CHAN YU LING AND OTHERS v. NATURAL CORPORATION LTD

HCMP 2148/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2148 OF 2013

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REASONS FOR DECISION

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1. I have before me nine applications for extensions of time for compliance with sections 111 and 122 of the Companies Ordinance issued by nine companies who all have the same ultimate beneficial owners and from part of one business group. Consequently they fall to be considered together. Sections 111 and 122 require, and I simplify, that a company prepares audited financial statements for each of its accounting years and lays them before the company in annual general meeting. In the case of six of the companies who have issued applications they have prepared audited financial statements for each accounting period and laid them before the company in annual general meeting; the infringement of sections 111 and 122 arises because the annual general meetings were not convened within the period required by virtue of the combined effect of the two sections. So far as the other three companies are concerned the position is as follows. In the case of Nong’s Chinese Medicine Health Care Centre Limited and Nong’s Chinese Medicine Clinic Centre Limited the companies were dormant for calendar years 2006 to 2011 inclusive and financial statements were not produced and annual general meetings were not held during these years. In the case of Purapharm International Limited although it held annual general meetings no financial statements were produced for the years 2003 to 2010 inclusive. The breaches of sections 111 and 122 came to light during a due diligence exercise carried out for the purposes of a listing on The Stock Exchange of Hong Kong Limited (“Stock Exchange”).

2. Sections 111(2) and 122(1B) give the Court a discretion to extend the time periods for convening an annual general meeting and laying before a company its audited financial statements.  The Court generally takes into account factors such as the following in determining such applications:

(1)  Whether the default was inadvertent and arose from an identifiable mistake rather than indifference;

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

(3)  Whether the Court is satisfied that the company will comply with the obligation to lay audited financial statements before annual general meetings in the future[1].

3. A default is inadvertent if it arises from an accidental oversight or carelessness and a lack of attention.  If it arises from a lack of interest or concern in complying with the relevant statutory requirements the case is more properly characterised as one of indifference and in my view the Court should be slow to grant to applications in such cases.  It is, of course, for an applicant to demonstrate to the Court by evidence that a breach falls into the former case not the latter. 

4. This case illustrates the difference between inadvertence and indifference.  The fact that in the present case the majority of the companies produced audited financial statements and held annual general meetings suggests that the breaches of the Ordinance have arisen from oversight rather than indifference. Mr Abraham Chan, who with his Wife is the ultimate beneficial owner of the companies, explains in his affirmation in support of the applications that he had not been informed by the accounts staff or the companies’ company secretary about the need to put audited financial statements before the companies in annual general meeting within specific time periods and that this was required whether or not a company was dormant.  I am satisfied that the breaches were inadvertent.

5. I am also satisfied on the evidence that no prejudice has been caused to shareholders and that such breaches are unlikely to happen again.

6. There is one other matter which needs to be addressed.  The factors to which I have referred to in paragraph 2 are things to which the Court has regard in deciding whether or not to exercise its discretion.  It does not follow that because they are satisfied the discretion should automatically be exercised.  Particularly where the application is retrospective, the breaches go back a considerable period of time and remedying them is from the Court’s perspective largely academic there has to be some good reason for the Court to exercise its discretion.  As I observed in Prime Sunlight ibid, and is echoed in the judgment of DHCJ Le Pichon in Re Array Electronics (China) Limited at paragraph 92, a prospective listing may be a reason for exercising the Court’s discretion but it is not necessarily so.  Determining whether or not to exercise it will to some degree involve balancing on the one hand the extent to which the nature and duration of the breaches make an application artificial and an unjustified imposition on the Court’s resources and on the other the consequences of not making an order.  At present it is unclear to me what precisely the consequences of the Court refusing to grant an order are for a prospective listing.  I have not had any evidence adduced in this or any other application which demonstrates that if the Court does not make an order remedying breaches of sections 111 and 122 it will be fatal to the successful progress of a listing.  This, and similar applications, seem to be made on the basis that it is easier to apply to Court for orders remedying breaches than address the issue with the Stock Exchange.  Unfortunately this has resulted in a massive increase in the number of such applications in the last 18 months.  I understand that approximately 250 originating summonses have been issued so far this year pursuant to sections 111 and 122 representing I am told approximately 8% of all miscellaneous proceedings issued in the High Court.

7. In the present case I am satisfied that it is appropriate to grant the orders sought.  I would add that I consider these applications to be on the border line between cases which justify an order and those that do not.  Had the majority of the applications not been for straightforward extensions of the dates for convening annual general meetings which had taken place and at which audited financial statements had been placed before the companies, I would have been reluctant to have granted orders.