LEE KING CHEUNG JOHN AND ANOTHER v. TOM LEE MUSIC CO LTD AND OTHERS

HCMP 2417/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2417 OF 2012

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DECISION ON COSTS

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Introduction

1.  On 29 October 2012 the Plaintiffs issued an originating summons pursuant to section 121 of the Companies Ordinance, Cap 32, and the court’s inherent jurisdiction for what is described in paragraphs 5 and 6 to the schedule to the originating summons as “Determinations” of the Plaintiffs’ rights as directors of the company to have access to and copies of the documents referred to in paragraph 5 and the electronic data referred to in paragraph 6.

2.  The 1^st to 6^th Defendants are companies forming part of the Tom Lee Music Group.  The 7^th Defendant is a director of those companies and the 8^th Defendant is a member of staff whose responsibilities included supervising the books of accounts of the companies.

3.  The Plaintiffs were at the time that the originating summons was issued directors of the companies.

4.  The originating summons first came on for hearing before me on 9 May 2013.  By that time it had become apparent that a resolution was to be put before the shareholders of the companies at an extraordinary general meeting for the removal of the Plaintiffs as directors.  I made directions for the filing of further evidence which took into account the likely removal of the Plaintiffs as directors.  On 2 August 2013 the matter came back before Mr Justice Ng.  By this time the Plaintiffs had been removed as directors.  The parties agreed that the originating summons should be discontinued.  The question of costs was reserved for argument.

5.  At the hearing before me on 11 June 2014 the Plaintiffs were represented by Mr William Wong SC and Mr Patrick Siu.  The 1^st to 6^th Defendants were represented by Mr Andrew Sheppard.  The 7^th and 8^th Defendants were represented by Mr Jose Maurellet.

6.  The Plaintiffs sought a costs order in their favour.  The 7^th and 8^th Defendants sought an order that the costs of the 7^th Defendant be paid by the Plaintiffs on a party and party basis, and the costs of the 8^th Defendant be paid by the Plaintiffs on an indemnity basis.  The 1^st to 6^th Defendants (“Companies”) seek an order that the Plaintiffs pay their costs and support the 8^th Defendant’s application.  On 18 July 2013 the Companies’ solicitors wrote to the solicitors representing the other parties proposing that the proceedings be discontinued or dismissed with no order as to costs. The 7^th and 8^th Defendants were prepared to agree to this.  The Plaintiffs did not.

7.  In short the question of costs falls to be determined by reference to whether or not I consider that the application was properly commenced by the Plaintiffs even if, as a result subsequently of their removal of as directors, it ceased to be viable. Before considering the relevant facts I will address the legal principles that govern a director’s rights to access a company’s books and records.

Legal Principles

8.  Section 121(1) provides that every company shall keep proper books of account.  The adequacy of those accounts is to be determined by reference to whether or not they are sufficient to give a true and fair view of the state of the company’s affairs and to explain its transactions: subsection 2.  Subsection 3 gives directors the right to inspect the books of account with section 121 requires to be kept.

9.  In addition a director has a common law right to inspect documents.  That right is a corollary to a director’s duties to a company.  A director does not have to explain why he wishes to inspect particular documents access to which he seeks either pursuant to his common law right or pursuant to section 121.  It is only where it can be established, and the burden is upon the company, that the director intends to abuse the right and injure the company that a company can probably refuse access.  These principles and the authorities which establish them are summarised in paragraph 29 of the judgment of Kwan J (as she then was) in Ng Yee Wah v Lam Chun Wah [2012] 4 HKLRD 40. They are not in dispute.  In my decision in Lam Kit Sing v Chungshan Commercial Association, Hong Kong [2011] 3 HKLRD 323, I explained that section 121(3) gives a director a right to inspect a company’s books of account and take copies of such records by such method as modern technology allows.  A director is not, however, entitled to require the company to provide copies itself.  Neither is a director entitled to require the company or its staff to sort out for a director the type or categories of documents that he wishes to inspect.  A director’s right is limited to having documents or electronic data containing the information he is interested in seeing made available to him but, in other words, he is not entitled to require the company to compile it for him in a form in which it does not already existed.  It was not suggested before me that in this respect there was a material difference between the common law rights and the statutory rights.  The authorities refer generally to common law rights of inspection.  I, therefore, proceed on the basis that insofar as the Plaintiffs were purporting to exercise their common law rights they were entitled to be given access to books of account in whatever form they were maintained for them to inspect, but not to require them to be copied or sorted out specifically for them.  This is not to suggest that it is not sensible for a company’s staff to assist a director to obtain access to documents or data efficiently.  However, section 121 and the common law place a limited obligation upon a company in this regard.

