Factors pertaining to the Interest of Establish Company in Hong Kong and the Effect of Ratification and Multiple Exercise of Statutory Derivative Action

To assess the loss incurred by the company through any breach of duty or any act of fraud or mis-conduct, there are certain factors which may show to determine the extent of the interest of company. There is the matter of notification that if the company incorporation Hong Kong has not suffered any sort of financial or economic loss, does not implies that action went into or proposed to be done, was in the interest of the company. For instance, if the application makes breach of fiduciary duties by the directors its subject, then there may be the issues of managerial capacity in the company which prima facie does not seems to be that much damaging to the company as if breach would be of fiducial sort of issue but such managerial conflicts should be remedied at earliest as to save the company from any decision made in grudge against the other party or opponent managers in the company. Apart from this, there are other factors too, which may amount to the damage to company’s interest or is mandatory for the safeguard of interests of the company. Court should ascertain following factors to decide the matter, as if it whether be in the interest of the company or not?

  • Assessment of the character of the company: lets understand it with an example of a company, constituting of family business. If any proceedings are put forward with the subject of damage to the interests of the company then for such case or such family businesses run companies court should evaluate the character of the company by evaluating the effect of proposed actions on the company. Will the proposed act tend to create any conflict or would sustain the true essence of the company? Such examination can easily be made by looking into the relationships between family members.
  • There is the need to ascertain effect of the proposed litigation on the company. For example, board may decide not to take action for any commercial reason against the wrong-doer. Such reluctance may be due to the fact that board does not want to hurt or damage the long-term corporate partnership with the defendant which proves to be beneficial and hence in the interest of the company. There is another fair reason also which says that board may not want to pursue as if not to advertise the bad publicity for the company and if proposed action is taken against the defendant, it may affect the important corporate negotiations which seems to be in the interest of the company, on credential of such deal to be profitable and good for company’s corporate turnover.
  • Defendant is able to provide substantial contribution to any judgement passed by the court, in the favour of the company, in respect of any favour granted on account of derivative action.
  • Cost analysis is an important factor. To determine that whether the proposed litigation would be in the benefit of the company incorporation Hong Kong or not? Cost involved should be determined so as to avoid the avoid the circumstances where the cost of litigation or more generally the cost of proceedings, is greater than the loss incurred by the company and even greater than what company would recover back, if it shall be successful in its claims. However legal commentators negate the concept of avoiding claims or pursuance of the proceedings against the wrong doer merely because it does not seem to be overweighing the cost incurred by any mis-conduct. It is said that, it should not be considered in the interest of the company if the proposed action or claim was avoided just on the grounds that it would not be financially or economically beneficial for the company against the loss or damage incurred by the company. Instead irrespective of any cost analysis, if proposed litigation deems to protect and ensure the interest if the company, it should be exercised, in any way. If for any reason, it is thought that pursuance of any action would not be in the interest of the company as company is going through a financial crisis and that, company’s financial position is not strong enough to pursue the litigation, then all such arguments should be considered irrelevant and court may order the grant of leave on the basis of applicant’s consent to bear the cost of litigation, in first instance.
  • However, in addition to what has been said earlier if the board decides unanimously that pursuance of the proceedings would not be in the interest of the company, on the basis of the bona fide commercial decision, then board’s such unanimous decision should be given the weigh over any other perception or argument. But where the proceedings are against any director of the company, for such circumstances board’s consent or any unanimous decision should not be given great relevance and other avenues should well be explored.

For the case of Re Li Chung Shing Tong (Holdings) limited, Justice Harris granted the leave to the minority shareholder of the company who was in fact the plaintiff on behalf of the company, on the grounds that, director and supervisor of the company were involved in the recalling of company’s products on the grounds of contamination. Court accepted the prayer of the applicant and accepted that company’s top management were found to be failed in quality assurance and safety in the set up company in HK manufacturing mechanism of products. Here court held that commercial consideration for the bringing up of such proceedings gets superseded by the strong grounds of breach of duties by the directors and hence they must be held responsible for such negligence and breach. Court categorically communicated that defendants arguments that; this case is not supposed to be prima facie in the best interest of the company itself gets denied by the evidence and justification that wrong doing was purported against the company and there is no reality in regarding contamination incident as “one-off” and in short, directors and supervisors are to be held responsible for all this negligence and breach of duty.

