LAW WAI DUEN AND ANOTHER v. B.F. CONSTRUCTION CO. LTD. AND OTHERS

CACV 1835/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 1835 OF 2001

(ON APPEAL FROM HCMP NO. 702 OF 2001)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1. This is an appeal from a judgment and the orders of Chu J made on 27 July 2001. The matters arose in respect of two companies.

2. In respect of the first company, Boldwin Construction Company Limited ("Boldwin"), the plaintiff sought an order for inspection of what might be collectively referred to as the company documents. The inspection was to be both by herself and by her agents or representatives. The order was sought against both the company and one of the directors. The application was made by originating summons. In respect of the other company, B.F. Construction Company Limited ("B.F. Construction"), the same plaintiff, together with another director, sought similar orders against both that company and two of its directors.

3. The judge dismissed both originating summonses and made orders for costs in favour of the directors who had been made parties. In respect of the second action, the order for costs against one of the directors was made on an indemnity basis. This appeal is brought against the judge's orders. The plaintiffs seek orders in terms of the originating summonses.

4. Fundamental to the directors' rights and powers in relation to inspection of company books is the position and duties of a director. Under section 153 of the Companies Ordinance, Cap. 32 ("the Ordinance") a company is required to have at least two directors. There is no composite list of duties of directors but there are a number of sections of the Ordinance which place duties upon directors. Over and above that, however, the directors are responsible for the business of the company. Article 82 of Table A commences with the words "The business of the company shall be managed by the directors ...". In respect of Boldwin, not only is Table A adopted, save in case of conflict with the articles, but article 41 commences with precisely the same words. In respect of B.F. Construction, Table A is adopted and there is nothing in the articles which would derogate from the notion that the business of the company should be managed by the directors.

5. The position of directors was considered by Street C.J. in Equity in the case of Edman v Ross [1922] 22 SR (NSW) 351. At page 360 the judge referred to the fact that the directors of a trading concern were in the position of being agents and trustees. In describing the position of directors, he referred to what Lord Selborne had said in the case of Great Eastern Railway Company v Turner L.R. 8 Ch 149 at page 152. He also referred to what Jessel MR had said, to the like effect, in the case of In re Forest of Dean Coal Mining Company 10 Ch. D. 450 at 451. The position of directors was described as being at least commercial trustees, or a position analogous to managing partners.

6. That this is the nature of a directorship is exemplified in relation to the accounts of a company. Under section 121(1) of the Companies Ordinance every company is required to keep proper books of account. They must record all sums of money which are either spent or received by the company, all sales and purchases of goods and the assets and the liabilities of the company. Sub-section (2) lays emphasis on the fact that the books must give a true and fair view of the state of the company's affairs and explain the transactions. Sub-section (3) is important because that provides that the directors must have access to the books the first part of that sub-section reads:

"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 ..."

Under the section, the books are required to be kept for seven years.

7. The importance of the provisions of section 121 is, again, emphasised by the fact that if a director of a company fails to take all reasonable steps to secure compliance with the requirements he is guilty of a criminal offence under sub-section (4).

8. The emphasis on the directors' duty in relation to the financial records of the company does not end there. Section 123 relates to the balance sheet of a company. These are required to give a true and fair view of the state of affairs of the company as at the end of its financial year. Every profit and loss account of a company also has to give a true and fair view of the profit or loss of the company for the financial year. The directors' responsibility in relation to the balance sheet is highlighted in section 129B. That requires the Board of Directors of a company to approve every balance sheet of the company. Two of the directors have to sign the balance sheet in respect of the profits and loss account that must be put to the company in general meeting under section 129C. Under section 129D the directors are required to lay a report before the company in general meeting with respect to the profit or loss of a company for the financial year and that must be attached to every balance sheet.

9. Executive directors and non-executive directors have the same responsibility in law as to the management of the company's business. They have the same responsibility in law with regard to the finances of the company and as regards accounting to the shareholders for the company's finances. The law, and, in particular, the Companies Ordinance, does not have any regard to whether a director has an executive position within the company or whether a director is paid a salary. The duties and responsibilities arising from a directorship are the same. Reference may be had, in this regard, to Company Directors: Law and Liability by Sinclair, Vogel and Snowden para. 1.25 and to the decision of Foster J in Dorchester Finance Co. Ltd v Stebbing [1989] BCLC 498. This case concerned duties of directors of companies governed by the Companies Act 1948, but there can be no distinction which can be drawn between the Act and the Ordinance. At page 505e he said:

"For a chartered accountant and an experienced accountant to put forward the proposition that a non-executive director has no duties to perform I find quite alarming. It would be an argument which, if put forward by a director with no accounting experience, would involve total disregard of many sections of the Companies Act 1948 (see in particular ss 176 to 204). ... In the Companies Act 1948 the duties of a director whether executive or not are the same."

