Re San Imperial Corporation Ltd

Case No.HCMP 127/1978

Court

High Court CFI

Date—

Judge—

Case Document

100%Judiciary

HCMP000127/1978

Section 143(a) of Companies Ordinance - declaration that affairs of a company ought to be investigated by an inspection - when declaration may be made.

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IN THE SUPREME COURT OF HONG KONG

MISCELLANEOUS PROCEEDINGS NO. 127 OF 1978

MISCELLANEOUS PROCEEDINGS NO. 179 OF 1978

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	In the matter of San Imperial Corporation Limited
	and
	In the matter of Section 143 of the Companies Ordinance, Chapter 32
	and
	In the matter of Order 102 Rule 4(1)(c) of the Rules of the Supreme Court 1967

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Coram: Yang, J.

Date of Judgment: 1st May 1978

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JUDGMENT

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1. By a judgment of this Court dated 25th January 1978, charging orders in respect of fifteen million shares of the respondent company San Imperial, were made absolute in favour of the applicants, who were judgment creditors of one C.K. San, the registered holder of those shares. The judgment will be the subject of an appeal and cross appeal.

2. On 7th April 1978 the applicants obtained a court order for the sale of those shares at such time and in such manner as this Court may direct, and a receiver for the shares was appointed pending sale.

3. In the present proceedings, brought under section 143(a) of the Companies Ordinance, the applicants seek a declaration that the affairs of San Imperial ought to be investigated by an inspector appointed by the Financial Secretary. The sub-section reads:

"143. Without prejudice to his powers under section 142, the Financial Secretary-

(a)

shall appoint one or more competent inspectors to investigate the affairs of a company and to report thereon in such manner as the Financial Secretary may direct, if the court by order declares that its affairs ought to be investigated by an inspector appointed by the Financial Secretary."

4. By section 142 of the same Ordinance the Financial Secretary may appoint an inspector to investigate the affairs of a company either on the application of not less than 100 members or of members holding not less than one-tenth of the shares issued or, in the case of a company not having a share capital, on the application of not less than one-tenth in number of the persons on the company's register of members.

5. By section 143(b) the Financial Secretary may appoint an inspector if the company by special resolution declares that its affairs ought to be investigated. Section 143(c) provides that the Financial Secretary may appoint an inspector if it appears to him that there are circumstances suggesting (i) that the business of the company has been or is being conducted with intent to defraud its creditors or the creditors of any other person or otherwise for a fraudulent or unlawful purpose or in a manner oppressive of any part of its members or that it was formed for any fraudulent or unlawful purpose; or (ii) that persons concerned with its formation or the management of its affairs have in connexion therewith been guilty of fraud, misfeasance or other misconduct towards it or towards its members; or (iii) that its members have not been given all the information with respect to its affairs that they might reasonably expect.

6. Section 143(a) is therefore the only provision under which the Financial Secretary is bound to appoint an inspector. And it is the only provision whereby the Court's assistance may be invoked in the appointment of an inspector.

7. The procedure by which an application under section 143(a) should be followed is not prescribed in the Companies Ordinance or any related legislation, nor in the Rules of the Supreme Court. In the case now before this Court, the applicants have proceeded by way of motion. No objection has been taken upon it. In my view, this appears to be the appropriate procedure (see Palmer on Company Law, 22nd ed., Vol. I, 74-02).

8. There are no reported cases in Hong Kong which deal with a declaration under section 143(a). Nor are there any reported cases in England on a similar section, viz. section 165(a)(ii) of the Companies Act 1948.

9. In Re Pergamon Press Ltd. ⁽¹⁾ the Court of Appeal had to consider an appointment made under section 165(b) of the Companies Act 1948, which is equivalent to section 143(c) of the Companies Ordinance. The case is relevant only to the extent that it lays down the principle on which an inspector should act. Sachs L.J. said (at p. 401):

"The proceedings that ensue from an appointment of inspectors made under section 165 of the Companies Act, 1948, are of a somewhat special nature by reason of a combination of attributes. Of these the first to be noted is that the inspectors' function is in essence to conduct an investigation designed to discover whether there are facts which may result in others taking action: it is no part of their function to take a decision as to whether action be taken and a fortiori it is not for them finally to determine such issues as may emerge if some action eventuates. On the other hand, at any rate when the appointment is made under section 165(b) - that is to say, 'if it appears to the Board of Trade that there are circumstances suggesting' the possibility of fraudulent and criminal conduct or a lack of compliance with the obligations imposed by the Companies Act - then the appointment itself involves, at least in the eyes of the business world, proceedings of an accusatory nature."

