Lehman & Co. Management Ltd v. Effiscient Ltd and Another

CACV140/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 140 OF 2011

(On appeal from HCCW 377 & 383 of 2010)

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HCCW377/2010

BETWEEN

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HCCW383/2010

BETWEEN

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Before : Hon Chu JA, Suffiad & Bharwaney JJ in Court

Date of Hearing : 11 August 2011

Date of Judgment : 3 October 2011

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J U D G M E N T

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Hon Chu JA giving the judgment of the Court of Appeal:

1.In these proceedings, the petitioner in HCCW377/2010 and 2^nd respondent in HCCW383/2010 (“Petitioner”) seeks to appeal the judgment of Deputy High Court Judge Coleman SC handed down on 13 July 2011 (“Judgment”) dismissing its application for an order for inspection of the records of LehmanBrown Limited (“Company”) under section 152FA of Companies Ordinance, Cap.32 with costs.

2.The appeal is opposed by the 1^st respondent in HCCW377/2010 and the petitioner in HCCW383/2010 (“Respondent”).

Interlocutory or final appeal

3.The Petitioner has not applied for leave to appeal and no leave has been given by the Court of First Instance for the appeal.  The first issue that arises for determination is whether the appeal is an interlocutory appeal and that leave to appeal is required.  After hearing counsel’s submissions, we held that it is an appeal against an interlocutory judgment and that leave to appeal is required.  Mr Barlow SC who (together with Mr Wong) appeared for the Petitioner applied orally to this Court for leave to appeal under Order 59 rule 2B(4) of Rules of the High Court, Cap.4A.  This is our judgment on the application made out of time for leave to appeal.

Interlocutory appeal

4.Before dealing with the leave application, we would set out our reasons for holding that the Judgment is an interlocutory judgment and that leave to appeal is required.

5.Under section 14AA(1) of the high Court Ordinance, Cap.4, no appeal lies to the Court of Appeal from an interlocutory judgment or order of the Court of First Instance in any civil cause or matter unless leave to appeal has been granted by the Court of First Instance or the Court of Appeal.

6.In Shell Hong Kong Ltd v. Yeung Wai Man & Anor (2003) 6 HKCFAR 222, the Court of Final Appeal held that in determining whether a judgment or order is interlocutory or final, the application test or approach applies.  This requires an examination of the application to see whether the judgment or order made upon the application would, whether it fails or succeeds, determine the whole action.  It is recognised that in some instances, a judgment may be final even if it does not finally determine the whole action.  P Chan PJ, giving the judgment of the Court, stated the court’s approach where this is the case as follows (at para.31):

“… where an order or judgment given in an application does not finally dispose of the whole action but only an issue in the action, it is necessary to consider the purpose and substance of the application, the issue dealt with and determined by the court and the effect of a determination of this issue on the rights of the parties, the further conduct of the proceeding and the final disposal of the whole action. A broad commonsense approach should be adopted. If the issue dealt with and determined by the court is “a substantive part of the final trial” (Holmes v. Bangladesh Biman, p.124); or “a crucial issue” in the case or a point “that goes to the root of the case” (First Pacific Bank Ltd v. Robert HP Fung, p. 532), or “a dominant feature of the case” (Korso Finance Establishment Anstalt v. Wedge & others, p.7), then the order or judgment, even if it does not finally dispose of the whole action, should nevertheless be regarded as a final judgment.”

7.The application in question was made by summons issued in the winding-up proceedings relating to the Company.  In the summons, the Petitioner applied for: (i) an order for inspection under s.152FA of the Companies Ordinance together with ancillary orders; and (ii) specific discovery under Order 24 of Rules of the High Court.  By the Judgment, the Deputy Judge dismissed both applications. The trial of the petition and the cross-petition in the winding-up proceedings has yet to take place.

8.Mr Barlow SC argued that the Judgment is a final judgment.  His first argument was that the s.152FA application was a standalone application that could be made independent of any existing proceedings. Secondly, he argued that the determination was a final determination of the applicant’s substantive rights under section 152FA.  In support of this argument, he referred to the Australian cases of Yara Australia Pty Ltd v. Burrup Holdings Ltd [2010] FCA 1273 at para.108 and London City Equities Ltd v. Penrice Soda Holdings Ltd [2011] FCA 674 at para.11.  Thirdly, he argued that applications for final relief could be made within existing winding up proceedings, citing as an example the case of Re Legend International Resorts Ltd (unreported) HCCW1139/2004, 8 February 2011 at paras.10-14.

