Moorthy Selvaraj v. Gmt Industrial Ltd

HCMP 971/2019

[2019] HKCFI 2299

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 971 OF 2019

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R U L I N G

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1.This is an application made by Mr Moorthy Selvaraj (“Moorthy”) by way of originating summons dated 4 July 2019 under which he seeks an order authorising inspection by him or someone on his behalf of the bank accounts of the company, GMT Industrial Limited (“GMT”), held with HSBC. He seeks the inspection of the account statements from the date of reactivation of those accounts in around March 2019 up to the date of the order to be granted. The application is made pursuant to section 740 of the Companies Ordinance.

2.Moorthy has been a shareholder of GMT since 2 April 1979 and presently holds 1,500 out of 15,000 issued ordinary GMT shares.  Though it may not particularly matter for the purposes of this application, it can be noted that Moorthy also served in the capacity of director of GMT for a lengthy period of time between 2008 and 2018.

3.The application is led by Moorthy’s affirmation of 3 July 2019.  Although GMT has filed the acknowledgement of service, technically out of time, it has not filed any evidence and has not applied to file any evidence out of time.  Mr Richard Healy, appearing for GMT this morning, told me that he did not wish to file evidence and did not need to as he is content to address the application simply by reference to Moorthy’s own affirmation. He does so by saying that the affirmation identifies that the application is not made in good faith or proper purpose, as it must be in order to trigger the exercise of discretion under section 740 of the Companies Ordinance.

4.Some brief background facts can be identified.  GMT is a family-owned company, incorporated as long ago as 1979 to hold the Selvaraj family’s business. Apparently it was previously managed by Moorthy’s father, and then on his demise subsequently by the eldest brother, Selvam.  After Selvam died in 2008, the management has become a matter of significant dispute between Moorthy and his other elder brother, Mohan, who is also a shareholder and director of GMT.

5.Clearly, those disputes have erupted into numerous court proceedings, either commenced by or involving Mohan and Moorthy and others, usually making criticism in particular of Moorthy in his conduct qua director of GMT.  Although Moorthy’s father passed away intestate, the shares previously held by him which were transferred to the mother as administratrix of the estate no part of them have not been distributed to Moorthy have been distributed to Moorthy as would otherwise have occurred and he complains that that distribution failure has permitted voting to remove him as a director, improperly, in August 2018.

6.In any event, it is perhaps not surprising that in the light of the lengthy disputes around this company, Moorthy asserts that he no longer wishes to be involved with GMT and would wish, if possible, to sell his shares.  It is in that context that he has started to take steps to seek to extricate himself from the company.

7.In March this year he requested, through his solicitors, confirmation that the bank accounts had been reactivated and repayment of a sum of $1.2 million which he made as a shareholder’s loan, together with a payment for some salary from the company.  The original response of the company, GMT, was to identify that the bank accounts had been reactivated and that the sums payable to Moorthy would be paid within four weeks after GMT had repaid other more pressing debts to non-family creditors. It was also stated that the accounting records would be provided once they were ready.

8.When Moorthy asked to see the bank statements in order to verify the claim that GMT is presently repaying other more pressing debt, there was a change of position by GMT which, through it solicitors, issued another letter now denying that GMT was indebted to Moorthy at all and claiming instead that it was Moorthy who owed GMT US$2.5 million which would be used to set off any amounts due.

9.It is in those circumstances that Moorthy makes the current application identifying in essence two purposes.  One is to investigate what Moorthy describes as a genuine and credible belief on his own part that GMT, under Mohan’s control, has operated the accounts in a manner which constitutes corporate mismanagement or unfair and prejudicial conduct. And the second is for him to be able to ascertain GMT’s present cash position as part of a valuation process of the fair market price of his own shares which he would intend to sell.

10.In his skeleton argument, Mr Anthony Chan, counsel for Moorthy, has set out the legal principles which it seems from Mr Healy’s skeleton are essentially common ground between the parties.  It is common ground that section 740 of the Companies Ordinance confers on the court a discretion to order inspection of the company’s records or documents if the application is made by a person or persons numbering more than five shareholders, or representing 2.5 per cent in value of voting rights, if the application is made in good faith and if the inspection is for a proper purpose. Here, there is no question but that Moorthy is a person who is able to make this application and the contest, as I have indicated, is whether the application is made in good faith and the inspection is for a proper purpose.

11.The requirement of good faith requires the applicant himself to act honestly and with a purpose that he himself believes to be proper.  As to what constitutes a proper purpose, the authorities identify a number of helpful points of guidance.  One is that an application made by a substantial and longstanding shareholder may in and of itself discharge the burden of establishing good faith and proper purpose.  A second is where an applicant seeks inspection to protect his economic interest in the company that might prima facie satisfy the proper purpose requirement.

12.Moorthy says that he satisfies those requirements because, firstly, he has been a substantial shareholder of GMT for 40 years and served it faithfully, including as a director until, he says unlawfully, he was removed from the board last year.  He says he is seeking a narrow scope of documents, demonstrating that he is not embarking on a fishing expedition or attempting to harass or cause prejudice or harm to GMT, and the reasonable request for the documents has been unreasonably refused notwithstanding its proportionate nature.

13.Importantly, he says, that the clear purpose is to safeguard his economic interest qua shareholder of GMT and not to challenge the business decisions of the board, and inspection of the bank statements would not challenge such decisions nor would inspection cause any real or substantial prejudice to GMT.

