CHU KONG v. LAU WING YAN AND OTHERS

HCA 226/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 226 OF 2017

________________________

________________________

____________

DECISION

____________

1.  This was an application by the 4^th defendant Ever Ning Shipping and Trading Limited (“the applicant”) by summons dated 20 April 2017 that the action be stayed pending arbitration. The action is a multiple derivative action brought by Chu Kong (“the plaintiff”) on behalf of the 7^th defendant Giant Progress Limited (“the company”). The plaintiff is the ultimate owner and indirect shareholder (through Starry Fortune Global Limited (“D5”) and All Brilliant Investments Ltd (“D6”) respectively) of 40% of the shareholding in the company.

Background facts

2.  The action is a multiple derivative action in respect of wrongs committed against the company principally founded on breaches of fiduciary and other duties by the 3^rd defendant Wong Wing Yee (“D3”) who is the company’s sole director.

3.  The company agreed to acquire a vessel owned by the applicant for US$25 million by entering into a Bareboat Charter with the applicant on 24 November 2013 (“the Contract”).  Under its terms, the 1^st instalment by way of a non-refundable deposit of 10% of the purchase price (US$2.5 million) was payable on or before 26 November 2013.  70% was payable on before 28 March 2014 and the remaining 20% on the 1^st anniversary of the actual delivery of the vessel.  The Contract provided for the vessel to be chartered to the plaintiff for a period of “about 3 – 4 months” at its option at the rate of US$2000 per day.  It also contained a dispute resolution clause that provided for arbitration in the event of any dispute arising (“the dispute resolution provision”).

4.  On 28 March 2014 the company entered into a supplemental agreement with the 2^nd defendant Giant Shine Limited (“D2”) and the applicant the effect of which was to substitute D2 as the buyer of the vessel from the applicant instead of the company.  The supplemental agreement expressly incorporated the dispute resolution provision of the Contract. 

5.  In the derivative action, it is alleged that in causing the company to enter into the supplemental agreement, D3 committed breaches of fiduciary duties and/or breach of trust and/or breach of duty of fidelity and good faith she owed to the company as its director.  The 1^st defendant Lau Wing Yan (“D1”) is an indirect shareholder of 40% of the company and also owns 80% of D2 which he controls.  It is alleged that the plaintiff had no knowledge of these supplemental agreement and had never consented to it.  It is further alleged that D1 and D2 were complicit with D3 in the misappropriation of the company’s assets.

6.  There are no allegations made against the applicant in the derivative action.  The applicant has been joined as a defendant in the action so that it would be bound by the outcome should the plaintiff prevail in the action as it could be affected by any relief granted.

The issues

7.  The application is made pursuant to section 20(1) of the Arbitration Ordinance (Cap 609) which gives effect to Article 8 of UNCITRAL Model Law:

“ (1) A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”

( emphasis added)

8.  Mr Wong SC who appeared for the plaintiff submitted that a stay should not be granted because:

(a) there is no substantive dispute with the applicant;

(b) the arbitration clause in the supplemental agreement has no application where the plaintiff’s claim is that D3 had no authority to enter into the supplemental agreement; and

(c) the arbitration clause has no application by reason of the fact that this is a derivative action.

Substance of the dispute

9.  It is evident from the brief description of the action in §§5 – 6 above that the dispute is whether D3 has committed wrongs against the company in her capacity as sole director and whether D1 and D2 were complicit in the wrongdoings.  Those complaints do not concern or involve the applicant.

10.  Mr Lam who appeared for the applicant submitted that because the plaintiff is seeking a declaration against the applicant that the supplemental agreement is void and unenforceable and the applicant’s position is that it is valid and binding, there is a “dispute” that falls within section 20(1).  It was said that the “dispute” is over the validity of the supplemental agreement.

11.  It was also emphasised that the supplemental agreement conferred an important contractual right on the applicant — the right to have disputes arbitrated.  It was submitted that the applicant should not be deprived of that right unless the agreement to arbitrate is shown to be “null and void, inoperative or incapable of being performed”.

12.  On the basis of the applicant’s analysis, “the matter” in respect of which the action was brought must go to arbitration because it is “the subject of an arbitration agreement” within section 20(1).  The correctness of the applicant’s submission is best tested in the context of the envisaged arbitration to which I now turn.

