Convoy saga: The requirements for pursuing a multiple statutory derivative action involving an overseas company in Hong Kong
Introduction
The Court of First Instance in Chen Pei Xiong v Convoy Global Holdings Limited [2024] HKCFI 1568 considered issues relating to commencing a statutory derivative action (“SDA”) pursuant to sections 732 and 733 of the Companies Ordinance (Cap. 622) (the “Ordinance”) on behalf of a foreign company, including the requirement of having a “place of business” in Hong Kong, and the relevance of the law of the place of incorporation of the foreign company.
Background
The Plaintiff, who is a beneficial owner of the 1st Defendant (“Convoy”), made an application for leave to commence a multiple statutory derivative action on behalf of the 2nd Defendant (“Forthwise”) against Mr Ng Wing Fai (“Mr Ng”), a director of the Forthwise and an executive director of Convoy since 2015. Forthwise is a company incorporated in the British Virgin Islands (“BVI”) and is an indirectly wholly-owned subsidiary of Convoy.
Mr Ng allegedly entered into 4 unsecured, interest-free and repayable on demand loans on behalf of Forthwise with a borrower (the “Borrower”).
The Plaintiff contends that Mr Ng has breached his fiduciary duty and duty of care owed to Forthwise, as the entering into loan agreements were not in the best interests of Forthwise.
In 2018 after the loans had been reported in the press, another shareholder has commenced a common law derivative action against Convoy, Forthwise and Mr Ng on the basis that Mr Ng had fraudulently or dishonestly procured the loans. This previous action had been struck out by the Court of First Instance, and the appeal against such decision was dismissed by the Court of Appeal.
Issues
The following issues, among others, were considered by the Court:
1. Whether this application is an abuse of process given there was a previous common law derivative action proceedings against the same defendants;
2. Whether Forthwise is a “company” for the purposes of sections 732 and 733 of the Ordinance; and
3. Whether the Plaintiff is required to seek leave from the BVI Court to commence an SDA.
Ruling
Whether this application is an abuse of process
The Court views that this application for leave to commence an SDA is not an abuse of process because the previous claim brought by another shareholder does not give rise to a straightforward or short answer to the present proceedings. The Court held that there are differences between a common law derivative action and an SDA, and that the evidence now available before the Court is different from those adduced in the previous proceedings. As such, the Court views that it is necessary to consider the various other points of the present proceedings.
Whether Forthwise is a “company” for the purposes of
sections 732 and 733 of the Ordinance
Sections 732 and 733 are under Part 14 of the Ordinance. According to section 722, in Part 14 of the Ordinance, a “company” includes a “non-Hong Kong company”, meaning a company incorporated outside Hong Kong which establishes a “place of business” in Hong Kong after the commencement date of the Ordinance. The issue is whether Forthwise has established a “place of business” in Hong Kong.
The Court considered several authorities and concluded the law as follows:
1. A failure to register, though in breach of the requirements of the Ordinance, would not deprive the company of its status as a non-Hong Kong company.
2. The requirement is only for the company to “have established a place of business” in Hong Kong, and there is no requirement for the continued existence of such a place of business, not least at the time when sections 732 and 733 of the Ordinance are invoked.
3. A broad common sense approach should be adopted to the interpretation of “place of business”.
4. The “place of business” need not be owned or rented by the company.
5. But it connotes a place where or from which the company either carries on or possibly intends to carry on business.
6. The word “establish” indicates that some degree of regularity and permanence of location is required, and points to the company having what is sometimes referred to as a ‘local habitation’ of its own.
7. But there is no reason simply to assume that only one transaction means there is no “place of business”.
8. Depending on all the circumstances, the holding out of an address as a company’s place of business may be sufficient to establish that it is a “place of business”.
9. “Business” is not confined to commercial transactions or transactions creating legal obligations, but it does not cover purely internal organisational changes in the governance of the company itself.
10. The fact that a company’s directors discuss its affairs and hold their board meetings in a particular place is not sufficient by itself to make that place the company’s place of business.
11. The mere presence of a company’s directors at a location, followed by the company’s entry into a transaction elsewhere, is not enough for a finding that that location is a place of business.
12. There is no requirement in fact or law requiring a company which does not carry on business at all to have a place of business, and there would be nothing strange in finding that such a company has not established one anywhere.
Counsel for the Plaintiff relied on the following facts to establish that Forthwise has a “place of business” in Hong Kong:
1. Forthwise’s address (the “Address”) was stated in the loan documents to be its address;
2. Mr Ng, the sole director of Forthwise, worked at the Address, and the valuation report of the loans was addressed to the Board of Forthwise at the Address;
3. It was declared by both Forthwise and the Borrower in the loan documents that the place of negotiation and completion of such documents was at the Address;
4. In Convoy’s annual report, it is stated that Forthwise’s “place of incorporation/registration and business” was “BVI/Hong Kong”, which amounts to an admission that Forthwise had a place of business in Hong Kong; and
5. The records and documents of Forthwise have been kept at the Address.
Upon considering the arguments of both sides, the Court held that Forthwise had established a place of business in Hong Kong within the meaning of the Ordinance. While Forthwise’s conduct of business was limited to the loans, there is no particular requirement that there should be several items of business conducted before a “place of business” can be established.
Whether the Plaintiff is required to seek leave
from the BVI Court to commence an SDA
The Court considered case authorities which held that whether a shareholder can commence a multiple derivative action in the name and on behalf of the company is a matter of substantive law, and is governed by the law of the place of incorporation of that company. The applicant of an SDA must first demonstrate he has done what is required in the place of incorporation before commencing a multiple derivative action, and then show compliance with the requirements of the Ordinance.
The Court considered the Defendants’ expert opinion on BVI law of Mr Tom Smith KC, who opines that:
1. since there is no statutory provision under BVI law which allows multiple derivative claims to be brought, it is necessary to look at the common law;
2. under English law, although multiple derivative actions arise from common law, leave is required to commence them; and
3. in the absence of a BVI case deciding on whether leave is required to commence a multiple derivative action, the BVI Court would likely follow English law on this issue.
The Court accepted the expert opinion and held that the BVI Court would impose a requirement of leave to bring a multiple derivative action.
While the Court dismissed the plaintiff’s application based on other reasons (see below), the Court expressed that were it necessary to decide on this point, it would hold that the Plaintiff has failed to establish that he has the relevant standing in the absence of obtaining any leave from the BVI Court.
The Plaintiff’s application dismissed
According to sections 732 and 733 of the Ordinance, an SDA is to be commenced by a member of the company or of its associated company. “Member” is defined in section 2 of the Ordinance to mean a founder member of the company, or a person who agrees to become a member of the company and whose name is entered, as a member, in the company’s register of members. Since the Plaintiff is a beneficial owner of Convoy and his name is not entered in Convoy’s register of members, the Plaintiff has no standing to commence an SDA. Accordingly, the Court dismissed the Plaintiff’s application for leave to commence an SDA.
Key takeaways
This case demonstrates the stringent requirements which an applicant needs to establish before he or she may commence a multiple SDA on behalf of the foreign company. The applicant should ensure that the foreign company constitutes a “non-Hong Kong company” as defined in the Ordinance (i.e. the company has established a “place of business” in Hong Kong), and that he has complied with the requirements for commencing a derivative action under the law of the place of incorporation. In the event that the foreign company is incorporated in BVI, leave from the BVI Court would be required before the applicant may commence a multiple derivative action on behalf of the foreign company in Hong Kong.
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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors. |
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