FUNG CHUEN v. SANDMARTIN INTERNATIONAL HOLDINGS LTD

HCMP 1044/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1044 OF 2017

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JUDGMENT

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Introduction

1.  This is an application[1] for an order under s 740, the Companies Ordinance (Cap 622) for inspection of documents.

2.  The defendant (“the Company”) is a limited company incorporated in Bermuda the shares of which have been listed on the Main Board of the Hong Kong Stock Exchange since 2005.  The plaintiff (“P”) is its shareholder holding not less than 2.5% in value of the voting rights of all the members having a right to vote at general meetings.[2]

3.  By the present application, P seeks inspection of the following categories of documents of the Company:

(1)   documents regarding the Company’s loans to and investment in two debtors in Nepal, namely Emiratinvest International Ltd (“Emiratinvest”) and Simple Media Network Pvt Ltd (“Simple Media”)[3] (collectively “the Nepalese debtors”); and

(2)   documents regarding the Company’s investment in MyHD Media FZ LLC (“MyHD”), a company incorporated in Dubai. 

P’s case

4.  P alleges that the Company’s dealings with the aforesaid companies are extremely dubious to say the least:

(a)  as regards the Nepalese debtors, both of them only commenced business in 2015 and therefore none of them had any proven track record.[4]  On the other hand, the Company itself was in grave financial difficulties.  Despite the aforesaid, the Company still saw fit to lend Simple Media a further HK$14.5 million during 2016 when the Nepalese Debtors together were already owing the Company about HK$88 million.[5] What is more astonishing is that shortly afterwards in the same year the Company, without any satisfactory explanation, impaired all the loans which the Nepalese Debtors owed (including the new loan of $14.5 million).  That manoeuvre caused BDO, the Company’s auditors, to raise concerns, resulting in a qualified opinion regarding the impairment[6]; and

(b)   as regards MyHD, P says that it is an insolvent company with no positive assets and it does not generate any positive cash flow.  As of 30 June 2015, MyHD has a net current liability of HK$105,840,000.  Despite the fact that the Company was itself in a precarious financial position, it still saw fit to finance debts of MyHD and also to acquire a 40% stake in the latter. 

5.  Apart from the above, there is also evidence which, P says, indicates that Hung (the Chairman of the Company) and his wife Carmen Chen were connected with the Nepalese Debtors and MyHD:

(i)  their son, Erik Hung, and his wife, Lo, had successively been appointed a director of Simple Mind,[7] a fact which the Company had failed to disclose in its Reply to the Stock Exchange[8]; 

(ii)  Carmen Chen described herself as the “Board Head” of MyHD which position was at the top of its organization chart;[9] and

(iii)  the sole shareholder and director of Emiratinvest, Chen Jo Wan, is the sibling of the shareholder of MyHD, Chen Chu Li,[10] both of them are close associates of Hung.[11] Yet, in a draft announcement for “Disclosable Transaction”, the Company said the two Nepalese Debtors were “not related”[12].  Whilst this might be technically correct, it was quite capable of being misleading.  P says that this is a typical example showing that the management of the Company was playing a game of “catch me if you can” and that one has to squeeze the truth out of them.

6.  Based on all of the above, it is submitted that P has made out a reasonable case that there is a genuine and reasonable need to investigate into the proprietary of the aforesaid transactions in order to protect P’s interest as a shareholder of the Company.  It is also submitted that P has demonstrated good faith in making the present application.

The Company’s case

7.  On the other hand, my attention has been drawn to the fact P is also petitioning for the Company’s winding-up[13] and that the grounds relied on by him in the present application are also the grounds for the winding up petition.[14] Besides, the Company alleges that P is an associate of one Mr Zhi (a professional financial investor) who has been prohibited by a restraint order from commencing further legal action against the Company.  The Company says that P’s and Zhi’s various litigations against the Company were attempts to frustrate the Company’s effort to raise working capital[15] so as to force Hung to negotiate a settlement to buy back P’s shares.  Moreover, the Company alleges that the present application is a fishing expedition by P in search of evidence to substantiate his allegations in the winding up petition, that there is no reasonable case for investigation and that there is bad faith and improper purpose on P’s part.  Lastly, the Company also argues the scope of documents sought is too wide.

