Choi Chi Wai v. Hong Kong Agriculture Special Zone Ltd and Others

HCMP 53/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 53 OF 2011

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J U D G M E N T

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1.This is an application for inspection of documents of a company pursuant to sections 152FA and 152FB of the Companies Ordinance, Cap. 32. The applicant, the 2nd and 3rd respondents are the equal shareholders of 1st respondent. The 1st respondent is one of three Hong Kong companies that are licensed to import live pigs from the mainland into Hong Kong.

2.The applicant took out this application to inspect the books and papers of the 1st respondent because of his belief that the 2nd and 3rd respondents have mismanaged the 1st respondent to his prejudice.  He harbours this belief mainly because of the substantial expenditures incurred by the 1st respondent as shown in its audited financial statements which expenditures he regarded unreasonable.  He wants to look into the engagement by the 1st respondent of one Hong Kong Agriculture Special Zone Management Limited (“Agricultural Management”) which occasioned the sharing of 2/9ths of the 1st respondent’s income and resulted in bad debts of at HK$1,912,938.  He wants to consider whether he should exercise certain rights as a shareholder of the 1st respondent and assess the value of his shares therein.  He has also filed a petition on 14 April 2012 against the 1st, 2nd and 3rd respondents for relief under section 168A of the Company Ordinance.

Background

3.The applicant used to manage the 1st respondent on his own from the commencement of business on 28 November 2007 to 30 April 2008.  He said he did this by agreement with the 2nd and 3rd respondents, but the 2nd and 3rd respondents disputed that.

4.The applicant has also kept the operation profits of the 1st respondent up to 31 December 2007.  There is again a dispute on his entitlement to these profits.  The applicant was removed as a director of the 1st respondent on 8 March 2008 which was then operated by the 2nd and 3rd respondents being the remaining directors and to the exclusion of the applicant. 

5.The 1st respondent’s operation was set up by the applicant as he managed the 1st respondent’s business on his own at the start of the 1st respondent’s business.  According to his supporting affirmation, the first thing he did was to look for pig farmers in the southern provinces of the mainland who were willing to sell their pigs in Hong Kong.  He then advised the Ministry of Commerce in the mainland and the Agriculture & Fisheries and Conservation Department in Hong Kong on the progress of setting up and commencement of the 1st respondent’s business.  He then engaged a logistics contractor to transport the pigs from the quarantine checkpoint in Shenzhen to the Sheung Shui Abattoir.  He also contracted with an auction agent to auction the pigs at the abattoir for the 1st respondent.

6.Once the suppliers of pigs, the logistics contractor and the auction agent were lined up and the operation started, the business of the 1st respondent can be carried on smoothly.  The daily tasks are to communicate with the mainland suppliers to ascertain the number of pigs to be imported into Hong Kong on the next day and then relay the information to the logistics contractor and the auction agent. 

7.The operation appeared lucrative.  The 1st respondent would receive a percentage of the sale price as commission for importing and selling the pigs.  This commission was fixed at 12% at the beginning but was lowered to 7% at sometime in 2008.  The remuneration of the auction agent was fixed at 2.5% of the sale price.  Such remuneration is paid out of the sum due from the agent to the 1st respondent.  Hence, when the 1st respondent was obtaining a commission at 12%, it actually received 9.5% after 2.5% was taken by the agent.  When the percentage for the 1st respondent was lowered to 7%, it received 4.5%. 

8.In addition, the 1st respondent has to pay the agent HK$10 per pig for labour costs.  Apart from paying the auction agent, the 1st respondent also has to pay the logistics contractor in terms of the number of truck loads of pigs delivered.  The 1st respondent also has to engage its own staff to discharge the daily tasks. 

9.When the applicant was running the business, the 1st respondent employed his wife, daughter and brother-in-law.  For the 3-month period from January to March 2008, they were paid salaries totalling HK$114,000.

