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Wong Ho Kwan And Another v Hsin Kuang Restaurant (Holdings) Ltd And Others

Judgment Cited authorities 12 Cited in Precedent Map Related
Vincent
Judgment Date23 June 2020
Neutral Citation[2020] HKCFI 1314
Year2020
Judgement NumberHCMP481/2019
Subject MatterMiscellaneous Proceedings
CourtCourt of First Instance (Hong Kong)
HCMP481/2019 WONG HO KWAN AND ANOTHER v. HSIN KUANG RESTAURANT (HOLDINGS) LTD AND OTHERS

HCMP 481/2019

[2020] HKCFI 1314

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 481 OF 2019

________________________

IN THE MATTER of sections 732 and 733 of the Companies Ordinance (Cap 622)

and

IN THE MATTER of HSIN KUANG RESTAURANT (HOLDINGS) LIMITED (新光酒樓(集團)有限公司)

______________

BETWEEN

WONG HO KWAN 1st Plaintiff[1]
WONG YUEN SHUN KWONG WAH HONG LIMITED 2nd Plaintiff

and
HSIN KUANG RESTAURANT (HOLDINGS) LIMITED (新光酒樓(集團)有限公司) Defendant
LI KWOK HUNG (李國雄) Intended 2nd Defendant
CHING CHI WAI (程志偉) Intended 3rd Defendant
HO MAN CHE PETER (何文智) Intended 4th Defendant

________________________

Before: Hon Linda Chan J in Chambers
Date of Hearing: 18 May 2020
Date of Judgment: 23 June 2020

________________________

J U D G M E N T

________________________

1. This is an application made by the plaintiffs, Mr Wong Ho Kwan (“P1”) and Wong Yuen Shun Kwong Wah Hong Limited (“P2”) (together “Ps”), under section 733 of the Companies Ordinance (Cap 622) (“Ordinance”) for leave to bring a statutory derivative action in the name of Hsin Kuang Restaurant (Holdings) Limited (“Company”) against Mr Li Kwok Hung (“Li”), Mr Ching Chi Wai (“Ching”) and Mr Ho Man Che Peter (“Ho”) (collectively “Ds”) for breach of duties in causing the Company to sell its properties as per the draft statement of claim (“SOC”).

2. The Originating Summons (“OS”) was heard before Harris J on 5 September 2019 and was adjourned sine die to allow the Company to ascertain the view of the shareholders. The Company was ordered to issue a notice to convene an extraordinary general meeting (“EGM”) to consider a resolution on whether the shareholders are in favour of an action being brought in the name of the Company against the Ds for any breach of duty as per the SOC (“Resolution”); and “any other resolutions proposed by shareholders pursuant to the Articles of Association”.

A. Ds’ Summons

3. The resumed hearing of the OS was scheduled to be heard on 6 February 2020 but was adjourned due to the General Adjourned Period. Shortly before that hearing, on 22 January 2020, the Ds issued a Summons under Order 15 rule 6 for (1) leave to be joined as defendants to the OS (“Joinder Application”); and (2) an order to set aside the Resolution and/or for the Company to procure the board to issue a notice to convene an EGM within 21 days to consider the same Resolution (“Setting Aside Application”).

4. The Summons is issued under Order 15 rule 6, which does not empower the Court to grant any substantive relief such as the relief sought in the Setting Aside Application. The proper procedure for seeking a substantive relief is to issue an originating summons to claim that relief, given that:

(1) Order 102 regulates the procedure of all applications to the Court of First Instance under the statutory jurisdiction conferred by the Ordinance and the Companies (Winding-up and Miscellaneous Provisions) Ordinance (Cap 32). Order 102 rule 2 provides that except in the case of applications made in proceedings relating to the winding up of companies or applications made pursuant to section 724 of the Ordinance, every application under the Ordinance and Cap 32 may be made by originating summons; and

(2) Order 7 rule 3 provides that “every originating summons must include a statement of the questions on which the plaintiff seeks the determination or direction of the Court of First Instance or, as the case may be, a concise statement of the relief or remedy claimed in the proceedings begun by the originating summons with sufficient particulars to identify the cause or causes of action in respect of which the plaintiff claims that relief or remedy”.

5. It seems to me that in making the Setting Aside Application by way of the Summons, the Ds are trying to circumvent the procedure prescribed by the relevant rules when there is no basis for them to do so.

6. As for the Joinder Application, I allow the Ds to be joined as the 2nd to 4th defendants in these proceedings as I take the view that all the allegations are directed against the Ds and, as a matter of fairness, they are entitled to be heard on the merits (or lack of it) of the intended claim (Re Gen2 Partners Inc [2012] 4 HKLRD 511 at §§26-27, per Barma J (as he then was)).

