact that neither during the time when the Applicant had conduct of the Action on the Company’s behalf nor at any time before or since then has the Applicant suggested that the Company should abandon the claims against Wang and Ren.

31.  The Company suggests that, especially given the fact that a claim for fraudulent conspiracy is made against all the Defendants, it is procedurally impractical and inappropriate to proceed solely (or independently) against Zeng and Li whilst service on the other defendants remain pending. This is because:

31.1   until Zeng and Li are served and pleadings in the Action as a whole are closed, a timetabling questionnaire (a prerequisite for the filing of a Case Management summons) cannot be served;

31.2   from a case management point of view, it would be unsatisfactory to have separate trials against 2 groups of defendants, and

31.3   it is important to know and understand the case of Wang and Ren before proceeding with discovery and before preparing and filing the Company’s evidence.

32.  The Company accepts that if it becomes clear that the difficulties as regards service on Wang and Ren are insuperable and/or service on these defendants becomes impractical, there may come a time when the Company will have to decide whether or not to abandon the claims against these defendants but it insists that no one (not even the Applicant) has yet suggested that that point has yet been reached.

ALLEGED CONFLICT OF INTEREST

33.  The Applicant alleges that the Action has been pursued in a dilatory fashion and that that is because of what he alleges to be a close relationship between the present chairman of the Company, Chiu Tung Ping (“Chiu”) and Li and by reason of business dealings between the 2 of them since the late 2000s.

34.  In particular, the Applicant relies on the fact that Chiu and Li had interests in CTDC and in a solar energy project in the PRC (“the Project”) which the Company acquired from one of Chiu’s corporate vehicles and suggests that the Alleged Unauthorised Transaction was beneficial to Chiu and Li as the price of CTDC’s shares surged as a result of it. On this basis the Applicant alleges that Chiu had a motive to “cover up the matter” and see to it that the Action progressed sluggishly.

35.  The Applicant also alleges that Chiu, Li and Ren colluded with each other, relying on the following:

35.1   the procurement by Chiu of the distribution to Li and Ren’s nominees of part of the convertible bonds issued by the Company for the purpose of acquiring the Project;

35.2   an admission made by Chiu to the Applicant that he had approached Li through a middleman to settle the Action, and

35.3   an admission made by Ren to the Applicant that he and Chiu had sold their respective shareholding in CTDC to the Company by means of the Alleged Unauthorised Acquisition.

DISCUSSION

36.  Notwithstanding the difficulties which have been encountered with regard to the service of the proceedings on Wang and Ren, I accept that the Company has not pursued the Action as diligently as it should have done. However it does not follow from this fact alone that the court should accede to the Application. The Court must additionally be satisfied that it would be in the Company’s interests for the Applicant to take over the conduct of the Action against the wishes of its board of directors.

37.  Prima facie it is the board of directors of a company which is charged with the responsibility of managing the company’s affairs including the conduct of litigation to which it is a party. In a case like the present where proceedings are already in train and the litigation is being conducted by the Company (albeit in a dilatory fashion), something more than lack of diligence in the prosecution of the proceedings is required before the Court should exercise its powers under sections 732 & 733 to grant leave to a member of the Company to take over the conduct of the litigation, such as evidence that the board of directors has not been acting bona fide, the existence of serious conflicts of interest or evidence that the Company is or has been motivated by improper purposes. Cogent evidence of these matters is required if an application to intervene in proceedings which have already commenced and which are in progress is to succeed.

38.  In my view the evidence adduced by the Applicant falls short of what is required before the court can be reasonably satisfied that it is in the Company’s interests that its board of directors should be stripped of the responsibility of conducting the Action and that he should take over its conduct. It is circumstantial and does not in my view demonstrate that Mr. Chiu has in any way obstructed the conduct or prosecution of the Action. In any case, Mr. Chiu is only one director on the board and the suggestion that the other directors are mere puppets has not been substantiated. The Applicant has failed to show that the board of the Company as a whole has not acted bona fide, has a conflict of interest or has been motivated by any improper purpose.

39.  On any basis there are serious questions as to whether it would be appropriate to allow the Applicant to take over the conduct of the Action:

39.1   the Applicant was the chairman of the Company’s board of directors at the time of the Alleged Unauthorised Transaction whereas none of the members of the present board were;

39.2   the Applicant may well have a personal grievance in relation to the Alleged Unauthorised Transaction on account of the fact that the funds for it were sourced from his personal investment in the Company through a share subscription and convertible bond;

39.3   as a result, the Applicant’s motivations may not align with those of the board or with the interests of the Company, and

39.4   in any case the Applicant is no longer a director and is only a 7% shareholder.

CONCLUSION

40.  For all of the above reasons I dismiss the Application and make an order nisi that the costs of the Application be paid by the Applicant to the Company, to be taxed if not agreed.