CHIU KIN LOK ROCKO AND ANOTHER v. MATSUE LTD AND ANOTHER

HCMP 2667/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2667 OF 2011

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J U D G M E N T

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1.  I have before me an originating summons issued on 28 December 2011 by the Plaintiffs for an order under section 121 of the Companies Ordinance for the inspection of the following of the Company’s documents:

(1) All bank statements and copy passbooks of all the bank accounts of the Company for the past 7 years.

(2) The ledgers and management accounts of the Company for the past 7 years, or alternatively a list of all assets and account payables of the Company, with supporting documents such as loan agreements, mortgage agreements, IOUs, promissory notes and invoices.

(3) Letter issued by Ms Helena Ho dated 8 January 1998 referred to in the 2^nd Defendant’s letter dated 28 November 2011 to Ms Helena Ho (exhibited as “CKLR-4” to the Affirmation of Chiu Kin Lok Rocko).

(4) Deed of Assignment executed on 8 January 1998 referred to in the 2^nd Defendant’s letter dated 28 November 2011 to Ms Helena Ho.

2.  The Plaintiffs are 2 of the 4 directors of the Company.  The 1^st Plaintiff holds 50% of the Company’s issued shares.  The 1^st Defendant is the Company and the 2^nd Defendant is one of its 4 directors. The 1^st Plaintiff explains the reason for the application in his short first affirmation as follows.  Since 1994 the Company has been under the control of the 2^nd Defendant.  The only outstanding matter at that time, 1994, was to pursue an arbitration in the Mainland.  On 30 July 1996 the Company obtained an arbitration award for US$1,600,000.  It took until 2011 to enforce it.  This brought the Company’s affairs to close.  It has been agreed between the shareholders that the award should be distributed between them. The Plaintiff finds it necessary to review all the Company’s financial documents. Since October 2011 the 1^st Plaintiff has made repeated demands for inspection of corporate documents he is entitled to see and these have not been adequately dealt with.

3.  The 2^nd Defendant in her reply affirmation explains in rather more detail what has transpired up to October 2011.  What she says is not disputed by the Plaintiffs and amounts to this.  It is correct that since 1994 she dealt with the Company’s sole remaining matter, which was an arbitration relating to a failed project in the Mainland, which the Company had been formed to pursue.  The Plaintiffs were directors in 1994, but since that time have taken no interest in the Company’s affairs.  An arbitration award of US$1,600,000 was received in October 2010 and was distributed the next month. She explains in paragraph 4(xviii) of her affirmation what happened next:

“In about October 2011, I further recovered the sum of HK$14.81 million (being the interest on the principal sum of compensation) from the PRC counterparts on behalf of the Company and I notified Helena Ho accordingly. On 17 October 2011, through the arrangement of Helena Ho I met the 1^st Plaintiff to discuss the distribution of the sum of HK$14.81 million, Helena Ho and Jacky Ho were present too. Since there had been some disagreement as to how the said sum should be distributed, no distribution was made. So I requested that as a matter of prudence the sum should not be distributed until the Company’s accounts were formally checked and audited. Also, I thought I should take some time to calculate all the expenses which I spent in the past 16 years to pursue the arbitration and enforcement proceedings on behalf of the Company. To deal with the disagreement I then started to check again all the Company documents in my possession; however, since in the past 16 years I had moved home and office several times, the task of gathering all the Company’s documents became a difficult task.”

4.  One might have thought that this was reasonable and prudent and that the 1^st Plaintiff would have expressed his gratitude for the 2^nd Defendant bringing the arbitration to a successful conclusion and agreed that she should prepare an account of the expenses she had incurred, which would be reimbursed by the Company.  This was not his reaction.  Instead he wrote 2 hostile letters to the 2^nd Defendant on 18 October 2011.  The first complained that the 2^nd Defendant would not agree to distribute the entire sum of HK$14,810,000 received in respect of interest and threatening her with the possibility of legal action if she did not agree to do so within 7 days.  He also threatened that if she caused any amount to be withdrawn from the account, presumably in respect of her expenses, this would be fraud.  This was a needless concern as the 1^st Plaintiff had apparently forgotten that he was one of the joint signatories to the Company’s bank and that the 2^nd Defendant could not, as she reminded him in subsequent correspondence, withdraw any money without his agreement.  The second letter was a demand to inspect the books of the Company.  The 1^st Plaintiff complained that “although all the aforesaid documents are in your possession, I have been denied the access to the same or any part therefore at all material times”.  There appears to have been no justification for this complaint.  The 1^st Plaintiff seems to have taken no interest in the Company’s affairs between 1994 and 2010 and there is no evidence of him ever seeking, prior to his letter, access to any documents at all.

