FUNG CHUEN v. SANDMARTIN INTERNATIONAL HOLDINGS LTD

HCMP 1044/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1044 OF 2017

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RULING

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INTRODUCTION

This is the Company’s application for stay of execution of my judgment[1] (the “Judgment”) in which it was ordered, pursuant to s 740 of the Companies Ordinance (Cap 622), that the Company shall produce certain documents to the Plaintiff (“P”) for inspection. 

2.  The Company has filed a Notice of Appeal[2] against the Judgment.  In support of the present application for stay, the Company has also filed on the same date an affirmation of Mr Hung[3].

APPLICABLE LEGAL PRINCIPLES

3.  The following legal principles for granting a stay of execution pending appeal are not in dispute:

(a)   An appeal does not operate as a stay of execution of the decision below.  Unless a defendant can justify a stay of execution, one will not be ordered. Justification can be demonstrated only if good reasons exist: O 59 r 13, RHC.

(b)   Good reason can exist in a variety of forms. It will be wrong to set out any exhaustive definition of what would constitute good reasons, but, commonly, reference is made to the following factors:

(i) The existence of an arguable appeal (that is, one with reasonable prospects of success) is the minimum requirement before a court would even consider granting a stay.Conversely, the existence of strong grounds of appeal will usually by itself enable a stay to be granted because this would alone constitute a good reason for a stay.

(ii) Where it is demonstrated that an appeal would be rendered nugatory if a stay were not granted, the Court may require no more than the existence of an arguable appeal.  

(iii) While it is impractical and even undesirable for the Court, in dealing with an application for a stay of execution, to go deeply into the merits and strengths of an appeal, it must however form a preliminary view of these aspects.

(iv) Ultimately, the Court embarks on a balancing exercise and uses its common sense, taking into account the relative prejudices that may be caused to the appellant and to the respondent by a stay of execution.

See Star Play Development Ltd v Bess Fashion Management Co Ltd[4]; SNE Engineering Co Ltd v Chim Kee Machinery Co Ltd[5]; and generally Hong Kong Civil Procedure 2018, Vol 1, at §59/13/1.   

CONSIDERATION

Grounds of Appeal

4.  Since this is not an application for leave to appeal, I do not propose to deal with the grounds of appeal in any great details.  It suffices for me to say that the grounds boil down to the following complaints:

(a)   this court erred in holding that P’s application was made in good faith and for a proper purpose; and

(b)   alternatively, this court erred in the exercise of the discretion to grant the inspection order in P’s favour. 

5.  It is a major plank of the submissions of Mr. Anson Wong, SC (and with him, Ms Ebony Ling) that P’s application for inspection was in fact a manoeuvre for him to seek a pre-trial discovery of documents which would otherwise be disclosed to him in the winding up proceedings[6] and at the same time to avoid any implied undertakings which would be imposed upon him as to the usage of those documents in case of a normal discovery.  Great emphasis is placed by Mr Wong on the fact that P’s grounds for inspection were the same as the grounds he put forward in the winding up petition in which he also seeks an account from its directors.  

6.  As regards the exercise of the discretion, Mr Wong submits that this court erred in taking into consideration that the documents which P would be able to obtain in the winding up proceedings would be subject to an implied undertaking as to their usage.

Whether the grounds of appeal are arguable

7.  In the Judgment, reference was made to Leung Chung Pun v Masterwise International Ltd^[7], cited with approval by Harris J in Re Bank of East Asia^[8],where Recorder Chow, SC (as he then was) said:

“ Where, as in the present case, the application for inspection of a company’s records is for the purpose of enabling the plaintiff to carry out investigation into alleged misconduct or maladministration,it would not be possible or appropriate for the court to reach a firmconclusion on each complaint raised because, amongst other things, the evidence would likely not be complete, it is unlikely that disputes of fact can be resolved on affidavit evidence alone, and the complaint may well be raised again in subsequent proceedings for adjudication. Accordingly, what I consider the court should do is to assess, on the basis of the available evidence, whether the plaintiff has made out a proper case for investigation taking into account such explanations as may be offered by the defendant. If the plaintiff is able to make out a proper case for investigation, the court should move on to consider whether, in the exercise of its discretion, the inspection sought ought nevertheless to be refused.‌…”

8.  I do not understand that Mr Wong has any disagreement to the correctness of the above passage.  In fact, Mr Wong with his customary fairness accepts that had there not been the winding up petition made by P, there would not be any sufficient grounds of appeal against the order of inspection made by this court.

