Howard Nathan Shapiro v. Asia Interactive Services (Hong Kong) Ltd and Others

HCMP 1429/2022

[2024] HKCFI 680

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1429 OF 2022

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BETWEEN

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J U D G M E N T

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The application

1.On 14 February 2023 I heard the Plaintiff’s application for production of the 1^st Defendant’s (“Company”) documents pursuant to sections 374, 375 and 740 of the Companies Ordinance, Cap. 622. Section 374 provides that a company’s accounting records must be open to inspection by its directors at all times without charge. Section 375 provides that a company must either allow a director to take copies of its accounting records or provide a copy is so requested without charge. Section 740 provides that the court may if specified criteria are satisfied order that a member be permitted by a company to inspect records or documents of a company. The Plaintiff is a director and a member of the Company. He holds sufficient shares in the Company to permit him to make an application under section 740.

2.When the matter first came on before me the 2^nd Defendant appeared to take the position that the Company’s documents were and always had been open for inspection by the Plaintiff if only he were willing to attend Board meetings and explain what he wanted to see. The 2^nd Defendant said that all the documents that the Plaintiff wanted to see could be accessed through a Google drive, which he offered to make available. I adjourned the application in order that the Plaintiff have the opportunity to consider the documents available on the Google drive and whether it provided what he wanted. Unfortunately, it appears it did not.

3.I shall first describe what documents are sought in the originating summons and then the relevant legal principles.

4.The Plaintiff seeks production of in practice just about all Company’s documents between 2015 and 2022.

5.The scope of the originating summons was originally limited to accounting records. The Plaintiff subsequently decided to expand the scope of the request to include agreements and associated documents concerning a possible corporate transaction involving Ken Osborne. In terms of the applicable principles nothing turns of this because as I will demonstrate a director of a company is, subject to a limited qualification, entitled to inspect all the documents of a company.

A director’s right to inspect company documents and data

6.The reason why a director is given by statute and the common law the right to inspect all of a company’s documents and records, and in the contemporary context data, is considered in some detail in [4]–[11] of the judgment of Rogers VP in Law Wai Duen and others v B.F. Construction Company Limited[1]. These rights apply to both executive and non-executive directors. Rogers VP goes on to explain the rights of inspection in [13]–[15]:

“13. It is in this context, therefore, that Street C.J.’s statement at the foot of page 360 can be understood. He said:

‘A director’s right to inspect and take copies of documents belonging to his company is, I think, clear.’

14. The judge went on to emphasise that the right of director to inspect and take copies of company documents was essential to the proper performance of the director’s duties.

15. In my view, it is only when the fundamental duties of a director are considered in their context that it will be appreciated that when Street C.J. went on to say that the exercise of a director’s rights of inspection is ‘generally speaking, not a matter of discretion with the court’, he was emphasising the fact that it was 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.”

7.More recently Susan Kwan J (as she then was) summarised, but comprehensively, the principles that determine a director’s right of inspection of company documents in [29] of her judgment in Ng Yee Wah v Lam Chun Wah[2]:

“29. The legal principles are not in dispute. The relevant propositions are fairly stated in Mr Liang’s submissions as follows:

(1) The right of a company director to inspect the company’s documents is well established at common law (Burn v London and SouthWales Coal Co and Risca Investment Co (1890–91) 7 TLR 118, 118–119; Edman v Ross (1922) 22 SR (NSW) 351, 360–361; Conway v Petronius Clothing Co Ltd [1978] 1 WLR 72, 89–90; Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150, 163–164; Molomby v Whitehead (1985) 7 FCR 541, 550–552; Wuu Khek Chiang George v ECRC Land Pte Ltd [1999] 3 SLR 65, paras.25, 27, 31–34; Re Boldwin Construction Co Ltd [2001] 3 HKLRD 430, 435–437.

(2) The right of inspection flows from the director’s duties to the company and a director does not have to explain why the inspection is sought or demonstrate any particular ground or ‘need to know’ as a basis (Re Boldwin Construction Co Ltd at pp.432 and 436; Molomby v Whitehead at p.550; Wuu Khek Chiang George v ECRC Land Pte Ltd at para.27). Thus, the inaction on the part of the director after grounds for suspicion concerning the company’s affairs have arisen is irrelevant; likewise, the intention of the director to discover misfeasance with the view to seeking relief, or that the desire to find evidence is motivated by vindictiveness (Re Boldwin Construction Co Ltd at p.436).

(3) It is only where it can be proved that the director intends 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 can be interfered with, and such interference can only be effected in circumstances where a restriction on a director’s right can be imposed because of misuse of confidential information leading to damage (Re Boldwin Construction Co Ltd at p.435).

