LEUNG CHI MING v. LAW KWOK YAN AND ANOTHER

HCMP 1857/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1857 OF 2006

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D E C I S I O N

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1.  This is an application by the 1^st Defendant, Mr Law Kwok-Yan (“Mr Law”), seeking an order that the Originating Summons in these proceedings be struck out and the proceedings dismissed on the grounds that: (1) it discloses no reasonable cause of action against him; (2) it is scandalous, frivolous, or vexatious; or, (3) it is otherwise an abuse of the process of the court.

2.  By the Originating Summons, which was taken out on 14 September 2006, the Plaintiff, Mr Leung Chi-ming (“Mr Leung”) seeks orders against the Mr Law and the 2^nd Defendant, a company called Harvest Rise Limited (“the Company”), requiring them to allow him inspection of certain books and records and other documents that are said to be books, records and documents of the Company.  The first paragraph of the Originating Summons is in the following terms:

“That the 1^st Defendant, being a director of the above-named Harvest Rise Limited (“the Company”) and the Company shall within 21 days produce or cause to be produced to the Plaintiff and his agents or representatives duly appointed by him, all books of accounts, management accounts, working papers, bank statements, cheque stubs, contracts, instruments of transfer, statutory records and invoices belonging to the Company (“the source documents”), and without limitation to the source documents as set out above, all documents which evidence record or otherwise relate to the company and Guangzhou Hon Ming Hot and Cold Equipment Company Limited (廣州康明熱冷設備製造有限公司) “whether in printed or documentary form or any other form, ...”

It then continues by stating various possible electronic forms of such documentation.  The subsequent paragraphs of the Originating Summons seek orders relating to entry into premises where such documents might be kept and orders permitting Mr Leung or his agents to search for the relevant documents and remain on the premises until their search and inspection is complete.

3.  These proceedings have a considerable background, which includes an earlier application by the Mr Law for a similar order in relation to documents of the Company that he brought in 2005 against the Company, Mr Leung and two other directors of the Company.  Those proceedings were dealt with in July 2005 when I made an order requiring Mr Leung, the other two directors and the Company to produce for the Mr Law’s inspection various accounting records of the Company which were described in general terms and further particularised in the order.  In essence, the order then made related to all of the accounting records of the Company.  It has to be said that in those proceedings, it was not disputed by any of the defendants to those proceedings, including Mr Leung, that the Company had such documents and that such documents were in the control of the defendants to those proceedings.

4.  Following the making of that order, it appears that it took some time before the order was complied with.  It is the position of Mr Law that there has not been full compliance with the order that I made then, and he has taken out an application to seek to compel compliance with that order.

5.  Following the taking out of that application, Mr Leung commenced these proceedings.  His application is supported by an affirmation in which he deposes to the background to the relationship between the parties.  In essence, it appears that the parties relationship arose out of the fact that they (together with the other two persons who were defendants to Mr Law’s earlier application for inspection) were shareholders and directors of the Company.  Mr Leung says that because the Company was not doing well, it was decided between them that the Company should effectively cease to carry on active business and should simply retain its interest in a joint venture operation on the Mainland – the Guangzhou Hon Ming Hot and Cold Equipment Company Limited (“the joint venture”).

6.  It was, Mr Leung says, agreed that Mr Law would be responsible for running the affairs of the joint venture and that, in consideration of his being given a free hand to do so, he agreed to pay to the Company (and thus indirectly to its shareholders) certain amounts by way of guaranteed profits for each of the following five years, during which he was to run the affairs of the joint venture.  No such sums having been paid as agreed, the Company, Mr Leung and the other two shareholders and directors brought proceedings in the High Court against Mr Law seeking payment of the amounts that he had allegedly promised to pay.

7.  Mr Leung has said in his affirmation in these proceedings that in the course of attempting to comply with the order for production and inspection that was made against him in Mr Law’s earlier application for inspection, he caused steps to be taken to seek, from various sources on the Mainland, documents relating to the affairs of the joint venture.  He says that as a result of the documentation which has been obtained, it appears that there are a number of documents on which what purport to be his signature and signatures of the other two shareholders are in fact forgeries.  The point that he makes in his affirmation is that the existence of such documents suggests that notwithstanding that the Company was meant to be dormant from the time of the agreement to allow Mr Law to run the affairs of the joint venture, it seems that in the course of doing that, Mr Law has nonetheless made use of the Company's name and purported to act on its behalf in various respects.  It is in relation to those respects principally, I think, that the application in these proceedings is directed.

