RE KIDSLOOP LTD (“the Company”)

HCMP 338/2021

[2021] HKCFI 1454

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 338 OF 2021

________________________

________________________

________________________

D E C I S I O N

________________________

1.  There is before me the application of Kidsloop Limited (“the Company”) for an order that:

(1) a general meeting of the company be held on or before 25 June 2021 and such general meeting shall be regarded as the annual general meeting of the company in respect of the financial year ending on 31 December 2020 (“the said general meeting”);

(2) the requirements for the laying of reporting documents for the financial period ending on 31 December 2020 be substituted with a requirement to lay the said reporting documents at the said general meeting; and that the period of nine months as referred to in section 431(1)(a)(i) of the Companies Ordinance (Cap 622) be extended accordingly.

2.  This originating summons first came before Madam Recorder Yvonne Cheng, SC, on 27 April 2021 whereby she adjourned the application as she was not satisfied that the Company had sufficiently dealt with certain factual matters which have since been addressed.

Background

3.  The Company was incorporated on 2 August 2019, following a restructuring exercise.  With effect from 11 November 2019, the Company altered its articles of association and changed to its present status as a public company limited by shares.  The Company has at present 80 shareholders.  It is a holding company with 11 subsidiaries that are incorporated in Hong Kong and six other jurisdictions.  The Company and its subsidiaries’ principal business is early education technology.

4.  In or around the summer of 2020, the Company commenced discussions regarding its audit with Messrs Deloitte Touche Tohmatsu (“Deloitte”) which then commenced its engagement in November 2020.  This culminated in a formal engagement letter on 11 December 2020.

5.  The exercise proved to take more time than originally anticipated for a number of reasons:

(1) This was the first time Deloitte had been engaged to audit the financial statements of the Company and its subsidiaries.

(2) As the Company was a holding company, pursuant to section 379(2) of the Companies Ordinance, such consolidated financial statements had to be prepared covering all the subsidiaries, including those out of the jurisdiction.

(3) The year end of 31 December 2020 had been adopted in order to align this with those of other subsidiaries instead of an earlier year end such that there was a shorter window for preparation.

(4) The COVID-19 restrictions and other controls made the process not as smooth as it would otherwise have been.

(5) Viewing the said auditing exercise, Deloitte advised that because of the relevant rules on accounting which had to do with merger, the Company’s consolidated financial statements had to be prepared as if the Company and its subsidiaries had been in existence from 1 January 2019 notwithstanding the fact the Company was in fact only incorporated in 2 August 2019.

6.  In addition, in or around middle of March this year, after this originating summons had been taken out, it transpired that the valuation process of a convertible loan was more complex than originally anticipated.  This in turn required the engagement of a separate external professional valuer, Messrs WeValue Advisor Limited.  This exercise is expected to be completed sometime next week. 

Applicable Legal Principles

7.  The non-compliance in the present case concerns the time limit for laying financial statements before AGMs and holding AGMs as set out in section 431(1) and 610(1) of the Companies Ordinance.  The court has undoubted jurisdiction to extend such times retrospectively: see section 431(1)(a)(i) which provides that the relevant period is nine months “or any longer period directed by the court”.  Section 610(5) provides that if for any reason the court thinks fit to do so, it may, on an application made before the end of the period otherwise allowed for holding an annual general meeting in respect of a financial year of a company, by order extend that period by a further period specified in the order.  

8.  Miss Jasmine Cheung, counsel for the Company, helpfully drew my attention to Re Sanliuyidu (Hong Kong) Sports Goods Company Limited [2009] 4 HKLRD 708 per Madam Justice Kwan (as Kwan VP then was) at paragraph 5 and also Re Hong Kong Times Investments Limited [2014] 2 HKLRD 29 per Godfrey Lam J at paragraph 14.

9.  From these authorities, she drew the following principles on the relevant factors the Court would consider:

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

(2) whether the default was inadvertent;

(3) whether the court was satisfied that the company would comply with its obligation in the future.

10.  Of these requirements, it is probably the second one which has given rise to the most arguments in practice.  As Harris J pointed in Re Natural Corporation Limited (unreported judgment, HCMP 2148/2013, 9 January 2014):

“A default is inadvertent if it arises from an accidental oversight or carelessness and a lack of attention. If it arises from a lack of interest or concern in complying with the relevant statutory requirements the case is more properly characterised as one of indifference and in my view the court should be slow to grant to applications in such cases. It is, of course, for an applicant to demonstrate to the court by evidence that a breach falls into the former case and not the latter.”

11.  Finally, I should point out that the court has the power not only to make the order prospectively but also retrospectively.  In other words, the court has power to grant a time extension whether the application is made before or after the original deadline, although a more compelling justification is required where an application is made retrospectively rather than when it is made in advance of the deadline: see recent decision of Deputy High Court Judge W. Tsui in Michelle Wong Yatyee v Goldbond Group Holdings Limited at paragraph 24.

12.  It is also perhaps noteworthy that insofar as section 610 is concerned, the applicable subsection where the application is made before the time expires is section 610(5) which is to be made by the company (as opposed to section 610(10) where the relevant application is to be made by a shareholder).  This subsection is new and there was no equivalent provision in section 111 of the former Companies Ordinance, and therefore, as Deputy Judge Tsui noted at paragraphs 35 and 50 of her judgment, this gives an opportunity to the company to seek to extend time to apply.

Application to the Present Case

13.  On the evidence before me, it would appear that on two occasions now, the company’s 80 shareholders, both those who reside within Hong Kong and those who reside out of the jurisdiction, have been given notice.  I agree with Miss Cheung that it would be impracticable to join all of them as defendants in these proceedings and, hence, the OS was taken out in the form of an ex parte OS.  I note that this is the same approach which Mr Justice Anthony Chan had taken in Re Wan Yi Enterprise Company Limited (unreported, HCMP 2564/2013, dated 21 January 2014).  The said letters in the present case were sent to the shareholders respectively on 10 March 2021 (to inform them of the hearing before the learned Recorder) and 25 March 2021 (to inform them of the adjourned hearing before me today).

14.  I agree with Miss Cheung that the Company has made on the evidence a proper case for the court to exercise its discretion to extend the relevant time periods for convening an AGM and laying the reporting documents.  Critically, no prejudice will be suffered by any of the shareholders of the company.  On the evidence, these shareholders have been made aware of the general financial position of the company as they have been sent business and other financial updates from time to time, the latest such update being dated 9 February 2021 and which I have considered.

15.  Further, there was also an investor update call on 24 March 2021 in respect of which fairly detailed Powerpoint slides containing financial updates and other draft financial statements had been circulated and which I have also considered.

16.  In addition, none of the shareholders have expressed any objection to the present application, for which only a short time extension of less than three months had been sought.

17.  On the evidence before me, I am satisfied that the relevant defaults are in this case inadvertent rather than the result of indifference.  The Company has promptly and properly taken out the present application and before the statutory deadline. It is also clear, having regard to the type of advisers and the general sophistication of the management of the Company, that it is very likely that they will comply with their corporate governance obligations in the future.

18.  In the circumstances, I make an order in terms of the originating summons before me today.