CHEN FANGLIN v. ALLEN INTERNATIONAL HOLDINGS LTD

HCMP 2175/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2175 OF 2013

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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 Mr Chen Fanglin (“Mr Chen”) for an order to regularise non-compliance with the requirements of section 122 of the Companies Ordinance, Cap 32 (“the Ordinance”) to lay audited accounts for the years ended 31 December 2010, 2011 and 2012 before Allen International Holdings Limited (“the Company”) at its AGMs.

2. In the hearing on 27 November 2013, I allowed the application and I now give my reasons.

Background

3. An order is sought to lay the director’s report and audited consolidated financial statements of the Company (“the Consolidated Accounts”) at a general meeting held on or before 31 December 2013.  The Consolidated Accounts are audited by Pricewaterhouse-Coopers.

4. 4 affirmations have been filed by Mr Chen supporting the present application.  Mr Chen is one of the ultimate beneficial owners of the Company.  The other ultimate beneficial owners have each signed letters to the court indicating their consent to the present application.

5. The Company was incorporated in Hong Kong on 1 February 2010.

6. It has at all material times been an investment holding company.  It was never engaged in active business in Hong Kong.

7. The Company wholly owns 3 Mainland subsidiaries.  These subsidiaries were transferred to the Company by 16 July 2010 and have principally been engaged in the business of manufacturing, distributing and selling home decoration products and electric fireplaces in the Mainland.

8. 3 ultimate beneficial shareholders hold the shares in the Company through a chain of companies (collectively “the Group”). They are Mr Chen, Ms Chen Xiangqun (Mr Chen’s wife) and Mr Ho Shun Wing, who respectively and indirectly hold 65%, 20% and 15% of the Company.

9. The shares of the Company have been directly owned by China Prosper Int’l Limited (“China Prosper”) since its date of incorporation.  Mr Chen has at all material times been the sole director of China Prosper.

10. Mr Chen has been the sole director of the Company since 31 March 2010, when he replaced China Prosper (also represented by him at the time) as the Company’s director.

11. The Group is intended to be listed on the main board of the Hong Kong Stock Exchange.

12. In June 2013, in the course of advising on the listing and restructuring of the Group, Messrs Squire Sanders discovered that the Company did not comply with section 122 of the Ordinance.  While the 1st, 2nd and 3rd AGMs of the Company were duly held, in contravention of section 122 of the Ordinance no audited accounts were laid at these AGMs.

Legal principles

13. Mr Chen accepts that the Company was in breach of section 122(1) and (2) of the Ordinance.  Sections 122(1) and (2) require a company to put before its members at an AGM its profit and loss account and balance sheet for the financial year ending either immediately preceding the calendar year in which the AGM takes place or during it.  Section 122(3) provides for criminal liability for directors who fail to take all reasonable steps to comply with the section.

14. Nevertheless, section 122(1B) expressly confers upon the court the power to regularise non-compliances of section 122(1) or (2).  It provides that:

“(1B) The court, if for any reason it thinks fit so to do, may in the case of any company and with respect to any year —

(a) substitute for the requirement in subsection (1) to lay a profit and loss account or (as the case may be) an income and expenditure account before the company at its annual general meeting a requirement to lay such account before the company at such other general meeting of the company as the court may specify; and

(b) extend the periods of 6 and 9 months referred to in subsection (1A).”

15. As summarised by Harris J in the recent case of Re Asiatic Century Ltd, unrep, HCMP 1445/2013 (28 October 2013) at §11, the factors to which the court has to regard in considering whether to regularise non-compliances of section 122 are:

(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 was satisfied that the company would comply with the obligation to lay its profit and loss accounts or income and expenditure statements before general meetings in future.

16. The court will usually grant an order under section 122(1B) if it is satisfied that an inadvertent or genuine mistake has been made which has not caused any prejudice to the owners of a company (see: Re Asiatic Century Ltd at §16).

17. In contrast, default caused by an “indifference to compliance” does not, or not necessarily, fall to be characterised as inadvertent (see: Re Asiatic Century Ltd at §16 and Re Array Electronics (China) Ltd, unrep, HCMP 1489/2013 (12 November 2013) at §21.

18. The court will consider the length and extent of the delay.  The longer the time has elapsed where a retrospective order is sought, the more likely the grant of an order would be artificial, e.g. because the shareholders may have changed and there is no prospect of the breach being prosecuted (see: Re Asiatic Century Ltd at §17).

19. As to whether the shareholders may be prejudiced by the non-compliance, it is relevant that the company in question has no more than a handful of shareholders who are likely to be familiar with its financial condition (see: Re Array Electronics (China) Ltd at §85).

20. The reasons why the order is sought will also be considered.  Remedying a breach in order to progress a proposed listing may be a reason to grant an order, but it is not automatically so (see: Re Asiatic Century Ltd at §17).  Yet, this factor may tip the balance where the other relevant factors are satisfied (see: Re Array Electronics (China) Ltd at §92).

Whether the non-compliances were inadvertent?

21. Having carefully considered the explanations given in Mr Chen’s affirmations, I am satisfied that the non-compliances were inadvertent.

22. First, the Company did not carry on any business within Hong Kong and was not required to file tax returns.  It is and was an investment holding company.  The operating subsidiaries of the Group carried on business in the Mainland and not in Hong Kong, and the Company had no discernable role to play in the profit generating activities of the Mainland subsidiaries.

