LAU CHO KWAN, LEO v. LAU SIU FAN, ELAINE AND ANOTHER

HCMP 564/2020

[2020] HKCFI 2779

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 564 OF 2020

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AND

HCCW 262/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 262 OF 2020

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AND

HCA 1144/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1144 OF 2020

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(Heard Together)

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D E C I S I O N

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1.  There are before the Court 3 proceedings commenced by the plaintiffs, Mr Lau Cho Kwan Leo (“P1”) and Mrs Lau Betty Barbara (“P2”) (together “Ps”), in respect of Cornwall Agency Company Limited (“Company”) within 3 months in 2020. The proceedings are:

(1)  HCMP 564/2020, an originating summons dated 12 May 2020 issued by P1 qua director to compel one of its directors, Ms Lau Siu Fan Elaine (“Elaine”), and the Company to provide 18 categories of documents for his inspection pursuant to sections 374, 375 and 740 of the Companies Ordinance (Cap 622) (“Ordinance”) (“Inspection Proceedings”).   

(2)  HCA 1144/2020 commenced on 9 July 2020.  This is a common law derivative action brought by Ps (on behalf of all shareholders except Elaine) against (i) Elaine for damages, equitable compensation and account of profits in causing the Company to enter into various transactions allegedly in breach of her fiduciary duties owed to the Company; and (ii) against Cornwall Investments Limited (a 99% subsidiary of the Company) (“CIL”) and Cornwall Management Limited (“CML”) for damages, knowing receipt and knowing assistance for their participation in such transactions (“Derivative Action”).

(3)  HCCW 262/2020, being a “just and equitable” winding-up petition presented by Ps on 18 August 2020 in respect of the Company (“WU Petition”).  The only substantive relief sought is a winding-up order against the Company.

2.  In addition, there is another action, HCA 617/2020, commenced by Ps on 12 May 2020 against Elaine and the Company to compel the Company to issue replacement share certificates to them (“Certificates Action”). 

A.  Procedural History

3.  At the hearing on 3 September 2020 in HCCW 262/2020, the Company sought a validation order in respect of ordinary business expenses and legal costs incurred and to be incurred in the WU Petition and 4 other sets of proceedings[1] in which the Company was named as a defendant (“Validation Summons”).  The application which concerned ordinary business expenses was disposed of at the hearing.  The remaining part of the application and the question of the costs were adjourned for arguments.

4.  It appears from the WU Petition that Ps, who are both of advanced age and have long emigrated to Australia, are desirous of extricating their interests in the Company.  However, instead of focussing their resources in pursuing the WU Petition, Ps’ legal advisers have caused multiple proceedings to have been commenced.  It is a matter of concern that in commencing these proceedings, Ps’ legal advisers did not have any proper regard to the underlying objectives of the Rules of the High Court in particular, the need to increase cost effectiveness and to promote reasonable proportion and procedural economy in the conduct of proceedings.  This is reinforced by the fact that some of the defendants have already issued summonses to strike out or dismiss the Derivative Action and the Inspection Proceedings.  Consequently, this Court reminded Ps’ legal advisers their duty to assist the Court to further the underlying objective of the Rules by focussing on those proceedings which would resolve the dispute between the parties once and for all. 

5.  To avoid wasting the Court’s time and the parties’ costs, I directed the following applications to be heard at the hearing on 29 September 2020:

(1)  the remaining part of the Validation Summons;

(2)  the summons dated 23 July 2020 issued by Elaine for dismissal of the Inspection Proceedings, and the summons dated 27 July 2020 issued by the Company for dismissal of the Inspection Proceedings (together “Dismissal Summonses”); and

(3)  the summons dated 23 July 2020 issued by Elaine and CML to strike out the Derivative Action (“Strike Out Summons”), and the summons dated 21 August 2020 issued by Ps in the Derivative Action for discovery of documents against third parties (former auditors of the Company).

6.  As regards the Certificates Action, upon this Court’s enquiry, counsel confirmed that the main issue is whether Ps should be required to provide an indemnity to the Company.  The parties were directed not to take further step in the action, and to report to the Court by 10 September 2020 whether the action could be disposed of by consent and, if not, they should lodge written submissions and the action would be disposed of on paper. In the Decision handed down on 21 October 2020, an order was made that upon Ps providing duly executed deeds of indemnity to the Company, the Company shall issue share certificates to Ps.  Ps were ordered to pay 60% of the costs of the action to the Company, given that Ps had not pleaded any reasonable cause of action or viable relief in the statement of claim and had raised issues and made allegations against the Company improperly and unnecessarily. 

7.  Prior to the hearing, Ps have taken the following steps with a view to saving costs and the Court’s time:

(1)  In respect of the Derivative Action, Ps filed a notice of discontinuance on 16 September 2020.  Ps intend to introduce the alleged wrongdoings pleaded in the Derivative Action in the WU Petition.

