YU SUN SAY AND OTHERS v. HKI PROPERTIES LTD

HCMP 2556/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2556 OF 2007

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BETWEEN

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REASONS   FOR   DECISION

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1.  I have before me 11 originating summons seeking extensions of time pursuant to section 122(1) of the Companies Ordinance, Cap. 32, for laying the relevant company’s income and expenditure statement before the company in general meeting. Each application has been issued by the directors of the company in question.

2.  With the exception of Meridian Finance Company Limited (Meridian), the companies are members of a group held directly or indirectly by HKI Properties Limited. Meridian has common beneficial ownership with the other companies and their businesses are closely related.

3.  The explanation for the failure to put audited income and expenditure statements before the companies in general meeting is the same in each case. All the companies carry on business in China and do not pay income tax in Hong Kong. As a consequence they have not been required by the Inland Revenue Department to file audited accounts with it. The directors explain in their affirmations in support of each application that they understood that it was not necessary to produce audited accounts if they were not required by the Inland Revenue Department to do so unless a company had shareholders who were not represented on a company’s board of directors and would not, therefore, be aware of a company’s financial position. In the case of each company there has, with the exception of H.K.I. Development Limited for a period of 2 years in 2006 and 2007, always been a representative of each shareholder on each board of directors.

4.  In July 2007 HKI Properties Limited recruited a new financial controller, Tang Chi Fai, for the group of companies of which it is the parent. Mr. Tang told the directors of the companies that they should have put audited accounts before the company in annual general meeting. It was this that led to the present applications to regularize the position.

5.  The periods in which the companies have failed to put audited accounts before the company in annual general meeting vary. In 7 cases the periods are short as the companies were only incorporated in 2006 and 2007. In the other 4 cases the periods are longer. In one case the failure goes back to 1999.

6.  Section 221(1B)(a) is in the following terms:

“(1B) The court, if for any reason it thinks fits to do so, may in the case of any company and with respect to any year –

(a) substitute for the requirement of subsection (1) to lay a profit and loss account or (as the case may be) an income and expenditure account before the company at its annual general a requirement to lay such account before the company at such other general meeting of the company as the court may specify;”

7.  The court has a discretion to grant extensions of time for the laying of profit and loss accounts or income and expenditure statements before a company’s general meeting “for any reason it thinks fit”: Re Chiyu Banking Corporation Limited HCMP 2832/2002, 1 August 2002, per Kwan J. at §5.

8.  The court has exercised such power to regularize non-compliance which has occurred continually for periods as long as 10 years: Re Artini International Company Limited & Others HCMP 2065, 2067, 2068, 2069, 2071, 2072/2007, 16 November 2007, per Kwan J. at §§9-12; Re Ta Yang Silicone Rubber Industrial Company Limited & Others HCMP 446-448/2007, 27 March 2007, per Kwan J. at §§6-14.

9.  The above cases demonstrate that the type of factors to which the court has regard in considering whether to regularize non-compliance with section 122(1) include:

(1) Whether the shareholders were aware of the financial position of the company in question and thus were not prejudiced by non-compliance;

(2) Whether the default was inadvertent; and

(3) Whether the court was satisfied that the company would comply with the obligation to lay its profit and loss accounts or income and expenditure statements before general meetings in future.

10.  I am satisfied in the case of each of the companies which are the subject of the applications before me that the shareholders have not been prejudiced, the default was inadvertent and that now the directors are alive to the companies’ obligations they will comply with them in the future.

11.  One thing, which seems to me to me would complete the picture in a case such as the present is an explanation of the position in respect of the companies obligations to file tax returns with the Inland Revenue Department. I would have expected there to have been some correspondence with the Inland Revenue Department and each company recording that the Inland Revenue Department did not require tax returns to be filed, and thus audited financial statements, to be filed. This would be consistent with the directors’ evidence that they thought, albeit erroneously, that it was not necessary to have audited accounts prepared, because they were not required to file them with the Inland Revenue.

12.  Despite the fact that such evidence is not before the court in the present case I will grant orders in the terms of each of the drafts before me as I am satisfied that it is appropriate to do. I would, however, note for the benefit of practitioners that in future applications in which the failure to comply with section 122(1) is explained on the grounds that it was not necessary to file audited accounts with the Inland Revenue Department and this mislead the directors into thinking it was not necessary to produce audited financial statements at all, evidence should be adduced, if it is available showing that the Inland Revenue did not require tax returns to be filed.