What are the Criteria for the Grant of Leave as per Statutory Derivative Action in Hong Kong company formation services?

Court may order to initiate the proceedings of grant of leave as per the statutory derivative action, if there are enough grounds for the any such grant to the members who deem to continue the proceedings, satisfies court that:

  • Assessment of the application or writ provides that, any grant of sought leave would prove to be in the interest of the company.
  • Serious question to be tried.
  • Evidence that company itself has not brought up the proceedings.
  • Members who petitioned for the grant of leave, has already served the notice to the company. Literature of the notice clearly discloses the intention of the member to apply for the leave.

As human nature perceives that not all fingers are equal, after HK business registration similar analogy applies here and out of these four criteria one may supersede the other or one may find to be less important in contrast to other assessment parameters. It has usually been noticed that court gives priority to the condition pertaining to the “serious question to be tried” the priority as if there is no strong justification in matter to be staunch then continuation of the proceedings wont be worth it in contrast to the investment in terms of finance, time and diligence that has been or deems to be spent in deciding for this low ranked setting. The condition of “serious question to be tried” simply makes the interest of the company, its subject and hence assessment of this can simply be regard to the determination of the extent, to which it deemed to effect the interest of the company”.

On contrary to this, if the mentioned threshold for the “serious question to be tried” is satisfied then this implies to the situation where the questioned matter is thought to be in the best interest of company. However, not every time this is necessary that satisfaction of “serious question to be tried” be considered as the matter to be in the interest of the company as both of these requirements are itself independent criterion for the grant of leave. Hence, it may happen that, where the threshold for “serious question to be asked” is met then for the similar circumstances it may not amount to be in the interest of the company.

Explanation of the criteria of “Serious Question to be asked”

Though the requirement of “serious question to be tired” is supposed to be the primary requirement for the evaluation of the application but generally speaking this requirement is of relatively low threshold as compared to the other requirements. Not only Hong Kong legislation thinks this way, rather Australian authorities reports of similar requirement in their country. It was accepted by the Justice Kwan in Re F & S Express Ltd that what Australian perspective says about this, has the legitimate grounds. Kwan J expressed that Australian doctrine rightfully declared that

Court will not assess the merits for the invoke of Derivative Action solely on this criterion and thus applicant would enjoy the same low threshold for the criteria of serious question to be tired as he or she would have been to the matter of “interlocutory injunction”.

As per the threshold, applicant would require to maintain that whatever has been sought in the writ should reflect that subsequent claim would entitle company to be successful in its claims after HK business registration. Court’s jurisdiction lies to the examination of the legal or equitable rights of the applicant that will the applicant be able to get the relief, he or she has sought in petition or writ? However, there should be less focus of court on the assessment of applicant’s or plaintiff’s legal and equitable rights unless the probability of success is too narrow that it demands for such assessment. It does not mean that criteria for the “serious question to be tired” be revolve around the examination and prove of applicant’s failure rather applicant’s prospects of success should weigh more in contrast of the prospects of failure. Court’s prime focus in this regard should primarily be the assessment of the circumstances for which this application could either be successful or need more elaboration on part of the applicant to make this petition, the reflection of what has been sought by him or her.

After obtaining business registration certificate Hong Kong, for the success and to properly ascertain what “serious question to be tired” doctrine demands, there is the need to provide court with sufficient evidences and enough information so that court may be made satisfied on the prospects of the application, writ or petition. This can best be referred by the case of Charlton where it was reported that plaintiff was unable to provide the enough evidences against the directors, for the breach of their fiduciary duties owed to the company by entering into the transaction pertaining to the grant of uncommercial loans. But, it was noted that plaintiff did not disclosed or shared the terms of agreement or deed before the court hence court held that; in the circumstances where applicant is unable to provide sufficient evidence against his claims henceforth matter of “serious question to be tired” is being disregarded as there are no strong grounds for such proceedings to continue.

Matter did not settled upon it, instead for another case which reports to somehow similar circumstances, court held that threshold for the criteria of “serious question to be tired” has been met as applicant supported his claims, as per which improper payments of dividends was bestowed upon specific class of shareholders and this claim was supported with the evidence of “puncturing or tampering in constitution of the company” where in fact, company’s articles (which were presented to obtain business registration certificate Hong Kong) discourage the breach of equitable rights of different classes of the shareholders and gives all classes of shareholders equal rights over the dividends. Hence court held that on the presentation of substantial evidence criteria of “serious question to be tired” suggests that it can be invoked. Hence both of these cases clearly suggest that provision of substantial evidences and information is very important in the satisfaction of this primary criteria for the grant of leave as per statutory derivative action.

