LITTLE STAR BRANDS GROUP LTD v. BEST KIDS INTERNATIONAL LTD

HCMP 1577/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1577 OF 2014

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D E C I S I O N

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1.  I have before me an originating summons issued on 27 June 2014 seeking an order pursuant to section 610(7) of the Companies Ordinance Cap 622.

2.  The company has failed to hold annual general meetings and put before those meetings financial reports since its incorporation to 2013, except for the period from 2002 to 2007. 

3.  Mr Henry Cheng who appeared for the applicant accepted at the outset that as there was no risk of prosecution in respect of breaches occurring before September 2011, the court would not grant orders rectifying the earlier breaches and the court was only concerned with the failure to comply with section 122 of the previous Companies Ordinance for the calendar years 2012 and 2013.  In other words, the failure to put financial reports for the financial year ending 31 December 2011 before the company at annual general meeting during the first 9 months of 2012 and a failure to put the financial report for the financial year ending 31 December 2012 before the company annual general meeting convened during the first 9 months of 2013.

4.  The circumstances leading to the applications are briefly as follows.  A restructuring of the company and associated companies took place at the end of 2011.  It appears, from a disclosure schedule prepared for the purposes of that restructuring, that in December 2011 the directors of the company were informed that the company had not complied with section 122 of the previous Companies Ordinance for the years 2007 through to 2011.

5.  In about October 2012, the company changed company secretarial service provider. The new company secretarial service was provided by the company secretarial department of King and Wood Mallesons.  By the end of 2012, King and Wood Mallesons had discovered the failure to comply with section 122. 

6.  Precisely what happened thereafter is a little obscure but it appears from the second affirmation filed in support of the application by Mr Liu Chien-hung, Paul, that during conversations with King and Wood Mallesons, the directors obtained the impression that until the existing breaches of the old ordinance had been cured, there were, or might be, some impediment to the company complying in current and subsequent years.

7.  What, however, does seem clear is that certainly by the end of 2012, the directors were well aware of the company’s failure to comply with the requirement to convene an annual general meeting in each calendar year and lay before that meeting the company’s financial report for the previous accounting period.

8.  I am told that partly because of the misunderstanding about the requirements of the Ordinance, by which I refer to the impression the directors had that the existing breaches needed to be remedied before the company could comply with the Ordinance in future, and the fact that  a number of the directors are resident outside Hong Kong, audited financial statements for the financial years 2010 through to 2013 did not come to be finalised until August 2014 and the present application was not issued, as I have already noted, until the end of June 2014.

9.  The authorities establish that the court will only grant applications of this sort if it is satisfied of primarily three things:

(1) That the shareholders were aware of the financial position of the company and have not been prejudiced by non-compliance;

(2) The default was inadvertent;

(3) The court is satisfied that the company will comply with its obligations in future.

10.  Factors (1) and (3) are normally readily satisfied and I am satisfied that they are met in the present case.  Normally, the more contentious matter is whether the failure to comply with the Ordinance can be fairly characterised as inadvertence rather than indifference.

11.  In the present case, the directors have known about the failure to comply with section 122 since the end of 2011.  It would appear that they were reminded of the provisions of the Ordinance again roundabout the end of 2012 or the beginning of 2013.

12.  It may be that they had obtained a misleading impression of how the relevant provisions of the Ordinance operated, but it seems to me that one cannot sensibly characterise the way in which the board has approached curing non-compliance as inadvertent.  I am not satisfied that there is any satisfactory explanation for it taking until the middle of this calendar year for the company to make applications to remedy the breaches, and put itself in a position to comply with the Ordinance going forward.

13.  I am therefore not satisfied that this can fairly be characterised as a case of inadvertence or a case in which it would be appropriate for the court to exercise its discretion to grant orders curing the defects that have occurred, or the breaches that have occurred, during the last 3 years.

14.  I will therefore dismiss the originating summons.