WONG MICHELLE YATYEE v. GOLDBOND GROUP HOLDINGS LTD

HCMP 2259/2020

[2021] HKCFI 1129

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2259 OF 2020

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DECISION

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INTRODUCTION

1.  By originating summons dated 8 December 2020, the applicant, an executive director and a shareholder of the respondent, applies for extension of time (a) for the respondent to hold its annual general meeting for the years ended 31 March 2019 and 31 March 2020, and (b) for the respondent’s directors to lay its audited financial statements and the reports of the directors and of the auditors for the two financial years in its annual general meeting.  The application is made pursuant to sections 429, 431 and 610 of the Companies Ordinance, Cap 622.

2.  The respondent is a public company.  Under section 431(1)(b)(i), its directors should lay the financial statements before the company in annual general meeting within 6 months after the end of its financial year.  Under section 610(1), the respondent should hold a general meeting as its annual general meeting also within the same 6-month period.

3.  For the financial years of 2019 and 2020, the respondent failed to comply with the statutory requirements.  The respondent’s explanation is, in gist, that there was an ongoing forensic investigation involving a wholly-owned subsidiary and because of that, it was not able to finalise the financial statements within the statutory periods.

4.  I make a note of two matters at the outset. First, the application is made retrospectively.  The statutory periods expired on

5.  The respondent has been served with the application.  It did not appear at the hearing.

THE FACTS

6.  The respondent has been listed on the Hong Kong Stock Exchange since 1972.  At present, it is principally engaged in the provision of financial services in Hong Kong and mainland China.

7.  The applicant has filed affirmation evidence setting out the factual circumstances why the respondent was not able to comply with the statutory requirements.

8.  A board meeting was originally scheduled for 27 June 2019 for approving the final results for 2019.  Shortly before that scheduled meeting, Deloitte, the then auditor of the respondent, made a request to its audit committee to undertake forensic investigation into certain trading transactions carried out by Shanghai Goldbond Trading Company Limited, a wholly-owned subsidiary of the respondent in mainland China.  Pursuant to the request, the respondent engaged Ernst & Young (China) Advisory Limited, an independent accounting firm, to conduct the forensic investigation.  For that reason, the final financial results could not be finalised pending the investigation.  The respondent also requested a trading halt of its shares.

9.  By announcement made on 28 September 2019, the respondent informed its shareholders of the forensic investigation, the suspension of the audit work, and the delay in the publication of the 2019 results.

10.  In January 2020, the respondent published the key findings of the forensic investigation.  Its audit committee made a number of recommendations and the board of directors resolved to take remedial actions to address the key findings. 

11.  In March 2020, the audit committee engaged the independent accounting firm to conduct further investigation.

12.  In the meantime, audit work resumed in May 2020.  By announcement dated 26 June 2020, the respondent informed its shareholders that there would be delay in the publication of the 2020 results.

13.  The key findings of the further investigation were published in September 2020.

14.  The 2019 and 2020 results were finalised in around November 2020.

15.  In summary, the audit work for the two financial years was suspended from June 2019 to May 2020 due to the forensic investigation and the further investigation.

16.  Throughout this period, the respondent had kept its shareholders informed of its financial condition by means of, among other things, quarterly updates on its business operations, and the release of interim results and unaudited management accounts.

17.  The suspension of the audit work resulted in the respondent’s default in complying with the requirements of laying the financial statements and holding the annual general meetings for 2019 and 2020 within the statutory periods.  The applicant says that the default was not deliberate but was inadvertent.

18.  The applicant further explains that at the time the focus of the respondent was on the forensic investigation, the further investigation and the corresponding remedial actions.  The directors, including the applicant, did not apply their minds to the potential legal consequence for failing to comply with the statutory requirements.  As a result, the respondent did not take out any application to extend time in advance of the prescribed deadlines.

19.  It was only after the audited financial statements became available in around November 2020 that the respondent approached its solicitors for advice.  The applicant then took out the present application on 8 December 2020.  The annual general meeting for the two years were held on 28 December 2020. 

20.  If time extension is not granted, it is submitted that the respondent and its directors may be prosecuted for contravening sections 429 and 610.  In fact, the respondent has already been fined for failing to deliver its annual return for 2019 in contravention of section 662.

