HO YUEN KI WINNIE AND ANOTHER v. HO HUNG SUN STANLEY AND OTHERS

HCMP 1377/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1377 OF 2007

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BETWEEN

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D E C I S I O N

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The strike out applications

1.  There are three striking out summonses before me, taken out by the 1^st to 4^th respondents in this petition presented under section 168A of the Companies Ordinance, Cap. 32.

2.  The petition was presented on 24 July 2007 by Ho Yuen Ki Winnie (“Winnie Ho”) and Mutual Stand Limited, a company owned entirely by her. She is a sister of Ho Hung Sun Stanley (“Stanley Ho”), the 1^st respondent herein.

3.  The subject company, Shun Tak Holdings Limited 信德集團有限公司 (“the Company”), is the 4^th respondent herein. The Company was incorporated in Hong Kong in 1972 and its shares are listed on the Main Board of The Stock Exchange of Hong Kong Limited. Its main businesses are in property development, transportation, hospitality and investment holding. It is a shareholder of a private company incorporated in Macau known as Sociedade de Turismo e Diversões de Macau, S.A.R.L. 澳門旅遊娛樂股份有限公司 (“STDM”). Prior to 2001, STDM owned a monopoly franchise in Macau to operate casino businesses. Since 2001, STDM has indirectly owned one of three licences granted by the government of Macau to operate casino businesses.

4.  At all times, Stanley Ho has held, directly and indirectly, the largest shareholding in the Company. He is chairman of the board of directors of the Company and the managing director of STDM. One of his daughters, Ho Chiu King Pansy Catilina (“Pansy Ho”), who is the 2^nd respondent herein, is also a major shareholder of the Company. Pansy Ho is chairman of the executive committee of the board of directors of the Company and a director of STDM. The 3^rd respondent, So Shu Fai Ambrose (“Ambrose So”), is an employee of the Company and its company secretary. He is an executive director of the Company and a manager of STDM.

5.  The petitioners are minority shareholders in the Company and in STDM. Winnie Ho fell out with Stanley Ho in 2001. She was dismissed as a director of the Company and a director of STDM in March 2002.

6.  Directions have been given for the parties to file evidence in this petition. Three rounds of affidavits were filed. The petitioners then issued a summons for specific discovery against all four respondents on 10 October 2008. This was adjourned to 27 February 2009 for argument.

7.  On 6 February 2009, the Company issued a summons to strike out the entire petition as an abuse of the process of the court under Order 18 rule 19(1) of the Rules of the High Court and the inherent jurisdiction of the court. Stanley Ho, Pansy Ho and Ambrose So followed with identical summonses on 9 February. On 12 February, I gave directions on the conduct of the strike out summonses and adjourned the petitioners’ summons for specific discovery pending the determination of the strike out applications.

The grounds for striking out

8.  The broad ground for striking out the petition, as stated in the summonses, is that having regard to the matters set out in the evidence filed in the petition, there is no reasonable prospect of the court making the orders prayed for in the petition. Specifically, such matters in the evidence included the following: (a) the Company’s committee of independent directors has concluded that the pursuit of the action claimed by the petitioners would not be in the Company’s interests; (b) the petitioners are members of STDM and in that capacity they are able to pursue in proceedings against STDM directly the matters intended to be complained of in the claimed action; and (c) the purpose of the petition is not to secure relief in respect of conduct which is or has been unfairly prejudicial to the petitioners as members of the Company.

9.  The arguments developed by counsel for the respondents at the hearing concentrated on the matter in (c). Submissions were made mainly by Mr. Fok, SC and Mr. Eugene Fung on behalf of the Company, and by Mr. Shieh, SC and Miss Roxanne Ismail on behalf of Stanley Ho and Ambrose So. Mr. Harris, SC, who appeared on behalf of Pansy Ho, adopted their submissions.

10.  In gist, it was contended that the complaints in the petition are of misconduct alleged against Stanley Ho, Pansy Ho and Ambrose So rather than allegations of mismanagement of the Company, and that the relief sought in the petition is an order directing the Company to commence litigation, and in the case of the complaint concerning Interdragon Limited (“Interdragon”; in which the Company holds 60% of its issued share capital), to cause Interdragon to commence litigation, so as to obtain redress for the Company for misconduct against it, rather than to end any mismanagement. It was submitted that the petitioners should have brought proceedings by way of a derivative action, or they should have sued STDM directly as shareholders of STDM, and the use of a petition under section 168A is an abuse of the process of the court.

11.  In support of the above contention, great reliance was placed on the decisions of the Court of Final Appeal in Re Chime Corp. Ltd. (2004) 7 HKCFAR 546 (“Chime”) and Waddington Ltd. v. Chan Chun Hoo Thomas & Ors., FACV No. 15 of 2007, 8 September 2008 (“Waddington”).

12.  In respect of the complaint concerning Interdragon, two further grounds were advanced for striking out this complaint and the relief sought in relation thereto.

13.  Firstly, it was contended that any litigation Interdragon might be ordered to bring against STDM in this respect as sought by the petitioners is bound to fail, in view of the supplemental agreement dated 27 June 2007 (“the Supplemental Agreement”) entered into between STDM, Shun Tak Ferries Limited (“Shun Tak Ferries”) and Interdragon. The petitioners have not challenged the Supplemental Agreement in the petition. It was submitted that it is an abuse of process to compel the Company to procure Interdragon to bring a groundless claim.

14.  Secondly, the position adopted by the petitioners in the complaint relating to Interdragon in these proceedings is inconsistent with the position of Winnie Ho taken in legal proceedings she brought in Macau to challenge the validity of Interdragon’s shareholding in STDM. It was submitted it is an abuse of process to advance two cases which are plainly inconsistent and incompatible with one another.

