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HCA 411/2006
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 411 OF 2006
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BETWEEN
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RAJESH KISHOR MEHTA |
Plaintiff |
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and |
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VIJAY KIRTILAL MEHTA |
1st Defendant |
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LUNGHIN CAPITAL LIMITED |
2nd Defendant |
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WALLACERY PROFITS LIMITED |
3rd Defendant |
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DARLINGFORT COMPANY LIMITED |
4th Defendant |
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VALUABLE RESOURCES LIMITED |
5th Defendant |
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Before: Recorder Rimsky Yuen, SC in Chambers
Date of Hearing: 20 November 2006
Date of Decision: 13 April 2007
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D E C I S I O N
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1. This is a derivative action brought by the Plaintiff on behalf of the 2nd, 3rd and 4th Defendants (collectively the “BVI Companies”). The Plaintiff’s claim was, however, overtaken by subsequent events and the key disputes between the parties when this matter came before this Court are whether this action should be stayed or struck out and how the costs previously incurred should be dealt with.
Background
2. The 1st Defendant is the Plaintiff’s uncle. Prior to the appointments of liquidator referred to below, they were the only directors of each of the BVI Companies. They are also the only registered shareholders of each of the BVI Companies, each of them holding 50% of the shares the BVI Companies.
3. The 5th Defendant (“VRL”) is a private limited company incorporated in Hong Kong. By reason of an agreement made in March 2004, VRL became entitled to a sum of around US$40 million by way of a settlement in respect of certain legal proceedings not relevant to this action. In the rather voluminous affidavits lodged before this Court, there are allegations and cross-allegations concerning this settlement and the handling of the said sum of US$40 million. For the present purpose, it is not necessary to go into the details of the underlying factual disputes. Suffice it to say that the settlement money appears to be one of the principal assets of VRL.
4. The BVI Companies are the registered shareholders of VRL in that the 2nd, 3rd and 4th Defendants respectively holds 49.9%, 49.8% and 0.01% of the shares in VRL. The remaining shareholders of VRL are Rashmi Mehta and Prabodh Mehta, who each holds 0.1% of the shares in VRL. The BVI Companies’ shareholdings in VRL constitute their sole assets.
5. On 14 December 2005, the 1st Defendant held shareholders meetings in London for the BVI Companies (collectively the “BVI Shareholders Meetings”) and the following resolutions were, amongst others, passed (collectively the “BVI Resolutions”):
(1) that the company would use its shareholding in VRL to take whatever necessary steps to take control of the management and affairs of VRL for the purposes of tracing and collecting in all the assets of VRL, including taking proceedings in any part of the world, so that the assets of company might be realized and distributed;
(2) that the 1st Defendant be appointed and authorized for and on behalf of the BVI Companies to exercise all their rights as shareholders of VRL and to take all steps referred to in (1) above.
6. Basing upon the BVI Resolutions, the 1st Defendant issued notice dated 25 January 2006 to convene an extraordinary general meeting of VRL to be held in Hong Kong on 28 February 2006 (“Intended EGM of VRL”) as the authorized representative of the BVI Companies. This notice provided for the removal of three directors from the board of VRL, and the appointment of two directors in their place. It is the Plaintiff’s case that the two proposed directors were the nominees of the 1st Defendant.
7. The Plaintiff contended that the BVI Shareholders Meetings and the BVI Resolutions were invalid and of no effect and therefore the 1st Defendant was not validly appointed or authorized to act on behalf of the BVI Companies. It is also the Plaintiff’s case that the notice calling for the Intended EGM of VRL was invalid since the 1st Defendant did not have any authority to issue the notice on behalf of the BVI Companies.
8. On 24 February 2006, the Plaintiff issued the Writ in this Action against the 1st to 4th Defendants and claimed, inter alia, the following relief:
(1) a declaration that the BVI Resolutions are invalid, void and of no effect;
(2) a declaration that the 1st Defendant has no authority to act on behalf of the BVI Companies in their capacity as shareholders of VRL, and in particular, has no authority to act on behalf of the BVI Companies in relation to the Intended EGM of VRL;
(3) an injunction to restrain the 1st Defendant from acting on behalf of the BVI Companies in any dealings or matter concerning VRL and in particular in respect of the Intended EGM of VRL.
