GRAND ASIAN LTD v. SHOE MART CO LTD

HCMP 590/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 590 OF 2013

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R U L I N G

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1.  There are two applications by way of originating summonses before me today for rectification of the non-compliance with sections 111(2) and 122(1B) of the Companies Ordinance, Cap 32 (hereafter referred to as “the ordinance”) as follows:

(a)     for holding a general meeting for Shoe Mart Company Limited (hereinafter called “Shoe Mart”) and for laying various audited accounts before Shoe Mart at the meeting; and

(b)     for holding a general meeting for Cobblers Limited (hereinafter called “Cobblers”) and for laying various audited accounts before Cobblers at the meeting.

2.  Shoe Mart and Cobblers have not filed any acknowledgement of service and have not appeared at the hearing today.

3.  Section 112(1) of the ordinance requires the directors to lay before the company at its annual general meeting (hereinafter called “AGM”) a profit and loss account for the period in the case of the first account since the incorporation of the company and in any other case since the preceding accounts.

4.  Section 122(1A) of the ordinance requires such accounts to be made up to a date falling not more than nine months before the date of the meeting in the case of a private company.

5.  Section 122(2) of the ordinance provides that a director shall cause to be made in every calendar year and to be laid before the company at its AGM a balance sheet as at the date to which the profit and loss account is made up.

6.  Section 111 of the ordinance requires every company, inter alia, to hold an AGM each year and to specify the meeting as such in the notice calling it.  However, section 111(6) dispenses with the requirement provided that:

(a)     everything that is required or intended to be done at the AGM is done by written shareholders’ resolution(s) in accordance with section 116B of the ordinance; and

(b)     a copy of each document (including any accounts or records) required by the ordinance to be laid before the company at the AGM is provided to each member of the company before or at the same time as the written shareholders’ resolution(s) are provided to the member.

7.  Section 116B(5)(6) of the ordinance further provides that any reference to any enactment to the date of a meeting is, in relation to the resolution agreed to be in accordance with section 116B of the ordinance without a meeting, a reference to the date of the resolution.

8.  In respect of applications under section 122(1B) of the ordinance for rectification of non-compliance, the applicable principles are set out in Yu Sun Say v HKI Properties Limited HCMP 2566 – 2561, 2563 and 2565 – 2568/2007, Deputy High Court Judge Harris (as he then was) (unreported, 20 January 2008) as follows:

(a)     the court has a discretion to grant extension of time for laying financial statements before a company in general meeting; and

(b)     in the exercise of such discretion, the court will consider the following factors:

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

(ii)     whether the default was inadvertent; and

(iii)    whether the court was satisfied that the company would comply with an obligation to lay its profit and loss accounts and income expenditure statement before general meetings in future.

9.  These principles have been adopted by Kwan J (as she then was) in Re Sanliuyidu (Hong Kong) Sports Goods Co Ltd [2009] 4 HKLRD 708, Head Park Group Limited v Asia Fair International Limited HCMP 1435 – 1446/2010, Harris J (unreported, 31 August 2010), and Kwan Win Lok Michael and Another v Tai Tau Chai Environmental Engineering Ltd HCMP 210/2013, G Lam J (unreported, 22 February 2013).

10.  Similar considerations will be taken into account in the exercise of discretion in respect of applications for rectification of non‑compliance under section 111 of the ordinance (see Head Park Group Ltd).

11.  Shoe Mart and Cobblers were respectively incorporated on 18 January 2005 and 17 April 2000.  They are members of a group of companies that engages in the distribution and retail of lifestyle comfort footwear products of international brands in Hong Kong, Taiwan and Macau.  Shoe Mart is principally engaged in the sale of discounted footwear, and Cobblers is principally engaged in the distribution and wholesale of footwear.

12.  Since the incorporation of Shoe Mart and Cobblers, their directors have been Wu Se, Wong May Heung and Chu Chun Wah Haeta. Grand Asian Limited has been the sole shareholder of Shoe Mart and Cobblers.

13.  As a result of recent due diligence exercise, Messrs Wilkinson & Grist (hereinafter called “W&G”) discovered that the directors of Shoe Mart have failed to comply with section 122 of the ordinance with regard to its audited financial statements or financial accounts for the period from 18 January 2005 to 31 December 2006, 1 January 2007 to 31 December 2007, and 1 January 2008 to 31 December 2008.

14.  At the AGMs for the years 2006 to 2008 no financial statements were available for presentation to the members.  At the 2009 AGM held on 19 January 2009, the first set of audited accounts made up to 31 December 2007 was available, but those accounts contravened section 122(1A) of the ordinance since they were made up to a date falling more than nine months before the AGM in question.

