KU CHIT MAY v. TSUI CHUNG MING AND ANOTHER

HCMP 2169/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2169 OF 2012

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REASONS FOR DECISION

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1.  By an Originating Summons dated 4 October 2012, the Plaintiff, Mr Ku Chit May (“the Plaintiff”), applies for various relief under ss 111(2), 122 and 152FA of the Companies Ordinance (Cap 32) (“Ordinance”). At the hearing, I granted most of the relief sought (with amendments) and ordered the costs of the Originating Summons be paid by the 1^st Defendant, Mr Tsui Chung Ming (“the 1^st Defendant”). These are the reasons for my decision.

2.  The background fact relevant to the application is not in dispute. 

Background fact

3.  The 2^nd defendant, Team Wealth Engineering Limited (“the Company”), was incorporated on 23 March 2009 under the Ordinance. 

4.  Since its incorporation, the 1^st Defendant has been its sole director.  There are 5 shareholders of the Company and their shareholdings are as follows:

(1)  The Plaintiff, holding 25,000 shares (or 16.67%);

(2)  The 1^st Defendant, holding 33,000 shares (or 22%);

(3)  Mr Wong Siu Keung (“Mr Wong”), holding 25,000 shares (or 16.67%);

(4)  Mr Lau Yik Fai, holding 33,500 shares (or 22.33%); and

(5)  Mr Tso Tat Man, holding 33,500 shares (or 22.33%).

5.  The Company was incorporated for the specific purpose of investing in and holding 15% issued shares in another company, Citylink Design and Build Limited (“Citylink”).  Citylink is a Hong Kong company and was incorporated for the specific purpose of acting as the sub-contractor of Shui On Construction in respect of 3 contracts awarded by the Government. 

6.  Apart from holding the investment in Citylink, the Company has not carried on any other business.

7.  According to the Plaintiff, the 5 shareholders have injected a total amount of $9,685,000 into the Company of which $1,625,000 was contributed by him.  This is not disputed by the 1^st Defendant. As is clear from the latest Annual Return filed by the Company on 2 April 2012, the Company only has issued share capital of $150,000.  It is not clear whether the balance of the $9,535,000 said to have been injected by the shareholders represents the share premium in the Company’s accounts or the loan advanced by the shareholders to the Company in proportion to their shareholdings. 

8.  Although the Company has now been in operation for 3 years, no annual general meeting has ever been held.  Nor has any financial statement, be it profit and loss account, balance sheet, or an income and expenditure account required to be laid before the Company at its annual general meeting under s 122 of the Ordinance, been prepared. 

9.  Since at least 29 May 2012, the Plaintiff has through his solicitors pointed out to the 1^st Defendant that the Company had been in breach of s 111(1) of the Ordinance, and required the 1^st Defendant to convene an annual general meeting.  The request was repeated in another letter dated 14 August 2012 from the Plaintiff’s solicitors to the 1^st Defendant. 

10.  In the same letter dated 14 August 2012, the Plaintiff stated that the Company was entitled to receive dividend from Citylink, and demanded the 1^st Defendant to provide full details of the dividend declared together with supporting documents.  The Plaintiff also requested the 1^st Defendant to provide the profit and loss account or the income and expenditure account and the updated management accounts on or before 28 August 2012.  There was no reply from the 1^st Defendant.

11.  After the parties had filed all their evidence in these proceedings, the Plaintiff discovered through a company search that on 14 October 2011, the Company acquired another 25,263 shares in Citylink from Kenzian Development Limited.  By letter dated 14 January 2013, the Plaintiff’s solicitors requested the 1^st Defendant to provide details of the acquisition, including the source of fund for acquiring the shares.  A reminder letter was sent to the 1^st Defendant’s solicitors on 22 January 2013.

12.  On 23 January 2013 the 1^st Defendant through his solicitors stated that he was still in the process of retrieving the requested documents and information from Citylink’s account department, and sought an extension until 13 February 2013 to answer the Plaintiff’s letter dated 14 January 2013. 

