HAO XIAOYING v. GREEN VALLEY INVESTMENT LTD

HCMP 1393/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1393 OF 2015

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J U D G M E N T

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1. This is the plaintiff’s (“Hao”) application against the defendant (“Company”) for inspection of its records under s.740 of the Companies Ordinance, Cap. 622.

2. Hao is a 20% shareholder of the Company.  There is a history of litigations in both Hong Kong and the Mainland between Hao and the Company (and those in control of it).

3. The Company is controlled by Mr William Yiu Lam Wong (“Wong”), Mr Huang Kwang Min (“Huang”) and Mr Lau Yan Yin (“Lau”).  They are the only directors of the Company and they each own 20% of the shares in it.  The other 20% shareholder is Mr Lu Jia Don (“Lu”).  It should be pointed out that Wong is the only effective director of the Company since 2007 because none of the other 2 directors has any involvement in its management since then.

4. The Company has been dormant since 2004, save for the conduct of a number of litigations in the Mainland.  Some of those litigations are against Hao, his wife (“Chiu”) and Lu.  Prior to becoming dormant, the Company’s only business was its investment in a Mainland joint venture company (“JV Company”) (holding 55% of its interest), which was engaged in property development in Shanghai. 

5. In simple terms, the Mainland litigations arose out of alleged wrongdoings on the part of Hao, Chiu and Lu in misappropriating the Company’s interest in the JV Company by incorporating a Canadian company with a name similar to that of the Company and transferring the 55% interest to the Canadian company.  Thereafter, the profits derived from the JV Company were pocketed by those wrongdoers. 

6. There is a judgment by the Mainland court against Hao, Chiu and Lu whereby the Company’s misappropriation claim was upheld against them and they were ordered to pay damages to the Company of nearly RMB48 million with interest (“Mainland Judgment”).  Their appeal against the Mainland Judgment has been rejected very recently.  It is, however, suggested that there is a further appeal against the same.  

7. On 26 September 2013, this court made an order (“Order”) for production of documents against the Company in favour of Hao pursuant to s.152FA of the former Companies Ordinance, Cap 32 (the predecessor of s.740) in HCMP 837/2013.  The documents related to a large sum of compensation (RMB16 million) (“1^st Compensation”) received by the Company in the Mainland. 

8. However, the Order was not complied with, resulting in contempt proceedings (HCMP 1968/2014) against Wong, Huang and Lau as the Company’s directors.  By a judgment dated 2 March 2015 (“Judgment”), each of them was held to be in contempt of court.  I have been informed that there is an appeal against the Judgement, which is primarily concerned with the proper construction of the Order.  The appeal was heard 2 weeks ago with judgment pending.

9. The above provides a thumbnail sketch of the background of this application.  Some of the details can be found in paras 2 to 32 of the Judgment.  I do not propose to repeat them here.  This application may be seen to be a continuation of the 2013 production application.  Three categories of documents are sought in this application : 

(i)   The 1st category is the records/documents evidencing the receipt of a sum of RMB23 million being the agreed compensation paid by Shanghai Nanxiang Green Villas Co Ltd (“2^nd Compensation”) to the Company and the subsequent transfers and/or use thereof (“Category 1 Documents”).  It appears that the 2^nd Compensation was paid to settle, inter alia, the Company’s claim against Lu. 

(ii)   The 2nd category is the records/documents supporting 12 entries relating to the compensation receivables and bad debts of the Company as shown in the Financial Statements of the Company for the years ended 31 March 2011, 2012, 2013 and 2014 (“Category 2 Documents”).

(iii)  The 3rd category of documents is the notices/documents by which Wong and Huang declared their interest in the transactions between P&Y Industrial Ltd (“P&Y Industrial”) and the Company and all board resolution(s) authorising the entering into those transactions (the “Category 3 Documents”).

10. Unsurprisingly, in light of the consequence of the Order, this application is hotly contested.  The issues here concern whether this application is made in good faith and for a proper purpose – elements which have to be satisfied by Hao in order to invoke the discretion of the court under s.740.

Law

11. There is no material dispute over the applicable legal principles, which can largely be found in 2 judgments of Harris J : Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241 and Re Bank of East Asia [2015] 4 HKC 137. 

12. The “good faith” and “proper purpose” requirements constitute two separate and independent tests.  The applicant must first, establish that he is acting in good faith and second, the court must believe the circumstances are such that the inspection sought is for a proper purpose : Re Bank of East Asia Ltd, §25(1).

13. The requirement of good faith merely requires that the applicant himself acts honestly with a purpose that he himself believes to be proper : Wong Kar Gee Mimi, §16.

14. In order to satisfy the “proper purpose” criteria it is not necessary to satisfy the court that the applicant has a specific or personal right that can only be protected through the inspection of records.  A wish to inspect documents to investigate a genuine and credible belief that there has been corporate mismanagement is capable of constituting a proper purpose.  Generally, where the court is satisfied that the purpose is germane to a shareholder’s economic interest in the company a proper purpose will have been satisfied : Re Bank of East Asia Ltd, §25(5).

15. The court should incline to a liberal interpretation of “proper purpose” with a view to advancing the protection of shareholder rights and interest and the maintenance of appropriate standards of corporation governance : Re Bank of East Asia Ltd, §25(6).

16. As part of establishing a proper purpose, the applicant has to show that there is a sufficiently reasonable “case for investigation” as regards past or future wrongful or other undesirable conduct.  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 : Re Bank of East Asia Ltd, §25(7).