The issues

8.  In view of the evidence before this court and counsel’s submissions, the major issues for this court to decide are as follows:

(a)  whether, based on the evidence before the court, there is a proper case for investigation regarding the Company’s dealings with the Nepalese debtors and with MyHD;

(b)   if so, whether P has acted with good faith and proper purpose in the present application;

(c)  if so, whether the court should exercise its discretion by ordering inspection; and

(d)   if so, whether the scope of documents sought is wider than necessary.

The relevant legal principles

9.  Section 740 of the Companies Ordinance says:

“ 740. Court may order inspection of records or documents

(1)  On application by a required number of a company’s members, the Court may make an order—

(a)  authorizing a person who is the applicant or one of the applicants to inspect any record or document of the company; or

(b)  authorizing a person who is not the applicant or one of the applicants to inspect any record or document of the company on behalf of the applicant or applicants.

(2)  The Court may make an order authorizing a person to inspect a record or document if it is satisfied that—

(a)  the application is made in good faith; and

(b)  the inspection is for a proper purpose.

(3)  If the Court makes an order authorizing a person to inspect a record or document, the person may, unless the Court otherwise orders, make copies of the record or document.

(4)   If the Court makes an order authorizing a person to inspect a record or document, it may make any other order that it thinks fit, including—

(a)  an order requiring the company, or an officer of the company, to produce any record or document to the person;

(b)  an order specifying the record or document that may be inspected by the person;

(c)  an order requiring the applicant to pay the expenses reasonably incurred by the company in the inspection; and

(d)  an order permitting the person or, if the person is not the applicant, the applicant to disclose any information obtained as a result of the inspection to any other person specified in the order.

…

(6)   In this section, a reference to a required number of a company’s members is a reference to—

(a)  the number of members that represents at least 2.5% of the voting rights of all the members having a right to vote at the company’s general meetings at the date of application; or

(b)  at least 5 members of the company.”

10.  From a plain reading of the provision, for it to apply:

(i)  a shareholder or shareholders would first need to be qualified under either one of the two limbs of s 740(6);

(ii)  the applicant must then satisfy the court of the conditions under s 740(2), namely that the application is made in good faith and that the inspection applied for is for a proper purpose; and

(iii)  even if those conditions are satisfied, the court still has a discretion whether or not to grant an order for inspection.

11.  The predecessor of s 740 of Cap 622 is s 152FA of Cap 32.  The latter was modelled on s 247A of the Australian Corporations Act 2001.  For the present purpose, the legal principles regarding applications for inspection by shareholders of company documents remain the same after the enactment of Cap 622 and those principles have recently been summarized by the Court of Appeal in Veron International Ltd v RCG Holdings Ltd[16] as follows:

“ 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.[17]

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.”

(Emphasis supplied)

12.  Whilst there is no question that both “good faith” and “proper purpose” have to be established before an order for inspection can be made,  there is some controversy as to whether the requirements of “good faith” and “proper purpose” in s 740(2) constitutes a “composite notion” or two separate and distinct requirements and whether the test for “good faith” is subjective or objective: see Wong Kar Gee Mimi v Hung Kin Sang Raymond & Anor[18], applied in Re Bank of East Asia[19] and Wong Sau Man, Samuel v Wong Kan Po, Wilson & Ors[20].  As a matter of stare decisis, I am bound by the decisions of the Court of Appeal in Re LehmanBrown Ltd and Veron International’s case to the effect that s 740(2) expresses a composite notion so that the inspection is to be made in good faith and for a proper propose.  On the other hand, it is also necessary to bear in mind that the Court of Appeal in Re LehmanBrown Ltd has pointed out that this does not mean that if a proper purpose is proved, a case of good faith shall follow or is to be assumed.[21] I readily accept that in some factual situations the difference in approach to s 740(2), namely whether “good faith” and “proper purpose” is a composite notion or two separate and distinct requirements, may bear on the results of an application for inspection.  In the present case, however, as can be seen in the later part of this judgment, the factual situation is such that I do not consider that the two different approaches would produce two different results. 