The petition

15.  The complaints raised in the petition, as summarised in paragraph 43 thereof, are said to be four-fold. They are as follows:

(1)  non-payment of preferential dividends properly payable by STDM to Interdragon in respect of 9,204 shares acquired by Interdragon in STDM in 2002, which should be preferential shares and not ordinary shares (“the Interdragon issue”);

(2)  underpayment of dividends properly payable by STDM to the Company in respect of 4,250 ordinary shares held by the Company in STDM, in that 9,204 shares in STDM were held in treasury before STDM contributed these shares to Interdragon in 2002 and under the law in Macau dividends were not payable in respect of shares held in treasury; hence, the Company should have received 5.59% of the dividends in respect of the 4,250 ordinary shares instead of 4.99% from 1994 to 2002 (“the Sleeping Dividends issue”);

(3)  failure of STDM to distribute its entire annual net profits to its shareholders (including the Company and Interdragon) by way of dividends as STDM is required to do under article 46 of its articles of association (“the Article 46 issue”); and

(4)  inaction of the Company to inquire into the complaints in (1) to (3), to enforce its rights and entitlement as holder of preferential and ordinary shares in STDM, and to take action against Stanley Ho, Pansy Ho and Ambrose So for breaches of duties in failing to pursue the complaints in (1) to (3) against STDM.

16.  In essence, the complaint in the petition is the failure of the Company, by those three named directors, to recognise and assert its rights and entitlement to proper payments of dividends from STDM in the three respects in (1) to (3) above. I will come back to the nature of the complaints in this petition after I have discussed the relevant propositions of law.

17.  The only substantive relief sought in the prayer in the petition is as follows:

(1)  an order that the Company do bring proceedings against STDM for recovery of all dividends which the Company was entitled to be paid but has not been paid by STDM (i.e. the Sleeping Dividends issue and the Article 46 issue);

(2)  an order that the Company do cause proceedings to be brought in the name of Interdragon against STDM for recovery of all dividends which it was entitled to be paid but has not been paid by STDM (i.e. the Interdragon issue); and

(3)  an order that proceedings be brought by the Company against Stanley Ho, Pansy Ho and Ambrose So for damages for their breaches of duties in not causing the Company to bring the proceedings in (1) and (2) above.

The approach in a strike out application

18.  There is no dispute on the applicable principles in a strike out application. I take them from the written submissions of Mr. Shieh, SC and Miss Ismail.

19.  These principles are stated in Re Forecast Nominee Ltd. [1996] 4 HKC 12 at 18C to D:

(1)  the court will assume the facts alleged by the petitioners in the petition and the supporting affidavits are correct;

(2)  the burden is on the applicants for striking out to establish it is plain and obvious that the petition is bound to fail and hence an abuse of the process of the court; and

(3)  it would be inappropriate to strike out a petition based on pleading points if such deficiencies are capable of being cured by amendment.

The provision in section 168A(2)

20.  Section 168A(2) provides that if on any petition under subsection (1), the court is of opinion that the affairs of the company are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members including the petitioning member, whether or not such conduct consists of an isolated act or a series of acts,

“(a)  the court may, with a view to bringing to an end the matters complained of —

(i)  make an order restraining the commission of any such act or the continuance of such conduct;

(ii)  order that such proceedings as the court may think fit shall be brought in the name of the specified corporation against such person and on such terms as the court may so order;

(iii)  appoint a receiver or manager of the whole or a part of a specified corporation’s property or business and may specify the powers and duties of the receiver or manager and fix his remuneration; and

(iv)  make such other order as it thinks fit, whether for regulating the conduct of the specified corporation’s affairs in future, or for the purchase of the shares of any members of the specified corporation by other members of the specified corporation or by the specified corporation and, in the case of a purchase by the specified corporation, for the reduction accordingly of the specified corporation’s capital, or otherwise; and

(b)  the court may order payment by any person of such damages and interest on those damages as the court may think fit to any members (including the member who presented the petition) of the specified corporation, whose interests have been unfairly prejudiced by the act or conduct.”

21.  There is no doubt about the width of the statutory language of section 168A(2) (Chime at para. 39, per Lord Scott of Foscote NPJ). The substantive relief sought in this petition, insofar as derivative actions to be brought in the name of the Company are concerned, is within the ambit of the kind of order the court is empowered to make in section 168A(2)(a)(ii). The court also has power to order payment of compensation to the subject company or to any members including the petitioning member. As for the multiple derivative action to be brought in the name of Interdragon in respect of the wrong done to Interdragon, none of the counsel for the respondents have argued this is strictly beyond the scope of the power in section 168A(2)(a)(ii). I note in Waddington Lord Millett NPJ referred to this statutory provision at para. 78 and he had this to say: “it is far from clear that [the court] can direct [the petitioner] to bring a multiple derivative action; and as at present advised I do not think that it can.”

22.  The respondents submitted it is clear from Chime the mere fact that the court has jurisdiction under section 168A does not mean it must exercise it, and does not prevent the petition being held to be an abuse of the process of the court where relief is sought for a complaint of misconduct rather than mismanagement.

The ratio in Chime

23.  I will start with the ratio decidendi in Chime, as it was contended by Mr. Chow, SC and Mr. Laurence Li on behalf of the petitioners that the respondents’ reliance on Chime is misplaced in that the issue of law decided by the Court of Final Appeal is a very narrow one and does not assist the respondents in this application.

24.  Mr. Chow referred to these passages in the two major judgments in Chime in which the Court of Final Appeal formulated the issue of law before the court:

“The question of law is whether there is jurisdiction to make, on an unfair prejudice petition presented by a shareholder, an order for the payment of damages or compensation, or for the grant of restitution, to the company itself.” (para. 8, per Bokhary PJ).

“The issue in this case is not, I think, whether the court, in exercise of its s. 168A jurisdiction, can order a respondent to make a monetary payment, or to make some other form of restitution, to the company, but, rather, whether the court can, on a s. 168A petition, deal with and dispose of a cause of action for damages or restitution that is vested in the company and, if it can do so, in what circumstances it should do so.” (para. 35, per Lord Scott).