10. Buckley L.J. (at pp. 406-407) agreed:

"The function of an inspector appointed under section 165 of the Companies Act, 1948, is an inquisitorial function. His duty is to investigate the affairs of the company and to report on them to the Board of Trade. It is not a judicial function. But having regard to the circumstances which may lead to the appointment of an inspector under section 165, paragraph (b), which is the paragraph with which we are concerned in the present case, and to the fact that under the Act a copy of the report must be furnished to the company, a need for due regard to fair treatment may arise if inspectors propose to report adversely on the conduct of any director or officer."

11. By section 146 of the Companies Ordinance the inspector shall make a report to the Financial Secretary on the conclusion of his investigation. The following observations of Palmer (at 74-12) seem apposite:

"The report is not itself a legal decision, nor are the opinions of the inspector expressed therein binding upon any person in the manner that a judgment of the court is. It is merely an expression of the findings and opinions of the inspector. Since there is no right of appeal against such findings or opinions and no effective means of protesting, and since there is no certainty that proceedings will follow, in which a person referred to might defend his name, such investigations are not altogether satisfactory."

12. A number of Commonwealth decisions have been cited by counsel. The most helpful authority is the South African case of Irvin & Johnson Ltd. v. Gelcer & Co. (Pty.) Ltd. ⁽²⁾ which I follow. The case deals with an application to the Court under section 95 (bis) of Act 46 of 1926 (as amended) for an order declaring that the affairs of the respondent company ought to be investigated by an inspector appointed by the Minister of Economic Affairs. Herbstein, J., said (at p.62):

"Under sec. 95 (bis) the Minister must act if by special resolution the Company declares, or the Court makes an order that 'its affairs ought to be investigated ...' What exactly the meaning of this phrase is, is a matter of some difficulty. It must be contrasted with the language of sec. 95 'good reason for requiring the investigation' and that of sec. 95 (bis) (b) which gives the Minister the right to appoint an inspector 'if it appears to the Minister that there are circumstances suggesting ...' In none of these cases is the requirement of a prima facie case for an enquiry laid down. 'Good reason' is not the same as 'good cause'; the word 'ought' expresses various ideas, e.g. rightness, duty or advisability and in the context in which it is used here conveys the idea that the Court should function if it seems it right or advisable to order an investigation and not only if some prima facie case is made out. This view is strengthened by the fact that in terms of sec. 95 (bis) (b) the Minister may act if the circumstances suggest (i) (ii) or (iii); he need not be satisfied that there is a prima facie case of e.g. fraud or oppression; it suffices if there are circumstances suggesting it."

13. It will be noted that section 95 (bis) (b) (i) (ii) and (iii) is the same as section 143(1) (i) (ii) and (iii) of the Hong Kong Ordinance.

14. The learned judge went on to say (at pp. 62-63):

	"The power of the Court would appear to be wider, for it is not confined to the circumstances set out in sec. 95 (bis) (b) (i) (ii) and (iii); it can make the required declaration if, on a consideration of all the facts placed before it, it deems it advisable or desirable that the affairs of the Company should be investigated.
	Professor Gower in his Modern Company Law dealing with similar provisions in England says (p.515) that

'the most likely ground of action ... is that there is a suspicion of some grave impropriety probably involving conduct resembling fraud on the minority'.

In his view

'not only is an inspection expressly envisaged in cases involving oppression but it is available in cases of impropriety by the controllers which would not be regarded as sufficiently improper to give rise to any of the former remedies.'

He suggests that the Board of Trade, which in England takes the place of the Minister of Economic Affairs:

'can be trusted not to appoint unless the circumstances warrant it but they will test the need on the basis of public and commercial morality and not on the basis of what is in the selfish interests of the complaining member - the two tests may not be the same.'

