Fung Chuen v. Sandmartin International Holdings Ltd

CACV 240/2017

[2020] HKCA 146

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 240 OF 2017

(ON APPEAL FROM HCMP NO 1044 OF 2017)

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REASONS FOR JUDGMENT
AND
SUMMARY ASSESSMENT OF COSTS

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Hon Yuen JA (giving the Reasons for Judgment and Summary Assessment of the court):

1.1.On 17 April 2018, this court heard the application of the defendant (“the Company”) for a stay of execution pending appeal from the Judgment of DHCJ A. Lee, now A. Lee, J (“the judge”) given on 17 October 2017 (“the Judgment”) ordering that the Company should, pursuant to s.740 Companies Ordinance Cap.622, produce various documents for the inspection of the plaintiff, a shareholder.

1.2.In effect, we had to consider whether the company had reasonable prospects of success on appeal so as to justify a stay pending appeal.   

1.3.At the conclusion of the hearing, we dismissed the application for stay pending appeal, for reasons to be given.

1.4.However shortly thereafter, on 8 May 2018, the parties applied by consent to dismiss the appeal, and an order in terms was duly made.  

1.5.Subsequently the plaintiff’s solicitors applied for a summary assessment of costs.  Our brief reasons for (1) refusing the application for stay and (2) for the summary assessment of costs appear below. 

2.Section 740 provides, where material:

“(1) On application by a required number¹ of a company’s members, the Court may make an order –

(a) authorizing a person who is the applicant ... to inspect any record or document of the company ...

(2) The Court may make an order authorizing a person to inspect a record or document if it is satisfied that –

(a) the application is made in good faith; and

(b)   the inspection is for a proper purpose.”

3.The background of the matter has been set out in detail in the learned judge’s clear and well-reasoned Judgment.    

4.1.The Company was incorporated in Bermuda and listed in Hong Kong.  The plaintiff held enough shares in the Company to qualify him to apply under s.740(1). 

4.2.In 2014-2016, the Company transferred substantial amounts of money to a company in Dubai called MyHD, some by way of loans and some by way of convertible loans, and eventually became MyHD’s 40% shareholder.

4.3.Further in 2015-2016, the Company lent substantial amounts of money to two Nepalese companies (the plaintiff alleges with no track record) without obtaining security.  Subsequently the Company entered into an agreement for pledge of the shares of one of the Nepalese companies, but without a valuation of those shares. 

4.4.Importantly these transfers of money were effected at a time when the Company’s own finances were in a precarious situation.  The Company announced on 20 March 2017 that “the Company became aware of its liquidity issue in late 2015 ...”.

4.5.The plaintiff also alleged (on the basis of matters set out in §5 of the Judgment) that the chairman of the Company and his family were connected with MyHD and the Nepalese companies. 

5.1.Suffice it to say that the judge held that, based on the evidence before him, there was a reasonable case for investigating the Company’s dealings with MyHD and the Nepalese companies². It is notable that Mr Anson Wong SC leading counsel for the Company³ did not seek to argue otherwise.

5.2.In his Judgment, the judge then went on to consider whether in making the s.740 application, the plaintiff acted with good faith and that the inspection was for a proper purpose.   

Good Faith

5.3.In respect of the requirement of good faith, the judge found that on the objective grounds advanced by the plaintiff, there was a proper case for investigating the Company’s dealings with MyHD and the Nepalese companies; the plaintiff had a heavy stake in the Company; he had acted out of a genuine and legitimate concern to protect his interests as a shareholder; and that he honestly believed that it was proper for him to seek to investigate the Company’s dealings to determine what action he should take⁴.

Proper purpose

5.4.In respect of the requirement of proper purpose, the judge found that the plaintiff’s primary purpose in making the s.740 application was to protect his interests as a shareholder against potential wrongdoing by the Company’s directors⁵.

