CHAN KEONG v. NICE THEME LTD AND OTHERS

HCMP2169/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2169 OF 2005

____________________

____________________

____________________

R U L I N G

____________________

1.  On 14 October 2005, I made an order on the application of the Plaintiff in these proceedings (“Mr Chan”) requiring that he be given inspection of certain books and records of the four companies which are the 1st to 4th Defendants to these proceedings.  That order was made on the basis of an Originating Summons which was issued on 10 October 2005 and served on the Defendants, in particular the 5th Defendant, Mr Luk Wing-hung (“Mr Luk”), on 12 October 2005.  When I made the order of 14 October 2005, the question of costs was reserved, since Mr Luk contended that the Plaintiff had acted unreasonably in taking out the application and insisting on prosecuting it, whereas the Plaintiff contended that it was in fact Mr Luk who was acting unreasonably in resisting the inspection sought by the Originating Summons.

2.  The background to this dispute is that the Plaintiff and Mr Luk are shareholders and directors in the 1st Defendant, Nice Theme Limited (“Nice Theme”), which in turn is the parent company of the 2nd, 3rd and 4th Defendants.  The companies are or were involved in the preparation and publication of educational materials for young school children in Hong Kong and had for some years had a profitable and thriving business in that area.  It appears that Mr Chan at some stage emigrated to Canada while Mr Luk remained in Hong Kong and was responsible for the day to day operation of the business of the companies.  Unfortunately, as sometimes happens, relations between the two took a turn for the worse and Mr Chan became somewhat suspicious of certain activities which he thought Mr Luk might be carrying out, which would have had the effect of diverting to Mr Luk, or companies controlled by him, business and income which Mr Chan felt should properly belong to Nice Theme and the other companies within its group.

3.  These suspicions eventually hardened and culminated in a letter being written by solicitors instructed by Mr Chan to Mr Luk and Nice Theme on 6 October 2005, in which various allegations were made of what would appear to be serious wrongdoing on the part of Mr Luk.  Requests were made for an extensive range of things to be done, which included the production of certain accounting records and other records of the company to Mr Chan or his representatives for inspection immediately, and a request for production of management accounts within a few days, by 10 October 2005.

4.  Before Mr Luk had an opportunity to respond to this letter, a notice was sent the following day, 7 October 2005, by Mr Chan or those representing him to Mr Luk and Nice Theme setting out a variety of documents which Mr Chan wished to inspect.  That notice, which was in Chinese, but which has been translated in an affirmation filed by Mr Luk later in these proceedings, essentially indicated that it was Mr Chan’s wish that four named representatives, or groups of representatives, of his should be afforded the opportunity to inspect a total of eight categories of documents, and that this inspection was to be carried out the next day, 8 October 2005, commencing in the morning. 

5.  The notice requested that one of the categories of documents sought, all accounts of the companies and all related documents for the past three years, including all current account records and records of income and expenses, should be placed in a conference room of Nice Theme on the first floor of its offices; whereas the other seven categories of documents were to be placed in a conference room on the second floor of Nice Theme’s offices. 

6.  The other seven category of documents were: all contractual documents executed by the companies in the past 24 months; all sales records of the company in the past 24 months; all correspondence, delivery orders and related documents with certain named companies or entities; all human resources records of the companies in the past 24 months, including various specified documents; all records of movements of stock from the company’s warehouse in the past 24 months; all documents involving educational assessment projects; and all minutes of meetings of departments and committees of the companies, all of which were to be placed in the conference room on the second floor of the building by the next morning.

7.  It is perhaps relevant to note that the notice was apparently served in the early afternoon at around, I am told, 3 pm, on the Friday.  I sought inspection the next morning, a Saturday.  The response to this was that the company was not in a position to allow inspection the next day, because Saturday was not a normal working day for the company or its staff, but instead it was proposed that the Plaintiff and his representatives should be allowed to inspect the documents during the working hours of Nice Theme, which were stated to be about 9.30 to 12.30 and 1.30 to about 5.30, on Mondays to Fridays.  It was stated that this would be permitted on reasonable notice being given.  No indication was, however, given as to what notice would be considered reasonable. 

8.  It appears that the Plaintiff’s representatives did attend the offices of Nice Theme on the Saturday morning and on that occasion arrangements were eventually made for the office to be effectively sealed, with an undertaking being given by Mr Luk that no one would be allowed to have access to the office until the following week, so as to ensure that none of the documents that were in the office would be removed or dealt with in the meantime.  This undertaking appears to have been given at the Plaintiff’s insistence, no doubt because of his concerns as to what might happen to the documents if they were left unattended and the office was left unsecured over that weekend.

