TSE FUNG CHIU v. KWOK CHEUNG HING AND ANOTHER

HCMP 2189/2018

[2019] HKCFI 1679

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2189 OF 2018

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JUDGMENT

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A. INTRODUCTION

A1.   The application before the Court

1.  By originating summons of 12 December 2018 (“Originating Summons”), the Applicant (“Tse Junior”) applied for an order for inspection of various documents and records of the 2^ndRespondent (“the Company”) pursuant to section 740 of the Companies Ordinance, Cap 622 (“CO”).

2.  By summons of 30 April 2019, Tse Junior applied to amend the Originating Summons.  This application was not opposed and I granted leave to amend accordingly at the hearing.  References below are to the Originating Summons as amended.

A2.   The background

3.  The Company was incorporated on 25 August 2009.  It is in the business of trading model trains and moulds.  There have been at all times two shareholders, Tse Junior and Kwok Man Hei (“Kwok Junior”).  Tse Tsang Yao, Tse Junior’s father (“Tse Senior”) was the sole director of the Company from incorporation until 26 March 2013. Kwok Cheung Hing, Kwok Junior’s father (“Kwok Senior”) was appointed as a director from 27 March 2013.  On or about 25 November 2014, Tse Senior resigned as director, and thereafter Kwok Senior has been the sole director of the Company.

4.  Tse Senior was the General Manager of the Company from incorporation until early May 2015, and Tse Junior was the Assistant General Manager from incorporation until 29 May 2015.

5.  The parties have fallen out and have been engaged in various pieces of litigation, including the following.

HCA 1320/2015 and HCA 1777/2015

6.  HCA 1320/2015 was commenced on 16 June 2015, and HCA 1777/2015 was commenced on 6 August 2016.  They were consolidated on 2 December 2016 and will be referred to as “the Consolidated Action”.

7.  In the Consolidated Action, the Company claims, inter alia, that:

(1)  Tse Junior wrongly received $2.3 million from the Company, and was the beneficiary of two insurance policies paid for by the Company without authorisation;

(2)  Tse Senior wrongly received $4.65 million from the Company,and was the beneficiary of five insurance policies paid for by the Company without authorisation;

(3)  Tse Senior’s wife, Madam Ng, wrongly received $750,000 from the Company; and

(4)  Tse Senior has taken away various documents and property of the Company.

8.  Tse Senior counterclaimed against the Company for repayment of a total $11,957,923, which he said had been loaned to the Company through various payments made between 2007 and 2015.

HCA 2119/2015

9.  HCA 2119/2015 was commenced by Madam Ng against Kwok, in respect of a loan granted to Tse Senior and Madam Ng by a finance company belonging to Kwok Senior.

HCMP 2066/2016

10.  HCMP 2066/2016 was commenced by Tse Junior against Kwok Senior and the Company under sections 379, 429 and 610 of the CO for an order that Kwok Senior and the Company do call an AGM of the Company for 2015 out of time, and provide reporting documents of the Company for the financial year 2015 pursuant to sections 379 and 429(1) of the CO.

11.  The proceedings were disposed of by a consent order of 28 June 2016, which ordered that an AGM be held and that Kwok Senior and the Company provide the documents requested.

12.  In the event, the AGM took place on 26 September 2016 and 3 October 2016 but without Tse Junior’s participation.  Tse Junior complained that the notice of the AGM and the audited financial statements for the year 2015 were not provided to him.

HCMP 3419/2016

13.  HCMP 3419/2016 was commenced by Tse Junior against Kwok Senior and the Company, seeking a declaration that the AGM for 2015 held on 26 September 2016 and 3 October 2016 was void and invalid as the financial statements were not available.

14.  The proceedings (save as to costs) were disposed of by a consent order of 28 June 2016, which declared that the resolutions passed at the AGM were ineffective, void and/or invalid.

HCMP 1547/2018

15.  HCMP 1547/2018 was commenced by the Company against Kwok Junior and Tse Junior, seeking leave to convene its AGMs for 2016 and 2017 out of time.

16.  On 18 October 2018, Deputy High Court Judge Le Pichon allowed the reconstitution of the application by substitution of Kwok Junior in place of the Company as the applicant, and by joining the Company as the 2^ndRespondent.  Leave was then granted to extend the time for holding the 2016 and 2017 AGMs.

HCMP 183/2019

17.  In HCMP 183/2019, Tse Junior is seeking leave to commence a derivative action against Kwok Senior, alleging wrongdoing by Kwok Senior including in relation to an alleged loan of $7 million.

B.   THE PRINCIPLES APPLICABLE TO AN APPLICATION UNDER SECTION 740 OF THE CO

18.  Section 740 of the CO provides as follows:

“ (1) On application by a required number of a company’s members, the Court may make an order—

(a) authorizing a person who is the applicant or one of the applicants to inspect any record or document of the company; or

(b) authorizing a person who is not the applicant or one of the applicants to inspect any record or document of the company on behalf of the applicant or applicants.

(2) The Court may make an order authorizing a person to inspect a record or document if it is satisfied that—

(a) the application is made in good faith; and

(b) the inspection is for a proper purpose.

…

(6) In this section, a reference to a required number of a company’s members is a reference to—

(a) the number of members that represents at least 2.5% of the voting rights of all the members having a right to vote at the company’s general meetings at the date of application; or

(b) at least 5 members of the company.”

