General-lite Group Corp. v. T & L Securities Ltd

HCMP 2113/2021

[2022] HKCFI 3080

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2113 OF 2021

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JUDGMENT

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THE APPLICATION

1.By Originating Summons filed on 13 December 2021 (‘the Originating Summons’), the plaintiff applied for an order of production and inspection of various documents of the defendant (‘the Company’) pursuant to sections 620, 653W and 740 of the Companies Ordinance (Cap.622, Laws of Hong Kong) (‘the Ordinance’).  The documents requested may be summarised as follows:

(1)  All minutes of all general meetings and all resolutions of members of the Company for the past 10 years (‘Category 1’);

(2)  The audited financial statements of the Company for each of the financial years from its incorporation to the financial year ended 31 March 2017 (‘Category 2’);

(3)  All records evidencing the bank loans taken out by the Company, or that were outstanding, from 1 April 2011 to the date of the Order (‘Category 3’);

(4)  All records evidencing the shareholders’ loans taken out by the Company, or that were outstanding, from 1 April 2011 to the date of the Order (‘Category 4’);

(5)  All documents provided to the Auditor in preparation of the property investment figures as recorded in the audited financial statements of the Company, for each of the financial years ended 31 March 2017, 2018, 2019 and 2020 (‘Category 5’);

(6)  All records relating to the management fee in the amount of $2,400,000, as recorded in the audited financial statements of the Company for each of the financial years ended 31 Mach 2018, 2019 and 2020 (‘Category 6’);

(7)  The latest Register of Significant Controllers of the Company (‘Category 7’).

2.The Company has, in the Affirmation of Pu Mei Lee Teresa filed on 11 May 2022 (‘Pu’s Affirmation’), confirmed that it has no objection against producing documents under Category 1 and Category 7 and these documents have indeed been provided to the plaintiff on 27 June 2022[1]. 

3.However, the Company opposes the application in relation to the documents under Categories 2 to 6.

THE LEGAL PRINCIPLES

4.Section 740(2) of the Ordinance provides that:

‘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.’

5.The applicable legal principles are well settled.  For the purpose of the application before this Court, the following principles are relevant:

(1)  The basis of a member’s right to inspection flows from his proprietary interest in the company.  Although a member does not have a proprietary interest in the assets of a company, he has a very real interest in the company itself.  He can reasonably expect to able to protect his interest and section 740 facilitates this by providing the member with access to corporate information, which might not otherwise be available to him (Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011]5 HKLRD 241, at [17] – [18]);

(2)  The procedure under section 740 of the Ordinance is enacted for the protection of shareholder rights and interests and the community’s more general interest in the maintenance of good corporate governance.  This section should therefore be interpreted and applied in a manner consistent with these legislative objectives.  This can be achieved through taking a generous approach to the interpretation of what constitutes an interest ‘reasonably related’ or ‘germane’ to the applicant’s status as a shareholder (Wong Kar Gee Mimi (supra), at [25]);

(3)  The good faith and proper purpose requirements constitute two separate and independent tests (Wong Kar Gee Mimi (supra), at [14]);

(4)  The Court will determine whether the applicant is acting in good faith and whether the inspection is made for a proper purpose by applying an objective test (Veron International Ltd v RCG Holdings Ltd [2013] 3 HKLRD 657, at [19]);

(5)  The burden of proof rests on the applicant (Veron International Ltd (supra), at [19]);

(6)  While an application made by a substantial and long-standing shareholder may in and of itself discharge the burden of establishing good faith and proper purpose (as opposed to an applicant who has only recently acquired a shareholding in the company) (Wong Kar Gee Mimi (supra), at [23]), there is no presumption in favour of a substantial shareholder of an entitlement to inspect (Re LehmanBrown Ltd [2011] 5 HKLRD 668, at [33]);

