JINGANG GROUP INVESTMENT LTD (suing on behalf of itself and all other shareholders in the 11th and 12th Defendants) v. JAIME CHE AND OTHERS

HCA 562/2020

[2021] HKCFI 948

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 562 OF 2020

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BETWEEN

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DECISION

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1.  There are 2 matters before me:

(1) the appeal lodged by the plaintiff (“P”) on 4 November 2020 against the order of Master KH Hui (“the Master”) dated 23 October 2020 (“the Order”); and

(2) a summons taken out by P (“the summons”) on 26 March 2021 for leave to withdraw the concessions made by P in the hearing before the Master on 23 October 2020 (“the Concessions”).

2.  The background relating to these matters are as follows:

(1) P commenced these proceedings on 8 May 2020.

(2) P is a minority shareholder of the 11^th defendant (“D11”), which is a company incorporated in Bermuda.

(3) The 12^th defendant (“D12”) is a company incorporated in BVI.  According to [8] of P’s Amended Statement of Claim filed on 5 June 2020, D12 is a wholly owned subsidiary of D11.

(4) The proceedings herein are derivative proceedings commenced by P purportedly on behalf of D11, and double derivative proceedings commenced by P purportedly on behalf of D12.  Before the appointment of the joint and several provisional liquidators (“JPLs”) over D11 on 20 July 2020 as mentioned in the subparagraph below, the 1^st to the 6^th defendants (“D1 to D6”) were the directors of D11.  The 7^th defendant (“D7”) is a secured lender to D11.  The 8^th to the 10^th defendants (“D8 to D10”) are receivers appointed by the lender pursuant to the relevant security documents.

(5) On 20 July 2020, the Bermuda court appointed the JPLs, who have full power over the matters of D11.

(6) In the hearing before the Master on 23 October 2020, there were 2 striking-out summonses before the court, one issued by D1 to D6 and the other issued by D7.  In that hearing, the solicitor for P orally made the Concessions.  The meaning of the Concessions is that leave must be first obtained from the Bermuda court before a derivative action can be commenced on behalf of a Bermuda company.  Further, leave must also be first obtained from the BVI court before a derivative action can be commenced on behalf of a BVI company.

(7) Based upon the Concessions, and since no leave was obtained by P from the Bermuda court and from the BVI court, the Master ruled that P had no locus to mount the present action and struck out P’s claim.

3.  P now says that the Concessions were wrongfully made.  P therefore seeks leave to withdraw the Concessions.  P also says that once the Concessions are withdrawn, the Order should be set aside and P should be allowed to file evidence in opposition to the striking-out applications taken out by D1 to D6 and by D7.

4.  In my view, P’s appeal is bound to fail in any event.

5.  As submitted by Mr Jose-Antonio Maurellet SC (leading Ms Natalie So) for D1 to D6, a derivative action cannot be brought where a company is in liquidation.  There are clear authorities in support of this proposition.

(1) In Ever Joint (Holdings) Ltd v Nice Theme Ltd & Other[1], DHCJ Gill said:

“ (1) A derivative claim may not be brought where a company is in liquidation. This is because the company is no longer in the control of the alleged wrongdoers, in which event the reason for any exception to the rule in Foss v Harbottle (1843) 2 Hare 461 disappears.

(2) Where a company is in liquidation, it is the liquidator, if necessary with the sanction of the liquidation committee or the court, who has the power to initiate proceedings on behalf of the company.

(3) This is the case even if the company was not in liquidation at the time the derivative action was commenced. Once a company goes into liquidation, there is no wrongdoers’ control and the decision whether to continue with the action should best be left to the judgment of an independent liquidator.” (Emphasis added)

(4) Hence, pending any consent by the liquidator or any order by the court for the liquidator to take over or continue with a derivative action, a plaintiff shall have no authority to take any further steps or issue any further applications in the derivative action.” (Emphasis added)

(2) Similarly, in Shih-Hua Investment Co Ltd v Zhang Aidong & Others[2], Harris J confirmed that if a Board is “independent of the wrong-doers and able to take an informed view of the alleged claim and decide whether or not the company should pursue the claim it is not permissible for a shareholder to commence a common law derivative action”. The learned judge expressly approved the dicta in Ever Joint (supra).

(3) Such a position in common law has also been explained in the relevant textbooks[3].

6.  D11 is now in liquidation and is being controlled and managed by the JPLs.  It is not in control of D1 to D6.  In other words, D11 is not controlled by any alleged wrongdoers.  As to D12, given that it is a wholly-owned subsidiary of D11, D12 is also being controlled by the JPLs and not by any alleged wrongdoers.  As there is no control of D11 and D12 by any alleged wrongdoers, it would not be permissible for P to bring and to continue any derivative proceedings on behalf of D11 and D12.