The financial statements as at 31 March 2008 and the applicant’s query

10.When the applicant was running the business from 28 November 2007 to 31 March 2008.  He produced a total commission income at HK$13,384,309 or an average of HK$3,346,077 per month.  The rate of commission was then at 12%.  The administration expenses for the period were HK$4,798,475.  After provision for taxation, the profit for the period was at HK$7,083,314. 

11.However, I should point out that these figures are taken from the audited financial statements of the 1st respondent for the period from its incorporation to 31 March 2008, but the auditors have declined to opine whether these financial statements gave a true and fair view of the affairs of the 1st respondent or its profit and cash flow.  They did so on the ground that the 1st respondent had not maintained a proper set of books and records. 

12.Regarding the administration expenses of $4,798,475, it was made up of:

Directors’ emoluments	$910,000
Staff salaries	$1,235,000
Audit fees	$25,000
Unexplained	$2,628,475
Total:	$4,798,475

13.The applicant by a letter of his solicitors dated 7 December 2009 asked the 2nd and 3rd respondents, as directors of the 1st respondent, to explain various matters including why were there these expenses, why were there such high directors emoluments and staff salaries and who were the staff employed by the 1st respondent.

14.The 2nd respondent on behalf of the 1st respondent purportedly replied to the applicant’s solicitors by a letter dated 27 January 2010, but gave no answer whatsoever to the above-mentioned queries.

15.Subject to the auditors’ disclaimer and the unexplained expenses, these financial statements do show a lucrative operation. 

The financial statements as at 31 March 2009 and the applicant’s query

16.The financial statements for the next period of 1 April 2008 to 31 March 2009 however showed a much less lucrative operation.  The 1st respondent’s commission rate was at 7%.  The net commission less the 2.5% to the auction agent at 2.5% was 4.5% which was slightly less than half of previous net commission of 9.5%. If the number of pigs sold was the same as before, the turnover would be slightly less than half of that for the previous period. 

17.The turnover for this period was at HK$9,221,028, but the administration expenses were at HK$8,430,523.  After provision for taxation, the profit was at HK$835,732. 

18.If the commission were at the old rate, the turnover would have been at HK$19,470,000.  Applying the ratio of turnover to administration expenses for the previous period to this supposed turnover, the administration expenses would have been at around HK$7,000,000.  This estimate of expenses may be on the high side as it ignores the fact that there may be some fixed expenses which would not increase in line with the increase in turnover.  However, the actual administration expenses for this year were at HK$8,430,523 or HK$1,400,000 above the estimate. 

19.One of the reasons for the reduction of net profits could be because of the engagement by the 1st respondent as from 1 May 2008 Agricultural Management as its agent.  Agricultural Management was to undertake on behalf of the 1st respondent all the tasks in relation to the importing and sale in Hong Kong of the live pigs (see Exhibit CCW-48 to CCW-50).

20.The auction agent was advised by the 1st respondent of the engagement of the Agricultural Management and instructed to pay all net proceeds of auction sale of pigs to it.  The logistics contractor was also advised to invoice all its charges to Agricultural Management. 

21.The consideration for Agricultural Management in acting for the 1st respondent was 2/9ths of the commission earned by the 1st respondent. That means 1.55% of the sale price.  The payment to Agricultural Management and the auction agent would thus take up 4.05% of the sale price leaving 2.95% to the 1st respondent.  The 1st respondent would still have to pay HK$10 per pig labour charge, the costs of the logistics contractor, staff salaries and other administration costs. 

22.However, with the engagement of Agricultural Management to take up all tasks in the 1st respondent’s daily tasks, it is not known what was left to be done by the 1st respondent’s own staff or whether it was necessary for the 1st respondent to keep its own staff.  Nevertheless, the financial statements for the year ending 31 March 2009 showed staff costs at HK$1,619,000.

