LAM YAN YEE AND ANOTHER v. THIS THIS RICE (HONG KONG) LTD AND OTHERS

HCMP 1979/2024

[2025] HKCFI 1378

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1979 OF 2024

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D E C I S I O N

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I.  INTRODUCTION

1.  This is the Plaintiff’s application by way of Originating Summons filed on 9 October 2024 pursuant to section 740 of the Companies Ordinance (Cap 622) for an order that the Defendants do produce for inspection the documents of the 1^st Defendant (the “Company”) listed in Schedule 1 (“Schedule 1”) to the Originating Summons and also the documents of the subsidiary companies of the Company (the “Subsidiary Companies”) listed in Schedule 2 (“Schedule 2”) attached to the Originating Summons. Among them is one Hungry Dragon Food Factory Ltd (“Hungry Dragon”), in which the Company holds 99% shares and the 3^rd Defendant holds the remaining 1%.

2.  There are 12 classes of documents listed in Schedule 1:-

(1)  Daily reports;

(2)  Expenses vouchers;

(3)  Check stubs;

(4)  Bank statements;

(5)  Purchases and subcontracting orders;

(6)  Salary list, copies of Employer’s returns and MPF records;

(7)  Inventory list;

(8)  Business contract;

(9)  Copies of loans and hire purchase agreements;

(10)  Copy of the leasehold agreement;

(11)  Fixed asset register; and

(12)  Minutes of all directors meetings.

3.  In response to the Plaintiffs’ application, the Defendants offer to produce audited financial statements of the Company and Subsidiary Companies and pending the completion of the audit, their management accounts. The Plaintiffs refuse to accept the offer. The Plaintiffs’ refusal is completely understandable because there is no evidence of when the auditors were engaged to prepare the audited financial statements and also no evidence like a letter issued by the auditors about when the auditing is expected to be completed. Equally fundamental is the lack of evidence of the identity of the auditors. It is only during the hearing was the name of the auditors given from the bar table, but of course, there was no meaningful opportunity to verify such information given during the hearing only.

II.  BACKGROUND

4.  The Company was incorporated in 2022. The Company operates a restaurant chain under the brand known as This This Rice (in Chinese “添飯餸”) (“TTR”). It operates different branches at various locations in Hong Kong under the brand through the Subsidiary Companies except Hungry Dragon, which is a food supplier. On record[1], the shareholding structure is, out of 1,000,000 issued shares:-

(1)  The 1^st Plaintiff: 340,000 shares;

(2)  The 2^nd Plaintiff: 330,000 shares; and

(3)  The 2^nd Defendant: 330,000 shares.

5.  Currently on record, the 2^nd Defendant is a director of the Company. The 3^rd Defendant is the 2^nd Defendant’s husband. On record, before the Company filed Form ND2A dated 9 October 2023, which stated that the Plaintiffs resigned as directors, both Plaintiffs were also directors of the Company.

6.  On 19 June 2023, the 2^nd Defendant and the Plaintiffs signed a written shareholders agreement (the “Shareholders Agreement”). The Shareholders Agreement set out the percentages of shares registered in the shareholders’ names and the percentages of the “actual dividends” (實際股息) to be received by the shareholders respectively.

7.  The Shareholders Agreement also provided that:-

(1)  “由董事會根據公司營利情況決定分派股息”

“ The board of directors shall determine on distribution of dividends according to the profit situation of the Company.” (translation)

(2)  The percentages of the actual dividends shall apply to three of the Subsidiary Companies specified in the Shareholders Agreement.

(3)  “ 董事會沒有主席職位，董事會決議重大決策時將由股東及董事投票決定”

“There is no chairman of the Company. Any major decisions shall be made by vote by the shareholders and directors.” (translation)

8.  Around the same time when the Shareholders Agreement was entered into, the Plaintiffs and the 2^nd Defendant as directors of the Company signed an undated written resolution of the Company. It provided, among others that:-

“按照分紅政策，在公司連續3個月獲得淨利潤後，股東可根據其百分比每月獲分配利潤”

“According to the dividend policy, if the Company makes net profits for 3 consecutive months, shareholders may receive a share of the profits every month based on their respective shareholdings of the Company.” (translation)

For convenience, I shall refer to this provision as the “Dividend Clause”.

