Topic 4

Management and administration of a company (II):

Shareholders and company meetings

TOPIC OUTLINE & SUMMARY (PART 1)

1. Proper plaintiff principle

Foss v Harbottle where wrong to company then it is proper plaintiff

2. Statutory derivative action

Companies Ordinance (Cap.622), Pt.14 Div.4

The court may grant leave for a member to commence proceedings on
behalf of the company if the court is satisfied that:
o on the face of the application, it appears to be in the company’s
interests that leave be granted;
o there is a serious question to be tried;
o the company has not itself brought the proceedings; and
o the member has served a written notice on the company of the
member’s intention to apply for leave

3. Unfair prejudice remedy

Companies Ordinance (cap.622), ss.724-725

Unfairness + prejudice
Some examples:
o Exclusion from management
o Mismanagement
o Breach of directors’ fiduciary duties
o Excessive remuneration and the failure to pay dividends

4. Just and equitable winding up

Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap

32), s.177(1)(f)
A remedy of last resort
Leading case: Ebrahami v Westbourne Galleries

Topic 4 Materials (Part 1) Page 1

THE PROPER PLAINTIFF PRINCIPLE

Source: Sealy & Worthington’s Cases and Materials in Company Law, 10 th edition, 2013, by Len
Sealy and Sarah Worthington, p.640

Topic 4 Materials (Part 1) Page 2

STATUTORY DERIVATIVE ACTION

Companies Ordinance (Cap 622)

Part 14 Division 4 (Derivative Action for Remedies for Misconduct against
Companies etc.)

Section 731 (Interpretation)

In this Division—

misconduct means fraud, negligence, breach of duty, or default in compliance with

any Ordinance or rule of law;

Section 732 (Member of company or of associated company may bring or intervene

in proceedings)

(1) If misconduct is committed against a company, a member of the company or

of an associated company of the company may, with the leave of the Court
granted under section 733, bring proceedings in respect of the misconduct
before the court on behalf of the company.

(2) If, because of misconduct committed against the company, a company fails to
bring proceedings in respect of any matter, a member of the company or of an
associated company of the company may, with the leave of the Court granted
under section 733, bring proceedings in respect of the matter before the court
on behalf of the company.

(3) If, because of misconduct committed against the company, a company fails to
diligently continue, discontinue or defend proceedings, a member of the
company or of an associated company of the company may, with the leave of
the Court granted under section 733, intervene in the proceedings before the
court for the purpose of continuing, discontinuing or defending those
proceedings on behalf of the company.

(4) The cause of action in relation to the proceedings under subsection (1) or (2)
is vested in the company. Any of those proceedings must be brought in the
name of, and the relief (if any) must be sought on behalf of, the company.

(5) The right to continue, discontinue or defend any proceedings intervened in

under subsection (3) is vested in, and the relief (if any) must be sought on
behalf of, the company.

[Note: According to section 2 of the Companies Ordinance, an ‘associated

company’, in relation to a body corporate, means: (a) a subsidiary of the body
corporate; (b) a holding company of the body corporate; or (c) a subsidiary of such a
holding company.]

Topic 4 Materials (Part 1) Page 3

STATUTORY DERIVATIVE ACTION (CONT’D)

Section 733 (Leave of Court to bring or intervene in proceedings)

(1) On application by a member of a company or of an associated company of a

company, the Court may grant leave for the purposes of section 732(1), (2) or
(3) if it is satisfied that—

(a) on the face of the application, it appears to be in the company’s

interests that leave be granted to the member;

(b) in the case of—

(i) an application for leave to bring proceedings under section

732(1) or (2), there is a serious question to be tried and the
company has not itself brought the proceedings; or
(ii) an application for leave to intervene in proceedings under
section 732(3), the company has not diligently continued,
discontinued or defended the proceedings; and

(c) except where leave is granted by the Court under subsection (5), the
member has served a written notice on the company in accordance
with subsection (3), and the notice complies with subsection (4).

(2) The Court may refuse to grant leave if it is satisfied that—

(a) in the case of an application for leave to bring proceedings under

section 732(1) or (2), the member has, in the exercise of any common
law right, brought proceedings on behalf of the company in respect of
the same cause or matter; or

(b) in the case of an application for leave to intervene in proceedings

under section 732(3), the member has, in the exercise of any common
law right, intervened in the proceedings in question to which the
company is a party.

(3) The written notice must be served on the company, at least 14 days before
the member applies for leave in respect of the company …

(4) The written notice must state—

(a) the member’s intention to apply for leave for the purposes of section
732(1), (2) or (3) in respect of the company; and

(b) the reasons for that intention.

(5) The Court may grant leave to dispense with the service of a written notice for
the purposes of subsection (1)(c).

