YAU KWAI LUNG AND ANOTHER v. YU SO LAN RAINBOW AND OTHERS

HCMP 2713/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2713 OF 2004

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DECISION

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1.  The plaintiffs and the 1^st to 3^rd defendants are the directors of the 4^th defendant, Rainbow Beauty Skin Care Limited (“the Company”).  The 2^nd plaintiff is the daughter of the 1^st plaintiff.  The 1^st and 2^nd defendants are husband and wife and the 3^rd defendant is their daughter.

2.  On 20 October 2004, the plaintiffs issued the Originating Summons herein, seeking to compel the 1^st to 3^rd defendants to produce for their inspection “the books of accounts, management accounts, working papers, bank statements, cheque stubs, contract, instrument of transfer, statutory records and invoices” of the Company and for copies of them to be taken.  The Originating Summons also seeks ancillary relief pertaining to the production and inspection order.

3.  The Originating Summons was returnable on 21 December 2004.  On 20 December 2004, an Order by consent was made in terms of the Originating Summons, save as to costs.  The relevant consent summons was filed on 18 December 2004.  The Order provides for the costs of this action and the consent summons be reserved.

4.  Since then, the plaintiffs had carried out the inspection.  On 21 May 2005, the plaintiffs petitioned for the winding-up of the Company under HCCW 378/2005.

5.  The present hearing is to dispose of the only outstanding issue on the Originating Summons, namely, the costs of these proceedings.  The plaintiffs are applying for costs against the 1^st to 3^rd defendants on indemnity basis.  The 1^st to 3^rd defendants oppose it.

6.  Costs is a matter of the court’s discretion.  The usual rule is for the successful party to have his costs: Hong Kong Civil Procedure 2004 vol.1 para. 62/2/6.    By the Order of 20 December 2004, the plaintiffs had basically succeeded in obtaining all the relief they seek under the Originating Summons.  Despite that, the 1^st to 3^rd defendants contend that they are not entitled to have the costs of the proceedings on the ground that the present proceedings were brought prematurely and unnecessarily. 

7.  Specifically, the 1^st to 3^rd defendants say that:

(1)	They never deny the plaintiffs as directors of the Company have the right to inspect the documents of the Company.
(2)	The documents of the Company were not available for inspection as they were kept with the accountant of the Company, and were required by the accountant for the preparation of the audited accounts and the revisions to the previous accounts of the Company.  It was only in December 2004 that the documents could be made available for inspection by the plaintiffs.
(3)	At the Board meeting on 31 August 2004, the directors had agreed to the mechanism for effecting the inspection.  The 1st plaintiff was to provide a list of documents required and the defendants would require time to consider and sort out the documents.

8.  The 3^rd defendant additionally says that she has acted reasonably and has done all that she can as a director.

9.  The merits and strength of these assertions of the 1^st to 3^rd defendants have to be considered against the events leading to the institution of these proceedings.

10.  Before that, however, it is important to bear in mind that the plaintiffs, as directors, have the right to inspect and take copies of documents belonging to the Company for the purpose of properly discharging their duties: see section121 of the Companies Ordinance and Re Boldwin Construction Co Ltd [2001] 3 HKLRD 430.   It should also be noted that the 1^st to 3^rd defendants do not dispute that the plaintiffs were and are entitled to exercise the right.  It is not their case that the plaintiffs had ulterior motive or were misusing their right when seeking to inspect the documents of the Company.  

11.  By a letter dated 7 April 2004, the 1st plaintiff first made a request to have the accounts of the Company.  On 18 May 2004, the plaintiffs’ solicitors wrote to the Company for the attention of the 1^st defendant asking for, inter alia, copies of bank statements of the Company.  On 1 June 2004, the plaintiffs’ solicitors wrote again to request for monthly business income reports.  There was no response to these requests.

12.  By a letter dated 10 June 2004, the plaintiffs’ solicitors warned that legal proceedings would be instituted if the monthly business income reports were not provided within three days.  The 1^st defendant replied to this by letter dated 15 June 2004 saying that the management was in the course of preparing the accounts and would provide a full set for inspection upon the finalisation of the account. 

