Jeffrey Thomas Robbins and Another v. Peaktop Technologies (Usa) Hong Kong Ltd

HCMP 2456/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2456 OF 2006

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BETWEEN

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Before : Hon. Barma J in Chambers (Open to Public)

Date of Hearing : 16 May 2007

Date of Decision : 16 May 2007

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D E C I S I O N

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1.This is an application by Jeffrey Thomas Robbins and Gregory George Schutte against Peaktop Technologies (USA) Hong Kong Limited (“the Company”), made by originating summons dated 22 November 2006, seeking inspection of the books and records of the Company from December 2003 onwards. 

2.Both Applicants were, at the time the application was made, directors of the Company.  The application is made pursuant to section 121(3) of the Companies Ordinance, which gives directors of a company a right at all times to inspect the books of account of the company of which they are directors.

3.Although the Applicants were, as I have said, directors of the Company when the application was made, they were, on 10 April 2007, removed as directors at an EGM of the Company convened for that purpose.  In the light of their removal, the validity of which they do not accept, the Applicants recognise that they no longer have locus to make the application and therefore seek to withdraw it.

4.Given that the application was made more than three weeks after the last affirmation filed in opposition by the Company, the leave of the court is required before the application can be withdrawn.  I see no reason why leave should not be given to them to withdraw their application and I shall, accordingly, give such leave.

5.The Applicants maintain, however, that they were entitled to bring the application when it was instituted and that their inability to pursue it is not due to any recognition on their part that it was not going to succeed, but is due entirely to the actions of the Company in removing them as directors.  They therefore ask that, notwithstanding that they have sought leave to withdraw their application, they be awarded the costs of the application.

6.Mr Wong, appearing for the Company, drew my attention to the commentary in paragraph 62/10/11 in the White Book.  That suggests that where an application is withdrawn, the court has no jurisdiction to order costs in favour of the Applicant, and that where leave is obtained for withdrawal, exceptional circumstances are required before the court will deprive the Respondent of his costs by making no order as to costs.  He suggested that there was no basis here for making an order against his client, particularly as there were no exceptional circumstances in this case. 

7.I do not think that this is right.  It is clear from Order 21 rule 3(1) that the court has a wide discretion as to what, if any, terms should be imposed when giving leave to withdraw.  The court also has a wide discretion as to costs.  It seems to me that if the circumstances are, exceptionally, such that a costs order should be made in favour of an Applicant who has obtained leave to withdraw his application, there is no jurisdictional bar to the court making such an order. 

8.Further, it seems to me that where an Applicant’s application is doomed to failure by reason not of anything which he has done or not done, but because of an act of the Respondent which is within its control and out of the hands of the Applicant and is, further, a step which could have been taken either prior to the application being made or at an earlier stage in the application so as either to obviate the possibility of the application being made, or to minimise the costs associated with it, it may well be appropriate to recognise this by an appropriate costs order.

9.I therefore turn to consider whether or not there are, in this case, grounds for making an exceptional costs order in favour of the Applicants.  I consider first the conduct of the Company in removing the Applicants from their positions as Directors on 10 April 2007, more than four and a half months after the application was brought. 

10.The background to the application is that the Applicants are associated with a US company called GeoGlobal Partners LLC (“GGP”), which is a 49 per cent shareholder in the Company, the other 51 per cent being owned by Peaktop Investment Holdings BVI Limited (“Peaktop BVI”).  Both GGP and Peaktop BVI are involved in the business of manufacturing garden equipment.  This includes both general gardening equipment and what the parties have referred to as water gardening equipment, which I understand to refer to features such as decorative fountains and the like. 

11.It appears that since December 2003, they engaged in a venture to co-operate in respect of the supply, distribution, marketing and sale of certain gardening products, including water gardening products, in the USA, Mexico and Canada.  The intention appears to have been that Peaktop, or companies in its group, should manufacture the products at their production facilities, principally in China, and that GGP would market the products to large stores in the United States such as Target, K-Mart, Home Depot and others. 