13.  Despite the further letters sent by the Plaintiff’s solicitors to the 1^st Defendant’s solicitors dated 24 January 2013 and 8 February 2013, no further reply was provided by the 1^st Defendant on any of the requests made by the Plaintiff. 

Merit of application

14.  In his written submission, Mr Ross Yuen, who appears for the 1^st Defendant and the Company, did not raise any objection to the relief sought in the Originating Summons in relation to the holding of annual general meetings for 2010 and 2011 and the extension of time to lay the profit and loss account and balance sheet of the Company at such meeting.  However, he submits that there is no justification for the Plaintiff to seek an order in terms of paragraph 3 of the Originating Summons which, if granted, would replace the quorum of 2 members as required by article 23 of the Articles of Association of the Company to “any number of the members of the Company (including one member)”. 

15.  Mr Vincent Lam, who appears for the Plaintiff, has not been able to articulate any basis or justification for seeking to replace the quorum requirement as suggested by the Plaintiff.  As there are 5 shareholders of the Company and no allegation has been made against any of the other shareholders (apart from the 1^st Defendant), I do not think that there is any proper basis to ask the court to substitute the quorum requirement for the annual general meetings.   

16.  Mr Yuen also objects to the order sought in paragraph 5(c) of the Originating Summons, where the Plaintiff seeks an order that at the annual general meetings to be held by Company, the shareholders should consider the appointment of the Plaintiff as director of the Company, as the shareholders had already considered the appointment of the Plaintiff as director at the recent extraordinary general meeting held on 24 December 2012[1] and decided against the appointment. 

17.  In my view, there is no basis for the Plaintiff to ask the court to make an order which requires the shareholders at the coming annual general meetings to consider the appointment of the Plaintiff (or, indeed, any particular person) as director.  The question of who should be appointed as directors of the Company is a matter for the shareholders and should be decided at the annual general meetings.  It is not a matter for the court. Indeed, article 7 of the Articles of Association of the Company provides that at the annual general meeting “all Directors, except Permanent Directors if any are appointed, shall retire from office and shall be eligible for re-election”. In light of this article, the 1^st Defendant is obliged to retire as director at the annual general meetings.  It seems to me that it is necessary for the shareholders to consider the appointment of directors at the coming annual general meetings.  It is then up to the shareholders to decide whether they want to put forward their names for appointment as directors, and follow the necessary procedure prescribed by the Articles of Association and the Ordinance for such purpose. 

18.  I therefore consider that paragraph 5(c) of the Originating Summons should be amended, so that one of the matters to be considered and voted upon at the annual general meetings is “to appoint directors of the Company”.

19.  Subject to the above 2 matters and the timing for holding the annual general meetings and laying the accounts at such meeting, the application under s 111(2) and s 122(1B) of the Ordinance must succeed.  The obligations to hold annual general meeting and to lay the profit and loss account and the balance sheet of the company at such meeting are important statutory obligations and must be complied with.  Without such meeting, the shareholders will not be able to consider the important matters such as the performance of the Company, whether any dividend can be paid to the shareholders as well the appointment of auditors and directors. 

20.  In fact, other than an assertion that he had difficulty in finding an accounting firm to prepare the accounts, no other explanation has been given by the 1^st Defendant as to why he failed to comply with the statutory obligations under ss 111 and 122 of the Ordinance.  I do not accept the alleged difficulty in finding an accounting firm provides a valid reason for not holding the annual general meeting and preparing the accounts.  The 1^st Defendant as the sole director of the Company was under a duty to take all necessary steps in a timely manner to ensure that the Company would comply with all the statutory obligations.

