YUEN WAI YEE v. LI KWOK HUNG AND OTHERS

HCMP 991/2019

[2021] HKCFI 2543

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 991 OF 2019

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J U D G M E N T

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1.  This is the hearing of an Originating Summons taken out pursuant to section 732 of the Companies Ordinance, Cap. 622 (“the Ordinance”)  for leave to bring a statutory derivative action in the name of D4 (“the Company”)  against each of D1 to D3 (collectively “Ds”)  for breach of fiduciary duties as directors in misappropriating the Company’s assets. The Plaintiff (“Yuen”)  is a minority shareholder of the Company. In bringing the present application, Yuen has the support of 20 other minority shareholders.

2.  The Company had operated a restaurant in Tsuen Wan since the 1980s but ceased operation since about 2001. The Company owns a number of real properties, the identities of which have never been disclosed to the shareholders including Yuen and her supporters.  It is not in dispute that the financial statements of the Company merely referred to the Company owning “properties in Hong Kong” and the respective estimated total market value.

3.  The Company has over 200 shareholders with a total of 130,000 issued shares. Each respective shareholder holds a varying amount of shares ranging from 6,105 to 24.  Both Yuen and D1-D3 are shareholders of the Company.  According to the 2019 Annual Return of the Company[1], the Company has 4 directors which include D1-D3.  It is not in dispute that D1-D3 controlled the board of the Company at all material times. The 4^th director, one Mr Ho, was only appointed on 29 May 2019.

4.  Originally, in support of and attached to the Originating Summons was a draft Statement of Claim for the intended derivative action.  This draft Statement of Claim identified alleged breach of fiduciary duties and misappropriation of the Company’s assets in relation to the Company’s transactions with 4 companies.  Subsequently, Yuen has provided a Revised Statement of Claim which confines the intended action to two complaints relating to the Company’s dealing with the following companies:-

(1)  Hsin Kuang Food Limited (“Food Limited”); and

(2)  Hsin Kuang Restaurant & Night Club (Shing Mun River)  Limited (“SMRL”)

5.  At the hearing, Yuen issued a summons formally seeking leave to amend the Originating Summons to plead reliance on the Revised Statement of Claim instead. The Summons was rightly unopposed and I granted leave accordingly. 

6.  Yuen’s first complaint relates to the Food Limited which can be summarized as follows:-

(1)  The Company owns Shop No. G3, G/F, Tsuen Wan Centre Shopping Arcade, No. 86 Tsuen Wan Circuit, Tsuen Wan, New Territories (the “Shop Premises”).

(2)  Ds, who have been controlling the board of the Company, had never disclosed the particulars of the properties owned by the Company and the sale/rental arrangements thereof to the shareholders.

(3)  Since about June 2014, there have been repeated demands for such disclosure by the minority shareholders. Ds persistently refused to disclose the same. This is exemplified by a letter dated 21 November 2015[2] from the “常務董事會”, i.e. Ds.

(4)  In fact, on 10 November 2015, there was an incident whereby Yuen and some other minority shareholders attended the office of the Company and demanded for disclosure of particulars of the properties owned by the Company and the rental arrangements thereof. D1 and D2 refused and the police was summoned.

(5)  In the course of this visit, Yuen accidentally picked up from the Company’s office a copy of a tenancy agreement entered into between Food Limited and another company named Fai To Elderly Affairs Limited (“Fai To”)  in respect of the Shop Premises. This set off a chain of enquiry and discoveries.

(6)  It was then discovered that the Shop Premises is one of the properties owned by the Company.  By a tenancy agreement dated 8 July 1999[3] (the “1^st Head Tenancy Agreement”), the Company rented the Shop Premises to Food Limited for a term of 12 years (commencing from 1 January 1998).  The monthly rental was HK$40,000 for the first 4 years, to be increased to HK$44,800 for the next 4 years and HK$50,176 for the last 4 years.  This was in Yuen’s view well below the market rate and she produced a surveyor’s report as substantiation[4].

(7)  It was later admitted by D2 that since the 1980s, Ds had caused the Company to rent the Shop Premises to Food Limited as a factory for making mooncakes at a “concessionary rate of HK$30,000 to HK$40,000”. Using HK$40,000 as the monthly rental and comparing it with the surveyor’s assessment of market rentals, the Company has suffered an estimated loss of rental incomes of HK$16,531,200 between the years of 1986 and 1999.

