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Chung Keng v Pearl Oriental Oil Ltd

Judgment Cited authorities 5 Cited in Precedent Map Related
Vincent
Judgment Date20 November 2018
Neutral Citation[2018] HKCFI 2564
Judgement NumberHCMP1795/2018
Citation[2018] 5 HKLRD 567
Year2018
Subject MatterMiscellaneous Proceedings
CourtCourt of First Instance (Hong Kong)
HCMP1795/2018 CHUNG KENG v. PEARL ORIENTAL OIL LTD

HCMP 1795/2018

[2018] HKCFI 2564

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1795 OF 2018

_____________

IN THE MATTER of PEARL ORIENTAL OIL LIMITED (東方明珠石油有限公司)
and
IN THE MATTER of sections 732(1) and 733 of the Companies Ordinance, Cap 622

_____________

BETWEEN
CHUNG KENG (鍾鏗) Applicant
and
PEARL ORIENTAL OIL LIMITED
(東方明珠石油有限公司)		 Respondent

_____________

Before: Mr Recorder Stewart Wong SC in Chambers

Date of Hearing: 14 November 2018

Date of Decision: 20 November 2018

__________________

D E C I S I O N

__________________


1. By Originating Summons dated 22 October 2018, the applicant, a registered shareholder of the respondent, applies for leave, under sections 732(1) and 733 of the Companies Ordinance[1], for him to commence, in the name of the respondent, a statutory derivative action against two of its directors, Ms Fan Amy Lizhen (樊麗真) and Mr Tang Yau Sing (鄧有聲) (“the prospective defendants”). They were at the material times two of the three directors of the respondent.

2. According to the draft statement of claim exhibited to the Originating Summons, the applicant is concerned by the following acts or omissions (which I shall call “complaints”) of the prospective defendants (referred to therein as “the Defendants”), and which are said to constitute breaches of fiduciary and statutory duties owed to the respondent (referred to as “the Company” therein):

“ (a) The dubious circumstances surrounding the execution and sudden termination of the Proposed Placing (as defined below) when the Defendants failed to secure placees of their own choosing to receive the shares under the said placing exercise;

(b) The insistence on relocating the Company’s office premises in the absence of commercial justifications and despite the lack of sufficient funding;

(c) The failure to settle outstanding wages of employees;

(d) Despite the above, the refusal, for no apparent reason, to accept the proposed loan offered by [the applicant] where the Company has no reasonable alternatives to secure funding;

(e) Worse still, the reinforcement of their positions as directors by (i) refusing to convene a Special General Meeting in respect of resolutions to remove existing directors; and (ii) the appointment of directors lacking in required experience and qualifications.”

3. An affirmation was made by the applicant on 22 October 2018 in support of his application. It was, however, not filed or served until 9 November 2018, a few days before the hearing.

4. On 24 September 2018, solicitors for the applicant sent a letter to the directors of the respondent, which is said to constitute a formal notice under section 733(1)(c) that the applicant intended to apply for leave to commence a statutory derivative action on behalf of the respondent against the prospective defendants (“the Notice”). The complaint stated therein was that the prospective defendants did not acceptthe offer of a loan from the applicant, ie complaint (d) in the draft statement of claim. The other complaints were not mentioned. The respondent has not replied to this letter.

5. At the first hearing of the Originating Summons before me on 14 November 2018, Mr Michael Lok, appearing for the applicant with Ms Jasmine Cheung, asks me to grant leave straight away. He says that the threshold for the grant of leave under section 733 is low and the allegations contained in the draft statement of claim give rise to, at the very least, serious issues to be tried.

6. Mr Val Chow, who appears for the respondent, submits that this application should be dismissed for non-compliance with section 733(1)(c), because only one of the complaints set out in the draft statement of claim was stated in the Notice, but the requirements under section 733(4) is that the Notice must set out in full the reasons for the intention to apply for leave.

7. Further, if I am not minded to dismiss the Originating Summons because of the alleged defect regarding the Notice, Mr Chow submits that I should not grant substantive relief (namely leave to commence a derivative action) right away because:

(1) An independent board committee (“the Committee”) was appointed by the respondent to consider the issues raised in the draft statement of claim and what action the respondent ought to take, and should be given a chance to consider the allegations and decide what to recommend to the board, and to file evidence in opposition if it considers appropriate. The Committee was only formed on 5 November 2018 and the evidence of the applicant in support was only served on 9 November 2018. Mr Chow says that the respondent should respond to the evidence, rather than merely the allegations contained in the draft statement of claim;

(2) There are possibilities that the control of the respondent would change, because (i) there is an upcoming special general meeting (“SGM”) on 29 November 2018 where shareholders will consider whether to pass resolutions to remove seven of the current eight directors of the respondent; (ii) a winding-up petition and an application for provisional liquidator are pending before the Court in Bermuda (where the respondent was incorporated). In such scenarios, Mr Chow says, the respondent would no longer be in control of the prospective defendants, and a derivative action cannot be brought or continued in relation to a company in liquidation.[2] However, I am told that there is no hearing date fixed for the matters in Bermuda.

8. Mr Lok submits that the Notice is adequate. The applicant has stated the reason for the intention to apply for leave, namely that the prospective directors had been acting in breach of their duties owed to the respondent. The complaints are merely grounds or particulars. He cites a judgment of Belinda Ang Saw Ean J of the High Court of Singapore, Teo Seng Hoe (alias Tew Seng Hoe) v IDV Concepts Pte Ltd [3], which in turn cited a judgment of Nemetz CJBC of the British Columbia Court of Appeal in Bellman v Western Approaches Ltd [4] in support of the proposition that a failure to specify each and every cause of action in such a notice does not invalidate the notice as a whole, if the directors are reasonably notified of the intention to apply for leave. If necessary, he asks for a dispensation under section 733(5).

9. Mr Lok also suggests that the respondent, who is still under the control of the prospective directors and those they appointed, is employing delaying tactics, in particular the appointment of the Committee. Having been served with the draft statement of claim on 23 October 2018, the respondent ought to, but has failed to, plead or respond to it, and only appointed the Committee on 5 November 2018. It has not suggested that the allegations in the draft statement of claim have no prospect of success. He also queries the independence, expertise and qualifications of the members of the Committee. He emphasises that their very appointment as directors is a subject of complaint (see complaint (e) above). He also suggests that there is no reason to wait to see if the possibilities for change of control happen.

10. I shall deal with the question of the adequacy of the Notice first.

11. Section 733 provides as follows:

“ (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 interests 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

(ii) an application for leave to intervene in proceedingsunder section 732(3), the company has not diligentlycontinued, discontinued or defended the proceedings; and

(c) except where leave is granted by the Court under subsection (5), the member has served a written notice on the company in accordance with subsection (3), and the notice complies with subsection (4).

(2) The Court may refuse to grant leave if it is satisfied that—

(a) in the case of an application for leave to bring proceedings under section 732(1) or (2), the member has, in the exercise of any common law right, brought proceedings on behalf of the company in respect of the same cause or matter; or

(b) in the case of an application for leave to intervene in proceedings under section 732(3), the member has, in the exercise of any common law right, intervened in theproceedings in question to which the company is a party.

(3) The written notice must be served on the company, at least 14 days before the member applies for leave in respect of the company—

(a) in the case of a company as defined by section 2(1), by leaving the notice at, or by sending the notice by post to, its registered office; or

(b) in the case of a non-Hong Kong company, in a manner that the notice is sufficiently served on the company by virtue of section 803.

(4) The written notice must state—

(a) the member’s intention to apply...

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