There is a quite leverage for the plaintiff regarding the provision of the sufficient evidence and information. Generally, presentation of “draft statement” is supposed to be the fair replica of any required evidences, provided that this particular draft statement addresses the concerns communicated in the plea or writ before the court thus amounting to the success of the writ. But, if defendant fairly demonstrates that there is a flaw in the claim as the presented draft statement does not indicates of a real substance then there can be serious questions on the validity of the draft statement and thus in case of such failure, enough evidences shall have to be presented to pose the criteria to be fulfilled henceforth paving the way for the successful grant of leave.

Explanation of the criteria of “in the interest of company”

Raw definition of this criteria recognises the one true corporate fact that:

For the situation where company has the open choice to take action but on the grounds of management’s decision that adoption of the policy of “no action” would be more appropriate for the company’s prospects and that interest of the company can even be ensured by not pursuing the required action. Then such decision of management would have a legitimate standing as it is been done in the interest of the company.

Referring to the decision of the Justice Kwan in Re F&S Express Ltd, Kwan J accepted that legitimate evidences for the setting where any managerial or fiducial decision after open company in HK was taken in the best interest of the company as if the decision taker was fair and honest in such decision then such decision would have a legal standing. Such sentiments are also supported by the Canadian perspective. However, Section 733(1) of Cap.622 refer this to as “on the face of application” whereas Canadian provision and Section 168BC(2)(a) of predecessor companies ordinance regards it to be “prima facie in the interest of the company”. It is believed that change of wording does not modifies or change the essence of the provision.  Generally speaking word “prima facie” itself indicates towards the literal meaning at first sight, so it can well be deduced that Canadian and Hong Kong’s perspective are like the two sides of coin and both demands the determination of the audacity of establishment of matter be in the interest of company. In the legal perspective it can be well said that; not only Hong Kong but also Singaporean and Canadian doctrine related to open company in HK follows the same principles for this particular criterion and held threshold of it to be “low” however, Australia distinguish itself from this common doctrine where there is strictness in this criteria and so the set threshold is quite high as compared to this tri-nation doctrine for the criteria of interest of the company. In Australia, it is seen as the primary responsibility of the applicant to present of the circumstances where it the bringing up of proceeding would prove to be in the best interest of the company. While if we look in to the situation of Hong Kong, precisely, then it is quite evident that there are not such high standards on the matter of proof and thus substantial presentation and arguments against matter to be seen in the interest of company on the first sight is sufficient even there is no need to prove it to be prima facie case.

Generally speaking, Australian provisions are not that much horrifying and strict as they be seen as legislation does not require the cost-benefit analysis of the possible outcomes of the proceedings. Same is situation in Hong Kong, which specifically negates the perception of trial within a trial and does not go into such deep investigation and formality, if to be more specific hence discourages the cross-examination.

Only strength of such cases lies in the examination of the situations and circumstances that, whether such proceedings would be in the interest of the company or not? And court is allowed to only assess and examine the arguments and points of challenges by the respondents. But, where there are serious disputes going on within an organization or inter-organization then court should better not be forced to evaluate the merits and demerits of the claims.

Although we already discussed the meaning of the “in the interest of company”, but let’s challenge our memory stack. Even though Australian provisions poses the burden of proof but still their definition is quite relatable to the situation in Hong Kong as a guiding principle. As per the Australian definition:

Any matter that recognise the separate entity of company and falls within the jurisdictions of independent welfare of the company, be taken in the interest of the company.

In the case of corporate group there is no need to examine the interest of each and every company of that concerned corporate group, rather examination of the interests of the subjected company be carry out. However, argument that interest of particular company in the corporate group refers to the interest of the corporate group, collectively. However, it is advised that any exercise involving examination of interests of all companies within a corporate group be only conducted where the collective interest of the corporate group is sought. Henceforth, individuality of the assessment be ensured and restrained to the company, in question and where deem appropriate related instructions or attention should be communicated.