23.By reason of the 1st respondent’s instructions referred to above, the auction agent should have paid to Agricultural Management all the net proceeds of sale due to the 1st respondent.  The financial statements for the year ending 31 March 2010 showed a provision for impairment loss of receivables at HK$1,303,250 due from Agricultural Management as at 31 March 2009.  Since Agricultural Management was still in the engagement of the 1st respondent after 31 March 2009, it is not easy to understand why a provision had to be made for such loss as at 31 March 2009.  In fact, the financial statements for the year ended 31 March 2010 showed a further provision for HK$609,689 making a total provision for loss due to irrecoverable receivable from Agricultural Management at HK$1,912,938.

24.I have referred to a letter dated 7 December 2009 from the applicant’s solicitors which queried the administration expenses of the 1st respondent for the period ended 31 March 2008.  This letter was issued after the applicant’s receipt of the financial statements for the year ended 31 March 2009 and it also contained queries for these statements.  The 2nd respondent by a letter dated 27 January 2010 purportedly replied to these queries.

25.The applicant queried, among other matters, why there were substantial amounts of directors’ emoluments, staff salaries and audit fees at HK$1,560,000, HK$1,619,000 and HK$70,000 respectively and why was there the provision for bad debt at HK$1,303,250 due from Agricultural Management.  The applicant also asked for the reason to engage Agricultural Management.

26.The 2nd respondent in his reply only asserted that the expenses and provision for bad debt were produced under the 1st respondent’s normal operation and that the board had exercised tight control over the expenditures.

27.Regarding the engagement of Agricultural Management, the 2nd respondent said when he and the 3rd respondent took over the business from the applicant from 8 March 2008 onwards, the aspects of operation whether in logistics, market management or financial management were all in chaos.  The 1st respondent had no independent office or books of account.  Some 500 odd manifests had not been submitted to the Customs and Excise Department which resulted in a total fine of about HK$110,000.  They therefore had to organise the company from afresh.  However, the daily operation had to continue.  It was difficult to employ professional market management personnel and the 2nd and 3rd respondents were busy to extend the outside market.  Therefore, the market management operation was sub-contracted to Agricultural Management. 

28.I note that the 2nd respondent’s reasons for engaging Agricultural Management are all very general.  There is no particular on what the 2nd and 3rd respondents had done and how many employees had been employed and to do what.  The applicant had only operated the 1st respondent for about 5 months.  Any difficulty he created in the running of the business should have been put right by the 2nd and 3rd respondents in a few months after they had taken over the business.  However, they arranged the 1st respondent to engage Agricultural Management for about 2 years and that left an unexplained bad debt of HK$1,912,938 due from Agricultural Management. The general explanation given by the 2nd respondent for engaging Agricultural Management therefore does not appear reasonable.

29.The applicant also said in his letter that the income, expenditure, profit and loss statement did not have details and he could not tell if the other expenditures were reasonable.  He also by a letter dated 23 January 2010 asked for a detailed profit and loss account.  But his request was not entertained.

30.The applicant also raised the issue of the provisions for bad debt for the receivables from Agricultural Management in his affirmation in support of this application.  The 3rd respondent made two affirmations in opposition.  But he merely said that these provisions had been audited by the auditors and harboured no ambiguity.  He refused to give a word of explanation on why the provisions had to be made or whether any and if so what attempt had been made for recovery of the receivables before the provisions were made in these 2 years.

The financial statements as at 31 March 2010 and the applicant’s query

31.The financial statements for the year ending 31 March 2010 were signed off by the 2nd respondent as chairman on 3 November 2010.  They showed a turnover of HK$242,701,461 based not on commission income but on the invoiced value of the pigs sold.  After deducting the HK$233,406,353 paid to the pig farmers, the gross commission earning was at HK$9,295,108.  That was 3.82% of the turnover of the year.  That sum was slightly more than the HK$9,221,028 earned in the previous year. 

