Procedural Mechanism for the Award of Remedy under Common Law after Hong Kong Company Incorporation

Let’s recall a little bit about the remedies, Common Law usually entertains. Common law forms the action for matters where:

  • Members seeks for the remedy in form of restitution of property; or
  • Member seeks the remedy through the damages, incurred by the plaintiff through the breach of duty by the accuser.

It must be remembered that such law suites or legal proceedings should not be done on behalf of the company and so it must not have company’s name as plaintiff, rather company should be identified as defendant in such legal proceedings. Now, the action for remedy in company setup in Hong Kong may include;

  • Action is brought against the wrong doer with the name of member and any other accompanying members in their individual capacity, company however if included, must have itself identified as defendant.
  • Action is brought up against any such wrong doer or any third party, whose actions are alleged to be causal to the company in terms of loss. In such cases company will be treated as nominal defendant.
  • At the time of complaint of wrong doing or any mis-conduct, it is not mandatory to have the name of the members on the writ, filed in the court for the action. However, when action is being brought up or have been done, then it is required to have the complaining members name on the writ or action list.
  • Those members who have personally enjoyed perks of any misappropriation or any act which is subjected to some legal actions, cannot join or become the party of proceedings which are being carried out against any act of ultra vires. However, they are allowed to become the party if they deem to cease the mis-conduct in their personal or individual capacity.
  • If any party who has their identity visible in the writ, allegedly transfer his or her shares to let them cease to be the member of the company, then such party of the writ shall apply for the grant of leave from court in this matter or shall otherwise plea before the court to grant leave in this matter to allow the appointment of new member(s) in his or her vacant position.
  • The writ filed for the remedy should have:
  • Nature of the act, which is in complaint or against which writ is filed.
  • Mentioning the impossibility on the part of the company to take appropriate action.
  • Inherently, it is advised not to combine any personal damage, occurred to the member personally, in such writs as not to confuse the matter in question and makes the nature of required action or proceeding, the complicated one to proceed.

By showing his or her clear intentions and through the provision of the evidence that the he or she acted fairly and stood firm and honest with the company, then upon such basis the person who have commenced the proceedings may ask for the indemnity for his or her incurred cost from the company and there would be nothing wrong in it as it is his or her right. While considering the grant of such order, court would look and assess the merits and demerits of the circumstances to evaluate whether plaintiff was fair in company setup in Hong Kong and thus acted in best interest of the company or not? Additionally, court will also look for the financial position or capability of the plaintiff.

Court must finalise the grounds and basis for the bringing up of derivative action and issue of its enactment must be decided at the preliminary stage of the hearing. In other words, issue of invoking the derivative action must be decided on the first hearing and thus decision must not be left on the subsequent hearings. Otherwise court will make this so complicated and time consuming that, it will spend 30 days to determine whether the plaintiff is entitled to make company subject to the course of actions for 30 days more. Eventually the precious time of the court be wasted, and inefficiency on the part of legal procedure would prevail as it is well said that “Justice delayed is Justice denied”.

For the situation where derivative action was commenced as soon as the petition was presented before the court for the grant of statutory relief under Section 168A, any proceeding or plea to struck out this action as an abuse of process, would not be entertained, rather it would be heard parallel to the legal proceedings so as to enable the court to issue directions in most efficient way of proceeding. However, it seems quite irrational to make defendant bound to respond to two sets of parallelly proceeded matters for the same issue.

If the company is in process of liquidation then member cannot bring the derivative action on the behalf of the company, as now liquidator is more relevant to pursue such activities. However, where liquidator is unwilling to continue proceedings of derivative action then members have the right to pursue such matter on behalf or name of the liquidator, provided such pursuance is in reference to court’s prior leave.

It must be noted that, companies who are limited by shares in Hong Kong limited company formation are not restricted to benefit from the remedy as a result of derivative action merely on the perception that guarantee companies are less commercial. Although it happens less often but still as they operate in corporate world so possibility exist that dispute may occur between company’s members in Hong Kong limited company formation. Pertaining to such disputes, it is quite certain that member(s) may seek for the remedy via derivative action on behalf of the company, against mis-conduct of director which is alleged to be the matter that ultra vires the company through the loans or investments undergone by the director(s).