5.  I asked Mr Gary Lam, who appeared for the Plaintiffs, what, if any, explanation there was for what in on their face seem to have been entirely unreasonable letters.  He told me that his client was concerned about the Company’s liabilities.  When pressed to identify what they were he drew my attention to an account payable of HK$18,997,491 referred to in paragraphs 9 and 10 of the 1^st Plaintiff’s first affirmation.  It appears, however, that the 1^st Plaintiff had forgotten that this sum was a sum owed to a director, Helena Ho, recorded in audited financial statements of the Company for 1993 and 1994, which I understand are the last periods for which audited financial statements have been prepared, signed by the 1^st Plaintiff as chairman of the board, which had been assigned to 4 people, including the Plaintiffs and 2^nd Defendant, in equal proportions in January 1998 and that he had signed the assignment.  In other words it appears that the 2^nd Defendant’s concern was entirely justified.  The fact that the Plaintiff had forgotten about the loan is demonstrated by the inclusion of the documents referred to in paragraphs 3 and 4 to the schedule to the originating summons, which relate to it.

6.  The 2^nd Defendant replied on 24 October 2011 disputing the 1^st Plaintiff’s complaint that he had been denied access to documents and suggesting, sensibly, that they meet to sort things out.  The 1^st Plaintiff replied on 3 November 2011.  He did not agree to the 2^nd Defendant’s proposal and gave a final warning that unless she complied with his demand he would instruct lawyers to proceed with legal action against her.  It seems to me that this was an entirely unjustified and unhelpful response.  This was followed by a solicitors’ letter on 11 November 2011 to which the 2^nd Defendant replied complaining about the 1^st Plaintiff’s behaviour and suggesting that a meeting take place at which the 1^st Plaintiff could inspect the documents that she had.  A meeting on 19 November 2011 was arranged.  The 1^st Plaintiff was not satisfied with what he was shown.  A further solicitor’s letter of complaint followed and in turn the 2^nd Defendant instructed solicitors who wrote on 12 December 2011 complaining about the 1^st Plaintiff’s attitude and recording that the 2^nd Defendant would look for any further documents that 1^st Plaintiff cared to identify.  The Plaintiffs responded by issuing the originating summons.

7.  It is not in dispute that a director is entitled to inspect as of right documents, which fall within the scope of section 121: Ho Pui Tin Terence v Wah Nam Group Ltd [2006] 3 HKC 40 at para 18 and Lam Kit Sing v Chungshan Commercial Association, Hong Kong [2011] 3 HKC 535 at para 11.  The right of inspection flows from a director’s duties to the company and he does not have to justify why he wishes to inspect documents: Ng Yee Wah v Lam Chun Wah HCMP 4616/2001, unrep 28 June 2005, per Kwan J at para 29.  However, a director is only entitled to seek the intervention of the Court in support of this right if it is necessary.  He needs to satisfy the Court that there are documents in existence that he has improperly been prevented from inspecting.  If an applicant is unable to demonstrate that the documents he wishes to inspect probably exist or the Court concludes that the application was unnecessary the director is not entitled to an order.  In considering these issues the Court will have regard to circumstances of the particular case before it.  The right does not operate without regard to realities that affect the conduct of a particular company’s affairs.

