WONG SAU MAN, SAMUEL v. WONG KAN PO, WILSON AND OTHERS

HCMP 2250/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2250 OF 2016

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DECISION

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1.  This is the plaintiff’s application by originating summons dated 22 September 2016 (“the Originating Summons”) for an order under section 374 and section 740 of the Companies Ordinance (Cap 622) (“the Ordinance”) for inspection of a wide range of documents of the 6^th defendant, Bright Focus International Limited (“the Company”). Essentially, the plaintiff seeks the following orders:

(a)   The plaintiff and/or his representatives be given access to the registered office of the Company during office hours upon 3 days’ written notice for the purpose of inspecting the Company’s accounting records and taking copies thereof;

(b)   The plaintiff and/or his representatives be given access to the registered office of the Company during office hours upon 3 days’ written notice for the purpose of inspecting the Company’s record and documents in the schedule attached thereto (“the Schedule”); and

(c)   Photocopying charges be borne by the Company.

2.  The 1^st to 5^th defendants are directors of the Company.  They are joined, according to the plaintiff, for the purposes of costs.

Background

3.  This case concerns a rather sad dispute between a father (the 1^st defendant, or “the Father”) and his eldest son (the plaintiff).  The Father, who is now over 80, has three sons, namely (in order of age), the plaintiff, the 2^nd defendant and the 3^rd defendant.  The 4^th and 5^th defendants are the sons of the Father’s elder sister.  They are hence cousins of the plaintiff, the 2^nd and 3^rd defendants. 

4.  In 1992, the Father established Wilson Re Limited (“Wilson Re”) to carry out the business of insurance and reinsurance.  I note that Wilson is the name of the Father.  Since its incorporation, Wilson Re has been the Father’s main business and source of income.  To date, the Father remains the sole shareholder and chairman of Wilson Re.  Wilson Re has offices in Hong Kong, London, Seoul and Taipei, offering various kinds of reinsurance services.  The 2^nd to 5^th defendants all participate in the operation of Wilson Re’s business.  The 2^nd defendant takes care of Wilson Re’s business from London while the 3^rd to 5^th defendants are stationed in Hong Kong, overseeing business in Asia. 

5.  In the same year of 1992, the Father acquired the Company as a corporate vehicle to acquire and hold various real properties.  From 1992 to date, the Company’s paid up capital has always been $10,000.  There is no dispute that the plaintiff was and is the registered owner of 17% shareholding (“the Shares”) in the Company since 1992.  The Company’s other registered shareholders are the Father (46%), the 2^nd defendant (16%), the 3^rd defendant (16%), the 4^th defendant (2.5%) and the 5^th defendant (2.5%).  The Father also appointed the plaintiff and the 2^nd to 5^th defendants as directors of the Company.  There is also no dispute that all properties held by the Company were acquired using funds from the Father and/or Wilson Re.   

6.  The Father suffered a stroke in 2012.  There is no dispute that prior to the stroke, the plaintiff and his family relied heavily on the financial assistance of the Father.  According to the Father, as he was getting old, he became increasingly concerned about the plaintiff’s problem of overspending and financial dependency on him.  Throughout the years, he had repeatedly asked the plaintiff to control his expenses but it was after his stroke that he realized he could not financially support the plaintiff forever.  In order to force the plaintiff to reflect on his financial problems, in December 2013, the Father cancelled the supplementary credit cards given to the plaintiff since he attained the age of 18, and reduced maintenance provided to him to US$25,000 per month.  Thereafter, the plaintiff repeatedly demanded for more money and the reissuance of the supplementary credit cards. 

7.  In July 2014, the Father offered to pay the plaintiff a lump sum of HK$5,350,000, being 17% of the Company’s net assets as per the audited account ended 31 March 2013, if the plaintiff agreed to transfer the Shares to the Father.  According to the Father, at all materials times, the plaintiff, and indeed all the other shareholders of the Company, hold shares in the Company on trust for him.  Nevertheless, as the Father was aware that the plaintiff was desperately in need of money and would not agree to return the Shares unless he received a windfall, the Father made the offer to the plaintiff.  The offer was not accepted by the plaintiff.  As a result, the Father decided in April 2015 to cease all remittance to the plaintiff. 

8.  The above factual background is important because it is upon the Father’s cessation of financial assistance to the plaintiff in April 2015 that the present application arose.

9.  By a letter dated 8 June 2015 from Messrs Zhong Lun Law Firm, the plaintiff, qua registered shareholder, requested to inspect (a) resolutions and minutes for the past 10 years, (b) register of members, (c) register of directors; (d) register of company secretaries, (e) register of charges, (f) register of debenture; and (g) copies of financial statements for the last 10 years.  Further, in his capacity as a director of the Company, the plaintiff requested to inspect all accounting records of the Company, including daily entries of all sums of money received and expended by the Company and record of the Company’s assets and liabilities.