(2)  As for the Validation Summons, by letter dated 16 September 2020 Messrs Oldham Li & Nie (“OLN”) informed the Company that save for the addition of the words “properly incurred” to qualify the legal costs incurred by the Company, Ps would not oppose the application and costs should be paid out of the Company’s assets or in the cause.  The Company incorporated Ps’ proposed amendment and prepared a consent summons with a view to dispose of the application.

8.  However, after Ps had filed the notice of discontinuance in respect of the Derivative Action, on 21 September 2020, Elaine and CML filed a summons to seek costs against Ps on an indemnity or common fund basis (“Indemnity Costs Summons”). 

9.  Mr Anson Wong SC[2] submits that it is questionable whether the Court has jurisdiction to order costs on a higher scale, where the rules expressly provide an automatic consequence upon a plaintiff serving a notice of discontinuance.  In any event, this is not a case where the Court should order costs on a higher scale, given that (1) Ps will pursue the complaints by making appropriate amendments in the WU Petition; (2) Ps decided to discontinue the Derivative Action with a view  to saving the Court’s time and the parties’ costs; and (3) Ps accepted that the essential elements to found a derivative action are not pleaded in the statement of claim, and they did not fight the Strike Out Summons till the bitter end. 

10.  Mr Maurellet SC[3] accepts that he is not aware of any authority in support of his contention that after a plaintiff filed a notice to discontinue the action pursuant to Order 21 rule 2(1), the Court may still order the costs of the action against the plaintiff on a higher scale in favour of the relevant defendants. 

11.  In my view, the Indemnity Costs Summons is misconceived.  Order 21 rule 2(1) provides that the plaintiff may, without leave of the Court, discontinue the action as against any or all of the defendants at any time no later than 14 days after service of the defence on him.  The right to discontinue the action is unqualified save where interim payment has been ordered[4]. Once a notice is filed pursuant to Order 21 rule 2(1), the action will be discontinued automatically against the relevant defendants who will get their costs in the usual way[5]. There is nothing under Order 21 rule 2 which preserves the Court’s jurisdiction to deal with the question of costs or otherwise keeps the action alive for any purpose.   

12.  In any event, I do not think that Ps’ conduct warrants the Court awarding costs of the Derivative Action in favour of the defendants on a higher scale.  Indeed, Ps should be commended for their act in seeking to discontinue the Derivative Action at an early stage.  I therefore dismissed the Indemnity Costs Summons with costs payable by Elaine and CML to Ps.

B.  Background

13.  The Company was incorporated on 22 October 1968. It was founded by the late Mr Lau Ting Wei (“Father”) and his wife, the late Madam Lucy Cheng, who were its subscribers and first directors.  They had 6 children, who are P1, Lau Big Ying Rose (“Rose”), Lau Cho Yee (“Cho Yee”), Lau Cho Yan, Lau Cho Bun (“Cho Bun”) and Lau Cho Dick (“Cho Dick”).

14.  Father died in 1977 and according to his will, the 1,000 shares then registered in his name should be distributed to his 6 children and his wife as to 1/7 each.  There is a dispute as to whether the shares previously held by Father were distributed in accordance with his will, and whether the number of shares currently held by the shareholders is correct.

15.  The Company has 5,000 issued shares of HK$100 each, all of which have been held by members of the Lau family.  According to the Company’s register of members, there are 10 shareholders and their shareholdings are as follows:

Name	No. shares	Shareholding
P1	583	11.66%
P2	250	5%
Father	2	0.04%
Elaine	833	16.66%
Rose	714	14.28%
Cho Yee	833	16.66%
Hui Keng Yee (“Hui”)	833	16.66%
Lau Fun	118	2.36%
Liu Yi	417	8.34%
Liu Jie	417	8.34%
Total	5,000	100%

16.  Except Father and Ps, all shareholders are named as respondents to the WU Petition.  The shares held by Hui (wife of Cho Dick) are the subject matters of HCA 561/2019, which is an action commenced by Lau Chung against his mother (Hui) and the Company (“Share Dispute Action”).     

17.  The Company has always been managed by members of the Lau family.  From 1978 to 1996, Cho Bun was a director and secretary.  From December 1988 to 2001, Cho Dick was a director.  In 1988, Elaine was appointed as a director.  In December 1999, P1 became a director.  For over 19 years, from 2001 to 29 May 2020 (when Rose was appointed as an additional director), P1 and Elaine were the only directors of the Company. 

18.  As P1 has been residing in Australia, the day-to-day affairs of the Company have been managed by Elaine, who is the Managing Director of the Company. 

