RENATO COMELLI v. VYCOM GLOBAL SOURCES LTD

HCMP 1334/2019

[2020] HKCFI 240

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1334 OF 2019

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R U L I N G

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1.  This is the hearing of the applicant’s application by originating summons dated 27 August 2019 for an inspection order of the documents and records of the respondent company, Vycom Global Sources Limited, pursuant to section 740 of the Companies Ordinance, Cap 622. The applicant is Mr Renato Comelli and I explain later in this judgment how he fits into the overall picture.

2.  The applicant seeks to inspect the documents and records of the company for the past seven years as follows:

(a) audited financial statements;

(b) tax returns, together with supporting documents;

(c) tax assessments issued by the Inland Revenue Department;

(d) management accounts;

(e) cash flow statements;

(f) all books and records, including but not limited to accounting ledgers, journals, vouchers, statements, records, loan draw down notices, repayment records, purchase orders, invoices, receipts, payment vouchers, remittance advices, cheque stubs and copies, contracts, agreements, etc;

(g) monthly bank statements for all bank accounts;

(h) all notes, resolutions and minutes of directors’ and shareholders’ meetings;

(i) any and all agreements/contracts, tenancy licence, provision of goods/services, sale and purchase, employment or otherwise in respect of all the properties/assets owned by the company;

(j) payroll records and employer tax returns in respect of all directors and employees of the company; and

(k) correspondence and communications between the company and its accountants.

3.  The background is as follows.  The respondent is a limited company incorporated in Hong Kong on 17 October 2003, involved in the business of manufacturing and trading of printed circuit boards.  The three founders, including the applicant, Mr Renato Comelli, are Italian nationals and the company has clearly been built up into a successful business.

4.  The company’s share capital comprises of 200 shares of HK$1.00 per share of which the applicant holds 90 shares, ie 45 per cent.  Another founder, Mr Denis Vigo and his company, DVS Srl, together hold 55 per cent of the shares.  This shareholding appears to date from 13 May 2019, when DVS acquired the shares previously held by Mr Paolo Facco, the third founder.  The directors of the company are now Mr Facco and Mr Giorgio Cappellazzo.

5.  Until 3 August 2018 when it resigned, an offshore company named Eastern Sky Limited was a corporate director of the company.  It is not in dispute that there were, and perhaps still are, three directors of Eastern Sky, namely the three founders.  The applicant’s case is that it was through Eastern Sky and a service company called Vistra Corporate Services Hong Kong Limited that operated Eastern Sky that he maintained access to the financial documents and records of the company to keep informed of its financial health and status.  Now that Eastern Sky, and through it, Vistra, is no longer a director, the applicant says he has been denied information pertaining to the company to which he is entitled.  I should add that it is clear from the evidence that the reason that Vistra stood down is that it was getting conflicting instructions from the applicant and Mr Vigo and Mr Facco.

6.  There is no dispute as to the legal principles.  Section 740 of the Companies Ordinance gives the court the discretion to order an inspection of a company’s records or documents when the following requirements are met: (1) the person or persons making the application represent at least 2.5 per cent of the voting rights, which is more than satisfied here; (2) the application for an order for inspection is made in good faith; and (3) the inspection is for a proper purpose.

7.  As for the court’s approach, both parties rely on Veron International Ltd v RCG Holdings [2013] 3 HKLRD 657 at paragraph 19:-

“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 faith and that the inspection is to be made for a proper purpose expresses 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 his investment 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 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.”

8.  Mr Derek Hu, counsel for the applicant, also cites Anthony Chan J at paragraphs 11 and 19 of Hao Xiaoying v Green Valley Investment Ltd (unreported HCMP 1393/2015, 17 February 2016) :-

“11. There is no material dispute over the applicable legal principles, which can largely be found in 2 judgments of Harris J : Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241 and Re Bank of East Asia [2015] 4 HKC 137. 

