YANG YU v. HK HUANHAI TRADE CO. LTD

HCMP 216/2023

[2024] HKCFI 1495

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 216 OF 2023

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BETWEEN

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DECISION

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Introduction

1.  By Amended Originating Summons filed on 22 March 2023 (“the Amended OS”), Mr Yang seeks an order for inspection and making copies of certain company records and documents of HK Huanhai Trade Co. Limited (“the Company”) set out in Schedule B and Schedule C annexed thereto pursuant to sections 355, 620, 631, and 740 of the Companies Ordinance, Cap.622 (“the CO”).

2.  Schedule B includes the following documents:

(1) Records of members’ resolutions;

(2) Minutes of general meetings;

(3) Register of Members;

(4) Copies of instruments creating charges; and

(5) Register of Charges.

3.  Schedule C includes the following documents:

(1) All records and documents since the date of incorporation in relation to the bank account of the Company;

(2) All bank statements since the date of incorporation in relation to the bank account of the Company;

(3) Management accounts of the Company since the date of incorporation;

(4) All existing valuation reports for the assets of the Company;

(5) All contracts entered into by the Company since the date of incorporation; and

(6) All directors’ resolutions of the Company since the date of incorporation.

4.  The Company, represented by Mr Lai together with Mr Lim, opposes this application. It took out a summons dated 5 April 2024 (“the New Affirmation Summons”) to seek retrospective leave to file and serve the 2^nd Affirmation of Li Wenrou (“the 2^nd Li Affirmation”). At the call-over hearing of the New Affirmation Summons on 2 May 2024, just 28 days away from the substantive hearing of the Amended OS, I adjourned the hearing of the New Affirmation Summons to be heard together with the Amended OS and the 2^nd Li Affirmation be adduced on a de bene esse basis and at the same time granted leave to Mr Yang to file and serve his affirmation in reply on or before 21 May 2024.

Background facts

5.  The following account of the undisputed background facts is essential to the understanding of the bitter disputes between the parties leading to the commencement of the present proceedings.

6.  The Company is locally incorporated in 2017. It has four members. Out of the total 1,000,000 shares, Li Wenrou (“Li”) and Mr Yang holds 328,000 shares and 310,000 shares respectively. Mr Ji Jie (“JJ”) holds 262,000 shares and Mr Jiang Cheng Yuan (“Jiang”) holds 100,000 shares. In other words, Mr Yang holds 31% of the entire shareholding.

7.  Li and JJ are the only two de jure directors of the Company.

8.  The Company has two related companies with common shareholders, namely, 杭州環海健康科技有限公司 (“the Hangzhou Company”), incorporated in Mainland China in 2015 and 環海健康株式會社 (“the Japan Company”) incorporated in Japan in 2016.

9.  The Company, the Hanzhou Company and the Japan Company (collectively “the Companies”) carry on the trade of health products sourced from Japan to Mainland customers on various e-commerce platforms under the trade name of 野口醫學研究所海外旗艦店 Noguchi Medical Research Overseas Flagship Store (“Noguchi Store”).

10.  The Japan Company deals in health products sourced in Japan and the Company is one of its customers. It entered into an authorized dealership agreement (“the Dealership Agreement”) with 野口醫學研究所株式會社 Noguchi Medical Research, Co. Ltd (“Noguchi Company”) for the trade of its health products by Noguchi Store. Allegedly the Dealership Agreement was terminated as of 31 July 2023. Madam Huang, the wife of Mr Yang, was in charge of the Japan Company until 23 December 2020.

11.  Apparently, only companies incorporated in the Mainland can carry on trading by the use of the e-commerce platforms in the Mainland. Hence the Hangzhou Company came into being to facilitate the main business of the Companies.

12.  Mr Yang holds 31% of the shareholding of the Japan Company and his wife Madam Huang is the Chairman. Li holds 32.8%, JJ holds 26.2% and Jiang holds 10% of the shareholding of the Japan Company.

13.  Mr Yang also holds 34% of the shares of the Hangzhou Company. On the other hand, Li holds 41% and JJ holds 25% of the shareholding of the Hangzhou Company.

14.  There are 3 companies which have given rise to considerable disputes between the parties. They are 申友株式會社 (“Friend”), 好助健康有限公司（香港） (“Good Help”), 藍櫻花株式會社(日本) (“Blue Sakura”)(collectively “the 3 Companies”). The Company alleges that Mr Yang is the person behind the 3 Companies and the 3 Companies are its competitors.

