SHUM CHIU HUNG v. HONG KONG TIMES INVESTMENTS LTD

HCMP 2301, 2302, 2303 & 2304/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2301 OF 2013

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(Heard Together)

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D E C I S I O N

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1. These are four related applications by way of originating summonses heard together for orders pursuant to s 122(1B) of the Companies Ordinance (Cap 32) (“the Ordinance”) extending time retrospectively for the laying of accounts before four connected companies in general meeting.

Hong Kong Times Investments Limited

2. The first case concerns Hong Kong Times Investments Limited (“Hong Kong Times”), a company incorporated in Hong Kong on 24 March 2000.  The plaintiff, Mr Shum Chiu Hung, was its director from 27 March 2000 to 20 September 2010 and has been a director again from 20 January 2012 onwards.  There have been a few changes in the shareholding structure of the company but from the date of its incorporation up to the present, all the shares have been held by Mr Shum, his wife Madam Li Yi Ping and one Mr Luo Weiwen or their wholly owned corporate vehicles in various combinations.  In particular, after October 2007, the shares have been indirectly wholly owned by Mr and Mrs Shum, with Mr Shum being apparently the sole director.

3. As a result of a plan to have Times Property Holdings Limited, an intermediate holding company of Hong Kong Times, listed on the Main Board of the Stock Exchange of Hong Kong and the consequent due diligence exercise, it was discovered that there had been default in compliance with s 122 of the Ordinance in respect of Hong Kong Times in that its audited financial statements for a number of financial years were not placed before the company in general meeting within the period of 9 months as prescribed in s 122(1A).

4. Instead, the financial statements were signed by the directors and auditors, and approved by the shareholders, on the dates shown in the table below respectively:

Financial year	Date of the audited financial statements	Date of approval of the audited financial statements by shareholders
2002 (for the period ended 30 June 2002)	17 July 2002	20 August 2013
2002 (for the period from 1 July 2002 to 31 December 2002)	23 December 2003	20 August 2013
2003	5 September 2005	20 August 2013
2004	5 September 2005	20 August 2013
2005	1 February 2007	1 February 2007
2006	1 February 2007	1 February 2007
2007	22 January 2008	25 April 2008
2008	6 September 2012	6 September 2012
2009	6 September 2012	6 September 2012
2010	6 September 2012	6 September 2012
2011	25 March 2013	1 April 2013

Profit City Investment Limited

5. The second application concerns Profit City Investment Limited (“Profit City”), a company incorporated in Hong Kong on 23 April 1992.  From 1992 to the beginning of 2009, Profit City was held by some third parties unconnected with Mr Shum.  With a view to acquiring a real estate project in Mainland China owned by Profit City, in January 2009 Mr and Mrs Shum, using Hong Kong Times as the corporate vehicle, acquired all the issued shares of Profit City from its then shareholders.  Hong Kong Times has since been the sole shareholder of Profit City.

6. In the same circumstances as in the case of Hong Kong Times, it was discovered that there had been default in compliance with s 122 in respect of Profit City.  Beginning from the financial year ended on 31^st December 2008, no audited financial statements of Profit City were placed before the company in general meeting within the period of 9 months as prescribed in s 122(1A).  Instead, the financial statements were prepared by the directors and auditors, and approved by the shareholders, on the respective dates shown in the table below:

Financial year	Date of the audited financial statements	Date of approval of the audited financial statements by shareholders
2008	31 August 2012	5 September 2012
2009	31 August 2012	5 September 2012
2010	31 August 2012	5 September 2012
2011	31 August 2012	5 September 2012

Steelmine Minerals (H.K.) Development Limited

7. The third case relates to Steelmine Minerals (H.K.) Development Limited (“Steelmine”), a company incorporated in Hong Kong on 4 October 2000.  Held by some independent third parties, in February 2008 Steelmine owned another real estate project in Mainland China.  In order to acquire that project, Mr Shum and his wife through their indirectly wholly-owned corporate vehicle Venus Tower Limited acquired all the issued shares in Steelmine from its then shareholders in February 2008.  Venus Tower Limited has since been the sole shareholder of Steelmine.  Mr Shum has also since February 2008 been the sole director of Steelmine.

