Lui Yau Tak and Another v. Melofield Nursery and Landscape Contractor Ltd
Read the full judgment text of HCMP 312/2024 on BabelCite. This High Court CFI judgment was delivered on 17 March 2025.
1. This is the substantive hearing for the Originating Summons dated 23 February 2024 (“ OS ”) issued by (i) the 1 st Plaintiff, Lui Yau Tak (“ Paul ”), the then director of the Company, and (ii) the 2 nd Plaintiff, Lui Yau Bun Raymond (“ Raymond ”), a shareholder of the Company (collectively “ Ps ”), against the Defendant, the Company, for orders for the Company to (i) provide to Paul (a director) and Raymond (a shareholder) the accounting records of the Company as particularized in the S
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HCMP 312/2024 [2025] HKCFI 1037 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 312 OF 2024 _________________
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_______________ JUDGMENT _______________ A. INTRODUCTION 1.This is the substantive hearing for the Originating Summons dated 23 February 2024 (“OS”) issued by (i) the 1st Plaintiff, Lui Yau Tak (“Paul”), the then director of the Company, and (ii) the 2nd Plaintiff, Lui Yau Bun Raymond (“Raymond”), a shareholder of the Company (collectively “Ps”), against the Defendant, the Company, for orders for the Company to (i) provide to Paul (a director) and Raymond (a shareholder) the accounting records of the Company as particularized in the Schedule annexed to the OS (“Schedule”) for Ps’ inspection forthwith and without charge, pursuant to sections 373 to 378 and section 740 of the Companies Ordinance (Cap. 622) (“CO”), and (ii) provide or allow Ps to make copies of such accounting records without charge if they so request. 2.The Schedule seeks inspection of accounting records of the Company under 7 Categories (each with various sub-Categories), namely (1) bank accounts, (2) tax filings, (3) ledgers and contracts, (4) suppliers and/or sub-contractors, (5) wages and other expenses, (6) finance costs and (7) financial position. In particular, under Category 7(5) of the Schedule, Ps seek inspection of records of transactions, relationship, and other dealings between the Company and 27 “related companies”. 3.On 26 March 2024, about a month after the issuance of the OS, Paul was removed as a director of the Company. It is common ground that as a result of such removal, Paul is not entitled to seek inspection of the Company’s accounting records qua director. Nevertheless, since Paul was a director of the Company at the time of issuance of the OS, there is a question as to whether Paul should nonetheless be entitled to costs of the OS against the Company. Aside from the question of costs in respect of Paul’s application, the real issue before the Court is Raymond’s application for inspection qua shareholder under statute, namely section 740 of the CO. 4.The fact that Raymond’s application is made under statute has a bearing because, quite apart from the statutory route, Raymond has also entered into a shareholders’ agreement in Chinese entitled “經緯園藝有限公司策略投資協議” (i.e. strategic investment agreement) (“SHA”) on 20 October 2020 with (i) Lau Sum Yan (劉森仁) (“SY Lau”) and (ii) Lau Ming Fung (劉銘豐) (“Lewis”). By the SHA, Raymond acquired 30% shareholding in the Company from SY Lau and Lewis, whereupon the remaining 70% shareholding in the Company is held by Lewis. The parties also entered into supplemental agreements to the SHA subsequently. 5.The SHA is for a term of 5 years. It confers on Raymond various rights of access to information. At the hearing before me, Ms Lydia Leung for Ps confirmed that Ps are not pursuing inspection pursuant to the contractual rights under the SHA. Nevertheless, there remains a question as to the relevance of the SHA to the present application. 6.The substantive hearing of the matter first took place before DHCJ Jonathan Wong on 31 October 2024, with submissions lodged by Ps and the Company respectively. In that hearing, his Lordship brought to the parties’ attention an Australian decision in Simba Global Pty Ltd v IFOTA Pty Ltd[2019] FCA 1020, where Moshinsky J stated at §23 as follows:
7.His Lordship took the view that the parties should address the Court further on the relevance of the SHA, and directed the parties to file further skeleton submissions to deal with “the significance of the right of information conferred upon the 2nd Plaintiff by the Strategic Investment Agreement dated 20 October 2020”. The matter was later fixed to be heard before me on 28 February 2025. 8.I should also mention that, on 23 November 2023, Lewis and the Company commenced an action in HCA 1899/2023 against Raymond and Paul (“1899 Action”). Clause 4(9) of the SHA provides inter alia that, if the revenue of the Company exceeds HK$120 million, the shareholders should provide loan financing to the Company in proportion to their shareholding ratio: “… 如果營業額突然提升超過港幣一億貳仟萬元，則所有股東需按其持股份比例對公司進行融資貸款”. In gist, in the 1899 Action, Lewis and the Company contend that, in breach of Clause 4(9) of the SHA, Raymond failed to provide financing or loans to the Company, and claim damages for the loss suffered. In response, Paul and Raymond contend inter alia that the financing or loans were not provided due to the Company’s failure to provide access to accounting documents. In the OS, the Company’s main objection is that Raymond’s request for access mirrors his defence in the 1899 Action, and should be dismissed as he is in effect seeking “discovery” for the 1899 Action. B. SALIENT BACKGROUND AND STANCE 9.The principal activity of the Company is the provision of nursery and landscaping contracting works. 10.On 20 October 2020, Raymond entered into the SHA with SY Lau and Lewis. He acquired 30% shareholding in the Company with the remaining 70% shareholding held by Lewis. Raymond acquired his shares in the Company by providing a HK$15 million investment (Clause 3). 11.Among others, the SHA provides for the following:
12.Notably, the SHA stipulates various protections, rights of participation and access to information in favour of Raymond as follows:
13.Ps say they have been requesting for access to accounting information since 2021, but to little avail. On the other hand, Lewis and the Company say that Raymond failed to provide financing or loans, in breach of Clause 4(9) of the SHA. 14.Meanwhile, Lewis claimed to have provided or procured financing or loans to meet the Company’s need and sought to have more shares allotted. By a share allotment/ share disposal exercise purportedly passed at the Annual General Meeting of the Company on 27 September 2023, the shareholding percentage of the Company was adjusted to Lewis (holding 76.9%), Home Harmony Limited (“HHL”) (holding 12.8%), and Raymond (holding 10.3%) after the allotment of new shares on 5 October 2023 (“Share Allotment”). Raymond believes that HHL is Lewis’ company, and challenges the validity and legality of the Share Allotment as a breach of the SHA and the Articles of Association of the Company. 15.On 23 November 2023, Lewis and the Company commenced the 1899 Action against Raymond and Paul. They contend that Raymond failed to provide financing or loans to the Company in breach of Clause 4(9) of the SHA, and claim damages for the loss suffered. On the other hand, Raymond counterclaims against Lewis inter alia for his failure to maintain Raymond’s 30% shareholding in the Company. 