15.  The stated purpose of the present application for inspection of the documents of Mr Yang in the 1^st Affirmation of Yang Yu filed on 10 February 2023 (“the 1^st Yang Affirmation”) is to investigate into the following various misconduct by the directors:

(1) Unreasonable refusal to declare and/or distribute dividends since the Company’s last distribution of dividends on or about 9 January 2020 despite sufficient accumulated profits of the Company and its healthy financial liquidity;

(2) Misappropriation of the Company’s assets; and

(3) Serious and reasonable suspicion of false accounting.

16.  The Company, represented by Li, denies all these allegations and further claims that the present application is motivated by bad faith and merely serves Mr Yang’s improper purpose, via, seeking to obtain trade secrets and confidential information of the Company for the rival business of Good Help and Blue Sakura.

The New Affirmation Summons

17.  I have to first dispose of the New Affirmation Summons to determine the state of evidence before I can properly consider the Amended OS.

18.  Less than a month after Mr Yang commenced these proceedings, the Company disclosed to Mr Yang the audited financial statements of the Company for the financial periods from 1 April 2018 to 31 March 2022 and on 12 January 2024, the 2023 Financial Statement (collectively “the Financial Statements”). On 17 March 2023, the Company disclosed to Mr Yang the Register of Members and Register of Charges, i.e. Items 3 and 5 of Schedule B.

19.  The Company only filed its affirmation in opposition by way of the 1^st Affirmation of Li Wenrou (“the 1^st Li Affirmation”) on 4 July 2023, almost 5 months after it had received the 1^st Yang Affirmation.

20.  With similar slowness, it was only on 11 December 2023 that Mr Yang filed the 2^nd Affirmation of Yang Yu (“the 2^nd Yang Affirmation”) to which he exhibited the written opinion of Mr Ryan Wan, a Certified Public Accountant, on the Financial Statements (“Written Opinion”). Inevitably, in the 2^nd Yang Affirmation, Mr Yang made some new allegations based on the opinion and findings of Mr Ryan Wan in the Written Opinion.

21.  Mr Yang further made a new allegation about a local company called HK Blossomsea International Co., Limited (“HK Blossomsea”) apparently owned by Li. Mr Yang alleges that Li has engaged in a business in competition with the Companies through HK Blossomsea.

22.  All such new allegations are plainly beyond the scope of an affirmation in reply to the 1^st Li Affirmation. Whilst it is understandable that Mr Yang could only make some of such new allegations after the receipt of the Financial Statements, he should not have conveniently included them in his reply affirmation. He should have properly sought leave to file a further affirmation in support of the Amended OS and leave for the Company to file and serve an affirmation in opposition thereto. All such new allegations included without leave are liable to be expunged.

23.  The Company, however, did not apply for such allegations to be expunged from the 2^nd Yang Affirmation. Instead, by a letter dated 25 January 2024 (“the January Letter”), it requested for the consent of the solicitors of Mr Yang to file the 2^nd Li Affirmation and suggested that Mr Yang could file a further affirmation in reply thereto. It was indicated that in the absence of a substantive reply, the Company would take out a summons to make an application within 7 days therefrom.

24.  The solicitors of Mr Yang did not reply to the said letter. Their failure to make any reply is unreasonable and against the spirits of the Civil Justice Reform.

25.  Against this background, the Company took out the New Affirmation Summons. The Company gives no explanation as to why it had to wait for more than 2 months to issue the same, nevertheless.

26.  Mr Lai submits that the 2^nd Li Affirmation is necessitated by the new allegations in the 2^nd Yang Affirmation. His submission must be right.

27.  Mr Chan, for Mr Yang, opposes this application on the main ground that it was made too late. He complains that it is unfair to allow Mr Yang only 19 business days to reply to the 2^nd Li Affirmation as Mr Yang is a frequent traveller without all the relevant documents in his physical possession. Mr Chan seems to ignore the fact that the 2^nd Yang Affirmation contains new allegations liable to be expunged and Mr Yang’s non-reply to the request of the Company in the January Letter. I too cannot accept that Mr Yang has not been given inadequate time to file his affirmation in reply to the 2^nd Li Affirmation.

28.  Curiously enough, Mr Chan indicates that Mr Yang does not oppose those part in the 2^nd Li Affirmation concerning HK Blossomsea only.