8. Times Property Holdings Limited is also an intermediate holding company of Venus Tower Limited.  As a result of the due diligence exercise carried out for the former’s planned listing, it was discovered that there had been default in compliance with s 122 of the Ordinance in respect of Steelmine in that, starting from the financial period from 1^st April 2007 to 31^st December 2007, the audited financial statements of Steelmine had not been placed before the company in general meeting within the period of 9 months as prescribed in s 122(1A). Instead, the financial statements were prepared and signed by the directors and auditors, and approved by the shareholders, on the respective dates shown in the table below:

Financial year	Date of the audited financial statements	Date of approval of the audited financial statements by shareholders
2007	3 April 2013	10 April 2013
2008	3 April 2013	10 April 2013
2009	3 April 2013	10 April 2013
2010	3 April 2013	10 April 2013
2011	3 April 2013	10 April 2013

Wah Tai (H.K.) Development Limited

9. The fourth case is an application relating to Wah Tai (H.K.) Development Limited (“Wah Tai”), a company incorporated in Hong Kong on 28 May 1992.  As at November 2007, Wah Tai was held by some independent third parties and it owned yet another real estate project in Mainland China. To acquire that project, Mr Shum and his wife through another indirectly wholly-owned corporate vehicle of theirs, Million Sensor Management Limited, acquired all the issued shares in Wah Tai from its then shareholders in November 2007.  Million Sensor Management Limited has since been the sole shareholder of Wah Tai.  Mr Shum had been the sole director of Wah Tai from 7 November 2007 to 20 September 2010 and from 20 January 2012 onwards.

10. As Times Property Holdings Limited is also an intermediate holding company of Million Sensor Management Limited, it was discovered in the due diligence exercise that there had been default in compliance with s 122 in the case of Wah Tai in that, starting from the financial year ended on 31^st December 2006, no audited financial statements of Wah Tai had been placed before the company in general meeting within the period of 9 months as prescribed in s 122(1A).  Instead, the financial statements were prepared and signed by the directors and auditors, and approved by the shareholders, on the respective dates shown in the table below:

Financial year	Date of the audited financial statements	Date of approval of the audited financial statements by shareholders
2006	22 January 2008	22 January 2008
2007	22 January 2008	22 January 2008
2008	4 August 2009	28 May 2010
2009	25 March 2013	28 March 2013
2010	25 March 2013	28 March 2013
2011	25 March 2013	28 March 2013

11. In each case Mr Shum as director and plaintiff (and as one of the co-plaintiffs in the case of Profit City) applies to the court for an order extending time under s 122(1B) to the date when the audited financial statements were approved by the shareholders respectively, i.e. the dates shown in the third column in each of the tables above.  He says that as he had come from Mainland China he was not familiar with the requirements of the Ordinance.  He had relied on D & T Corporate Services Co Ltd and Associated Consultants Ltd, the company secretaries of the companies at the time, to ensure compliance with the Ordinance but they never advised him on the statutory requirements under s 122 to lay accounts before the general meeting within prescribed time.

Discussion

12. S 122 of the Companies Ordinance provides as follows:

“(1) Subject to subsection (1B), the directors of every company shall lay before the company at its annual general meeting a profit and loss account or, in the case of a company not trading for profit, an income and expenditure account for the period, in the case of the first account, since the incorporation of the company, and, in any other case, since the preceding accounts.

(1A) The accounts referred to in subsection (1) shall be made up to a date falling not more than 6 months, or, in the case of a private company (other than a private company which at any time during the period to which the said accounts relate was a member of a group of companies of which a company other than a private company was a member) and a company limited by guarantee not more than 9 months, before the date of the meeting.