13.  Besides, I note that all the relevant case authorities agree that hostility on the part of the applicant does not of itself negate “proper purpose”; and provided that there the application is made in “good faith” and that the primary or dominant purpose is proper, whether inspection may be of benefit to the applicant for other purposes is irrelevant.

14.  Mr Chong (and with him Mr Tai), counsel for P, submits that the court should take 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 corporate governance.  In this regard, I note that the case authorities all agree that the requirement of “proper purpose” is an objective test that calls for an examination of all the surrounding circumstances in order to determine whether the purpose for the inspection order is indeed proper[22]. As to whether a “liberal approach” should be adopted, I take heed of the following comments by the Court of Appeal in Veron International’s case:

“ 20.1 During the course of this appeal, it was argued that there were two approaches to applications under s.152FA, a ‘liberal’ approach adopted by Harris J in Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241 and a ‘less liberal’ approach adopted by Deputy Judge Coleman SC at first instance in Re LehmanBrown Ltd [2011] 4 HKLRD 237.

…

20.3 For my part I do not find it constructive to enter into an academic discussion as to whether there were two approaches, and if so, which one should prevail.

20.4 Nor do I see why the legislation should be applied differently in the case of a listed company as compared with a private company. Whilst there may be more information in the public domain for listed companies, shareholders of a listed company lack the personal relationships that are normally present in private companies which enable shareholders to know more or less how the company is being run.

20.5  In my view the real issue is how the Court, guided by the principles set out in the preceding paragraph, should apply the legislation to the facts of the individual case.”

15.  As to the factual disputes between the parties, I am alive that this is not a trial on affidavits and that the court is not required and should not endeavor to reach conclusions about the merits of the matters relied on as constituting a proper purpose.   The Court only needs to be satisfied that a proper purpose has been established and that it is a proper case to exercise the Court’s discretion to order inspection.  In this regard, the observations of Recorder A Chow SC (as he then was) in Leung Chung Pun v Masterwise International Ltd[23], which is cited with approval by Harris J in Re Bank of East Asia[24],is pertinent:

“ 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.‌…”

16.  Ms Ling, counsel for the Company, relying on the first instance decision of Deputy Judge Coleman SC in Re LehmanBrown Ltd[25] submits that:

“ [An order for inspection] would ordinarily only be made where the applicant member had some specific and/or personal right which could only be protected by the making of such an order. If the shareholder can obtain appropriate protection under the discovery process in ongoing litigation, it is unlikely that an order under the section is the only means of protection.”

(Emphasis supplied)

17.  With respect, I am unable to accept her aforesaid submission.  This is because what was said in by the learned judge must now be read in the light of the judgments of the Court of Appeal Re LehmanBrown Ltd and Veron International’s case.  Whilst the Court of Appeal, differently constituted, has held that “The section operates where the applicant seeks to protect some specific or personal right by the making of the order”, the word “only” is remarkably absent there.  Furthermore, the Court of Appeal on both occasions adopts as an example that an order for inspection can be made 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.  It is also pertinent to note that in Veron International’s case[26] the Court of Appeal says that the fact that the applicant may have other means of obtaining the information elsewhere does not mean that he cannot satisfy the two requirements but it is relevant to the court’s decision whether to exercise its discretion to grant an order. 

18.  With the aforesaid legal principles in mind, I now turn to consider the issues raised by the parties in the present case.  In so doing, I note that there is no dispute between the parties that P has met the condition under s 740(6)(a) as regards shareholding. 

Proper case for investigation

The Nepalese Debtors

19.  Having considered all the evidence before me (including the Company’s explanations) and counsel’s submissions, I am satisfied that P has adduced sufficient material before the court which gives rise to a reasonable case for investigating whether the loans advanced to the two Nepalese Debtors were a pretext by the Company’s directors for siphoning off the Company’s funds to the detriment of its various stakeholders including the minority shareholders.  My reasons are as follows:

(a)  within a short period of about two years the Nepalese Debtors, which had no track records, were allowed by the Company to accumulate huge amount of loans and trade debts (HK$88 million) without any security.  Notably, those loans and trade debts were not even secured at the time they were incurred[27];

