NEW SPARKLE ROLL INTERNATIONAL GROUP LTD v. ZHENG HAO JIANG AND OTHERS

HCMP 792/2024

[2025] HKCFI 3033

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMI NISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 792 OF 2024

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D E C I S I O N

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Introduction

1.  On 13 June 2025, the Amended Originating Summons (the “OS”) issued by the plaintiff (the “Company”) came before me for hearing fixed for 3 hours.

2.  I heard the Company’s application for relief under §2 of the OS, seeking an order of indemnity against the 4^th defendant, 5^th defendant, 6^th defendant and 8^th defendant (collectively, the “Subject Defendants”). The Subject Defendants are former independent non-executive directors (“INEDs”) of the Company. The indemnity sought is for:

(a)  The Company’s costs including legal costs incurred in dealing with, arising out of and relating to Companies (Winding up) Action number 91 of 2024 lodged before the Commercial Court of Bermuda (the “Bermuda Proceedings”) on an indemnity basis;

(b)  Damages suffered by the Company as a result of the ex parte application to appointment joint provisional liquidators (“JPLs”) and the petition presented in the Bermuda Proceedings on 15 April 2024;

(c)  All of the JPL’s costs and expenses arising out of or in relation to their appointment in the Bermuda Proceedings.

3.  The Company was represented by Mr William Wong SC, leading Ms Tinny Chan. The Subject Defendants were represented by Mr Hugh Kam.

4.  Mr Wong SC clarified that the Company was not pursuing the item at §2(b) above. The only relief sought was an order for indemnity from the Subject Defendants in respect of: (i) the Company’s legal costs in the Bermuda Proceedings; and (ii) the costs of the JPLs in the Bermuda Proceedings.

5.  §1 of the OS sought an anti-suit injunction restraining the defendants from taking certain steps in the Bermuda Proceedings, which granted on an interim basis on 13 May 2024. This is no longer a live issue since the Bermuda Proceedings have been struck out: see below.

6.  The basis of the Company’s claim under §2 of the OS is that the Subject Defendants acted in dishonest breach of fiduciary duty by causing the Company to initiate the Bermuda Proceedings and applying ex parte for the appointment of JPLs in those proceedings[1].

7.  At the start of the hearing, I raised concerns as to whether the Company’s allegations against the Subject Defendants could properly be resolved summarily and without the benefit of cross-examination of witnesses. The parties made arguments on this issue and others.

8.  For the reasons set out below, I take the view that the Company’s allegations cannot fairly be resolved on a summary basis, and that orders and directions are appropriate for the further hearing of this matter including oral evidence.

9.  I will accordingly focus on that issue and my reasons for so concluding.

Background

10.  Below, I rely on the affidavit evidence and submissions filed by the Company, for a summary of the background facts and allegations.

11.  According to the Company’s summary:

(1)  The defendants to these proceedings are the former directors of the Company. They and Mr Sze Ching Lau (“Mr Sze”) have been fighting for control over the Company since Mr Sze first requisitioned to convene a special general meeting (“SGM”) to consider the replacement of the Company’s board of directors (the “Board”) in September 2023.

(2)  The said requisition triggered what Mr Sze believes to be a series of retaliatory steps by the defendants to entrench their control over the Company by: invoking suspect and unparticularised allegations of fraud to unlawfully disqualify his voting rights; granting and exercising share options to dilute his shareholding; attempting to place convertible bonds to dilute his shareholding; and obstructing his general offer to purchase shares in the Company by way of obtaining an interim injunction in Hong Kong[2].

(3)  In February 2024, as Mr Sze was completing a general offer for the purchase of the Company’s share which would render him its single largest shareholder, he again requisitioned an SGM for the reconstitution of the Board.

(4)  The defendants then convened an SGM to be held on 8 April 2024 for the purpose of considering the reconstitution of the Board. Shortly before that SGM, they once again cited some unparticularised allegations of fraud to challenge Mr Sze’s shareholding, and adjourned the SGM to 23 April 2024 (the “23 April SGM”).