19.  The Company’s only business is property holding and its only income is the rent generated by a 3-storey building known as Villa Cornwall at 12 Cornwall Street, Kowloon Tong, Hong Kong  (“Property”). In 2017, the Property had a market value of $717 million - $749 million.  The rental income generated by the Property from 2013 to 2019 are as follows:

Year	Amount
2013	$3,325,000
2014	$3,400,000
2015	$3,512,634
2016	$3,676,801
2017	$3,753,551
2018	$3,728,305
2019	$3,433,000

20.  The following 2 Hong Kong companies are said to be under the control of Elaine and feature prominently in Ps’ complaints:

(1)  CIL was incorporated on 6 July 2010.  Its sole director was Elaine or her husband.  On 14 July 2010, the only issued share was transferred from the subscriber to Elaine.  On 9 December 2010, 999 shares were allotted to the Company and since then, the Company has been holding 99.9% shareholding in CIL. 

(2)  CML has 2 directors and equal shareholders, who are Elaine and her sister, Ms Lau Hoi Wai. 

C.  Inspection Proceedings

21.  As stated in §1(1) above, the originating summons was issued under sections 374, 375 and 740 of the Ordinance (“OS”). Apart from seeking an order to allow P1 (and his agents) to inspect and make copies of all the 18 categories of documents listed in the Schedule, P1 also seeks an order, at §§2-3 of the OS, in the following terms:

“2.  Where any of those records and documents listed in the Schedule annexed hereto be non-existent or otherwise could not be made available to [P1], [Elaine] do serve a statutory declaration to that effect within 7 days from the date of the Order to be made;

3.  [Elaine] do serve a statutory declaration to the effect that besides those records and documents provided to [P1] on 3 April 2020 and to be provided pursuant to the Order to be made, there are no other documents of the Company which could, may or might substantiate the claim that [Elaine] has been in a breach of fiduciary duty against [the Company]”

22.  At the callover hearing of the originating summons before DHCJ Douglas Lam SC on 11 June 2020, the Court was informed by counsel[6] that:

(1)  amongst the 18 categories of documents sought by P1, only Categories 3, 11 and 16 (collectively “Disputed Documents”) would be disputed;

(2)  as regards the remaining 15 categories (“Undisputed Documents”), the only question dividing the parties was the manner of inspection or in the words of Mr Tom Ng (counsel for Elaine), “the nitty-gritties about non-disclosure agreement, photocopiers, number of agent”;

(3)  in relation to manner of inspection, the Company offered to provide 47 bundles of documents within the next 7 working days for inspection by the 4 agents appointed by P1 subject to availability of the designated business centre;

(4)  P1 accepted that he would be under an obligation to keep the documents provided by the Company confidential and to use such documents for proper purposes.  On this basis, Elaine and the Company did not insist on P1 signing a confidentiality agreement in respect of the documents;

(5)  the Court should make an order by consent in terms of what was agreed by the parties at the hearing subject only to the question of costs, which would be reserved for arguments; and

(6)  §§2-3 of the OS would be adjourned for argument. 

23.  On 26 June 2020, the Company’s solicitors provided OLN with an USB containing electronic copies of 47 bundles of documents (“47 Bundles”).  In Rose’s affirmation filed on 27 July 2020, she said the delivery of 47 Bundles to Ps was pursuant to the Order of DHCJ Lam SC dated 11 June 2020.

C1.    Interlocutory Skirmishes

24.  Despite the large measure of agreement reached between the parties and the delivery of the 47 Bundles to P1, the parties saw fit to complicate and prolong the proceedings by taking the following steps:

(1)  P1 filed his affirmation on 30 June 2020 (“P1’s Aff”) which runs to 31 pages (with single line spacing) and contains 113 paragraphs.  It sets out the history of the Company, the various disputes between the shareholders inter se, the alleged wrongdoings alleged to have been committed by Elaine against the Company, the minute details of all the correspondence exchanged between the parties’ solicitors in respect of P1’s request for inspection of the Company’s documents, the attack against Elaine’s character and details of the correspondence between P1 and the auditors.  It is clear that P1’s legal advisers failed to pay heed to what had been agreed between the parties at the callover hearing, and drafted an affirmation raising many matters and allegations which are not only irrelevant to the application but also fall outside the scope of the evidence directed to be filed by the parties. 

(2)  Elaine and the Company issued the Dismissal Summonses.

(3)  In response, P1’s legal advisers caused a summons to be issued on 30 July 2020 for, inter alia, an order to dismiss the Dismissal Summonses on the grounds that any allegations made by Elaine and the Company “in the pleadings” are “unmeritorious and/or incorrectly or insufficiently pleaded to substantiate the allegation(s) and/or that the Dismissal Summonses are scandalous, frivolous or vexatious” or constitute an abuse of process (“July Summons”).

(4)  On 10 August 2020, P1’s legal advisers issued yet another summons, under Order 45 rule 8, to compel Elaine and the Company to comply with the order made by DHCJ Lam SC on 11 June 2020 (“August Summons”).

25.  At the hearing on 24 August 2020, DHCJ Lam SC dismissed the July Summons and the August Summons and ordered the costs of the former Summons against P1 on an indemnity basis.  The learned Judge observed that the July Summons was “abusive”, and considered the possibility of ordering costs against P1’s legal advisers on the basis that it was wholly misconceived.

