Tse Fung Chiu v. Kwok Cheung Hing and Another
Read the full judgment text of HCMP 2189/2018 on BabelCite. This High Court CFI judgment was delivered on 16 July 2019.
1. By originating summons of 12 December 2018 (“ Originating Summons ”), the Applicant (“ Tse Junior ”) applied for an order for inspection of various documents and records of the 2 nd Respondent (“ the Company ”) pursuant to section 740 of the Companies Ordinance, Cap 622 (“ CO ”).
Cited by 2 cases · Cites 8 cases
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HCMP 2189/2018 [2019] HKCFI 1679 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 2189 OF 2018 _________
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_________ Before: Madam Recorder Yvonne Cheng SC in Court Date of Hearing: 9 May 2019 Date of Judgment: 16 July 2019 __________________ JUDGMENT __________________ A. INTRODUCTION A1. The application before the Court 1.By originating summons of 12 December 2018 (“Originating Summons”), the Applicant (“Tse Junior”) applied for an order for inspection of various documents and records of the 2ndRespondent (“the Company”) pursuant to section 740 of the Companies Ordinance, Cap 622 (“CO”). 2.By summons of 30 April 2019, Tse Junior applied to amend the Originating Summons. This application was not opposed and I granted leave to amend accordingly at the hearing. References below are to the Originating Summons as amended. A2. The background 3.The Company was incorporated on 25 August 2009. It is in the business of trading model trains and moulds. There have been at all times two shareholders, Tse Junior and Kwok Man Hei (“Kwok Junior”). Tse Tsang Yao, Tse Junior’s father (“Tse Senior”) was the sole director of the Company from incorporation until 26 March 2013. Kwok Cheung Hing, Kwok Junior’s father (“Kwok Senior”) was appointed as a director from 27 March 2013. On or about 25 November 2014, Tse Senior resigned as director, and thereafter Kwok Senior has been the sole director of the Company. 4.Tse Senior was the General Manager of the Company from incorporation until early May 2015, and Tse Junior was the Assistant General Manager from incorporation until 29 May 2015. 5.The parties have fallen out and have been engaged in various pieces of litigation, including the following.
6.HCA 1320/2015 was commenced on 16 June 2015, and HCA 1777/2015 was commenced on 6 August 2016. They were consolidated on 2 December 2016 and will be referred to as “the Consolidated Action”. 7.In the Consolidated Action, the Company claims, inter alia, that:
8.Tse Senior counterclaimed against the Company for repayment of a total $11,957,923, which he said had been loaned to the Company through various payments made between 2007 and 2015.
9.HCA 2119/2015 was commenced by Madam Ng against Kwok, in respect of a loan granted to Tse Senior and Madam Ng by a finance company belonging to Kwok Senior.
10.HCMP 2066/2016 was commenced by Tse Junior against Kwok Senior and the Company under sections 379, 429 and 610 of the CO for an order that Kwok Senior and the Company do call an AGM of the Company for 2015 out of time, and provide reporting documents of the Company for the financial year 2015 pursuant to sections 379 and 429(1) of the CO. 11.The proceedings were disposed of by a consent order of 28 June 2016, which ordered that an AGM be held and that Kwok Senior and the Company provide the documents requested. 12.In the event, the AGM took place on 26 September 2016 and 3 October 2016 but without Tse Junior’s participation. Tse Junior complained that the notice of the AGM and the audited financial statements for the year 2015 were not provided to him.
13.HCMP 3419/2016 was commenced by Tse Junior against Kwok Senior and the Company, seeking a declaration that the AGM for 2015 held on 26 September 2016 and 3 October 2016 was void and invalid as the financial statements were not available. 14.The proceedings (save as to costs) were disposed of by a consent order of 28 June 2016, which declared that the resolutions passed at the AGM were ineffective, void and/or invalid.
15.HCMP 1547/2018 was commenced by the Company against Kwok Junior and Tse Junior, seeking leave to convene its AGMs for 2016 and 2017 out of time. 16.On 18 October 2018, Deputy High Court Judge Le Pichon allowed the reconstitution of the application by substitution of Kwok Junior in place of the Company as the applicant, and by joining the Company as the 2ndRespondent. Leave was then granted to extend the time for holding the 2016 and 2017 AGMs.
