There were a lot of issues for the member(s) or any person seeking for the derivative action against any wrong doing whether of a financial standing or managerial or related to the breach of fiduciary duties of the defendant. All these difficulties and barriers led to the enactment of “Statutory Derivative Action”. Provisions to allow for Statutory Derivative Action were first introduced in Predecessor Companies Ordinance as Pt. IVAA (repealed) and was re modelled in modified Companies Ordinance (Cap.622) as Pt. 14 Div. 4. It is found that there are not many changes in prevailing clause in Cap.622 as compared to predecessor Companies Ordinance, however slight changes such as replacement of the word “mis-conduct” with “misfeasance” occurred in this new ordinance which is operation after opening a business in Hong Kong.
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For the applicant, seeking for invoking Statutory Derivative Action, must first obtain grant of leave from the court. For the court to assess the eligibility of the application, there is no need to evaluate it as per the standards entailed in the case of Foss, rather it can best be referred to the criteria set by the ordinance.
In elaboration of what has been discussed above, for any issue that may corresponds to any of these situations:
In any of above-mentioned situations, applicant may seek for the leave of the court on behalf of the company and that derivative action can be either be commenced or may prone to be intervened, if court deems appropriate.
Criteria for the Grant of Leave
It is noted that grant of leave is totally upon the discretion of court and for any such orders from the court, applicant, plaintiff or member needs to prove that:
In determination of grant of leave, court must take into account issues such as whether applicant or the members of the company has ratified the complaint conduct and if yes then presentation of the features of the ratification must be presented before the court. It must be noted that such presentation shouldn’t be deemed to prevent court from refusing the grant of leave or determination of the issue. Once the court has ordered to grant the leave, any further settlement or discontinuation of the leave can occur only with the leave of the court and none other than the court, not even the inter or intra organizational settlement of the parties or members.
It must be remembered that these provisions do not permits to infringe the personal rights of the members and thus does not restricts him or her to intervene or commence the proceedings which may deem to infringe his or her personal rights or any matter which may fall within the jurisdiction of Common Law Derivative Action. Even if the circumstances pertain to the proceedings as per Section 168A or Section 168BA which are applicable after opening a business in Hong Kong, then concurrent application can be brought before the court and it will then be court’s prerogative to either keep them separate or consolidate both to ensure better case management. But, where proceedings have already been started and any later application for the similar situation be submitted, then there are clear chances that such late requisition or writ would eventually be struck off or may prone to be hold, for later consideration.
It is a matter of notice that, court has the right to issue interim orders, direct any personnel to act upon court’s instruction in matter being questioned or the appointment of any individual to investigate the course of actions and company’s financial position on behalf of court so that factuality be maintained before the court. In addition to this, court has sort of financial powers too where it can order the company or the defendant to pay the amount equivalent to the cost that has been incurred or supposed to be incurred by the plaintiff while carrying out proceedings on behalf of the company, for the grant of leave. There is the possibility that court may order to indemnify out the member who sought legal help for grant of leave, as merely to regard his or her cost.
Situation in Hong Kong
Concept of Statutory Derivative Action is significantly new in Hong Kong however similar provisions existed in predecessor company’s ordinance. Although Australian and Singapore legislative system entailed the provisions related to Statutory Derivative Action and these countries including Hong Kong set out minimum threshold to invoke the actions pertaining to Statutory Derivative Action. But, Hong Kong’s standard for Statutory Derivative Action are slightly different, let’s go into the comparative analysis and have a look on how they differ from each other, in following ways:
Examination Mechanism of the court
In deciding whether to grant the leave or not for the issues related to Statutory Derivative Action, court needs to examine:
As per the general view, the Singaporean provisions are restricted merely to non-listed companies and the proceedings of the cases reflects the court’s focus towards the determination of good faith and affirmation of the foreseeing that up to what extent derivative action would be beneficial in bridging the private differences between the parties, rather than just benefiting the company.
Jurisdiction of the Statutory Derivative Action
Jurisdiction of Statutory Derivative Action revolves around following matter:
There are some points of consideration in catering such proceedings. The foremost is the understanding of the word “proceedings”, the word proceedings implies to any civil proceedings, that falls within the jurisdiction of Hong Kong’s court and judicial system.
Statutory Derivative Action is opened to be exercised by any Hong Kong company which relates to the incorporate HK company or any foreign incorporated company and any situation of setup offshore company in Hong Kong, having an operational business base in Hong Kong, for any situation that may amount to any kind of mis-conduct against the company.
Statutory Derivative Action is not just confined to the inappropriacy on the part of directors only, instead any who has committed mis-conduct against the company is subjected to the proceedings of Statutory Derivative Action. Apart from this, Statutory Derivative Action is opened to be exercised for any situation where company was found reluctant to proceed against mis-conduct committed against it. It must be noted that Statutory Derivative Action can be used to institute proceedings against the third party.
Definition of mis-conduct
The term mis-conduct is being used in Cap.622 and replaced the word “misfeasance” that was being used in predecessor Companies Ordinance. As per the classic definition, word “mis-conduct” implies of “any fraud, negligence or breach of duty on the part of the company, which is in fact contradictory or non-compliant to the prevailing laws of companies ordinance or any other rule of law”. Therefore, the word “mis conduct” is found to be quite wider than the term “equitable fraud” and thus there is greater probability of the bringing up of derivative action in this scope rather than any other common law provision.