KIM SEUNG YOUNG v. WEINA HONGKONG CO LTD

HCMP 1478/2023

[2024] HKCFI 2500

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1478 OF 2023

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JUDGMENT

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Introduction

1.  This is the substantive hearing of the Plaintiff’s application by Originating Summons issued on 7 September 2023 (“OS”) for inspection and to take copies of the Defendant’s records and documents pursuant to section 740 of the Companies Ordinance, Cap 622 (“CO”). Since 2013, the Plaintiff has been holding 11% of the Defendant’s shareholding. Presently, the Plaintiff still holds 11% of the Defendant’s shareholding, with the balance 89% being held by Mr Lee Sun Yong (“Lee”).

2.  Paragraph 1 of the OS originally provided as follows:

“1. The Defendant do provide the Plaintiff with full access to, and allow the Plaintiff to take copies of, the Defendant’s records and documents (whether in hard copy, electronic form or otherwise):

(a) All minutes of all board meetings and all resolutions of directors of the Defendant from 2019 to date;

(b) All minutes of all general meetings and all resolutions of members of the Defendant from 2019 to date;

(c) The audited financial statements of the Defendant for each of the financial years from 2019 to date;

(d) The books and records of the Defendant for each of the financial years from 2019 to date; and

(e) All documents of 上海維娜化妝品有限公司in the Defendant’s possession, custody and/or power, which are relevant to the distribution of dividends by the Defendant from 2019 to date.”

3.  The OS was first heard before Mr Recorder William Wong SC on 27 September 2023. At that hearing, Mr Recorder Wong SC actually made an Order in terms of paras 1(b) and (c) of the OS with costs in the cause, so that the only matters left for this court’s determination would be paras 1(a), (d) and (e) of the OS.

4.  For reasons best known to the Plaintiff’s legal team, in the Draft Order submitted to the court by the Plaintiff’s solicitors in their Hearing Bundle A, the court is still being asked to make an Order in terms of inter alia paras 1(b) and (c) of the OS. After further queries by this court, Mr Cheung confirmed the Plaintiff did not require an Order from this court regarding those 2 sub-paras.

5.  At the hearing, Mr Cheung for the Plaintiff, after taking instructions, agreed that the ambit of the remaining paras of the OS should be further narrowed down. Hence, as far as para 1 (a) is concerned, the documents sought by the Plaintiff were limited to the period from 1 January 2021 to date. As far as para 1 (d) is concerned, instead of “books and records”, the Plaintiff was content to have management accounts, bank statements and cheques showing the receipt and payment of dividends for the period from 1 January 2020 to date.

6.  As a result of the Plaintiff’s narrowing down of his request, Mr Pang, very sensibly, indicated no objection to paras 1(a) and (d) as revised and this court then made an Order in terms as follows:

“The Defendant do provide the Plaintiff with full access to, and allow the Plaintiff to take copies of, the Defendant’s records and documents (whether in hard copy, electronic form or otherwise) of:

(a) All minutes of all board meetings and all resolutions of directors of the Defendant concerning declaration, receipt and/or payment of dividends from 1 January 2021 to date; and

(b) All management accounts of the Defendant and bank statements and cheque records of the Defendant concerning declaration, receipt and/or payment of dividends from 1 January 2020 to date.”

7.  In the end, what is left to be decided by this court is para 1 (e) of the OS. That is resisted by Mr Pang for the Defendant and this Judgment is principally directed to Para 1 (e) as revised with the agreement of Counsel on both sides. The revision changes the period under para 1(e) from 1 January 2020 to date.

Background and the Plaintiff’s case

8.  The following are taken from the Plaintiff’s 1st affirmation (“Kim 1”) and 2^nd affirmation (“Kim 2”).

9.  “上海維娜化妝品有限公司” (“Weina SH”) is a limited company incorporated in the PRC in 2003. It principally engaged in skincare and makeup business in the PRC.

