WAI LAM WORKSHOP LTD v. THIS THIS RICE (CAUSEWAY BAY) LTD AND OTHERS

HCMP 1623/2024

[2025] HKCFI 508

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1623 OF 2024

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DECISION

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1.  This is the application of Wai Lam Workshop Limited (the “Plaintiff”)  under section 740 of the Companies Ordinance Cap 622 (the “Ordinance”)  for inspection of documents of This This Rice (Causeway Bay)  Limited (the “Company”).

Relevant background

2.  The Plaintiff is a 10% investor in the establishment of the Company, the Causeway Bay branch of the restaurant chain “This This Rice” (“TTR”). The Company was incorporated on 25 May 2023. The Plaintiff is the beneficial owner of 10% of its issued shares.

3.  On 17 June 2023, the Plaintiff entered into a “Shareholders Internal Agreement” (“SIA”)  with This This Rice (Hong Kong)  Limited (“D2”)  and Lin Xiaoling (“D3”)  who are the major shareholders of the Company. The table below shows the “registered shareholder” and “actual shareholding” of different shareholders:

SHAREHOLDER

Founding Member/Shareholder	Registered Percentage of Shareholdings	Actual Percentage of Shareholdings	Actual Capital Amount (HK$)
This This Rice (Hong Kong)  Limited	51%	30%	976,356
LIN XIAOUNG	27%	39%	1,269,263
WAI LAM WORKSHOP LIMITED	7%	10%	325,452
Lee Lai Ki	7%	10%	325,452
Lee Man Kuen	7%	10%	325,452
KEUNG HON SING SAMUEL	1%	1%	32,545
Total	100%	100%	3,254,520

4.  According to the Company’s Incorporation Form dated 25 May 2023 and its NAR 1 filed on 17 July 2024[1], the Company has 6 shareholders. D4 is the sole director of D1 and holds 1% of the issued shares. D4 is the husband of D3[2].

5.  It is common ground that 3% of the Plaintiff’s shares are held by D2 on trust for the Plaintiff.

The Plaintiff’s case

6.  Mr Michael Kung and Mr Daneel Heung, counsel for the Plaintiff, submitted that although 22 months have elapsed since the Company was incorporated, the Plaintiff (a 10% shareholder of the Company)  has not received any audited accounts. The Ordinance requires a newly incorporated company to file its audited accounts and its tax returns within 18 months of incorporation. In the Company’s case, those accounts should have been submitted and filed on or before 24 November 2024.  

7.  On or about 29 January 2024, D4 (who is not an accountant)  provided draft management accounts he had prepared for the period from September[3] to December 2023 to the Plaintiff. Similar draft management accounts for the 3 months from January to March 2024 were provided sometime later. For convenience, those accounts (which together cover a period from commencement of business on 9 September 2023 to 31 March 2024)  are referred to as “D4’s draft accounts”.

8.  The Plaintiff has been requesting the accounts of the Company since November 2023. On 12 June 2024, the Plaintiff’s solicitors (“ELC”)  wrote to D3 (on the basis that she was the director/shareholder of the Company)  asserting the Plaintiff’s right as a member of the Company to inspect and take copies of its books and records relating to various matters that eventually became the items listed in schedule 1 to the OS.  

9.  In their reply letter of 22 July 2024 (the “July letter”)  solicitors (“WLC”)  representing not only D3 but also D4 informed the Plaintiff that the Company had already engaged accountant(s)  and/or auditor(s)  to prepare the financial statements which statements were expected to be ready in the next 2 months and the Plaintiff would be informed accordingly. On that basis, they suggested that the Plaintiff withhold the taking out of an application to the Court pending such financial statements.

10.  When nothing further was heard for over a month, on 28 August 2024, the Plaintiff issued the OS.

11.  Almost 3 months after the July letter, on 17 October 2024, each of D3 and D4 as “director and shareholder” filed affirmations on their own behalf as well as on behalf of the Company and D2 in opposition to the application.

12.  The exhibit “KHSS 6” to D4’s affirmation is a single paged document showing the Company’s draft profit and loss account for the period from 25 May 2023 to 31 March 2024 (“the Company’s draft P & L”). It was said to have been prepared by certified public accountants but whose identity was withheld. It is said to show that the Company’s business was running at a loss as at the end of March 2024.

13.  While the period covered by the Company’s draft P & L exceeds that covered by D4’s draft accounts by approximately 3 months, the additional 3 months preceded the commencement of business. Relevantly, both D4’s draft accounts and the Company’s draft P & L capture the period of the Company’s operations from its commencement of business until 31 March 2024. 