19.  Section 740 of the CO confers on the Court a discretion, upon the application of the requisite number of members of a company,[1] to order the inspection of a company’s records or documents if the two requirements set out at section 740 of the CO are satisfied, namely:

(1)  the application is made in good faith, and

(2)  the inspection is for a proper purpose.

See Re Bank of East Asia Ltd [2015] 4 HKC 137 at [24], per Harris J.

20.  There was little dispute as to the relevant principles governing the application of the requirements of “good faith” and “proper purpose”.  In Veron International Ltd v RCG Holdings Ltd [2013] 3 HKLRD 657, Yuen JA, with whom the other members of the Court of Appeal agreed, said as follows:

“ 19. The relevant principles have been set out in Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344, [29], adopted by this Court (Chu JA, Suffiad and Bharwaney JJ) in Re LehmanBrown Ltd [2011] 5 HKLRD 668, [31], which is set out below for ease of reference:

1. The requirement that the applicant is acting in good faithand that the inspection is to be made for a proper purposeexpresses a composite notion and the court will determine whether each has been demonstrated by applying an objective test: Barrack Mines Ltd v Grants Patch Mining Ltd [1988] 1 Qd R 606; Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Ltd (1989) 7 ACLC 536 at 540–541.

2. The onus is on the applicant to demonstrate that he is acting in good faith and that the inspection is for a proper purpose: Intercapital Holdings Ltd v MEH Ltd (1988) 6 ACLC 1068 at 1074.

3. The section operates where the applicant seeks to protect some specific or personal right by the making of the order. Examples are where a shareholder contemplates proceedings under s.233 of the Corporations Act (the statutory successor of s.320 of the Companies Code); Re Augold NL [1987] 2 Qd R 297 at 308–309; Re Humes Ltd [1987] VicRp 43; (1987) 5 ACLC 64 at 68–69; Grants Patch Mining at 107; or where a shareholder reasonably takes the view that a transaction could adversely affect hisinvestment and he seeks to investigate the transaction for the purpose of determining what action he should take: Intercapital Holdings at 1074–1075; or where a shareholder seeks to ascertain facts for the purpose of considering a takeover offer: Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Ltd at 539. Other examples are provided in a number of the cases listed in the appendix.

4. If the applicant’s primary or dominant purpose is a proper purpose, it is not to the point that an inspection may be of benefit to the applicant for some other purpose:Re Humes Ltd at 70; Grants Patch Mining at 109–110;Cescastle Pty Ltd v Renak Holdings Ltd (1991) 9 ACLC 1333 at 1335.

5. The rights provided by s.247A [2]should not be regarded as affecting the basic rule of company law that a shareholder should not ordinarily have recourse to the courts to challenge a managerial decision made by or with the approval of the directors: Re Humes Ltd at 68–69; Grants Patch Mining Ltd at 614.

6. Since every shareholder has a right to apply under the section for an inspection order, it is no answer to an application that, if an order is made, the applicant may acquire information not available to other shareholders and thereby be in a more advantageous position than those shareholders: Re Humes Ltd at 70; Grants Patch Mining at 615.

7. Applicants do not necessarily lack a proper purpose merely because:

(a) they are hostile to other directors; or

(b) they will, after inspection, have more information than other members: Re Humes Ltd at 70.

8. The procedure under s.247A is not intended to be a process as wide-ranging as the process of discovery of documents so that, as a general rule, inspection will be confined to, say, the results of decisions of directors rather than all the documents such as board papers leading to decisions: Re Claremont Petroleum NL (No 2) [1990] 2 Qd R 310 at 314. I emphasize that this is a general rule. There may be occasions where it is proper to admit inspection of board papers. I examine this question in a moment.

9. Even where an applicant is acting bona fide and has shown a proper purpose, the court has a discretion whether to order inspection: Re Humes Ltd at 70.”

21.  As to the interrelationship between the requirements of “good faith” and “proper purpose”, Chu JA said in Re LehmanBrown Ltd at [34] that:

“ We accept that s.152FA expresses a composite notion so that the inspection is to be made in good faith and for a proper purpose.[3] This does not however mean that if a proper purpose is proved, acase of good faith shall follow or is to be assumed. The position is explained by Brooking J in Knightswood Nominees Pty Ltd v Sherwin Pastoral Co Ltd (1989) 15 ACLR 151, 156:

The language actually used in [s.265B(1)(b)] does suggest that there are two distinct matters to be considered: the court must be satisfied that the member is acting in good faith and that the inspection is to be made for a proper purpose.  No doubt the purpose set up by an applicant must be a genuine, not a pretended purpose, quite apart from the express mention of good faith.Once it is accepted that one can up to a point go on asking ‘Why do you want to do that?’ in ascertaining purpose, I do find it hard to see how anything that could be investigated in relation to good faith could not also be investigated in relation to proper purpose.  I am disposed to think that, notwithstanding the way in which para.(b) of s.265B(1) is constructed, all that the reference to good faith does is to remind us, first, that the proper purpose set up must not be a mere pretence, and, secondly, that in considering purpose it will be necessary to go beyond the mere desire to obtain information by the inspection of books and ask what the applicant wishes to achieve as a result.  Putting the matter another way, I am disposed to think that the section requires the court to be satisfied that the applicant is acting, or that the inspection is to be made (there is no distinction here), ‘in good faith for a proper purpose’ and that this expression is a composite one.”

22.  Furthermore:

(1)  An applicant must show that the purpose must be to assist him in his capacity as a member; the purpose must be genuine and not a mere pretense.  The procedure is not a form of, and should not be used as a substitute for, discovery or inspection after discovery by list or affidavit.  See Re LehmanBrown Ltd at [35], [41].