10.  In July 2007, Lee acquired the entire issued share capital of Weina SH.

11.  In 2011, Lee offered to sell parts of his shares in Weina SH to 4 persons ie the Plaintiff, Seok Wooktae[1] (“Seok”), Ms Kim Yongran[2] (“Kim”) and Chung Woon Sung (“Chung”).  Upon the completion of the sale of Lee’s shares in Weina SH aforesaid, Seok held 8%, Kim held 30%, Chung held 14%, the Plaintiff held 11%, and Lee held the remaining 37% of the shareholding in Weina SH.

12.  The Defendant is a company incorporated in Hong Kong in May 2013 by Weina SH as its sole founding member, holding all 1,500,000 shares.

13.  Subsequently, there were 2 restructurings of the Defendant in 2013[3] and 2016/2017, the details of which are immaterial for the present purpose. However, the effect of the 2013 restructuring was that the Plaintiff has become 11% shareholder of the Defendant since 18 September 2013 by way of transfer of 165,000 shares from Weina SH. The Plaintiff claimed he had paid HK$165,000 for the shares, the payment for which was evidenced by the bought and sold note and instrument of transfer signed by Weina SH and the Plaintiff. This is denied by the Defendant. The effect of the 2016/2017 restructuring was that the Defendant became the sole shareholder of Weina SH.

14.  There have been changes to the shareholding structure of the Defendant since. As evident by the Defendant’s annual return as of 31 May 2023, the Plaintiff (11%) and Lee (89%) were the only 2 shareholders of the Defendant. Mr Cheung told this court that that remained the case as at the date of the hearing.  

15.  A table of the Defendant’s shareholders and directors since 2020, also derived from the Defendant’s annual returns, as prepared by the Plaintiff pursuant to this court’s Order, was as follows:

(1)  As at 31 May 2020 and 2021, Lee held 44.17%, Kim held 30%, Chung held 6.83% while the Plaintiff held 11% of the Defendant’s shareholding.

(2)  As at 31 May 2022 and 2023, Lee held 89% while the Plaintiff continued to hold 11% of the Defendant’s shareholding.

(3)  As at 31 May 2020 and 2021, the 3 directors of the Defendant were the Plaintiff, Lee and Seok. As at 31 May 2022 and 2023, the Defendant only had 2 directors viz Lee and Seok. The Plaintiff was removed as a director in December 202, without notice according to his case.

16.  Weina SH was a very successful company. The following tables shows the dividends declared by it for the financial years of 2014 to 2019.

Financial Year	Date of Weina SH Shareholder’s resolutions	Amount of dividends declared (RMB)
2014	21 April 2015	9,236,415.31
2015	24 February 2016	26,000,000
2015	6 March 2018	4,635,054.59
2016	6 March 2018	23,364,945.41
2016	8 August 2018	23,778,981.69
2017	27 February 2019	36,480,051.73
2018	16 May 2019	50,000,000
2018	2 September 2019	21,131,922.20
2019	3 June 2020	45,000,000
2019	8 June 2020	45,000,000
2019	19 October 2020	48,082,158.98

17.  As a result of Weina SH’s success, the following table shows the dividends declared by the Defendant for the financial years of 2015 to 2019 and the Plaintiff’s entitlement thereto.

Financial Year	Date of the Defendant’s board written resolutions	Amount of dividends declared (the Plaintiff’s entitlement in US$)
2015 and 2016	6 April 2018	431,665.36
2016	3 September 2018	294,255.04
2017	11 April 2019	536,900
2018	21 June 2019	714,360
2018	9 September 2019	130,000
2019	24 June 2020	930,000
2019	11 November 2020	687,000

18.  Although the amounts of the Plaintiff’s entitlement were as stated above, in Kim 1, the Plaintiff complained that according to his records, he had not received all his entitlement of dividends. For instance, for the financial years 2015 and 2016, the outstanding amount due to him was US$150,322.69. For the financial years 2017 and 2018, the outstanding amount due to him was US$251,275. For the financial year 2019, the outstanding amount due to him was US$10,000.

19.  For the financial year of 2020, the Plaintiff complains that:

(1)  According to the resolution passed at a board meeting of Weina SH held on 25 May 2021, it was resolved that dividends in the sum of RMB137,308,697.27 be declared and paid to the Defendant for the financial year of 2020. On 14 June 2021, the Defendant received US$19,328,651.23 from Weina SH through its Account.