25.  He submitted that the issue decided in Chime is whether the court in a section 168A petition has jurisdiction, whether in the theoretical or practical sense, to make an order for payment of damages or compensation or for the grant of restitution to the company itself. The issue was restricted to the availability or appropriateness in such proceedings of granting direct monetary relief to the company. The case is not authority for the wider proposition that where the nature of the complaint is misconduct as opposed to mismanagement, it is not appropriate to proceed by a section 168A petition and the proper vehicle for obtaining relief would be a derivative action.

26.  Mr. Chow pointed to these passages in the judgment of Lord Scott for the criteria to be met to make it appropriate for the court to exercise jurisdiction under section 168A to order payment of compensation or restitution where the nature of the complaint is misconduct and relied particularly on those parts italicised below:

“61.  Although for the reasons I have given the court has jurisdiction, in the strict sense, to make the orders sought (other than the order against CAL which is not a party to the petition) it would not, in my opinion, be proper for the court on this petition to entertain what would, in effect, be Chime’s action against the directors for their breach of duty in causing the loan to be made.  If there is misconduct it can be established in a derivative action.  If the court, on hearing the petition, thinks that a derivative action prosecuting this alleged misconduct should be brought, it can make an order to that effect under s.168A(2)(b).  It could also, if persuaded it were a convenient course to adopt, order that the petition and the derivative action be tried together.

62.  As a general rule, in my opinion, the court should not in a s.168A petition make an order for payment to be made by a respondent director to the company unless the order corresponds with the order to which the company would have been entitled had the allegations in question been successfully prosecuted in an action by the company (or in a derivative action in the name of the company).  If the order does not so correspond then, either the company will have received less than it is entitled to, in which case it will be entitled to relitigate the issue in an action against the director for the balance, or the company will have received more than it was entitled to, in which case a clear injustice to the director will have been perpetrated.  Nor, in my opinion, should the court allow a prayer in the petition for payment by the respondent director of compensation or of restitution to the company to stand unless it is clear at the pleading stage that a determination of the amount, if any, of the director’s liability at law to the company can conveniently be dealt with in the hearing of the petition.  In any other case, in my opinion, if the allegations against the director are proper to be relied on as evidence of unfairly prejudicial conduct, the appropriate relief to be sought would be an order under s.168A(2)(b) for a derivative action to be brought for the recovery of the sum legally due.  It would be proper for the company to express its views as to whether it would be in its interests for such an action to be brought.”

27.  The petitioners in Chime had taken the precaution of issuing a protective writ for a derivative action. Bokhary PJ also said, at para. 28, that the court hearing the petition could, if it appeared appropriate to do so, order that the relief regarding the repayment of the loan be pursued in the derivative action that had been commenced.

28.  Mr. Chow submitted that what the petitioners have done in the present case – in seeking an order under section 168A(2)(a)(ii) to bring a derivative action in respect of the wrong done to the Company (in the case of the wrong done to Interdragon, a multiple derivative action would be brought) – is exactly what Lord Scott and Bokhary PJ had advised could be done in the parts italicised.

29.  I am inclined to agree with Mr. Chow that the Court of Final Appeal was concerned with the question whether it was permissible and appropriate in a petition under section 168A to order payment of compensation or the grant of restitution to a company where the cause of action is vested in the company. The proposition of law that formed the ratio decidendi would not include the propriety of granting other forms of relief in the petition, such as an order under section 168A(2)(a)(ii) to bring proceedings in the name of the company where no other substantive relief is sought, as that would not be necessary for the decision. Nevertheless, discussions in Chime on matters of principle and rationale leading to the ratio, coming from the Court of Final Appeal, must be regarded as dicta of great persuasive authority.

The rationale for the ratio in Chime

30.  The starting proposition is that notwithstanding a very wide jurisdiction is conferred by the legislature in section 168A, it is not enough to show that the court has jurisdiction in the strict sense to grant relief for a particular complaint. “It should be necessary also to show that the claim for the remedy in question is one that, as a matter of proper practice, the court should, if the relevant underlying allegations are made good, grant” (para. 41).

31.  The Court of Final Appeal considered a number of cases on the inter-relationship between petitions under section 168A and derivative actions. Whilst the same facts may found either a derivative action or a section 168A petition, “that should not disguise the fact that the nature of the complaint and the appropriate relief is different in the two cases” (per Millett J as Lord Millett then was, in Re Charnley Davies Ltd. (No. 2) [1990] BCLC 760 at 784a, quoted at para. 14 by Bokhary PJ).

32.  In para. 47, Lord Scott referred to Charnley Davies at 783f to h where Millett J was concerned to distinguish between proceedings where the complaint was of unfairly prejudicial conduct of the company’s affairs and proceedings where the complaint was of breaches of duty to, or other misconduct actionable by, the company. The relevant passage read as follows:

“In my judgment the distinction between misconduct and unfairly prejudicial management does not lie in the particular acts or omissions of which complaint is made, but in the nature of the complaint and the remedy necessary to meet it.  It is a matter of perspective.  The metaphor is not a supermarket trolley but a hologram.  If the whole gist of the complaint lies in the unlawfulness of the acts or omissions complained of, so that it may be adequately redressed by the remedy provided by law for the wrong, the complaint is one of misconduct simpliciter.  There is no need to assume the burden of alleging and proving that the acts or omissions complained of evidence or constitute unfairly prejudicial management of the company’s affairs.  It is otherwise if the unlawfulness of the acts or omissions complained of is not the whole gist of the complaint, so that it would not be adequately redressed by the remedy provided by law for the wrong.  In such a case it is necessary to assume that burden, but it is no longer necessary to establish that the acts or omissions in question were unlawful, and a much wider remedy may be sought.”

33.  Lord Scott opined that Millett J was right to question the propriety of seeking an order for payment of compensation, or for restitution to be made, to the company on an unfair prejudice petition, if “the whole gist of the complaint” was not of mismanagement of the company but of misconduct by the director. If “the essence of the complaint” was of director’s misconduct, rather than of the director’s mismanagement, Charnley Davies is “authority for the proposition that the proper vehicle for seeking and obtaining such relief would be a derivative action, rather than a s.168A petition” (para. 48).

