MANFIELD COATINGS CO LTD v. SPRINGFIELD CHEMICAL COMPANY LTD

HCMP 1379/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1379 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 pursuant to sections 111 and 122 of the Companies Ordinance seeking an extension of the times within which the company should have put its profit and loss accounts and balance sheets for the two financial periods ending 31 December 2010 and 31 December 2011 before the companys’ shareholders at annual general meetings.

2. The application pursuant to section 111 is necessary because although the company purported to conduct paper annual general meetings, because of the failure to give the necessary audited financial statements to shareholders, as subsection 111(6) requires, techinically an annual general meeting did not take place.

3. The circumstances in which the court will grant extensions of time for failures to comply with these sections have been rehearsed in various authorities. Generally, the court has regard to the following considerations:

(1)   whether the failure to comply with the Ordinance arose as a result of inadvertence as opposed to indifference;

(2)   whether the shareholders were aware of the financial position of the company; and

(3)   whether the court is satisfied that the company is likely to comply with its obligations under the Companies Ordinance in the future.

In addition, the court needs to be satisfied that there is a good reason for it to exercise its discretion.  If the breaches took place more than 3 years before the application, then there is no risk of prosecution and, generally, there would be no reason for the court to grant extensions of time.

4. In the present case, the failure to prepare audited financial statements appears to have arisen as a result of a misunderstanding by members of the company’s staff concerning the relevant requirements.  As seems to be commonly assumed, if the Inland Revenue does not require the submission of financial statements, as is so in the present case, the assumption is that the company does not have to prepare audited financial statements.  This view is, of course, erroneous.

5. I am satisfied, as is normally the case, that as this is a company with only one shareholder, and the application has been made at all, that the second and third criteria are satisfied.  As is clear from the introductory paragraph of this decision, the relevant periods still fall within the past 3 years and therefore there is, at least in theory, a risk of prosecution.

6. So far as inadvertence is concerned, I am satisfied that this is a case of inadvertence.  As demonstrated by the fact that the company purported to hold annual general meetings, it was not completely indifferent to the relevant requirements of the Companies Ordinance.  Its understanding of what was required of it was muddled.  Having said that, it is not apparent that the company took the trouble to obtain specific advice from its auditors or a company secretarial service as to precisely what its obligations were. Although I am prepared to treat this as a case of inadvertence, I consider it, because of the lack of such evidence, a borderline case.

7. I will grant the orders sought.  I would, however, note that it seems to me that in practice, this is another example of an application which serves limited practical purpose.  There does not appear to have been any realistic prospect of the company or its directors being prosecuted.