21.  As for the timing of holding the annual general meetings for the years 2010 and 2011, I allow 42 days from the date of the hearing for the 1^st Defendant to convene and hold such meetings instead of 28 days sought in the Originating Summons or 60 days suggested by the 1^st Defendant.  There are 3 reasons for this: 

(1)     First, regulation 52 of Table A in the First Schedule to the Ordinance, which applies to the Company, provides that an annual general meeting shall be called by 21 days’ notice.  Under s 129G of the Ordinance, the Company is obliged to send the balance sheet and the directors’ and auditors’ reports to the shareholders at least 21 days before the general meeting. 

(2)     Secondly, as the Plaintiff is allowed to inspect some of the Company’s records (as discussed in paragraphs 32 to 35 below) within 28 days from the date of the hearing, it will assist the Plaintiff if the meetings are to be held after he has  inspected the documents so that he knows the status of the dividend and, if necessary, ask further questions at the meetings.

(3)     Thirdly, I am told by Mr Yuen that the 1^st Defendant is now working overseas and, therefore, needs more time to prepare the accounts and the meetings.  This, however, is not a weighty factor in view of the default and inaction on the part of the 1^st Defendant in complying with the statutory obligations.    

22.  As regards the extension of time for the Company to prepare the accounts for the years ended 31 December 2010 and 31 December 2011, I order that the time for preparing such accounts (as prescribed by S.122(1A) of the Ordinance) be extended to 35 days from the date of the hearing.

23.  I now turn to the application for inspection of the following categories of documents sought by the Plaintiff under s 152FA of the Ordinance, which was described in paragraph 6 of the Originating Summons:

(1)     “Audited financial statements of the Company for the financial years ended 31 December 2010 and 31 December 2011, and if these were not available, unaudited financial statements.

(2)     Management accounts and reports for the same financial years.

(3)     The updated management accounts and reports made up to 31 August 2012.

(4)     Board minutes (or the notes and memorandums (sic)) and papers of the Company.

(5)     Documents recording dividends or returns of capital (including trial balances, ledgers and shareholders’ current accounts) of the Company for the same financial years.

(6)     Documents and correspondence, including but not limited to those documents and correspondence provided by or with Citylink, in relation to the Company’s entitlements (past, present and future) as a shareholder of Citylink or the Company’s investment in Citylink”.

24.  The principles governing an application under s 152FA are not in dispute.  They have been sufficiently set out by Harris J in Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241, at paras 8-43, and summarized by the Court of Appeal in Re LehmanBrown Ltd [2011] 5 HKLRD 668 at para 31.  The burden is on the applicant to satisfy the court that in making the application, he is acting in good faith and that the inspection is for a proper purpose.  These requirements constitute 2 separate tests, with “good faith” concerns the subjective intention of the applicant, while “proper purpose” requires the court to apply an objective test and look at all surrounding circumstances and determines whether the purpose for the inspection is indeed proper.  The purpose for which inspection is sought must bears some reasonable relationship to the interests that the shareholder wants to protect (see Wong Kar Gee Mimi, supra, para 19).

25.  There is no dispute that in making the application, the Plaintiff has acted in good faith. 

26.  As regards proper purpose, Mr Lam says that the inspection is necessary to enable the Plaintiff to assess his investment in the Company and to protect his economic interest in the Company.  He emphasizes that the main concern of the Plaintiff is whether dividend has been declared and paid by Citylink, as such dividend is the only source of income of the Company.  If dividend was in fact paid by Citylink to the Company, the Plaintiff is entitled to know what has become of such dividend as it will determine whether the Company has any income to declare dividend to the shareholders at the coming annual general meetings.  Mr Lam submits that in light of the history of the matter, in particular, the repeated failure on the part of the 1^st Defendant to respond to the requests made by the Plaintiff, unless the 1^st Defendant is ordered to provide the documents sought by the Plaintiff, it is likely that the Plaintiff will not be able to obtain any meaningful answers or information from the 1^st Defendant, whether before or at the annual general meetings.