29.  Neither party is free from blame. Both of them have contributed to the unsatisfactory state of affairs and an extra burden has been placed on this court due to Mr Yang’s indiscipline regarding his purported reply evidence and the Company’s inexplicable lateness of this application. It has crossed my mind that I should simply disallow the 2^nd Yang Affirmation and hence the 2^nd Li Affirmation and the 3^rd Affirmation of Yang Yu altogether. In order to dispose of the application in accordance with the substantive rights of the parties, however, I believe that I should allow all these affirmations to be adduced. I so order and each party should bear its own costs in respect of the New Affirmation Summons.

30.  Now I turn to the substantive application by way of the Amended OS.

Applicable legal prinicples

31.  The legal principles governing applications made by shareholders for inspection of company’s documents are well-settled. The guidance of Harris J in Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241 is instructive and often cited. In Wong Sau Man Samuel v Wong Kan Po Wilson [2017] 4 HKLRD 542 at §39, DHCJ William Wong SC gave a good summary of the applicable legal principles making references to relevant authorities including Wong Kar Gee Mimi. I find it of utility to adopt the same hereinbelow:

“39. …

(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 241 at 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 considering all 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 application for 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)”

32.  Further, in Cheung Tung Lan, Tony v Yang Yongdong and Ors. (HCMP 447/2012, unreported, 17.5.2012), at §28, Harris J had this to say about “proper purpose” in the context of a shareholder’s application for inspection of the documents of a company,

“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.”

33.  In short, Mr Yang is required to satisfy this court that his application is made in good faith and that the inspection sought is for a proper purpose. The former involves a subjective test and the latter involves an objective test.

34.  With these principles in mind, I now scrutinise the reasons of the application given by Mr Yang and proceed to determine whether the two tests are met.

Denial of distribution of dividends

35.  The gravamen of Mr Yang’s complaint is that despite the significant retained earnings and healthy cash balance since Financial Year 2019, the directors of the Company have persistently refused to distribute dividends.

36.  Mr Yang complains that unreasonable failure to distribute dividends harms his economic interest qua member of the Company.

37.  It is imperative to identify the real cause of the non-distribution of dividends issue.

38.  Mr Yang relies on the following matters. First, there was a discussion about dividend distribution among Li, JJ and Mr Yang on or about 10 July 2019. Li and Mr Yang agreed to the proposal of JJ that there should be a periodic dividend distribution policy (“Dividend Policy”) and after a one-off dividend distribution of RMB2 million, there would be a quarterly declaration of dividends in January, April, July and October each year. This discussion is evidenced by the screenshot of a WeChat chat group involving all three of them.

39.  In the same month, a written agreement was signed by all the members of the Company dated 26 July 2019 in which all the members agreed that in view of the large responsibility taken up by Mr Yang in the business operation of the Company and his vast contribution, in the event of a dividend distribution, Mr Yang should first be entitled to 15% of the declared dividends and the remaining 85% would be distributed among the members in accordance with their respective shareholdings (“the Dividend Distribution Agreement”).

40.  Mr Yang says he last received dividend payment on 9 January 2020 and he has not received any dividends ever since. He made an enquiry with Li about dividend distribution on 25 August 2020. There is a screenshot of the relevant WeChat conversation in the chat group evidencing the enquiry. Mr Yang first asked whether the audit process had been completed and Li said he would keep chasing and his estimate of the completion time was before mid-November by the latest. Mr Yang asked about the arrangement for the dividends covering the Financial Year 2019 to the 3^rd quarter of Financial Year 2020. Li replied that after the completion of the audit process, in light of the opinion of the auditors, he would canvass their views in the chat group.

41.  On Christmas Eve in 2020, there was a meeting (“the 24/12/2020 Meeting”) and the members met in person. They had a discussion about the non-payment of dividends despite the agreed Dividend Policy. Mr Yang alleges that the directors promised him that he would be paid dividends by 15 August 2021 (“the 24/12/2020 Dividend Distribution Promise”).

42.  Mr Yang alleges that on 15 January 2021, there was a general meeting held in Japan in which all the four members attended (“the 15/1/2021 General Meeting”). Jiang and he attended the general meeting by way of video conferencing. Mr Yang says that at the meeting both the directors and all the members unanimously resolved that in accordance with the Dividend Policy and in light of the accumulated profits in the amount of HK$4,091,361, there would be a declaration of dividends and the dividends payable to Mr Yang would be HK$1,268,321.91. Mr Yang exhibited a draft record of the resolution passed in the 15/1/2021 General Meeting to the 1^st Yang Affirmation (“the Alleged Resolution”).

