YUNG SIU WA v. RAFFLES FAMILY OFFICE LTD AND OTHERS

HCMP 1900/2018

[2018] HKCFI 2620

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1900 OF 2018

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REASONS FOR JUDGMENT

AND DECISION ON COSTS

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A. INTRODUCTION

1.  By Originating Summons dated 30 October 2018, the plaintiff, a director of each of the defendants, seeks an order for inspection and taking of copies of various documents of the defendants.  Even though theOriginating Summons refers only to sections 374 and 375 of the Companies Ordinance[1], it is clear that the plaintiff is also relying on his right as a director to inspect under common law.

2.  The plaintiff was and, as at the hearing before me on 23 November 2018, still is one of four directors of each of the defendants, the other three being Kwan Chi Man (“Kwan”), Mok Wan Chi (“Mok”, the wife of Kwan), and Tam Chun Wing Ray (“Tam”).  The plaintiff claims that he and Kwan have been operating the defendants as a quasi-partnership since June 2017.

3.  Until 25 October 2018, the plaintiff was also the Chief Investment Officer (“CIO”) of the 1^st defendant.

4.  Regarding the shareholding structure, Kwan is the sole ownerof another company (“CMK”) which is the registered shareholder of 44% of the issued capital of the 1^st defendant.  The plaintiff’s father is the registered holder of 32% as his nominee.  There are two other registered shareholders, each holding 12%: Tam and Poon Pui Fan (“Poon”).

5.  In turn, the 1^st defendant wholly owns each of the 2^nd to 6^th defendants.

6.  It is the plaintiff’s case that he recently discovered various misconduct of Kwan and Mok, including a proposal by Kwan to use part of the proceeds of a share allotment by the 1^st defendant to repay an alleged loan due to a company owned by the two of them. 

7.  On 7 October 2018, the plaintiff wrote a letter to the 1^st and 2^nd defendants, attention to Kwan and Mok, inter alia asking for details of, and documents relating to, the alleged loan.  No reply was provided.

8.  On 22 October 2018, the plaintiff sent an email to Kwan asking for certain documents as a director of the defendants.  Apparently the demand was not met.

9.  On 23 October 2018, the plaintiff’s solicitors, Messrs Oldham, Li & Nie (“OLN”), wrote to the 1^st and 2^nd defendants, attention to Kwan and Mok, with details of allegations of misconduct against them, and inter alia demanded they or CMK purchased his shares in the 1^stdefendant(although strictly the shares were and are held in the name of the plaintiff’sfather).  Court proceedings were threatened if there was no reply. 

10.  In this letter, OLN stated that CMK owned 44% of the shares in the 1^st defendant, and “your affiliate, Mr. TAM Chun Wing Ray (‘Ray’), who is accustomed to your instructions, hold another 12% of the shares in [the 1^st defendant]”.  It was also alleged that the plaintiff transferred 6% of his shares in the 1^st defendant to Tam in April 2018 for no consideration by reason of misrepresentation, duress and/or financial coercion. 

11.  In the letter, the plaintiff did not ask for inspection of documents as a director of the defendants.  No reply was provided.

12.  On 25 October 2018, the plaintiff was summarily dismissed asthe CIO of the 1^stdefendant, and his access card to the defendants’ premises was deactivated.

13.  On the same date, after the deactivation of the access card (and thus presumably the dismissal), two persons from OLN, on behalf of the plaintiff, went to the defendants’ premises and on his behalf demanded an inspection of the books and records of the defendants as a director.  That was refused.

14.  On 29 October 2018, notices were given to the plaintiff that board meetings of the six defendants would be held on 5 November 2018 to consider the convening of general meetings of the six defendants to remove him as a director of each company. 

15.  On the same date, but with no evidence as to whether this happened before or after the giving of the notices referred to in §14 above, OLN sent a letter to the Court, presumably with the draft Originating Summons and supporting documents, copied to the defendants. 

16.  The defendants wrote to the Court, copied to OLN, on 30 October 2018, referring to OLN’s letter to the Court, and stating that they were willing to provide copies of the documents to the plaintiff but requested 42 days to do so.

17.  On the same date, the plaintiff issued this Originating Summons. Again, there is no evidence as to whether the Originating Summons was issued before or after OLN received the letter from the defendants.

18.  The general meeting of the 1^st defendant convened to consider the removal of the plaintiff as a director is fixed for 27 November 2018. 

