CHO YUK PING v. YOUNG WORLD ENTERPRISE LTD AND ANOTHER

HCMP 1597/2022

[2024] HKCFI 155

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1597 OF 2022

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BETWEEN

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JUDGMENT

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1.  This is the Plaintiff (“Cho”)’s application as director to inspect the 1^st Defendant (“Company”)’s documents as set out in the amended schedule contained in the Amended Originating Summons (“AOS”) re-filed on 12 April 2023 pursuant to ss. 374 and 375 of the Companies Ordinance, Cap 622 (“Ordinance”). The amended schedule has been overtaken by the Minutes of Order (“Minutes”) placed before the Court on behalf of Cho.

2.  According to the Minutes, Cho seeks access to and copies of 6 classes of documents to be provided by the Company (which did not appear at the hearing) under the procurement of the 2^nd Defendant (“LCK”). I adopt (with modifications) the classification of the documents set out in the skeleton arguments of Mr Cheung, who appeared for Cho as follows :

(a) Financial Statements and accounting records of the Company since October 2017 (classes (1) and (2) of the Minutes);

(b) Bank account records of the Company since October 2017 (class (3));

(c) Minutes and resolutions of directors’ meetings and general meetings of the Company since October 2017 (class (4));

(d) Records involving the Company and the IRD (class (5)); and

(e) Complete record of the Company’s assets and liabilities since 2017 (class (6)).

3.  LCK does not dispute Cho’s statutory right as a director of the Company to access and inspect books of account necessary to give a true and fair view of the state of the Company’s affairs. However, LCK disputes (i) the necessity of this application and (ii) the scope of inspection sought.

4.  In summary, it is LCK’s case that it had already informed Cho that it had provided to her all relevant documents of the Company which were in existence and in LCK’s possession. Moreover, LCK contends that it is within Cho’s knowledge that the documents being sought are not in existence and/or in the possession of LCK. In any case, reasonable attempts were not taken by Cho to inspect the Company’s documents prior to this application and LCK has never impeded Cho’s attempts at inspection.

Background

5.  Unfortunately, the background facts are not free from controversy and I shall confine the facts to what are essential and largely uncontroversial.

6.  The Company was incorporated on 9 December 2013. It was solely owned by LCK at the time. LCK was in waste recycling business. It was a family business run by Mr Lau Yiu Shing (“Lau”) and his wife, Ms Wong Mi Kuen (“Wong”).

7.  Subsequently, the Company became a vehicle for setting up and running a joint venture business (“JV”), a plastic waste recycling plant on a Site in Tai Po Industrial Estate in late 2017. The lease for the Site was granted under a short term tenancy to LCK by the Government on 28 December 2017.

8.  Cho, Mr Chen Mao Lan (“Chen”) and Lau reached an oral agreement for the JV on about 10 October 2017. In early December 2017, Cho, Chen and LCK became the 3 directors and shareholders of the Company with equal shareholdings.

9.  On 29 December 2017, Cho, Chen, and Mr Lau Chun Wai (the son of Lau and Wong) on behalf of LCK signed a Chinese JV Agreement (“Agreement”) in a restaurant in Sheung Shui.

10.  Cho had made monetary contributions to building a factory and modular office buildings on the Site from early October 2017 to January 2018, as well the operating expenditures of the Company from December 2017 to July 2018. Chen had imported 2 sets of plastic waste recycling machines from Mainland China, and installed them on the Site in early 2018.

11.  LCK, through Lau and Wong, had been responsible for the day-to-day operation of the Company, including the keeping of records and books of account, and the operation of the plastic waste recycling plant. Wong on behalf of LCK was responsible for the finance matters of the Company. Mr Cheung said that Cho and Chen are basically investors of the Company. On the other hand, as pointed out by Mr Chung, who appeared for LCK, according to cl. 2(2) of the Agreement, Cho was the managing director of the Company.

The evidence

12.  Given Cho’s right as director to access the books of the Company and the applicable legal principles (see below), the Court can start with the evidence of LCK which was given by Lau and Wong.

13.  According to LCK, there was a “plastic ban” in the Mainland introduced on 3 January 2018, shortly after the Company started its business. This resulted in the Company becoming dormant from February 2018.

14.  Pursuant to cl. 1(1)(2) of the Agreement (“三人出資對等”), LCK had contributed HK$2 million for the costs of site formation, installation of water and power supply, and tents for use by the Company.

15.  Lau had tried to apply (on behalf of LCK) for deregistration of the Company on 8 March 2022 to avoid further statutory duties and the associated costs. This took place after the last request for Company documents by Cho (via her former solicitors) dated 18 September 2020, and before the filing of the Originating Summons herein on 17 October 2022.

16.  Cho’s solicitors complained to the Companies Registry by letter of 5 September 2022, contending that LCK’s application to deregister the Company did not comply with the condition under s.750(2)(a) of the Ordinance, namely, that all members had agreed to the deregistration at the time of the application. Subsequently, by letter of the Registry dated 4 November 2022 to the Cho’s solicitors, the latter was informed that the Companies Registry had discontinued the deregistration proceedings.

