Wadhuram Kewalramani v. Crown Import & Export (HK) Ltd

HCMP 2119/2021 and HCMP 2120/2021
(Heard Together)

[2022] HKCFI 1440

HCMP 2119/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2119 OF 2021

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AND

HCMP 2120/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2120 OF 2021

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(HEARD TOGETHER)

Before:  Deputy High Court Judge Le Pichon in Chambers

Date of Hearing:  13 May 2022

Date of Decision:  18 May 2022

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DECISION

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1.Before the court are two originating summons taken out by Wadhuram Kewalramani (“the Plaintiff”) on 14 December 2021. In HCMP 2119/2021 the defendant is Crown Import & Export (HK Limited (“HKCIE”) and in HCMP 2120/2021 the defendant is Crown Import & Export Limited (“CIE”).

2.The relief sought against each of HKCIE and CIE is identical: namely the delivery up of documents listed in the Schedule to each of the originating summonses (“the Subject Documents”) described in §14 below.

3.The application in HCMP 2119 is made by the Plaintiff qua shareholder and in HCMP 2120 qua director and shareholder. At the conclusion of the hearing, the decision was reserved which I now give.

Background

4.CIEHK and CIE are family owned trading companies whose shareholders are the Plaintiff, Kanhiyalal (“KK”) and Parmanand (“PK”) (collectively, “the brothers”), each holding one-third of the issued shares of the relevant company.

5.Apart from CIEHK and CIE (“the Hong Kong companies”), the family also carried on business in India and the Middle East and had offices there.

6.According to PK, in or about 2017, PK and his son Sunil commenced legal proceedings in India against the Plaintiff in relation to their respective shares of undivided profits of the family business and offices in the Middle East to which PK had a loan of USD 800,000.

7.The brothers then discussed a splitting of family businesses among themselves and agreed an arrangement which was not reduced into writing.

8.In broad outline, it involved (a) the Hong Kong companies being retained by PK as from 1 April 2018 who, thereafter, would be solely responsible for their profits and losses and (b) the Middle East business and offices being retained by the Plaintiff and KK: those in Dubai and Saudi Arabia as from 31 December 2017 and that in Kuwait from 31 March 2018.

9.According to the Plaintiff, he and KK would be paid their respective shares of undivided profits in the Hong Kong companies pursuant to the balance sheets of those companies as of 31 March 2018; (ii) valuations would be obtained for the Indonesian and Hong Kong properties held by CIE; (iii) the Plaintiff and KK’s unsecured loans advanced to CIE would be settled. However, it was said that PK failed to carry out the agreed arrangement.

10.The Plaintiff’s evidence is that PK’s share of undivided profits was settled pursuant to a valuation agreed and accepted in April 2017. However, no evidence has been adduced to substantiate that claim and at the hearing the court was given to understand that the litigation over the Middle East business remains ongoing. Further, it is also unclear from the Plaintiff’s evidence whether the USD 800,000 loan is disputed.

11.KK passed away on 24 May 2021 leaving his 2 sons as his heirs.

12.Suffice it to say that there is deep distrust and suspicion between the rival camps (i.e. the Plaintiff and KK constituting one camp and PK the other) with neither camp taking steps to implement the arrangement, and each accusing the other of not carrying out his part of the bargain.

13.There appears to be a complete stalemate in the arrangement’s implementation which cannot be in the interest of any of the parties or of the family companies involved in the long-term.

The Subject Documents

14.They are set out in the Schedule to each of the originating summonses. 3 categories of documents are sought:

“1. All minutes and records of general meetings of the Defendant, and all resolutions of shareholders of the Defendant passed otherwise than at such meetings, from January 2017 to the date of the Order to be made.

2. All minutes and records of meetings of the Board of Directors of the Defendant, and all resolutions of the Board of Directors of the Defendant passed otherwise than at such meetings, from January 2017 to the date of the Order to be made.

3. The Defendant’s books of account, including but not limited to the following documents:

(a) the Defendant’s balance sheets from January 2017 to the date of the Order to be made; and

(b) all documentation relating to the Defendant’s cash flow and net asset value from January 2017 to the date of the Order to be made.”