9.  There is no dispute that the Company has never declared and distributed any dividends since the signing of the Shareholders Agreement on 19 June 2023. There is no dispute that the Company has not had its financial statements audited. There is no evidence that the board has ever met to review its accounts, audited or not, to determine whether there has been any 3 consecutive months of net profits.

10.  In July 2024, the business of TTR was made the subject matter of a TV programme titled “東張西望”. In the programme, the 2^nd Defendant said that he welcomed shareholders to look at the accounts of the business.

III.  PLAINTIFF’S EVIDENCE

11.  The Plaintiffs say that the 2^nd and 3^rd Defendant have had the control of the Company. Further, against the above backdrop, the Plaintiffs say that the parties’ understanding of the Dividend Clause was that the Company’s accounts would be revised every 3 months and that if the Company would make a profit in every month of that 3-month period, dividends would be payable to all the shareholders.

12.  Further, the Plaintiffs say that only in November 2023 when seeking legal advice, did they come to know that on record, they had ceased to act as directors by From ND2A dated 9 October 2023, as mentioned above.

13.  The Plaintiffs further say that also only in November 2023 did they come to know that certain branches of TTR had been opened by franchise. The Plaintiffs claim that they have never been consulted on the franchise or opening of these branches.

14.  According to a CCTV recording produced by the Plaintiffs, on 4 June 2024, at a meeting between the 3^rd Defendant, the 1^st Plaintiff’s friend Mr Liu and the 2^nd Plaintiff’s husband Mr Chan Wah (“Chan”):-

(1)  The 3^rd Defendant agreed to produce the books and all financial information requested by the Plaintiffs in about two weeks’ time;

(2)  The 3^rd Defendant admitted that many TTR branches had been making profits. For example, the Sheung Wan branch had made a profit of HK$600,000. However, the amount of profit had declined dramatically in the recent months. The 3^rd Defendant then said that “this only meant that Hungry Dragon was enjoying more profit”. The Plaintiffs took this to mean that it was either that the prices of the materials supplied by Hungry Dragon to the Sheung Wan branch were inflated, or that Hungry Dragon was supplying less materials for the same prices;

(3)  The 3^rd Defendant admitted that he and the 2^nd Defendant had set up new branches of TTR (the “New Branches”) without informing the Plaintiffs. The 3^rd Defendant admitted that “it was his fault” for what happened;

(4)  The 3^rd Defendant admitted some of the shareholders of the New Branches included the 2^nd Defendant’s mother and his personal friend. The Plaintiffs take the view that those branches were controlled by and only benefit the 2^nd and 3^rd Defendants and their family and friends, while the 1^st Defendant had little or no control and would gain little;

(5)  The 3^rd Defendant admitted that he and the 2^nd Defendant had used funds from the Company or other TTR branches to set up the New Branches; and

(6)  The 3^rd Defendant admitted that he had taken funds from the TTR business back to his home, where she lived with the 2^nd Defendant, and the amount of the funds exceeded HK$1,000,000.

15.  Based on the above, the Plaintiffs say that:-

(1)  The Plaintiffs suspect that the 2^nd and 3^rd Defendants deliberately withhold dividend payments from the Plaintiffs and deliberately withhold the Company’s accounts from the Plaintiffs so as to prevent them from determining their entitlement to dividends;

(2)  As a result of the matters admitted by the 3^rd Defendant in §14(4) above, the Company has little control over, and makes little gains from, the New Branches; and

(3)  The Plaintiffs suspect that the 2^nd and 3^rd Defendants have been siphoning money off the Company for their own benefits.

16.  Based on the above, the Plaintiffs say that there is a sufficiently reasonable case for investigation into the conduct on the part of the 2^nd and 3^rd Defendants. The Plaintiffs further say that they no longer trust accuracy of the Company’s accounts and therefore it is necessary for them to have the underlying documents for the accounts.

