Procedural Mechanism for the Statutory Derivative Action after Business Registration Hong Kong

Statutory Derivative Action can be invoke in a company and in order for Hong Kong open company, procedure required to invoke Statutory Derivative Action must be familiarized.

Credentials of the Person deem to invoke Statutory Derivative Action

Company’s current members are entitled to seek remedy pertaining to Statutory Derivative Action or generally, they have the legal standing to invoke Statutory Derivative Action. Members are those persons who are enlisted in company’s register of members. There is the possibility that member of an associated company of the parent company or member of any subsidiary of the parent company may sought leave of court through the actions pertaining to Statutory Derivative Action. Let’s refresh our brain cells to recall what is basically defined as “subsidiary”. Subsidiary is basically an associated company or the sub company of any corporate group and merely being controlled by the parent company but factually being entitled to the separate entity usually, subsidiary should be given rights, powers and privileges as it would be given to any individual company. There is another term which is used for subsidiaries and they often regarded as holding company in structural framework of Hong Kong open company. It is usually said that members of the holding company within the same corporate group were first given rights and powers to invoke Statutory Derivative Action, in the predecessor companies ordinance in 2010 and this legal standing was conferred to the members of other  holding companies in the same corporate group, in case there are sufficient evidences of the fact that there is an abuse of power by the other companies of the group towards the company in question.

There is generally a misconception that as per the legislative requirements only minority member is entitled to bring action pertaining to Statutory Derivative Action. However, in fact where there are 50% shareholders are sure about any abuse and their collective consent ascertain the enactment of criteria of leave, then those 50% member can also apply for the leave and thus, are entitled to bring proceedings and take actions as per Statutory Derivative Action. But for the situation where majority shareholder applied for the leave to court to let company institute or defend the proceedings specifically without the help of the court, leave would not be granted because such majority shareholder is itself in the position to institute or defend the proceeding, on account of majority votes towards any voting procedure any does not reflects the sentiments of the company.

Where there is conflict of interest and question of being fair and honest?

As per the classic requirement, there is no need for the applicant or plaintiff to show that he or she is applying for the leave of court in good faith and that he or she is fair and honest in their transactions with company, without any such evidence grant of leave can be granted but certain other parameters are need to be assessed also for the invoke of Statutory Derivative Action. It seems as if this provision is in contrast with the provisions in effect, overseas.

Australian courts have communicated that, while determining the interests of the company in bringing up of proceedings it is not just and hence sufficient that matter be decided merely on the justification that applicant has personal interests in such proceedings and on thus determination or the assessment be continued on the basis of conflict of interest. But, fact that applicant has the conflicting interest in the transaction and that if action as per Statutory Derivative Action be proceeded then on grounds of this fact it may be appropriate to regard such action as per Statutory Derivative Action, not in the interest of the company and henceforth this fact be considered relevant and valid. Thus, after Hong Kong company incorporation and for the situation where there are fair arguments and justifications that such proposed litigation seems to have conflicting interest and may not be in the interest of the company, there such probability or evidence should be given weigh and no benefit of doubt be granted.

Where company in question is said to be in liquidation?

Talking about Hong Kong, well there is still an uncertainty that should leave be granted or not for the situation where company in question is said to be in liquidation or have been liquidated. However, foreign legislation says that there will be an inappropriacy if leave be granted as per Statutory Derivative Action for the situation where company has been liquidated or is being entered into liquidation. Canadian Legislation invalidates the Statutory Derivative Action where company has entered into liquidation and outlined the provisions that has been expressed in the case of Foss. Canadian authorities after Hong Kong company incorporation, invalidates the Statutory Derivative Action on the grounds that, in liquidation common law becomes inapplicable and hence none of any individual is entitled to proceed for the Statutory Derivative Action because it is now rather liquidator’s prerogative to commence proceedings as per Statutory Derivative Action, on behalf of the company. Though Australian earlier decisions for the same matter indicates the story opposite to it, but generally now their recent decisions accept that for the liquidated company Statutory Derivative Action becomes inapplicable and hence held unavailable. For the situation in Hong Kong, even though Div. 4 of Pt.14 of Cap.622 restrains the Statutory Derivative Action for companies in liquidation, but still there are other potential avenues for the members to seek remedy from the company, against any personal damage or abuse.

How proceedings would commence?

