Hong Kong Lawyer | Contempt or not? That is the question!

Hong Kong Lawyer | Contempt or not? That is the question!

Hong Kong Lawyer | Contempt or not? That is the question! 600 386 Hugill & Ip
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In ZPMC Offshore Service Co Ltd v Philip Jeffrey Adkins [2021] 4 HKLRD 559, Harris J considers the proper plaintiff rule set out in Foss v Harbottle in setting aside Contempt Proceedings after striking out an Originating Summons and discharging an order.

Background

ZPMC Offshore Service Co Ltd (“ZPMC”), the majority shareholder of ZPMC-Red Box Energy Services Limited (the “Company”) issued an originating summons on 24 February 2017 (the “Originating Summons”) seeking declarations under sections 728 and 729 of the Companies Ordinance (Cap.622) (“CO”) that a board meeting of the Company, and resolutions purportedly passed at the board meeting removing the 1st Respondent, Philip Jeffrey Adkins (“Mr. Adkins”) as CEO of the Company were valid, and seeking orders, amongst other things that Mr. Adkins not hold himself out as CEO of the Company.

At the same time, ZPMC applied ex parte on notice for an order prohibiting Mr. Adkins from holding himself out as the CEO of the Company, with such order granted by Louis Chan J on 24 February 2017 (the “Order”).  The Order was continued by Harris J without opposition on 3 March 2017 and 11 April 2018.

It appears that Mr. Adkins was aware of the Order but breached it on more than one occasion. On 24 August 2020, Harris J granted ZPMC leave to apply for an order of committal and an originating summons was issued on 31 July 2020 seeking an order for committal (the “Contempt Proceedings”). Mr. Adkins subsequently applied to strike out the Originating Summons, to discharge the Order, and to set aside the order for leave to issue the Contempt Proceedings and dismiss the Contempt Proceedings.

Sections 728 and 729 of the CO along with section 730 provide (under the heading to Division 3 of Part 14) “Remedies for others’ conduct in relation to companies”. Section 729(1) provides that a member “whose interests have been, are or would be affected by…” conduct falling within section 728(1)(a) can seek a final injunction or a declaration. Section 728(1)(a)(iii) includes “a breach specified in subsection (4)”. Subsection (4) includes breach of a person’s fiduciary duties owed to the company in question both as a director and in any other capacity.

The Court made it clear that these provisions are statutory exceptions to well-known rule in Foss v Harbottle (1843) 2 Hare 461 which provides that the proper plaintiff in proceedings to remedy a wrong to a company is the company itself, because it is in the company that the cause of action is vested.  In other words, section 729 is only intended to permit and facilitate a member to remedy a wrong, which a company cannot or will not take steps to remedy itself.

ZPMC was the majority shareholder of the Company. The Company’s Articles provided for the Company to have seven directors, of which four were to be appointed by ZPMC. It was clear from the Articles and relevant provisions of the Company’s Shareholders Agreement that it was possible for ZPMC to convene a board meeting to pass any resolution it liked other than in relation to reserved matters, albeit that because of the way which the Articles operated, it may initially have required the initial meeting of the Board to have been adjourned because the quorum requirements required a director representing each member to be present. However, if the initial meeting was inquorate, it could have been adjourned for 10 days at which if any four directors were present the board meeting would become quorate. Accordingly, as the wrongs of which ZPMC complained were clearly done to the Company and ZPMC could cause the Company to take action to remedy them on the face of the matter it was unnecessary for ZPMC qua member to take action.  Having reached this conclusion, the Court struck out the Originating Summons and discharged the Order.

But what about the contempt proceedings?

Having struck out the Originating Summons and discharged the Order, the Court then considered whether or not to allow the Contempt Proceedings to go ahead.

Mr. Adkins argued that the order for leave to issue the Contempt Proceedings should be set aside, and the Contempt Proceedings dismissed, on the grounds (1) that prosecution of the Contempt Proceedings would be disproportionate and excessive given that the Order was a legal nullity and (2) material non-disclosure in the leave application concerning the failure to bring the Court’s attention to the defence to the claim giving rise to the striking out of the Originating Summons.

On the other hand, ZPMC argued that Mr Adkins clearly and knowingly breached the Order, that this is fundamentally objectionable and the Court should allow the Contempt Proceedings to proceed because it is desirable that the Court determines the proceedings with a view to protecting the integrity of the Court’s process and respect for the law.

The balance of Justice?

In analysing various authorities regarding failure to comply with court orders, the Court observed that in the present litigation culture the decision whether or not to allow contempt proceedings to be prosecuted for failure to comply with a civil court order involves a balancing of various considerations. This includes the utility of the contempt proceedings. If an order is still relevant and a party requires compliance with it to protect their interests, commonly contempt proceedings will be justified in order to enforce compliance and secure respect for the order and the court. Ulterior motive and attempts to use the contempt process to exert pressure is another consideration and where it can be demonstrated to be present will militate against granting leave. The seriousness of the contempt will always be a very important consideration. Maintaining respect for the court and its process is essential if the system of justice is to operate effectively. Breaches of orders are not to be treated lightly. That having been said the seriousness needs to be assessed in the context of other considerations. If the court is of the view, for example, that ultimately it is unlikely that it would impose a serious penalty and the order is not necessary in order to protect the applicant’s rights the court is more likely to refuse leave even if the court recognises that there appears to have been a knowing breach of an order.

In the circumstances of this case, although Harris J found Mr Adkins’s failure to comply with the Order unsatisfactory and said that he may have taken a different view if the Order had been obtained properly, he took the view that the order for leave to issue the Contempt Proceedings should be set aside, and the Contempt Proceedings discontinued.

 


The article was originally published on Hong Kong Lawyer

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