12.In January 2004, the two companies entered into an agreement whereby they agreed to set up the Company to act as a distributor for such products.  Each side was to be entitled to board representation consisting of two directors.  The Applicants in these proceedings were the representatives of GGP. 

13.This agreement was due to expire on 31 July 2006.  Before its expiry, the parties entered into negotiations for its extension.  According to the Applicants, because of problems that had been encountered in relation to water gardening products supplied by the Company, GGP no longer wished to deal in such water gardening products, preferring to source its own products of this nature and to resume the business which it had previously carried on in that regard.  The Company contends that it was, on the contrary, misled into thinking that GGP intended to carry on with the relationship. 

14.It is not possible to come to any firm conclusions one way or another as to this dispute.  In the event, however, a limited extension for one further month was agreed by way of a supplemental agreement entered into on 28 July 2006.  The supplemental agreement provided that the main agreement should be amended so as to remove water gardening products from its scope.  It also contained a term that the parties would waive any claims against each other in respect of matters in respect of which the agreement was amended.  This might, although it is neither necessary nor appropriate to try to resolve this question here, have had the effect of removing complaints concerning water gardening products and dealings in such products, by either party, from the area of potential dispute arising by way of a breach of the agreement.  There had, prior to the entry into the supplemental agreement, been some dissatisfaction expressed by Peaktop BVI about alleged dealings by GGP with customers in respect of some water gardening products on its own account, rather than for the account of the Company.  The customers in question were Target and K-Mart. 

15.After the expiry of the supplemental agreement, Peaktop BVI, or associated companies, brought proceedings against GGP in the United States, alleging that GGP was in breach of the agreement and supplemental agreement, and was also guilty of breaches of fiduciary duty.  These proceedings are hotly contested. 

16.Peaktop BVI has also issued a writ in Hong Kong making similar allegations. However, although this writ was issued some seven months ago or more, it does not appear yet to have been served on any of the intended Defendants.  Mr Wong suggested that the explanation for this might lie in the fact that the Defendants were out of the jurisdiction.  However, no evidence was put before me as to whether attempts to obtain leave to serve out had been made, or to suggest any other particular difficulties in relation to service.  Indeed, the Company’s own evidence suggests that the writ was issued largely as a protective measure.

17.Thereafter, on 9 October 2006, solicitors acting for the Applicants wrote to the Company seeking inspection of its books and records from the beginning of the parties’ relationship, that is, December 2003.  Initially, the Company did not indicate any opposition to inspection being given; however, it delayed giving inspection for some six weeks, by the end of which period the Applicants lost patience and commenced these proceedings.

18.It does appear that, in the correspondence leading up to the application, the Company inquired as to the purpose of the proposed inspection.  The Applicants declined to give any explanation, saying simply that, as Directors, they had a generally unqualified right of inspection of the Company’s accounting records. 

19.The hearing of the originating summons was originally fixed for 13 December 2006.  However, on 12 December, the Company filed an affidavit alleging that, having regard to the hostile litigation which existed between the parties and also the allegations of misconduct which it briefly alluded to in that affirmation, it feared that the Applicants would, in fact, misuse the information that they might glean from the documentation that was sought.  The Company also indicated that, in light of the shortness of time available, it had not been able to provide full details of its complaints and its fears and sought an opportunity to file further evidence to supplement that which it had just filed.  Directions were then given for the filing of further evidence by the Company within three weeks, with the Applicants having an opportunity to reply to such evidence three weeks thereafter.

20.Despite those directions, no steps were taken by the Company to file any further evidence for some considerable time.  Instead, slightly over two months later, in February 2007, notice was given by the Company of the EGM at which it was to be proposed that the Applicants should be removed as directors.  This was eventually followed by the EGM itself on 10 April 2007, at which, as I have noted, the Applicants were duly removed as directors. 

