LEUNG CHUNG PUN v. MASTERWISE INTERNATIONAL LTD AND OTHERS

HCMP 2681/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2681 OF 2012

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D E C I S I O N

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APPLICATION

1.  I have before me an application made by the 1^st defendant (“Masterwise”) by summons dated 19 August 2015 seeking an order that it is not required to produce various documents more particularly set out in paragraph 3 below under an earlier order made by me on 22 January 2014 as amended on 23 October 2014 (“the Inspection Order”), on the ground that Masterwise “is not currently entitled as a matter of legal right to have possession of them”.

BACKGROUND FACTS

2.  The background facts giving rise to the Inspection Order, which was made pursuant to Section 152FA of the old Companies Ordinance, Cap 32 (“Section 152FA”),were set out in my previous written decision dated 22 January 2014 (“the Decision”), and will not be repeated here.

3.  By paragraph 1 of the Inspection Order, Masterwise is required to produce to the plaintiff for inspection various classes of documents as described in the Schedule thereto, including:-

(1)  With regard to Shenzhen Fifu (Shenzhen) Company Limited (“Shenzhen Fifu”), a wholly owned subsidiary of Masterwise incorporated in the PRC, the following records for the period from 1 November 1997 up to 22 January 2014 insofar as they are currently in the possession of Masterwise or Masterwise is currently entitled as a matter of legal right to have possession –

Item 2.1   Information on the legal representative and other senior management of Shenzhen Fifu (including title, duties, and responsibilities), and their employment/service contracts (if any);

Item 2.2   All books of accounts including accounting journal, vouchers, ledgers and supporting documents and the audited financial statements.

(2)  With regard to Huizhou Fifu Electronics Co Ltd (“Huizhou Fifu”), a wholly owned subsidiary of Shenzhen Fifu incorporated in the PRC, the following records from its establishment to 22 January 2014 insofar as they are currently in the possession of Masterwise or Masterwise is currently entitled as a matter of legal right to have possession –

Item 3.2   Information on the legal representative and other senior management of Huizhou Fifu (including title, duties, and responsibilities), and their employment/service contracts (if any);

Item 3.3   All audited financial reports and management accounts;

Item 3.4   All books of account including journal entries, vouchers, ledgers, and supporting documents in relation to its expenses incurred in establishing Huizhou Fifu;

Item 3.5   Current accounts between (a) Huizhou Fifu and Shenzhen Fifu and (b) Huizhou Fifu and Masterwise;

Item 3.6   Accounting and financial reports prepared by the PRC accountants of Huizhou Fifu.

4.  I should mention that the documents relating to Huizhou Fifu under item 3.7 of the Schedule to the Inspection Order referred to in the summons have already been provided by Masterwise.  The other documents remain, however, outstanding.

5.  It is not disputed by Mr Patrick Siu (for Masterwise) that the outstanding documents exist and are in the possession of Shenzhen Fifu or Huizhou Fifu (as the case may be), save that there is no employment contract in existence for the legal representative of Shenzhen Fifu or Huizhou Fifu.

6.  It is also not in dispute that the boards of directors of Masterwise, Shenzhen Fifu or Huizhou Fifu are identical, constituted in each case by the 2^nd, 3^rd and 4^th defendants.  In addition, the 3^rd defendant is the chairman of the boards of directors of Shenzhen Fifu and Huizhou Fifu.  He is also the legal representative of Shenzhen Fifu.

7.  It is the case of Masterwise that Shenzhen Fifu and Huizhou Fifu, have by letters dated 14 April 2015 and 22 July 2015 respectively, turned down its requests for the production of the outstanding documents.

THE PARTIES’ RESPECTIVE CONTENTIONS

8.  Mr Siu argues that Masterwise is not required to produce the outstanding documents. His submissions, in summary, are as follows:-

(1)  Masterwise is a mere shareholder of Shenzhen Fifu, and indirect shareholder of Huizhou Fifu.

(2)  Under Article 33 of the PRC Companies Law, a shareholder of a company is entitled to inspect and make copies of only limited classes of documents belonging to the company, namely –

(a)  articles of association,

(b)  minutes of shareholders’ meetings;

(c)  resolutions of directors’ meetings;

(d)  resolutions of supervisory board meetings; and

(e)  financial reports.