(2)  From the Defendant’s records, the Defendant transferred US$10,000,000 and US$9,000,000 to Lee from its Account on 18 June 2021 and 29 June 2021 respectively. These are what the Plaintiff describes an Unauthorised Payments (“Unauthorised Payments”).

(3)  On 29 December 2022, the Plaintiff obtained copies of two purported written resolutions of the board of directors signed by Lee and Seok only, presumably on 16 June 2021 (“2021 Board Resolutions”). At that time, the Plaintiff was still a director of the Defendant. According to Article 9 of the Defendant’s articles of association, directors’ written resolutions must be signed by all directors in order to be valid and effectual.

(4)  In one of the 2021 Board Resolutions, it was purportedly resolved that dividends of US$19,000,000 be declared and distributed to Lee only whereas in the other one it was purportedly resolved that dividends be declared and distributed as follows:

	Amount (US$)
Lee	14,336,071.74
Seok	1,546,293.30
Chung	991,481.67
The Plaintiff	2,126,153.29
Total:	19,000,000.00

20.  Since the Defendant has received dividends of US$19,328,651.23 from Weina SH, the Plaintiff, being a 11% shareholder of the Defendant, should at least be entitled to dividends in the sum of US$2,126,151.64. Whereas on 29 June 2021, the Plaintiff only received US$1,150,000 as part of the dividends for the financial year of 2020.

21.  For the financial year of 2021, the Plaintiff complains that:

(1)  Since his removal as a director in December 2021, he no longer had access to documents and information pertaining to the Defendant’s or Weina SH’s financial status or the status of the dividends declared by the Defendant or Weina SH.

(2)  Despite his request for dividends to be paid out, he had not received any dividends for the financial year of 2021.

Defendant’s opposition

22.  In opposition, Lee filed his 1^st affirmation in January 2024 (“Lee 1”). In gist, the Defendant’s case, as summarised in Mr Pang’s skeleton, is this.

23.  First, the Plaintiff never paid for the shares in the Defendant. Nor did he fully own the 11% in Weina SH. He only had 6% of the shares in Weina SH. This is because the Plaintiff and Lee had reached the so-called “5% Share Agreement” under which the Plaintiff held the 5% shares in Weina SH on trust and as nominee for Lee.

24.  Second, the Plaintiff is not entitled to any rights in the Defendant’s shares because he had never paid valuable consideration for them. Although there is a bought and sold note dated 18 September  2013 signed by Weina SH and the Plaintiff stating the Plaintiff had paid for the shares, there is no record of any payment by the Plaintiff to the Defendant. Lee only found out recently that the Plaintiff never made any payments for the Defendant’s shares. Hence, the Plaintiff was never entitled to any dividends from the Defendant at all.

25.  Third, Lee denies the Common Understanding and Agreement alleged by the Plaintiff. This Common Understanding and Agreement will be explained in the next section.

26.  Fourth, the previous declarations of dividends by the Defendant were illegal agreements between the Plaintiff and Lee. In essence, the protection of the Plaintiff’s economic interest ie dividend payments to the Plaintiff is also illegal.

27.  Fifth, the argument that the Plaintiff was unfairly prejudiced or the Plaintiff wanted to seek redress from the court should not be the Court’s main concern. If the Plaintiff feels that he has been unfairly prejudiced, he has every right to commence a proper action against the Defendant and/or Lee at any time.

28.  Sixth, the Plaintiff should not utilise section 740 CO to challenge managerial or commercial decisions of the board without appropriate basis. The Court held in Cheung Tung Lan, Tony v Yang Yongdong unrep., HCMP 447/2012, 17  May 2012, Harris Jat [24] that the section does not enable a shareholder to inspect documents to monitor what the directors are doing with a view to challenging their decisions.

Deliberation

29.  Section 740 of CO provides as follows.

“740. Court may order inspection of records or documents

(1) On application by a required number of a company’s members, the Court may make an order—

(a) authorizing a person who is the applicant or one of the applicants to inspect any record or document of the company; or

(b) authorizing a person who is not the applicant or one of the applicants to inspect any record or document of the company on behalf of the applicant or applicants.