13.  Further on 21 June 2004, the plaintiffs’ solicitors wrote to request for bank statements and credit card statements in addition to the monthly business income reports.   There was no reply.  A further letter was written on 5 July 2004 warning against legal proceedings.  The 1^st defendant responded by letter dated 8 July 2004 giving notice that they were seeking legal advice.  The plaintiffs’ solicitors sent a chaser by letter dated 12 July 2004.  It met with no reply.  Another letter was sent on 26 July 2004.  The 1^st defendant responded by letter dated 30 July 2004 stating that all the books and accounts of the Company were with the accountant for preparing the audited account and asked the plaintiff to wait until the end of August 2004.

14.     On 13 August 2004, the plaintiffs requisitioned a board meeting and served a proposed agenda for the meeting.  Item 7 of the agenda was to discuss the inspection of the books, accounts and records of the Company.  The directors did meet on 31 August 2004 and item 7 was discussed at the meeting.  The defendants had prepared a transcript of the recordings of the meeting, the accuracy of which is accepted by the plaintiffs.  

15.  From the transcript, it can be seen that during the meeting, the 1^st defendant said that arrangement was being made and the inspection was for the time being not necessary.  A batch of selected documents was provided to the plaintiffs and the 2^nd defendant suggested that would be sufficient for the time being as the plaintiffs would need time to go through them.  When the 1^st plaintiff asked when he could see the documents underlying the audited reports, the 1^st and 2^nd defendants told him to make out a list and to give them time to prepare. At this junction, the following exchange took place between the 1^st plaintiff and the 2^nd defendant before they changed to another topic:

1st plaintiff :	“你使唔使三 、四個月吖?”
2nd defendant :	“哦, 咁又唔使, … 一頭半個月… 個零月啦,一個月喥啦。”

16.  On the strength of this exchange, the defendants say that the 1^st plaintiff had offered to allow them 3-4 months to furnish the documents, and that it was agreed that the 1^st plaintiff would provide them with a list of the documents he required.  I am unable to accept these contentions.  Reading the transcript in context, it is plain that the 1^st plaintiff was unhappy about the 1^st and 2^nd defendants’ response to his request to see the underlying accounting documents and was posing a rhetorical question rather than offering to give the defendants 3-4 months to get the documents ready for inspection.  After all, the director’s right to inspection extends to all documents and records of the Company, and there is no question of the plaintiffs being required to provide a list or the defendants selecting the documents for inspection.

17.  Then on 8 September 2004, the plaintiffs’ solicitors wrote to the Company’s accountant, Messrs Alan Chan & Co. and requested to have the audited reports and the breakdowns of the financial statements of the Company.  The accountant replied by letter dated 10 September 2004 that they had been instructed not to disclose any information.  Enclosed in the letter was a memo to the accountant signed by the 1^st defendant informing that they were not allowed to disclose the accounting and financial information to any third parties, including any minority shareholders.

18.  On about 17 September 2004, the plaintiffs were given the audited report for the year ending 31 December 2003.   On 21 September 2004, the plaintiffs’ solicitors wrote to the Company for the attention of both the 1^st and 2^nd defendants requesting for the underlying and other updated accounting documents.  The request was not met.

19.  Separately, the plaintiffs’ solicitors wrote to the 3^rd defendant by letter dated 4 October 2004 requesting for the accounting documents of the Company.  There was no response to it.

20.  Looking at the events, it is evident that despite a series of requests since April 2004, the plaintiffs had not been able to have access to the documents of the Company.   It is true that the 1^st to 3^rd defendants had not overtly disputed that the plaintiffs are entitled to inspect the company documents.  However, they had consistently ignored and stalled the plaintiffs’ requests. 

21.  In Re Boldwin Construction Co Ltd at p.438 para.27, Rogers VP when dealing with the duties of a director in relation to his co-director’s right to access company documents, said,

“… he was, nevertheless, a director of a company.  When it came to the exercise by directors of the undoubted right of access to company documents, he could not take a neutral role. … His duties as a director obliged him to use such power as he had as a director to enable other directors to exercise their right and position as directors.”

