NICHOLAS TIMOTHY CORNFORTH HILL v. ALVAREZ & MARSAL ASIA LTD

HCA 56/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 56 OF 2007

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(Heard Together)

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R U L I N G S

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1.  There are three related matters before me for a ruling.  Each is in different proceedings, all of which are concerned with a dispute between Nicholas Timothy Cornforth Hill (Mr Hill) and Alvarez & Marsal Asia Limited (A&M) over amounts of money owed by A&M to Mr Hill.

2.  The trial of these issues, to be heard together, has been set down for hearing in September next.  The matters before me are for discovery and inspection of documents that Mr Hill is pursuing for preparation of his case for trial.  All are opposed.

3.  There is a short but detailed history; I shall set that out first.

HISTORY

4.  Mr Hill was a founder in 1995 of a business set up to provide corporate advisory and insolvency services in Hong Kong and, through subsidiaries, around Asia.  The business came to be run in a partnership comprising Mr Hill and three others; Cosimo Borrelli, Kelvin Flynn and Neil Poole, through a partnership agreement and the company RSM Nelson Wheeler Corporate Advisory Services Limited (RSM Corporate).

5.  In or about 2005 Mr Hill decided that he wanted to retire from the business.  He formed the idea at or about the time those in control of a similar operation based in the US called Alvarez & Marsal LLC were looking to expand into the local arena and had made preliminary approaches to join up with the local company.  However, there was never an intention that his departure was predicated upon such prospective joining; thus negotiations surrounding his leaving were undertaken solely amongst the four founding partners.  This had an important bearing on the way these negotiations developed into a contractual commitment on various fronts.

6.  Mr Hill, by mathematical and economic right, was entitled to expect a substantial amount of remuneration for his interest including a share of the worth of work in progress, loans and book debts and goodwill.  But an important priority was that payment should be structured so that RSM Corporate or its successor would not be starved of working capital and could continue to trade actively.

7.  Secondly, the partners had, in the way of successful commercial partnerships, formed a close bond amongst themselves, so that each wanted to look out for the other partners in how the deal was to be structured; trust in the goodwill and integrity of the others played an integral part.

8.  Third was that Mr Hill was the appointed liquidator or otherwise was playing a key role in the administration of a number of companies in the process of being wound up or whose affairs were being managed by RSM Corporate, making it sensible that he stay on in a limited capacity to complete these particular projects.

9.  So, the structure to which they finally committed was that Mr Hill should be paid his fair dues, but over a period of years so that the business would have sufficient capital to continue to operate and, prospectively, expand, Mr Hill would continue to be involved in a winding down programme, and there was to be trust and goodwill pervading through the transitional process.

10.  The deal worked out was, broadly speaking, implemented in this way:

(1) The amount RSM Corporate owed Mr Hill was assessed at about $101 million dollars (the RSM Corporate Debt);

(2) RSM Corporate would stop trading, but would stay in existence for the purpose of receiving moneys due (the Accounts Receivable);

(3) RSM Corporate would sell its fixed assets and rental deposits to a new company to be incorporated by the remaining partners (Newco).  The consideration therefor due by Newco to RSM Corporate (but not immediately payable) was identified as the Fixed Assets and Deposits Debt.  That was quantified at the “Net Book Value” of the assets and deposits;

(4)     RSM Corporate, being the parent company of the regional subsidiaries and holding debts from them, would sell these debts (the Subsidiaries’ Loans) to Newco at their “Net Book Value” as well, to be known as the Subsidiaries’ Loans Debt.  These transactions would leave RSM Corporate with three principal assets, being the Accounts Receivable, the Fixed Assets and Deposits Debt and the Subsidiaries’ Loans Debt.  It also would have one debt, due to Mr Hill, being the RSM Corporate Debt;

(5) RSM Corporate would sell at cost (i.e. at Net Book Value) the Fixed Assets and Deposits Debt and the Subsidiaries’ Loans Debt to LAIL.  LAIL is the acronym for Lion Archer Investment Limited, which is owned and controlled by Mr Hill and his wife.  The consideration therefor was to be met by a matching reduction in the RSM Corporate Debt due to Mr Hill.  LAIL was thus to be entitled to look to Newco for payment of the Fixed Assets and Deposits Debt and the Subsidiaries’ Loans Debt, to be paid out of future profits rather than from Accounts Receivable as and when collected by RSM Corporate;

(6) Mr Hill’s goodwill was assessed at $23.4 million and was to be paid by Newco to Mr Hill monthly by instalments of not less than $335,000 beginning from January 2006.

