TERENCE HO PUI TIN v. WAH NAM GROUP LTD.

HCMP5224/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5224 OF 1999

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REASONS FOR JUDGMENT

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1. This is an application by the Plaintiff, a non-executive director of the Defendant company ("the Company"), for inspection of the books of account of the Company under s.121 of the Companies Ordinance, cap. 32.

2. The application was heard as a matter of urgency in Chambers and judgment was given in the late afternoon of Friday 27 August 1999. In view of the time at the end of the hearing, the reasons for my judgment were handed down on Monday 30 August 1999 in open court as this was an Originating Summons.

Background

3. The Company is a listed company. Its Annual Report for the year ended 31 December 1998 was published on 2 August 1999. Its auditors Deloitte Touche Tohmatsu gave a qualified report. The Annual General Meeting of the Company is scheduled for Tuesday 31 August 1999.

Plaintiff's request for inspection

4. The Plaintiff says that at the Board Meeting of the Company on 2 August 1999, he informed the directors of his concern over the accuracy and reliability of the accounts, and on 18 August 1999, he wrote to the Company stating that in order to discharge his fiduciary duties as a director of the Company, he would attend the office of the Company in the afternoon of 20 August 1999 to inspect and review the books of account of the Company, including the Accounts, the supporting schedules, working documents, ledgers, vouchers and the Minutes of the Company and its subsidiaries. (The Plaintiff is a certified public accountant who was the Finance Director of the Company, until he was removed from that post by the Board in March 1999).

The Company's position

5. In reply, the Company referred to proceedings involving the validity of some convertible loan notes issued by the Company, of which companies controlled by the Plaintiff are the legal owners (although their beneficial ownership is disputed by the controlling shareholder of the Company), and to an action instituted against the Plaintiff for breach of fiduciary duties. It also alleged that sometime in March 1999, documents belonging to the Company were taken away secretly by the Plaintiff. The Company said that when "practical problems" about security arising from those matters were solved, it would fix a convenient time for inspection.

6. On the same day (19 August 1999) the Plaintiff replied stating that he did not propose to look at any privileged documents, which the Company could feel free to remove.

Attempts at inspection

7. On 20 August 1999 (Friday), the Plaintiff attended the office of the Company, but no inspection took place. The Company's explanation for this was that the director who was responsible for dealing with the Plaintiff's request was out of town. The Plaintiff then wrote on the same day stating that he would attend the office again on Monday 23 August 1999. Correspondence between the parties' respective solicitors ensued.

8. However, black rainstorm warnings were in force on Monday 23 August 1999 and the morning of Tuesday 24 August 1999.

9. On 24 August 1999 (Tuesday), the Plaintiff wrote to the Company again stating his intention to attend the office the following day 25 August 1999 (Wednesday).

The "Advised List" and the "Company's Reply"

10. On 25 August 1999, the Company's solicitors wrote to the Plaintiff's solicitors stating that the Company would allow the Plaintiff to inspect the books of account of the Company (but not any other documents of the Company, or any documents or records of any subsidiaries of the Company of which the Plaintiff was not a director) subject to various terms as listed. This required amongst other things that the Plaintiff had to advise the Company in advance of the specific books of account that he wished to inspect (called"the Advised List") and that the Company would then seek legal advice on the same and then inform the Plaintiff of its view on the Advised List (called "the Company's Reply").

11. On the same day (25 August 1999), the Plaintiff's solicitors wrote to the Company's solicitors stating that all financial records relevant to the annual accounts which had been audited by Deloittes could be described as "the Advised List".