(2)  A wish to inspect documents to investigate a genuine and credible belief that there has been corporate mismanagement is capable of constituting a proper purpose.  Generally, where the court is satisfied that the “purpose” is germane to a shareholder’s economic interest in the company, a “proper purpose” will have been satisfied. See Bank of East Asia Ltd at [25(5)].  As part of establishing a proper purpose, the applicant has to show that there is “a sufficiently reasonable ‘case for investigation’” as regards past or future wrongful or other undesirable conduct.  The shareholder may fail to obtain inspection where he fails to make out on his own material some kind of case for investigation, or where the corporation is able by leading evidence to dispel whatever suspicion has reasonably been aroused.  See Bank of East Asia Ltd at [25(5)], [25(7)].

(3)  Where inspection is sought on the basis of suspected wrongful conduct, there must be proper evidence to support a case for investigation: Re LehmanBrown Ltd at [43].

(4)  Even if a proper purpose is established, a shareholder is not entitled to abuse his entitlement by going on a fishing expedition through vast amounts of the company’s records in search of a cause of action to support his mere suspicion of wrongdoing.  Such an approach would be excessively intrusiveand beyond what is reasonably necessary.  See Wong Kar Gee Mimi at [40].

(5)  The court is not required, and should not endeavour, to reach conclusions about the merits of the matters relied on as constituting a “proper purpose”.  The court needs to be satisfied that a proper purpose has been established and that in the exercise of the court’s discretion it is a proper case in which to make an order for inspection: Bank of East Asia Ltd at [26].  As to what process this involves, Harris J cited Leung Chung Pun v Masterwise International Ltd [2014] 1 HKLRD 1129 at [25] per Recorder Anderson Chow SC (as he then was):  

“ 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 firm conclusion 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. The statute does not lay down any restriction as regards the matters which the court may take into account when exercising its discretion. Thus, the court is entitled to take into account a wide spectrum of matters. However, as cautioned by Harris J in Wong Kar Gee Mimi v Hung Kin Sang Raymond (supra), [34]–[37], the court should strike a proper balance between (i) requiring the company to be transparent and (ii) not permitting the statutory jurisdiction to be used by a shareholder to challenge managerial or commercial decisions made by the board of directors of the company. How this balance should be struck in any given case can only be determined on a case by case basis.”

(6)  Once the court is satisfied that the applicant has established a “proper purpose”, the company should be required to be transparent: Bank of East Asia Ltd at [25(8)].

(7)  The assertion of a proper purpose and good faith must be testedagainst the proper context of the application: Re LehmanBrown Ltd at [36].

(8)  The fact that the applicant may have other means of obtaining the information elsewhere does not mean that he cannot satisfythe requirements of good faith and proper purpose, but this will be relevant to the Court’s discretion as to whether to grant an order: Veron International Ltd at [38.2].

23.  Ms Michelle Liu, counsel for Tse Junior, submitted that the court should be inclined to a liberal interpretation of “proper purpose” with a view to advancing the protection of shareholder rights and interest and the maintenance of appropriate standards of corporate governance: Bank of East Asia Ltd at [25(6)].  Mr Brown submitted that the Court of Appeal in Veron International Ltd had expressed doubt as to whether a liberal approach should be adopted.  It seems to me that what Yuen JA was saying in Veron International Ltd at [20.1] to [20.3] was that it was not necessary to decide whether there had a “more” liberal approach or “less” liberal approach taken in a number of previous cases; the Court was to apply the legislation to the facts of the individual case before it, guided by the principles which it had identified.

C.   THE PARTIES’ RESPECTIVE POSITIONS

C1.   Tse Junior’s case

24.  In his first Affirmation of 12 December 2018 (“Tse I”) Tse Junior says that there is a sufficiently reasonable case for investigation in relation to two matters:

(1)  First, in the Company’s audited financial statements for the year ending 31 March 2015 (“the 2015 Audited Accounts”), prepared by PH Tang & Co (“PH Tang”), the amount said to be due from the Company to Tse Junior in the Consolidated Action was reduced from $9,414,473 in 2014 to $3,014,473 in 2015, whereas the amount due from the Company to Kwok Senior in the Consolidated Action had been increased from $2,700,000 in 2014 to $7,000,000 in 2015.  However, the amounts owed to Kwok Senior had already (it is said) been repaid by 2014.  Tse Junior says that the alleged debt of $7,000,000 to Kwok Senior calls for investigation.

(2)  Second, the 2015 Audited Accounts were extensively qualified by the firm of auditors, which stated that it had not been able to obtain sufficient audit evidence, had been unable to determine whether adequate accounting records had been kept, and had not obtained all the information and explanations necessary for the audit.  Tse Junior says that as the Company is under the sole control of the sole director, Kwok Senior, the books and accounts of the Company need to be investigated, and in particular, the qualified entries in the 2015 Audited Accounts which are set out in the Schedule annexed to the Originating Summons.

25.  Accordingly, Tse Junior seeks an order for the inspection of:

(1)  under paragraph 1(a) of the Originating Summons, the Company’s statements for its bank account held at HSBC for the period between 25 August 2009 and 31 March 2015 (“the HSBC Statements”); and

(2)  under paragraph 1(b) of the Originating Summons, the Company’s trial balance, company ledgers and accounting evidence including but not limited to books, accounts and vouchers in respect of certain entries in the 2015 Audited Accounts which carried qualifications by the auditors, as set out in the Schedule to the Originating Summons.  The entries in question relate to (a) seven items of expenses in the income statement, (b) two items of current assets on the balance sheet, (c) one item of current liabilities on the balance sheet, and (d) two loans said to be owed to directors or ex-directors (namely Kwok Senior [4] and Tse Senior).