21.  In the circumstances, the applicant asks for an order that time be extended for the laying of financial statements for 2019 and 2020 and for the holding of annual general meeting for the two financial years to 28 December 2020 or, as an alternative to the latter relief, an order that the general meeting held on 28 December 2020 be deemed to be the annual general meeting for the two financial years.

LEGAL PRINCIPLES

22.  It is not uncommon for an application to extend time for the laying of financial statements and an application for the holding of annual general meeting to be made to the court at the same time.  In many cases, the factors to be taken into account in the court’s exercise of discretion in the two applications are similar.  Notwithstanding that, it should be noted that the statutory provisions governing the power of the court to extend time to comply with the two requirements are crafted differently. 

Laying of financial statements

23.  The requirement for a company’s director to lay the financial statements before the company is set out in section 429(1).  The period for the directors to do so in the case of a public company is “6 months, or any longer period directed by the Court” after the end of the accounting reference period: section 431(1)(b)(i).  A director may be liable for an offence if the requirement is not complied with: section 429(3) to (5). 

24.  The court has power to extend time for the director to comply beyond the prescribed 6-month period.  This is made clear by the express words “or any longer period directed by the Court”.  It is also reasonably plain that the court has the power to grant time extension whether the application is made before or after the original deadline.  (As will be seen below, this is to be contrasted with the court’s power to extend time for a company to hold its annual general meeting pursuant to section 610(5).)

25.  When exercising its discretion, the court would take into account factors including:

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

(2)  Whether the default was inadvertent; and

(3)  Whether the court is satisfied that the company would comply with the obligations to lay its financial statements before general meetings in future.

26.  The above considerations are not exhaustive. The court’s discretion is unfettered: Re Sanliuyidu (Hong Kong) Sports Goods Company Limited [2009] 4 HKLRD 708 at para 5, per Kwan J; Re Hong Kong Times Investments Limited [2014] 2 HKLRD 29 at paras 14 and 15, per G Lam J.  These decisions concerned section 122 of the former Companies Ordinance, Cap 32, the predecessor section of section 429.  The former section was differently worded from the latter section.  The general principles governing the exercise of the discretion discussed in those cases should however apply with equal force to the new section: Butterworths, The Annotated Ordinances of Hong Kong, Cap 622 at para [431.02]. 

27.  Whether a non-compliance can fairly be characterised as due to inadvertence is a fact-sensitive question.  A genuine yet mistaken belief that no accounts need be produced in the specific circumstances of the company is one thing.  A wholesale and reckless disregard of the statutory obligations of financial reporting is another: Hong Kong Times at para 16. 

28.  Where an application is made retrospectively, ie after the original deadline has expired, a more compelling justification is required than where it is made in advance of the deadline: Hong Kong Times at para 19.

29.  The effect of a retrospective time extension is that once granted and the laying of financial statements is done within the extended period, there is no contravention of the statutory requirement at all.  This is because technically speaking, the laying of financial statements is done “within time” as extended.  The practical effect of a retrospective time extension is therefore to relieve the directors of any potential criminal liability under section 429 and to render them immune from prosecution for the original default: Hong Kong Times at para 20.

30.  For that reason, where the substantive if not the sole purpose of the extension is to relieve a director of potential liability, I consider that it is appropriate for the court to approach the matter by asking itself whether it would be a proper and justifiable exercise of its discretion for that purpose to be achieved in the particular circumstances of the case. 

31.  Lastly, the discretion ought to be exercised for some discernible legitimate purpose.  Where the reason put forward by the company or its directors is that there is justification to relieve them of any potential liability arising from the original default but there is no realistic prospect of any prosecution because the 3-year limitation period set out in section 900 has lapsed, it would appear that the application ought to be refused.  That is because no useful purpose will be served by a court order and it would be a waste of judicial resources to grant one: Hong Kong Times at para 23; Re Tai Wo Tong Pharmaceutical (Hong Kong) Company Limited [2014] 3 HKLRD 218 at paras 9 to 11, per Deputy High Court Judge Le Pichon; Re Modern Automobile Company Limited HCMP 3378/2013, 7 March 2014 at paras 8 to 9, per Harris J.

