CHIENG TSAI WAN JUDY v. KWOK KAM FUNG AND ANOTHER

HCMP 625/2016

[2018] HKCFI 603

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 625 OF 2016

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DECISION

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1.  This is the plaintiff’s application for an order pursuant to sections 373 to 375 of the Companies Ordinance, Cap 622 that she be given access to, and allowed to inspect and take copies of, certain of the company’s documents as set out in a Schedule to the Originating Summons which is dated 17 March 2016. It was said that the application is also made at common law,though it was not suggested that this gives rise to any difference of approach in this case.

2.  The facts are set out in a decision of Recorder Linda Chan SC of 5 June 2017 in associated proceedings for an injunction.  It is sufficient to summarise them briefly here.  The 2^nd defendant is a company called Pristine Cultural International Limited which was incorporated in 2008.  The company has not been represented at this hearing.

3.  The 1^st defendant was one of the original shareholders and directors of the company, and so was the brother of the plaintiff.  The original intention was to set up a museum for the preservation of cultural relics, particularly Buddhist relics.  In the event, the museum was not established and the company’s business consisted of storing relics at various different workshops which were acquired between 2008 and 2010.  According to the plaintiff’s evidence, the business was financed through a loan by her brother.  In 2009, the plaintiff became a director and shareholder in his place.  According to the 1^st defendant’s evidence, she played little or no part in the business of the company.

4.  As found by Recorder Linda Chan SC, and not in dispute, the 1^st defendant has been responsible for the day-to-day operations of the company, including keeping account records and the keys to the various properties.

5.  The company does not appear to have been a commercial success, and, on the 1^st defendant’s evidence, the plaintiff’s brother agreed to wind it up early in 2016.  However, by that time the parties were in dispute, in part in relation to the loan, and in part in relation to smaller loans said to have been made to, among others, the 2^nd defendant.  As a precursor to the present proceedings, on 28 January 2016, the plaintiff’s solicitors asked to inspect and take copies of the company’s accounting records.

6.  Although the plaintiff’s case is that the 1^st defendant opposed this course, on a fair reading of the evidence, she was prepared to comply, at least up to a point.  By agreement, over four days in May 2016, the plaintiff’s legal representatives attended the company’s registered office and inspected and took copies of documents.  The 1^st defendant says, and there is no reason to doubt, that a considerable volume of material was made available in this way.

7.  Following the decision of 5 June 2017 in the injunction proceedings, the plaintiff then took up again the application for inspection.  By letter of 5 July 2017, so over a year after the inspection, the plaintiff’s solicitors wrote to the effect that only a limited number of accounting documents had been provided.  They produced an extensive schedule comparing the documents that had been provided, and those documents which they said had not been provided.

8.  By a letter of 23 November 2017, the 1^st defendant sought to resolve the matter by offering access to the room where the accounting and company documents were kept.  The plaintiff says that the letter should have been sent to her solicitors, but in any case, it is objected that such access had already been given and that there was no purpose in simply repeating the May 2016 exercise.  In these circumstances, the matter has come back before the court for decision today.

9.  The plaintiff’s case is that this is a straightforward application giving rise to her right as a director to the inspection of the company’s accounting records.  On the authorities, it is submitted, there are no grounds for the court to withhold an order given the evidence that records which may be expected to exist have not in fact been provided to date, and that no valid reason has been given by the 2^nd defendant.  The right to inspect flows automatically from the nature of the plaintiff’s duties as a director.  As to the scope of the application, certain items listed in the Schedule to the Originating Summons have not been pursued since the defendants say that they do not have them, but there is no such statement in the evidence as to the balance of the documents which should now be provided.  A draft Order with a Schedule of documents has been produced by the plaintiff.

10.  The 1^st defendant’s case is as follows.  First, so far as it relates to board and shareholders’ meetings and written resolutions, which are items 7 and 8 in the Schedule to the draft Order, these items do not fall within the meaning of accounting records in section 375 of the Companies Ordinance.

11.  Second, as to the remaining items, for whatever reasons, these were missing documents, and these are not in the possession of the company and an order should not be made in respect of them.

12.  Third, the obligation to provide the documents is that of the company, and not the director, in this case the 1^st defendant.