17.In HCMP 183/2019, Tse Junior is seeking leave to commence a derivative action against Kwok Senior, alleging wrongdoing by Kwok Senior including in relation to an alleged loan of $7 million. B. THE PRINCIPLES APPLICABLE TO AN APPLICATION UNDER SECTION 740 OF THE CO 18.Section 740 of the CO provides as follows:
19.Section 740 of the CO confers on the Court a discretion, upon the application of the requisite number of members of a company,[1] to order the inspection of a company’s records or documents if the two requirements set out at section 740 of the CO are satisfied, namely:
See Re Bank of East Asia Ltd [2015] 4 HKC 137 at [24], per Harris J. 20.There was little dispute as to the relevant principles governing the application of the requirements of “good faith” and “proper purpose”. In Veron International Ltd v RCG Holdings Ltd [2013] 3 HKLRD 657, Yuen JA, with whom the other members of the Court of Appeal agreed, said as follows:
21.As to the interrelationship between the requirements of “good faith” and “proper purpose”, Chu JA said in Re LehmanBrown Ltd at [34] that:
22.Furthermore:
23.Ms Michelle Liu, counsel for Tse Junior, submitted that the court should be inclined to 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: Bank of East Asia Ltd at [25(6)]. Mr Brown submitted that the Court of Appeal in Veron International Ltd had expressed doubt as to whether a liberal approach should be adopted. It seems to me that what Yuen JA was saying in Veron International Ltd at [20.1] to [20.3] was that it was not necessary to decide whether there had a “more” liberal approach or “less” liberal approach taken in a number of previous cases; the Court was to apply the legislation to the facts of the individual case before it, guided by the principles which it had identified. C. THE PARTIES’ RESPECTIVE POSITIONS C1. Tse Junior’s case 24.In his first Affirmation of 12 December 2018 (“Tse I”) Tse Junior says that there is a sufficiently reasonable case for investigation in relation to two matters:
25.Accordingly, Tse Junior seeks an order for the inspection of:
C2. The Respondents’ case 26.The Respondents say that the real purpose of Tse Junior’s application is to find evidence to support Tse Senior’s claim for loans that he says are owed to him by the Company; the evidence shows that this was all along his real concern. This cannot be a purpose which assists Tse Junior in his capacity as a member of the Company. The application is therefore neither made in good faith nor for a proper purpose. D. WHETHER PROPER PURPOSE: THE MATTERS WHICH ARE SAID TO CALL FOR INVESTIGATION D1. The $7 million debt owed to Kwok Senior (Originating Summons Schedule item 12) 27.The 2015 Audited Accounts stated that the amount owed to Kwok Senior was $7,000,000, whereas the amount stated in the audited financial statements for the year ending 31 March 2014 (“the 2014 Audited Accounts”) [5] was $2,700,000.[6] Tse I says that:
28.It is further said that the payments for the making of the loan were made prior to the date of the 2014 Audited Accounts, and therefore would have been taken into account by the auditors at the time of preparing those accounts, in which the amount of the loan outstanding to Kwok Senior was stated to be $2.7 million. It was therefore implausible that the amount would have increased to $7 million in the 2015 Audited Accounts. 29.It is in respect of this item that Tse Junior seeks disclosure of the HSBC Statements,[7] in addition to the categories of documents listed in paragraph 1(b) of the Originating Summons. 30.Kwok Senior’s evidence (in the affirmation of Kwok Cheung Hing of 19 March 2019 (“Kwok I”)) is that the payment of $7.9 million made to him was used:
31.In response, the 2nd Affirmation of Tse Fung Chiu (“Tse II”) said that:
32.I note that whilst Tse II suggested that Kwok Senior’s explanation as to the use of the $3 million was not true, this was on the basis that use of the $3 million for onward payments by Kwok Senior ought to have been described as “advances” by the Company (since Kwok Senior received the funds before he made any payments for the Company) rather than as “repayment” of loans, which was the terminology used by OLN. There was, however, no direct evidence from Tse Junior or Tse Senior to rebut Kwok Senior’s evidence regarding the circumstances in which the arrangements for onward payments had been made, including the evidence that the arrangements had been requested by Tse Senior himself. In the circumstances, the fact that OLN referred to repayment of loans is little more than a point of semantics. 