Ho Kwok Keung, Tony v. Hub Global Freight Solutions (HK) Ltd

HCMP 670/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 670 OF 2012

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BETWEEN

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J U D G M E N T

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Introduction

1.This is the Plaintiff’s application under section 152FA of the Companies Ordinance, Cap. 32, (“the Ordinance”) to inspect and take copies of the records, books and papers of the Defendant (“the Company”).

2.In the Originating Summons dated 11 April 2012, the Plaintiff set out a long list of documents which he sought and which, without exaggeration, covered almost everything and anything that could be described as “records, books and papers”. Towards the end of the hearing, Mr Maurellet submitted a revised draft Order to this court which substantially reduced the list to 4 categories of documents:

(a) All the Company’s bank statements and/or passbooks from 1 March 2010 to the date of the disclosure.

(b) All the Company’s receipts, invoices, cheques, bills, contracts, vouchers, minutes and resolutions of board and shareholders’ meetings from 1 March 2010 to the date of the disclosure.

(c) All the Company’s ledgers and management accounts from 1 March 2010 to the date of the disclosure.

(d) The Company’s “Contra Aging Analysis” from 1 March 2010 to the date of the disclosure.

3.It would appear that these 4 categories of documents were modeled on a request made by the Plaintiff’s solicitors in a letter dated 7 July 2011 to the Company. The request was rejected in its entirety in a reply dated 12 August 2011 from the Company’s solicitors.

4.The Company was set up jointly by the Plaintiff and Mr Law Kin Wah (“Mr Law”) in August 2008 for the purpose of engaging in the shipping and logistics business. Mr Law holds 51% of the Company’s shares while the Plaintiff holds the remaining 49%. Mr Law has always been and still is a director of the Company. The Plaintiff said he was formally appointed a director only in September 2009 after he had left his former employer, although the Form D2A filed by the Company with the Companies Registry suggested the date of appointment was actually 29 October 2009.

5.Be that as it may, the relationship between the Plaintiff and Mr Law turned sour rather rapidly, so much so that the Plaintiff decided to resign as a director from 1 March 2010 to pursue his own business. For the present purpose, it is not necessary for this court to inquire into the reasons for that – suffice it to say that the parties blamed each other for the deterioration of their relationship. The Plaintiff said he had originally wanted a clean break from the Company but, due to Mr Law’s alleged insistence, was unable to sell his 49% shareholding. 

6.After the Plaintiff’s resignation, Mr Law became the only director and in sole control of the Company.

7.What prompted the present application was the Plaintiff’s concerns about the way the Company had been managed since his resignation. These concerns were threefold.

(a) First, the Company made 4 successive capital calls on the Plaintiff between December 2010 and April 2011, each demanding a sum of HK$85,750. The figure was apparently arrived at in the following manner: HK$700,000 × 49% ÷ 4 = HK$85,750. The Company was also reticent as to whether Mr Law had fully paid up his capital calls.

(b) Secondly, the payment of the Company’s trade receivables into Mr Law’s personal bank account.

(c) Suspicious entries in the Company’s financial statements for the year ended 31 March 2010.

8.I shall deal with each of these concerns in turn. But before I do so, I shall remind myself of the provisions of section 152FA of the Ordinance and the legal principles.

The law

9.Section 152FA provides as follows:

“(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.”

10.A director is generally entitled to inspect the documents of a company in order to discharge his duties as a director. A shareholder is in a different position.  Other than documents he is entitled to under the Ordinance, for instance, the financial statements which have to be put before a company in general meeting pursuant to section 122, a shareholder is in general not entitled to inspect a company’s documents or obtain copies of them. He can, however, apply to court for an order to inspect records of a company under section 152FA if he can fulfill the twin requirements that (a) the application is made in good faith; and (b) the inspection is for a proper purpose.

11.In Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241, Harris J said this in relation to the section:

“14. …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.

…

24. ...In my view, section 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 section 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. This can be achieved through taking a generous approach to the interpretation of what constitutes an interest ‘reasonably related’ or ‘germane’ to the applicant’s status as a shareholder. 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 section 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.

