Fung Chuen v. Sandmartin International Holdings Ltd
Read the full judgment text of HCMP 1044/2017 on BabelCite. This High Court CFI judgment was delivered on 17 October 2017.
1. This is an application [1] for an order under s 740, the Companies Ordinance (Cap 622) for inspection of documents.
Cites 9 cases
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HCMP 1044/2017 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 1044 OF 2017 ___________
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Introduction 1.This is an application[1] for an order under s 740, the Companies Ordinance (Cap 622) for inspection of documents. 2.The defendant (“the Company”) is a limited company incorporated in Bermuda the shares of which have been listed on the Main Board of the Hong Kong Stock Exchange since 2005. The plaintiff (“P”) is its shareholder holding not less than 2.5% in value of the voting rights of all the members having a right to vote at general meetings.[2] 3.By the present application, P seeks inspection of the following categories of documents of the Company:
P’s case 4.P alleges that the Company’s dealings with the aforesaid companies are extremely dubious to say the least:
5.Apart from the above, there is also evidence which, P says, indicates that Hung (the Chairman of the Company) and his wife Carmen Chen were connected with the Nepalese Debtors and MyHD:
6.Based on all of the above, it is submitted that P has made out a reasonable case that there is a genuine and reasonable need to investigate into the proprietary of the aforesaid transactions in order to protect P’s interest as a shareholder of the Company. It is also submitted that P has demonstrated good faith in making the present application. The Company’s case 7.On the other hand, my attention has been drawn to the fact P is also petitioning for the Company’s winding-up[13] and that the grounds relied on by him in the present application are also the grounds for the winding up petition.[14] Besides, the Company alleges that P is an associate of one Mr Zhi (a professional financial investor) who has been prohibited by a restraint order from commencing further legal action against the Company. The Company says that P’s and Zhi’s various litigations against the Company were attempts to frustrate the Company’s effort to raise working capital[15] so as to force Hung to negotiate a settlement to buy back P’s shares. Moreover, the Company alleges that the present application is a fishing expedition by P in search of evidence to substantiate his allegations in the winding up petition, that there is no reasonable case for investigation and that there is bad faith and improper purpose on P’s part. Lastly, the Company also argues the scope of documents sought is too wide. The issues 8.In view of the evidence before this court and counsel’s submissions, the major issues for this court to decide are as follows:
The relevant legal principles 9.Section 740 of the Companies Ordinance says:
10.From a plain reading of the provision, for it to apply:
11.The predecessor of s 740 of Cap 622 is s 152FA of Cap 32. The latter was modelled on s 247A of the Australian Corporations Act 2001. For the present purpose, the legal principles regarding applications for inspection by shareholders of company documents remain the same after the enactment of Cap 622 and those principles have recently been summarized by the Court of Appeal in Veron International Ltd v RCG Holdings Ltd[16] as follows:
12.Whilst there is no question that both “good faith” and “proper purpose” have to be established before an order for inspection can be made, there is some controversy as to whether the requirements of “good faith” and “proper purpose” in s 740(2) constitutes a “composite notion” or two separate and distinct requirements and whether the test for “good faith” is subjective or objective: see Wong Kar Gee Mimi v Hung Kin Sang Raymond & Anor[18], applied in Re Bank of East Asia[19] and Wong Sau Man, Samuel v Wong Kan Po, Wilson & Ors[20]. As a matter of stare decisis, I am bound by the decisions of the Court of Appeal in Re LehmanBrown Ltd and Veron International’s case to the effect that s 740(2) expresses a composite notion so that the inspection is to be made in good faith and for a proper propose. On the other hand, it is also necessary to bear in mind that the Court of Appeal in Re LehmanBrown Ltd has pointed out that this does not mean that if a proper purpose is proved, a case of good faith shall follow or is to be assumed.[21] I readily accept that in some factual situations the difference in approach to s 740(2), namely whether “good faith” and “proper purpose” is a composite notion or two separate and distinct requirements, may bear on the results of an application for inspection. In the present case, however, as can be seen in the later part of this judgment, the factual situation is such that I do not consider that the two different approaches would produce two different results. 