(8)  In evidence are the Annual Returns of the Food Limited for 4 years: 

(i)  The 1983 AR shows that the Company had 3 corporate shareholders and 7 directors. D1-D3 were 3 of them;

(ii)  The 1992 AR shows the same shareholders. There were only 6 directors. D1-D3 were 3 of them;

(iii)  The 2001 AR again shows the same shareholders. There were only 4 directors and D1-D3 were 3 of them; and  

(iv)  The 2015 AR shows that the number of shareholders were reduced to two: Hsing Kuang Consultant Limited (“HKCL”)  holding 1 of the 3 shares and Hsing Kuang Restaurant (Investment & Management)  Ltd (“HKRI&M”)  holding 2 of the 3 shares.  It is not in dispute that HKCL actually holds the 1 share on trust for HKRI&M.  Effectively there is only one beneficial shareholder, namely HKRI&M, which in turns has 7 corporate shareholders[5]. As of 2015, the Company had only 3 directors, i.e. D1-D3. It is not in dispute that it was only on 29/5/2019 that a 4^th director was appointed.

(9)  Although the evidence so far is not entirely clear as to the exact extent of the beneficial interest owned by D1 to D3 in Food Limited, it is not in dispute that D1-D3 do hold beneficial interest in Food Limited.  This can be seen from extracts of financial statements of the Company provided by Ds in the course of this application[6]. For instance, the financial statement of the Company for the year ended 31 March 1999 reads:-

“During the year the Company made purchases of HK$72,000, … from Hsin Kuang Restaurant (Investment & Management)  Limited …. Moreover, the Company received rental income of HK$480,000 from Hsin Kuang Food Limited. All governing directors of the Company have beneficial interests in these companies.” [emphasis added]

(10)  Although it was disclosed that rental income of $480,000 was received from Food Limited and that all the Governing Directors had beneficial interest in Food Limited, no particulars of the property or properties involved were disclosed. There is no way that the minority shareholders could even start making inquiry, let alone ascertaining the fair market rent. Further, the fact that the rent was a “concessionary rent” was not disclosed, let alone any justification for such privilege granted to Food Limited.

(11)  Moreover, D2’s admission actually demonstrates that Ds had been deliberately misleading the shareholders by stating in the same audited financial statement of 1999[7] that “the directors of the Company are of the opinion that the above transaction [referring to the HK$480,000 rental income] were entered into on normal commercial terms”.  Similar misleading statements can be found in the audited financial statements of the Company in various subsequent years[8].

(12)  On the other hand, by a Sub-Tenancy Agreement dated 27 April 2000, which was for a term of 8 years commencing on 1 May 2000 (the “1^st Subletting Agreement”), Food Limited sublet the Shop Premises to Fai To at a monthly rental of HK$150,000. The 1^st Subletting Agreement was executed by D1 and D2 as directors of Food Limited. It is interesting to note that both the 1^st Head Tenancy Agreement and the 1^st Subletting Agreement were prepared by the same firm of solicitors. It is also intriguing and yet unexplained why the two documents, though apparently executed several months apart, were both registered with the land registry on 5 June 2000. By reason of the subletting, Food Limited made an instant profit of HK$90,000 every month.

(13)  The 1^st Subletting Agreement was due to expire on 30 April 2011. This would go beyond the 12 years terms of the 1^st Head Tenancy Agreement which would expire on 31 December 2009.  Instead of letting the 1^st Head Tenancy Agreement to run through its entire term, the Company executed another Tenancy Agreement with Food Limited on 12 August 2008, i.e. 1 year 4 months earlier (the “2^nd Head Tenancy Agreement”). The Company executed the 2^nd Head Tenancy Agreement by using its common seal.  Yet, no relevant board resolution was disclosed in evidence.  The 2^nd Head Tenancy Agreement was to run another 12-year term commencing on 1 January 2020.  The monthly rental was marginally increased to HK$56,000.  Ds have not explained such conduct in their affidavit evidence.

(14)  Coincidentally, Fai To executed another Subletting Agreement on 27 August 2008 (the “2^nd Subletting Agreement”).  Its 3-year term commenced on 1 May 2008 and would run until 30 April 2011. It is obvious that Fai To must have intimated its intention to remain at the Shop Premises prior to the execution of the 2^nd Subletting Agreement. It must also be obvious that Food Limited entered into the 2^nd Head Tenancy Agreement in order that it would be in a position to grant Fai To another subletting term beyond 31 December 2009 and to continue profiting from the letting and subletting arrangement.