(1B) The court, if for any reason it thinks fit so to do, may in the case of any company and with respect to any year-

(a) substitute for the requirement in subsection (1) to lay a profit and loss account or (as the case may be) an income and expenditure account before the company at its annual general meeting a requirement to lay such account before the company at such other general meeting of the company as the court may specify; and

(b) extend the periods of 6 and 9 months referred to in subsection (1A).

(2) The directors shall cause to be made out in every calendar year, and to be laid before the company at its annual general meeting or at such other general meeting of the company as may be specified by the court under subsection (1B), a balance sheet as at the date to which the profit and loss account, or the income and expenditure account, as the case may be, is made up.

(3) If any person being a director of a company fails to take all reasonable steps to comply with the provisions of this section he shall, in respect of each offence, be liable to imprisonment and a fine:

Provided that-

(a) in any proceedings against a person in respect of an offence under this section, it shall be a defence to prove that he had reasonable ground to believe and did believe that a competent and reliable person was charged with the duty of seeing that the provisions of this section were complied with and was in a position to discharge that duty; and

(b)  a person shall not be sentenced to imprisonment for such an offence unless, in the opinion of the court dealing with the case, the offence was committed wilfully.”

13. The discretion to enlarge time under s 122(1B) is unfettered and, as expressed in the statute itself, the court may exercise that power “if for any reason it thinks fit so to do”.

14. The courts have exercised that power in previous cases and in Re HKI Properties Limited & Others, HCMP Nos 2556 to 2561, 2563, 2565 to 2568 of 2007, 29 January 2008, at paragraph 9, Deputy Judge Harris SC (as Harris J then was) summarised the position at the time by stating that “the type of factors to which the court has regard in considering whether to regularise non-compliance with section 122(1) include” (my emphasis):

“(1) Whether the shareholders were aware of the financial position of the company in question and thus were not prejudiced by non-compliance;

(2) Whether the default was inadvertent; and

(3)  Whether the court was satisfied that the company would comply with the obligation to lay its profit and loss accounts or income and expenditure statements before general meetings in future.”

15. Since then there seems to have grown an impression among some legal practitioners that once an affirmation is made by a director or shareholder of the company asserting these three points, the court would grant an order extending time under s 122(1B) “almost as a matter of routine”.[1] That in my view takes too narrow and mechanistic a view of the court’s approach to its power under the statute.  As Kwan J said in Re Sanliuyidu (Hong Kong) Sports Goods Co Ltd [2009] 4 HKLRD 708 at §5, the discretion under s 122(1B) is unfettered.  Nor are the three factors summarised in Re HKI Properties Limited necessarily the only matters to be looked at by the court in any given case.

16. It would in my view be equally misconceived to think that it is sufficient in every case to show the default in compliance was inadvertent simply by swearing that the directors at the time were not aware of the requirements of s 122.  Whether non-compliance could fairly be characterised as due to inadvertence is a fact-sensitive question: see Re Array Electronics (China) Limited, HCMP 1489/2013, 12 November 2013, at §21 per Deputy Judge Le Pichon.  A genuine albeit mistaken belief that because the company is dormant no accounts need be produced is one thing, a wholesale and reckless disregard of the statutory obligations of financial reporting is another.

17. In Re Asiatic Century Ltd & Others, HCMP 1445/2013, 28 October 2013, Harris J stated as follows:

“16.  The authorities to which I have referred demonstrate that the court will normally grant orders if it is satisfied that a genuine mistake has been made which has not caused any prejudice to the owners of a company.  An example of a genuine mistake is a belief that if a company does not need to file a tax return, which is commonly the position for Hong Kong companies that carry on business exclusively on the Mainland and thus have no taxable income here, it does not need to prepare accounts that satisfy section 123 and consequently does not need to put them before the company in annual general meeting.  Indifference to compliance with sections 111(1) and 122(1) by a group of companies is a rather different matter and does not, or not necessarily, fall within the kind of breach which in paragraph 9(2) of HKI Properties Limited I describe as “inadvertent”.”