13.Besides, I note that all the relevant case authorities agree that hostility on the part of the applicant does not of itself negate “proper purpose”; and provided that there the application is made in “good faith” and that the primary or dominant purpose is proper, whether inspection may be of benefit to the applicant for other purposes is irrelevant. 14.Mr Chong (and with him Mr Tai), counsel for P, submits that the court should take a liberal interpretation of “proper purpose” with a view to advancing the protection of shareholder rights and interest and the maintenance of appropriate standards of corporate governance. In this regard, I note that the case authorities all agree that the requirement of “proper purpose” is an objective test that calls for an examination of all the surrounding circumstances in order to determine whether the purpose for the inspection order is indeed proper[22]. As to whether a “liberal approach” should be adopted, I take heed of the following comments by the Court of Appeal in Veron International’s case:
15.As to the factual disputes between the parties, I am alive that this is not a trial on affidavits and that the court is not required and should not endeavor to reach conclusions about the merits of the matters relied on as constituting a proper purpose. The Court only needs to be satisfied that a proper purpose has been established and that it is a proper case to exercise the Court’s discretion to order inspection. In this regard, the observations of Recorder A Chow SC (as he then was) in Leung Chung Pun v Masterwise International Ltd[23], which is cited with approval by Harris J in Re Bank of East Asia[24],is pertinent:
16.Ms Ling, counsel for the Company, relying on the first instance decision of Deputy Judge Coleman SC in Re LehmanBrown Ltd[25] submits that:
17.With respect, I am unable to accept her aforesaid submission. This is because what was said in by the learned judge must now be read in the light of the judgments of the Court of Appeal Re LehmanBrown Ltd and Veron International’s case. Whilst the Court of Appeal, differently constituted, has held that “The section operates where the applicant seeks to protect some specific or personal right by the making of the order”, the word “only” is remarkably absent there. Furthermore, the Court of Appeal on both occasions adopts as an example that an order for inspection can be made where a shareholder reasonably takes the view that a transaction could adversely affect his investment and he seeks to investigate the transaction for the purpose of determining what action he should take. It is also pertinent to note that in Veron International’s case[26] the Court of Appeal says that the fact that the applicant may have other means of obtaining the information elsewhere does not mean that he cannot satisfy the two requirements but it is relevant to the court’s decision whether to exercise its discretion to grant an order. 18.With the aforesaid legal principles in mind, I now turn to consider the issues raised by the parties in the present case. In so doing, I note that there is no dispute between the parties that P has met the condition under s 740(6)(a) as regards shareholding. Proper case for investigation The Nepalese Debtors 19.Having considered all the evidence before me (including the Company’s explanations) and counsel’s submissions, I am satisfied that P has adduced sufficient material before the court which gives rise to a reasonable case for investigating whether the loans advanced to the two Nepalese Debtors were a pretext by the Company’s directors for siphoning off the Company’s funds to the detriment of its various stakeholders including the minority shareholders. My reasons are as follows:
MyHD 20.Mr Chong has prepared the following chronology concerning the Company’s loans to and investment in MyHD which I gratefully adopt as follows:
21.Having considered all the evidence before me (including the Company’s explanations) and counsel’s submission, I am satisfied that P has adduced sufficient material before the court to show a reasonable case for investigating the propriety of the Company’s dealings with MyHD, in particular whether the directors had acted in breach of their fiduciary duty owed to the Company. My reasons are as follows:
22.I bear in mind that it would not be possible or appropriate for this court to reach a firm conclusion on each of the complaints raised by P. That is a matter for the trial court. However, based on the available material before me, I find that P has on objective grounds made out a reasonable case for investigation regarding the Company’s dealings with the Nepalese Debtors and MyHD under consideration. Good faith and proper purpose 23.The Company, through Hung, insinuates that P had engaged triad members to visit the Company’s office in Taiwan[35] as well as instructing Mr Zhi to commence various vexatious proceedings against the Company[36], all these were done with the purpose of forcing Hung to buy back P’s shares in the Company.[37] It is also submitted that the present application is intended to facilitate P in gathering evidence for the winding-up petition. 24.As regards Hung’s allegation that P had resorted to the use of a triad member in Taiwan, I note that Hung’s evidence is based on multiple hearsay and is also nebulous. What Hung alleges is that he was given the “message” that “the Plaintiff’s Group” wanted him to buy back their shares without specifying whether the triad was sent by P.[38] As regards Hung’s allegation that P had acted in collaboration with Zhi, the only basis for Hung to say that is a general statement that “Zhi regarded the Plaintiff as his ‘fellow shareholder’”[39]. As regards Hung’s assertion that P’s purpose is to take retaliation and to force him to buy back P’s shares, that is based on a newspaper article.[40] P has denied all the allegations on affirmation. I note also that the defendant in the present proceedings is the Company, not Hung. Having considered what Hung says in his affirmations and P’s reply, I accept Mr Chong’s submission that all of the Company’s allegations against P are highly speculative and have no substance. 25.In Re LehmanBrown Ltd, the Court of Appeal agrees that the assertion of a proper purpose and good faith must be tested against the proper context of the application.[41] 26.As aforesaid, I am satisfied that based on the objective grounds put forward by P there is a proper case for investigation as regards the Company’s dealings with the Nepalese Debtors and MyHD under consideration. Moreover, on the evidence before me including but not limited to the fact that P has a heavy stake in the Company, I am also satisfied that P has acted out of a genuine and legitimate concern to protect his interests as a shareholder of the Company against any potential wrongdoings by its directors and that he honestly believes that it is proper for him to seeks to investigate the Company’s dealings under consideration for the purpose of determining what action he should take. In short, I am satisfied that P has acted with “good faith” in the present application, whether the test for “good faith” is objective or subjective. 27.As regards the requirement of “proper purpose”, whether or not as a matter of law it is a separate requirement from “good faith”, in the factual situation of the present case there is a significant degree of overlap between the two. As aforesaid, I accept that P has a genuine and legitimate concern to protect his interests as a shareholder of the Company against potential wrongdoings by its directors and that, I am satisfied, is also his primary purpose in taking out the present application. Given my view that there are objective grounds to support an investigating into the propriety or otherwise of the transactions under consideration, I am also able to be satisfied that P’s aforesaid primary purpose is in all the circumstances a “proper” one. 28.As regards Ms Ling’s submission that P is trying to obtain ammunition for the winding up petition, it is held by G Lam J in Wei Xing v Willwin Development (Asia) Company Limited[42], which I respectfully agree, that that is not in itself a ground for refusing an application for inspection by a shareholder. Besides, I am also satisfied that P’s hostility, if any, to the present management of the Company does not negate the aforesaid “proper purpose”. Lastly, as I am satisfied that P’s primary purpose for the present application is proper, the fact that he may other purposes in mind is irrelevant. Discretion 29.Ms Ling submits that what P is seeking in the present application he can also obtain them in the winding up petition when the latter reaches the discovery process, as many of the grounds relied upon by P in the present application have also been raised in the winding up petition. 30.I am not sure whether it is correct that P would be able to obtain the Company’s documents in the winding up petition. In any event, whatever documents that P might be able to obtain from the winding up petition are likely to be subject to an implied undertaking not to use them for any other purposes. On the other hand, it is quite foreseeable that P may eventually consider a derivative action against the individual directors of the Company or to take such other steps as are lawful and appropriate to protect his interests as a shareholder which include reporting the suspected transactions to the relevant authorities. Moreover, as the case authorities say, the fact that P may be able to obtain the documents he seeks by other means is just one of the factors to be taken into account in the exercise of the court’s discretion. 