"The Advised List"

12. On 26 August 1999, the Plaintiff listed the documents of the Company and its subsidiaries he wished to inspect, as follows:-

1. Consolidation Working and Schedules for the Consolidated Balance Sheet and Profits and Loss Account for the financial year ended 31st December 1998;

2. General Ledger, Sub-ledgers, Bank Books, Fixed Assets Register, Bank Statements, Payroll records, Receipt Vouchers, Payment Vouchers, Journal Vouchers, Monthly Management Accounts for the period from 1st January 1998 to 31st December 1998 (for review of the Financial Statements) and for the period 1st January 1999 to 2nd August 1999 (for review of the Post Balance Sheet Events);

3. Board Minutes and minutes of meeting for executive directors or management (if applicable) for Wah Nam Group Ltd and its subsidiaries for the period from 1 January 1998 to 2 August 1999;

4. All Contracts, Agreement, Letter of Intent signed or unsigned in relation to the acquisition, disposal, charging of fixed assets of Wah Nam Group Ltd and its subsidiaries.

13. The same day (Thursday) the Plaintiff attended at the office but no inspection took place. The legal officer of the Company Mr Alfred Cheung said that the Company needed to take legal advice on the List.

"The Company's Reply"

14. Later that day, the Company joined issue on the Advised List by a letter which was presumably "the Company's Reply". The Company refused inspection of any documents of any subsidiaries. As regards the items in the Advised List,

1. inspection was refused save for the Consolidated Balance Sheet and Profits and Loss Account, on the grounds that the other documents sought did not fall within the definition of "books of account";

2. the Plaintiff was asked to specify the exact documents he wished to inspect one by one, so that the Company could seek legal advice thereon and make arrangements for inspection;

3. inspection of the Minutes of the Company was permitted;

4. inspection of contractual documents was refused as the same did not fall within the definition of books of account.

Events leading to application to Court

15. On Friday (27 August 1999) the Plaintiff attended the office of the Company. Mr Cheung, the Company's legal officer, gave the Plaintiff a copy of the Company's Reply to the Plaintiff. The Plaintiff asked for the books and records which the Company would allow him to inspect.

16. Board minutes of the Company up to 17 March 1999 were produced. Mr Cheung said that he would need to arrange the Minutes for the period thereafter. When the Plaintiff asked for a full set of ledgers and vouchers, Mr Cheung gave him a computer print-out of the general ledger. However no supporting documents were made available to the Plaintiff despite a wait of nearly half an hour, apparently because the Company expected him to describe individual documents, and then obtain legal advice on each. It was in those circumstances that the present application was brought to Court in the mid-afternoon of Friday 27 August 1999, a course of action of which the Company had been warned in previous correspondence.

Abridgement of time

17. The first issue between the parties was whether time should be abridged for the hearing of the Originating Summons. In the circumstances stated above, in particular the impending Annual General Meeting of the Company on Tuesday morning and the fact that the Plaintiff had sought inspection nearly 10 days ago (although I accept some of the time lost was due to the weather conditions), in the exercise of my discretion I abridged the time for the service of the Originating Summons and the filing of evidence.

No evidence that application made mala fides

18. The second issue was whether the application was made mala fides, such that this Court should not permit inspection by the Plaintiff even though he was a director of the Company. Mr Chain, counsel for the Company, has referred me to Conway v Petronius Clothing Co Ltd [1977] 1 WLR 72 in which Slade J (as he then was) held that the common law conferred on a company director the right to inspect the company's books of account so as to enable him to carry out his duties as a director, and that s.147 of the Companies Act (the equivalent of s.121 of the Companies Ordinance) conferred no statutory right, but merely implicitly recognised the existence of the right at common law, so that the Court retained a residual discretion whether or not to order inspection; although normally, the Court's discretion to withhold inspection would be very sparingly exercised; and that the Court would assume that the director was exercising his right in the interests of the company, unless the Court was satisfied affirmatively that the director's intention was to abuse the confidence reposed in him as a director, and was to injure the company.

19. Mr Chain sought to argue that there was such affirmative evidence of mala fides, in that according to Mr Cheung's Affirmation, the Plaintiff just took a brief glance at the Minutes when Mr Cheung provided them to him. However, I do not see how that could be evidence of mala fides. The Minutes which were provided were up to March 1999, and since the Plaintiff was Finance Director of the Company until March 1999, it is not surprising that he did not take much time with them.