34.  Statements to similar effect were made by Lord Millett in his judgment in Waddington at para. 77:

“Shareholders may bring proceedings under s.168A of the Companies Ordinance if the affairs of a subsidiary are being conducted in a manner which is prejudicial to their interests; and for this purpose the affairs of the subsidiary can also be regarded as the affairs of the parent company: see Re Citybranch Ltd [2005] 1 WLR 3505.  But while there is some overlap between such proceedings and the derivative action they serve essentially different functions.  Unfair prejudice proceedings are concerned to bring mismanagement to an end; derivative actions are concerned to provide a remedy for misconduct: see Re Charnley Davies Ltd (No.2)[1990] BCLC 760; Re Chime Corp Ltd(2004) 7 HKCFAR546.  While the court may have jurisdiction in the strict sense on a petition under s.168A to order payment of compensation to the company, the derivative action is the proper vehicle for obtaining such relief where the plaintiff’s complaint is of misconduct rather than mismanagement: see Re Chime Corp Ltd at p.571.”

35.  Mr. Shieh submitted the key to the above passages is not just to look at the nature of the complaint, as Mr. Chow had asked the court to do. It is to look at the nature of the complaint together with the relief sought. If the whole gist of the complaint is misconduct and the objective of the litigation is to seek redress for the company for the misconduct, then it is squarely a case within derivative action territory and the matter would not be within the practical jurisdiction of section 168A, although there may be theoretical jurisdiction. I agree with this analysis.

36.  I am also inclined to agree with Mr. Fok and Mr. Shieh that the reasoning for questioning the propriety of granting monetary relief in a section 168A petition where the essence of the complaint is misconduct should apply equally to the situation where the only substantive relief is to bring a derivative action for the recovery of monetary loss. As submitted by Mr. Fok, in the context of determining the proper approach whether jurisdiction under section 168A should be exercised as a matter of proper practice, the distinction between granting direct monetary relief and an order directing proceedings to be brought to recover monetary loss is a distinction without a difference. The former is derivative action relief, the latter requires the further step of bringing proceedings for recovery. The objective is the same.

37.  The parts italicised in paras. 61 and 62 of Lord Scott’s judgment particularly relied on by Mr. Chow must be read in the proper context. The statements that it would be appropriate to order a derivative action to be brought for the recovery of monetary loss were made in the premise that “if the allegations against the director are proper to be relied on as evidence of unfairly prejudicial conduct” (para. 62). In Chime, the Court of Final Appeal allowed amendments to be made in the body of the petition regarding the loan impugned (on the footing that they related to management conduct and could constitute unfairly prejudicial conduct if established) but disallowed amendments to the prayer seeking repayment of the loan (as the criterion in para. 62 for allowing derivative action relief to be claimed in a section 168A petition could not be met). In the context of dealing with the allegations as part of the evidence of unfairly prejudicial conduct, it may be appropriate for the court to direct a claim to be brought in the company’s name.

38.  There was an additional reason given in the judgment of Bokhary PJ at para. 28 why it would not be appropriate to pursue relief for misconduct in a section 168A petition rather than by way of a derivative action. This would entail the risk of the respondent director facing a claim for such relief in a derivative action after the petitioner had failed to obtain the same in the petition. I would later discuss the risk of double jeopardy in the present case. Those who are not parties to the petition would of course not be bound by any findings made in the petition in a subsequent derivative action.

Policy reasons for derivative actions

39.  There are policy reasons underlying the requirements for shareholders to bring derivative actions. It is a fundamental principle of company law, expressed as part of the rule in Foss v. Harbottle (1843) 2 Hare 461, that where a wrong was done to the company, the cause of action is vested in the company and the company alone can sue. Where what has been done amounts to a “fraud on the minority” and the wrongdoers are in control of the company, the procedural device of a derivative action was invented by the courts to afford protection to the minority. In para. 63 in Chime, Lord Scott referred to the use of a section 168A petition in order to circumvent the rule in Foss v. Harbottle where the nature of the complaint is misconduct rather than mismanagement and expressed the view this would be an abuse of process. He said that to use a petition to outflank the rule in Foss v. Harbottle would not be appropriate unless the criterion suggested in para. 62 were met.

40.  In Waddington, the Court of Final Appeal affirmed the threshold requirement for a common law derivative action, which provided a useful filter to prevent frivolous and abusive actions or actions which it was not in the interests of the company to bring (paras. 10 to 20, per Ribeiro PJ; paras. 47 to 57, per Lord Millett). The threshold test is as laid down in Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No. 2) [1982] Ch 204 at 221 to 222, namely, that the plaintiff is to establish a prima facie case (i) that the company is entitled to the relief claimed, and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v. Harbottle, usually the fraud on the minority exception. Where the plaintiff seeks an order to be indemnified as to costs by the company which may benefit from the derivative action, the court would consider whether and to what extent an honest, independent and prudent board of directors might decide to authorise prosecution of the action, given the available evidence (Wallersteiner v. Moir (No. 2) [1975] QB 373 at 404).

41.  A statutory derivative action was introduced by the amendments to Cap. 32 with a new Part IVAA. The relevant provisions came into operation on 15 July 2005. Leave of the court must be obtained to bring a statutory derivative action. Pursuant to section 168BC(3), the court may grant leave if it is satisfied, inter alia, that it appears to be prima facie in the interest of the company that leave be granted, and there is a serious question to be tried. Except where leave is granted by the court to dispense with the service of a written notice, the applicant must serve a notice in writing on the company stating his intention to seek leave to bring a statutory derivative action and the reasons for his intention.

