PENG HUI ZHOU v. HONG KONG TACHIBANA ELECTRONICS CO LTD AND OTHERS

HCMP 1987/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1987 OF 2007

____________

____________

_____________

D E C I S I O N

_____________

1.  These proceedings were brought by Mr Peng Hui Zhou, a director of Hong Kong Tachibana Electronics Company Limited, against the company and the other two directors of the company, Mr Koji Matsumoto and Mr Kenji Hasuo, seeking an inspection of the company’s books of accounts pursuant to section 121 of the Companies Ordinance.

2.  In the event, when the matter first came on for hearing on 1 November 2007 at the first appointment of the originating summons which had been issued on 15 October 2007, the parties were in agreement that an order for inspection should be made in terms of the originating summons. 

3.  The only issue that divided the parties was the question of who should bear the costs of the proceedings, and that matter was stood over for further argument and directions were given for the parties to file evidence to address that aspect of the matter.  Today’s hearing is the hearing of the argument as to costs.

4.  The background to the application can, I think, be fairly briefly stated.  Mr Peng is, as I have said, a director of the company.  He was also, it seems, its general manager, and was based in China at the company’s factory premises in Guangdong Province.  He was, however, dismissed by the company in the latter part of 2006, and since the dismissal there have been a number of disputes between himself and the company which have led to various correspondence and certain proceedings being taken as between himself and the company.  Those are relevant only by way of background and do not, I think, really bear, at the end of the day, on the outcome of this application.

5.  It appears that following his dismissal as an employee of the company, he sought to exercise his rights as a director to inspect certain of the company’s accounting records, namely, its audited accounts.  These were, to some extent at least, kept at the company’s registered office in Hong Kong, which was the address of its company secretary, the company not having any other presence in Hong Kong.

6.  That inspection took place in February of 2007.  According to the company, Mr Peng adopted a somewhat aggressive attitude when seeking to carry out that inspection, having attended at the company’s secretary’s office with little prior warning and seeking to inspect a large quantity of documents and to take away some such documents with him.  In the event, it seems that no effective inspection occurred at his visit, but the documents sought were subsequently supplied by the company to Mr Peng.

7.  Thereafter, matters seem to have gone quiet for a short period, but they came back to life in July 2007 when, in the course of correspondence covering a number of different aspects of the relationship between Mr Peng and the company, Mr Peng once again sought, through his solicitors, to renew his request for inspection of the company’s accounting books.  This correspondence extended from about the early part of July 2007 until early September 2007.

8.  In the course of the correspondence, Mr Peng asked on a number of occasions for inspection of the company’s accounting books and records, referring to his right to such inspection under section 121 and indicating in a number of letters, including letters from his solicitors dated 31 July, 13 August and 28 August 2007, that in the absence of agreement to supply for his inspection or to make available for his inspection such accounting records, he would take out the necessary legal proceedings seeking orders under section 121 to enable such inspection to take place.

9.  It is fair to say that in that correspondence, Mr Peng sought inspection initially not only of the company’s documents but also of similar documents of a related PRC company, and also sought inspection of financial records of the company, including sales documentation and purchase orders, which do not come strictly within the definition of accounting books for the purposes of section 121.  However, those matters are not, at the end of the day, of particular relevance, since Mr Peng did not, it seems, pursue the request for inspection of the PRC company’s records in Hong Kong and the company, in the end, decided not to resist inspection in relation to the sales agreements and purchase orders.

10.  This stage of the correspondence culminated with a letter from the company’s legal representatives of 5 September 2007 in which they indicated the company was agreeable to providing the inspection which Mr Peng sought.  Mr Peng was invited to suggest a date for such inspection, it being pointed out by the company that while the bulk of the accounting records sought were maintained or kept at the company’s factory premises in Guangzhou, a certain amount of documentation remained with the company’s company secretary in Hong Kong, as those documents had been placed with them for the purposes of audit and preparation of tax returns.

11.  Unfortunately, neither inspection proved fruitful, and on both those dates Mr Peng proved unable to inspect any of the documents that he had hoped to inspect.

12.  The reason for his failure to achieve a meaningful inspection or any inspection at the company’s factory premises is the subject of some controversy between the parties.