43.  Not having received any dividends, Mr Yang caused his former solicitors Messrs Zhang Lawyers to send the Company a letter dated 9 February 2022 (“the 9/2/22 Letter”) and referred to the 24/12/2020 Dividend Distribution Promise. A demand, among other things, that payment of the overdue dividends for the period from 1 April 2019 to 31 March 2021 in accordance with the Dividend Distribution Agreement should be paid to Mr Yang by way of a cheque drawn in favour of “Zhang Lawyers” within 10 days from the date of the 9/2/22 Letter was made.

44.  Messrs Samuel L.C. Yang & Co. (“SY”), former solicitors for the Company, sent a reply letter dated 15 March 2022 (“the 15/3/2022 Letter”). There, among other matters, SY requested for supporting documents evidencing the Dividend Distribution Agreement. They denied the existence of the Dividend Distribution Agreement.

45.  SY further pointed out that even if the Dividend Distribution Agreement had been made, it should cease to have any effect in light of the termination of the employment contract between Mr Yang and the Company on 31 March 2020. Thereafter, Mr Yang could no longer contribute to the success of the Company and so he should not be entitled an extra 15% of dividends as a reward for his contribution.

46.  SY then referred to Clause 73 of the Articles of Association of the Company (“the AA”), which conferred on the directors’ discretion to recommend a declaration of dividends. The members would become entitled to dividends only after there was a declaration of dividends at a general meeting. According to their instructions, the board of directors had not yet distributed any dividends and hence Mr Yang had no entitlement to any dividends.

47.  Mr Yang was then disillusioned by the 15/3/2022 Letter and formed the view that the directors would avoid dividend distribution at all costs, even in total denial of the previous Dividend Policy, the 24/12/2020 Dividend Distribution Promise and the Dividend Distribution Agreement. He contends that the unreasonable refusal to distribute dividends amounts to a breach of the fiduciary duties of the directors and, given their effective control of the Company, unfair prejudicial conduct to him as a member of the Company.

48.  Mr Yang suspects that the decision of the directors not to distribute dividends is not made on commercial grounds but because of their misappropriation of the assets of the Company.

49.  Mr Chan highlights to this court that the ever-changing position of the directors on the refusal to distribute dividends indicates that they do not have genuine commercial reasons. He submits that Mr Yang is entitled to investigate whether dividends have been declared but not paid and how much is available for reasonable distribution and for that purpose, Mr Yang should be entitled to inspect:

(1) All records and documents relating to the bank accounts of the Company since 2019;

(2) All bank statements in relation to the bank account of the Company since 2019;

(3) Management accounts of the Company duly endorsed by the authorised representatives since 2019; and

(4) All directors’ resolutions of the Company since 2019.

50.  The case of the Company on non-distribution of dividends is neatly summarised by Mr Lai in his written submissions and the following is mainly taken from his account.

51.  Since the inception, members of the Company had been paid dividends informally before declaration of dividends at general meetings. Such payments were booked as shareholders’ loan for audit purposes to be set off by any dividends declared subsequently.

52.  This practice is apparently evidenced by a document entitled “Request for Confirmation of Balances” dated 15 July 2019 (“the 15/7/2019 Confirmation”) sent to Mr Yang by Rich Moral CPA Limited (“Richful”) , the auditors of the Company for the purpose of the Financial Year 2019 audit. In this document, Mr Yang signed to acknowledge an outstanding amount of HK1,249,527 in the shareholders’ current account. It was booked as a unsecured, interest-free and no payment date loan. Mr Yang signed on the 15/7/2019 Confirmation without demur.

53.  However, when Mr Yang was asked to sign another Request for Confirmation of Balances on 26 November 2020 (“the 26/11/2020 Confirmation”) to confirm the prepaid dividends that he had received in the sum of HK$4,985,077.44 were loans as of 31 March 2020, Mr Yang refused to do so despite the fact that it was expressly stated to be for audit purposes only.

54.  From the transcript of the audio-recording of the 24/12/2020 Meeting, it can be seen that Li had explained this practice to Mr Yang when he again raised queries about the alleged loans owed by him to the Company. Apparently he accepted the explanation of Li.