9.There is no doubt that a s.152FA application can be made on its own and does not have to be made in existing proceedings.  Where this is the case, the application will be commenced by an originating summons seeking an order for inspection by way of final relief.  The judgment or order thus rendered, whether granting or refusing the order of inspection, will clearly be a final judgment or order because it will determine the whole action.

10.It does not, however, follow that where, as in here, the s.152FA application is made by way of summons in existing proceedings, the judgment or order thus rendered must also be final.  Plainly, the judgment or order on the application will not necessarily (and in most cases will not) determine the whole action.

11.In ascertaining whether the judgment or order is interlocutory or final, the proper approach is that set out in Shell Hong Kong Ltd (see above).  If the judgment or order does not dispose of the whole action, it is necessary to consider the purpose and substance of the application, the issue that has been determined and its effect on the rights of the parties, the further conduct of the proceeding and the final disposal of the whole action.

12.The present application deals only with the present right of the Petitioner to inspect the records of the Company.  The determination of the application does not determine any of the issues in the petition or the cross-petition.  The petitioner’s right to inspect the records of the Company as a substantial shareholder is not “a substantive part of the final trial” or “a crucial issue in the case” or “a point that goes to the root of the case or a dominant feature of the case”. The Judgment is interlocutory, not final, in nature.

13.The cases of Yara Australia Pty Ltd v. Burrup Holdings Ltd and London City Equities Ltd v. Penrice Soda Holdings Ltd do not advance the Petitioner’s case.  In Yara Australia Pty Ltd, there were two applications before the court, namely, an interlocutory injunction application and an application under s.247A of the Companies Act (which is identical to our s.152FA).  The order for inspection was the subject matter of an alternative claim and was therefore described as a final relief.  In London City Equities Ltd v. Penrice Soda Holdings Ltd, the action itself was a s.247 application and the order for inspection was therefore the final relief.  The two cases do not support any proportion that a s.152FA application is invariably an application for final relief. 

14.As for Re Legend International Resorts Ltd, the liquidators applied for security for the costs of the application to remove them.  In the context of deciding whether the application to remove liquidators is “proceedings” within the meaning of Order 23 rule 1 of Rules of the High Court, Deputy High Court Judge L Chan considered that the application  

“raises and seeks the final determination of the issue of the fitness of the incumbent liquidators to continue with the liquidation of the company. This application will result in the determination of the liquidators’ rights to continue with the liquidation which are, in substance, independent of the issues in the liquidation.”

He therefore held that the application is not interlocutory but final in nature and the court has jurisdiction to order security of costs under Order 23 rule 1.  What is of interest about this case is the passage in the judgment of Lord Scott of Forscate in GFN SA & Ors v. Bancredit Cayman Limited (in official liquidation) [2010] Bus LR 587, para.26, which was cited by counsel to Deputy Judge L Chan.  It reads:

“…An interlocutory application designed to regulate or assist in some way the conduct of the substantive action between the parties would not, in my opinion, constitute ‘proceedings’ for the purpose either of section 74 or Order 23. On the other hand, an application which, although interlocutory in form, raised issues as to the rights of the parties which were in substance independent of the issues in dispute in the parent action would, in my opinion, normally constitute in substance ‘proceedings’ for those purposes.”

15.Mr Beresford observed that, on Lord Scott’s formulation, namely, whether the application raises issues as to the rights of the parties that are in substance independent of the issues in dispute in the parent action, it was plain that the Petitioner’s s.152FA application was interlocutory in nature and not final.  We agree.

16.Mr Barlow SC submitted that it did not matter whether the application is made by way of originating summons or by summons within the winding-up proceedings.  We do not agree because as the analysis above shows, there is a critical difference when applying the application test.  Mr Barlow SC also argued that the right of a substantial shareholder to appeal against the refusal of inspection could not be dependent on the manner in which the application was brought.  In so far as this is directed at the requirement to obtain leave to appeal, the objective of the Civil Justice Reform in introducing the leave requirement to interlocutory appeals is to reduce unnecessary delay and expense caused by litigation on interlocutory proceedings so as to ensure procedural economy and that the main action proceeds expeditiously.  Other than those interlocutory application that have been specifically exempted under Order 59 rule 21(1) of Rules of the High Court, the leave requirement applies to appeals from all interlocutory applications, including an interlocutory application made under s.152FA application.  The focus is on reducing appeals from interlocutory applications that do not deal with the substantive rights of the parties in the action.  Thus viewed, there is nothing objectionable in the leave requirement notwithstanding that the application in question could have been made by way of originating summons, in which case the rights of the parties under the application become the substantive issue in the action.

