YIP WAI KWOK GABRIEL v. HONG KONG SOCIETY OF CONGENITAL & STRUCTURAL HEART DISEASE LTD

HCMP 1541/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1541 OF 2016

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R E A S O N S   F O R   D E C I S I O N

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1.  This is an application by the plaintiff (“Dr Yip”) under ss.431 and 610 of the Companies Ordinance, Cap 622 (“Ordinance”) for extension of time to allow: (a) the defendant (“Company”) to hold its AGMs[1] for the years 2012 to 2015; and (b) the Company’s directors to lay at those AGMs the reporting documents[2] for the financial years ended 31 March 2012 to 31 March 2015.

2.  The merits of this application are reasonably plain.  The Company is a charitable organisation with the aim to promote, maintain and pursue excellence in the care of patients with congenital or structural heart decease.  It is limited by guarantee, and is exempted from tax under s.88 of the Inland Revenue Ordinance, Cap 112.   

3.  Dr Yip is a cardiologist and the President of the Council which manages the business of the Company.  It appears that all the Council members are volunteers. 

4.  The failure to hold an AGM, and concomitantly to lay the requisite documents before the Company in AGM, for the years in question was caused by an erroneous belief on the part of the Council members that such obligations did not apply to the Company once it became exempted from tax. 

5.  I am prepared to accept that it was an inadvertent mistake given the circumstances of this case.  In particular, all the Council members were volunteers and none had any legal training.  I am also satisfied on the evidence that none of the Company’s members has suffered any prejudice as a result of the non-compliances, and that there is no risk of future non-compliance.  Thus, the requirements for granting relief are satisfied: see Re Sanliuyidu (Hong Kong) Sports Goods Co Ltd [2009] 4 HKLRD 708, §5. 

6.  As a consequence of the irregularities in question, the Company’s bank account has been frozen by its bank, and it is in danger of losing the banking service.  There is therefore good reason for the court to exercise its discretion in this case.

7.  There are interesting legal issues concerning the transition between the old Companies Ordinance, Cap 32 (“Predecessor Ordinance”) and the Ordinance.

8.  The duties to hold AGM and to lay the requisite documents at the AGM were governed by respectively s.111 and s.122[3] of the Predecessor Ordinance.  These obligations are governed by ss.610 and 429 of the Ordinance since the 3 March 2014. 

9.  In respect of the transition between s.122 and s.429, the issues have been explored and dealt with in Re Bamboos Professional Nursing Services Ltd [2014] 3 HKLRD 51. 

10.  As regards the transition between s.111 and s.610, I have been referred to Re Pioneer Industries (Holdings) Ltd [2015] 1 HKLRD 1.  It was a case which concerned both s.610 of the Ordinance and s.122 of the Predecessor Ordinance (see para 1 of the judgment).  However, the court made no distinction between the 2 obligations and dealt with them collectively in para 8 of the judgment as follows :

“It follows, as this application was made after the new Ordinance came into effect, that although the sections have been breached are the relevant sections of the old Ordinance, the extension is to be granted pursuant to s.610 of the new Companies Ordinance, and I grant, pursuant to that section, an order that the annual general meetings to remedy the mistake that has taken place are held on or before 16 November 2014.”

11.  There is a tension between Re Bamboos Professional Nursing Services Ltd and Re Pioneer Industries (Holdings) Ltd in that in the earlier case it was held that the transition between the old and new statutory provisions (s.122 and s.429) are as follows :

(a) In respect of a financial year which commenced and ended prior to the commencement date of the new provisions (3 March 2014) (“Commencement Date”), because the liability or obligation had been accrued under the old provisions, s.23 of the Interpretation and General Clauses Ordinance, Cap 1 (“Cap 1”) would apply pursuant to s.914(1) of the Ordinance.  The effect of s.23 is “as if the repealing Ordinance had not been passed”: see Re Bamboos Professional Nursing Services Ltd, §§8-11;

(b) In respect of a financial year which commenced before but ended on or after the Commencement Date, s.122 would continue to apply pursuant to s.78 of Schedule 11 of the Ordinance (“Schedule 11”): see Re Bamboos Professional Nursing Services Ltd, §7;

(c) As regards any financial year which commenced on or after the Commencement Date, the new provisions (s.429) would apply: see Re Bamboos Professional Nursing Services Ltd, §6.