42.  Thus, irrespective of whether a derivative action is brought under common law or by statute, there is the safeguard of a filter, by the threshold requirement or the leave application, to prevent unmeritorious claims or claims which it was not in the interest of the company to pursue. There is no such safeguard in a petition under section 168A if a petition is used to circumvent the rule in Foss v. Harbottle. If the court were to decide by the end of the trial of a petition that the case is not a proper one to order proceedings to be brought in the name of the company, the company and the alleged wrongdoers would have undergone the ordeal of a trial.

Other authorities on the inter-relationship between unfair prejudice petitions and derivative actions

43.  Mr. Chow cited to the court other authorities in support of his contention that a section 168A petition is permissible even where the nature of the complaint is misconduct rather than mismanagement and where the complaint may also be pursued by way of a derivative action. A number of these authorities were discussed in Chime. I am inclined to agree with Mr. Fok that these authorities, properly analysed, do not support Mr. Chow’s contention.

44.  Re Kong Thai Sawmill (Miri) Sdn. Bhd. [1978] 2 MLJ 227 is a decision of the Privy Council on appeal from Malaysia. Mr. Chow relied on the speech of Lord Wilberforce at 229F to H:

“First, it is claimed by the appellants that the section [i.e. the provision in the Malaysian Companies Act equivalent to section 168A] is not a substitute for a minority shareholders’ action and, specifically, that many if not most of the matters complained of would properly form the subject of such an action.  Their Lordships agree with this in part.  Relief cannot be sought under section 181 merely because facts are established which would found a minority shareholders’ action: the section requires (relevantly) ‘oppression’ or ‘disregard’ to be shown, and these are not necessary elements in the action referred to.  But if a case of ‘oppression’ or ‘disregard’ is made out, the section applies and it is no answer to say that relief might also have been obtained in a minority shareholders’ action.  To the extent that the appellants so contend their Lordships do not accept their argument.”

45.  Kong Thai Sawmill was mentioned in Chime at para. 11. As Bokhary PJ had observed, the claim in that case failed because none of the complaints were substantiated, so it was unnecessary for their Lordships to say anything more about the inter-relationship between such petitions and derivative actions.

46.  The issue in In re A Company (No. 005287 of 1985) [1986] 1 WLR 281 was whether the petition should be struck out against one of the respondents who was no longer a member of the company, having transferred all his shares to another entity that was made a respondent to the petition. Other reliefs were sought in the petition, for the purchase of the petitioners’ shares and winding up the company in the alternative, not available in a derivative action. In dismissing the application, Hoffmann J (as he then was) held that looking at the matter from a practical point of view it would not be very convenient to require separate proceedings to be brought by writ against that particular respondent in respect of matters which would very substantially overlap, if not duplicate, the issues in the petition. That was how this case was analysed by Lord Scott in Chime at para. 42. I do not think the passage at 284E to F of Hoffmann J’s judgment supports the proposition Mr. Chow sought to advance.

47.  Lowe v. Fahey [1996] 1 BCLC 4262 was discussed in Chime at paras. 18 and 44. The relief sought in the petition included an order to purchase the petitioner’s shares calculated on the basis that the acts complained of had not occurred. One of the respondents sought to strike out the petition on the ground that the claims against it were derivative and the court had no jurisdiction to permit the bringing of a derivative claim by petition. For like reasons as Hoffmann J in In re A Company (No. 005287 of 1985), the judge held it would make no practical or juridical sense to require the petitioner to bring her claim against that respondent by way of writ action as this would unnecessarily increase the costs and, in any event, both proceedings would have to be heard concurrently. I agree with Mr. Fok that the passage in the judgment of Deputy Judge Aldous, QC at 268a to c provides support for the respondents here: “This is not to say that in a case where the only substantive relief being sought was a claim on behalf of the company against such a third party that a claimant could always proceed by petition instead of derivative action” (emphasis supplied).

48.  Anderson v. Hogg [2002] SC 190 was a petition that had proceeded to trial. It was hardly surprising that Lord Hamilton who was in the majority thought it would be “highly unfortunate if at that stage … the court were to refuse a remedy simply because alternative mechanisms might have been invoked” (at 361B). This decision was considered in Chime at paras. 20 to 22.

49.  The primary relief claimed in the petition in Bhullar v. Bhullar [2003] 2 BCLC 241 was for the sale to the petitioners or to the company of the shares held by the respondents. Alternatively, the petitioners sought an order giving relief in respect of the various matters of which complaint was made and also an order to bring derivative action in the name of the company against the respondents for breach of fiduciary duty. The substantive issue was whether the directors had acted in breach of fiduciary duty in diverting investment opportunities from the company to themselves. The judge declined to grant the primary relief but found that the respondents had breached their fiduciary duty in acquiring for their personal benefit a property which could have been purchased by the company. He made a declaration that the property was held on trust for the company and granted consequential relief. As pointed out by Mr. Fok, there was no discussion in the judgment of the English Court of Appeal as to the inter-relationship between a derivative action and an unfair prejudice petition.

50.  Mr. Chow reasoned it cannot be the case that a claimant is required to bring parallel proceedings by way of an unfair prejudice petition and a derivative action and have them tried together when all the claims can conveniently be made in the petition. He cited Clark v. Cutland [2004] 1 WLR 783, which was discussed in Chime at paras. 23 and 45. There the petitioner had commenced a derivative action on behalf of the company for misappropriation of funds. Later he brought an unfair prejudice petition which was tried together with the derivative action and it was in the petition that relief was granted in an order for the purchase of the respondent’s shares. Lord Scott thought the value of this case on the jurisdiction point was reduced by the circumstance that a derivative action had been commenced and consolidated with the unfair prejudice proceedings. As Bokhary PJ went on to say at para. 24 in Chime, “where an unfair prejudice petition and a derivative action have been tried at the same time, no one is likely to achieve anything of substance by complaining on appeal that the trial court’s formal order had been drawn up in a form which grants the company relief in the petition rather than in the action.” This case does not support Mr. Chow’s contention.