11.  In summary, this meant Mr Hill (and LAIL) would, in the fullness of time, be paid:

(a) by RSM Corporate the RSM Corporate Debt of $101 million, but less the Fixed Assets and Deposits Debt and the Subsidiaries’ Loans Debt, paid from the Accounts Receivable collected by RSM Corporate;

(b)    by Newco, reimbursement for the Fixed Assets and Deposits Debt and Subsidiaries’ Loans Debt at Net Book Value (with no fixed repayment dates or terms);

(c) by Newco, the Goodwill of $23.4 million at $335,000 per month from January 2006.

12.  Mr Hill contends that this was all structured so that Newco would not be deprived of working capital and would continue to operate and thrive in the manner of RSM Corporate in the pre-retirement era.  Thus whilst it received the benefit of the Fixed Assets and Deposits and Subsidiaries’ Loans forthwith it would not have to pay for them forthwith; rather, the terms were left open-ended, to be paid when Newco could afford to do so.

13.  Mr Hill further points out that in agreeing to these terms he had foregone the sellout terms to which he would have been entitled under the partnership agreement which had governed the relationship of the four partners.  Under that he would have been entitled to a guarantee from the remaining partners for the deferred payments.  That he did not call for these was consistent with the camaraderie and trust that had developed amongst them during the 10 years they had worked together.

14.  Finally, it was agreed that Mr Hill would stay on to complete those transactions where he was the appointed liquidator or joint liquidator.  To this end he was appointed to the post of non-executive director of Newco. 

15.  Then it was, following the completion of the agreements which committed the parties to the above terms, that the remaining three partners let it be known that they were to be joined by Alvarez & Marsal from the USA, upon terms to which Mr Hill was not privy.  This was not entirely unexpected, given the interest that had been shown by the US entity some time prior.  But as far as the retirement deal was concerned, nothing had changed, save that the proposed structure of Newco was expanded to include the US entity.  It came to be registered under the name of Alvarez & Marsal Asia Limited (A&M).

16.  On Mr Hill’s account, following the signing of the agreements in June 2005, things proceeded satisfactorily.  His hours were reduced to the time needed to complete the various transactions he was committed to.  RSM Corporate Accounts Receivable were steadily collected and paid net of expenses.  The Goodwill instalments began to be paid from January 2006. 

17.  In fact, notwithstanding the litigation that was shortly to erupt, it is pertinent to note that of the Accounts Receivable, in excess of $45 million has been allocated and paid to RSM Corporate, and the instalments for payment of the Goodwill have been made without default.

18.  Mr Hill left Hong Kong in May 2006.  Then in September 2006 it came to his attention that there was a significant development at A&M.  His former partners Borrelli and Flynn had resigned and were about to leave, leaving behind only the most junior of the original quartet, Poole.

19.  In fact Borrelli and Flynn did both leave, in September 2006, with an agreed pay out of US$800,000 each and a significant amount of A&M’s business.

20.  With the successor to his RSM Corporate thenceforth downsized and now largely run by strangers, Mr Hill came to realize that the not inconsiderable amounts still outstanding to him, in large part dependent upon the ongoing success of A&M to generate profits, were at risk.

21.  These misgivings on the face of it seemed justified.  Having returned to Hong Kong in October 2006 there were two significant developments.

22.  The first was that after two visits he was barred from A&M’s office and denied access to its records and books of account, although he remained (and remains) a director.  The second was that A&M’s management declared the Subsidiaries’ Loans Debt was worthless for which thus no payment was due.

23.  But Mr Hill had contracted in the sellout on the basis that the Subsidiaries’ Loans Debt’s worth was about $20 million and that is what he would expect to be paid.

24.  The next step which was to be the precursor of the litigation that followed was taken by Mr Hill. On 2 November 2006 he issued and served on A&M a statutory demand for payment of three debts due and owing; namely, the Fixed Assets and Deposits Debt of $946,591, the Subsidiaries’ Loans Debt of $20,127,885 and the balance of the Goodwill of $20,310,092; thus a total of $41,384,568.