(5)  As a result, Mr Sze commenced HCMP 589/2024 on 9 April 2024 and applied for an injunction against the defendants restraining them from delaying or interfering with the 23 April SGM or the votes cast at that SGM by Mr Sze.

(6)  On 12 April 2024 (the “April 2024 Hearing”), Mr Sze’s application for injunctive relief in HCMP 589/2024 came before Linda Chan J. At that hearing, the Company and the defendants made clear that they would not allow Mr Sze to vote at the 23 April SGM, citing allegations of fraud against Mr Sze in an attempt to impugn his shareholding in the Company (the “Shareholding Allegations”).

(7)  However, at the April 2024 Hearing, Linda Chan J granted the injunction order sought by Mr Sze. Her Ladyship’s reasoning included that:

(a)  The Shareholding Allegations pertained only to the beneficial ownership of Mr Sze’s shares in the Company, whereas Mr Sze’s entitlement to vote and determine the constitution of the Board depended on his status as registered legal shareholder of the Company.

(b)  It was prima facie a misfeasance for the defendants to expend the Company’s resources on investigating shareholding disputes raised by third parties, who should expend their own resources to pursue such complaints, without the Company’s involvement.

(8)  Despite the injunction granted at the April 2024 Hearing and the Court’s reasoning referred to above, the defendants caused the Company to on 15 April 2024: (i) commence the Bermuda Proceedings seeking a winding-up order against itself on the just and equitable ground; and (ii) make an application ex parte in the Bermuda Proceedings for the appointment of JPLs. On 16 April 2024, an order was made in the Bermuda Proceedings for the appointment of the JPLs in respect of the Company.

(9)  It was not until the evening before the 23 April SGM that the Company issued an announcement that the JPLs had been appointed.

(10)  At the 23 April SGM, the defendants were removed as directors of the Company and replaced by a new board of directors (the “New Board”). However, the JPLs continued to exercise full powers afforded to them by their appointment order in the Bermuda Proceedings, to the exclusion of the New Board.

(11)  On 30 April 2024, the New Board received the application materials for the ex parte application which had been made in the Bermuda Proceedings, and discovered that various material non-disclosures and misrepresentations had been made.

(12)  On 6 May 2024, the New Board caused the Company to take out an application in the Bermuda Proceedings to dismiss the winding-up petition and set aside the order appointing the JPLs (the “Setting Aside Application”). At a first hearing of the Setting Aside Application on 10 May 2024, inter alia, the 1^st defendant sought an adjournment.

(13)  On 13 May 2024, the Company issued the OS in these proceedings against the defendants. On the same date, Linda Chan J made an order pursuant to §1 of the OS, restraining the defendants from taking actions to oppose, obstruct, delay or interfere with the Setting Aside Application in the Bermuda Proceedings. According to an attendance note included in the Company’s evidence, Her Ladyship’s oral reasoning included that: (i) there had been an abuse of process in bringing the Bermuda Proceedings given the protracted litigation in Hong Kong in relation to the 23 April SGM; and (ii) Her Ladyship’s preliminary view was that the defendants were frustrating the order granted at the 12 April Hearing.

(14)  On 15 May 2023, the Bermuda Court granted the Setting Aside Application, ordering that the petition in the Bermuda Proceedings be struck out and the JPLs be discharged.

12.  In broad summary, the Company’s complaint is that its former directors (including the Subject Defendants) acted in dishonest breach of fiduciary duty by doing precisely what Linda Chan J had identified would be misfeasance at the April 2024 Hearing, ie expending the Company’s funds on the further ventilation of shareholder disputes. Further, the Subject Defendants had sought to circumvent the Court’s order which had the purpose of ensuring that the 23 April SGM proceeded without interference with Mr Sze’s voting rights as registered shareholder.

The Subject Defendants’ position and evidence

13.  Mr Kam, for the Subject Defendants, drew attention to Clause 164(1) of the Company’s Bye-Laws, which provides to the Company’s directors an indemnity for acts in the execution of their duties, save in the case of fraud or dishonesty[3].