5.5.In particular, the judge dealt with the Company’s argument that the plaintiff’s purpose was to obtain “ammunition” for a winding-up petition that the plaintiff had presented on 5 July 2017, two months after the s.740 application was filed.  The judge echoed the view of G. Lam J in Wei Xing v Will Win Development (Asia) Co Ltd ⁶that even if the applicant was looking for material to found a winding-up petition on the just and equitable ground, that was not in itself a ground for refusing the application.  The judge was satisfied that the plaintiff’s hostility, if any, to the present management of the Company did not negate the proper purpose found, and that as the plaintiff’s primary purpose was proper, the fact that he might have other purposes in mind was irrelevant⁷. 

Discretion

5.6.Finally, the judge went on to consider whether, in the exercise of his discretion, he should make the order for inspection. 

5.7.In relation to this stage, the Company had argued that the documents sought could be obtained in the winding-up petition “when the latter reaches the discovery process”⁸, as many of the grounds the plaintiff relied upon in the s.740 application had also been raised in the petition.  In this respect, the judge said “I am not sure whether it is correct that [the plaintiff] would be able to obtain the Company’s documents in the winding up petition”.  He also held that in any event, whatever documents that the plaintiff might be able to obtain in the winding-up petition would be likely to be subject to an implied undertaking not to be used for other purposes.  However it was foreseeable that the plaintiff might consider a derivative action against the directors or take other steps to protect his interests as a shareholder including reporting the matter to the appropriate authorities.  Moreover the fact that the plaintiff might be able to obtain the documents sought by other means was only one of the factors to be taken into account in the exercise of the court’s discretion⁹.

5.8.The judge then went on to take into account other factors, and concluded that it was an appropriate case for the court to order inspection¹⁰.  

Appeal

6.The Company lodged a Notice of Appeal on 27 October 2017 which was amended on 22 December 2017.     

Application for Stay pending appeal

7.The Company applied to the judge for a stay of the inspection order which was refused on 15 December 2017.  An interim stay was granted by a single judge of this court pending the hearing of the present application for stay pending appeal.

Arguments on behalf of the Company

8.1.The Company’s main argument was that the plaintiff could not have a proper purpose in making the s740 application because the winding-up petition was extant at the time of the hearing before the deputy judge.  The argument¹¹ was that (a) the plaintiff obviously considered that he had sufficient grounds to present the petition, (b) “the plaintiff in any event would obtain [the documents sought] through the discovery process of HCCW207/2017", and (c) if the plaintiff succeeded in the petition, liquidators would be appointed to investigate the Company’s affairs. 

8.2.In particular, in connection with (b) above, the Company argued that as the subject documents “would eventually be disclosed in HCCW207/2017, the plaintiff effectively side-steps the discovery regime of HCCW207/2017"¹² and avoids compliance with the implied undertaking not to use documents disclosed in discovery without the sanction of the court.  Mr Wong relied on Smartec Capital Pty Ltd v Centro Properties Ltd ¹³, a decision of the Supreme Court of New South Wales, where¹⁴ the judge quoted an article¹⁵ in which the author listed “instances in which the court has refused applications, indicating as not ‘proper purposes” where it is “to serve as a substitute for discovery”.  Cases quoted in the article in support of this last instance were Rowland v Meudon ¹⁶, Re Claremont Petroleum NL ¹⁷and Czerwinski v Syrena Royal Pty Ltd [No.1] ¹⁸.

Discussion

9.Dealing first with argument (a), the fact that the plaintiff considered that he had enough grounds to present the petition is just one factor to be taken into account.  There is no principle that stipulates that once a petition is presented, the petitioner is confined to that course of action alone.  Unlike an action between individual parties¹⁹ where the plaintiff has the carriage of the action, the process of a petition to wind-up is subject to a number of variables including the wishes of other contributories and creditors.  Put another way, the progress, or otherwise, of a petition is not entirely in the petitioner’s hands.    

10.1.As for argument (b), I shall proceed to consider the three cases which the author had cited in support of his proposition that it is not a proper purpose for statutory inspection to serve as a substitute for discovery.

