Monday, 1 March 2021

Hong Kong: Foss v Harbottle, 'fraud on the minority', and the common law derivative action

A recent decision of the Court of Appeal concerning the common law derivative action, Wang Pengying v Ng Wing Fai [2021] HKCA 100, will be of interest beyond Hong Kong - and in particular in England because of the discussion it contains about whether Harris v Microfusion 2003-2 LLP [2016] EWCA Civ 1212 was wrongly decided in holding that, for the purposes of the 'fraud on the minority' exception to what is known as the rule in Foss v Harbottle(1843) 2 Hare 461, personal benefit by the wrongdoers was required in cases of breach of duty not involving fraud.   

Two of the three appellate judges - Kwan VP and Yuen JA - expressed a view, albeit obiter: in their opinion, the appropriate test for the purposes of the 'fraud on the minority' exception was not personal benefit by the wrongdoers, or in loss to the company, but in the lawfulness of the majority vote releasing the defaulting director from liability. Yuen JA stated that the requirement for personal benefit by the wrongdoers, as set out in Microfusion, was "difficult to justify, because if ... not met, even the most egregious breach of duty cannot be brought to court" (para. 86.1). 

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