(15)  Yuen argues that there are salient features to show that the letting and subletting arrangement was obviously a fraudulent design on the part of Ds:-

(i)  There is no dispute that prior to 1999, there was no written tenancy executed between Food Limited and the Company.  Ds caused the Company and Food Limited to execute the 1^st Head Tenancy Agreement solely in order to enable Food Limited to sublet the Shop Premises for profits.  Ds arranged for the Company to enter into a 12 year-long tenancy in writing in July 1999 and with a commencement date being back-dated to 1 January 1998.  This had been specifically pointed that out in Yuen’s affirmations. Yet, the Ds were unable to cogently explain why the commencement date should be back-dated for over one and a half years. One obvious reason is to create an appearance that the long-term tenancy was entered into well before Food Limited’s decision to cease its factory business in 1999. The evidence clearly shows that Ds had arranged the 1^st Head Tenancy Agreement at the time when they already knew and decided that Food Limited would cease its business at the Shop Premises.

(ii)  Ds stated in §45 of the 1^st Affirmation of Woo[9] that it was around early 2000s that Food Limited decided to close down its food factory business. This is demonstrably a lie. Yuen had conducted a business registration search on Food Limited which shows that Food Limited had ceased its factory business at the Shop Premises since 17 July 1999[10].

(iii)  This ties in with the fact that the 1^st Head Tenancy Agreement was executed on 8 July 1999 and submitted for stamping on 21 July 1999. The 1^st Head Tenancy Agreement must have been executed when Ds knew fully well that Food Limited would soon cease its factory business. Securing a 12-year term tenancy from the Company at a well-below market rental must have been designed to allow Food Limited to reap profit through subletting the Shop Premises.

(iv)  Ds simply failed to provide any credible explanation as to why, when Food Limited decided to cease operating its factory at the Shop Premises in July 1999, it did not surrender the Shop Premises to the Company so that the Company could find a tenant from the market and earn market rentals.  The fact that Food Limited could sublet the Shop Premises to Fai To several months later at HK$150,000 per month is good evidence of the then market rental fetchable.

(v)  The fraudulent design is even more apparent when one examines the circumstances and timing of the execution of the 2^nd Head Tenancy Agreement and the 2^nd Subletting Agreement. It is obvious that the 2^nd Head Tenancy Agreement was arranged so as to enable Food Limited to continue profiting from the letting and subletting arrangement.

(16)  By reason of the aforesaid, it is Yuen’s case that Ds, having beneficial interest in Food Limited, must have breach their fiduciary duties owed towards the Company.  By reason of the above fraudulent arrangements, the Company stood to suffer loss in the range of HK$35 million[11]. Ds must have profited from the said fraudulent arrangements through their interest in Food Limited.

7.  Yuen’s second complaint relates to SMRL.  In gist, Yuen’s complaint is that Ds used a corporate vehicle, namely Sunny Restaurant Holdings Limited (“Sunny Restaurant”)  to acquire shares in SMRL and then sold part of those shares to the Company for profit.  The circumstances of such a scheme can be summarized as follows:- 

(1)  In April 2016, Ds resolved to wind up HKRI&M.

(2)  On or about 20 May 2016, a shelf company in the name of Richly Marvel Limited was acquired by Ds’ nominee, Kung Kin Ming. By an allotment of shares on the same day, Ds’ another nominee, Au On Fok became a shareholder of Richly Marvel Limited holding one share whilst the said Kung Kin Ming held the other share.

(3)  On 27 May 2016, Richly Marvel Limited changed its name into Sunny Restaurant Holdings Limited, i.e. Sunny Restaurant.

(4)  On or about 24 February 2017, Sunny Restaurant acquired 3,990,000 Class B shares of SMRL from HKRI&M (in liquidation at that time)  apparently for a nominal consideration. SMRL had been a failing company suffering sustained loss for years. For the year ended 31 March 2016, it had an accumulated loss in the sum of HK$5,983,119.00. Ds have so far provided no contrary evidence of the actual consideration paid despite Yuen’s assertion that the acquisition was made at “apparent nominal consideration”.