IV.  THE DEFENDANTS’ EVIDENCE

17.  The Defendants (including the Company) filed the 1^st and 2^nd Affirmations of the 3^rd Defendant in opposition. It is noted that although the 3^rd Defendant holds no office in the Company, it is he who makes the affirmations on behalf of the Company, and he does not deny the Plaintiffs’ allegation that he and the 2^nd Defendant are in control of the Company.

18.  According to them, the 1^st Plaintiff has held the shares on trust for her mother Ms Chiu On Ying (“Chiu”), and the 2^nd Plaintiff has held the shares on trust for her husband, that is, Chan.

19.  The 3^rd Defendant deny that there was any common understanding of the Dividend Clause among the shareholders and Chiu and Chan that the Company’s accounts would be reviewed every 3 months. Instead, according to the Defendants, for determining whether the Company made a profit, the shareholders would have to wait for the audited financial statements of the Company after the end of each year of assessment for tax purpose, and only then the board of directors would be able to review whether the Company made profits. The 3^rd Defendant goes further to say that unaudited accounts may be incomplete for the purpose of assessing profits (if any) and it would not be cost-efficient to have audited accounts every 3 months.

20.  The 3^rd Defendant says that since October 2023, the relationship between Chiu and Chan on one hand and the 2^nd and 3^rd Defendants on the other deteriorated. The 3^rd Defendant refers to the following matters:-

(1)  In about mid-2023, Chiu invited the 2^nd Defendant to form a company to take over a business known as “Wan Chai Add Rice and Foods” (“WC Add Rice”) which Chiu and some others owned. However, the accounts of that business were disorganised and disputes arose among the owners of the business;

(2)  Meanwhile, from February 2023 to January 2024, Chiu was the supplier of vegetables to certain branches of TTR, and from May 2023 to January 2024, Hungry Dragon was the supplier of processed meats to WC Add Rice. It was agreed that Chiu could use the money due to Hungry Dragon from WC Add Rice to offset part of the debt due from two of those branches to Chiu;

(3)  However, on or around 15 January 2024, Chiu informed the 3^rd Defendant that she would no longer supply vegetables to the TTR branches until the Company would settle all the vegetable debts due to her approximately in the sum of HK$2,200,000, while the amount of money due and owing by WC Add Rice to Hungry Dragon was HK$700,000;

(4)  In February 2024, Chiu, the 2^nd Defendant and the 3^rd Defendant met and discussed how to solve the debts. While they agreed at the end of the meeting to verify the figures, Chiu did not follow up as agreed;

(5)  Around the same time, Chiu made a report to the police that the 2^nd Defendant had been involved in a fraud case. The police arrested the 2^nd Defendant for investigation. The investigation was concluded in September 2024 with no further action. The 3^rd Defendant accuses Chiu of making the report to the police in bad faith; and

(6)  Subsequently, the 2^nd and 3^rd Defendants were harassed by triad members or some unknown persons, and they suspect that the triad members acted on Chiu’s instructions.

21.  As regards the resignation of the Plaintiffs as directors in November 2023, the 3^rd Defendant’s evidence is set out in §31 of his Affirmation filed on 27 December 2024:-

“In or about November 2023, in accordance with clause 22(e) of Section 3 of the articles of association of [the Company], the 1^st and 2^nd Plaintiffs were removed as directors of [the Company] for the reason being the director did not failing to show up for order directors’ meetings for over 6 months without the permission of the directors.”

22.  In relation to the TV programme in June 2024 mentioned in §10 above, the 3^rd Defendant deposes that it was Chiu who caused it to report the matter.

23.  With respect to the 4 June 2024 meeting mentioned in §14 above, the 3^rd Defendant explained that he made the admissions and said what he said not voluntarily but under duress as a result of physical threats and harassment he had received. In particular, the 3^rd Defendant referred to his visit to WC Add Rice on 3 June 2024. He said that he visited it upon Chan’s invitation, but once he arrived at WC Add Rice, a male known as Liu Kai Chi forced him to a corner nearby and made threats to him and his family.