10.  The plaintiff further expanded the scope of his application to essentially all documents of the Company since its incorporation in 1992, including all bank statements and accounting records, all financial statements, directors’ reports or auditors’ reports on those financial statements, and the register of particulars not required to be contained in notes to the financial statements since 1992. 

11.  It is noted that prior to April 2015, the plaintiff has never exercised his right as a registered shareholder and/or participated in the management of the Company as a director.  He has never requested access to any of the documents that he now asks for.This has some bearing on the court’s assessment of the plaintiff’s purposes for seeking inspection at this stage and the exercise of the court’s discretion on whether to order inspection of such documents.    

12.  It is also to be noted that in February 2016, the Father increased his offer to HK$16,200,000, being 17% of the value of the properties then and still owned by the Company.  Such offer was also rejected by the plaintiff.  The Father’s position now is that he is not prepared to pay any sum of money to the plaintiff even if the plaintiff now agrees to transfer the Shares back to him. Hence, the position at the hearing was that all offers from the Father to buy out the plaintiff have been withdrawn.

Director’s right of Inspection under section 374 of the Ordinance

13.  It is established law that a person has a right to inspect all accounting records of the company to which he or she is a director at all times without charge.  A director has both a statutory and common law duty vis-à-vis the company.  In order for him or her to discharge his or her director’s duties, he or she must have unrestricted access to all documents and records of the company.  Section 374(1) of the Ordinance states that:

“ (1) A company’s accounting records–

(a) must be kept at its registered office or any other place that the directors think fit; and

(b) must be open to inspection by the directors at all times without charge.”

14.  In Tsai Shao Chung v Asia Television [2012] 4 HKLRD 52, Fok JA (as he then was) at paragraph 26 approved the relevant principles which were helpfully set out in the judgment of Susan Kwan J (as she then was) in Ng Yee Wah v Lam Chun Wah [2012] 4 HKLRD 40, at paragraph 29 and I shall not repeat the same here.   

15.  The issue in dispute is whether the plaintiff is a director of the Company.  Mr Alder, for the plaintiff, submitted that the plaintiff is a director of the Company.  It is the plaintiff’s case that by the operation of Articles 22(1)(a) and (2) of the new Articles of Association adopted by the Company on 9 February 2015 (“the New Articles”), tenure of all then directors appointed by ordinary resolution was converted from one of 12 months (or strictly speaking from one AGM to the next) to one of unlimited in time.  Mr Wong, for the defendants, disagreed with that analysis. 

16.  Mr Wong submitted that, prior to 2015, the appointment of directors was governed by Article 7 of the Articles of Association registered on 30 June 1992 (“the Old Articles”) which provided that:

“ At the Ordinary General Meeting to be held next after the adoption of these Articles and at every succeeding Ordinary General Meeting all Directors, except Permanent Directors if any are appointed, shall retire from office and shall be eligible for re-election.”

17.  Throughout the years, AGM of the Company was invariably held on the last day of the year, that is 31 December, at which all directors retired and were re-elected “for the ensuring year”. 

18.  Following the usual practice, an AGM was held on 31 December 2014 at which the Father, the plaintiff and the 2^nd to 5^th defendants were re-elected as directors of the Company “for the ensuring year”. 

19.  At the general meeting on 9 February 2015, it was resolved that the New Articles be adopted in substitution for the Old Articles.  Article 22 of the New Articles provides that:

“ (1) A person who is willing to act as a director, and is permitted by law to do so, may be appointed to be a director-

(a) by ordinary resolution; or

(b) by a decision of the directors.

(2) Unless otherwise specified in the appointment, a director appointed under paragraph (1)(a) holds office for an unlimited period of time ….” (emphasis added)

20.  Mr Wong submitted that none of the provision in the New Articles has the effect of converting the appointment of directors from “the ensuring year” to “an unlimited period of time”.  There was also no resolution passed at the general meeting on 9 February 2015 to extend or vary the tenure of any director previously appointed.  I agree with Mr Wong.  On its proper construction, Article 22(2) is applicable only to appointments made under Article 22(1)(a) after the adoption of the New Articles.  It has no application to the plaintiff’s appointment made on 31 December 2014.

21.  I also agree with Mr Wong’s submission that in any event it is expressly provided in Article 22(2) that directors appointed under Article 21(1)(a) will hold office for an unlimited period of time “unless otherwise specified in the appointment”.  The adoption of Article 22(2) did not retrospectively affect the fact that the appointments on 31 December 2014 was for the “ensuring year” only. 

