LEI ZI SHEN v. TAI-AO ALUMINIUM GROUP LTD AND OTHERS

HCCW 1116/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1116 OF 2004

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D E C I S I O N

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1.  This is a summons for specific discovery issued by the petitioner in a petition for winding up and buy-out relief under section 168A of the Companies Ordinance, Cap. 32.

2.  Three types of documents are sought in the schedule to the summons.  They are:

(1)     full sets of the audited consolidated accounts of the Company in question, Tai-Ao Aluminium Group Limited (“the Company”) for each of the financial years commencing from the year of incorporation in 2002 to present;

(2)     monthly management accounts (including profit and loss accounts and balance sheets) of the Company and its wholly owned subsidiary, Tai-Ao Aluminium (Taishan) Company Limited (“the Taishan Company”), for the period commencing from the date to which the last audited consolidated accounts of the Company were made up to present; and

(3)     bank statements of all bank accounts of the Company and its subsidiaries dating back from the date to which the latest audited consolidated accounts of the Company were made up to present.

3.  By an order I made on 12 February 2007, the Company was ordered to give discovery of item (1).  This order has been complied with.  The Company has disclosed the audited consolidated accounts for the years ended 31 December 2002, 2003 and 2004.

4.  The draft consolidated accounts for the year ended December 2005 have been prepared.  They are in the process of being finalised and audited.

5.  According to the submission of counsel for the 1^st and 2^nd respondents, the consolidated accounts for 2005 would be audited and approved by June 2007.  This would be disclosed to the petitioner who is entitled to receive a copy as a shareholder.

6.  The Company is opposed to disclosing the unaudited management accounts of the Company, or the bank statements of the Company and all of its subsidiaries.

7.  There is no dispute that the documents sought to be disclosed are in the possession, power and custody of the respondents.  The only question is whether they are relevant to the disputes in the proceedings and whether discovery should be given for disposing fairly of the cause or matter or for saving costs.

8.  I do not propose to set out the complaints in the re-amended petition upon which the petitioner seeks to wind up the Company on the just and equitable ground and founds his case of unfairly prejudicial conduct.

9.  Miss Tsui submitted for the petitioner that the documents sought are relevant for these reasons:

(1)     There is a factual dispute relating to the intention of Ho Seong Ping (one of the directors of the 2^nd respondent, which is the majority shareholder of the Company) behind the taking out of bank loans by the Taishan Company.  The documents sought are necessary to resolve this factual dispute.

(2)     Winding-up relief is sought in the petition.  For the court to determine whether the Company should be wound up or whether it would be more appropriate to grant buy-out relief under section 168A, the court must be put in the picture of the latest financial position of the Company.

(3)     Buy-out relief is sought in the petition.  The court would need to determine the date for valuation of the shares if this relief is granted, and the documents sought are necessary for this purpose.

I will deal with these grounds in the order as set out above.

10.  The allegation regarding Mr Ho’s intention towards the bank loans is contained in paragraph 25 of the re-amended petition.  To understand the relevance and significance of this allegation, it is best to set out this paragraph verbatim instead of giving a paraphrase:

“In or about May 2004, the relationship between the Petitioner and the other directors (led by Ho) of the Company deteriorated as a result of the Petitioner’s concern over the level of bank loans which Ho, with the concurrence of the other directors, caused the Taishan Company to obtain from its bankers, which stood at around RMB400 million compared to RMB142 million in 2002.  Upon learning from Ho that he did not intend that the Taishan Company and the Company should repay such loans, and instead he had ensured that moneys received by the Taishan Company be placed in Hong Kong so that when the banks called loans, the directors of the Taishan Company and the Company could abscond with the moneys, the Petitioner, upon taking legal advice in the Mainland, decided on 24 May 2004 to resign from his positions as (i) chairman and legal representative of the Taishan Company and (ii) chairman of the Company.  Lai was appointed to succeed the Petitioner as chairman and legal representative of the Taishan Company on the same date.  Also, SK Ho, Chen and Lai were appointed as additional directors of both the Company and the Taishan Company.”