15.While the categories of documents sought are the same in both applications, a shareholder’s right to inspect the records or documents of a company is not the same as that of a director. Accordingly, the CIEHK and CIE applications will be considered separately.

Applicable legal principles

16.The relevant provisions of the Companies Ordinance, Cap 622 (“the Ordinance”) for present purposes are sections 618, 620 and 740 (which confer rights on members of the companies to certain company records and documents) and sections 374-375 (in relation to a director’s right to inspect and obtain copies of accounting records).

17.The legal principles are well-settled in relation to those provisions and their scope and application will be considered in the context of whether and, if so, to what extent the Plaintiff is entitled to disclosure of the 3 categories of documents sought in relation to each of the Hong Kong companies.

CIEHK

18.Category 1 documents correspond to documents a company is obliged to keep pursuant to section 618 of the Ordinance. Section 620 confers on a member of the company and thus, the Plaintiff, a right to inspect and request copies of such documents and records.

19.The Defendant’s objection is as follows:

(a) Since CIEHK is a family business and as KK and the Plaintiff both reside outside Hong Kong no physical general meetings have been convened since its incorporation. Therefore, no such minutes exist.

(b) It was a common understanding that shareholders’ decisions would be made by way of written resolutions but since the family dispute in India in about 2018 with the Plaintiff and KK refusing to be involved in the affairs of CIEHK, there are no such resolutions.

20.The Defendant referred to Ng Yee Wah v Lam Chun Wah [2012] 4 HKLRD 40 (at §29) where Kwan J (as she then was) observed that for documents not in existence, there is no point to make an order for inspection in respect of them[1].

21.As regards category 2 documents, the Defendant maintains that board minutes do not exist as PK was the sole director prior to 28 September 2020. Board decisions were made in the form of written resolutions. After Sunil was appointed an additional director on that date, they continued to be made in that form.

22.The Plaintiff seeks category 2 documents pursuant to section 740 of the Ordinance. It is common ground that the court may exercise its discretion to authorise a person to inspect documents and records it is satisfied that (i) the application is made in good faith and (ii) the inspection is for a proper purpose: see Wong Sau Man Samuel v Wong Kan Po Wilson [2017] 4 HKLRD 542 at §39 (a).

23.The Plaintiff submitted that his request for categories 2 and 3 documents stems solely from a desire to obtain information for a proper valuation of his shareholding and to safeguard his economic interest in CIEHK[2].

24.The Defendant objects to inspection of category 2[3] documents on the ground that they are not necessary or relevant to the valuation of the Plaintiff’s shares in CIEHK.

25.As the Plaintiff has neither explained nor adduced evidence to show necessity or relevance of category 2 documents for a valuation, in my view, no case for disclosure has been made out in respect of such documents.

26.As regards category 3[4] documents (the company’s books of account), the Defendant has no objection to the inspection of item (a), namely the balance sheets from January 2017 to date, save and except for the balance sheet for the financial year 2017-2018 (which formed part of the audited financial statement for that year that is already in the Plaintiff’s possession). The Defendant objects to item (b) as being too broad and vague.

27.As a member of CIEHK, the Plaintiff is entitled to be provided with a copy of company’s audited annual financial statements and not just the balance sheet: see section 430 of the Ordinance. It would appear from PK’s evidence that such statements subsequent to 2017-2018 exist but have not been circulated due to the family dispute[5]. Those statements should now be provided to the Plaintiff.

28.If and in so far as the Plaintiff seeks inspection of other financial documents, it is incumbent on him to identify the type and nature of the document(s) with supporting evidence to show that their disclosure is necessary for a proper purpose and that the application is made in good faith.

29.The test for proper purpose is prima facie satisfied if the purpose is to protect a shareholder’s economic interest[6].

30.In so far as PK’s affirmation (at §13) is alleging that the Plaintiff has no legal right to have his shares purchased by any other person and therefore he has no right to an inspection under section 740[7], there is no evidence to show the constraints on disposal to which the Plaintiff is subject.