Holding of annual general meeting

32.  The duty to hold an annual general meeting in respect of a financial year is set out in section 610.

33.  The relevant parts of the section provide as follows:

“610. Requirement to hold annual general meeting

(1) Subject to subsections (2) and (3), a company must, in respect of each financial year of the company, hold a general meeting as its annual general meeting within the following period (in addition to any other meetings held during the period)—

(a) in the case of a private company or a company limited by guarantee, 9 months after the end of its accounting reference period by reference to which the financial year is to be determined; and

(b) in the case of any other company, 6 months after the end of its accounting reference period by reference to which the financial year is to be determined.

…

(5) If for any reason the Court thinks fit to do so, it may, on an application made before the end of the period otherwise allowed for holding an annual general meeting in respect of a financial year of a company, by order extend that period by a further period specified in the order.

(6) If the period otherwise allowed for holding an annual general meeting in respect of a financial year of a company has been extended under subsection (5), the company must hold a general meeting as its annual general meeting within the period as so extended.

(7) If a company contravenes subsection (1), (2), (3) or (6), the Court may, on application by any member of the company—

(a)  call, or direct the calling of, a general meeting of the company; and

(b)  give any ancillary or consequential directions that the Court thinks expedient, including—

(i)  a direction modifying or supplementing, in relation to the calling, holding and conducting of the meeting, the operation of the company’s articles; and

(ii)  a direction that one member of the company present in person or by proxy is to be regarded as constituting a meeting.

(8) Subject to any directions of the Court, a general meeting held under subsection (7) is to be regarded as an annual general meeting of the company in respect of the financial year in respect of which the company has failed to hold an annual general meeting in accordance with this section.

(9) If a company contravenes subsection (1), (2), (3) or (6), or contravenes a direction given under subsection (7), the company, and every responsible person of the company, commit an offence, and each is liable to a fine at level 5.” (italics added)

34.  At the first hearing of the originating summons, the applicant sought the time extension under section 610(5).  What arose for consideration at that hearing was whether the court had the power to grant the time extension retrospectively.  In the present case, the application was made after the statutory deadline. 

35.  It is plain from the express wording in section 610(5) that the court has the power to extend the time for the holding of an annual general meeting under that subsection only if an application is made before the time expires: see the italicised words quoted in para 33 above.  It has no power to grant any extension under that subsection if the application is made after the prescribed deadline.  It is not a matter of discretion.  The court simply has no power or jurisdiction to grant a retrospective time extension under subsection (5).

36.  At the first hearing, the applicant referred me to Re Meanmax Limited [2020] HKCFI 336.  Harris J made the following observation (at para 4):

“ … Section 610(5) gives the court a discretion to extend this period. Normally applications are made in my experience after the period (in the case of private companies generally nine months after the date of the end of the financial year) has expired. …” (italics added)

37.  In the end, the judge granted an extension of 35 days from the date of the decision.  It is not entirely clear whether the application in that case was a retrospective one but it would appear to be so. It would also appear from the context that the extension was granted pursuant to subsection (5).

38.  At the first hearing, the applicant invited the court to grant a retrospective time extension based on the observation made in Re Meanmax Limited.  In view of the contrary express wording appearing in the subsection, I directed the applicant to do further research on this point.

39.  At the adjourned hearing, the applicant no longer maintained the view that it is within the power of the court to grant a retrospective time extension under subsection (5).  The applicant instead relied on subsection (7).

40.  In my view, in light of the express wording employed there, the applicant was right in not insisting that the court has the power to extend time retrospectively under subsection (5).  It is trite that the court has no inherent power to extend a time period prescribed by statute in the absence of any express statutory provision to that effect.

41.  I now turn to section 610(7).

42.  It provides that if a company contravenes the requirement to hold an annual general meeting, whether within the original period or the period extended under subsection (5), a member may apply to the court for an order that a general meeting be called.

43.  As a matter of general principle, an annual general meeting provides an opportunity for the shareholders to review the performance of the board and to question the directors generally on the company’s business and financial position.  The statutory regime set out in section 610 reflects that and underlines the importance of annual general meetings.