22.  Following the usual practice, an AGM was convened on 31 December 2015 at which all directors (including the plaintiff) retired.  The Father and the 2^nd to 5^th defendants, but not the plaintiff, were re‑elected as directors.  Article 22(2) carries with it the proviso “unless otherwise specified in the appointment”, and it is not disputed that notwithstanding their appointments were made under Article 22(1)(a) of the New Articles, it was resolved that they were still appointed “for the ensuring year” only.  It is quite clear to me that Article 22(2) does not have the legal effect of entrenching directorship in any person for an indefinite period of time irrespective of specific resolutions passed during general meetings of the Company. 

23.  Hence, I agree with Mr Wong that the plaintiff had retired on 31 December 2015 and he was no longer a director of the Company when the Originating Summons was issued in September 2016.  It follows that the plaintiff does not have the requisite locus to found his application both under Section 374 of the Ordinance and common law.

24.  The plaintiff also argues that the notice of the AGM on 31 December 2015 only reached him on 29 December 2015.  However, I agree with Mr Wong that this is irrelevant as all directors retired on 31 December 2015 not as a result of any resolutions passed thereat.  The retirement was due to the fact that their appointments “for the ensuring year” expired on 31 December 2015.  Hence, the validity of resolutions passed at the AGM on 31 December 2015 has no bearing on the retirement of directors appointed at the previous AGM held on 31 December 2014.

25.  For the above reasons, it is this court’s ruling that the plaintiff is not a director of the Company and his application under section 374 of the Ordinance and common law is therefore dismissed. 

26.  For the sake of completeness, I should also mention that even if an applicant was a director at the time when the originating summons was issued, his or her application would still be dismissed if by the time of the hearing, he or she is no longer a director of the subject company.  (See Re Opes Asia Development LimitedHCMP 447/2012, 17 May 2012, para 2, per Harris J.)

Shareholder’s right of Inspection under section 740 the Ordinance

Locus of the plaintiff and relevance of beneficial ownership of the Shares

27.  There is no dispute that the plaintiff is a registered shareholder of the Company.  However, whether the plaintiff also has the beneficial ownership of the Shares is in dispute.

28.  The status of the plaintiff as a registered member gives a complete answer to the issue of locus.  As a matter of law, a company must treat every person on the register as a member even if a person in fact holds on trust for another as a nominee.  (See Pender v Lushington(1877) 6 Ch D 70.)

29.  Mr Wong for the plaintiff submitted that the beneficial ownership of the Shares is a relevant consideration.  It would, thus, be convenient to deal with the relevance of the dispute over the beneficial ownership of the Shares in the present application.

30.  It is the plaintiff’s case that the Shares were gifted to him absolutely by the Father.  The plaintiff in his 1^st affirmation states that:

“ The 1^st Defendant and I have always enjoyed a good and loving relationship. Since I was a young age, the 1^st Defendant has always assured me that he would look after me (and later on my own family) financially.”

It is also the plaintiff’s case that for the same reason, the Father appointed him to be a director of the Company.  These assertions are refuted by the Father who filed an affidavit and stated that:

“ I have never made such promise or assurance to any of my children (including the Plaintiff). The Plaintiff is not under disability and there was no reason why I would ‘always’ assure him since he was young that I would look after, not only him, but also his family, financially. I don’t believe any father with the right mind would have made such promise to his young children as it would only spoil them and discourage them from working hard in future.”

The Father’s case is that the plaintiff is a mere trustee and holds the Shares on trust for him.

31.  According to the Father, before allocating shares in the Company to his sons (including the plaintiff) and the 4^th and 5^th defendants, he made it clear to each of them that they were merely holding the shares on trust for him and he only allocated the shares to them upon their agreement to the trust arrangement. In the Father’s affidavit, it is stated that the 2^nd to 5^th defendants confirmed his account of the trust arrangement.

32.  Mr Wong submittd that the Company has not engaged in other kind of business activities save for holding real properties.  The Company has never paid any remuneration to its directors or declared any dividends since its incorporation.  It is submitted that it makes little common and commercial sense for a beneficial shareholder not to have received any dividends and directors’ remuneration since 1992, over some 25 years. 

33.  Further, there is no dispute that the plaintiff never paid any consideration for the Shares or made any contribution to the Company’s capital or investments.  According to the Father, the capital for the Company’s operation and investments was contributed solely by him and he was the person who made all important decisions. 

34.  Mr Wong further submitted that the plaintiff’s assertion of beneficial ownership of the Shares is inconsistent with his conduct throughout the years:

(a)   After the allocation of the Shares in 1992, the plaintiff never showed any interest in the Company’s business.  He never cared about the Company’s investments or financial situation;

(b)   He never participated in the operation of the Company even though he was a director (up to 31 December 2015).  He never asked when shareholders’ meetings and directors’ meetings would be held;

(c)   Even when the plaintiff was in great financial difficulties (with total indebtedness exceeding US$5 million), he never utilised the Shares to relieve his problem; and

(d)   It was only after the Father proposed to pay him a sum of money in return of the Shares in July 2014 and ceased the monthly remittance that the plaintiff started to show interest in the Company and ask for documents, obviously knowing that the Shares would probably be the “last shot” for him to get any large sum of money from the Father. 