33.As to the $4.9 million (which Kwok I said was to repay other loans of $5.025 million), Tse II did not admit that Kwok Senior had lent a further $5.025 million to the Company. However, Tse II did not seek to explain what the cheques totalling $5.025 million drawn by Kwok Senior, Kwok Junior and Kwok Senior’s companies in favour of the Company were for, or provide other evidence to answer Kwok I’s evidence that the $4.9 million was used to repay loans of $5.025 million. 34.As to the payments totalling $3,335,447.54 from the Company to Kwok Senior which Tse II says were not taken into account, Mr Brown submitted, and I agree, that this was disingenuous, given that Tse Senior had pleaded in HCA 1777/2015 that these amounts were in fact repayments of an earlier, separate loan made by Kwok Senior in 2007 to Modern Gala (International) Limited (which was taken over by the Company). The repayments were completed by June 2010, before Kwok Senior lent the disputed $7 million to the Company. 35.I further note that whilst the Schedule to the Originating Summons included the $7 million director’s loan as one of the “qualified” items, in fact, in the 2015 Accounts, the amount was not qualified. This indicates that PH Tang was satisfied that the Company did indeed owe $7 million to Kwok Senior. It was suggested that pressure was brought to bear on PH Tang through proceedings brought by the Company, but the Company had not in fact “sued” PH Tang; it had simply taken out an application for discovery of documents. 36.It is true that there is no explanation as to why the amount owed to Kwok Senior was stated as $2.7 million in the 2014 Audited Accounts. However, Ms Liu’s argument that the change was implausible must implicitly assume that the 2014 Audited Accounts were correct on this point. But there was no evidence as to whether this was the case. Rather, Tse Junior’s evidence was directed to showing that all of the $7 million loan which Kwok I said had been made by Kwok Senior had been repaid. In this regard, as explained above, I do not consider that such evidence suggests that the figure of $7 million in the 2015 Audited Accounts is a result of wrongful or undesirable conduct, or corporate mismanagement. 37.I therefore find that Tse Junior has not established that there is a sufficiently reasonable case for investigation as regards any wrongful or undesirable conduct, or corporate mismanagement, in relation to the amount of $7 million said to be due from the Company to Kwok Senior. D2. The $3,014,473 debt owed to Tse Senior (Originating Summons Schedule item 11) 38.The 2015 Audited Accounts stated that the amount owed to Tse Senior was $3,104,473, whereas the amount stated in the 2014 Audited Accounts was $9,414,473. Tse I did not address this complaint specifically, but identified the debt owed to Tse Senior as one of the qualified items in the 2015 Audited Accounts which required investigation. In Tse II,[8]Tse Junior complained that:
39.However, what PH Tang had said in the 2015 Audited Accounts was that they had not obtained direct confirmations in respect of the debt of $3,014,483 owed to Tse Senior, rather than that they had themselves positively confirmed that $3,014,483 was owed to Tse. PH Tang had issued a request for confirmation to Tse Senior, saying that in the course of examining the Company’s accounts they had found that $3,014,483 was the amount showing as the balance on his account. (Tse Senior did not sign it.) It does not follow that the Company must have provided documents to support this figure. 40.It also appears that in response to the request of Tse Junior’s solicitors, Johnnie Yam, Jacky Lee & Co (“JYJL”), to the Company to prepare audited financial statements for the year ending 31 March 2015, OLN’s letter of 1 June 2016 had asked Tse Senior to provide documents in support of the amount he claimed to be due to him, pointing out that the loans would have been made during the time when Tse Senior was the director and general manager of the Company. However, Tse Senior never provided any documents. Nor has Tse Junior provided any empirical evidence in the current application as to the existence or amount of the loan from Tse Senior. It appears that what Tse Junior and Tse Senior rely on is merely the fact that the 2014 Audited Accounts showed the amount owing to Tse Senior as being $12,114,473. In a letter of 1 December 2018, JYJL referred to Tse Senior’s counterclaim against the Company in the Consolidated Action for $11,957,923 and said that:
41.If Tse Junior suspected misconduct or mismanagement giving rise to a misstatement of the amount of the loan to Tse Senior in the 2015 Audited Accounts, one would have thought that empirical evidence would have been produced to show such misstatement, but none has been produced,nor has any explanation been given for the absence of such evidence. 42.As to why the amount of the loan had decreased between the 2014 Audited Accounts and the 2015 Audited Accounts, what can be seen from the documents is that:
43.None of the deponents have addressed the issue of whether the 2015 Management Accounts were indeed prepared on Tse Senior’s instructions. However, I note that Tse Junior did not dispute Kwok Senior’s evidence (in paragraph 42 of Kwok I) that the 2015 Audited Accounts were prepared based on data provided by Tse Senior,[9] which would suggest that the reduction in the amount of the loan is due to the difference in figures provided by Tse Senior. 44.Even leaving this point aside, it does not seem to me that asking to inspect documents relating to why a loan to an ex-director is said by the company’s auditors not to have been directly confirmed, or why the loan has been reduced, or why the loan is not the amount claimed by the ex-director in legal proceedings against the Company, constitutes a proper purpose for the purposes of section 740 of the CO. It would not assist Tse Junior in his capacity as a member. It would not be germane to the shareholder’s economic interest in the company, given that the loan is said to have been reduced and is doubtful. The adjustment of the amount of the loan does not lead to the inference that there has been corporate mismanagement, or wrongful or undesirable conduct, particularly when no empirical evidence as to the existence or amount of the loan has been produced. 45.I am therefore not satisfied that a sufficiently reasonable case for investigation arises in relation to the amount of $3,014,473 said to be due from the Company to Tse Senior. D3. Sales commission of $228,328 (Originating Summons Schedule item 1) 46.In the 2015 Audited Accounts, PH Tang stated that they were unable to obtain sufficient appropriate audit evidence or explanation to satisfy themselves as to the appropriateness of the accounting entries of various items in the income statement. The first such item is an expense, being sales commission of $228,328. 47.Kwok I says that the item is an amount allegedly paid to a purchaser named Daniel K, which Tse Junior does not deny. Kwok I says that Kwok Senior “interrogated” Tse Senior over this payment, and that the amount in the 2015 Audited Accounts was lower than the amount of the payment in the 2014 Audited Accounts, and was based on data provided by Tse Senior. Tse II denied that Kwok Senior “interrogated” Tse Senior about the payment, but did not deny that the figure was based on data provided by Tse Senior. 48.I am not satisfied that Tse Junior has made out a sufficiently reasonable case for investigation as regards any wrongful or undesirable conduct, or corporate mismanagement. Indeed, Ms Liu did not identify any such misconduct or mismanagement. Apparently, a commission payment to Daniel K in the year ending 31 March 2014 was accepted by the auditors, but a (smaller) payment of the same nature in the year ending 31 March 2015 was considered not to be supported by sufficient audit evidence; this does not suggest any misconduct or mismanagement. In any event, the amount of the payment was apparently based on data provided by Tse Senior. D4. Insurance of $285,548, payment of “Manuselect Investment” of $72,000,and “retire income plan payments” of $373,337 (Originating Summons Schedule items 2, 3, 7) 49.In the 2015 Audited Accounts, there were three items of expense relating to insurance, in relation to which PH Tang stated that they were unable to obtain sufficient appropriate audit evidence or explanation to satisfy themselves as to their appropriateness. 50.Kwok I says that in the Consolidated Action, the Company is claiming (against Tse Senior, Tse Junior and Madam Ng) for loss suffered due to unauthorised insurance policies which Tse Senior purchased for himself, Tse Junior and Madam Ng, using the Company’s money. He says that Tse Senior was the person purchasing the policies and should therefore know what they were about. He also surmises that the three insurance items had previously been grouped together in the 2014 Audited Accounts under the simple heading of “insurance”, a matter that was challenged by Ms Liu in her submissions, but whether or not the surmise is correct is beside the point. 51.Tse II did not deny that the three expense items relate to policies purchased by Tse Senior, or the point that Tse Senior, rather than Kwok Senior or the Company, was the person who should know what the items were about. 52.I am therefore not satisfied that Tse Junior has made out a sufficiently reasonable case for investigation as regards any wrongful or undesirable conduct, or corporate mismanagement, in respect of these items. D5. Motor vehicle expenses of $142,560 and car rental expenses of $201,368 (Originating Summons Schedule items 4, 6) 53.In the 2015 Audited Accounts, there were two items of expense relating to cars, in relation to which PH Tang stated that they were unable to obtain sufficient appropriate audit evidence or explanation to satisfy themselves as to their appropriateness. 