13.  Fourth, the application for the missing documents is vexatious because such documents were examined and audited by the company’s accountants, albeit the plaintiff refused to sign the relevant reports.  As a director, she could have obtained the missing documents from the bank or from the accountants herself without the necessity for an application.  Further, the defendant had made a reasonable offer in her letter of 23 November 2017.

14.  Fifth, the application is unreasonably wide since it relates to documents up to today’s date and not those existing at the date of the Originating Summons.

15.  The applicable legal principles have not been in dispute. A director’s right of access to accounting records of the company is well-established both at common law and under section 374(1) of the Companies Ordinance (see Tan Beng Huat v Swisscelin Distribution Ltd [2016] HKCFI 593 at paragraph 7, G Lam J).  The right of inspection flows from the director’s duties to the company (see Ng Yee Wah v Lam Chun Wah [2012] 4 HKLRD 40 per Kwan J, as she then was).  

16.  It was submitted on behalf of the 1^st defendant that the court should not make an order if the purpose of the application is to harass the defendant.  I agree with that submission, which is similar to that accepted by Rogers V-P in Re Boldwin Construction Co Ltd [2001] 3 HKLRD 430 at paragraph 15, and in Re Alvarez & Marsal Asia Ltd [2009] 4 HKLRD 728 at paragraph 30 by Johnson Lam J (as he then was).  However, a case of harassment, so far as it was advanced, is not supported by the evidence in the present case.

17.  In the light of the submissions that were made to me, I should also add that, in my view, the court will not make an order that is so wide or imprecise that it cannot reasonably be complied with.  On behalf of the plaintiff, it has been submitted that care has been taken in the drafting to avoid that in the Schedule annexed to the draft order.  I was taken through the Schedule item by item, and, on the whole, I accept this submission.

18.  Turning to the issues, the 1^st defendant relies on the Alvarez & Marsal Asia Ltd case for the proposition that matters relating to board and shareholders’ meetings, written resolutions and the like do not come within the terms of books of account as used in section 375.  That is correct (see paragraph 26 at page 736), but that general rule has to be seen in the light of Tsai Shao Chung v Asia Television Ltd [2012] 4 HKLRD 52 which suggests that the issue is ultimately one of fact (see paragraphs 51 to 54 at pages 67 to 68).  In the present case, it is clear from the letter of 5 July 2017 that many documents within this category have already been disclosed.  So far as there are some limited exceptions, it does not seem unreasonable that the picture is completed.

19.  In fact, one of the main objections taken by the 1^st defendant, and on which much of the argument turned, is that the documents that are requested for inspection are, for whatever reason, missing. It is pointed out that this is a small company, and, in any case, the documents were not found during the plaintiff’s examination in May 2016.

20.  It is rightly accepted on behalf of the plaintiff that if documents do not exist, or have gone missing, or are beyond the control of the company or its directors, then an order for their inspection and copying cannot be made under sections 374 and 375 of the Companies Ordinance.  As Godfrey Lam J said in the Swisscelin case at paragraph 10, “If a document does not exist, then it cannot be inspected.  It really is as simple as that.”

21.  It was accepted on behalf of the plaintiff that this issue was raised in the 1^st defendant’s skeleton argument.  The objection taken by the plaintiff is that this is a factual assertion which is not the subject of any evidence before the court.

22.  In response on her behalf, reference was made to the 1^st defendant’s affirmation dated 16 May 2016, in which she refers in paragraph 23 to other “other documents not being in the possession of the company”.  However, as the plaintiff points out, this is a reference to certain particular classes of item which the plaintiff had asked to inspect.  It was these items which the 1^st defendant was saying were not in the possession of the company.  It is not a general statement as to missing items, and in fact the application has not been pursued by the plaintiff in respect of these items.

23.  In the Ng Yee Wah case, Kwan J (as she then was) made an order to the effect that the defendant was to file an affidavit stating which of the requested documents were in the company’s possession.  I have considered making a similar order in the present case, on the basis that if the documents are not in fact there, then an order for their inspection is redundant.  On balance, I am persuaded by the plaintiff that the circumstances in the Ng Yee Wah case are different from the present circumstances, and in particular the position as to the evidence is different.  I agree with the submission made by the 1^st defendant that it is important that an application such as the present is not used oppressively.  However, the identification of which of the requested items is not in fact in the company’s possession does not seem oppressive, and could have been done.  It is not suggested that the reasons for the absence of the documents are relevant, at least in the context of an application like the present one.