17.For the above reasons, we are of the view that the intended appeal of the Petitioner is an interlocutory appeal that requires leave.

Application for leave to appeal 

18.We turn next to the Petitioner’s application to this Court for leave to appeal. The application is made under Order 59 rule 2B(4) of Rules of the High Court, which provides that:

“If the Court of Appeal allows, the application may be made direct to the Court of Appeal within 14 days from the date of the judgment or order.”

19.Since the time for obtaining leave from the Court of First Instance had expired and as we have seized of the matter, we consider it is appropriate to allow the Petitioner to apply for leave directly from this Court.

20.Clearly, the leave application is out of time. When deciding whether to grant leave to appeal out of time, the court will have regard to: (i) the length of delay; (ii) the reason for the delay; (iii) the merits of the appeal; and (iv) the degree of prejudice to the other party: see Menno Leendert Vos v. Global Fair Industrial Limited & Ors (unreported) HCMP796/2010 , C.A., para.16.

21.The Judgment was handed down on 13 July 2011. The leave application is out of time by about 2 weeks.  The delay is not substantial.  There is no suggestion that the failure to apply to the Court of First Instance for leave was deliberate or actuated by ill faith.  Given that the Petitioner has all along made plain its intention to appeal, we do not think, and the Respondent has not suggested, the delay in seeking leave has caused the Respondent any irreparable prejudice.  In our view, the most important consideration in deciding whether to grant leave out of time is the merits of the appeal, to which we now turn.

Background to the appeal

22.Briefly stated, the background to the intended appeal is as follows.  The Company was incorporated in Hong Kong in October 2000. It is a professional services firm, operating an accounting, management book-keeping and consultancy enterprise in China.  The Petitioner and the Respondent each holds one of the two issued shares in the Company.  The Petitioner is a BVI company.  Mrs Karolina Lehman (“Karolina”) is and was the beneficial owner of the Petitioner.  Mr Edward Eugene Lehman (“Lehman”) is the authorised representative of the Petitioner.  The Respondent is beneficially owned by Mr Russell Peter Brown (“Brown”) and his wife Madam Zhou Han (“Zhou”).  They are also the directors of the Respondent.  Until November 2010, Brown and Million Strong International Limited (“Million Strong”) were the two directors of the Company.  Million Strong was the nominee director for the Petitioner.  In November 2010, Million Strong was de-registered.  Thereafter Zhou became a director of the Company.

23.It is common ground that the Company was founded by Lehman and Brown.  There is also no dispute that their relationship turned sour in 2004 and came to a complete breakdown in 2008.  Since then, the Petitioner and the Respondent have been in a deadlock.  In 2010, the petition and the cross-petition were presented.  Both the Petitioner and the Respondent sought an order under section 168A of the Companies Ordinance directing the other side to sell its shareholding in the Company.  The trial of the petition and the cross-petition is due to take place in October 2011.

The Petitioner’s purposes for the s.152FA application

24.On 13 May 2011, the Petitioner issued the summons in question seeking, inter alia, an order to inspect and take copies of “all the records, books and papers (as respectively defined in sections 2(8A) and 2(1) of the Companies Ordinance)” of the Company. 

25.In the 2^nd affidavit of Lehman filed in support of the application, it was stated that the application was made for two purposes.  The first is to enable the Petitioner to work out the fair value of the Company’s shares so that it can engage in settlement discussions with the Respondent.  The second purpose is to protect the Petitioner’s interest and to ascertain whether Brown and/or Zhou have committed wrongdoings against the Company.  In this regard, Lehman referred to the solicitors’ correspondence in which the Petitioner’s request to inspect the Company’s books and records was not acceded to and said that this demonstrates that the Respondent “has something to fear”, and “such unexplained fear coupled with the non-transparent way in which the [Respondent] handled the Company’s business and affairs … give rise to a real and legitimate belief that an order of inspection of the Company’s records, books and papers is necessary to enable the Petitioner to protect its legitimate interest and to ascertain whether or not there has been any wrongdoings committed against the Company”.

