SENG KWAI FO MARIA v. YIN SHIN LEUNG CHARITABLE FOUNDATION INC AND ANOTHER

HCMP 599/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 599 OF 2005

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D E C I S I O N

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Introduction

1. These proceedings were commenced in March 2005 by the plaintiff (“Maria”), in her capacity then as a director of the 1st defendant (“Company”), for inspection of the books of account and records of the Company.  The 2nd defendant (“David”) is her brother, and another director of the Company.

2. On 1 November 2011, Maria applied to the Court for leave to withdraw these proceedings.  Such leave was granted by the Master on 17 May 2012, with no orders as to the costs in relation to the proceedings, but that Maria should be paid the costs of the application for withdrawal.  The defendants appeal against the Master’s orders for costs, and ask instead that Maria should pay to them the costs of the action as well as the costs of the application for withdrawal.

Applicable legal principles

3. The parties do not dispute the legal principles applicable to the determination of costs, where an action is withdrawn or discontinued, as set out in paragraph 21/5/10 of the Hong Kong Civil Procedure and the cases cited there:

“While the general rule is that a party withdrawing a claim should pay for the costs of the opposite party, the court has complete discretion in dealing with the issue of costs and to do justice between the parties. The general rule that a defendant is entitled to costs when an action is discontinued may be departed from in a case where the discontinuance of the proceedings is due to the matter having become academic, rather than to any acknowledgment by the plaintiff of likely defeat.”

4. Leading Counsel acting for Maria highlights the fact that at the commencement of these proceedings, Maria was a director of the Company and had a statutory and a common law right to inspect the books and records of the Company.  It was emphasized that Maria did not have to explain her request for inspection, and that further, she was entitled to have an agent to conduct the inspection of the books and records in exercise of her right.  Counsel placed reliance on the judgment of Kwan J (as she then was) in Ng Yee Wah v Lam Chun Wah [2012] 4 HKLRD 40:

“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… 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…”

5. It is also not disputed, that the director’s right to inspect company documents, under section 121 of the Companies Ordinance and at common law, can be interfered with where it can be shown that the director intended to abuse the confidence of the company’s affairs, thereby materially injuring the company (Re Boldwin Construction Co Ltd [2001] 3 HKLRD 430, Edman v Ross (1922) 22 SR (NSW) 351).  Leading Counsel for Maria emphasized that the defendants have not adduced any clear evidence that Maria was exercising her right for an improper purpose, or that there was any likelihood of material damage to the Company as a result.  It was argued on behalf of Maria that her inspection of the books and records of the Company has merely become academic by reason of her having been removed as a director in July 2006, and that the board’s act of removing Maria as a director was something out of her control.  But for her removal as a director, Maria would have had a good chance of obtaining the orders for inspection sought, and relying on the judgment of Barma J in Re Peaktop Technologies (USA) Hong Kong Ltd (2007) 4 HKLRD 207, it was argued that there was justification for not ordering Maria to pay the defendants’ costs despite her withdrawal of the action. 

6. The defendants argue that the general rule is that where a plaintiff discontinues an action, the defendant is entitled to its costs.  This is so even in cases where the plaintiff does not need the leave of the court to withdraw its action under Order 21 rule 2, by virtue of the provisions of Order 62 rule 10 and rule 3 (7).  The defendants rely on Inchroy Credit Corporation Ltd v Chung Man-cheung [1991] 1 HKLR 120, 123, where Kaplan J made it clear that the application of the general rule as to costs on a discontinuance is not limited to cases where the discontinuance can be equated to defeat.  There may be cases where justice would require an order entitling the defendant to recover its costs, even where the plaintiff discontinues the proceedings for reasons unconnected with the likelihood of success or failure.

7. In Supply Chain & Logistics Technology Ltd v NEC Hong Kong Ltd, unreported, HCA 1939/2006, 29 January 2009, Lam J (as he then was) followed Inchroy and Trend Publishing (HK) Ltd v Vivien Chan & Co [1996] 3 HKC 433, and ordered the plaintiff who discontinued his claim in the action to pay the costs of the defendant.  His Lordship pointed out that there must be “good reason” to show that it is just in a case to deprive the other party of its costs.  The mere fact that a plaintiff discontinues its claim for economic consideration is not, by itself, sufficient to justify departure from the general rule for the discontinuing plaintiff to pay the costs of the defendant.

8. It is clear from the authorities cited by Counsel that the correct approach should be to start with the general rule: that as the plaintiff who seeks to discontinue her action against the defendants, Maria should pay the costs of the action unless she can show that there are good reasons to depart from that rule, such that the court should, in the exercise of its discretion, make some other order as to costs which is just in the circumstances of the case.