14.Mr Healy says that a more detailed analysis of Moorthy’s affirmation reveals the absence of good faith and proper purpose.  First, he says that the idea that the application is made because Moorthy might want to sell his shares is contradicted by the fact that, this being a private company where the directors have an absolute discretion as to whether or not to accept the registration of any transfer of shares, the plaintiff has no legal right to have shares purchased by any other person.  He refers me to a case called Leung Chung Pun v Masterwise International, HCMP 2681/2012, in support of the principle that where a plaintiff has no legal right to compel the purchaser of the shares, such a plaintiff might not be entitled to an order under section 740.

15.In his reply submission, Mr Chan says that the correct proposition of law is that it remains in principle a proper purpose for seeking inspection to enable an applicant to assess the value of his presently owned shares, particularly where the possibility of a disposal of that investment is in prospect.

16.I accept that that is the correct proposition and it does not seem to me that it is right for it to be assumed, as Mr Healy invites me to assume, that given that the mother, Mohan and Shiva collectively are the controlling shareholders and duly appointed directors, the only person to whom Moorthy might be intending to sell his shares would be another relevant family member, Jyoti, the widow of Selvam, with whom there are significant extant disputes, including in litigation.  It seems to me that the possibility of selling shares does not and should not presuppose that certain people would or would not be interested in buying them, depending on a price the value of which has not been obtained nor considered and set.

17.Mr Healy also refers me to the deed of settlement which was made in the context of the longstanding disputes between the various members of the family.  The deed is dated 17 November 2017 and was made between the mother, Mohan, Moorthy, Shiva (the younger brother), and GMT, and specifically was intended to achieve settlement of disputes between the various parties regarding the administration of the father’s estate and the distribution of assets thereunder.

18.In paragraph 2.1 of the deed, reference is made to an agreed distribution of sums in GMT’s bank account between various parties to the deed to take place after settlement of liabilities, including expressly the reference to the $1.2 million advanced by Moorthy in respect of payment of employees’ salaries; that is, the shareholder’s loan.  From that, it appears that there was no dispute in relation to the right for Moorthy to be repaid that shareholder’s loan.

19.However, Mr Healy also identifies that clause 2.5 refers to the agreement by which all the shares in GMT to which Mohan and Moorthy are entitled, including both those that they currently hold and those which they would ordinarily inherit from the father under the laws of intestacy, should be transferred to Shiva and that the payment of the sums and the transfer of those shares presupposes the settlement waiver of all claims between themselves as shareholders or directors.

20.The deed also recognises that it cannot in practice be effective without the settlement of the disputes with Jyoti;  and the deed requires various steps to be attempted to achieve that settlement.  It is partly in the context of that that Mr Healy reminds me that if it is the case that the bank statements are going to be shared with Jyoti, then GMT would not believe that that would be in the best interest in relation to the conduct of the litigation against Jyoti as the administratrix of Selvam’s estate.  But it seems to me that there is no genuine basis for assuming that the bank statements would be shared with Jyoti or are being sought for that purpose.

21.The thrust of Mr Healy’s dispute is that Moorthy appears to be equivocal, blowing hot and cold perhaps, about whether or not the deed is regarded by him as binding.  He says that the complaints made by Moorthy essentially are complaints which he makes not as a member of the company, but as a creditor.  But the amount in the deed seems to me to be potentially affected by whether or not the advancement, which is recognised as due and payable to Moorthy, is somehow not to be paid, as that would plainly affect the amount to be received by Moorthy as a member.

22.I also think that the company must be blowing hot and cold in relation to the deed because the company asserts as a reason not to repay the shareholder’s loan, an alleged debt which would otherwise have been settled under the terms of the deed, because the debt is said to arise as a result of misconduct on the part of Moorthy qua director as relating to money taken from GMT’s account as dividend or quasi-dividend on shares which would have been held by Moorthy had the distribution of the intestate estate of the father taken place.

23.At bottom, as Mr Chan reminds me, the matters of complaint giving rise to this application have arisen from the conduct of the company since March 2019, and the particular criticisms that have been levelled have not been addressed, for the reasons that Mr Healy has chosen to resist the application by attacking the applicant’s evidence rather than deploying evidence on the part of the defendant.

24.Ultimately, I am satisfied that Moorthy has demonstrated: first, that he has the status to be able to make the application; secondly, that the application is made by him in good faith; and thirdly, that the inspection is for a proper purpose, not least because of his substantial and longstanding shareholding and also where he is seeking to protect his economic interest in the company as shareholder.  It also seems to me that the relatively narrow scope of the application, the limited documents to which reference is made, identify the appropriate proportionality of the request.

25.I therefore grant an order in the terms of paragraph 1 of the originating summons and I will hear the parties on costs.

(Discussion re costs)

26.On that basis, I will make an order that the costs of the application in the originating summons are to be paid by the defendant and the costs will be taxed on a summary assessment basis on paper.

(Discussion re time for perusing skeleton bill)

27.The Plaintiff’s skeleton still can be provided today. The defendant can comment on it within 14 days.  Seven days for any response, and then I will deal with the assessment on paper.

Mr Anthony Chan, instructed by Cheung & Choy, for the plaintiff

Mr Richard Healy, of Oldham, Li & Nie, for the defendant