Introduction
Normally, if a wrong is done to a company, it is the company itself – rather than its owners – that has the standing to sue for the wrong done to it. This is commonly known as the “Proper Plaintiff Rule”. However, this general rule may be displaced where the wrongdoers themselves control the company and would not allow it to sue. In that scenario, an aggrieved shareholder may exceptionally bring a derivative action in the name of the company.
Chu Kong v Lau Wing Yan & Ors [2026] HKCA 1004 involved a curious situation where a supposed aggrieved shareholder sought to bring a double derivative action on behalf of companies under the control of court-appointed liquidators. He argued that the exception is engaged because the liquidators are the “very persons against whom wrongdoing is alleged”.
Background
The case arose out of a long-running dispute between two former business partners, Mr Chu Kong and Mr Lau Wing Yan, whose relationship had deteriorated into a “total war of attrition”, spawning no fewer than 33 litigations in Hong Kong. One aspect of their dispute concerns Ocean Sino Limited (OSL), a BVI company jointly owned by Mr Chu and Mr Lau. OSL wholly owns PBM Asset Management Limited (PBM), a Hong Kong company, which in turn holds a 49% stake in BGA Holdings Limited (BGAH), another Hong Kong company previously engaged in shipping-related businesses.
Following the breakdown of their relationship, Mr Lau presented a petition to wind up OSL on the just and equitable ground. The petition was granted by the BVI court, which appointed liquidators over OSL. As part of their duties to investigate the affairs of OSL and those of its group, the OSL liquidators appointed themselves as directors of PBM. Acting in that capacity, they caused PBM to petition for the winding-up of BGAH.
Mr Chu responded by applying to the BVI court to remove the OSL liquidators, alleging (among other things) that they had displayed a total disregard of his interests by petitioning for BGAH’s winding-up. His application was dismissed by the BVI court. Shortly after, the BGAH was ordered to be wound up by the Hong Kong court.
Just three weeks after his removal application was dismissed – and a week after the winding-up order against BGAH was made – Mr Chu commenced a double derivative action purportedly on behalf of OSL and PBM against Mr Lau and the OSL liquidators (in their capacity as PBM directors), complaining of various breaches of directors’ duties.
The decision
At first instance, the Hong Kong court struck out Mr Chu’s action on grounds of lack of standing, issue estoppel and collateral attack. Mr Chu appealed.
The Court of Appeal upheld the decision below, indicating that striking out Mr Chu’s action, on the ground of lack of locus standi alone, was plainly correct. The court confirmed that a derivative action is not permissible where a company is in liquidation. This is because, when a company goes into liquidation, it – as well as its wholly-owned subsidiary – comes under the control of the court through the liquidator as an officer of the court. Accordingly, the company cannot be said to be controlled by wrongdoers and the basis for a derivative action falls away.
The court also rejected Mr Chu’s argument that he was left without remedy. It pointed out that the appropriate remedy of a shareholder lies in the liquidation regime, including applying to the companies court for an order that the liquidator bring the action in the name of the company, or that he is given the right to bring the action in the name of the company. Where another adequate remedy is available, the court will not allow the derivative action to proceed. Ultimately, Mr Chu’s appeal was dismissed, with costs awarded to the defendants on an indemnity basis.
Commentary
The Court of Appeal’s judgment provides helpful clarification on the limits of derivative actions in the insolvency context. It is now clear that, once a company enters liquidation, the statutory regime displaces both the need for and the availability of derivative actions. Aggrieved shareholders must instead pursue remedies within the insolvency framework supervised by the relevant court.
Importantly, the principles in Chu Kong apply with equal force to a cross-border context. The Court of Appeal accepted the submissions that an aggrieved party in this instance should apply to the BVI court (as the liquidators’ appointing court) for appropriate directions, rather than commence proceedings in Hong Kong against the liquidators. Allowing such proceedings in Hong Kong without the litigant having first sought directions from the appointing court could risk interfering with the integrity of the existing liquidation process and undermining the principle of modified universalism.
Keith Brandt, Henry Li and Charmaine Chan of Dentons Hong Kong acted for the 4th Defendant, one of the OSL liquidators, in Chu Kong.
For further information, please contact:
Keith Brandt. Managing Partner, Dentons
keith.brandt@dentons.com