10. Perhaps the classic exposition of the duty of care required of a director was given by Romer J in the case of In Re City Equitable Fire Insurance Co. Ltd [1925] Ch 407. The standard which he described as being required of a director is, if anything, open to review in present day circumstances as, perhaps, being too low. Nevertheless at page 428 he accepted the description of the level of care which would be expected of a company director "to be measured by the care an ordinary man might be expected to take in the circumstances on his own behalf."

11. In so saying, Romer J also went on to indicate that it was permissible for a director not to give continuous attention to the affairs of the company. Similarly, it was self-evident that a director should be in a position to trust company officials to carry out their duties in relation to the running of the company. It would only be in cases where there were reason to consider that another official could not be relied upon, that a director might be at fault if he failed to take further steps in relation to any particular duty.

12. Hence, in relation to many matters directors will no doubt rely upon what is done by company officials and their fellow directors in relation to the affairs of a company. But that is not to say that the ultimate responsibility does not lie upon the director. If a director has cause to be suspicious, or reasonably believes there is such cause, then the director may incur liability if he does not satisfy himself in relation to all matters relating to the company's affairs. More importantly, even if a director does rely upon other directors or company officials in the conduct of the company's affairs, he must, at all times, be at liberty to satisfy himself as to any matter in relation to the company's business.

13. It is in this context, therefore, that Street C.J.'s statement at the foot of page 360 can be understood. He said:

"A director's right to inspect and take copies of documents belonging to his company is, I think, clear."

14. The judge went on to emphasise that the right of director to inspect and take copies of company documents was essential to the proper performance of the director's duties.

15. In my view, it is only when the fundamental duties of a director are considered in their context that it will be appreciated that when Street C.J. went on to say that the exercise of a director's rights of inspection is "generally speaking, not a matter of discretion with the court", he was emphasising the fact that it was only if it could be proved that a director intended 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 could be interfered with. In my view, such interference could only be effected in circumstances where a restriction on a director's rights could be imposed because of misuse of confidential information leading to damage.

16. Street C.J.'s judgment in the Edman case was referred to with approval by Slade J in Conway v Petronius Clothing Co. Ltd [1977] 1 WLR 72. Slade J attempted to formulate five propositions which were derived from the law, particularly as expounded by Street C.J.. Whilst I would not question the formulation of the propositions, I would emphasise that they can only be properly understood when considered in the light of the underlying legal principles.

The present appeal

17. Madam Law Wai Duen, the plaintiff in the Boldwin case, is the wife of Chan Shiu Chick, the 2nd defendant. In the B.F. Construction case Madam Law is the 1st plaintiff and her daughter is the 2nd plaintiff. Her husband is the 2nd defendant. The 3rd defendant is another director of B.F. Construction. There is no dispute that Madam Law is a non-executive director of the companies. Her daughter worked in Boldwin for a time but is, too, a non-executive director of B.F. Construction. There is no dispute that there is hostility between the plaintiffs on the one hand and Mr Chan on the other. The matrimonial disputes are, in my view, irrelevant for the purposes of these proceedings.

18. The judge below refused the plaintiffs inspection of the documents in the two cases on the basis that the plaintiffs had "abused the confidence reposed in them such that they should be barred from enforcing their right to inspect." In my view, there was no basis for the conclusion stated by the judge.

19. As Mr Leong SC, who appeared on behalf of the 2nd defendant in both cases, conceded, there was no direct evidence either of abuse or likelihood of abuse of the documents. Neither was there any evidence of damage likely to be occasioned to the companies. All that could be argued on behalf of the defendants was that those matters should be inferred. The judge had referred, in paragraph 40 of the judgment, to what she described as Madam Law's persistent refusal to sign a cheque in respect of employee compensation for one employee. Having been taken through such evidence as there was about that incident, I am by no means satisfied that Madam Law's refusal was persistent. It may have involved a meticulous examination of company documents, but that was no more thorough than would be expected of an auditing accountant acting properly. Mr Leong sought to rely on other instances when cheques were not signed. These were not referred to by the judge. Even if it were appropriate to take these into account, again, I find myself in a position of not being satisfied that there was any legitimate complaint in respect of Madam Law's conduct. More importantly, even if Madam Law had refused to sign company cheques when she should have signed them, that seems to me to be totally irrelevant to any consideration as to whether she would abuse her right of inspection of documents. Still less does it indicate any likelihood of her causing damage following any such inspection.