19.  Despite the stance of the defendants stated in the letter dated 30 October 2018, the plaintiff pursues this application because he considers the 42-day period to be too long, this being (he says) delaying tactics, and would expire after the holding of the general meeting.  The defendants, on the other hand, just before the first hearing of the Originating Summons before me on 13 November 2018, resiled from that stance, claiming that after taking legal advice, they now consider that they have grounds to oppose the application.  I gave directions for the filing of evidence by the defendants in opposition and by the plaintiff in reply, so that the Originating Summons can be substantively disposed of before the holding of the general meeting on 27 November 2018.  No application for interlocutory relief has been made, nor has any party asked for this Originating Summons to proceed to a full trial.  The defendants undertook to me by counsel that if I order inspection, that would take place on 26 November 2018, the day before the general meeting.

20.  The hearing took place on 23 November 2018.  At the conclusion of the hearing, I dismiss the Originating Summons with reasons to be handed down.  These are my reasons.

B.    GENERAL PRINCIPLES

21.  Before me, Mr Patrick Siu, appearing for the defendants, points to the fact that it is inevitable that the plaintiff would be removed as a director of each of the defendants on 27 November 2018.  That being the case, he submits that the application could not have been made for the purpose of enabling him to carry out his duties as a director.  The clear inference is that the plaintiff is seeking to have access to the documents to assist him in a likely unfair prejudice petition (as foreshadowed in the letter dated 23 October 2018) and to support a higher buy-out valuation of his shares.  He relies in particular on the judgment of the Court of Appeal of England and Wales in Oxford Legal Group Ltd v Sibbasbridge Services Ltd [2].

22.  Mr Lai Chun Ho, appearing for the plaintiff, submits that the mere fact that a director is to be removed soon does not mean that an attempt by him to inspect the company’s documents is for an improper purpose.  He emphasises that Oxford Legal Group is not an authority for that.  That case involved an application for summary judgment for inspection, and it was held that there was a triable issue as to whether the director, soon to cease to be so because there was a buy-out order, had an improper purpose in seeking inspection.

23.  The general principles regarding a director’s right to inspect documents were set out by Kwan J (as she then was) in Ng Yee Wah v Lam Chun Wah [3], and which have been approved by the Court of Appeal[4]:

“ (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.” [5]

24.  Despite the use of the word “only” in principle (3) by Kwan J, it is clear that inspection is not to be refused only in the circumstances stated therein, ie abuse or breach of confidence leading to injury or damage to the company.  Any improper purpose, properly established by the company, constitutes a ground of refusal, with abuse or breach of confidence leading to injury or damage perhaps the most usual or obvious kind of improper purpose.  This is not disputed by counsel before me, and is amply supported by authorities: see principle (5) of Kwan J; Tsai Shao Chung v Asia Television Ltd [6] and Re Alvarez & Marsal Asia Ltd [7].  In Re Tanyuen Investments Ltd [8], Kwan JA said:

“ The right of a director to inspect documents belonging to the company under section 121 and at common law is not in dispute. This right of inspection is essential to the performance of the duties of a director and the court would not interfere with this right unless it could be clearly established that the director intended to abuse the confidence in relation to the company’s affairs and to injure the company in a material way…or that the director intended to use the right to inspect not for the purposes for which the right was conferred but for some other improper purpose ….”

25.  I respectfully agree with the analysis and conclusion of Sir John Chadwick[9] in Oxford Legal Group [10]:

“ if the director was seeking to exercise that right, not for the purpose for which it was conferred but for some purpose unconnected with his duties as a director, there was no reason why inspection should not be refused.”

26.  An attempt to achieve an advantage in proceedings, anticipated or existing, between various shareholders of the company concerned, if established, would be an improper purpose, as this would not be for the purpose of discharging one’s duties as a director.[11]

27.  I accept Mr Lai’s submissions that the fact that a director seeking inspection is likely or inevitably to be removed soon is not per se a reason to refuse inspection.  Inevitable removal may in itself be a reason to refuse interlocutory relief as this may be an important factor in the discretionary consideration of the balance of convenience.[12]  But where, as in here, inspection as final relief is being sought, where the matteris not one of discretion for me, the question is what inference can be drawnfrom the likely or inevitable removal regarding the purpose of the inspection in the light of all the circumstances.  The burden is on the company concerned to establish improper purpose affirmatively with clear proof.

C.    INEVITABILITY OF REMOVAL OF THE PLAINTIFF AS A DIRECTOR

28.  I first deal with the question of whether the removal of the plaintiff as a director of each of the defendants is inevitable.