55.  Li says that because of the refusal of Mr Yang to sign the 26/11/2020 Confirmation to acknowledge the loans previously extended to him, which were in truth his prepaid dividends, no dividends could be declared out of distributable profits by way of a shareholder’s resolution.

56.  On the other hand, Li refuses to accept that the 24/12/2020 Dividend Distribution Promise is an unconditional promise to pay Mr Yang dividends by 15 August 2021. Mr Yang had to sign the confirmation requested by Richful to enable the auditing process to be completed. I perused the transcript of the 24/12/2020 Meeting and I am inclined to agree with him.

57.  As regards the Alleged Resolution at the 15/1/2021 General Meeting, Li denies its existence and says that it was a mere draft resolution circulated by him. Li received the draft resolution from the auditors of the Company to resolve the shareholders’ loan issues. The 15/1/2021 General Meeting was not convened at all and the draft resolution was not passed. Since Mr Yang did not agree to provide confirmation, no such resolution could be passed.

58.  The WeChat record on 15 January 2021 could somehow lend support to Li’s account. Li sent to the group a draft resolution regarding dividend distribution and another draft resolution regarding conversion of loans to dividends. This indicates that there was indeed a connection between dividend distribution and “loans” previously extended to shareholders.

59.  Mr Lai draws my attention to the records of Mr Yang. They recorded Mr Yang’s receipts of 5 sums marked as “shareholder withdrawal” from Financial Years 2019 to 2020 totalling HK$4,985,077.44 (“the Sum”).

60.  Indeed, Mr Yang does not deny having received these sums amounting to the Sum. In the 9/2/2022 Letter, he raised objections to the request of Richful to sign a “Request for Confirmation of Balances” to confirm that as of 31 of March 2020 that the Sum was due from Mr. Yang to the Company. He said that he was surprised by the request and maintained that all sums of money previously received by him from the Company in the past represented dividends paid to him and did not form any part of any loans between the Company and him.

61.  However, Mr Yang did not give any particulars as to how such dividends received by him or any part thereof had been declared and approved at general meetings.

62.  It is noteworthy that in the 15/3/2022 Letter, SY simply demanded Mr Yang to make repayment of the Sum as his debt owing to the Company. There was no mention that it was in truth dividends previously distributed to him informally without declaration at general meetings.

63.  Of course, I have not lost sight of the 15/7/2019 Confirmation (and also a confirmation dated 18 February 2019) and Mr Yang’s explanation for his signature appearing therein. I accept the force in Mr Lai’s submission that his explanation cannot be accepted given Mr Yang’s commercial experience. However, I am not in a position to make a factual finding as to why he signed the 15/7/2019 Confirmation.

64.  I note that Clause 73(2) of the AA provides that the directors may from time to time pay the members interim dividends that appear to the directors to be justified by the profits of the Company. Thus, the directors are empowered to pay interim dividends even without a full audit and a declaration of dividends at a general meeting. Mr Yang does not complain about the refusal of the directors to pay interim dividends pursuant to Clause 73(2) and I have heard no submission on this provision.

65.  The rift between Mr Yang and the other shareholders including Li and JJ is obvious. They have previously resorted to litigations to resolve their differences. First, in May 2021, the Japan Company commenced a legal action against Mr Yang, Madam Huang and Friend claiming compensation for their wrongful activities which injured its financial interest. The parties finally reached a settlement.

66.  In March 2022, Mr Yang commenced legal proceedings in the Mainland against JJ and the Hangzhou Company for an application for disclosure of documents. His application was dismissed by the Zhejiang Hangzhou Shang Cheng District People’s Court (“SPC”) by a judgment dated 20 July 2022 (“the SPC Judgment”). In gist, the SPC held that Mr Yang set up Blue Sakura and Good Help with one Mr Lin to carry on a rival business against the commercial interest of the Hangzhou Company. Therefore, Mr Yang should be denied access to the accounting records of the the Hangzhou Company which contained its trade information so as to avoid any harm done to the Hangzhou Company.

67.  Mr Yang’s appeal against the SPC Judgment was dismissed by the Zhejiang Hangzhou Intermediate People’s Court by a judgment dated 5 December 2022 (“the IPC Judgment”).