32.However, the administration expenses, which were broken down to selling and distribution expenses (HK$7,704,265), administration expenses (HK$2,785,332) and provision for impairment of debt (HK$3,206,723), totalled HK$13,696,321.  That exceeded the expenses for the previous year by more than HK$5,000,000.  The overall operation for the year produced a net loss of HK$3,556,355.

33.The applicant again sent a letter dated 7 December 2010 making enquiry on these statements.  He queried why the 1st respondent had to pay staff salaries totalling HK$1,780,887 when the tasks of the 1st respondent’s operation had been sub-contracted to Agricultural Management.  He queried the directors’ emolument and audit fees which remained at HK$1,560,000 and HK$70,000 respectively.  He also queried the provision for impairment at HK$3,206,723 which included the HK$609,689 provision for the receivables from Agricultural Management for that year.  He also queried why the performance of the 1st respondent had deteriorated since 2008 culminating in substantial loss in the latest year.

34.The 2nd respondent replied by letter dated 18 February 2011.  In relation to staff salaries, he only said that they included salaries to the staff and the directors and all salaries and fees were in line with market standard.  But he did not explain why the 1st respondent had to pay out such salaries when it had sub-contracted all business tasks to Agricultural Management.

35.Regarding the provision for impairment at HK$3,206,723, the 2nd respondent said that was made up of HK$609,689 due from Agricultural Management and HK$2,597,034 due from the applicant.  The latter sum is disputed by the applicant who said that he was entitled to this sum which he generated from 28 November to 31 December 2007.

36.The 2nd respondent further said in his letter of reply that the 1st respondent was trying to recover the sums by process of law.  But that never happened at least in relation to what was allegedly due from the applicant.

37.Regarding the loss suffered by the 1st respondent, the explanation by the 2nd respondent was that about 3/4ths of that was owing to the provision for impairment or bad debts.  He also attributed the market competition for the 1st respondent’s deterioration of performance.

38.The applicant’s solicitors asked for inspection of documents under section 152FA of the Ordinance, but to no avail.  The applicant then issued these proceedings on 13 January 2011.

The financial statements as at 31 March 2011

39.The financial statements for the year ended 31 March 2011 were available on 10 November 2011.  The total turnover for the year was at HK$310,189,514.  That was a 27.8% increase from the sum of HK$242,701,461 of the previous year.  The gross commission income was at HK$22,033,615.  That was 7.1% of the total turnover of the year and a 137% increase from the previous year.  The rate of the net income at 7.1% is nearly double of the previous rate of 3.83%.  There was also no provision for impairment or bad debts comparing with a provision of HK$3,206,723 in the previous year.  Despite all these, the net profit after tax for the year was only at HK$994,089 comparing with a loss of HK$3,556,355 in the previous year. 

40.The cause for the low profits appears to be mainly due to the increase in the administration expenses from HK$13,696,321 in the previous year to HK$20,120,093.  That was a 46.9% increase.  Despite the total turnover for the year only increased by 27.8% and there was no provision for bad debts, the expenses for the year increased by a much bigger rate.  The engagement of Agricultural Management also ended in the previous financial year.  As was the case in the previous years, there was also no breakdown for the administration, selling and distribution expenses in these financial statements.

Table of figures for comparison

41.The applicant has prepared a table setting out the key figures in the 4 sets of financial statements for comparison.  I reproduce the table below:

	06/08	08/09	09/10	10/11
TURNOVER	13,384,309	9,221,028	9,295,108*	22,033,615**
ADMINISTRATION EXPENSES
(i) Selling and distribution expenses		2,814,574	7,704,265	17,165,234
(ii) Administration expenses		4,312,700	2,785,332	2,954,858
(iii) Finance cost				142,914
(iv) Provision for impairment loss of debts		1,303,249	3,206,723
ADMINISTRATION EXPENSES (TOTAL)	4,798,475	8,430,523	13,696,321	20,263,008 (including finance costs of HK$142,914)
DIRECTORS’ REMUNERATION	900,000	1,560,000	1,560,000	1,560,000
PROFIT AFTER TAX	7,083,314	835,732	-3,556,355	994,098

Section 152FA of the Companies Ordinance, Cap. 32

42.Section 152FA of the Companies Ordinance, Cap. 32 in so far as it is relevant to this matter provides:

“(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;
...