44.  In Re Belgravia Properties Limited [2013] 5 HKLRD 337, Anthony Chan J made the following observation (at para 14) on section 111 of the former Companies Ordinance, Cap 32, the predecessor section of section 610:

“ It is perfectly plain from the above statutory provisions that it is important for a company to have at least a meeting every year. With such a meeting, the members of the company will have an opportunity to meet and raise questions with the management over the affairs of the company (at the AGM members are entitled to be informed of the financial situation of the company: s 122 of the Ordinance). It is a fundamental entitlement of the members. Such entitlement is so important that the company and its officers are liable to be fined if they fail to give effect to it.” (italics added)

45.  Although the old section and the new section are differently worded and provide for different formulations of the deadline, in my view, the above observation applies with equal force to section 610.

46.  It was further held that once default on the part of the company is established, the court should normally exercise its discretion in favour of having a meeting which will have the effect of remedying the default, save in exceptional circumstances: para 23.

47.  On a practical level, it may appear that an order made under section 610(5) and one made under section 610(7) is the same. Both have the effect of facilitating or allowing the holding of an annual general meeting after the original time period expired.  However, the legal effect is different.

48.  Where the meeting is held within the period extended under section 610(5), it is held “within time”.  For that reason, the company and its directors would not be regarded as contravening the statutory requirement in the first place.  Hence, they would be relieved of the sanction which would otherwise apply to them but for the time extension.  The analysis of section 429 in this regard undertaken above in para 29 applies here.

49.  By contrast, an order calling a general meeting or directing one be called is, technically speaking, not an extension of the original time limit.  It is in effect a relief granted to a member who is aggrieved or affected by the company’s failure to hold an annual general meeting within the statutory time limit.  As explained in Belgravia Properties, the holding of annual general meeting is an important entitlement of a member.  Section 610(7) provides a mechanism to safeguard such entitlement.  As a matter of construction, even where an order is granted under that subsection, it does not have the effect of absolving the company or its directors from the sanction for contravening the statutory requirement in the first place.  The default remains.  It is remedied only in the sense that the entitlement of the member to a meeting is restored and upheld.

50.  That construction is, in my view, reasonably discernible from the overall structure of section 610 and the words used there. Subsection (1) lays down the statutory requirement.  Subsection (5) gives an opportunity to the company to extend the time to comply so long as it makes an application before the deadline.  (I would note here that this subsection is new and there was no equivalent provision in section 111 of the former Companies Ordinance.)  Where a company defaults, a member may apply under subsection (7) to have the meeting called.  Lastly, subsection (8) provides that a meeting called under subsection (7) would be regarded as an annual general meeting of the company of the financial year “in respect of which the company has failed to hold” one.

51.  There is nothing in the section which expressly provides or impliedly suggests that a meeting held under subsection (7) would have the effect of “forgiving” the contravention of the subsection (1) requirement or absolving the company or its directors from their liability. 

52.  To sum up, the company or its directors would still be in contravention of the statutory requirement even where an order has been made under subsection (7) and a meeting has been duly held as ordered.

53.  In Re Tune Bright Investments Limited [2020] HKCFI 519, the court made an order under section 610(7).  Deputy High Court Judge R Ismail, SC remarked that in that case all interested parties believed that “the Company should and can mend its ways” and there was “no objection to relieving the Company from liability for non-compliance” (para 26).

54.  Insofar as the remark suggests that a section 610(7) order can relieve a company of liability arising from its original default, I would respectfully disagree for the reason given above.

DISCUSSION

55.  The evidence shows that the audit work of the respondent was suspended from late June 2019 to May 2020 and that was because of the need to carry out the forensic investigation and the subsequent investigation.  In the circumstances, I am satisfied that the audited financial statements for the two financial years could not have been finalised within the respective statutory deadlines.  As soon as the audited financial statements were ready in around November 2020, the respondent and its directors took steps to seek legal advice on the appropriate steps to be taken.  The present application was then promptly taken out on 8 December 2020.  Importantly, the respondent proceeded to hold the annual general meeting on 28 December 2020 in which the financial statements for 2019 and 2020 were considered and approved.

56.  I am satisfied that for the above reasons, the default was not deliberate and it was not due to any disregard of the relevant statutory obligations on the part of the respondent or its directors.  In fact, the shareholders had been kept informed of both the status of the preparation of the financial statements and the respondent’s financial position by the regular announcements issued by the respondent throughout the time when the audit work was put on hold.  And there does not appear to be any prejudice suffered by them as a result.