12. The “good faith” and “proper purpose” requirements constitute two separate and independent tests.  The applicant must first, establish that he is acting in good faith and second, the court must believe the circumstances are such that the inspection sought is for a proper purpose : Re Bank of East Asia Ltd, §25(1).

13. The requirement of good faith merely requires that the applicant himself acts honestly with a purpose that he himself believes to be proper : Wong Kar Gee Mimi, §16.

14. In order to satisfy the “proper purpose” criteria it is not necessary to satisfy the court that the applicant has a specific or personal right that can only be protected through the inspection of records.  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 : Re Bank of East Asia Ltd, §25(5).

15. The court should incline 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 corporation governance : Re Bank of East Asia Ltd,§25(6).

16. 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 : Re Bank of East Asia Ltd, §25(7).

17. Once the primary or dominant purpose for the application for inspection is deemed by the court to be “proper” in that it is germane to the applicant’s status as a shareholder, then any further or secondary purpose in seeking the records is irrelevant.  So long as the applicant acts in good faith and for a proper purpose, then the fact that there is hostility between the parties is equally irrelevant : Wong Kar Gee Mimi, §§21-22.

18. 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 intrusive and beyond what is reasonably necessary : Wong Kar Gee Mimi, §40.

19. Further, it should be remembered that a shareholder has no general right to access the records of the company in order to challenge the commercial decisions of its management : see also Re Bank of East Asia, §25(4).”

9.  Mr Hu also cites the case of Tse Fung Chiu v Kwok Cheung Hing [2019] HKCFI 1679 where Recorder Yvonne Cheng SC stated at paragraph 22:-

“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)].”

10.  She added at subparagraph (5):-

“(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.”

11.  The applicant’s case is as follows.  The company is now a company essentially owned by two shareholders; that is to say himself and Mr Vigo.  Therefore, he is now the minority shareholder whereas the company was previously owned by three shareholders, with the applicant and Mr Vigo having the same percentage shareholding as, in essence, partners in business.  Furthermore, there were three directors with Eastern Sky/Vistra providing corporate and management services, but Vistra has now dropped out as I have described.  The net result, it is submitted, is that the control of the company is under the grip of Mr Facco and Mr Vigo, with the applicant left out of the picture entirely.  This is his first and main concern.

12.  The second main concern, it is submitted, can be seen from the 2015 to 2017 financial statements which show that the total staff costs and operating expenses of the company have increased significantly out of proportion with the revenue, cost of sales and distribution costs.  Part of this relates to Mr Facco’s remuneration, which has tripled from US$53,300 to US$192,308.  It is clear, it is submitted, that the company has not disclosed all the documents and records as reasonably requested by the applicant.

13.  The scope of the request is reasonable because as a 45 per cent shareholder it is not in his personal interest to cause harm to the company.  He says that those in control of the company strenuously oppose this application not in the best interests of the company, but in their own best interests.  He says that the allegation of competition on his part with an Italian company called Tekube Srl is raised to muddy the waters.  He is not a shareholder or director of Tekube and is only a part-time employee assisting Tekube on technical matters.  This has nothing to do with the financial documents and records of the company.  In any case, Mr Hu offered an undertaking that none of the information disclosed would be passed on to Tekube.

14.  In conclusion, it is submitted on behalf of the applicant that the application has been made for a proper purpose, and in good faith, and that the company should be ordered to disclose the requested documents and records.

15.  On behalf of the company, Mr Richard Leung submitted that, first, it has discharged its duties towards the applicant as a shareholder and has provided him all the documents he is entitled to; and second, and more importantly, the real reason for the present application is not to investigate any alleged wrongdoings, but an attempt to benefit Tekube, which is a direct competitor of the company, and set up by the applicant’s two sons, namely Matteo Comelli and Massimo Comelli.  He says he has been unfairly ousted from his position as de facto director and/or shadow director as a result of Vistra’s resignation, but the proper purpose of applications such as this must be germane to the applicant’s status as a member and not to his previous alleged position as a director.