C2.   The Respondents’ case

26.  The Respondents say that the real purpose of Tse Junior’s application is to find evidence to support Tse Senior’s claim for loans that he says are owed to him by the Company; the evidence shows that this was all along his real concern.  This cannot be a purpose which assists Tse Junior in his capacity as a member of the Company.  The application is therefore neither made in good faith nor for a proper purpose.

D.   WHETHER PROPER PURPOSE: THE MATTERS WHICH ARE SAID TO CALL FOR INVESTIGATION

D1.   The $7 million debt owed to Kwok Senior (Originating Summons Schedule item 12)

27.  The 2015 Audited Accounts stated that the amount owed to Kwok Senior was $7,000,000, whereas the amount stated in the audited financial statements for the year ending 31 March 2014 (“the 2014 Audited Accounts”) [5] was $2,700,000.[6]  Tse I says that:

(1)  Kwok Senior says that he lent $7 million to the Company by means of seven payments of $1 million made between March 2012 and January 2014;

(2)  this particular sum of $7 million was repaid to Kwok Senior through nine cheques drawn by the Company, for a total amount of $7.9 million, between March 2012 and November 2014;

(3)  the claim made in correspondence that the repayment was made in respect of other loans made by Kwok Senior was doubtful; and

(4)  the 2015 Audited Accounts were signed by Kwok Senior as sole director of the Company, and were prepared by PH Tang, against whom the Company had applied for specific discovery (which application was withdrawn upon signing of the 2015 Audited Accounts).

28.  It is further said that the payments for the making of the loan were made prior to the date of the 2014 Audited Accounts, and therefore would have been taken into account by the auditors at the time of preparing those accounts, in which the amount of the loan outstanding to Kwok Senior was stated to be $2.7 million.  It was therefore implausible that the amount would have increased to $7 million in the 2015 Audited Accounts.

29.  It is in respect of this item that Tse Junior seeks disclosure of the HSBC Statements,[7] in addition to the categories of documents listed in paragraph 1(b) of the Originating Summons.

30.  Kwok Senior’s evidence (in the affirmation of Kwok Cheung Hing of 19 March 2019 (“Kwok I”)) is that the payment of $7.9 million made to him was used:

(1)  (as to $3 million) for onward payment of a PRC factory as requested by Tse Senior.  The factory was the Company’s main supplier, and Tse Senior was its Legal Representative; and

(2)  (as to $4.9 million) for repayment of other loans made by KwokSenior to the Company between September 2009 and April 2012 of $5.025 million.  Copies of the cheques drawn in favour of the Company were produced.

31.  In response, the 2^nd Affirmation of Tse Fung Chiu (“Tse II”) said that:

(1)  Kwok Senior’s explanation is inconsistent with the explanation earlier given in the letter of 29 November 2018 from Oldham Li & Nie, the Respondents’ solicitors (“OLN”), which had said that the $7.9 million was used to repay other loans advanced by Kwok Senior to the Company;

(2)  there were various other payments, totalling $3,355,447.54, made by the Company to Kwok Senior, between March 2009 and June 2011; and

(3)  Kwok Senior had admitted in his witness statement in HCA 2119/2015 that he had withdrawn a total of $2 million from the Company in January 2015 and March 2015.  This was a new allegation to which the Respondents did not have the opportunity to respond.  I have therefore not put any weight on this.

32.  I note that whilst Tse II suggested that Kwok Senior’s explanation as to the use of the $3 million was not true, this was on the basis that use of the $3 million for onward payments by Kwok Senior ought to have been described as “advances” by the Company (since Kwok Senior received the funds before he made any payments for the Company) rather than as “repayment” of loans, which was the terminology used by OLN.  There was, however, no direct evidence from Tse Junior or Tse Senior to rebut Kwok Senior’s evidence regarding the circumstances in which the arrangements for onward payments had been made, including the evidence that the arrangements had been requested by Tse Senior himself.  In the circumstances, the fact that OLN referred to repayment of loans is little more than a point of semantics.

33.  As to the $4.9 million (which Kwok I said was to repay other loans of $5.025 million), Tse II did not admit that Kwok Senior had lent a further $5.025 million to the Company. However, Tse II did not seek to explain what the cheques totalling $5.025 million drawn by Kwok Senior, Kwok Junior and Kwok Senior’s companies in favour of the Company were for, or provide other evidence to answer Kwok I’s evidence that the $4.9 million was used to repay loans of $5.025 million.

34.  As to the payments totalling $3,335,447.54 from the Company to Kwok Senior which Tse II says were not taken into account, Mr Brown submitted, and I agree, that this was disingenuous, given that Tse Senior had pleaded in HCA 1777/2015 that these amounts were in fact repayments of an earlier, separate loan made by Kwok Senior in 2007 to Modern Gala (International) Limited (which was taken over by the Company).  The repayments were completed by June 2010, before Kwok Senior lent the disputed $7 million to the Company.

35.  I further note that whilst the Schedule to the Originating Summons included the $7 million director’s loan as one of the “qualified” items, in fact, in the 2015 Accounts, the amount was not qualified.  This indicates that PH Tang was satisfied that the Company did indeed owe $7 million to Kwok Senior.  It was suggested that pressure was brought to bear on PH Tang through proceedings brought by the Company, but the Company had not in fact “sued” PH Tang; it had simply taken out an application for discovery of documents.

