C Y Foundation Group v Cheng Chee Tock & Others

CourtHigh Court (Hong Kong)
Judgement NumberHCMP680/2011
Subject MatterMiscellaneous Proceedings
HCMP680A/2011 C Y FOUNDATION GROUP v. CHENG CHEE TOCK & OTHERS

HCMP 680/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 680 OF 2011

____________

BETWEEN

C Y FOUNDATION GROUP Plaintiff
and
CHENG CHEE TOCK & OTHERS Defendants

____________

Before: Hon Barma J in Chambers

Date of Hearing: 29 April 2011

Dates of further Written Submissions: 4, 9 12 and 13 May 2011

Date of Judgment: 9 December 2011

______________

J U D G M E N T

______________

1. By these proceedings, the Plaintiff, C Y Foundation Group Limited (“CYF”) complains of the payment of a sum of HK$9,306,500 by CYF for the benefit of the 1st and 2nd Defendants, Mr Theodore Cheng Chee Tock (“Mr Cheng”) and his wife, Madam Leonora Yung (“Madam Yung”), pursuant to a resolution by which the board of directors of CYF resolved to indemnify Mr Cheng and Madam Yung in respect of legal costs incurred by them:-

(1) in defending proceedings (HCMP 702/2010) relating to CYF that were brought against them (and others) pursuant to section 168A of the Companies Ordinance (Cap. 32) by Luck Continent Ltd (“Luck Continent”); and

(2) in respect of an investigation of them by the Independent Commission Against Corruption arising out of complaints that they had defrauded the CYF in relation to a transaction (which has been called “the 17/F transaction”) by which CYF acquired its office premises, it being alleged that they were financially interested in the property acquired by CYF (Mr Cheng has now been charged with offences of dishonesty in relation to the 17/F transaction, and is due to stand trial in February 2012).

2. The proceedings are brought against Mr Cheng, Madam Yung, and also against three of CYF’s former directors, who passed the resolution complained of.

3. CYF contends that the resolution was passed by the board in breach of its fiduciary duties to CYF, and that the resolution is invalid. CYF also contends that, in consequence, payments to Mr Cheng and/or Madam Yung pursuant to it (in particular, the payment of HK$9,306,500) were misapplications of its funds, and that Mr Cheng and/or Madam Yung thereby became constructive trustees of the sums received by them, as they must have been aware of the breach. The HK$9,306,500 was in fact paid to Madam Yung, by a cheque dated 15 February 2011.

4. On commencing these proceedings, CYF also applied by inter partes summons for an injunction to restrain Mr Cheng and Madam Yung from disposing of or dealing with this sum, and for disclosure orders to require Mr Cheng and Madam Yung to state what they had done with it, whether any of it remained with either of them, and whether any other sums paid by either of them to their legal advisers in respect of either of the matters referred to in paragraph 1 above had been funded by CYF. This was the hearing of those applications.

5. By way of background, CYF is a Bermuda company that is listed on the Hong Kong Stock Exchange. Its largest shareholder is Luck Continent, which is controlled by a Mr Poh Po Lian while its second largest group of shareholders consists of various companies beneficially owned by Madam Yung. Until 8 April 2008, Mr Cheng was the Chairman of the board of CYF and one of its Executive Directors, and Madam Yung was a Vice-President in charge of Human Resources and Administration, but not a director.

6. The section 168A proceedings concerned various complaints by Luck Continent and Mr Poh of allegedly unfairly prejudicial conduct on the part of Mr Cheng, Madam Yung, and the shareholders beneficially owned by Madam Yung, in particular their consistent opposition to amending the constitution of CYF to enable its directors to be removed by an ordinary resolution (the articles require a special resolution to be passed for this purpose). There were also complaints about a number of transactions entered into by CYF, although at the trial, the focus in this respect was only on the 17/F transaction. Judgment in those proceedings has been reserved.

7. During the course of the trial of those proceedings, CYF held an Annual General Meeting, at which Luck Continent gained control of CYF’s board. As a result, Mr Cheng and Madam Yung were suspended from their duties. Shortly after CYF’s new board took over, the payment was discovered by them, and these proceedings were commenced.

8. At the hearing, CYF was represented by Mr Douglas Lam, and Mr Cheng, Madam Yung and the 3rd and 5th Defendants were represented by Mr John Litton and Mr Kestrel Lam.

9. Mr Lam explained that the injunction applied for (which is designed to prevent the sum paid to Madam Yung being dealt with) was not a Mareva injunction to prevent dissipation of assets which might otherwise be available to meet any order for payment that might be made at the end of the day. Rather, it was premised on Mr Cheng and Madam Yung being constructive trustees of any amounts received by them pursuant to CYF’s board resolution of 10 February 2011, and was intended to preserve the proceeds of such payments in their hands. Accordingly, it was based on proprietary claims advanced by CYF against Mr Cheng and Madam Yung. It would therefore require CYF to identify assets of Mr Cheng and Madam Yung which can be said to represent the sums paid to them by CYF.

10. The basis of the claims, as explained in CYF’s evidence filed in support of the application, was that CYF was under no obligation or liability to make such a payment to Mr Cheng and/or Madam Yung, that the payment was accordingly in the nature of a gift and not made bona fide in the best interests of CYF, and thus was made in breach of fiduciary duty on the part of the directors approving it.

11. In particular:-

(1) In the context of the funding by CYF of costs incurred in relation to HCMP 702/2010, Mr Lam pointed out that it is well recognised that a company should not expend its own funds in defending section 168A proceedings in relation to itself, and should not provide funding to its shareholders or directors who are parties to such proceedings, as section 168A proceedings are in the nature of a dispute between the shareholders of the company, which should remain neutral (see e.g. Re Hydrosan Ltd [1991] BCLC 418; Core Pacific-Yamaichi International (HK) Ltd (unreported, Barma J, HCMP 3231/2003, 17 October 2003)).

(2) In the context of the criminal...

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