(2) The Court may make an order authorizing a person to inspect a record or document if it is satisfied that—

(a) the application is made in good faith; and

(b) the inspection is for a proper purpose.

(3) If the Court makes an order authorizing a person to inspect a record or document, the person may, unless the Court otherwise orders, make copies of the record or document.

(4) If the Court makes an order authorizing a person to inspect a record or document, it may make any other order that it thinks fit, including—

(a) an order requiring the company, or an officer of the company, to produce any record or document to the person;

(b) an order specifying the record or document that may be inspected by the person;

(c) an order requiring the applicant to pay the expenses reasonably incurred by the company in the inspection; and

(d) an order permitting the person or, if the person is not the applicant, the applicant to disclose any information obtained as a result of the inspection to any other person specified in the order.

(5) A person who complies with an order made under subsection (1) or (4) does not incur any civil liability by reason only of the compliance.

(6) In this section, a reference to a required number of a company’s members is a reference to—

(a) the number of members that represents at least 2.5% of the voting rights of all the members having a right to vote at the company’s general meetings at the date of application; or

(b) at least 5 members of the company.”

30.  The applicable legal principles are well-established and have been set out in Mr Cheung’s skeleton. They are not contested by Mr Pang.  For ease of reference, they are summarised below.

31.  First, the section (and its predecessor) essentially codifies and expands upon the common law right of a company’s members to examine the company’s “records”.  By reason of the liberal definition of “records”, the section prima facie entitles shareholders of a company to be granted generous access to corporate information in order to protect their interests in the company: Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241 at [9] (Harris J).

32.  Second, the Court may make an Order under the section if it is satisfied by the applicant, the burden being on him, that (i) the application is made in good faith and (ii) the inspection is for a proper purpose. These are two separate and independent requirements. These two requirements, to some extent, lay down a subjective and an objective test: the applicant must first establish that he believes his purpose in applying for an inspection order is proper (ie that he is acting in good faith) and secondly, the court must believe the circumstances are such that the inspection applied for is for a proper purpose: Wong Kar Gee Mimi v Hung Kin Sang Raymond at [14] –[16].

33.  Third, once the primary or dominant purpose of the application is deemed by the Court to be proper ie it is a purpose germane to the applicant’s status as a shareholder, then any further or secondary purpose for seeking inspection, that is irrelevant. Equally, so long as the applicant acts in good faith and for a proper purpose, then the fact that there is hostility between the parties is equally irrelevant: Wong Kar Gee Mimi v Hung Kin Sang Raymond at [21] – [22].

34.  Fourth, the requirement of good faith requires the applicant himself to act honestly and with a purpose that he himself believes to be proper.  As to what constitutes a proper purpose, the authorities identify 2 helpful points of guidance: (i) an application made by a substantial and longstanding shareholder may in and of itself discharge the burden of establishing good faith and proper purpose, and (ii) where an applicant seeks inspection to protect his economic interest in the company that might prima facie satisfy the proper purpose requirement: Selvaraj (Moorthy) v GMT Industrial Ltd [2019] 4 HKLRD 572 at [11] (Coleman J).

35.  Fifth, it remains in principle a proper purpose for seeking inspection to enable an applicant to assess the value of his presently owned shares, particularly where the possibility of a disposal of that investment is in prospect: Selvaraj (Moorthy) v GMT Industrial Ltd at [15] and [16].  

36.  Selvaraj (Moorthy) v GMT Industrial Ltd is an instructive case for the present purpose. The applicant has been a shareholder of the Company since 2 April 1979. The Company was a family-owned company, incorporated as long ago as 1979 to hold the Selvaraj family’s business. At the time of the hearing, he held 1,500 out of 15,000 issued ordinary shares of the Company. He applied for an Order authorizing inspection of the bank accounts of the Company. The 2 purposes of his application were: (i) to investigate what the applicant described as a genuine and credible belief on his own part that the Company, under his brother’s control, had operated the accounts in a manner which constituted corporate mismanagement or unfair and prejudicial conduct, and (ii) for him to be able to ascertain the Company’s cash position as part of a valuation process of the fair market price of his own shares which he would intend to sell.  The application was allowed by Coleman J. As shall be seen later in this Judgment, these purposes are not that different from the Plaintiff’s purposes in the present case.