26. That, I think, was what the drafters of the American equivalent of s.152FA meant, when they said in paras. 286-288 of 18A American Jurisprudence 2d 2004: …

“288    Statutes providing for inspection by stockholders should be liberally construed in favour of stockholders, particularly in enforcing the inspection rights of stockholders in a close corporation, at least in the absence of a satisfactory showing of bad faith on their part.”

…

41. …[section 152FA] plainly requires that the court be satisfied that the applicant actually has a sufficiently reasonable ‘case for investigation’ by examining ‘what the applicant actually wants to achieve’ before exercising its discretion to intervene and grant the inspection order: see also Re LehmanBrown Ltd. per Deputy Judge Coleman SC at para. 45.”

12.In a later decision Re Opes Asia Development Limited unrep. HCMP447/2012 17 May 2012, Harris J, at paragraph 6, adopted the following summary in counsel’s submissions as accurately reflecting the state of the case law on the subject:

“ 27.1 While the section expresses a composite notion, it does not mean that, if a proper purpose is proved, a case of good faith shall follow or is to be assumed. The ‘good faith’ and ‘proper purpose’ requirements constitute two separate and independent tests.

27.2 The burden is on the applicant to demonstrate that he is acting in good faith and that the inspection is for a proper purpose. The burden is not satisfied simply by suggesting that an inference can be drawn that the company resisting inspection must have something to hide.

27.3 Good faith means ‘honestly and with no ulterior motive’, and a proper purpose must be the primary or dominant purpose actuating the inspection.

27.4 The applicant must show that his application is not made 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 of the company, and that the proper purpose set up must be genuine and not a pretence.

27.5 The requirement of a ‘proper purpose’ is an objective test that calls for the court to look at all the circumstances and to determine whether the purpose for the inspection was indeed proper.

27.6 Even if the applicant is able to show that the application was made in good faith and for a proper purpose, the court may, in its discretion, ultimately consider that there is an insufficient prospect of anything useful resulting from the grant of the inspection order.

27.7 The section requires the court to be satisfied that the applicant actually has a sufficiently reasonable ‘case for investigation’ by examining ‘what the applicant actually wants to achieve’ before exercising its discretion to intervene and grant the inspection order.

27.8     The section 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 directors.”

13.With these in mind, I turn to the three concerns expressed by the Plaintiff.

Discussion

Calls on share capital

14.The Plaintiff complains that the Company’s successive calls and their timing are suspicious and require investigation. According to the return of allotments filed by Mr Law on behalf of the Company, the additional 700,000 shares were ratably allotted to Mr Law and the Plaintiff on 29 October 2009. There was no demand for payment at the time. In fact, prior to the Plaintiff’s resignation as a director on 1 March 2000, there had never been any calls on share capital: the Company demanded calls on unpaid capital only after the relationship between the parties had turned sour, and when Mr Law was its sole director.

15.In the Company’s demand letters, no explanation was given as to why the calls on capital were necessary. Further, the Company has not at the time provided the Plaintiff with copies of the board resolutions which allegedly authorised the call on capital. Even in the affirmation filed by Mr Law on behalf of the Company in these proceedings, no explanation was provided as to the purpose of the successive calls on capital. There was also no evidence showing calls had been made on Mr Law himself, nor actual payment by Mr Law, save a letter from the Company dated 8 December 2010, signed by Mr Law himself, which purported to show that he had paid various sums totalling HK$400,000 to the Company as capital:

a. HK$100,000.00 on 1 August, 2008;

b. HK$50,000.00 on 13 August, 2010;

c. HK$50,000.00 on 16 August, 2010;

d. HK$27,500.00 on 16 September, 2010;

e. HK$50,000.00 on 17 September, 2010;

f. HK$22,500.00 on 5 October, 2010;

g. HK$50,000.00 on 20 October, 2010;

h. HK$50,000.00 on 21 October, 2010.

16.The letter, however, raises more question than it seeks to answer. 

17.First, there was no explanation why the aggregate sum of HK$400,000 was paid, instead of a sum proportionate to Mr Law’s 51% shareholding in the Company, both before (HK$153,000) and after (HK$357,000) the allotment on 29 October 2009. 