20. The judge referred to the inaction on the part of the two plaintiffs in relation to inspecting company documents even after grounds for suspicion may have arisen. Again, in my view that is irrelevant. A director does not have to explain why inspection is sought. The right of inspection flows automatically from the director's duties.

21. Even if it be the intention of the plaintiffs to discover misfeasance, or worse, on the part of Mr Chan with a view to seeking relief in respect of it, that does not begin to demonstrate abuse of confidence, let alone detriment to the company. Neither, in my view, does it affect the situation if that desire to find evidence of misdeeds were to have motivated by vindictiveness.

22. In this case, one further factor is that the plaintiffs wish the inspection to be made primarily by accountants appointed by themselves. As Street C.J. pointed out in the Edman case, that is a perfectly proper course to take. In my view, the likelihood of misuse and damage to the company would be significantly reduced if inspection were made by accountants. If there were any ground for suspicion that there were to be abuse of the inspection process, it would be even more difficult to envisage it if the inspection were to be conducted by an auditor.

The position of Mr Yip

23. Mr Yip is the 3rd defendant in the B.F. Construction case. His title in that company is Project Director. His affidavit sets out that he became a director of the company in April 1999. Apparently the invitation was extended with a view to there being compliance with the Building Regulations. There is no reason to doubt the fact that Mr Yip was appointed a director because of his technical expertise in relation to building construction. There is no dispute that he has no interest in the company, in the sense that he is not a shareholder of the company. Nevertheless, he is a director. In his affirmation he says "I have nothing to do with the books and the accounts of the Company, not even of financial transactions between the Company and its sub-contractors."

24. Whilst, no doubt, on general principles, Mr Yip was entitled to leave the handling of various matters relating to the accounts to those officials or other employees of the company who were well-qualified to deal with it, for reasons which have already been explained, Mr Yip was not, as a director, at liberty to absolve himself entirely from responsibility in relation to the company's financial affairs. Still less could Mr Yip absolve himself from responsibility in relation to the management of the company.

25. The complaint against Mr Yip arises primarily because Mr Yip has taken the view that the plaintiffs' request for inspection of documents is primarily a facet of Madam Law's dispute with her husband and that was not a matter for his concern. A meeting of directors of B.F. Construction was called on 29 January 2001. The evidence is that four directors attended: the plaintiffs and the defendants in the B.F. Construction case. They could not agree as to the chairman of the meeting. Notes of the meeting have been prepared by those representing Mr Chan and have been amended by those representing Madam Law. Madam Law says that these notes, nevertheless, do not accurately, or fully, reflect what had been discussed between the parties at the meeting. It is clear that one of the matters that was discussed at the meeting was a request by the plaintiffs to examine the company's books and accounts. Specifically there was a request that Mr Chan should supply all directors with updated copies of all bank statements, management accounts and audit accounts. Madam Law said in her affirmation of 21 April 2001:

"Indeed, had it not been for the concerted action between the 2nd and 3rd (Mr Yip) Defendants in refusing to accede to our requests for inspection made at the meeting of the Board of Directors on 29 January 2001, a resolution would have been passed allowing us to inspect the Documents."

26. Mr Yip's attitude is summarised in paragraph 16 of his affirmation of 22 February, he said:

"I only became aware of the disputes between the 1st Plaintiff and the 2nd Defendant in November 2000. Both of the Plaintiffs knew my position as an employee and they were fully aware that my main duties were project management and I could not possibly accede to their requests concerning the books and accounts of the Company. When the communication between the 1st Plaintiff and the 2nd Defendant virtually broke down in November 2000, I, with a view to minimising any harm that may be done to the Company, offer to serve as the middle person between them relaying messages, most of which turn out to be related to Company's cheques the 1st Plaintiff was asked to signed."

27. Mr Yip's attitude in relation both to his duties and position as a director and to the plaintiffs' request for access to company documents is, I regret, flawed. Whereas Mr Yip may regard himself as performing a purely technical role he was, nevertheless, a director of a company. When it came to the exercise by directors of the undoubted right of access to company documents, he could not take a neutral role. His deference to Mr Chan was misplaced. He could not simply act as a messenger and do nothing. His duties as a director obliged him to use such power as he had as a director to enable other directors to exercise their right and position as directors. If he had exercised such voting rights as he had in favour of allowing inspection but as a practical matter that had been refused by Mr Chan, then no complaint could be made. But by deferring to Mr Chan's refusal of the plaintiffs' request for access to company records, Mr Yip has himself failed in his duties as a director.

28. In the circumstances, it was inevitable that this appeal had to be allowed. In doing so this court order costs in favour of the plaintiffs. The defendants might consider themselves fortunate that the costs were only ordered on a party and party basis.

Hon Le Pichon JA:

29. I agree.

Hon Suffiad J:

30. I agree.