27.  When I ask what is the purpose of seeking inspection of the first 5 categories of documents and whether such documents are still necessary in light of the order I made requiring the 1^st Defendant and the Company to provide the audited accounts of the Company for the years ended 31 December 2010 and 2011, Mr Lam is unable to point to any purpose which may justify an inspection of the documents within these 5 categories. 

28.  In my view, the Plaintiff has not discharged the burden of satisfying the court that the inspection of the first 5 categories of documents is for a proper purpose for the following reasons:

(1)     The Plaintiff is not a director of the Company and has no power to manage the affairs of the Company.  There is no reason why he needs to inspect the primary accounting documents such as ledgers and trial balances of the Company.  The same goes to the “Board minutes (or notes and memorandum) and papers” of the Company. 

(2)     Once the audited accounts have been prepared, the Plaintiff will be able to see the financial position of the Company.  I am conscious of the fact that the Plaintiff has not yet seen the audited accounts and therefore would not know whether they accurately reflect the financial position of the Company.  However, this does not by itself constitute a sufficient reason to allow the Plaintiff to inspect the primary accounting documents, as the Company is obliged under s 123 of the Ordinance to prepare its balance sheet and profit account which give a true and fair view of the state of affairs of the Company for the relevant financial year, and if the director fails to take all reasonable steps to secure compliance with the provisions, he is liable to imprisonment and a fine (see s 123(6) of the Ordinance).  Moreover, the auditors will qualify their opinion on the accounts if they do not reflect a true and fair view of the financial position of the Company.  Further, I would expect the audited accounts of the Company to be quite simple as it is common ground that the Company has not itself carried on any business and has no asset other than the shares in Citylink and any dividend which has been paid by Citylink to the Company.  This is accepted by Mr Yuen on behalf of the 1^st Defendant and the Company. 

(3)     The documents sought in the 4^th category which concern “Board minutes (or notes and memorandum) and papers” are in any event too wide as they are not related to or directed against any particular transaction or concern identified by the Plaintiff. 

(4)     The Plaintiff’s concern about the status of the dividend declared or to be declared by Citylink will adequately be met by an inspection of the documents in the last category with the amendments suggested by the court.    

29.  Mr Yuen submits that no order for inspection should be made in respect of all the documents sought by the Plaintiff for the following reasons:

(1)     There is no allegation of misappropriation of assets and, as the Company does not have any bank account or any asset other than the shares in Citylink, no asset could possibly be misappropriated. 

(2)     The 1^st Defendant has already confirmed in his Affirmation that there was no written correspondence between Citylink and the Company in relation to the Company’s entitlement to dividend declared by Citylink.

(3)     The decision to invest in 25,263 shares in Citylink is an investment decision of the Company and “it is not open to be encroached” through the use of s 152FA. 

(4)     While the 1^st Defendant has not provided any substantive answer to the queries raised by the Plaintiff, the Company “was negotiating with Citylink to provide further documentary evidence which [the Plaintiff] would demand in due course”.    

30.  In his Affirmation filed on 12 December 2012, the 1^st Defendant asserted that he had all along kept all shareholders of the Company aware of the development of Citylink. He said he had not been able to communicate with the Plaintiff since 2010 as the Plaintiff never picked up his phone.  According to the 1^st Defendant, whenever he reported anything about the Company and Citylink to Mr Wong, he would ask Mr Wong to inform the Plaintiff.  The 1^st Defendant said that his discussion with Mr Wong about the possibility of Citylink declaring a dividend of $2 million to the Company took place in late 2011, but no account was opened as he was concerned about naming the Plaintiff as an authorized signatory of the Company’s bank account. 

31.  As I consider that the Plaintiff has failed to satisfy the court that there is a proper purpose for inspecting the first 5 categories of documents, it is not necessary to consider Mr Yuen’s grounds of objection in respect of such documents. 