(4) In view of the proposition in (3), the exercise of a director’s right of inspection is, ‘generally speaking, not a matter of discretion with the Court’ (Edman v Ross at p.361; Berlei Hestia (NZ) Ltd v Fernyhough at p.163; Wuu Khek Chiang George v ECRC Land Pte Ltd at paras.32 and 33; Re Boldwin Construction Co Ltd at p.435).

(5) The onus of establishing that the right of inspection will be exercised for improper purpose lies on the person who asserts it and ‘clear proof’ is required to satisfy the Court ‘affirmatively’ that the grant of the right of inspection would be detrimental to the interests of the company (Wuu Khek Chiang George v ECRC Land Pte Ltd at para.34).

(6) The scope of inspection can potentially be very wide, covering any ‘documents belonging to the company’ (Burn v London and South Wales Coal Co and Risca Investment Co at p.118; Edman v Ross at p.360), ‘corporate material’ (Molomby v Whitehead at p.550), ‘corporate records and accounts’ or ‘corporate information’ (Berlei Hestia (NZ) Ltd v Fernyhough at p.163), ‘accounting and other records of the company’ (Wuu Khek Chiang George v ECRC Land Pte Ltd at para.25).

(7) It is perfectly proper for a director to engage an accountant to conduct the inspection in exercise of his right. A director may certainly exercise his right through his agent (Edman v Ross at p.361; Re Boldwin Construction Co Ltd at p.436). A director is also entitled to take copies of the documents during inspection (Burn v London and South Wales Coal Co and Risca Investment Co at p.118; Edman v Ross at p.361).

(8) Whilst there may be some dispute in the authorities if the statutory provision (our statutory provision is s.121(3) of the Companies Ordinance) adds a statutory right of inspection to an existing common law right, it is abundantly clear that the statutory provision is consistent with and does not detract common law right (Conway v Petronius Clothing Co Ltd at pp.85 and 89; Berlei Hestia (NZ) Ltd v Fernyhough at p.163; Wuu Khek Chiang George v ECRC Land Pte Ltd at paras.25 and 31).”

8.The rights of a director are, therefore, clear. A director is entitled to inspect all and any document of a company, whether kept in hard copy or electronic form, without giving any reason. In practice one would expect a director to restrict requests for inspection to particular areas of interest in a company’s affairs if only because a request to inspect all, or even a large proportion, of a company’s documents would be immensely time consuming for the director and serve little purpose. If a director behaves irresponsibly making endless requests for documents for no apparently good reason, the company may take the view that the director should be removed. But subject to these practical considerations a director is entitled to require access to all company documents unless the company, or a person with locus to object, can demonstrate by clear proof that inspection would lead to misuse of information that would be detrimental to the interests of the company. The fact that a director has limited involvement in the affairs of the company is not a ground to refuse inspection. Neither is a dispute between shareholders or directors concerning matters to which the documents sought relate. “Clear proof” in this context requires evidence of facts, which demonstrate documents will be misused to the detriment of the company or from which misuse can properly be inferred. Conjecture is not evidence.

9.I would add one minor further qualification. The court will not make an order if the company demonstrates that access to the documents requested has been made available and the application is unnecessary[3].

10.The present case illustrates the common reason why such applications are made: The Plaintiff and the 2^nd Defendant do not trust one another and appear unable to communicate constructively. The Plaintiff believes documents are being withheld. The 2^nd Defendant believes the Plaintiff is messing him and the Company around. However, wherever fault may lie, the Plaintiff is clearly entitled to inspect all the Company’s documents and if he is not being given access to them, he is entitled to an order, which allows him to do so.

11.The issues boil down to whether the 2^nd Defendant, who opposes the application and appeared in person, has demonstrated either that the application is unnecessary, because the Plaintiff has been given access to all the documents he seeks, or that if granted the Plaintiff will misuse the documents.

12.On 24 February 2023 Ince & Co, the Plaintiff’s solicitors, wrote to the 2^nd Defendant setting out in a schedule to the letter 11 categories of documents that the Plaintiff wished to inspect, thought existed and which could not be located on the Google drive. In the light of the principles that I have explained the relevant questions where: Did the documents exist, if they did was the Plaintiff correct that they could not be located on the Google drive, if they were not on the Google drive how inspection of them was to be made? Unfortunately rather than address these narrow factual issues the 2^nd Defendant proceeded to write lengthy letters taking issue with various matters concerning the Plaintiff and his solicitors conduct of the application and associated litigation.