9.  Despite the ingenuity of the submissions of Mr Wong, with respect, I am unable to see that any of the grounds of appeal has a reasonable prospect of success.  My reasons are as follows.

10.  Firstly, as pointed out by Mr Patrick Chong (and with him, Mr Terrence Tai), P’s counsel, the Company does not, and cannot possibly, challenge the finding that P has “on objective grounds made out a reasonable case for investigation”: see the Judgment at §§22, 26 and 27.  

11.  Secondly, it is well-established that whether or not a shareholder is acting in “good faith” and for a “proper purpose” are questions of fact to be determined according to the circumstances in each case: Unity APA Ltd (No 2) v Humes Ltd[9]. 

12.  Applying the principles stated at §§9-17 of the Judgment and having considered all the evidence available filed on behalf of P and the Company, it was open to this Court to find, as it did, that P has acted in “good faith” and with a “proper purpose”:

“P has acted out of a genuine and legitimate concern to protect his interests as a shareholder of the Company against any potential wrongdoings by its directors and that he honestly believes that it is proper for him to seeks to investigate the Company’s dealings under consideration for the purpose of determining what action he should take.”[10]

“As aforesaid, I accept that P has a genuine and legitimate concern to protect his interests as a shareholder of the Company against potential wrongdoings by its directors and that, I am satisfied, is also his primary purpose in taking out the present application. Given my view that there are objective grounds to support an investigating into the propriety or otherwise of the transactions under consideration, I am also able to be satisfied that P’s aforesaid primary purpose is in all the circumstances a “proper” one.”[11]

13.  I readily accept that reasonable people can differ as to their assessment of the evidence before them.  However, I am unable to see how it can be said that this court erred in making the above findings, even though one is to take into account that the findings were made mainly on the basis of affirmation evidence.

14.  Thirdly, as aforesaid, a major plank of Mr Wong’s submission is the Company’s present assertion that P’s real purpose for seeking inspection was to obtain ammunition for his winding up petition against the Company and to avoid exposing himself to any implied understanding as to the usage of the documents so obtained. 

15.  However, this present assertion is not only contrary to the Court’s findings that P acted in “good faith” and with a “proper purpose”, but is also not supported by any of the affirmations previously filed on the Company’s behalf for opposing P’s application for inspection.  As pointed out by Mr Chong, in none of Hung’s previous affirmations[12] had Hung ever asserted that P’s purpose of seeking inspection was to have a pre-trial discovery of documents or that P wanted to avoid any undertakings of usage being imposed.  Thus, the Company’s present assertion has the smack of an afterthought rather than a genuine concern.

16.  Besides, the Company’s present assertion has more smoke than fire to it:   

(i)   as regards the submission that P is seeking a pre-trial discovery, this court readily accepts that inspection should not be used as a substitute for discovery.  However, this court found that that was not the case here.  On the other hand, there are ample case authorities for the proposition that the very purpose of s740 of the Companies Ordinance is to enable a member to obtain company documents so that he may then make an informed decision as to whether to take legal or other actions to safeguard his interests as a member.  In this regard, in Wong Kar Gee Mimi v Hung King Sang Raymond & Anor[13], a case relied upon by Mr Wong, Harris J cited with approval the American equivalent of our old s152FA of Cap 32 (the predecessor of s 740) as follows:

“… The primary purpose of these inspection statutes, like that of the common law right, is to protect small and minority shareholders against the mismanagement and unfaithfulness of their agents and officers, by providing a stockholder with a simple, practical and expeditious procedure for obtaining inspection of the corporate books and records. The fact that a shareholder may also have discovery rights when engaged in a lawsuit with a particular corporation does not eliminate the statutory right of inspection.”