36.  It is true that there is no explanation as to why the amount owed to Kwok Senior was stated as $2.7 million in the 2014 Audited Accounts.  However, Ms Liu’s argument that the change was implausible must implicitly assume that the 2014 Audited Accounts were correct on this point.  But there was no evidence as to whether this was the case.  Rather, Tse Junior’s evidence was directed to showing that all of the $7 million loan which Kwok I said had been made by Kwok Senior had been repaid.  In this regard, as explained above, I do not consider that such evidence suggests that the figure of $7 million in the 2015 Audited Accounts is a result of wrongful or undesirable conduct, or corporate mismanagement.

37.  I therefore find that Tse Junior has not established that there is a sufficiently reasonable case for investigation as regards any wrongful or undesirable conduct, or corporate mismanagement, in relation to the amount of $7 million said to be due from the Company to Kwok Senior.

D2.   The $3,014,473 debt owed to Tse Senior (Originating Summons Schedule item 11)

38.  The 2015 Audited Accounts stated that the amount owed to Tse Senior was $3,104,473, whereas the amount stated in the 2014 Audited Accounts was $9,414,473.  Tse I did not address this complaint specifically, but identified the debt owed to Tse Senior as one of the qualified items in the 2015 Audited Accounts which required investigation.  In Tse II,[8]Tse Junior complained that:

(1)  on the one hand, PH Tang said that they did not obtain a direct confirmation in respect of the amount due to Tse Senior and were therefore unable to determine whether any adjustment to the amount was necessary, but on the other hand, PH Tang did issue a “Confirmation for Audit Purposes” to Tse Senior on 23 March 2018 which, it is said, confirmed that $3,014,473 was due to Tse Senior as at 31 March 2015.  Ms Liu submitted that in issuing this confirmation, the Company must have produced some documents to PH Tang in support;

(2)  Tse Senior had told him that the Company owed him $11,957,923.00, as counterclaimed in the Consolidated Action. 

39.  However, what PH Tang had said in the 2015 Audited Accounts was that they had not obtained direct confirmations in respect of the debt of $3,014,483 owed to Tse Senior, rather than that they had themselves positively confirmed that $3,014,483 was owed to Tse.  PH Tang had issued a request for confirmation to Tse Senior, saying that in the course of examining the Company’s accounts they had found that $3,014,483 was the amount showing as the balance on his account.  (Tse Senior did not sign it.)  It does not follow that the Company must have provided documents to support this figure.

40.  It also appears that in response to the request of Tse Junior’s solicitors, Johnnie Yam, Jacky Lee & Co (“JYJL”), to the Company to prepare audited financial statements for the year ending 31 March 2015, OLN’s letter of 1 June 2016 had asked Tse Senior to provide documents in support of the amount he claimed to be due to him, pointing out that the loans would have been made during the time when Tse Senior was the director and general manager of the Company.  However, Tse Senior never provided any documents.  Nor has Tse Junior provided any empirical evidence in the current application as to the existence or amount of the loan from Tse Senior.  It appears that what Tse Junior and Tse Senior rely on is merely the fact that the 2014 Audited Accounts showed the amount owing to Tse Senior as being $12,114,473.  In a letter of 1 December 2018, JYJL referred to Tse Senior’s counterclaim against the Company in the Consolidated Action for $11,957,923 and said that:

“ 4. Tse Senior’s case is to rely on the [2014 Audited Accounts].

5. Thus, the reliability and/or accuracy of the Plaintiff’s Audited Financial Statement is crucial to the issue whether there is such loan due by the Plaintiff to Tse Senior.”

41.  If Tse Junior suspected misconduct or mismanagement giving rise to a misstatement of the amount of the loan to Tse Senior in the 2015 Audited Accounts, one would have thought that empirical evidence would have been produced to show such misstatement, but none has been produced,nor has any explanation been given for the absence of such evidence.

42.  As to why the amount of the loan had decreased between the 2014 Audited Accounts and the 2015 Audited Accounts, what can be seen from the documents is that:

(1)  the director’s current account in the management accounts for the year ended 30 March 2015 (“the 2015 Management Accounts”) was stated to be $10,014,473.20 (a reduction from the $12,114,473 in the 2014 Audited Accounts).  The 2015 Management Accounts were provided by OLN to JYJL on 1 June 2016.  OLN claimed that they were prepared on Tse Senior’s instructions, but Ms Liu says that this is disputed;

(2)  the total amount stated to be due to a director/‌ex-director in the 2015 Audited Accounts is also $10,014,473 (that is, the same as the figure in the 2015 Management Accounts);

(3)  $7 million of that amount was stated to be due to Kwok Senior, leaving $3,014,473 as the amount due to Tse.

43.  None of the deponents have addressed the issue of whether the 2015 Management Accounts were indeed prepared on Tse Senior’s instructions.  However, I note that Tse Junior did not dispute Kwok Senior’s evidence (in paragraph 42 of Kwok I) that the 2015 Audited Accounts were prepared based on data provided by Tse Senior,[9] which would suggest that the reduction in the amount of the loan is due to the difference in figures provided by Tse Senior.

