NICHOLAS TIMOTHY CORNFORTH HILL v. ALVAREZ & MARSAL ASIA LTD

CACV 171/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 171 OF 2008

(ON APPEAL FROM HCMP NO. 73 OF 2007)

----------------------

----------------------

----------------------

----------------------

J U D G M E N T

----------------------

Hon Rogers VP:

1.  This was an appeal from a judgment of Deputy High Court Judge Gill given on 3 June 2008.  The judge had before him a number of applications in two actions which were heard together.  This appeal concerns the summons under HCMP 73 of 2007.  In that originating summons the plaintiff sought a declaration pursuant to section 121 of the Companies Ordinance, Cap. 32 (“the Ordinance”), that the plaintiff, as a director of the defendant, was entitled at all times to inspect the books of account of the defendant.  The second prayer was that there should be a direction that the defendant do forthwith provide the plaintiff with full and uninterrupted access to the books of account of the defendant.

2.  The judge dismissed the application.  On this appeal the plaintiff sought an expanded order that spelt out that the expression “full and uninterrupted access to the books of account” of the defendant included, but was not limited to, the classes of documents set out in the schedule to the notice of appeal.

3.  At the conclusion of the hearing of this appeal, this court reserved judgment to be given in writing.

Background

4.  The plaintiff is an accountant who established a successful insolvency practice in Hong Kong and in other countries in Asia.  By 2005 the business was effectively a partnership with three other partners.  At that time the plaintiff wished to retire from the business but the other three partners were content, then, to stay on.  The history of the negotiations leading up to the plaintiff’s retirement is set out both in the judgment below and, perhaps more fully, in a judgment of Saunders J given on 23 December 2008 in related proceedings.  For the purposes of this judgment it suffices to say that the business had come under the umbrella of a company namely RSM Nelson Wheeler Corporate Advisory Services Ltd.

5.  The plaintiff’s case is, and there is no dispute about this, that there were two agreements entered into both dated 24 June 2005 which may be referred to as the Asset Transfer Agreement and the LAIL Agreement.  LAIL is an acronym for Lion Archer Investments Limited, which was a company owned by the plaintiff.  There was then an agreement in September 2006 whereby the plaintiff was assigned all the rights and benefits under the Asset Transfer Agreement and the LAIL Agreement.  Those rights included not only the right to payment for what were termed the Fixed Assets and the Deposits Debt but also the loans that had been made to the overseas subsidiaries which were referred to as the Subsidiaries’ Loans Debt.

6.  The parties to the LAIL and Asset Transfer Agreements agreements were not only the plaintiff and his company Lion Archer Investments Limited, but the other three persons who had been partners in the insolvency business and the defendant, which was the company taking over the business.  Those partners were to continue to run the business.  Under the agreements the plaintiff was to receive very substantial payments.  They have been more particularly dealt with, albeit not as yet fully calculated, in the judgment of Saunders J.  Again, it is not necessary to set out the details, it suffices to say that the defendant was to be responsible for paying the plaintiff more than $100 million.  As at June 2005, the three partners would be working and generating for the defendant, which would ultimately go to pay the debts owed to the plaintiff.

7.  One of the provisions of the LAIL agreement was that the plaintiff should become a director of the defendant.  Paragraph 8.6 of that agreement provided:

“Appointment of NTCH as Non-Executive Director

The A&M Asia Shareholders and A&M Asia agree that for so long as any amount of the LAIL Debt, the Fixed Assets and Deposits Debt, the Subsidiaries Loans Debt and the A&M Asia Working Capital Loan remains owing and outstanding to LAIL, they shall procure that NTCH shall be appointed as a non-executive Director of A&M Asia.  NTCH agrees and acknowledges that as a non-executive Director of A&M Asia, he shall have no involvement in the executive decision making process and day-to-day business operations of A&M Asia and furthermore that he shall have no authority to act for or on behalf of A&M Asia and so to bind A&M Asia, without the express approval of A&M Asia's board of Directors.”

8.  One observation which can be made immediately is that although there may be internal differences between the role of a non-executive director and any other director, as far as the obligations and duties of a director are concerned, specifically under the Ordinance and under the law generally, a non-executive director is under the same obligations as any other director.  So, for example, section 129B of the Ordinance requires that the board of directors shall approve the balance sheet and section 129C provides that any profit and loss accounts which are not incorporated in the balance sheet must also be approved by the board of directors.  It is then the director’s duty to lay before the company at its annual general meeting the profit and loss account of the company.  In this regard reference may be made to section 129D.  I would also draw attention to what was said by this court in the case of Law Wai Duen v Boldwin Construction Co. Ltd [2001] 4 HKC 403 at pages 406-7 and in particular to the cases and authorities cited therein.

