Grand Field Group Holdings Limited (the "Company") was listed on the Hong Kong Stock Exchange and carried on the business of property development and sales in China through its subsidiaries.

Mr Tsang and his wife were the founders of the Company ("Tsangs").  The Tsangs and their company together held about 22% of the issued shares of the Company.  In July 2007, there was a change in the management of the Company when the Tsangs resigned as directors.  They brought in Mr Huang as a strategic investor in the Company and became consultants of the Company until Mr Huang, the chief executive officer and an executive director, and Mr Chu, the chairman and an executive director of the Company, served a notice to terminate their consultancy in March 2008.

Mr Tsang claimed that there were breaches of fiduciary duties by Mr Huang and Mr Chu as the Company's directors in a number of transactions including misappropriation of funds and improper transactions.  As the Company had not itself brought proceedings against its directors because they were in control of the board, Mr Tsang applied for leave of the Court of First Instance (the "Court") to bring a statutory derivative action on behalf of the Company and for an order that an independent auditor be appointed for and on behalf of the Company to investigate and report to the Court on its financial position.

Court's Decision

Section 168BC(3) of the Companies Ordinance (Cap.32) sets out three requirements for leave to be granted by the Court to bring a statutory derivative action.  They are as follows :-

(1)        it appears to be prima facie in the interest of the company that leave be granted to the applicant to bring proceedings on its behalf;

(2)        there is a serious question to be tried and the company has not itself brought the proceedings; and

(3)        the applicant has served a written notice on the company in accordance with section 168BD of the Companies Ordinance.

For the first requirement, it was only necessary to establish that it appears to be prima facie in the interest of the Company to sue.  It was not necessary or appropriate to establish this to a particularly high standard and the Court should not attempt to resolve the underlying dispute.  It would suffice if an arguable case was disclosed and, on the face of it, it would be in the interest of the Company to bring proceedings.  The second requirement was likewise of a relatively low threshold.

The complaints indicated that there was an arguable case that the Company had through its subsidiary entered into a number of disadvantageous transactions and there were doubts as to the legality of some of these transactions. If these allegations were established, the Court was inclined to think that the Company had suffered financial loss and ought to be compensated in damages by those directors who had acted in breach of their fiduciary duties.  The Court was satisfied that the complaints raised by Mr Tsang had disclosed an arguable case having a serious question to be tried and it would appear to be prima facie in the interest of the Company to bring legal proceedings against the intended defendants.  The Court also held that the Company had not indicated it would bring proceedings against the intended defendants and Mr Tsang had served a notice on the Company in accordance with section 168BD.

The Court therefore decided to grant leave to Mr Tsang to bring a statutory derivative action on behalf of the Company.

The Court further held that there was no need for investigation by an independent auditor to be appointed by the Court at this stage as the information presently available to Mr Tsang was prima facie sufficient to bring proceedings.  If the Company wished to engage such an auditor, it was at liberty to do so, without any order from the Court.

Conclusion

Based on the decision of this case, it is clear that a shareholder of the company may apply to the Court for leave to bring proceedings on behalf of the company under section 168BC(3) of the Companies Ordinance.  The Court would apply a relatively low threshold on the requirements of section 168BC(3) when granting leave to shareholders.  

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