YEUNG CHUN KEI v. 2A LTD AND OTHERS

HCMP 2/2024

[2024] HKCFI 3177

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2 OF 2024

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D E C I S I O N

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Introduction

1.  This is the substantive hearing of the Originating Summons dated 2 January 2024 (the “Originating Summons”) pursuant to which the Plaintiff applies for inspection and delivery up of the requested documents listed in the Schedule of the Originating Summons (the “Schedule”) by 2A Limited, the 1^st Defendant (“2A”), 88 International Limited (“88”) and 1368 Limited (“1368”) (collectively, the “Defendants”).

2.  With reference to the Schedule and the case development after the issuance of the Originating Summons, as at the date of the hearing, the Plaintiff seeks the following documents from the Defendants:-

(1)  As for audited annual financial statements (“AFS”):

(a)  2A is willing to provide the AFS to the Plaintiff but it, through its solicitors, Messrs TWSL Partners (“TWSL”), claimed that the AFS have yet to be finalised on 11 July 2024. No AFS has been provided to the Plaintiff as of the date of this Submissions. The Plaintiff therefore prays for an Order in respect of paragraph 1 of the Originating Summons.

(b)  88 has provided the AFS to the Plaintiff on 19 July 2024. The remaining issue is costs and the Plaintiff respectfully asks for costs in respect of paragraph 5 of the Originating Summons.

(c)  1368 has provided the AFS to the Plaintiff on 19 July 2024. The remaining issue is costs and the Plaintiff respectfully asks for costs in respect of paragraph 9 of the Originating Summons.

(2)  Management accounts of the Defendants.

(3)  Minutes of records of general meetings of the Defendants. The Defendants for the first time confirmed in TWSL’s letter dated 11 July 2024 that “no general meetings had been held by the Defendants and no resolutions has been passed by the Defendants”. The remaining issue is costs and the Plaintiff asks for costs in respect of paragraphs 3, 7 and 11 of the Originating Summons.

(4)  Minutes and records of meetings of the board of directors of the Defendants.

3.  I am of the view that as a shareholder, the Plaintiff is legally entitled to have a copy of the annual financial statements and the minutes of the general meetings of the Defendants. There is no legitimate reason to deny the Plaintiff of the same. All AFS should be provided to the Plaintiff including those yet to be finalized as and when they are ready. I make an order in terms of paragraph 1 of the Originating Summons.

4.  As a shareholder of the Defendants, the Plaintiff has a statutory right to inspect the minutes and records of, and resolutions passed in shareholders’ meetings of the Defendants under sections 618, 620 and 740 of the Companies Ordinance, Cap 622 (the “Ordinance”). He also has a statutory right to be provided with a copy of the AFS of the Defendants for every financial year pursuant to section 430 of the Ordinance.

5.  The Plaintiff is also entitled to the costs of the same as there should not be any need for the Plaintiff to commence legal proceedings in order to obtain access to or copy of the AFS and the minutes of the general meetings of the Defendants.

6.  Specifically, for minutes and records for general meetings, the Defendant, for the first time on 11 July 2024, confirmed that no general meetings had ever been held, which was around 7 months after the Plaintiff’s request. Should the Defendants have made this clear before the issuance of the Originating Summons or in their affirmation in opposition, there would be no practical utility for the Plaintiff to pursue this matter any further. I thereafter agree that the Plaintiff is entitled to costs for paragraphs 3, 7 and 11 of the Schedule of the Originating Summons.

7.  The remaining disputes to be resolved are:-

(1)  Whether the Defendants should produce (a) the management accounts; and (b) the minutes and records of meetings of the board of directors for the Plaintiff?

(a)  The Plaintiff made the application under section 740 of the Companies Ordinance (Cap 622) (the “Ordinance”). The scope of the application is from the respective date of incorporation of the Defendants until the date of the Order to be made herein.

(b)  The purpose of the Plaintiff in obtaining those documents has been explained in the 2^nd Affirmation of Yeung Chun Kei dated 24 June 2024 (“Yeung 2^nd”) that he wants to obtain information for a proper valuation of his shareholding in the Defendants and to safeguard his economic interest in them.