25.  A&M declined to pay on the basis that variously the amounts were disputed or not presently due.

26.  This led to a series of proceedings.

THE LITIGATION

27.  In November 2006 A&M filed an originating summons in HCMP 2461 of 2006, seeking declarations as to its liabilities arising out of the various agreements due to Mr Hill and LAIL.  This is one of the proceedings (known to the parties as the Construction Summons) in which there is an application before me, which is that A&M make available copies of documents referred to in affidavits filed on its behalf, brought under O.24 rr.10 and 11A RHC.

28.  Then on 10 January 2007 Mr Hill initiated two further proceedings.  One was a summons in HCMP 56/2007 (the Inspection Summons) in which he seeks a declaration that as a director of A&M he has the right to inspect its books of accounts and a direction that he be given access to them.  This is the second of the applications that are before me.

29.  The second proceedings of 10 January was an action in HCA 56/2007 (the Writ Action) in which Mr Hill claims payment of the Fixed Assets and Deposits Debt and the Subsidiaries’ Loans Debt, totalling $21,135,083.87, due to him by A&M.  Within this action is the third and final application for me to deal with; for discovery of specific classes of documents under O.24 rr 3 and 7 RHC.

30.  Meanwhile, with the threat of a winding up petition hanging over it, A&M filed an originating application in December 2006 under HCMP 2586/2006 for an injunction to restrain Mr Hill from presenting a winding up petition.  Mr Hill filed an affidavit to oppose but let it be known that he would withdraw that opposition on condition that A&M undertook not to make any payments to third parties other than in the ordinary course of business, pending the determination of the Construction Summons, and that it demonstrate its solvency.

31.  When A&M declined to abide by these conditions or any further conditions proposed the matter came to be heard as a contested one before Kwan J in January 2007. 

32.  The next month she granted the injunction asked for with indemnity costs, holding that it would be an abuse of the process of the court for Mr Hill to present a winding up petition.  She accepted that A&M had raised a substantial dispute to be resolved; as to the amount of the Subsidiaries’ Loans Debt, by whom that debt and the Fixed Assets and Deposits Debt are due, and whether the debts as per the statutory demand were in fact due and payable.

THE ISSUES FOR TRIAL

33.  Those that would seem to be paramount have already been identified by Kwan J.  They are:

(1) Is A&M liable for the Fixed Assets and Deposits Debt and the Subsidiaries’ Loans Debt?

(2) What was meant by the expression “Net Book Value” with reference to the debts at 1?  And what is their worth in terms of what is due to be paid to Mr Hill or LAIL?

THE APPLICATIONS

The Construction Summons – HCMP 2461 of 2006

34.  O.24 r.10 provides for discovery of any document referred to in the affidavits.  I do not believe it controversial that the principles are as set out in the decision of Bowen LJ in Quilter v Heatley (1883) 23 Ch D 42 at p.51:

“The reference to a document gives rise to a prima facie entitlement to its production;

Consequently, the disclosure of the document will be ordered unless the other party shows good cause why it should not be disclosed;

Order 24 rule 13 does apply to Order 24 rule 10, but the mere fact of reference in the affidavits indicates that the document is relevant and necessary for disposing fairly of the cause or matter; and

A party should not be faced with having to deal with evidence it has not been able to see.”

35.  The references in the affidavits giving rise to the request for disclosure are set out in a letter attached to the summons from Mr Hill’s solicitors to those representing A&M.  In each case the deponent is deposing to entries (or the fact that there were no entries) in A&M’s books of account in relation to the loans that had been made to the subsidiaries operating in Thailand, Malaysia and Singapore.  This gave rise to a request for copies of the books of account of the Singapore subsidiary which have been provided, and those of A&M which have not.

