Cost involved in the proceedings of Statutory Derivative Action and Issue of the provision of Indemnity after a new Company Registration in Hong Kong


In this article we shall share the cost involved in bringing up of proceedings of Statutory Derivative Action and after that, issues and the considerations pertaining to the issuance or award of the indemnity for the cost incurred by the applicant be discussed in detail as this matter is sensitive and complex too after establishing a business in Hong Kong.

Financial Implications of the Proceedings

Worried about the cost involved in bringing up proceedings? Before getting into details, let’s ease yourself with knowing that, if you are acting in good faith and fair in your transaction then you’ll get the incurred cost covered up and shall be compensated.

As per the Section 738(1) of Cap.622 court has the power to issue order, where it deem appropriate, regarding the cost incurred or is expected to be incurred by the member, company or any other party who has brought up the proceedings as per Statutory Derivative Action. It must be noted that after establishing a business in Hong Kong, jurisdiction of such orders is spread across any proceedings pertaining to the grant of leave or any other proceedings for Statutory Derivative Action or any proposed action regarding intervention, by the member on behalf of the company. Court shall issue such orders only if court is sure that person who applied for proceedings of Statutory Derivative Action or applied for the intervention in the proceedings, is fair and was honest in his or her transactions with the company and that there existed proper and sound justification in bringing up proceedings of Statutory Derivative Action or any such application seeking for court’s permission to intervene in the proceedings. It is believed that court’s discretion is broad and court is thus entitled to seek for any unanswered question which it deems should be addressed, which may or may not be confined by the jurisdiction of Statutory Derivative Action. Other than cases pertaining to Statutory Derivative Action, court has the prerogative to seek for any question which it thinks mandatory to decide for the application of cost, using its broad discretionary powers and scope. It is noted that courts are not restricted to exercise their powers as per Statutory Derivative Action however, they are independent in their exercise of ordinary power and the powers in addition to Statutory Derivative Action, to decide for the matters pertaining to the cost to be incurred or is being incurred by the one who brought the proceedings of Statutory Derivative Action.

Section 738 makes company liable for the cost incurred by the member in bringing up, intervention in the proceedings by indemnifying its assets to the member who brought up application of leave, brought or applied for the intervention in the proceedings. Legal commentators, after Hong Kong corporation registration, believes that members of the company may feel reluctant to initiate their conferred members to institute proceedings pertaining to Statutory Derivative Action or apply for the grant of leave or intervene in commenced proceedings. They think that such reluctance is due to the fact that members think that first they would have to bear the costs involved in bringing up of any sort of proceedings of Statutory Derivative Action which can either be of interventive nature or the grant of leave whatsoever is the nature of the deemed action. And if in any case such litigation is successful then company would itself benefit from the conferred remedy because writ was filed on behalf of the company and that as per the proper plaintiff principle, company is the proper plaintiff.

Such fear or misconception, whatever best suits the situation, is addressed in the case of Wallersteiner where as per the common law, scope of remedy was extended to the restriction imposed on the part of the Hong Kong corporation registration company to indemnify those members who brought up proceedings against any wrongdoing or abuse of power and thus members were enabled to obtain indemnity from the company against any cost incurred in bringing up any course of action as per the derivative action. But, generally it is thought that courts would not always be so flexible and liberal, if to be more literal, in awarding such indemnities to the members. So, basically it is noted and been keenly observed that this matter is of legislative nature and it is the responsibility on the parts of the legislatures, so that court’s power for the award of indemnity to the members be affirmed and court’s jurisdiction be broadened up in this respect.

Indemnification of the Members for the Application of the Leave

Hong Kong’s legal framework has been kind enough to indemnify members out of the assets of the company for any sort of proposed action pertaining to Statutory Derivative Action and this kindness or more literally, indemnification is quite apparent in the situation where leave to commence the derivative action has been granted. Any such member whose act or mode of transaction indicates towards the company proofs him or her to be fair and honest with the company, shall be indemnified out of the company’s assets for any proceedings brought by him or her. Such affirmation regarding fairness and the honesty of the concerned member be established where there is the evidence that:

  • If evidence shows that the member in question was acting for the welfare of the company.
  • There is the evidence of the fact that, intention behind bringing up of proceedings of Statutory Derivative Action was purely centered around the recovery of the loss incurred by the company or any recovery or compensation against the damage, company went in due to the matter, which is up for the invoke of Statutory Derivative Action.