9.  In the event, on the Monday, 10 October 2005, Mr Chan, through his representative Mr Fong, an alternate director whom he said he had appointed, did attempt again to make arrangements for an inspection of the documents.  According to Mr Fong in his affirmation in support of the application, he tried to contact Mr Luk in the morning on 10 October 2005, but was unable to do so as he was told that Mr Luk was in a meeting.  However, he eventually got hold of Mr Luk shortly before 11 o’clock that morning.  Mr Fong says that when he asked if he could come and inspect the documents, he was told by Mr Luk that he could not do so, and that the only person who was entitled to inspect the documents was the Plaintiff himself, the director of the company, and not any other person.  This was in contrast to the letter written by Mr Luk’s solicitors, the previous Friday, in which it appears to have been indicated that Mr Chan’s representatives would be permitted to inspect the documents on reasonable notice being given, provided that the inspection took place within office hours.

10.  Faced with this response, Mr Chan took out the Originating Summons in these proceedings.  Perhaps hoping that it might be possible to obtain an inspection without the necessity to come to court, the Plaintiff did not immediately serve the Originating Summons, but eventually did so two days later on 12 October 2005. 

11.  I would note that the Originating Summons seeks rather less in the way of documentation than the Chinese notice which had been served on 7 October 2005, being restricted to four main categories of documents, these being: contracts and agreements entered into or signed between the companies on the one hand, and two named companies, Kasil International Limited, and BBS Company Limited on the other; management accounts of the companies up to the close of business on 10 October 2005; records of staff movements during the past 24 months, including information as to employees who had left and then subsequently joined either of Kasil of BBS; and documents containing details of the dealings between the companies on the one hand, and Kasil and BBS on the other.  This is a rather more restricted range of documentation than was originally sought. 

12.  Notwithstanding that the documentation sought was rather more restricted, there does not appear to have been any immediate response to the Originating Summons by Mr Luk or any of the companies, save that there was some correspondence between the solicitors now acting for Mr Luk (who at the time also purported to act for the companies) and Mr Chan’s solicitors, in which issue was taken as to the validity of the appointment of Mr Fong as an alternate director.  It certainly does not appear to be the case that any proposal was made for inspection of the documents sought in the originating summons to be afforded to the Plaintiff, or his representatives, at any particular time.

13.  In the event the matter then came on for hearing on 14 October 2005, at which time Mr Luk appeared in person.  Objection had been taken by the Plaintiff to the solicitors who were acting for Mr Luk acting for the companies as well, but for reasons which are not entirely clear, this appears to have resulted in Mr Luk coming on his own to the hearing on 14 October 2005. 

14.  At that hearing it transpired that there might have been some misunderstanding on Mr Luk’s part as to the nature of the documentation which it was sought to inspect, since he initially appeared to think that he was required to produce management accounts which were up to date as at 10 October 2005, which was not, in fact, what was sought by the Originating Summons, which only called for inspection of such management accounts as were in existence at that date.  When this was explained to him, Mr Luk accepted that it would be possible to produce management accounts of the companies that existed as at 10 October 2005 to the Plaintiff for inspection.

15.  During the course of the hearing Mr Luk said, more than once, that he did not oppose Mr Chan being allowed to inspect the documentation requested, but he did continue to suggest that it would be appropriate to give him a reasonable time to prepare for such inspection.  On being asked what amount of time he felt was necessary to prepare for the inspection, Mr Luk initially suggested that he would need at least four days to prepare for the inspection that Mr Chan wished to carry out. 

16.  In the event, I was not prepared to permit that amount of time to elapse, having regard to the nature of the complaints of the Plaintiff and his understandable desire to get on with the inspection as soon as possible.  It was also not entirely clear to me what objection or difficulty there could be in permitting the inspection to start as soon as practicable, so that the Plaintiff could at least commence the inspection that he had been anxious to carry out at the earliest opportunity.  Even if not all documents were available immediately, that was a matter that I had hoped could be sorted out between the parties with a modicum of common sense and good will.  In the event, I ordered that Mr Chan was to be free to commence the inspection the same afternoon. 

17.  It is against this background that the dispute has arisen as to whether or not Mr Chan should be entitled to its costs of the application.  Mr Suen, who appeared for Mr Luk defendant today, suggested that in all of the circumstances, the appropriate costs order was either that Mr Luk should be given his costs of the Originating Summons and the hearing on 14 October 2005, or (as a fallback position) that the court should simply make no order as to costs. 