44.  Even leaving this point aside, it does not seem to me that asking to inspect documents relating to why a loan to an ex-director is said by the company’s auditors not to have been directly confirmed, or why the loan has been reduced, or why the loan is not the amount claimed by the ex-director in legal proceedings against the Company, constitutes a proper purpose for the purposes of section 740 of the CO.  It would not assist Tse Junior in his capacity as a member.  It would not be germane to the shareholder’s economic interest in the company, given that the loan is said to have been reduced and is doubtful.  The adjustment of the amount of the loan does not lead to the inference that there has been corporate mismanagement, or wrongful or undesirable conduct, particularly when no empirical evidence as to the existence or amount of the loan has been produced.

45.  I am therefore not satisfied that a sufficiently reasonable case for investigation arises in relation to the amount of $3,014,473 said to be due from the Company to Tse Senior.

D3.   Sales commission of $228,328 (Originating Summons Schedule item 1)

46.  In the 2015 Audited Accounts, PH Tang stated that they were unable to obtain sufficient appropriate audit evidence or explanation to satisfy themselves as to the appropriateness of the accounting entries of various items in the income statement.  The first such item is an expense, being sales commission of $228,328.

47.  Kwok I says that the item is an amount allegedly paid to a purchaser named Daniel K, which Tse Junior does not deny.  Kwok I says that Kwok Senior “interrogated” Tse Senior over this payment, and that the amount in the 2015 Audited Accounts was lower than the amount of the payment in the 2014 Audited Accounts, and was based on data provided by Tse Senior. Tse II denied that Kwok Senior “interrogated” Tse Senior about the payment, but did not deny that the figure was based on data provided by Tse Senior.

48.  I am not satisfied that Tse Junior has made out a sufficiently reasonable case for investigation as regards any wrongful or undesirable conduct, or corporate mismanagement.  Indeed, Ms Liu did not identify any such misconduct or mismanagement.  Apparently, a commission payment to Daniel K in the year ending 31 March 2014 was accepted by the auditors, but a (smaller) payment of the same nature in the year ending 31 March 2015 was considered not to be supported by sufficient audit evidence; this does not suggest any misconduct or mismanagement.  In any event, the amount of the payment was apparently based on data provided by Tse Senior.

D4.    Insurance of $285,548, payment of “Manuselect Investment” of $72,000,and “retire income plan payments” of $373,337 (Originating Summons Schedule items 2, 3, 7)

49.  In the 2015 Audited Accounts, there were three items of expense relating to insurance, in relation to which PH Tang stated that they were unable to obtain sufficient appropriate audit evidence or explanation to satisfy themselves as to their appropriateness.

50.  Kwok I says that in the Consolidated Action, the Company is claiming (against Tse Senior, Tse Junior and Madam Ng) for loss suffered due to unauthorised insurance policies which Tse Senior purchased for himself, Tse Junior and Madam Ng, using the Company’s money.  He says that Tse Senior was the person purchasing the policies and should therefore know what they were about.  He also surmises that the three insurance items had previously been grouped together in the 2014 Audited Accounts under the simple heading of “insurance”, a matter that was challenged by Ms Liu in her submissions, but whether or not the surmise is correct is beside the point.

51.  Tse II did not deny that the three expense items relate to policies purchased by Tse Senior, or the point that Tse Senior, rather than Kwok Senior or the Company, was the person who should know what the items were about.

52.  I am therefore not satisfied that Tse Junior has made out a sufficiently reasonable case for investigation as regards any wrongful or undesirable conduct, or corporate mismanagement, in respect of these items.

D5.    Motor vehicle expenses of $142,560 and car rental expenses of $201,368 (Originating Summons Schedule items 4, 6)

53.  In the 2015 Audited Accounts, there were two items of expense relating to cars, in relation to which PH Tang stated that they were unable to obtain sufficient appropriate audit evidence or explanation to satisfy themselves as to their appropriateness.

54.  Kwok I says that his understanding was that PH Tang broke down what had previously, in the 2014 Audited Accounts, been termed “plant rental” into these two separate items of expense.

55.  Tse II’s response was that if this were the case, why would PH Tang have been satisfied about them in the 2014 Audited Accounts, but not in the 2015 Audited Accounts?

56.  However, the mere fact that certain expenses were accepted by the auditors as being sufficiently evidenced or explained in one year does not mean that expenses of a similar nature will be accepted in a subsequent year.  The lack of sufficient audit evidence does not in itself point to any misconduct or mismanagement.

57.  I am therefore not satisfied that Tse Junior has made out a sufficiently reasonable case for investigation as regards any wrongful or undesirable conduct, or corporate mismanagement, in respect of these items.

D6.   Office rental and rates of $113,741 (Originating Summons Schedule item 5)

58.  This is the last of the seven items of expenses in the 2015 Audited Accounts in relation to which PH Tang stated that they were unable to obtain sufficient appropriate audit evidence or explanation to satisfy themselves as to their appropriateness.

59.  Kwok I explains that the premises used by the Company were provided rent-free by his friend Mr Wan, in return for premises which Kwok Senior provided to Mr Wan’s company.  In around April 2014, Mr Wan no longer used Kwok Senior’s premises, but Kwok Senior asked Mr Wan to delay demanding rent as Tse Senior had told him that the Company was in financial difficulties.  However, in November 2014, when Kwok Senior found out that (as he alleges) the Company was paying substantial sums to the Tse family without justification, Kwok Senior was angry, and he and Tse Senior decided that the Company would start paying rent to Mr Wan.