(b)  despite the HK$88 million which the Nepalese Debtors were already owing the Company, the latter saw fit to grant further loans amounting to HK$14 million during 2016.  Then, all of a sudden the Company impaired all loans which the Nepalese Debtors owed, citing “prudent accounting approach” as a reason[28] when “prudence” seems to be the very opposite of what the Company had been doing with the Nepalese Debtors;

(c)  the accumulation of the loans and trade debts appears to be all the more suspicious against the backdrop of the precarious financial position of the Company at the time[29];

(d)  that the Company had seen “a great potential” in the cable television market of the Nepalese Debtors in Nepal is an assertion without any adequate support;

(e)  the independent auditor, BDO, had queried the Company about the impairment and the Company had apparently responded to those queries.  However, no matter what the Company may have given to BDO by way of explanations, those explanations obviously were unable to alleviate BDO’s concerns so as to avoid in a qualified opinion being given about the impairment;

(f)  the explanation given by Hung[30] that Erik Hung and Lo were appointed as successive directors of Simple Media with a view to supervise the use of funds lent by the Company and repayment of trade payables from Simple Media in my view raises more questions than it has answered.  If what Hung says was true, then it would be difficult to see why (and no explanation has been given) the Company would stop appointing anyone as director of Simple Media after 15 May 2017, especially when it is said that the Company has not yet completely given up the hope of recovering some debts from the Nepalese Debtors;

(g)  as to the Agreement for Pledge of Shares made between the Company and Emiratinvest on 25 March 2016[31], I am told that no valuation was made at the time of the shares of the Nepalese Debtors to see whether they in fact were worth anything.  Although there was a report by Grant Thornton on the value of the shares of Simple Media, it was only available almost a year later on 4 May 2017.[32]  Notably, Grant Thornton said that the valuation was done solely on explanations, information and financials projections provided by the Company.  The firm was also careful to say that they would not independently investigate or otherwise verify the data provided.[33]  Lastly, the option under that Agreement for Pledge of Shares has not been exercised[34] and its value to the Company remains in question; and

(h)  the fact that Stock Exchange has made enquiries the Company about P’s complaint does not mean the Company or its directors have been cleared of any wrongdoings.  The court has not been informed of any conclusions or findings by the Stock Exchange.

MyHD

20.  Mr Chong has prepared the following chronology concerning the Company’s loans to and investment in MyHD which I gratefully adopt as follows:

Date	Detail
1 April 2014	The Company loaned US$2 million to MyHD
16 June 2014	The Company acquired 11% equity interest in MyHD from a third party through an assignment of account receivables of HK$50,573,000 from MyHD
1 October 2014	The Company loaned US$8 million to MyHD
3 August 2015	The Company loaned US$2 million to MyHD with a right of conversion into equity interest
26 February 2016	The Company loaned US$2 million to MyHD with a right of conversion into equity interest
29 March 2016	The Company loaned US$6.5 million to MyHD with a right of conversion into equity interest
16 May 2016	The Company entered into a subscription agreement to capitalize the loan of US$11,237,000 owed by MyHD for 40% of its shareholdings
Subsequently	The Company advanced further inter-company loans of US$9 million to MyHD

21.  Having considered all the evidence before me (including the Company’s explanations) and counsel’s submission, I am satisfied that P has adduced sufficient material before the court to show a reasonable case for investigating the propriety of the Company’s dealings with MyHD, in particular whether the directors had acted in breach of their fiduciary duty owed to the Company.  My reasons are as follows:

(a)  substantial sums were paid by the Company to MyHD which is insolvent and which requires approximately US$2 million every month for its operation, all these happened when the Company was itself in a precarious financial position;

(b)   there is evidence to show that Carmen Chen occupied a top position in MyHD.  The explanation given by Hung, namely that the inclusion of her name in the marketing presentation materials of MyHD was due to a mistake is less than convincing, given that the marketing presentation materials were attached to an email originated from Carmen Chen;

(c)  it seems too much of a co-incidence that the de facto owner of the Nepalese Debtors (Chen Jo Wan) and a substantial shareholder of MyHD (Chen Chu Li) are siblings and both of them are close associates of Hung;

(d)   the present challenge is not about the wisdom of the management in making commercial decisions for the Company but whether the directors had acted in breach of their fiduciary duty owed to the Company and there is some evidence of such a breach; and

(e)  the fact that the Stock Exchange had raised queries with the Company about its dealings with MyHD is not to the point, there being no evidence before the court of any findings or conclusion made by the Stock Exchange or that its investigation into the Company has drawn to a close.

