THE CHIUS MANUFACTURING COMPANY LTD v. MACKING DEVELOPMENT LTD

HCMP 538/2022

[2024] HKCFI 2436

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 538 OF 2022

________________________

________________________

________________________

________________________

J U D G M E N T

________________________

1.  This was an application dated 6 May 2022 pursuant to S.740 of the Companies Ordinance, wherein the applicant Plaintiff, a 10% shareholder in the Company, Macking Development Limited, sought disclosure of certain directors’ reports, financial statements, and monthly management accounts from the late 1990s up to 2021. Mr Chiu Chun Bong (“Mr Chiu”), the shareholder and director of the Plaintiff, deposed the evidence in support of the application.

2.  The Company had been set up in the early 1990s with the intent of investing in land in Nam Shan, Sai Kung, the plan being to develop village houses in that area. The Plaintiff had invested into the Company by way of shareholders’ loan, and had been provided with annual audited financial accounts up until 2012.  Thereafter, no accounts had been provided.

3.  In Mr Chiu’s evidence in support, the Plaintiff references the loan that had been provided at the outset, and the interest (9% monthly, on a compound basis)  that would be charged in relation thereto.  He then says inter alia that “being a shareholder of the Defendant, the Plaintiff is entitled to receive financial statements regularly and diligently regulated under our company laws,” and after complaining of not having had accounts since 2012, says that “the Plaintiff does not have full knowledge of the financial position of the Defendant over the years… Thus, I cannot decide what I should do with the 10% share and the loans.”  Save for this, the affirmation does not delve into much further reasoning as to why the documents are sought.

4.  By the time the application came before me, the documents sought had essentially been provided. There had been some dispute previously as to whether monthly management accounts existed (the Defendant said on oath that they did not), but eventually yearly management accounts were provided. The only real remaining issue was largely one of costs.

5.  The Plaintiff’s position was that owing to the provision of documents by the Defendant, it had been successful in its application, and thus an order in terms of the application should be made and costs should follow the event. The Defendant’s position was essentially that the application itself was unmerited because the vast majority of documents had been or were going to be provided, and that in any event, the application was not made for a proper purpose.

6.  The following dates are germane to the consideration of the issues:

a.  In or around 2007 to 2013, there had been negotiations between the Plaintiff and the Defendant’s majority shareholder for a buy out of the Plaintiff’s shareholding. But nothing came out of that.

b.  Negotiations resumed in September 2021. The Plaintiff then requested the Defendant to provide audited financial statements since 2013.

c.  On 16 March 2022, the Defendant provided the Plaintiff with (i)  the audited financial statements for the years 2003, 2005 and 2006 (inclusive of directors’ reports), and the unaudited financial statements for the years 2013 to 2021.

d.  On 5 May 2022, notice was given for the annual general meeting of the Company to be held on 6 June 2022, and that the audited financial statements and the directors’ reports would be received and considered at that time.

e.  On 6 May 2022, these proceedings were taken out.

f.  On 10 May 2022, the Defendant provided the Plaintiff with the audited financial statements and directors’ reports for the years 2013 to 2021.

g.  On 19 May 2022, the Defendant provided the Plaintiff with the audited financial statements and directors’ reports for the years 1998, 1999 and 2001.

h.  The AGM was held on 6 June 2022, and the audited financial statements for the years 2013 to 2021 were received, adopted and ratified.

i.  On 6 July 2022, the Defendant’s evidence in opposition was filed, detailing inter alia the above (viz. stating that the bulk of what had been requested had been provided)  and that there were no monthly management accounts.

j.  The matter then went quiet for almost two years. On 6 June 2024, Mr Chiu’s evidence in reply was filed.

k.  By that point, apparently because of various ongoing negotiations, the OS had been left in abeyance for a significant time. It was only on 10 July 2024 that a Notice of Appointment for hearing the OS was filed.

l.  Following that, in August 2024, yearly management accounts were provided to the Plaintiff.

m.  This matter then came on before the Court on 9 September 2024.

7.  The legal principles in relation to a s.740 application are uncontroversial and may be summarized as follows.

a.  Under CO s.740(2), P must satisfy the Court that the application is made in good faith and the inspection is for a proper purpose.

b.  The requirements of “good faith” and “proper purpose” are two separate and independent tests. “Good faith” requires that the applicant acts honestly with a purpose that he himself believes to be proper. “Proper purpose” requires the court to apply an objective test and look at all surrounding circumstances to see whether the purpose for the inspection is indeed proper. It must bear some reasonable relationship to the interests of the applicant qua shareholder: Leung Chung Pun v Masterwise International Ltd[2014] 1 HKLRD 1129 §16(1)-(2)  (Recorder A Chow SC, as he then was).

c.  An applicant is not entitled to go 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. A shareholder is not entitled to substitute a s.740 order for a pre-action discovery exercise. The applicant must have a sufficiently reasonable case for investigation: Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241 §§40-41 (Harris J).  A general stated purpose to “carry out a thorough investigation” of the company’s affairs was not a proper purpose: Wong Sau Man Samuel v Wong Kan Po Wilson [2017] 4 HKLRD 542 §§41-42 (DHCJ W Wong SC).

d.  Valuation or assessment of an applicant’s shareholding will also not constitute a proper purpose if the applicant does not have a legal right to have his or her shares bought out by defendants or other parties: Leung Chung Pun §61. Likewise, valuing a company’s assets for an unfair prejudice action was not a proper purpose, when the petition had not been heard and the court can make discovery orders for a valuation exercise if and when a buy-out is ordered: Re LehmanBrown Ltd [2011] 5 HKLRD 668 §41 (Chu JA, as she then was).

8.  As indicated above, the purposes set out in Mr Chiu’s initial evidence in support are essentially that as a shareholder, the Plaintiff has a statutory right to receive financial statements. From the evidence in support, it was not entirely clear what the Plaintiff wished to do with the information obtained. In his reply evidence filed in 2024, Mr Chiu had alluded to suggestions that there had been “attempts to suppress income in 2012” and raised various other suggestions (but without much concrete evidence to back it up)  that there had been unfair treatment of the Defendant and/or that there had been misleading of the Inland Revenue Department. These allusions were developed orally during the hearing by Mr George Chu, counsel for the Plaintiff, to suggest that there may have been fraudulent activity going on and that the Plaintiff wished to investigate further. The upshot, when considering the evidence as a whole, is that there is no clear purpose identified by the Plaintiff beyond the statutory entitlement to annual accounts and various suspicions.

9.  Viewing matters in the round, I agree with the Defendant that no proper purpose has been identified for the inspection (cf. Leung Chung Pun at §61; Re LehmanBrown at §33).

10.  Further, as I had explored with Mr Chu during the hearing, there is insufficient evidence at present for the Plaintiff to suggest that there had been fraud. At best, there are undeveloped and incomplete allusions which are merely hinted at in Mr Chiu’s evidence.

11.  Moreover, taking into account the chronology above, I agree that by and large steps were being taken at the material time in 2022 by the Plaintiff to make good the prior omission in arranging and tabling the audited accounts.

12.  For the above reasons, notwithstanding there had been provision of the documents by the Defendant, I do not agree that the OS (and the continued pursuit thereof)  was merited.

13.  Accordingly, I dismiss the OS, with costs of and occasioned by the same to be paid by the Plaintiff to the Defendant, to be taxed if not agreed on a party and party basis. Whilst the Defendant has asked for indemnity costs, I do not consider this an appropriate case in which to impose the same.

14.  I thank counsel for their assistance.