TOM MING CHOU v. PAN PING-HU ANTONY AND OTHERS

HCCW 375/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 375 OF 2008

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D E C I S I O N

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The applications

1.  I have three applications before me in this petition for winding up on just and equitable grounds and for relief under section 168A of the Companies Ordinance, Cap. 32.  The company being the subject of the petition is Tanyuen Investments Limited昌源投資有限公司 (“the Company”).  The petitioner, Tom Ming Chou, holds 34.12% shares in the Company and is one of its directors.  The 1^st to 6^th respondents are the other shareholders in the Company.  The 1^st respondent, Pan Ping-hu Antony, holds 48.37% shares in the Company and is also one of its directors.  The Company is the 7^th respondent.

2.  The first application is a summons issued by the petitioner on 16 December 2008 against the 1^st respondent and the Company.  Paragraph 1 of the summons seeks an order that the 1^st respondent and the Company should produce to him “all books of accounts, management accounts, working papers, bank statements, cheque stubs, contracts, instruments of transfer, statutory records and invoices belonging to [the Company] and Shanghai Yifeng Culture Entertainment Centre Company Limited滬港合作上海怡豐文化商娛中心有限公司 (“Yifeng”)”.  Paragraph 2 seeks an order that the petitioner be allowed to enter those premises stated therein to search for, inspect and copy the above documents.  Mr Kent Yee, who appeared for the petitioner in this hearing, has confirmed in his reply submissions that he does not seek an order under paragraph 2.

3.  On 14 January 2009, I made an order requiring the Company to keep in safe custody and possession its books and records and such of the books and records of Yifeng currently in its possession and adjourned the summons for argument after the filing of evidence in opposition and in reply.

4.  This application is opposed by the 1^st respondent and by the Company.

5.  The summons issued next in time is an application filed on 18 May 2009 by the 1^st, 2^nd, 4^th  and 5^th respondents for security for costs to be provided by the petitioner in these proceedings, on the ground that the petitioner is ordinarily resident in Shanghai.  The amount of security sought in the summons was $3,218,200.  In the written submissions of their counsel, Mr Jonathan Wong, the amount sought was reduced to $2,818,200.

6.  The last summons was issued by the Company on 25 August 2009, also an application for security for costs against the petitioner.  The amount of security sought in the summons was $1,589,800.  In the written submissions of its counsel, Mr William Wong, the amount sought was reduced to $929,800.

7.  Both applications for security for costs are opposed by the petitioner.

8.  I will first set out the background matters relevant to the above applications.

The background

9.  The petitioner and the 1^st respondent had co-operated in business ventures since the 1970s.  They acquired properties and established companies in the United States, Taiwan, Hong Kong and the PRC.  The Company was one such company in which the petitioner and the 1^st respondent each holds substantial shareholding.  It was incorporated in Hong Kong in 1992.  At all times, its only business was to hold its investment in Yifeng and Yifeng’s only source of income was from the operation, management and leasing of a commercial building in Shanghai known as 領館廣場.  Yifeng was established in 1993 and was a joint venture of the Company with an entity in the PRC known as Shanghai Qilinshi Enterprises Development Company Limited 上海麒麟士企業發展有限公司 (“Qilinshi”).  Qilinshi provided the land for the development and the Company provided the capital in the amount of US$2 million.

10.  From 1994 to April 2002, the petitioner, the 1^st respondent and the 6^th respondent were the only directors of the Company.  From April 2002 to 3 May 2007, the petitioner and the 1^st respondent were the only directors of the Company.  The 1^st respondent was chairman of the board of directors of Yifeng and the petitioner one of the directors of Yifeng until the incidents complained of. 

11.  It is alleged in the petition that the co-operation of the petitioner and the 1^st respondent in the Company and Yifeng was a quasi-partnership.  This is denied by the 1^st respondent.

12.  The complaints in the petition are two-fold: the 1^st respondent’s exclusion of the petitioner from management of Yifeng since 26 January 2006, and his denial of the petitioner’s access to books and records of Yifeng since that date. 

13.  In May 2007, two additional directors were appointed for the Company and the petitioner was not appointed to the board of Yifeng.  He has remained a director of the Company. 

14.  The petitioner seeks an order in the petition that the 1^st respondent should purchase all his shares in the Company on such terms as the court thinks fit, alternatively that the Company should be wound up.

The inspection summons

15.  The marginal note of the summons stated the application was made under section 168A and the inherent jurisdiction of the court.  Mr Yee has now made clear that the application was made pursuant to section 121 of Cap. 32 only and that the petitioner is relying on his right as a director to inspect documents belonging to the Company under section 121 and at common law.

