Will a shareholder’s failure to serve adequate notice on the company result in dismissal of his application to commence statutory derivative action?
Introduction
Section 732 of the
Companies Ordinance (Cap. 622) (the “CO”)
allows a member of a company, with leave of the Court, to bring proceedings on
behalf of the company in respect of any misconduct committed against the
company. Under s.733(3) of the CO, a
member of a company must serve 14 days’ written notice on the company of his
intention to apply for leave to commence a statutory derivative action under
s.732, and under s.733(4)(b) must set out the “reasons for that intention” in
the written notice. The rationale of this notice requirement is to give the
directors of a company a chance to consider a response to the complaints set
out in the notice. If the subject company is willing to pursue the complaints
on its own, a leave application by the shareholder will become redundant,
meaning that no further legal costs will be incurred or wasted in dealing with
the issue of whether leave ought to be granted.
In a recent Court of First Instance case Chung Keng v Pearl Oriental Oil Ltd [2018] HKCFI 2564, a company argued that the
leave application by a shareholder to commence a statutory derivative action
should be dismissed because of the shareholder’s failure to set out his “reasons
for that intention” required under s.733(4)(b), as only one of the complaints
set out in his draft statement of claim was stated in the written notice served
earlier.
Facts
In September 2018, the applicant, a
registered shareholder of the subject company (the “Applicant”), sent a letter which was stated to be a formal written
notice under s.733 of the CO (the “Written
Notice”) to the subject company (the
“Company”) that the Applicant
intended to apply for leave to commence a statutory derivative action in the
name of the Company against two of its directors (the “Two Directors”). The Company has not replied to the Written Notice.
Subsequently, the Applicant filed an
Originating Summons exhibiting a draft statement of claim to apply for leave. The
draft statement of claim mentioned five complaints in relation to the conducts
or omissions of the Two Directors which are said to constitute breaches of
fiduciary and statutory duties of the Two Directors owed to the Company. Four
out of his five complaints, such as the Two Directors’ failure to settle the
outstanding wages of the employees and refusal to convene a Special General
Meeting in respect of resolutions to remove existing directors, were not set
out in the Written Notice.
The Company argued that the leave application
should be dismissed for non-compliance with the requirement under the CO. The
requirement under s.733(4) is that the notice must state in full the reasons
for the intention to apply for leave, but only one of the Applicant’s five complaints
set out in the draft statement of claim was stated in the Written Notice.
On the other hand, the Applicant argued that
the Written Notice was adequate, as he had stated in the Written Notice that the
Two Directors had been acting in breach of their duties owed to the Company.
The complaints, i.e. the various acts and/or omissions of the Two Directors,
are merely particulars and do not constitute “reasons for that intention” under
s.733(4) of the CO.
The Court considered two major issues:
1.
whether the Written Notice
was adequate in respect of the four complaints not being set out therein; and
2.
if not, whether a dispensation
with the service of a notice ought
to be granted in this case for the four complaints.
The Court’s
Decision
The adequacy of notice
under s.733(4)
The Court held that the Written Notice was
inadequate. The purpose of a notice under s.733(4) of the CO is to allow the Company
to consider what to do with the complaints stated in the Written Notice. Therefore,
the Written Notice must set out sufficient details and particulars of each of
the complaints. Such details are part and parcel of the reasons required to be
given in a notice under s.733. What constitutes sufficient details and
particulars is a question of fact in each case. In considering the adequacy of
a notice under s.733(4), one should apply the test of whether the directors of
the Company, as reasonable commercial persons, with their knowledge of the
Company’s affairs, would be in a position to make a proper and informed
decision on how to respond when reading the Written Notice.
In the present case, only one out of the five
complaints was set out in the Written Notice. The Company was simply not in a
position to consider how to respond at all. The Applicant’s bare assertion of
breach of fiduciary and statutory duties without reasons does not suffice as “reasons
for that intention” required under s.733(4) of the CO. It was therefore held
that the Written Notice was inadequate in so far as the Applicant is seeking
leave to commence a statutory derivative action for the four complaints not
mentioned in the Written Notice.
Discretion to
dispense with the service of notice under s.733(5)
Although the Written Notice was held to be
inadequate, the Court decided to exercise its discretion under s.733(5) of the
CO to grant leave to dispense with the service of a notice for the four complaints
not stated in the Written Notice for several reasons. Firstly, under s.733(3)
of the CO, the Company was given 14 days to consider whatever complaints the
Applicant had. It was not the Company’s case that had such an adequate notice
setting out all five complaints of the Applicants been given to the Company,
the Company would have agreed to take action against the Two Directors itself,
thus rendering a leave application by the Applicant unnecessary.
Furthermore, the question that the Court
should consider in exercising its discretion is whether, in all the
circumstances, including in particular the intended purpose of the Written
Notice and any likely prejudice or wastage of costs in granting or refusing
dispensation, it was just to grant dispensation. Whilst the draft statement of
claim containing details of all the complaints had been duly served on the
Company 22 days before the present hearing for the leave application, there was
no response from the Company. The Applicant’s failure to mention and to give
full details of the other complaints in the Written Notice was thus immaterial
in the present case.
In addition, it would be meaningless and a
complete waste of time to dismiss the leave application for all complaints
except for one and start the whole process afresh. In the meantime, no
prejudice would be caused to the Company in granting the dispensation. It is
still open to the Company to agree to take action on the complaints directly.
Conclusion
This case provides welcome guidance to a shareholder
contemplating statutory derivative actions in the face of mismanagement of the
company by its directors. A shareholder must serve an adequate written notice setting
out details of all his complaints in the written notice of his intention to
commence a statutory derivative action to the subject company, failing which
his leave application may be dismissed by the Court. Nevertheless, the
shareholder’s failure to provide adequate written notice will not be fatal to
his leave application, as the Court will grant dispensation of such notice if
it is just to do so. The nature of the tests in determining the adequacy of
such notice and whether it is just to grant dispensation, as discussed above,
means that the Court’s findings largely turn on the facts of the case.
For enquiries, please contact our Litigation
& Dispute Resolution Department: |
E:
insolvency@onc.hk T:
(852) 2810 1212 19th Floor, Three
Exchange Square, 8 Connaught Place, Central, Hong Kong |
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. |
Published by ONC Lawyers © 2019 |