Factual Matters

10.  There is no solicitors’ correspondence prior to issue of the originating summons.  The requests are contained in various emails sent primarily by Susan Lee between May and August 2012.  It is not necessary to record the contents of these. What is quite clear is that the requests which it is suggested were not satisfied were requests for data and documents to be provided rather than for access to be provided in order that inspection could take place.  In my view it could not be fairly said that the emails demonstrate that the Plaintiffs had requested the right to inspect documents and that right had been refused.

11.  The solicitors began to correspond on 19 November 2012.  I think there is some force in Mr Wong’s submission that whilst trying to give the impression of being willing to provide inspection the 7^th and 8^th Defendants’ solicitors were crafting replies which contained qualifications which interfered to some degree with access.  For example, in a letter of 19 November 2012 they requested that an undertaking as to confidentiality be signed.  It seems to me that this they were not entitled to.  However, the request was subsequently withdrawn.  Similarly later when the Plaintiffs informed them that they would attend the office for inspection with their legal advisors and an accountant initially access for the professional advisors was refused. However, it is well established that a director is entitled to bring a suitably qualified professional advisor with him to assist him when inspecting documents.  However, it seems to me that a bigger problem was the apparent failure of the Plaintiffs’ solicitors to appreciate the limits of their client’s right to inspect.  For example, in a letter dated 12 April 2013 they said this on page 2:

“At these instances, we expect your Clients to provide effective access to the documents by showing our Clients how to access the requested documents from the vast data base and to copy such documents, as considered necessary, to our Clients’ computer(s) and/or storage device(s). Further, in order to facilitate the access to the documents, please arrange for three computer terminals, IT specialists and accountants to be available during the above times.”

It also would appear from the correspondence that they thought wrongly that their client was entitled to copies of documents. 

12.  The relevance of the correspondence between solicitors is that, Mr Wong argued, whatever view I took of the emails it was apparent from the correspondence from the 7^th and 8^th Defendants’ solicitors that the reality was that the 7^th and 8^th Defendants had tried to fetter the Plaintiffs’ right to inspect and that this demonstrated that it was reasonable for the originating summons to be issued and that the Plaintiffs should have their costs of the originating summons.  I disagree.

13.  It seems to me, as I have already said, apparent from the emails that the Plaintiffs did not properly understand their rights to inspect documents and that the originating summons was issued prematurely.  Although, as I have already observed, I accept that the correspondence from the 7^th and 8^th Defendants’ solicitors indicates a degree of gamesmanship in dealing with access, the Plaintiffs’ own solicitors apparent failure to understand what their clients were entitled to certainly contributed at least equally to the ineffective way in which the parties proceeded between November and May to try and resolve the inspection issue.  In the round it seems to me that the originating summons was issued prematurely and I will, therefore, order that the Plaintiffs pay the Defendants costs of the originating summons.

14.  There was some suggestion by Mr Wong that the Companies had taken an unnecessarily active role in the proceedings.  I disagree and in any event to the extent that unnecessary work was carried out I would expect this to be a matter that will be dealt with during the taxation process.

15.  That leaves the question of the basis upon which the 8^th Defendant’s costs should be paid.  Mr Maurellet submitted that the 8^th Defendant, who is not a director of the company, should clearly never have been joined and that she should have her costs paid by the Plaintiffs on an indemnity basis. It seems to me that this is correct.  I will therefore make an order that the Plaintiffs pay the 8^th Defendant’s costs on an indemnity basis.