13.The 2^nd Defendant filed a further affirmation in response to the Plaintiff’s affirmation in support of the relisted originating summons setting out what he believed had not been made available. The 2^nd Defendant’s 36 pages affirmation does not address what the Plaintiff believes is missing from the Google drive. He seems to concede that not all documents have been provided (paras 2, 4, page 21 para 3, page 27, page 29, page 30, page 32) and objects that the Plaintiff is being unreasonable in not attending Board meetings to discuss any more information that he believes he is entitled to. He also suggests (para 5.4, page 18) that the Plaintiff is seeking to gather information for improper purposes but does not identify them. For the most part the 2^nd Defendant’s affirmation is a rant, containing repetitive complaints about the Plaintiff’s conduct and bad faith. The 2^nd Defendant’s 20-page submissions are similar.

14.In his 4^th affirmation in reply the Plaintiff wisely largely avoids commenting on the 2^nd Defendant’s general complaints and focuses on the 11 categories of documents expanding a little on what he is seeking in each case. It is in tabular form and I largely repeat it in the following table:

#	DESCRIPTION	UPDATED STATUS
1.	Correspondence between the Defendants and third parties for New M&A/RTO Opportunity (Ref: §1(a) of the Originating Summons dated 27 September 2022 (the “OS”) and §2(a) of the Summons dated 7 June 2023)	None are on the BOD drive. George confirmed at the hearing on 14 Feb 2023 that there was many correspondences (including whatsapp messages) between him and potential investors. I believe there should also be other correspondences and draft agreements being passed between George and the investors.
2.	All documents related to the New M&A/RTO Opportunity. (Ref: §1(b) OS and §2(b) of the Summons dated 7 June 2023)	Only the following documents have been provided:- The Odin/PropGo agreement signed on 4 July and 10 August 2022; and The PropGo/Socrates agreement dated 26 April 2022. Similar to item 1 above, that there must be more documents, including correspondence and draft which has not been disclosed. These deals were not finalized and there should be communication about reasons why the investors decided not to go ahead.
3.	All documents from 2015 to 2022 provided to the auditors of the 1st Defendant for the preparation of the audited financial statements. (Ref: §1(c) OS)	PropGO Board Meeting Drive > Book Keeping Statement > Auditor contains only payment vouchers and copy cheques. I wish to know what were in fact passed to the auditors.
4.	General ledgers, debtor/creditor ledgers, extended trial balance with a list of audit adjustments for the years ended 31 December 2015 to 2021. (Ref: §1(d) OS)	General ledgers were uploaded at PropGO Board Meeting Drive > Book Keeping Statement > General Ledger Balance sheets, and Profit and Loss Statements for January 2020 to March 2021 were uploaded at PropGO Board Meeting Drive > Book Keeping Statement > Financial Report I am awaiting the remaining documents to be disclosed, for example the debtor / creditor balance which will set out how much the 2nd Defendant currently owes to each debtor. George have said in a recent EGM that his family advanced loans to the company so there must be a record.
5.	All payment vouchers with supporting documents (Ref: §1(e) OS)	There are no payment vouchers for 2015, Jan to Apr 2016, Oct to Dec 2016.
6.	Profits tax computations together with working schedules for the years of assessment 2015/2016 to 2021/2022. (Ref: §1(f) OS)	None are on the BOD drive.
7.	Profits tax returns for the years of assessment 2015/2016 to 2021/2022. (Ref: §1(g) OS)	None are on the BOD drive.
8.	Employer returns for the years of assessment 2015/2016 to 2021/2022. (Ref: §1(h) OS)	The returns for George for all years are missing. George has been the highest paid employee so far as I know. In addition, for other employees, the returns for years 2015/2016, 2016/17 and 2021/22 are missing. Other returns are on PropGO Board Meeting Drive\Book Keeping Statement\ER
9.	All of the signed or unsigned working schedules and notes of the auditors which accompanied the 1st Defendant’s audited financial statements between 2010 and 2021. (Ref: §1(a)(i) Plaintiff’s summons dated 3 January 2023 (the “Summons”))	None of the working schedules have been uploaded on the BOD Drive. The working schedules in 2016 and 2019 was disclosed in related actions [see pages 186 - 218 and 245 to 266 of HNS-3].
10.	The 1st Defendant’s HSBC bank statements between 2010 and 2021 for accounts ending in 70833 and 10103. (Ref: §1(a)(ii) Summons)	References to these accounts have previously been made in email correspondences discussing the affairs of the Company between George and his sister, Toula on 19 July 2020, a copy of which can be found at pages 267–270 of “HNS- 3”. If the account belongs to the company, then I think it is reasonable for George to write to the bank for the statements. If these are personal accounts he can easily produce a redacted statement that shows the account number and the name of the account holder.
11.	The 1st Defendant’s Paypal account statements (Merchant Account ID: HF33BYLPSJHQ2 and X4VUXEGB5734) between 2010 and 2021. (Ref: §1(a)(iii) Summons)	In respect of Merchant Account ID HF33BYLPSJHQ2, the statements between 2010 to March 2019 are missing. In respect of Merchant Account ID YX4VUXEGB5734, the account statements for 2010 to April 2018 appears to be missing. I recognize that on the online accessible statements, you can only see 3 years of account, but it is open to George and 1st Defendant to seek past records from Paypal.