The background history

9. The background history of the proceedings has to be briefly narrated.  Seng Ping Ling (“Father”) is the father of Maria and David.  He and Fung Yuet Ngor (“Mother”) have 9 children.  Father established a very successful textile business and made substantial amounts of charitable donations over the years, in particular to charities on the Mainland for children’s causes.  The Company was incorporated in 1993 for the sole purpose of undertaking charitable work.  Father, Maria, David, and 2 other of their siblings, Jimmy and Joseph, were directors of the Company, each holding 20% of the shareholding in the Company.  Father also established the Seng & Sons Trust (“Trust”) in 1984, to make provision for his family as well as for charitable purposes.

10. In October 2003, Father suffered a stroke.  (He died subsequently in 2009, after these proceedings had been in progress for some years.)  It is not disputed that prior to Father’s stroke, he had been in active control of the management of the Trust and of the Company, and had, as the patriarch of the family, made all decisions relating to the affairs and assets of the Company and the Trust.  His control and decisions were accepted by the entire family, unquestioned.  It is also accepted that all the shares of and in the Company were held by David, Maria, Jimmy and Joseph on trust for Father. 

11. After Father’s stroke in 2003, the family became divided into 2 camps: with David, Jimmy and Joseph on one side, and Maria, Mother and the other siblings (Peter, Agnes, William, Helen and Henry) on the other.  Various sets of proceedings were instituted by Maria and her camp.  Accusations have been made by members of the family and directed against each other, and it would appear that these stem from their disagreement over how the fortunes amassed by Father should be used. 

12. This action was commenced in March 2005, after Maria’s requests for inspection of the Company’s books of account were refused by David.  Prior to Father’s stroke, Maria had not been involved in or concerned with the operations of the Company.  It was David who had assisted Father in these operations.  In early 2004 and after Father’s stroke, Maria claimed that she became concerned that the Company was improperly run by David, in a manner which she claimed was contrary to Father’s wishes.  She suspected that David had made “illegal and unauthorized transactions” with respect to the Company’s accounts, that he was mismanaging the Company and was planning to misappropriate the Company’s assets.  These accusations were flatly denied by David, who claims that by seeking inspection of the Company’s account, Maria and Peter were working towards seeking control of the assets of the Trust, to advance their own interests as beneficiaries under the Trust, and not to further the interests of either the Trust or the Company.

13. In their arguments on the appropriate costs orders to be made in the withdrawal of these proceedings, each side has claimed that there are merits in its case and that should the trial proceed, it was likely to succeed (but for Maria’s removal as a director).  Unfortunately, without a full trial and examination of the witnesses, it is difficult if not impossible for the Court to come to a clear conclusion on the rights and wrongs of the parties.  The best that can be done is to view the evidence filed to date objectively, and by application of the principles summarized in paragraphs 3 to 8 above, to consider whether there are good reasons to depart from the general rule that Maria should pay the costs of the withdrawal of these proceedings.

Whether there are good reasons shown

14. In her fourth affidavit filed in support of the application to withdraw these proceedings, Maria states that her application for inspection has been overtaken by events which have rendered her application unnecessary.  She referred to the appointment on 17 July 2006 of a committee in respect of the estate of Father.  She also relied on a transfer of US $16.5 million made from the Company to the Trust. 

15. After Father’s stroke, Mother made an application under the Mental Health Ordinance in January 2006 (“Mental Health Proceedings”) to seek the appointment of a committee to deal with the affairs of and assets belonging to Father, including assets belonging to Father through the Company.  Consequently, a committee comprising Mr Lester Huang, Mr Larry Ko, both solicitors, and Mr Jacky Muk, an accountant, was appointed on 17 July 2006 (“Committee”). According to Maria, the appointment of the Committee “went a long way towards meeting (her) desire for a proper inspection of the Company’s affairs”.

16. Objectively considered, I agree with Leading Counsel for the Company that the appointment of the Committee cannot be regarded as a true reason for Maria to withdraw these proceedings, or to justify such withdrawal with no order as to costs against Maria. 

17. Maria has claimed from the outset that her request for inspection of the Company’s books was premised upon her suspicion and claims that David was mismanaging the Company and that there were unauthorized and illegal transactions or dealings in the Company’s funds.  Even leaving aside the fact that before the appointment of the Committee in 2006, David had arranged for a meeting of the directors of the Company to be held on 7 March 2004, and for Maria, Joseph and Jimmy to review at the meeting the Company’s financial documents after they had signed undertakings to keep such financial information confidential, independent auditors had been appointed by the Board as early as October 2005 to audit the Company’s books of accounts from 1 September 2003 to 30 June 2005.  This was pursuant to Maria’s request made in September 2004 to inspect the books of account, bank statements and certificates of deposits of the Company from 1 August 2003 to September 2004.  Maria had indicated to David in November 2004 that as an alternative to her request for inspection, an accountant should be appointed to inspect the books on her behalf.

