CHEN HA PING HEPBURN AND ANOTHER v. CHEN TING SAN DANIEL AND ANOTHER

HCMP2059/2011, HCMP2060/2011
& HCMP2062/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2059 OF 2011

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REASONS  FOR  DECISION

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1.  Before the court were three applications for production and inspection of documents of Loong San Investment Co Ltd (“Loong San”), Leeloong Investment Co Ltd (“Leeloong”) and Loong Wan Investments Limited (“Loong Wan”) pursuant to section 121 or alternatively section 152FA of the Companies Ordinance, Cap 32. On 16 May 2012, after hearing the parties, I allowed the applications. I had indicated that I would hand down the reasons for decision, which I now do.

Background

2.  The parties involved are family members.  Mr Chen Tsing Kwan (“the Father”) is the father.  He is married to Madam Fung Pui King (“the Mother”).  They have four children, that is, Mr Chen Ting San Daniel (“Daniel”), Ms Chen Ha Ping Hepburn (“Hepburn”), Mr Chen Ting Hoi (“TH”) and Mr Chen Ting Nam (“TN”).  Daniel is the eldest son.

3.  The Father was a successful architect and property developer.  In around 1971, he founded the firm TK Chen & Associates. In 1972, he set up Leeloong as a vehicle to invest in development projects and to hold properties.  It now holds Leeloong Building in Central.  In 2001, he set up Loong San and Loong Wan as corporate vehicles for the purpose of acquiring Parkview Centre and Loong Wan Building in North Point respectively.  The three companies mainly manage the buildings and collect rentals and have no other substantive business operations.

4.  The shareholders and directors of the companies are :

Company	Shareholders	Directors
Loong San	Hepburn (25%)	Hepburn
	TH (25%)	Daniel
	TN (25%)
	Daniel (25%)
Loong Wan	Same as Loong San	Same as Loong San
Leeloong	Hepburn (20%)	Father
	TH (20%)	Mother
	TN (20%)	Daniel
	Daniel (40%)

5.  It is the Father’s express intention that his children should be interested in the properties held by the companies in proportion to their shareholdings in the companies.  He also entrusted Daniel with the daily management and financial affairs of the companies.  Hepburn, TH and TN all have their own careers.

6.  The plaintiffs’ complaint is, in gist, this.

7.  In about 1996, the Father was then 76.  He was afraid that should he die, heavy estate duty might be levied on the substantial wealth that he accumulated over the years.  So he decided to entrust the rentals collected by Leeloong to Daniel to hold the same on trust for him.  The rentals collected would be deposited into Daniel’s personal account.  Daniel had to follow his instructions as to how to use the moneys so deposited.  With the same estate duty planning in mind, the same trust arrangement applied to the rentals collected by Loong San and Loong Wan.  In mid June 2010, the Father asked Daniel to distribute the rentals collected over the years to his siblings.  Daniel refused and said the moneys were his.  He even alleged that the Father, his siblings and the companies owed him money.  Disputes ensued. Daniel told Hepburn that there was serious loss of business in the companies. On 26 July 2010, he sent her an email attaching a document “Financial Information” (Extracted from 2009 audited accounts).  In that document, it was alleged that Loong San and Loong Wan were indebted to Daniel for HK$53,066,000 and HK$54,249,000 respectively.  Such allegation is extremely doubtful because none of the three buildings held by the companies were subject to any encumbrances and the companies carried on no business other than receiving rentals.

8.  On or about 10 August 2010, the Father asked Daniel to make available the books of accounts, records and documents of the companies so that he could review their accounting affairs.  Two days later, Daniel removed all the documents and records from the registered office of the companies.

9.  In September 2010, Hepburn, through the assistance of Ms Shirley Chan, accounting clerk (“Ms Chan”), obtained some documents of the companies.  A forensic accountant was then engaged to review them.  The accountant advised, among other things, that there was no concrete evidence to show the existence of the two loans to Loong San and Loong Wan as alleged by Daniel; that the general ledgers showed that Daniel had withdrawn a total of about HK$55,428,268 from Loong San and Loong Wan’s bank accounts; and that there were serious irregularities relating to the alleged dividends payments of the companies.  The accountant took that view that it was likely that Daniel had fabricated the books and records of the companies by way of false accounting.  He advised that it was necessary to gather further documents and information to carry out further investigation.

10.  The plaintiffs then commenced these actions.

11.  Daniel did not deny that he was in procession of the documents sought.  In opposing the applications, he contended that they were brought with bad faith.

Discussion

12.  The present applications are brought by Hepburn and the Father primarily in their capacity as directors of Loong San and Loong Wan (in Hepburn’s case) and Leeloong (in Father’s case).  Hepburn and TH also sue in their capacity as shareholders for all the three companies. 