60.  Ms Liu submits Kwok Senior was in breach of his fiduciary duty to the Company as he acted in his friend’s interest rather than the Company’s by deciding that the Company should start paying rent.  However, Tse II did not deny that it was in fact a joint decision by Tse Senior and Kwok Senior, namely the Company’s board of directors, that the Company would pay rent to Mr Wan. Nor did Tse II deny that the original basis for the rent-free arrangement (namely that Mr Wan enjoyed rent-free premises from Kwok Senior) had ceased.  Instead, Tse II expressed doubt as to Kwok Senior’s explanation as to what the amount was for, on the grounds that Kwok Senior had a personal interest in the transaction, and as Kwok Senior had not exhibited any documents, such as a signed tenancy agreement.  It was therefore said that it is necessary to inspect the Company’s documents to see if the item is correct.

61.  However, it is not suggested that the decision of the board to pay rent for premises which were indeed occupied by the Company amounted to a breach of fiduciary duty by the board.

62.  I am therefore not satisfied that Tse Junior has made out a sufficiently reasonable case for investigation as regards any wrongful or undesirable conduct, or corporate mismanagement, as regards this item.

D7.   Long outstanding trade and other receivables of $5,641,449 and deposits and prepayments of $2,935,372 (Originating Summons Schedule items 8, 9)

63.  In the 2015 Audited Accounts, PH Tang said that they were unable to obtain sufficient appropriate audit evidence or explanation to satisfy themselves as to the recoverability of two items which were carried in the statement of financial position, namely:

(1) long outstanding trade and other receivables in the amount of $5,641,449, and

(2) long outstanding deposits and prepayments of $2,935,372.

64.  Kwok I says that he asked PH Tang about these two items after the present application was taken out.  He says that PH Tang said that:

(1)  the receivables of $5,641,449 formed part of the trade and other receivables of $12,992,062 listed under “Current assets” on the balance sheet in the 2015 Audited Accounts.  This particular amount (of $5,641,449) had been identified as being outstanding for too long, contrary to usual payment terms, but without being written off as bad debt;

(2)  the deposits and prepayments of $2,935,372 formed part of the deposits and prepayments of $3,074,512 listed under “Current assets” on the balance sheet in the 2015 Audited Accounts.  Similarly to the receivables, this particular amount (of $2,935,372) had been identified as being outstanding for too long, without being written off.

65.  Tse II did not address the items other than to make the general complaint that Kwok Senior must have given some explanations to the auditors, who were nevertheless not satisfied; and to deny the suggestion that Tse Senior was in a better position to explain them since they would have been accumulated during his tenure as director and general manager.

66.  Ms Liu submitted that as the 2015 Audited Accounts did not define what was meant by “long outstanding”, it was uncertain for how long the receivables had been overdue, or for how long the deposits and prepayments had been made.  They might not in fact have been carried over from 2014, and instead have been created in 2015.  It was said that Tse Junior wanted to investigate why there were such qualified items.

67.  However, if PH Tang described a certain amount of the receivables and deposits and prepayments as being “long outstanding”, there does not seem to be any real basis to suggest that these amounts had only been created within the very same accounting year.  Nor does the description of the amounts as being “long outstanding”, without more, suggest any corporate mismanagement.  The auditors were simply expressing a view that as regards certain amounts which had not been recovered for a long period of time, their recoverability was in doubt, and they did not have sufficient evidence or explanation to indicate recoverability.  

68.  I am not satisfied that Tse Junior has made out a sufficiently reasonable case for investigation as regards any wrongful or undesirable conduct, or corporate mismanagement, in relation to these two items.

D8.   Trade and other payables of $11,443,379 (Originating Summons Schedule item 10)

69.  The balance sheet in the 2015 Audited Accounts shows, under “Current liabilities”, an item of “trade and other payable” [sic] in the amount of $11,443,379.  PH Tang stated that they had not obtained a direct confirmation in respect of this item, and that they were unable to determine whether any adjustments to these amounts were necessary.

70.  Kwok I said that he had asked PH Tang, who confirmed that these were trade and other payables which the Company should have paid out to third parties.  There was however neither evidence to prove that the payments were actually owed by the Company, nor any chaser from any of the third parties.  PH Tang simply relied on the information previously provided by Tse Senior in preparing the previous audited statements.

71.  Mr Brown submitted that the item was, like items 8 and 9, an aging entry carried forward from previous years.  To this, Ms Liu pointed out that there had been a “massive increase” in the amount of this item from the 2014 Audited Accounts, the balance sheet of which had stated $4,918,846 as the amount for trade and other payables, so that much of the $11,443,379 was not an amount carried forward from the previous year, but consisted instead of fresh liabilities.  She submitted that Tse Junior had a legitimate interest in investigating this item since the auditors could not tell whether adjustments needed to be made to the amount, and any adjustments made would affect the financial position of the Company.

72.  However, it seems to me that what PH Tang was saying in respect of this item was simply that they had not obtained direct confirmations from the various third party creditors to whom the Company allegedly owed money.  This is not indicative of any mismanagement on the part of the Company.  It simply means that the third parties had not responded to PH Tang’s request for confirmation.  In any event, the lack of confirmation from such third parties would, if anything, tend to suggest that the debts might ultimately not need to be paid by the Company.  Tse II did not explain why this would adversely affect his position as shareholder.   

D9.   Cumulative effect of qualified entries

73.  Ms Liu submitted that the qualified entries in the 2015 Audited Accounts should be considered cumulatively, rather than on an individual basis.  This was why, in Tse I, apart from the $7 million debt owed to Kwok Senior, the qualified entries were not addressed separately at all.  Ms Liu’s case was that when the qualified entries were taken together, this meant that the 2015 Audited Accounts were financial statements which did not reflect the true financial position of the Company.  Applying a “liberal approach” to the assessment of whether there was a “proper purpose”, the qualifications in the accounts suggested that there was some problem with the corporate governance of the Company, and this in turn affected the economic interest of Tse Junior as a member.