16.On 17 January 2024, Ps’ solicitors Darin Leung & Partners (“DL&P”) wrote to the Company’s solicitors Li, Kwok & Law (“LKL”), requesting various accounting information of the Company, which is later reflected in the Schedule. On 30 January 2024, LKL replied, refusing the provision of the said documents, alleging that the scope of documents sought is “obviously excessive and disproportionate and constitutes a fishing exercise”, and that discovery is “premature”. 17.On 16 February 2024, the Company held an Extraordinary General Meeting (“EGM”) to remove Paul as a director. The resolution was not passed as the meeting was not quorate. The EGM was adjourned to 23 February 2024. 18.In the morning of 23 February 2024, Ps issued the OS. At the time of issuing the OS, the board of directors of the Company (“Board”) consist of Lewis, Lewis’ parents (i.e. SY Lau and a Lau Wah), and Paul. In the adjourned EGM held later on the same day, the resolution to remove Paul was not passed due to the lack of special notice to Paul. 19.In view of the ongoing efforts to remove Paul as a director, Ps already foreshadowed that further moves will be made to remove Paul as a director. Therefore, at the time of issuing the OS, Raymond has made an application for inspection of documents in the alternative in his capacity as shareholder of the Company. 20.In Raymond’s Affirmation in support, he deposed to the need for inspection as follows:
21.On 26 March 2024, Paul was removed as director in the EGM of the Company. 22.On 27 March 2024, the Company filed the Affirmation of Lewis dated 26 March 2024, where Lewis stated inter alia that:
23.Specifically, Lewis alleges in his Affirmation that Raymond’s application is not bona fide nor for a proper purpose as it is made with the express intention of seeking discovery of documents of the Company in place of the normal discovery process in various proceedings including:
24.Lewis further contends in his Affirmation that the Company has already provided Ps with the audited financial statements which are sufficient for the purpose of informing Ps the revenue and financial position of the Company and that, in any event, the scope of the documents sought under the Schedule is simply too extensive and wide. 25.On 16 May 2024, Ps filed the 2nd Affirmation of Paul and the 2nd Affirmation of Raymond in reply. Paul’s 2nd Affirmation stated inter alia that:
26.By his 2nd Affirmation, Raymond stated inter alia as follows:
27.At the hearing before DHCJ Jonathan Wong on 31 October 2024, the Company has adduced further affidavit evidence to (i) exhibit the unqualified opinion to the Company’s audited financial statements for the year 2023, and (ii) update the Court as to the progress of the 1899 Action. C. RELEVANT PRINCIPLES C1. Inspection by director 28.It is trite that a director is in general entitled, both under common law and statute, to seek inspection of accounting documents and records of a company. In particular, Sections 375(1)-(2) CO provide for a director’s right to make a copy of a company’s accounting records in the course of inspection and to be provided with a copy of the company’s accounting records without charge if so requested by the director. 29.Equally, it is trite that even if an applicant was a director at the time of an application, such application would be dismissed if by the time of the hearing, the applicant is no longer a director of the company: see Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241, per Harris J at §6; Re Opes Asia Development (unreported, HCMP 447/2012, 17 May 2012), per Harris J at §2; Re China Ease Investments Limited [2018] HKCLC 175, per DHCJ Maurellet SC (as he then was) at §13; Wong Sau Man Samuel v Wong Kan Po Wilson & Ors [2017] 4 HKLRD 542, per DHCJ William Wong SC (as he then was) at §26. 30.Nevertheless, where an applicant was entitled to inspection at the time of application but was thereafter removed, and would have succeeded in the application but for the removal, the applicant may be entitled to costs: see e.g. Yiu Ho Wing v China Ease Investments [2018] HKCFI 1498 at §21. Of course, that would very much depend on the circumstances of a case. C2. Inspection by shareholder under section 740 of CO 31.Section 740(1) CO provides that, on application by a required number of a company’s members, the Court may make an order authorizing a person who is the applicant or one of the applicants to inspect any record or document of the company. Section 740(2) CO further provides as follows: -
32.On behalf of Ps, Ms Leung refers to Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241 at §14, where Harris J held that the above requirements are two separate and independent tests, the former being subjective and the latter being objective. 33.The requirement of “proper purpose” was examined in Leung Chung Pun v Masterwise International Ltd [2014] 1 HKLRD 1129 at §16(3):
34.In Wong Kar Gee Mimi, supra at §22, Harris J elaborated on proposition (c) above as follows: “The corollary of this proposition is that 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 and is no bar to an application for an inspection order: Unity APA v Hume (No 2), p.479.” 35.At §24, he observed that the predecessor of section 740 CO: “affords shareholders an often overlooked yet powerful right by which to expose wrongful conduct in relation to the company’s affairs. Where the shareholders and directors are at loggerheads, the right of access to corporate information is particularly important: in these circumstances, even if a member suspects that something is amiss, for example an egregious breach of fiduciary duty, he will be unable to protect his economic interest and financial investment within the company (through, for instance, a derivative action) unless he is able to obtain sufficient information.” 36.At §26, he identified the primary purpose of inspections statutes by citing §§286 & 288 of 18A American Jurisprudence 2d 2004:
37.Nevertheless, an applicant should not abuse his statutory right of inspection by using it as a fishing expedition or a substitute for a pre-action discovery exercise: see Wong Kar Gee Mimi, supra at §40. 38.Moreover, if the application is for the purpose of enabling the applicant to carry out investigation into alleged misconduct or maladministration, the Court should assess, on the basis of available evidence, whether the applicant has made out a proper case for investigation taking into account such explanations as offered by the company. If the applicant is able to make out a proper case for investigation, the Court should then consider whether to exercise its discretion to grant the inspection order by taking into account a wide spectrum of matters. The Court should strike a proper balance between (i) requiring the company to be transparent and (ii) not permitting the statutory jurisdiction to be used by a shareholder to challenge managerial or commercial decisions made by the board of directors of the company: see Leung Chung Pun, supra at §25. 39.Similarly, on behalf of the Company, Mr Wong refers to the summary of relevant principles in Wong Sau Man Samuel v Wong Kan Po Wilson & Ors [2017] 4 HKLRD 542 per DHCJ William Wong SC (as he then was) at §39:
40.Further, apart from citing Wong Kar Gee Mimi, supra at §40, Mr Wong relies on other authorities in support of the proposition that it is not a proper purpose for an application to serve as a substitute for discovery, e.g. Smartec Capital Pty Ltd v Centro Properties Ltd & Anor (2011) 83 ACSR 461, per Barret J at §67(2); Lehman & Co Management Ltd v Efficient Ltd [2011] 5 HKLRD 668 at §§39, 41. 41.That said, Mr Wong has fairly drawn to the Court’s attention the decision of Fung Chuen v Sandmarin International Holdings Limited (unreported, CACV 240/2017, 17 April 2018), where the Court of Appeal stated at §10.6 that “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”, though he argues the facts there are very different. 42.In my view, the relevant principles set out by Ms Leung and Mr Wong are well-established. Whilst they might have different emphasis, it does not appear to me that there is any serious dispute or controversy on those general principles. C3. Relevance of shareholders’ agreement 43.As mentioned above, at the hearing on 31 October 2024, DHCJ Jonathan Wong drew the parties’ attention to the Australian decision in Simba Global Pty Ltd v IFOTA Pty Ltd[2019] FCA 1020, and directed the parties to file further submissions to deal with “the significance of the right of information conferred upon the 2nd Plaintiff by the Strategic Investment Agreement dated 20 October 2020”. 44.On behalf of the Company, Mr Wong argues that there is a clear distinction between a shareholder’s information rights under a shareholder’s agreement and a shareholder’s information rights under the statute, citing Australian decisions in Yara Australia Pty Ltd v Burrup Holdings Limited [2010] FCA 1273 and ACD Tridon Inc v Tridon Australia Pty Ltd [2002] NSWSC 896. He submits that Yara, supra is authority for the following propositions:
45.Further, he contends that on a more conceptual level, a shareholders’ rights under contract and under company law are “two different relationships on two different planes”, i.e. the private law plane and the company law plane, praying in aid the Singapore High Court case of BTY v BUA [2018] SGHC 213 (at §§79-107) and ACD Tridon, supra (both cited with approval by Godfrey Lam J (as he then was) in Dickson Holdings Enterprise Co Ltd [2019] 3 HKLRD 210). In BTY, the Singapore Court has explained why these claims operate on separate planes (at §§85-90). Indeed, the private law plane is subordinate to company law (at §91). By nature, it is supplementary to the company law plane. As explained in ACD Tridon, supra at §165:
46.Significantly, a company is often not a party to a shareholders’ agreement. Mr Wong submits that this is important as the shareholders’ agreement is a consensual agreement and any provisions therein could only bind the parties to it. In this regard, he reminds the Court that, in the present case, the Company is not a party to the SHA; whereas the company is a party to the shareholders’ agreement in Simba, supra. In any event, the judge in Simba, supra was not asked to deal with the point of whether there is any distinction between the two routes; there was no analysis on the point; and apparently no case authority has been cited to the judge. 47.As Mr Wong put it in his oral submissions, the routes under a shareholders’ agreement and company law are akin to two separate tunnels. If an applicant chooses to enter one of them, the applicant should abide by the requirement or criteria of that specific tunnel. Hence, any intention to “enforce” Raymond’s information rights under the SHA cannot constitute a free-standing proper purpose for the purpose of section 740 CO. 48.In my view, there is support for Mr Wong’s two propositions, and his contention that on a more conceptual level, the rights under a shareholders’ agreement and the rights under company law relate to two different planes, namely the private law plane and the company law plane. This must be right because a shareholders’ agreement is a consensual arrangement among the shareholders. The rights under such contract are separate and distinct, both by nature and in terms of the parties thereto, from statutory provisions – and very often mandatory provisions – under company law. This explains why in ACD Tridon, supra at §165, Austin J observed that a shareholders’ agreement is supplementary to the rights and liabilities of the shareholders conferred by company law, and does not purport to exclude or replace the latter – indeed, the statutory rights of shareholders cannot, for the most part, be taken away by an agreement. This also explains why provisions in a shareholders’ agreement may not necessarily be binding on a company, even if the company is a party to it (e.g. due to fetter of its statutory powers). It follows that a shareholder cannot contend that, simply because he or she may be entitled to right of access under a shareholders’ agreement as a matter of contract, he or she can ipso facto invoke statutory right to obtain access against the company. 49.However, such analysis is not the end of the matter. What it entails is that one cannot transplant or superimpose provisions on right to access in a shareholders’ agreement to an application under section 740 CO, as if those provisions can replace or dispense with the requisite statutory requirements. One must still apply the statutory requirements. However, the fact that there are two separate and distinct routes does not mean that a shareholders’ agreement is irrelevant for the purpose of considering the statutory requirements under section 740 CO. The requirements of “good faith” and “proper purpose” are inherently fact-sensitive, and whether a request is made in “good faith” and for “proper purpose” would necessarily vary from cases to cases, depending on the relevant factual matrix and context. Viewed such way, relevant provisions in a shareholders’ agreement might well form an important factual matrix or context against which the Court would assess whether a request is made in “good faith” and for “proper purpose”. 50.On behalf of Ps, Ms Leung relies on Simba, supra at §23 where Moshinsky J considered the shareholder’s inspection application to be made in good faith and for a proper purpose, saying that “The context includes the Shareholders Agreement, which contains a clause conferring a right of access to those documents”. Such dicta tallies with my view that a shareholders’ agreement, including provisions on right of access, forms part of the context in evaluating the statutory requirements. Of course, it does not follow that simply because a document sought to be inspected is covered by a provision on right of access in a shareholders’ agreement, such request would, without more, satisfy the statutory requirements. 51.Such analysis is consistent with other authorities cited by Ms Leung. In Tsai Shao Chung v Asia Television Ltd [2012] 4 HKLRD 52, the Court of Appeal rejected the argument that a director’s application for inspection be refused because he may allow shareholders from his camp to use them for purposes other than in the proper performance of his duties as director, and took into account the shareholders’ agreements which provide for shareholder’s right to receive information from its appointed director, thereby ensuring that the shareholder’s economic interest in his shares are protected via the director (at §§45-46). This illustrates (albeit in the context of directors) that provisions in a shareholder’s agreement could be relevant in assessing whether a request for inspection is for proper purpose. 