51.  Barma J in Re Linea Trading Co. Ltd., HCCW No. 350 of 2004, 7 December 2005, referred to Chime. Mr. Chow relied on paras. 21 and 43 to support his argument that where allegations can amount to a case for mismanagement rather than only misconduct, an unfair prejudice petition will be a route open to the petitioner. In those paragraphs, Barma J was considering whether allegations should be allowed to stand in a petition, which is a different question from whether particular relief should be allowed to be claimed in the petition. I agree with Mr. Fok that Barma J was not intending to restrict the effect of Chime as to the difference between misconduct and mismanagement. The distinction between misconduct and mismanagement was best encapsulated in the passage from Charnley Davies at 783f to h referred to by Lord Scott at para. 47 in Chime, set out in the earlier part of this decision. As mentioned earlier, the proper perspective is to look at the whole gist or essence of the complaint and the remedy necessary to meet it.

52.  Gamlestaden Fastigheter AB v. Baltic Partners Ltd. [2007] BCC 272 is a Privy Council decision on appeal from Jersey. The main issue for decision in the striking out application was whether it was open to a member of a company to make an unfair prejudice application for relief in circumstances where the company was insolvent and where the relief sought would confer no financial benefit on the applicant qua member (paras. 3 and 29). Derivative proceedings had been commenced and adjourned and the relief sought in the unfair prejudice application included an order authorising the continuation of the derivative action. The judgment was given by Lord Scott and he referred to Chime at para. 28 in addressing the question whether an order for payment of damages to the company whose affairs have allegedly been conducted in an unfairly prejudicial manner can be sought and made in an unfair prejudice application. It was held in Chime there was power to make such an order and Lord Scott said no reason was advanced why the decision in Chime should not be followed, so no objection could be taken to the prayer in the unfair prejudice application for an order that the directors should pay damages to the company for breach of duty.

53.  I agree with Mr. Fok and Mr. Shieh that in para. 28 Lord Scott was not abandoning the criterion he had carefully set out in para. 62 in Chime or detracting from anything he said in his judgment there. I agree with Mr. Shieh’s reading that the discussion of the court’s jurisdiction at para. 28 on the wide language of the statutory provision to grant relief in an unfair prejudice application was about jurisdiction in the strict or theoretical sense, considered in paras. 39 to 49 of Lord Scott’s judgment in Chime.

54.  The last authority was a decision of the Supreme Court of Western Australia, Re Overton Holdings Pty. Ltd. (1984) 9 ACLR 225. Mr. Chow relied on this to say the petitioner sought exactly the type of relief sought by the petitioners in the present proceedings, namely, an order for the petitioner to bring proceedings against a director and other parties in the name of the company. Rowland J held that the powers given to the court by the companies legislation were extremely wide and gave statutory force to the exception to the rule in Foss v. Harbottle. The petitioner was entitled to the relief sought and the matter was adjourned to consider on what terms the relief should be given. The arguments advanced by the defendants did not address the question in what circumstances it would be appropriate to exercise the statutory power where the essence of the complaint was misconduct. Overton was decided before Charnley Davies, and took no account of the development in case law since then.

55.  Except for Overton, none of these authorities involved a situation where the sole complaints are breach of duties owed to the company and the only relief sought in the petition was to provide a remedy to the company for the misconduct, namely, an order for proceedings to be brought by the company.

56.  Having reviewed the cases, I turn to consider, with regard to each of the complaints raised in the petition, the essence of the complaint and the remedy sought in respect of each. I agree with and adopt the analysis in the written submissions of Mr. Shieh and Miss Ismail.

The essence of the complaints and the relief sought

57.  Before going to each of the three broad complaints in the petition mentioned earlier, two general features should be noted as submitted by counsel.

58.  Firstly, it is clear from paragraphs 41 and 42 of the petition that the essence of the complaints which followed is one of misconduct. Paragraph 41 pleads duties owed by Stanley Ho, Pansy Ho and Ambrose So as directors of the Company and paragraph 42 pleads breaches thereof. Although there is also mention in paragraph 42 that the affairs of the Company have been conducted in a manner unfairly prejudicial to members, that is premised upon the wrongfulness of the acts of breach pleaded earlier.

59.  Secondly, of all those involved in the management of the Company, only those three named directors are singled out for acts of breach of duty and the ostensible justification given in the petition is that they were directors of both the Company and STDM (this is factually incorrect in the case of Ambrose So, who was not a director of STDM). Viewed in this light, it is the gist of the petitioners’ complaints that these three individuals had conflicting loyalties and had acted in breach of duty by preferring the interests of STDM to the Company.

60.  In respect of the Interdragon issue pleaded in paragraphs 44 to 53 of the petition, it is pertinent to note the following:

(1)  In paragraph 49, there is a plea of improper self-enrichment against Stanley Ho.

(2)  In paragraph 51, there is a general charge of obfuscation against the Company, which connotes deliberate wrongdoing.

(3)  In paragraph 52, there is a plea of knowing failure by those three individuals to pursue on behalf of Interdragon preferential dividends against STDM.

(4)  In paragraph 53, there is a plea of disclosure of false and misleading information by the Company regarding the true nature of its interest in the 9,204 shares in STDM and that those three individuals had traded in the Company’s shares with knowledge of the true nature of such interest.

61.  The relief sought in respect of the Interdragon issue are:

(1)  the Company should cause proceedings to be brought by Interdragon against STDM for recovery of preferential dividends which Interdragon was entitled to be paid; and

(2)  the Company should pursue the three individuals for breach of their duties in failing to cause the Company to cause Interdragon to bring the claim against STDM in (1).

62.  The Sleeping Dividends issue is covered in paragraphs 54 to 58 of the petition. Paragraph 58 pleads a knowing failure by the three individuals to cause the Company to pursue its entitlement of proper dividends against STDM. The relief sought in respect of this issue are:

(1)  the Company should cause proceedings to be brought against STDM for recovery of its share of the ordinary dividends payable in respect of the treasury shares; and

(2)  the Company should pursue the three individuals for breach of their duties in failing to cause the Company to bring the claim against STDM in (1).