54.Kwok I says that his understanding was that PH Tang broke down what had previously, in the 2014 Audited Accounts, been termed “plant rental” into these two separate items of expense. 55.Tse II’s response was that if this were the case, why would PH Tang have been satisfied about them in the 2014 Audited Accounts, but not in the 2015 Audited Accounts? 56.However, the mere fact that certain expenses were accepted by the auditors as being sufficiently evidenced or explained in one year does not mean that expenses of a similar nature will be accepted in a subsequent year. The lack of sufficient audit evidence does not in itself point to any misconduct or mismanagement. 57.I am therefore not satisfied that Tse Junior has made out a sufficiently reasonable case for investigation as regards any wrongful or undesirable conduct, or corporate mismanagement, in respect of these items. D6. Office rental and rates of $113,741 (Originating Summons Schedule item 5) 58.This is the last of the seven items of expenses in the 2015 Audited Accounts in relation to which PH Tang stated that they were unable to obtain sufficient appropriate audit evidence or explanation to satisfy themselves as to their appropriateness. 59.Kwok I explains that the premises used by the Company were provided rent-free by his friend Mr Wan, in return for premises which Kwok Senior provided to Mr Wan’s company. In around April 2014, Mr Wan no longer used Kwok Senior’s premises, but Kwok Senior asked Mr Wan to delay demanding rent as Tse Senior had told him that the Company was in financial difficulties. However, in November 2014, when Kwok Senior found out that (as he alleges) the Company was paying substantial sums to the Tse family without justification, Kwok Senior was angry, and he and Tse Senior decided that the Company would start paying rent to Mr Wan. 60.Ms Liu submits Kwok Senior was in breach of his fiduciary duty to the Company as he acted in his friend’s interest rather than the Company’s by deciding that the Company should start paying rent. However, Tse II did not deny that it was in fact a joint decision by Tse Senior and Kwok Senior, namely the Company’s board of directors, that the Company would pay rent to Mr Wan. Nor did Tse II deny that the original basis for the rent-free arrangement (namely that Mr Wan enjoyed rent-free premises from Kwok Senior) had ceased. Instead, Tse II expressed doubt as to Kwok Senior’s explanation as to what the amount was for, on the grounds that Kwok Senior had a personal interest in the transaction, and as Kwok Senior had not exhibited any documents, such as a signed tenancy agreement. It was therefore said that it is necessary to inspect the Company’s documents to see if the item is correct. 61.However, it is not suggested that the decision of the board to pay rent for premises which were indeed occupied by the Company amounted to a breach of fiduciary duty by the board. 62.I am therefore not satisfied that Tse Junior has made out a sufficiently reasonable case for investigation as regards any wrongful or undesirable conduct, or corporate mismanagement, as regards this item. D7. Long outstanding trade and other receivables of $5,641,449 and deposits and prepayments of $2,935,372 (Originating Summons Schedule items 8, 9) 63.In the 2015 Audited Accounts, PH Tang said that they were unable to obtain sufficient appropriate audit evidence or explanation to satisfy themselves as to the recoverability of two items which were carried in the statement of financial position, namely:
64.Kwok I says that he asked PH Tang about these two items after the present application was taken out. He says that PH Tang said that:
65.Tse II did not address the items other than to make the general complaint that Kwok Senior must have given some explanations to the auditors, who were nevertheless not satisfied; and to deny the suggestion that Tse Senior was in a better position to explain them since they would have been accumulated during his tenure as director and general manager. 66.Ms Liu submitted that as the 2015 Audited Accounts did not define what was meant by “long outstanding”, it was uncertain for how long the receivables had been overdue, or for how long the deposits and prepayments had been made. They might not in fact have been carried over from 2014, and instead have been created in 2015. It was said that Tse Junior wanted to investigate why there were such qualified items. 