37.  Sixth, where the application is for the purpose of enabling the applicant to carry out investigation into alleged misconduct or maladministration, it would not be possible or appropriate for the Court to reach a firm conclusion on each complaint raised. This is because, amongst other things, the evidence would likely not be complete, it is unlikely that disputes of fact can be resolved on affidavit evidence alone, and the complaint may well be raised again in subsequent proceedings for adjudication. What the Court should do is to assess, on the basis of the available evidence, whether the applicant has made out a proper case for investigation, taking into account such explanations as may be offered by the respondent.  If the applicant is able to make out a proper case for investigation, the court should move on to consider whether, in the exercise of its discretion, the inspection sought ought nevertheless to be refused: Leung Chung Pun v Masterwise International Ltd [2014] 1 HKLRD 1129 at [25] (Recorder Anderson Chow SC, as he then was).

38.  The Court is entitled to take into account a wide spectrum of matters and should strike a proper balance between requiring the company to be transparent and not permitting the jurisdiction to be used by a shareholder to challenge managerial or commercial decisions made by the board. How this balance should be struck could only be determined on a case by case basis: Leung Chung Pun v Masterwise International Ltd ibid.

39.  In the Plaintiff’s overview and executive summary of his skeleton, he sets out the basis of the present application as follows.

40.  It was agreed between the Plaintiff and Lee that the Defendant should be run based on certain common understanding and agreement (“Common Understanding and Agreement”) which was that:

(1)  The Defendant would be run as a holding company[4].

(2)  The real economic interests of Lee and the Plaintiff would be their indirect interests in Weina SH.

(3)  Distributions of dividends would be made by Weina SH to the Defendant and in turn by the Defendant to Lee and the Plaintiff whenever Weina SH’s profits were available for distribution.

(4)  So long as the Plaintiff held shares in the Defendant, he would be entitled to remain as its director and participate in the management of its affairs.

41.  Consistent with the Common Understanding and Agreement, dividends were declared and distributed, and eventually received by the Plaintiff over the years, although the timing of receipts was not regular.

42.  In recent years, Lee has been acting in contravention of the Common Understanding and Agreement in that the Plaintiff was not distributed dividends in full for the financial year of 2020 – the last interim dividends he received was on 29 June 2021. The Plaintiff was not distributed any dividends for the financial year of 2021 and thereafter. The Plaintiff also complains he was unjustifiably removed as director in December 2021 so that he no longer had access to the requested documents.

43.  The Plaintiff submits the present application is made bona fides for a proper purpose:

(1)  The Plaintiff is a substantial and long-standing shareholder of the Defendant.

(2)  The Plaintiff seeks to protect his economic interests in the Defendant as a shareholder.

(3)  The Plaintiff has found solid indicators showing that Lee acted in an unfairly prejudicial manner, and steps might have to be taken to protect his minority interests as the Defendant’s shareholder.

(4)  The documents sought are necessary to evaluating whether out-of-court exit arrangements, such as a buy-out, can be implemented. If the way forward is for the Plaintiff’s shares in the Defendant to be bought by Lee, he would also require the documents requested so as to ascertain an appropriate buyout price.

44.  The Defendant’s grounds of opposition have been set out earlier in this Judgment.

45.  Notwithstanding the alleged Common Understanding and Agreement and the alleged unauthorised and wrongful removal of the Plaintiff’s directorship, which Lee denies, ultimately, Mr Pang submits that they are irrelevant. At this stage, this court needs only focus on the following questions:

(1)  Whether the inspection application is for a proper purpose.

(2)  If so, whether this application is made in good faith.

(3)  If so, whether the court should exercise its discretion to refuse such an application.