31.I take into account the factors mentioned by Deputy Judge William Wong SC in Wong Sau Man, Samuel v Wong Kan Po, Wilson & Ors[43] relevant to the exercise of discretion, including the prospect of anything useful resulting from the inspection sought; the fact that the applicant may have other means of obtaining the information elsewhere; confidentiality; and the possibility of any substantial prejudice to the company in complying with an inspection order. I understand the list of factors given by the learned judge does not mean to be exhaustive. 32.Besides, I also take into account P’s stake in the Company; the apparent weight of the material put forward by P, the seriousness of the allegations made; the fact (I am told) that the Company has already completed its open offer for raising working capital[44]; and the fact that no matter has been raised as to any prejudice or other difficulties that the Company may have in complying with an inspection order. In all the circumstances, I am satisfied that this is an appropriate case for this court to exercise its discretion to order inspection. SCOPE OF INSPECTION 33.In the draft order, there is a Schedule of documents of which P seeks copies as follows:
34.Most of the items listed in the Schedule are based on the recommendation of RSM, P’s forensic accountant, as the areas for review regarding the issues raised by P in the present application, whilst some of them items relate to the factual matters raised in Hung’s 1st and 2nd Affirmations[45]. 35.Ms Ling counters the above requests by submitting that they are not necessary for P’s purpose in the present application but are a “fishing expedition”. She also submits that the documents will be provided to P in the winding up proceedings in due course. 36.With respect, if it is the Company’s position that the documents sought by P in the present application would eventually be provided to him in the winding up proceedings, then I have difficulties seeing why the Company would take the trouble of opposing the present application. Nor do I agree with the submission that P’s application is a “fishing expedition”. This is not the case that P is in search of a cause of action with no defined purpose or that he is just seeking information. P has raised specific complaints (which this court accepts are based on objectively grounds) and the documents that he is asking for inspection relate to his complaints. 37.I take on board the general principle that s 740 is intended to enable a member of a company to inspect its books in order to obtain information about matters that, as member or shareholder in the company, he ought to be informed of by the company and is not intended to be a process as wide-ranging as the process of discovery of documents. On the other hand, I accept Mr Chong’s submission to the extent that most of the documents requested are directly relevant to P’s complaints about the potential misuse of the Company’s funds (in relation to the dealings with Nepalese Debtors), potential breach of fiduciary duty by the directors (in relation to the dealings of MyHD) and the factual matters raised by Hung’s affirmations. I also take into account that the requests are backed by the opinion of a firm of forensic accountants, though the court is not bound to accept whatever the forensic accountants say is relevant or important and has to exercise its own judgment. 38.In my view:
39.Therefore, I would allow items 1 – 2, 4 – 8 and 10 – 16. However, the documents are restricted to those which are in the possession of the Company or under its control. 40.On the other hand, I am unable to be satisfied that item 3 (ie, documents provided to and correspondence with BDO) and item 9 (ie, documents provided to and correspondence with Grant Thorton) are necessary for P’s intended purpose:
41.As regards §1 of the draft order, instead of saying that:
it should be amended and read as:
42.It is expected that P would need the assistance of forensic accountant and lawyers to assist him. For that purpose, I give him leave to disclose and provide copies of the documents obtained to the legal advisers and accountants duly appointed by him. 43.P should be given liberty to apply for further inspection in relation to other documents of the Company if he can demonstrate at the time of the application that he meets all the statutory requirements. As said by Harris J in Wong Kar Gee Mimi v Hung Kin Sang Raymond & Anor[46], an applicant might, following inspection of documents, demonstrate a justification to inspect more documents and there is nothing objectionable in this. Costs 44.I grant an order nisi that P shall have his costs forthwith, to be taxed if not agreed.