18. In October 2005, which was after Maria’s commencement of these proceedings against the Company and David, Deloitte was engaged by the Company to audit and review the Company’s books, management accounts and financial documents from September 2003 to June 2005.  By notice of 18 November 2005, a board meeting was convened to be held on 2 December 2005 for inspection by the directors (including Maria) of Deloitte’s report in order to determine whether there was evidence of David’s misappropriation of the assets of the Company, as alleged by Maria.  Maria declined to attend the board meeting.

19. Deloitte found in its audit report dated 2 December 2005 that there was no irregularity in the Company’s accounts.  At the Company’s board meeting held on 2 December 2005, Mr Dennis Chow of Deloitte (“Chow”) stated that there was no evidence of David having misappropriated the Company’s assets.  Chow pointed out to the board that Deloitte’s audit was conducted according to international accounting standards and that the financial statements reviewed gave a true and fair view of the Company’s state of affairs as at 30 June 2005.  On the basis of such audit report, the board of the Company resolved that there was no justification for further inspection of the Company’s books of accounts by any director, and that these proceedings commenced by Maria for inspection of accounts should be discontinued or withdrawn.  It was further resolved that if these proceedings were not discontinued by Maria within 7 days of the meeting, she would be deemed to be removed from the board as from 12 December 2005.

20. Maria did not accept the independent findings of the auditors in December 2005.  She continued these proceedings and maintained her claims against the Company and David.  Further, Maria and her camp initiated the Mental Health Proceedings in January 2005.

21. The Company claims that Maria was removed as a director with effect from 12 December 2005, as resolved by the board on 2 December 2005.  On 3 July 2006, the directors of the Company further resolved to remove Maria as a director for cause, by reason of her breach of fiduciary duties to act in the best interests of the Company.  This was claimed to be without prejudice to the Company’s contention that Maria had been removed as a director as from 12 December 2005.

22. On Maria’s part, she maintained, until the hearing in January 2013, that she remained a director of the Company notwithstanding the board’s purported removal of her directorship.  It was only at the hearing in January 2013 that Leading Counsel informed the Court that Maria accepts that she had been removed as a director of the Company in July 2006.

23. The appointment of the Committee was made in July 2006.  Deloitte’s audit report was given to the Committee.  The Committee separately engaged KPMG in November 2006 to review the accounting records of the Company from September 2003 to November 2006.  The Committee also conducted a fund flow analysis of the bank accounts of the Trust, and found no irregularity.  Finally, the Committee confirmed in its report dated 16 March 2007 that it was satisfied that no unusual transaction had been found in relation to the funds received by the Trust from the Company.  In its letter of 11 July 2007, the Committee stated that its members had found nothing improper in the Trust accounts after their investigation, and expressed concerns as to costs being incurred for any further investigations.

24. Maria and her camp had stated clearly in their letter of 2 August 2007 to the Committee that they did not accept the findings of the Committee.  In February 2008, Maria commenced legal proceedings to remove David and Jimmy as trustees of the Trust, and to seek an account of the Trust assets.  Her application for a Beddoe order in the trust proceedings was refused by Chu J (as she then was), on the basis that the intended action was commenced to advance the interests of Maria and her camp as beneficiaries of the Trust, rather than for the general interests of the Trust.  Proceedings were nevertheless commenced by Maria and her camp, in April 2009, against (inter alia) David, Jimmy and Joseph, to investigate the transfer of funds from the Trust.

25. In the circumstances described in paragraphs 17 to 24 above, and in particular Maria’s refusal up to the filing of her fourth affidavit in November 2011 to accept the findings of the Committee made in 2007, I am totally unconvinced by her about-turn, and her suggestion that the appointment of the Committee had allayed her concerns and somehow “met (her) desire for a proper inspection of the Company’s affairs”.

26. In the same way, I fail to see how the alleged revelation of the transfer of US $16.6 million (“Transfer”) out of the Trust, including the alleged transfer of US $12 million to the Company from the Trust, can be a reason for Maria’s withdrawal of these proceedings, as she claims. 

