Comparative Analysis of Statutory Derivative Action and other Remedies along with Member’s Personal Actions in Company Setup in Hong Kong

In this article we shall go in comparative analysis and shall compare the provisions of Statutory Derivative Action with that of other available remedies. Then we shall tend to introduce the generic view of personal actions of the members for any abuse or wrong doing against them, that may happen after setting up an office in Hong Kong.

Statutory Derivative Action v/s Common Law

In general, Statutory Derivative Action does not halt or denies the provisions of common law and hence it is up to the wish of applicant that whether he or she wants to seek remedy or go for any derivative action through Common Law or Statutory Derivative Action. However, the said person or the applicant is not allowed to seek remedies as per the Statutory Derivative Action and Common Law for the same matter thus concurrent invoking of both these doctrines is not appreciated and choice from any of these two doctrines shall have to be made by the applicant, for any course of action pertaining to any sort of derivative action. For the situation where court has allowed for the continuation of proceedings as per Statutory Derivative Action, then any sought remedy by the plaintiff as per provisions of Common Law would naturally be strike out and only the proceedings of Statutory Derivative Action would be continued. But after setting up an office in Hong Kong and where the plaintiff, initiated proceedings as per the Common Law first, then court will decline the bringing up of any subsequent proceedings, that were proposed to be invoked under statue.

However, it will be upon the court’s discretion to decide for appropriate course of action, if one person commenced proceedings pertaining to Statutory Derivative Action and the other person brought proceedings of Common Law. Apart from this, it would also fall in the jurisdiction of the court to decide what sort of action would be commenced and what would be restricted to be exercised as well as determination of the eligibility and credentials of both parties to ascertain whom of these parties reserves the credentials to continue the proceedings for any sort of derivative action and who is ineligible to continue the proceedings.

There is one legality involved for the situation where grant of leave for any sought derivative action is refused then what are the options left to be exercised by the plaintiff or the applicant. Factually, Companied ordinance does not cater for the situation where plaintiff was refused to be granted sought relief pertaining to Statutory Derivative Action and he or she may now want to opt the Common Law for the enactment of sought relief. Ordinance clearly mentions that; for any proceedings as per the Section 732, supposing that sought relief as per the Statutory Derivative Action has been refused by the court then the applicant or the plaintiff is not entitled to bring proceedings as per the Common Law for the same matter.

It has been duly stated by the Court of Final Appeal that where the applicant wants to take advantage of both of these derivative actions that is Common Law and the Statutory Derivative Action, then it would now be the court’s responsibility to depreciate such abuse of power through exercise of its powers, whether inherently or expressive, court must intervene to resolve the disputing matters to full of its ability regarding such disputing matters so that none of any procedural complication would arise from such disputes.

It is however thought that it is much easier for the plaintiff to commence the proceedings as per Statutory Derivative Action but such permission should be given only where it is required to invoke Statutory Derivative Action henceforth there may be the possibility that where Statutory Derivative Action is put forward by the plaintiff, circumstances may report towards the appropriacy of the derivative action as per Common Law and thus for such situations Statutory Derivative Action could not be invoked.

Such restriction or generally, this liability or arrangement is to preserve the rights and abilities of the members, who are bringing up proceedings on behalf of the foreign company, operating in Hong Kong offshore company setup. Only those foreign companies who comes in the jurisdiction of “Non-Hong Kong Companies” are entitled towards the pursuance of any derivative action. Non-Hong Kong Companies are those foreign companies who may have been incorporated in any overseas company registry but has the operational corporate centre as per the Hong Kong offshore company setup and that is why foreign companies are not entitled for any sort of derivative action. This restriction or ban is because of the fact that determination of the question that whether should derivative action be taken otr not, is of procedural sanctity, which is governed by the law of the lex fori or the forum. Thus abolishment of common law for the foreign companies would give a message that derivative action cannot be brought in Hong Kong on behalf of the foreign companies and that proper place for such actions is the global entity, where company is incorporated.

The Hon’ble Court of Appeal however denies this principle and says that:

Whether proceedings for derivative action be taken or not? is a matter of substantive law and thus be determined only by the laws of the place of incorporation. So, even though remedy as per common law is unavailable or is abolished, it would still be possible for the foreign companies to bring proceedings pertaining to Statutory Derivative Action or any derivative action in Hong Kong, provided the law of the place of incorporation allows so.

The only foreseen advantage of the retention of derivative action with that of Statutory Derivative Action in the Hong Kong is merely to provide flexibility and deems to cater the situation which might be outside the jurisdiction of Statutory Derivative Action but falls permissible and valid as per the Common Law provisions.

