RE SANLIUYIDU (HONG KONG) SPORTS GOODS CO LTD

HCMP 1152/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1152 OF 2009

----------------------

----------------------

AND

HCMP 1153/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1153 OF 2009

----------------------

----------------------

----------------------

(Heard Together)

----------------------

D E C I S I O N

----------------------

1.  I have before me 2 originating summonses, one made by Sanliuyidu (Hong Kong) Sports Goods Company Limited (“the Company”) and the other made by all the shareholders of the Company.

2.  The Company has not prepared any audited accounts or convened any annual general meetings since its incorporation in 2004, and is in breach of sections 122 and 111 of the Companies Ordinance, Cap. 32.  Section 122(1) requires directors of every company to lay accounts before it at its annual general meeting.  Section 122(1A) further requires the accounts of a private company to be made up to a date falling not more than 9 months before the date of the annual general meeting.

3.  The Company seeks an order under section 122(1B) that the period of 9 months in section 122(lA) to lay the accounts before the Company at its annual general meetings with respect to the periods ended 30 June 2005, 2006, 2007and 2008 be extended to such period up to and including 16 June 2009 or such other period as the court thinks fit for the laying of such accounts before the Company.

4.  The shareholders seek an order under section 111(2) and (3) for directions that the general meeting of the Company by written resolutions dated 16 June 2009 be deemed to be general meetings of the Company for the years of 2005, 2006, 2007 and 2008, a1ternatively, for an order calling or directing the calling of a general meeting of the Company under section 111(6) by way of written resolutions under section 116B within 14 days of the date of this order, dispensing with all applicable notice requirements, and deeming such meeting to be the annual general meetings of the Company for the years of 2005, 2006, 2007 and 2008 with any ancillary directions as the court thinks fit.

5.  Mr Suen for the applicants have cited to the court a number of cases in which the court has exercised its statutory powers to extend time and to rectify the default in holding annual general meetings.  The discretion is unfettered as under section 122(1B), the court may exercise the power to extend time for “any reason it thinks fit to do so”.  In past instances, as noted by Deputy Judge Harris, SC in Re HKI Properties Limited & Others, HCMP Nos. 2556 to 2561, 2563, 2565 to 2568 of 2007, 29 January 2008, at paragraph 9, the type of factors the court has regard in considering whether to regularise non-compliance with section 122(1) include:

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

(2) Whether the default was inadvertent; and

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

6.  The background and circumstances giving rise to the default in these proceedings may be stated as follows.

7.  361 Degrees International Limited (“361 International”) and its subsidiaries (collectively the “361 Group”) are engaged in sportswear business under the name of 361º.  The 361 Group is one of the leading domestic sportswear enterprises in the PRC.  It was established by 3 PRC residents, Ding Huihuang, his brother Ding Huirong and their relative Ding Wuhao.

8.  The Company was incorporated in Hong Kong on 6 April 2004.  Ding Huihuang was the sole shareholder and director, holding 51% of the issued shares on trust for Ding Huirong and 25% of the shares on trust for DingWuhao since incorporation until 31 July 2008, when these shares were formally transferred to the beneficial owners.

9.  The Company was the sole shareholder of the entire registered share capital of a PRC company known as Sanliuyidu (China) Company Limited (“361China”).  The Company has never carried on any trading business in Hong Kong.  361 China has been engaged in the business of manufacturing and sales of sportswear products.

10.  In September 2008, the 361 Group filed an application for listing of the shares of 361 International on The Stock Exchange of Hong Kong Limited.  In the course of the listing application and review of corporate compliance, the Company’s legal advisers discovered in December 2008 that no accounts had ever been prepared for the Company and laid before it at an annual general meeting since inception, and no annual general meeting has ever been convened or written resolutions signed by members have ever been adopted as required.

11.  Initially, the plan was to include the Company in the 361 Group for listing application.  Subsequently, it was decided to simplify the structure of the Group by transferring the Company’s interest in 361 China to Sanliuyidu Enterprise Company Limited (“361 Enterprise”), a company directly owned by the Group.  The transfer was effected by an agreement dated 25July 2008.  After that, the Company ceased to hold any interest in any member of the 361 Group and was itself not a member of the Group.

12.  The sole director of the Company, Ding Huihuang, does not speak or write English, and has little knowledge about the laws of Hong Kong.  He had relied on professional company secretarial service providers in Hong Kong, who were appointed the company secretary, for compliance with the corporate secretarial obligations.  He had no contact with the personnel of the company secretary in Hong Kong, and had liaised all along with a representative of the company secretary in the PRC.  He genuinely believed that by signing documents as prepared by this company secretary, he had complied with all the requirements under Cap. 32 and had completed all the necessary filings at the Companies Registry.  He was not told of any requirement to conduct any meeting under section 111, and had no idea as a director he was required to lay before the Company at its annual general meeting the profit and loss accounts and balance sheet under section 122.  There was no reason or basis on his part to question the professional ability of the company secretary at the time.

13.  As the Company was not an active trading company all along, and was not part of the 361 Group which had always been an active business unit, this meant that the management team of the Group did not actively inquire into its affairs, making it less likely for the default to be discovered early on.

14.  I am satisfied that the default in complying with sections 111 and 122 was inadvertent and not wilful.

15.  After the default was discovered, the Company had terminated the retainer of the company secretary and appointed its legal advisers in Hong Kong to be the company secretary.  Further, a firm of certified public accountants in Hong Kong was appointed to prepare audited accounts for the Company from incorporation up to 30 June 2008.  These audited accounts were approved by the board of directors and were laid before the Company by a written resolution of all its shareholders dated 16 June 2009.

16.  Prior to the transfer of its shares in 361 China to 361 Enterprise, the Company had only acted as the holding company of 361 China.  Proper accounts of 361 China have been prepared throughout the past years in accordance with the relevant rules and regulations in the PRC, and these accounts are subject to audit performed by certified public accountants in China, and are available to the beneficial owners of the Company.  Notwithstanding the failure to prepare audited accounts of the Company, its beneficial owners had all along been conversant with the financial position of 361 China.  It does not appear that the shareholders of the Company were prejudiced by the default.

17.  I understand that the shareholders and directors of the Company genuinely wish to comply with the law and rectify the default.  It is the intention of the shareholders that once all necessary legal requirements have been complied with and relief obtained from this court, an application would be made for the deregistration of the Company, as 361 Enterprise has assumed the Company’s role as the shareholder of 361 China and it is not expected that the Company will have any other business going forward.  So the non-compliance with corporate secretarial obligations would become academic.

18.  I am satisfied it would be appropriate in the circumstances to grant relief.

19.  I make an order in terms of paragraphs 1 and 2 of the originating summons in HCMP No. 1152 of 2009 and an order in terms of paragraphs 1 and 3 in HCMP No. 1153 of 2009.