(3)  The shareholder otherwise has no legal right to inspect, still less to make copies of, the books of account of the company (although the shareholder may request to inspect the same, which request the company may refuse).

(4)  The shareholder has also no legal right to inspect or make copies of the supporting or underlying documents in relation to the accounts of the company.

9.  In support of the above submissions, Masterwise has produced two expert opinions on PRC law by Mr Xue Mingxiang dated 17 August 2015 and 29 October 2015 respectively.

10.  On behalf of the plaintiff, Ms Janet Ho submits that:-

(1)  the present application by Masterwise constitutes an abuse of the court’s process, in that the argument that it has no current legal right to have possession of the outstanding documents of Shenzhen Fifu and Huizhou Fifu could and should have been raised at the previous hearing in 2013 which led to the making of the Inspection Order; and

(2)  the application is, in any event, without merit in that Masterwise is entitled as a matter of legal right to possession of the outstanding documents.  In support of this submission, the plaintiff has produced an expert opinion on PRC law by Mr Hu of Sheng Tang Law Firm dated 24 August 2015.

11.  Mr Siu has raised two preliminary objections to the plaintiff’s expert opinion. First, it is said that it is not clear whether the report was prepared by Mr Hu himself.  However, the report bears, on its face, the signature of Mr Hu, and he must be taken to have verified the contents of that report and accepted responsibility for the opinions expressed therein.  Second, it is said that the report is neither verified by a statement of truth nor supported by a declaration of duty to the court.  As a matter of fact, the plaintiff’s solicitors sent to the solicitors of Masterwise a statement of truth and a declaration of duty to the court signed by Mr Hu on 31 March 2016 under cover of a letter dated 1 April 2016.  I am prepared to accept and consider the contents of Mr Hu’s report for the purpose of the present application.  However, for reasons stated below, I do not consider that the outcome of the present application would depend on the expert evidence on PRC law produced by the parties.

DISCUSSION

12.  The submissions of Mr Siu and Ms Ho have focused on the issue of whether Masterwise is “currently entitled as a matter of legal right to have possession of” the outstanding documents.  In my view, this is not the critical issue for determining whether Masterwise is required to produce the outstanding documents under the Inspection Order.  What is critical is whether those documents can properly be regarded as forming part of the records of Masterwise for the purpose of Section 152FA(1).

13.  The phrase “currently entitled as a matter of legal right to have possession” appears in paragraph 21 of the Decision.  What I said there was as follows:-

“It seems to me abundantly clear, from the language of Section 152FA(1), that the court’s jurisdiction extends to anything which can properly be regarded as forming part of the ‘records’ of the specified corporation, regardless of the sources from which the documents came to become part of the records of the corporation in the first place. However, the ‘records’ referred to in that subsection must, it seems to me, be a reference to the current records of the corporation. Accordingly, documents which are currently in the possession of the corporation, or of which the corporation is currently entitled as a matter of legal right to have possession, can, in my view, properly be regarded as forming part of the records of the corporation for the purpose of Section 152FA(1). This having been said, the documents of a subsidiary are, generally speaking, not the documents of its parent company, and they are not within the power of the parent company: see Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241 at paragraph 47.”

14.  When I referred to documents “which are currently in the possession of the corporation, or of which the corporation is currently entitled as a matter of legal right to have possession” in that paragraph, I was focusing on the point that the records of the specified corporation referred to in Section 152FA(1) must be a reference to the “current” records of the corporation.  I drew a distinction between “current” and “past” records because there was a suggestion at the last hearing that the plaintiff was arguing that under that section, the court could order inspection of documents of a subsidiary which were at one time passed by the subsidiary to the parent company but were no longer in the possession of the parent company at the time of the application or hearing (see paragraph 22 of the Decision).

15.  It is important to appreciate that the court’s jurisdiction to make an order under Section 152FA is restricted to the records of the specified corporation.  This requirement was mentioned in the opening sentence of paragraph 21 of the Decision, and it was stated at the end of that paragraph that, generally speaking, the documents of a subsidiary are not the documents of its parent company.