16.  Mr Jonathan Wong submitted on behalf of the 1^st respondent it is not accepted that the summons invokes section 121 of Cap. 32 and the common law, as the application was made by summons in the petition and not by a free-standing application in separate proceedings.  He contended the 1^st respondent was entitled to and did treat the present application as a premature application for discovery under the Rules of the High Court. 

17.  Mr William Wong submitted for the Company it was not clear to the Company that in the present application, the petitioner was seeking an order under section 121 to enforce his statutory and common law rights of inspection as a director of the Company, in that the marginal note of the summons mentioned section 168A and the inherent jurisdiction of the court.  He also dealt with the summons primarily as an application for specific discovery under the Rules of the High Court.

18.  In my view, the technical objections of the 1^st respondent and the Company are without merit.  It is clear from the correspondence exchanged between the petitioner’s solicitors and the Company before the presentation of the petition (letters dated 16 May 2008 and 5 June 2008) that the petitioner was asserting his right to inspect accounts and records of the Company under section 121.  Although the summons was subsequently made under section 168A, in the letters of the Company’s former solicitors to the petitioner dated 8 and 12 January 2009, the Company had queried if this was correct.  The Company’s former solicitors further stated the petitioner should be looking for relief under section 121 instead and accepted that the petitioner “as a director of the Company is entitled to inspection of the available books of accounts of the Company and that right is not denied”.  For that reason, the former solicitors asserted for the Company it was pointless for the petitioner to proceed with paragraph 1 of the inspection summons.

19.  I reject also the contention that the petitioner is required to make a free-standing application in separate proceedings to enforce his statutory and common law rights of inspection as a director of the Company.  The drawback for the petitioner in not taking out separate proceedings is that if I should order security for costs, all further proceedings in the petition, including the inspection summons and any order made on it, would be stayed until security is provided.  I turn to the merits of the application. 

20.  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 (Re Boldwin Construction Company Limited & Another [2001] 3 HKLRD 430), 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 (Oxford Legal Group Limited v. Sibbasbridge Services plc and another [2008] 2 BCLC 381; Nicholas Timothy Cornforth Hill v. Alvarez & Marsal Asia Limited [2009] 4 HKLRD 727, paras. 23 and 30).

21.  On the evidence before me, and notwithstanding Mr William Wong’s submission to the contrary, I am not satisfied it has been clearly established that it would be detrimental to the interests of the Company for the petitioner to exercise his right of inspection or that the inspection was for a collateral purpose other than in pursuit of the petitioner’s duties of a director and for the benefit of the Company.

22.  Mr William Wong pointed to the petitioner’s affirmation in which he stated that one of the reasons for inspecting the books and records of the Company is to enable the petitioner to make a proper valuation of his shares which he has offered to sell to the other shareholders.  Mr Wong submitted this is similar to the situation in Oxford Legal Group in which it was held that the plaintiff’s wish to inspect for the purpose of assisting its nominee to get a proper value of the company’s shares was a collateral purpose foreign to the purpose for which the right of inspection existed.  Mr Jonathan Wong made a similar submission for the 1^st respondent.

23.  As Rogers VP had pointed out in Hill v. Alvarez & Marsal Asia at para 23, the corporate director which was the plaintiff in Oxford Legal Group had been ordered by the court to sell its shares in the company, and the only interest that director had remaining was as to the price at which the shares owned by other linked companies would be acquired.  This is distinguishable from the present situation.  No order has yet been made for the purchase of the petitioner’s shares.  The petitioner has raised queries in one of his affirmations of the propriety of the settlement agreement reached by the Company with Qilinshi in July 2008 by which the Company relinquished its rights to operate and manage the commercial building of Yifeng and the whereabouts of huge sums of rent collected by Yifeng since late 2006 when the Company stopped paying Qilinshithe latter’s share of the rentals.  He claimed that inspection of the documents of the Company and Yifeng was also required to address these and other queries.  As submitted by Mr Yee, even though the petitioner has another purpose of inspecting the documents so as to obtain proper evaluation of his shares, it could not be said that his other purposes for inspection is not in the interest of the Company.  The fact that no allegation is made in the petition at this stage regarding the settlement agreement or the rental collected is immaterial.  Relevance to the issues in the petition is not required to be established, as this is not an application for specific discovery.

24.  Complaint was also made by Mr William Wong that the documents sought in the summons are wide-ranging with no time limit and it is oppressive to permit inspection on such an extensive basis.  Although Mr Jonathan Wong recognised it has been judicially decided that in an application under section 121 it is permissible to allow inspection of a wide scope of documents, he pointed out that the petitioner has already obtained the official accounts of Yifeng for 2006 and 2007, and urged the court to refuse inspection on that basis and for other reasons. 