18.  As I understood his submission, it was based on the suggestion that the Plaintiff had acted unreasonably and precipitously in issuing and pursuing the Originating Summons proceedings without seeking before then to make any appointment, giving reasonable notice, which Mr Luk could have considered.  It was suggested that had the plaintiff done so, it was likely that the matter could have been resolved without the need for proceedings and the hearing on 14 October 2005.

19.  With respect to Mr Suen, I am afraid that I do not see that that is necessarily the case.  It seems to me, leaving aside the question of the reasonableness or otherwise of Mr Chan’s behaviour up to 10 October 2005, that as at 10 October, Mr Chan had made his position clear.  By the Originating Summons which was issued that day and served two days later, Mr Chan was making it very clear to Mr Luk what documents he wished to see.  It is true that these were rather less in terms of their scope than the documents that had originally been sought.  But having been provided with that information, it was open to Mr Luk either to accept that it was appropriate to grant inspection, or to resist it.  In the event, Mr Luk continued to resist the granting of immediate inspection until well into the hearing on 14 October 2005.

20.  I would accept that the initial notice that was served (i.e. the Chinese notice of 7 October 2005), in demanding inspection the next morning, and demanding that all the documents referred to, which were indeed voluminous, should be made available at the offices of the company and arranged in two separate locations by the next morning, was probably asking too much.  In this context, I think I should indicate that where a director seeks to exercise his right of inspection under section 121 of the Companies Ordinance, he is generally free to do so at any time within normal office hours.  Although it may be that in certain circumstances a certain amount of time will have to be allowed to prepare for the inspection, in general, there should be very little difficulty in allowing a director in and making available to him the documents which he wishes to inspect.

21. 21. In saying this, I do not ignore the fact that there may be cases in which it will not be possible to afford immediate inspection of all documents sought, but in those cases the matters will, I think, have to be dealt with on a case-by-case basis.  If, for example, documents are sought which date back some time into the past, it may turn out that those documents are not available at the company’s offices.  In that sort of situation it would no doubt be reasonable to allow a reasonable time to retrieve the documents and make them available for inspection. 

22.  However, that was not entirely the case here.  What was sought were documents which admittedly went back a year or two in some respects, but it seems to me that some at least of the documents would have been in the offices of the company.  Indeed, at the hearing on 14 October 2005, Mr Luk confirmed that many of the documents that were sought by the Originating Summons were in fact kept at the company’s offices and were available there and could therefore be provided for inspection. 

23.  Notwithstanding that it may have been somewhat aggressive for the Plaintiff to have sought inspection of the documents which he did by his Chinese language notice of 7 October 2005, and to ask for that to be provided the next morning, it seems to me that by 10 October 2005, the position was that, notwithstanding that the Defendants had indicated that they would be amenable to inspection on reasonable notice, they were still resisting inspection of any documentation during office hours that day or the next day.  Further, as Mr Luk’s stance on 14 October 2005 indicates, he was of the mind that any inspection should not commence until about three or four days after notice had been given.  On that aspect of the matter, the ruling which I made on 14 October 2005 clearly went against him. 

24.  In those circumstances, it does seem to me that Mr Chan plaintiff was substantially successful in obtaining what he sought and that although some of his earlier behaviour might have been on the aggressive side and might have gone beyond what could reasonably be expected, by the time that he had narrowed down his request in the Originating Summons, the request as so limited was one which, in my view, he was entitled to seek immediate inspection of within office hours, and that is what he effectively obtained.

25.  It therefore seems to me (although I have some sympathy to Mr Luk’s position, having regard to the earlier history of the matter) that once the Originating Summons was issued and served on Mr Luk, it was and the case that the Plaintiff would be entitled to the order that he sought.  In those circumstances it seems to me that it would be right to order that Mr Luk should pay the Plaintiff the costs of the Originating Summons, by which I mean the costs of preparing the originating summons and the affirmation in support, and also the costs of the hearing on 14 October 2005. 

26.  It seems to me that, so limited, that order reasonably reflects the success of Mr Chan, and the failure of Mr Luk to put off the inspection for a period of time.  I make it clear that in awarding such costs I do not intend to award to the plaintiff any of the costs of the earlier correspondence, or earlier attempts to obtain inspection. As for the costs of this hearing, I do not think that Mr Suen can really resist the costs of today, and I award these to the Plaintiff.  All the costs awarded are to be taxed on the party in party basis if not agreed.