7.  Mr Alan Kwong (together with Mr Martin Lau) for P have put forward the following counter-arguments:

(1) The ability to bring a derivative action in Hong Kong is a matter for the law of the place of incorporation of the company (being Bermuda and BVI in the present case), though it is also necessary to comply with Hong Kong procedural requirements for the bringing of such actions[4].

(2) It is unsafe to assume that the positions under Bermuda law and BVI law would as same as the position under Hong Kong law. For instance, in some jurisdictions (such as Australia), it is permissible for a minority shareholder to bring a derivative claim on behalf of a company in liquidation if certain conditions are satisfied[5]. It would only be prudent to allow P to adduce evidence on Bermuda law and BVI law to address the issue.

(3) Although the JPLs have been appointed over D11, they are unable to control D12.  In other words, the wrongdoers are still controlling D12. There is no reason why P should be deprived of the opportunity to file factual evidence on the issue of control.

(4) P should not be criticized for not filing evidence earlier, for the hearing on 23 October 2020 was a call-over hearing and was not an occasion for substantive arguments.  The purpose of that hearing was only for giving directions for filing evidence.  After the call-over hearing, P’s claim has been struck out already. As such, P could not have filed any evidence pending this appeal.

8.  With respect, I am unable to accept Mr Kwong’s submissions.  I have no quarrel with the principle that the ability to bring a derivative action in Hong Kong is a matter for the law of the place of incorporation of the company.  However, in order to succeed in the appeal, it would be incumbent on P to show that it is at least arguable that a minority shareholder may bring a derivative claim on behalf of a company in liquidation under Bermuda law and BVI law.  On this crucial issue, P has not put forward a positive case, let alone evidence in support of the case.

9.  If P is putting forward any positive case in this appeal, P should seek leave to adduce evidence in support of its case. However, P has made no attempt to adduce evidence to show that a derivative action by a minority shareholder on behalf of a company in liquidation is permissible, or at least arguably permissible, under Bermuda law and BVI law.

10.  Further, P must be bound by its own pleading. While P has accepted that D12 is a wholly-owned subsidiary of D11 in its Amended Statement of Claim, it would not be open to P to argue that the JPLs cannot control D12.

11.  In these circumstances, I must respectfully say that there is no substance in Mr Kwong’s submissions.  The points made by Mr Maurellet SC as summarised in [5] to [7] above are unanswerable.  For these reasons, P’s claim must be struck out and the appeal must be dismissed.

12.  Once this conclusion is reached, with or without the Concessions, the outcome of these proceedings would be the same. Accordingly, granting leave to P to withdraw the Concessions would not serve any meaningful purpose.  I would dismiss the summons.

13.  I dismiss both the appeal and the summons.

14.  Costs should follow the event.  There be an order that costs of the appeal and costs of the summons be paid by P to D1 to D6 and to D7 forthwith, and those costs be summarily assessed on the papers. With no disrespect to counsel, having considered the complexity of the matters before me, I am unable to grant a certificate for 2 counsel.  I am also unable to accede to the request to award costs on a higher basis made by D1 to D6, and the request for indemnity costs made by D7.  In my view, although I have dismissed the appeal and the summons, I cannot say that there are some unusual features justifying costs to be awarded on a higher basis.  Costs would be awarded on party and party basis.  There be leave to D1 to D6, and there also be leave to D7, to file and serve their respective bills of costs for summary assessment within 7 days, and leave to P to file and serve a written reply to the said bills within 7 days thereafter.

15.  D11 has elected to attend this hearing through their legal representatives.  D11 maintains a neutral stance in respect of the appeal and the summons.  Counsel for D11 merely attends this hearing on a watching brief basis.  That being the case, I am of the view that it would not be necessary or appropriate to award costs to D11.

16.  Lastly, it remains for me to thank counsel for the helpful assistance rendered to the court.

POST-HEARING MATTERS

17.  I have pronounced the decision as set out in the above at the end of the hearing on 8 April 2021.  After the conclusion of the hearing, in the afternoon on 8 April 2021, D11’s solicitors wrote to this court and drew my attention to the matter that the JPLs have not yet obtained control of D12.  This is because 75% of the shares of D12 have been mortgaged by D11 to D7 a security for the loan advanced by D7 to D11.  D7 has appointed D8 to D10 as receivers of the 75% shares.  There is affidavit evidence on this point. D11’s solicitors also said that to the best of D11’s understanding, the present directors of D12 are D1, as well as D8 to D10.

18.  These matters have not been raised by any party in the hearing.  However, having taken these matters into account, I am not prepared to change my decision in any aspect.  In my view, while it has not been shown that P may bring a derivative action on behalf of D11 which is now in liquidation, it would not be possible for P to bring a double derivative action on behalf of D12 in any event.