21.After that, the Company promptly filed a further affirmation, some three days later, on 13 April 2007.  This was slightly over a month before this hearing but some three and a half months late having regard to the timetable that had originally been provided.  The affidavit provided some amplification of the alleged wrongdoing on the part of the Applicants and GGP.  It was suggested that there were at least five instances in which the Applicants, or their company GGP, had sought to divert business away from the Company to itself.  It was also suggested that the Applicants might misuse the information that they could glean from the accounting records by using pricing information which could be obtained by an analysis of such records, thereby to steal an advantage in competing with the Company in the same market.  The fact of the removal of the Applicants as directors as a basis on which the application should be refused was also mentioned.

22.On 10 May 2007, the Applicants filed their affirmation in reply, denying any intention to misuse the information that might be obtained from the documentation that was sought to be inspected, and indicating that they had wished to check the books and records of the Company to ensure that all matters that should have been recorded in them had been properly recorded.  In this context, reference was made to an incident in February 2006, which the Applicants said led them to be concerned about the integrity of the Company’s records. 

23.Today, Mr Suen, who appears for the Applicants, has submitted that costs should be awarded to them because their application was entirely well-founded when it was brought.  At the time of the application, they were directors of the Company and, as such, had a right to inspection under section 121(3).  Mr Suen referred me to the leading authorities on section 121, including Boldwin Construction Company Limited [2001] 3 HKLRD at 430, Ng Yee Wah v Lam Chun Wah, an unreported decision of Kwan J in HCMP4616/2001, given on 28 June 2005, and the earlier Australian case of Edman v Ross (1922) 22 SR (NSW) 351.  The applicable principles are conveniently summarised in Ng Yee Wah v Lam Chun Wah (see paragraph 29 of Kwan J’s decision).

24.For present purposes, it suffices to note the following principles.  First, that a director is entitled to inspection under section 121 and, indeed, at common law, as of right and does not need to explain why he wishes to inspect documents of the company of which he is director.  Secondly, that interference with this right is only justified and can only be effected where the respondent is able to prove that the director intends to abuse the confidence in relation to the company’s affairs so as to injure the company in a material way.  Thirdly, given the importance to be attached to the right of inspection, clear proof is needed to satisfy the court affirmatively that recognising the right would, in the circumstances of the particular case, in fact be detrimental to the company’s interest.

25.Mr Suen also pointed out dicta in Edman v Ross which were to the effect that the company’s remedy in the event that it was felt that a director might abuse his position and abuse information which he obtained in that capacity was, if it were possible to do so, to remove the director concerned from his position as director.  This, I think, was a course that was clearly open to the Respondents in this case, given that Peaktop BVI was the holder of some 51 per cent of the shares in the Company.  Mr Suen submitted that, in this case, the evidence put forward by the Company fell short of what was required to justify a denial of the right of inspection to the Applicants. 

26.I agree.  The Company’s evidence consisted largely of references to the existing litigation, reference to a number of alleged instances of diversion of customers after GGP or the Applicants had been provided with what appears, for the most part, to have consisted of design documentation, samples and specifications, rather than financial information, and the suggestion that as GGP and Peaktop were now in competition with one another, the provision of financial information would be detrimental to the Company since GGP would thereby be enabled to work out the Company’s margins and pricing strategies and, thus, to tailor their own margins and pricing strategies accordingly.

27.I do not think that the existence of litigation is in itself sufficient to justify the inference that any information that might be gleaned from the documents would be likely to be abused.  It seems to me likely that, in so far as it is necessary, information of that nature, if relevant to those proceedings, is likely to be obtained by the parties in the context of those proceedings in one way or another.  So far as the alleged wrongdoings are concerned, two of the instances appear to have been known since before the supplemental agreement was entered into – that is to say, since before July 2006.  The others also relate, it seems, to matters which took place in the first half of 2006. 

28.Notwithstanding the 10 months or so that have since elapsed, the evidence that has been put forward by the Company is, in my view, sparse.  If these allegations were seriously to be pursued, given the fact that litigation exists both in the United States and had been contemplated at least in Hong Kong, one would have thought that, by this stage, the Company would be in a position to provide much clearer and stronger evidence of the alleged abuse.

