Ng Yee Wah v. Lam Chun Wah

HCMP 4616/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4616 OF 2001

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BETWEEN

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Before : Hon Kwan J in Chambers

Date of Hearing : 28 June 2005

Date of Decision: 28 June 2005

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DECISION

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The applications

1.There are two applications before me.  The first is an originating summons under section 121 of the Companies Ordinance, Cap. 32 issued on 24 August 2001, amended on 28 May 2004 and re-amended on 21 June 2004.  The second application is a summons of the defendant issued on 20 July 2004 to strike out the re-amended originating summons on the ground that it is scandalous, frivolous, vexatious, or may prejudice, embarrass, delay a fair trial, and/or is otherwise an abuse of the process of the court.

2.In the re-amended originating summons, the plaintiff seeks an order that the defendant do produce for her inspection these documents:

“the books of accounts, management accounts and all papers and documents in support thereof and in relation thereto, including but not limited to: working papers, bank statements, cheque stubs, applications for banking facilities, facilities letters, applications for documentary credits, documentary credits issued and/or used, shipping documents and delivery notes covering all business transacted by and for the Company, tax returns, contracts, instrument of transfers, statutory records, invoices, receipts and vouchers and correspondence within the power, control and custody of the Company.” 

The background and other proceedings

3.The defendant and the plaintiff were formerly husband and wife.  They were and are the only directors and shareholders of the company in question, Grand Sino International Limited (“the Company”), each holding 50% of the shares.  The Company was the registered owner of the former matrimonial home that was mortgaged to the Hua Chiao Commercial Bank.

4.The plaintiff and the defendant separated on 17 March 2001.  Prior to that, the plaintiff was not closely involved in the affairs of the Company.  After their separation and in March 2001, the plaintiff made enquiries with the bank and discovered that the Company was indebted to the bank to the extent of HK$9.5 million, as the mortgage of the matrimonial home was also used to finance trading activities of the Company.

5.From March 2001 to August 2001, the plaintiff through her solicitors made requests to the defendant for information and access to the books and accounts of the Company.  As the plaintiff was not satisfied with the response, she issued the originating summons on 24 August 2001.  The originating summons simply sought inspection in these terms:

“An order for the defendant to produce for the plaintiff’s inspection: (1) the books of account of the Company; (2) all contracts, invoices, accounts, receipts, vouchers and bank statements of the Company.”

6.The plaintiff did not proceed with the originating summons for three years as during this time, the defendant had allowed the plaintiff and her representatives, from an accountants’ firm and a solicitors’ firm, to carry out inspection of the documents he made available at the registered office of the Company and to take copies.

7.Inspection and photocopying of documents were carried out on these dates: 6 September 2001, 27 to 29 August 2002, 3 October 2002 and 11 April 2003.  According to the defendant, over 3,000 pages of documents were photocopied.

8.Before the last inspection on 11 April 2003, the plaintiff’s solicitors wrote to the defendant’s solicitors on 19 March 2003 pointing out that the accounting papers were incomplete and listed 8 items found missing.

9.After the inspection, the plaintiff’s solicitors again wrote to the defendant’s solicitors on 15 April 2003 complaining that most of the missing items set out in the 19 March 2003 letter was not made available at the last inspection and setting out their preliminary observations of 8 missing items as to the books and accounts for the year 2000.  As for the books and accounts and other corporate materials for the years other than 2000, they were being reviewed by the plaintiff’s solicitors and the plaintiff’s solicitors stated that they would put the defendant’s solicitors on notice if there were any unsatisfactory findings.

10.The plaintiff’s solicitors followed up with a letter dated 14 May 2003, again complaining that the missing documents in the earlier letter of 19 March 2003 were not made available for inspection and listing two further categories of documents that should be made available.  Further, the defendant was asked to provide explanation and documents regarding seven matters as set out in the letter.

11.There was no letter in response from the defendant, but the plaintiff took no steps to proceed with the originating summons until a year later.  Meanwhile, on 17 March 2003, the plaintiff petitioned for divorce and on 8 September 2003, the decree nisi was made. Matters relating to custody and ancillary relief were adjourned for argument.

12.On 8 September 2003, the plaintiff brought a derivative action in High Court Action No. 3349 of 2003 (“the High Court Action”) against the defendant and the Company, to seek relief against the defendant for wrongs committed against the Company.