Topic 4 Materials (Part 1) Page 4

STATUTORY DERIVATIVE ACTION (CONT’D)

Section 734 (Approval or ratification of conduct does not bar derivative action)

(1) If a company’s members approve or ratify any conduct, the approval or

ratification—

(a) does not prevent a member of the company, or of an associated

company of the company, from—

(i) bringing proceedings under section 732(1) or (2);

(ii) intervening in proceedings under section 732(3); or
(iii) applying for leave for the purposes of section 732(1), (2) or (3);

(b) is not a ground for the Court to refuse to grant leave for the purposes
of section 732(1), (2) or (3); and

(c) is not a ground for any court to determine the proceedings brought or
intervened in by the member in favour of the defendant.

(2) Despite subsection (1), the court may, after having regard to the matters
specified in subsection (3), take the approval or ratification into account in
deciding what judgment or order to make in respect of—

(a) any proceedings brought or intervened in under section 732(1), (2) or

(3); or

(b) an application for leave for the purposes of section 732(1), (2) or (3).

(3) The matters are—

(a) whether the members were acting for proper purposes, having regard
to the company’s interests, when they approved or ratified the conduct;

(b) to what extent those members were connected with the conduct, when
they approved or ratified the conduct; and

(c) how well-informed about the conduct those members were, when they
decided whether or not to approve or ratify the conduct.

Topic 4 Materials (Part 1) Page 5

STATUTORY DERIVATIVE ACTION (CONT’D)

Factors relevant to interests of company

“The fact that the company has suffered significant losses which it could recover in
the proposed action is a factor tending to show that it is in the interests of the
company for leave to be granted. On the other hand, the mere fact that the
company has not suffered specific economic loss does not necessarily show that the
proposed action is not in the interests of the company. For example, if the
proceedings related to breaches of directors’ duties, there may be problems of
mismanagement in the company which need to be remedied for in the future. Other
factors which might also be relevant looking at whether the proceedings would be in
the interests of the company include:

• The character of the company. For example if the company is a small family
company, it may be relevant to take into account the effect of the proposed
litigation on the purpose for which the company was established and on the
relationships between the family members who are the shareholders.

• The effect of the proposed litigation on the business of the company. In this
respect, there may be good commercial reasons for the board to decide not to
pursue a claim such as where the directors do not want to damage a good,
long-term profitable relationship between the company and the defendant, or
because they do not wish to generate bad publicity for the company because
of some important negotiations which are underway.

• The ability of the defendant to meet at least a substantial part of any judgment
in favour of the company in the proposed derivative action.

• The likely costs of the litigation, since it might not be in the interests of the
company to bring the proceedings where the loss to the company is minimal
and the costs would outweigh any benefit that the company could attain even
if successful in the proceedings. However the mere fact of the possibility of
an adverse costs order against the company, in the event of the company not
succeeding in the derivative action, would not be relevant as ‘[t]his
consideration begs the question because, if it is in the best interests of [the
company] to bring the action, the risk that a costs order may be made against
it if it is unsuccessful cannot mean it is not in its best interests to pursue its
claim’. In addition, the mere fact that the company is in a poor financial
position and may be unable to bear the costs of the litigation is not
necessarily relevant, as the court can grant leave on the basis that the
applicant is prepared to bear in the first instance the costs of the litigation.

• If the board has made a bona fide commercial decision that it is not in the
interests of the company that proceedings are commenced, then the board’s
view will be given considerable weight; but in cases in which the prospective
claim is against a director, the board’s view may be of less relevance.”

Source: Law of Companies in Hong Kong, 2nd edition, 2015, by Stefan HC Lo and Charles Z Qu,
pp.411-412

Topic 4 Materials (Part 1) Page 6

UNFAIR PREJUDICE REMEDY

Companies Ordinance (Cap 622)

Part 14 Division 2 (Remedies for Unfair Prejudice to Members’ Interests)

Section 724 (Circumstances in which company may be wound up by court)

(1) The Court may exercise the power under section 725(1)(a) and (2) if, on a
petition by a member of a company, it considers that—

(a) the company’s affairs are being or have been conducted in a manner
unfairly prejudicial to the interests of the members generally or of one
or more members (including the member); or

(b) an actual or proposed act or omission of the company (including one

done or made on behalf of the company) is or would be so prejudicial.

Requires unfairness and prejudice

“A petitioner can obtain a remedy under Cap.622 ss.724-725 only if the conduct is
‘unfairly prejudicial’. The elements of both unfairness and prejudice must be
established.”

Prejudice includes damage to financial and other interests

“ ‘Prejudice’ was described in Re Taiwa Land Investment Co Ltd as meaning ‘injury,
detriment, or damage’. Prejudice includes both damage to the financial interests of
the member such as where the value of the shareholding is diminished or
jeopardised, as well as damage to other interests of members in their capacity as
members, such as infringement of their rights under the Ordinance or constitution or
damage to other interests which would be protected pursuant to equitable
considerations. Members can be prejudiced by a misapplication of the company’s
assets for the benefit of the controller of the company even though there is only a
limited impact on the value of the shares. However not all breaches by directors
necessarily have a prejudicial effect on the members. There might not be any
prejudice if the conduct has not altered the company’s position nor the position of the
members. Trivial breaches of legal duties might not give rise to prejudice, however
certain legal rights conferred by the Ordinance or the articles may well be regarded
as important by the courts.”