15.  Further, Shoe Mart did not hold an AGM in the year 2010.  Wu Se purported to sign a written shareholder’s resolution on 19 April 2010 in lieu of the 2010 AGM, but the audited accounts of Shoe Mart for the period from 1 January 2009 to 31 January 2009 were not provided to Grand Asian Limited before or at the same time as the 19 April 2010 resolution.  In fact, only the audited accounts for the period from 1 January 2008 to 31 December 2008 were sent to Grand Asian Limited together with such resolution.  Hence, Shoe Mart could not rely on section 111(6) of the ordinance, and was still required to hold a 2010 AGM.

16.  There was further irregularity in that more than 15 months elapsed between the date of the 2009 AGM held on 19 January 2009 and the 19 April 2010 written shareholder’s resolution.

17.  As a result of the same due diligence exercise, W&G discovered that the directors of Cobblers had failed to comply with section 122 of the ordinance with regard to its audited financial accounts for the period from 17 April 2000 to 31 December 2004, 1 January 2005 to 31 December 2006, 1 January 2007 to 31 December 2007, and 1 January 2008 to 31 December 2008.

18.  At the AGMs for the years 2001 to 2004, no financial statements were available for presentation to the members.  The 2005 AGM was held on 16 April 2005, but the minutes stated that the audited accounts were made up to 31 March 2004.  But in fact, it was a mistake, and no accounts were actually tabled at the 2005 AGM.

19.  At the 2006 AGM held on 15 April 2006, again the audited accounts were not available for presentation to the shareholder.  At the 2007 AGM held on 15 April 2007, the first set of audited accounts made up to 31 December 2005 was available, but those accounts contravened section 122(1A) of the ordinance since they were made up to a date falling more than nine months before the AGM in question.  At the 2008 and 2009 AGMs, no audited accounts were available for presentation to the shareholder. 

20.  Further, Cobblers did not hold an AGM in the year 2010.  Wu Se purported to sign a written shareholder’s resolution on 30 June 2010 in lieu of the 2010 AGM, but the 2009 audited accounts of Cobblers were not provided to Grand Asian Limited before or at the same time as the 30 June 2010 resolution.

21.  Cobblers’ audited accounts for the periods from 1 January 2006 to 31 December 2006, 1 January 2007 to 31 December 2007, and 1 January 2008 to 31 December 2008 were purportedly accepted and approved by the 30 June 2010 resolution.  Hence, Cobblers could not rely on section 111(6) of the ordinance.

22.  Chu Chun Wah Haeta explained that the directors of Shoe Mart and Cobblers were unaware of the requirements of sections 111 and 122 of the ordinance, as they were reliant on the companies’ external auditors.  However, the external auditors did not bring the specific statutory requirements to the directors’ attention save for a brief reference to non‑compliance with “the implied requirement under Section 111 of the Companies Ordinance” in the first set of accounts of Shoe Mart and in the auditors’ report for Cobblers for the period from 17 April 2000 to 31 December 2004, and the directors overlooked the same.

23.  There was no further reminder in the financial statements for the other years in which non-compliance occurred.  Further, there was lack of advice from the companies’ secretaries until Miss Lam Lai Kuen was appointed on 21 April 2010.  Since then compliance by Shoe Mart and Cobblers improved and the only non-compliance was in relation to the 19 April 2010 and 30 June 2010 written shareholder’s resolutions for Shoe Mart and Cobblers respectively.

24.  Cobblers was inactive for the period from 2001 to 2004.  The directors were under the impression that it was not necessary to prepare accounts for that period.  For Cobblers in the subsequent years and for Shoe Mart, since their financial year ends on 31 December, external auditors would usually finalise the audited accounts in July of the following year, and then the directors would have to turn their attention to preparing proper tax returns.  Such work flow and the need to give 21 days’ notice for calling AGM led to a tight time frame, and the directors inadvertently missed the deadline for the AGM.

25.  Chu Chun Wah Haeta explained that Grand Asian Limited, being the sole shareholder of Shoe Mart and Cobblers, was not prejudiced in any way by the non‑compliances.  She confirmed that as director of Grand Asian Limited, she had access to Shoe Mart’s and Cobbler’s bank statements and management accounts, and hence Grand Asian Limited has been fully informed about Shoe Mart’s financial status.

26.  Chu Chun Wah Haeta also confirmed that the non‑compliances are unlikely to be repeated in future since the group of which Grand Asian, Shoe Mart and Cobblers were members had engaged W&G as its legal advisers and Messrs Deloitte Touche Tohmatsu as their auditors to advise on compliance matters.  Further, good corporate governance measures would be implemented and a qualified accountant would be appointed in the event that the proposed listing of the holding company of the group is successful .

27.  Having carefully considered the grounds put forward by the company, I consider that it is appropriate to exercise the discretion under sections 111(2) and 122(1B) of the ordinance in favour of the applicants subject to their undertakings through counsel to procure that the order made herein and the reasons for seeking it are brought to the attention of the Stock Exchange of Hong Kong Limited in connection with the proposed listing of the holding company of the group or any company of which Grand Asian Limited, Shoe Mart or Cobblers is a subsidiary, and is referred to in any prospectus of such listing.

28.  There will be no order as to costs of the applications.