(c)  The Defendants, however, argued in the Affirmation of Chu Chun Shing dated 15 April 2024 (“Chu Aff”) that the scope of the application with respect to management accounts is unduly wide as “No evidence has been put forward by him to justify a wholesale inspection of all the books and accounts of the Defendants. It is a plainly a fishing expedition on the part of the Plaintiff, which is not permissible in a section 740 application.”

(d)  As for the minutes and records of meetings of the board of directors, the Defendants contended that (i) the Plaintiff had failed to state specific issues that justified investigation and necessitated the obtaining of all minutes and records of the Defendants; and (ii) as there is another set of ongoing litigations between the Plaintiff and the Defendants in DCCJ 1572/2024, the Plaintiff’s obtaining of those documents would make him have an understanding of what the Defendants’ respective boards had discussed.

(e)  Further, the general ground of opposition from the Defendants is that the Plaintiff has an ulterior motive in making the application, but the Defendants failed to pinpoint what the “ulterior motive” of the Plaintiff is in Chu Aff or at all. It remained as a sub-heading without any elaboration.

(f)  The Plaintiff’s case is that judging from the context of TWSL’s letter dated 11 July 2024, the Defendants did not challenge the scope of the application and maintained their views on the application was made for an “ulterior motive” anymore, the sole remaining issue would be whether the Plaintiff’s application was for a legitimate purpose which would be analysed in detail hereinunder.

(2)  Whether the Defendants should be liable for the costs of the Plaintiff’s application?

Material Facts

8.  The Plaintiff is and was a minority shareholder of the Defendants. He was a personal trainer of the three fitness centres operating by the Defendants, namely TST 24/7, Jordan 1 24/7 and Jordan 2 24/7.

9.  The Defendants are all trading as “24/7 Fitness” in Hong Kong and each of them operates a branch of it. 24/7 Fitness is a well-known chain of fitness centres in Hong Kong which runs 24-hour gym rooms for its members.

10.  On 19 May 2022 and 16 September 2022, the Plaintiff received dividends distributed by 2A in the sum of HK$1 million and HK$1.5 million

11.  In Clause 7 of the Shareholders’ Agreements for 2A and 88, it is stated that dividends would be declared to shareholders once every two months when 2A and 88 (as the case may be) have HK$500,000 as working capital (營運資金).

12.  The Plaintiff’s case is that he had been completely excluded from the management of the Defendants since late 2022, he was not even allowed to enter TST 24/7 in December 2022. Other than two AFS of 2A and 88 for the financial year ended 31 March 2021 and 31 March 2022 respectively, which were only supplied to the Plaintiff on 26 September 2023 upon request made by his then Solicitors on 29 September 2023, the Plaintiff possessed no other financial reports and/or statements concerning the Defendants.

13.  Another two AFS of 2A and 1368 for the financial year ended 31 March 2022 and 31 March 2023 respectively were provided by TWSL on 19 July 2024. The Plaintiff submits that:-

(1)  The Defendants would not supply any AFS to the Plaintiff unless and until the Plaintiff has engaged legal representation to make (repeated) requests. The Plaintiff further submits it is the statutory obligation for the Defendants to send the AFS to the Plaintiff, but the Defendants had clearly acted in defiance of the law by failing to comply with the statutory requirement all along the years.

(2)  The Defendants prepared AFS always on a backdated basis:-

	Name	Financial Year Ended	Date of AFS
(a)	2A	31 March 2021	8 June 2023
(b)	88	31 March 2022	31 June 2023
(c)	88	31 March 2023	27 November 2023
(d)	1368	31 March 2023	1 December 2023

(3)  The Plaintiff submits that the explanation that the AFS for 2A for the financial year ended 31 March 2022 and 31 March 2023 has yet to be finalised is unacceptable and unsatisfactory. There is simply no justifiable reason for the Defendants to delay the release of the AFS when 88 and 1368 could engage “Clark Chang & Co CPA Limited” (the “Auditor”) to prepare AFS for them, but the Auditor or any auditor in Hong Kong could not prepare AFS for 2A.

