Introduction

A recent District Court case Myers Management Consulting Limited v Topmix International Company Limited [2015] HKEC 1319 makes a groundbreaking ruling on the common law right for minority shareholders to intervene and defend their companies in legal proceedings. The uniqueness of the case lies in the fact that the interveners chose to resort to their common law right to intervene instead of the statutory framework provided under Section 732(3) of the Company Ordinance (“CO”) (Cap. 622 of the Laws of Hong Kong). The case entails a detailed discussion on the availability of the common law right of aggrieved minority shareholders to intervene to defend their companies, which serves as an alternative to their statutory right under Section 732(3) of the CO.

Facts

The Defendants were companies engaged in the business of production and sale of carbon fibre automobile body parts. 50% of the shares of each of the Defendants were held by Wong Luen Hang and Tsui Kwok So (the “Interveners”) while the remaining 50% were held by Chan Yuk Lung and Chan Yuk Wai (“Chan Brothers”). Chan Brothers and Tsui Kwok So were the directors of the Defendants. The Plaintiff, a BVI company, allegedly entered into consultancy service contracts with the Defendants at a total sum of HKD7.2 million for a period of two years (the “Consultancy Service Contracts”). As the services fees became due and remained unpaid for months, the Plaintiff commenced legal proceedings against the Defendants to recover the sum. The Plaintiff successfully obtained a default judgment on 10 November 2014 as a result of the Defendants’ failure to give any notice of intention to defend (the “Default Judgment”).

The Plaintiff later presented a winding up petition against the Defendants as the judgment debt remained unpaid. The Interveners applied to be added as interveners in the proceedings for defending on behalf of the Defendants in the winding up proceedings while applying for the Default Judgment to be set aside.

Issues

There were two essential issues in this case: (1) whether the Interveners were entitled to intervene to defend on behalf of the Defendants; and (2) whether the Default Judgment should be set aside.

The Plaintiff’s and the Interveners’ Arguments

The Plaintiff alleged that the Interveners did not have proper and necessary locus to be joined in the proceedings due to the two reasons below:

1.        with the availability of an express statutory framework under Section 723(3) of the CO to aggrieved shareholders to apply for leave to intervene on behalf of their companies, the statutory framework should be the only avenue for shareholders to intervene; and

2.        the Interveners did not fall within the scope of Order 15 Rule 6(2)(b) of the Rules of District Court (“RDC”), which provides for the Court’s power to join parties to proceedings.

The Interveners asked for leave to be added as interveners to defend the Defendants as the winding up petition was allegedly part of a conspiracy between the Plaintiff and Chan Brothers to cover up their misappropriation of the business and assets of the Defendants.

Court Judgment

The Common Law Right to Intervene

The Court noted that there does not seem to be any precedent for the common law right to intervene and counsel on both sides were not able to find any such precedent. Yet, in response to the Plaintiff’s argument that Section 723(3) of the CO was the only way for the Interveners to intervene in the proceedings, the Court examined the wordings of the CO carefully and concluded that the CO confirms the existence of the common law right of aggrieved shareholders to intervene in proceedings on their companies’ behalf. In particular, sections 732(6), 733(2)(b) and 736(1) of the CO explicitly mention the common law right to intervene in proceedings. Section 736(6) expressly states that the statutory provisions do not affect “any common law right of a member of a company… to… intervene in any proceedings to which the company is a party.” The Court therefore ruled that the common law right to intervene does exist or is deemed to have existed. Interveners need not justify their choice between their common law or statutory right to intervene.

The Court further noted that while the preservation of the common law derivative action may be to cater for overseas companies controlled by Hong Kong residents, the final enacted CO provisions do not make any distinction between Hong Kong and overseas companies in this regard. The Court concluded that it could not deny minority shareholders of Hong Kong companies of their common law right to intervene, which is acknowledged by the CO provisions.

More importantly, when a minority shareholder commenced a common law derivative claim, the company in question, the majority shareholders or the defendant instead of the plaintiff to such a claim should be the ones to challenge the locus standi of the minority shareholders, as previously explained in Waddington v Chan Chun Hoo (2008) 11 HKCFAR 370. In the present action, all related documents were served on the Defendants and Chan Brothers were present in the court hearing. Yet, they did nothing to challenge the locus standi of the Interveners. The Court further commented that Order 15 rule 6 of the RDC was not directly relevant or necessary to be applied in this case and held that there was no ground to deny the Interveners’ common law right to intervene.

Whether the Default Judgment should be set aside

In order to set aside a default judgment, the applicant must satisfy the Court that he has a real prospect of success, rather than merely an arguable defence: Premier Fashion Wears Ltd & Anor v Chow Cheuk Man & Anor [1994] 1 HKLRD 377.

The Court noticed a number of suspicious circumstances regarding the Consultancy Service Contracts. For instance, neither the Plaintiff nor the Plaintiff’s owner and subcontractor had proven any track record for providing consultancy services. Further, the service fees of HKD7.2 million was unjustifiable when the Defendant’s combined profits in 2011 was around HKD4 million with records of substantial losses thereafter. Even facing serious attacks on the Consultancy Service Contracts’ justifiability, neither the Plaintiff nor Chan Brothers offered any justification for the consulting arrangement. In view of the said suspicious circumstances, the Court held that the Interveners had a real prospect of success and the Default Judgment was set aside.

Conclusion

Although the CO provides a statutory framework for the right of aggrieved minority shareholders to apply to intervene in proceedings to defend on their companies’ behalf, the present case confirms that such a right is also available under the common law.

However, the Court also queried the necessity to invoke the common law right which is not as well-defined as the statutory rights. The Court pointed out that urgency was not a good reason for invoking the common law right as the statute expressly allows the applicant for intervention to apply to dispense with the notice requirement. Hence even though this case confirms the availability of the common law right to intervene, practitioners should still consider the circumstances carefully before opting for the appropriate procedures to be adopted.