35.  Insofar as the plaintiff’s reliance on the Father’s offers is concerned, Mr Wong submitted that the Father had explained in his affidavit that he did so because he knew that the plaintiff was in desperate need of money and would not agree to return the Shares unless he received a windfall. 

36.  During the course of oral submissions, Mr Alder rightly submitted that it is not right to resolve the dispute as to the beneficial ownership of the Shares by way of affidavit evidence only.  Mr Wong fairly agreed that this court cannot at this stage determine whether the plaintiff is indeed holding the Shares on trust for the Father. 

37.  In Re China Merchants Kin Swiss Transportation Company LimitedHCMP 333/2014, unreported, 16 July 2014, there was a pending proceeding to determine the issue of beneficial ownership of the applicant’s shares, G Lam J at paragraph 13 said:

“ Secondly, insofar as CAU’s application for inspection is concerned, it is well-established that under section 152FA of Cap.32, now section 740 of Cap.622, it is necessary to ask whether the inspection is sought in good faith and would be for a proper purpose and, in particular, whether the purpose is germane to the applicant’s status as a shareholder (see Re LehmanBrown Ltd[2011] 5 HKLRD 668 at paragraph 33). If CAU is in fact a mere nominee holding the shares and the application for inspection is not brought for the benefit of the person beneficially entitled to the shares but is, in fact, opposed by him, there may be questionsraised—and I need not put it any higher than that—as to whetherinspection is being sought in good faith and for a proper purpose.” ‌

38.  In that case, G Lam J made an order that the hearing of the originating summons be adjourned sine die pending the determination and resolution of the issues of the ownership of 52,000 shares registered in the name of CAU.  That appears to me to be a very sensible approach.  However, in the present case, there is no pending application to determine the beneficial ownership of the Shares.  I have drawn parties’ attention to this case and ascertained if the defendants would like to make any application for adjournment so that the issue of the beneficially ownership of the Shares can first be determined.  The defendants’ stance, however, is not to seek any adjournment.  In such circumstance, albeit there is a reasonably arguable case that the plaintiff holds the Shares on trust for the Father, this court does not take into account the issue of beneficial ownership of the Shares in determining whether the application is made in good faith and for proper purposes. 

Good faith and proper purpose

39.  The applicable legal principles in this area of the law are well developed in this jurisdiction.  For the purpose of this application, the following principles are relevant:

(a)   The good faith and proper purpose requirements constitute two separate and independent tests.  (Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011]5 HKLRD 241at paragraph 14; Re Bank of East Asia Ltd[2015] 4 HKC 137 at paragraph 25)

(b)   The burden of proof rests on the applicant.  (Lehman & Co Management Ltd v Efficient Ltd [2011] 5 HKLRD 668 at paragraph 33; Veron International Ltd v RCG Holdings [2013] 3 HKLRD 657 at paragraph 19) The burden is not discharged by suggesting that an inference that the company resisting a section 740 application must have something to hide can be drawn. 

(c)   Good faith is not to be inferred from an established proper purpose (Lehman & Co Management Ltd v Efficient Ltd (supra) at paragraph 34) but depends on whether the applicant acted honestly with a purpose that he or she believes to be proper.  (Wong Kar Gee Mimi v Hung Kin Sang Raymond (supra) at paragraph 16)

(d)   Proper purpose is to be determined objectively by consideringall the surrounding circumstances of the case.  (Wong Kar Gee Mimi v Hung Kin Sang Raymond (supra) at paragraphs 14 and 16)

(e)   The test for proper purpose is prima facie satisfied if the purpose is to protect a shareholder’s economic interest.  (Re Bank of East Asia Ltd (supra) at paragraph 25 affirming Wong Kar Gee Mimi v Hung Kin Sang Raymond (supra) at paragraph 25)

(f)   The purpose must be germane to or reasonably related to the interests of the applicant qua member.  A mere desire to obtain information will not constitute proper purpose.  (Lehman & Co Management Ltd v Efficient Ltd (supra) at paragraphs 34 – 35)

(g)   If the primary or dominant purpose is proper, whether inspection may be of benefit to the applicant for other purposes is irrelevant.  (Lehman & Co Management Ltd v Efficient Ltd (supra) at paragraph 31 and Wong Kar Gee Mimi v Hung Kin Sang Raymond (supra) at paragraphs 21 and 24)

(h)   Purpose must be genuine and not a mere pretense.  (Lehman & Co Management Ltd v Efficient Ltd (supra) at paragraph 35)

(i)   Valuation or assessment of an application’s shareholding will 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 v Masterwise International Ltd (supra) at paragraph 61)

