Application of the Statutory Derivative Action after Setting up a Business in HK

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 IVAA (repealed) and was re modelled in modified Companies Ordinance (Cap.622) as Pt. 14 Div. 4.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.

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:

• Fraud.
• Negligence.
• Breach of duties, whether against Hong Kong registered company or any company that has been incorporated as per Part XI of Cap.622.
• Non-compliance with any law or any legal obligation.

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:

• Prior to his or her legal battle in the court, he or she had delivered 14 days’ notice to the company’s registered office, mentioning about his or her intention to seek for the leave of court. Apart from this, member should mention the reason behind his or her intention for such application.
• Evidence that such action would be in the best interest of the company and case is of prima facie nature.
• He or she is acting in good faith to the company and is fair in his or her such proceedings or transactions.
• Where the applicant has brought application to commence the proceedings, establishment of the fact that he or she is doing it in his or her personal capacity and company has nothing to do in bringing up of such type of proceedings.
• Where the plaintiff asked for the intervention, there must not be any evidence pertaining to company’s involvement in continuing, discontinuing or defence of on-going proceeding.

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:

• Singapore Doctrine: Singaporean legal provision allows the court to grant leave to the immediate member or any other person who is entitled to be the proper person to lodge an application for such actions. But, restricts such immunity from the members or person acting on behalf of the company, which despite of being incorporated in Hong Kong, are not being listed in local security exchanges.
• Australian Doctrine: Provided to the fact that person is a member of company or any related body corporate or whatsoever, there is the restriction in Australia to bring proceedings pertaining to Statutory Derivative Action by any such member on behalf of company, for which there is the requirement of being incorporated in Australia.
• Hong Kong Doctrine: for the situation of Hong Kong there is the independence for bringing proceedings related to Statutory Derivative Action for any one, whether a company is listed, Non-Hong Kong company or a local company or any setup offshore company in Hong Kong, such status won’t affect the fate of proceedings pertaining to Statutory Derivative Action.
• Hong Kong’s provisions on Statutory Derivative Action limits its fate and probability of implementation to four areas, as identified by the standing committee on Company Law reforms. These restrictions are found to be quite opposite to what Bills Committee suggested, which however was successful in forming the minimum threshold level for such actions, but practical scenarios suggested this to be not working for derivative action. Situation is totally opposite in Australian and Singaporean legislative atmosphere, where there is no restriction or more precisely no limitations on the Statutory Derivative Action to act on any incurred injury to the company or any sort of wrong doing to it.
• There is another distinction which Hong Kong maintains with Singaporean and Australian authorities. Ground realities and the legal practices in Singapore and Australia gives evidence of the situation where there is no restriction on bringing up course of actions related to Statutory Derivative Action on behalf of sub-subsidiary or the subsidiary of the parent company and successfully provides grounds for invoking multiple derivative actions. However, situation in Hong Kong is totally opposite to this and Hong Kong authorities restricts the possibility and more precisely negates the probability of multiple derivative actions for incorporate HK company.

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:

• Fairness and acting in good faith of the applicant or plaintiff and this fairness would be ascertained as if:
• Cause of action would be beneficial for the company’s prospects and reflects of honesty on the part of applicant or pleader or the plaintiff.
• Would not such action of the applicant amount to any abuse of power in the form of collateral damage to the company or defendant, if leave shall be granted?
• Company overall reputation or character.
• Transactions or business of the company.
• Affirmation of the fact that there were not any alternative redressal ways were available, against company’s sought claims or any such redressal would not be against the company’s will.
• Determination of the fact that defendant has the capacity or reserves enough ability to meet the substantial part of the remedy, if court’s verdict goes in favour of the company. This determination is just to ensure that would the expected action be of any benefit for the company or not?

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:

• An application to initiate proceedings as per Statutory Derivative Action, for the mis-conduct against the company.
• To proceed as per Statutory Derivative Action in the matter, where company failed to bring proceedings against the wrong-doer or any other matter which evidences of the mis-conduct against the company.
• Intervention in the proceedings where company has failed to exercise its entity and powers, any sort of continuation, discontinuation or defence of proceedings is not evident for the conduct which is against the company.

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.