(5)  On 31 March 2017, a total number of 3,399,998 shares of Sunny Restaurant were allotted to Hsin Kuang Consultant Limited, a company wholly or substantially owned and controlled by Ds. On or about 5 May 2017, Ds’ nominees, Kung Kin Ming and Au On Fok, transferred their two shares in Sunny Restaurant to Hsin Kuang Consultant Limited. Sunny Restaurant became solely controlled by Ds.

(6)  On or about 16 June 2017, for no apparent reason or justification, Ds caused the Company to purchase from Sunny Restaurant 1,596,000 Class B shares of and in SMRL at a substantial consideration of $1,360,000. Ds have so far provided no explanation as to why it caused Ds’ own nominee company to make the acquisition first and then sold the shares to the Company for HK$1,360,000 within the same year.

(7)  On the other hand, according to the audited financial statement of the Company ended 31 March 2018[12], it seems that the Company immediately within the same year of the acquisition, placed an “impairment loss” on those SMRL shares in the amount of HK$430,000[13]. This was quite extraordinary and remains unexplained by Ds.

(8)  Further still, at the AGM held on 5 January 2018, P specifically raised this issue and complained about the purchase of SMLR shares by the Company. This incident alerted Ds.  Soon afterward, Ds caused the Company to sell the SMLR shares to Hsin Kuang Consultant Limited in July 2018. According to D2, the SMLR shares were sold for a consideration of $1,020,000 entailing a loss of HK$340,000 for the Company.  Yuen argues that this was an attempt to cover-up Ds’ delinquency. But for Yuen’s complaint at the AGM, the Company would have suffered loss greater than HK$340,000.  Ds are clearly guilty of “self-dealing” and in breach of the “no conflict rule”.

Applicable legal principles

8.  It is trite and not in dispute between the parties that the “no conflict rule” and rule against secret profits are of inflexible and stringent nature.  No director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and a resolution at a general meeting approves of his so doing.  There is no answer that the profit is of a kind which the company could not itself have obtained, or that no loss is caused to the company by the gain of the director.  The rules governing fiduciary duties are so strict and inflexible that it does not depend on the extent of the adverse interest of the director, the fairness or unfairness of the transaction, or the genuineness of the transaction.  Further, the burden of proving full disclosure as to the nature and extent of his interest lies with the fiduciary and it is not sufficient for him to merely state that he has an interest or to make such statements as would put the principal on inquiry.  The fiduciary must specify the magnitude of what he stands to gain in the transaction in order to bring home the potential conflict of interest, particularly where the beneficiary consists of unsophisticated persons and in situations not conforming with usual market practice: Wong Lung v Chinese University of Hong Kong Employees’ Credit Union [2016] HKCU 2673, unrep., HCA 1122/2010, 2 November 2016 per DHCJ Wilson Chan (as he then was) at §§ 14-21.

9.  It is also trite and not in dispute that a director owes a duty to act bona fide in the interests of the company.  He must exercise his power solely for the purpose for which it was conferred.  If a director gave away the company’s asset for no consideration, it was prima facie an abuse of their powers as director for an improper purpose.  The burden is on the director to demonstrate the propriety of the transaction.  If no grounds have been put forward upon which it could honestly have been thought that the transactions were for the benefit of the company, the director will be liable to compensate the company for the transfer of assets: Liu Chun Kau Andy v Hung Lee Construction Engineering Limited, unrep., [2019] HKCFI 1269, HCMP 527/2019, 14 May 2019 at §13.

10.  If the breach of fiduciary duty consists of the removal of property from the beneficiary pursuant to an unauthorised transaction between the fiduciary and the beneficiary, the fiduciary is simply not entitled to enforce the transaction, the transaction can be set aside, and the fiduciary is required to restore the property removed from the beneficiary. It is, in particular, not relevant to enquire whether the beneficiary nonetheless would have entered into the transaction if the fiduciary had not breached his duty. Even if it could be shown that the fiduciary’s principal would have consented, if asked, the fiduciary is required to make restoration.: Company directors, duties, liabilities, and remedies, 3^rd ed., §19.40 at p.474.

11.  Statutory derivative actions are governed by Part 14, Division 4 of the Ordinance.  The relevant provisions are as follows:

Section 732

“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.