(7)  ‘Good faith’ in section 740 of the Ordinance means ‘honesty with no ulterior motive’. This requirement only requires that the applicant himself acts ‘honestly’ with a purpose that he himself believes to be proper (Wong Kar Gee Mimi (supra), at [16]);

(8)  If the applicant’s primary or dominant purpose is a proper purpose, whether an inspection may be of benefit to the applicant for some other purposes is irrelevant (Veron International Ltd (supra), at [19]);

(9)  The rights provided by section 740 should not be regarded as affecting the basic rule of company law that a shareholder should not ordinarily have recourse to the Courts to challenge a managerial decision made by or with the approval of the directors (Veron International Ltd (supra), at [19]);

(10)  An applicant is not entitled to go on a fishing expedition in search of a cause of action to support his or her mere suspicion of wrongdoings.   Section 740 shall not be used as a substitute for pre-action discovery (Wong Kar Gee Mimi (supra), at [40]);

(11)  If the purpose is to investigate alleged misconduct, there must be proper evidence to support a reasonable case for investigation, taking into account any explanations offered by the defendants.  Mere assertions of misconduct will not suffice (Re Bank of East Asia Ltd [2015] 4 HKC 137, at [25]);

(12)  The Court is not required, and should not endeavour, on an application under section 740 of the Ordinance, to reach conclusions about the merits of the matters relied on as constituting a ‘proper purpose’ (Re Bank of East Asia Ltd (supra), at [26]);

(13)  Even where an applicant is acting bona fide and has shown a proper purpose, the Court has a discretion whether to order inspection (Veron International Ltd (supra), at [19]).  When the Court considers whether to exercise the discretion, it is entitled to take into account a wide spectrum of matters (Leung Chung Pun v Masterwise International Ltd [2014] 1 HKLRD 1129, at [25]);

(14)  Insufficient prospect of anything useful resulting from the inspection sought is a relevant consideration  (Wong Kar Gee Mimi (supra), at [39]);

(15)  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 (Veron International Ltd (supra), at [38.2]);

(16)  Confidentiality is a relevant consideration but concerns of confidentiality can be addressed by undertakings restricting the use of information (Re Bank of East Asia Ltd (supra), at [27] & [29]);

(17)  Substantial prejudice to the company in complying with an inspection order is also a relevant consideration (Veron International Ltd (supra), at [38.4]).

THE BACKGROUND OF THE APPLICATION

6.The factual matters which I set out below are undisputed or indisputable.

7.The Company was incorporated in 1992.  At all material times, it was used as a vehicle for the development of 11 luxurious houses on Lot 868 of District Lot 1 (‘Lot 868’) in Nga Kau Wan, Lamma Island (‘the Development’).  The sole business and operations of the Company was to construct the Development.

8.Since June 2002, the shares in the Company were ultimately owned by Bobby Li (40%), Teresa Pu (10%) and Franklin Li (or his successor) (50%).

9.Bobby Li and Teresa Pu got married in 2000. They separated in 2007.  While they were initially able and willing to communicate with each other on financial and commercial matters after their separation, their relationship deteriorated in around 2011 or 2012 and eventually broke down.  They commenced their matrimonial proceedings in 2019.

10.Since August 2014, Keung Po Hung (Teresa Pu’s mother) became a director of the Company, together with Legend Times Limited (Teresa Pu’s company) and Innovest Group Ltd (Franklin Li’s company).

11.Lot 868 was purchased by the Company from the Government in September 1997 at the price of $64 million.

12.In around 2004, construction work for the Development began.  The construction cost of the Development was funded partly by a construction loan and partly by King Wong Development Ltd (‘King Wong’), a company through which Bobby Li (and others) conducted property development business.[2]

13.In relation to the construction loan, the Company took out a building loan from the Overseas Union Bank Limited on 23 September 1997 for the sum of around $38 million, and executed a debenture incorporating a building legal charge and a floating charge over Lot 868 and all the Company’s assets to this facility.