(j)   The section is not an opportunity for shareholders to undermine entrenched company law principles and challenge the commercial decisions of the company’s management.  (Wong Kar Gee Mimi v Hung Kin Sang Raymond (supra) at paragraph 36)

(k)   An applicant is not entitled to go on a fishing expedition in search of a cause of action to support his or her mere suspicion of wrongdoings.  Section 740 shall not be used as a substitute for pre-action discovery.  (Wong Kar Gee Mimi v Hung Kin Sang Raymond (supra) at paragraph 40; Lehman & Co Management Ltd v Efficient Ltd (supra) at paragraph 41)

(l)   If the purpose is to investigate alleged misconduct, there must be proper evidence to support a reasonable case for investigation, taking into account any explanations offered by the defendants.  Mere assertions of misconduct will not suffice.  (Re Bank of East Asia Ltd (supra) at paragraph 25)

(m)   The court retains a discretion to decide whether an applicationfor inspection should be granted (Wong Kar Gee Mimi v Hung Kin Sang Raymond (supra) at paragraph 39) after taking into consideration of a wide spectrum of matters.  (Leung Chung Pun v Masterwise International Ltd (supra) at paragraph 25)

(n)   Insufficient prospect of anything useful resulting from the inspection sought is a relevant consideration.  (Wong Kar Gee Mimi v Hung Kin Sang Raymond (supra) at paragraph 39)

(o)   The fact that the applicant may have other means of obtaining the information elsewhere does not mean that he cannot satisfy the two requirements, but it is relevant to the court’s decision whether to exercise its discretion to grant an order.  (Veron International Ltd v RCG Holdings (supra) at paragraph 38.2)

(p)   Confidentiality is a relevant consideration but concerns of confidentiality can be addressed by undertakings restricting the use of information.  (Re Bank of East Asia Ltd (supra) at paragraphs 27 and 29)

(q)   Substantial prejudice to the company in complying with an inspection order is also a relevant consideration.  (Veron International Ltd v RCG Holdings (supra) at paragraph 38.4)

(r)   Inspection should be limited to documents that are necessary, relevant and germane to the proper purpose.  (Wong Kar Gee Mimi v Hung Kin Sang Raymond (supra) at paragraph 83)

40.  With the above legal principles in mind, the first thing that this court noticed is that the scope of the application as set out in the Originating Summons is very wide.  The plaintiff is asking for various categories of documents commencing from 1992 to 2015.  They include:

(a)   All resolutions of members passed otherwise than at general meetings for the years from 1992 to 2015;

(b)   Minutes of all proceedings of general meetings from 1992 to 2015;

(c)   The register of debenture holders;

(d)   All banks statements and accounting records of the Company from 1992 to 2015;

(e)   Financial statements/directors’ reports/auditors reports on those financial statements, and the register of particulars not required to be contained in notes to financial statements for from 1992 to 2015;

(f)   Proof of delivery of notice of AGM;

(g)   Notice of directors’ meetings and evidence of delivery;

(h)   Leases;

(i)   All annual tax returns since 1992 to date.

41.  Looking at this list of requested documents, I agree with Mr Wong that this strongly suggests a case of a fishing expedition.  Section 740 is not supposed to be deployed by shareholders to go through every single piece of corporate record of a company so as to satisfy himself that the company is being managed properly.  Equally, it must not be used as an instrument by shareholders to fish for evidence to support whatever case he or she might have against the company and/or its directors.  This cannot be a proper propose under Section 740.  Yet, this is the stated purpose of the plaintiff.  At paragraph 65 of his first affidavit, he stated that “[i]t is therefore warranted that I be allowed to carry out a thorough investigation on the affairs of the Company.”

42.  I do not find that a “thorough investigation on the affairs of the Company” or to use Mr Wong’s words, “to carry out a forensic exercise” is a proper purpose under Section 740.  On this ground alone, the plaintiff’s application could be dismissed.  Harris J’s comments in paragraph 33 of Re Opes Asia Development LimitedHCMP 447/2012, unreported, 17 May 2012 is very apt in this context:

“ 33. I would emphasise that in bringing applications of this sort, an applicant’s advisors should be careful to limit the requestfor inspection to documents which are relevant to‘proper purpose’ relied on. Seeking broad categories of documents that necessarily include documents irrelevant to that purpose may lead to an application that might otherwise have been successful being dismissed.”

43.  Mr Alder submitted that this is a small family company which only holds real properties and therefore merits a full scale investigation by the plaintiff. The plaintiff would then know, amongst other things, whether the Company has been properly managed, how were loans borrowed by the Company being used, why did the Company advanced interest-free loans to the Father, why did Wilson Re (a company wholly owned by the Father) advanced interest-free loans to the Company, and why did the Company sold its Taiwan business, etc.  With respect, I do not agree that these constitute proper purposes. 

