Ling Yun Sang and Another v. Chan Hak Kong and Another

HCA003347/1985

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

Coram: Deputy Judge Barnett in chambers

Date of hearing:    10th June, 1985

Date of judgment: 12th June, 1985

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JUDGMENT

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1. The 1st plaintiff is a director of the 2nd defendant, which I shall refer to as the Company in the balance of this decision. The 2nd plaintiff is the 1st plaintiff's alternate. The 1st defendant is the managing director of the Company. The 1st plaintiff seeks a declaration that he, or in his absence the 2nd plaintiff, is entitled to enter the Company's office and inspect its books of account, management accounts, working papers, bank statements, cheque stubs, contracts, invoices and other vouchers, and minutes of directors' meetings; and to take copies of all the documents which I have recited. The plaintiffs then asked for orders that the defendants permit the 1st or 2nd plaintiff to enter the Company's office for the purpose of the inspection, and that the defendants produce the documents.

2. By summons in the action the plaintiffs have applied for orders permitting inspection and requiring production by way of interlocutory relief. These orders, if granted, will effectively bring an end to the proceedings.

3. For the plaintiffs, Mr. Burns relied on Conway v Petronius Clothing Co. Ltd. and Ors.⁽¹⁾. In that case, Mr. Justice Salde, after reviewing the limited number of authorities, reached 5 conclusions in relation to the nature of the right of a director to inspect the books of account of a company. The first three conclusions recited the law and, in summary, are:

4. The other 2 conclusions concerned the application of the law by the courts. Because of their considerable relevance to the present case, I think they must be set out in full:

5. I see no reason to disagree with the conclusions of Mr. Justice Slade. For the defendants, Mr. Ma accepts the conclusions but contends that, as the plaintiffs' application is for interlocutory relief, only (5) is relevant because (4) relates to principles to be applied upon trial of the action.

6. I cannot agree with that Mr. Justice Slade was dealing with an interlocutory application. He would not, I am confident, have gone into such detail in (4) unless he intended it to be applicable to the application before him. The last sentence of (4), however, seems to me to put the matter beyond doubt. The clear reference is to the mischief that may ensue if an interlocutory application is not approached in accordance with the earlier part of (4).

7. Mr. Burns is entitled to rely on the principles that the discretion to withhold an order for inspection will be sparingly exercised, and that a director may be restrained from exercising his right if the court is satisfied affirmatively that his intention is to abuse the confidence reposed in him as director and materially to injure the company.

(5) of course related to the special facts of the case before Mr. Justice Slade. As Mr. Burns pointed out, in the present case there is really no prospect of the 1st plaintiff being removed as director. Little help can, therefore, be gleaned from this conclusion. However, I do not think that Mr. Justice Slade was laying down the only circumstances in which principles different from those set out in (4) should apply. Clearly, the facts of each case must be looked at to see whether there are reasons sufficiently cogent to persuade the court not to grant an order for inspection.

8. In the present case, Madam Chang Wong Lai Hing, whom I will refer to as Wong, as administrator ad colligenda bona of her husband's estate holds 45% of the Company's shares. She is locked  in, as Mr. Ma put it, a gigantic dispute with the defendants about the way the Company is being run. In summary Wong complains:

9. Between January and May this year, Wong tried to obtain access to the Company's books. She was unsuccessful. The defendants alleged she was no longer a director and not entitled to inspect. On the advice of her solicitor she then enlisted the assistance of another director, the 1st plaintiff, who gave instructions to Wong's solicitors. The Company agreed that the 1st plaintiff might inspect but not that he might be accompanied by an advisor. Again on the advice of the solicitors, the 1st plaintiff appointed the 2nd plaintiff, an accountant, as his alternate and arranged to be out of Hong Kong at the time appointed for inspection.

10. The inspection added more fuel to the flames. To put it at its most neutral, there was a misunderstanding over time. The Company agreed to inspection on Saturday, 18th May between 3 p.m. and 3.30 p.m. That was outside working hours to suit the convenience of the Company. The plaintiffs asked for confirmation that the time indicated was the time at which they should call and that the duration of the inspection would not be restricted. The defendants responded ambiguously that the time was when the books would be open for inspection. In the event, the 2nd plaintiff was asked to leave the Company's office at 3.35 p.m. He estimated he would need 2 or 3 days to carry out a full inspection.