(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.”

43.This section was enacted by Companies (Amendment) Ordinance 2004.  It has been considered by Deputy Judge Coleman SC in Re LehmanBrown Ltd [2011] 4 HKLRD 237 and Harris J in Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241.

“Good faith” and “proper purpose”

44.Regarding whether “good faith” in sub-section (3)(a) and “proper purpose” in sub-section (3)(b) create one requirement or separate requirements, Brooking J in Knightwood Nominees Pty Ltd v Sherwin Pastoral Co Ltd (1989) 15 ACLR 151 at 156 took the view that the reference to good faith colours and reinforces the requirement of proper purpose.  He concluded that acting in good faith and inspection for a proper purpose means acting and inspecting for a bona fide purpose. 

45.Deputy Judge Coleman SC took a different view. He said in para 33 of LehmanBrown:

“33. I accept that I am required to treat the two parts of s. 152FA(3) as in reality a composite expression. But I do not think that that is equivalent to saying that once one has proved a proper purpose, good faith has also been established; that would be to break the composite expression back into its component parts and then to ignore one of them.”

46.Harris J agreed with Deputy Judge Coleman SC (Wong Kar Gee Mimi at paras 11 to 13).  Harris J also said in para 14:

“14. I agree with Deputy Judge Coleman SC that Brooking J’s view is unsustainable and that the ‘good faith’ and ‘proper purpose’ requirements constitute two separate and independent tests. To be sure, there are numerous instances in which the requirement of good faith ‘colours and reinforces’ the requirement of a proper purpose. Indeed, in a great deal of cases, where a member is acting for an improper purpose, it logically follows that he is not acting in good faith. The scenarios referred to by Brooking J, such as a member who seeks inspection but is motivated by harassment or blackmail, exemplify this. But that is not the same as saying that just because a member is acting in good faith, he necessarily has a proper purpose for seeking the inspection. In this regard, it appears to me that the two tests under section 152FA(3), to some extent, lay down a subjective and objective test: the applicant must first establish that he believes his purpose in applying for an inspection order is proper (i.e. that he is acting in good faith) and secondly, the Court must believe the circumstances are such that the inspection applied for is for a proper purpose.”

47.Deputy Judge Coleman SC further said in paras 36 to 38 of LehmanBrown, that the grant of any rights of inspection under this section is likely to be very much the exception than the norm.  An order would ordinarily only be made where the applicant had some specific and/or personal right which could only be protected by the making of such an order. If the applicant could obtain discovery in ongoing litigation or had failed to utilize other options or remedies that were open to him to protect his specific and/or personal rights, then it will unlikely be said that an order under this section is the only means of protection of such rights.

48.However, Harris J took a broader view of the applicability of the section.  He referred in para 17 of Wong Kar Gee Mimi to Unity APA v Humes (No 2) [1987] VR 474 at 477 and 18A American Jurisprudence 2d 2004 para 289, which stated the basis of a member’s right to inspect the documents of a company on his proprietary interest in the company.  The learned Judge further said in paras 18, 24 and 25:

“18. Although a member does not have a proprietary interest in the assets of a company, he has a very real economic interest in the company itself. In my view, he can reasonably expect to be able to protect this interest and s. 152FA facilitates this by providing the member with access to corporate information, which might not otherwise be available to him.

…

24. … In my view, s. 152FA affords shareholders an often overlooked yet powerful right by which to expose wrongful conduct in relation to the company’s affairs. Where the shareholders and directors are at loggerheads, the right of access to corporate information is particularly important: in these circumstances, even if a member suspects that something is amiss, for example an egregious breach of fiduciary duty, he will be unable to protect his economic interest and financial investment within the company (through, for instance, a derivative action) unless he is able to obtain sufficient information.