12.  Although it is not clear from the judgment of Re Pioneer Industries (Holdings) Ltd which financial year was involved in that case in respect of the s.122 obligation, it appears from the terms of para 8 of the judgment that it was a case which fell within either category (a) or (b) (more likely the former) as identified in the preceding paragraph.  However, Re Bamboos Professional Nursing Services Ltd was not referred to the court.

13.  For extension of time for holding AGM, under s.107(5) of Schedule 11 infringements under the old and new provisions are treated in the same manner, as long as there is no application made for relief under s.111(2) of the Predecessor Ordinance :

“(5) If a company has contravened section 111(1) of the predecessor Ordinance and no member of the company has made an application under section 111(2) of that Ordinance, section 610(7), (8) and (9) has effect in relation to the company as if –

(a) for the words ‘subsection (1), (2), (3) or (6)’ in section 610(7) and (9), there were substituted the words ‘section 111(1) of the predecessor Ordinance’; and

(b) for the words ‘the financial year in respect of which the company has failed to hold an annual general meeting in accordance with this section’ in section 610(8), there were substituted the words ‘the year in respect of which the company has failed to hold an annual general meeting in accordance with section 111(1) of the predecessor Ordinance’.”

14.  It appears that the court in Re Pioneer Industries (Holdings) Ltd was relying upon s.107(5) in granting relief.  However, those provisions do not apply to any breach of s.122.  Relief for infringement of s.122 is governed by s.122(1B) of the Predecessor Ordinance.

15.  Mr Lok, appearing for Dr Yip, had valiantly tried to reconcile the 2 authorities by suggesting that where an application is made pursuant to s.610 of the Ordinance for extension of time to hold an AGM, the court has the power under s.610(7)(b) to “give any ancillary or consequential directions”, and an extension of time for the laying of financial documents may be granted as an ancillary or consequential direction.

16.  I am unable to agree with Mr Lok because: (a) it appears from s.610(7)(b)(i) and (ii) that the ancillary or consequential directions are concerned with the conduct of the AGM; and (b) such a construction tends to undermine the importance of s.122 or s.429 and nullify the specific transitional provisions discussed in Re Bamboos Professional Nursing Services Ltd. 

17.  Turning to the present case, Mr Lok had in his further supplemental skeleton submissions dated 25 July 2016 withdrawn his application in respect of 2015. 

18.  In respect of the extension of time to allow the Company to hold its AGMs for 2012 to 2014, I agree with Re Pioneer Industries (Holdings) Ltd.  This court is vested with the power to grant relief by reason of the combined effect of s.107(5) of Schedule 11 and s.610(7) and (8) of the Ordinance.

19.  As regards the extension of time for laying the income and expenditure accounts (s.122(1) of the Predecessor Ordinance) and the balance sheets (s.122(2)), s.23 of Cap 1 would apply in respect of the financial years ended 31 March 2012 and 31 March 2013.  Section 122(1B) would continue to apply to those financial documents for the year ended 31 March 2014 by virtue of s.78 of Schedule 11.   

20.  However, there is another complication.  Under s.122(1A) of the Predecessor Ordinance, the financial documents are required to be made up to a date, in this case, not more than 9 months before the date of AGM.  In respect of the financial years ended 31 March 2012 and 2013, this requirement would not present any problem because of the continuous application of s.122(1B).  Different consideration applies for the financial year ended 31 March 2014.

21.  In respect of that financial year, s.78(2) and (3) of Schedule 11 impacts upon the date to which the financial documents are to be made up to :

“(2) Despite subsection (1), section 122(1B) of the predecessor Ordinance, as in force immediately before its repeal, continues to apply in relation to accounts for a financial year beginning before the commencement date of Subdivision 3 of Division 4 of Part 9 and ending on or after that commencement date as if paragraph (b) of that section were omitted.

(3) If the Court makes an order under section 122(1B) of the predecessor Ordinance having a continuing effect under subsection (2), the accounts to be laid at the meeting concerned must be made up to the company’s primary accounting reference date under section 369(1)(b).”