14.In relation to the funding from King Wong, King Wong has paid for the construction and renovation costs of the Development throughout the years in the total sum of over $70 million ($28.6 million as construction costs and $44.7 million as renovation costs).[3]

15.Construction of the Development was completed in 2012.

16.It may be recalled that Bobby Li was said to be the ultimate owner of 40% of the shares in the Company.  He held such 40% shareholding via the plaintiff which was incorporated on 13 May 2002.  At the time of its incorporation, Bobby Li was its sole director and shareholder (as the beneficial owner of the sole bearer share in the plaintiff). 

17.However, in around 2011 or 2012, Bobby Li discovered that Teresa Pu claimed herself to be the sole shareholder and director of the plaintiff.  He therefore commenced HCA 873/2013 against her to claim back his shareholding in the plaintiff.  Eventually, by a Judgment dated 15 May 2019 (‘Lok J’s Judgment’), Lok J ordered Teresa Pu to transfer the shareholding in the plaintiff back to Bobby Li, which Teresa Pu did in May 2020.  The procedure to register such transfer of shares in the BVI was completed in June 2020.

THE PLAINTIFF’S GROUNDS OF INSPECTION

18.Having regained control of the plaintiff, Bobby Li wrote to Teresa Pu’s solicitors, the Company’s Board of Directors (‘the Board’) as well as Chong Hing Bank Limited to request for access to documents and information pertaining to the Company’s management.  At the end of the day, the Board sent the following documents to the plaintiff’s solicitors:

(1)  A copy of the minutes of the Company’s AGM held on 29 April 2020;

(2)  The audited financial statements for the years ended 31 March 2018 and 31 March 2019 respectively.

19.It is alleged by the plaintiff that in respect of documents under Categories 2 to 6, it has established a reasonable case for investigation and therefore an order of inspection should be made in respect of those documents. The plaintiff’s case in respect of each Category of documents is summarised below.

Category 2 – audited financial statements

20.It is Bobby’s Li’s case that he has lost control of the plaintiff since at least 2011, and therefore, he has lost the means to, through the plaintiff, have access to the Company’s documents and financial information since then.

21.While on his own case Bobby Li only lost control of the plaintiff in 2011, he argued that he should be entitled to inspect the audited financial statements of the Company over the period even prior to 2011, because he said he had all along left the administrative and financial matters of the plaintiff and the Company to Teresa Pu to handle.  He therefore claimed that he should be entitled to obtain copies of the audited financial statements of the Company for each of the financial years from its corporation to the financial year ended 31 March 2017.

Category 3 – records evidencing bank loans

22.The plaintiff stated that it was found in the Balance Sheet of the audited financial statements for the year ended 31 March 2018 and 31 March 2020 respectively (‘the 2018 Financial Statements’ and ‘the 2020 Financial Statements’ respectively) that the bank loan as at 31 March 2017 and 31 March 2020 were in the sums of $109,995,877 and $107,507,050.38 respectively, which was a significant increase from 2011, when the then corresponding figure was only around $43 million.   It was alleged that there is no legitimate reason for the Company to have a more than doubled amount of bank loans between 2011 and 2017, because the construction of the Development had already been completed in 2012, hence the largest portion of the costs of the Development would have been incurred by then, and the Company did not have any other business up to at least 2019.

23.The plaintiff had also drawn this Court’s attention to the manner the Company used the bank loans obtained.  While it was stated in Pu’s Affirmation that the Company still had to incur substantial expenses in the post-construction stage (in the form of bank charges/interest, interior design and renovation costs, ongoing maintenance costs and deferred construction and marketing costs) after 2012, the plaintiff’s counsel pointed out that the bank loans were drawn down in significant amounts (in the sums of $20 million, $26 million and $6 million in May 2013, June 2016 and May 2018 respectively), and the entirety of such loans was withdrawn immediately thereafter.  Such one-time withdrawals in significant amounts were said to be inconsistent with the kind of regular continuing expenses in relatively modest amounts as put forward by the Company.