18. In that case Harris J refused the applications as he was not satisfied with the explanation why no accounts were prepared for the companies in question.  He concluded (at §30) that he was “not satisfied that the breaches of the Ordinance arise from what can fairly be characterised as ‘inadvertence’” and that “the breaches are more likely to be explained by indifference and quite possibly the assumption that the requirement to prepare audited accounts and the attendant costs could be avoided”.

19. Applications have often been made under s 122(1B) retrospectively, i.e. at a time past the deadline stipulated in s 122(1A). In Re Asiatic Century Ltd Harris J stated at §17:

“Orders will be more readily be granted if an application is made for an extension of the relevant time period in advance. A retrospective order requires more compelling justification.”

I agree and I think one reason for circumspection in dealing with a retrospective application is this.  The obligation to lay accounts before the company in general meeting within the prescribed time is imposed by s 122 on the directors of the company.  By defaulting in the performance of that obligation the directors will not only have breached their duty to the company but have potentially incurred criminal liability for an offence punishable by imprisonment (up to 12 months) and a fine (up to the amount of $300,000): see s 122(3) and the 12^th Schedule to the Ordinance.  On the terms of s 122(3), there will be no liability where the director has taken “all reasonable steps to comply with the provisions of [s 122]” or where “he had reasonable ground to believe and did believe that a competent and reliable person was charged with the duty of seeing that the provisions of this section were complied with and was in a position to discharge that duty”.  The offence can however be committed through negligence.  The fact that the director did not default “wilfully” is not a defence as such but only a ground for avoiding imprisonment (see proviso (b) to s 122(3)).  For an example of prosecution of a director for offences under s 122, see R v Lo Hon Yiu Henry [1985] 1 HKC 183.

20. Once an order is made retrospectively extending time under s 122(1B), it would appear that there would no longer be any non-compliance with s 122 at all.  It seems to me that an order by the court extending time under s 122(1B) would therefore have the effect of relieving the directors from any potential criminal liability under that section and rendering them immune to prosecution for the original default. 

21. The court has of course a general power, under s 358 of the Ordinance, directly to relieve an officer of a company from liability, including criminal liability for infringement of the Ordinance, if

“it appears to the court hearing the case that that person is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that, having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused for the negligence, default, breach of duty or breach of trust”.

Thus in Re Barry and Staines Linoleum Ltd [1934] Ch 227, the court in exercise of its power under s 372 of the Companies Act 1929 (the equivalent of s 358 of the Ordinance) relieved a director of potential criminal liability for acting as a director without holding the requisite qualification shares as required by the articles of the company and by s 141 of the Companies Act 1929 (cf s 155 of the Ordinance).  Maugham J however said at p 233 that “the jurisdiction [under s 372 of the 1929 Act] ought to be exercised with great care”. 

22. It seems to me that where the substantive if not the sole purpose of the extension sought under s 122(1B) of the Ordinance is to relieve a director of potential liability, the court ought also to exercise great care.  It would be relevant to examine if the director in question “has acted honestly and reasonably”, and whether, “having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused”.

23. The court’s discretion under s 122(1B) is there to be exercised for some discernible legitimate purpose.  It is sometimes said by applicants that the orders are sought to rectify past non-compliance with statutory requirements in preparation for the listing of the shares of the company in question or of a related company on the Stock Exchange of Hong Kong.  Yet there is often little explanation just what such listing precisely requires and what it is that the order of the court is supposed to achieve.

24. Turning to the present applications, as can be seen from the tables above, while Hong Kong Times did have audited financial statements prepared between 2002 and 2007, albeit sometimes a year or so late, there were no audited financial statements prepared for the years 2008 to 2010 until September 2012, which presumably was after discovery of the default in the course of the due diligence exercise.  Likewise, after Mr Shum acquired Profit City in January 2009, no audited financial statements were produced for the years 2008 to 2011 until September 2012.  After Mr Shum acquired Steelmine in February 2008, no audited financial statements were produced for the years 2007 to 2011 until April 2013.  After Mr Shum acquired Wah Tai in November 2007, there were no audited financial statements for the financial years 2009 to 2011 until March 2013, although the audited accounts for 2006 and 2007 were prepared in January 2008 and the audited accounts for 2008 had been prepared by August 2009.  There was no explanation why the accounts for these specific years were prepared but not the others.