10.2.The first of these cases was Re Claremont.  There was no litigation in that case.  When McPherson J said that “the procedure [of statutory inspection] ... is not intended as a form of or substitute for inspection of documents after discovery on affidavit or answers to interrogatories in pending litigation”, he was explaining why he was making an order that was narrower than the usual order on discovery in a writ action.  Thus, the order made was for documents relating to only the results (eg an agreement made by the company) of decisions made by the directors, and not documents relating to the decisions themselves (eg minutes of directors’ meetings resolving to enter into the agreement) ²⁰.  So understood, this is not an authority that an order for inspection under s.740 should not be made for want of proper purpose simply because there is pending litigation involving discovery. 

10.3.In Czerwinski, S and C were in litigation.  S refused to disclose certain documents on the basis that they were covered by legal professional privilege. C did not make any applications to the court to challenge S’s claim of privilege, but proceeded to apply for inspection of documents under the Australian version²¹ of our s.740.  The judge in the Supreme Court of Victoria refused C’s application, holding that she had failed to show a proper purpose because (a) she had not provided evidence as to her purpose in making the inspection application²², and (b) she had not made any effort to challenge S’s claim of privilege in the litigation.  The judge held: “the procedure under s.247A is not intended as a form of or substitute for inspection of documents to overcome the obstacle of legal professional privilege claimed in another proceeding” ²³.  In other words, statutory inspection should not be used as a device to circumvent legal professional privilege.  

10.4.In Rowland, the company was the registered owner of a residential building, where individuals owned shares associated with their respective units²⁴.  The company had allowed the penthouse owner B to carry out certain building works.  The 7^th floor owner W objected and succeeded in litigation against the company.  Another owner R (who had not supported the company’s decision to defend the claim made by W) then applied for inspection of the company’s documents in relation to the litigation between W and the company, eg decisions on the prospects of success, the possibility of settlement and assessment of risks for liability to costs.  She said her purpose was to ascertain whether she should commence proceedings against the directors of the company.  The judge in the New South Wales Supreme Court held that R had established a proper purpose.  This case does not assist the Company’s argument here.

10.5.Coming to Smartec, having quoted the author’s views at §67(2) of the Judgment, in the following paragraph the judge did not adopt the author’s apparently rigid statement that it is not a proper purpose for statutory inspection to serve as a substitute for discovery.  Instead the judge cited a passage in Rowland that “... there is no rule of exclusion and no reason why involvement of a management decision should be a ground for refusal of access to documents; the matter is discretionary.  With respect to management decisions a conservative approach to exercise of the discretion is appropriate”. 

10.6.In other words, there was no hard and fast rule that statutory inspection should be refused if the documents might also be disclosed in the course of discovery. As this court²⁵ emphasized in Re LehmanBrown Ltd²⁶, the focus in a statutory inspection application is whether the applicant has shown a purpose germane to his status as a member.  And as has been held by this court²⁷ in Veron International Ltd v RCG Holding Ltd ²⁸, the fact that the applicant may have other means of obtaining the information elsewhere does not mean that it cannot satisfy the two conditions²⁹ although it is relevant to the court’s decision whether to exercise the discretion to grant an order³⁰.

11.Finally, as for argument (c), it is common knowledge that liquidators charge professional fees, and thus there are often financial constraints on the liquidators’ exercise of their powers of investigation.  This by itself cannot be a ground against ordering statutory inspection.    

Order

12.For the reasons set out above, the application for stay was dismissed with costs. The parties have supplied statements of costs for summary assessment.  Having considered them, we are satisfied that a reasonable sum would be $350,000.  The time taken to render these Reasons and Summary Assessment is regretted.  

Mr Patrick Chong and Mr Terrence Tai, instructed by Howse Williams Bowers, for the Plaintiff

Mr Anson Wong SC and Ms Ebony Ling, instructed by ONC Lawyers, for the Defendant