7. Mr Douglas Lam SC[2], counsel for the Ps, cites Re Yau Wing Company Limited, HCMP 3250/2015, unrep., 21 January 2016, where Harris J observed (at §25) that an application for joinder “should only be granted if the applicant can demonstrate that his participation is likely to be necessary to ensure that all relevant matters are put before the Court”, as where due to deadlock in the board, the company would not be able to respond substantively to the application. Mr Lam SC submits that the Ds fail to show any justifiable reason to be joined, as they “had ample time and opportunity to make representations to the shareholders” before the Resolution was passed, and the Resolution is binding upon the Company.

8. I do not think the passage in Yau Wing supports Mr Lam’s submissions. The observation was made in circumstances where the putative defendant wanted to advance lengthy submissions “descending into more detail and controversy than the criteria” required to assess an application under section 732, and His Lordship reminded the parties that the threshold for establishing a serious issue to be tried is not high, and the Court would not entertain exhaustive submissions and arguments or examine the potential defence advanced by the putative defendants in any great details.

9. In my view, it is often proper and necessary for the plaintiff to join the “wrongdoing” directors as defendants if they are in control of the board when the section 733 application is made. There are 2 main reasons for this.

10. First, in a common law derivative action, the shareholder has the conduct of the action on behalf of the company. The company is a nominal defendant and does not take an active role in the action other than giving discovery and receiving the proceeds of any successful recovery. The same applies to a statutory derivative action brought by a shareholder in the name of the company against the “wrongdoing” directors. As a matter of principle, there is no reason why the company should take an active role in opposing a section 733 application, when it is not allowed to do the same in a common law derivative action.

11. More importantly, it may be said against the “wrongdoing” directors that their act in causing the company to oppose a section 733 application constitutes a misuse of company’s money. This accords with the well established principle that the company’s money should not be used for the collateral purpose of defending a proposed claim against the “wrongdoing” directors.

12. This, of course, is not to say that the company can never take an active role in a section 733 application, as there may be circumstances where it is necessary for the company to take a stance in the application. For example, where the plaintiff proposes to ask the company to meet or indemnify the costs of the action, or where there are matters which the “independent” directors (against whom no allegation is made) would wish to bring to the attention of the Court.

B. Background

13. The Company was incorporated under the former Companies Ordinance (Cap 32) on 6 March 1981. By virtue of article 1 of the Company’s Articles of Association (“AA”), the regulations in Table A in the First Schedule to the former Companies Ordinance (1975 ed) (“Table A”) were adopted as part of its regulations.

14. In May 1981, the Company purchased the properties at the Restaurant on Upper Ground Floor, Kwai Sing Centre, 1 Wo Yi Hop Road, Kwai Chung (“UG Property”) at HK$34,950,000. In November 1981, the Company further acquired Shops Nos 93-95 on G/F, Kwai Sing Centre, 412 Castle Peak Road, Kwai Chung (“GF Property”) at HK$3,256,540. The UG Property and GF Property together are referred to as “Properties”.

15. The UG Property was used to operate a restaurant from 1991 to 1998 and thereafter was let to tenants, and the current tenant uses it to operate a nursing home. The GF Property was initially used for storage and from 2010, was let to the same tenant which operates a nursing home at the UG Property.

16. According to the annual return made up to 6 March 2019, being the latest annual return in the evidence:

(1) the Company has 161,000 issued shares, which are held by 104 shareholders;

(2) the Ps hold 21,800 shares (13.54%): P1 holds 4,000 shares and P2 holds 17,800 shares. P2 is the single largest shareholder; and

(3) the Ds are shareholders: Ho holds 8,000 shares (4.97%), Li holds 2,500 shares (1.55%) and Ching holds 2,000 shares (1.24%).

17. From at least 2014, the Company had 4 directors, namely the Ds and Mr Woo Chu (“Woo”) (who holds 3,000 shares). They were (and still are) permanent directors and the only members of the Management Committee (“MC”).

18. Under article 21 of the AA, which was amended in January 1985, “the Directors shall delegate to the [MC] and the [MC] shall be deemed to have the power of general management and other powers which the Directors may exercise on behalf of the Company”. In other words, the power of management has been vested in, and can only be exercised by the MC but not the board unless the MC becomes ineffective.

19. At the EGM held on 26 July 2014, a special resolution was passed by the shareholders to the effect that the Properties would be sold at a target price of not less than HK$500 million (“July 2014...

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