63.  The Article 46 issue is dealt with in paragraphs 59 to 62 of the petition and these matters should be noted:

(1)  Paragraph 61 pleads improper retention of net profits which benefited the three individuals, who were able to control the retained profits within STDM, which remained at all times a private company, without being subject to governmental regulation and market scrutiny.  This is clearly a plea of deliberate misconduct.

(2)  Paragraph 62 pleads knowing failure by the three individuals to cause the Company to pursue proper dividends against STDM.

64.  The relief sought in respect of the Article 46 issue are:

(1)  the Company should cause proceedings to be brought against STDM for recovery of its share of the undistributed profits; and

(2)  the Company should pursue the three individuals for breach of their duties in failing to cause the Company to bring the claim against STDM in (1).

65.  I reject Mr. Chow’s submissions the above complaints amount to or are evidence of mismanagement of the affairs of the Company in an unfairly prejudicial manner. The fact that the acts complained of were on a recurring basis does not make that a mismanagement complaint. As mentioned earlier, it is the substance of the complaint and the relief sought which must be looked at together. It is a matter of perspective and substance must prevail over form.

66.  The essence of the complaints in each of the three issues is that the three individuals had, in breach of their duties of good faith and loyalty to the Company, failed to cause the Company, or cause the Company to procure Interdragon, to pursue STDM for proper dividends. The whole gist of the complaints is plainly misconduct, the objective of the petition is to seek redress for the Company for the misconduct, and the remedy provided by law for the wrong would adequately redress the misconduct. The petitioners are not seeking relief from mismanagement. Unlike the other cases cited by Mr. Chow, if the complaints about misconduct are taken away and the redress sought for the Company is removed, there would be nothing left in this petition. As analysed earlier, the proper vehicle for seeking and obtaining relief in this situation is not a petition under section 168A but a derivative action. This is not within the jurisdiction of the court in the practical sense under the powers conferred in section 168A.

The policy reasons as applied here

67.  As mentioned earlier, unlike a common law derivative action or statutory derivative action, no filter is required for these proceedings to be brought under section 168A. Whatever the views of the Company (the committee of independent directors of the Company has concluded there is no merit in the complaints of the petitioners), it would have to take part in a trial of this petition to have the complaints adjudicated. For present purpose, it is not necessary to go into the merits of the underlying complaints to see if the petitioners would have demonstrated a prima facie case (for the purpose of a common law derivative action) or that there is a serious question to be tried (for the purpose of a derivative action).

68.  The petitioners have offered no or no valid reason why the safeguard of a filter should be bypassed in this instance. It is difficult to see what positive benefit they could gain by pursuing the complaints in a section 168A petition, other than avoiding the filtering process.

69.  If the petitioners were to succeed in obtaining an order that the Company should bring proceedings against STDM or cause the Company to procure Interdragon to sue STDM (assuming this may be ordered under section 168A(2)(a)(ii)), the complaints would need to be tried in fresh proceedings. This would be akin to the situation described by Lord Millett in Waddington at para. 52, namely, that the Company would be subjected to “a 30-day action in order to decide whether the plaintiffs were entitled to bring a 30-day action”.

70.  Mr. Chow suggested that notwithstanding the need to bring fresh proceedings, the new proceedings could be “fast-tracked”, as many of the issues in dispute would be settled upon the determination of the petition and could not be re-opened. I do not agree with this. STDM and Interdragon are not parties to the present proceedings. They would not be bound by any findings made in this petition. And as they are not parties to the petition, it would not be an abuse of process for them to challenge in the derivative action the findings in the petition, as it would not be manifestly unfair to have the same issues re-litigated, nor would it bring the administration of justice into disrepute (Secretary of State for Trade and Industry v. Bairstow [2004] Ch 1 at 17C, para. 38). It is also doubtful if the individual respondents would be precluded from challenging any findings made in the petition vis-à-vis the Company in the derivative action, as there is no lis between the Company and the individual respondents in the petition, even though they are all respondents in the proceedings.

71.  If the petition were dismissed after trial, there is still a risk of double jeopardy recognised by Bokhary PJ in Chime at para. 28. The individual respondents could still be vexed again by a derivative action brought in the name of the Company, or a multiple derivative action in the name of Interdragon. The issue in the petition is whether the court should direct the Company to bring proceedings against the wrongdoers, whereas in the derivative action the issue is whether the underlying complaint is made out substantively. The court in dismissing the petition may not find it necessary to make binding determinations or findings, so issue estoppel may not be invoked by the respondent directors, quite apart from the difficulty there is no lis between the respondent directors and the Company in the petition.

72.  For the above reasons, I rule that the petition is plainly an abuse of process and it should be struck out. The petitioners should pursue their complaints by a common law or statutory derivative action, or, as they are both shareholders of STDM, bring proceedings themselves directly against STDM, instead of seeking to foist that responsibility on the Company against its wishes.

73.  I turn to the two additional grounds for striking out the complaint relating to the Interdragon issue.

The Supplemental Agreement

74.  By a joint venture agreement dated 31 October 2002 made between STDM and Shun Tak Ferries (“the Joint Venture Agreement”), STDM subscribed for part of the original capital of Interdragon and paid for this subscription by delivery of 9,204 of its own shares to Interdragon. It is the petitioners’ case that the 9,204 shares of STDM held by Interdragon are not ordinary shares but preference shares.

75.  The Company disputes that the shares held by Interdragon are preference shares, and it has filed evidence showing that all along it has regarded these shares as ordinary shares in STDM. In the definition clause of the Joint Venture Agreement, “STDM Consideration Shares” was defined to mean “the 9,204 issued ordinary shares of MOP $1,000 each in the share capital of STDM currently held by STDM in treasury”.

