LAW LEUNG WAI v. LAW LEUNG KWAN AND ANOTHER

HCMP 622/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 622 OF 2014

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D E C I S I O N

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Introduction

1.  The applicant brings this application pursuant to ss 373 and 375, Companies Ordinance (Cap 622) in his capacity as one of the two directors of the 2^nd respondent (“the thread company”). The 1^st respondent (“Kwan”) is the other director of the thread company.

2.  The said provisions of Cap 622 respectively require (i) a company to keep accounting records, and (ii) that company to allow its director to inspect and make copies of those records without charge upon his request.

3.  The respondents oppose this application on two grounds:

(a) the applicant (“Wai”) is no longer a director at the time of this application (17 March 2014);

(b) this application is made for an improper purpose; namely, it is probably made in breach of Wai’s duty of confidence and/or for the purpose of injuring the thread company’s interest.

Ground (b) above is based on circumstances which show that Wai has set up and/or actively participated in a rival business (“the Dongguan company”).

4.  Further, by reason of the above factual disputes, (so the respondents contend) it is not appropriate for this application to proceed in a summary way.

Background

5.  Except expressly otherwise stated, the background below is largely undisputed.  Wai and Kwan are brothers.  Wai became a minority shareholder (39%) of the thread company in mid-1998 while Kwan has been the majority shareholder.

6.  The thread company was incorporated in 1992. Both Wai and Kwan were the thread company’s directors (but whether Wai was a director after August 2012 is a matter in dispute).

7.  Whatever might have been the true reason, it is a fact Wai was no longer involved in the affairs of the thread company after that time.

8.  In around March 2013, the Dongguan company was set up, with a similar business as the thread company’s (in thread and related production); thus, it is regarded by Kwan as a rival business.  Wai denies that, and contends that the Dongguan company’s business focuses on the lower stratum of the market whereas the thread company’s business belongs to the higher stratum.

9.  Wai’s precise connection with the Dongguan company is also disputed.  On the part of the respondents, they contend that the Dongguan company is actually owned by Wai (whether wholly or partly).  On the part of Wai, he claims he is only an employee (part-time trainer for training the sales personnel).

Applicant’s locus standi

10.  The respondents say that Wai has tendered his resignation verbally at the beginning of August 2012.

11.  While denying his resignation, Wai accepts that:

(1) since about April 2012, the thread company stopped paying him remuneration;

(2) since about August 2012, he was barred from taking part in the thread company’s affairs.

12.  Wai argues that the following matters show that this part of the respondents’ case has no merit.

13.  One, the thread company’s articles of association provides that Table “A”, Cap 32 (now Cap 622) shall apply, and that Table “A” requires a director’s resignation to be:

“… by notice in writing to the company given in accordance with section 157D(3)(a) of the Ordinance” (clause 90(e) thereof).

Where a company’s articles of association require resignation notice to be given by a director, the resignation shall not have effect unless he gives the notice in writing: s 157D(3)(a).  In addition, a notice must be sent to the Companies Registry in the prescribed form within 14 days: s 158(4).

14.  There being no written notice of resignation, Wai argues that, even if he is found by the court to have tendered the alleged verbal resignation, that notice has no legal effect.  Such being the case, a document purporting to be the thread company’s board meeting minutes of 1 September 2012, which recorded Wai’s “resignation”, can have no effect.

15.  Two, the respondents’ allegation is in any event unbelievable.  Kwan did not mention Wai’s alleged resignation in his 1^st affirmation.  Kwan only said:

“… with the continuous decrease of his business income from 2006 onwards, [Wai] resigned his post as salesperson in July 2012. Once his resignation was approved and accepted by [the thread company], his monthly salary was stopped accordingly. …

… despite [Wai] demanded to disclose [the thread company’s] 7 years account records … [in August 2012] … [Wai] still had the keys to the … office …

Apart from the telephone conversation, both [Wai] and I met personally sometimes in September 2012 … ”

(para 14, 16 and 17 thereof).

16.  Kwan first deposed to the alleged resignation in his 2^nd affirmation:

“At the beginning of August 2012, [Wai] had verbally resigned his post as a director … in front of me and other relatives during a family meeting”

(para 7 thereof).

17.  I agree with Wai’s above criticisms, and therefore conclude that no weight should be given to this part of Kwan’s evidence.

18.  Accordingly, I find no merits in the defence contention that Wai has already resigned from his directorship.

Purpose of inspection

19.  It is here Wai’s application faces difficulties.

20.  The defence deposed to a close relationship between the shareholders of the Dongguan company:

(1) a Mr Tso (“Tso”), who the defence deposes is Wai’s brother-in-law (his wife’s brother);

(2) a Ms Wu (“Wu”), who the defence deposes is Wai’s close relative.

21.  Wai deposed in answer that:

“I confirm that I was only an employee … I also confirm that Tso and [Wu] were not a relative of mine … ” (para 16, 2^nd affirmation).

After having been contradicted by evidence adduced by the defence, Wai then deposed:

“… I write to clarify that while Tso is technically not my relative-by-blood …, he is my brother-in-law. [Wu] is the grand-daughter of my mother’s brother … and she is only a very remote relative of mine … ” (para 4, 3^rd affirmation).

