The Effect Ratification can have on the Proceedings of Derivative Action in Hong Kong company formation


As per the Section 168BF (1) even if the members of company have ratified or grant approval for the conduct, which in turn also supposed to be prone to the derivative action, then this argument would not be sufficient to restrain court from ordering the leave or initiation or continuation of the proceedings against concerned company or the director or any wrongdoer. But as per the Section 168BF (2), court may take any actions of the members or any concerned authority in deciding what appropriate action or judgment should be passed, into its consideration to ensure the legitimate independence of the members to create a company in Hong Kong. Such actions may have been exercised by the members to ratify any relevant act or conduct and there would be no question on their ratification however, how well informed they were of the consequences that whether they are acting in the best interest of the company or not?

Despite of the fact that certain ratifications of the company can be challenged, as discussed above. However, members of the company can still ratify any conduct of the director which they think might fall within the jurisdiction of breach of duty and such ratification would be merely to relieve director from any kind of liability, even though company knows that such transaction by the director was meant to be the breach of his or her fiduciary duties. There are certain restrictions on such type of ratification. First restriction restrains the general meeting from any type of ratification which may amounts to the infringement of any personal rights of the member while the second restriction is imposed on any such ratifications by the general meeting which can amount to the fraud on company.

Fraud cannot be classified as only the ones involving corporate frauds, instead where any ratification for any such mis-conduct or wrong doing of director(s) or members or both which concurrently amounts to the fraud and is done to relieve the concerned person from the liability or any action as per the derivative action, then any ratification for such activities would also be considered as fraud on the company. Hence, this manifests the perception and also the understanding that, fraud can be of many types. For any ratification which is done solely to restrain from the derivative action then such purported ratification itself provides the ways to invoke “Derivative Action”.

There is the perception which advertise the idea that as members are not the fiduciary of the companies after create a company in Hong Kong hence prima facie they are allowed to vote as per their wish even if it evidence reports of their personal interest in such voting transaction. Their perception leads to the argument where under common law, directors are supposed to vote for any proposed resolution as they are also the members of the board of the director and hence prima facie can vote for any transaction as they deem appropriate despite of the fact that director has conflicting interest in such transaction. However, not every perception is meant to be taken seriously and as a fact because legal critics are very sensitive to such legal sensitivities hence abrupt action is expected and so does this perception also got victimised of such abrupt back-fire. The critics think that where the act of director was of a nature which caused company to a loss or damage then any ratification of the members to relieve the director from the liability of derivative action would be considered as fraud on the part of the company, especially for the case where resolution for ratification was passed by the majority voting rights of the accused member or shareholder.

However, Section 473 of Cap.622 restricts director’s prerogative to ratify their conduct of wrong doing in their capacity of members of the board of the directors. where there is the evidence of the ratification by the director for his or her breach of duty then such ratification can simply be invalidated through the Section 473 of Cap.622 and there is no need to rely upon the provision of fraud on the part of the company for the ineffectiveness of the ratification. Even though there is Section 473 of Cap.622 for the rescue, still it is believed that doctrine of fraud in context of common law for the derivative action is sufficient for the invalidation of the ratification and such invalidation can further be taken down in three phases:

  • 1st Phase: Section 473 of Cap.622 would not be applied for the situation where rather than ratification of the wrongful conduct, general meeting authorises any such transaction of the wrongdoer.
  • 2nd Phase: where although members were not involved in the wrongdoing which purports to the implications of derivative actions but as members they ratified such wrong doing and provided them with relief, thus on such grounds they will be would thus be considered as being engaged in the fraud on the company.
  • 3rd Phase: this doctrine would stay valid where wrong doer is not the company’s director instead, a member and the alleged member ratified their own mis-conduct pertaining to the company’s assets or any sort of fraud, to get the relief from the liability.

For the situation where majority members are ratifying the mis-conduct of the wrong doer in their individual capacity even for the arrangement which caused company, a loss, and thus not for any collateral purpose then in the presence of such circumstances, such ratification would be considered valid & effective and thus restriction on the derivation action be stand imposed. Derivative action would still be held invalid if the majority of the members are against such action, provided this consent of majority should be on individual basis.