14.  The Plaintiff invited attention to the fact that apart from the Company’s draft P&L, no other information such as its balance sheet was provided.

15.  The Plaintiff then proceeded to highlight a mismatch between D4’s draft accounts and the Company’s draft P & L. The aggregate management fees shown in D4’s draft accounts are approximately HK$176,000 whereas in the Company’s draft P & L, they are shown to be in excess of HK$2.2 million and thus submits that they merit further investigation.

16.  Additional comments were made regarding 2 entries shown in the Company’s draft P & L:

(a)  There is a claim for “depreciation” which presupposes the existence of fixed assets belonging to the Company when the Company claimed that it has no fixed assets.

(b)  There is an item in respect of the auditor’s remuneration when no audited accounts have been provided.

17.  Mr Kung submits that based on all those matters, there is every reason for the Plaintiff to be concerned about her investment and to take steps to protect her economic interest in the Company and shows that this application is made in good faith and for a proper purpose.

18.  The schedule to the OS lists 12 items or categories[4] of documents in respect of which discovery is sought.

19.  Mr Derek Hu and Ms Jacqueline HH Chan, who are counsel not only for D2 - D4 (collectively, the “Defendants”)  but also the Company, oppose the application and submitted that it was premature since it proceeded the deadline for the audited accounts by about 3 months.

20.  Nevertheless, Mr Hu acknowledged that as of the date of this hearing (which is well past the due date), the auditors have yet to finalise the accounts for the Company.  

21.  Mr Hu’s criticism is to be viewed against the backdrop of the events described in §§8-14 above. According to the July letter the audited accounts should have been ready by the end of September 2024. Yet, almost 4 months later, all that is available is a one-page P&L prepared by unidentified auditors.

22.  The fact that the Company and the Defendants cannot even produce a draft set of audited accounts at this hearing is telling. That fact, coupled with the absence of any credible explanation and the undisclosed identity of the auditors, raises serious doubts as to whether a draft set of accounts actually exists.

23.  Turning to the Plaintiff’s specific complaints mentioned above, Mr Hu referred to an agreement described as “Human Resources Service Outsourcing Agreement” (the “TT HR Agreement”)  dated 12 July 2023 made between the Company and a company called 添添人力資源管理有限公司This This Human Resources Company Limited (“TT HR”).

24.  In his affirmation of 17 October 2024 (at §11 a.), D4 exhibited the TT HR Agreement, explaining that salary expenses are listed under management expenses because the Company does not hire its staff directly. The hiring of staff in all branches indirectly owned by D2 is done by a separate company, namely, TT HR.

25.  For operation purposes, the kitchen and operation staff (such as frontline staff)  are also hired TT HR but they do not work at a specific branch and are allocated to the branches as necessary on an ad hoc basis. The salary of such staff is paid by TT HR based on the actual time worked. The Company would be charged a management fee by TT HR based on the allocation of staff hours of work done in each specific month.

26.  On the issue of mismatch raised by the Plaintiff, Mr Hu response is that it is the accountant’s/auditor’s view that the item described as “salaries” in D4’s draft accounts should not feature as a separate item but should properly be subsumed into and form part of the item “management fee”.

27.  If that approach is adopted, the total “management fee” for the period covered by D4’s draft accounts comes to HK$2,051,621. That is not significantly different from the HK$2.2 million odd shown in D1’s draft P & L when the latter covers the pre-commencement of business period of 3 months.

28.  As regards the complaints raised in relation to “depreciation” and “auditor’s fee”, Mr Hu explained that no such complaints had previously been made and these were raised for the 1^st time at this hearing. Hence the Defendants have not had the opportunity of addressing those matters by way of evidence.

29.  It is noted that in the evidence filed for this application, apart from the issue of management fees, the Plaintiff’s complaints have largely been directed at the issue of dividends. Despite the evidence filed and written submissions made in that regard, the dividends issue was not raised at the hearing.

Conclusion

30.  Had the Company complied with its statutory obligations[5], by now the Plaintiff would have been provided with its annual audited financial statements. In my view, at a minimum and as an initial step, the Plaintiff must be provided with such statements as soon as possible. It will then be open to the Plaintiff to seek additional disclosure if considered appropriate.

31.  For the Plaintiff to be provided with the Company’s annual audited financial statements, an AGM of the Company must first be convened at which the directors must lay before it, inter alia, the reporting documents including the audited financial statements and directors’ report for the financial year and the auditors’ report on the Company.

32.  Accordingly, I order that (a)  the Defendants do convene an AGM to be held within 28 days of this Decision for the purpose of allowing the shareholders to approve audited financial statements, and (b)  this application be adjourned sine die with liberty to apply.