Laying of financial statements

57.  In respect of the application to extend time to lay the 2019 and 2020 financial statements before a general meeting pursuant to sections 429(1) and 431(1), it is a retrospective application as the originating summons was issued only after the original statutory deadline expired.

58.  As discussed above, the court has the power to grant a retrospective time extension under section 431(1). 

59.  On the facts of the case, I would exercise my discretion to do so.  It was impracticable for the respondent to meet the original deadline.  Furthermore, the applicant has stated on affirmation that at that time, the focus of the respondent and its directors was on the forensic investigation and also the resumption of trading of its shares.  The respondent and its directors did not apply their minds to the potential legal consequence for not complying with the statutory requirement or for not promptly applying for a time extension in advance of the deadline.

60.  While the failure to apply in advance is not satisfactory, the chronology of events shows that the respondent and its directors have subsequently taken reasonable steps to rectify the situation. That amounts to good justification for exercising the discretion in their favour.  It is a proper case for the court to relieve them of the potential liability or criminal prosecution arising from the original default.

Holding of annual general meeting

61.  In respect of the application to extend time to hold the annual general meeting for the two financial years, I do not have the power to grant a retrospective time extension under section 610(5).  See para 35 above.

62.  However, I do have the power to call a general meeting or direct that one be called under section 610(7) at the instance of the application made by the applicant, who is a member of the respondent.

63.  The present case is not one of those cases where a member is aggrieved by the failure or refusal of the company to hold an annual general meeting and hence comes to the court for help.

64.  At the first hearing, the applicant pursued the application pursuant to section 610(5).  Having come to the view that the retrospective application was beyond the jurisdiction of the court, at the adjourned hearing, the applicant pursued the application under section 610(7) instead.  The grounds in support of the application remained the same.  In effect, the applicant’s interest in this application is aligned with the respondent’s.

65.  My consideration set out in paras 55 and 56 above therefore applies to my exercise of discretion here.  In any event, applying the test laid down in Belgravia Properties, the court should prima facie order that a meeting be called for the benefit of the members.

66.  In the present case, however, I do not consider that it is a proper case to exercise my discretion under section 610(7) for two reasons.

67.  First, the respondent had already held the annual general meeting for the two financial years in December 2020.  Insofar as an order under section 610(7) is intended to protect and enforce a member’s fundamental entitlement to an annual general meeting, there is no need for the court to act when the meeting has already been held.

68.  Second, it would appear that the only reason for the applicant to nonetheless pursue the order is to avoid prosecution for the original default.  As discussed above, unlike an order made under section 610(5), a section 610(7) order does not have the effect of turning the original default into a “non-default”.  Even where the order is granted and the members’ entitlement is safeguarded, the default remains.  The company and its directors are still liable to be prosecuted.  On the evidence before me, the prosecution risk cannot be eliminated.  No purpose can thus be served by an order under section 610(7) here.  No order should be granted.  (This case is therefore the converse situation of Modern Automobile.  There, the order was not granted in cases where there was no risk of prosecution given that the limitation period had already expired.  Here, an order would not remove the prosecution risk.  In neither case would an order serve any useful purpose.)

69.  The applicant submitted that the court should nonetheless grant the order to the effect that the annual general meeting held on 28 December 2020 be deemed to be the annual general meeting for the two financial years.  A similar deeming order was made in Re Collectors Car Club of Hong Kong Limited HCMP 3461/2015, 8 December 2016, para 2(1).  This, it was submitted, would demonstrate that the respondent had done its best to salvage the situation.

70.  It is unclear on the face of that decision what considerations had been taken into account and why the order was made in those terms. I do not consider appropriate to simply follow the form of that order here.

CONCLUSION

71.  For the above reasons, I order that the time period for the directors of the respondent to lay the audited financial statements and the reports of the directors and of the auditors of the respondent for the years ended on 31 March 2019 and 31 March 2020 respectively before the company in its annual general meeting be extended to 28 December 2020.

72.  I refuse to make an order under section 610(7). I therefore dismiss para 1 of the originating summons.

73.  There be no order as to costs of the originating summons.