22.  By ignoring and stalling the plaintiffs’ requests, the defendants had effectively denied the plaintiffs’ right of access to company documents.  It is not good enough for the defendants to claim that they did not dispute the plaintiffs’ entitlement.  They are under a duty to facilitate and enable the plaintiffs to exercise their right. 

23.  As to the defendants’ assertion that the documents could not be inspected because the accountant was auditing and revising the accounts, the genuineness of this must be thrown into doubt given the 1^st defendant’s memo to the accountant and the accountant’s reply to the plaintiffs’ solicitors.  The accountant only said that they were forbidden to make disclosure without mentioning that they required the documents for their accounting work.  Also, if the documents could not be inspected because of the accounting work, the defendants could have informed the plaintiffs, instead of instructing the accountant to withhold the information.

24.  Furthermore, the audited report for the year ending 31 December 2003 was available on about 17 September 2004.   There has been no satisfactory explanation as to why the request for inspection as per the plaintiffs’ solicitors’ letter dated 21 September 2004 was not acceded to.  Had the defendants genuinely accepted and respected the plaintiffs’ right of access to company documents, there was plenty of time before the commencement of these proceedings for them to allow the plaintiffs to have access to the documents.  Yet it was only on 14 December 2004 that they positively agreed to let the plaintiffs carry out the inspection.

25.  The defendants sought to explain the inaction by the so-called agreement reached at the meeting on 31 August 2004.  As noted above, the defendants’ assertion cannot withhold scrutiny.

26.  Turning finally to the 3^rd defendant, the law is clear that she is obliged to use such power as she has as a director to enable the plaintiffs to exercise their right of access to documents.  Mr Ho argues that the 3^rd defendant did not know of the plaintiffs’ request to access documents until she received the agenda for the 31 August 2004 meeting.  Miss Yiu submits, and I agree, it is hard to accept that the 1^st and 2^nd defendants, her parents with whom she resides, would not relate to her the many requests from the plaintiffs and their solicitor. 

27.  That said, the 3^rd defendant admittedly knew by the terms of the agenda of the 31 August 2004 meeting that the plaintiffs were requesting for access to company documents.  She was additionally served with the letter dated 4 October 2004.  She could not be in any doubt as to the plaintiffs’ requests.   The evidence does not show she had done or endeavoured to do anything to enable the plaintiffs to have access to the documents.  Although she was present at the 31 August 2004 meeting, she had not spoken up on the issue.  It is argued that she had not expressed objection to it.  But that is insufficient because there is clearly a lot that she can do within her power as director.  The reality is, like the 1^st and 2^nd defendants, she had ignored the plaintiffs’ requests.  This is tantamount to denying the plaintiffs’ undoubted right.   

28.  It is Mr Ho’s submission that the 3^rd defendant is only obliged to vote in favour of allowing access to the plaintiffs, but since the matter was not put to vote, there was nothing further that she could do.  This is a misreading of the judgment of Rogers VP in Re Boldwin Construction Co Ltd at para.27.  The reference in the judgment to voting rights was made in the context of the facts of that case.  It is not the law that a director’s duty is only to vote for giving access if the matter is put to vote.

29.  For the above reasons, the plaintiffs are driven to come to court in order that they can exercise their right.  Accordingly, there is no justification to depart from the usual rule of awarding costs to the successful party.  The plaintiffs should have the costs of this action, including all costs reserved.

30.  The plaintiffs have also sought costs on indemnity basis.  In my view, the matter has to be approached from two perspectives.  On the one hand, although the 1^st to 3^rd defendants were at fault in not acceding to the plaintiffs’ requests for access and inspection, they had eventually decided not to resist the Originating Summons and had consented to an order being made on it.  There is nothing exceptional in their conduct up to the making of the consent order that should attract an indemnity costs order.

31.  On the other hand, the 1^st to 3^rd defendants had chosen to put up an entirely unmeritorious resistance to the plaintiffs’ claim for costs.  This had resulted in a lengthy hearing and further affirmations.  The defendants’ conduct in this regard is unreasonable and ought to be visited with a higher costs order in respect of the costs application.

32.  I therefore order that the 1^st to 3^rd defendants pay the plaintiffs the costs of the action, including all costs reserved to be taxed on party-and-party basis, save that the costs incurred after 20 December 2004 be taxed on indemnity basis.