C2.    Applicable Principles

26.  The principles governing an application made by a director for inspection of the company’s documents have been sufficiently stated by Kwan J (as she then was) in Ng Yee Wah v Lam Chun Wah [2012] 4 HKLRD 40, §29, as follows:

“(1)  The right of a company director to inspect the company’s documents is well established at common law (Burn v London and South Wales Coal Company and Risca Investment Company (1890-91) 7 TLR 118 at 118-119; Edman v Ross (1922) 22 SR (NSW) 351, at 360-361; Conway v Petronius Clothing Company Ltd [1978] 1 WLR 72, at 89-90; Berlei Hestia (NZ) Limited v Fernyhough [1980] 2 NZLR 150 at 163-164; Molomby v Whitehead & Australian Broadcasting Corp (1985) 7 FCR 541, at 550-552; Wuu Khek Chiang George v ECRC Land Pte Limited [1999] 3 SLR 65, paras 25, 27, 31-34; Law Wai Duen v Boldwin Construction Limited [2001] 3 HKLRD 403, 435-437).

(2)  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 (Law Wai Duen, supra at 405 and 409; Molomby, supra at 550; Wuu Khek Chiang George, supra at paragraph 27). Thus, the inaction on the part of the director after grounds for suspicion concerning the company’s affairs have arisen is irrelevant; 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 (Law Wai Duen, supra at 409).

(3)  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 a director’s right can be imposed because of misuse of confidential information leading to damage (Law Wai Duen, supra at 408).

(4)  In view of the proposition in (3), the exercise of a director’s right of inspection is, ‘generally speaking, not a matter of discretion with the Court’ (Edman v Ross, supra at 361; Berlei, supra at 163; Wuu Khek Chiang George, supra at paragraphs 32 and 33; Law Wai Duen, supra at 408).

(5)  The onus of establishing that the right of inspection will be exercised for improper purpose 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 (Wuu Khek Chiang George, supra at paragraph 34).

(6)  The scope of inspection can potentially be very wide, covering any ‘documents belonging to the company’ (Burn v London and South Wales Coal Company, supra at 118; Edman v Ross, supra at 360), ‘corporate material’ (Molomby, supra at 550), ‘corporate records and accounts’ or ‘corporate information’ (Berlei, supra at 163), ‘accounting and other records of the company’ (Wuu Khek Chiang George, supra at paragraph 25).

(7)  It is perfectly proper for a director to engage an accountant to conduct the inspection in exercise of his right. A director may certainly exercise his right through his agent (Edman v Ross, supra at 361; Law Wai Duen, supra at 409). A director is also entitled to take copies of the documents during inspection (Burn v London and South Wales Coal Company, supra at 118; Edman v Ross, supra at 361).

(8)   Whilst there may be some dispute in the authorities if the statutory provision (our statutory provision is section 121(3) of Cap. 32) adds a statutory right of inspection to an existing common law right, it is abundantly clear that the statutory provision is consistent with and does not detract from the common law right (Conway v Petronius, supra at 85 and 89; Berlei, supra at 163; Wuu Khek Chiang George, supra at paragraphs 25 and 31).”

C3.  Merit of OS and Dismissal Summonses

27.  The reasons for commencing the Inspection Proceedings, as stated in P1’s Aff[7], are as follows.

28.  First, Elaine has caused the Company to enter into various allegedly “abnormal transactions”, and P1 is duty bound to find out what happened to the Company.  Examples of such transactions are:

(1)  Elaine has allegedly “siphoned off funds belonging to the Company to CIL and/or CML and to procure CIL to make investment in a taxi licence”.

(2)  Elaine has not “disclosed” the financial statements of CIL and CML to the Company’s auditors for the years ended 31 March 2012 to 2015.  Although the financial statements of CIL and CML were supplied to the auditors from the financial year ended 31 March 2016, they were not disclosed to Ps.

(3)  Elaine obtained interest-free loans from the Company from 2012 to 2015.

(4)  The Company advanced loans to CIL and CML in 2013.

(5)  Elaine used her personal bank account to receive the rental income belonging to the Company.

(6)  Elaine allegedly “refused and obstructed the Company to pay dividends to the shareholders”, despite the Company had “consistently acknowledged its liability to do so, if required by shareholders resolution”.  The last interim dividend was paid on 25 August 2017.

29.  Second, Ps want to exit the Company.  They had previously offered to sell their shares in the Company but was obstructed by Elaine on the basis that their offer was invalid. There is a need to ascertain the true financial position of the Company so that they can “come up with a true and fair value of [their] shares”. 