13.  The principles governing an application by a director for inspection of documents are well settled.  In Ng Yee Wah v Lam Chun Wah, HCMP4616/2001, 28 June 2005, unreported, Kwan J (as she then was) summarized them at para 29 :

“ (1) The right of a company director to inspect the company’s documents is well established at common law... .

(2) The right of inspection flows from the director’s duties to the company and a director does not have to explain why the inspection is sought or demonstrate any particular ground or ‘need to know’ as a basis. ... Thus, the inaction on the part of the director after grounds for suspicion concerning the company’s affairs have arisen is irrelevant; likewise, the intention of the director to discover misfeasance with the view to seeking relief, or that the desire to find evidence is motivated by vindictiveness... .

(3) It is only where it can be proved that the director intends to abuse the confidence in relation to the company’s affairs and to injure the company in a material way that the director’s right of inspection can be interfered with, and such interference can only be effected in circumstances where a restriction on a director’s right can be imposed because of misuse of confidential information leading to damage... .

(4) In view of the proposition in (3), the exercise of a director’s right of inspection is, ‘generally speaking, not a matter of discretion with the Court’... .

(5) The onus of establishing that the right of inspection will be exercised for improper purpose lies on the person who asserts it and ‘clear proof’ is required to satisfy the court ‘affirmatively’ that the grant of the right of inspection would be detrimental to the interests of the company... .

(6) The scope of inspection can potentially be very wide, covering any ‘documents belonging to the company’ ... ‘corporate material’ ... ‘corporate records and accounts’ or ‘corporate information’ ... ‘accounting and other records of the company’... .

(7) It is perfectly proper for a director to engage an accountant to conduct the inspection in exercise of his right. A director may certainly exercise his right through his agent... . A director is also entitled to take copies of the documents during inspection... .

(8)   Whilst there may be some dispute in the authorities if the statutory provision (our statutory provision is section 121(3) of Cap 32) adds a statutory right of inspection to an existing common law right, it is abundantly clear that the statutory provision is consistent with and does not detract from the common law right... .”

14.  For a shareholder’s application brought under section 152FA, the principle is that a shareholder is entitled to inspect documents if first he subjectively believed that he inspected for a proper purpose, and second the court is also objectively satisfied that the inspection sought was for a proper purpose.  Where a member seeks to protect his economic interest in the company (e.g. value of his shareholdings), this should prima facie constitute a proper purpose, and hostility between the parties is irrelevant.  See Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241, per Harris J at paras 14 - 16 and 18 ‑ 22.

15.  Applying these principles to the present case, I think the plaintiffs have made out a very strong case for production and inspection of the documents sought.  On the evidence before me, their suspicion that Daniel might have wrongfully dealt with the financial affairs of the companies is well justified.  In particular, Daniel did not appear to have the money to lend nearly HK$110 million to Loong San and Loong Wan at the time (2003 - 2005) because even taking his allegations at the highest, he only had about HK$28.7 million at the time.  The alleged loans are extremely doubtful.  The directors are entitled to have access of the documents sought so that they can investigate into the apparent irregularities as discussed by the accountant and to gain a true and fair view of the affairs of the companies.  The shareholders are also entitled to inspect the documents sought.  For obviously, the alleged loans and the apparent irregularities identified by the accountant would have a significant impact on the value of their shareholding in the companies.

16.  In opposing the applications, Daniel first alleged that he was actually very rich and financially capable of offering the two loans to Loong San and Loong Wan.  However, as said, when his allegation is subject to a closer scrutiny, he only had about HK$28.7 million at most.

17.  He next argued that the plaintiffs did not act in good faith.  He took a number of points :

(1)  The Father and Hepburn had a dispute with him concerning the sale proceeds of some farmlands in the New Territories that the Mother transferred to him.

(2)  The Father had misappropriated HK$4 million from his personal account.

(3)  The Father had assaulted and criminally intimidated him.

(4)  The Father had defamed him by threatening to publish an autobiography.

(5)  Hepburn had attempted to interfere with the accounts of Loong San.

Daniel contended that the applications for the companies’ documents amount to an attempt to further misappropriate his moneys which are now sitting in his personal account.

18.  However, Points (1) to (4) are irrelevant to the present applications.  Point (5) has been explained by Hepburn.  She merely requested, quite legitimately, Daniel to produce the documents.  Her conduct does not amount to any interference with Loong San’s accounts as alleged.

19.  In my view, Daniel has failed to demonstrate how the plaintiffs might be able to use the documents sought to injure the companies in a material way.  His argument, taken at its highest, is that the plaintiffs have been hostile to him.  That is irrelevant and in any event not a sufficient ground to resist the applications.

20.  Daniel also sought to rely on the affirmations filed by Ms Chan and the Mother.  Ms Chan dealt with the accounting procedure of the companies.  The Mother essentially dealt with the disputes among the family members.  As their evidence adds little, if any, to the present applications, I shall not dwell on them.

Conclusion

21.  For the above reasons, I allowed the applications with costs.