(2)  If, because of misconduct committed against the company, a company fails to bring proceedings in respect of any matter, 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 matter before the court on behalf of the company.

…

(4)  The cause of action in relation to the proceedings under subsection (1)  or (2)  is vested in the company. Any of those proceedings must be brought in the name of, and the relief (if any)  must be sought on behalf of, the company.”

Section 733

“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 interest 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

(c)  …. the member has served a written notice on the company in accordance with subsection (3), and the notice complies with subsection (4).”

12.  In Liu Chun Kau Andy v Hung Lee Construction Engineering Limited (supra) at §9, Madam Recorder Linda Chan SC (as she then was)  succinctly summarized the principles governing an application made under section 732 as follows:-

“9. … In short, the plaintiff has to satisfy the court that: -

(1)  it appears to be in the company’s interests that leave be granted to the members. In this regard, if a serious issue to be tried is shown, it will normally be in the interest of the company to pursue the proceedings as the fruit of any judgment to be obtained will be paid to the company;

(2)  there is a serious question to be tried. This is a low threshold. In considering the prospect of the company’s success, the court will consider the allegations set out in the draft statement of claim. It is only if the defendant can demonstrate fairly readily that there is a serious flaw in the claim or that the claim has no real substance such that the company cannot be said to have any expectation of success that the court will find against the plaintiff;

(3)  the company has not itself brought the proceedings; and

(4)  a written notice has been served on the company in accordance with section 733(3)  and the notice complies with section 733(4).”

13.  Insofar as the first and second requirements are concerned, in Zhang Heng v Kingstone International Wealth Management Limited, unrep., CACV 56/2017, 22 September 2017, the Court of Appeal stated that:

“11. … The relevant legal propositions have been summarized by the judge in Green Valley Investment Ltd at §§10 and 11:

‘10. On serious question to be tried:

(a)  The threshold is relatively low. The prospects of the company’s success are to be investigated only to a limited extent, and the court should be slow to find against the applicant unless such prospects are so slim that the company cannot be said to have any expectation of success. See Re Primlaks (HK)  Ltd, HCMP 1789/2015, unrep, 28 January 2016, §§7-8 per Ng J.

(b)  At the leave stage, it is not the court’s function to try to resolve conflicts of evidence or difficult questions of law which require substantial argument and deliberation. In practice, if the applicant is able to produce a draft pleading that sets out a case with some prospect of success when only the allegations contained in the pleading are considered, the criteria will be satisfied unless the respondent can demonstrate fairly readily that there is a serious flaw in the claim and that it has no real substance. See Re Primlaks (HK)  Ltd, §9.

11. As regard the interest of the company:

(a)  Again, the threshold is low. In deciding whether it is prima facie in the interest of the company for leave to be granted, the court should have regard to the fact that “there should not be a trial within a trial and the court should not be forced to enter into the merits of claims where there are serious disputes”. See Re Primlaks (HK)  Ltd, §21.

(b)  If a “serious question to be tried” has been demonstrated, in most cases it will follow that it is prima facie in the interest of the company that proceedings are pursued. See Re Primlaks (HK)  Ltd, §§20-21.

(c)  In assessing whether it appears to be in the interest of the company that the derivative action be pursued, the court ought to take into account whether any practical benefit is likely to result, even in circumstances where it may be clear that, eg, a director has breached his duties to the company. This essentially involves assessing whether it appears that the company stands to gain in money or money’s worth in light of the costs which will have to be incurred.’

12. The court would usually consider the serious question requirement first, because if this requirement is not satisfied, it would be difficult to see how it could be in the company’s interest to bring a derivative action.  This was the approach adopted by the judge.”

Serious issue to be tried

14.  In view of the above quoted evidence and arguments so far presented by Yuen and the relatively low threshold involved, Mr Maurellet SC (leading Mr Alexander Tang and Mr Martin Lau)  for Ds did not seek to argue that there are no serious issues to be tried in respect of the two complaints. In my view, such concession was sensibly made. The focus of their arguments is in the second stage test, namely, whether the intended derivative action is in the Company’s interest.