24.  Based on the above, the Defendants contend that the Plaintiffs’ application is made in bad faith.

25.  The Defendants deny any wrongdoing. With regard to dividend, the Defendants say that the audited accounts and pending the completion of the audited accounts expected to be ready by early June 2025, the management accounts would be sufficient for the Plaintiffs to check whether the Company made profits.

V.  LEGAL PRINCIPLES

26.  I shall not repeat here the legal principles in relation to section 740 as summarised by DHCJ William Wong SC in Wong Sau Man Samuel v Wong Kan Po Wilson [2017] 4 HKLRD 542 at §39.

27.  In relation to whether a record or document of a subsidiary constitutes a “record or document of the company” for the purpose of section 740, I draw on the Court of Appeal’s judgment in Hao Xiaoying v Wong Yiu Lam William [2017] 6 HKC 151, a case on section 152FA of the then Companies Ordinance (Cap 32), the predecessor to section 740. In summary:-

(1)  “ The starting point is that the documents of a subsidiary are not the documents of its parent company. A parent company generally has no legal right or power to obtain the documents of its subsidiary in the capacity of a shareholder. It is the board of the subsidiary that has control of the documents.” (§3.4); and

(2)  However, records or documents which are currently in the possession of the parent company, or of which the current company is currently entitled as a matter of legal right to have possession, are “records or documents of the company” for the purpose of section 152A of the then Companies Ordinance (Cap 32). (§§3.5-3.8)

28.  In my view, these principles apply equally to section 740.

VI.  ISSUES

29.  The issues, therefore, are, broadly:-

(1)  Whether the inspection of the documents now sought by the Plaintiffs is for a proper purpose;

(2)  Whether the present application is made in good faith; and

(3)  Assuming that the answers to the above are in the affirmative, whether the Court order should include the records and documents of the Subsidiary Companies.

VII.  FOR A PROPER PURPOSE

30.  Whatever the parties understood the Dividend Clause to mean, one of the Plaintiff’s purposes, namely, to check the accounts to determine whether the Company has made any profit for dividends under the Dividend Clause, is clearly a proper purpose, since this goes to the economic interests of the Plaintiffs as shareholders.

31.  For this proper purpose, management accounts and audited financial statements would normally be sufficient. However, the audited financial statements are not yet available, and there is no concrete evidence of when the auditing would complete except an estimate, not supported by any evidence from the auditors themselves, that it should be completed in 6 months. Further, Ms Cyndi Ho, counsel for the Plaintiffs, submits that because of the 2^nd and 3^rd Defendants’ suspicious conduct or misconduct, the Plaintiffs no longer trust accuracy of the Company’s accounts. Therefore, the Plaintiffs require all these documents for checking the accuracy. Ms Ho further submits that the suspicious conduct or misconduct constitutes a reasonable ground for investigation. Ms Ho refers to the points below to establish the suspicious conduct or misconduct.

32.  First, according to §13 of the 1^st Plaintiff’s affirmation:-

“Despite repeated requests and demands by the Plaintiff, and in breach of the Agreement, the 2^nd and 3^rd Defendants have yet to, up to the time of this application, provided any information related to the finances of the 1^st Defendant, or any of subsidiary companies listed in the Summons. For instance, Mr Chan (“Chan”), the husband of the 2^nd Plaintiff, repeatedly asked the 3^rd Defendant in the period from September to October 2023 respectively about the financial situation of TTR and when a dividend would be declared. On all these circumstances, the 3^rd Defendant used various unreasonable excuses saying that the requested information was not ready and unavailable.”

33.  The Defendants have not denied such accusation. In my view, while auditing of financial statements would take time, the Company’s bank statements and management accounts could have been provided readily, but the Defendants have not explained why this could not have been done. In any event, the Company should have already had its financial statements for 2022-2023 and possibly 2023‑2024 audited. The failure to provide such information is especially unsatisfactory when the availability of dividend would depend on such information.