Format of the Writ Petition

The format for the writ petition pertaining to the derivative action follows this general format:

To the High Court of Hong Kong

The Humble Petition of the [name of the petitioner] showeth as follows:

  • The [name of the company] was incorporated in the [month] of [date] as per Companies Ordinance.
  • The registered office of the company is located at [ the location of the office in the records of Companies Registry]
  • Company has the capital of $ [amount in USD], further divided into [number of shares] shares having nominal value of $ [price of each share] each. The total paid up capital is $ [amount of credit capital].
  • As per the ordinance Company enjoys the privilege, capacity, rights and powers as of a natural personal. The objects for which the company was established are [enlist the objects of the company].
  • [ mention the allegation for which remedy is to be sought].
  • In light of these circumstances, petitioner deems to submit that the affairs of the company are being carried out in quite unfairly prejudice manners and affects the members of the company, including your petitioner.
  • Thus, your petitioner humbly prays that:
  • The company’s repurchase of the shares as possessed by the petitioner are [mention the number of shares] shall be registered in the name of the petitioner with the nominal price of each share, determined by the honourable court.
  • Or any such relief or other, which court deems appropriate and just, in the premises, kindly be issued.

This is a general format and is open to be modified or adapted, as best fits the situation or the plea of the plaintiff. It must be noted generously that, where the person or member of the company sued the wrong doer or any third party in his or her own while on behalf of the company, then company must be identified as defendant in this case. This setting is to make company bound to any issued judgment and to enable company to benefit from the awarded remedy in its favour, by the court. There is another technical point which states that, where the plaintiff has sued the other party on behalf of the company, it is not necessary for him or her to declare in the writ or plea that he or she (the plaintiff) is suing on behalf of rest of shareholders.

Where members have sought the legal help to bring the actions pertaining to derivative actions, it is mandatory for them to disclose the cause of actions on behalf of the company and to disclose the grounds on which they think that remedy should be granted and their right to sue in their name on behalf of the company should be respected. If the plaintiff fails to provide these necessary disclosures in his or her plea regarding HK company formation, court has the prerogative to strike out the claim on the basis that, plaintiff failed to disclose the causal nature of the claims.

Cases on grounds of prima facie

For the situation where member’s standing for derivative action is challenged, it is mandatory to resolve this issue at the preliminary stage. Concerned member is thus, required to prove that this is case of prima facie and company is entitled to receive the sought relief and the action falls within the jurisdiction of exceptions entailed in the proper plaintiff principle. For such determination it is required that court must not treat the plaintiff’s pleadings as fact as they would be on trial and that is the reason due to which plaintiff is required to disclose the grounds and causality of the action in the preliminary stage so that court may get satisfied and certain that this is the case of prima facie. There is another legal leverage court could grant and that leverage allows the court to adjourn the proceedings till the time, members decides in the general meeting that should proceedings be continued or not? Or would it be beneficial, and case is so strong to pursue or not?

Matters related to the cost of proceedings

English Court of Appeal in Wallersteiner decided that court reserves the equity power to direct company to bear the cost incurred by the plaintiff in bringing up proceedings of derivative action. However, this payment is allowed only where:

  • Action against the defendant is successful. In simple words, if cost could not be recovered from the defendant then company would be stand liable to pay the plaintiff cost it incurred while bringing up proceedings as well as any additional cost incurred by the plaintiff.
  • Action against the defendant was unsuccessful. It can better be understood as the situation where company would be held liable to pay for both the cost which is ordered by the Hon’ble court, to the defendant, and the cost incurred by minority member, on a common fund basis in HK company formation.

However, it is found that, court has the discretionary right whether to grant such order or not and where such order is to be issued, it would be appropriate to order the payment of full indemnity to the concerned member, provided there has been the significant evidences of his or her fairness, honesty and up-rightness towards the company, during the course of legal proceeding. Generally, court takes following merits, in deciding whether such grant be ordered or not:

  • Merits and nature of the case.
  • Wishes of genuine independent shareholders.
  • Ascertaining of the fact that whether this matter benefits the shareholder or not?
  • Financial position or strength of the plaintiff.

One such example of where court sought into consideration above-mentioned merits, is the case of Melvin Waxman where court ordered the grant of full indemnity to the minority shareholder, so as to stable his financial incurring.