13.On 6 May 2004, the defendant succeeded in an appeal before Deputy Judge Jat, SC, against an order made by a Master in the High Court Action, the details of which I do not need to go into.

14.As a result of certain observations made by the Deputy Judge in his judgment, the defendant issued a summons to strike out the High Court Action on 7 May 2004.

15.Shortly after this, the plaintiff obtained leave to amend and then re-amend the originating summons.  The defendant countered with his summons to strike out the re-amended originating summons issued on 20 July 2004. 

16.On 13 July 2004, the defendant’s solicitors wrote to the plaintiff’s solicitors complaining that the re-amended originating summons was a “fishing expedition” and requesting the plaintiff’s solicitors to point out specifically what accounting documents they wish to inspect.  The defendant’s solicitors stated that the plaintiff, having carried out extensive inspections, should not continue to allege there was a lack of documents in vague terms, or to make a request for inspection in broad and general terms.  If a concrete reply was not received to this letter, the defendant would contest the re-amended originating summons.

17.No reply by letter came from the plaintiff’s solicitors.  On 23 July 2004, I gave directions for the filing of evidence of these two applications.

18.The defendant did not proceed with his application to strike out the High Court Action, after the plaintiff made extensive amendments to the statement of claim.  His application was withdrawn on 18 October 2004.  The High Court Action has proceeded to the stage of filing of lists of documents and inspection, after which it would be listed before a Listing Master for setting down.

19.For the matrimonial dispute, custody has been determined in May 2005. The application for ancillary relief has been ordered to be transferred to the Court of First Instance after the determination of the custody application.

The evidence filed in these applications

20.When the re-amended originating summons came before me for directions in July 2004, the only evidence filed by the plaintiff in support was her affidavit made on 12 July 2002 and that was overtaken by events.  So directions were given for the plaintiff to file further evidence in support of her application, for the defendant to file evidence in opposition and the plaintiff in reply.

21.In the plaintiff’s evidence in support of her originating summons filed in August 2004, she described the documents made available for inspection in the four inspections.  She mentioned that the defendant had failed to respond to the letters of her solicitors dated 15 April 2003 and 14 May 2003. In paragraph 25, she deposed that she was advised by her accountant that the books of account disclosed so far did not give a true and fair view of the affairs of the Company and failed to explain transactions in respect of ten matters as set out in that paragraph.  She also relied on the three affidavits made by her accountant filed in the High Court Action in opposing the application to strike out the writ.  In the concluding paragraph at paragraph 41, she set out the documents found missing from the inspections.

22.The defendant made an affirmation in answer on 11 October 2004, again complaining that the plaintiff had failed to particularise what documents are lacking notwithstanding the documents made available for inspection on previous occasions, and addressing the documents said to be missing in paragraph 41 of the plaintiff’s said affidavit.

23.In the plaintiff’s evidence in reply, filed in January 2005, she produced an affidavit of her accountant running to 45 pages with five schedules, and in Schedule V, he sets out with particularity the relevant documents found missing from previous inspections.  This schedule ran to five pages.

24.I gather that the defendant’s solicitors have raised objection to this evidence in reply only on last Saturday.  I agree much of the evidence in the accountant’s affidavit should have been furnished in the plaintiff’s evidence in support, not in the evidence in reply, in particular the relevant documents said to be missing.  But the defendant’s solicitors have five months to react to this and could have sought leave to answer any new material raised in the accountant’s affidavit that would require answering.  They did nothing until it was too late.  I would not entertain any objection to the propriety or otherwise of the accountant’s affidavit, although I flag this as a matter that may be relevant to costs.

The four inspections and the subsequent disclosure

25.In the written submission of Mr Liang for the plaintiff, he set out in meticulous detail the documents inspected by the plaintiff on the four occasions in paragraphs 6 to 9, and the further documents disclosed by the defendant in the High Court Action in paragraph 10.  I do not propose to repeat what he has comprehensively summarized for this court.

26.Mr Hung, for the defendant, submitted that the documents examined by the accountant as deposed to in his affidavits are the documents photocopied during the various inspections.  It does not follow that such documents were the only documents available for inspection.  The accountant was only present at the inspection on the last occasion.  The first two inspections were carried out by his senior audit clerk and the third inspection by a solicitor’s clerk.  However, I have no reason to think that the accountant, who did attend the last inspection, which was after the letter of the plaintiff’s solicitors dated 19 March 2003, would have overlooked any item said to be missing, if it was indeed made available for inspection.