Unfair means “not fair or equitable; unjust”

“In Re Taiwa Land Investment Co Ltd, Fuad J noted the ordinary meaning of the
word ‘unfair’ as being ‘not fair or equitable; unjust’. The courts have observed that
the legislature had adopted the concept of ‘fairness’ to replace ‘oppression’ to free
the court from technical considerations of legal right and to confer a wide power to
do what is just and equitable. In that regard, the courts have further emphasised
that the provision should be applied flexibly to meet the circumstances of the case
and be interpreted in a liberal spirit to advance the remedy since it had been
designed to suppressed as acknowledged mischief.”

Source: Law of Companies in Hong Kong, 2nd edition, 2015, by Stefan HC Lo and Charles Z Qu,
pp.446-447

Topic 4 Materials (Part 1) Page 7

UNFAIR PREJUDICE REMEDY (CONT’D)

Section 725 (Remedies that Court may order)

(1) The Court may—

(a) for the purposes of section 724(1), make any order that it thinks fit for
giving relief in respect of the matter mentioned in section 724(1)(a) or
(b);

(2) Without limiting subsection (1), the Court—

(a) may make any or all of the following orders—

(i) an order—

(A) restraining the continuance of the conduct of the

company’s affairs in the manner mentioned in section
724(1)(a) …;
(B) restraining the doing of the act mentioned in section
724(1)(b) …; or
(C) requiring the doing of an act that, as mentioned in section
724(1)(b) …, the company has omitted, or has proposed
to omit, to do;

(ii) an order that proceedings that the Court thinks fit be brought in
the company’s name against any person, and on any terms, that
the Court so orders;

(iii) an order appointing a receiver or manager of either or both of

the following—

(A) the company’s property, or any part of the property;

(B) the company’s business, or any part of the business;

(iv) any other order that the Court thinks fit, whether—

(A) for regulating the conduct of the company’s affairs in

future;
(B) for the purchase of the shares of any member of the
company by another member of the company;
(C) for the purchase of the shares of any member of the
company by the company and the reduction accordingly
of the company’s capital; or
(D) for any other purpose; and

(b) may order the company or any other person to pay any damages, and
any interest on those damages, that the Court thinks fit to a member of
the company whose interests have been unfairly prejudiced by the
conduct of the company’s affairs or by the act or omission.

Topic 4 Materials (Part 1) Page 8

JUST AND EQUITABLE WINDING UP

Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32)

Section 177 (Circumstances in which company may be wound up by court)

(1) A company may be wound up by the court if-

(a) the company has by special resolution resolved that the company be
wound up by the court;

(b) the company does not commence its business within a year from its
incorporation, or suspends its business for a whole year;

(c) the company has no members;

(d) the company is unable to pay its debts;

(e) the event, if any, occurs on the occurrence of which the articles provide
that the company is to be dissolved;

(f) the court is of opinion that it is just and equitable that the company
should be wound up.

Winding-up remedy of last resort

“… The approach of the courts is that winding up is a remedy of last resort and there
is a reluctance to grant winding up where another remedy would be adequate for the
petitioners, especially in circumstances where the company is successful and
profitable.”

Unfair prejudice remedy might be more appropriate

“Alternative remedies may be available under Cap.622 ss.724-725 (unfair prejudice),
and petitioners often claim for relief under both the unfair prejudice provision and
s.177(1)(f) of [Cap.32] in the alternative. As courts are slow to wind up solvent
companies if some other remedy is available, a remedy for unfair prejudice may be
more appropriate even though the circumstances also come within s.177(1)(f).
however, there would be some situations where a remedy would not be available
under s.725 of Cap.622 but where it may be just and equitable to wind up the
company, such as where there is a breakdown in a relationship of trust and
confidence between the parties due to irreconcilable differences in circumstances
where the breakdown is not the fault of any party. Moreover, courts may be
prepared to order winding up despite the possibility of utilising s.725 where relief
under this s.725 has not been pressed by the petitioners and where there is no
opposition to the petition for winding up on the grounds that an alternative remedy is
available, or where, in circumstances where the only appropriate relief is a buy-out
order, there is no evidence of the respondents’ financial ability to buy out the
petitioner’s shares.”

Source: Law of Companies in Hong Kong, 2nd edition, 2015, by Stefan HC Lo and Charles Z Qu,
pp.476-477

Topic 4 Materials (Part 1) Page 9

JUST AND EQUITABLE WINDING UP (CONT’D)

Topic 4 Materials (Part 1) Page 10

Topic 4 Materials (Part 1) Page 11
Topic 4 Materials (Part 1) Page 12
Source: Sealy & Worthington’s Cases and Materials in Company Law, 10 th edition, 2013, by Len
Sealy and Sarah Worthington, pp.800-802

Topic 4 Materials (Part 1) Page 13