23. Under such circumstances, the auditors of the Company are satisfied that the Company did not generate any assessable profits for the financial years ended 31 December 2010, 2011, and 2012.

24. Because of this, Mr Chen was unaware of the necessity to prepare audited accounts for the Company, let alone the legal requirement to lay such accounts before the Company at its AGM.

25. This may be a typical case of a genuine mistake.  As observed by Harris J in Re Asiatic Century Ltd at §16 (see also §12):

“An example of a genuine mistake is a belief that if a company does not need to file a tax return, which is commonly the position for Hong Kong companies that carry on business exclusively on the Mainland and thus have no taxable income here, it does not need to prepare accounts that satisfy section 123 and consequently does not need to put them before the company in annual general meeting.”

26. Second, I accept the explanation by Mr Chen that he relied on the professional expertise of the corporate secretarial company he engaged, who regrettably failed to alert Mr Chen to the breaches of section 122 when they occurred.

27. Mr Chen engaged Win Forever Limited (“Win Forever”) to handle the secretarial affairs of the Company, which he understood to provide secretarial services to many companies in Hong Kong.  Win Forever has been trading under the name “Best Win Consultants Co”, which is shown as the presenter of the Company’s annual returns.  It shares the same address as Win Forever.

28. The Trade Development Council website shows that Best Win Consultants Co commenced business as a service company providing bookkeeping and accounting, taxation and corporate secretarial services since 2002 and thus has over 10 years of experience in providing corporate secretarial services.

29. Mr Chen had to rely on the expertise of a professional secretarial company.  He has never carried on any business in Hong Kong and has at all material times been resident in the Mainland.  He does not own or control any company incorporated in Hong Kong with an active business within the jurisdiction.  Under such circumstances, I accept his explanation that he was unaware of the section 122 requirements.  Further, Win Forever had failed to alert him to any non-compliances, and so I accept that the breach was an inadvertent one.

30. In the recent decision of Re Array Electronics (China) Ltd, DHCJ Le Pichon held that non-compliance caused by the oversight of directors who were not fully familiar with the statutory requirements could be characterised as an inadvertent breach.  The learned judge found it relevant that the directors placed reliance on the expertise of professionals engaged to attend company secretarial matters who failed to alert the directors to the non-compliances.

31. Based on the 2 factors identified above, I am satisfied that the breach was an advertent one.

The support of the application by the ultimate beneficial shareholders

32. The affected shareholders and directors during the period of default have been precisely identified in the supporting evidence, which is in compliance with the good practice described by DHCJ Le Pichon in Re Array Electronics (China) Ltd at §17.

33. The main beneficial shareholder is Mr Chen, who has deposed that he and the immediate 100% shareholder, China Prosper, were at all material times conversant with the financial position of the Company such that the failure to lay the accounts causes no prejudice to them.

34. The other beneficial shareholders, Ms Chen Xiangqun and Mr Ho Shun Wing, have indicated their consent to the present application.  They also confirm that they were at all material times conversant with the financial position of the Company, having been provided with the periodic accounts of the Mainland subsidiaries.

35. In the premises, I am satisfied that none of the legal or beneficial shareholders are prejudiced by the non-compliances with section 122.

Future compliance

36. In § 25 of his 4th affirmation, Mr Chen has informed the court about the concrete steps that will be taken by the Company to ensure that no breaches of section 122 will occur in the future, including the employment of an accounting manager to ensure future compliance of the Ordinance, the engagement of professionals advisers to advise on compliance matters, the setting up of audit mechanism to oversee financial reporting and internal control procedures of the Group including the Company, and the engagement of new company secretary.  In such circumstances, I am satisfied that the Company will comply with the obligations in the future.

Conclusion

37. I first dealt with this case on 12 September 2013.  By that time, the auditors of the Company gave an adverse opinion about the financial statements of the Company, because the financial statements of the Company and its subsidiaries had not been consolidated as required by the Hong Kong Accounting Standard.  By reason of such adverse opinion, I adjourned the application pending the preparation of the consolidated accounts of the Company and its subsidiaries.

38. The Consolidated Accounts were presented to the court in the adjourned hearing.  The auditors of the Consolidated Accounts are of the view that such accounts give a true and fair view of the Company’s financial position.

39. In allowing Mr Chen’s application, I have also considered the judgment of Harris J in Re Asiatic Century Ltd.  However, as observed by DHCJ Le Pichon in § 21 of Re Array Electronics (China) Ltd, the issues involved in such kind of applications are fact-sensitive, and so the merits of each application would depend on the facts of each individual case. 

40. In Re Asiatic Century Ltd, the breaches involved were extensive and they related to a large number of companies.  A sophisticated corporate structure was employed but no professionals were ever engaged.  The default also covered a considerable period of time.

41. The facts of the present case are quite different.  Based on the reasons given above, it is an appropriate case for the court to exercise the discretion to make an order regularizing the past non-compliances.  I therefore so ordered.

42. The Company will provide the usual undertaking to procure that the order and the reasons why it was sought to be brought to the attention of the Stock Exchange in connection with the proposed listing.

43. These are the reasons for the order I made at the hearing.