52.Ms Leung also relies on decisions which take into account specific shareholder’s rights when considering whether an application for inspection was made for proper purpose and in good faith: see Yeung Chun Kei v 2A Limited [2024] HKCFI 3188,at §§11 & 23; Sea Heritage Holdings Limited v Nice Wave International Limited [2023] HKCFI 3076,at §§6, 58. They illustrate that such specific rights (and by analogy those under shareholders’ agreement) form part of the context which should be taken into account in considering if the statutory requirements are satisfied. 53.It is instructive to note that, even in Yara, supra, Barker J accepted that “the facts of each case will finally dictate what documents might be appropriately accessed under this provision” (§122). There is no reason why, in undertaking such a fact-sensitive analysis, the Court should exclude the relevant provisions in a shareholder’s agreement. 54.I agree with Ms Leung’s submissions that, whilst the statutory right of a shareholder to inspect a company’s books should not be limited by contract, it is quite another thing to say that a shareholder’s right under contract has no significance or bearing to the Court’s analysis (or indeed fact-sensitive assessment) of proper purpose and good faith. As confirmed by Ms Leung, Ps do not suggest that the Court, in exercising its discretion under section 740 CO, should adopt, blind-folded, the rights as conferred by a shareholders’ agreement. Instead, the real question is whether such shareholders’ agreement bears any significance to the Court’s evaluation of good faith, proper purpose, and the proper scope of inspection. 55.In the circumstances, the provisions in the SHA should fall within the relevant factual matrix and context against which the Court could assess the statutory requirements of good faith and proper purpose, and indeed the proper scope of inspection. Whilst I will go into some of the specific provisions of the SHA in the analysis further below, I wish to mention at this juncture two broad aspects under which provisions in a shareholders’ agreement may become relevant. 56.First of all, insofar as the shareholders’ agreement provide for specific rights and obligations of shareholders and there is a need to seek access to relevant documents for the purpose of performing such rights and obligations, then plainly the Court must be entitled to take into account such contractual rights and obligations as relevant context in evaluating the statutory requirements. This aspect relates to the substantive contents of contractual provisions, independent from any right of access provisions. 57.Second, insofar as the shareholder’s agreement provide for right of access, or indirect access (e.g. through appointment of director), this is a relevant context pertaining to such shareholder’s level or extent of participation in the business of the company, and the right to information commensurate with the same. In other words, in a context where a shareholder is envisaged to participate and/or be kept informed of the daily business of a company, the Court may well consider a wider request for inspection to be in good faith and for proper purpose, as contrasted with a different context where the shareholder is a passive investor simpliciter without any right to access to information under a shareholder’s agreement. D. ANALYSIS D1. Relevant Provisions of SHA 58.I have set out some of the relevant provisions of the SHA in §§11-12 above. Before going further into them, I should mention a few words about the status of the SHA. 59.In the 1899 Action, Lewis and the Company aver in §§17-18 of the Statement of Claim therein that Lewis is entitled to treat the SHA as having been repudiated by Raymond, and Lewis has accepted repudiation of the SHA and has communicated his acceptance of the same to Raymond since around August to September 2023 or, further or alternatively, by service of the Writ and Statement of Claim in the 1899 Action to Raymond. Nevertheless, for the purpose of the OS, Mr Wong has not suggested that the Court should disregard the SHA simply because of the Company’s stance that the SHA had been terminated by acceptance of repudiation. 60.In any event, in the Defence and Counterclaim of Raymond and Paul, they deny §§17-18 of the Statement of Claim, and specifically deny that Raymond is in breach of the SHA. Therefore, as far as Ps are concerned, the SHA remains in existence since its term of 5 years (until October 2025) has not yet expired. For the purpose of the OS, it is neither necessary nor appropriate for this Court to express any view on the merits of the 1899 Action. It suffices to say that, in the absence of submissions by the Company to the contrary, there is no reason why the Court could not proceed on the footing that prima facie the SHA remains extant, at least for the purpose of assessing whether Ps seek inspection in good faith and for proper purpose, irrespective of the outcome of the 1899 Action in future. 61.Moving on to the provisions of the SHA, as I have explained in §§56-57 above, they could be relevant firstly in terms of their substantive contents, and secondly in terms of the rights of access. On the former, the following call for heightened access to accounts and financial information:
62.On the latter, and consistent with the substantive contents of the former which call for heightened access to accounts and financial information, there are built-in provisions in the SHA conferring rights of participation and access to information in favour of Raymond, viz.:
63.The above provisions demonstrate that, notwithstanding the status of Raymond as an investor, the consensus among shareholders of the Company is that Raymond should nonetheless enjoy a high level and extent of participation in the business and management of the Company, and a heightened right to information commensurate with the same. There is no sound reason why, in seeking inspection under section 740 CO, Raymond could not have these substantive contents of provisions of the SHA and the heightened right of access under the SHA in mind, or otherwise as part of the factual matrix informing the Court as to whether he has been acting in “good faith” and for “proper purpose”. In my view, it is at least a relevant context which the Court may take into account in assessing whether a wider request for inspection remains in good faith and for proper purpose. D2. Specific concerns of Ps 64.As mentioned above, Ps have raised a number of specific concerns in their evidence. On behalf of Ps, Ms Leung also highlights those concerns in her written and oral submissions. Suffices it to say that the Court has taken these into account and need only set out a few key concerns by way of illustration. 