16.  There have been a number of first instance decisions discussing the question of what constitute the records of the specified corporation for the purpose of section 152FA.  This question was fully considered by the Court of Appeal in a recent decision in Hao Xiaoying v Wong Yiu Lam William and 2 Others, CACV 70/2015 (2 March 2016).  Cheung JA (with whom Yuen and Pang JJA agreed), after reviewing a number of local and Australian cases, expressed his conclusion that, for the purpose of Section 152FA, the “records of the specified corporation” refer to documents which are “owned by” or “belong to” the corporation.  This conclusion is amplified in paragraphs 3.18 to 3.22 of the judgment of the Court of Appeal, as follows:-

“3.18 Areva stands for the propositionthat the books of a corporation means books which are owned by or belong to the corporation.

3.19 In my view, the Areva approach can be adopted in the construction of section 152FA. ‘Records of the corporation’ means records which are owned by or belong to the corporation. Properly analysed, all the Hong Kong authorities that I referred to earlier have adopted this meaning in the construction of section 152FA. The reference in Wu Yang to the right or power of a corporation to obtain a document can only mean that the document is owned by or belong to the corporation. This is so even if it is not currently in the possession of the corporation. An example is the draft witness statement in Areva.

3.20 On the other hand, the mere possession by a corporation of a document which is not owned by or belong to it does not by itself make that document a record of that corporation.

3.21 Once Areva is properly understood, then one can see why Harris J referred to possession in Wong Kar Gee Mimi and Wu Yang. As mentioned earlier, generally speaking the document of a subsidiary is not owned by and does not belong to the parent company. Harris J was addressing the situation before him of a parent company having possession of the document of the subsidiary company by reason of the parent company’s ownership of that document. Harris J gave the example of a copy of an original document owned by a subsidiary which the corporation has obtained by virtue of its control of its subsidiary in order for it to have a complete record of the business activities and assets of the members of a group of companies, which it owns. Properly understood, Harris J’s formulation does not impose conjunctive requirements. While possession by itself does not make a document a record of the corporation, the absence of possession does not disqualify a document from being a record of the corporation.

3.22 Yuen JA’s reference to possession in Veron International Ltd is merely a short hand reference to the formulation in Wong Kar Gee Mimi. So was Recorder Anderson Chow SC’s reference to possession in Leung Chung Pun and there is no inconsistency between that case and Wu Yang.

3.23     For the avoidance of confusion, I would suggest in future that the Court should simply adopt a single test of whether the document is owned by or belongs to the corporation in deciding whether it is the record of the corporation without any reference to possession.  In this regard, the reference to the discovery provision under Order 24, rule 2(1) of the High Court Rules is not helpful because of the use of express words there of ‘document in the possession, custody and power’ which are absent in section 152FA.”

17.  It is clear from the above judgment of the Court of Appeal that a document belonging to a subsidiary does not become part of the records of the parent company merely because the parent company has possession, or is entitled as a matter of legal to have possession, of it.

18.  In the present case, it has not been suggested by the plaintiff that the outstanding documents are owned by or belong to Masterwise.  The plaintiff’s case, as I understand it, is that Masterwise is entitled to call for the outstanding documents from Shenzhen Fifu and Huizhou Fifu because they are wholly owned direct and indirect subsidiaries respectively of Masterwise.  This is not, however, sufficient to make those documents part of the records of Masterwise for the purpose of Section 152FA.

19.  I should mention that although Mr Siu did draw my attention to the decision of the Court of Appeal in Hao Xiaoying at the hearing of the summons, he expressly disclaimed reliance on that decision and based his application on the ground mentioned in the summons, ie, Masterwise is not currently entitled as a matter of legal right to have possession of the outstanding documents. However, the proper meaning of the Inspection Order is a matter of law, and I am duty bound to decide the present application on the basis of the law as explained by the Court of Appeal in Hao Xiaoying.  Also, Ms Ho had notice of that decision and in fact made submissions on it at the hearing of the summons.  I do not therefore consider it unfair to the plaintiff to decide the present application on a basis which was not advanced by Mr Siu.

OTHER ISSUES

20.  For the above reason, it is strictly not necessary for me to resolve the conflicting expert opinions on PRC law adduced by the parties.  I shall, nevertheless, express my views briefly on the PRC law issue in case this matter should go further to the Court of Appeal.