32.  This leaves the last category of documents sought by the Plaintiff which relate to the status of the Company’s investment in Citylink and the dividend declared or to be declared by Citylink to the Company.  I am satisfied that the Plaintiff has a proper purpose for seeking to inspect these documents for the following reasons:

(1)     I accept that the Plaintiff has a legitimate cause for being concerned about the status of the Company’s investment in Citylink including the important question of whether dividend has in fact been declared or paid to the Company.  The concern is justified in light of the woefully inadequate information provided by the 1^st Defendant despite the repeated requests made by the Plaintiff.  I do not accept the 1^st Defendant’s allegation that he was unable to communicate with the Plaintiff due to the Plaintiff’s refusal to pick up his phone since 2010.  As the Plaintiff pointed out in his Affirmation, the 1^st Defendant had been using emails to communicate with the shareholders of the Company.  There was no reason why the 1^st Defendant could not continue to use emails to communicate with the Plaintiff had he wished to do so. 

(2)     It is clear from the history of requests summarised in paragraphs 9 to 13 above that the Plaintiff had since at least May 2012 been requesting the 1^st Defendant to convene annual general meeting and provide the accounts of the Company and information regarding the status of the dividend declared by Citylink to the Company, but the 1^st Defendant failed to provide any substantive response on all the requests.

(3)     The information provided by the 1^st Defendant as regards the status of dividend is inconsistent and does not make sense.  According to the Plaintiff, he was told by the 1^st Defendant in late 2011 that Citylink had already declared some interim dividends and the Company’s entitlement would be about $8-9 million.  The 1^st Defendant does not challenge this part of the Plaintiff’s evidence and, in fact, relies on it and says that it was him who informed the Plaintiff that Citylink was to declare dividend.  However, the 1^st Defendant goes on to say that what he told Mr Wong was that Citylink “was about to declare dividend and that [the Company] was to receive about less than $2 million”.  He then goes on to describe why no bank account could be opened in the name of the Company.  There is no attempt by the 1^st Defendant to explain what has happened to the $8-9 million said to have been declared by Citylink.  Nor is there any explanation as to whether the $2 million dividend about to be declared by Citylink in 2011 has in fact been declared afterwards.  In light of the inconsistency and paucity of the information provided by the 1^st Defendant in his Affirmation, I ask Mr Yuen to clarify whether the $8-9 million and $2 million dividend have in fact been declared by Citylink to the Company.  However, Mr Yuen says on  instruction that no dividend has in fact been declared by Citylink, and the Plaintiff has over-reacted on the question whether dividend had been declared.  This is surprising as it contradicts the 1^st Defendant’s own evidence in his Affirmation. 

(4)     I do not accept the 1^st Defendant’s suggestion that once the Plaintiff is appointed as a signatory of the bank account to be opened in the name of the Company, there is a risk that the Plaintiff would make a fuss out of it by refusing to sign any cheque and to bargain for more dividend than he is entitled to.  There is simply no evidence in support of such speculation.  In any event, if there were a genuine concern about the appropriateness of appointing the Plaintiff as one of the authorized signatories, there was no reason why the 1^st Defendant could not convene a general meeting and let the shareholders to decide the matter.  It seems to me that the 1^st Defendant’s explanation (even if true) on why no bank account was opened in the name of the Company is irrelevant to the questions concerning the status of the dividend declared by Citylink.  As I said, the 1^st Defendant may either ask the shareholders to decide who should be named as the signatories of the bank account or ask Citylink to pay the dividend to the shareholders of the Company directly.  If the 1^st Defendant was concerned about being criticized by the shareholders for not asking Citylink to pay the dividend to the Company’s bank account, he could seek the approval from the shareholders before taking such step. 

33.  I do not accept the 1^st Defendant’s assertion that there was no written correspondence between Citylink and the Company in relation to the dividend, or that such assertion (even if true), constitute a ground for opposing the inspection of such documents.  The documents for which inspection is sought is not confined to correspondence between Citylink and the Company.  It is clear that there are documents relating to dividend declared by Citylink to the Company, as the 1^st Defendant through his solicitors’ letter dated 23 January 2013 stated that he had been in the process of retrieving the documents and information requested by the Plaintiff from Citytlink’s account department which, he said, would take some time to complete. 