46.  But first, this court should deal with the Plaintiff’s locus.

47.  As far as the Plaintiff’s status as a member of the Defendant is concerned, a member is defined in section 2 of CO as inter alia a person who agrees to become a member of the company and whose name is entered as a member in the company’s register of members. There is no specific requirement that the shares must have been paid for if the aforesaid 2 requirements are satisfied. Hence, even a donee of shares can become a member of a company if all the formal procedural requirements to implement registration of the donee as transferee are met: Gore-Browne on Companies Vol. 2 para 23-9.

48.  Further, Article 27 of the Defendant’s Articles of Association only provides that “A transfer of shares shall not pass the right to any dividend declared thereon before the registration of the transfer.” Given that it is not Lee’s case that the Plaintiff’s 11% shareholding in the Defendant had not been properly registered, and given the previous declarations and payment of dividends by the Defendant to the Plaintiff, this court is not prepared to find for the present purpose the Plaintiff is not a member of the Defendant and does not have locus under section 740(6)(a) of CO.

49.  In these circumstances, notwithstanding Mr Pang’s bare assertion of the law, even assuming for the sake of argument the Plaintiff had not in fact paid for the 11% Defendant’s shares, which this court is not satisfied on the available evidence, this court is not persuaded by his submission that (i) the Plaintiff was never entitled to any dividends from the Defendant at all, or (ii) the previous declarations of dividends by the Defendant to the Plaintiff were illegal agreements between the Plaintiff and Lee.

50.  In any event, it seems to this court the Defendant’s arguments (in essence Lee’s arguments) against inspection contain bare assertions of the law without the support of proper authorities or bare assertions of facts which are disputed and cannot readily be resolved in an application of this kind. Hence, whether the Plaintiff had paid for his 11% of the Defendant’s shares, whether the Common Understanding and Agreement alleged by the Plaintiff and whether the “5% Share Agreement” alleged by Lee exist are not something that this court can be expected to come to a firm view on affirmation evidence.

51.  Further, this court is not persuaded by Mr Pang’s argument that (i) whether the Plaintiff has been unfairly prejudiced by Lee’s action should not be the Court’s main concern since he has every right to commence a proper action against the Defendant and/or Lee at any time, or (ii) the Plaintiff is utilising the section to challenge managerial or commercial decisions of the Defendant’s Board without appropriate basis.

52.  Rather, this court accepts Mr Cheung’s submission that:

(1)  Seeking inspection to protect a shareholder’s economic interests in the Defendant can prima facie satisfy the good faith and proper purpose requirements and does so satisfy the twin requirements in this case.

(2)  The Plaintiff’s purpose is not to challenge the commercial decision of the Defendant’s Board as such. The Plaintiff only seeks to ascertain, factually (i) whether and if yes how much dividends the Defendant had received from Weina SH; and (ii)  whether and how much the Defendant had declared and paid dividends to Lee and/or others to the exclusion of the Plaintiff for the relevant period.

(3)  By this application, the Plaintiff is also seeking to investigate into potential misconduct of Lee in receiving the Unauthorised Payments.

53.  For completeness, under para 1(e) of the OS, the Plaintiff is only seeking “All documents of 上海維娜化妝品有限公司in the Defendant’s possession, custody and/or power, which are relevant to the distribution of dividends by the Defendant from 1 January 2020 to date.  This is clearly permissible. In Wong Kar Gee Mimi v Hung Kin Sang Raymond at [46], Harris J observed that “records emanating from a subsidiary, which become owned by or possessed as of right by the specified corporation, come within ‘records of the specified corporation’”.

54.  To conclude, this court is satisfied that the present application is made in good faith and for a proper purpose. This court also cannot see any justification to exercise its discretion to refuse the present application. Indeed, the Defendant has accepted orders for inspection can be made in terms of paras 1 (a) to (d) as revised. So why leave out para 1 (e) when the basis of the Plaintiff’s application for the entire para 1 of the OS is the same?

Disposition and costs order nisi

55.  There shall be an Order in terms of paras 1 (e) as revised.

56.  Costs should normally follow the event. There shall be an Order nisi that costs of the OS be to the Plaintiff, to be taxed if not agreed and paid forthwith, certificate for counsel.