26.In opposing the application, the Respondent said that the Petitioner was not serious about achieving settlement and that the Petitioner’s request for “all records and books” of the Company was a fishing expedition that was not made in good faith nor for a proper purpose.  In the 2^nd affidavit of Brown, references were made to the history of hostility between the parties and the previous conduct of Lehman and Karolina, which are also issues in dispute in the petition and the cross-petition.  The Respondent further said that the vast majority of the information sought had already been disclosed to the Petitioner in a defamation action brought by Brown and others against Lehman, including the audited accounts of the Company.  The Petitioner’s response is that it is necessary to look at the underlying financial documents in order to ascertain the liability of the parties and to serve as a starting point in settlement negotiations.

27.The Deputy Judge was of the view that the Petitioner had failed to show that the application was made in good faith or that it was made for a proper purpose.  He therefore dismissed the application.

The Petitioner’s grounds of appeal

28.In the Notice of Appeal, the Petitioner raised a number of grounds.  They are:

(1)  While the Deputy Judge was correct in accepting that the requirements under s.152FA(3)(a) and (b) constitute one composite consideration, he incorrectly held that an applicant could prove his application was made for a proper purpose without establishing good faith (Ground 1).

(2)  The Deputy Judge was wrong to hold that the Petitioner failed to show a proper purpose for the application when he is a long-standing 50% shareholder who intends to carry out the inspection to protect his interest and to assess the fair value of his shareholding (Grounds 2 and 3).      

(3)  The Deputy Judge erred in:

(a)  Taking into account an irrelevant consideration, namely, the Petitioner previously through Million Strong had enjoyed the rights of access to the records of the Company available to a director but had chosen not to exercise those rights (Ground 4);

(b)  Concluding that the application was made for the purpose of causing disruption to the Company, the fact that the Petitioner did not attempt to narrow down its request for inspection was consistent with the application being a fishing expedition, and that the undertakings offered by the Petitioner in respect of the use of the documents was insufficient to demonstrate that the application was made in good faith (Grounds 5, 6 and 7);

(c)  Concluding that it was sufficient for the purpose of the valuation exercise for the Petitioner to be provided with the audited accounts of the Company and failing to have regard to the Petitioner’s allegation of shadow dividend (Grounds 8 and 9); and

(d)   Not giving effect to the objectives of the Civil Justice Reform when the application if allowed would have enhanced cost-effectiveness, promoted procedural economy and facilitated settlement of disputes (Ground 10).    

29.The thrust of the Petitioner’s intended appeal is twofold.  The first is that the Petitioner, being a substantial 50% shareholder, is entitled to inspect the records of the Company, but it has been denied of the right for no good reason or explanation.  Secondly, the two bases upon which inspection is sought (see paragraph 25 above) have satisfied the requirements of good faith and proper purpose.  The Respondent had made allegation of bad faith against the Petitioner, which the Deputy Judge failed to adjudicate upon.

Section 152FA of Companies Ordinance

30.The Petitioner’s application was made under s. 152FA of the Companies Ordinance, which provides as follows:

“152FA. Inspection of Specified Corporations’

Records by Members

(1) Subject to sections 152FD and 152FE, on application by such number of members of a specified corporation as is specified in subsection (2) (in this section referred to as “applicant”), the court may make an order—

(a) authorizing the applicant or any one or more of such members applying as applicant to inspect any records of the specified corporation; or

(b) authorizing a person (whether or not a member of the specified corporation) other than the applicant to inspect any such records on behalf of the applicant.

(2) For the purposes of subsection (1), an application may be made by—

(a) any number of members representing not less than one-fortieth of the total voting rights of all members having at the date of the application a right to vote at a general meeting of the specified corporation;

(b) any number of members holding shares in the specified corporation on which there has been paid up an aggregate sum of not less than $100000; or

(c) not less than 5 members.

(3) The court may only make an order under subsection (1) if it is satisfied that—

(a) the application is made in good faith; and

(b) the inspection applied for is for a proper purpose.

(4) Any person who is authorized by the court to inspect the records of a specified corporation may make copies of the records unless the court orders otherwise.

(5) A person who complies with an order made under this section or section 152FB to produce records for inspection shall not be liable for any civil liability or claim whatever to any person by reason only of that compliance.”

31.S.152FA is modelled on s.247A of the Australian Corporations Act 2001, which has an American origin.  A useful summary of the principles relevant to an application under the section is given by Debelle J in Acehill Investments Pty Ltd v. Incitec [2002] SASC 344 at para.29, referred to by Commissioner Siopis SC in Lau Chak Chuen v. Laredo Pty Ltd [2005] WASC 58 at para.59 as follows:

"1. The requirement that the applicant is acting in good faith and that the inspection is to be made for a proper purpose expresses a composite notion and the court will determine whether each has been demonstrated by applying an objective test: Barrack Mines Ltd v Grants Patch Mining Ltd [1988] 1 Qd R 606; Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Ltd (1989) 7 ACLC 536 at 540-541.