67.However, if PH Tang described a certain amount of the receivables and deposits and prepayments as being “long outstanding”, there does not seem to be any real basis to suggest that these amounts had only been created within the very same accounting year. Nor does the description of the amounts as being “long outstanding”, without more, suggest any corporate mismanagement. The auditors were simply expressing a view that as regards certain amounts which had not been recovered for a long period of time, their recoverability was in doubt, and they did not have sufficient evidence or explanation to indicate recoverability. 68.I am not satisfied that Tse Junior has made out a sufficiently reasonable case for investigation as regards any wrongful or undesirable conduct, or corporate mismanagement, in relation to these two items. D8. Trade and other payables of $11,443,379 (Originating Summons Schedule item 10) 69.The balance sheet in the 2015 Audited Accounts shows, under “Current liabilities”, an item of “trade and other payable” [sic] in the amount of $11,443,379. PH Tang stated that they had not obtained a direct confirmation in respect of this item, and that they were unable to determine whether any adjustments to these amounts were necessary. 70.Kwok I said that he had asked PH Tang, who confirmed that these were trade and other payables which the Company should have paid out to third parties. There was however neither evidence to prove that the payments were actually owed by the Company, nor any chaser from any of the third parties. PH Tang simply relied on the information previously provided by Tse Senior in preparing the previous audited statements. 71.Mr Brown submitted that the item was, like items 8 and 9, an aging entry carried forward from previous years. To this, Ms Liu pointed out that there had been a “massive increase” in the amount of this item from the 2014 Audited Accounts, the balance sheet of which had stated $4,918,846 as the amount for trade and other payables, so that much of the $11,443,379 was not an amount carried forward from the previous year, but consisted instead of fresh liabilities. She submitted that Tse Junior had a legitimate interest in investigating this item since the auditors could not tell whether adjustments needed to be made to the amount, and any adjustments made would affect the financial position of the Company. 72.However, it seems to me that what PH Tang was saying in respect of this item was simply that they had not obtained direct confirmations from the various third party creditors to whom the Company allegedly owed money. This is not indicative of any mismanagement on the part of the Company. It simply means that the third parties had not responded to PH Tang’s request for confirmation. In any event, the lack of confirmation from such third parties would, if anything, tend to suggest that the debts might ultimately not need to be paid by the Company. Tse II did not explain why this would adversely affect his position as shareholder. D9. Cumulative effect of qualified entries 73.Ms Liu submitted that the qualified entries in the 2015 Audited Accounts should be considered cumulatively, rather than on an individual basis. This was why, in Tse I, apart from the $7 million debt owed to Kwok Senior, the qualified entries were not addressed separately at all. Ms Liu’s case was that when the qualified entries were taken together, this meant that the 2015 Audited Accounts were financial statements which did not reflect the true financial position of the Company. Applying a “liberal approach” to the assessment of whether there was a “proper purpose”, the qualifications in the accounts suggested that there was some problem with the corporate governance of the Company, and this in turn affected the economic interest of Tse Junior as a member. 74.I have already referred above to Veron International and Yuen JA’s observation that the correct approach was to apply the principles identified without reference to “more” or “less” liberal approaches. In any event, it seems to me that if the complaints in respect of various entries in the 2015 Audited Accounts do not stand up to scrutiny individually, the accumulation of the entries does not render the complaints more forceful. D10. Conclusion regarding proper purpose 75.I am therefore not satisfied that Tse Junior has demonstrated that the inspection of documents sought pursuant to the Originating Summons is being sought for a proper purpose. The application therefore fails. E. GOOD FAITH 76.For completeness, I set out also my views on the issue of good faith. 77.Ms Liu submitted that Tse Junior’s good faith was demonstrated by the fact that he brought other proceedings against Kwok Senior and the Company in HCMP 3349/2015, HCMP 2066/2016 and HCMP 3419/2016, and was successful. However, Kwok Senior’s evidence was that Tse Junior had failed to explain the full background to these proceedings and that the orders relied on by Tse Junior had been made by consent. 