HEAD PARK GROUP LTD v. ASIAFAIR INTERNATIONAL LTD

HCMP 1435/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1435 OF 2010

____________

____________

______________

J U D G M E N T

______________

1.  I have before me 12 applications made by subsidiaries of Fine Profit Enterprises Limited (“Fine Profit”) for orders under section 111(2) of the Companies Ordinance extending the time for convening the applicants’ annual general meetings for 2007 and 2008 and extending time under section 122(1B) of the Companies Ordinance for the applicants to lay their profit and loss accounts before their shareholders in general meeting.

2.  Fine Profit is incorporated in the British Virgin Islands and is the ultimate holdings company of the 6 applicants, which are in themselves intermediate holding companies owning mainland Chinese subsidiaries.  It is not explained in the evidence what business they are involved in.  Apparently the applicants’ operations do not attract Hong Kong tax.

3.  The failure to hold annual general meetings in 2007 and 2008 was discovered by the applicants’ solicitors during due diligence carried out in connection with the proposed listing of Fine Profit on the main board of The Stock Exchange of Hong Kong Limited (“Stock Exchange”).  Unless the breaches of sections 111 and 122 are remedied, I am told that they may interfere with the successful listing of Fine Profit.  The Companies Court has had a number of applications of this sort recently and it is appropriate that I set out what I consider to be the correct approach to dealing with them.

4.  The factors to which the court generally has regard when considering applications under section 122 were summarized by me in Yu Sun Say v HKI Properties Limited HCMP 2556-2561, 2563, 2565-2568/2007 and adopted by Kwan J (as she then was) in Re Sanliuyidu (Hong Kong) Sports Goods Co. Limited [2009] 4 HKLRD 708.  They are as follows:

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

(2)     Whether the default was inadvertent; and

(3)     Whether the court is satisfied that the company would comply with the obligation to lay its profits and loss accounts or income and expenditure statements before general meetings in future.

5.  In cases of this sort these criteria are normally readily satisfied.  This is so in the present case.  The ultimate beneficial owners of the applicants are the same: Zhang Zhi Rong and Chen Qiang.  They are well aware of the applicants’ financial positions.  The defaults were inadvertent arising from a belief on the part of the accountant whose job it was to deal with company secretarial matters that as tax returns did not need to be filed with the Inland Revenue it was unnecessary to prepare audited accounts and put them before the companies in annual general meeting.  I accept that given the present involvement of professionals who are aware of the provisions of sections 111 and 122 the mistakes are unlikely to be made again.

6.  Compliance with the corporate governance provisions of the Companies Ordinance is important.  I recognize that when dealing with companies which have only 1 or 2 shareholders some provisions may be of less practical significance than they are in companies with more shareholders some of whom are not involved in management, but it remains important that the court insists that company directors are mindful of their duties as part of the ongoing process of ensuring sound and transparent corporate governance.  The behavior of directors with regard to such matters becomes all the more relevant in the context of public companies.  In my view the court should not grant orders, which allow a company to gloss over infractions, which it appears the Stock Exchange considers important.  The correct balance in a case such as the present is achieved by requiring an applicant to bring to the attention of the Stock Exchange and prospective investors applications of this sort and the reasons why it was necessary.  I will, therefore, grant the orders sought against an undertaking by the applicants in the following terms:

AND UPON the Applicant undertaking through its counsel to procure that this order and the reasons why it was sought have been brought to the attention of The Stock Exchange of Hong Kong Limited in connection with the proposed listing of Fine Profits Enterprises Limited or any other company of which the Applicant is a subsidiary and is referred to in any prospectus for such listing.