20. Although there is litigation between the Plaintiff and the Company, given that the Plaintiff had invited the Company from the start to exclude any privileged documents from his inspection, the Company has failed to discharge the burden upon it of satisfying the Court affirmatively that the Plaintiff's intention was to abuse the confidence reposed in him as a director, and was to injure the Company.

Scope of inspection

21. Another issue between the parties was as to the scope of inspection: first, were the books of account of the Company's subsidiaries liable to be inspected?

22. The Plaintiff's application was made under s.121 of the Companies Ordinance. That section in itself did not refer to books of accounts of subsidiaries. Miss Cruden, counsel for the Plaintiff, referred me to s.124(1) which deals with group accounts. However I was not persuaded that the combined effect of the two sections would enable a director of the holding company to inspect the books of account of a subsidiary per se, but I accept that where there were a consolidation balance sheet and profit and loss account, consolidation working documents and schedules should be included for inspection even if they do disclose the position of the subsidiaries.

23. I accordingly ordered for paragraph 2(a) of the Originating Summons (relating to paragraph 1 of the Advised List) that the scope of inspection include consolidation working documents and schedules for the consolidated balance sheet and profit and loss account for the financial year ended 31 December 1998.

24. Another issue in relation to the scope of inspection was whether the Plaintiff was entitled to look at contracts, agreements and letters of intent in relation to the acquisition, disposal or charging of fixed assets.

25. It is true that these documents would affect the assets of the Company and its income and expenditure. However, s.121 only permits a director to inspect the "books of account". As I understand the term, books of account would include ledgers, journals, vouchers, statements and such like accounting records. I was not persuaded that the term would include contracts and agreements, even if they may give rise to entries in accounting records. For this reason, I did not give the Plaintiff liberty to inspect any documents listed in paragraph 2(d) of the Originating Summons (relating to paragraph 4 of the Advised List).

26. The same reasoning applies to the minutes. The Plaintiff had proceeded under s.121 only. I do not understand minutes to be included in the term "books of account", and so I did not make any orders for inspection of any documents listed in paragraph 2(c) of the Originating Summons (relating to paragraph 3 of the Advised List). In any event, the Company had no objection to producing minutes for inspection.

27. That left paragraph 2(b) of the Originating Summons (relating to paragraph 2 of the Advised List). The Company's objection was that as a matter of practicality, it could not provide the documents for inspection because the documents were not specific enough. I cannot agree. The Plaintiff had as early as 18 August 1999 asked for ledgers and vouchers. His request was set out in greater detail in the Advised List. As I noted in the course of the hearing, I fail to see how more specific a request for bank statements for the period 1 January 1998 to 2 August 1999 could be. The documents listed are clearly all accounting records. Accordingly, I ordered that the Plaintiff be at liberty to inspect those books of account of the Company.

Allowance for reasonable time to take legal advice

28. In light of the fact that the parties are in litigation, the orders I made for inspection were subject to the provision that the Company should not be required to provide for the Plaintiff's inspection any documents privileged from production under the 4 pieces of litigation, and that the Company should be entitled to a reasonable time to obtain legal advice on such privilege. Of course, whether the time that may be taken is reasonable or not would depend on all the circumstances, including the length and nature of the document, and the fact that the Plaintiff had asked for the documents nearly 10 days ago.

Costs

29. That left the issue of costs. I have set out the history of the Plaintiff's request for inspection in some detail above, as I took the view from those matters that the Plaintiff had met with considerable obstruction from the Company on his request, in particular in respect of the accounting records listed in item 2 of the Advised List. There was no evidence of mala fides, and so the Plaintiff's request for inspection should have been complied with as soon as possible. In my view, although the Plaintiff did not get to inspect everything he wished (as I was not persuaded that he could inspect the books of account of the subsidiaries per se), he has obtained an order under which he has got more than what the Company by its actions had shown that they were prepared to provide.

30. Accordingly for an order for costs to follow the event, the appropriate order was that the Company bear the Plaintiff's costs. I would note here that Mr Chain has asked for leave to appeal the order as to costs, which I granted.