22.  According to s.78(2), paragraph (b) of s.122(1B) does not apply to the financial year in question (this gives rise to different treatment between the 2012 and 2013 financial years and 2014).  Section 122(1B)(b) contains the power of the court to extend the period of 9 months referred to in s.122(1A).  In substitution of such power, s.78(3) provides that the financial documents are to be made up to the Company’s “primary accounting reference date” (“PARD”) under s.369(1)(b) of the Ordinance.  I therefore need to turn to those provisions to work out the PARD.  Unfortunately, those provisions are highly complicated.

23.  Section 369(1)(b) provides as follows :

“(b) if, on or after the commencement date of this section, such company’s accounts have not been laid or provided as mentioned in paragraph (a)(i) or (ii) –

(i) in the case where such accounts have been prepared on or before the date by which the company is required by section 111(1) of the predecessor Ordinance having a continuing effect under Schedule 11 to hold a general meeting, the date up to which those accounts are made;

(ii) in the case where subparagraph (i) does not apply, but accounts made up to a date falling more than one day before the commencement date of this section have been prepared on or before the date by which the company is required by that section 111(1) to hold a general meeting, the first anniversary of the date up to which those accounts are made; or

(iii) in any other case, the date by which the company is required by that section 111(1) to hold a general meeting.”

24.  Section 369(1)(b)(i) and (ii) are not applicable because, in this case, no accounts were prepared on or before the date required to hold a general meeting under s.111 of the Predecessor Ordinance having a continuing effect under Schedule 11.

25.  For completeness, the difference between s.369(1)(b)(i) and 369(1)(b)(ii) appears to be the date to which the accounts (if prepared) are made up to.  By virtue of s.369(2), s.369(1)(b)(i) “does not apply if those accounts are made up to a date falling more than one day before the [Commencement Date]”.

26.  To comply with s.369(1)(b)(iii), one needs to work out the date by which the Company is required by s.111(1) of the Predecessor Ordinance to hold a general meeting.  The relevant evidence is as follows :

(a) The relevant obligation under s.111(1) is that an AGM must be held every year and not more than 15 months before the last AGM;

(b) In this case, only 2 AGMs were held since 30 August 2011, one on 5 December 2013 and the other on 9 January 2016.  However, the former did not satisfy the requisite notice requirements;

(c) Following on from 30 August 2011, the next AGM should have been held not later than 30 November 2012;

(d) The subsequent AGMs should have been held not later than 31 December 2013 and 31 December 2014 respectively.  An AGM held after those dates would have fallen foul of the requirement that such a meeting be held every year.

27.  In the premises, the financial documents to be laid at the 2014 AGM should be made up to 31 December 2014 pursuant to s.78(3) of Schedule 11.

28.  For these reasons, I allowed this application and made an order at the end of the hearing on 31 August 2016 as follows :

“1. A general meeting of [the company] be held within 28 days from today and that such general meeting shall be regarded as the annual general meeting of the company in respect of the years of 2012, 2013 and 2014 (the “said General Meeting”).

2. The requirement for the laying of the income and expenditure accounts and the balance sheets for the financial years ended on 31 March 2012 and 31 March 2013 be substituted with a requirement to lay the said income and expenditure accounts and balance sheets at the said General Meeting; and that the period of 9 months as referred to in s.122(1A) of the former Companies Ordinance (Cap. 32) (“Cap. 32”) be extended accordingly, pursuant to s.122(1B) of Cap. 32.

3. The requirement for the laying of the income and expenditure account and the balance sheet for the financial year ended on 31 March 2014 be substituted with a requirement to lay the said income and expenditure account and balance sheet at the said General Meeting, and that such income and expenditure account and balance sheet be made up to 31 December 2014.

4. There be no order as to costs.”

29.  Last but not least, I am grateful to Mr Lok for his able assistance.

[1] Annual General Meetings.

[2] Defined in s.357(2) of the Ordinance to include the financial statements, the directors’ report and auditor’s report.

[3] The requisite documents in this case under the Predecessor Ordinance are the income and expenditure account and balance sheet.