22.  I bear in mind that it would not be possible or appropriate for this court to reach a firm conclusion on each of the complaints raised by P.  That is a matter for the trial court.  However, based on the available material before me, I find that P has on objective grounds made out a reasonable case for investigation regarding the Company’s dealings with the Nepalese Debtors and MyHD under consideration. 

Good faith and proper purpose

23.  The Company, through Hung, insinuates that P had engaged triad members to visit the Company’s office in Taiwan[35] as well as instructing Mr Zhi to commence various vexatious proceedings against the Company[36], all these were done with the purpose of forcing Hung to buy back P’s shares in the Company.[37]  It is also submitted that the present application is intended to facilitate P in gathering evidence for the winding-up petition.

24.  As regards Hung’s allegation that P had resorted to the use of a triad member in Taiwan, I note that Hung’s evidence is based on multiple hearsay and is also nebulous.  What Hung alleges is that he was given the “message” that “the Plaintiff’s Group” wanted him to buy back their shares without specifying whether the triad was sent by P.[38]  As regards Hung’s allegation that P had acted in collaboration with Zhi, the only basis for Hung to say that is a general statement that “Zhi regarded the Plaintiff as his ‘fellow shareholder’”[39].  As regards Hung’s assertion that P’s purpose is to take retaliation and to force him to buy back P’s shares, that is based on a newspaper article.[40]  P has denied all the allegations on affirmation.  I note also that the defendant in the present proceedings is the Company, not Hung.  Having considered what Hung says in his affirmations and P’s reply, I accept Mr Chong’s submission that all of the Company’s allegations against P are highly speculative and have no substance.

25.  In Re LehmanBrown Ltd, the Court of Appeal agrees that the assertion of a proper purpose and good faith must be tested against the proper context of the application.[41]

26.  As aforesaid, I am satisfied that based on the objective grounds put forward by P there is a proper case for investigation as regards the Company’s dealings with the Nepalese Debtors and MyHD under consideration.  Moreover, on the evidence before me including but not limited to the fact that P has a heavy stake in the Company, I am also satisfied that P has acted out of a genuine and legitimate concern to protect his interests as a shareholder of the Company against any potential wrongdoings by its directors and that he honestly believes that it is proper for him to seeks to investigate the Company’s dealings under consideration for the purpose of determining what action he should take.  In short, I am satisfied that P has acted with “good faith” in the present application, whether the test for “good faith” is objective or subjective. 

27.  As regards the requirement of “proper purpose”, whether or not as a matter of law it is a separate requirement from “good faith”, in the factual situation of the present case there is a significant degree of overlap between the two.  As aforesaid, I accept that P has a genuine and legitimate concern to protect his interests as a shareholder of the Company against potential wrongdoings by its directors and that, I am satisfied, is also his primary purpose in taking out the present application.  Given my view that there are objective grounds to support an investigating into the propriety or otherwise of the transactions under consideration, I am also able to be satisfied that P’s aforesaid primary purpose is in all the circumstances a “proper” one. 

28.  As regards Ms Ling’s submission that P is trying to obtain ammunition for the winding up petition, it is held by G Lam J in Wei Xing v Willwin Development (Asia) Company Limited[42], which I respectfully agree, that that is not in itself a ground for refusing an application for inspection by a shareholder.  Besides, I am also satisfied that P’s hostility, if any, to the present management of the Company does not negate the aforesaid “proper purpose”.  Lastly, as I am satisfied that P’s primary purpose for the present application is proper, the fact that he may other purposes in mind is irrelevant. 

Discretion

29.  Ms Ling submits that what P is seeking in the present application he can also obtain them in the winding up petition when the latter reaches the discovery process, as many of the grounds relied upon by P in the present application have also been raised in the winding up petition. 