15.  In considering this question, it is important to bear in mind the language of section 733(1)(a).  In granting leave, the Court is required to be satisfied “on the face of the application, it appears to be in the company’s interest that leave be granted to the member”.  The Court is not required to conclude definitively, at this stage, that the intended derivative action is in the Company’s interest.  An appearance is sufficient.  Accordingly, the threshold in this regard has also been described as equally low and the Court is not obliged to enter into a “trial within a trial”.  That is why the authorities are clear in that if a serious issue to be tried is shown, it will normally be in the interest of the Company to pursue the proceedings. In this case, purely on the 1^st Complaint, the amount of damages for breach of fiduciary duties claimed would in the region of HK$35 million.  The 2^nd Complaint would involve a much smaller sum but if serious issues to be tried have been shown to exist for both complaints, there is no reason not to grant leave for the 2^nd Complaint as well since both complaints would be pursued together in one derivative action with one set of costs. Furthermore, there is no suggestion that Ds are not persons of means who can face such monetary award, if made against them at the end of the day. 

16.  The nub of Ds’ argument is to rely on a resolution passed at an EGM of the Company which took place on 7 September 2020 (the “907 EGM”).  The following is a summary of Ds’ version of the 907 EGM:

(1)  After Yuen commenced these proceedings, the Directors decided to give shareholders a chance to voice their opinion. To avoid conflict, the Directors decided to appoint independent person to conduct the exercise.

(2)  The Directors established a 3-member committee (the “Concern Committee”)  to take charge of the process. All 3 of them signed declarations of independence. The Directors then passed a resolution to delegate the task of informing shareholders and preparing the 907 Meeting to the Concern Committee.

(3)  Represented by an independent law firm (Messrs Henry Chiu & Partners), the Concern Committee then issued invitations to both Yuen and the Directors to prepare a written summary of their respective cases.

(4)  Notwithstanding earlier objection by Yuen, in the end, both sides duly filed their written summaries. Yuen had put forward a detailed submission including the Revised Statement of Claim.

(5)  The Directors set out their case, pleading to the shareholders that:

(i)  Yuen’s claims are stale and vexatious.

(ii)  It would derail the Company from its proper management if litigation is pursued against the Directors.

(iii)  By seeking a costs indemnity, Yuen is in effect trying to use shareholders’ money to propel her own vendetta.

(6)  The Concern Committee then circulated both side’s submissions to the shareholders.  In addition, the Concern Committee also made available the Court documents for inspection.

(7)  A formal Notice of Meeting was then issued, putting to the shareholders the following question:-

“Whether the shareholders are in favour of an action being brought by Madam Yuen Wai Yee in the name of the Company against Mr Li Kwok Hung, Mr Woo Chu and Mr Ching Chi Wai in relation to the leasing of the [Shop Premises] and the sale and purchase of shares in [Shing Mun River].”

(8)  Eventually, at the 907 Meeting:-

(i)  Yuen obtained proxy for 5,400 shares, but boycotted the voting. An additional 250 shares voted in favour of commencing proceedings. The total number of shares voting in favour of proceedings was thus 5,650.

(ii)  On the other hand, 38,366 shares voted against commencing proceedings against the Directors. (“the Resolution”)

(9)  The shareholders have thus spoken overwhelmingly against the derivative action. Even taking into account Yuen’s proxy shares which were not voted, the shareholders voted against commencing proceedings by an overwhelming majority of 87% [38,366 / (38,366 + 5,650)].

(10)  Even if one were to discount those shares which were connected to the Directors (19,540 shares), the shareholders still voted against commencing proceedings by a majority of 76% [18,826 / (18,826+5,650)].

17.  Yuen, however, gives a different account about what transpired at the 907 meeting and disputes the effect of the resolution:-

(1)  The Concern Committee which convened the EGM did not have the capacity to convene such a meeting.  Directors as agents of the company are, in general, not allowed to delegate their powers in the absence of any express or implied authority to do so (Halsbury’s Laws of Hong Kong, 2^nd ed. Vol. 14, §95.0668 at p.781).  There is no provision in the Articles of Association of the Company (“Articles”)  which allows the directors to delegate their power to persons who are not directors.  The members of the Concern Committee were not directors of the Company.  There was no valid delegation of power.  Accordingly, the EGM was not validly convened and the Resolution is of no effect.

(2)  The Ds had provided misleading information regarding Ds’ conduct to the shareholders. In Ds’ written case summary:-

(i)  Ds failed to disclose at all whether they had received financial benefits from Food Limited throughout the relevant periods, and if so, in what amount;

(ii)  Ds failed to disclose that they caused the Company to purchase the SMRL shares from a company (Sunny Restaurant)  which they beneficially owned and how much profit Sunny Restaurant had made therefrom.