13.  Mr Peng’s version of events is that he attended with his solicitor and two accountants at the factory premises of the company as arranged on 26 September 2007.  However, when he arrived, having produced the appointment letter which had been written indicating his intention to inspect on that particular date, he was not granted immediate admittance into the factory premises but was asked by a security guard at the gate to the factory compound to wait while he inquired with members of staff in the factory as to the proposed inspection.  According to Mr Peng, the ultimate outcome of this was that there was a refusal to allow him to enter into the premises, with the local police being called.  As a result, he did not enter the factory premises, and left without any inspection. 

14.  Mr Peng’s version of events, which was set out in a letter from his solicitors to the company’s solicitors dated 26 September 2007, was disputed by the company.  The company, however, did not put forward its version of events until a letter from its solicitors to Mr Peng’s solicitors on 22 October 2007, some four weeks later, and one week after the issue of the originating summons to these proceedings.  In that letter the company suggested that the problem that had arisen was due in some measure at least to the attitude adopted by Mr Peng whom, it was said, was uncooperative and aggressive, and refused to agree to the security guard’s request for particulars in the form of identity card numbers or other identification particulars of himself and the three other persons accompanying him to be recorded.  It was said that Mr Peng became agitated and somewhat aggressive and that that was the reason why the police had to be called.  It is not, however, in dispute that no inspection took place on the day.

15.  In Mr Peng’s solicitor’s letter of 26 September 2007, they reiterated their intention to attend at the company’s registered office to carry out the balance of the inspection the next day.  However, when they attended the following day, they were told by staff of the company secretarial company that there were no documents to be inspected at their premises as they had in fact been sent to the factory in China.  It appears that the company secretary had, on learning that Mr Peng was to inspect the accounting documents at the factory in China on 26 September 2007, the day before he was scheduled to visit its offices, had decided that it might be more convenient if he were simply to inspect all the documents at the factory premises, and had therefore sent the documents to the factory premises prior to 26 September 2007.  Unfortunately, it does not seem that Mr Peng was advised of this fact either before the date of his attempt to inspect at the factory or before his visit to the company secretarial company’s office on the following day, 27 September 2007.

16.  As a result, a further letter was written by Mr Peng’s solicitors to those acting for the company in which Mr Peng’s version of what happened at the company secretary’s office was set out.  The letter concluded with a request from Mr Peng’s solicitors on his behalf for confirmation as to the whereabouts of the documents that he was hoping to inspect and a query as to whether or not the solicitors had instructions to accept service of legal proceedings on the company.  A reply to this letter was requested within seven days.

17.  No substantive reply was in fact received within the seven day period mentioned.  Instead, on 3 October 2007, which was the last day of the period specified in the 27 September 2007 letter, the company’s then solicitors wrote to Mr Peng’s solicitors indicating that they no longer had instructions to act for the company, and stating that in those circumstances, none of the allegations or statements that had been made in either of their two letters were admitted.

18.  What followed was that two days later, new solicitors instructed on behalf of the company came on the scene.  They wrote to Mr Peng’s solicitors to inform him of that fact and to indicate that all future correspondence should be addressed to them.  They did not, however, address any of the requests made in the letters of 26 and 27 September 2007.  Thereafter, Mr Peng waited a further 10 days before issuing these proceedings.

19.  The company suggests that Mr Peng acted precipitously and unreasonably in issuing these proceedings, given that the company had indicated that it had no objection to his inspecting the documents in question, that it had in fact indicated this as long ago as 5 September 2007 and had made arrangements for him to inspect the documents on 26 September 2007 at the factory and 27 September 2007 at the company secretary’s offices.  In those circumstances, it is said it was unreasonable for Mr Peng to have issued proceedings without giving express notice of them to the company prior to the issue of the proceedings.

20.  Miss Lam, who has appeared for Mr Peng today, submitted that his version of events as to what happened on 26 September 2007 was to be preferred, but that in any event, regardless of whose version of events as to what happened on that occasion is to be preferred, the fact was that the company had failed to respond to the letters that had been written subsequent to those events, and in the circumstances there was no reason why Mr Peng should have written further or caused his solicitors to write further prior to the issue of proceedings.  She pointed out that despite having been warned of the intention to issue proceedings on 27 September 2007, no substantive response was in fact received until after proceedings were issued.  As I have indicated, the substantive response from the company did not come until 22 October 2007, a week after the issue of proceedings.

21.  Mr Chan, appearing for the company, sought to persuade me that in the circumstances the court should conclude first that the version of events put forward by the company as to what happened on 26 September 2007 was the more probable account of what actually happened, but that in any event, having regard to the company’s willingness to provide the documentation that had been requested, it was unreasonable for Mr Peng to have taken out the proceedings without at least writing a further letter before action after the new solicitors came on the scene.