78.It is not possible or appropriate for me to make determinations as to whether Tse Junior acted in good faith in other proceedings which are not before me. In any event, whether or not Tse Junior acted in good faith in such other proceedings is not determinative of whether the current application is being made in good faith. 79.Ms Liu submitted that Tse Junior honestly believes that there is “something wrong” about the items listed in the Originating Summons and that there has been corporate mismanagement. However, the assertion of a proper purpose and good faith must be tested against the proper context of the application. Mr Brown submitted that Tse Junior’s application was brought for an ulterior motive, namely, to support Tse Senior’s counterclaim in the Consolidated Action for repayment of over $11 million lent to the Company, by fishing for evidence to support the amount of the loan and undermining the 2015 Audited Accounts (which state the amount of the loan to be $3-odd million). In this regard, it is noteworthy that in JYJL’s letter of 1 December 2018, it was said that Tse Senior’s case for repayment of the loan (as counterclaimed in the Consolidated Action) relied on the 2014 Audited Accounts (see extracts set out in paragraph 40 above). The letter went on to state that “if 2015 Audited Statements were reliable, the amount of the indebtedness due by the Company to Tse Senior … would not be substantiated.” It would therefore be in Tse Senior’s interest to challenge the reliability of the 2015 Audited Accounts. 80.I bear in mind that the mere fact that the parties are at loggerheads with each other does not necessarily mean that Tse Junior’s application was not brought in good faith. Nevertheless, I consider the following to be significant:
81.Given these matters, and my earlier conclusion above that Tse Junior has failed to demonstrate that the proposed inspection of documents is being sought for a proper purpose, I am not satisfied that the real purpose of the application is to investigate suspected misconduct or mismanagement on the part of Kwok Senior, and that therefore the application is made in good faith. F. CONCLUSION 82.For the foregoing reasons, I dismiss the Originating Summons, and make an order nisi that the costs of and occasioned by the Originating Summons be to the Respondents, to be taxed if not agreed.
Ms Michelle Liu, instructed by Johnnie Yam, Jacky Lee & Co, for the applicant Mr Toby Brown, instructed by Oldham, Li & Nie, for the 1st and 2nd respondents [1] There is no dispute in the present case that the application is being made by the requisite number of members of the Company and I say no more about this. [2] Section 247A of the Australian Corporations Act 2001, on which the predecessor of section 740 of the Companies Ordinance was modelled. [3] Mr Toby Brown, counsel for the Respondents, placed emphasis on the requirements as being separate and independent (citing Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241). However, the difference is probably simply a matter of semantics. [4] In fact, the amount said to be owed to Kwok Senior was not qualified by the auditors. [5] Also prepared by PH Tang. [6] Strictly speaking, the 2014 Audited Accounts did not give a breakdown of the amount of $12,114,473 stated as being owing to the directors, but the 2015 Audited Accounts provided the breakdown for both the year ending 31 March 2014 and the year ending 31 March 2015, and indicated that for the year ending 31 March 2014, $9,414,473 was attributed to Tse Senior and $2,700,000 was attributed to Kwok Senior. [7] Although it should be noted that in fact, the HSBC Statements have already been disclosed to Tse Junior and Tse Senior in the Consolidated Action, albeit with some redactions for the months of January 2015 to March 2015 of matters which Mr Brown says relate to irrelevant transactions. [8] Mr Brown argued that Tse Junior’s honesty and motive at the time of filing the application can only be assessed by reference to Tse I, and not Tse II, as the latter was not filed at the time of the application. I do not agree that the Court is limited in this way; the matters stated in a reply affirmation, whilst not contemporaneous with the filing of an application, may nevertheless shed light on whether the application is being made in good faith and for a proper purpose. [9] Whilst the heading of this part of Kwok I indicates that it relates to sales commission, the statement that the 2015 Audited Statements being based on data provided by Tse Senior is a general one. | |||||||||||||||||||||||||||||
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