27. According to the Company and David, the US $12 million was transferred from the Trust into the Company in March 2004, pursuant to a resolution of the trustees of the Trust at a meeting held on 15 November 1991, signed by Father and Maria, that funds should be transferred from the Trust to the Company for charitable use.  The Committee had investigated the Transfer from the Trust to the Company, and had found nothing improper.  Even leaving these aside, on Maria’s own case, her desire to inspect the books and financial records of the Company was due to her suspicion that David had misappropriated the Company’s funds, and that the inspection was for the protection of the interests of the Company.  However, the very reason which Maria gave for withdrawing the proceedings to seek inspection was the Transfer of US $16.5 million - not a transfer to the Company which she had been seeking to protect, but a transfer from the Company to the Trust of which Maria is a beneficiary, being a transfer of funds from which she will benefit under the family Trust.

28. The basis of Maria’s application for inspection was at all material times premised on her claims of David’s misappropriation, illegal acts and unauthorized transactions in relation to the Company’s accounts and assets.  Her requests for inspection had been rejected by David and the Company on the basis that she was not acting in the interests of the Company, but was seeking to abuse the confidence in relation to the Company’s affairs to further her own interests and those of her siblings as beneficiaries under the family Trust.  The Company claims that the evidence shows that Maria had disclosed the Company’s financial information to Peter, who is not a director of the Company.  Despite the involvement of independent auditors and a Committee of professionals, no evidence has been unearthed in the lapse of 8 years to substantiate Maria’s claims of David’s alleged unlawful conduct.  To the contrary, the evidence of the Company shows, and the events which have unfolded since the commencement of proceedings in March 2005 confirm the claims made by the Company and David, that Maria’s attempts to seek inspection of the Company’s books were to seek benefits for herself and for the siblings in her camp under the Trust.

29. Leading Counsel for Maria seeks to rely on Re Peaktop Technologies (USA) Hong Kong Ltd (2007) 4 HKLRD 207, by arguing that Maria’s application for inspection is doomed to failure by reason only of the Company’s act of removing her as a director in July 2006, and that but for such removal, it would have been appropriate for the Court to make an order substantially in the terms sought by Maria, such that there were exceptional circumstances to justify the making of a costs order in favor of Maria, or not ordering her to pay costs. The judgment of Barma J in Re Peaktop has to be read in the context of the facts of that case, which are totally distinguishable from the present case.  In Re Peaktop, his Lordship was not satisfied that the company had put forward any evidence of alleged abuse by the directors in seeking inspection, despite the lapse of 10 months for it to a file evidence, and did not consider that the grounds for interference with the directors’ right to inspection would have been out had the matter been fought out.  His Lordship also considered that the company had delayed in taking steps to remove the applicants as directors of the company until just before the hearing, which suggested that the company’s alleged fears of the applicants’ abuse was exaggerated.

30. In this case, the acts and legal proceedings initiated by Maria demonstrate that she was consistently seeking to take the Company’s assets: by the relief sought in the Mental Health Proceedings and the claim made that the Company’s assets were Father’s; and by seeking the Transfer from the Company to the Trust (in HCMP 661/2009).  I cannot say that but for Maria’s removal as a director, it would have been appropriate to make an order for inspection as sought by her in these proceedings.  If her concerns and alleged suspicions as to David’s misappropriation or wrongdoing had been genuine, and she had no other improper motive for seeking inspection of the Company’s books, the independent findings of Deloitte in December 2005 and of the Committee in March 2007 should have allayed her concerns and prompted her to withdraw these proceedings.  She did not, which is unfathomable on an objective view of the evidence.

31. Further, unlike the facts in Re Peaktop, it cannot honestly be said for Maria that the Company’s act of removing her as a director, for cause, in July 2006 was the real cause for her withdrawal of these proceedings, in that the removal caused her to lose locus to pursue the application and made her request for inspection academic.  She had always maintained from 2006 (until the hearing in 2013) that she remained a director, and that the board had no cause to remove her.  As Leading Counsel for the Company pointed out, Maria’s removal which was put in issue was one of the matters for trial.  Her application to withdraw these proceedings was only made in November 2012, nearly 7 years after her removal in December 2005, and nearly 5 1/2 years after July 2006.

32. Taking into account all the circumstances of this case, I consider that Maria has not established any good reason or exceptional circumstances to justify a departure from the general rule for the payment of costs. 

33. Having so concluded, it is not necessary to determine whether the Court has subject matter jurisdiction to order the BVI Company and its directors to produce its books, an issue which has been raised by Counsel for David at this late stage of the proceedings. 

Orders

34. I will set aside the costs orders made by the learned Master, and order instead that Maria should pay to the Company and to David the costs of the action, the costs of her application for withdrawal by summons dated 1 November 2011, and the costs of the appeal, all with certificate for counsel.