A multiple derivative arbitration?

13.  This is a concept that I find somewhat novel.  How would one begin to go about it in Hong Kong?

14.  Mr Lam cited a law review article entitled The Rise of “Shareholder Derivative Arbitration” in Public Corporations (1996) 31 Wake Forest L. Rev. 337 by Jeffrey A Sanborn in support of such a concept.  However, that article offers no assistance in the context of Hong Kong given that what was being addressed was US law and US public corporations.  There was no mention of a multiple derivative arbitration as such.  

15.  Mr Lam then submitted that Sinwa SS (HK) Co Limited v Nordic International Limited and another [2016] SGHC 111 (a decision of the Singapore High Court) offers guidance.  The applicant suggested that the plaintiff could take out an originating summons joining the company, D5 and D6 as respondents for a declaration that the plaintiff is entitled to bring a multiple derivative arbitration on behalf of the company and its ultimate shareholders other than D1.

16.  However, it is wholly unclear upon what basis such an application is to be made that would give the court jurisdiction to grant the relief sought.  Sinwa was concerned with a common law derivative action and, pursuant to the regime prevailing in Singapore, leave had to be obtained from the court before such an action could be commenced.  Such leave is not required in Hong Kong: see Waddington Limited v Chan Chun Hoo Thomas (2008) 11 HKCFAR 370.  

17.  Further, sections 731 and 732 of the Companies Ordinance do not provide the answer since proceedings thereunder are confined to court proceedings.  In short, the applicant has not been able to identify any available Hong Kong procedure that would enable the plaintiff to obtain the proposed declaration.

18.  It should be mentioned that reference was also made to Chan Tat Man v Tsoi Yuk Ming (unreported, 18 April 2008, HCA 2028/2007), the relevance of which in the present context escapes me.  The application before the judge in that case was an application pursuant to Order 15, rule 6(2)(b) to intervene in an action.  Related to the action was an ongoing arbitration that had been adjourned pending the court application.  It offers no assistance on the question this court has to consider.  It offers no guidance as to available legal procedure for a shareholder to obtain leave to commence a common law multiple derivative arbitration in Hong Kong.

19.  There is a further difficulty.  Upon analysis, who would the respondent(s) to the proposed arbitration be?  An arbitration against the applicant (being the other contracting party to the supplemental agreement that contained the arbitration provision) would accomplish nothing since the plaintiff’s quarrel is not with the applicant.  The “matter” in respect ofwhich the action is brought is a multiple derivative action.  The plaintiff’s complaints and grievances (in respect of which he seeks redress) are against D1, D2 and D3 and notthe applicant.

20.  The subject matter of the action consists of wrongful acts committed against the company by those 3 defendants but none of them is a party to the arbitration agreement.  How could they be or be made parties to the proposed arbitration given its consensual nature?  How could it be said that a multiple derivative action is the “matter which is the subject of an arbitration agreement” for the purposes of section 20(1)?

21.  In my judgment the “matter” in respect of which the action is brought is a multiple derivative action which is not “the subject of the arbitration agreement”.  I do not consider a multiple derivative action to be arbitrable between the plaintiff and the applicant when the necessary parties to such an action are not parties to the arbitration agreement. 

22.  If in the action the complaints are not made out, that would be an end of the matter.  If, however, the complaints are made out, the applicant could potentially be affected by the relief that, having regard to all the circumstances of the case, would be appropriate for the court to grant.  It is precisely for that reason that the applicant has been joined as a defendant so that it could be heard and bound should by any relief granted.

23.  The applicant’s position is that as it has received full payment of the balance of the purchase price from D2, it would be prejudiced if the court were to grant the declaration sought against it in the action which would involve the balance of the purchase price having to be returned.

24.  Assuming that the supplemental agreement is held to be void, it does not follow that the applicant would necessarily suffer any prejudice because for one thing the company must still perform the Contract by paying the balance of the purchase price to the applicant.  In any event, it is no more than a possible consequence of a successful claim against D1 – D3.  It is hardly conceivable that the relief the court would consider appropriate would not ensure that the effect on the applicant would be neutral.

Conclusion

25.  For those reasons, I have no hesitation in dismissing the summons.  There is to be an order nisi of costs payable forthwith to be summarily assessed in favour of the plaintiff with certificate for 2 counsel in respect of which directions are separately given.