18.Secondly, the first valid board resolution authorizing the making of calls on the 700,000 additional shares was dated 17 December 2010, by which time Mr Law had allegedly made HK$140,000 advance payment (inclusive of the two payments on 20 and 21 October 2010 aforesaid) for his additional shares. There was no explanation why this sum should have been paid even before the resolution was passed and the calls on capital were made.

19.Thirdly, according to the Company’s statement of claim in DCCJ3123 of 2011, the last of the four actions against the Plaintiff for HK$85,750, in fact no call had been made by the Company on Mr Law in relation to the shares allotted to him, albeit he had voluntarily made various payments of HK$40,000 or HK$50,000 each to the Company from 20 October 2010 onwards.

20.It is trite law that the directors are the proper judges of whether a call is necessary, and the court will not interfere with their discretion, provided that it is exercised bona fide. Their powers in this regard are fiduciary and must not be used for some collateral purpose. There is an implied condition of equality between shareholders so that it is prima facie improper to make a call on some shareholders of the same class but not the others: Gore-Browne on Companies vol. 2 para. 21[19].

21.In the present case, the evidence does reveal a reasonable cause for concern on the part of the Plaintiff. On the Company’s own admission, no call was ever made on Mr Law on the additional shares and even as late as 15 August 2011, the date when the last of the four District Court actions was instituted by the Company against the Plaintiff, Mr Law had not fully paid for his additional shares.  Notwithstanding the fact that the Plaintiff had raised the issue directly in these proceedings, the Company remained silent on the purpose of the calls, the timing of the calls and what prompted the sudden need for cash if that was the purpose. These questions are germane to the Plaintiff’s status as a shareholder and are legitimate questions for a shareholder to ask, especially when he alone is being sued by the Company for non-payment of the calls.

Payment of Company’s funds into Mr Law’s personal bank account

22.The Plaintiff has adduced evidence before this court that on two occasions in April 2010, Sethi International, a trade debtor of the Company, paid cash of HK$15,000 each directly into Mr Law’s personal bank account, instead of the Company’s bank account. The payments were then booked in the Company’s vouchers as payment of accounts receivables due to the Company.

23.Mr Law, in his affirmation filed on behalf of the Company, did not dispute that Sethi International had paid monies due to the Company into his own bank account. That was, on his case, a temporary measure prompted by the Plaintiff’s absence from the office to sign cheques since early 2010 and had been fully explained to him in a meeting held in April 2010. Mr Law had also exhibited a massive amount of documents to his affirmation which he claimed would show clearly that all the monies paid by Sethi International into his personal account had been paid back to the Company, save for those funds directly paid out to the Company’s trade creditors ie two master co-loaders and a debt collector. On the Company’s own case, this so-called “temporary measure” lasted from April 2010 to at least end of the year. By contrast, in the evidence before this court, as early as 25 May 2010, Mr Law alone was able to sign cheques on behalf of the Company. This rather raises the query as to why the “temporary measure” had to be maintained until end of the year. The query was unanswered in the evidence.

24.Counsel for the Defendant has twice tried to demonstrate to this court that all the monies paid by Sethi International into Mr Law’s personal account have been properly accounted for.

(a) First, by way of a table (derived from exhibit “LKW-19” of Mr Law’s affirmation) attached to his supplemental submissions which he said would demonstrate that all payments into Mr Law’s personal bank account between May and December 2010 had been fully transferred to the Company’s account.

(b) Secondly, after the hearing, by way of a “Table of Reconciliation”, which he submitted would demonstrate that the payments by Sethi International shown in exhibit “LKW‑19” fully reconciled with the official receipts issued by the Company to Sethi in exhibit “LKW-21”. As for the latter, his instructing solicitors seem to disagree with him and wrote to this court on 26 February 2013, saying that the two could be reconciled with each other, save for something like over 20 exceptions.

25.This court does not find the evidence or the tables have fully demonstrated that all the monies paid by Sethi International into Mr Law’s personal bank account have been properly accounted for. This court is not even certain whether Mr Law’s assertion that he had fully disclosed all payments made by Sethi International into his personal bank account is true or not.