11.  In the petitioner’s supporting affirmation, he deposed to what Ho had said at a meeting to all directors in March 2004 which made clear he had the alleged intention.  Again, it is best to quote the relevant passage in the petitioner’s affirmation:

“In March 2004, the PRC central government announced a policy of national marcoeconomic adjustment and control.  In a meeting of all the directors, Ho said that the new economic measures might result in the Taishan Company’s bankers reducing, or ceasing to provide, banking facilities granted.  He further said it was important to ensure all moneys received by the Taishan Company be placed in Hong Kong so that, in the event the bankers ceased to support the Taishan Company and started to call back loans, all the directors would be able to take the money in Hong Kong and fee.”

12.  The first thing to note about the allegation of Ho’s intention of not repaying the bank loans and absconding with the money is that this was made in the context of providing an explanation why the petitioner had resigned from his positions in the Taishan Company and the Company.  The second thing to note about the alleged statement of intention is that it was made in a hypothetical situation, namely, in the event that the bankers would cease to support the Taishan Company and start to call in their loans.  That hypothetical situation has not arisen on the evidence filed. 

13.  The respondents have denied in the affirmations filed that Ho had said anything to the petitioner that might cause him to think that Ho had no intention to cause the Taishan Company to repay the bank loans.  The respondents have alleged that the petitioner resigned from his positions because he wanted to retire and that he had asked Ho if someone could be found to purchase his shares.

14.  Miss Tsui has pointed to the increase in the bank borrowings from 2002 to 2004, as appeared in the audited accounts already disclosed.  She said that the latest management accounts and bank statements would help to resolve the factual dispute on Ho’s intention of not repaying the bank loans.

15.  Whether the rise in bank borrowings from 2002 to 2004 was attributable to the alleged intention of not repaying bank loans or whether this was due to some other factor is a matter that could be explored at trial.  This has no bearing on the documents sought in this application.  The documents sought relate to the financial position after December 2004.

16.  I am wholly unable to see how such documents would assist in any way in resolving whether Ho did or did not have the intention to repay the banks in the earlier part of 2004, before the petitioner tendered his resignation.  Besides, even if Ho did make the utterance in March 2004 as alleged, it was in the hypothetical situation of the banks not supporting the Taishan Company and calling in the loans, which has simply not arisen.

17.  I turn to the second basis for seeking the documents, that relates to winding-up relief.  The Company accepts that the latest financial position of the Company is relevant to the court’s consideration if the Company should be wound up or whether buy-out relief should be granted.  If the audited accounts are up-to-date, that would pose no problem.  In the present case, they are not.  I understand the audited consolidated accounts for 2005 are being finalised, but the audited consolidated accounts for 2006 have not even been compiled.

18.  If the Company as the holding company does not prepare monthly accounts, it should produce the monthly management accounts of its principal operating subsidiary, that is, the Taishan Company.  But I see no reason to require the Company to give disclosure of the bank statements of the Company and its subsidiaries, just because the court would need to know the latest financial condition of the Company to decide whether it would be appropriate to wind up the Company.  The fact that in an earlier affirmation, a director of the Company had given a profit forecast which is not borne out by the audited accounts when the accounts later came to be compiled does not mean that the management accounts should be called into question.

19.  The last basis for seeking the documents relate to the buy-out relief.  I would need to know the latest financial position of the Company and the principal operating subsidiary.  There is no basis for seeking the bank statements as well.

20.  The Company has resisted discovery alleging an ulterior purpose of the petitioner in seeking the documents, as the petitioner has set up business in competition after he was removed as a director of the Company.  It is denied by the petitioner that he has any interest in a competing business.  Even if he has, I do not think the documents that the Company is required to disclose would contain any sensitive information that might be useful to a competitor, quite apart from the usual undertaking that the petitioner would be subjected to, namely, that any documents disclosed in these proceedings are not to be used for any purpose other than in connection with the present proceedings.

21.  I order the 1^st and 2^nd respondents to file an affidavit giving discovery within 21 days hereof and produce for inspection by the petitioner within 7 days thereafter the following documents:

the monthly management accounts (including the profit and loss accounts and balance sheets) of the Company and the Taishan Company for the period commencing from 1 January 2005 to present.

22.  I order the 1^st and 2^nd respondents to pay two-thirds of the petitioner’s costs of this summons in any event.