36.  There was also the following deposed to by one Peter Charles Cheston, a director of A&M, where he calls the company A&M Asia:

“…A&M Asia has engaged in discussions with the local partners of the operations in Thailand and Malaysia in order to try to collect at least some part of the Subsidiaries Loans.  Whilst ultimately those discussions did not result in any recoveries in respect of those loans in relating to either the Thai or Malaysian subsidiaries, it has proved to be possible to arrange for an assignment of the loans from A&M Asia to (in effect) in each case the local partner/management running the local office …”

37.  This gave rise to the request for copies of the assignments of the loans from A&M to the local partner/management of the Thai and Malaysian subsidiaries.  This has not been complied with either.

38.  A&M resists the production of A&M’s books of account on the grounds of irrelevance, and that such a task would be oppressive.  It has disclosed the relevant book entries; there can be nothing further that warrants disclosure of all the books.

39.  It further claims not to have to provide copies of assignments.  The discovery sought must be limited to documents referred to; an act of assignment is not a document.

Discussion

40.  The short answer to the blanket request for all of the books of account of A&M is that it puts far too liberal an interpretation on the expression ‘document’.  The first entry is the all important one dealing with how if at all the Subsidiaries’ Loans are entered. 

41.  Mr Manzoni representing Mr Hill submitted that as Mr Cheston had deposed — “the Malaysian and Thai loans were not brought into the books at all” justifies a trawl through all of the books of accounts.

42.  I disagree.  His words it seems to me are designed to emphasize that the loans were left out altogether.  This expression without more may not be treated as warranting production of the accounts in their entirety. That would be unnecessary and oppressive; there is evidence that these records are contained in 250 lever arch files.  There shall not be discovery of A&M’s books of account under this application.

43.  As far as the assignments are concerned: it is deposed that there were two assignments.  That denotes not only action but something entered into to record the commitment to that action.  It is not suggested that there was an oral commitment or that there was no record at all of it.

44.  The request that A&M provides copies of the assignments of the loans from A&M to the local partner or manager of the Thai and Malaysian subsidiaries should have been acceded to, and will now be ordered.

The Writ Action — HCA 56/2007

45.  This the application for specific discovery under O.24 rr.3 and 7 is for 12 classes of documents set out in the schedule to the application.  

46.  In this an application for specific discovery, the party seeking an order has to make out a prima facie case that:

(a)    there is in existence a specific document or class of documents;

(b)   the opposing party has or has had the document in his possession, custody or power;

(c)    the document or class of documents relates to a matter in question in the action.

47.  Once these requirements are made out, the court will have jurisdiction to grant or refuse the application in whole or in part, in exercise of its discretion, depending on the view taken as to whether discovery is necessary for the disposal of the action or for saving of costs.

48.  A case for the relevance of these documents and that there is a need for them to be disclosed to enable a fair disposal of the issues is advanced in an affidavit by Kevin Bowers, a partner of the solicitors representing Mr Hill having conduct of the case.

49.  It is on any view, an enormous list.  That of itself does not warrant a dismissal of the application outright.  If the documents can be categorized relevant beyond those already disclosed then so be it; their discovery will likely be ordered no matter how tedious the task.

50.  The response in opposition is that the summons follows extensive discovery already given by A&M.  There is no suggestion that there is a defect on the face of the list already served, or to any reference to other documents on the face of disclosed documents, or that A&M has probably had other relevant documents not disclosed.

51.  It is submitted that the application is an attempt to go behind the documents disclosed.  Mr Hill has failed to show there is a reason to believe there are any undisclosed documents A&M ought to produce.

52.  It is to be noted that included in the list are A&M’s books of account, required to determine the proper construction of the documents identified as the Asset Transfer Agreement and the LAIL Agreement because they will identify the amount which A&M included in its accounts as being due.  It is said of this that A&M has already disclosed the relevant account entries.

53.  Further, it is noted that a number of documents are required going to negotiations between the parties which eventually led to the various contracts.  It is submitted as a matter of law these cannot be relevant, the more so because A&M was not a party to these negotiations.  Further, there is no evidence that documents additional to those disclosed exist.

54.  Finally, it is submitted that in each case the classes are so wide that they would inevitably include documents that are not relevant.

Discussion

55.  Applying the rules going first to jurisdiction:

I am not satisfied that Mr Hill has made out a case that the documents set out in classes 1, 2, 3, 7 and 10 satisfy the test of engaging the court’s jurisdiction to order discovery.