9.  Once it is appreciated that all directors, whether they be executive or non-executive, have serious and important responsibilities with regard particularly in relation to the accounts, it becomes obvious that the provisions of section 121 are extremely important.  Subsection (1) requires that every company shall cause to be kept proper books of account with respect to:

“(a)  all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place;

(b)    all sales and purchases of goods by the company;

(c)    the assets and liabilities of the company.”

10.  The proper books of account are not confined simply to ledgers or spreadsheets showing sums of money which has been received or spent.  They include documents relating to any such received payment or expenditure.  This is perhaps further emphasised by subsection (2) which provides:

“For the purposes of subsection (1), proper books of account shall not be deemed to be kept with respect to the matters aforesaid if there are not kept such books as are necessary to give a true and fair view of the state of the company's affairs and to explain its transactions.”

11.  The provisions of the Ordinance in relation to the directors’ duties are reflected in the remaining provisions of section 121, the important provision for the purposes of the present appeal being subsection (3):

“(3)  The books of account shall be kept at the registered office of the company or at such other place as the directors think fit, and shall at all times be open to inspection by the directors:

Provided that if books of account are kept at a place outside Hong Kong there shall be sent to, and kept at a place in, Hong Kong and be at all times open to inspection by the directors such accounts and returns with respect to the business dealt with in the books of account so kept as will disclose with reasonable accuracy the financial position of that business at intervals not exceeding 6 months and will enable to be prepared in accordance with this Ordinance the company’s balance sheet, its profit and loss account or income and expenditure account, and any document annexed to any of those documents giving information which is required by this Ordinance and is thereby allowed to be so given.”

12.  The remainder of the section provides amongst other things, for criminal sanctions in respect of a failure to accord proper access to the books of account.

13.  The present dispute between the parties is part of what has now become protracted litigation.  In short, difficulties between the parties arose because the plaintiff became aware that the defendant was no longer going to have the services of at least two of the three former partners that were initially going to remain with the defendant.  As a result, he feared that the income stream to the defendant, which would be the major source of the payment of the debts owing to himself, might be in jeopardy.  Amongst other things the plaintiff served a statutory demand on the defendant and clearly threatened to bring winding up proceedings.  In consequence, the defendant applied for an injunction to restrain the plaintiff presenting a winding up petition.  Madam Justice Kwan granted an injunction to prevent the presentation of winding up petition holding that the plaintiff’s demands had included demands for sums which were at that stage not due and owing and that the plaintiff had been using the threat of the winding up petition as a bargaining tool to put himself in a better contractual position as against the defendant.

14.  Since then, other proceedings have come before Saunders J and although the judge was unable to quantify the amount that was owing from the defendant to the plaintiff, he came to the conclusion that there was a substantial amount owing; that comprised at least part of the sums which were the subject of the statutory demand; those included what had been referred to as the Fixed Assets and Deposits Debt and the Subsidiaries Loans Debt.  As a result he considered that the circumstances justified the ordering of an account to be taken.  The order on that interim judgment is still to be drawn up.

The judgment below

15.  The judge below refused to grant the plaintiff the orders which the plaintiff sought.  In so refusing he said that it had clearly been established that the plaintiff had “…at the least demonstrated a collateral purpose”.  The judge took an adverse view of the plaintiff because not only had he issued a statutory demand for the sums that were owing, but he had also strenuously resisted the application on behalf of the defendant to restrain him from applying to wind up the defendant.  The judge then went on to say:

“90.  Given the outcome of that interim application and the plethora of legal proceedings, it cannot be said otherwise but that the parties are in battle mode.

91.   For all that he remains a director of A&M, in such circumstances it has become impossible for Mr Hill to justify that he has ongoing rights and responsibilities to carry out, and it would be quite inappropriate to permit him access to his adversary’s books qua his position of director.

92.   It has been submitted that his pursuit of rights afforded directors under section 121 of the CO is a device to give him unfettered access, thus to permit a circumvention of the rules of discovery that bind litigants.  I make no finding on this, save to observe that there is support for it in that Mr Hill has in the two other applications for discovery tried and, at least at this level, failed in gaining access to A&M’s books.

93.   The question I posed earlier under the head of the Inspection Summons (para.59), I answer ‘No’.”

This appeal

16.  I regret that I find difficulty in understanding how the judge could say that the plaintiff did not have ongoing responsibilities as a director of the defendant.  He clearly had.  He had statutory and common law duties which cannot be denied.  The defendant had clearly agreed that the plaintiff should remain a director of the defendant until such time as all the debts owing to the plaintiff had been discharged.  It is clear beyond peradventure that the purpose of that was that the plaintiff should be in a position to know what took place within the defendant company so that he could at least have some assurance that he would be paid.  Be that as it may, the plaintiff was a director.  He clearly had duties to perform and to perform those duties he needed access to the books of account.