65.First of all, Ps acknowledge that in the 1899 Action, Lewis and the Company claim against Raymond and Paul substantial damages for Raymond’s failure to provide financing on the premise that the Company’s annual revenue is above the threshold of HK$120 million (as reflected in the Company’s audited financial statements). This relates to the financing obligation under Clause 4(9) of the SHA. Ps’ stance is that Raymond has made repeated requests to the Company for the provision of the financial information of the Company since 2021, but to no avail. Whilst I can see Mr Wong’s point that the audited accounts should prima facie be correct, it must not be forgotten that the financing obligation is a substantial (if not onerous) one. As such, Ps’ concern (particularly when viewed alongside other concerns) should not be lightly dismissed. In my view, Raymond has legitimate reasons to seek inspection to verify the revenue of the Company. If the threshold were indeed satisfied, Raymond could well be mistaken in failing to provide financing, and he might seek to remedy the situation by providing financing going forward (if it is still open to him to do so). 66.In this regard, as both Ms Leung and Mr Wong have accepted, Raymond remains a shareholder of the Company at present. Hence, such information is relevant to the financing obligation in the SHA specifically or, at the very least, the economic interest and prospects of Raymond remaining as a shareholder and investor of the Company going forward. 67.Second, Ms Leung submits that a most alarming feature here is the increase of borrowings to the directors of the Company. Specifically:
68.On behalf of Ps, Ms Leung say that they suspect that these amounts are money lent to the directors to buy properties. Significantly, as stated in the audited financial statements, all these amounts are “unsecured, non-interest-bearing and repayable on demand”. Whilst Mr Wong has rightly pointed out that such amounts have substantially reduced and reached a negative in 2023 (i.e. amounts are due to directors and related companies instead), this is not itself an answer to the use of the Company’s funds by directors and related companies without payment of interest which prima facie conferred financial benefits on them. With respect, Mr Wong has no answer to the suggestion that this may constitute wrongdoings such as breach of fiduciary duties by Lewis and others. In my view, Raymond has legitimate reasons to seek inspection to investigate into the same. 69.Third, Ps produce the Comparison Table to demonstrate the Company’s apparent financial deterioration, e.g.:
70.In particular, as emphasised by Ms Leung, in both the audited financial statements for the years ended 31 March 2022 and 31 March 2023, the auditors expressed concern under the heading “Material Uncertainty Related to Going Concern” in the Independent Auditor’s Report. They noted that the Company’s current liabilities exceeded its current assets by HK$7,919,646 as of 31 March 2022 and by HK$12,955,336 as of 31 March 2023, and opined that “This condition indicates that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern”. 71.Further, it may also be noted that, according to the Company’s audited financial statements, its net assets have fallen below HK$30 million since 2021: (i) HK$25,903,120 for 2021, (ii) 27,264,051 for 2022, and (iii) 23,526,235 for 2023. This is apparently contrary to Clause 4(1) of the SHA. 72.Whilst the Company has subsequently adduced an unqualified opinion of its audited accounts for the year ended 31 March 2023, this does not address most of the concerns raised above. The financial well-being and prospects of the Company not only affect Raymond’s economic interest as a shareholder in general, but they also have bearings on specific matters under the SHA including inter alia (i) whether the main objective of getting the Company listed on the Main Board of the HKSE within 5 years could be achieved, (ii) whether the net asset value of the Company is less than HK$30 million, (iii) whether Raymond should invoke Clause 4(6) of the SHA to request for repurchase of his shares, and (iv) whether Raymond should provide financing under Clause 4(9) of the SHA (e.g. commercially or in terms of Raymond’s economic interest, quite apart from whether he is legally obliged to do so). In my view, Raymond has legitimate reasons to seek inspection in relation to the above. 73.Fourthly, Ps point out that there are material discrepancies between the Company’s management accounts and its audited financial statements. For instance, the management accounts of the Company dated 19 September 2022 show an after-tax profit of HK$14,533,101.81 for the year ended 31 March 2022, whereas the audited financial statements for the year ended 31 March 2022 record an after-tax profit of HK$7,360,931. As noted by Ms Leung for Ps, the latter were signed off by Lewis on behalf of the Board on 20 September 2022, which is only 1 day apart from the date of the management accounts. Ps’ stance is that discrepancies such as these warrant investigations into the Company’s accounts, which I agree. 74.For the avoidance of doubt, discrepancies between the management accounts and the audited accounts are not uncommon, but the point is where the discrepancies are material and adjustments are made within a very short period of time, it could give rise to legitimate concern. As Ms Leung has explained, in view of such discrepancies, there is a need for Ps to seek inspection of supporting documents (such as those pertaining to expenses on wages and entertainment) to verify the same. 75.Fifthly, Ps produce another table on the expense analysis of the Company from 2020 to 2023, and also the period in April to June 2023. As one can see from the table, there are substantial increase in the wages, staff benefits and entertainment expenses over such 3-year period. In particular, as noted by Ms Leung, despite the Company’s apparent liquidity problems in recent years, a substantial bonus of HK$2.4 million was paid to a director (presumably to Lewis himself) in 2023, as shown in Note 4 to the Company’s audited financial statements for the year ended 31 March 2023 report, when no such bonuses have previously been paid. 76.In addition, there is a big jump in rent, rates and building management fees. Importantly, the latter are expenses charged by related party. As shown in Note 16(a) to the Company’s audited financial statements for the year ended 31 March 2023, there was substantial increase in rental expenses charged by related party in 2023 (being (i) HK$720,000 by a subsidiary, (ii) HK$2,809,000 by a director and (iii) HK$644,600 by related companies) as compared with 2022 (being HK$225,000 charged by a subsidiary only). Indeed, one can also see substantial increases in other expenses charged by related party, such as interest expenses, purchase and sub-contractor fee. 77.In this regard, Mr Wong has referred the Court to various audited accounts of the Company which display a continuous increase in the revenue of the Company in the past few years. As Ms Leung accepts, the increases of expenses are not, without more, a matter of concern because, if the revenue of the Company has increased, more expenses might have to be incurred in order to generate revenue at a greater scale. 78.In response, Ms Leung contends that the problem is that revenue has purportedly increased but not the net assets or profits. As I have made clear at the hearing, it is not the case that, as revenue increases, the net assets or profits would necessarily increase, as it depends on various factors such as profit margins and costs of sales. Nevertheless, this can raise legitimate concerns and call for further investigations. 