CHAN KWAN v. EVERBEST WATER TREATMENT DEVELOPMENT COMPANY LTD

HCMP 692/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 692 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 Section 122(1) of the Companies (Winding up and Miscellaneous Provisions) Ordinance, Cap 32, for orders extending the time for laying the profit and loss account and balance sheet before the company at annual general meeting in respect of the calendar years from 2003 to 2012.

2.  In the case of the first five years in respect of which orders are sought, as the relevant periods are all outside the limitation period of three years provided by Section 351A of the Companies (Winding up and Miscellaneous Proceedings) Ordinance in respect of which a prosecution can be brought, I will dismiss the application as there is no risk of prosecution.

3.  The final year is in respect of 2012 and a prosecution is therefore possible.  In support of the application, an affirmation of the applicant, Mr Chan Kwan, has been filed.  Mr Chan addresses in his affirmation the criteria by reference to which the court assesses applications of this sort.  As has been explained in various authorities, the factors to which the court normally has regard are:

(i) whether the shareholders were aware of the company’s financial position and were not prejudiced by non‑compliance;

(ii) the default was inadvertent; and

(iii) the court is satisfied that the company is likely to comply with its obligations in future.

4.  As is common in these cases, the circumstances in which the breaches came to light were as follows.  The group of which the respondent forms part is applying for a listing on the Stock Exchange of Hong Kong Limited, and due diligence exercises have been undertaken which have identified the breaches of Section 122(1).

5.  I accept that the shareholders of the company were aware of its financial position: it was a holding company.  I also accept that in the circumstances it is unlikely that the company will fail to comply with its obligations under the relevant sections of the Companies Ordinance in future. 

6.  The contentious issue is whether or not it can properly be said the default was inadvertent.  Mr Chan’s evidence in this regard is very limited.  In paragraph 27 of his affirmation he states that the directors of the company, including himself, did not have professional legal and accounting knowledge and, as a result, were not aware of the relevant provisions in the Companies Ordinance.  In paragraph 28 he goes on to say this:

“Moreover, since the respondent has at all material times been an investment holding company and has no taxable income in Hong Kong, the Directors at the material time, including myself, believed that it was not necessary to engage external company secretarial services or legal advisers, who might have advised the Respondent on compliance with section 122 of the Predecessor Companies Ordinance...”

7.  What is not explained is how, given the fact that Mr Chan accepts that he and his fellow directors did not have the relevant knowledge, they could have come to believe that it was not necessary for the company to prepare audited accounts.  What this suggests is that the mistake did not arise as a result of inadvertence.  The mistake arose as a result of an indifference to compliance with the regime established by the Companies Ordinance for the improper administration of a company’s affairs. 

8.  Any person who incorporates a company in Hong Kong should appreciate that its affairs will be governed by a sophisticated regime contained in the Companies Ordinance (now Cap 622).  If they wish to use a Hong Kong company to conduct any part of their business or personal affairs, then it is incumbent upon them to obtain at least basic advice on those matters which the Companies Ordinance requires the directors of a company to ensure take place.  If directors of company cannot demonstrate that they have done so, this indicates that resulting mistakes are not a matter of what can fairly be described as inadvertence, but rather are mistakes that have arisen as a result of indifference.  In these circumstances, I am not satisfied that the second criteria is met and I dismiss the application in its totality.

9.  There is one final matter I would mention.  In what is now a long line of authorities I, and a number of other judges, have explained that applications of this sort which have become prevalent in recent years as a result of, it would appear, misunderstandings about the requirements of the Stock Exchange in respect of listing applications are for the most part unnecessary and an inappropriate imposition on judicial resources. 

10.  I asked Mr Kim, who appeared for the applicant, why it was felt necessary to continue with this application which, although issued before some of the relevant decisions had been delivered, has been heard at a point in time when the legal advisers would have appreciated both the criteria by reference to which a court assesses these kind of applications, but also the concerns of the Companies Court, about the proliferation of this type of unnecessary applications.  I was told that this application had been continued largely at the instigation of the sponsor for the listing, who in this case is Quan Capital Limited. 

11.  I hope in future that applicants’ legal advisers will make it clear to sponsors that, for the most part, these applications are unjustified and are unnecessary.