	If the Court is entitled to act on 'a suspicion of some grave impropriety', it should be satisfied that the suspicion is well founded and that it has a solid and substantial basis. A mere feeling that something might be wrong should not be, and in my opinion is not, enough.
	The comments of the learned author would appear to relate to companies in which the public are concerned; the contrast he draws between 'public and commercial morality' and 'the selfish interests of the complaining member' suggest that he did not intend to deal with a case like the present - where because the shares are held by only two shareholders the public qua public would not be interested in any domestic discussions and quarrels. While, where the public would be interested 'a suspicion of some grave impropriety' might suffice, it does not seem to me that the Legislature could have intended the provisions for an investigation to apply to a situation like the present. This view may, however, be incorrect and, therefore, the specific allegations will be considered in detail."

Having reviewed the facts, the learned judge concluded that there did not even exist a suspicion of fraud and that no case had been made out justifying interference by the Court in what was essentially a domestic quarrel between two groups of shareholders. Describing the disputes between the two groups as "internecine quarrels", the learned judge observed that the application was a means of solving differences between two groups of shareholders. He therefore refused to make the required declaration.

15. The facts of the present case can hardly be categorized as a domestic or internecine quarrel between two groups of shareholders. The principles stated in the South African case however remain applicable to the situation now under consideration.

16. In a New Zealand case, In re Mercantile Finance Co. ⁽³⁾, an application was made by members holding more than the necessary one-fifth of shares issued. It was held that an appointment of an inspector is not to be made as a matter of right to every dissentient minority in the company but only upon evidence of suspicion of grave misconduct or mismanagement.

17. In the Manitoba case of Re Town Topics Co. Ltd. ⁽⁴⁾ the headnote reads, in part:

	"Section 81 of the Manitoba Joint Stock Companies Act (as added by 4 & 5 Edw. VII ch. 5) provides that, upon an application by not less than one-fifth in value of the shareholders of a company, a Judge of the Court of King's Bench may, if he deems it necessary, appoint an inspector to investigate the affairs and management of the company:-
	Held, following In re Grosvenor Hotel Co. Limited, 76 L.T.R. 337, that the object of the enactment is, that facts and circumstances not otherwise open may be disclosed to those concerned; that the Judge, upon an application, has a discretion, which must be exercised judicially, with caution, and only in cases clearly calling for the application of the power.
	To justify an order, it should appear that there is reason, on substantial grounds, to believe that material information regarding the affairs or management of the company is being concealed or withheld from shareholders whose interests entitle them to the disclosure."

18. And Robson, J., explained the principle further and said (at p.648):

"The object of the legislation, then, evidently is, that facts and circumstances not otherwise open may be disclosed to those concerned. The appointment is to be made if the Judge deems it necessary. This intrusts a discretion which must be exercised judicially. In considering the application of the provision, it must be borne in mind that the Courts have ordinarily no visitatorial power over companies, and will, therefore, exercise such a power when, as under this Act, it is given them, with caution, and only in cases clearly calling for its application.

I take the view that, to justify an order of the kind asked for, it should appear that there is reason, on substantial grounds, to believe that material information regarding the affairs or management of the company is being concealed or withheld from shareholders whose interests entitle them to the disclosure."

19. The next case was decided by the Supreme Court of Alberta, Re Sarnia Ranching Company ⁽⁵⁾. This was also an application by a minority of the shareholders of the company for an inspection of its affairs. Simmons, J., held that it is an elementary principle that aside from fraud or ultra vires the court has no jurisdiction to interfere with the internal affairs of a company.

20. A more recent case in that of Re Automatic Phone Recorder Co. Ltd. ⁽⁶⁾, decided by Coady, J., sitting in the Supreme Court of British Columbia. This too was an application by shareholders holding more than one-fifth of the issued shares of the company for an appointment of an inspector. Applying the remarks of Robson J. in Re Town Topics Co. Ltd. ⁽⁴⁾ quoted above, the learned judge continued (at p.667):