30.  Third, Elaine has allegedly treated the Company as her own and used its assets at her will.  The Company has been making investments unknown to shareholders and in particular, how the Company’s assets were utilised through CIL and CML “remains a mystery to [Ps]”.  There is at least a prima facie case to commence a derivative action to recover the losses suffered by the Company from the  wrongdoers.

31.  In his skeleton argument, Mr Tom Ng, counsel for Elaine, submits that the OS should be dismissed on the grounds that (1) the application was made for improper purposes; (2) P1 has acted in breach of confidence; and (3) §§2-3 of the OS are misconceived. 

32.  Mr Ng argues that improper purposes can be inferred from the following facts and matters:

(1)  Ps have been trying to persuade Elaine and other shareholders to buy out their shares but to no avail, which cumulated in the presentation of the WU Petition;

(2)  Ps have commenced 4 proceedings against Elaine.  The proceedings including the July Summons and August Summons are “abusive and vexatious”, evidenced by the fact they have either been discontinued or dismissed with costs in favour of Elaine;

(3)    the alleged need to investigate the affairs of the Company had already been fulfilled, given that Ps were able to commence the Derivative Action and the WU Petition without the Disputed Documents;

(4)  the alleged need to ascertain the value of Ps’ shares is not a good reason for inspection, as it is not necessary for a shareholder to go beyond the audited financial statements for such purpose (Re LehmanBrown Ltd [2011] 5 HKLRD 668, §§38-39, per Chu JA, a case on inspection qua shareholder under s.740 of the Ordinance; Leung Chung Pun v Masterwise International Ltd [2014] 1 HKLRD 1129 §§61-62);

(5)  P1 is not seeking inspection for the purpose of discharging his duties as director, but to obtain an early discovery of documents relating to his proceedings against the other shareholders, which is an improper use of inspection proceedings (Re Raffles Family Office Ltd [2018] 5 HKLRD 816, §26, a case on inspection qua director.  See also Re LehmanBrown Ltd, §§39, 41);

(6)  at the extraordinary general meeting of the Company held on 24 June 2020, it was resolved by a majority of shareholders not to commence action against Elaine;

(7)  the documents sought are very wide and not directed at the transactions said to require investigation; and

(8)  Elaine (on behalf of the Company) had already made available the 47 Bundles[8] for inspection by P1’s agent on 3 April 2020, and she offered 17 April 2020 as the next date for inspection. 

33.  As for breach of confidence, Mr Ng relies on the fact that P1 has on 15 April 2020 circulated the legal advice obtained by the Company from Messrs Hogan Lovells in respect of the Share Dispute Action (“HL Advice”) to all shareholders including Hui which, it is said, has injured the Company in a material way.   

34.  Lastly, §§2-3 of the OS is misconceived, given that the Court does not have jurisdiction under sections 374, 375 or 740 to order a defendant to make a statutory declaration.  It is in any event impossible for Elaine to determine whether a document “could, may or might substantiate the claim that [she] has been in breach of fiduciary duty against the [Company]”.  A party cannot seek discovery of documents by reference to their relevance to a particular issue (Li Tak Yee Samuel v Societe Generale Bank and Trust [2013] HKEC 542, §§38-39, 41; PT Tugu v Citibank [2018] HKCFI 1398, §§9, 12).

35.  Mr Jason Yu[9] makes similar points set out in §§31-34 above.  Further, he submits that:

(1)  P1 does not need the documents for valuation purpose.  Ps do not seek a buy-out order in the WU Petition and P1 (qua director) has approved the financial statements of the Company from 2012 to 2019;

(2)  P1 does not need the documents for investigation purpose as he already had enough information to commence the WU Petition and the Derivative Action;

(3)  the true purpose of the application is to exert improper pressure on Elaine and the Company;

(4)  P1 has already filed 3 lengthy affirmations with exhibits of over 1,000 pages.  If the OS is not dismissed, the proceedings will likely be turned into “an unwieldly and expensive piece of satellite litigation” in which the parties and the Court will have to grapple with “repetitive affirmations and exhibits that are in disarray”; and  

(5)  the Company has been cooperative and provided 47 Bundles to P1.  He should go through the documents and identify whether there is any need for seeking further documents through the discovery process in the WU Petition. 

36.  On the other hand, Mr Wong SC contends that the arguments advanced by Elaine and the Company should be rejected for the following reasons:

(1)  no inference of improper purpose can be drawn against P1, given that the bringing of the WU Petition and the Derivative Action are to put an end of the “wrongs” done to, or seek recovery for the benefit of, the Company;

(2)  although proceedings have already been commenced, inspection may unearth further wrongs committed against the Company;

(3)  a director’s right to inspect documents cannot be conflated with a litigant’s right to seek discovery and, in any event, should not be curtailed simply because he has brought proceedings in respect of certain specific complaints.  The cases cited by Elaine and the Company do not assist them, as they concerned with applications made by shareholder under section 152FA of the former Companies Ordinance (since replaced by section 740 of the Ordinance), which is much more restrictive than a director’s right to inspect documents;

(4)  the fact that Elaine feel “pressurized” is irrelevant.  A director does not have to explain why the inspection is sought or demonstrate any particular ground or “need to know” as a basis of the application; and

(5)  the scope of inspection can be very wide to cover any documents belonging to the Company, as the power is given to a director to enable him to discharge his duties to the Company. 