2. The onus is on the applicant to demonstrate that he is acting in good faith and that the inspection is for a proper purpose: Intercapital Holdings Ltd v M E H Ltd (1988) 6 ACLC 1068 at 1074.

3. The section operates where the applicant seeks to protect some specific or personal right by the making of the order. Examples are where a shareholder contemplates proceedings under s 233 of the Corporations Act (the statutory successor of s 320 of the Companies Code); Re Augold NL[1987] 2Qd R 297 at 308-309; Re Humes Ltd [1987] VicRp 43; (1987) 5 ACLC 64 at 68-69; Grants Patch Mining at 107; or where a shareholder reasonably takes the view that a transaction could adversely affect his investment and he seeks to investigate the transaction for the purpose of determining what action he should take: Intercapital Holdings at 1074-1075; or where a shareholder seeks to ascertain facts for the purpose of considering a takeover offer: Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Ltd at 539. Other examples are provided in a number of the cases listed in the appendix.

4. If the applicant's primary or dominant purpose is a proper purpose, it is not to the point that an inspection may be of benefit to the applicant for some other purpose: Re Humes Ltd at 70; Grants Patch Mining at 109-110; Cescastle Pty Ltd v Renak Holdings Ltd (1991) 9 ACLC 1333 at 1335.

5. The rights provided by s 247A should not be regarded as affecting the basic rule of company law that a shareholder should not ordinarily have recourse to the courts to challenge a managerial decision made by or with the approval of the directors: Re Humes Ltd at 68-69; Grants Patch Mining Ltd at 614.

6. Since every shareholder has a right to apply under the section for an inspection order, it is no answer to an application that, if an order is made, the applicant may acquire information not available to other shareholders and thereby be in a more advantageous position than those shareholders: Re Humes Ltd at 70; Grants Patch Mining at 615.

7. Applicants do not necessarily lack a proper purpose merely because

(a) they are hostile to other directors; or

(b) they will, after inspection, have more information than other members: Re Humes Ltd at 70.

8. The procedure under s 247A is not intended to be a process as wide-ranging as the process of discovery of documents so that, as a general rule, inspection will be confined to, say, the results of decisions of directors rather than all the documents such as board papers leading to decisions: Re Claremont Petroleum NL (No 2) [1990] 2 Qd R 310 at 314. I emphasize that this is a general rule. There may be occasions where it is proper to admit inspection of board papers. I examine this question in a moment.

9. Even where an applicant is acting bona fide and has shown a proper purpose, the court has a discretion whether to order inspection: Re Humes Ltd at 70."

Discussions

32.The starting point, and an important plank, of the Petitioner’s arguments is that as a 50% shareholder, it has an entitlement to inspect the records, books and papers of the Company.  It is said that s.152FA permits substantial shareholders to have access to company records, books and papers unless they are shown to be of bad faith or to have improper purpose.  We do not accept this reflects the law.

33.Under s.152FA, a 50% shareholder does not prima facie enjoy a right of inspection.  He is required to make an application and to satisfy the court that he is acting in good faith and the inspection is for a proper purpose.  There is no presumption in favour of a substantial shareholder of an entitlement to inspect.  Neither is the opponent under a duty to prove that the application for inspection is made in bad faith or for improper purpose.  The burden is on the applying member to demonstrate that his application is made in good faith and for proper purpose.  It is only when he has discharged the burden that an order for inspection may be granted.

34.We accept that s.157FA expresses a composite notion so that the inspection is to be made in good faith and for a proper purpose.  This does not however mean that if a proper purpose is proved, a case of good faith shall follow or is to be assumed.  The position is explained by Brooking J in Knightswood Nominees Pty Ltd v. Sherwin Pastoral Co Ltd [1989] 15 ACLR 151 at 156:

“The language actually used in [s.265B(1)(b)][1] does suggest that there are two distinct matters to be considered: the court must be satisfied that the member is acting in good faith and that the inspection is to be made for a proper purpose. No doubt he purpose set up by an applicant must be a genuine, not a pretended purpose, quite apart from the express mention of good faith. Once it is accepted that one can up to a point go on asking “Why do you want to do that?” in ascertaining purpose, I do find it hard to see how anything that could be investigated in relation to good faith could not also be investigated in relation to proper purpose. I am disposed to think that, notwithstanding the way in which para (b) of s.265B(1) is constructed, all that the reference to good faith does is to remind us, first, that the proper purpose set up must not be a mere pretence, and, secondly, that in considering purpose it will be necessary to go beyond the mere desire to obtain information by the inspection of books and ask what the applicant wishes to achieve as a result. Putting the matter another way, I am disposed to think that the section requires the court to be satisfied that the applicant is acting, or that the inspection is to be made (there is no distinction here), ‘in good faith for a proper purpose’ and that this expression is a composite one.”