27.Mr Hung also made the point that under section 121(3A), the obligation to keep books of account under section 121(1) is for seven years, so documents more than seven years before 2004 should not be made the subject of inspection.  I do not agree with this submission. The right to inspection is not restricted to documents for seven years, if the company should happen to retain documents for more than seven years.

28.The plaintiff’s case is that notwithstanding the four inspections, there are still other documents of the Company necessary to give a true and fair view of its affairs and to explain its transactions that have not been disclosed, as particularised in Schedule V to the accountant’s affidavit.

The legal principles

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

(1)	The right of a company director to inspect the company’s documents is well established at common law (Burn v London and South Wales Coal Company and Risca Investment Company (1890-91) 7 TLR at 118-119; Edman v Ross [1922] 22 SR (NSW) 351 at 360-361; Conway v Petronious Clothing Company [1977] 1 WLR 73 at 89-90; Berlei Hestia (NZ) Limited v Fernyhough [1980] 2 NZLR 150 at 163-164; Molomby v Whitehead & Australian Broadcasting Corp [1985] 7 FCR 541 at 550-552; Wuu Khek Chiang George v ECRC Land Pte Limited [1999] 3 SLR 65 at paragraphs 25, 27, 31-34; Law Wai Duen v Boldwin Construction Limited [2001] 4 HKC 403 at 408-409).
(2)	The right of inspection flows from the director’s duties to the company and a director does not have to explain why the inspection is sought or demonstrate any particular ground or “need to know” as a basis (Law Wai Duen, supra at 405 and 409; Molomby, supra at 550; Wuu Khek Chiang George, supra at paragraph 27).  Thus, the inaction on the part of the director after grounds for suspicion concerning the company’s affairs have arisen is irrelevant; likewise, the intention of the director to discover misfeasance with the view to seeking relief, or that the desire to find evidence is motivated by vindictiveness (Law Wai Duen, supra at 409).
(3)	It is only where it can be proved that the director intends to abuse the confidence in relation to the company’s affairs and to injure the company in a material way that the director’s right of inspection can be interfered with, and such interference can only be effected in circumstances where a restriction on a director’s right can be imposed because of misuse of confidential information leading to damage (Law Wai Duen, supra at 408).
(4)	In view of the proposition in (3), the exercise of a director’s right of inspection is, “generally speaking, not a matter of discretion with the Court” (Edman v Ross, supra at 361; Berlei, supra at 163; Wuu Khek Chiang George, supra at paragraphs 32 and 33; Law Wai Duen, supra at 408).
(5)	The onus of establishing that the right of inspection will be exercised for improper purpose lies on the person who asserts it and “clear proof” is required to satisfy the court “affirmatively” that the grant of the right of inspection would be detrimental to the interests of the company (Wuu Khek Chiang George, supra at paragraph 34).
(6)	The scope of inspection can potentially be very wide, covering any “documents belonging to the company” (Burn v London and South Wales Coal Company, supra at 118; Edman v Ross, supra at 360), “corporate material” (Molomby, supra at 550), “corporate records and accounts” or “corporate information” (Berlei, supra at 163), “accounting and other records of the company” (Wuu Khek Chiang George, supra at paragraph 25).
(7)	It is perfectly proper for a director to engage an accountant to conduct the inspection in exercise of his right. A director may certainly exercise his right through his agent (Edman v Ross, supra at 361; Law Wai Duen, supra at 409).  A director is also entitled to take copies of the documents during inspection (Burn v London and South Wales Coal Company, supra at 118; Edman v Ross, supra at 361).
(8)	Whilst there may be some dispute in the authorities if the statutory provision (our statutory provision is section 121(3) of Cap. 32) adds a statutory right of inspection to an existing common law right, it is abundantly clear that the statutory provision is consistent with and does not detract from the common law right (Conway v Petronious, supra at 85 and 89; Berlei, supra at 163; Wuu Khek Chiang George, supra at paragraphs 25 and 31).

30.There is no allegation by the defendant that the right of inspection sought to be exercised by the plaintiff would be detrimental to the interests of the Company, or that she intends to abuse the confidence in relation to the Company’s affairs.