Statutory Derivative Action v/s other available Remedies

If we generally evaluate the primary criteria for the Statutory Derivative Action, one will find that; Statutory Derivative Action will only be applicable if the proceedings are being commenced on behalf of the company in accordance with the cause of actions vested in the company. There must be the maintenance of distinction between corporate abuse and the personal wrongdoing but factually, Statutory Derivative Action does not cater the personal injury caused to member’s personal rights and thus proceedings pertaining to Statutory Derivative Action can not be commenced for any personal injury incurred by the member(s) of the company. It must be noted that, presence of Statutory Derivative Action does not hinder the members right to seek for the remedy in case of any personal injury to their individual rights and powers, as opposed to the situation discussed above that only one out of these two derivative actions be used. So, this indicates towards the situation that situation may prone to the variation and thus proper examination of the circumstances be ensured so as to prevail the true essence of justice.

The situation will be made quite clear by referring to the case of Swansson. Case suggests that where there is an alternative remedy available against the question that; will the proposed action be in the interest of the company then for such conditions, alternative remedy should be awarded. Justice Palmer suggested that for the situation where the relief sought by the plaintiff is of extent which does not require company to went into the litigation or to take any responsibility of the proceedings, then it may be possible for the plaintiff or the applicant to bring proceedings in his or her own name. But, such proceedings would not be considered in the interest of the company and thus company would not involved nor be made liable for the commencement and bringing up of proceedings. Such decision of Justice Palmer was based on the decision his lordship cited in his verdict. However, this referred case was later on overturned by the Queensland court of Appeal. In the overturned comments, Queensland Court of Appeal stated that;

Declaring this matter “not to be in the interest of the company” merely on the grounds that case relates more to the personal claims and henceforth plaintiff be granted leave to commence the proceedings, on behalf of the company. It would not be a legitimate approach to regard assets, any advantage or the particular opportunity, to the company. It should rather be conferred to the members of the company in one, two or more groups. Derivative Action is expected to resolve the conflicting matter, rather not to air the dispute and conflict between members and the company or between the members of the company with other members and be invoked to let company be in the position where it can recover the incurred loss.

Where there are similar reported circumstances for the enactment of derivative and personal actions then it would be possible for the court to join both of proceedings and commence and continue the concurrent proceedings, thus there would be no question on the legitimacy and the legality on such proceedings of court.

Introduction to the Personal Actions of the Member(s)

After open company in Hong Kong, the proper plaintiff principle entailed in the case of Foss recognizes the wrong done to the company only, but wherever personal rights or powers of the member have been infringed, members are entitled to exercise their conferred personal rights for any sort of personal abuse. Such actions would be commenced or will be carried out in the name of the affected member(s), thus such proceedings would commence in the name of the victim, plaintiff or the applicant and as for such scenarios they will be the proper plaintiff hence for any conferred remedy even for the sought remedy, company would not have any share or right to consider this for it (company).

Categorical Distinction of the Member’s Personal Rights

Member’s personal rights would arise or originate following the:

  • Company’s articles or the constitution of the company.
  • Provisions in the Common Law
  • Agreement, deed or the contract, signed and authorised by the member.
  • Any rights conferred by the Statue.

The prime statutory provisions which subjects the personal remedies for the members are:

  • Provisions on Unfair Prejudice.
  • Provisions pertaining to winding up of the company or the business on equitable and just grounds.
  • Provisions on the Statutory Injunction.

Apart from these statutory provisions, there are also other statutory provisions conferred to the members by the Cap.622. These statutory provisions include:

  • Protection of Class Rights.
  • Permissions to the member to inspect or access the record(s) of the company.

Legal References; Endorsing Personal Actions of the Members

Case of Pender reports towards the situation where after open company in Hong Kong, Mr. Pender split his shareholdings and so does voting rights, amongst his nominee to bypass provision in the company’s constitution which entitles members to fixed maximum numbers of the votes and thus on this grounds chairman of the board refused to accept the vote of the nominee. Mr. Pender sued the company on this issue. Jessel MR held in his verdict that:

Mr. Pender was legitimate in such injunction henceforth chairman was bound to accept the votes of the nominee, who is actually the registered member of the company and that Mr. Pender is entitled to sue on his own behalf, for any infringement of his personal rights. This issue has nothing to do with the question raised in the case of Foss as Mr. Pender exercise his legitimate powers being the registered member of the company and that whether he votes in his majority or minority capacity, his vote is supposed to be recorded and such act of Mr. Pender was supposed to be done in his or her personal capacity, for himself.