16.  It is submitted that the applicant’s concerns regarding the management of the company are a pretence and what he is seeking to achieve is to “squirm” his way back onto the board of directors or attempt some form of coup.  Further, his allegations of being asked from the management of the company are wrong; it was the applicant himself who wished to be dismissed from any company operations role in 2017.

17.  The applicant takes issue with Mr Facco’s appointment as director, but when that appointment took place on 18 April 2016, the company submits, the applicant never raised any objections.

18.  The applicant’s concerns regarding DVS Srl are not understood.  Mr Vigo’s participation in this is not as a director and his position as an employee is immaterial.  There was also nothing to suggest that DVS has diverted any clients of the company.

19.  Looking at the matter in the round, the company submits that there is no proper purpose for this application.  It is submitted that the application was not taken out in good faith.  All of the concerns had been dealt with adequately by way of inter-solicitor correspondence and in reality the applicant is on a fishing expedition.  The company therefore asks the court to dismiss the originating summons outright.

20.  I now turn to the court’s view of the parties’ contentions.  By this application the applicant seeks in effect all the company’s documentation for the past seven years.  It is impossible to see how such an order could possibly be justified.  In his skeleton argument, the applicant cut that down to the last four years.  That pushes the clock back to 2016.  The justification for this period is that Mr Facco was appointed a director in April 2016 of which the applicant says he had no advance notice.  Since his case is that he was a de facto/shadow director, he says he should have been properly consulted.

21.  However, the same objections apply as to the width of the order sought, albeit for a somewhat shorter time period.  For its part, as I have said, the company’s position is that the application is not made in good faith and that the applicant has had everything he asked for and that the application should be dismissed.

22.  The oral submissions of both counsel were helpful in narrowing the areas of dispute.  For the applicant, Mr Hu accepted that up until 3 August 2018, the applicant had in effect been represented as a director by Vistra.  He argued, however, that “any wrongdoing” may have happened earlier.  However, he found it difficult to articulate quite what wrongdoing the applicant had in mind other than to point to the fact that the operating personnel expenses have increased in proportion to income over the 2016 to 2017 period.

23.  A key issue is whether the applicant asked for information clarifying the position prior to taking out this summons and how that request was responded to.  The position here is that on 24 April 2018, the applicant asked Mr Facco for “clarifications and a breakdown” of various listed items.  Though the relations between the parties had clearly broken down by then, the request itself is not extravagant in form.  Mr Facco responded on 2 May 2018 to the effect that this information could be obtained from Vistra.

24.  It is not clear to me why that information could not have been provided directly by the company, but at all events, a response was sent via Vistra on 25 July 2018.  Although Mr Hu contended that the information provided was stated rather than verified, it is evident from the response and the considerable number of attachments that a full effort was made to comply.

25.  Mr Richard Leung pointed out that further information was provided by the company’s solicitors on 26 April 2019.  That, however, was in more terse form and did not specifically answer the question as to why there had been such a big increase in operating expenses save by reference to Schedule C of the company’s consolidated financial statements for 2017.  There the expenses are itemised simply by category in the normal way.

26.  The applicant would, of course, have been entitled to ask these questions as a director had he been a director.  His point is that he cannot require appointment as a director since he is only a minority shareholder.  That is correct.  But it seems that he asked in August 2017 “with immediate effect to be dismissed from any company operations role”, but that a shareholders’ meeting should be called every three months.  There is therefore considerable force in Mr Leung’s submission that the applicant was not, as he claims, the subject of a secret ouster as director, but that this reflected his own wishes.

27.  On the other hand, I have to bear in mind the breakdown of relations and how that may have impacted, in practical terms, on the position.  I should record that I was told, on instructions, that the applicant has asked to become a director again, although there is no evidence to support this.  However, as noted already, the company’s submissions are that he is, as it is put, seeking “to squirm his way back onto the board”.  The inference I draw is that this prospect is not welcomed by Mr Vigo or Mr Facco.