14.  The Plaintiff submits that it was not until 11 July 2024, the Defendants, through TWSL’s letter, for the first time disclosed to the Plaintiff that they had never convened any general meetings, no matter AGM or EGM, nor passed any resolutions by the shareholders of the Defendants. The Plaintiff submits that this again showed how the Defendants ignored the statutory requirement to hold AGM pursuant to section 610 of the Ordinance. I agree that the complaints of the Plaintiff are justified.

Applicable Legal Principles

15.  The legal principles governing application under section 740 of the Ordinance are well-established and have been sufficiently stated in General-Lite Group Corp. v. T&L Securities Limited (unreported, HCMP 2113/2021, 7 October 2022) at §5 by DHCJ H Au-Yeung (as he then was):-

(1)  The basis of a member’s right to inspection flows from his proprietary interest in the company. Although a member does not have a proprietary interest in the assets of a company, he has a very real interest in the company itself. He can reasonably expect to able to protect his interest and section 740 facilitates this by providing the member with access to corporate information, which might not otherwise be available to him (Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241, at [17] – [18]);

(2)  The procedure under section 740 of the Ordinance is enacted for the protection of shareholder rights and interests and the community’s more general interest in the maintenance of good corporate governance. This section should therefore be interpreted and applied in a manner consistent with these legislative objectives. This can be achieved through taking a generous approach to the interpretation of what constitutes an interest ‘reasonably related’ or ‘germane’ to the applicant’s status as a shareholder (Wong Kar Gee Mimi (supra), at [25]);

(3)  The good faith and proper purpose requirements constitute two separate and independent tests (Wong Kar Gee Mimi (supra), at [14]);

(4)  The Court will determine whether the applicant is acting in good faith and whether the inspection is made for a proper purpose by applying an objective test (Veron International Ltd v RCG Holdings Ltd [2013] 3 HKLRD 657, at [19]);

(5)  The burden of proof rests on the applicant (Veron International Ltd (supra), at [19]);

(6)  While an application made by a substantial and long-standing shareholder may in and of itself discharge the burden of establishing good faith and proper purpose (as opposed to an applicant who has only recently acquired a shareholding in the company) (Wong Kar Gee Mimi (supra), at [23]), there is no presumption in favour of a substantial shareholder of an entitlement to inspect (Re LehmanBrown Ltd [2011] 5 HKLRD 668, at [33]);

(7)  ‘Good faith’ in section 740 of the Ordinance means ‘honesty with no ulterior motive’. This requirement only requires that the applicant himself acts ‘honestly’ with a purpose that he himself believes to be proper (Wong Kar Gee Mimi (supra), at [16]);

(8)  If the applicant’s primary or dominant purpose is a proper purpose, whether an inspection may be of benefit to the applicant for some other purposes is irrelevant (Veron International Ltd (supra), at [19]);

(9)  The rights provided by section 740 should not be regarded as affecting the basic rule of company law that a shareholder should not ordinarily have recourse to the Courts to challenge a managerial decision made by or with the approval of the directors (Veron International Ltd (supra), at [19]);

(10)  An applicant is not entitled to go on a fishing expedition in search of a cause of action to support his or her mere suspicion of wrongdoings. Section 740 shall not be used as a substitute for pre-action discovery (Wong Kar Gee Mimi (supra), at [40]);

(11)  If the purpose is to investigate alleged misconduct, there must be proper evidence to support a reasonable case for investigation, taking into account any explanations offered by the defendants. Mere assertions of misconduct will not suffice (Re Bank of East Asia Ltd [2015] 4 HKC 137, at [25]);

(12)  The Court is not required, and should not endeavour, on an application under section 740 of the Ordinance, to reach conclusions about the merits of the matters relied on as constituting a ‘proper purpose’ (Re Bank of East Asia Ltd (supra), at [26]);