37.  In my view, the Dismissal Summonses are “satellite” litigations which achieve no benefit to the parties and do not decide any real issue between them.  They are inconsistent with the summary nature of the proceedings and the practice of the Court in dealing with such proceedings. All the arguments advanced on behalf of Elaine and the Company in respect of the Dismissal Summonses are arguments which can be, and should be, raised at the substantive hearing of the OS.  When this Court enquired with counsel as to the justifications for issuing the Dismissal Summonses, Mr Maurellet SC (for Elaine) gives 2 reasons: (1) §3 of the OS is demurrable and should be struck out; and (2) the stance taken by P1[10] is that the OS will remain ongoing for some time, as DHCJ Lam SC has at the hearing on 24 August 2020 given directions for P1 to review the 47 Bundles and file further evidence in respect of the application.  I do not think that these are valid grounds for issuing the Dismissal Summonses, particularly when the suggestion to review the 47 Bundles and file further evidence came from the Company and Elaine themselves.   

38.  As all counsel make their submissions on the merit of the OS and Mr Wong SC acknowledges that there is no point for the OS to proceed further, I will determine the merit of the OS on the basis of the arguments advanced by all counsel together with the question of costs.   

39.  In my view, P1 is entitled to inspect the Undisputed Documents, all of which are documents of the Company and are not voluminous. I should say that in the ordinary course, a director in particular one who has been holding the office for a long time and has actively participated in the management of the company, should not seek a wholesale inspection of all the documents of the company without any temporal limit.  This is because during his directorship, he should have some knowledge of, if not familiar with, the affairs of the company.  In that scenario, I would expect the director to seek inspection of documents relevant to the purposes identified or the areas of which he has some basis to be concerned with. 

40.  I do not think the matters relied on by Elaine or the Company are sufficient for the Court to draw an inference that the application is made by P1 for the alleged or any improper purposes. 

41.  First, as the authorities show, P1 does not have to explain why he needs to see the documents for which inspection is sought.  Nor is there any requirement for a director to identify the documents he wishes to inspect beyond describing the categories of documents and the time period covered.  The latter requirement is to enable the Court to assess the reasonableness of the application and the corresponding burden on the company to comply with the request.  This is consistent with section 375 of the Ordinance, which makes it clear that a director’s right to obtain copies of the company’s accounting records is not subject to any restriction or condition.  If a director abuses his power qua director and uses the records obtained for a collateral or improper purpose, the remedy lies in the company seeking an injunction or compensation against him/her. 

42.  Second, as a director of the Company, P1 is under a duty to act in the best interests of the Company.  Such duty requires him to scrutinise the transactions and affairs of the Company to satisfy himself that they have been properly conducted and that no wrong has been done to the Company.  As submitted by Mr Wong SC, the case of Re Raffles Family Office Ltd is distinguishable in that by the time the director issued the application for inspection of the company’s documents, there had been in existence a proposed resolution to remove him as director.  In the present case, there is no suggestion that P1 will be removed as director.  The fact that Ps have commenced the WU Petition and the Derivative Action, far from showing that P1 pursued the application for improper purposes, is consistent with the discharge of P1’s duties as director. 

43.  Third, the fact that Ps will at a later stage be able to obtain documents relevant to the questions in issue in the WU Petition is neither here nor there.  A director’s right to inspect the company’s documents cannot be circumscribed or defined by the issues raised by the parties in ongoing proceedings, given that the scope of discovery is much more narrow than a director’s right to inspect company’s document.  

44.  Fourth, the multiple proceedings and the misconceived nature of the July Summons and August Summons are the result of the misguided approach taken by Ps’ legal advisers.  In any event, the July Summons, the August Summons, the Certificates Action and the Derivative Action have already come to an end, with costs to be paid by Ps to Elaine and/or the Company. 

45.  Fifth, the fact that a resolution was passed by the majority of shareholders not to commence action against Elaine is irrelevant and at any rate, is not a matter which could defeat P1’s right to scrutinise the affairs of the Company.  If anything, it supports P1’s contention that there is a need to bring proceedings so as to redress the alleged “wrongs” done to the Company. 

46.  Sixth, the fact that the 47 Bundles were provided to P1 for his inspection on one day in April 2020 does not show that the OS was issued for improper purpose.  It is clear from the correspondence that the Company had imposed various conditions to limit the exercise of the right of P1 (and his agents) to inspect the documents as a result of which they were not able to review most of the 47 Bundles or obtain copies of such documents. 