21.  In relation to the court’s approach when being presented with two conflicting expert opinions on an issue of PRC law, a judge is entitled to “use [his] knowledge in the Chinese language and legal training, insofar as permissible in accordance with the principles set out in Bishopsgate Investment[1] to examine the relevant legislations, directives and other authorities referred to by the experts” and form a view on which of the two conflicting opinions should be accepted: see Shenzhen Development Bank Company Limited v New Century Int’l (Holdings) Limited and Another, HCA 2976/2001 (31 July 2002), at paragraphs 25 to 27 per Deputy High Court Judge Lam (as he then was).

22.  I have read and considered the respective opinions of Mr Xue and Mr Hu.  I do not accept the opinion of Mr Xue.  His approach is to focus only on Article 33 of the PRC Companies Law, which relates to the general rights of a shareholder of a PRC company to inspect or make copies of some of the company’s documents.

23.  Masterwise is not, however, a mere shareholder of Shenzhen Fifu.  It is the sole shareholder of Shenzhen Fifu.  It is entitled to require or direct Shenzhen Fifu and, through Shenzhen Fifu, Huizhou Fifu to produce the outstanding documents in reliance on Article 46, instead of Article 33, of the PRC Companies Law.  Article 46 provides that the board of a company is answerable to the shareholders and is obliged to give effect to their resolutions.  I accept the opinion of Mr Hu that Masterwise is entitled, under Article 46, to direct Shenzhen Fifu to produce the outstanding documents, and Shenzhen Fifu is obliged to follow such direction, as a matter of PRC law.  Any contrary conclusion would simply be unreal.

24.  In relation to Ms Ho’s argument on abuse of process, it is important to note that the Inspection Order provides that various classes of documents are required to be produced by Masterwise for inspection or copying by the plaintiff.  The Schedule to the Inspection Order refers simply to the “records” without specifying which company’s records are required to be produced.  Nevertheless, the Inspection Order is an order requiring Masterwise, not Shenzhen Fifu or Huizhou Fifu, to produce documents.  Prima facie, it should be read as requiring Masterwise to produce its own records for inspection or copying by the plaintiff.  If there is any ambiguity, I believe it is permissible to refer back to the Decision to ascertain the proper scope of the Inspection Order.  I consider it is clear, from paragraph 21 of the Decision, that the documents which Masterwise is required to produce relate to its own records, not the records of its subsidiaries.  In other words, under the Inspection Order, Masterwise is required to produce those documents falling within the various classes as described in the Schedule which have become part of the records of Masterwise. It is certainly possible for documents belonging to Shenzhen Fifu or Huizhou Fifu to become part of the records of Masterwise: see Wong Kar Gee Mimi v Hung King Sang Raymond [2011] 5 HKLRD 241, paragraph 46 per Harris J (quoted in paragraph 20 of the Decision); Wu Yang v Dayuan international Development Ltd, HCMP 2143/2011 (4 June 2013), paragraph 23 per Harris J.

25.  Paragraph 5(b) of the Inspection Order expressly provides that the parties shall have liberty to apply in the event that there is any dispute between the parties on the carrying out of the order.  In my view, if there is any dispute between the parties as to whether any particular document or documents fall within the scope of the Inspection Order, either party can apply to the court for determination of the dispute.  I do not therefore consider the present application by Masterwise to constitute an abuse of process of the court.

DISPOSITION

26.  For the above reasons, I make an order in terms of paragraph 1 of the summons of Masterwise dated 19 August 2015 (save in respect of item 3.7 referred to in that paragraph).

27.  I also make an order nisi that there be no order as to costs of the application.  Although Masterwise has been successful in obtaining the relief that it seeks under the summons, my decision is based on a ground different from that advanced on behalf of Masterwise.  As earlier mentioned, I do not accept the ground advanced on behalf of Masterwise.  Neither do I accept the expert opinion of Mr Xue produced by Masterwise.  I prefer instead the expert opinion of Mr Hu produced by the plaintiff.  I should add that the conflicting expert opinions formed the bone of contention between the parties at the hearing.  In all the circumstances, I consider it fair to make no order as to costs.

28.  Lastly, it remains for me to thank counsel for the assistance that they have rendered to the court.