25. By enacting s. 152FA, the Legislature provided an important new procedure for the protection of shareholder rights and interests and the community’s more general interest in the maintenance of good corporate governance. Section 152FA should therefore be interpreted and applied in a manner consistent with these legislative objectives …”

49.I am inclined to the view of Harris J as that appears to be more in line with the prevailing disposition of the community on corporate governance. 

50.A liberal interpretation and application of the section requires the “purpose” in the section to be interpreted liberally. Harris J said in para 19, 25 and 29 of Wong Kar Gee Mimi:

“19. As to the question of what constitutes a ‘proper purpose’, para. 304 of 18A American Jurisprudence 2d 2004 states this:

‘Since the right of inspection grows out of the stockholder’s relationship to the corporation, and is given to the stockholder for the protection of his or her interests therein, it is generally recognized that the right is properly qualified by the requirement that it be exercised for purposes germane to one’s status as a stockholder. This is the rule both at common law and under most statutes. Stated another way, a proper purpose for a request for corporate information is one that is not harmful to the corporation or its shareholders and can be surmised where the shareholder’s purpose requesting the information bears some reasonable relationship to the interests that the shareholder wants to protect by seeking the inspection’.

…

25. … Given that a member’s status is based entirely on his shareholding in the company, I am inclined to think that where the purpose for seeking an inspection order is founded upon the protection against a change in the value of a member’s shares, that purpose is ‘germane’ to his status as a shareholder and ‘proper’ under s. 152FA. Put another way, where a member seeks to protect his economic interest in the company, this should prima facie satisfy the ‘proper purpose’ requirement.

…

29.   … A member might wish to inspect documents because of a genuine and credible belief that there has been corporate mismanagement which is adversely affecting the economic welfare of the company, or where the member seeks to ascertain the fair market value of his shares. … In my view, if the evidence proved that the concern was bona fide and had a credible foundation, I think a ‘proper purpose’ would be established.”

51.Both Harris J (para 21 of Wong Kar Gee Mimi) and Deputy Judge Coleman SC (para 39 of LehmanBrown) also regarded that once the primary or dominant purpose of the application is proved to be a proper purpose, i.e. a purpose germane to the applicant’s status as a shareholder, then even if the application should also bear a secondary purpose for seeking the inspection, that is irrelevant.  Hostility between the parties, which should not be uncommon in this kind of application, is also irrelevant (para 22 of Wong Kar Gee Mimi and para 35 of LehmanBrown).

Analyses and decision on proper purpose good faith

52.In the present case, the applicant has in December 2009 and December 2010 raised questions on the three sets of accounts of the 1st respondent from its date of incorporation to 31 March 2010.  I have already referred to the applicant’s evidence in some detail above.  I regard the questions raised as reasonable.  I also think that the respondents have not provided satisfactory answers to the applicant’s queries.  The applicant’s request made through his solicitors for inspection of the documents of 1st respondent under section 152FA was also to no avail.  It was against such background that the applicant issued these proceedings on 13 January 2011.  I accept that the applicant honestly believes that his purpose in applying for the inspection order is a proper one.  I therefore regard the application as having been made in good faith.

Analyses and decision on proper purpose

53.Regarding the question of whether the applicant’s purpose of inspection is indeed a proper one.  I accept that he has a genuine concern based on credible reasons that the 1st respondent might have been mismanaged by the 2nd and 3rd respondents.  One of the matters of concern was their engagement of Agricultural Management and the incurring of bad debts due from it. There are also the other unanswered queries raised by the applicant on the account that I have referred to above.

54.The 2nd and 3rd respondents in their affirmations merely said that the applicant’s real purpose in making this application was to interfere with the 1st respondent’s normal operation with a view to resume his illegal control of the 1st respondent and to misappropriate all the interests of the 1st respondent to himself.  However, they did not provide anything further to support this assertion.