44.  As Harris J rightly pointed out in Re Opes Asia Development Limited (supra) at paragraphs 23 – 25:

“ 23. The purpose of this application is apparently to find out what other investments have been made since October 2011 and how the existing ones have been dealt with.

24. Section 152FA does not alter the basic rule of company law that a shareholder does not ordinarily have access to the courts to challenge managerial decisions of directors. It follows that the section does not enable a shareholder to inspect documents to monitor what directors are doing with a view to challenging those decisions.

25. It seems, however, that this is what the plaintiff wishes to do.  He has not suggested that there is any particular purpose to seeking documents other than confirming his view that the 4^th defendant is continuing to use an investment manager who has performed poorly and has not been as transparent in making recommendations as it should have been.Presumably, although this is not expressly stated, he thinks the investment manager should be replaced.”

45.  It should be noted that despite the wide-ranging categories of documents being sought (as set out in paragraph 39 above), the defendants had in fact voluntarily provided most of the requested documents.  It is also understandable that many documents are not available as they date back to 1992.  What remains outstanding are:

(a)   All bank statements from 2010 to 2015;

(b)   All register of particulars not required to be contained in notes to financial statements from 2004 to 2015;

(c)   Notice of directors’ meeting from 1992 to 2015;

(d)   All annual tax returns from 2010 to date.

46.  During the course of submissions, I asked Mr Alder what are the plaintiff’s specific purposes for seeking inspection of the above four outstanding categories of documents.  Insofar as it is for the purpose of a thorough investigation, I dismiss that as a proper purpose. 

47.  Mr Alder also referred this court to the plaintiff’s four specific concerns that he has from his study of the documents voluntarily disclosed by the defendants.  It seems to me that the plaintiff has carried out a partial forensic exercise from the disclosed documents.  First, it is complained that the rental income generated from the Company’s properties was too low.  It was said that the amount of rent received remained unchanged for more than 7 years. However, Mr Alder fairly accepted that there is no evidence on the market rent of the Company’s properties.  In any event, I do not see how the four specific categories of documents will assist the plaintiff to further investigate this matter.  Either the rental income level is too low or at market level, the disclosure of the four outstanding categories of documents will not in any way assist the plaintiff insofar as his investigation into the rental level is concerned. 

48.  As for the concern that some properties are used as staff quarter, car parking space and storage by Wilson Re, the plaintiff’s case is that such leases may not have been entered in the best interest of the Company.  In paragraph 61(i) of his first affidavit, he stated that:

“ In this regard, recent investigation further shows that the 4^th Defendant and his family are living at the Cambridge Building property above. The 4^th Defendant’s occupation of this property is being carried out without seeking my knowledge or approval. I do not know the precise terms under which the 4^th Defendant and his family are occupying this property and whether the terms are in line with those prevalent in the market. I also understand that the Company also pays for all of the 4^th Defendant’s maintenance fees and expenses at the Cambridge Building property.”

49.  I note from Note 14 of the financial statements of the Company for the year ended 31 March 2015, the Company did receive rental income from “Wilson Re Limited” and “Wilson Risk Solutions Limited” in the sum of HK$180,000 and HK$240,000 respectively.  The plaintiff has not adduced any evidence to show that such rental level is below market rate.  At this stage, I must say that this may well raise suspicion in the mind of the plaintiff upon which he may wish to further investigate.  However, such investigation based on mere suspicion fall short of a proper purpose required under Section 740. 

50.  Secondly, it is submitted that there are lack of particulars and proper explanations as to the sum of HK$12.6 million interest-free loan due to the Company by the Father and the sum of HK$44 million interest-free loan from Wilson Re to the Company.  This seems to sit quite well with the Father’s case that all along, he has been treating the Company as his own and that he is the sole beneficial shareholder of the Company.  Be that as it may, the plaintiff has not demonstrated to this court as to how the four outstanding categories of documents could be useful in his pursuit of investigation in this particular aspect. 

51.  Thirdly, the plaintiff complains about the lack of particulars and proper explanations as to why properties held by the Company were pledged as security for bank loans taken out by a related company.  From the financial statements of the Company dated 31 March 2013 to and 31 March 2015, it appears that the Company has not taken out any bank loans.  Hence, bank loans must have been taken out in earlier years.

52.  In a letter dated 14 September 2015, Messrs Hobson & Ma, on behalf of the Father replied to Messrs.  Zhong Lun Law Firm, former solicitors acting for the plaintiff and stated that:

“ … Mr Wilson Wong has been treating Bright Focus as his company. Bright Focus has been used a properties holding company for obtaining loans for the business of Wilson Re Ltd. The operations of Bright Focus is to the order of Mr. Wilson Wong.

The Loan to Mr. Wilson Wong originated from loans by financial institutions to Bright Focus which Mr. Wilson Wong has used for operation of Wilson Re Ltd, and for personal remittance to your client.”