8.  Mr Chung, who appears for Mr Law on this application, has made a number of submissions as to why the proceedings are doomed to fail and should be struck out.

9.  The first point that Mr Chung took was that the scope of the application in terms of the documentation that is sought is far too wide.  As to this, Mr Chung draws attention to the fact that section 121 of the Companies Ordinance (“the Ordinance”), which is, according to the marginal note on the originating summons, the provision pursuant to which the application is made, relates only to books of account of the company.   Section 121(1) requires a company to cause to be kept proper books of account.  Subsection (3) provides that the books of account shall be kept at the registered office of the company or at such other place as the directors think fit and shall, at all times, be open to inspection by the directors. 

10.  Mr Chung submits that the documents that are being sought by the summons go far beyond books of account and, to that extent at least, the summons is one that cannot be supported by reference to section 121 of the Ordinance.  In support of that submission, Mr Chung cited two authorities – Terence Ho Pui Tin v Wah Nam Group Limited (unreported, CFI, Yuen J, HCMP 5224 of 1999, 30 August 1999) and Re J&D Industrial (HK) Limited [2006] HKEC 423.

11.  In response, Miss Yiu, who appeared for the plaintiff, submitted that the right of a director to inspect the books of account provided for by section 121(3) is in fact no more than a recognition of a wider common-law right which entitles a director of a company to inspect all documents of the company where he wishes to do so for the purpose of carrying out his duties as a director.  In support of that submission, Miss Yiu relied on Conway v Petronius Clothing Company Limited [1978] 1 WLR 72.  It is certainly true that in that case, an order appears to have been made which entitled a director to inspect of documents of a company which went beyond what might strictly be called books of account and to that extent, therefore, the decision goes further than the two decisions that Mr Chung cited to me in which the Hong Kong courts came to a rather narrower view of section 121 and concluded that under section 121, it is only books of accounts that can be inspected by a director.

12.  This being an application to strike out, I should only strike out the relief sought if I am satisfied that it is hopeless or doomed to fail.  Miss Yiu has indicated that although section 121 is referred to in the margin of the Originating Summons, the application is in fact brought both by virtue of section 121 and also by virtue of the director's right at common law to inspect the books, records and other documents of the company of which he is a director.  For present purposes, I do not think that it can be said that it is unarguable that a director has a right to inspect documents that go beyond what might be strictly called books of account.  For that reason, I do not think that it would be appropriate to strike out the application as a whole on that basis.

13.  The second point that Mr Chung took was that reading the Originating Summons together with the affirmation in support, there was nothing in either the Originating Summons or the affirmation to indicate that there was any reason to think that his client had possession of any documents of the Company.  He also submitted that there was no suggestion in the evidence that there had been any request for inspection of the documents prior to the taking out of the Originating Summons.

14.  As to the first point, in paragraph 11 of Mr Leung’s affirmation in support of this application, he deposes to the circumstances in which he came to seek to obtain records from the Chinese authorities as to the affairs of the joint venture and the Company.  He then refers to certain documents which he has obtained and says in paragraph 13 that all of these documents demonstrate that while the Company has ceased business and remained dormant in Hong Kong since 31 March 1997, Mr Law had purported to use the name of the Company and carried out commercial activities in China without the approval, consent or knowledge of the Company’s board of directors.

15.  Miss Yiu submits that this is, if not explicitly, at least implicitly an allegation that there exist, or may well exist, documents of the Company, or documents generated in respect of the affairs of the Company which should be regarded as documents of the Company, which were generated by the Mr Law and which are, therefore, documents of the Company in his possession.  I have to say if that is what was intended, it could have been much more clearly stated, but I bear in mind that at this stage, the question is one of whether or not the application should be struck out altogether and it seems to me that, although the position is not entirely clear from Mr Leung’s evidence filed so far, he is suggesting that there are certain documents of the Company that have been generated during the period between 1997 and about 2002 which are in the possession of the Mr Law.  I do not think that it is possible to say, at this stage, that the claim is bound to fail, although I should not be taken as suggesting that it will or is likely to succeed.  All that I decide at this stage is that I am not satisfied that the claim is so hopeless that it ought to be struck, and that it should therefore be allowed to continue.  It may well be that when all of the evidence is complete – and I would expect there to be evidence filed on both sides as to this particular issue – that the court will ultimately come to a conclusion, one way or another, as to whether or not such documents are likely to exist so as to justify the making of an order, but at this stage, I do not think that the court is in a position to say with certainty that there is no possibility that such documents exist so that the application should be struck out.