14.  Mr Wong SC fairly accepted that in order for the Company’s claims against the Subject Defendants to succeed, it was necessary to show that their breach of duty was dishonest.

15.  The Subject Defendants each filed evidence by affirmation in opposition to §2 of the OS, in similar terms, including the following points:

(1)  The Subject Defendants gave details of various events and allegations underlying the disputes which had arisen with Mr Sze and the litigation before the Hong Kong courts, labelled as the “Shareholding Disputes”, the “Regulatory Complaint” and the “Price Manipulation Allegations”. For present purposes, it is unnecessary for me to set out the details of these allegations.

(2)  The Board’s decision on 5 April 2024 to adjourn the SGM was based on legal advice received and the prevailing circumstances, including the Shareholding Disputes, the Regulatory Complaint and the Price Manipulation Allegations.

(3)  Following receipt of Mr Sze’s originating summons in HCMP 589/2024, the Company obtained further legal advice from Bermuda legal advisers dated 9 April 2024 (the “9 April Memorandum”), which made reference to, inter alia, an application for the appointment of JPLs in respect of the Company, as an alternative last resort.

(4)  Following the Court’s injunction order dated 12 April 2024 in HCMP 589/2024, the Company proceeded to issue the Bermuda Proceedings and apply ex parte for the appointment of JPLs in those proceedings, based on legal advice (including in particular the 9 April Memorandum), for the purpose of protecting the Company and the interests of the shareholders as a whole.

(5)  The 23 April SGM proceeded and resolutions for the replacement of the Board were passed. There was accordingly no interference with or breach of the injunction order which had been made in HCMP 589/2024.

(6)  Following their removal as INEDs, the Subject Defendants had no further involvement in the Company’s affairs.

(7)  In response to the Company’s allegations of dishonest breach of fiduciary duty, the Subject Defendants said:

(a)  The decision of the former Board to commence the Bermuda Proceedings was a unanimous one. It was based on legal advice, including in particular the 9 April Memorandum.

(b)  The decision was also based on the prevailing factual circumstances at the time, including the Shareholding Disputes, the Regulatory Complaint and the Price Manipulation Allegations. It would not be prudent for an INED to brush aside such matters, as they were very serious and would affect the Company’s interests if they turned out to be true. It was therefore decided that JPLs should be appointed to protect the interests of the Company and its shareholders as a whole.

(c)  The Court’s injunction order dated 12 April 2024 was not flouted by the Subject Defendants, since the 23 April SGM proceeded and the Board was replaced.

(d)  There was no misrepresentation or concealment of information to/from the Bermuda court; and the Subject Defendants certainly did nothing to mislead, the evidence and arguments having been prepared by the Company’s lawyers.

(e)  The Subject Defendants believed that they had acted in the Company’s best interests and not in breach of fiduciary duty. They also had no personal interest in the subject matter of the proceedings, and there was no reason for them to risk their reputations by flouting any court order.

Relevant principles

16.  Mr Kam cited the following relevant authorities:

(1)  EAC Transportation Services (Hong Kong) Limited v Way Prosperity Cargo Services Company Limited [2025] HKCFI 1233. Madam Recorder Rachael Lam SC considered the principles applicable to an allegation of misfeasance under section 276 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32) in the following terms at §36 (with emphasis added):

“ The Respondent Directors & Shareholders rely on the following propositions: (to which there is no great exception taken by the Petitioner)

…

(2) Fiduciary duties are not concerned with competence but with concepts of honesty and loyalty: Wang Pengying v Ng Wing Fai & Ors [2021] 1 HKLRD 997 ([2021] HKCA 100) at §74 (per Kwan VP).

(3) The duty imposed on directors to act bona fide in the interests of the company is a subjective one. Where there is evidence of the director directing his mind to the interests of the company, the question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the best interests of the company. Rather, the question is whether a director honestly believed that his chosen course of act or omission was in the interests of the company. The key consideration pertains to the director’s genuinely belief: Regentcrest plc (in liq) v Cohen & Anor [2001] BCC 494 at §120.