9. On the same date when this Action was commenced, the Plaintiff applied for and was granted an interim injunction against the 1st Defendant restraining him from acting on behalf of the BVI Companies in respect of any dealings concerning VRL and in particular in relation to the Intended EGM of VRL (“Injunction”). A sealed copy of the Injunction was served on Messrs. Haldanes under cover of a letter dated 25 February 2006. By a letter dated 27 February 2006, Messrs. Haldanes informed the Plaintiff’s solicitors that they had instructions to accept service on behalf the 1st Defendant.
10. By a Summons dated 27 February 2006, the Plaintiff applied for a continuation of the Injunction. On the other hand, by a Summons dated 13 April 2006, the 1st Defendant applied to stay this Action on the ground that the High Court in the British Virgin Islands (“BVI”) is the natural and appropriate forum for resolving the issues in this action.
11. Subsequently, by an Order dated 9 June 2006, the Plaintiff was granted leave to join VRL as the 5th Defendant. Consequential upon such joinder, both the Writ and the Statement of Claim were amended on 13 June 2006. In addition to the original relief, the Plaintiff claimed a declaration that the notice in respect of the Intended EGM of VRL is invalid and of no effect and also an injunction to restrain VRL from acting upon any instruction or representation based on the authority said to have been granted to the 1st Defendant under the BVI Resolutions.
12. On 11 July 2006, the 1st Defendant issued proceedings in the BVI seeking the appointment of a liquidator for each of the BVI Companies. On 10 November 2006, the BVI Court allowed the applications and appointed Mr. Andrew Bickerton as the liquidator for each of the BVI Companies. The BVI Court held that the BVI Companies are hopelessly deadlocked and there is a total lack of trust and confidence between the two directors (i.e. the Plaintiff and the 1st Defendant) such that the BVI Companies have ceased to function effectively or at all.
13. Following the decision by the BVI Court, the 1st Defendant issued the Summons dated 14 November 2006 whereby he applied to strike out this action or alternatively the claim against the 1st Defendant and for his costs of this action.
The Questions for Determination
14. In light of the above background, the key questions that require determination by this Court are these:
(1) whether this action, or alternatively the Plaintiff’s claim against the 1st Defendant, should be struck out since a liquidator has been appointed for each of the BVI Companies;
(2) if this action is to be struck out as contended by the 1st Defendant (or to be stayed, as contended by the Plaintiff), what should be the appropriate costs order in respect of the costs previously incurred by the parties.
1st Defendant’s Summons for Striking Out
15. As stated above, the BVI Court appointed a liquidator for each of the BVI Companies on 10 November 2006. Following such appointments, the Plaintiff cannot continue this derivative claim. In Victor Joffe, Minority Shareholders: Law, Practice and Procedure (LexisNexis UK) (2nd edn.), the position is explained as follows (para. 1.89, at p. 27):
“Where a company is in liquidation, a derivative claim cannot be brought by a minority shareholder. The reason lies in the nature of the derivative claim as a procedural device which enables proceedings to be brought on behalf of the company notwithstanding that it is under the control of persons who have committed or acquiesced in the wrongdoing. ‘But once the company goes into liquidation the situation is completely changed, because one on longer has a board, or indeed a shareholders’ meeting, which is in any sense in control of the activities of the company of any description, let alone its litigation ...... the liquidator is the person in whom that right is vested’. In these circumstances, the reason for any exception to the rule in Foss v Harbottle disappears.”
See also: Ferguson v Wallbridge [1935] 3 DLR 66 (Privy Council), Fargro Ltd. v Derek Godfroy [1986] BCLC 370 (Walton J.) and Ever Joint (Holdings) Ltd. v Nice Theme Ltd., unrep., HCA No. 2153 of 2005 (8 November 2006) (Deputy High Court Judge Gill) (para. 8 & 16-20).
16. The parties do not dispute the law as expounded in these authorities. They, however, differed on what should be the appropriate order to make. The 1st Defendant applied to strike out this action or alternatively the Plaintiff’s claim against the 1st Defendant. The Plaintiff, on the other hand, submitted that this action should be stayed.
17. In principle, both options contended by the Plaintiff and the 1st Defendant are open to this Court. In Fargro Ltd. v Godfroy (above), Walton J. observed (at p. 374j) that a derivative action could properly be struck out when the company on whose benefit the action was brought went into liquidation. In Ever Joint (Holdings) Ltd. v Nice Theme Ltd. (above), Deputy High Court Judge Gill ordered a stay of the derivative claim so that the...
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