(13)  Even where an applicant is acting bona fide and has shown a proper purpose, the Court has a discretion whether to order inspection (Veron International Ltd (supra), at [19]). When the Court considers whether to exercise the discretion, it is entitled to take into account a wide spectrum of matters (Leung Chung Pun v Masterwise International Ltd [2014] 1 HKLRD 1129, at [25]);

(14)  Insufficient prospect of anything useful resulting from the inspection sought is a relevant consideration (Wong Kar Gee Mimi (supra), at [39]);

(15)  The fact that the applicant may have other means of obtaining the information elsewhere does not mean that he cannot satisfy the two requirements, but it is relevant to the court’s decision whether to exercise its discretion to grant an order (Veron International Ltd (supra), at [38.2]);

(16)  Confidentiality is a relevant consideration but concerns of confidentiality can be addressed by undertakings restricting the use of information (Re Bank of East Asia Ltd (supra), at [27] & [29]);

(17)  Substantial prejudice to the company in complying with an inspection order is also a relevant consideration (Veron International Ltd (supra), at [38.4]).

16.  Harris J. has explained in Re Bank of East Asia Ltd [2015] 4 HKC 137 at §25 the test of proper purpose as follows:-

“(5) In order to satisfy the ‘proper purpose’ criteria it is not necessary to satisfy the court that the applicant has a specific or personal right that can only be protected through the inspection of records. A wish to inspect documents to investigate a genuine and credible belief that there has been corporate mismanagement is capable of constituting a proper purpose. Generally, where the court is satisfied that the ‘purpose’ is germane to a shareholder’s economic interest in the company a “proper purpose” will have been satisfied.

(6) ‘As I have already explained, in my view the court should incline to a liberal interpretation of ‘proper purpose’ with a view to advancing the protection of shareholder rights and interest and the maintenance of appropriate standards of corporate governance. This is particularly true in the case of publicly listed companies ……… the court should be more willing to grant inspection orders to protect the interests of members in publicly listed companies”. This view was endorsed by Deputy Judge (as he then was) L Chan in Choi Chi Wai v Hong Kong Agriculture Special Zone Limited as being “more in line with the prevailing disposition of the community on corporate governance’.

(7) As part of establishing a proper purpose, the applicant has to show that there is a sufficiently reasonable ‘case for investigation’ as regards past or future wrongful or other undesirable conduct. The shareholder may fail to obtain inspection where he fails to make out on his own material some kind of case for investigation, or where the corporation is able by leading evidence to dispel whatever suspicion has reasonably been aroused: §39.

(8) Once the court is satisfied that the applicant has established a ‘proper purpose’ the company should be required to be transparent.” (Emphasis Added)

17.  On the other hand, where the application is made for the purpose of investigation based on some reasonable grounds for believing that misconduct or maladministration has taken place, the court may nevertheless refuse to exercise its discretion to permit inspection where it is satisfied that nothing of utility will come from the inspection or that the company will suffer undue prejudice as a result: see Leung Chung Pun v Masterwise International Ltd [2014] 1 HKLRD 1129 at §18 per Recorder A Chow SC (as he then was).

Analysis and Determination

18.  The Plaintiff submits that the inspection of the documents requested is justified as the application was made in good faith and the inspection was for a proper purpose. It is important to note that, since the Plaintiff joined the Defendants, he has had no access to the Defendants’ documents and financial information, and he has been kept in the dark as to the Defendants’ affairs.

19.  Further, the Plaintiff has always been provided with the AFS late by the Defendants, not to mention that the AFS for the financial year ended 31 March 2022 and 31 March 2023 regarding 2A are still outstanding. The Defendants even made express admission for not convening any AGM over the years. It is submitted that such violation of the Ordinance should be considered as malpractice and malmanagement of the board of the Defendants. Ms Ho for the Plaintiff further submitted that this evidence has already warranted the Plaintiff to carry out an investigation about the Defendants.