(4) Thus it is the director’s state of mind instead of a hindsight judgment on the relevant facts in place of the decision made by the directors at the time that is relevant. The Court need not consider whether it would have acted differently had it been in the position of the director at the relevant time: Francis Wessely v Richard White [2018] EWHC 1499 (Ch) at §§43-44. Further, the petitioner must prove that any alleged loss suffered by the Company were caused by such breaches: ibid at §45. The burden of proving both the alleged breach and loss falls squarely on the petitioner: ibid at §50

…

(6) Where the misfeasance complained of is dishonesty / fraud / conspiracy, the complaining shareholder must establish that the alleged breach of duty is deliberate and wilful in nature. It must be proved that there is an irresistible inference that there was such fraudulent or dishonest breach of duty which were ultra vires of the company’s powers, mere negligence is insufficient: Wang Pengying (supra) at §§73-74.”

(2)  Wrexham Association Football Club Ltd v. Crucialmove Ltd [2006] EWCA Civ 237. In the context of an application for summary judgment, the English Court of Appeal reasoned as follows (with emphasis added):

“57. I do not underestimate the importance of a finding adverse to the integrity to one of the parties. In itself, the risk of such a finding may provide a compelling reason for allowing a case to proceed to full oral hearing, notwithstanding the apparent strength of the claim on paper, and the confident expectation, based on the papers, that the defendant lacks any real prospect of success. Experience teaches us that on occasion apparently overwhelming cases of fraud and dishonesty somehow inexplicably disintegrate. In short, oral testimony may show that some such cases are only tissue paper strong. As Lord Steyn observed in Medcalf v Weatherill (2003)1 AC 120 at paragraph 42, when considering wasted costs orders:

“The law reports are replete with cases which were thought to be hopeless before investigation but were decided the other way after the Court had allowed the matter to be tried.”

And that is why I commented in Esprit Telecoms UK Ltd and others v Fashion Gossip Ltd , unreported, 27 July 2000 that I was

“troubled about entering summary judgment in a case in which the success of the claimant’s case involves, as this one does, establishing allegations of dishonesty and fraud, which are strongly denied, and which cannot be conclusively proved by, for example, a conviction before a criminal court.”

58. This collective judicial experience does not always, or inevitably, provide a compelling reason for allowing the case to proceed to trial, nor for that matter require the judge considering the application to reject the conclusion that there is no real prospect of a successful defence of the claim if he is satisfied that there is none. That is not what the Rules provide, and if that had been intended, express provision would have been made. It is however a factor constantly to be borne in mind, if and when, as here, the reason for concluding summary judgment is appropriate is consequent on a disputed finding, adverse to the integrity of the unsuccessful party.”

(3)  The Federal Republic of Nigeria v Santolina Investment Corp. [2007] EWHC 437 (Ch). The summary and application by Lewison J of principles applicable on an application for summary judgment included the following:

(a)  At §4(vii): “Although there is no longer an absolute bar on obtaining summary judgment when fraud is alleged, the fact that a claim is based on fraud is a relevant factor. The risk of a finding of dishonesty may itself provide a compelling reason for allowing a case to proceed to trial, even where the case looks strong on the papers: Wrexham Association Football Club Ltd v Crucialmove Ltd [2006] EWCA Civ 237 at [57]”.

(b)  At §73: “I acknowledge that this is a strong case on the papers, or at least on those parts of the papers on which the Federal Republic has chosen to rely. Mr Alamieyeseigha undoubtedly has a lot of explaining to do. But as Judge LJ pointed out in Wrexham Association Football Club Ltd v Crucialmove Ltd, even where there is a confident expectation, based on the papers, that the defendant lacks any real prospect of success, experience teaches that apparently overwhelming cases of fraud and dishonesty sometimes inexplicably disintegrate. This is a case, in my judgment, where, in the words of Mummery LJ in Doncaster Pharmaceutical Group Ltd v The Bolton Pharmaceutical Co 100 Ltd, there are reasonable grounds for believing that a fuller investigation into the facts would add to or alter the evidence available to a trial judge and so affect the outcome of the case”.