47.  Seventh, while it is correct that P1 does not seek a buy-out order in the WU Petition, there are regulations in the articles of association which provide a mechanism for a shareholder to sell his/her shares in the Company.  There is no reason why Ps should be deprived of the right to sell their shares in the Company by following the requisite procedure.  To the contrary, if Ps are provided with unrestricted access to the documents relevant to the financial position of the Company, there will be greater transparency which, in turn, will enhance the prospect of the parties being able to come to an agreement for Ps to exit the Company.  For the purpose of assessing the value of Ps’ shares, the audited financial statements of the Company are not the only relevant documents.  This is because if, as P1 contends, there were "wrongs” done to the Company and the Company suffered pecuniary loss as a result, the valuation should take into account such “wrongs” and any amount which may be recovered by the Company from the alleged wrongdoers.

48.  As regards the concern about P1’s breach of confidence, insofar as the Undisputed Documents are concerned, it has been adequately addressed by the undertaking given by P1 to the Court on 11 June 2020 (see §22(4) above). 

49.  As for §2 of the OS, Mr Wong SC submits that the Company has not made an affirmation to confirm that the 47 Bundles are all the documents within the scope of the Undisputed Documents and it is not uncommon for the Court to direct the defendant to file an affirmation to confirm the existence or non-existence of the documents sought (Ng Yee Wah, §38(1); Chieng Tsai Wan Judy v Kwok Kam Fung & anor [2018] HKCFI 603, §23).  Mr Yu confirms that the 47 Bundles are all the documents which the Company has in its possession and custody which fall within the scope of the Undisputed Documents, and the Company will make an affirmation to confirm this fact. 

50.  Mr Wong SC (rightly) abandons §3 of the OS, which is wholly without basis and is demurrable.   

51.  I turn to the Disputed Documents.  The position of the Company is as follows:

(1)  Category 3 documents relating to the Share Dispute Action: the Company may have to substantively defend certain claims made against it.  In light of P1’s act in disclosing the HL Advice to Hui, the Company is concerned that P1 may supply further privileged documents to third parties, including Hui and Lau Chung. 

(2)  Category 11 all loan agreements and records: other than the documents already supplied to P1, the Company does not have any further document in its possession, power or custody, as confirmed in Rose’s 2^nd Aff, §7. 

(3)  Category 16 accounting records of CIL and CML: the Company has never supplied these documents to the auditors.  These documents never formed part of the Company’s books, accounts or records.  Nor does the Company has in its possession, custody or power any of such documents, as confirmed in Rose 2^nd Aff, §8.

52.  In relation to Category 3, Mr Wong SC submits that the Share Dispute Action is a dispute between Hui and her son in relation to the shares held by Hui in the Company, and the Company should not take an active role in the Action.  P1 was concerned about why the Company had incurred costs in engaging Hogan Lovells to advise on the Action and the HL Advice was provided to all the shareholders in that context.  In any event, P1 is willing to give an undertaking to the Court that he “would not disclose the contents of this category of documents, save for the purpose of seeking legal advice and conducting legal proceedings”. 

53.  In response, Mr Yu contends that substantive relief including a declaration that the Company holds assets on trust for Lau Chung is sought.  It was therefore necessary for the Company to seek legal advice.  The undertaking proposed to be given by P1 is ambiguous and would not stop P1 from providing the legal advice obtained by the Company to Hui whose interest is not aligned with that of the Company. 

54.  To address the concern raised by Mr Yu, Mr Wong SC confirms that P1 is prepared to give an undertaking to the Court not to disclose any documents covered by legal professional privilege in any way save for the purpose of taking legal advice  (“Revised Undertaking”).  Mr Yu accepts that the Revised Undertaking is sufficient to address the Company’s concern in respect of Category 3.

55.  As for Category 11 and Category 16, in light of the confirmations given in Rose’s 2^nd Aff (on behalf of the Company), Mr Wong SC accepts that P1 cannot take the matter any further.   

56.  For the above reasons, this Court accepts the Revised Undertaking given by P1 in respect of documents under Category 3.  Elaine and Rose, being the 2 directors in charge of the day-to-day management of the Company, is directed to file an affirmation to confirm that the 47 Bundles are all the documents within the possession or custody of the Company which falls within the scope of the Undisputed Documents.   

C4.   Costs

57.  As for costs, I make the following order nisi that:

(1)  The costs of and occasioned by the OS up to and including the hearing on 11 June 2020 be paid by Elaine and the Company to P1, to be taxed if not agreed.  This reflects the fact that until the hearing on 11 June 2020, P1 has not been able to obtain unrestricted access to the 47 Bundles to which he is entitled to see.

(2)  Elaine and the Company do pay (i) 30% of the costs of P1’s Aff and (ii) 80% of the costs of and occasioned by the Dismissal Summonses (but not the costs of P1’s 3^rd Aff) including the costs of the hearing on 29 September 2020 and all costs reserved, to be taxed if not agreed, with certificate for 2 counsel. 