22.  The above “clarification” is in truth a lame attempt to mend an untruth.  In relation to Tso, the defence deposed specifically that he is Wai’s brother-in-law.  Having denied that, a later admission that such was in fact the case cannot properly be regarded as a clarification; so is Wai’s earlier categorical denial that Wu is his relative, and his subsequent admission that Wu is in fact “a very remote relative”.

23.  Not only are the above an indication of the accuracy of Wai’s deposition (against which I have taken a dim view (above)), an adverse inference can (and should) also be made because of this inaccuracy. This is because Tso and Wu were relied upon by the defence expressly for the purpose of showing that Wai was the person actually in charge of the Dongguan company (para 30, Kwan’s 1^st affirmation; para 12, Kwan’s 2^nd affirmation; para 4 to 9, Kwan’s 3^rd affirmation); at the very least, based on this, Wai is said to be unduly close to the management of the Dongguan company.

24.  This failed attempt to distant himself from such association can thus be regarded as circumstantial evidence that there was a close association.

25.  Further, two of the thread company’s suppliers have provided written statements of having been contacted by Wai and his wife (Tso’s sister) to entice for business for the Dongguan company.  Because these statements were not sworn evidence, usually they should be given much less weight.  However, in view of the inference I have been able to draw against Wai (see above), they should be given more weight than usual.  Looked at in such light, such evidence is supportive of (or at least consistent with) such an inference.

26.  With the above in mind, I find that the possibility that Wai is closely associated with (or may even be the person behind) the Dongguan company cannot be ignored.

27.  The dispute regarding whether the Dongguan company is a business rival of the thread company can be considered in a similar fashion.  Wai’s assertion (para 17, 2^nd affirmation) that the two were operating in “totally different market sectors” (namely, the thread company “sells higher priced [products]”) while the Dongguan company “sells lower priced or more economically priced products” does not prevent either or both of them from expanding their scope into the other’s business area if and when there is such a demand.  Para 25 above is telling on this point.

28.  All of the above shows that there is a real risk this application, brought about 2 years after Wai was (for reasons which may or may not be legitimate) no longer involved in the management of the thread company, may not be made for the purpose intended by the law to enable company directors to legitimately inspect and make copies of company accounting records.

Summary application

29.  The significance of whether the relief is final or interlocutory in nature arises from observations found in two decisions:

(1) Oxford Legal Group Ltd v Sibbasbridge Services Ltd and Another [2008] Bus LR 1244;

(2) Ling Yun Sang and Another v Chan Hak Kong and Another HCA 3347/1985 (12 June 1985).

30.  In the Oxford Legal Group decision, the court observed:

“It is important to keep in mind that [the] application … in the present proceedings was for summary judgment. … If the defendants raised a serious issue which could not be resolved without a trial, the [the applicant] was not entitled to summary judgment. …

… The burden was on those who opposed inspection to demonstrate that inspection was sought for an improper purpose. It is said, correctly, that the court must be astute to ensure that a director’s right to inspect the books and documents of the company is not rendered nugatory by delay while the court embarks on a prolonged examination of his motives for seeking to exercise that right. …

Plainly, there will be cases where—on an application for summary judgment—the court will feel confident that there is no real prospect of those opposing inspection establishing at a trial, clearly and affirmatively, that inspection is sought for an improper purpose. …

For completeness, I should add that somewhat different considerations may apply in a case where the director seeks an order for inspection by way of interim relief.  In such a case it is for those opposing inspection to satisfy the court that there is a serious question as to improper purpose which cannot be resolved with a trial. … But, even if satisfied that there is a question to be tried, the court may conclude that the balance of convenience favours an immediate order.  And, in that context, the question whether inspection might be used to cause damage to the company may well be decisive. … ”

(para 41, 43 and 44 thereof).

31.  A similar approach seems to have been adopted (earlier) in the Ling Yun Sang decision:

“I accept that the defendants have not, either by their own evidence or by analysis of the plaintiffs’ evidence, affirmatively proved that the plaintiffs intend to abuse confidence reposed in them or materially to injure the Company. The most that [the defendants] can say is that there is a possibility of leakage of confidential information or that, at a time when the Company is at a critical stage of reconstruction, the nuisance caused by inspection might be damaging to it.

I am of the opinion, however, that this is a case where inspection should not be ordered. The 1^st plaintiff, while not susceptible of removal, is the object of something more than specious allegations. … ”.

Conclusion

32.  Applying the above to the evidence before me (especially that concerning a real risk of this application being made for an improper purpose), I am of the view my discretion should be exercised to refuse this application, being an originating summons seeking inspection (and so on) by way of final relief.

Other matters

33.  The parties’ written submissions also mentioned various other points.  These have not been expressly set out or dealt with above.  This is so only because of the need to balance between the length of the decision and its comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked).  To avoid doubt, those other points have also been considered.

Costs order

34.  The parties agree to the usual rule that costs should follow the event.  There will accordingly be a costs order that the costs of this application (including any reserved costs) be paid by the applicant to the respondents to be taxed if not agreed.