"That seems to me, with respect, to be the object and intention of the section. The section provides an extraordinary remedy applicable only in certain circumstances. It is not intended by that section to provide for a summary investigation into alleged wrongdoing by officers or shareholders of a company in relation to the company's affairs, when the information relating to such alleged wrongdoing has been disclosed by the company to its shareholders. On a review of the material filed in support of this application, and upon full consideration of the submissions made by counsel, I am of the opinion that what is sought here is not so much to discover what has been done by the officers of the company because it seems to me that is common ground, since a full disclosure, generally speaking, has been made of that, but rather it is sought to inquire into the legal propriety of that which has already been done. Counsel strenuously argues that there has been a breach of duty on the part of the directors of the company and misfeasance on their part. Where disclosure has been made these are not matters to be inquired into under sec. 179, it seems to me. The petitioners herein are not without a remedy. The application must be dismissed."

21. Such then are the main authorities cited by counsel. I would like to place on record my indebtedness and gratitude to Mr. Yorke leading counsel for the applicants MBF, Mr. Fung, acting for the applicants Mr. I.C. Lee and Mr. K.W. Lee, Mr. Wright, leading counsel for San Imperial and Mr. Murphy, Crown Counsel for their illuminating submissions without which my task would have been made so much more difficult in view of the dearth of direct authorities. I therefore hope that my decision not to follow the usual practice of referring to their arguments in detail will not be taken as a sign of disrespect.

22. On the authorities already cited and general principles as well as on other authorities referred to below, the following principles may be formulated:

	(1)	Section 143(b) is extremely wide. It would be wrong except in the most exceptional cases to read into an Ordinance words which are not there in order to restrict its application (per Lord Mersey in Thompson v. Goold & Co. ⁽⁷⁾)
	(2)	There is nothing in the Companies Ordinance indicating who may make an application under section 143(b). It has been argued on behalf of San Imperial that only a member of the company may apply. This cannot be so, given the wide terms in the sub-section. The applicants have a substantial and special interest in the fifteen million shares which represents about one-third of the total share capital. They may therefore be described as quasi-members. Certainly they may apply.
	(3)	On the authorities cited above, there must be a strong suspicion of some grave misconduct or mismanagement to warrant the making of a declaration. A mere feeling that something is wrong will not suffice.
	(4)	Where an applicant, in pursuing his selfish interest, incidentally or unintentionally enables public interest to be served, the application should not be refused merely on the ground that his motive was selfish. In most if not all applications of this sort, one might expect a substantial degree of selfishness. It is true to say that it must be on extremely rare occasions that an application is brought for entirely altruistic purposes.
	(5)	Where selfish and public interests may be affected by a declaration, both need to be carefully considered by the court. I would suggest that, in the event of a conflict of interests, public interest must prevail.
	(6)	I leave open the question whether a declaration should or should not be made where selfish interests only are affected (see Irvin & Johnson Ltd. v. Gelcer & Co. (Pty.) Ltd. supra, at p.63).
	(7)	The Financial Secretary is not the only person who is entitled or competent to consider public interest. In a case such as this, where the application arose from a judgment and findings of facts of this Court, it is both proper and convenient that this Court should consider whether public interest will be served by a declaration.
	(8)	Where other remedies are available to the applicant, the Court may nevertheless, in a suitable case, exercise its discretion to make a declaration, particularly if public interest demands it. Whilst the availability of other remedies must be taken into account by the Court in the exercise of its discretion, it does not by itself preclude the applicant from obtaining the declaration desired.
	(9)	Inspite of the passage in Sarnia's case quoted above, in my view interference with the internal management of a company which results from a declaration under section 143(b) is but an important factor to be considered by the court before deciding to make the declaration asked for. In an appropriate case the court may well take the view that such interference is a necessary evil and therefore has to be tolerated for the good of the public.
	(10)	It is common ground that an inspection will almost certainly lead to a suspension of trading of San Imperial's shares on the stock market, thereby greatly affecting the interests of the investing public. But on the principles already stated, the prospect of a suspension does not per se render improper the making of a declaration.
	(11)	The misconduct of members of the board of directors in their capacity as directors may well lead to the making of a declaration because the state of mind of the managers is the state of mind of the company and is treated by the law as such: Tesco Ltd. v. Nattrass ⁽⁸⁾. However if such misconduct or the bad character of the directors does not relate to their capacity as directors, the court will have no reason to interfere.
	(12)	The remedy offered by section 143(b) must be given with extreme Caution and is usually given in cases of fraud, unlawful or oppressive conduct or other grave misconduct, gross management or incompetency, or concealment of information.
	(13)	On general principle, the fact that there have been no reported cases of successful applications of this nature in Hong Kong and England is not a good reason for not making a declaration.
	(14)	On the authority of Automatic Phone Recorder Co. Ltd. and Pergamon Press Ltd. (supra) the purpose of the investigation is to discover facts and not to make any pronouncement, on the propriety or impropriety on what has transpired.