Brooking J went on to point out that what is capable of being regarded as a proper purpose “must be affected by the consideration that the right to apply for an order is given only to members of the company”, agreeing with the position in the United States that a proper purpose “must be a purpose ‘germane to his status as a stockholder’, or ‘reasonably related to the interest of such person as a member or stockholder’, or ‘reasonably related to the status of a stockholder”.               

35.An applicant must therefore show that his application is made not out of a mere desire to obtain information, that the purpose of the inspection must be to assist him in his capacity as a member, and importantly for the present discussion, that the proper purpose set up must be genuine and not a pretence.

36.In our view, the Deputy Judge is correct in taking the view that the assertion of a proper purpose and good faith must be tested against the proper context of the application.  He considered it relevant to have regard to the fact that the Petitioner’s nominee, Million Strong, as a director had the rights of access to the books and records of the Company, but did not exercise such rights.  He also took into account the fact that Million Strong had, until the relationship between the Petitioner and the Respondent turned sour, signed the financial statements of the Company.  We do not agree with Mr Barlow SC that these are irrelevant considerations.   

37.We turn to consider the two purposes put forward by the Petitioner. The first purpose is to enable it to value its 50% shareholding in the Company so as to explore the possibility of settlement. Mr Barlow SC relied on O’Neill v. Phillips [1999] 1 WLR 1092, 1107H and Re Prudential Enterprises Ltd (2000) 5 HKCFAR 375, para.8 and argued that the Petitioner should have the same right of access to information about the Company that bears upon the value of the shares.

38.On this first purpose, the Deputy Judge said (paras.76 to 81 of the Judgment):

“76.   On its own, this might appear to be a point of some force. However, I reject any suggestion that the only way that the petitioner can begin a valuation exercise is by having inspection to the totality of the materials ever generated by the Company. There are audited accounts, and they can be reviewed for the purposes of the consideration of value. In this context, I note that, in the requests for documents made in correspondence, the petitioner itself emphasized that the information was “routine and standard ... when conducting an audit for the purpose of verifying the accuracy and completeness of financial information”. One would expect, therefore, for that material already to have been considered for audit purposes.

77.  Further, the criticisms levelled against the cross-petitioner essentially relate to the allegations of shadow dividends arising from the suggested unreasonably high level of remuneration paid to Brown and other members of management. Those matters probably do not significantly affect valuation of a business providing accounting services, the real value of which lies not in any capital base but in the staff abilities and contacts.

78.  (Incidentally, it might be noted that Lehman's and the petitioner's complaints do not suggest that there should be greater capital in the company than there is presently; their complaint is that payments made from the Company ought to have been made not just to Brown and his ‘side’, but equally to the petitioner.)

79.  Further, I accept Mr Manzoni's submission that the relevant valuation process will essentially be forward-looking, rather than requiring any trawl through historical documents generated by the Company over the last 10 years.

80.  I recognise that the petitioner does not necessarily accept the evidential value of the audited accounts, and Mr Barlow made repeated reference to the fact that the accounts had been audited by a small, not well-known firm. But the accounts are audited (see point made above), and they clearly provide a proper starting point for a valuation process of a company providing professional services.

81.  Further, Brown and the cross-petitioner have also provided various schedules of information relating to remuneration in response to enquiries made by the petitioner through its solicitors. Of course, I also note that those schedules (unfairly, in my view, derided as "home-made") are also not necessarily accepted by the petitioner. But I do not accept there is any positive evidence that the remuneration packages are other than has been disclosed to the auditors, and indeed to another accountant who has provided a valuation report for the purposes of the defamation proceedings. In any event, whether or not the remuneration was "excessive" is not a matter that would have concerned the auditors, but remains an argument open to the petitioner supported by whatever comparative evidence it might seek to adduce.”