11. At the inspection the 2nd plaintiff saw only a journal for the period 1st January 1985 to the date of inspection, a general ledger and a bank book. No other vouchers or documents were produced. He noted that the journal entries were all in the same ink and handwriting, and that all 3 books were new and appeared not in a state to suggest regular use. He noted also that the 1st defendant and another were drawing salaries of $120,000 per month but, in the absence of the minute books, could not verify if these salaries had been authorised.

12. The plaintiffs being unable to arrange for a further satisfactory inspection, they commenced this action. The 2nd plaintiff, of course, is very much the object of a device. That device has been fully and frankly disclosed and I make no criticism of it. I merely observe that, although it has not been argued, I doubt if the 2nd plaintiff is a necessary or proper party to these proceedings.

13. The 1st plaintiff is described by the 1st defendant as a dormant director. That has not effectively been disputed. It was not, it appears, until he was approached by Wong that he started taking his current active role. He said in his affidavit that he had been dissatisfied with the way in which the Company was being managed and that he readily agreed to assist Wong. Mr. Burns says therefore that the 1st plaintiff was acting on his own account out of a legitimate interest in the welfare of the Company and, in so far as he was concerned about Wong's affairs, it was to see whether there was any substance in her complaints which might require intervention to ensure that the Company was being properly run. The 1st plaintiff was not, as Mr. Ma suggested, therefore, assisting or siding with Wong.

14. There is another factor. The 1st defendant alleges that in November 1984 when he was trying to arrange bank loans the 1st plaintiff wrote an anonymous letter to, amongst others, the Bank of Canton saying in effect that the 1st defendant was a crook and the Bank should beware. Mr. Burns had been unable to take instructions on this but said that, even assuming the 1st plaintiff to have written the letter, it was immaterial on the question of his bona fides. The letter was prior to and unconnected with this application and related to the 1st defendant personally, not the Company.

15. I confess I find no merit in this contention. It would be unrealistic to take no notice of this allegation which the 1st defendant has particularised in some detail in his affidavit.

16. Because of the matters which I have recited, I therefore have reservations about the 1st plaintiff's bona fides.

17. Wong, of course, is not an applicant. Mr. Burns said her motives are immaterial and, even if they are material, there is nothing to suggest mala fides on her part. Again, I am afraid I find that wholly unrealistic. Wong is admittedly using the 1st plaintiff to gain access to the Company's books and documents. If the 1st plaintiff had simply said, as Mr. Ma suggested, that he was concerned to satisfy himself as to the position, there could, perhaps, be no complaint. But the 1st plaintiff has deposed to assisting Wong and, at the same time, to wishing to satisfy his own personal concern. It is curious, to say the least, that he took no action until prompted by Wong.

18. Wong's motives must be material and, having regard to the conflict in which she finds herself with the defendants, as with the 1st plaintiff I have reservations about her motives.

19. I accept that the defendants have not, either by their own evidence or by analysis of the plaintiffs' evidence, affirmatively proved that the plaintiffs intend to abuse confidence reposed in them or materially to injure the Company. The most that Mr. Ma can say is that there is a possibility of leakage of confidential information or that, at a time when the Company is at a critical stage of reconstruction, the nuisance caused by inspection might be damaging to it.

20. I am of the opinion, however, that this is a case where inspection should not be ordered. The 1st plaintiff, while not susceptible of removal, is the object of something more than specious allegations. Between Wong (for whom in my view this action is really being maintained) and the defendants are substantial conflicts which are more properly capable of resolution in other ways, perhaps by a minority shareholders action. If I grant the relief sought, this action will effectively be determined and the defendants shut out from defending the action.

21. There is, of course, no rule that interlocutory relief should not be granted so as to give a plaintiff everything he might get at trial: Bailey (Malta) Ltd. v. Bailey and Ors. ⁽²⁾. However Mr. Ma , by reference to the notes to Order 29 of the Rules of the Supreme Court, argued that where a mandatory injunction is sought and there are substantial conflicts of fact, the proper procedure is to seek speedy trial. Although he did not refer to them, developments in the law relating to injunctions since American Cyanimid, notably Cayne and Anr. v. Global Natural Resources plc⁽³⁾ , make it plain that, to put it at its lowest, the courts must proceed cautiously before granting relief in such circumstances.

22. On the particular facts of the present case, therefore, I decline to grant relief sought and dismiss the plaintiffs' summons.

(1)    (1977) 1 W.L.R. 72

(2)    (1963) 1 Ll. L. R. 595

(3)    (1984) 1 All E. R. 225

Representation:

Mr. Burns of Johnson, Stokes & Master for Plaintiffs

Mr. Geoffrey Ma instructed by Szeto & Yeung for Defendants