16.  So far as the point as to a previous request for inspection prior to the commencement of the proceedings is concerned, I think it has to be said that there is no indication in the affirmation, whatever may be the position in fact, that any such request was made but, at the end of the day, I am not satisfied that this is a basis on which the claim should be struck out altogether.  It seems to me that, at best, if no request for documentation had been made prior to the commencement of proceedings, if the proceedings were subsequently to be acceded to, that might be a basis on which a defendant might resist an order for costs being made against him.  However, as it appears that the application is to be resisted and it is likely that there will be further evidence filed, I would not be prepared to strike out the application on this basis.

17.  I should also mention one other matter relating to the scope of the application.  Mr Chung suggested that in so far as what was sought was documentation of the joint venture, there was no basis for such an application being made by Mr Leung, whether pursuant to section 121 or at common law in his capacity as a director of the Company.  It seems to me that that is probably right, but Miss Yiu has indicated that what is sought are documents of the Company that relate to its affairs including its relationships and its dealings with the joint venture.  It seems to me that if there are such documents in existence and it can be shown that such documents are likely to exist and be in the possession of Mr Law, there may well be a basis, whether under section 121 or at common law, for making an order for inspection.

18.  However, having said that, I should say that the right of inspection on the part of a director of a company, whether under section 121 or at common law, would, as a matter of first impression at least, appear to me to be limited quite clearly to documents which are documents of the company and that such right would not appear to extend to inspection of documents belonging to third parties which merely throw light on the affairs of the company itself.  In this respect, it seems to me that the position may well be very different from the position where a company is in liquidation and the liquidator seeks information as to the affairs of a company.  However, this is, in my view, a matter that will have to be dealt with at the substantive hearing of the application.

19.  Mr Chung also submitted that the application was an abuse of process in that it sought to re-litigate matters that had already been litigated in the first application for inspection brought by Mr Law in 2005.  Although it is fair to say that Mr Leung, who was a defendant to those proceedings, did not expressly take issue with the allegation that he and the other two directors were in control of the company and had possession of all of its accounting records, it does not seem to me that there has been any determination in those proceedings of the issues which are raised Mr Leung’s application in these proceedings.  The present application involves the parties in different capacities, in that Mr Leung was not the plaintiff in the previous proceedings and it is quite clear that he has not previously made an application for inspection of documents belonging to the Company and been refused such relief.  I do not see how the fact that a previous application was made by Mr Law for inspection of documents which were said to be in the control of Mr Leung is in any way determinative of Mr Leung’s right to seek inspection against Mr Law in these proceedings.  I therefore do not think that there is any substance in the suggestion that these proceedings are merely a re-litigation of the earlier proceedings and issues that arose in them.

20.  Finally, Mr Chung also took the point in his skeleton that the court had no jurisdiction to deal with this matter on the basis, I think, that what was sought was documentation relating to the joint venture.  I do not think that this argument is well-founded, since it seems clear that what Mr Leung is seeking is documentation of the Company itself, and although such documentation may record or throw light on the dealings of the Company with the joint venture, it cannot be said that this is a dispute relating to the joint venture, which, as between the parties to the joint venture agreement, is required to be dealt with by arbitration or negotiation on the Mainland.

21.  For all of the foregoing reasons, it does not seem to me that it can be said that Mr Leung’s application is bound to fail, so that it ought to be stopped in its tracks and struck out now.  Rather, it seems to me that it will be necessary for the court to come to a view as to the merits of the application at a substantive hearing after each of the parties has had an opportunity to file full evidence in relation to his position, on the basis of which the court can come to its determination. 

22.  For all of those reasons, I have decided that the right course to take would be to dismiss the application to strike out and allow the proceedings to proceed in their normal course.