23. It has been argued on behalf of San Imperial that a declaration should not be made because a receiver has already been appointed. In answer to this contention, Mr. Yorke, supported by Mr. Fung, submitted, in my view correctly, that the purpose for which a receiver is appointed in this case and his functions are quite different from that of an inspector. Firstly, the receiver's duty relates to the fifteen million shares only, whilst the inspector's duty is not thus limited. Secondly the receiver has no greater right than the registered holder of those shares, but an inspector's powers as given by the Ordinance are far more extensive (see for example section 144). Thirdly the receiver is concerned with the interest connected with the fifteen million shares but the inspector is concerned with public interest generally. Accordingly in my judgment the appointment of a receiver does not render the appointment of an inspector either improper or otiose.

24. There are four main facts which the applicants rely on as showing circumstances sufficiently suspicious as to warrant an investigation into San Imperial.

25. The first fact concerns the manner in which the control of San Imperial passed into the hands of one James Coe. At all material times James Coe was and is the Chairman of the Siu King Cheung Hing Yip Company Limited (hereafter called the SKC). The fifteen million San Imperial shares were held by C.K. San, a man facing substantial charges of fraud and a fugitive from justice living in Taiwan. James Coe let it be known that he was desirous of acquiring a controlling interest in San Imperial. On hearing of James Coe's intentions, there persons formed themselves into a syndicate with a view to acquiring such number of San Imperial shares as would give James Coe the controlling interest he was seeking. The syndicate had as its members one David Ng (a stockbroker), one Melville Ives (a solicitor), and one Ho Chapman (a businessman), all three of whom had at one time or other close business association with the fugitive C.K. San. By a series of sham dealings the syndicate pretended that they had purchased the fifteen million shares from C.K. San, and, pretending that they were acting in their own behalf, entered into an agreement with James Coe whereby James Coe was given an irrevocable option to purchase those shares subject to the lifting of certain restraints placed on those shares by the Court. Though the syndicate were not acting honestly and in good faith, James Coe was a bona fide purchaser for value. The option however is not as yet exercisable. In addition to this transaction, a genuine sale and purchase agreement was entered into between the syndicate and James Coe whereby the latter acquired some eight million San Imperial shares which were duly registered in the name of James Coe's nominee company. It was by virtue of the eight million shares that James Coe obtained effective control and became managing director of San Imperial. David Ng was by that time Chairman of the company. This aspect of the case was fully canvassed at a previous trial which culminated in my judgment of the 25th January 1978. According to my findings in that judgment, James Coe, unlike the syndicate, did not behave dishonestly in his acquisition of a controlling interest in the company. In any event, it is a little difficult to see how an inspector is able to uncover further facts as far as this particular matter is concerned.

26. The second fact relates to a sale to SKC of one of San Imperial's subsidiary companies called the Oceania, whose only asset was a property called the Bangkok Hotel. The sale took place at a time when both David Ng and James Coe were on the board of San Imperial. Though San Imperial was at the time in dire need of cash, Oceania was sold to SKC for seven million SKC shares at a dollar each. SKC then sold Bangkok Hotel for $7.4 million. Again this aspect of the case was fully canvassed at the previous trial and the findings of facts are to be found in my judgment delivered on the 25th January 1978. The transaction does give one a feeling that something was wrong, but it does not in my view give rise to a grave suspicion that there was gross misconduct or mismanagement. It is unlikely that an investigation by an inspector will result in the disclosure of further material facts.

