Kim Seung Young v. Weina Hongkong Co Ltd
Read the full judgment text of HCMP 1478/2023 on BabelCite. This High Court CFI judgment was delivered on 20 September 2024.
1. This is the substantive hearing of the Plaintiff’s application by Originating Summons issued on 7 September 2023 (“ OS ”) for inspection and to take copies of the Defendant’s records and documents pursuant to section 740 of the Companies Ordinance, Cap 622 (“ CO ”). Since 2013, the Plaintiff has been holding 11% of the Defendant’s shareholding. Presently, the Plaintiff still holds 11% of the Defendant’s shareholding, with the balance 89% being held by Mr Lee Sun Yong (“ Lee ”).
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HCMP 1478/2023 [2024] HKCFI 2500 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 1478 OF 2023 _________________
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________________ JUDGMENT ________________ Introduction 1.This is the substantive hearing of the Plaintiff’s application by Originating Summons issued on 7 September 2023 (“OS”) for inspection and to take copies of the Defendant’s records and documents pursuant to section 740 of the Companies Ordinance, Cap 622 (“CO”). Since 2013, the Plaintiff has been holding 11% of the Defendant’s shareholding. Presently, the Plaintiff still holds 11% of the Defendant’s shareholding, with the balance 89% being held by Mr Lee Sun Yong (“Lee”). 2.Paragraph 1 of the OS originally provided as follows:
3.The OS was first heard before Mr Recorder William Wong SC on 27 September 2023. At that hearing, Mr Recorder Wong SC actually made an Order in terms of paras 1(b) and (c) of the OS with costs in the cause, so that the only matters left for this court’s determination would be paras 1(a), (d) and (e) of the OS. 4.For reasons best known to the Plaintiff’s legal team, in the Draft Order submitted to the court by the Plaintiff’s solicitors in their Hearing Bundle A, the court is still being asked to make an Order in terms of inter alia paras 1(b) and (c) of the OS. After further queries by this court, Mr Cheung confirmed the Plaintiff did not require an Order from this court regarding those 2 sub-paras. 5.At the hearing, Mr Cheung for the Plaintiff, after taking instructions, agreed that the ambit of the remaining paras of the OS should be further narrowed down. Hence, as far as para 1 (a) is concerned, the documents sought by the Plaintiff were limited to the period from 1 January 2021 to date. As far as para 1 (d) is concerned, instead of “books and records”, the Plaintiff was content to have management accounts, bank statements and cheques showing the receipt and payment of dividends for the period from 1 January 2020 to date. 6.As a result of the Plaintiff’s narrowing down of his request, Mr Pang, very sensibly, indicated no objection to paras 1(a) and (d) as revised and this court then made an Order in terms as follows:
7.In the end, what is left to be decided by this court is para 1 (e) of the OS. That is resisted by Mr Pang for the Defendant and this Judgment is principally directed to Para 1 (e) as revised with the agreement of Counsel on both sides. The revision changes the period under para 1(e) from 1 January 2020 to date. Background and the Plaintiff’s case 8.The following are taken from the Plaintiff’s 1st affirmation (“Kim 1”) and 2nd affirmation (“Kim 2”). 9.“上海維娜化妝品有限公司” (“Weina SH”) is a limited company incorporated in the PRC in 2003. It principally engaged in skincare and makeup business in the PRC. 10.In July 2007, Lee acquired the entire issued share capital of Weina SH. 11.In 2011, Lee offered to sell parts of his shares in Weina SH to 4 persons ie the Plaintiff, Seok Wooktae[1] (“Seok”), Ms Kim Yongran[2] (“Kim”) and Chung Woon Sung (“Chung”). Upon the completion of the sale of Lee’s shares in Weina SH aforesaid, Seok held 8%, Kim held 30%, Chung held 14%, the Plaintiff held 11%, and Lee held the remaining 37% of the shareholding in Weina SH. 12.The Defendant is a company incorporated in Hong Kong in May 2013 by Weina SH as its sole founding member, holding all 1,500,000 shares. 13.Subsequently, there were 2 restructurings of the Defendant in 2013[3] and 2016/2017, the details of which are immaterial for the present purpose. However, the effect of the 2013 restructuring was that the Plaintiff has become 11% shareholder of the Defendant since 18 September 2013 by way of transfer of 165,000 shares from Weina SH. The Plaintiff claimed he had paid HK$165,000 for the shares, the payment for which was evidenced by the bought and sold note and instrument of transfer signed by Weina SH and the Plaintiff. This is denied by the Defendant. The effect of the 2016/2017 restructuring was that the Defendant became the sole shareholder of Weina SH. 14.There have been changes to the shareholding structure of the Defendant since. As evident by the Defendant’s annual return as of 31 May 2023, the Plaintiff (11%) and Lee (89%) were the only 2 shareholders of the Defendant. Mr Cheung told this court that that remained the case as at the date of the hearing. 15.A table of the Defendant’s shareholders and directors since 2020, also derived from the Defendant’s annual returns, as prepared by the Plaintiff pursuant to this court’s Order, was as follows:
16.Weina SH was a very successful company. The following tables shows the dividends declared by it for the financial years of 2014 to 2019.