56.  Those in the remaining classes have as I find passed that test, and in exercise of my discretion I order discovery of those not already disclosed; thus of the classes of documents identified at nos 4, 5, 6, 8, 9, 11 and 12.

The Inspection Summons — HCMP 73/2007

57.  This I think has been the most controversial of the three applications and occupied most of the two days of the hearing.  Integral to it was the examination of Mr Hill, non-executive director since 31 July 2005 of A&M and still on the Board in that capacity, and Fernando Gaspar, an ordinarily director of A&M.

58.  Brought under section 121 of the Companies Ordinance (CO), the pertinent provisions of the section read:

“Accounts and Audit

121.  Keeping of books of account

(1) Every company shall cause to be kept proper books of account …

(2) 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; …”

59.  Has A&M’s barring of Mr Hill from its office and refusal to make available to him for inspection its books of account been a breach of section 121 CO?

60.  I turn to consider the law on the point.

The Legal Principles

61.  A convenient starting point is the judgment of Kwan J, Hong Kong’s designated Companies Judge, in Ng Yu Wah v Lam Chun Wah, unreported HCMP 4616 of 2001, handed down on 28 June 2005. 

62.  At paragraph 29 she sets out what principles are to be applied in respect of an inspection application under this head, which I reproduce below.  It is important to note that what she stated was not in dispute in the case before her:

“The legal principles

29.   The legal principles are not in dispute.  The relevant propositions are fairly stated in Mr Liang’s submissions as follows:

(1)   The right of a company director to inspect the company’s documents is well established at common law (Burn v London and South Wales Coal Company and Risca Investment Company (1890-91) 7 TLR at 118-119; Edman v Ross [1922] 22 SR (NSW) 351 at 360-361; Conway v Petronious Clothing Company [1977] 1 WLR 73 at 89-90; Berlei Hestia (NZ) Limited v Fernyhough [1980] 2 NZLR 150 at 163-164; Molomby v Whitehead & Australian Broadcasting Corp [1985] 7 FCR 541 at 550-552; Wuu Khek Chiang George v ECRC Land Pte Limited [1999] 3 SLR 65 at paragraphs 25, 27, 31-34; Law Wai Duen v Boldwin Construction Limited [2001] 4 HKC 403 at 408-409).

(2)   The right of inspection flows from the director’s duties to the company and a director does not have to explain why the inspection is sought or demonstrate any particular ground or “need to know” as a basis (Law Wai Duen, supra at 405 and 409; Molomby, supra at 550; Wuu Khek Chiang George, supra at paragraph 27).  Thus, the inaction on the part of the director after grounds for suspicion concerning the company’s affairs have arisen is irrelevant; likewise, the intention of the director to discover misfeasance with the view to seeking relief, or that the desire to find evidence is motivated by vindictiveness (Law Wai Duen, supra at 409).

(3)   It is only where it can be proved that the director intends 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 can be interfered with, and such interference can only be effected in circumstances where a restriction on a director’s right can be imposed because of misuse of confidential information leading to damage (Law Wai Duen, supra at 408).

(4)   In view of the proposition in (3), the exercise of a director’s right of inspection is, “generally speaking, not a matter of discretion with the Court” (Edman v Ross, supra at 361; Berlei, supra at 163; Wuu Khek Chiang George, supra at paragraphs 32 and 33; Law Wai Duen, supra at 408).

(5)   The onus of establishing that the right of inspection will be exercised for improper purpose lies on the person who asserts it and “clear proof” is required to satisfy the court “affirmatively” that the grant of the right of inspection would be detrimental to the interests of the company (Wuu Khek Chiang George, supra at paragraph 34).

(6)   The scope of inspection can potentially be very wide, covering any “documents belonging to the company” (Burn v London and South Wales Coal Company, supra at 118; Edman v Ross, supra at 360), “corporate material” (Molomby, supra at 550), “corporate records and accounts” or “corporate information” (Berlei, supra at 163), “accounting and other records of the company” (Wuu Khek Chiang George, supra at paragraph 25).

(7)   It is perfectly proper for a director to engage an accountant to conduct the inspection in exercise of his right. A director may certainly exercise his right through his agent (Edman v Ross, supra at 361; Law Wai Duen, supra at 409).  A director is also entitled to take copies of the documents during inspection (Burn v London and South Wales Coal Company, supra at 118; Edman v Ross, supra at 361).