68.  Without expressing any view on the correctness of the SPC Judgment and the IPC Judgment, I believe that the business activities of the 3 Companies have caused serious and valid concerns among the other members of the Company. There is hardly any mutual trust and confidence among them. This explains why at the 24/12/2020 Meeting, Li impressed upon Mr Yang that as a further condition for distribution of dividends, Mr Yang should not harm the interest of the Company.

69.  Whether this could be a valid reason to deny distribution of dividends is quite another matter. It appears to me that the poor relationship among the shareholders does play a significant part in the directors’ refusal or reluctance to distribute dividends to Mr Yang.

70.  On the evidence, I am not convinced that non-payment of dividends has anything to do with the books and records of the Company. In the Alleged Resolution, Li already made it clear there was accumulated profits in the amount of HK$4,091,361. It should be sufficiently clear to Mr Yang what the actual differences between him and the other two shareholders and directors (Li and JJ) are and why he is denied further dividends. It is not about figures. For the avoidance of doubt, I am not expressing any view as to whether the denials are justified.

71.  I am unable to accept Mr Chan’s submission that there is a real question as to whether dividends have been declared but not paid to Mr Yang. There is no evidential basis for this question to be raised.

72.  Whilst it is perfectly understandable that Mr Yang is frustrated about the impasse, he is unable to identify what kind of investigation he intends to carry out with an order for inspection and how such an inspection order could assist him. He should consider other remedies.

False accounting

73.  I should make it clear that I do not find any valid basis for Mr Yang to suspect false accounting on the part of the Company involving Richful. Despite Mr Yang’s alleged surprise expressed in the 9/2/2022 Letter, there is evidence that Li had explained to him the purpose of such confirmations requested by Richful and that Mr Yang indicated his understanding of the purpose they served. There is no evidence to support his alleged belief that the Sum was paid to him as dividends having been properly declared at general meetings.

74.  For completeness, I cannot accept that the wide-ranging criticisms of the accuracy of the Financial Statements are valid and an investigation is called for.

75.  Basically, in reliance of the Written Opinion, Mr Yang has identified three question expenses, namely foreign currency exchange losses, staff costs and commission expenses. He has further identified the following suspicious matters:

(1) the sudden appearance of commission expenses of the Financial Year 2021 retrospectively added in the 2022 Financial Statement;

(2) the discrepancy in the amount of foreign currency exchange losses recorded for the Financial Year 2021 as shown in the 2021 and 2022 Financial Statements;

(3) the discrepancy in the administrative and operating expenses recorded for the Financial Year 2021 in the 2021 and 2022 Financial Statements; and

(4) the change in term for the directors’ remuneration since the 2022 Financial Statements.

76.  In the first place, the Financial Statements were prepared by professional auditors. False accounting is a very serious allegation cannot be lightly made without clear evidence.

77.  Even if Mr Yang has some suspicions about these matters raised in the Written Opinion, the directors should be given a proper chance to proffer their explanations with the assistance of Richful. As the matters now stand, I cannot accept such complaints, considered individually or cumulatively, can give rise to any reasonable suspicion of false accounting.

Misappropriation of assets of the Company

78.  Mr Yang made an allegation of suspected misappropriation of the assets of the Company in the 1^st Yang Affirmation. He asserted that he had good reason to believe that the unreasonable refusal to pay dividends was due to the misappropriation of assets of the Company by the directors. This is logically a non sequitur.

79.  Mr Yang also made an allegation of unauthorized directors’ loans but he was referring to those loans recorded in the confirmations prepared by the auditors.

80.  In the 2^nd Yang Affirmation, after a review of the Financial Statements, he found out both Li and JJ have respectively taken out directors’ loans from the Company over the years without the approval of the members. In particular, it was recorded that in the Financial Year 2022, the sums recorded under directors receivables stand at HK$7.7 million. Mr Chan submits that such unauthorized loans are apparently in contravention of section 500 of the CO.

81.  Li sought to explain these loans in the 2^nd Li Affirmation. First, some of such loans were booked as directors’ loans but in fact were prepaid dividends for audit purposes. With these directors’ loans, Li and JJ do not have any loans recorded in their shareholders’ current accounts.

82.  On the other hand, Li explained that from time to time they would withdraw money from the Company as directors’ loans to make prompt payments for the expenditures of the Company conveniently. Such expenditures include payments to KOLs and online platforms pivotal to the business of the Company.

83.  Mr Lai refers to section 506 of the CO which provides that a company is not prohibited by section 500 from entering into any transaction to provide a director with funds to meet expenditure incurred for the purposes of the company. He submits that such loans are legitimate. On the evidence, this submission seems to be valid.