17.As a result of Weina SH’s success, the following table shows the dividends declared by the Defendant for the financial years of 2015 to 2019 and the Plaintiff’s entitlement thereto.
18.Although the amounts of the Plaintiff’s entitlement were as stated above, in Kim 1, the Plaintiff complained that according to his records, he had not received all his entitlement of dividends. For instance, for the financial years 2015 and 2016, the outstanding amount due to him was US$150,322.69. For the financial years 2017 and 2018, the outstanding amount due to him was US$251,275. For the financial year 2019, the outstanding amount due to him was US$10,000. 19.For the financial year of 2020, the Plaintiff complains that:
20.Since the Defendant has received dividends of US$19,328,651.23 from Weina SH, the Plaintiff, being a 11% shareholder of the Defendant, should at least be entitled to dividends in the sum of US$2,126,151.64. Whereas on 29 June 2021, the Plaintiff only received US$1,150,000 as part of the dividends for the financial year of 2020. 21.For the financial year of 2021, the Plaintiff complains that:
Defendant’s opposition 22.In opposition, Lee filed his 1st affirmation in January 2024 (“Lee 1”). In gist, the Defendant’s case, as summarised in Mr Pang’s skeleton, is this. 23.First, the Plaintiff never paid for the shares in the Defendant. Nor did he fully own the 11% in Weina SH. He only had 6% of the shares in Weina SH. This is because the Plaintiff and Lee had reached the so-called “5% Share Agreement” under which the Plaintiff held the 5% shares in Weina SH on trust and as nominee for Lee. 24.Second, the Plaintiff is not entitled to any rights in the Defendant’s shares because he had never paid valuable consideration for them. Although there is a bought and sold note dated 18 September 2013 signed by Weina SH and the Plaintiff stating the Plaintiff had paid for the shares, there is no record of any payment by the Plaintiff to the Defendant. Lee only found out recently that the Plaintiff never made any payments for the Defendant’s shares. Hence, the Plaintiff was never entitled to any dividends from the Defendant at all. 25.Third, Lee denies the Common Understanding and Agreement alleged by the Plaintiff. This Common Understanding and Agreement will be explained in the next section. 26.Fourth, the previous declarations of dividends by the Defendant were illegal agreements between the Plaintiff and Lee. In essence, the protection of the Plaintiff’s economic interest ie dividend payments to the Plaintiff is also illegal. 27.Fifth, the argument that the Plaintiff was unfairly prejudiced or the Plaintiff wanted to seek redress from the court should not be the Court’s main concern. If the Plaintiff feels that he has been unfairly prejudiced, he has every right to commence a proper action against the Defendant and/or Lee at any time. 28.Sixth, the Plaintiff should not utilise section 740 CO to challenge managerial or commercial decisions of the board without appropriate basis. The Court held in Cheung Tung Lan, Tony v Yang Yongdong unrep., HCMP 447/2012, 17 May 2012, Harris Jat [24] that the section does not enable a shareholder to inspect documents to monitor what the directors are doing with a view to challenging their decisions. Deliberation 29.Section 740 of CO provides as follows.