20.  Ms Ho also referred this Court to the case of Artan Investments Ltd and others v. The Bank of East Asia Ltd and others (unreported, HCMP 125/2015, 5 June 2016) (“Artan Investments”) where Harris J at §28 said:-

“…As I have already noted in my view it is not necessary for a shareholder to satisfy the court that he requires inspection of documents with a view to take action to protect a particular right. It may be sufficient depending on the facts of the case to demonstrate that there is reason to be concerned that there has been a failure of corporate governance, which a shareholder legitimately wishes to investigate.”

21.  The Defendants’ case is that:-

(1)  The board of the Defendants would only be able to determine the amount of dividend that would be available for distribution to its shareholders at a given point in time after the financial statements of the Defendants were laid before them.

(2)  The board of 2A had never informed the Plaintiff that he could expect dividends to be distributed every 3-4 months.

(3)  The Plaintiff harboured a misconceived understanding that he would have an absolute entitlement to dividends in the Defendants if it was profitable.

(4)  2A had no distributable profits since late 2022, and the Defendants had at all material times no distributable profits.

(5)  The decision to declare dividends is at the discretion of the respective directors of each of the Defendants. The financial information of the Defendants could not be conclusive about whether the Plaintiff would be entitled to dividends. As such, the information sought would not be of utility.

22.  I am of the view that it is not necessary for this Court to determine at this stage whether it is right or wrong for the Defendants to delay or refrain from declaring dividends. What this Court needs to determine is whether the Plaintiff has a proper purpose in requesting for access to the applied documents in good faith.

23.  Given that it is the Defendants’ position the financial position of the Defendant do not permit distribution of dividends, it is perfectly reasonable for the Plaintiff to request to understand the financial position of the Defendants and to see if there were board deliberations on the said issue.

24.  Ms Ho for the Plaintiff also pointed out that it is explicitly stipulated in the Shareholders’ Agreement of 2A that when it has HK$500,000 as working capital, dividends would be declared to shareholders once every two months.

25.  Importantly, Ms Ho for the Plaintiff submitted that from the disclosed AFS of 88 and 1368, there are serious issues to be investigated:-

The AFS of 88

26.  The Plaintiff highlights the issues:-

	Description	Year ended 31.03.2023 (HK$)	Period from 01.09.2021 to 31.03.2022 (HK$)	Changes	Comment by the Plaintiff
(1)	Revenue	6,307,246	40,697	Increase by 15,398%	/
(2)	(-) Costs of Service	(1,834,627)	/	/	New item – Contractors’ fees that have not been explained in AFS
(3)	(-) Administrative expenses	(4,180,530)	(1,248,086)	Increase by 234.96%	No explanation is provided by such a drastic degree of increase in expenses despite the breakdown at [C/42/558]
(4)	Profit	292,089	(1,207,389)	/	The relatively small amount of profit made by 88 was due to the huge costs of service and administrative expenses considering the significant increase in revenue
(5)	Handling for transactions to a member	257,790	11,415	Increase by 2,158.34%	No explanation in the AFS
(6)	Accounting fee	21,000	3,900	Increase by 438.46%	No explanation in the AFS
(7)	Building management fee	451,248	221,642	Increase by 103.59%	No explanation in the AFS
(8)	Cleaning fee	35,335	/	/	New item – no explanation in AFS
(9)	Government rates	108,640	49,632	Increase by 118.89%	No explanation in the AFS
(10)	Rental expenses	1,675,000	314,516	Increase by 432.56%	No explanation in the AFS
(11)	Transaction fees	209,525	21,418	Increase by 878.27%	No explanation in the AFS

27.  Ms Ho for the Plaintiff submitted that some of the expenses of 88 (Jordan 1 24/7) have been drastically increased, and new items, such as costs of service are included in the financial year ended 31 March 2023. None of them have been (properly) addressed by the Auditor in the AFS. The Plaintiff has no idea as to what was happening in 88 and with those unreasonably high expenses that had almost caused the significant revenue to go down the drain. Hence, the Plaintiff is entitled to the management accounts of the Defendants to conduct an investigation.