31.In Selvaraj (Moorthy) v GMT Industrial Limited [2019] HKCFI 2299, the court considered (at §§15-16) 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. In that case, a proper purpose was made out.

32.Assuming that inspection is for a proper purpose, the Plaintiff has not identified with sufficient specificity the nature and type of documents falling within the meaning of ‘books of account’ for the purposes of the Ordinance that are necessary for, and relevant to, the valuation of his shares. To that extent, his application must fail.

CIE

33.Section 375 of the Ordinance confers a statutory right on a director of the company to make a copy of its accounting records in the course of inspection. In Re Boldwin Construction Co Ltd & Another [2001] 3 HKLRD 430 it was held (at §15) that

“…only if it could be proved that a director intended to abuse the confidence in relation to the company’s affairs and to injure the company in a material way that the director’s right of inspection could be interfered with. In my view, such interference could only be effected in circumstances where a restriction on a director’s rights could be imposed because of misuse of confidential information leading to damage.”

34.As a director and shareholder, prima facie, there is no question but that the Plaintiff is entitled to inspect the documents sought in categories 1 and 2 as well as the books of account in category 3.

35.As regards category 3, the Defendant submitted that the Plaintiff’s application a director was not made for the purpose of discharging his duties as a director but “likely in breach of his duty of confidence and/or for the purpose of injuring CIE’s interest[8]”.

36.PK’s affirmation refers to the fact that the Plaintiff is a shareholder in companies incorporated in Dubai and Kuwait which are fabric trading companies and had engaged CIE to import fabric from Mainland China until February 2020. It was then asserted that since the Plaintiff did not have any direct contact with CIE’s Chinese suppliers, his request for books of accounts “are likely made for the purpose of obtaining such information relating to the business of CIE.”

37.In my view, that is nothing more than pure speculation. Direct evidence either of abuse or likelihood of abuse of the documents as also evidence of damage likely to be occasioned to CIE is required[9]. There is none.

38.It must follow that the Plaintiff is entitled to inspect and make copies of CIE’s books of account.

Conclusion

39.Ms Ronald, counsel for Defendant, submitted that as the Defendant has already affirmed that categories 1 and 2 documents do not exist for the Hong Kong companies, it would serve no purpose to order disclosure of those categories.

40.Given the level of suspicion and mistrust of anything said or done by the other party, I agree with Mr Sebastian Leung, counsel for the Plaintiff, that the court should nonetheless include the relevant category in the orders to be made under the originating summonses. It causes no hardship to the Defendants and offers the Plaintiff a measure of assurance.

Orders

(A) HCMP 2119

41.There is to be an order in terms of the Plaintiff’s originating summons dated 14 December 2021 save that the Schedule therein be replaced by a revised Schedule.

42.The revised Schedule is to provide for disclosure of category 1 documents and the Defendant’s audited financial statements from January 2017 to the date of the Order.

43.On the question of costs, while the Plaintiff has succeeded in obtaining an order, he has not been successful on the substantial part of the relief sought. In the circumstances, a fair order would be that the Plaintiff be awarded 30% of his costs and I make an order nisi on that basis.

(B) HCMP 2120

44.There is to be an order in terms of the Plaintiff’s originating summons dated 14 December 2021 save that the Schedule therein be replaced by a revised Schedule.

45.The revised Schedule is to provide for disclosure of categories 1 and 2 documents and for category 3 it should read as follows:

“3. The Defendant’s books of account and all accounts and returns required to be kept pursuant to section 374 of the Companies Ordinance, Cap. 622.”

46.There is to be an order nisi of costs in favour of the Plaintiff with certificate for counsel, such costs to be summarily assessed and payable forthwith.

47.The Plaintiff is directed to lodge his statement of costs within 7 days of this Decision, the Defendant to lodge its objections within 14 days thereafter and the Plaintiff to lodge his reply (if any) within 7 days thereafter.

48.Summary assessment will take place in Chambers.

49.The parties are directed to submit agreed draft orders for approval.

Mr Sebastian Leung, instructed by M.B. KEMP LLP, for the plaintiff in both actions

Ms Rachel Ronald, instructed by Ling & Lawyers, for the defendants in both actions