30.The applicable legal principles are well-established and have been set out in Mr Cheung’s skeleton. They are not contested by Mr Pang. For ease of reference, they are summarised below. 31.First, the section (and its predecessor) essentially codifies and expands upon the common law right of a company’s members to examine the company’s “records”. By reason of the liberal definition of “records”, the section prima facie entitles shareholders of a company to be granted generous access to corporate information in order to protect their interests in the company: Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241 at [9] (Harris J). 32.Second, the Court may make an Order under the section if it is satisfied by the applicant, the burden being on him, that (i) the application is made in good faith and (ii) the inspection is for a proper purpose. These are two separate and independent requirements. These two requirements, to some extent, lay down a subjective and an objective test: the applicant must first establish that he believes his purpose in applying for an inspection order is proper (ie that he is acting in good faith) and secondly, the court must believe the circumstances are such that the inspection applied for is for a proper purpose: Wong Kar Gee Mimi v Hung Kin Sang Raymond at [14] –[16]. 33.Third, once the primary or dominant purpose of the application is deemed by the Court to be proper ie it is a purpose germane to the applicant’s status as a shareholder, then any further or secondary purpose for seeking inspection, that is irrelevant. Equally, so long as the applicant acts in good faith and for a proper purpose, then the fact that there is hostility between the parties is equally irrelevant: Wong Kar Gee Mimi v Hung Kin Sang Raymond at [21] – [22]. 34.Fourth, 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 2 helpful points of guidance: (i) an application made by a substantial and longstanding shareholder may in and of itself discharge the burden of establishing good faith and proper purpose, and (ii) where an applicant seeks inspection to protect his economic interest in the company that might prima facie satisfy the proper purpose requirement: Selvaraj (Moorthy) v GMT Industrial Ltd [2019] 4 HKLRD 572 at [11] (Coleman J). 35.Fifth, 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: Selvaraj (Moorthy) v GMT Industrial Ltd at [15] and [16]. 36.Selvaraj (Moorthy) v GMT Industrial Ltd is an instructive case for the present purpose. The applicant has been a shareholder of the Company since 2 April 1979. The Company was a family-owned company, incorporated as long ago as 1979 to hold the Selvaraj family’s business. At the time of the hearing, he held 1,500 out of 15,000 issued ordinary shares of the Company. He applied for an Order authorizing inspection of the bank accounts of the Company. The 2 purposes of his application were: (i) to investigate what the applicant described as a genuine and credible belief on his own part that the Company, under his brother’s control, had operated the accounts in a manner which constituted corporate mismanagement or unfair and prejudicial conduct, and (ii) for him to be able to ascertain the Company’s cash position as part of a valuation process of the fair market price of his own shares which he would intend to sell. The application was allowed by Coleman J. As shall be seen later in this Judgment, these purposes are not that different from the Plaintiff’s purposes in the present case. 37.Sixth, where the application is for the purpose of enabling the applicant to carry out investigation into alleged misconduct or maladministration, it would not be possible or appropriate for the Court to reach a firm conclusion on each complaint raised. This is because, amongst other things, the evidence would likely not be complete, it is unlikely that disputes of fact can be resolved on affidavit evidence alone, and the complaint may well be raised again in subsequent proceedings for adjudication. What the Court should do is to assess, on the basis of the available evidence, whether the applicant has made out a proper case for investigation, taking into account such explanations as may be offered by the respondent. If the applicant is able to make out a proper case for investigation, the court should move on to consider whether, in the exercise of its discretion, the inspection sought ought nevertheless to be refused: Leung Chung Pun v Masterwise International Ltd [2014] 1 HKLRD 1129 at [25] (Recorder Anderson Chow SC, as he then was). 38.The Court is entitled to take into account a wide spectrum of matters and should strike a proper balance between requiring the company to be transparent and not permitting the jurisdiction to be used by a shareholder to challenge managerial or commercial decisions made by the board. How this balance should be struck could only be determined on a case by case basis: Leung Chung Pun v Masterwise International Ltd ibid. 39.In the Plaintiff’s overview and executive summary of his skeleton, he sets out the basis of the present application as follows. 40.It was agreed between the Plaintiff and Lee that the Defendant should be run based on certain common understanding and agreement (“Common Understanding and Agreement”) which was that:
41.Consistent with the Common Understanding and Agreement, dividends were declared and distributed, and eventually received by the Plaintiff over the years, although the timing of receipts was not regular. 42.In recent years, Lee has been acting in contravention of the Common Understanding and Agreement in that the Plaintiff was not distributed dividends in full for the financial year of 2020 – the last interim dividends he received was on 29 June 2021. The Plaintiff was not distributed any dividends for the financial year of 2021 and thereafter. The Plaintiff also complains he was unjustifiably removed as director in December 2021 so that he no longer had access to the requested documents. 43.The Plaintiff submits the present application is made bona fides for a proper purpose:
44.The Defendant’s grounds of opposition have been set out earlier in this Judgment. 45.Notwithstanding the alleged Common Understanding and Agreement and the alleged unauthorised and wrongful removal of the Plaintiff’s directorship, which Lee denies, ultimately, Mr Pang submits that they are irrelevant. At this stage, this court needs only focus on the following questions:
46.But first, this court should deal with the Plaintiff’s locus. 47.As far as the Plaintiff’s status as a member of the Defendant is concerned, a member is defined in section 2 of CO as inter alia a person who agrees to become a member of the company and whose name is entered as a member in the company’s register of members. There is no specific requirement that the shares must have been paid for if the aforesaid 2 requirements are satisfied. Hence, even a donee of shares can become a member of a company if all the formal procedural requirements to implement registration of the donee as transferee are met: Gore-Browne on Companies Vol. 2 para 23-9. 48.Further, Article 27 of the Defendant’s Articles of Association only provides that “A transfer of shares shall not pass the right to any dividend declared thereon before the registration of the transfer.” Given that it is not Lee’s case that the Plaintiff’s 11% shareholding in the Defendant had not been properly registered, and given the previous declarations and payment of dividends by the Defendant to the Plaintiff, this court is not prepared to find for the present purpose the Plaintiff is not a member of the Defendant and does not have locus under section 740(6)(a) of CO. 49.In these circumstances, notwithstanding Mr Pang’s bare assertion of the law, even assuming for the sake of argument the Plaintiff had not in fact paid for the 11% Defendant’s shares, which this court is not satisfied on the available evidence, this court is not persuaded by his submission that (i) the Plaintiff was never entitled to any dividends from the Defendant at all, or (ii) the previous declarations of dividends by the Defendant to the Plaintiff were illegal agreements between the Plaintiff and Lee. 50.In any event, it seems to this court the Defendant’s arguments (in essence Lee’s arguments) against inspection contain bare assertions of the law without the support of proper authorities or bare assertions of facts which are disputed and cannot readily be resolved in an application of this kind. Hence, whether the Plaintiff had paid for his 11% of the Defendant’s shares, whether the Common Understanding and Agreement alleged by the Plaintiff and whether the “5% Share Agreement” alleged by Lee exist are not something that this court can be expected to come to a firm view on affirmation evidence. 51.Further, this court is not persuaded by Mr Pang’s argument that (i) whether the Plaintiff has been unfairly prejudiced by Lee’s action should not be the Court’s main concern since he has every right to commence a proper action against the Defendant and/or Lee at any time, or (ii) the Plaintiff is utilising the section to challenge managerial or commercial decisions of the Defendant’s Board without appropriate basis. 52.Rather, this court accepts Mr Cheung’s submission that:
53.For completeness, under para 1(e) of the OS, the Plaintiff is only seeking “All documents of 上海維娜化妝品有限公司in the Defendant’s possession, custody and/or power, which are relevant to the distribution of dividends by the Defendant from 1 January 2020 to date. This is clearly permissible. In Wong Kar Gee Mimi v Hung Kin Sang Raymond at [46], Harris J observed that “records emanating from a subsidiary, which become owned by or possessed as of right by the specified corporation, come within ‘records of the specified corporation’”. 54.To conclude, this court is satisfied that the present application is made in good faith and for a proper purpose. This court also cannot see any justification to exercise its discretion to refuse the present application. Indeed, the Defendant has accepted orders for inspection can be made in terms of paras 1 (a) to (d) as revised. So why leave out para 1 (e) when the basis of the Plaintiff’s application for the entire para 1 of the OS is the same? Disposition and costs order nisi 55.There shall be an Order in terms of paras 1 (e) as revised. 56.Costs should normally follow the event. There shall be an Order nisi that costs of the OS be to the Plaintiff, to be taxed if not agreed and paid forthwith, certificate for counsel.
Mr Tommy Cheung, instructed by M/s YTL LLP, for the Plaintiff Mr Ronald Pang and Mr Edward Chin, instructed by M/s Francis Kong & Co, for the Defendant [1] Lee’s brother in law. [2] Lee’s wife. [3] The purpose of which was to mirror the shareholding structure of Weina SH. [4] On the available evidence, the Defendant’s audited financial statements for the years 2019 to 2021 all signed by Lee and all stated the Defendant’s principal activities to be investment holding. There is also no suggestion from Lee that the Defendant had any “operating” business. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment