Familymart China Holding Company, Ltd v Yin-Heng Wei
| Jurisdiction | Cayman Islands |
| Judge | Justice Kawaley |
| Judgment Date | 09 September 2022 |
| Court | Grand Court (Cayman Islands) |
| Docket Number | CAUSE NO. FSD 165 OF 2019 (IKJ) |
The Hon. Justice Kawaley
CAUSE NO. FSD 165 OF 2019 (IKJ)
IN THE GRAND COURT OF THE CAYMAN ISLANDS
FINANCIAL SERVICES DIVISION
Summons for leave to continue derivative claim and ancillary directions — scope of ‘fraud’ exception to the rule in Foss v Harbottle — whether prima facie case requirement met — application to adjourn summons pending determination of Privy Council appeal in related petition proceedings — Grand Court Rules, Preamble, Orders 15 rule 12A and 32 rule 4
Mr Tom Lowe QC of counsel, Ms Gemma Lardner and Mr Corey Byme of Ogier for the Plaintiff
Mr Mac Imrie QC, Mr Paul Smith, and Mr Ryan Hallett of Maples and Calder (Cayman) LLP for the Defendants
The present proceedings were commenced as derivative proceedings by a Writ of Summons dated August 28, 2019. On January 22, 2020, this Court granted the Plaintiff leave to serve the proceedings out of the jurisdiction on the non-resident defendants who filed Acknowledgments of Service on September 30, 2020. The proceedings were stayed by consent until the determination of an application for leave to appeal to the Privy Council by Ting Chuan (Cayman Islands) Holding Corporation (“Ting Chuan”) against the Cayman Islands Court of Appeal's judgment dated April 23, 2020 ( In re China CVS [ 2020 (2) CILR 201]) in just and equitable winding proceedings commenced in this Court by the Plaintiff on October 12, 2022 in FSD 195/2018 (the “Privy Council Appeal” / the “Petition Proceedings”). The Privy Council granted leave to appeal on September 29, 2021 with the result that the consensual stay of these proceedings fell away.
By an Amended Summons dated November 25, 2021, the Plaintiff sought the following principal orders and directions:
“1. Pursuant to Order 15, rule 12A (2) of the Grand Court Rules (1995 Revision) (‘GCR’) the Plaintiff have leave to continue the action…
4. Discovery is to be made by the exchange of lists of documents within 60 days with inspection to take place within 7 days thereafter.
5. The Plaintiff shall file and serve a summons for directions seeking further directions for the further progress of the proceedings 14 days after exchange of the list of documents.
6. The costs of this Summons be in the cause…”
By Summons dated December 30, 2021, the Defendants sought orders that the Plaintiffs Amended Summons be adjourned alternatively stayed until the determination of an arbitration before the International Chamber of Commerce (“ICC Arbitration”) and the Privy Council Appeal in JCPC 2020/055. These two applications (“Applications”) were initially listed for hearing on March 30–31, 2022, but by a Consent Order dated March 23, 2022 that hearing was vacated and the Applications were adjourned sine die with liberty to apply after the parties received the Award in relation to the ICC Arbitration. The Award was handed down on June 10, 2022.
At the hearing on August 8, 2022, I decided to hear Mr Imrie QC's application for the Plaintiff's Summons to be adjourned or stayed first as it sought to forestall the need for full argument on the main substantive relief sought on the Plaintiff's Amended Summons. The most compelling argument advanced was the need for a composite case management approach to both the present proceedings and the Petition Proceedings. That argument did not to my mind justify postponing a hearing that had been listed for 2 days and which the parties had clearly prepared to argue on the assigned date, wasting both Court time and private costs. The combined case management argument did clearly justify adjourning the directions limb of the Plaintiff's Summons, after the leave to proceed application had been determined, assuming that leave was in fact granted.
Accordingly, I rejected the Defendants' ‘complete adjournment’ application and proceeded to hear argument on the merits of paragraph 1 of the Plaintiff's Summons.
GCR Order 15 rule 12A provides so far as is relevant as follows:
“(1) This rule applies to every action begun by writ by one or more shareholders of a company where the cause of action is vested in the company and relief is accordingly sought on its behalf (referred to in this rule as a “derivative action”).
