YOSHITO HANDA AND OTHERS v. CHAN WING HON PETER AND OTHERS

HCMP 2471/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2471 OF 2004

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J U D G M E N T

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Introduction

1.  This case relates to an originating summons dated the 27 September 2004 taken out by the Plaintiffs to oblige the Defendants to allow the Plaintiffs to inspect the 5^th Defendant’s books as particularised in the Summons itself [pages 1-3 Bundle A].  On the 19 October 2004 Suffiad J. made an order which had that effect (see pages 30-31 Bundle A).  In the order he gave the Plaintiffs liberty to apply as to the terms and implementation of the order and reserved the question of the costs of the originating summons to a date to be fixed for argument.  Although the order by Suffiad J. was not expressed to be by consent it had not been contested by the Defendants save as to costs.  I will return to the significance of this presently.  The other important aspect of the order is that it had the effect of putting to an end the originating summons in that the Plaintiffs had achieved their purpose in taking out the summons.  It represented the substantive order on the summons.  It was a final order.

2.  The Defendants now object to the Plaintiffs’ inspection of certain classes of document notwithstanding the fact that these form part of the judge’s order.  As a result the Plaintiffs have taken out a summons dated the 19 January this year to compel inspection [the enforcement summons].  The Defendants for their part have a summons dated the 24 January to discharge or vary this order (together with a further summons to amend the discharge summons).  Lastly, I also have before me the argument on the costs of the originating summons as reserved by Suffiad J.

Background

3.  The matter comes about in this way. The 5^th Defendant (“the Company”) manufactures and sells electric wire and cable.  It is a joint venture between Hitachi Cable Limited, which is part of the very well-known Japanese Hitachi Group, and a Hong Kong group of companies which bear the name Shin Ho.  Hitachi Cable and Shin Ho each own 50% of the Company.  Shin Ho is owned by a family called Chan.  They are the 1^st to the 4^th Defendants and are directors of the 5^th Defendant.  As such they have the day-to-day management of the Company.  The four plaintiffs are also the Company’s directors nominated by Hitachi Cable.  Under the joint venture which is dated the 13^th July 1987 the purpose and scope of the agreement is that the partners should carry on business in common with each other through the Company in Hong Kong and at such other places as may be agreed between them in writing as appears in Article 2.1 of the joint venture agreement.

4.  The joint venture which has operated for many years has been profitable and successful.  Nevertheless recently, tensions have emerged between the parties and questions have been asked by the Japanese partners as to the management and profitability of the Company as managed by the Chan directors.  It is with this in mind that the Japanese directors have required inspection of the books of account and other company documents in order that they may form their own view of how the Company is being operated and also in order that they may be able to satisfy themselves as to the Company’s audited accounts for the financial year ended March 2003.  In view of the fact that full inspection facilities were not being extended to them the Plaintiffs took out the originating summons in September last year.  Unsurprisingly, in circumstances where the originating summons had been unopposed, the Plaintiffs started their inspection on the 13^th October 2004 until that facility was withdrawn by the Defendants on the 5^th November 2004.  On the 7^th November 2004, the 1^st to the 4^th Defendants’ solicitors sent a letter to the Hitachi Cable side of the joint venture informing them that an application was to be made to vary Suffiad J’s inspection order.  The variations which were required included limiting the inspection to the Plaintiff directors personally or their nominated accountants, the period of inspection was to be restricted from the 1^st January 2002 onwards and inspection was to be suspended pending “buy out” negotiations between Hitachi Cable and the Chan’s whereunder the Chan’s were wishing to purchase Hitachi Cable’s 50% shareholding in the Company and thereby put an end to the joint venture agreement.  There was also to be a restriction on the documents which the Plaintiffs could copy which would exclude documents which relate to products of the Company which were being manufactured or marketed by Hitachi Cable.

5.  Apart from their summons to discharge or vary the inspection order the Chan’s, through their Shin Ho Companies which formed part of the joint venture company, took out a petition, in the Companies Court, under s.168A Companies Ordinance on the 15^th November 2004 which alleged unfairly prejudicial conduct in the affairs of the Company.  The Respondents to the Petition were the present plaintiffs, Hitachi Cable and the joint venture company itself.  The Petition sought the removal of the Japanese directors (the four plaintiffs in this matter) and an order that the shares of the joint venture company be valued and sold to the Petitioners and for a confidentiality order in respect of proprietary information as defined in the joint venture agreement.

6.  I should to observe that on the 2^nd February this year Kwan J struck out that Petition under order 18 rule 19 on the ground that it disclosed no reasonable cause of action, was frivolous or vexatious or an abuse of this process of the court.  Her reasons for doing so appear in her judgment dated the 2^nd February.

7.  It is by this route and for these reasons that the matter now comes before me.  A number of issues have been canvassed by both counsel in the course of their very helpful submissions, which I need to give separate consideration to.  I propose to take these in the order in which logically I consider they fall to be decided.

Order 42 rule 1

8.  Mr James Cheng submits, really by way of preliminary issue (and so I take it first), that the judge’s order is of no effect because it falls foul of Order 42 rule 1 of the Rules of High Court.  The order in its material parts says “… a judgment or order which requires a person to do an act must specify the time after service of the judgment or order, or some other time within which the act is to be done”.  He submits that as there is no time specified in the judge’s order, the order itself is invalid and therefore should be set aside as being of no affect.  Mr Mok for the Plaintiffs submits that this is not the type of order contemplated by Order 42 rule 1.  It does not require the doing of any act on the part of the defendants.  The order merely contemplates passivity on the part of the Defendants’ to enable the Plaintiff’s to carry out their lawful right to inspect the Company’s books and indeed to perform their duty as the Company’s directors to ensure that the Company is being properly managed.  It is only now when the Defendants are refusing to comply with the judge’s unopposed order that as part of the enforcement process the court is being invited to impose time limits for the Defendants to allow inspection.  If there be any doubt as to the validity and correctness of the order as drafted Mr Mok draws attention to Vol. 10 of Atkin’s Court Forms (1992 Edition) Form 236 which is the form of application for leave to inspect the Company’s books which the Plaintiffs’ solicitors have adapted to suit this situation in drafting the originating summons and Form 238 which is the form of order giving leave to inspect the Company’s books which has also been adapted to suit this case.  The significant aspect is that no time limit appears within which the order for inspection has to be complied with.  I am sure that Mr Mok’s analysis is the correct one and that the order, as drafted and approved by the Court, is perfectly valid and effective for an order such as this with the result that Mr Cheng’s preliminary point fails.

Is the Court now functus?

9.  This is how Mr Mok’s primarily approaches the matter.  He submits that once Suffiad J made the Order in October this finally determined all issues between the parties on the originating summons.  Save for the provision giving the Plaintiffs (not the Defendants) liberty to apply as to the terms and implementation of the order itself and the expressly reserved provision as to costs the court has no jurisdiction to hear and determine anything further relating to the merits or the substantive relief claimed by the Plaintiffs or obtained by them under the judge’s order.  There has been a merger between the relief sought and the order given by the Court.  Thereafter the court is functus and it has no power to discharge or vary its order which is a final, as opposed to an interlocutory order.  The only avenue available to the Defendants would be by way of appeal to the Court of Appeal, although in circumstances where the order was not opposed it would be difficult to envisage how such an appeal might succeed.  That being so Mr Mok submits that I have no jurisdiction to hear Mr Cheng’s summonses to vary or discharge the order and so these must fail in limine.  If Mr Mok is right in that submission this would conclude the matter against the Defendants leaving over the enforcement of the judge’s order and the terms as to time for compliance of the order, apart from the reserved issue on costs and the costs of these matters.

10.  Save as to any power that the court may have as to time under Order 3 of the Rules of High Court to extend time for compliance of an order or under the provisions of the slip rule where an order as drawn does not reflect what the Court intended I can discover no basis in terms of jurisdiction for me to vary or, even more draconially, to discharge an order that was unopposed as early as the Defendants return of the acknowledgement of service to the originating summons and where they appeared before the judge and let the matter go by default, to express it in another way.

11.  The inspection order which was sought and obtained unopposed is the one that enforcement is now being asked for.  It in no way seeks to have inspected documents which fall outside the ambit of the judge’s order.  As a matter of jurisdiction I am persuaded by Mr Mok that I am not able to re-visit this order in the way of Mr Cheng asks me to.  Mr Cheng has referred me to the case of Seibe Gorman & Co Ltd v Pneupac Ltd (1982) 1 All E.R. 377 where the English Court of Appeal which had before it an interlocutory order which had been expressed to be by consent held that whether the order was truly by consent or merely unopposed (as in this case) the parties there could not be taken to have excluded the court’s jurisdiction to extend time under the order.  In my judgment this case cannot assist the Defendants.  The case there is only authority on the court’s power under Order 3 rule 5(1) of the Rules of High Court (in HK) to extend time for complying with an order, even one that is by consent or, at least one that is unopposed.  The factual situation before me is entirely different.  It concerns a final judgment entered unopposed.  It is not suggested that it is one obtained by fraud or material non-disclosure.  In fact it is only too plain that the matters which now concern the Defendants, relating as they do to sensitive information, were matters that were clearly exercising them whilst the dispute was ongoing and certainly at the time that the originating summons had been taken out by the Plaintiffs, which they acknowledge they were not going to oppose, save as to costs.

12.  I am satisfied that this final judgment now drawn up, perfected and entered into the court’s record is one that is not amenable to discharge or variation in the way that is now asked for by the Defendants.  I hold that I have no jurisdiction to do so and on this ground I propose to dismiss the summons to discharge or vary Suffiad J’s order.  As a matter of form I had allowed the Defendants to amend their original summons by virtue of their summons to do so dated the 7^th February 2005 and it is this amended summons which I am dismissing.

The alternative basis

13.  In the event that he might fail on functus, Mr Mok has also sought to argue the question of discharge or variation on its merits which I now propose to resolve should the matter go on appeal and I am held to have been wrong to have decided that I have no jurisdiction to entertain a discharge or a variation.

14.  Given the state of the evidence this is really tantamount to allowing the question of inspection to be argued de novo by the Defendants where on the first round they were prepared to allow the issue to go by default.  To state it in this way merely serves to underline the unsatisfactory nature of their stance where it seems to me, for pure commercial reasons, they are in the throes of “buy out” negotiations, they wish to prevent the Plaintiffs from copying what they feel would be market sensitive information.  To compound the weakness of their position one needs only to briefly reflect on the fact that their s. 168A Petition has been struck out by Kwan J.  Whilst I appreciate the issues before her were more extensive the effect of that Petition would have been inter alia, to remove the Plaintiffs as directors of the Company and therefore put an end to their right to inspection.  The fact that Kwan J considered this Petition so bad as to be characterised as one that was bound to fail merely serves to underline the hopelessness of their position.

15.  Mr Mok has very carefully taken me through a director’s power to inspect the company’s books of which he is a director.  The power comes from S 121(3) of the Companies Ordinance.  That power is expressed in unequivocal and unconditional terms as follows:

“	The books of account shall be kept at the registered office of the Company… and shall at all time be open to inspection by the directors”.

Notwithstanding that apparent statutory “carte blanche” power of inspection, the power is in fact is not an unfettered one.  In Hong Kong the extent of that power has been examined by the Court of Appeal in Re Boldwin Construction Company Limited and another (2001) 3 HKLRD 430.  The headnote to the report adequately reflects the basis and extent of the directors power of inspection.

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As a general rule, the director’s rights and powers in relation to the inspection of the Company’s documents was not a matter of discretion with the Court.  The right of inspection, being essential to the performance of the director’s duties, was implied in the Companies Ordinance.  Only if it could be proved that a director intended to abuse the confidence in relation to the Company’s affairs and to injure the company, in a material way could be the director’s right of inspection be interfered with.”

Reference is then made to Edman v Ross (1922) 22SR (NW) 351.

16.  Mr Cheng submits that the Plaintiffs in this case, being the Japanese partners nominated directors, by being allowed to inspect the books and obtain sensitive commercial information which will be of use to Hitachi Cable, will thereby damage the interests of the joint venture company.  In the present impasse between the joint venture partners they cannot serve two masters at the same time and they will inevitably seek to further the interests of Hitachi Cable who have put them there in the first place to take care of their interests, with the result that if Shin Ho and the Chan’s are successful in the buy out of Hitachi Cable’s interests in the joint venture company this will injure the Company in a material way.

17.  The first observation that I wish to make is that, although at first blush an attractive argument, it fails in two crucial respects.  Firstly, on a full reading of the evidence it is clear to me that all of the these concerns were already there before the originating summons was issued and yet despite that being the case the Defendants were prepared to let the order of inspection be made by Suffiad J without objection.  They should not be allowed to blow hot and cold on this just because it now happens to suit their purposes in the buy out negotiations.  This I believe in what has motivated their summons and the now failed s 168A Petition.  Secondly, the sensitive information which they seek to protect is, in any event, information which belongs to the Hitachi Cable which Shin Ho has been privy to for the purposes of operating the joint venture company.  In effect the Defendants are trying to restrain Hitachi Cable from knowing commercial information which it owns.  That is not a legitimate reason for refusing inspection of this type of document which may contain such information.

18.  I am also satisfied, from a preliminary report prepared by the Plaintiff directors from information already obtained, that there are a number of legitimate concerns about the way that the company is being run which they as directors should be allowed to investigate by inspection of all the documents ordered by Suffiad J, consistent with their duties as directors of the company.

19.  I am satisfied therefore that on the merits as well the Defendants’ summons to discharge or vary the inspection order must be dismissed. 

20.  This therefore must clear the way for the enforcement of the judge’s order.  Mr Mok had suggested a form of order which would give the Defendants some time to comply with the order.  The time limits were predicated on the basis that the order would have been made on Monday 14^th February immediately following the argument.  I have reserved my judgment to today (3 days later) and so I will hear from the Plaintiffs on a proposed amended time scale to take this into account.  Save as to time the form of the enforcement order will be as read out to me by Mr Mok at the close of the argument.

Costs

21.  This leaves over costs.  As to the costs of these summonses, I would have thought that they must, inevitably, follow the event.  As to the costs of the originating summons culminating in Suffiad J’s order, I am entirely satisfied that the Plaintiffs were justified in taking out and proceeding with the originating summons.  It was only by doing so that they were able to obtain all the orders that they were asking for.  Accordingly, they must also have those costs to be taxed if not agreed on a party and party basis.  Because counsel has been released by me I will make both orders for costs orders nisi in the usual way.