The Deputy Judge did not accept that the stated desire to obtain some valuation of the shareholding for the purposes of settlement discussions has been demonstrated to be a primary or dominant purpose of the intended inspection.          

39.We are unable to agree with the criticisms made of the Deputy Judge’s reasoning and conclusion.  We note that the scope of the documents covered by the intended inspection is wide-ranging and does not have any temporal restriction.  It essentially seeks to inspect all of the Company’s documents.  It is difficult to accept that such an extensive inspection is needed for the Petitioner to know the value of its shareholding and to make a reasonable settlement offer.  We also note that quite a number of the documents sought to be inspected had already been provided to the Petitioner, including audited financial statements of the Company.  Mr Beresford in his submissions referred to the expert report made by Mr Simon Blade, a chartered accountant, in the defamation proceedings.  The report, which included a financial overview of the Company, was for the purpose of assessing the decrease in value of the Respondent’s 50% shareholding in the Company as a result of Lehman’s defamatory statements.  The Petitioner has not explained why, and in what way, are the documents that had been disclosed insufficient for the purpose of knowing the value of its shareholding and for embarking on settlement discussions.  There is no evidence to show that the audited accounts are inaccurate or incorrect. Nor is there evidence to cast doubt on the manner in which the auditor carried out his duties.

40.The Petitioner relied on O’ Neill v. Phillips and Re Prudential Enterprises Ltd and argued that the shareholders should have equality of arms in terms of access to company’s records and books, as justifying the application for inspection.  It is important to understand that the discussion on equality of arms arose in the context of considering whether a s.168A petition should be dismissed on the basis that there was an offer to buy the minority shareholder’s shares.  Equality of arms between the parties was considered by the House of Lords and our Court of Final Appeal to be relevant to whether the offer, or the refusal to accept the offer, is reasonable.

41.Mr Barlow SC made a further point that the Petitioner was entitled to access the Company’s primary records and books and not to rely upon secondary materials which have been prepared or selected or managed by the management of the Company.  He cited United Rural v. Lopmand (2003) 45 ACSR 417 para. 8 as illustrating that the court would not confine the parties’ valuation exercises to reliance on the audited accounts.  However, we are not at the stage of having to conduct a valuation of the shares.  As and when the petition and cross-petition have been heard and an order for buy-out is made, there will be directions setting the parameters of the valuation exercise as well as providing for discovery of documents relevant to the valuation of shares.  That will be the occasion to consider issues of equality of arms and access to primary documents.  It is important to recognise the distinction between an inspection under s.152FA and discovery in civil litigation.  Inspection under s.152FA has to be for a purpose germane to an applicant’s status as a member.  The procedure is not a form of, and should not be used as a substitute for, discovery or inspection after discovery by list or affidavit.                                   

42.As to the second purpose put forward by the Petitioner, it is that there is a need to investigate suspected misapplications of the Company’s funds and assets by Brown and Zhou so as to protect the Petitioner’s interest in the Company. The Petitioner complained there has been wrongful suppression of primary accounting records and related financial information, concealment of the excessive remuneration packages and also management misconduct in relation to the Company’s assets.  Specifically, it was pointed out that there were no written employment contracts and no board resolution to approve the remunerations of Brown and Zhou.     

43.In Knightswood Nominees Pty Ltd v. Sherwin Pastoral Co Ltd, supra, Brooking J pointed out that where inspection is sought on the basis of suspected wrongful conduct, as is the case here, there must be proper evidence to support a case for investigation (at p.157):

"In the MEH case, and in my reasons thus far in the present case, reference is made to whether the plaintiff has established a case for investigation without any express explanation of how that question arises, or may arise, on an application under this section. The explanation, obvious enough, is this: an application must show that the inspection is to be made for a proper purpose. Often the applicant's case will be that he wishes to inspect the books because something wrongful or untoward has occurred or is going to occur in relation to the company's affairs, or because he believes that there has been or will be such an occurrence. As part of his proof in establishing a proper purpose the applicant seeks to show that there is at least a case for investigation as regards past or future wrongful or other undesirable conduct. If he is unable to show that he has some reasonable grounds for believing that misconduct or maladministration (or whatever else is suggested) has taken place, or is going to take place, he may well fail to establish the prerequisite to the making of an order, namely, that he is acting in good faith and that the inspection is to be made for a proper purpose. And even if he establishes the prerequisites, the court may, as a matter of discretion, consider that not enough is shown to warrant its intervention, there not being sufficient prospect that anything useful will come out of the proposed inspection. The American cases show, as one would expect, that the shareholder may fail to obtain inspection where he fails to make out on his own material some kind of case for investigation, or where the corporation is able by leading evidence to dispel whatever suspicion has reasonably been aroused: 15 ALR 2^nd Series, 16-49."