Proper parties to this application

33.  The issue is whether it is appropriate to join the shareholders and/or the director as parties to this application. Mr Hu submits D2 and D3 (who are said to be merely shareholders of the Company)  and D4 (its director)  are unnecessarily joined and seek costs on their behalves from the Plaintiff.

34.  Mr Kung submits that a director who is the “puppet master” controlling the company and orchestrating its response to the application is a proper party, citing Wong Kar Gee Mimi v Hung Kin Sang Raymond and Another [2011] 3 HKLRD 241[6] at §99.

35.  In Leung Chung Pun v Masterwise International Limited [2014] 1 HKLRD 1129, Recorder Anderson Chow SC (as he then was)  recognised that, in appropriate circumstances, directors can be joined in an application under section 152FA[7].

36.  Reference was then made to the following passage from the judgment of Harris J (at §42)  in Re Opes Asia Development Limited, unrep., HCMP 447/2012, 17 May 2012[8]:

“it would only be in a rare case in which there is strong evidence of particular directors of the company, dictating the decisions of the board that there would be justification for making individual directors parties to an application such as this simply with a view to obtaining a costs order against them.”

37.  Wong Kar Gee Mimi v Hung Kin Sang Raymond and Another [2011] 3 HKLRD 241 is an example of a failed attempt where a director was joined in such an application solely for the purposes of seeking an order that he should be required to pay the costs of the application on the basis that he was the “puppet master”. As the Court was not in a position to determine that factual question, it ordered the plaintiff to pay 1^st defendant’s costs on the basis that the 1^st defendant was unnecessarily made a party.

38.  In Leung Chung Pun, the plaintiffs joined all 3 directors as defendants. The decisions not to entertain the plaintiffs’ requests for inspection of documents appeared to have been made by the directors collectively acting as the board in each case. The court considered that in substance, the dispute was between the company acting through its board of directors on one side and a shareholder of the Company on the other and not between 2 factions of shareholders and held (at §68)  that the principle of company law that the company’s money should not be expended on what is in effect a dispute between shareholders in relation to unfair prejudice petitions or winding up petitions on just and equitable grounds cannot be extrapolated generally to other types of litigation between a company and its shareholder.

39.  In the present case, D2 and D3 are ‘major’ shareholders of D1. Pertinently, section 2 of the SIA provides as follows:

“2. Director

Major Shareholder and Director	Registered Percentage of Shareholdings
This This Rice (Hong Kong)  Limited	51%
LIN XIAOUNG	27%
KEUNG HON SING SAMUEL	1%
Total	79%

The company must have at least one director, but the major shareholder has the right to appoint directors.

There is no chairman position on the board of directors.  Major decisions by the board will be made by a vote of the major shareholders and the directors.”

40.  As earlier noted[9], the Company has 2 other minority shareholders. They are named in section 1 of the SIA.

41.  While D4 is shown on the CR as the sole director, in her supporting affirmation in opposition to this application, D3 describes herself as “a director and shareholder of D1[10]”.

42.  In those circumstances, section 2 of the SIA assumes significance. It undeniably shows that D2, D3 and D4 together control D1 and act as its directors. It is strong evidence that D2, D3 and D4 dictate the decisions of the board and control the Company’s affairs.

43.  The facts of the present case are unusual and can be considered to be sui generis. In my view, it falls within the “rare case” category that Harris J had in mind when he made his observations in Wong Kar Gee Mimi[11].

44.  I do not read Leung Chung Pun as authority for the proposition that where the dispute is shown to be a shareholders’ dispute, it is never appropriate to join those effectively controlling the company as defendants. In my view, if they are responsible for the Company’s breach of its statutory obligations to provide audited financial statements to its shareholders as defendants, they are proper parties.

45.  Accordingly, I do not consider that the strictures mentioned in Leung Chung Pun are applicable to the facts of this case to render it not appropriate join D2, D3 and D4 as parties. 

46.  Having regard to the fact that there are 2 other minority shareholders in addition to the Plaintiff, to make a costs order against the Company would mean that part of the costs would be at the expense of the minority shareholders who are blameless. Such a result would be manifestly unfair to the minority shareholders when there is no conceivable reason to hold them responsible for the Company’s breach of its statutory obligations.

Costs

47.  On the facts of this case, I consider it appropriate to order nisi that the costs of this application (with certificate for Counsel)  be borne by D2, D3 and D4, such costs to be summarily assessed and payable forthwith.

48.  As the Plaintiff has already served its statement of costs, I direct that the Defendants lodge their list of objections (limited to 2 pages)  within 14 days hereof and the Plaintiff its reply (if any)  within 7 days thereafter.