55.I also do not think the applicant want to have the inspection order to challenge the decisions of the 2nd and 3rd respondents as directors of the 1st respondent.  Their decision to engage Agricultural Management is also a matter of history as that engagement had ended in 2010.

56.Mr Fung, counsel for the respondents, submitted that the applicant has already filed a petition under section 168A of the Companies Ordinance.  He therefore has no more need to pursue this application to investigate the transactions of the 1st respondent and to determine if he has been thereby prejudiced.  He also does not need this application to determine and decide if he should exercise certain rights as a shareholder of the 1st respondent.  Counsel further echoed the assertions of the 2nd and 3rd respondents that the applicant’s purpose in this application is to harass the 2nd and 3rd respondents with a view to regain control of the 1st respondent.

57.Counsel then referred to other disputes between the parties which have nothing to do with the applicant’s queries raised on the accounts.  Counsel then referred to the accounts of the 1st respondent as having been audited and that the applicant’s queries were not raised by his professional advisers.  Counsel used these as answers to the applicant’s claim for inspection of documents.  Counsel then gave an analysis of the decisions of LehmanBrown and Wong Kar Gee Mimi before repeating that the accounts had been professionally audited.  But all these are not answers to the applicant’s queries and his allegations of mismanagement of the 1st respondent.

58.Having considered the evidence presented by both sides, I am not persuaded that by the submissions of counsel for the respondents. I have accepted that the applicant makes this application out of good faith.  I also accept that the purpose of this application is germane to his status as a shareholder of the 1st respondent as it is to protect the value of his shares. This is so despite his having issued section 168A proceedings.  Those proceedings are for different purposes and the discovery to be made therein are for those purposes which may not produce the same result as the application herein. Discovery in those proceedings also cannot be treated as a substitute of this application.  I therefore accept that the applicant has demonstrated a proper purpose as required by section 152FA.

Scope of inspection

59.Regarding the scope of inspection, Mr Yau has deleted a few items from the schedule to the originating summons.  Mr Fung only made a general attack that the scope of documents required is too broad.  He did not focus his attack on any particular type of documents.  I have considered the items maintained by Mr Yau.  I think these documents may provide the answers or clues to the answers to the applicant’s queries and to show whether the 1st respondent has been mismanaged by 2nd and 3rd respondents.  I also extend the period to the financial year ended on 31 March 2011 for the accounting documents.

Order

60.I therefore order that:

(1)  the 2nd and 3rd respondents do within 21 days from today serve on the applicant’s solicitors an affirmation verifying a list of the documents and records of the 1st respondent that answer the descriptions of documents and records in the schedule hereto.

(2)  the applicant shall, within 21 days upon service of the affirmation and list of documents and records on him, serve on the solicitors of the 2nd and 3rd respondents a notice specifying the documents and records in the list which he would like to have copies and an undertaking to pay the 2nd and 3rd respondents the usual photocopying charges for the same.

(3)  the 2nd and 3rd respondents shall, within 14 days of the receipt of the applicant’s notice and undertaking, provide the applicant with copies of all the documents and records requested for in the notice.

Costs order nisi

61.Regarding costs, I make a costs order nisi that the 2nd and 3rd respondents do pay the applicant the costs of this application.  I only order the 2nd and 3rd respondents to pay the costs as they are the true protagonist’s vis-à-vis the applicant in these proceedings.