28.  As Mr Leung says, whilst the applicant is not the subject of fiduciary duties owed to the company as a director but is merely a shareholder, he is entitled to compete.  It is submitted that this is precisely what he is doing through Tekube, which is a family enterprise, effectively started by the applicant and his sons.

29.  The applicant’s response is that he is employed by Tekube solely in a technical capacity.  However, I think the court is entitled to treat this explanation with a degree of scepticism and there is no dispute that this new company is in fact carrying on or seeking to carry on much the same business as Vycom.

30.  By the end of the parties’ submissions it was obvious that the applicant’s case could not be sustained as to the breadth of the documents required, even as limited to a four-year period.  Mr Hu accepted that the request should be cut down both by category and as to operating expenses by reference to Schedule C.

31.  On behalf of the company, Mr Richard Leung maintained his submission that the application should be dismissed as not being in good faith or for a proper purpose.  However, and rightly, he also commented upon the scope of the documents sought as now cut down.

32.  I now come to express my conclusions.  Mr Leung has made out a strong case that this application has little to do with the desire for information.  He says it is more to do with the competitive advantage that the applicant seeks to obtain for Tekube.  There may be some force in that, but the more likely explanation is the obtaining of leverage in the dispute that has unfortunately arisen between the three founders of this successful business.  Furthermore, as I have already commented more than once, the summons as issued was totally unsustainable in its present form.

33.  It is, however, impossible for the court to form a view as to the reasons for the breakdown of the relationship to the extent that this is possible or permissible at all on an application such as the present.  I very much kept in mind Mr Leung’s legal submissions in that regard.  Nevertheless, as a matter of fact, the applicant is now in a very vulnerable position since his holding is a minority holding and he has no representation on the board.  I start from the position that his original request for information was particularised and not in itself self-evidently unreasonable.  Indeed, the company says that it has fully responded.

34.  Unfortunately, however, when trust between partners goes, these things are no longer taken for granted.  There does seem to me to be a sufficient basis for some further legitimate clarification by the company as to the core area of enquiry identified at the hearing, namely the increase in operating expenses and salary, given that directors’ remuneration was only paid from 2016.

35.  Applying section 740, and the authorities which have expounded it, and holding the balance as best as I can and as the authorities require, I consider it right to make a limited order.  I disallow the first five items claimed on the basis that I accept the affirmation on the part of the company that these have already been provided.  In any case, Mr Hu did not pursue items (b) and (c).  He also did not pursue items (g) and (k).  I disallow (h) on the basis that I accept the affirmation on the part of the company that this has already been provided.  I disallow (i) on the basis that it is far too wide.

36.  I allow (j) subject to the limitation that so far as employees of the company are concerned, this is limited to Hong Kong employees.  Item (f) relates to operating expenses.  Mr Hu narrowed this down by reference to Schedule C.  I think on balance it is right to make a limited order covering bank charges, computer technical support, insurance, rental expenses, travelling, accommodation and messing, and written off interest in the subsidiary.

37.  As regards China office expenses and overseas representative office expenses, I am told that these are separately audited and make it clear that all that is necessary at this stage is to produce the audited reports, not the underlying vouchers.  Salaries and allowances are already covered under (j) and I make no separate order.

38.  I should add that this is limited to the years, 2016 and 2017.  I should also say that in complying with the order the company is entitled to take a reasonable approach.  There is no purpose to be served in maximising expense in complying with this order beyond what is reasonable.

39.  I will hear counsel now as to the form of the order to carry this into effect. 

40.  I would add that the three individuals who are the real parties to this dispute may wish to consider a formal or informal mediation that brings their dispute to a close without further disruption and legal expense.  That will require compromises on each of their parts.  There is nothing more that it is appropriate for me to say on that subject now.  That is my ruling.

41.  I make an order that the costs of the hearing of the applicant’s application by originating summons dated 27 August 2019 are to be paid by the applicant to the respondent, to be taxed if not agreed.