(8)   Whilst there may be some dispute in the authorities if the statutory provision (our statutory provision is section 121(3) of Cap. 32) adds a statutory right of inspection to an existing common law right, it is abundantly clear that the statutory provision is consistent with and does not detract from the common law right (Conway v Petronious, supra at 85 and 89; Berlei, supra at 163; Wuu Khek Chiang George, supra at paragraphs 25 and 31).”

63.  Mr Manzoni urged upon me that this case is not only the starting point but the finishing point, for it establishes what is self apparent from section 121(3) CO; that Mr Hill must be entitled to inspect all the books and records of A&M unless it can be “clearly proven” that the inspection is for improper purpose and detrimental to the interests of the company.

64.  He submitted that the mere fact that there is a dispute goes only so far and does not provide the clear proof that Kwan J refers to.

65.  He cited what might lead to a finding of a director inspecting for the purpose of materially injuring the company, hinted at as point (3) in Kwan J’s judgment: where a director might be planning to set up in opposition to the company with obvious injurious intent and effect.

66.  Mr Beresford for A&M did not seek to take issue with Kwan J’s analysis of how and when a director’s intentions might be branded improper and likely to be contrary to the company’s best interests, save that they do not go far enough.

67.  In that regard he took me to a recent English Court of Appeal case hot off the press; the judgment was handed down on 18 April 2008.  It is Oxford Legal Group Ltd v Sibbasbridge Services plc [2008] WL 1741230.  This was an appeal from a refusal by the judge below to grant summary judgment to the plaintiff giving it the right as director of the defendant to inspect its books.

68.  Sir John Chadwick giving the lead judgment set the scene at paras.16 and 17:

“16.   The substantive question on this appeal, as it seems to me, is whether the judge was correct to direct himself as he did in paragraph [34] of his judgment: in particular, whether he was correct in his view that: ‘if it is clearly shown that a director is not using the right [to inspect] for the purposes for which it is conferred but rather to injure the company or for other and improper purposes then the court may not intervene to assist him’.  It might be thought that, if the judge were correct to direct himself that if it were shown that OLG, as director of SBS, were seeking to use the right to inspect, not for the purposes for which that right was conferred, but for other (and so, improper) purposes then the court would not assist him, his conclusion that this was not a case for summary judgment was unassailable.  It could hardly be said, in the present case, that the judge was not entitled to take the view that there was a serious case to be tried as to the purposes for which OLG was seeking inspection.

17. In addressing that question it is important to keep in mind, first, that the judge did not confine the circumstances in which the court would not (or might not) intervene to those in which the director was shown to be using the right to inspect ‘to injure the company’.  It is plain that he contemplated that the circumstances in which the court would not (or might not) intervene included those in which the director was shown to be using the right to inspect ‘for other and improper purposes’: that is to say for purposes that were improper notwithstanding that they did not give rise to injury to the company.  Second, it is clear from the context that, in using the phrase ‘improper purposes’, the judge was referring to purposes other than those for which the right was conferred.  As he said, it was particularly important to have in mind that the right of a director to inspect the books of account of a company ‘is a right conferred by the common law in order to enable him to carry out his duties as director and for the benefit of the company.”

Paragraph 17 is the introduction by the judge, Kitchin J, to a form of conduct by the director seeking to inspect that is improper so as to warrant an order refusing inspection, notwithstanding there is not implicit in that a wish to injure.

69.  Sir John Chadwick then proceeded to undertake a trawl of cases in England and the Commonwealth on the point, to see if that wider proposition warranting refusal is sustainable.  The report is detailed and lengthy; there is the need for me only to touch upon several of those cases, and briefly his analysis of them.

70.  He referred to an excerpt from the judgment of Slade J in Conway v Petronious [1978] 1 WLR 72 at p.89:

“(2) The right of a director to see his company’s books of account, which is exercisable both at and outside meetings, is conferred by the common law in order to enable the director to carry out his duties as a director: see the Burns case, 7 T.L.R.118.”

And at p.90:

“The right of inspection is in my judgment one given to him to exercise for the benefit of the company.  He can claim the right as a personal right only in the sense that he may invoke it so as to enable him to discharge his personal obligations to the company and his statutory obligations.”