The strike out application

31.As I have indicated to Mr Hung in the course of his submission, I do not think the defendant’s application to strike out the re-amended originating summons can get off ground.  Any ulterior motive of the plaintiff for wanting to exercise the right of inspection, whether to advance her case in the High Court Action, or to put pressure on the defendant in the ancillary relief application, is irrelevant.  Similarly, the way proceedings were conducted in the High Court Action, or the fact that the plaintiff is seeking redress on behalf of the Company for alleged wrongs committed by the defendant against the interests of the Company, is immaterial.  Whether the allegations in the High Court Action are of substance is neither here nor there for the purpose of the present applications.  I must dismiss the striking out application.

The relevant documents

32.I turn to consider the documents sought to be inspected by the plaintiff as set out in Schedule V of the accountant’s affidavit.

33.In Mr Liang’s submission, he has helpfully set out for my reference the relevant parts of the evidence filed by the plaintiff and the exhibits relating to each of the items in the schedule.  This ran from pages 12 to 24 of his submission.  Mr Liang wished to make one amendment to the schedule in respect of the items regarding board minutes and/or shareholders’ resolutions evidencing the defendant’s disclosure to the Company of the nature of his interest in and the Company’s approval or authorization of the transactions as specified.  He would like to add after “material interest” the words “or interest” in each instance.

34.As mentioned earlier, these documents are only particularised in sufficient detail in the plaintiff’s evidence in reply.  The defendant did not seek leave to file evidence in response.  For most of the documents in the schedule, there is no evidence forthcoming from the defendant whether the Company has in its possession, power or custody the documents sought to be inspected.  The only exception is the stock ledger and stock list for the years 1997, 1998, 1999, 2000 and the first quarter of 2001.  Further, Mr Hung has informed the court that for the years of 1997 to 2000, consolidated accounts of the Company and Keybo Development Limited (“Keybo”), or consolidated financial statements accounting for the Company’s investment in Keybo, were not prepared.

35.Obviously, for documents not in existence, there is no point to make an order for inspection in respect of them.

36.It seems to me it might give rise to unnecessary and endless disputes if I were to simply order inspection in terms as sought in the re-amended originating summons.  In the special circumstances of this case, and given the history of this matter, I think it desirable to particularise the items of documents for which the plaintiff should be allowed to exercise her right of inspection.  Schedule V of the accountant’s affidavit has given sufficient particulars of each of the items of documents sought.  I also think it desirable, before the inspection is to be conducted, that the defendant should inform the plaintiff with regard to each of the documents particularised in Schedule V, which of the documents are in the power, control and custody of the Company.  This would, I hope, minimize dispute as to whether there is compliance with the order to give inspection.

37.The plaintiff also seeks to inspect books of account and other documents of the Company subsequent to the first quarter of 2001 to present.  As she has not had access to these documents at all, so no particulars were given as to the items of documents she would like to inspect for this subsequent period.  I hope with this decision the defendant and his legal advisers should be in no doubt now as to the scope of inspection to be given for the subsequent period, and that the parties would co-operate in the inspection process.

38.The order I propose to make is along these lines, I will hear the parties on the precise terms:

(1)	within a specified time of this order, the defendant is to file and serve an affidavit, stating which of the documents specified in Schedule V to the affidavit of the accountant are in the power, control and custody of the Company;
(2)	subsequent to the filing of the defendant’s affidavit in (1), and upon giving notice in writing to the defendant’s solicitors within a specified period, the plaintiff is to be allowed to inspect,
	(a)	the documents as particularised in Schedule V to the affidavit of the accountant, as amended in the way indicated by Mr Liang referred to earlier, with the exception of the stock ledger, the stock list and the consolidated accounts and financial statements of the Company and Keybo, as are in the power, control and custody of the Company; and
	(b)	the books of account and other documents of the Company subsequent to the first quarter of 2001 to present;
(3)	the plaintiff, her agents or representatives be allowed to enter the registered office of the Company or such other premises where the documents in (2) are kept, to inspect and take copies of the same; and
(4)	the documents in (2) are to be kept in safe custody until after the inspection and taking of copies by the plaintiff.

39.I will now hear the parties on the exact terms of the order and on the costs of each of the applications.

Mr Alfred Liang, instructed by Messrs David Wong & Co., for the Plaintiff

Mr Andy Hung, instructed by Messrs Pansy Leung, Tang & Chua, for the Defendant