17.  The question posed by the judge in paragraph 59 had been:

“59.  Has A&M’s barring of Mr Hill from its office and refusal to make available to him for inspection its books of account been a breach of section 121 CO?”

In my view, once the serious obligations of a directorship are considered, the answer to that question has to be in the affirmative.

18.  The question is thus raised as to what right is there to prevent a director having access to company records.  I acknowledge that there must be power for a court to prevent abuse of a company’s documents.  So if there was evidence that a director was likely to misuse documents, whether by breaching confidence or in some other way, then it may be legitimate to control access to those documents by a director, even to the point, in extreme cases, of denying access.  Nevertheless, even on that basis, the court would have to be very careful that in restricting access to company documents it did not prevent a director from carrying out his duties.

19.  Mr Manzoni, who appeared on behalf of the plaintiff took this court through exchanges of e-mails between the plaintiff and the defendant and the defendant’s parent company in the United States concerning the 2005 financial statements.  It is unnecessary to quote large sections of that correspondence.  It is sufficient to say that on 10 March 2007 the plaintiff complained that the first time he had been shown the accounts for 2005 was 4 days after the accounts had been “signed off” with a statement that all directors had reviewed and approved the accounts.  Not surprisingly the plaintiff used such expressions as “beggars belief” to describe his outrage at what was seemingly an indefensible violation of the provisions of the Ordinance.  Indeed, in an e-mail dated 16 March 2007 Mr Fernando Gaspar, seemingly writing with the authority of the defendant, wrote:

“You were not invited to comment on the 2005 financial statements, although you have done so.  Your comments had been received and duly noted by me and my fellow directors, and your concerns have been drawn to the attention of the shareholders.  I note that you have also directed your comments to the auditors.”

20.  In argument Mr Beresford, who appeared on behalf of the defendant was unable to justify the defendant’s conduct other than to say that the defendant had attempted to put the matter right by subsequently preparing a further board resolution once its conduct had been found out.

21.  In my view, it cannot be said that simply because the plaintiff may have taken steps towards presenting a winding up petition against the defendant on the basis of insolvency and may have resisted an application for an injunction directed to preventing him presenting such a petition, constituted grounds which could justify a court overriding the provisions of section 121 of the Ordinance.

22.  As already stated, it is clear that the plaintiff was a director of the defendant precisely for the reason that he should be in a position to make sure that the monies, which had been agreed would be paid to him, would be paid and, if they were not paid, the plaintiff would be in a position to know exactly why.  Statutory demands and winding up petitions on the basis of insolvency are one of the most important tools that a creditor has.  In the context of a plaintiff who had substantial claims against the defendant, which have now been proved to be correct to a large extent, I see nothing wrong in a director bringing home the validity of his claims to the other directors, and specifically in circumstances where the director concerned is excluded from contributing to the executive decisions.

23.  In so saying, I have not overlooked what was said in the case of Oxford Legal Group Ltd v Sibbasbridge Services plc and another [2008] 2 BCLC 381.  That was a case where summary judgment had been sought in an action by a director whose interest had been ordered to be bought out.  It would seem that the only interest that that director, which was a corporate director, had remaining was as to the price at which the shares owned by other linked companies would be acquired.  It would seem that what was attempted in that case was to obtain inspection for some improper purpose namely as part of what had been characterised as a “fishing expedition”.  In contrast, in the present case, even if it could be said that the plaintiff wished to protect his own position as regards payment of debts which are owed to him, in the context of the LAIL Agreement which provided that the plaintiff should remain a director of the defendant so long as the debt was owing, it seems to me to be impossible to say that there was an improper motive in the plaintiff seeking to do that.  On a final analysis, it is not in the public interest that insolvent companies should continue to trade.

The extent of the order

24.  As noted above, on this appeal the plaintiff has sought to include, by way of a schedule to the notice of appeal, a list which extends to some 19 categories of documents which it is said all fall within the term books of account.  Mr Beresford, who appeared on behalf of the defendant relied on two cases as part of his argument that many of the classes did not constitute books of account.  The first was In re Winslow ex parte Godfrey (1885-86) 16 QBD 696 and the second Ho Pui Tin v Wah Nam Group HCMP 5224 of 1999.  As regards the first of those two cases, I derive little assistance because it involved a question of the construction of the Bankruptcy Rules 1883.  As noted above, section 121(2) requires that under the Ordinance the books of account which must be kept have to include such books as are necessary to give a true and fair view of the state of the company’s affairs.  In the second case, Madam Justice Yuen, as she then was, said she understood that ledgers, journals, vouchers, statements and “such like accounting records” were included within the term books of account but that she was not persuaded that the term would include contracts and agreements.  In this respect it is unnecessary to decide in this case whether the rights of inspection given by section 121 of the Ordinance go beyond the common law rights of inspection or merely incorporate them into statutory form.  At least for the present purposes, I consider that any such distinction is unnecessary and irrelevant.