26.In my view, given the admission by Mr Law that he has mixed the Company’s monies with his own, the Plaintiff is entitled, in order to safeguard his interest as a shareholder, to look more closely into the Company’s books and accounts to ensure that there was no misappropriation or missing of Company funds, whether by dishonesty, inadvertence or simply miscalculation. This is a legitimate exercise for a shareholder to undertake, especially in view of the Plaintiff’s substantial (49%) shareholding in the Company while the same has been and still is run solely by Mr Law. This is so whether or not the Plaintiff has previously been informed about the so‑called “temporary measure” at the meeting with Mr Law in April 2010. If there was misappropriation or missing of Company funds, Mr Law would be in breach of his fiduciary duty to the Company, which would support a potential derivative action by the Plaintiff.

Questionable Entries in the Company’s Audited Accounts

27.This can be dealt with rather briefly.

28.On 31 March 2011, the Plaintiff received from the Company the audited accounts for the year ended 31 March 2010. The audited accounts were qualified but only in relation to one aspect of the Company’s financial position irrelevant for the present purpose.

29.Upon perusing the audited accounts, the Plaintiff noticed that there were a number of entries which did not accord with his recollection of the Company’s financial position. In the Plaintiff’s skeleton submissions, these entries were reduced to the following two:

(a) The figures for the items “accounts receivable” and “accounts payable” in the Company’s balance sheet stood at HK$3,309,681 and HK$3,473,691. The Plaintiff said he had collected virtually all the Company’s accounts receivables and settled the Company’s accounts payable in March and April 2010 and the figures in the balance sheet were far too high.

(b) There should not be any “accrued expenses”, “bank charges and interest” or “legal and professional fee” since, to the best of the Plaintiff’s knowledge, the Company has not incurred any for the year ended 31 March 2010.

30.The Plaintiff submitted that, in these circumstances, he was entitled to inspect the books and records of the Company to ascertain the true nature of the alleged expenses, and to verify the figures for the accounts receivables and payables.

31.I do not agree. The mere fact that a shareholder, from recollection, doubts the accuracy of one or two entries in a Company’s audited accounts does not in my view provide any support for a section 152FA application. As I said earlier, a shareholder is entitled to the Company’s audited financial statements under the Ordinance, but not the underlying books and records on the basis of which the audited financial statements are prepared. The section requires the court to be satisfied that the applicant has a sufficiently reasonable case for investigation before exercising its discretion to intervene and grant the inspection order.

32.This court does accept for one moment that an applicant can put up a reasonable case for investigation simply by saying, according to his recollection, certain entries in the audited accounts are wrong – he has to have some evidential basis to satisfy the court that the Company’s directors who sign off the accounts and the Company’s auditors who audit the accounts are wrong, and he is right. This the Plaintiff has failed to do on the evidence.  I would not grant the present application if this were the only “concern” of the Plaintiff.

Disposition

33.For these reasons, I am satisfied that the application is made in good faith and the inspection is for a proper purpose. I would allow the Plaintiff’s application and make the following order:

(a) The Plaintiff or such agent(s) duly appointed in writing by the Plaintiff be authorised to inspect and take copies of the Company’s documents listed in paragraph 2 (a) to (d) of this Judgment, and the Company shall allow the Plaintiff or such duly appointed agent(s) to do so.

(b) Liberty to apply.

34.I will also make an order nisi that costs be to the Plaintiff, to be taxed if not agreed, with certificate for counsel.

Miscellaneous

35.The Plaintiff has offered to give an undertaking to this court to use the documents and information obtained from the Company for and only for a limited number of legitimate purposes including inter alia seeking legal advice, conducting legal proceedings and enforcing his right as a shareholder of the Company. This offer is set out in paragraph 63 of his affirmation dated 3 April 2012. For the record, this application is granted on the basis of such an undertaking.

Mr Jose Maurellet and Mr John Hui, instructed by Lee Wong & Co, for the plaintiff

Mr Billy Ma, instructed by Andy Fung & Associates, for the defendant