(3)  The 70% deduction under §(2)(i) reflects the fact that P1’s Aff contains matters which are wholly irrelevant to the OS and go beyond the scope of the direction given by DHCJ Lam SC at the callover hearing.  As for the 20% deduction under §(2)(ii), it reflects the fact that (a) P1 fails in his application under §3 of the OS, (b) the Revised Undertaking is only offered at the hearing, and (c) P1 has not accepted the confirmation given in Rose’s 2^nd Aff in respect of Categories 11 and 16 until the hearing.    

58.  I do not consider that P1 is entitled to recover 70% of the costs of P1’s Aff and all the costs of his 3^rd Aff for the following reasons:

(1)  In respect of P1’s Aff, I repeat what I said in §24(1) above.

(2)  As for P1’s 3^rd Aff filed in opposition to the Dismissal Summonses, I do not think it is fair to require Elaine and the Company to bear the costs of such Affirmation.  In this 9-page Affirmation (with single line spacing), P1 makes a series of accusations against Elaine’s character, recounting the various proceedings he commenced against Elaine and setting out the arguments why the Dismissal Summonses constitute an “abuse of process”.  It must be clear to P1’s legal advisers that such Affirmation is of no probative value and falls foul of the requirement of Order 41 rule 1.  This is reinforced by the fact that in his written and oral submissions, Mr Wong SC has not referred to any part of P1’s 3^rd Aff. 

59.  I consider that 70% of the costs incurred in preparing P1’s Aff and all the costs incurred in preparing P1’s 3^rd Aff to have been incurred improperly and unreasonably. It seems to me that there is a prima facie case to make a wasted costs order under Order 62 rule 8 against P1’s legal advisers, OLN and counsel Felix Ng, so that they cannot recover such costs from P1.  For this purpose, I direct OLN and counsel Felix Ng to show cause as to why a wasted costs order should not be made against them within 21 days of this Decision by lodging written submissions with the Court.   

C5.   Further Conduct of Proceedings

60.  As all parties agreed to proceed with the OS on the basis that P1 would go through the Undisputed Documents and identify any missing documents for which inspection is sought and the Company has confirmed that all documents within its possession and custody falling within the scope of the Undisputed Documents are contained in the 47 Bundles, directions are given for the parties to file affirmations on any missing items which are within the power of the Company but which the directors are unable to agree to procure the third parties to produce to the Company.  Both Mr Maurellet SC and Mr Yu submit that the right to inspect documents under sections 374, 375 and 740 of the Ordinance does not extend to documents within the power of the Company.  Mr Wong SC acknowledges the point and say that P1 will consider the affirmations to be filed by the Company and decide whether it is necessary to pursue the matter.   

61.  I direct the OS to be heard on 13 November 2020 if and to the extent that P1 still wishes to pursue any missing items after having considered this Decision.  To save costs and time, the Court will also hear Ps’ application for leave to amend the WU Petition, should this become controversial. 

D.  Costs of Validation Summons

62.  At the hearing, the parties submitted a consent summons which covers the remaining part of the Validation Summons.  The only remaining issue is costs.

63.  Mr Yu asks for costs of the Validation Summons on a party and party basis on the ground that it was only until 16 September 2020 that OLN agreed with what had been proposed by the Company subject to the addition of the words “properly incurred” and dropped their proposed undertaking requiring the Company to show all expenses to Ps before the same are allowed. 

64.  Mr Wong SC submits that Ps was only given a few days to consider the proposed order before the Validation Summons was issued on 28 August 2020.  On the same day, OLN indicated that they did not oppose the application as a matter of principle.  Ps had valid basis to be concerned about legal expenses as they had seen documents showing that the Company had been using its funds to pay for probate matters which ought not to have been paid by the Company.  In the circumstances, a fair order should be that costs of the Validation Summons be in the cause. 

65.  As Mr Yu rightly points out, although OLN stated that Ps were agreeable to the proposed order sought as a matter of principle, the fact remains that Ps did not give their consent to any part of the proposed order sought by the Company.  Given the urgent need to operate the Company’s bank accounts to pay the ongoing operating expenses, it was necessary for the Company to prepare the supporting affirmation and issue the Validation Summons on 28 August 2020. 

66.  In the circumstances, it is fair to order Ps to pay 50% of the costs of and occasioned by the Validation Summons up to 16 September 2020 in any event, and the remaining costs be in the cause save that the costs of the affirmation of Jonathan Gray filed on 23 September 2020 are disallowed in full.  This is a 18-page affirmation in which the Company’s solicitors sought to justify the legal expenses incurred by the Company in the Inspection Proceedings, the Share Dispute Action, the Certificates Action and the Derivative Action and was filed one week after Ps had already indicated their agreement to the terms set out in the consent summons.  I am unable to see why it was necessary for the Company to prepare this affirmation, given that the parties had already agreed on the terms of the order.