8.  In the present case there is no evidence that prior to 18 October 2011 the Plaintiffs had made any effort to inspect any documents.  On the contrary other than in January 1998, when the amount due to a director was assigned to, amongst other, the Plaintiffs and 2^nd Defendant, and October 2010, when the principal sum awarded to the Company in the arbitration was received, they appear to have taken no interest in the affairs of the Company since 1994.  They knew that other than for the conduct of the arbitration the Company had been inactive since 1994 and would probably have few financial or other records.  I think it reasonable to have expected the Plaintiffs to appreciate that as all the 2^nd Defendant had been doing since 1994 was dealing with the arbitration it was quite possible, in fact probable, that the Company did not have files of financial records for the last 7 years, which are items 1 and 2 of the schedule to the originating summons.  I think it also reasonable to have expected the Plaintiffs to have appreciated that it would probably take time for the 2^nd Defendant to get together such records as she had.

9.  It seems to me that if the 1^st Plaintiff has approached this matter sensibly and dealt with the 2^nd Defendant constructively he would within a reasonable period have obtained inspection to such documents as she had.  Perhaps the 2^nd Defendant would have provided the documents in stages as she located them and that the Plaintiff would have had to assist by suggesting the kind of things she might have that he was interested in seeing.  I see nothing unreasonable in expecting the 1^st Plaintiff to have been satisfied with this type of situation.  He and the 2^nd Plaintiff had sat back for 18 years and allowed the affairs of the Company to be conducted without regard to proper accounting and corporate procedures and it was entirely unreasonable and unrealistic for the 1^st Plaintiff to suddenly insist that the 2^nd Defendant deal with the Company’s affairs in a way which he knew full well was inconsistent with the informal way in which he and the other directors had allowed its affairs to be conducted for so long.  In my view the application was not necessary and is a consequence of the 1^st Plaintiff’s gratuitously aggressive and confrontational approach to the issue rather a consequence of the 2^nd Defendant’s unreasonable failure to allow him access to documents.

10.  Mr Lam told me during his address that if it is the 2^nd Defendant’s position, as Mr Damian Wong, who appeared for the 2^nd Defendant confirmed that it is, that the 2^nd Defendant has no further documents, this should be confirmed by an affirmation.  He says that this is reasonable as in the evidence that she filed she has in earlier affirmation referred to having documents that it then transpired she did not have.  He referred me particularly to tax demands.  I disagree.  Either the Court is satisfied that the Plaintiff has been unable to inspect the Company’s documents or it is not.  I can see no reason to think that other than documents that may have been mislaid overtime, the 2^nd Defendant has not given the Plaintiff the opportunity to inspect what she has.  For example, as I have already mentioned the Plaintiff’s apparent reason for wanting access to financial records in the first place was his concern to check the liabilities of the Company.  I have also explained that the Company’s bank account has joint signatories one of which is the 1^st Plaintiff.  Mr Lam did not dispute my suggestion that this being so the Company would appear not itself to have paid any expenses in connection with its own affairs in the last 18 years.  The only documents that the 2^nd Defendant had produced for inspection recording any expenses she suggests have been incurred by her on behalf of the Company in relation to the arbitration during the last 18 years total are for the very modest sum of approximately HK$38,000.  There is no evidence from the Plaintiff to suggest that the 2^nd Defendant has indicated that she incurred other expenses for which she seeks reimbursement.  In these circumstances I see no reason to conclude that she may have more financial records.

11.  I am not persuaded that the Plaintiffs require an order from the Court in order to inspect the Company’s documents and, therefore, dismiss the summons.

12.  Mr Lam argued in relation to costs that in the event that I was persuaded that the court should not make an order for inspection or service of an affirmation, the Plaintiffs should still get their costs up to the 19 June 2012, when the 2^nd Defendant’s solicitors sent to Plaintiffs’ solicitors documents, which had not previously been provided.  Mr Lam submitted that these documents were only obtained as a result of issue of the originating summons.  I do not agree.  The 2^nd Defendant has not refused to give access to documents and no reason has been advanced as to why she might wish to do so.  For the reasons I have already given I do not accept that it was necessary for the Plaintiffs to issue an originating summons in December. What was necessary was patience, common sense and an appreciation of the difficulties the 2^nd Defendant faced in getting together the Company’s records.  I, therefore, order that the Plaintiffs pay the 2^nd Defendant’s costs of the summons.