Challenges to the Plaintiff’s Authority to Sue

In Bold Shine Investment Limited v Zheng Deli [2024] HKCA 767, the Court of Appeal reviewed the principles governing applications to challenge a plaintiff’s authority to sue, holding that such applications must be made at the earliest opportunity in legal proceedings. In doing so, the Court clarified that this is a rule of law rather than a rule of practice. This decision is an important reminder for practitioners and litigants that a challenge to the plaintiff’s authority to sue should be made as soon as possible, lest they be barred from doing so later on in the proceedings.

Bold Shine Investment Limited (“Bold Shine”) sued Zheng De Li (“Zheng”) and Tsui Yee Kwan (“Tsui”) in two actions (the “Actions”). The primary issue in the Actions was whether the shares in Bold Shine, and in turn the disputed property held by Bold Shine, was beneficially owned by Zheng or held by him on trust (the “Trust Issue”).

Zheng and Tsui were husband and wife. It was their case that Zheng and Luo Ping Kwan (“Luo”) were the only two directors of Bold Shine. As part of their defence, Zheng and Tsui raised the issue (the “Authority Issue”) that Bold Shine had no authority to commence the Actions against them in the absence of any approval or resolution by the board of directors, which comprised only Zheng and Luo.

At a case management hearing on 25 April 2022, Queeny Au-Yeung J directed that Zheng and Tsui should, within 28 days, take out an appropriate application to resolve the Authority Issue.

Subsequently, Zheng and Tsui took the stance that new or varied directions should be made such that the Authority Issue be left for decision by the trial judge at the trial, on the ground that the Authority Issue depended entirely on the Trust Issue which could only be resolved after trial.

At the pre-trial review on 9 April 2024 (the “PTR”), DHCJ Winnie Tsui (as she then was) (the “Judge”) raised with the parties the outstanding Authority Issue. After hearing submissions, the Judge ordered that Au-Yeung J’s directions shall cease to have effect, accepting Zheng and Tsui’s contention that the Authority Issue would essentially “rise and fall” with the substantive claim and there was thus no need for Zheng and Tsui to take out a separate application to resolve the Authority Issue prior to the trial. Instead, in the view of the Judge, Zheng and Tsui could simply raise the Authority Issue at the trial should they wish to pursue it. Further, the Judge was under the impression that Counsel for Bold Shine agreed to this position.

The trial went before the Judge on 21 May 2024. At the outset, Counsel for Bold Shine (who did not appear at the PTR) sought a ruling from the Court that Zheng and Tsui be disallowed from challenging Bold Shine’s authority to sue in the trial. In essence, it was argued that, as a matter of law, a challenge to authority to sue must be made and determined before trial and could not be raised as a defence at the trial.

On the other hand, Counsel for Zheng and Tsui contended that whether the Court should allow the Authority Issue to be raised and determined at the trial was simply a rule of practice and not a rule of law. Thus, it was said, there was no absolute bar to the Court exercising its discretion to allow the Authority Issue to be dealt with at the trial so as to save time and costs given the overlap of disputes between the Authority Issue and the substantive issues.

In the event, the Judge refused Bold Shine’s application and ordered Bold Shine to bear the costs of the first day of the trial. In gist, the Judge considered that the challenge to authority to sue was primarily based on case management considerations. Having regard to the specific circumstances of the case, the Judge concluded that she was entitled to exercise her discretion to allow the challenge to Bold Shine’s authority to sue to be raised and determined in the trial of the Actions.

On the second day of the trial (i.e. 22 May 2024), the plaintiff applied for leave to appeal against the Judge’s decision. This was refused by the Judge. The trial of the Actions went ahead. After the closing of evidence, the parties were scheduled to make closing submissions on 29 August 2024.

On 5 June 2024, Bold Shine renewed its applications for leave to appeal against the Judge’s decision below.

On 9 August 2024, the Court of Appeal handed down its written judgment on the renewed applications.

In the judgment, the Court of Appeal conducted a detailed review of the case law on authority to sue. It restated the relevant principles as follows:-

1. A challenge to the plaintiff’s authority to sue cannot be raised by way of defence. It has no place in the trial to determine the merits of the substantive dispute. In this regard, the Court of Appeal expressly disagreed with the views of B Chu J in 釋照月 v Secretary for Justice [2023] HKCFI 1392 that the approach to determining the plaintiff’s authority to sue represents only a rule of practice and not a rule of law.
2. The challenge must be raised at the outset or when it comes to the attention of the Court or of the defendant in the course of the proceedings. This reflects the fact that authority to sue goes to the fundamental question of whether an action is properly constituted.
3. Once the issue has been raised it must be decided. It would be wrong to allow the action to go on without deciding the issue of standing as the defendant will not have a further chance to challenge the issue.
4. The fact that the issue of authority to sue involves factual disputes is not a justification for not resolving the issue at an early stage of the proceedings. It does not afford a basis for leaving the challenge to be determined at the trial.
5. There are a number of ways to make and resolve a challenge to authority to sue. A defendant may apply to strike out the claim for want of authority, which can be determined on affidavit evidence or by way of a trial where there are factual disputes that cannot be resolved on affidavit. A dispute over the plaintiff’s authority to sue may also be determined by way of a trial of preliminary issue. Such a course will be appropriate where there are overlapping issues between the challenge to authority and the substantive dispute.

Notwithstanding these principles, in the unique circumstances of the case, the Court of Appeal refused leave to appeal. Bending to the practicalities of the case, the Court attached critical weight to the fact that the renewed applications were brought at a time when the trial had commenced and was then underway. An appellate court should not interfere, or be seen to be interfering, with the conduct of an ongoing trial.

However, the Court of Appeal made clear that it would have granted leave to appeal but for the unusual situation that the evidence at the trial had been adduced and concluded.

The Court of Appeal’s decision is helpful in dispelling confusion about the principles governing challenges to authority to sue. In essence, such challenges should be made at the earliest opportunity, and can never be raised by way of defence. At the same time, the unusual facts and procedural history of the two Actions also leave an important reminder for practitioners acting for the plaintiff – once the defendant has omitted to launch a challenge to the plaintiff’s authority to sue, the plaintiff should, when the issue arises, make it doubly clear that the defendant is debarred from doing so later on in the proceedings. Otherwise, like Bold Shine in the two Actions, the plaintiff may find itself having to deal with the authority challenge at the trial of the substantive disputes, which may lead to wastage of time and costs.