17.  In her 2^nd Affirmation filed on 18 August 2023, Wong stated that Chen, acting through one Mr Yung had removed all the Company’s new plastic recycling machines from the Site in October 2018. A new company, Environmental Recycle Center (HK) Limited (“ERC”) with LCK being a shareholder, has been operating a new plastic waste recycling plant on the Site since about 2020.

18.  Cho disputed the allegations that the plastic recycling industry was “dead” due to the “plastic ban” in the Mainland and that the Company had been dormant since February 2018. She relied, firstly, on the fact that LCK and its new business partners had set up a new plant on the Site in the name of ERC since about mid-2020.

19.  Secondly, since February 2018 the Company had received 5 payments of processing fees during 22 August 2018 to 18 October 2018.

20.  Thirdly, the Government had awarded environmental funds to LCK of HK$2,380,000 in May 2020 and HK$19,305,000 in January 2022.

21.  Cho alleged that LCK wanted to stop the Company’s operation in order to start another business with new investors and to use the Site for setting up a new plastic waste recycling plant controlled by it.

Applicable principles

22.  It is trite that as a director of the Company Cho has a right of access to its accounting records pursuant to both s.374(1) of the Ordinance and common law. In respect of the latter, the right of access covers the Company’s documents and is not confined to the accounting records[1].

23.  The applicable principles were summarized by Kwan J (as she then was) in Ng Yee Wah v Lam Chun Wah [2012] 4 HKLRD 52, [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 …

(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 … 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 …

(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 …

(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” …

(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 …

(6) The scope of inspection can potentially be very wide, covering any “documents belonging to the company” …, “corporate material” …, “corporate records and accounts” or “corporate information” …, “accounting and other records of the company” …

(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 … A director is also entitled to take copies of the documents during inspection …

(8) Whilst there may be some dispute in the authorities if the statutory provision (our statutory provision is s.121(3) of the Companies Ordinance) 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 …”

Cho’s reliance on her common law right

24.  Mr Chung took issue with Cho’s entitlement to rely on her common law right of access to the Company’s documents because the AOS did not refer to the inherent jurisdiction of the Court. If the argument prevails, the scope of Cho’s entitlement would be considerably reduced.

25.  I am unable to agree with Mr Chung. With respect, the technical nature of the argument is not consistent with modern ethos on how litigation is conducted. There is no authority to support the proposition that the absence of reference to the inherent jurisdiction of the Court in the AOS inhibits Cho from relying on her common law right, which is well-established. As pointed out by Mr Cheung, it is evident from the schedule of the documents sought contained in the original Originating Summons that the scope extended beyond accounting documents. The reliance on Cho’s common law right was implicit. Further, it was explicitly stated in the letter before action of Cho’s solicitors that she was relying upon such right.

26.  This deals with LCK’s argument on the scope of inspection (see para 3 above).

Necessity

27.  This was the focus of the submissions of Mr Chung. In light of the applicable principles, the arguments may be dealt with swiftly. Notwithstanding that Cho is, under the terms of the Agreement the managing director of the Company, the weight of the evidence is that the day-to-day management of the Company was in the hands of LCK, acting via Lau and Wong. This is consistent with the fact that LCK had been answering the requests for documents of Cho and provided her with some of the documents.

28.  The Court was referred by Mr Chung to two general statements in the affirmations of Lau and Wong to the effect that all relevant documents had been provided to Cho. I do not believe that such statements constitute a complete answer to this application. The descriptions of the documents sought in the Minutes are fairly specific, eg, class (2) referred to “financial statements and accounting records showing [LCK]’s contributions to the [Company] since October 2017”. The table of expenditures which had been provided to Cho (C1/234) did not show where the funds came from, apart from a handwritten note that it was paid by LCK (“刘财记付”). Further, as pointed out by Mr Cheung, the recorded expenditures were not entirely consistent with LCK’s evidence on its contribution to the Company (see para 14 above).

29.  It was accepted by Mr Chung that LCK is in the position to provide bank account records of the Company (class (3)) to Cho, which has not been done so far.

30.  In respect of class (5), Mr Cheung submitted (without demur from Mr Chung) that the submissions made by LCK to the IRD on deregistration of the Company, which had not been provided to Cho, was important because to meet the requirement of deregistration it would have been stated that the Company was solvent.

31.  As for class (6), Mr Cheung pointed out (again without demur from Mr Chung) that the plant built with the contribution of Cho had allegedly been demolished, but no record had been provided on the disposal of such asset of the Company.

32.  In the premises, I am unable to accept that LCK had provided Cho with all the relevant records of the Company. On the other hand, the weight of the evidence is that, for whatever reason, the Company had become dormant since about October 2018. Consequently, there may not be a complete and up-to-date set of records of the Company as compared with an active entity.

33.  However, the answer is for LCK to provide an affirmation to verify whether any of the documents identified in the Minutes is in the power, control or custody of the Company, and to allow Cho access to the available documents unless they had already been provided.

Disposition

34.  For these reasons, I accede to Cho’s application. As indicated to the parties, they should endeavour to agree the terms of the appropriate order modelled on para 38 of Ng Yee Wah for the approval of the Court. Unreasonableness in doing so may be penalized on costs.

35.  As for the costs of these proceedings, there is no dispute that they should follow the event. I make an order that the costs of the AOS be paid by LCK, to be taxed if not agreed.

36.  I am grateful to counsel for their assistance.