17.  There was no dispute as to the applicability of the principles set out in the said authorities, to the present application.

18.  It is also trite that the standard of proof is commensurate with the seriousness of the allegations made, and that inferences of fraud or serious misconduct are not lightly drawn.

19.  I further refer to Hong Kong Civil Procedure 2025 at §28/4/2 for the principles applicable to the summary disposal of claims made by originating summons. In short, the proceedings may be disposed of summarily and without oral evidence where the court considers that there is no triable issue. The position is analogous to an application for summary judgment under Order 14, save that the burden is not cast upon the defendant[4].

Reasoning

20.  Mr Wong SC accepted that in a usual case where a plaintiff’s case is premised on an allegation of dishonesty, particulars of the allegations would fall to be pleaded, and oral evidence would be appropriate.

21.  He argued, however, that on the facts of this case the Company’s complaint was so clear and answerable that I should grant relief on a summary basis.

22.  Similarly, Mr Wong argued that the evidence filed by the Subject Defendants had dealt insufficiently with the Company’s complaint of dishonest breach of duty, and that there was no triable issue.

23.  The Company’s key arguments included the following:

(1)  Directors act collectively as the board of a Company.

(2)  It is trite law that directors should not cause the company’s funds to be expended on disputes between shareholders, and it is misfeasance for the them to do so.

(3)  During the April 2024 Hearing, the Court repeatedly referred to the point at (2) above. The Subject Defendants were parties to those proceeding and were represented by senior and junior counsel at the hearing. Costs orders were made against them.

(4)  The purpose of the injunction granted on 12 April 2024 was to allow Mr Sze to exercise his rights as the registered majority shareholder of the Company to reconstitute the Board at the coming SGM, and to prevent the defendants from interfering with the same.

(5)  Following the April 2024 Hearing, the Company’s former directors did precisely what the Court had indicated would be misfeasance, and further acted to defeat the purpose of the injunction which had been granted. They did so by causing the Company to take out an urgent application for the appointment of JPLs will full powers, on the basis of a need to investigate the very same allegations which the Hong Kong Court had already indicated would be an improper use of the Company’s resources.

(6)  The manner in which the Bermuda Proceedings were pursued was abusive in that the application for appointment of JPLs was made ex parte, and misrepresentations and non-disclosures were made. Importantly, the defendants delayed the announcement of the JPLs’ appointment until the night before the 23 April SGM, in order to prevent an application for discharge being made prior to the SGM (and contrary to what had been represented to the Bermuda court). The Hong Kong Court has already found that there was an abuse of process in bringing the Bermuda Proceedings: see §11(13) above.

(7)  The 9 April Memorandum from the Company’s Bermuda legal advisers referred only to “light touch” JPLs, which would leave the Board in control of the Company’s day‑to‑day operations. However, the former directors caused the Company to successfully apply for the appointment of JPLs with full powers, such that after the 23 April SGM the new Board was not in control of the Company’s operations. Mr Wong SC relied on various other aspects of the legal advice received, such as references to the appointment of JPLs being as a last resort, and to considerable commercial and legal risks associated with such an application.

24.  Despite these arguments, I am not persuaded that the allegations made can be resolved in the plaintiff’s favour summarily and without oral evidence. I rely on the following:

(1)  The Company must establish that the Subject Defendants acted in dishonest breach of their duty to act bona fide in the Company’s interests. The test is subjective. The question is whether the directors honestly and genuinely believed that the act in question was in the Company’s interest, rather than whether it in fact was, or whether the directors were negligent. See §16(1) above.

(2)  In their affirmations, the Subject Defendants gave at least some evidence as to their subject state of mind when taking the decision to commence the Bermuda Proceedings, including that they considered them to be in the Company’s best interests and the reasons for this at least in brief outline: see above.