25. These applications are therefore cases in which, not only were the accounts not placed before the company in general meeting within the prescribed time, but the relevant accounts were not prepared, and not audited as required by s 129C of the Ordinance, until years later when a listing proposal emerged.

26. That prompted me to enquire at the first hearing of these applications whether auditors had in fact been appointed and engaged by the companies.  It was asserted in the evidence filed in response that auditors were appointed early on at the same time as the company secretary. However:

(1)  In the case of Hong Kong Times, engagement letters could only be found dated 23 December 2003 and thereafter dated 16 April 2012 for the audit for the years 2008 to 2011 and dated 25 February 2013 for the audit for the year 2012.

(2)  In the case of Profit City, all the relevant engagement letters for the audit for the years from 2008 to 2011 were dated 16 April 2012.

(3)  All the engagement letters for the audit of Steelmine’s accounts for the years 2007 to 2011 were dated 25 February 2013.

(4)  All the engagement letters for the audit of Wah Tai’s accounts for the years 2009 to 2011 were dated 25 February 2013.

27. In his affirmations Mr Shum asserts that since the incorporation or acquisition of these companies, auditors had been “appointed to provide audit and taxation services” and that he “entrusted all audit and taxation matters to the Auditors and genuinely believed that they would ensure statutory compliance”.  On the state of the documentary evidence and in the absence of any evidence from the auditors in question, I am not convinced that these assertions can be taken at face value.  Moreover, as Deputy Judge Cruden said in R v Lo Hon Yiu Henry, supra, at p 188, auditors are under no duty to comply with s 122.  It seems to me untenable to suggest that, in the absence of any special arrangement that has been made, a director can properly be regarded as having acted reasonably by assuming that everything required by s 122 would be done by the auditors.

28. In addition, the application in the case of Wah Tai is made in respect of the audited financial statements for the years 2006 to 2011.  But Mr Shum acquired Wah Tai and became its director only in November 2007, when there was already default in compliance with s 122 of the Ordinance in relation to the 2006 accounts.  There is no evidence before the court of the circumstances prior to the acquisition.

29. As regards the purpose of the application, Mr Shum has confirmed that the applications did not arise from any specific request of the Stock Exchange nor were they a requirement under the Listing Rules.  He has however been advised that “statutory non-compliance, with an explanation as to reasons of non-compliance and rectification steps taken, … needed to be disclosed in the listing document”. 

30. This stated purpose has to be seen in light of the fact that, as is public knowledge, after the hearing of the applications, Times Property Holdings Limited has gone forward with its initial public offering and has already been granted listing of its shares on the Main Board of the Stock Exchange with the stock code of 1233.

31. The prospectus for the initial public offering of Times Property Holdings Limited, after setting out the non-compliance with s 122 as described above, disclosed that these applications had been made and judgment was pending and that each of the directors of each of the relevant companies at the material times are potentially liable for non-compliance with s 122 of the Ordinance.  It was further stated that any penalty, if applicable, would probably only be a fine in the absence of any evidence that the directors deliberately chose not to comply with the requirements in s 122.

32. Now that the holding company has been successfully listed, it seems to me no purpose would be served in making the order sought, except in effect to relieve the directors concerned of any potential criminal liability that may still remain under s 122(3).  This however was not the purpose of the applications as presented to the court.  Nor am I satisfied that the evidence filed has covered all matters relevant to the question of relief of directors from liability.  In these circumstances, I am not satisfied that this is an appropriate case in which a retrospective extension of time should be granted under s 122(1B).

Conclusion

33. For the above reasons, the applications are refused and the originating summonses dismissed.