CHIU WING NIN MICHAEL AND OTHERS v. WING FUNG CHEUNG CO LTD

HCMP 363/2022 and HCMP 364/2022
(Heard Together)

[2022] HKCFI 1512

HCMP 363/2022

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 363 OF 2022

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BETWEEN

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AND

HCMP 364/2022

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 364 OF 2022

________________________

________________________

BETWEEN

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(HEARD TOGETHER)

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DECISION

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1.  This is the hearing of two applications under section 740 of the Companies Ordinance, Cap 622 (“the Ordinance”) by originating summonses dated 13 April 2022:

(a) HCMP 363/2022 was issued by 4 shareholders (“the 363 plaintiffs”) of Wing Fung Cheung Company Limited (“WFC”) against WFC; and

(b) HCMP 364/2022 was issued by 2 shareholders (“the 364 plaintiffs”) of Chiu Sze Yuen Tong Limited (“CSYT”) (who are also 363 plaintiffs) against CSYT.

WFC and CSYT are collectively referred to as “the Companies” and the 363 plaintiffs and the 364 plaintiffs are collectively referred to as “the plaintiffs”.

2.  On 28 April 2022, Chiu Kung Phoo (“Leonard”) and Chiu Kai Hoo Kenneth (“Kenneth”) filed affidavits on behalf of WFC and CSYT respectively in response. The plaintiffs consider that those affidavits have provided the information that they seek and they no longer require a substantive hearing.

3.  The only outstanding matter is the issue of costs. The general principle is that costs should follow the event.

4.  The plaintiffs take the view that the applications were necessary in that the information would not have been forthcoming but for the applications. The Companies (who are the defendants) in the 2 applications opposed the applications on various grounds and take the stance that they have not provided “substantial disclosures” but have simply drawn the plaintiffs’ attention to facts and information known and available to the plaintiffs.

5.  The costs issue requires the court to evaluate whether or not the applications would have succeeded had the matter been substantively determined. That has now to be based on a reading of the hearing bundles without the benefit of a substantive hearing. At the conclusion of the hearing, the decision had to be reserved which I now give.

Background

6.  The late Chiu Lut Sau (“CLS”) founded a successful rice business managed and operated by members of the Chiu family through WFC whose voting shares were distributed among the immediate Chiu family and non-voting shares were distributed among the immediate Chiu family, relatives and long-term employees. Its assets consist mostly of cash and real estate.

7.  CSYT is an asset holding company of the Chiu family whose membership is restricted to direct descendants of CLS.

8.  Chiu Wing Nin Michael (“Michael”) and Chiu Chi Cheong Clifton (“Clifton”) and 2 other siblings are the 363 plaintiffs and Michael and Clifton are also the 364 plaintiffs.

9.  Leonard and Kenneth are also members of Chiu family. Leonard is the Chairman and managing director of WFC and Kenneth a director of CSYT.

10.  From about 2015, there has been a falling out between members of the Chiu family culminating in the filing of unfair prejudice petitions (“the UP petitions”) on 3 July 2018 in respect of each of the Companies by the 363 plaintiffs and the 364 plaintiffs respectively against Leonard and members of his family.

Applicable legal principles

11.  For an order to be made pursuant to section 740, the court must be satisfied that the application is made in good faith and the inspection is for a proper purpose.

12.  A useful summary of the applicable legal principles can be found in Wong Sau Man Samuel v Wong Kan Po Wilson [2017] 4 HKLRD 542 at §39 (a) to (r) of which the following are of particular relevance in the present case:

“(a) The good faith and proper purpose requirements constitute two separate and independent tests.

(b) The burden of proof rests on the applicant. The burden is not discharged by suggesting that an inference that the company resisting a s.740 application must have something to hide can be drawn.

(c) Good faith is not to be inferred from an established proper purpose but depends on whether the applicant acted honestly with a purpose that he or she believes to be proper.

(d) Proper purpose is to be determined objectively by considering all the surrounding circumstances of the case.

(e) The test for proper purpose is prima facie satisfied if the purpose is to protect a shareholder’s economic interest.

(f) The purpose must be germane to or reasonably related to the interests of the applicant qua member. A mere desire to obtain information will not constitute proper purpose.

…

(j) The section is not an opportunity for shareholders to undermine entrenched company law principles and challenge the commercial decisions of the company’s management.

(k) 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.

…

(n) Insufficient prospect of anything useful resulting from the inspection sought is a relevant consideration.”

HCMP 363

13.  HCMP 363 seeks inspection of a wide range of documents and working papers[1] against WFC in relation to a contemplated investment arrangement involving the creation of a special purpose vehicle (“SPV”) following resolutions passed at a general meeting held on 20 December 2017 (“the investment arrangement”).

14.  The plaintiffs take the view that the collective effect of the investment arrangement is to divest the assets of WFC into the SPV putting them out of reach and scrutiny of all members of WFC.

15.  Mr Benjamin Lam, counsel for the plaintiffs, submitted that the 2017 EGM minutes showed that money would be put into the SPV which is not owned by WFC without restrictions on the investments it can make. The court was given to understand from the plaintiffs’ submissions that all that would be done “without proper accounting and scrutiny”, a conclusion the basis of which is unclear.

16.  The attachments dated 4 December 2017 accompanying the notice of the general meeting to be held on 20 December 2017 were circulated to all members of WFC including the plaintiffs. They included a detailed explanation of the purpose and rationale for WFC to establish a separate investment account as well as a statement of investment policy.

17.  The 363 plaintiffs considered that the adoption of the resolutions for the investment arrangement including the SPV to be the final straw: it precipitated the issuance of the 363 UP petition.

18.  From the outset, the plaintiffs had objected to the proposals: Michael (writing on behalf of all minority shareholders) and the plaintiffs’ solicitors (“SKLAC”) sent written objections on 12 and 19 December 2017. That Michael’s email was antagonistic[2] is an understatement. As earlier noted, the plaintiffs did not attend the EGM on 20 December 2017 to raise their issues with the proposals and seek to persuade the other shareholders that it would not be advisable to go down that route.

19.  Their objections were followed by further letters from SKLAC in late December 2017 and early January 2018 threatening immediate court action.

20.  The defendant’s solicitors (“RSL”) replied on 12 January 2018 explaining the 2 fundamental elements of the proposed resolutions: (1) the shareholders approving an investment direction of buying bonds that had been part of WFC’s history between 2003 and 2013 until the Foreign Account Tax Compliance Act (“FATCA”) resulted in the closure of its investment account; and (2) the shareholders approving the mechanism of making such investment through a SPV held by “the same shareholders” of WFC and which would be the account holder.

21.  The letter proceeded to give a more detailed account of those 2 aspects and further responded to SKLAC’s drafting comments paragraph by paragraph. It would appear that the plaintiffs failed to grasp that the subject matter of the contemplated investment was bonds.

22.  The plaintiffs then complain that no updates or information about the SPV have been provided since the 2017 EGM. That was said to be ‘concerning’. However, despite it being ‘concerning’, no requests were made for information concerning the SPV for 4 years until S. Y. Chong & Co.’s letter of 22 December 2021. That letter sought information that corresponds to §§1.1-1.12[3] of HCMP 363 issued on 13 April 2022.

23.  It should be mentioned that Sandra (one of the 363 plaintiffs) sent a letter on 27 September 2021 (on the eve of the CSYT AGM to be held on 29 September 2021) requesting that it be postponed. Inter alia, it raised questions relating to WFC as to whether funds had been lent to the SPV and whether it was owned by WFC or by the shareholders.

24.  RSL replied to the 22 December 2021 letter on 18 January 2022 stating the fact that the request concerned financial, legal and accounting matters of WFC which could not be divulged when no legal ground had been put forward as the basis of the request.

25.  Audited Financial Statements for the financial years subsequent to the 2017 EGM, namely, for the years ending 31 December 2018, 2019 and 2020 had been sent to all WFC shareholders. The plaintiffs asserted that Note 4 to the Financial Statements for the year ending 31 December 2020 pointed to the fact that the SPV had ceased to be a subsidiary. The plaintiffs did not realise that the subsidiary referred to was a dormant BVI company held as to 100% by WFC and reported in the Financial Statements since 2009. In 2017, the plaintiffs had raised questions about the same Note 4 which in 2019 Clifton admitted was a subsidiary he had set up in 2009. The subsidiary referred to in Note 4 clearly could not have been the SPV.

26.  Relevantly, a perusal of the cash balances shows an increase from approximately $56.3 million in 2017 to $74.6 million in 2020. That evidence necessarily undermines the entire basis of the plaintiffs’ submission that the collective effect of the investment arrangement was to divest the assets of WFC into the SPV putting them out of reach and scrutiny of all members of WFC.

27.  WFC’s objections to the plaintiffs’ application are based on subparagraphs (j), (k) and (f) of §39 of the Samuel Wong case: they submitted that the plaintiffs’ application was an impermissible challenge to a managerial decision of its Board; section 740 should never be used as an instrument to obtain information; and the plaintiffs are not entitled to go on a fishing expedition in search of a cause of action to support their mere suspicion of wrongdoings.

28.  Looking at the facts objectively, it is difficult not to agree with WFC that the principles it relies on are applicable to the facts of the present case. It would follow that the plaintiffs are not able to make out a proper purpose for their application.

29.  Absent a proper primary purpose, the statement in Wei Xing v Will Win Development (Asia) Co Limited, HCMP 1922/2016 at §18, unrep., 13 April 2017 that “even if the applicant was looking for material to found a winding up petition on the just and equitable ground, that was not in itself a ground for refusing the application[4]” cannot assist the plaintiffs.

30.  One might well ask what the point was of the plaintiffs’ section 740 application if not the expectation of turning up information to support their suspicions of wrongdoing on the part of Leonard and his family.

HCMP 364

31.  HCMP 364 seeks inspection of various documents against CSYT relating to the “prescribed approval under section 500 of the [Ordinance] for making a non-interest bearing and unsecured loan … to [WFC]”. The single event prompting this application was the disclosure in Note 5 of the Notes to the Financial Statements for the year ended 31 December 2020 that a sum of approximately $20 million (being non-interest bearing and unsecured advances with no repayment terms) was due from WFC.

32.  Those Financial Statements were circulated to members together with the notice of CSYT’s AGM scheduled for 29 September 2021. As earlier noted, on the eve of the AGM, Sandra sent her letter dated 27 September 2021 to Leonard, inter alia, raising a question in relation to that loan and requesting that the meeting be postponed.

33.  The 364 plaintiffs did not attend the 2021 AGM.

34.  It is the 364 plaintiffs’ case that the primary purpose of the section 740 application was “to protect their interests as shareholders against potential wrongdoings by CSYT’s directors who have control of CSYT and are determined to keep its members in the dark[5]”.

35.  The evidence shows that ‘advances’ referred to in Note 5 to the 2020 Financial Statements reflected the Board’s decision of 16 October 2020 that as and when relevant time deposits placed by CSYT with DBS Bank mature, they would be transferred to the time deposits account maintained by WFC with BOC[6] which offered a better rate of interest and thus yield more profits for CSYT. In other words, it was a bona fide commercial decision taken by the Board.

36.  As earlier noted, the 364 plaintiffs did not attend the 2021 AGM at which they could have raised questions about the advances. Instead, they infer potential wrongdoing, attribute sinister motives to legitimate Board decisions and 3 months later asked for a copy of the “prescribed approval” for the advances to WFC.

37.  In fact, the 364 plaintiffs had been provided with the unaudited balance sheet of WFC in June 2021 on a without prejudice basis prior to the mediation conducted in relation to the UP Petitions. Under the heading of “Current Liabilities” an amount of approximately $22 million was subtracted from the assets of WFC as “C/A with [CSYT]”. That represented various time deposits made by WFC with BOC for CSYT.

38.  In view of the evidence before the court, I do not accept that there was any proper purpose to ground the section 740 application.

Order

39.  For the reasons set out above, the plaintiffs must bear the costs of the Companies of and incidental to the originating summonses, with certificate for counsel, such costs to be summarily assessed.

40.  I further direct that WFC and CSYT lodge their respective statements of costs within 7 days of this Decision, the 363 plaintiffs and the 364 plaintiffs lodge their respective objections within 14 days thereafter and WFC and CSYT lodge their respective replies (if any) within 7 days thereafter.

41.  Summary assessment will be conducted in Chambers.