GENERAL LITE GROUP CORP. v. T & L SECURITIES LTD

HCMP 2113/2021

[2023] HKCFI 315

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2113 OF 2021

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BETWEEN

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DECISION

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THE APPLICATION

1.  On 7 October 2022, this Court handed down a Judgment (“the Judgment”) by virtue of which an order of production and inspection of various documents pursuant to section 740 of the Companies Ordinance (“the S.740 Application”) was made against the defendant (“the Order”).

2.  On 21 October 2022, the defendant served a Notice of Appeal against the Judgment.

3.  By summons filed on the same day (“the Summons”), the defendant applied for stay of execution of the Order pending determination of the appeal against the Judgment.

THE LEGAL PRINCIPLES

4.  The legal principles governing stay of execution are trite. In Star Play Development Limited v Bess Fashion Management Co. Ltd. [2007] 5 HKC 84, it was held by Ma J (as his Lordship then was) that the starting point is that the successful party is not to be deprived of the fruits of his success, and it is always relevant to consider the prejudice that would be caused to the successful party in the event a stay is granted.

5.  The existence of an arguable appeal (that is, one with reasonable prospect of success) is the minimum requirement before a court would even consider granting a stay. However exceptional the circumstances may be otherwise justifying a stay of execution, if there exist no arguable grounds of appeal, no stay will be granted.

6.  In the event the court is satisfied that there is a strong likelihood that the appeal would succeed, that in itself would enable a stay to be granted because this would constitute a good reason for a stay.

7.  If there is just an arguable appeal instead of a strong one, the appellant has to provide additional reasons as to why a stay is justified. The demonstration of an appeal being rendered nugatory in the absence of a stay is a common example.

THE ISSUES

8.  Mr Lam and Mr Cheung who act for the plaintiff fairly accepted that the appeal will be rendered nugatory if no stay of execution is granted. However, they contended that there should be no stay of execution because the grounds of appeal are not arguable.

9.  Hence, this Court has to consider the defendant’s grounds of appeal and form a preliminary view on the merits of those grounds.

THE GROUNDS OF APPEAL

10.  The defendant has put forward two grounds of appeal as follows:

(1) This Court has erred in:

(a) disregarding the concept of separate legal entities; and

(b) conflating the personal interest of Bobby Li, as the shareholder of the plaintiff, with the corporate interest of the plaintiff itself,

when determining that the plaintiff’s S.740 Application, construed in its proper context (including section 741 of the Ordinance). In doing so, this Court has wrongly ascribed importance to the fact that Bobby Li is the sole shareholder of the plaintiff. (“Ground 1”)

(2) This Court erred in failing to give due or proper regard to the plaintiff’s and Bobby Li’s admissions against interest made in sworn evidence and in submissions that its application was made for the purpose and benefit of Bobby Li, which does not qualify as a proper purpose of the plaintiff under section 740 of the Companies Ordinance (when construed in its proper context). (“Ground 2”)

11.  In substance, Ground 2 is in support of Ground 1, rather than a separate ground of appeal as such. If Ground 1 fails, Ground 2 cannot stand on its own.

MERITS OF THE APPEAL

12.  It is difficult to understand how the defendant could allege that this Court had disregarded the concept of separate legal entities or conflated the personal interest of Bobby Li, as the shareholder of the plaintiff, with the corporate interest of the plaintiff itself, because it had been made clear in paragraph 38 of the Judgment that the Court would consider:

“whether the purposes put forward by the plaintiff are properly something that pertain to the plaintiff’s corporate interest as a shareholder of the Company as opposed to Bobby Li’s personal interest in disguise.”

13.  Mr Kwan and Ms Chong submitted on behalf of the defendant that:

“It is at least arguable that, in coming to its conclusion at §§37-38 that ‘where Bobby Li is the sole shareholder and director of the plaintiff’, the ‘purposes relied on are proper purposes in the interest of the plaintiff as shareholder of the [defendant]’, the Court has fallen into the same error as the CFI and CA in Perfekta, namely wrongly treating the plaintiff as a mere nominee or alter ego of Bobby Li.”[1]

14.  I am afraid counsel for the defendant had read the relevant parts of the Judgment totally out of context, for they had extracted and put together two phrases from two different paragraphs of the Judgment for the purpose of supporting their submissions for stay of execution.

15.  To understand properly what this Court meant when this Court referred to “where Bobby Li is the sole shareholder and director of the plaintiff”, paragraph 36 of the Judgment must also be quoted. For the sake of completeness, I set out the entirety of paragraphs 36 to 38 of the Judgment as follows:

“36. The Company even went as far as to submit that even if the Court makes an order pursuant to the application, the Company would not consent to disclosure of any information upon inspection to any person who is not the plaintiff (including but not limited to Bobby Li).

