TAN BENG HUAT AND ANOTHER v. SWISSCELIN DISTRIBUTION LTD AND OTHERS

HCMP 2000/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2000 OF 2015

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J U D G M E N T

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1. This is a simple application by two directors of Swisscelin Distribution Limited (“the company”) for access to the company’s documents.

2. The company is a joint venture between Swisscelin Limited (“Swisscelin”) and the Modern Beauty Group.  The business of Swisscelin is in the development, improvement and sale of an anti-aging health supplement manufactured by a Swiss contractor for Swisscelin. 

3. The joint venture was formed for the purpose of marketing and supplying the product in Hong Kong and the Mainland through the network of beauty service centres operated by the Modern Beauty Group. Swisscelin holds 80% of the shares in the company, and MCB Limited (“MCB”), a member of the Modern Beauty Group, holds the other 20%. 

4. The shareholder’s agreement provides each side may nominate two persons to be appointed as directors of the company.  The 1^st and 2^nd plaintiffs are the two directors nominated by Swisscelin, and the 2^nd and 3^rd defendants are the two directors nominated by MCB.

5. There is no dispute that the MCB side has thus far been responsible for keeping records and for the corporate paperwork and accounting work.  The plaintiffs and Swisscelin became concerned in the course of last year that since around March 2015, the MCB side has not given any further monthly or periodic sales report to Swisscelin, notwithstanding its requests.  Swisscelin also asked for an inventory account or stock-take in order to ascertain the number of boxes of products that remained in MCB’s logistics centre, but the information had not been provided.

6. When the plaintiffs, despite requests, were unable to obtain access to the company’s records, they instituted proceedings by the originating summons herein, which is now before me.

7. The law on a director’s right of access to accounting records, both at common law and under the statute, previously section 121 of Cap 32, and now section 374(1) of Cap 622, is well-established, and made very clear by a series of decisions of the Court of Appeal including Re Boldwin Construction Company Ltd [2001] 3 HKLRD 430, Re Alvarez & Marshal Asia Ltd [2009] 4 HKLRD 727, and Tsai Shao Chung v Asia Television Ltd [2012] 4 HKLRD 52. The principles summarised by Kwan J (as she then was) in Ng Yee Wah v Lam Chun Wah [2012] 4 HKLRD 40, at paragraph 29, which was adopted by the Court of Appeal in Tsai Shao Chung v Asia Television Ltd at paragraph 26, and in particular, subparagraphs 3 to 5 of Kwan J’s judgments are of particular relevance in the presence case. 

8. Although by the affirmation of the 3^rd defendant dated 5 January 2016, the application of the plaintiffs was opposed, the issues have narrowed down considerably since Mr Danny Chan lodged his skeleton on 24 February, so much so that it seems to me that there is, at the time of this hearing, very little that remains contentious between the parties.

9. One of the three matters that was specifically mentioned in Mr Danny Chan’s skeleton on behalf of the defendants was the audited financial statements of the company.  It is said that because of the non‑co‑operation of the plaintiffs, the auditors had not been paid in time for the audited accounts to be prepared and audited and signed off. 

10. The originating summons, however, does not expressly seek inspection of any audited accounts, but simply the accounting records of the company as stipulated in sections 373 and 374 of the Ordinance including but not limited to sales reports, ledgers, profit and loss accounts, income and expenditure accounts, book records, balance sheets, bank statements, and records of assets and liabilities of the company.  It seems to me there is no need to make any express exception for the audited accounts.  If a document does not exist, then it cannot be inspected.  It really is as simple as that.

11. The second matter mentioned in Mr Danny Chan’s skeleton is the records of the company’s sale of products to its buyers. Clearly, insofar as these records exist, they are part of the accounting records of the company.  There was originally an argument that inspection should not be allowed because it is said that the plaintiffs had been seeking access to the records for a collateral purpose.  It was suggested, or rather suspected, that Swisscelin wished to obtain information relating to the company’s buyers in order to effect direct sales to those buyers. 

12. In response, Mr Maurice Chan in his skeleton made it quite clear that what the plaintiffs primarily seek is the information about the number of products sold, rather than the identities or contact details of the buyers in question.  In any event, Mr Danny Chan informed me this morning that the 2^nd and 3^rd defendants no longer contest this part of the application. 

13. The third matter that was referred to in counsel’s skeleton is paragraph 1A(ii) of the originating summons which seeks inspection of: 

“Records of the number of products sub-sold by the buyers to their customers at the beauty service centres of the Modern Beauty Group (ie those beauty service centres of Modern Beauty Salon Holdings Limited (Stock code 909), or of the group of companies held under it).”

14. Prima facie, records of the buyers themselves would not be records of the company.  If, however, the information concerning the number of products sub-sold by the buyers had been given to the company, or appears in the company’s documents such as minutes or sales reports rendered to the company or in the correspondence with the company, then these documents of the company may of course also be inspected by the plaintiffs. 

15. We are, on this application, simply concerned with the directors’ right of access to the company’s existing records, not with the right of the company to an account by the buyer.  So whether or not there was some failure on the part of the 2^nd and 3^rd defendants to obtain information about such sales for the benefit of the company is not relevant for present purposes, nor is it relevant whether the company had a contractual right against the Modern Beauty Group for an account. 

16. Given the parties’ respective latest position, and for the reasons I have already given, there will be an order for inspection. 

(Discussions with counsel on form of order)

17. I make an order in terms of paragraphs 1, 2 and 3 as amended. 

(Submissions on costs)

18. For the reasons I have already pointed out, I think this is a case that justifies an order for costs on an indemnity basis. The plaintiffs’ rightful demands were totally ignored before the issue of proceedings, and even after the issue of proceedings, they were still ignored.

19. There was essentially no ground to oppose the application.  The 2^nd and 3^rd defendants were specifically warned and advised by the court to consider their position.  It was pointed out to them that the law on a director’s right of access to the company’s documents is very clear, that the right is a strong one, and that the grounds for restricting that right and opposing an application of this kind are highly limited.  They failed to put in an affirmation within time in opposition, and eventually, an unless order had to be obtained by the other side, and in the affirmation filed pursuant to the unless order, serious allegations of collateral purpose amounting to an allegation of bad faith were made on what, in my opinion, is wholly insufficient material.  This is demonstrated by the fact that the allegations have been dropped at the last minute.  I do not, of course, blame counsel for abandoning an allegation or argument that has no merit to start with, but it simply shows that there was no real ground for opposition to the application.  The opposition has been entirely misconceived, and has only served to stall the exercise of the directors’ undisputed right to inspect the documents of the company.

20. I order that the 2^nd and 3^rd defendants do pay the plaintiffs’ costs on an indemnity basis, to be taxed if not agreed.