Mr Patrick Chong and Mr Terrence Tai, instructed by Howse Williams Bowers, for the plaintiff Ms Ebony Ling, instructed by ONC Lawyers, for the defendant [1] See the Originating Summons dated 5 May 2017 [A/1]. [2] The Company has a share capital of HK$300,000,000 divided into 3,000,000,000 shares of HK$0.1 each. The number of shares issued is 1,311,530,134 of which P holds not less than 56,680,000 shares. See Fung’s 1st Affirmation: [A/2/13/§8]. [3] Emiratinvest owns 80% shares of Simple Media. [4] See Hung’s 1st Affirmation: [A/3/51/§70]. [5] See Fung’s 1st Affirmation: [A/2/14/§§14 - 18]. [6] See the Independent Auditor’s Report for the year ended 31 December 2016: [B4/1283]. [7] Erik Hung was a director of Simple Media between 9 January and 21 December 2015. Lo was a director between 21 December 2015 and 1 May 2017. See Fung’s 2nd Affirmation: [A/4/66/§12]. See also the reply in Hung’s 2nd Affirmation: [A/6/71-98/§§6 – 11]. [8] See the Company’s Reply to the Stock Exchange dated 15 September 2017: [B6/4/1733/§3] [9] See the email from Carmen Chen dated 26 February 2016 and the publication attached: [B4/3/1158] and [B4/3/1173]. [10] Fung’s 2nd Affirmation: [A/7/71-112/§11]. See also the reply in Hung’s 3rdAffirmation: [A/71-144/§8] where Hung said that “In any event, the shareholders of 2 companies are siblings is neither here nor there. It does not mean that those 2 companies are related entities.” [11] In the reply letter (dated 15 September 2017) from the Company to the Hong Kong Stock Exchange, it is said:
[12] [A/8/71-129] [13] Case No: HCCW 207/2017 [14] See the Petition dated 5 July 2017: [B2/730-773]. [15] Referred to as the 1st and 2nd open offer in Hung’s affirmations. [16] [2013] 3 HKLRD 657, at §19 [17] Debelle J later discussed the subject at §39 of that judgment. [18] [2011] 5 HKC 361, at §16, where it is held that the requirement of ‘good faith’ merely requires that the applicant himself acted ‘honestly’ with a purpose that he himself believed to be proper. [19] [2015] 4 HKC 137, at §25(1). [20] HCMP 2250/2016 (unreported), dated 14 August 2017. [21] Supra, at §34. [22] See, eg, Barrack Mines Ltd v Grants Patch Mining Ltd (No 2) (1987) 12 ACLR 630. [23] [2014] 1 HKLRD 1129, at §25 [24] [2105] 4 HKC 137, at §26 [25] [2011] 4 HKLRD 237, at §§37 - 38 [26] Supra, at §38.2 [27] See the draft “Disclosable Transaction” notice of the Company: [A/8/71-126 to 71-128] [28] I note that the only explanation given by Hung to the court is that: “… the full impairments were made to reflect a prudent accounting approach given that there was no subsequent settlement for the year ended 31 December 2016. Reversal of the imprisonment losses will be made when the Debtors make payment.” See Hung’s 1st affirmation: [A/3/51/§71]. [29] In the Company’s Annual Report 2015, it was reported that:
There was a similar note in the Final Results 2016 of the Company where it was said that the net loss in 2016 was HK$107,358,000 and that the current liabilities exceeded its current assets by HK$199,566,000. [30] See Hung’s 2nd Affirmation: [A/6/71-98/§9] [31] See Hung’s 1st Affirmation: [A/3/52/§74]. See also the agreement at [B3/1022-3]. [32] See Hung’s 1st Affirmation: [A/3/74/§75] and the Valuation Report: [B3/1095]. [33] [B/1098/§d]. [34] Hung said the Company could not exercise the option under the share pledge at the time because of its underwriting agreement with a potential investor of the Company: [A/3/52/§74]. [35] See Hung’s 1st Affirmation: [A/3/30/§17] [36] Ibid, at §§20, 40 - 56 [37] Ibid, at §65 [38] Ibid, at §17. The “Plaintiff’s Group” was defined as consisting P, one Ms Or and one Mr Tang: see §22. [39] Ibid, at §63 [40] See Hung’s 1st Affirmation: [A/3/31/§18] and [A/3/43/§§57 – 58]. [41] Supra, §36. [42] HCMP 1922/2016 (unreported), dated 13 April 2017, at §18. [43] Supra, at §39(m) - (r), applying Veron International’s case, supra, at §38.4. [44] See Hung’s 1st Affirmation: [A/3/53/§75] [45] Items 8, 9, 10 and 16 arise from Hung’s 1st and 2nd Affirmations [46] Supra, at §§96 - 97. | |||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under HCMP 1044/2017