29.In any event, it does not seem to me that the fact that a director has, in the past, been guilty of some misconduct in relation to the company necessarily leads to the conclusion that he is intending to abuse his position in respect of information that is obtained.  The nature of the information that was said to have been abused related more to design documentation and the like, information which is very different in nature to that which is sought by this application.

30.So far as the suggestion that GGP might be enabled to work out the Company’s pricing strategies and use this to its advantage and the detriment of the Company is concerned, I am not satisfied that this fear is justified.  I also note that the information that would have been made available had the application gone ahead and succeeded, would have been largely historical information. 

31.Mr Wong suggested that this might still be useful going forward into future years.  However, I have difficulty in seeing how this can be said in relation to accounting information for the years 2003 to 2005.  That information would appear to be purely historical in nature.  Even in relation to current information that is relatively up-to-date, it seems to me that, having regard to the way in which matters developed in respect of the occasions of which complaint is made, in relation to the approaching of customers during the spring of 2006, it seems to me that the sort of information that is needed for that purpose is information that is current, rather than information that is perhaps some months old. 

32.It seems to me, therefore, that it is not established that the information that the Applicants might obtain from the inspection which they wished to make would either have been capable of being used by them for the nefarious purposes suggested or, indeed, that there is any very clear evidence that they would be likely to use it for such purposes, even if it could be so used.  For all of those reasons, I do not think that the grounds for interference with the directors’ right of inspection would have been made out in this case had the matter been fought out.

33.Mention was also made of the fact that the Applicants did not explain why they wanted to inspect the documents.  As the authorities make clear, they are not required to do so.  It is only when a challenge is made to their right to inspect that it might be thought necessary to do so and, even then, it may not be necessary in every case for the Applicants to explain their position.

34.In this case, as it happens, that information has now been provided, albeit only recently.  However, it seems to me that nothing can really be made of the late provision of this explanation, which was largely due to the Company’s own delay in filing its own evidence some three and a half months late.

35.It was also suggested that the affidavit that has been filed by the Applicants goes beyond what is necessary and suggests that they are still persisting in their application.  As to the latter, I think that on a fair reading of that affidavit, this is not the case.  As to the suggestion that the affidavit may have gone into more detail than was necessary, or gone into matters that were not strictly necessary to be dealt with, it seems to me that it does not lie well in the Respondent’s mouth to complain about what the Applicants choose to put in, in response to their own late evidence.

36.It seems to me, at the end of the day, that as was pointed out in Edman v Ross, the Company had a remedy, which lay in its own hands, for the situation which it faced.  It could, at any time after the termination of the relationship between the parties, as long ago as the beginning of September 2006, have taken steps to remove the Applicants as directors if it felt that there was a need to do so.  Notwithstanding the litigation which the Company or its associated companies initiated in the United States, and notwithstanding the subsequent request for inspection by the Applicants in October 2006, no steps were then taken to remove them as directors of the Company.  That suggests that the fears now expressed may be somewhat exaggerated.  It was not, as I have observed, until much, much later in the proceedings that the removal of the Applicants as directors of the Company was eventually put through.

37.In the circumstances, I am satisfied that, but for the removal of the Applicants as directors of the Company, it would have been appropriate to make an order substantially in the terms sought.  There might have been some slight modifications to the order that was sought, either as to its precise scope, or perhaps by providing for the interposition of professional advisers in the inspection process so as to provide some greater safeguards for the integrity of the documentation, but I think, even with such slight modifications, the application would have been substantially successful.

38.That being so, I think that there have been shown, in this case, exceptional circumstances such as to justify the making of a costs order in favour of the Applicants and I will, therefore, give leave to the Applicants to withdraw the application made by their originating summons of 22 November 2006, but will order that, exceptionally, the costs of the application which, provisionally, would include the costs of this hearing, should be paid by the Company to the Applicants, to be taxed on the party and party basis if not agreed. 

Mr Jenkin Suen, instructed by Messrs Coudert Brothers, for the Applicants

Mr Wong Chao-wai, Brian, instructed by Hastings & Co., for the Respondent