53.  The Father in paragraph 75 of his first affidavit also stated that:

“ 75. As admitted by the Plaintiff, he never paid for the 17% shareholdings allocated to him. As he was financially dependent on me at all times, he never made any contributions to BFI’s capital or the investment. It cannot be disputed that all the funds for BFI’s operation and investment came from me, directly or through Wilson Re (which, as mentioned above, was my main source of income). As the real owner of BFI, I was the person who made all important decisions after consulting Derek, Ben, William and George.”

54.  In a letter dated 26 August 2016 from Messrs Hobson & Ma for the defendants to Messrs Tanner De Witt for the plaintiff, it is, inter alia, stated that:

“ Mr. Wong Senior did not call for any funding from shareholders of Bright Focus as it has been his intention that Bright Focus is his own company and all other shareholders are nominee shareholders. Thus, full sums of investments in the said Taiwan and PRC companies all came from Mr. Wong Senior’s own pocket.”

55.  So there are explanations from the Father.  Whether the plaintiff accepts such explanation is quite another matter.  There is currently a sum of about HK$44 million interest-free loan from Wilson Re to the Company.  Mr Wong submitted that these are all managerial decisions of the Company.  I agree.  The amounts of loans to Wilson Re, the Father and the amount of loans from Wilson Re have been clearly set out in the Company’s financial statements.  The plaintiff has not demonstrated how the inspection of the four outstanding categories of documents can in any way help to investigate this matter further.  Mr Wong also correctly pointed out that as all the minutes of meetings have been provided to the plaintiff, notice of directors meetings could not possibly add anything.  The same applies to the Company’s annual tax returns and the register of particulars not required to be contained in notes to financial statements from 1992 to 2015, not to mention that it is unclear to the court whether the Company has been keeping such a register or not.  In so far as bank statements are concerned, the amount of loans due to and from Wilson Re are recorded in the Company’s financial statements.  Insofar as Mr Alder’s submission that the plaintiff would like to study every single outgoing expenses of the Company over the past few years is concerned, I agree with Mr Wong that this is a fishing expedition and is therefore disallowed. 

56.  Finally, the plaintiff raises questions about the Company’s disposal of its 75% stake in a Taiwanese company, Wilson Re Construction Limited in 2012. There is no allegation of misappropriation of assets or that the sale was undervalued. The plaintiff’s complain is that he was not informed of the disposal.  I agree with Mr Wong that this was a managerial decision of the Company and there is nothing to investigate further, based on the evidence relied upon by the plaintiff. In any event, Mr Wong is also right in submitting that none of the four outstanding categories of documents are relevant to the issue of the Company’s disposal of its 75% stake in Wilson Re Construction Limited. 

57.  Mr Alder, for the plaintiff, submitted that the court should adopt a liberal and charitable approach to applications of this kind.  While in general that should be the case, as the legislative objectives were set out by Harris J in Wong Kar Gee Mimi v Hung Kin Sang Raymond (supra) at paragraph 25, I am also reminded of Harris J’s ruling in Re Opes Asia Development Limited (supra) where at paragraph 28, his Lordship said:

“ Such a liberal approach to the interpretation of ‘proper purpose’ should not, as appears to have happened in the case of the present application, be understood as providing a member access to records of management decisions about which he is unhappy. If a member of a public company is unhappy about the commercial acumen of its directors, his remedy is to sell his shares. If his concern is that a breach of duty has occurred, which he wishes to remedy in order to protect his economic interest in the company, he should be able to identify the breach in his application and explain to the court what he proposes to do as a result of obtaining the information he seeks.”

58.  In Wong Gar Gee Mimi v Hung King Sang Raymond [2011] 5 HKLRD 241 at paragraph 41, Harris J held that:

“ Put another way, the section 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.”

59.  The plaintiff also submitted that he needs the documents for the purpose of valuation of his shares.  Putting aside the disputed issue as to the beneficial ownership of the shares, in Leung Chung Pun v Masterwise International Ltd (supra), Recorder Anderson Chow SC (as he then was) at paragraphs 61 and 62 said:

“ 61. In support of the present applications, the plaintiffs should contend that inspection of Masterwise and Foster’s records also serves the purpose of providing them with the necessary information to assess the true value of their shareholdings in the companies. However, unlike the situation in Talal El Makdessi v Team Y & R Holdings Hong Kong Ltd where the applicant shareholder had a put option under a sale and purchase agreement with the defendant’s related company to compel it to purchase the applicant’s shares in the company, the plaintiff here have no legal right to have their shares purchased by the defendants or other parties. Also, the plaintiffs have not gone so far as to suggest that they are entitled to force a purchase of their shares in Masterwise and Foster by means of an application under s.168A.