(iii)  Ds misleadingly stated that they had made full disclosures in the Company’s audited financial statements.  Yet in fact they had never disclosed that the Shop Premises were leased to Food Limited at “concessionary rent” but instead falsely stated that the transactions were entered into “on normal commercial terms”.

(iv)  Ds failed to disclose that Food Limited had actually ceased business in 1999 and that their arrangement allowed Food Limited to sublet the Shop Premises and pocket the difference of some $100,000 per month from 2000 to 2014.  Furthermore, Ds provided no explanation for such conduct.

(v)  Furthermore, Yuen was prevented from confronting Ds with the above matters at the 907 Meeting because it was conducted unfairly.

(3)  The 907 Meeting was conducted unfairly in the following ways:-

(i)  Prior to and at the 907 EGM, Yuen had all along challenged the appointment of the Concern Committee, the validity of the convening of the EGM, and the appointment of Ho Chi Man, Peter, as the additional Governing Director.

(ii)  Yuen and the minority shareholders demanded for an explanation from Ds and threatened to boycott the EGM. Some shareholders suggested cancelling the 907 EGM and to sort out the appointment of additional Governing Directors by convening a proper shareholders’ meeting for this purpose. Yet, the Concern Committee ignored such demands and ordered immediate voting by all the attendees.

(iii)  Some shareholders expressed their discontent by leaving the meeting venue whilst some others summonsed the police for assistance.  When the police arrived, they invited Yuen and a few other shareholders to go outside the conference room to assist investigation.  It was at this very moment, in the absence and participation of Yuen and other shareholders that the Concern Committee proceeded with the voting. Some shareholders did demand them to withhold the voting but Ds and the Concern Committee ignored such requests and went ahead with voting.

(iv)  D1’s wife and one Hsin Kuang restaurant’s staff were tasked to count the votes.  When the poll box was taken from the conference room to outside for counting, Yuen saw it and immediately said loudly that they had not yet voted. D1’s wife laughed and said voting was closed and that they should have voted earlier instead of calling the police to come.

(v)  Many shareholders felt equally aggrieved and chose to boycott the meeting and left without casting their votes.

(vi)  The shareholders who attended the meeting carried a total of 59,096 shares. The number of votes casted was 38,616. The remaining 20,480 votes had not been casted (59,096 minus 38,616 = 20,480). Hence, those shareholders who felt equally aggrieved and boycotted the meeting (which included the 8,630 votes at Yuen’s disposal)  amounted to 20,480 votes (“uncasted votes”).

(vii)  On Ds’ own counting, their connected parties accounted for 19,540 shares, Ds claimed that the remaining 18,826 votes (i.e. 38,366 minus 19,540)  were shareholders who supported them. Yuen managed to identify from exhibit LKH-7 that apart from those “connected parties” admitted by Ds, there were a large number of shareholders (totaling another 16,960 votes)  who were closely connected with Ds (including relatives of D2; Hsin Kuang’s existing or former staff and their relatives who obtained their shares directly or indirectly from Ds without any consideration; and those who had unfailingly supported the Ds throughout).  This has not been disputed by Ds in their affirmations.

(viii)  Accordingly, these shareholders holding 36,500 shares (19,540 + 16,960 = 36,500)  were clearly not “independent” shareholders.  There is a substantial risk that they casted their votes to exonerate Ds rather than genuinely in the Company’s interest.  Their votes should be disregarded (see Smith v Croft (No.2) [1988] Ch 114 at 185E-186F).  Once their votes are disregarded, there remains only 1866 votes in support of the Resolution.  Yuen alone, with 8630 votes at her disposal, would have defeated the Resolution.

(ix)  In the circumstances, Yuen submits that no weight should be given to the result of such EGM by the Court in any event.

18.  Before this Court determines whether it could rely on the Resolution as an indication of the wishes of the independent shareholders, the Court is confronted with multiple disputes of facts concerning the circumstances under which the 907 Meeting was convened and conducted. There is also a keen dispute on who should be regarded as truly independent shareholders.  