The AFS of 1368

28.  The Plaintiff highlights the following issues:-

	Description	Year ended 31.03.2023 (HK$)	Comment by the Plaintiff
(1)	Revenue	8,185	Only membership fee of HK$8,185 was collected for the whole financial year
(2)	Other payable	1,195,670	No explanation in the AFS

29.  According to 1368’s AFS, it was operating at a loss for the financial year ended 31 March 2023. The main reason was that the only source of income was the membership fee in the sum of HK$8,185. Ms Ho submitted that this gives rise to the call for investigation. Even during the time of the COVID-19 pandemic, with reference to the AFS of 88, it was receiving a membership income of HK$40,697, and the total membership income for 88 for the financial year ended 31 March 2023 was HK$4,454,545. Although no direct comparison could be made between the two gym centres, the difference in the membership fee was around HK$4.5 million, not to mention they are situated in the same district, i.e. Jordan.

30.  The Defendants expressed a concern about the potential abuse of information by the Plaintiff due to the subsistence of an ongoing District Court action. However, this is not a good reason to deny the Plaintiff’s right to have access to the applied documents. First, as a matter of law, the Plaintiff cannot misuse the acquired information for ulterior motive. In Artan Investments, (supra) at §29, Harris J said:-

“Necessarily section 740 creates a right to inspect, if the statutory requirements are met, documents which are normally confidential. A company will have a legitimate interest in ensuring that information is not made public that may damage its commercial interests. The court will be concerned to ensure that this does not take place and that section 740 is not misused to obtain information to damage the company’s interests. However, directors should not be allowed to exploit this concern to restrict access to documents that will substantiate a legitimate concern that they have failed in their duties in some way. Once the court has been satisfied that a shareholder properly wishes to investigate the way in which directors have addressed a particular matter the court should err on the side of ordering full inspection and concerns of confidentiality should be addressed by requiring undertakings restricting the use of information obtained as a result of inspection.” (Emphasis Added.)

31.  Secondly, the Plaintiff repeats his express undertakings given in Yeung 2^nd in the case the Defendants are genuinely concerned with the confidentiality issue and are unwilling to disclose the minutes and records of meetings of the board of directors.

(1)  The Defendants could provide the documents sought in paragraphs 4, 8 and 12 of the Schedule of the Originating Summons to the Plaintiff with parts relevant to DCCJ 1572/2024 redacted; or

(2)  The Plaintiff undertakes to the Court and the Defendants that he would restrict the use of the said documents obtained as a result of the inspection to:-

(a)  To ascertain the financial position of the Defendants;

(b)  To assess the market value of the Plaintiff’s shares in the Defendants; and

(c)  To carry out an investigation into potential misconduct or maladministration.

32.  In the circumstances, I do not see any risk of abuse by the Plaintiff as alleged by the Defendants.

33.  I am of the view that the Defendants have unreasonably resist a legitimate application on no good basis.

Disposition

34.  For all the reasons stated above, I make the following orders:-

(1)  The 1^st to 3^rd Defendants do send to the Plaintiff’s solicitors, WONG & CO., of 16/F, Attilio Building, 579 Nathan Road, Kowloon, Hong Kong a set of copies of the documents and records listed in paragraphs 1, 2, 4, 6, 8, 10 and 12 of the Schedule of the Originating Summons (“the Subject Documents”) that are in the possession, custody or power of the 1^st to 3^rd Defendants respectively, with liberty to the Plaintiff’s solicitors to inspect and take copies of the Subject Documents that are in the possession, custody or power of the 1^st to 3^rd Defendants;

(2)  The 1^st to 3^rd Defendants shall comply with paragraph 1 hereinabove within 7 calendar days from the date of the Order herein;

(3)  The 1^st to 3^rd Defendants be refrained from parting with the possession of, destroying, mutilating, amending, deleting or removing any of the original or copy of the Subject Documents respectively until full compliance by the 1^st to 3^rd Defendants with the Order herein; and

(4)  The costs of and occasioned by the Originating Summons, including the costs of the hearing, be paid by the Defendants to the Plaintiff, on a party to party basis, to be taxed if not agreed.