37. With greatest respect, this argument is misconceived, at least in the circumstances of the present case, where Bobby Li is the sole shareholder and director of the plaintiff. If Bobby Li is not allowed to read the documents to be provided by the Company to the plaintiff, then in effect no one can read them. This cannot be right.

38. I agree with Mr Lam and Mr Cheung that the question here is: whether the purposes put forward by the plaintiff are properly something that pertain to the plaintiff’s corporate interest as a shareholder of the Company as opposed to Bobby Li’s personal interest in disguise. In this regard, I accept the plaintiff’s argument that the purposes relied on are proper purposes in the interest of the plaintiff as shareholder of the Company.”

(emphasis added on the phrases quoted by the defendant’s counsel)

16.  It can therefore be seen that, when this Court emphasised that Bobby Li is the sole shareholder and director of the plaintiff, it was dealing with the defendant’s stance that “even if an order of inspection were made, it would not allow anyone other than the plaintiff (including but not limited to Bobby Li) to inspect the documents”. I took the view that if even Bobby Li (who is the sole shareholder and director of the plaintiff) were not allowed to inspect the documents to be disclosed, then in effect no one could read those documents.

17.  However, by stating the above, it does not mean that this Court had disregarded the concept of separate legal entity, nor that this Court had equated the personal interest of Bobby Li as the interest of the plaintiff as shareholder of the defendant.

18.  Indeed, the conclusion that “the purposes relied on are proper purposes in the interest of the plaintiff as shareholder of the Company” was reached upon the Court’s consideration of the question posed by the plaintiff’s counsel: “whether the purposes put forward by the plaintiff are properly something that pertain to the plaintiff’s corporate interest as a shareholder of the Company as opposed to Bobby Li’s personal interest in disguise”[2].

19.  It is true that the background of the S.740 Application is that the entire procedure has been necessitated by Bobby Li having lost control of the plaintiff for a number of years. However, I accepted that the plaintiff has made out a reasonable case for investigation because there is a reasonable case that the plaintiff’s interest as a shareholder of the defendant had not been adequately protected while Teresa Pu was in control. This point was explained when this Court dealt with the defendant’s argument that a “but-for” test (“If Bobby Li has not regained control of the plaintiff, would the plaintiff make this application?”)[3] should be applied. It was stated in paragraph 41 of the Judgment that:

“[…] Take the Category 6 documents (relating to management fees) as an example. On the face of the information revealed so far, it appears that management fees in the sum of $2.4 million had been paid to a company of which Teresa Pu’s mother is a director. If the plaintiff (or Bobby Li) is right, this is prima face a related party transaction. If the plaintiff is still under the control of Teresa Pu, I am not surprised at all that she would not mount any challenge against this transaction. However, that does not mean that the fact that the plaintiff is now asking for documents in relation to such management fees means that it must be for the purpose of Bobby Li but not the plaintiff. If there is really impropriety in such a transaction, the plaintiff, as a 40% shareholder of the Company, is obviously entitled to look into the matter.”

20.  The above demonstrated that the Court has to consider carefully whether the purposes put forward by the plaintiff are properly something that pertain to the plaintiff’s corporate interest as a shareholder of the defendant as opposed to Bobby Li’s personal interest in disguise.

21.  As I see it, the defendant is in effect suggesting that the personal interest of Bobby Li and the interest of the plaintiff must be mutually exclusive, and that, as a result, if it is in the personal interest of Bobby Li to inspect the defendant’s documents, then it cannot be in the interest of the plaintiff to do the same. This argument is misconceived and cannot be accepted.

22.  It is also remarkable to note that, in the grounds of appeal and throughout the two sets of written submissions lodged by the defendant in support of this application, the defendant’s counsel had not explained how it could be said that the plaintiff has failed to, in respect of each of the individual categories of documents, establish a reasonable case of investigation from the perspective of the plaintiff.

23.  For reasons of the aforesaid, it is concluded that the grounds of appeal are not arguable.

DISPOSITION

24.  The application for stay of execution pending appeal under paragraph 1 of the Summons is dismissed.

25.  In paragraph 4 of the Summons, the defendant asked that if the application for stay is dismissed by this Court, then an interim-stay of execution of the Order for 14 days should be granted so that it could re-new its application before the Court of Appeal.

26.  The plaintiff did not make any submissions in opposition in this regard in its written submissions.

27.  I therefore order that there be an interim-stay of execution of the Order for 14 days from the date hereof.

COSTS

28.  Costs should follow the event.

29.  I therefore make an order nisi that the defendant shall bear the plaintiff’s costs of the Summons, to be taxed if not agreed.

30.  The above order nisi shall become absolute in the absence of application to vary (which, if any, shall be made by letter, and will be disposed of on paper) within 14 days hereof.