RE BAITIAN TECHNOLOGY LTD

HCMP 3416/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3416 OF 2013

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D E C I S I O N

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1. I have before me an Originating Summons for an order extending the time specified in Section 122(1) of the Companies Ordinance for the Company to lay its profit and loss accounts before its shareholders at annual general meeting for the period commencing with its date of incorporation, up to and including 2013, until 28 days after the date of this order.

2. The facts of this case are straightforward.  The Company is a holding company.  It is owned by a Cayman Islands company.  Apart from holding two subsidiary companies, the Company has never engaged in any active business and, apart from dividend interest income and net foreign exchange gains, the Applicant has not generated any taxable profits in Hong Kong.

3. The Company has not been liable to pay profits tax and this has been confirmed by the Inland Revenue Department.  The Company has not, however, prepared as required by the Ordinance, financial statements.  The reason for this is, as seems commonly to be the case, that the directors had assumed that because the Company did not pay tax in Hong Kong that, therefore, the Inland Revenue did not wish to see audited financial statements; they were not required.

4. The Court has in previous decisions set out the relevant factors to which it has regard when considering these kinds of applications (see Yu Sun Say v HKI Properties Limited[1]  and Re Sanliuyidu (Hong Kong) Sports Goods Co. Limited[2] .  These factors include:

(a) whether the shareholders were aware of the financial position of the company in question and thus were not prejudiced by the non-compliance;

(b) whether the default was inadvertent; and

(c) whether the Court was satisfied that the company would comply with the obligation to lay its profit and loss accounts or income and expenditure statements and balance sheets before general meetings in future.

5. I am satisfied that the shareholder was aware of the Company’s financial position.  The infringements of the Ordinance have come to light during an application for a listing and I am satisfied that in the future it is unlikely that similar breaches will arise.

6. The issue that requires more consideration is whether or not the default was inadvertent.  The Applicant submits that it was.  Its argument is quite straightforward.  The Company instructed a company secretarial service provider to deal with things such as annual general meetings.  The annual general meetings were held, as is conventional, by means of written resolutions.  However, the company secretarial service provider did not inform the directors, as clearly they should have done, that it was necessary for the Company to lay before the shareholders at each annual general meeting audited financial statements and that this is the case regardless of whether or not the Company is liable to pay tax in Hong Kong and regardless of whether or not the Inland Revenue Department requires to see such audited financial statements.

7. There is only one other matter which it is necessary to address.  In my decision dated 26 February 2014 in Re LWK & Partners (HK) Limited I declined to grant similar orders on the grounds that the breaches were so technical that I took the view that the applications were simply unnecessary and that it was undesirable that similar applications were made in future simply because of what is understood to be the requirements of the Stock Exchange in relation to listings.

8. A question that might fairly arise when comparing my decision in the present case, which is to grant the orders sought in the Originating Summons, and my decision in Re LWK & Partners (HK) Limited, is why the Court would refuse an application made on the benign facts of the latter case and allow an application in the present one.  The distinction is this: in Re LWK & Partners (HK) Limited I was dealing with a case where it was not sensible for the resources of the Applicant and the Court to be spent in addressing highly technical breaches that did not suggest there was any serious problem with the Company’s corporate governance and there was no realistic risk at all of the Company or its directors being prosecuted.

9. In the present case the facts are more serious because the Company had failed to prepare audited financial statements.  I accept, as was submitted by Mr Cheng on behalf of the Applicant, that having been alerted to the breaches of Section 122, the directors were behaving prudently in concluding that on the facts of this case it was desirable that they sought an order from the Court remedying the breaches.

10. In deciding whether or not it was prudent, it seems to me to be relevant for those advising potential Applicants to consider whether the infringements are very minor.  I would characterise short delays in convening annual general meetings at which audited financial statements are laid before a company’s shareholder as minor and technical as opposed to cases where no financial statements have been prepared at all. 

11. It is also relevant whether or not it can be sensibly suggested that the breaches arise from inadvertence rather than indifference.  If, as is the present case, there are sound reasons for contending that the directors sought professional advice which should, if it had been properly given, have avoided the breach that has occurred, the Court is quite likely to conclude that the case falls into the inadvertent category and therefore be amenable to granting an order.

12. I will therefore make an order in the terms of paragraphs 1 and 2 of the Originating Summons and Mr Cheng has offered on behalf of the Applicant to make the undertaking described in my decision in the Head Park Group Limited v.  Asiafair International Ltd[3].