LIANG RONALD AND OTHERS v. LWK & PARTNERS (HK) LTD

HCMP 1742/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1742 OF 2013

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R U L I N G

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1.  I have before me an originating summons issued by shareholders in the defendant company for orders pursuant to section 122(1B)(a) of the Companies Ordinance for extensions of the period in respect of which the company is required by section 122 to put its audited accounts and balance sheets before the company at an Annual General Meeting. 

2.  The breaches are all highly technical and go back some time.  There are four relevant years:

(1) For the financial period ending 31 March 1997.  For this period the accounts were put before the company at an AGM on 15 December 1997.  Although this is within the nine‑month period within which an AGM has to take place following the end of an accounting period for which audited accounts have been produced, there is a technical breach of the Ordinance because this was the first accounting period and it commenced on 19 October 1995.

(2) The second relates to the financial period ending 31 March 2002. The AGM was held on 30 January 2003 and, therefore, was one month late. 

(3) The third was for the financial period ending 31 March 2003, the Annual General Meeting took place on 14 February 2004 and was, therefore, six weeks late. 

(4) The fourth and final non-compliance was for the financial period ending 31 March 2009, the Annual General Meeting took place on 5 February 2010 and was, therefore, five weeks late.

3.  Self-evidently, all these breaches were technical and of a minor nature. 

4.  The originating summons first came on before me on 3 October 2013.  The application was adjourned in order to allow the plaintiffs to file further evidence concerning the company’s tax position, and also to explain in more detail the reason why the application was being made which, I was told, concerned prospective listing of the holding company of the group of which the defendant formed part.

5.  In October 2013, what was not clear to me, but has subsequently become clear, is that the reason that had been commonly advanced for making these types of applications up until that time - namely, that if orders of the type sought in the present application were not granted a prospective listing would be jeopardised - was fallacious.  This case itself illustrates that, as C Cheng Holdings Limited was listed on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited on 20 December 2013.

6.  It first came to my attention that the reason commonly being advanced for these applications was wrong when I became aware of the listing of Magnum Entertainment, which was the listed vehicle of a group of companies which had been the subject of an application before me, which was declined, the name of which is Prime Sunlight Ltd HCMP 1445-1449, 1451-1453, 1456‑1458 of 2013 (unreported decision dated 28 October 2013). 

7.  In that case, the breaches were not technical, and I was not satisfied that the breaches had occurred as a result of the inadvertence of the company’s management.  Despite this, and the fact that as the company’s prospectus revealed it was also in breach of three other ordinances at the time, the Stock Exchange approved the listing of Magnum Entertainment on its main board. 

8.  Another case, which was adjourned after its first hearing, and like this one by the time it came back on the relevant company had been listed, is Re Hong Kong Times Investments Ltd HCMP 2301,2302,2303 and 2304 of 2013, which is a judgment of Godfrey Lam J dated 30 January 2014.

9.  Section 122(1B) gives the court a discretion to extend the time period for convening an Annual General Meeting and laying before a company its audited financial statements.  The court generally takes into account factors such as the following in determining such applications:

(1) Whether the default was inadvertent and arose from an identifiable mistake rather than an indifference;

(2) Whether the shareholders were aware of the financial position of the company in question and thus were not prejudiced by non‑compliance;

(3) Whether the court is satisfied that the company will comply with the obligation to lay audited financial statements before annual general meetings in the future: see Prime Sunlight Limited HCMP 1445/2013 (unreported judgment, 28 October 2013).

10.  These are typical factors that the court takes into account.  But, it does not follow that simply because an applicant is able to satisfy them that an order remedying breaches will automatically be granted. 

11.  As I explain in paragraph 6 of my judgment in Natural Corporation Ltd HCMP 2148-2158/2013 (unreported judgment, 9 January 2014):

“There is one other matter which needs to be addressed. The factors to which I have referred to in paragraph 2 are things to which the Court has regard in deciding whether or not to exercise its discretion. It does not follow that because they are satisfied the discretion should automatically be exercised. Particularly where the application is retrospective, the breaches go back a considerable period of time and remedying them is from the Court’s perspective largely academic there has to be some good reason for the Court to exercise its discretion. As I observed in Prime Sunlight ibid, and is echoed in the judgment of DHCJ Le Pichon in Re Array Electronics (China) Limited at paragraph 92, a prospective listing may be a reason for exercising the Court’s discretion but it is not necessarily so. Determining whether or not to exercise it will to some degree involve balancing on the one hand the extent to which the nature and duration of the breaches make an application artificial and an unjustified imposition on the Court’s resources and on the other the consequences of not making an order. At present it is unclear to me what precisely the consequences of the Court refusing to grant an order are for a prospective listing. I have not had any evidence adduced in this or any other application which demonstrates that if the Court does not make an order remedying breaches of sections 111 and 122 it will be fatal to the successful progress of a listing. This, and similar applications, seem to be made on the basis that it is easier to apply to Court for orders remedying breaches than address the issue with the Stock Exchange. Unfortunately this has resulted in a massive increase in the number of such applications in the last 18 months. I understand that approximately 250 originating summonses have been issued so far this year pursuant to sections 111 and 122 representing I am told approximately 8% of all miscellaneous proceedings issued in the High Court.”

12.  As I explained in my judgment in Natural Corporation Ltd where an application is retrospective and the breaches go back a considerable period and remedying them is from the court’s perspective largely academic there has to be some good reason for the court to exercise its discretion.

13.  The question in the present case is: what is that reason given the fact that listing has gone ahead? 

14.  The reason, as I understand it, is this.  In the present case, the Stock Exchange’s comments on the draft prospectus, state in paragraph 1 under the heading, “Major Issues Non-Compliance Incidents”:

“For all non-compliance incidents, please fully address our standard comments SC1.2(i), (iii), (iv) and (vi).”

15.  Standard comment SC1.2(i) reads as follows:

“(i) in tabular format in the “Business” section, full details of the non‑compliance incidents including reasons(s) for the non‑compliance, the legal consequences and financial impacts including potential maximum penalties and other financial losses or savings (with support of legal opinion if applicable), whether provision has been made in the applicant’s financial statements and if not, reasons for not making provision, the identity and position of the Directors/ senior management involved in the non-compliance incidents, rectification actions taken/ to be taken, the latest status, and measures to prevent any future breaches and ensure on‑going compliance;…”

16.  These standard conditions are understood by the plaintiff, and would appear to be understood by other applicants for listings who have made similar applications to this court, as requiring steps to be taken to rectify any non‑compliance with the provisions of the Companies Ordinance.

17.  It would appear that the Stock Exchange does not give consideration to the nature of the non-compliance, and whether it is so minor that requiring rectification is unnecessary.  The result would appear to be a very significant increase in the number of these kind of applications made to the Companies Court.

18.  In the present case, it seems to me quite clear that the breaches are benign in nature, that there is no realistic prospect of the company or its director being prosecuted (and the application was not made on the basis that there was), and there is no reason at all to think that a refusal to grant the orders sought would have any adverse consequences on the listed status of C Cheng Holdings Ltd. 

19.  The application is, therefore, entirely academic and rather artificial, and is not one in which I think it appropriate for the court to exercise its discretion as there are no relevant facts or matters which justify it doing so. 

20.  I hope that, in future, consideration will be given by the Stock Exchange, and all other interested parties, to adopting a more considered approach to the way in which infringements of sections 111 and 122 of the Companies Ordinance should be dealt with by groups of companies applying for listings in Hong Kong so the Companies Court does not continue to be subjected to a large number of largely academic applications which are taking up far too much judicial resources. 

21.  I, therefore, refuse the application.