The point was taken up by Mahon J in Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150 at p.163:

“… where it is proved that a director is acting or is about to act in breach of his fiduciary duty to the company and intends to aid that process by inspecting the books, then his right to inspect disappears.”

Of this Sir John Chadwick said, at para.23:

“To my mind the proposition that the right to inspect the company’s books of account is conferred ‘in order to enable the director to carry out his duties as a director’ is not in doubt.  Nor is it in doubt, as it seems to me, that a right which is conferred for one purpose is not intended for use for some other purpose: for a director to invoke the right to inspect for some purpose other than that of carrying out his duties as a director is to seek to use the right for an improper purpose.”

And finally I reproduce Sir John’s analysis of a judgment from Hong Kong’s Court of Appeal in the case Law Wai Duen v Boldwin Construction Co. Ltd & Anr  [2001] 3 HKLRD 430.  At paragraph 12 Rogers VP, writing the lead judgment, had stated:

“[12] … 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.”

Of this, Sir John Chadwick said at para.37:

“37. It is clear that Mr Justice Rogers intended to emphasise that the right of inspection was conferred by the law in order to enable the director to carry out his duties.  The court could not, on the one hand, hold that the director was at risk of liability for breach of those duties and, on the other hand, refuse to enforce the right of inspection by the exercise of which the director could take steps to avoid liability for breach of those duties.  Although the final sentence of paragraph [15] of his judgment, taken out of context, might suggest support for the proposition that the circumstances in which the court will refuse to enforce the right to inspect are confined to those in which the purpose for which the director sought inspection is to injure the company, I find it difficult to think that he intended to hold that a court would be required to enforce the right in circumstances in which it was demonstrated that the director was seeking inspection for some other improper purpose (not involving injury to the company).  First, it was unnecessary, in that case, to make a distinction between intention to injure the company and other improper purposes: the Court held (ibid, at paragraph [19]) that there was no evidence either ‘of abuse or likelihood of abuse’ or ‘of damage likely to be occasioned to the companies’ from an inspection of company documents by the director (Madam Law) or her accountant.  Second, as I have said, I am not persuaded that there is support for that proposition in the judgment of Chief Justice Street in Edman v Ross or in the judgment of Mr Justice Slade in Conway v Petronius, to both of which Mr JusticeRogers referred with approval.  Third, as it seems to me, that proposition would be inconsistent with his own analysis of the reason why the court ought not to refuse to enforce the right of inspection: if the director was seeking to exercise that right, not for the purpose for which it was conferred but for some purpose unconnected with his duties as a director, there was no reason why inspection should not be refused.

38.  As I have said, I would hold that that the judge directed himself correctly (at paragraph [34] of his judgment) as to the approach which he was required to adopt.  I reject the submission that he should have appreciated that the circumstances in which the court would refuse to enforce the right to inspect were confined to those in which the purpose for which the director sought inspection was to injure the company.”

71.  Sir John Chadwick concluded that the judge below was entitled to take the view that there was a serious issue as to whether inspection was sought by the plaintiff for the benefit of the defendant and to enable the plaintiff to discharge its obligations as a director, or for some other, and improper purpose.

72.  He was of the opinion that the plaintiff’s wish to inspect was for the collateral purpose of assisting its nominee to get a proper value of the company’s shares; in the circumstances of this case, a collateral purpose which was foreign to the purposes for which the right of inspection existed.

73.  Mr Manzoni queried whether the extension analysed and approved by the Court of Appeal in Oxford Legal Group represented the law in Hong Kong.

74.  My view is that it does not offend Kwan J’s summary of the principles.  As I have said, in Kwan J’s case the parties were ad idem on what the principles are. 

75.  The Court of Appeal in Oxford Legal Group had the advantage of detailed argument on the additional proposition.  And the significant quotation from and the analysis of the judgment of Rogers VP in Law Wai Duen supports the view that the Court of Appeal in Hong Kong has already embraced this proposition.

76.  Thus I find that Kwan J’s summary may be extended by the proposition that where a director is wanting to inspect the records of the company for a collateral purpose other than in pursuit of his duties as a director and for the benefit of the company, that is sufficient reason for the court to find his purpose improper, and to deny him the right of inspection.