25.  The description of the documents sought in paragraph 1 of the summons in fact followed the wording of the notice of motion in Conway v. Petronius Clothing Company Limited [1977] 1 WLR 72 at 74H.  Slade J had stated at 85G that for the purpose of section 147(1) of the Companies Act 1948 (equivalent to our section 121(1)), “proper books of account” is intended to have a wide meaning because of the provision in section 147(2).

26.  In Hill v. Alvarez & Marsal Asia, Rogers VP stated in para. 10 that proper books of account are not confined simply to ledgers or spreadsheets showing sums of money which have been received or spent and should include documents relating to any such received payment or expenditure.  He also referred to section 121(2) which provides that for the purpose of section 121(1), “proper books of account shall not be deemed to be kept with respect to the matters aforesaid if there are not kept such books as are necessary to give a true and fair view of the state of the company’s affairs and to explain its transactions.”  Whether a particular document would come within proper books of account in that it is necessary to consider the document for the purpose of giving a true and fair view of the state of the company’s affairs and to explain its transactions would depend on the business activity of the company in question (Hill v. Alvarez & Marsal Asia, paras 24 to 26). 

27.  I am unable to tell from the terms of the summons whether all of the documents sought would be regarded as proper books of account of the Company.  If after considering the remaining objections raised, I am satisfied an order for inspection should be made, I propose to adopt the form of order made by the Court of Appeal in Hill v. Alvarez & Marsal Asia at para. 26. 

28.  For the reason mentioned above, the fact that some of the documents sought belong to Yifeng is immaterial.  Mr Yee submitted Yifeng is the subsidiary of the Company.  I have doubts about that on the available information.  What matters is that the accounting documents of Yifeng, provided they are in the possession of the Company, are clearly necessary to give a true and fair view of the state of the Company’s affairs and to explain its transactions.

29.  As to the dispute on the affirmations whether the petitioner has removed all the documents of the Company and Yifeng that had been kept in premises in Shanghai on 17 February 2006, I am satisfied on the evidence the Company does have in its possession some if not all of the documents belonging to it and to Yifeng, in particular documents that came into existence after February 2006.  The fact that Qilinshi has, pursuant to the settlement agreement, taken over the operation and management of Yifeng in November 2008 is not a reason for refusing inspection.  The obligation of the Company is to permit inspection of such of its books of account that are in its possession, power or custody. 

30.  The form of order I make is as follows.  The Company is to provide the petitioner with full and uninterrupted access to the books of account of the Company which would include all documents as are necessary to give a true and fair view of the state of the Company’s affairs.  I will hear counsel as to the time to comply with this order.

31.  I note the 1^st respondent’s undertaking in Mr Jonathan Wong’s submissions that insofar as any order for inspection is made against the Company, the 1^st respondent undertakes not to obstruct the carrying out of that order.

If the petitioner should be ordered to give security for costs.

32.  It is not in dispute the petitioner resides in Shanghai. 

33.  The petitioner does not contend that the petition has a high degree of probability of success, nor does he argue that his petition would be stifled by an order to provide security for costs.  He opposes liability to give security on the ground that there are available assets that could be utilized by the Company and the respondent shareholders to satisfy any adverse costs order that may be made against him, being his shares in the Company and the sum of RMB 1,590,980.15 being his share of the arbitration award made in favour of the Company in consequence of the settlement agreement with Qilinshi.

34.  The petitioner has not given any indication in his affirmations how much his shares in the Company would be worth.  In an affirmation made by Madam Chou Li Ling, one of the Company’s directors, she asserted that as the main business activity of the Company is being terminated, the petitioner’s shares in the Company are of limited value and they would be worth $300,000 odd at most.  No documents or calculations were provided by Madam Chou to substantiate her estimate. 

35.  Whatever may be the worth of the petitioner’s shares, they are shares in a private company and are not readily realizable to provide funds to meet the costs liability of the petitioner. 

36.  As for the petitioner’s share in the arbitration award of RMB 1.5 million odd, these funds are not assets within the jurisdiction.  According to the minutes of the board meeting of the Company on 19 November 2008, as the Company could not open a bank account in the PRC, the board resolved to use the personal bank account of Madam Chou to receive 80% of the arbitration award payable by Qilinshi under the settlement agreement.  It was further resolved that each of the shareholders should notify Madam Chou of his designated bank account in the PRC so that she could pay to each shareholder the amount apportioned by depositing the funds in his bank account.