25.  In my view each case has to be decided on its own particular facts.  Specifically, in this case, the business of the company is concerned with insolvency.  Looking at one of the items, namely item (16) which relates to stock ledgers/stock lists, this would clearly have a different meaning from that which would be relevant in respect of a manufacturing company.  Mr Beresford argued that many of the items, such as (11) identified as “contracts”, would not come within the meaning of books of account.  Recent events, however, in respect of major public companies have demonstrated that the terms of contracts may well have a material impact on what should go into the accounts.  In some instances contracts can contain terms and obligations extending well into the future which could in some circumstances impose unanticipated liabilities.  A prudent director may well have to consider whether the accounts should reflect that.

26.  I consider that it is not possible for this court to decide whether each and every category comes within books of account, the subject of section 121.  Clearly many of the categories would come within what would be necessary to give a true and fair view of the state of the company’s affairs and thus should be treated as books of account for the purposes of section 121.  In contrast categories (17) relating to board meetings: the notices/agenda/minutes/ resolutions, (18) relating to members meetings: notices/agenda/minutes/ resolutions and (19) categorised as “any other document owned by the defendant” would seem not to come within that category.  In the present case I consider that it would not be possible to determine the matter simply using the brief descriptions in the schedule to the notice of appeal.  The appropriate order for this court would seem to be that the defendant should provide the plaintiff with full and uninterrupted access to the books of account of the defendant which would include all documents as are necessary to give a true and fair view of the state of the defendant’s affairs.  I so order.  The order of the judge is set aside.

27.  I also make an order nisi that the costs of the appeal and the costs below including the costs of these proceedings be costs to the plaintiff.

Hon Sakhrani J:

28.  I agree.

Hon Lam J:

29.  I agree with the judgment of the Vice-President.

30.  Speaking for my part, I am prepared to accept the proposition of law in Oxford Legal Group Ltd v Sibbasbridge Services plc [2008] 2 BCLC 381 that inspection will not be permitted where it is clearly shown that a director intended to use the right to inspect for an improper purpose.  Yet I do not think the Defendant comes anywhere near in the present case in discharging that burden.

31.  Though the learned judge said at para.85 of his judgment that it has been clearly established that the Plaintiff has at least demonstrated a collateral purpose, he did not quite identify what that collateral purpose was.  In the subsequent paragraphs in the judgment, reference was made to the improper steps taken by the Plaintiff in the winding up.  But it has not been suggested that the inspection of books of account could have anything to do with the winding up.

32.  Then the learned judge said the parties were in battle mode. In the next paragraph (para.91) he concluded that it has become impossible for the Plaintiff to justify that he has ongoing rights and responsibilities to carry out.  Like the Vice-President, I would respectfully disagree with that conclusion.  Even when a director has a dispute with the company on a debt between the same parties, it does not necessarily follow that such director has no more duties or responsibilities in the company.  On the facts of the present case, notwithstanding the hostilities between the Plaintiff and the Defendant in the winding up episode and other ongoing legal proceedings, for the reasons given by the Vice-President I am of the view that the Plaintiff is still expected to perform his responsibilities as a director of the Defendant.

33.  The learned judge was unable to make a finding that the Plaintiff was trying to circumvent the rules of discovery in the context of the other pieces of litigation between the same parties, see para.92 of his judgment.  That must be right.  I must say I do not understand why it would be necessary for the Plaintiff to circumvent the rules of discovery.  If the documents were relevant, the Defendant is obliged to disclose them anyway.  If the documents were irrelevant, the Plaintiff could not use them in those pieces of litigation even if he obtained them through another channel.  As far as I can see, the Defendant has not pinpointed any specific occasion of misuse of books of the company by the Plaintiff to further his course in the other litigation with the Defendant.

34.  Mr Beresford submitted that the collateral purpose of the Plaintiff was to improve his position as a creditor.  The learned judge did not make such finding and counsel has not been able to explain to me how inspection of the books of account as director can improve the Plaintiff’s position as a creditor.  It was suggested that the Plaintiff was fishing for information to build up a case regarding payments by the company to his former partners.  But counsel has not explained why as a director the Plaintiff should not be concerned with such payments and asked questions to satisfy himself qua director that the payments were properly made.

35.  In the end, it seems to me all these suggestions of collateral purpose are mere assertions raised by those in the board of the Defendant who have a disposition to doubt the motive of the Plaintiff.

36.  Given the responsibilities of a director (owed not only to the company but in some circumstances also to the general creditors of the company), it is important that the court will not restrict his right to inspect the books of account on the strength of flimsy assertions by a hostile camp in the board.  It is only when ulterior motive is clearly shown that the court shall decline an application by a director for inspection.  A director needs not demonstrate any particular need to know before inspection is to be given.

37.  I also agree to the order proposed by the Vice-President.