LU YUGUANG AND OTHERS v. BEST PACIFIC INVESTMENT (HONG KONG) LTD

HCMP 167/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 167 OF 2014

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AND

HCMP 170/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 170 OF 2014

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D E C I S I O N

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1. I have before me five originating summonses issued pursuant to section 111(2) and section 122(1B) of the Companies Ordinance Cap 32.

2. By these originating summonses, the applicants seek orders curing breaches of those two sections. 

3. I will dismiss all five originating summonses. My reasons for doing so are as follows.

4. In the case of HCMP 168/2014 and HCMP 171/2014, the breaches that have been identified all occurred more than three years ago and, as a consequence, cannot by virtue of section 351(A), Companies Ordinance, Cap 32 be prosecuted.

5. In the case of HCMP 171/2014, there is an additional reason in respect of the application in regards to the laying of the audited financial statements for the financial year ending 31 December 2009 before the company in an annual general meeting. 

6. The company held two annual general meetings in 2010.  The first was on 15 June 2010.  At that meeting, the audited financial statements were not put before the company.  A second annual general meeting was held on 16 September 2010.  The audited financial statements were put before the shareholders of the company at that meeting.  Both annual general meetings were held within the nine-month time period specified in section 122(1A). 

7. It may be that there is a technical argument that as the section does not envisage two annual general meetings it should be read as requiring the audited financial statements to be put before the first annual general meeting, if there was more than one, however it is self-evident, I would have thought, that any such breach is so technical that there is no risk at all, assuming section 351A does not apply, of a company or its directors ever being prosecuted.  If any mistake has been made by the board, it is that they seem to have been excessively diligent in convening general meetings. 

8. In the case of the other three originating summonses, namely, 167, 169, and 170 of 2014 those applications were all made without regard to my decision in Re Fu Shou Yuan Group (Hong Kong) Ltd [2014] 1 HKLRD 415.  Mr Matthew Ho, who appeared for the applicants was, however, aware of the decision and he quite properly reminded me of it in his written submissions.

9. The facts of the three originating summonses are all similar to those in Fu Shou Yuan decision.  The companies all held annual general Meetings before the end of their first accounting period.  As a consequence, they did not have audited financial statements to put before the companies’ shareholders at the general meeting. 

10. As I have previously held, this in my view does not give rise to a breach of section 122.  It also seems to me to be quite obvious that even if I am wrong about that, the breaches are so technical and have clearly caused no prejudice to anybody, quite the contrary, that there is no risk of any prosecution. 

11. As I have emphasised in a number of recent decisions, I do expect parties and their solicitors to adopt a sensible approach to these kinds of cases.  The Companies Court has started to hear a very large number of these applications only in the last couple of years.  This is obviously not because there has been a dramatic increase in the number of board of directors who are failing to comply with sections 111 and 122 of the Companies Ordinance.  

12. As I have explained elsewhere, the origin of this dramatic increase in applications was an understanding on the part of prospective applicants for listings on the Hong Kong Stock Exchange, that the Stock Exchange required breaches of these sections to be remedied.  It has now been made clear by the Stock Exchange that this is generally not the case.

13. What, I think it is reasonable to assume, happened historically was that during due diligence exercises solicitors and accountants identified breaches of sections 111 and 122, but it was recognised that they were normally technical breaches and the Stock Exchange would not be concerned about them.  It would also have been recognised, I think it is reasonable to assume, that such breaches were never likely to be prosecuted either because they were outside the time period specified in section 351A, or because the reality was that the Companies Registry would never become aware of them, or that such breaches were so technical in nature that in the unlikely event that the Companies Registry did become aware of them, that the Registrar of Companies would not consider it appropriate to expend the Department’s limited resources on prosecuting them.

14. What now seems to have happened is that as a result of the initial spate of applications prompted by the assumed requirements of the Stock Exchange, a small cottage industry has developed which involves solicitors advising their clients to apply to remedy these breaches regardless of whether viewed practically it is necessary.  These five originating summonses seem to be a particularly good example of this. 

15. I would like to emphasise that I expect legal advisers to give sensible, practical advice to their clients and not to encourage unnecessary applications under sections 111 and 121 and their equivalent provisions in Cap 622.