Contrary to this, where court thinks or where evidence shows too, that reason behind application for the Statutory Derivative Action is not legitimate as applicant is not fair with the company and this being in done for some personal gain or out of grudge against the defendant, then court may decline to order award of indemnification to the applicant. Such position can also be taken for the matters which are so complex and where there is the probability of any abuse by the applicant, plaintiff or the petitioner. But as we discussed earlier that members or the victims of any abuse after starting a small business in Hong Kong may be reluctant to apply for the leave because they think that they will have to bear the cost involved in proceedings and if due to any reason, remedy be granted then it will be awarded to the company and they would get nothing. Merely to negate this probability and to loosen up the fear belt of victims or members of the company, there can be possibility that indemnity be still be awarded even if leave is not grant. But, such favor should be awarded only where there is affirmation of fairness and honesty on the part of the members as well as there is the evidence of the fact that there existed reasonable and fair grounds for lodging application pertaining to the Statutory Derivative Action.

Indemnification for the case where Proceedings were brought on behalf of the Company

For the situation where the applicant seek for the award of indemnity to cover or compensate the cost incurred by him or her, like the rest of the applications, establishment of fairness and honesty by the applicant in bringing up of proceedings as per the merits or the characteristics entailed in Section 738(3) of Cap.622, is the primary examining criteria and must be examined at first. Apart from this personal examination, burden of evidence is upon the member who brought the application for Statutory Derivative Action that company is able to or will be able to the pay the cost which it will be entitled to pay, at the time order be issued. Sought remedy or indemnity shall not be awarded where the evidences indicate towards the situation as per which company would not be able to pay the cost of litigation and that where the circumstances provide towards fact that applicant is in better financial condition then the company and henceforth able to bear the cost of proceedings, pertaining to Statutory Derivative Action. But, where the financial condition of the members proves that member or the applicant would not be able to finance the proceedings and so the matter gets in favor to award the indemnity, then there is a slight consideration that impecuniosity of the member should be considered as pre-condition or the only merit for the award of indemnity to the concerned member. Instead other considerations should be accommodated while awarding indemnity to the concerned member.

Hong Kong legal system adopts the policy of caution, for the matters which aimed towards the award indemnity for any proceedings leading to the grant of leave or any other proceedings related to Statutory Derivative Action. Number of occasions indicates towards the policy of caution by the Hong Kong courts because the defer the question of determination of liability for any procedural cost, cost to be paid by the company or any other quantum cost, to the latter stage and thus does not gives this determination the prime importance. Some of the overseas legal perspective says that, issue of any such liability or indemnity should be determined or resolved after the conclusion of Statutory Derivative Action or any other derivative action.

However, it is argued and the argument seems to be quite valid that; it would be inappropriate to restrict the order of the indemnification to the situation where company after starting a small business in Hong Kong stands successful in its claims and also for the situation where matter is deffered for the latter determination that is after the conclusion of Statutory Derivative Action or any other derivative action because such earlier determination was aimed to bridge the financing gap and to decline the rate of reluctancy on the part of the members and the victims of any abuse or wrong doing, as well as such deferment would  cause hard to the enactment of the provisions which emphasized on the resolution of the cost dispute at the earlier stages of the proceedings. Any further restrictions even more than the common law would decline the legislative intention of settling the corporate disputes at earliest and thus would stand against the legislative intention of good-will.

Foreign legal commentators think that for the situation where criteria for the grant of leave is satisfied and where there is no ambiguity in the grant of leave by the courts, there the deferment of determination of the liability regarding the payment of cost incurred during the proceedings to the applicant, by the company, seems in just and its implications are hard to digest. Same is what can be found in the literature of Section 738(3) of Cap.622 which says that where the good faith and fairness of the applicant is established, indemnity shall be awarded by the company to the applicant. But where there is question on the good faith as well as honesty and fairness of the applicant, then it seems quite legitimate to defer the determination of the liability to the latter stage so that evidences pertaining to this issue i.e. indemnity can be examined properly. However for the sake of justice and to address the reason of reluctance, it is required that such matter should not be deferred for latter consideration that should indemnification be awarded or not? Where there is the probability that cost might become substantial then court may award the indemnity to the applicant, in stages so that legislative intention as well as issue of reluctance be properly addressed.

Issue of settlement or Discontinuation of the Proceedings

For the situation where leave was granted as per the Section 732 of Cap.622, for the intervention or bringing up of proceedings as per the Statutory Derivative Action, then proceeding shall only be discontinued or the matter be settled if such settlement or discontinuation be ratified through the leave of the court. Such provisions are aimed towards the protection of company’s interest so that no member could settle the disputed matter in exchange of some personal benefit or any other privilege, on behalf of the company.