29.  On the basis of the plaintiff’s own case that Tam is an affiliate of Kwan and Mok and is accustomed to their instructions, as stated in OLN’s letter of 23 October 2018 (§10 above), Kwan’s “camp” therefore holds an aggregate of 56% of the issued capital of the 1^st defendant, which in turn wholly owns each of the 2^nd and the 6^th defendants.  Thus, it is a virtual certainty that the plaintiff will be removed as a director of each of the defendants. 

30.  In a letter sent to me on 26 November 2018, after the hearing before me on 23 November 2018, the plaintiff seeks to raise new arguments as to why his removal is not inevitable, because:

(1) No general meetings for the 2^nd to the 6^th defendants have been convened for 27 November 2018. 

(2) The plaintiff says that he in fact disputes some of the shareholding of Kwan’s camp.  He says 6% held by Tam was “stolen” from him (§10 above), while another 4% is unlawfully retained by CMK and should have been transferred to Poon.  If the above is proven to be true, then the plaintiff’s camp will be in majority control (the assumption being Poon is in his camp), and OLN has requested Tam and CMK to vote at the general meeting in accordance with the will of the plaintiff’s camp at the general meeting.  OLN has written letters on the above on 31 October 2018 and 2 November 2018, and has commenced an action on behalf of the plaintiff on 21 November 2018 regarding the shares in dispute.  However, apart from the mention of the 6% held by Tam in the letter of 23 October 2018 (§10 above), these matters have not been put to me at the hearing of 23 November 2018.

31.  In my judgment, these two matters, assuming them to be correct (as I have not heard the defendants on them), do not affect the position that the removal of the plaintiff as directors of the defendants is inevitable.

32.  For §30(1), even if this is correct, although I have not seen any evidence one way or another, if the 1^st defendant is indeed removed as a director of the 1^st defendant on 27 November 2018, as seems certain, so that Kwan’s camp controls the 1^st defendant at both shareholders and board levels, the removal of the plaintiff as a director of each of the 2^nd to the 6^th defendants in the near future, if not on 27 November 2018, is also inevitable.

33.  For §30(2), unless and until the plaintiff case on the disputed shares is established, the voting at the general meeting will have to go by the registered shareholding.  Despite OLN’s demand, there is no evidence that Tam and CMK have agreed to vote in the plaintiff’s favour in relation to those disputed shares. I do not agree that it is mere speculation, as OLN suggests in the letter of 26 November 2018, that they would breach their duties as the alleged trustees of the shares in dispute.  Rather, it is fanciful to suggest that they will vote in line with the plaintiff’s wishes as far as the disputed shares are concerned.  There is no suggestion before me that the plaintiff has taken out any application for interlocutory or final relief regarding what should or should not happen on 27 November 2018 at the general meeting, or indeed whether the meeting should be held at all, because of the disputes on those shares.

34.  In the light of the above, I find that it is inevitable that the plaintiff will be removed as a director of each of the six defendants on 27 November 2018 and soon thereafter.

D.    PURPOSE OF THE INSPECTION

35.  In the light of the circumstances as stated above, I also find that, on 30 October 2018, the plaintiff and his advisors must be aware that his removal in the near future would be inevitable, as Kwan’s camp controls the defendants and the plaintiff’s claims to the shares in dispute is unlikely to be resolved in his favour by the time of any general meeting to be held.  Yet the Originating Summons was issued on that date.  As the first hearing was fixed for 13 November 2018 with the general meeting to be held on 27 November 2018 by then scheduled, the plaintiff would know before the first hearing that even if the order was granted there and then, he would be removed in two weeks’ time from the 1^st defendant or soon thereafter.  Yet he persisted in the application.  Because of the time­table for the substantive hearing of this application, the plaintiff knew after 13 November 2018 that he would have no more than one day to inspect the documents, at least of the 1^st defendant, even if I grant the application. His removal as a director of the 2^nd to the 6^th defendants would follow soon. Yet he persisted. In the meantime, no application is taken out regarding the holding of the general meeting on 27 November 2018.

36.  It is not disputed that once a director is removed, the documents he obtained from an inspection order granted to him so as to discharge his duties as a director can no longer be used by him properly.

37.  All these are against the background that there are very seriousallegations made by the plaintiff against Kwan, Mok and Tam, and vice versa.  As Mr Lai says at the end of the hearing, litigation between the two camps is very likely and indeed, as I am subsequently told (but not at the hearing), the plaintiff has commenced an action on 21 November 2018.