34.  Second, despite the expansion of TTR business by way of opening more branches, no dividend has yet been declared. One would have thought that the expansion of the business must mean that the prospects were promising and that there were funds for the expansion. Of course I cannot rule out that so much investment may not necessary yield any immediate return. However, the problem lies in the Defendants’ failure to provide any information relating to the financial situation of the Company.

35.  Third, while the 2^nd Defendant said in the TV programme “東張西望” that he welcomed shareholders to look at the accounts, no accounts have been produced, and obviously the accounts have not been audited, and despite the present application, only an offer to produce audited accounts in six months and management accounts has been made. This is consistent with the Defendants’ failure to provide the Plaintiffs with information relating to the financial situation of the Company despite the Plaintiffs’ repeated requests and demands.

36.  Fourth, despite the provision in the Shareholders Agreement that any major decisions shall be made by vote by the shareholders and directors, the Plaintiffs were not even consulted about the opening of or investment in the New Branches, using the brand TTR and using the Company’s funds, with the 2^nd Defendant’s mother and his personal friend. The Defendants offer no explanation in this regard.

37.  Fifth, the Company had not convened any shareholders meetings. Coupled with this irregularity is the irregularity in removing the Plaintiffs as directors:-

(1)  The Defendants cannot even point out the date of the removal of them as directors;

(2)  While the Defendant purportedly rely on clause 22(e) of Section 3 of the articles of association of the Company to remove the Plaintiffs as directors on the ground that they had failed to attend directors’ meetings, there is no evidence of any warning or demands that the Plaintiffs should attend directors’ meetings;

(3)  There is no evidence or particulars of directors meetings which the Plaintiffs failed to attend;

(4)  There is no evidence of any notice for convening such directors’ meetings pursuant to clause 8(1) of Section 2 of the articles of association;

(5)  There is no evidence of any board resolution or members’ resolution or even any kind of written record to remove the Plaintiffs as directors pursuant to clause 22(e) of Section 3 of the articles of association of the Company; and

(6)  There is no evidence of any notice of resolution issued pursuant to section 462 of the Companies Ordinance and no evidence of how the Plaintiffs were afforded the right to protest against removal pursuant to section 463 of the Companies Ordinance.

38.  The Defendants offer no explanation why they could ignore the legal requirements. The Defendants only allege that the Plaintiffs were notified of the removal.

39.  Sixth, since the removal of the Plaintiffs as directors, the 2^nd Defendant has become the sole director. However, there has been no attempt to appoint any directors. The 2^nd Defendant has become the sole controller of the Company, and her husband the 3^rd Defendant has not denied his control of the Company.

40.  For the first, second and third points above alone, there is room for me to think that the TTR business, being a private business, may be disorganised and thus there was difficulty in providing the information relating to the Company’s financial situation in proper order. However, when these points are considered with the fourth, fifth and sixth points above, I agree with the Plaintiffs that there was reasonable ground for them to believe that there were some wrongful conduct committed to the prejudice of the Plaintiffs as shareholders such that the Defendants would like to remove the Plaintiffs as directors in such irregular manner to deprive the Plaintiffs of the directors’ entitlement to the Company’s documents and/or to make it more difficult for the Plaintiffs to obtain the Company’s documents.

41.  In the circumstances, I find that there is a reasonable case for the Plaintiffs to disbelieve the accuracy of the management accounts and audited report (which would to a certain extend depend on the accuracy of the underlying documents) and there is also a reasonable case for investigation.

42.  It follows, in my view, that the inspection of the documents listed in Schedule 1 is necessary for checking the accuracy and carrying out investigation, and is therefore for a proper purpose. I take this view even on the assumption (without making any finding) that the Plaintiffs did employ some triad members to threaten the 2^nd and 3^rd Defendants as they allege, because even on such assumption, the primary purpose of the applicant would, in my view, remain one of checking the accuracy and carrying out investigation.