22.  With respect, I do not think that I can accept Mr Chan’s submissions in this respect.  So far as the events of 26 September 2007 are concerned, it is difficult for the court to come to any concluded view on what actually happened, given the conflicting affidavit evidence as to the events.  Doing the best that I can, I would be inclined to regard the situation as being one in which there was a misunderstanding for which Mr Peng may have borne some responsibility.  But be that as it may, that is not the basis upon which I think it is appropriate to resolve this matter.

23.  It seems to me that, having regard to the fact that proceedings had been intimated since well before the agreement of the company to provide inspection on 5 September 2007, in the various letters that I have indicated during July and August 2007, the company and those representing them could have been under no illusions and under no mistake when they received the 27 September 2007 letter indicating, on Mr Peng’s part, an intention to take out legal proceedings if no response was received within seven days.

24.  Clearly, what was being sought was a substantive response from the company setting out its position: first, in relation to the matters of 26 and 27 September 2007; and, also, in relation to its position as to the inspection which had so far proved abortive.  What cannot be gainsaid is that there was in fact no inspection on 26 or 27 September 2007.

25.  In those circumstances, it was perfectly reasonable, I think, for Mr Peng to expect the company to indicate its position in response to his solicitors’ letter of 27 September 2007.  Although a response was received within the deadline, as I have indicated, it was not a substantive response.  It was simply notification of the fact that the solicitors to whom the letter was addressed had, by that stage, ceased to act for the company.  When the new solicitors came on the scene there was nothing in the letter of 5 October 2007 to indicate that there was any intention of responding to the request or to the points raised by Mr Peng in his solicitors’ letters of 26 and 27 September 2007.

26.  In those circumstances, it does not seem to me that Mr Peng and those acting for him can be criticised for taking out the proceedings when they did.  By the time that the proceedings were commenced, some three weeks had elapsed since the events of 26 and 27 September 2007 and the letter from Mr Peng’s solicitors of 27 September 2007 demanding information.

27.  It seems to me that in those circumstances it was for the company to respond, at the very least by indicating that they would respond substantively to the complaints raised within a reasonably short time.  It seems to me also that it would have been sensible for the company to have indicated that it remained its intention to allow Mr Peng to inspect the documents which he sought and to offer an alternative date or an opportunity for Mr Peng to make a fresh appointment.

28.  Had any of these things been done, I would have had greater sympathy for the company’s position.  But the fact is that despite having been warned of the intention to take out proceedings on 27 September 2007, the company simply did nothing until a week after proceedings were in fact issued.

29.  In all of these circumstances, therefore, it seems to me that Mr Peng cannot be criticised for having taken out these proceedings, and that he is, in principle, entitled to his costs of the proceedings.

30.  I should also add that it was mentioned in the affirmation filed on behalf of the company that one of the sticking points in disposing of the matter without the need for an attendance at court was that the company considered that the amount of costs that Mr Peng had indicated that he had incurred was very much on the high side.  While I can see some force in that submission in the sense that the costs that were said to have been incurred do appear to me to be on the high side for what should have been a fairly simple application, it seems to me that that does not provide the company with an excuse for seeking to avoid the costs altogether.

31.  In those circumstances, it would have been open to the company simply to agree to pay the reasonable costs of Mr Peng in taking out this application, and that had it not been possible to agree such costs, there could have been a taxation of such costs in the normal way.

32.  In all of the circumstances, therefore, I am satisfied that Mr Peng was entitled to bring these proceedings, that the company had had ample warning of them prior to their  issue, and that in the circumstances the appropriate order to make in relation to the costs of the proceedings, those being the costs of issuing the proceedings and the hearing on 1 November 2007, would be that the company should pay to Mr Peng his costs of the application and the hearing on 1 November 2007, to be taxed on a party and party basis if not agreed.

(Submissions as to costs)

33.  Given that Mr Peng has been successful in obtaining the costs of the proceedings against the company, it is quite clear that the relevant events for the purposes of this hearing has been resolved in his favour.  In the circumstances Mr Chan quite rightly accepts that he cannot resist an order for costs in respect of today’s hearing and the preparation of it, including the filing of the relevant evidence, to be paid by his clients to Mr Peng.  Such costs are to be taxed on a party and party basis in default of agreement.