Application lodged by the applicant for the grant of leave as per Statutory Derivative Action, would be instituted by firstly, serving the summons to the company along with the copy of the summon as company is supposed to appear before the court during the proceedings of the leave and is supposed to oppose the application. Court allows the shareholders and the directors of the company to submit their evidences and sentiments regarding such application which merely be done on their behalf and deem to oppose the application. There is an allowance for the defendant to oppose the application which has been lodged against them on the grounds of Statutory Derivative Action. Court however does not require to give permission in such exceptional circumstances as court primary role is to ascertain and examine the application and decide just fully about the merits of the application and credentials of courts to examine its jurisdiction to decide for such matters. Such examination is supposed to be done on the basis of the circumstances and the questions arose during the proceedings.

As we earlier discussed the proper plaintiff principle. Proper plaintiff principle considers company a proper plaintiff for any proceedings commenced in its name or being proceeded on behalf of the company. Same principle applies here and it is noted duly that, where the leave is granted for the Statutory Derivative Action, being continued on behalf of the court, then such proceedings be continued in the name of the company and thus company be considered as the proper and legitimate plaintiff.

Nunc pro tunc Grant of Leave

Canadian and Australian perspective thinks that; as to rectify any uncertain and certain irregularity, court may grant the leave Nunc pro tunc, especially for the situation where proceedings are being brought or have already been commenced on behalf of the company, without any leave.

What would be called as an Evidence?

For the application of leave, there is the requirement to provide evidence in the form of an “affidavit” before the court regarding proceedings of Statutory Derivative Action. Cross examination of the merits of the proposed actions as per Statutory Derivative Action be done and are permitted only with leave and that for any such situation leave shall only be granted sparingly.

Powers of the court for Statutory Derivative Action

As per the Section 737 of Cap.622 which subjects Hong Kong company incorporation services, court has the prerogative and the privilege to grant any order or direction it deems appropriate and which in court’s perspective be necessary to communicate for any application of leave, apart from this court’s consideration should also be extended to the other situations and general powers of the court is extended to:

  • Interim orders can be passed so as to held determination of the merits and prospects of the application, pending.
  • Directions can be given regarding the conduct of the application.
  • An order can be issued to the company’s executives, directors and the officers, directing them to provide any required information or the assistance to the court related to matters of Statutory Derivative Action. Such order may also direct them to act or not to act for some purposes, which court considers appropriate for to be issued.
  • Order can be issued to appoint an independent person, who may then investigate the merits and demerits of the matter and upon completion of investigation, shall present investigation report to court, containing his or her findings during the span of investigation.

Section 732 states that after leave has been granted, above mentioned powers can be exercised by the court for any proceedings that are being commenced or have been commenced or have been intervened by the member.

Requirements and Credentials of an Independent Investigator

You may wonder on the need of an independent investigator. Let’s bubble out this wonder, basically it is the power of the court to appoint an independent investigator who may assist the court through investigation of the matter, in question. Such investigators shall investigate the matter pertaining to the grant of leave, proceedings as per Statutory Derivative Action or any application for intervention in the proceedings by the member. Jurisdiction of such investigation would extend to the determination of the financial position of the company, facts regarding the factuality of the circumstances under which proceedings as per Statutory Derivative Action are brought up, cost which is being or is expected to be incurred by the member or the parties which applied for grant of leave, intervention and proceedings for the Statutory Derivative Action. After determination and examination of all above mentioned credentials or any other which should be considered, investigator would compile a report consisting of his or her findings and then this investigative report would be submitted before the Hon’ble court.

Where court is to be exercise its power of appointment of independent investigator for consideration of application for the grant of leave, as per Section 737(1)(b) of Cap.622 which subjects companies having business registration Hong Kong, then as per the communication of Section 732 court must ensure that does such appointment at this stage of proceeding, really needed or not? This precaution is to help out court in the situation where applicant can satisfy court with the grant of leave and where necessary, court must appoint investigator where:

  • Where there is reasonable amount of assistance is required for the court to either accept or refuse the application for leave.
  • Where it is necessary to enable the applicant to establish case to be of prima facie nature, if court is to be issued grant of leave.

Referring to the case of Re Lucky Money Ltd would let us understand the implication, more clearly. In this case Justice Kwan noted that there is not as such need for the appointment of independent investigator to investigate the matter which is of the setting mentioned in first point above, as the applicant itself presented sufficient evidences for the grant of leave however, to resolve the issue of conflicting evidences put forward by the parties in proceedings requires such appointment so as to ease the court in determining whether should leave be granted or not. It is noted that court usually restrain to appoint independent investigator where such matters are in consideration.

Legal commentators believe that circumstances entailed in Re Lucky Money Ltd is of exceptional nature and thus appointment be made only in the circumstances where exceptional circumstances are to be examined. Thus, there is the need to exercise this power of the court only in the situation where court believes that non-appointment would give rise to ambiguity and uncertainty would prevail.