Derivative actions and liquidation: Court of Appeal confirms proper route is through insolvency regime

The Hong Kong Court of Appeal has dismissed the appeal in Chu Kong v Lau Wing Yan & others [2026] HKCA 1004, affirming the striking out of a double derivative action and confirming that a contributory has no standing to bring proceedings on behalf of a company in liquidation.

Background

The Plaintiff and Defendant were former shipping business partners whose dispute led to extensive litigation in Hong Kong, the BVI and Singapore. A central issue of their dispute concerned Ocean Sino Limited (“OSL”), a BVI company jointly owned by the parties. OSL wholly owns PBM Asset Management Limited (“PBM”), a Hong Kong company, which in turn held a 49% stake in BGA Holdings Limited (“BGAH”).

Following the Defendant’s successful petition to wind up OSL on the just and equitable ground, the liquidators of OSL caused PBM to issue a statutory demand against BGAH in respect of a shareholder loan and subsequently petitioned for BGAH’s winding up in Hong Kong. The Plaintiff challenged the liquidators' conduct in the BVI and failed at first instance and on appeal. The Plaintiff then brought double derivative proceedings in Hong Kong on behalf of OSL and PBM against the Defendant and the liquidators, alleging breaches of fiduciary duties.   

Decision

The Court of Appeal upheld the lower court’s decision that the Plaintiff lacked locus standi to bring the derivative action. In particular:  

• It is well-established that a company is the proper plaintiff for wrongs done to it.  A derivative action is available only where the alleged wrongdoers control the company and can stifle an action against themselves. 
• That exception falls away once the company goes into liquidation. Control of the company, and any wholly owned subsidiary, passes to the liquidator acting under the court’s supervision. In this case, by virtue of OSL’s liquidation, both OSL and PBM are controlled by the OSL liquidators under the supervision of the BVI court. 
• A contributory’s remedy therefore lies within the liquidation regime, not through a derivative action against the liquidators. The contributory may apply to the companies court either to direct the liquidator to bring the action in the name of the company, or to permit the contributory to do so, subject to the usual indemnity given by the contributory against any consequences of that litigation.
• The Court rejected the Plaintiff’s argument that the liquidators lacked independence because they were alleged wrongdoers. As officers of the BVI court, they are subject to its supervision, and any complaint about their conduct should have been pursued through applications to the BVI court for directions or removal.
• The Court further held that, in a cross-border insolvency, challenges to the conduct of foreign-appointed liquidators should be brought before the appointing court. This accords with the principle of modified universalism, under which the Hong Kong court has power at common law to recognise foreign liquidators and assist foreign insolvency proceedings. It would be inconsistent for the Hong Kong court to recognise a foreign liquidator while permitting a litigant to undermine the integrity of that process by bringing proceedings in Hong Kong without first obtaining directions from the foreign court. 

Comments 

This decision draws a clear line: once a company enters liquidation, derivative actions are no longer available. Shareholders who believe a claim should be pursued must seek relief through the liquidation process and the court supervising the liquidation, rather than through separate proceedings. 

This decision is particularly important in the context of cross-border insolvencies. The Court of Appeal confirmed that challenges to foreign-appointed liquidators should ordinarily be brought before the appointing court. Hong Kong courts will be reluctant to permit proceedings that could interfere with a recognised foreign liquidation.

For more information, please contact Jojo Fan, Managing Partner, Paul Quinn, Partner, Rachael Shek, Partner, Truman Mak, Partner, Sara Troughton, Knowledge Lawyer or your usual Herbert Smith Freehills Kramer contact.