15.As I have explained the Plaintiff does not have to justify why he wants to inspect documents. He is entitled to be given access to all the Company’s documents. The 2^nd Defendant’s position at the hearing in February 2023 was that they could all be accessed through Google drive. This appears not to be the case. The 2^nd Defendant has not addressed the Plaintiff’s specific requests for documents falling within the categories originally sought in the originating summons, but which after inspection of those accessible through Google drive appear not to have been provided. I cannot identify any relevant substantive complaint that if the documents are provided they will be used to damage the Company’s interests. The 2^nd Defendant’s complaint is that the request itself is damaging because dealing with it is troublesome and not made in good faith. This is irrelevant. The court in determining applications such as this is not required to assess the motive for bringing the application. Motive is only relevant if the respondent to the application contends that if inspection is permitted the documents or their contents will be used in a way which prejudices the company’s interests. It is motive to which the 2^nd Defendant’s objections are directed not prejudice to the Company.

16.I will order that the Defendants make available for inspection the following categories of documents at a business or professional address on Hong Kong Island to be notified to the Plaintiff’s solicitors by 12 April 2024 or by such other means as may be agreed in writing by the Parties or directed by the Court:

(1) Correspondence between the Defendants and third parties for New M&A/RTO Opportunity.

(2) All documents related to the New M&A/RTO Opportunity.

(3) All documents from 2015 to 2022 provided to the auditors of the 1^st Defendant for the preparation of the audited financial statements.

(4) General ledgers, debtor/creditor ledgers, extended trial balance with a list of audit adjustments for the years ended 31 December 2015 to 2021.

(5) All payment vouchers with supporting documents.

(6) Profits tax computations together with working schedules for the years of assessment 2015/2016 to 2021/2022.

(7) Profits tax returns for the years of assessment 2015/2016 to 2021/2022.

(8) Employer returns for the years of assessment 2015/2016 to 2021/2022.

(9) All of the signed or unsigned working schedules and notes of the auditors which accompanies the 1^st Defendant’s audited financial statements between 2010 and 2021.

(10) The 1^st Defendant’s HSBC bank statements between 2010 and 2021 for accounts ending in 70833 and 10103.

(11) The 1^st Defendant’s Paypal account statements (Merchant Account ID: HF33BYLPSJHQ2 and X4VUXEGB5734) between 2010 and 2021.

17.The Plaintiff also seeks an order, in the absence of the 2^nd Defendant agreeing, that an email dated 6 October 2022, which was sent to the 2^nd Defendant by the Plaintiff’s son cannot be used in these proceedings as it was sent to him by mistake, was intended for the Plaintiff’s solicitors and is subject to legal privilege. The 2^nd Defendant does not accept that it was sent by mistake and suggests that it was sent to intimidate him. It does not read like an attempt to intimidate; it refers to the 2^nd Defendant in disparaging terms of a sort that a client might use when rushing of an email. I accept that it was intended for Ince & Co and privilege attaches to it. I will order that the 2^nd Defendant should not use the email dated 6 October 2022 from Jason Shapiro to the 2^nd Defendant, Steven Lee and the Plaintiff in any litigation proceedings before the Courts of the Hong Kong Special Administrative Region.

18.I make an order nisi that 75% of the costs of the originating summons dated 27 September 2022 and the summons dated 3 January 2023 be paid by the 2^nd Defendant to the Plaintiff. This is because it would appear that the Plaintiff could have inspected a significant proportion of the documents prior to issuing the originating summons, but his solicitors had failed to appreciate that a director is not entitled to production only to inspect data.

19.I will also make orders in the terms of the summonses dated 7 June 2023 and 29 August 2023 and in the terms of paragraph 1 of the summons dated 3 January 2023.

Mr Toby Brown, instructed by Ince & Co, for the plaintiff

The 2^nd defendant appeared in person

The 1^st defendant was not represented and did not appear

The 3^rd defendant was not represented and did not appear