62. In all, I am not satisfied that, on the facts of the present case, the plaintiffs are entitled to an order under s.152FA for the purpose of assessment of the value of their shareholdings in Masterwise and Foster respectively.”

60.  I am also of the view that the plaintiff here does not have a legal right for his shares to be purchased by the defendants.  Mr Wong submitted that the offers from the Father had all been withdrawn and there is no longer any offer on the table for the plaintiff to consider.  In the circumstances, I do not consider that the plaintiff is entitled to an inspection of the documents for the purpose of valuation.

61.  Mr Wong also made the submission that there has been a breach of trust on the part of the plaintiff by bringing the present application and hence the plaintiff could not be acting in good faith for proper purpose.  However, this begs the question as to whether the plaintiff is in fact a trustee for the Father or not. This is an issue yet to be determined as discussed above.  

62.  Applying the legal principles to the facts of the present case, I am not satisfied that the plaintiff has discharged his burden in showing that the present application is made in good faith and for proper purposes.  Mr.  Wong submitted even if the plaintiff satisfies this court that the application is made in good faith and for proper purposes, this court still has a discretion to refuse his application.  He relied on the fact that the plaintiff had been a director of the Company until 31 December 2015 and yet he had never exercised his director’s right to inspect his requested documents.  Indeed, the Father’s case is that the plaintiff never participated in the management of the Company at all.  I agree with Mr Wong that this is a relevant consideration.   

63.  In Wong Gar Gee Mimi v Hung King Sang Raymond (supra) at paragraphs 39, 40 and 42, Harris J held that:

“ 39. The wording of s152FA(1) clearly states that ‘on application by such number of members of a specified corporation…the court may make an order’. In other words, even if an 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…

40. The court’s discretion means that notwithstanding that an applicant has satisfied the court that he seeks the company’s documents for a proper purpose, he is not entitled to abuse this 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. A shareholder is not entitled to substitute an inspection order under s.152FA for a pre-action discovery exercise: Re Claremont Petroleum NL (No.2) [1990] 2 Qd R 310 per McPherson J at 314. Such an approach would be excessively intrusive and beyond what is reasonably necessary, thereby defeating the qualification inherent in the proper purpose requirement.

42.     Second, in applications under s.152FA, the burden of proof of establishing good faith and proper purpose is borne entirely by the applicant.  Mere assertion is insufficient, as the applicant must adduce sufficient evidence as to the basis upon which he advances his application: Chuen v Laredo [2005] WASC 58 at paras 59-60.  This is in direct contrast to the case of a director’s right of access to a company’s records….”

64.  In Lehman & Co Management Ltd v Effiscient Ltd & Anor (supra) at 683, paragraph 36, Chu JA said:

“ 36. In our views, the Deputy Judge is correct in taking the view that the assertion of a proper purpose and good faith must be tested against the proper context of the application. He considered it relevant to have regard to the fact that the petitioner’s nominee, Million Strong, as a director had the rights of access to the books and records of the Company, but did not exercise such rights. He also took into account the fact that Million Strong had, until the relationship between the petitioner and the respondent turned sour, signed the financial statements of the Company. We do not agree with Mr Barlow SC that these are irrelevant considerations.”

65.  In Lehman & Co Management Ltd v Effiscient Ltd & Anor (supra) at 683, paragraph 39 and 41, Chu JA said:

“ 39. We are unable to agree with the criticisms made of the Deputy Judge’s reasoning and conclusion. We note that the scope of the documents covered by the intended inspection is wide-ranging and does not have any temporal restriction. It essentially seeks to inspect all of the Company’s documents. It is difficult to accept that such an extensive inspection is needed for the petitioner to know the value of its shareholding and to make a reasonable settlement offer….

41.   … It is important to recognise the distinction between an inspection under s152FA and discovery in civil litigation.  Inspection under s.152FA has to be for a purpose germane to an applicant’s status as a member.  The procedure is not a form of, and should not be used as a substitute for, discovery or inspection after discovery by list or affidavit.”

66.  I agree with Mr Wong that the plaintiff did have access to the Company’s documents in his capacity as a director for all the years prior to 31 December 2015.  The fact that he did not bother to inspect the company’s documents is a relevant factor for the court to take into consideration in the exercise of its discretion against ordering an inspection of the four outstanding categories of documents. 

Disposition

67.  As indicated above, I do not consider the plaintiff’s application for inspection as well founded.  Accordingly, I make an order to dismiss the plaintiff’s Originating Summons with a cost order nisi that costs to be paid by the plaintiff to the defendants forthwith, on a party to party basis, to be taxed if not agreed.  Unless any party applies to vary the cost order nisi within 14 days after this decision is handed down, the same shall become absolute upon the expiry of the 14-days period.

68.  Finally, it remains for me to thank Mr Alder and Mr Wong, counsel for the plaintiff and the defendants for their helpful submissions and assistance rendered to the court.