30.  I am not sure whether it is correct that P would be able to obtain the Company’s documents in the winding up petition.  In any event, whatever documents that P might be able to obtain from the winding up petition are likely to be subject to an implied undertaking not to use them for any other purposes.  On the other hand, it is quite foreseeable that P may eventually consider a derivative action against the individual directors of the Company or to take such other steps as are lawful and appropriate to protect his interests as a shareholder which include reporting the suspected transactions to the relevant authorities.  Moreover, as the case authorities say, the fact that P may be able to obtain the documents he seeks by other means is just one of the factors to be taken into account in the exercise of the court’s discretion.

31.  I take into account the factors mentioned by Deputy Judge William Wong SC in Wong Sau Man, Samuel v Wong Kan Po, Wilson & Ors[43] relevant to the exercise of discretion, including the prospect of anything useful resulting from the inspection sought; the fact that the applicant may have other means of obtaining the information elsewhere; confidentiality; and the possibility of any substantial prejudice to the company in complying with an inspection order.  I understand the list of factors given by the learned judge does not mean to be exhaustive. 

32.  Besides, I also take into account P’s stake in the Company; the apparent weight of the material put forward by P, the seriousness of the allegations made; the fact (I am told) that the Company has already completed its open offer for raising working capital[44]; and the fact that no matter has been raised as to any prejudice or other difficulties that the Company may have in complying with an inspection order. In all the circumstances, I am satisfied that this is an appropriate case for this court to exercise its discretion to order inspection. 

SCOPE OF INSPECTION

33.  In the draft order, there is a Schedule of documents of which P seeks copies as follows:

“ A. Documents in relation to the investment in the Nepalese Debtors

1. Breakdown of the Company’s current account with the Nepalese Debtors, including but not limited to the breakdown of the loan receivables and trade receivables since 2014.

2. Accounting records in relation to the impairment losses of the Company and its subsidiaries since 2014, in particular, the impairment losses in connection with the loan receivables and the trade receivables due from the Nepalese Debtors.

3. Supporting documents, including bank statements, provided to the Company’s auditors (i.e. BDO) and the Company’s correspondence with BDO on the impairment losses in connection with the loan receivables and the trade receivables due from the Nepalese Debtors (‘Impairment’) and the decision to further loan of approximately HK$14.49 million to the Nepalese Debtors in 2016.

4. The board’s correspondence, emails and internal memos with the Company’s accounting department in connection with the Impairment.

5. Agreements entered into by the Company in relation to the loan of approximately HK$14.49 million to the Nepalese Debtors in 2016.

6. Board minutes and correspondence, emails and internal memos between board members on the decision to make the Impairment and to advance the loan of HK$14.49 million to the Nepalese Debtors in 2016.

7. Reports prepared by the Company’s investment advisers in relation to the Impairment and Company’s decision to provide funds to the Nepalese Debtors.

8. Documents showing the corporate and financial information of the Debtors.

9. All documents and materials provided to Grant Thornton, and all correspondence exchanged between the Company and Grant Thornton, for the purpose of obtaining valuation over the shares of Simple Media Network Private Limited and the reports prepared by Grant Thornton.

B. Documents in relation to the investment in MyHD

10. Documents showing the corporate and financial information of MyHD.

11. Agreements entered into by the Company in relation to the MyHD Loans, the Equity Acquisition, Capitalisation, Inter-Company Loan and the Corporate Guarantee.

12. Board minutes and resolutions in relation to the MyHD Loans, the Equity Acquisition, Capitalisation, Inter-Company Loan and the Corporate Guarantee.

13. Documents substantiating the MyHD Loans, the continuing operation costs of MyHD of approximately US$2 million per month, MyHD’s outstanding contractual commitments of HK$311.1 million and the Corporate Guarantee.

14. Documents in relation to the size test and aggregated tests conducted by the Company prior to the acquisition of MyHD pursuant to Rules 14.22 and 14.23 of the Listing Rules.

15. Financial information in relation to the fund flow of the MyHD Loans.

16.  Reports prepared by the Company’s investment advisers in relation to the MyHD Loans, the Equity Acquisition, Capitalisation, Inter-Company Loan and the Corporate Guarantee.”

34.  Most of the items listed in the Schedule are based on the recommendation of RSM, P’s forensic accountant, as the areas for review regarding the issues raised by P in the present application, whilst some of them items relate to the factual matters raised in Hung’s 1^st and 2^nd Affirmations[45].