Probability for the multiple derivative actions

A derivative action may be considered as “double derivative action” and this double derivative action can best be understood with the analogy which says that:

A derivative action would be called as double derivative action if member of Company X who is also a member of Company Y, seeks to bring derivative action against the Company X on behalf of Company Y and where the Company Y is a completely owned subsidiary of the parent company, the Company X. The need for such type of derivative action was invoked when the controllers of the Company X- the parent company, purported a wrong action or decision on the Company Y and prima facie the controllers of the Company X could suspend or deny the continuation of proceedings against themselves and there is not even any minority member in the Company Y who can bring action against the Company X, on Company Y’s behalf.

As far as “Multiple Derivative Action” is concerned, any action of the member of the sub-subsidiary on the parent company after obtaining certificate of incorporation Hong Kong would be counted as Multiple Derivative Action. This definition is generally the same as what defines the Double Derivative Action, but there is slight difference as the action is brought up by the one who is a member of the subsidiary of parent’s subsidiary or this analogy can be best understand as, action was taken by the subsidiary which was itself a subsidiary of the parent company or can be summarised as sub-subsidiary of the parent company.

This case could best be understood to the case of Chan Chun Hoo in Hong Kong. Lord Millen NPJ held in this case that, there is legitimate justification for the application of derivative action against the wrong doer who misappropriated the company’s assets or their act was causal to the sub-subsidiary and also to the subsidiary of the parent company and not just this, their fraudulent act effected the parent company also after they obtained certificate of incorporation Hong Kong. Wrong doer’s control over the company was so visible and vigilant that it prevented the action, company deem to brought. His Lordship thus communicated that question of the application of the derivative action could best be answered by the plaintiff’s position and grounds of suing the wrong-doer and His Lordship’s decision summary entailed that In Hong Kong there exists the provision for the application of multiple derivative action under common law. Court of Appeal further extended the view and explained that, application of derivative action as per the common law is the substantial matter and so determined by the law of incorporation, in Hong Kong. In other words, it can be said that, multiple derivative action cannot be sought against any foreign company or any offshore company registration in Hong Kong, operating in the Hong Kong if the law of incorporation of the place where such company is incorporated, restricts the application of multiple derivative action.

Procedural Prerogative

Any registered or legitimate member of the company have the right to bring the proceedings of derivative action, if that mis-conduct occurred prior to its joining or induction in the company. Whereas former members or any member who has been ceased from his or her privilege to be called the member of the company, cannot continue or initiate the proceedings of the derivative action, in addition to this beneficial shareholder are also excluded from their right of derivative action. But any such member who do not have any presence or existence in company’s register of member can initiate the proceedings of derivative action for the condition where, controllers of the company intentionally or via mal-intention, denied registering share of transfer and so on these circumstances company’s register of member does not have him or her name as company’s member.

Where the member who itself was engaged or was a party to the wrongdoing, seeks the legal help to invoke derivative action but itself found unjust and inequitable as per the legal understanding, then such claim won’t be entertained as “Derivative Action” is an equitable remedy but must not be exploited by the wrong-doers. For instance, consider the situation where wrong doer sought the legal help but found itself accused of “late move” or was found involved in the fraud against which he or she sought legal help or at least the act which amounted to the fraud or mis-conduct, was in knowledge of the plaintiff.

Company in Liquidation

Where the company went into liquidation or prone to liquidation, then any request or claim of the claimant for the operation of Derivative Action would not be entertained as it won’t be no more the prerogative of the members, rather it is now the privilege of the liquidator to bring any such proceeding, if liquidator find it appropriate or deems to invoke. As per the Section 200(5) of Cap.32 which deals with the matter related to the company’s wind up and more specifically the court’s power over the liquidator, if member of the company is found to be unsatisfied with the proceedings being continued by the liquidator, then the grieved one can seek for court’s help to intervene in this matter and exercise its powers to exercise control over the liquidator.

For the situation of overseas or foreign companies or any offshore company registration in Hong Kong, member can seek the help of court to grant order to allow him or her to sue the wrongdoer on behalf of the company and compel court to exercise its legal power where, court can order the company’s creditor , to have the authorised and legitimate prerogative to use company’s name as plaintiff for the continuation of proceedings of derivative action.

As per the Section 186 of Cap.32, if the proceedings for the derivative action was commenced before company went into liquidation, then upon liquidation such action would uphold and thus proceedings would be stopped or halted. Because this is now the prerogative of liquidator to either continue or halt such proceedings.