(2) Where a defendant in a derivative action has given notice of intention to defend, the plaintiff must apply to the Court for leave to continue the action.
(3) The application must be supported by an affidavit verifying the facts on which the claim and the entitlement to sue on behalf of the company are based…”
There was no substantial dispute as to the applicable general legal principles as opposed to how the relevant principles should be applied to the present case. The Plaintiff's Skeleton Argument summarised the principles concisely:
“29 The principles governing the availability of derivative relief were set out in Schultz v Reynolds 1 and Renova 2 and the procedure is governed by O.15, r.12A of the Grand Court Rules.
30 The requirement for minority shareholders to obtain leave to continue a derivative claim is to prevent vexatious claims which have little or no prospect of success and which have been brought by an aggrieved shareholder for his own reasons rather than in the interests of the company: Renova. This is clearly not such a case.
31 A shareholder may bring proceedings for the benefit of the company to redress a wrong done to the company by its directors where there has been a ‘fraud on the minority’ as an exception to the rule in Foss v Harbottle. The purpose of the Derivative Proceedings here is to enable FMCH to recover a valuable asset for and on behalf of the Company.
Prima facie case
32 The court must be satisfied that the plaintiff has a prima facie case based on ‘first impressions’, which is a serious case brought bona fide on reasonable grounds as opposed to speculative, spurious or unfounded.
Wrongdoer Control
34 A plaintiff seeking leave to continue under O.15, r.12A must also prove wrongdoer control. Where the wrongdoers themselves control the company, an action can be brought on behalf of the company with the plaintiff seeking redress on its behalf. In the Derivative Proceedings, the Plaintiff, FMCH, is a minority shareholder and the Defendants are the Majority Directors and their related entities.”
In the Defendants' Skeleton Argument, the following main principles, inter alia, were set out:
“49 The basic principle is that it is for the company, and not an individual shareholder, to enforce rights of action vested in the company and to sue for the wrongs done to it. This is the rule in Foss v Harbottle. A derivative action may only be brought if it is shown that one of the four exceptions to the rule in Foss v Harbottle applies. Templeman J in Daniels v Daniels [1978] Ch 406 at 408 stated that those exceptions were as follows (emphasis added):
‘The exceptions are four in number, only one of which is of possible application in the present case. The first exception is that a shareholder can sue in respect of some attack on his individual rights as a shareholder; secondly, he can sue if the company, for example, is purporting to do by ordinary resolution that which its own constitution requires to be done by special resolution; thirdly, if the company has done or proposes to do something which is ultra vires; and, fourthly, if there is fraud and there is no other remedy. There must be a minority who are prevented from remedying the fraud or taking any proceedings because of the protection given to the fraudulent shareholders or directors by virtue of their majority.’
50 The Defendants presume that FMCH invokes the fourth exception, namely that there is fraud and no other remedy. In relation to derivative actions, the term ‘fraud’ is attributed a wide meaning which embraces both actual fraud (in the sense of a deliberate and dishonest breach of duty) and a breach of duty which confers a benefit on the directors at the expense of the Company. In Daniels v Daniels, Templeman J held (emphasis added)]:
‘a minority shareholder who has no other remedy may sue where directors use their powers, intentionally or unintentionally, fraudulently or negligently, in a manner which benefits themselves at the expense of the company.’…
68. In Renova Resources Private Equity Limited v Gilbertson [2009] CILR 268, Foster J at para 32–35 summarised the test (emphasis added):
‘32. In my opinion, the appropriate test for this court to adopt in considering an application for leave to continue a derivative action is the prima facie case test, that is, where a defendant in a derivative action has given notice of intention to defend, the plaintiff must satisfy the court that the company has a prima facie case against the defendant (and that the action falls within an applicable exception to the rule in Foss v. Harbottle). Even if I am wrong about this, there was anyway no evidence before me to indicate that a hypothetical honest, independent and prudent board of directors could or would not have proceeded with the claim of the company, if such a board was satisfied that there was a prima facie case. I propose to consider the plaintiff's application on the basis of the prima facie case test.
35. The purpose of requiring the plaintiff to obtain leave to continue the derivative action, as I understand it, is to prevent the expense and time of (and to protect the defendants against)...
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