Legal Examples regarding the grant of leave

Case of Re F&S Express Ltd refers to the situation where grant of leave was ordered by the honourable court. In this case, Court of first instance held company’s director liable for the breach of their duties and to commence proceedings against him, leave was granted to the plaintiff, who is in fact a minority shareholder of the company and sought legal help on behalf of the company. This case is also unique in a sense that company didn’t opposed the writ of the petitioner and such sentiment was expressed through absence of it’s from the hearings in the court. Thus, court find itself as satisfying end that plea is based on facts and presentation of the unanswered letter, which was written by the plaintiff to the company’s director. This further strengthens the court’s perspective and court affirmed that there is the need for the serious question to be asked.

Case of Re Grand Field Group Holdings Ltd reports of the circumstances where director were subjected on the grounds that, director channelled funds of the company to entities attached or associated with the director in question and also that significant sums of capital was paid to the associated entities of the director via various agreements, who itself found to be disastrous for company’s prospects. Court in the presence of these circumstances, granted leave to the plaintiff to commence the proceedings against the alleged director on account of breach of fiduciary duties by the directors and it was held by the court that agreement through which all this wrong doing was done, was not based on nominal commercial terms, required for the set up company in HK.

Criteria for the Grant of Leave on Account of Intervention

For the situation where member of the company sought grant of leave through intervention in the proceedings, on the behalf of the company after establish company in Hong Kong, Court may grant any such leave if it is made satisfied that:

  • Grant of leave be bestowed as the writ of applicant seems to be in the interest of the company, on the face of the application.
  • Leave be granted on account of company’s absence in the continuation, discontinuity and diligence of the proceedings.
  • Prior to the application before honourable court, applicant or the plaintiff has served company with the written notice, disclosing about his or her or members intention to apply for the grant of leave.

Threshold for such intervention

Case of Re Lucky Money Ltd referred to the circumstances where application regarding intervention for the defence of the proceeding was presented before the court, on behalf of the company. Justice Kwan accepted that as the writ lacks the evidence for any argument that explains, what sort of defence would the plaintiff would like to bring through the intervention? Thus, it does not seem to be in the interest of the company henceforth leave shall not be granted for this particular setting. However, her ladyship accepted that applications for such circumstances should be given the less emphasis and thus threshold for them shall be made low and on this basis her ladyship accepted that what has been established in this case, eligibility stands valid against this low threshold.

For the second criteria which emphasis that after HK company registration, company shouldn’t be diligently defending the case, case would be established if there are the strong grounds for the allegation that who was the controllers of the company, were also the controllers of the entities of the plaintiff, which in fact instituted proceedings against the company. Such proceeding was put forward because controllers were found to be failed to pursue the actions without any appreciable explanation and to defend the company against any wrong doing and defend the company for any action, on behalf of the company. Also, for the situation where controllers of the company nor any nominee of him or her, attended the meeting convened by the plaintiff, prior to applying in the court, to discuss the matters related to this litigation.

For the case of Re Myway Ltd, court emphasised on setting low threshold for the situation where application for the grant of leave by the plaintiff on behalf of the company, aims against any third party on account of “passing-off” or against any former employee of the company, who actually assisted in such “passing-off” and for any other breach of duties.

Effect of Ratification on the Grant of Leave

Generally speaking, any act of ratification or any endorsement or approval by the company’s member would not be a barrier in court’s allowance to intervene in the proceedings of the company, to the plaintiff on behalf of the company. But, court must satisfy following factors before granting leave to intervene in the proceedings:

  • Were members fair and honest towards the company and were they acting for the interest of the company, when they ratified or approved any conduct which is subjected to be contradictory to the company’s interest?
  • The extent of member’s association to the conduct, at the time of ratification or approval of the conduct.
  • Extent of member’s information and knowledge about the matter in question, when they were about to ratify or approve the subjected conduct?

Case of Re Northwest Forest Products Ltd referred to the situation where company’s general meeting ratified the act of the directors which was prone to the breach of their duties, however such ratification was overturned by the Supreme Court of British Columbia and subsequent to this denial, hon’ble supreme court granted leave to the plaintiff to commence proceedings against the two directors who held approximately 38% of company’s shares and there was no presented evidence regarding whom actually did voted in the general company and on these grounds, applicant were allowed to continue the proceedings pertaining to sue them.

Any awarded approval or ratification may deem to be thought helpful to the court in deciding what sort of order or leave shall be granted to the plaintiff, regarding intervention.

Allowance for the Multiple Derivative Action

As per the ordinance, member(s) of the company or any associated company of the corporate group or the parent group, who has the eligibility to apply for the leave to bring proceedings pertaining to Statutory Derivative Action, may also bring multiple derivative action, provided the circumstances demands and legislation allows so.