35.  Ms Ling counters the above requests by submitting that they are not necessary for P’s purpose in the present application but are a “fishing expedition”.  She also submits that the documents will be provided to P in the winding up proceedings in due course. 

36.  With respect, if it is the Company’s position that the documents sought by P in the present application would eventually be provided to him in the winding up proceedings, then I have difficulties seeing why the Company would take the trouble of opposing the present application.  Nor do I agree with the submission that P’s application is a “fishing expedition”.  This is not the case that P is in search of a cause of action with no defined purpose or that he is just seeking information.  P has raised specific complaints (which this court accepts are based on objectively grounds) and the documents that he is asking for inspection relate to his complaints.

37.  I take on board the general principle that s 740 is intended to enable a member of a company to inspect its books in order to obtain information about matters that, as member or shareholder in the company, he ought to be informed of by the company and is not intended to be a process as wide-ranging as the process of discovery of documents.  On the other hand, I accept Mr Chong’s submission to the extent that most of the documents requested are directly relevant to P’s complaints about the potential misuse of the Company’s funds (in relation to the dealings with Nepalese Debtors), potential breach of fiduciary duty by the directors (in relation to the dealings of MyHD) and the factual matters raised by Hung’s affirmations.  I also take into account that the requests are backed by the opinion of a firm of forensic accountants, though the court is not bound to accept whatever the forensic accountants say is relevant or important and has to exercise its own judgment. 

38.  In my view:

  (i)  an understanding of the current accounts with the Nepalese Debtors; the reasons for the Company to decide to advance the additional loan in the total of about HK$14.5 million during 2016 in spite of its own precarious financial position and the extant indebtedness of the Nepalese Debtors; and how the decision to impair all loans and trade receivables had come about, all of these would plainly inform P of the strength of a potential claim against the directors for the alleged misuse of funds; and

  (ii)   the information about the corporate structure and finance of MyHD; the loans made by the Company to the latter; the basis for the Company’s decisions to make those loans and also to acquire a substantial interest in MyHD, all of these would inform P as to whether the explanations provided by Hung are genuine or whether the directors had acted in breach of their fiduciary duty to the Company and if the latter, to what extent the Company has suffered as a result.

39.  Therefore, I would allow items 1 – 2, 4 – 8 and 10 – 16.  However, the documents are restricted to those which are in the possession of the Company or under its control. 

40.  On the other hand, I am unable to be satisfied that item 3 (ie, documents provided to and correspondence with BDO) and item 9 (ie, documents provided to and correspondence with Grant Thorton) are necessary for P’s intended purpose:

(a)  as regards item 3, there is a substantial overlap with the other items already listed in the Schedule.  Moreover, there is no dispute that BDO had published a qualified opinion and the reasons for that was that the Company had failed to provide BDO with sufficient documents or a satisfactory explanation. Therefore, the qualified opinion was due to what the Company had failed to provide, rather than what it had provided to the BDO; and

(b)   as to the item 9, similarly there is a substantial overlap with the other items already listed in the Schedule. Moreover, Grant Thorton has stated in their report what they had been given by the Company.  The problem with Grant Thorton’s Report is not what the Company had provided to the former but that the information came solely from the Company and had not been verified.

41.  As regards §1 of the draft order, instead of saying that:

“ The Defendant shall within 7 days (i) produce or cause to be produced …”,

it should be amended and read as:

“ The Defendant shall within 14 days (i) upon payment by the Plaintiff of reasonable photocopying charges, produce or cause to be produced …”

42.  It is expected that P would need the assistance of forensic accountant and lawyers to assist him.   For that purpose, I give him leave to disclose and provide copies of the documents obtained to the legal advisers and accountants duly appointed by him.

43.  P should be given liberty to apply for further inspection in relation to other documents of the Company if he can demonstrate at the time of the application that he meets all the statutory requirements.  As said by Harris J in Wong Kar Gee Mimi v Hung Kin Sang Raymond & Anor[46], an applicant might, following inspection of documents, demonstrate a justification to inspect more documents and there is nothing objectionable in this.

Costs

44.  I grant an order nisi that P shall have his costs forthwith, to be taxed if not agreed.