79.On balance, I do accept that substantial increases in the Company’s expenses, particularly remuneration (such as bonus) paid to directors and expenses charged by related party, coupled with the Company’s apparent liquidity problems and reduction in profits, do raise concerns and would at least warrant investigations, without prejudging if there is anything improper at this stage. 80.Sixthly, Ms Leung emphasises that Ps have been requesting for information all along since 2021. For instance, Raymond has been asking Lewis to provide him with the Company’s monthly management accounts via WhatsApp messages since June 2021 to date. Similarly, Paul has been requesting the Company’s accountant as early as December 2022 to see the Company’s accounting records and supporting documents such as invoices and bank statements. More recently but before the instigation of the 1899 Action, Paul has asked for explanations and supporting invoices for the significant increase in cost of services for the period from April to June 2023. All these tend to suggest that Ps have a genuine interest to seek inspection since the outset. 81.In view of the above, I am of the view that there are sufficient factors and evidence to suggest that Raymond’s request for inspection is made in good faith and for proper purpose, subject to the Company’s main objection and the scope of inspection, which I now turn to. D3. Company’s main objection of seeking “discovery” 82.The Company’s main objection is that the purpose of this application is to serve as a substitute for discovery in the 1899 Action in an attempt to “fish” for documents which may be useful in proving Ps’ defence in the 1899 Action. It is also argued that the document request should be dealt with in a more focused manner by way of specific discovery in the 1899 Action. 83.On behalf of the Company, Mr Wong drew my attention to the pleadings in the 1899 Action. He submits that the same issues and allegations of alleged failure to provide documents relating to the Company’s finances were made in the 1899 Action. In gist, Ps say that they did not put in the funds because they are not provided with financial information. In addition, Mr Wong relies heavily on the letter dated 17 January 2024 from DL&P (“DL&P Letter”) which stated as follows:
84.Given such letter from DL&P, it seems fair to say that, at first blush, there is force in Mr Wong’s submissions that Ps are seeking inspection for the purpose of “discovery” or to otherwise assist Ps in the preparation of defence and counterclaim in the 1899 Action. Nevertheless, having considered the matter in the round, I do not agree that Raymond’s application should be rejected on such ground. 85.First of all, such purpose is not necessarily mutually exclusive with other proper purpose under section 740 CO. As a matter of law, if the primary or dominant purpose of the application is proper, whether inspection may be of benefit to the applicant for any further or secondary purpose is irrelevant: Lehman & Co Management Ltd v Efficient Ltd, supra at §31; Wong Kar Gee Mimi v Hung Kin Sang Raymond, supra at §§21, 24; Wong Sau Man Samuel v Wong Kan Po Wilson & Ors, supra at §39(g). 86.As mentioned above, Ps have been requesting for various information of the Company since 2021. Indeed, even in the DL&P Letter, it has referred to requests for information by Paul on 31 August 2023 and by Raymond on 12 September 2023, which predates the commencement of the 1899 Action on 23 November 2023. Ms Leung has also drawn my attention to a reply letter dated 22 September 2023 from Lewis in response to Ps’ requests for information which, again, predates the 1899 Action. Based on the chronology, it does not seem right to suggest that primary or dominant purpose of the application is to seek “discovery” for the 1899 Action. Instead, it would appear that Ps have been seeking information all along, and this should not be undermined simply because of any further or secondary purpose arising subsequently since the onset of the 1899 Action. 87.This is particularly the case given that Raymond’s request for inspection is substantiated by the substantive contents and the right of access under various provisions of the SHA, and further borne out by the specific concerns raised by Ps. They remain valid and legitimate concerns of Raymond qua shareholder, in respect of existing affairs of the Company and the prospects of the Company going forward, separate from any other concerns which Raymond might have as a party to the 1899 Action. 88.Secondly, Ms Leung argues that, if the documents sought are relevant to the 1899 Action, they should have already been disclosed by the Company; alternatively if the documents sought are not relevant to the 1899 Action, there is no reason why Ps could not apply for inspection. I accept there is limit to such tautological argument as it assumes that the Company has already disclosed all relevant accounting documents in the 1899 Action, which is not necessarily the case. Indeed, Mr Wong’s point is that the matter should be dealt with by applications for specific discovery in the 1899 Action. 89.However, what I consider to be crucial is the different nature of the purposes of discovery in the 1899 Action and the purpose of inspection here. Whilst it is true that Ps’ stance herein is similar to Ps’ defence in the 1899 Action, it may not be strictly necessary for Ps to obtain the accounts and documents sought herein to make good their defence in the 1899 Action. On behalf of Ps, Ms Leung submits that the success or failure of Ps’ defence in the 1899 Action is not dependent on the information to be obtained herein but on the interpretation of the SHA on which the 1899 Action is predicated upon. There is force in such argument. In other words, it probably suffices for Ps to establish, for instance, that the financing obligation is dependent on the provision of financial information to Ps, without having to obtain those financial information now. 90.Whilst it may still be helpful for Ps to obtain financial information (for instance if it can demonstrate that the revenues of the Company are overstated), it is fair to say that most of the documents requested under the Schedule are probably not necessary or relevant to the 1899 Action (although I need not, and should not, express any final view). 91.Thirdly, by saying that Ps’ stance mirrors their defence in the 1899 Action, the Company has failed to grapple with the nub of Ps’ case, namely that the dispute in the 1899 Action can be said to have arisen in the first place due to the Company’s repeated refusal to be transparent with its finances. Properly understood, such stance echoes and supports Ps’ request for information since the outset, rather than undermining the same. 92.Fourthly, apart from investigating into existing affairs and financial position of the Company, another purpose of the inspection herein is to enable Raymond to appraise the prospects of the Company such that Raymond could protect his economic interest in the Company and be better informed in terms of the options which he may exercise, including the possibility of invoking the right to ask for repurchase of his shares. This is a forward-looking perspective, as may be contrasted with the 1899 Action which is concerned with alleged breaches of the SHA in the past. 93.For all these reasons, I do not find in favour of the Company’s main ground of objection. D4. Scope of Inspection 94.As noted by Mr Wong on behalf of the Company, there is no temporal limit in some of the documents sought under the Schedule. Whilst Categories 1, 3, 6 and 7(1), (3) are sought from October 2020 onwards, Categories 2, 4, 5, 7(2), (4) and (5) are unlimited in scope. At the hearing, Ms Leung has confirmed that Ps are only interested to seek inspection of documents since Raymond has become a shareholder, i.e. from October 2020 onwards. 