24.Although the plaintiff made inquiries about such a matter with the Board through correspondence and at the Annual General Meeting held on 7 June 2021, the Board did not give any substantive reply.

Category 4 – records evidencing shareholders’ loans

25.A similar query was raised in relation to shareholders’ loans.  According to the 2018 Financial Statements, the shareholders’ loan as at 31 March 2017 was recorded at $168,746,440.  The amount rose to $186,456,009.11 as at 31 March 2020.  The plaintiff’s case was that there was no apparent reason why the Company would have to incur such a large amount of shareholders’ loan.

Category 5 – Documents on property investment figures

26.The plaintiff claimed that, from the 2018 – 2020 Financial Statements, it can be seen that there had been an increase in the value of property investment since 31 March 2017 ($288,429,754 as at 31 March 2017; $291,601,297 as at 31 March 2018; $294,726,165.68 as at 31 March 2019 and 31 March 2020).

27.Since the construction costs of the Development would have been incurred and funded by the construction loan in the sum of $38 million and by King Wong in the sum of around $70 million by 2012, it was said that the total costs of the Development would not significantly exceed the sums mentioned above.  Hence, it was alleged that the plaintiff should be entitled to information relating to the increased property investment figures.  However, the Board had repeatedly ignored the plaintiff’s repeated queries raised through correspondence.

Category 6 – records relating to management fees

28.In each of the 2018 – 2020 Financial Statements, there was an item of ‘management fee’ in the sum of $2.4 million on top of the sum of around $400,000 spent on security services.

29.In Pu’s Affirmation, she disclosed that the said management fees were paid to a company known as Maxrange Development Limited (‘Maxrange’).

30.According to the plaintiff, subsequent investigation shows that the director of Maxrange is Keung Po Hung, i.e. Teresa Pu’s mother, who is also a director of the Company.

31.Given Keung Po Hung’s involvement in both Maxrange and the Company, the management agreement reached between the Company and Maxrange is a related party transaction, but this was not disclosed in any of the Company’s financial statements in 2017 to 2020.

THE COMPANY’S GROUNDS OF OPPOSITION

32.Despite the fact that many grounds of opposition had been mentioned in Pu’s Affirmation, the Company’s counsel only relied on the following three grounds in their written submissions:

(1)  The application is made for the purpose of Bobby Li but not the plaintiff;

(2)  The findings of fact in Lok J’s Judgment are inadmissible herein;

(3)  The scope and breadth of the application show that this application is not made in good faith.

33.They will be dealt with in turn below.

Application not for the purpose of the plaintiff

34.The Company’s counsel had referred this Court to various parts of the Affirmations filed by the plaintiff and of the plaintiff’s written submissions so as to demonstrate that it is in fact not the plaintiff as shareholder of the Company but Bobby Li who is interested in finding out the financial position of the Company.  It was submitted that this is not a proper purpose. 

35.This Court was also reminded of the importance of the concept of separate legal entity.

36.The Company even went as far as to submit that even if the Court makes an order pursuant to the application, the Company would not consent to disclosure of any information upon inspection to any person who is not the plaintiff (including but not limited to Bobby Li).

37.With greatest respect, this argument is misconceived, at least in the circumstances of the present case, where Bobby Li is the sole shareholder and director of the plaintiff.  If Bobby Li is not allowed to read the documents to be provided by the Company to the plaintiff, then in effect no one can read them.  This cannot be right.

38.I agree with Mr Lam and Mr Cheung that the question here is: whether the purposes put forward by the plaintiff are properly something that pertain to the plaintiff’s corporate interest as a shareholder of the Company as opposed to Bobby Li’s personal interest in disguise. In this regard, I accept the plaintiff’s argument that the purposes relied on are proper purposes in the interest of the plaintiff as shareholder of the Company.

39.The Company then argued that the plain purpose of Bobby Li is to consider whether to mount a challenge (through the plaintiff) to the managerial and commercial decisions of the directors of the Company in the past.  On my part, I cannot see that is the purpose at all. On the other hand, I am satisfied that the plaintiff has established a reasonable case for investigation.

40.The Company’s counsel then suggested that the matter should be tested by a ‘but-for’ test, and ask: If Bobby Li has not regained control of the plaintiff, would the plaintiff make this application?

41.I agree with the Company that the answer to this question must be ‘No’.  However, the Court should not disregard the surrounding circumstances of the case.  Take the Category 6 documents (relating to management fees) as an example.  On the face of the information revealed so far, it appears that management fees in the sum of $2.4 million had been paid to a company of which Teresa Pu’s mother is a director.  If the plaintiff (or Bobby Li) is right, this is prima face a related party transaction.  If the plaintiff is still under the control of Teresa Pu, I am not surprised at all that she would not mount any challenge against this transaction.  However, that does not mean that the fact that the plaintiff is now asking for documents in relation to such management fees means that it must be for the purpose of Bobby Li but not the plaintiff.  If there is really impropriety in such a transaction, the plaintiff, as a 40% shareholder of the Company, is obviously entitled to look into the matter.

42.As far as the financial statements of the Company are concerned, counsel for the Company also submitted that it must be assumed that the plaintiff as a shareholder of the Company has been provided with such financial statements: Morris v Kanssen [1946] AC 459 at 475.

43.Putting aside the question of whether such a presumption is applicable to a company’s obligation to provide its shareholders with financial statements under sections 429 and 430 of the Ordinance, the circumstances of the present case clearly show that such a presumption, if applicable, is rebutted.  This is because while there is a clear demand on the part of the plaintiff as a shareholder to be provided with such financial statements, the Company has never contended that the plaintiff has been provided with such financial statements before.  Indeed, it would not be difficult for the Company to state that such financial statements had been duly provided to the plaintiff.  To the contrary, Teresa Pu, in her Affirmation, unequivocally stated that the Company would have no objection to the production of the audited financial statement ‘per se’.  The only point that was taken was that the plaintiff’s request to be provided with financial statements from the date of incorporation of the Company is unreasonable.

44.This ground is therefore rejected.

Lok J’s Judgment inadmissible

45.The Company’s counsel submitted that the plaintiff had placed reliance on the findings made in Lok J’s Judgment and that this is not permissible since such a Judgment, which concerned an action of which the Company was not a party, is inadmissible herein.  In this regard, the Company’s counsel referred to the following matters which they said Bobby Li and the plaintiff had placed reliance on, namely:

(1)  Bobby Li through King Wong has paid for the construction and renovation costs of the Development in the total sum of over $70 million;

(2)  Bobby Li was all along the sole shareholder of the plaintiff;

(3)  A non-party to these proceedings had exchanged the sole bearer share into a registered share in her name by way of fraud; and

(4)  Bobby Li had ‘lost control’ of the plaintiff from December 2009.

46.With respect, such an argument is totally misconceived, because, while the plaintiff did refer to the findings made in Lok J’s Judgment in its supporting affidavit, there was in fact direct evidence (apart from one matter – see further below) in the plaintiff’s supporting affidavit (Affidavit of Lo Kwan Wong George) in support of the aforesaid factual matters[4].

47.The only matter in respect of which no direct evidence has been adduced herein is in relation to the allegation that Teresa Pu had purportedly exchanged the sole bearer share (of which she was keeping custody for Bobby Li) into a registered share in her name by the use of certain forged instruments in December 2009.  However, in my view, the plaintiff’s application is not adversely affected even if the Court does not take this matter into account.

48.In other words, the plaintiff did not have to rely on Lok J’s Judgment herein, and the inadmissibility thereof has no impact on the present application.

Scope and breadth of the application

49.Lastly, the Company’s counsel invited this Court to infer, on the basis of the scope and breadth of the inspection sought, that there is lack of good faith on the part of the plaintiff and that it is fishing for information with an ulterior motive.

50.The mere fact that the application covers a wide scope with great breadth of documents per se, in my view, does not entitle the Court to draw the aforesaid inference.  The first question which this Court must ask is whether the extensive coverage of the documents requested is justified.  Only if it is not justified that the Court would proceed to consider whether such an inference should be made.

51.In the present case, the Company submitted that:

(1)  Category 1 seeks inspection of documents going back to 10 years ago;

(2)  Category 2 seeks inspection of documents going back to more than 30 years ago;

(3)  Categories 3 and 4 seek inspection of documents going back to 11 years ago.  They go beyond the period for which the Company is required to keep record under the law;

(4)  Category 5 seeks inspection of documents for 4 years which ‘perhaps’[5] amount to virtually all documentation ever produced by the Company.

52.As far as Category 1 (AGM minutes and resolutions) is concerned, this is an item in respect of which the Company had conceded and agreed to produce for inspection.  It is not open to the Company to complain that the request is unjustified.

53.In relation to Category 2 (audited financial statements), I agree that the request made is too wide in the sense that the audited financial statements to be provided should not be dated back to the date of incorporation.  As it was the plaintiff’s evidence that Teresa Pu claimed herself to be the sole shareholder and director of the plaintiff in around 2011 or 2012 (which coincides with the time when it was said that the relationship between Bobby Li and Teresa Pu deteriorated), I am of the view that the financial statements to be provided should only cover the period between the year ended 31 March 2012 and 31 March 2017.

54.Although it was alleged that Bobby Li did not have knowledge as to the financial position even before his relationship with Teresa Pu turned sour, in my view, this should not entitle the plaintiff to inspect financial statements earlier than the financial year ended 31 March 2012.  Given their harmonious relationship at that time, there is nothing which suggests that there is anything which worth investigation.

55.In respect of Categories 3 and 4 (documents relating to bank loans and shareholders’ loan), though the documents requested date back to 11 years ago, I think such requests are reasonable in the light of the circumstances relied on by the plaintiff.  The fact that such requests go beyond the period for which the Company is required to keep record under the law is neither here nor there.  In any event, it is not the evidence of Teresa Pu that any of the documents which were more than 7 years old had been destroyed or otherwise disposed of.

56.For Category 5, (documents provided to the auditor in relation to property investment figures), I am satisfied that the request is reasonable, even if that would cover all documentation ever produced by the Company on this matter.  Since those documents had been provided to the auditor before, it should not be difficult for the Company to gather these documents for inspection purpose. 

57.Hence, the only category of documents which I consider too wide in scope is Category 2.  I do not think that alone would be enough for the Court to infer that there was a lack of good faith on the part of the plaintiff or that it had an ulterior motive in launching this application. 

DISPOSITION

58.By reasons of the aforesaid, I make an order in terms of the Originating Summons, save that in the Schedule attached to the Originating Summons:

(1)  Paragraphs 1 and 7 be deleted; and

(2)  Paragraph 2 shall read: ‘The audited financial statements of the Company for each of the financial years from the financial year ended 31 March 2012 up to the financial year ended 31 March 2017.

COSTS

59.Costs should follow the event.  However, the costs order should reflect the result that a small part of the requests has been disallowed.

60.I therefore make an order nisi that the defendant shall bear 90% of the plaintiff’s costs of the Originating Summons, to be taxed if not agreed.

61.The above order nisi shall become absolute in the absence of application to vary (which, if any, shall be made by letter, and will be disposed of on paper) within 14 days hereof.

Mr Keith Lam and Mr John Cheung, instructed by Tony Kan & Co., for the plaintiff

Mr Steven Kwan and Ms Fiona Chong, instructed by Vincent T. K. Cheung, Yap & Co., for the defendant