38.  I find the respective words of Sir John Chadwick and Hughes LJ in Oxford Legal Group[13], as adapted to the facts here, applicable:

“ It is plain that [the plaintiff] would cease to be a director …. In those circumstances it is difficult to see any purpose for which [the plaintiff], as a director, needed to inspect the books and records of [the defendants]. But, plainly, there are grounds for the view that [the plaintiff] wanted inspection for the collateral purpose of assisting [the plaintiff] in the [likely actions] ‌….”

“ The critical factor in this case is that the claimant director … is inevitably about to cease to have any position in the company ….Thus there was in this case clear reason to say that the purpose of inspection might be other than qua director; rather, it appeared to be to achieve some collateral advantage in the [likely actions].”

39.  As Oxford Legal Group was a summary judgment application, the Court of Appeal did not have to express a view other than the triability of the issue of improper purpose, thus the rather tentative nature of the opinions in the judgments.  In this case, since it is an application for final relief, I have to come to a view as to what inference I can draw on the evidence as to the purpose of inspection by the plaintiff, bearing in mind that the burden is on the defendants to show affirmatively with clear proof that the purpose is improper.

40.  In my judgment the clear inference I can, and do, draw, from the above facts is that the plaintiff is not making, and continuing with, this application for inspection for the purpose of enabling him to discharge his duties as a director, when he must have known, when he issued the Originating Summons, that he would inevitably be removed quite soon. Mr Lai refers to the various earlier attempts of the plaintiff to seek inspection, and the fact that he sent the draft application to the Court and to the defendants on 29 October 2018.  Notwithstanding those earlier attempts, the issue remains whether the Originating Summons was issued with an improper purpose on 30 October 2018, when by then the plaintiff must know of his inevitable removal.  In my judgment, the clear inference from all the evidence is that the plaintiff is making, and continuing with, this application for the purpose of seeking information which may assist him in his own foreshadowed, and likely, litigation with Kwan and Mok.  I do not need to be as specific as Mr Siu suggests regarding exactly how the plaintiff is going to use such information in the likely litigation: if I can, as I have, come to an affirmative view, based on available evidence, that the plaintiff is not seeking inspection for the purpose of discharging his duties as a director of the defendants, then inspection should be refused, as Sir John Chadwick said (§25 above).  It is difficult to see why the plaintiff is still seeking inspection knowing that he would be removed quite soon, when the only proper purpose of inspection is for him to discharge his duties as a director.  Further, it is not necessary to find, and I do not, that there is any intention of the plaintiff to harm the interests of the defendants by seeking inspection.

E.    DISPOSITION

41.  For the above reasons, the Originating Summons is dismissed..

42.  In the light of the above, there is no need for me to consider the allegations of misconduct made by Kwan and Mok against the plaintiffin support of their secondary case of improper purpose (allegedly to obtain confidential information), in particular, as Mr Lai says, litigation between them where those allegations will be repeated is quite likely, and so the less I say about them the better. 

43.  Mr Lai submits that there should be no order as to costs becauseof the stance of the defendants on 30 October 2018 (agreeing to provide the documents but in 42 days’ time) it was reasonable for the plaintiff to take out the Originating Summons, and he also refers to the lateness of the allegations made by Kwan and Mok.  However, a necessary conclusion from my analysis above is that the improper purpose existed when the Originating Summons was issued on 30 October 2018.  Thus the making of this application is not justified.  I therefore see no reason that costs should not follow the event.  I order that the plaintiff is to pay the costs of the defendants of this Originating Summons, including the costs of the hearings on 13 and 23 November 2018.  In so far as necessary and for the avoidance of doubt, I give certificate for counsel for both hearings.

F.    POSTSCRIPT

44.  After I have finished writing these reasons, I received a letter dated 26 November 2018 from OLN making further submissions and referring to new evidence.  I have considered all the points made and have revised my reasons accordingly to deal with them in so far as it is necessary, on the assumption (without accepting or finding) that the necessary factual allegations stated therein are true.  Since my decision remains the same, I do not see the need to ask the defendants to respond but since I have not done so I repeat that I only assume those allegations to be true.  If any such matters become relevant in any future proceedings, this judgment should not be regarded as containing any findings or conclusions on the factual allegations in the said letter of 26 November 2018.

45.  I thank counsel for their assistance.