Statutory Derivative Actions: Threshold Requirements and Procedural Challenges – Chen Pei Xiong v Convoy Global Holdings Limited & Anor [2024] HKCFI 1568

In Chen Pei Xiong v Convoy Global Holdings Limited [2024] HKCFI 1568 (“Decision”), the Court of First Instance examined the requirements for granting leave to commence a statutory derivative action (“SDA”) under sections 732 and 733 of the Companies Ordinance (Cap. 622).

The plaintiff, a beneficial owner of shares in Convoy Global Holdings Limited (“Convoy”), sought leave to commence an SDA on behalf of Forthwise International Limited (“Forthwise”), an indirectly wholly-owned subsidiary of Convoy incorporated in the British Virgin Islands (“BVI”).

The Decision provides guidance on various procedural and substantive issues surrounding SDAs, particularly in the context of multiple derivative actions involving foreign-incorporated companies.

One issue involves in this case is whether Forthwise, as company incorporated in the BVI, has established a “place of business” in Hong Kong.  After reviewing the relevant case law, Coleman J summarised the relevant principles as follows:

1. A failure to register, though in breach of the requirements of the Companies Ordinance (Cap.622) (“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.

Based on these principles, Coleman J held that Forthwise had established a place of business in Hong Kong within the meaning of the Ordinance, despite its limited business activities.

Another issue addressed in the Decision is whether the law of the place of incorporation (lex incorporationis) is relevant to the bringing of an SDA in Hong Kong.

At the hearing, reference was made to:-

1. Wong Ming Bun v. Wang Min Fan [2014] 1 HKLRD 1108, where Ng J held that whether a shareholder can commence a derivative action in the name and on behalf of the company is a matter of substantive law, governed by the law of the place of incorporation.
2. Hongkong Zhongxing Group Co Ltd v Grand Field Group Holdings Ltd (HCMP 3278/2013, 20 November 2014), where Harris J observed that a person wishing to bring an SDA must first demonstrate compliance with the requirements of the place of incorporation before commencing a derivative action.

Based on these authorities, Coleman J expressed the view that that Hong Kong courts may require compliance with the procedural requirements of the place of incorporation, such as obtaining leave from the relevant foreign court, in addition to satisfying the requirements under the Hong Kong Companies Ordinance.

While not determinative in this case, Coleman J indicated that the plaintiff’s failure to obtain leave from the BVI Court could have been an additional barrier to establishing standing.

The Decision underscores the procedural and substantive hurdles facing potential plaintiffs in SDAs. It emphasizes the need for careful consideration of standing, jurisdiction, and the underlying merits of proposed derivative claims before commencing such actions.  More particularly:-

1. The threshold for establishing a “place of business” for foreign companies under the Ordinance may be met even with limited business activities, provided there is evidence of a continuing series of steps relating to the business conducted in Hong Kong.
2. In multiple derivative actions involving foreign-incorporated companies, Hong Kong courts may require compliance with the procedural requirements of the place of incorporation, such as obtaining leave from the relevant foreign court.

The full judgment is available at: https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=162118&currpage=T

Mr. William Wong SC, Mr. Lai Chun Ho, and Mr. Han Sheng Lim acted for the defendants.