24.  As to the other grounds of opposition, it is correct, as the 1^st defendant submits, that the obligation under section 375 of the Companies Ordinance lies on the company and not on an individual director.  However, the case law shows that individual directors are sometimes joined as parties.  In the present case, the evidence is that so far as these documents are concerned, the company can only realistically act through the 1^st defendant, and the objection on this ground is not a valid one.

25.  As is clear from what I have said already, I do not consider that the present application is a vexatious one, so far as that argument was advanced.  Further, there can be no objection to the fact that the draft order seeks to bring the position as to the documentation up to date, nor is it an answer to say that the plaintiff as director could have obtained the missing documents from the bank or from the accountants herself without the necessity for an application.  Nor, in the circumstances of the case, can it be said that the 1^st defendant’s letter of 23 November 2017 offering access to the room again provides an answer to the application.

26.  It follows that none of the objections raised by the 1^st defendant succeed, and the plaintiff has made good her application.  Given all the background, and in particular the fact that the plaintiff has already had access to the company’s documentation, however, the application does seem some whatperipheral to the real dispute between the parties.  As I have already indicated,this does not appear to me to be a case in which the 1^st defendant is deliberately seeking to avoid her responsibilities as regards inspection of documents.  I hope that in the light of this decision the parties can move on as regards inspection, at least to the extent that unnecessary time and expense is not expended on this particular issue.

27.  I will now hear the parties as to consequential matters arising out of this decision.

(Discussion re costs)

28.  So far as the application for indemnity costs is concerned, the principles are as set out in the Bond Star Development case ([1997] HKLRD 1327).  There are a number of circumstances where the court will make an order for indemnity costs, but ultimately the question is whether such an order is appropriate.

29.  Reliance is placed by the plaintiff on a case which also involved an application under section 375—that is the Swisscelin case, a decision of Godfrey Lam J, that I mentioned earlier in this decision.  In that case the judge made an order for indemnity costs, and at paragraph 19 explains why that order was made.  Those facts seem to me to be different from the facts of the present case.  It does not seem to me that the position taken by the 1^st defendant was so unreasonable as to merit an order for indemnity costs, and this would not, in my view, be an appropriate case in which to make such an order.

30.  It is not of course in dispute that the plaintiff is entitled to an order for party and party costs.  The issue is whether the court should make such an order on a summary basis or whether it should go over to taxation.  The Statement of Costs for Summary Assessment under Order 62 rule 9A and Practice Direction 14.3 that has been produced on behalf of the plaintiff is in the form of Appendix A to the Practice Direction.

31.  A number of objections are taken in that regard by the 1^st defendant as to why this is a matter that should appropriately go to taxation.  They are as follows.

32.  Firstly, it is said that the photocopy charges are un-particularised and show a very large number of pages having been copied—in fact, over 7,000.  On the other hand, this is not in money terms a particularly big item, and a consequence of seeking summary assessment is that the successful party has to accept that a broad-brush approach will be taken by the court— that is specifically spelled out in paragraph 13 of the Practice Direction.

33.  Second, it is correct that counsel has charged for a brief fee for an earlier hearing on 19 May 2016, as well as for today’s hearing, and an objection is taken on that basis as well.  However, that point does not seem to me to be a matter that goes to the necessity for a taxation.  A court can take a view on a summary assessment as to the extent to which the 1^st defendant should be obliged to pay two brief fees even if there is, as has been articulated persuasively by Mr Norman Nip, counsel for the plaintiff, a good reason why preparation for the first hearing that in the event was settled by consent had to take place.

34.  Third, the professional work by the solicitors is said to include an element of duplication, in this case duplication of the work done by counsel.  Again, however, that seems to me to be something that the court can take account of in the broad-brush approach.  The alternative is that the matter goes to taxation with the incurring of yet further expense.

35.  On the whole, I think that this is a case for a summary assessment but, as I have said, given that the court has declined to make an order on an indemnity basis, each of the factors that has been raised by the 1^st defendant are factors that the court is fully entitled to take into account on the paragraph 13 approach to summary assessment.

36.  The amount claimed in total by the plaintiff is $801,191.00.  Taking into account all the matters that have been raised by the 1^st Defendant relating to the Statement of Costs, I will summarily assess the costs at $600,000 to be paid by the 1^st defendant to the plaintiff.  That is my decision in this part of the case.