Schedule

	Documents	Description	Period
1.0	Board Minutes	All board minutes of the 1st respondent including, without limitation, the board minutes in relation to or in connection with the following matters and affairs: -  all sale and purchase of land properties -  all contracts and agreements with Hop Kee Sam Yick Laan Co., Limited (合記三益生豬欄) -  all contracts and agreements with Sam Ran China-Hong Kong Transportation Limited (三然中港運輸有限公司) -  all contracts and agreements with Hunan New Wellful Co., Limited (湖南新五豐股份有限公司), Guangxi Fungrich Imp. & Exp. Co., Limited (廣西豐潤進出口貿易有限責任公司) and Hubei Provincial Cereals Oils & Foodstuffs I/E (Group) Corporation (湖北省糧油進出口 (集團) 公司) -  all management contracts and agreements with Hong Kong Agriculture Special Zone Management Limited (香港農業專區管理有限公司) -  all loan contracts and agreements with Hong Kong Agriculture Special Zone Management Limited (香港農業專區管理有限公司) -  all bank or other guarantee(s) provided by the 1st respondent -  all guarantee(s) provided by the director(s) of the 1st respondent and all third party guarantee(s) made by the 1st respondent -  remuneration of the director(s) of the 1st respondent -  all loans provided by the 1st respondent to its director(s) -  all matters in relation to the opening and operation of bank accounts of the 1st respondent	From the date of incorporation to date
2.0	Business Contracts
2.1	Auction Agency Contracts	All contracts made and entered into with Hop Kee Sam Yick Laan Co., Limited (合記三益生豬欄)	From the date of incorporation to date
2.2	Live Pigs Transportation Contracts	All contracts made and entered into with Sam Ran China-Hong Kong Transportation Limited (三然運輸中港運輸有限公司) in relation to transportation of live pigs	From the date of incorporation to date
2.3	Management Contracts	All contracts made and entered into with Hong Kong Agriculture Special Zone Management Limited (香港農業專區管理有限公司)	From the date of incorporation to date
2.4	Contracts for Import and Supply of Live Pigs	All contracts made and entered into with the following companies: -  Hunan New Wellful Co., Limited (湖南新五豐股份有限公司) -  Guangxi Fungrich Imp. & Exp. Co., Limited (廣西豐潤進出口貿易有限責任公司) -  Hubei Provincial Cereals Oils & Foodstuffs I/E (Group) Corporation (湖北省糧油進出口 (集團) 公司)	From the date of incorporation to date
2.5	Bank Facilities/  Guarantee(s)	All records in relation to bank and loan facilities provided to the 1st respondent and guarantee(s), mortgage(s) and/or charge(s) executed or provided by the 1st respondent.	From the date of incorporation to date
2.6	Director Loan Agreement(s)	All loan agreements made and entered into by the 1st respondent with its director(s).	From the date of incorporation to date
3.0	Company Accounts
3.1	Management accounts including all profit and loss accounts	All management accounts including all profit and loss accounts	For the financial years of 2007  ̶ 2008, 2008  ̶ 2009, 2009  ̶ 2010 and 2010  ̶ 2011
3.2	Employment contracts	All employment contracts of the employees and staff of the 1st respondent (including both Hong Kong and China)	For the financial years of 2007  ̶ 2008, 2008  ̶ 2009, 2009  ̶ 2010 and 2010  ̶ 2011
3.3	Management and service fees and charges	All receipts and payment records in relation to the management and service fees and charges concerning Hong Kong Agriculture Special Zone Management Limited (香港農業專區管理有限公司)	For the financial years of 2007  ̶ 2008, 2008  ̶ 2009, 2009  ̶ 2010 and 2010  ̶ 2011
3.4	Accounts receivables/bad and doubtful debts	All records regarding bad and doubtful debts of the 1st respondent	For the financial years of 2007  ̶ 2008, 2008  ̶ 2009, 2009  ̶ 2010 and 2010  ̶ 2011
3.5	Directors’ current account	All records regarding the directors’ current accounts of the 1st respondent	From the date of incorporation to date
3.6	Bank Statements	All bank statements and records regarding the receipts and payments of the 1st respondent	From the date of incorporation to date

Mr Albert Yau, instructed by Lau, Chan & Ko, for the applicant

Mr Louis Karon Fung, instructed by Chan, Evans, Chung & Co, for the 1st, 2nd and 3rd respondents