HONG KONG Law and Practice Contributed by: George Lamplough, Edward Beeley, Vanessa Cheng and Curtis Pak, Holman Fenwick Willan
Common Law Derivative Action Under common law, a shareholder can commence a derivative action in relation to a fraud on the company. The shareholder has to establish that: • the wrongdoers have committed fraud on the company – “fraud” here is a broader concept than common law fraud, and generally covers conduct where power has been exercised for a purpose beyond the scope of or not justified by the instru - ment creating the power, such as breaches of fiduciary duties by directors; and • the wrongdoers are in control of the company – the element of control is often stated to be control of voting power in the general meeting. Common law derivative action can also be brought when the company has acted ultra vires and the com - pany has not commenced an action. Statutory Derivative Action (Part 14, Division 4, Companies Ordinance) With the permission of the court, a shareholder can commence a statutory derivative action on behalf of the company in respect of misconduct committed against the company, which includes a non-Hong Kong company (Section 732, Companies Ordinance). The person bringing the statutory derivative action must be a shareholder of the company. “Misconduct” means “fraud, negligence, breach of duty, or default in compliance with any Ordinance or rule of law” (Sec - tion 731, Companies Ordinance). The court may permit the shareholder to commence a derivative action if it is satisfied that: • on the face of the application, it appears to be in the company’s interests that leave shall be granted. This essentially involves comparing what the com - pany stands to gain in money or money’s worth with the likely cost of the proceedings; • there is a serious question to be tried; • the company has not itself brought the proceed - ings; and • the shareholder has served a written notice on the company (unless the requirement has been dis - pensed with by the court).
company has been used as a vehicle for fraud, it is possible to pierce the corporate veil and bring claims against the beneficial owners and directors of the company. The plaintiff has to establish the following in order to pierce the corporate veil: • the company is involved in some impropriety linked to use of the company structure to avoid or con - ceal liability; and • the wrongdoer controls the company at the time of the relevant transaction. Normally, the court will pierce the corporate veil only when there is clear evidence of fraud. Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (CWUMPO) If, in the course of the winding up of a company: • any person carries on the business of the com - pany with an intent to defraud creditors, or for any fraudulent purpose, the person may be found personally responsible for all or any of the debts or other liabilities of the company (Section 275, CWUMPO); and • any person misapplies or retains any money or property of the company, they may be compelled to repay or restore the money or property (Section 276, CWUMPO). 3.3 Shareholders’ Claims Against Fraudulent Directors General Principles Where directors have breached duties owed to the company, or where any person has infringed any rights of the company, the general rule is that the proper plaintiff is the company itself. Where both the company and a shareholder have a cause of action arising from the same conduct, but the shareholder’s loss is not a separate and distinct loss and is reflective of the company’s loss, the sharehold - er is not entitled to bring a personal action to recover that reflective loss ( Waddington Ltd v Chan Chu Hoo (2008) 11 HKCFAR 370).
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