37.  The evidence filed by the petitioner, the other shareholders and the Company regarding the payment of the arbitration award is unsatisfactory.  Mr William Wong informed the court on instructions today that the money has been received by Madam Chou for the Company.  A letter from the petitioner’s solicitors to the Company’s solicitors dated 27 October 2009 was produced and by that letter the petitioner has provided particulars of his designated bank account to Madam Chou.  Mr Wong informed the court that RMB 1.5 million odd would be transferred to the petitioner’s account in the PRC within a short time.

38.  It was proposed by the petitioner in lieu of an order for security for costs, he is to give an undertaking that his share of the arbitration award is to be used to set off any costs to which the 1^st, 2^nd, ,4^th and 5^th respondents might be entitled, citing Bristowe v. Needham (1842) 4 Mac. & G. 906.  Alternatively, Madam Chou should transfer the funds to Hong Kong to be held by the respondents’ solicitors or the petitioner’s solicitors as stakeholders as security for costs. 

39.  The Company has filed evidence that the funds are outside the jurisdiction and are subject to foreign exchange restrictions in the PRC.  The petitioner has not filed evidence to dispute these matters. 

40.  The respondent shareholders and the Company also filed evidence deposing that the petitioner, as the investor and legal representative of three companies in Shanghai, has faced claims of RMB 1.4 million odd for arrears of wages of workers.  The petitioner has not filed any evidence to deal with this allegation.  There is only the contention in the submission of his counsel that he would not be liable for the claims made against his companies. 

41.  I am not inclined to accept the proposed undertaking of the petitioner that his share of the arbitration award be used to set off his costs liability in these proceedings, as there is no or no satisfactory explanation regarding possible difficulties owing to the foreign exchange restrictions or the feasibility of holding the funds in the PRC pending the determination of the petition to satisfy any costs liability of the petitioner notwithstanding past or future claims that might be made against him or his companies in the PRC.  I will make an order for security for costs in each application.

Amount of security for costs for the respondent shareholders

42.  I turn to consider the quantum of security sought by the respondent shareholders.  As mentioned earlier, the amount sought is now reduced to $2.8 million odd.  This is on the basis of a 6-day trial with leading and junior counsel to be engaged and a forensic accountant is to be engaged at the cost of $100,000 although it is not clear on what issue expert evidence would be adduced. 

43.  The petitioner has given his response to the respondents’ skeleton bill item by item.  It was contended that costs to be incurred would only be $492,350, on the basis the trial is to last for 3 days. 

44.  This is not a taxation exercise.  It is not necessary to express a view on the estimate given for each item of work in the skeleton bill.  I am going to take a broad-brush approach on quantum.  I do not regard the petition, as it now stands, as involving complex matters of law.  The dispute is largely factual.  On the basis the trial is likely to last for 5 days, and making no allowance for the engagement of a leading counsel and forensic accountant, my estimate of the likely costs that may be allowed on taxation for respondent shareholders is $1.2 million.

Amount of security for costs for the Company

45.  The Company accepts its involvement in the proceedings is limited.  It has participated in the inspection application as an order is sought against it.  Mr William Wong has acknowledged there is no need for the Company to be present at the trial.  On that basis, the amount sought in the summons is reduced from $1.5 million odd to $929,800, to take out the fees for engaging counsel to appear at trial ($660,000) but not the fees of the solicitors incurred in preparation for trial ($114,000) and in attending trial ($225,000).  I fail to see why these items should not also be removed.  Even with the deduction of these further items, the skeleton bill would be in the region of $590,800.

46.  The petitioner has likewise given his response to the Company’s skeleton bill item by item.  It was asserted that the costs to be incurred would only be $107,900.

47.  As it is common ground that the Company would only be a nominal party in the petition which is a shareholders’ dispute, save for the application to give inspection, I fail to see why the Company should incur substantial costs of over $500,000.

48.  Again, taking a broad-brush approach, my estimate of reasonable costs that may be recovered by the Company on taxation is in the region of $150,000.  I order this amount to be provided as security for the Company’s costs. 

Orders on applications for security for costs

49.  I order the petitioner to provide security for the costs of the 1^st, 2^nd, 4^th and 5 respondents in these proceedings in the sum of $1.2 million and for the costs of the Company in the sum of $150,000, by making a payment into court within the time as stipulated after hearing submissions from counsel. 

50.  I further order all further proceedings on the petition are stayed save for the purpose of complying with the order for making payment into court as security for costs mentioned above, with liberty to the respondents to apply for dismissal of the petition in the event of non-compliance.

51.  I will hear counsel on the time to comply with the various orders made and on the costs of each application.