76.  The precise shareholding structure of STDM is the subject matter of various legal proceedings in Macau. In early 2007, the Company was considering the position it should take in those proceedings. The independent non-executive directors (“INEDs”) were deputed to consider a proposal for a supplemental agreement to the Joint Venture Agreement to confirm the parties’ intention that Interdragon would be entitled to ordinary dividends only in respect of the 9,204 shares. The issue was whether the Company could at law or in good faith maintain that the shares owned by Interdragon should be treated as preferential, which would constitute a windfall for the Company, notwithstanding that the Company had at all times regarded the shares as ordinary shares and had valued them as such. The INEDs were faced with a commercial decision whether to regularise the position so the Company actually received what it thought was getting in the first place, being ordinary shares in STDM, or unwind what was a very advantageous transaction to the Company, as set out in a circular of the Company to its shareholders dated 2 December 2002. After consultation with lawyers in Hong Kong and Macau, they decided it was in the best interests of the Company to regularise the position and the Supplemental Agreement was entered into between STDM, Shun Tak Ferries and Interdragon on 27 June 2007, less than a month before the presentation of this petition.

77.  By the Supplemental Agreement, the parties agreed and confirmed their belief and intention as regards the Joint Venture Agreement that they have at all times behaved and acted on the basis that the rights and benefits flowing from the “STDM Consideration Shares” were those flowing from ordinary shares of STDM and Interdragon has not claimed and does not seek to claim preferential dividends.

78.  As submitted by Mr. Fok, the effect of the Supplemental Agreement is not to change the nature of the “STDM Consideration Shares”, but to regulate the rights that may be exercised in respect of those shares as between STDM and Interdragon.

79.  The Supplemental Agreement is not referred to in the petition and there is no claim to set it aside. The petitioners have only adduced evidence from their Macanese law expert that the agreement to treat the “STDM Consideration Shares” as ordinary shares was void ab initio under Macanese law.

80.  The Supplemental Agreement forms part of the Joint Venture Agreement. Both agreements are governed by Hong Kong law. The opinion of the petitioners’ expert that the Company’s position is invalid under Macanese law is irrelevant.

81.  Given the terms of the Supplemental Agreement, and absent a claim to set aside the Supplemental Agreement, if Interdragon were to bring proceedings against STDM for recovery of preferential dividends, STDM would be entitled to rely on the Supplemental Agreement as a complete bar to its claim. Whatever the position under Macanese law, Interdragon cannot, as a matter of Hong Kong law, sue STDM in breach of the Supplemental Agreement.

82.  I agree it would be an abuse of process to compel the Company to cause Interdragon to bring a groundless claim against STDM. So for this reason as well, the relevant paragraphs of the petition relating to the Interdragon issue and paragraph (2) of the prayer should be struck out.

Inconsistent position in legal proceedings in Macau

83.  The respondents submitted here it is an abuse of process to advance two cases which are plainly inconsistent and incompatible with one another.

84.  In paragraph 34 of the petition, it is pleaded as follows:

“The 1^st Petitioner (as a shareholder of STDM) has brought legal proceedings in Macau to challenge the validity of Interdragon’s purported shareholding on the grounds that Interdragon obtained the 9,204 shares in a transfer contrary to the procedural requirements in Macanese law and STDM’s articles of association.  However, for the purpose of the present Petition only, it is not necessary for this Honourable Court to determine the issue of the validity of Interdragon’s purported shareholding in STDM and the Petitioners will assume that Interdragon’s purported shareholding in STDM is valid (unless and until the matter is otherwise determined by the Macanese Court). …”

85.  Thus, on the petitioners’ own case, they have previously brought proceedings in Macau challenging the validity of Interdragon’s acquisition of the 9,204 shares in STDM. That must be taken to represent their primary factual position. In the same paragraph of the petition, they are asking the Hong Kong court to “assume” Interdragon’s shareholding was valid unless otherwise determined by the Macanese court. This is asking the court to determine the petition on a factual basis it has not found and contrary to the position of the petitioners as presented in legal proceedings elsewhere. No authority was cited by the petitioners to support such an extraordinary proposition. This is very different from the situation where a party may plead, in the same action, different items of relief depending on alternative possible findings which are inconsistent, as the court would be able to adjudicate, once and for all, the factual basis on which any relief is to be granted.

86.  If the petitioners should be successful in the proceedings in Macau, Interdragon would have no basis for claiming unpaid dividends from STDM since its shareholding would not be valid. This would undermine the factual premise of the proceedings sought to be brought by Interdragon against STDM as one of the relief in this petition.

87.  There is no indication when a ruling would be made by the Macanese court. If the Hong Kong court were to direct upon the determination of the petition that the Company should cause Interdragon to sue STDM for dividends, this would be rendered completely futile if the Macanese court is to rule subsequently that the shareholding of Interdragon was invalid.

88.  Mr. Fok referred the court to the following dicta in Berthier Godown Ltd. v. E Wah Realty Ltd. & Anr. [1986] HKC 8 at 14H to 15A:

“It is that if the party seeks to raise new matters in separate proceedings or seeks to reverse a previous assumption that has been the basis of earlier proceedings in new proceedings, that amounts, first of all, to an abuse of the process and second, he is estopped from doing so.  A fortiori, this must be so if the earlier proceedings are still in existence and the party can raise those matters in the proceedings which have already been started and in which orders have already been made.  He certainly cannot seek to raise factual and legal issues in conflict with his earlier stance and the earlier order of the court.  He must pursue all the remedies available to him and raise all the arguments that are available to him in the first proceedings.”

89.  I think the above dicta would also apply to the present situation.

90.  I hold it is an abuse of process for the petitioners to adopt a stance inconsistent with that in the proceedings in Macau and the relevant paragraphs in the petition in respect of the Interdragon issue and paragraph (2) of the prayer should be struck out on this additional ground.

Orders

91.  I order the petition to be struck out as an abuse of the process of the court. I make an order nisi that the petitioners do pay the costs of the 1^st to 4^th respondents of this application and of the petition. There will be a certificate for two counsel for the 1^st and 3^rd respondents and for the 4^th respondent in this application.