44.Mr Beresford submitted, and we agree, that there is no proper evidence to support a case for investigation.  The Company’s books and financial statements had been subject to annual audit.  There is no suggestion, let alone evidence, that the accounts do not represent a true and fair view of the Company’s financial position.  As to the remunerations of Brown and Zhou, there is again no evidence to suggest that the remuneration packages and the payments to Brown and Zhou had been concealed and had not been disclosed to the auditor or to Mr Blade in connection with his preparation of the expert report (see para. 38 above).  The argument that because the Respondent had declined the Petitioner’s request to inspect the Company’s records and books, it demonstrates that the Respondent has something to hide and that an investigation is warranted, is a circular one.

45.In connection with this argument, the Deputy Judge referred to several matters raised by the Respondent in answer to why the Petitioner’s request to inspect had to be declined.  They include: the Petitioner is acting to cause disruption to the Company, Lehman runs a business in competition and the Petitioner is fishing for information to be added to the complaints that he is already pursuing.  The Deputy Judge went on to say (at para.66 of Judgment):

“I do not think I need to decide once and for all the merit in these answers, not least as some of the points are issues to be resolved at the trial of the petitions. I have well in mind Mr Barlow's reminder that the cross-petitioner should not be able to justify its stance by any "bootstrap" repetition of its allegations which will only be determined in any trial of these proceedings.”

46.Mr Barlow SC is critical of this part of the Judgment. He contended that the answers provided by the Respondent were allegations of bad faith and improper purpose against the Petitioner.  As these were serious allegations, the Deputy Judge should have decided on them, but he expressly refrained from so doing.  This, counsel said, amounted to an abdication of the Judge’s duty to adjudicate.

47.We have no hesitation in rejecting this submission. What the Deputy Judge said in para. 66 of the Judgment is that he would not decide on the merits of the matters raised by the Petitioner “once and for all” because they are also issues to be resolved at the trial.  This might be right given that he was dealing with an interlocutory application.  It was only necessary for him to form a tentative view of the merits of the points raised by the Respondent.  This was what the Deputy Judge did in the paragraphs that followed.  Having considered the matters raised by the Respondent, the Deputy Judge then returned to rule and make findings on the core issue in the application, namely, whether the requirements as to good faith and proper purpose had been met.  He concluded that the Petitioner had failed to satisfy the requirements.  In our view, the Judge’s approach cannot be flawed.             

48.Mr Barlow SC referred to Nina Kung v. Wong Din Shin (2005) 8 HKCFAR 387, 441I-443F and contended that as with other serious allegations, such as fraud, dishonesty or serious misconduct, there must be sufficient ascertained primary facts to support a clear inference of a finding of bad faith or absence of good faith.  He criticised the Deputy Judge for making no finding of primary facts and drawing no inferences.  This line of argument is, with respect, misplaced.  As noted above, the Deputy Judge is right in taking the stance that he should not make conclusions on the factual issues since they are also trial issues.  What he had refrained from deciding are the issues that arose out of the petition and cross-petition. That notwithstanding, he did indicate his tentative views when he said, for example, that the allegation of a desire by Lehman to cause disruption to the Company is “consistent with” the scope and breadth of material sought to be inspected, the allegation of Lehman running a competing business has “some support” and the allegation of “fishing expedition” is “consistent with” the chronology of the application (paras.68, 69 and 71 of the Judgment).          

Conclusion

49.In short, we are of the view that the Petitioner does not enjoy a reasonable prospect of successfully appealing against the Deputy Judge’s conclusion that it has failed to show that the application is made in good faith and the inspection is sought for a proper purpose and the dismissal of the application.

50.In the circumstances, we dismiss the application for leave to appeal out of time.  There is also an order nisi that the Petitioner pays the Respondent the costs of the proceedings in this court.                        

MrBarrie Barlow SC and Mr Anson Wong instructed by Messrs Chiu, Szeto & Cheng for the Petitioner in HCCW377/2010 & 2^nd Respondent in HCCW383/2010 (Appellant).

Mr Roger Beresford instructed by Messrs Reed Smith Richards Butler for the 1^st Respondent in HCCW377/2010 & Petitioner in HCCW383/2010 (Respondent).