See also Re Augold NL[14] ; Haines v Altarcoo Pastoral[15]; and Wei Xing v Willwin Development (Asia) Company Limited & Anor[16].  In this regard, the case of Czerwinski v Syrena Royal Pty Ltd (No 1)[17] prayed in aid by Mr Wong is based on a wholly different factual scenario and is clearly distinguishable; and

(ii)   as regards the submission that the documents would eventually be disclosed in the winding up proceedings, I note also the fact that an applicant may have other means of obtaining the information or had the information at an earlier point in time does not preclude him from making an application for inspection, although it is relevant to the exercise of discretion: see Veron International[18]; and Mesa Minerals Ltd v Might River International Ltd[19].

17.  Furthermore, the Company’s present assertion entails inherent contradictions.  If P’s real purpose was to seek documents for use in the winding up proceedings which he is pursuing anyway, then why should P bother with any implied undertakings which would not prevent him from using the documents in the winding up proceedings? On the other hand, if, as Mr Wong seems to suggest initially during his submission, any documents which may be subject to the inspection order would eventually be disclosed during discovery in the winding up proceedings[20], then why would P bother with the application for inspection of the documents would be made available to him soon or later and why would the Company bother to oppose P’s application if they are to disclose them anyway?   In the light of these apparent contradictions, it is not surprising that Mr Wong upon the query from this court, appears to have difficulties committing to his initial position that P would eventually get all the documents he has asked for inspection from the discovery procedure in the winding-up proceedings. 

18.  More fundamentally, as submitted by Mr Chong, the present contention of the Company is based on the false premise that P is confined to obtain information for the purpose of the winding-up petition and/or is confined to seeking relief under the winding-up petition in order to protect his interest in the Company.  However, P is not so confined.  P is entitled to take whatever lawful steps he likes to protect his interests as a shareholder which would include reporting any suspected transactions to the relevant authorities using the documents revealed during inspection: see Mimi Wong’s case[21]. As submitted by Mr Chong, P may even consider suing other persons together with the directors in case that there is evidence after inspection showing that the directors had acted dishonestly in a conspiracy with others to the prejudice of the Company.  The fact that P has petitioned for the winding-up, seeking among other things an account from the directors, is beside the point, especially when the winding up proceedings do not concern outsiders.

19.  In any event, there are ample authorities for the proposition that, as long as P’s primary purpose for inspection is a proper one, it is not to the point that an inspection may be of benefit to him for some other purpose: Re LehmanBrown Ltd[22]; Veron International[23]; and Barrack Mines Ltd v Grants Patch Mining Ltd (No 2)[24].

20.  Fourthly, as regards the exercise of discretion, contrary to Mr Wong’s submission, this Court did take into account that the documents might be disclosed in the winding up proceedings but noted that it was only one of the factors to be taken into account.   Further, this Court did take into account of the implied undertaking but considered that it is a factor which weights in P’s favour: see the Judgment at §§30-31.  Given that P is entitled to have recourse against the directors other than the winding up proceedings, it is difficult to see how it can be said that this court erred in taking the implied undertaking into account in P’s favour.  Needless to say, it is trite that the Court of Appeal is unlikely to interfere with the first stance judge’s exercise of discretion.

21.  Since this court of the view that none of the grounds of appeal, whether taken individually or collectively, would give rise to a reasonable prospect of success, it is not necessary to go on to consider whether a refusal of stay would render the appeal nugatory. 

CONCLUSION

22.  In view of the above, the Company’s application for stay is refused.

23.  Mr Wong has asked for an extension of time for the Company to comply with the order for inspection in case the stay application fails.  Mr Chong does not object to this.  Therefore, I grant the Company an extension of 21 days from the date of this Judgment. 

24.  This court has already canvassed with counsel as to the like terms of the costs order depending on the various possible outcomes of the present application.  Both sides have agreed that the successful party should have a certificate of two counsel.  In the circumstances, I grant P costs relating to the present application, with certificate of two counsel, to be taxed if not agreed.