84.  I do not accept that the wide-ranging allegations made by Mr Yang out of the Financial Statements can give rise to a reasonable suspicion of misappropriation of the assets of the Company. This is so even if Mr Yang opines that the loans to the directors are unauthorised. Mr Yang does not explain why an investigation with the inspection of all the books and accounts of the Company from its inception is necessary and helpful.

Good Help and Blue Sakura – rival business?

85.  There is a heated debate as to whether the business carried on by Good Help and Blue Sakura are in now competition with the Company.

86.  Mr Yang contends that the Company no longer runs its Naguchi Store in TMall Global since the end of July 2023 and has ceased to have any active business. Mr Chan submits that it can have no rival business now.

87.  On the other hand, Mr Yang explained that Good Help and Blue Sakura traded in a different brand of health products known as Meiji and their products are different from those Noguchi products that the Company used to sell previously.

88.  Li clarified that the Company is in active business and has actually started dealing in Meiji products since 31 July 2023.

89.  Mr Lai relies heavily on the SPC Judgment and the IPC Judgment in his submission that these two companies are in competition with the Company.

90.  Given the evidence of Li about the current business activities of the Company, I have little doubt that Good Help and Blue Sakura are the trade rivals of the Company without reference to the SPC Judgment and the IPC Judgment.

91.  I do not accept that the trade of Good Help and Blue Sakura in the Mainland would not affect the financial interest of the Company in Hong Kong. Obviously, the trading business of the Hangzhou Company must have a bearing on the revenue of the Company.

92.  I accept that there is a valid concern of the Company that Good Help and Blue Sakura can obtain some confidential trade information of the Company if Mr Yang is allowed full access to the books and accounts of the Company. They may gain financial benefit by the use of such confidential trade information to the detriment of the Company.

93.  However, I am not convinced that Mr Yang has such an ulterior motive or improper purpose in the present application. The Originating Summons was issued in February 2023, long before the commencement of the trade of Meiji products of the Company in July 2023. I also note that Mr Yang used to have access to the books and accounts of the Company before.

94.  In any event, I accept Mr Chan’s submission that concerns of confidentiality can be addressed by undertakings restricting the use of information obtained under inspection.

95.  This, however, does not mean I would find any merits in the application of Mr Yang.

Good faith and Proper purpose

96.  I am of the view that Mr Yang has failed both tests and is unable to meet the good faith and proper purpose requirements on the evidence.

97.  Mr Yang fails to convince me that with all the unmeritorious allegations made on flimsy grounds, he has an honest belief that his purpose of this application is proper.

98.  I do not have much confidence in his evidence. He was not frank and forthcoming in his affirmations. He tended to make serious allegations causally. For example, his allegation of a company suspiciously receiving funds from the Company known as Kankaikenkou Co., Ltd (“Kankaikenkou”) is completely groundless. Kankaikenkou is just the Japanese name of the Japan Company.

99.  Mr Yang’s allegation that he received information of two secret bank accounts with Standard Chartered Bank in Singapore from an anonymous informer is also baseless. A simple enquiry with the bank would disclose that the account numbers of the alleged bank accounts are invalid and the alleged bank accounts do not exist.

100.  I cannot be persuaded that Mr Yang honestly believes that he has a proper purpose of this application.

101.  Having considered all the surrounding circumstances of this matter and given my foregoing analysis of the evidence adduced by the parties, I come to the conclusion that Mr Yang has not made out a genuine case for investigation. In other words, he fails to establish his proper purpose of his application.

102.  The scope of the documents sought to be inspected is manifestly excessive and I accept Mr Lai’s submission that Mr Yang has not begun to justify the scope. This further reinforces my belief that the present application is a fishing expedition in search of a cause of action to support his sheer suspicion of wrongdoings.

103.  To conclude, I find that Mr Yang has failed both tests and is unable to meet the good faith and proper purpose requirements on the evidence.

Conclusion and Orders

104.  For the reasons given, I am unable to accede to the application of Mr Yang. I order that the Amended OS be dismissed.

105.  I further make an order nisi that costs of the Company of and occasioned by the Amended OS (including all costs reserved) be paid by Mr Yang, to be taxed if not agreed.

106.  Lastly, I thank Mr Chan, Mr Lai and Mr Lim for their assistance in this matter.