Apart from the application which used to be known as a “s.168A petition” (now s.724 of the new Companies Ordinance (Cap. 622) (“CO”)) and a petition for the winding up of a company on the just and equitable ground under s.177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), applications for leave to bring a derivative action against a wrongdoer for misconduct committed against the company are also commonly seen in a shareholders’ dispute. This article will look at two cases where the putative defendants were allowed to join in the leave application.

According to s.733 of the CO, except where leave is granted by the Court, a written notice stating the applicant’s intention to make the application and the reasons for such intention must be served on the company at least 14 days before the application. As a matter of procedure, the application is taken out against the company and the company is named as a respondent.

In most cases, derivative actions are required because the company’s board of directors cannot reach consensus in passing a resolution to sue the alleged wrongdoer, because the alleged wrongdoer (the putative defendant) is one of the directors/shareholders. A typical case is where the parties to the main action (i.e. the applicant and putative defendant) are equal shareholders and the only directors of the company. In those circumstances, while the applicant cannot get the company’s authority to sue the putative defendant, equally, the putative defendant cannot get the company’s authority to oppose the leave application.

From the applicant’s perspective, the leave application would be much easier if the putative defendant did not have standing to oppose the case, in which case the application would be dealt with by the Court as if it were ex parte. However, even if the putative defendant is not named as a party to the original application, it is always up to him to seek leave to join in as a party.

In Re Nice & Well Limited (HCMP 2148/2008), the putative defendant sought leave to be joined in as a party. It is noteworthy that the putative defendant did not challenge the applicant’s application for leave to bring a statutory derivative action. The reason she sought leave to be joined as a party was to oppose the costs order sought by the applicant regarding the leave application.

Eventually, leave was granted to the putative defendant to join in the originating summons as the 2nd respondent to argue the question of costs. The Court was of the view that she had an interest as a shareholder and director in the order sought by the applicant for the company to indemnify the costs of the applicant in both the leave application and the main action.

The legal position in this aspect was further elaborated in A R Evans Capital Partners Ltd. v. Novel Alternative Investment Ltd. & Others [2012] HKCU 1284. In that case, the putative defendant sought leave to intervene in the application for the purpose of opposing it on the basis that it should be permitted to intervene under the ordinary principles applicable to joinder of parties to proceedings, as they would be directly affected by any order made – as a party of the main action and as shareholders of the company against which an indemnity was sought in respect of costs incurred by the applicant on its behalf.

The Court accepted these submissions and held that, in order to carry out its function under s.168BC of the old Companies Ordinance (the equivalent of s.733 of the CO), the Court should be assisted by submissions that bear on such questions as jurisdiction to make an order under the section, or indeed as to the merits of the proposed claim. The Court said it would be capable of weighing for itself the strength of the arguments advanced on either side, and would not lose sight of the fact that a putative defendant will have an interest in belittling the aspiring derivative plaintiff’s prospects of success. Accordingly, the putative defendants were entitled to be heard in opposition to the s.168BC application.

As affirmed in many cases, the threshold for the Court to be satisfied that it is in the interests of the company to grant leave is relatively low. Normally, the Court will not go into the detail of the case in considering the merits of the respective parties in the main action.

Viewing this issue from another perspective – while in the absence of special circumstances, it may be difficult for the applicant to get rid of the putative defendant at the leave application stage, the leave application may at least serve as an opportunity for the applicant to test his case before he commits himself to the main action, which will involve more time and costs. If, by reason of the opposition of the putative defendant at the stage of leave application the applicant fails to convince the Court that the company has a reasonable case against the putative defendant, the applicant should not even proceed to the main action.