(3)  There are at least some portions of the 9 April Memorandum which may arguably assist the Subject Defendants, for example the statement at §65 that whilst provisional liquidation is a very serious step to take and associated with considerable risks, in light of the circumstances “it may be a course that the Board should now consider in greater depth”.

(4)  As noted above, Mr. Wong SC made detailed submissions criticising the evidence filed by the Subject Defendants as incomplete and inadequate, and to the effect that the 9 April Memorandum could not have been sufficient to assure them that the Bermuda Proceedings were a bona fide or acceptable use of the Company’s funds, particularly in light of what had been said at the 12 April Hearing.

(5)  There may very well be force in these submissions, but I consider that they are properly ventilated following oral evidence and cross-examination. To put the matter another way, I do not see that I can fairly reject the evidence of the Subject Defendants that they considered, subjectively, that they were acting in the Company’s interests, on the basis of the points made by Mr. Wong, without those points being put to the Subject Defendants in cross-examination such that they have a chance to respond.

(6)  Similarly, there are a number of unknowns which might be relevant and call for further explanation or investigation. For example, the extent to which each of the Subject Defendants knew and understood what had been said by the Court at the 12 April Hearing; the extent of their understanding of what could be considered to be in the Company’s interests; the details of any further exchanges with the Company’s legal advisers in the leadup to the commencement of the Bermuda Proceedings; and the circumstances in which it was decided to apply ex parte for the appointment of JPLs with “full” rather than “light touch” powers.

(7)  I bear in mind also that the allegations made are very serious, that the standard of proof is commensurate with this, and that inferences of fraud or dishonestly are not lightly drawn[5]. In addition, though it is principle permissible to resolve allegations of dishonesty on a summary basis, the authorities signal caution in this regard: see §§16(2) & (3) above.

(8)  In summary, I am not persuaded that the Company’s case is so overwhelming, or that the Subject Defendant’s evidence and defence is so obviously deficient, that I can resolve the matter summarily. Rather, there is a triable issue which should be ventilated through oral evidence.

The Subject Defendants’ other arguments

25.  Mr Kam, for the Subject Defendants, raised a number of other arguments as to why the relief sought should not be granted and §2 of the OS should be dismissed[6]. The parties exchanged submissions on these points.

26.  Since this matter is to go further, I will not deal with these arguments in any detail; save to note that I am not persuaded that any of them justifies the dismissal of §2 of the OS at this juncture.

Further directions

27.  Accordingly, I decline to make the orders sought by the Company on a summary basis, since I consider that there are triable issues.

28.  The parties addressed me very briefly on how I should proceed if I so concluded.

(1)  Mr Kam said that I should simply dismiss §2 of the OS; failing which there should be an order for the proceedings to be continue as if begun by writ.

(2)  Mr Wong SC said that it was unnecessary for the matter to proceed as if begun by writ, and orders should rather be for a further hearing of the OS including oral evidence.

29.  In short, I will not dismiss §2 of the OS, but will make further directions for the matter to progress to a hearing including oral evidence under either Order 28 rule 4, or on order for continuation as if begun by writ under Order 28 rule 8.

30.  I would, however, be assisted by further written submissions from the parties as to which of these two courses of action is appropriate, and the details of directions which should be made. The question of costs should be addressed at the same time.

31.  I will therefore direct as follows:

(1)  Within 14 days of the handing down of this Decision, the Company is to lodge written submissions on: (i) the appropriate orders and directions for progressing §2 of the OS to a hearing including oral evidence, whether under Order 28 rule 4 or rule 8; and (ii) the costs of the OS and the hearing before me.

(2)  Within 14 days thereafter, the Subject Defendants are to lodge written submissions on the same subjects.

(3)  Within 7 days thereafter, the Company may lodge written submissions in reply on the same subjects, if so advised.

(4)  All of the said written submissions should be not longer than 5 pages in length.