77.  And it need hardly be added that each case must depend upon its own facts.

Discussion

78.  Is there clear proof that, at the least, Mr Hill has a collateral purpose for wanting to inspect the books of A&M?

79.  Evidence adduced in support of the Inspection Summons and on behalf of Mr Hill rejects outright that proposition, a position he robustly maintained in cross-examination.

80.  It was said for him that he wants to satisfy himself as a director that its financial and other records are in order.  It had come to his attention from the limited access available to him as liquidator of one of the company’s yet to be completed managements that mistakes in accounting had been made, justifying further investigation to see how far reaching these mistakes were.

81.  Of particular concern is that A&M’s audited accounts to 31 December 2006 were approved without his being shown them, and that the same course was being adopted for the accounts to 31 December 2007.

82.  Further, that with the drastic reduction in size of A&M consequent upon the departure by Borrelli and Flynn, he was concerned to ensure that the company was solvent, for if it was not there fell on him as director the duty to deal immediately with that precarious situation.  He did accept however, that were he to find that the company was insolvent and had to be wound up, he would be concerned to know about this in order to protect his position as a creditor, particularly in view of apparently preferential treatment afforded Borrelli and Flynn when they left.

83.  He remains adamant that he has no motivation to harm A&M and is not seeking access to its books for a collateral purpose.  On the contrary, he has a strong vested interest in A&M remaining buoyant and thriving, given what remains owed to him. 

84.  That he issued a statutory demand against A&M was not intended for the purpose of harming A&M.  His requests for access to the books of account having fallen on deaf ears it was intended to shake up the other Board members and get a response.

Discussion

85.  I have to say I support the view that it has been clearly established that Mr Hill has at the least demonstrated a collateral purpose.

86.  To issue a statutory demand as a prelude to a winding up petition for debts said to be due cannot be said to be other than an unfriendly act against a company.  It goes much further than a “wake-up call” targeting somnolent directors who appear to be taking no notice.  On the contrary, they had already filed and served the Construction Summons to establish what A&M’s obligations are.

87.  Secondly, in opposing the application for an injunction to stall a winding up petition, he signalled an intention that he was prepared to pursue that course and refused to withdraw that opposition unless his demands were met which conditional offer the Board declined.  Given the terms of that offer and the prospect of a winding up petition being filed, it cannot be gainsaid but that that amounted to conduct intended to injure A&M.

88.  I have already noted that Kwan J ruled that it would be an abuse of process to permit Mr Hill to go ahead with a winding up petition and she ordered the injunction to restrain him from pursuing that.  As she noted, there were on foot two sets of proceedings to establish what if any might be due, and when.

89.  In expressing the view that Mr Hill’s conduct in going down this road was improper, she awarded costs against him on an indemnity basis.

90.  Given the outcome of that interim application and the plethora of legal proceedings, it cannot be said otherwise but that the parties are in battle mode. 

91.  For all that he remains a director of A&M, in such circumstances it has become impossible for Mr Hill to justify that he has ongoing rights and responsibilities to carry out, and it would be quite inappropriate to permit him access to his adversary’s books qua his position of director.

92.  It has been submitted that his pursuit of rights afforded directors under section 121 of the CO is a device to give him unfettered access, thus to permit a circumvention of the rules of discovery that bind litigants.  I make no finding on this, save to observe that there is support for it in that Mr Hill has in the two other applications for discovery tried and, at least at this level, failed in gaining access to A&M’s books.

93.  The question I posed earlier under the head of the Inspection Summons (para.59), I answer ‘No’.

THE RESULT  

94.  There will be orders as per the findings at paragraphs 44 and 56.

95.  The applications for the remaining matters sought are dismissed; see paragraphs 42, 55 and 93.

96.  Costs are nisi.

97.  In respect of the Construction Summons, Mr Hill shall have one third of his costs in any event.

98.  In respect of the Writ Action he shall have two thirds of his costs in any event.

99.  In respect of the Inspection Summons A&M shall have its costs in any event.  

100.  For the purpose of taxation, I adjudge 70% of the hearing before me was devoted to the Inspection Summons, the balance divided evenly between the two discovery application.