74.  I have already referred above to Veron International and Yuen JA’s observation that the correct approach was to apply the principles identified without reference to “more” or “less” liberal approaches.  In any event, it seems to me that if the complaints in respect of various entries in the 2015 Audited Accounts do not stand up to scrutiny individually, the accumulation of the entries does not render the complaints more forceful.

D10.   Conclusion regarding proper purpose

75.  I am therefore not satisfied that Tse Junior has demonstrated that the inspection of documents sought pursuant to the Originating Summons is being sought for a proper purpose.  The application therefore fails.

E.   GOOD FAITH

76.  For completeness, I set out also my views on the issue of good faith.

77.  Ms Liu submitted that Tse Junior’s good faith was demonstrated by the fact that he brought other proceedings against Kwok Senior and the Company in HCMP 3349/2015, HCMP 2066/2016 and HCMP 3419/2016, and was successful.  However, Kwok Senior’s evidence was that Tse Junior had failed to explain the full background to these proceedings and that the orders relied on by Tse Junior had been made by consent.

78.  It is not possible or appropriate for me to make determinations as to whether Tse Junior acted in good faith in other proceedings which are not before me.  In any event, whether or not Tse Junior acted in good faith in such other proceedings is not determinative of whether the current application is being made in good faith.

79.  Ms Liu submitted that Tse Junior honestly believes that there is “something wrong” about the items listed in the Originating Summons and that there has been corporate mismanagement.  However, the assertion of a proper purpose and good faith must be tested against the proper context of the application.  Mr Brown submitted that Tse Junior’s application was brought for an ulterior motive, namely, to support Tse Senior’s counterclaim in the Consolidated Action for repayment of over $11 million lent to the Company, by fishing for evidence to support the amount of the loan and undermining the 2015 Audited Accounts (which state the amount of the loan to be $3-odd million).  In this regard, it is noteworthy that in JYJL’s letter of 1 December 2018, it was said that Tse Senior’s case for repayment of the loan (as counterclaimed in the Consolidated Action) relied on the 2014 Audited Accounts (see extracts set out in paragraph 40 above).  The letter went on to state that “if 2015 Audited Statements were reliable, the amount of the indebtedness due by the Company to Tse Senior … would not be substantiated.”  It would therefore be in Tse Senior’s interest to challenge the reliability of the 2015 Audited Accounts.

80.  I bear in mind that the mere fact that the parties are at loggerheads with each other does not necessarily mean that Tse Junior’s application was not brought in good faith.  Nevertheless, I consider the following to be significant:

(1)  Any and all items carrying qualifications in the 2015 Audited Accounts have been seized upon as a target for inspection, whether substantial or small in amount, whether asset or liability.  

(2)  Apart from the $7 million debt to Kwok Senior (which did not carry a qualification in the accounts), Tse I did not condescend into any particulars regarding the other 11 items in the Schedule to the Originating Summons.  There was simply a general complaint that PH Tang had made extensive qualifications in the 2015 Audited Accounts, so that it was necessary to investigate the affairs relating to the books and accounts of the Company.  But as I have explained above, if the complaints in respect of individual items do not stand up to scrutiny, aggregating the complaints does not make them more forceful.

(3)  This absence of particularity is striking given that Tse Senior was director of the Company from incorporation in August 2009 to November 2014 (and the sole director for that period until March 2013), and General Manager of the Company from incorporation in August 2009 until May 2015, and given that Tse Junior was the Assistant General Manager from August 2009 until May 2015.  The 2015 Audited Accounts covered the year ending 31 March 2015.  If there were substantive concerns about the items (other than the fact that a qualification was given by the auditors on the grounds of insufficient evidence), Tse Senior and Tse Junior ought to have been in a position to raise them.  For example, were there any reasons why they suspected misconduct or mismanagement in relation to insurance expenses?  For the items identified as “long outstanding”, surely Tse Senior and Tse Junior would have had some knowledge of what these were and why they gave rise to concerns of misconduct or mismanagement?  Most notably, for the loan to Tse Senior, surely Tse Junior would have been able, with Tse Senior’s assistance, to producesome empirical evidence to support the suggestion that the 2015 Audited Accounts were wrong but the 2014 Audited Accounts were right (or at least would have been able to explain why none could be produced).  All in all, one would expect that Tse Junior, who had knowledge of the Company’s affairs for the period in question (and who could have called on Tse Senior’s knowledge as well), would have been able to voice more concrete concerns about any suspected misconduct or mismanagement.

(4)  In the correspondence preceding the making of the current application, JYJL only sought documents in relation to the loans by the Company’s directors, and not in respect of items 1 – 10 in the Schedule to the Originating Summons.  It therefore does not appear that Tse Junior had a genuine interest in investigating these items.

81.  Given these matters, and my earlier conclusion above that Tse Junior has failed to demonstrate that the proposed inspection of documents is being sought for a proper purpose, I am not satisfied that the real purpose of the application is to investigate suspected misconduct or mismanagement on the part of Kwok Senior, and that therefore the application is made in good faith.

F.   CONCLUSION

82.  For the foregoing reasons, I dismiss the Originating Summons, and make an order nisi that the costs of and occasioned by the Originating Summons be to the Respondents, to be taxed if not agreed.