27. The third fact is the failure of San Imperial to declare a dividend inspite of a modest profit for the year ended 30th June 1977. In an affidavit sworn by Mr. Francis Zimmern, a very senior and respected member and a past Chairman of the Hong Kong Stock Exchange, he said:

"A prudent Board would not, of course, have recommended distributing all the profit but it might have declared a cent a share. This would have been a sensible thing to do if the Board had any contemplation of issuing new shares as the longer a company has maintained a dividend trend the firmer its price is likely to be. It seems this was in contemplation as the Annual General Meeting was asked to pass a resolution authorising the directors to increase the capital and issue a further 10% at their discretion.

However, if I am right in my surmise in my Affidavit that the share-buying in the market is being done by the persons now controlling the Board, or people in association with them, then there would be a motive not to declare a dividend in order to keep the price down. This is an obvious conflict of interest situation and I would hope that the Board had taken independent advice. If they have not then this again is something that may need investigating."

28. Coming from an expert in matters of this kind, those words must naturally weigh heavily in the mind of any judge. However, on the other end of the scale, there are the principles that a company is not bound to divide all its profits on each occasion among its shareholders and that a court has no jurisdiction to interfere with the internal management of companies acting within their powers: Burland v. Earle ⁽⁹⁾. As in the situation discussed in the preceding paragraphs, in my view the applicants have not made out a case of grave suspicion. There is again nothing more than a feeling that something was wrong.

29. I now come to the fourth fact, which has been referred to as the Silver Strand or Clearwater Bay Project.

30. By a statement made by David Ng as Chairman of San Imperial dated 18th December 1977 in the Company's 1976-1977 Annual Report, it was declared that the redevelopment project at Silver Strand, Clearwater Bay would be completed before 31st March 1978 and it was hoped that the sale of flats in the project would bring "a handsome profit" to the Company. David Ng maintains that this is a project of San Imperial's and is in no way shared by any other person or company. However James Coe, as Chairman of SKC, on 8th October 1977 stated in the 1976-1977 Annual Report of that Company, "The Company is sharing a project in developing a 12-luxury-European-style-house villa at Silver Strand, Clearwater Bay Road in Kowloon. The project is expected to be completed before the end of this year, and it is hoped that it will bring handsome profit to the Company". It is common ground that the property referred to in this Report is the same as that mentioned in David Ng's statement. The attempted explanation given by David Ng is less than convincing. In an affidavit filed on 6th April 1978 in these proceedings, he said, at paragraph 13:

"The Chairman's statement in the Annual Report of SKC was brought to my attention only after the hearing of the High Court Proceedings Nos. 2459 of 1976, 155 of 1977 and 540 of 1977. I considered that it recorded no more than a unilateral expectation which did not materialise. The position is and always has been that the Company will get the full profit from the development subject to payment of a proper commission."

31. I have no doubt that the full facts about this project are not yet know, and the little that is known gives one a feeling that there might be something that is dishonest and improper. There is on the other hand no evidence of concealment of material facts from shareholders (see Town Topics Co. Ltd. supra). It is a difficult decision to make, but I have, with some reluctance, come to the view that the applicants have failed - I might add failed marginally - to make out a case for a declaration under section 143(a).

32. For the reasons stated, I must refuse to make the declaration sought.

1st May 1978

Representation:

Mr. R. Yorke, Q.C., Mr. D. Chang and Mr. W. Poon (Johnson, Stokes & Master) for applicant in Miscellaneous Proceedings No. 179 of 1978.

Mr. C. Ching, Q.C. and Mr. P. Fung (Deacons) for applicant in Miscellaneous Proceedings No. 127 of 1978.

Mr. R. Wright, Q.C., Mr. O.V. Cheung, Q.C. and Miss Audrey Eu (T.S. Tong & Co.) for respondent in both cases.

Mr. D.J. Murphy, C.C. for Attorney General.

(1) (1971) 1 Ch. 388.

(2) (1958) 2 S.A.L.R. 59.

(3) (1893) XII S.C. 248.

(4) (1911) 17 The Western Law Reporter 646.

(5) (1915) VIII Western Weekly Reports 697.

(6) (1955) 15 Western Weekly Report 666.

(7) (1910) A.C. 409, 420.

(8) (1972) A.C. 153, at 171.

(9) (1902) A.C. 83.