17. Once the primary or dominant purpose for the application for inspection is deemed by the court to be “proper” in that it is germane to the applicant’s status as a shareholder, then any further or secondary purpose in seeking the records is irrelevant.  So long as the applicant acts in good faith and for a proper purpose, then the fact that there is hostility between the parties is equally irrelevant : Wong Kar Gee Mimi, §§21-22.

18. Even if a proper purpose is established, a shareholder is not entitled to abuse his entitlement by going on a fishing expedition through vast amounts of the company’s records in search of a cause of action to support his mere suspicion of wrongdoing.  Such an approach would be excessively intrusive and beyond what is reasonably necessary : Wong Kar Gee Mimi, §40.

19. Further, it should be remembered that a shareholder has no general right to access the records of the company in order to challenge the commercial decisions of its management : see also Re Bank of East Asia, §25(4). 

Category 1 Document

20. Hao’s evidence is that he has been kept in the dark about the affairs of the Company because for many years there has been no AGM and no supply of the Company’s Financial Statements to him.  Such evidence is not contradicted.  Indeed, the evidence is that the Financial Statements for 2011 to 2014 were only made available in the course of the contempt proceedings. 

21. In January 2014, Hao learned about the 2^nd Compensation.  His efforts to press the Company for information relating thereto have been stonewalled. 

22. Further, Hoa’s case, based on the evidence filed by Wong in the contempt proceedings, is that the 1^st Compensation had been misused by him (see, eg, para 28 of the Judgment).  The evidence subsequently filed by Wong to purge his contempt is the subject matter of another application by Hao for leave to commence statutory derivative action against him, which is to be heard tomorrow. 

23. The Company relies heavily on the Mainland Judgment and contends that this application is made to exert pressure on it and Wong, and for Hao to gain leverage in negotiations. 

24. However, the Company’s contention does not alter the fact that Hao has a 20% stake in the Company, and it must be accept that he has a legitimate concern on the whereabouts of the 2^nd Compensation, which is a significant asset of the Company. 

25. I have little doubt that Hao has also the agenda to put as much pressure as he can on the Company and Wong, probably with the hope to secure a favourable settlement over the Mainland proceedings.  It was acknowledged by the court in Wong Kar Gee Mimi that the former wife applicant might well have been motivated by a desire to harass her former husband (see §§54 to 56).  It is an impossible task to look into what may be a combination of factors or considerations in the mind of an applicant.  I am satisfied that Hao has a legitimate purpose to serve in this application and it is wrong to say that he has not brought it in good faith. 

26. As for proper purpose, the whereabouts of the 2^nd Compensation is clearly germane to Hao’s interest as a 20% shareholder of the Company. 

27. For the present purpose, it is unnecessary for the court to determine the merits of the allegations of wrongdoings against Wong in respect of the 1^st Compensation : see Re Bank of East Asia, §26.  However, I am satisfied on the material before the court that there is a reasonable case for investigation in respect of the whereabouts of the 2^nd Compensation. 

28. For completeness, I am unable to agree with the Company’s argument that the Mainland Judgment militates against this application in that Hoa owes the Company more than he can expect from a 20% distribution of the 1^st and 2^nd Compensation to him.  The fallacy of the argument is that there is no set-off between the Mainland Judgment and the potential distribution of such Compensation.

Category 2 Documents  

29. These documents concern very large sums of money booked in the Company’s accounts as compensation receivables and bad debts. However, there is clearly an important difference between such entries and cash received by the Company.

30. It is a key plank of Hoa’s submissions here that the accounts are qualified by the auditors. 

31. Firstly, given the undisputed background facts, it is unsurprising to find that there are substantial compensation receivables in the Company’s accounts.  Secondly, it is equally unsurprising to find that assets of such quality would be qualified by the auditors.  I have considered the qualifications in question.  They highlighted the uncertainty in the recoverability of such assets and I can see nothing sinister.

32. Whilst it is quite unreasonable for the management of the Company to have stonewalled Hao’s enquiries about these entries, I have to bear in mind that the parties must have been galvanised by the years of litigation and I have no doubt that Hao is not highly regarded by the management given what he has been found to have done to the Company.  The lack of explanation by the management does not improve the quality of Hao’s case here.

33. However, I am troubled by 4 entries under “Compensation receivables – money held in trust by a director”.  Wong has been identified as the director in question.  Such receivables ran into nearly HK$169 million in 2011 to 2013, and were reduced to just below HK$150 million after the repayment of the 1^st Compensation to the Company by Wong in the 2014 financial year.

34. The evidence tends to suggest that there was very substantial money belonging to the Company held by Wong.  The lack of explanation by the Company of these entries must be taken against it.  I am satisfied that there is a reasonable case for investigation in respect of these 4 entries.

Category 3 Documents 

35. The transactions between P&Y Industrial (of which Wong and Huang are directors) and the Company did not involve very substantial sum – a handling fee of HK$240,000 per year in 2011 to 2014. 

36. Even though the Company has been dormant it would not be right to think that its management is therefore inactive. Clearly, the Mainland litigations demand a fair amount of input from the same. It is quite possible, as Mr Dawes SC (appearing for Hoa with Mr Man) has accepted, that these payments were made for the services provided by Wong and Huang to the Company.  Their interest in P&Y Industrial had been recorded in the Financial Statements.

37. Whilst it is quite unhelpful for the Company to have refused to provide any explanation for these payments, I see no reason for suspicion about them. 

38. In my view, this request is a fairly blatant fishing exercise with the hope to find something to put pressure on Wong and Huang.

Conclusions

39. For these reasons, I allow the application in respect of Category 1 Documents, subject to the modifications suggested by Mr Chan (appearing for the Company).  I also allow the application in respect of Category 2 Documents, but confined to the receivables held by Wong on trust.

40. I shall hear the parties on the precise terms of the order and costs.