19.  Mr Maurellet fairly acknowledged that the Court should not conduct a mini-trial upon affidavit evidence. He however asked the Court to consider Yuen’s version as per paragraph 11 of her affirmation[14]. In that paragraph, Yuen was describing the general state of divisions amongst the shareholders.  She pointed out that roughly over 50% of the shareholders were either the delinquent directors, their close friends and many existing or former staff of the Company who obtained shares from the Company and have unfailing supported Ds. Yuen then said that out of the remaining shareholders, about 10% are in support of Yuen. The rest of the shareholders (about 30% odd)  would be persons who did not take interest in the Company’s affairs.  Mr Maurellet thus submitted that all Yuen had would be the 10% support.  There was no basis to treat the “uncasted votes” as being on her side.

20.  With respect, I am unable to agree with Mr Maurellet.  Yuen was, in her affirmation, merely giving a general description of the divisions amongst the shareholders.  Mr Maurellet did not seem to dispute Yuen’s assertion that the shareholders who attended the 907 Meeting carried a total of 59,096 shares and that the number of votes casted was 38,616.   There was thus a total of 20,480 uncasted votes.  I have been referred to the transcript of the 907 Meeting[15]. It seems that there was much commotion at the meeting and most of the discussions were centered around the issue of legality of the meeting as well as conflicts of interest on the part of members of the Concern Committee. The minority shareholders were advocating immediate cessation of the meeting and voting. In fact it was noted[16] that amidst such arguments, many shareholders had left the meeting venue prior to voting.  Since the chairman of the meeting was pressing for voting and there were steep challenges from the minority shareholders to the legality of the meeting, those shareholders who left the meeting without voting were probably sharing the same view as that of the minority shareholders.  Objectively, these shareholders would unlikely be siding with the majority, at least on this occasion, because otherwise they would have stayed on and casted their votes to support the Resolution.  Alternatively, one can say that at least shareholders representing 20,480 votes had not properly expressed their wishes at the 907 Meeting which was conducted under chaotic circumstances.  On the basis that a substantial number of other shareholders were connected to the delinquent directors and hence should not be regarded as “independent”, these 20,480 could well constitute a majority decision if the issue was properly presented for a cool-minded consideration and voting.  In the light of the various factual disputes which this Court cannot resolve at this stage, this Court is unable to accept Ds’ submission that the shareholders had “spoken overwhelmingly against the derivative action”.

21.  In the circumstances, the Court is left with the prima facie position that allowing the two complaints to be pursued by Yuen in a derivative action is prima facie in the Company’s interest because there are serious issues to be tried and the Company is likely to recover substantial sums from the delinquent directors.  In fact, I should add that on the evidence so far present, this Court is of the preliminary view that Yuen has established a rather strong prima facie case against Ds. Without transgressing too far into merits, I am of the view that there are quite a lot for Ds to provide explanation for their conduct.

22.  In coming to this conclusion, I do not find it necessary to address Mr Maurellet’s other arguments based on the Limitation Ordinance.  Having acknowledged that there are serious issues to be tried, Ds must also have accepted that it is at least reasonably arguable that this case involves fraudulent breach of trust and/or deliberate concealment such that the ordinary 6 years limitation period may not be applicable.

23.  In conclusion, I grant leave to Yuen to institute a derivative action in the name of the Company as per the draft Revised Statement of Claim attached to the Amended Originating Summons.

24.  As for the application for an order of indemnification of costs pursuant to Section 738(3)  of the Ordinance, the relevant considerations have been set out in the decision of Recorder Linda Chan SC (as she then was)  in Liu Chun Kau Andy v Hung Lee Construction Engineering Limited, [2019] HKCFI 1269 at §24.  Since I have concluded, at least at this stage, that Yuen has established a rather strong prima facie case against Ds, the bringing of the derivative action would appear to be for the Company’s benefit.  In similar view as the learned Recorder, I consider that as a matter of fairness, Yuen should be entitled to the protection of an order to indemnify her of the costs that would be incurred in bring the derivative action up to and including the close of pleadings.  Thereupon, the Court would be in a better position to decide whether or not further indemnification should be ordered.

25.  As for costs of the Originating Summons, this application has been contested by Ds and it is only fair that costs of the Originating Summons be paid by Ds to Yuen, to be taxed if not agreed, on party and party basis.

26.  I will give general liberty to apply.

27.  Lastly, I would like to thank counsel for their invaluable assistance.