95.Further, Mr Wong argues that the scope of inspection should be specifically tailored to address Ps’ concerns. He says the scope of the Schedule is so wide that Raymond is trying to do a complete re-audit of the Company’s accounts. In my view, there is some force in Mr Wong’s stance although I note that, under the SHA, extensive rights of access have been conferred on Raymond which are commensurate with the substantive rights and the level and extent of participation on the part of Raymond. That said, it would not be right for the Court to transplant or superimpose the provisions in the SHA as if they could replace the statutory requirements, and I will consider each Category in the Schedule in turn. D4.1 Category 1: Bank Accounts 96.Under Category 1(1), Raymond seeks inspection of monthly bank statements for all bank accounts belonging to the Company from October 2020. Raymond further seeks under Categories 1(2)-(6) all transaction documents, board/shareholder resolutions, contracts and power of attorney in relation to the same, and a list of names and date of appointment of all authorized signatories of the Company’s bank accounts. 97.The above requests are extensive and wide. Not only do they cover bank statements, they seek to cover virtually all sorts of documents pertaining to all transactions reflected on the monthly bank statements. There is no attempt to limit the scope, for instance, by reference to the nature or value of the transactions. 98.On behalf of Ps, Ms Leung points to the dramatic increase in bank borrowings from around HK$12m as at 31 March 2020 to around HK$105m as at 30 June 2023, but the Company says this is a result of Raymond’s failure to provide financing. She also points to the amounts due from directors, shareholders, subsidiary and related companies as raising concerns, including concerns that funds have been channelled to them from external bank borrowings. Against such context, she argues that monthly bank statements, cross checked against underlying transaction documents, board/shareholder resolutions and contracts, will reveal whether the incomings and outgoings of the Company are legitimate and whether the transactions undertaken by the Company are for its best interests, whilst powers of attorney and authorized signatories will reveal whether there are any unauthorised payments. 99.Whilst I agree that Raymond should be allowed access to monthly bank statements as a starting point, together with documents pertaining to bank borrowings or related party transactions or balances, it is difficult to see how one can justify an extensive scope of inspection covering virtually everything. Nevertheless, the context and concerns in Sections D1 and D2 above would, in my view, support allowing access to documents relating to transactions which are relatively more substantial. Adopting a broad-brush approach, I am prepared to extend the inspection to cover, in addition, transactions with a value of HK$250,000 or above. 100.On balance, I am of the view that:
D4.2 Category 2: Tax filings 101.In my view, the context and concerns in Sections D1 and D2 above do not seem to justify inspection in relation to tax filings. There are no specific concerns or evidence adduced by Ps to cast doubt on the correctness or accuracy of the same. 102.Ms Leung argues that any problematic transactions in the Company’s audited financial statements would necessarily be reflected in the Company’s tax filings and even points to increased staff costs etc, but this does not justify additional access to tax filings – it is a separate question whether the Court would allow access to underlying documents under other Categories. Ms Leung also says that problematic transactions may have been identified and investigated by the Inland Revenue Department but this appears to be mere speculation. 103.On balance, Category 2 is not allowed. D4.3 Category 3: Ledgers and contracts 104.In the present case, Raymond complains about excessive bank borrowings, excessive remuneration paid to director(s), and improper or unjustified payments to related parties, and also discrepancies in the Company’s accounting records, etc. On behalf of Ps, Ms Leung argues that if the Court is satisfied that Raymond is entitled to inspect some of the Company’s detailed financial records, such as bank statements, then it would necessarily follow that it would be reasonable for Raymond to access the Company’s ledgers and contracts to enable him to properly trace through various transactions he suspects of wrongdoing. She relies on the dicta of Harris J in Wong Kar Gee Mimi, supra at §71:
105.Having reflected on the matter, and even though Category 3(1) is crafted in a wide manner, I agree that Raymond should be entitled to access the complete set of financial records which must necessarily include the monthly management accounts and the ledgers. Nevertheless, in relation to contracts and other documents in Category 3(2), it seems fair to impose limits similar to those pertaining to Categories 1(2)-(5). 106.On balance, I am of the view that:
D4.4 Category 4: Suppliers and/or sub-contractors 107.In essence, Ps contend that (i) the Company’s cost of services had increased at a rate that is disproportionate to the growth in revenues and (ii) the Company made purchases from related parties after Raymond became a shareholder. In my view, it is difficult to justify extensive scope of inspection in respect of all suppliers and/or sub-contractors from the first point alone, and it is fair to say that Ps’ submissions focus predominantly on the second point. In the circumstances, it seems fair to impose limits similar to those pertaining to Categories 1(2)-(5) (save that it is not necessary to refer to bank borrowings which are not applicable). 108.On balance, I am of the view that:
D4.5 Category 5: Wages and other expenses 109.Under this Category, the main theme of Ps’ case is twofold: (i) the audited accounts show a clear trend of increase in wages and other expenses that is not commensurate with the Company’s revenue growth and (ii) the Company stopped annexing the detailed income statement which shows a breakdown of cost of sales, other revenue, finance costs and all general and administrative expenses to its audited accounts from the year ended 31 March 2022 onwards. 110.In my view, the above could not justify an extensive scope of inspection of all records of wages and breakdown of all expenses, let alone record of taxes on top of them. The focus should be on wages to related party, or management staff (“管理層員工”) within the meaning of Clause 4(12) of the SHA. Moreover, Raymond should be able to ascertain the breakdown of all expenses from the ledgers, etc in Category 3(1). 111.On balance, I am of the view that:
D4.6 Category 6: Finance Costs 112.Ps have concerns over (i) persistent increase in borrowings by the Company and (ii) substantial interest expenses to shareholders ($2,387,818) and related companies ($12,000,000) during the year ended 31 March 2023. Ps thus seek inspection of underlying documents and records to investigate whether there have been any unauthorised or improper transactions undertaken to the detriment of the Company. 113.Whilst it seems difficult to suggest that all the borrowings by the Company could be challenged, I accept that logically if Raymond plaintiff is to be allowed to inspect some of the Company’s detailed financial records on borrowings, it logically follows, and is entirely appropriate, that he be allowed to the complete set of financial records on such borrowings in order to properly trace through and investigate those borrowings he suspects of wrongdoing. 114.On balance, I am of the view that:
D4.7 Category 7: Financial Position 115.In relation to motor vehicles under Category 7(1), Ps point to the Company’s acquisition of motor vehicles of HK$5,567,822 for the year ended 31 March 2022, which represents 37% of the cost of motor vehicles at the beginning of the financial year of HK$14,866,698. Bearing in mind the significant capital outlay and the restriction of the request to a financial year, I am prepared to accede to the same. 116.As regards Category 7(2), Ps say that excessive borrowing by the Company and unexplained increases in movement of the Company’s funds to related companies have led Raymond to suspect that the Company’s funds have been improperly and unjustifiably redirected to purchase landed properties and other investments through related companies owned by Lewis and his family. Coupled with Ps’ concern over the big jump in rent, rates and building management fees charged by related party in the year ended 31 March 2023, I am prepared to accede to the same in relation to real estate investments (but not other investments which are overly broad). 117.In relation to Category 7(3), Ps say that cash flow statements would show precisely how much has been applied to operating, investing and financing activities so that Raymond can understand the root cause of the severe liquidity problem now faced by the Company. I am prepared to accede to the same. 118.As regards Category 7(4), I accept that Raymond’s concern of misapplication of the Company’s funds is closely connected to related party transactions. Nevertheless, it does not mean that Raymond should be entitled to inspect “all records of related companies”, as opposed to records pertaining to related party transactions or balances within the meaning of the Company’s audited accounts. 119.In respect of Category 7(5), it is very extensive and covers 27 companies. Ps produce a table setting out the particulars of these 27 companies with remarks as to why Ps say they are related companies. However, some of the remarks are based on loose concepts of friendship (“朋友”), good friend (“好友”), an aunt (“阿姨”) or ex-employee (“舊伙記”). In her oral submissions, Ms Leung explained Ps have compiled such table as they are not in a position to tell which companies fall within the meaning of “related companies” in the audited accounts. With respect, that is not an excuse for adopting a homemade list of “related companies”. Instead, the Company itself must be in a position to tell, whether by itself or through its auditors, the “related companies” (or “related party transactions or balances”) within the meaning of its own audited accounts. 120.On balance, I am of the view that:
121.Further, in terms of costs, although I have found in favour of Raymond, I have also taken the view that the Schedule is too wide and I have made various modifications and disallowed certain Category or sub-Categories. Adopting a broad-brush approach, I would allow Raymond to claim 80% of his costs against the Company, with certificate for two Counsels (bearing in mind there is some complexity on the law). D5. Question of Costs in respect of Paul 122.Ps contend that Paul should be entitled to costs because, but for his removal as director, Paul should be entitled to the relief under the OS. On behalf of Ps, Ms Leung emphasises that Paul has been seeking inspection of documents for a long time. 123.On the other hand, the Company opposes costs. The main arguments are twofold: (i) no formal pre-action letter was sent before the OS was taken out, and (ii) it was patently clear at the time that Paul would be removed as director once the procedural matters (e.g. special notice) were sorted out. 124.In my view, Paul should be entitled to costs on a similar basis as Raymond, i.e. I would allow Paul to claim 80% of his costs against the Company. Although it may be foreshadowed that Paul would sooner or later be removed as director, given the lack of special notice there is still utility for Paul to issue the OS because, if there can be a first hearing of the OS before 26 March 2024, Paul could well obtain an order in his favour as he was yet to be removed as director. That said, the timing is tight. Moreover, whilst a director is entitled to a wider scope of inspection, the Schedule still appears to be rather wide even for a director. On the whole, since Paul is also filing his Affirmation in support of Raymond’s application, one may also subsume that or treat the costs of Paul’s application as part and parcel of, or otherwise on a similar footing as, the costs of Raymond. I would therefore also allow Paul to claim 80% of his costs against the Company, with certificate for two Counsels. E. CONCLUSION 125.For all these reasons, I find in favour of Raymond and would make an Order in terms of paragraphs 3 and 4 of the OS, provided that:
126.Further, I order that 80% of the costs of the OS (including all hearings) be paid by the Company to Ps, with certificate for two Counsel, to be taxed if not agreed. 127.It remains for this Court to thank Ms Leung and Ms Law for Ps and Mr Wong for the Company for their assistance to the Court.
Ms Lydia Leung and Ms Belinda Law, instructed by Darin Leung and Partners, for the plaintiffs Mr Joseph Wong, instructed by Li, Kwok & Law, for the defendant [1] This should include the transactions and balances with respect to shareholder, director, subsidiary, related company and/or related party within the meaning of the Company’s audited accounts (see e.g. Note 16(a) to the Company’s audited accounts for the year ended 31 March 2023). [2] This should include the transactions and balances with respect to shareholder, director, subsidiary, related company and/or related party within the meaning of the Company’s audited accounts. [3] This should include the transactions and balances with respect to shareholder, director, subsidiary, related company and/or related party within the meaning of the Company’s audited accounts. [4] This should include the transactions and balances with respect to shareholder, director, subsidiary, related company and/or related party within the meaning of the Company’s audited accounts. [5] This should include shareholder, director, subsidiary, related company and/or related party within the meaning of the Company’s audited accounts. [6] This should include the transactions and balances with respect to shareholder, director, subsidiary, related company and/or related party within the meaning of the Company’s audited accounts. [7] This should include shareholder, director, subsidiary, related company and/or related party within the meaning of the Company’s audited accounts. |
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