34.  As to the 1^st Defendant’s suggestion that the new shares acquired by the Company in Citylink is an “investment decision”, I do not think that this is a valid ground of objection.  The very purpose for which the shareholders agreed to acquires shares in the Company was to participate in the investment in Citylink, which remains the only asset of the Company.  The economic interest of the shareholders in the Company depends entirely on its investment in Citylink.  It is in the circumstances legitimate and, indeed,  reasonable for any shareholders to be concerned about any change in the Company’s investment in Citylink, as it will have a direct impact on the interest of all the shareholders of the Company.  In fact, in his Affirmation and his solicitors’ letter dated 23 January 2013, the 1^st Defendant never suggests that the shareholders of the Company including the Plaintiff has no right to inquire about the status of dividend.  To the contrary, it is the 1^st Defendant’s case that all along he has “kept all shareholders of [the Company] aware of the development of Citylink”.

35.  For the above reasons, I do not consider any of the matters raised by the 1^st Defendant constitutes a valid ground to oppose the Plaintiff’s application for inspection of the documents relating to Citylink.  As for the precise terms of the order, the 1^st Defendant does not raise any objection to the wordings in paragraph 6(f) of the Originating Summons and the additional wordings suggested by the court at the hearing as regards the Company’s investment in the additional 25,263 shares in Citylink.  I therefore order that the 1^st Defendant and the Company shall allow the Plaintiff or his agents to inspect the following documents within 28 days from the date of the hearing:

(1)     Documents and correspondence, including but not limited  to those documents and correspondence provided by or with Citylink, in relation to the Company’s entitlements (past, present and future) as a shareholder of Citylink or the Company’s investment in Citylink.

(2)     Documents and correspondence relating to the Company’s investment in 25,263 shares in Citylink which were transferred from Kenzian Development Co Ltd to the Company on 14 October 2011.

36.  To ensure that the 1^st Defendant will provide all the documents failing within the scope of the order, I further order the 1^st Defendant to file an affidavit to verify the completeness of the list of documents to be made available to the Plaintiff’s inspection within 28 days from the date of the hearing. 

37.  As regards costs of the Originating Summons, Mr Lam seeks costs of the application against the 1^st Defendant on the basis that the application was necessitated by the failure of the 1^st Defendant in discharging his statutory obligations and answering the legitimate requests made by the Plaintiff.  Mr Yuen submits that the Plaintiff should not be entitled to all the costs of the Originating Summons as the Plaintiff has failed in 5 out of the 6 categories of documents sought, and his legal advisers have failed to comply with the Practice Directions in lodging hearing bundles and skeleton argument by one day.  Other than that, Mr Yuen does not oppose that the costs should be paid by the 1^st Defendant. 

38.  While I agree that it is the duty of the legal advisers to comply with the Practice Directions, which is an important duty for the proper conduct of the hearing, in light of the relatively short delay, I do not consider that it is a sufficient ground to deprive the Plaintiff of his costs.  Moreover, until Mr Yuen’s submissions lodged 2 days before the hearing, the 1^st Defendant’s stance had been to oppose the entire Originating Summons.  In any event, in light of the 1^st Defendant’s opposition to the application for inspection, the hearing could not have been avoided.  As the Plaintiff has substantially prevailed in his application, I consider that it is fair to allow the Plaintiff to recover the entire costs of his application. 

39.  Lastly, as I point out to the parties at the hearing, it is wrong for the Plaintiff to describe the parties as “Applicant” and “Respondent” in the Originating Summons, which have since the CJR been changed to “Plaintiff” and “Defendant”.  I directed the parties to rectify the mistakes by amending the Originating Summons in this regard.