VIII.  GOOD FAITH

43.  While it is not in dispute that the relationship between the Plaintiffs and the 2^nd and 3^rd Defendants has turned sour, given the circumstances explained above, and even assuming (without making any finding) that the Plaintiffs did employ some triad members to threaten the 2^nd and/or 3^rd Defendants as they allege, I am not convinced that the present application is made in bad faith, for example, deliberately to make trouble to or even threat the Defendants. On the contrary, given the circumstances explained above, I am satisfied that the Plaintiffs honestly believe that the purpose identified above is a proper purpose, and therefore, they make the present application in good faith.

44.  The Defendants submit that an order of production of the documents would cause disruption to the business of the Company. I fail to see how any disruption would be caused – as they have already engaged auditors to audit the financial statements, such documents should have already been compiled in proper order for the auditors. This may take time, but I do not see how raising disruption in such circumstances would constitute a valid ground of opposition, whether in terms of bad faith or otherwise.

IX.  DOCUMENTS OF SUBSIDIARY COMPANIES

45.  Applying Hao Xiaoying v Wong Yiu Lam William, supra, only the documents of the Subsidiary Companies which the Company is currently in possession of or is entitled to possession of are regarded as the Company’s records for the purpose of section 740. There is no evidence that any of the documents are in the Company’s possession. As regards entitlement, the Company is not a director of any of the Subsidiary Companies. Ms Ho (for the Plaintiffs) relies on the Company’s shareholdings in the Subsidiary Companies. However, even as a majority shareholder, the Company is not entitled to the documents of the Subsidiary Company.

46.  Ms Ho seems to suggest that the 2^nd and/or 3^rd Defendants, being directors of certain Subsidiary Companies, are entitled to the company’s documents. However, the 2^nd Defendant is joined to the present proceedings in her capacity as director of the Company, and the 3^rd Defendant is joined as a person controlling the Company together with the 2^nd Defendant. They can in no way be joined in their capacity as directors of any of the Subsidiary Companies because the Plaintiffs are not shareholders of any of the Subsidiary Companies and cannot in the first place rely on section 740 in respect of the Subsidiary Companies.

47.  Ms Ho also submits that the Plaintiffs would at least like to have the Defendants’ confirmation on whether such documents of the Subsidiary Companies are in possession of the Company. However, I see no basis for acceding to such submissions – after all, the burden lies upon the Plaintiffs to satisfy me that I should grant the order under section 740. They cannot just make such an application and then request for such confirmation, which is essentially a fishing exercise.

48.  In the circumstances, I find that the Plaintiffs have failed to prove that the documents of the Subsidiary Companies are in the possession of the Company or documents the possession of which the Company is entitled.

X.  CONCLUSION

49.  By my analysis above, I allow the application to the extent of Schedule 1 and dismiss the application to the extent of Schedule 2. I therefore make the following order:-

(1)  The 1^st Defendant do within 21 days produce, and the 2^nd and 3^rd Defendants do within 21 days cause the 1^st Defendant to produce, to the Plaintiff and any persons duly authorised by them for inspection of all documents of the 1^st Defendant of all the classes of documents listed in Schedule 1 to the Originating Summons;

(2)  The Defendants do file and serve an affirmation to confirm compliance with paragraph (1) above within 14 days thereafter, in particular, all the documents have been produced to the best of the Defendants’ knowledge;

(3)  The Defendants do allow the Plaintiff and any persons duly authorised by them to take copies of all and any documents mentioned in paragraph (1) above; and

(4)  Liberty to apply.

50.  As regards costs, costs should follow the event. I think it appropriate to apportion 80% of the costs to Schedule 1 and 20% to Schedule 2. Taking a broad brush approach, I would set off the percentages, so the Plaintiffs are entitled to 60% of the costs.

51.  I agree with Ms Ho (for the Plaintiffs) that the costs should be borne by the 2^nd and 3^rd Defendants only, jointly and severally, because the Company is effectively neutral in the current dispute between the Plaintiffs and the 2^nd and 3^rd Defendants controlling the Company. Therefore, I order that the 2^nd and 3^rd Defendants shall pay the Plaintiffs 60% of costs. The whole costs is summarily assessed at HK$255,130, and thus 60% thereof is HK$153,078.

52.  It remains for me to thank counsels for their assistance.