YIU HO WING v. CHINA EASE INVESTMENTS LTD

HCMP 960/2017

[2018] HKCFI 1498

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2386 OF 2014

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D E C I S I O N

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Introduction

1.  There is before me an originating summons dated 25 April 2017 taken out by Yiu Ho Wing against China Ease Investments Limited (the company).  It is made pursuant to section 374(1)(b) of the Companies Ordinance, Cap 622.

2.  Mr Yiu, at the time of the application, was one of three directors and shareholders.

3.  The applicable principles in these types of applications are well-known and straightforward.  They were conveniently summarised in the decision of Kwan J (as she then was) in Ng Yee Wah v Lam Chun Wah [2012] 4 HKLRD 40.

4.  The main principles which are relevant here are:

(i)  “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 relevant; 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.”

(ii)  “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 director’s right can be imposed because of misuse of confidential information leading to damage.”

(iii)  “In view of the proposition in [(ii)], the exercise of a director’s right of inspection is, ‘generally speaking, not a matter of discretion with the Court’.”

(iv)  “The onus of establishing that the right of inspection will be exercised for improper purposes 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.”

5.  On 27 May 2017, by consent, Deputy High Court Judge To gave directions for the filing of evidence.  Paragraph 3 of the order further provided that “No further affidavit/affirmation be filed without leave of the court”.

6.  The affirmation relied upon to found the application is short and straightforward, which it should be.  It states that the plaintiff is a director and therefore wishes to and is entitled to exercise his rights.  Further, the plaintiff, as mentioned above, is one of three shareholders holding 3,000 of the 10,000 paid up shares in the company.

7.  The company opposes the application primarily by reference to what is called a Deed of Family Arrangement dated 30 September 1998 (“the Deed”).   The company accordingly says that in reality the plaintiff is a mere trustee holding the shares for the benefit of the beneficial shareholders.  The company says therefore that the plaintiff “should have ceased to be a director”.

8.  It is further suggested that he should transfer the said shares, pursuant to clause 1(iii) of the Deed, to transfer the shares back to the beneficial owners.  Apparently a demand was made on 12 September 2017.

9.  The plaintiff’s position is that (for reasons I need not get into) the said Deed is invalid and therefore does not bite.

10.  I queried whether or not proceedings had been brought to enforce the Deed or to enforce the agreement for the transfer of shares.  Miss Wallis Chung confirmed that no proceedings were on foot, let alone any injunction applications to restrain the plaintiff from exercising his rights as prima facie a shareholder of the company would be allowed to enjoy.

11.  On the papers before me, it would appear that as early as 25 August 2015, which is almost three years ago, Mayer Brown JSM, solicitors then and now acting for the plaintiff, sought documents from the company, and in particular, relying on section 375(2) of the Companies Ordinance for the basis of his requests.  Up to today, no such proceedings to try to request by way of specific performance the plaintiff to transfer shares have been taken out.  In short, it would appear that the plaintiff was entitled to an order applying the principles set out by Kwan J in Ng Yee Wah.

12.  The defendant, by its summons dated 24 May 2018, sought leave to be granted to file an affirmation of Yiu Ching-kum dated 4 April 2018.  The short point being made there was that as a result of an EGM being held by the defendant, the majority shareholders exercising their voting rights removed the plaintiff as a director.

13.  Once the plaintiff was removed as a director of the company, his statutory right or indeed at common law to seek inspection of those documents ceases.  This has been confirmed in a number of First Instance authorities including Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241 (per Harris J) and Re Opes Asia Development (HCMP 447/2012), unreported decision dated 17 May 2012(per Harris J).

14.  The immediate reaction by the plaintiff was to seek an amendment to its originating summons to rely on a further basis, namely not as merely pursuant to his original right to seek inspection of company accounts qua director, but also qua shareholder under section 740 of the Companies Ordinance.

15.  At the hearing before me, Mr James Man, counsel for the plaintiff, accepted that I should grant leave to adduce the latest evidence filed by the company, and on that basis, that his client no longer had the locus to seek the documents he was seeking qua director.  He also confirmed that he would not be pursuing his summons for the amendment and that if the plaintiff is so advised, he would pursue inspection pursuant to section 740 of the Companies Ordinance by way of a separate application.

16.  The only issue remaining was therefore costs.

Applicable principles

17.  The present case is not dissimilar to the one faced by Barma J (as he then was) in Re Peaktop Technologies (USA) Hong Kong Limited [2007] 4 HKLRD 207.  What had happened there was that between the filing of the application and the hearing, the applicant had been removed as a director and the applicant’s legal advisors recognised they no longer had the locus to make the application and therefore sought leave to withdraw the application.  His Lordship then made the following observations at paragraph 5:

“The Applicants maintain, however, that they were entitled to bring the application when it was instituted and that their inability to pursue it is not due to any recognition on their part that it was not going to succeed, but is due entirely to the actions of the Company in removing them as directors. They therefore ask that, notwithstanding that they have sought leave to withdraw their application, they be awarded the costs of the application.”

18.  At paragraph 8, His Lordship further added:

“Further, it seems to me that where an Applicant’s application is doomed to failure by reason not of anything which he has done or not done, but because of an act of the Respondent which is within its control and out of the hands of the Applicant and is, further, a step which could have been taken either prior to the application being made or at an earlier stage in the application so as either to obviate the possibility of the application being made, or to minimise the costs associated with it, it may well be appropriate to recognise this by an appropriate costs order.”

19.  His Lordship concluded that in the circumstances he was satisfied that but for the removal of the applicants as directors of the company, it would have been appropriate to make an order substantially in the terms sought and he therefore granted leave to the applicants to withdraw that application, and would order exceptionally that the costs of the application would be paid by the company.

20.  It seems to me that those observations are apposite here.  As early as 2015, the company and the adverse shareholders were aware of the plaintiff wishing to avail himself of his statutory right of inspection as a director and yet no steps had been taken to seek to remove him.  Had those steps been taken, none of the costs associated with this application would have been incurred.

21.  Miss Wallis Chung, who appeared for the company, said everything which could possibly be said, and fairly so, on the behalf of the company.  But all in all I am satisfied that this is a case, like Re Peaktop Technologies where the applicant, but for the eleventh hour removal of his status as a director, would have succeeded and therefore he should be entitled to his costs.

22.  I bear in mind that the plaintiff, by his summons, sought to amend the application so as to try to rely on his status as a shareholder.  That has also been withdrawn.  It seems to me that faced with the eleventh hour application for leave to adduce evidence, it was not unreasonable for the plaintiff to try to think of a way to salvage the situation.  I think the fairest order in the circumstances is simply that on the summons to amend the originating summons, leave be given for it to be withdrawn with no order as to costs.

23.  As to the originating summons before me on the HCMP 960/2017, I order the defendant pay the plaintiff’s costs to be taxed if not agreed on a nisi basis.

(Counsel for the defendant raised points on costs)

24.  I grant leave to adduce the affirmation as per the defendant’s summons dated 24 May 2018.  I make no order as to costs on that summons.

25.  On these HCMP proceedings, I make an order in favour of the plaintiff to be taxed if not agreed, save that costs of and occasioned by its application by summons to amend the originating summons dated 21 May 2018, where there shall be no order as to costs.

26.  It remains for me to thank both counsel for their helpful assistance in this matter.