SE HOK PAN AND ANOTHER v. GRACE GLORY LTD

HCMP442/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.442 OF 2010

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REASONS  FOR  DECISION

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1. This is the plaintiffs’ application for an order :

(1) that the requirements under sections 122(1) and (2) of the Companies Ordinance (Cap.32) (“the Ordinance”) be substituted and leave be granted to lay the Company’s profits and loss accounts and balance sheets during the period between September 2005 and December 2008 by virtue of the shareholders’ resolution dated 30 August 2009 (“the Special Resolution”); and

(2) that the time prescribed by section 122(1A) of the Ordinance for laying the Company’s profits and loss accounts and balance sheets up to 2008 be extended to 30 August 2009.

2. On 15 April 2010, I allowed the application.  These are the reasons for my doing so.

The Company

3. The Company was incorporated in Hong Kong on 30 September 2005 with the plaintiffs, who are husband and wife, as shareholders and directors.  On 6 May 2008, the plaintiffs assigned their shares to China Wood Flooring Holding Co. Ltd (“China Wood”), a BVI company of theirs, through which they continue to own and control the Company.  They remain as directors to date.

4. The Company is part of a group of companies owned by the plaintiffs.  It does not have any business or operation of its own.  It is a corporate vehicle holding the interests in two wholly owned subsidiaries in the Mainland (“the Subsidiaries”).  The Subsidiaries operate manufacturing plants in Quanshan and Zhangjiagang respectively, producing wood and manufacturing products.

The non-compliance

5. The group of companies went through an internal restructuring recently for the purpose of raising further capital.  For the internal restructuring, the Company engaged Lo and Kwong CPA Co. Ltd to conduct auditing for the group.

6. In about April 2009, the auditors discovered that the Company had in breach of section 122 of the Ordinance failed to lay accounts before its annual general meetings since its incorporation.  The Company immediately instructed the auditors to prepare the audited accounts and balance sheets from the date of incorporation up to 31 December 2008.

7. On 30 August 2009, China Wood, as the Company’s sole shareholder, passed the Special Resolution approving and adopting the said audited accounts and balance sheets.

8. The plaintiffs then took out the present application.

The principles

9. Section 122(1B) of the Ordinance provides :

“  (1B)    The court, if for any reason it thinks fit so to do, may in the case of any company and with respect to any year—

(a) substitute for the requirement in subsection (1) to lay a profit and loss account or (as the case may be) an income and expenditure account before the company at its annual general meeting a requirement to lay such account before the company at such other general meeting of the company as the court may specify; and

(b) extend the periods of 6 and 9 months referred to in subsection (1A).”

10. In considering whether to exercise the discretion under section 122(1B) to regularize the non-compliance, the court will have regard to the following matters :

(1) whether the shareholders are aware of the financial position of the company and thus are not prejudiced by the non-compliance;

(2) whether the default is inadvertent; and

(3) whether the court is satisfied that company will comply with the obligation to lay its profit and loss accounts or income and expenditure statements before general meetings in the future.

See Re HKI Properties Ltd & Others, HCMP2556–2561, 2563 and 2565–2568/2007, unreported, 29 January 2008, per Deputy Judge Harris SC (as he then was) at para.9.

11. I am satisfied that each of the above requirements are satisfied here.

12. First, China Wood is and was at all material times fully aware of the financial affairs of the Company.  No question of prejudice arose.

13. Second, the reason for non-compliance is this.

14. At all material times, the plaintiffs acted under a misapprehension that it was only necessary to lay accounts and balance sheets at general meetings only if it had to pay tax under Hong Kong or there were third party shareholders who did not understand the Company’s financial affairs.  As the Company had no operation or taxable income in Hong Kong and they were the only shareholders in reality, no audited accounts or balance sheets were laid at past general meetings.  They did engage accountants in the Mainland to prepare audited accounts for the Subsidiaries but failed to do the same for the Company. 

15. The plaintiffs also entrusted the auditing work of the group to its internal accounting staff.  Stationed in the Mainland, the accounting staff handled more than 20 companies in different jurisdictions.  The staff failed to advise the plaintiffs of the statutory obligations under section 122 of the Ordinance.

16. I accept the plaintiffs’ explanation and found that the non-compliance was inadvertent.

17. Third, the plaintiffs have now engaged professional advisors to advise and act for the Company on compliance.  With their assistance, the Company will comply with its statutory obligations under section 122 in the future.

Conclusion

18. For the above reasons, I allowed the application.