VERON INTERNATIONAL LTD v. RCG HOLDINGS LTD

CACV 126/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 126 OF 2012

(ON APPEAL FROM HCMP NO. 343 OF 2011)

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J U D G M E N T

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Hon Yeung V-P:

1. I have read, in draft, the judgment of Yuen JA. I agree with it and an order will be made in term of paragraphs 39-41 hereof.

Hon. Yuen JA:

2. This is an appeal from a judgment of Barma J (now Barma JA) refusing an application for an order under s.152FA Companies Ordinance (“the Ordinance”) for inspection of records of a company.

Introduction

3. The company from which inspection was sought is RCG Holdings Ltd (“the Company”).  It was first listed on the AIM (Alternative Investment Market) of the London Stock Exchange in July 2004 and on the PLUS market also on the same exchange in June 2007, and then on the main board of the Hong Kong Stock Exchange by way of introduction on 10 February 2009.

4. The applicant for inspection is Veron International Ltd, the single largest shareholder of the Company. Between 2005 and 2007, it acquired a substantial shareholding in the Company, reaching more than 27%.  Its shareholding in the Company has since been reduced to 16% (according to the Company, 19%).  It does not have a seat on the board.

5. 1  The application for inspection revolved around the Company’s acquisition (through a subsidiary) of shares in two companies, Vast Base Technology Ltd (“VB”) and Strong Aim Ltd (“SA”).

5.2  Both VB and SA are BVI companies. Both were involved with Radio Frequency Identification (“RFID”) technology, a technology for data acquisition by way of radio frequency transponders and a host system.  SA’s business involved the use of RFID technology in connection with the use of mobiles phones as RFID reading devices.

Vast Base

6. 1  The Company acquired 80% of the shares of VB between December 2007 and November 2008 for a total consideration of about $735m in cash.  Three years later, the Company disposed of the shares for $50,000. 

6.2  The Applicant claims that this showed that the entire investment has been lost.

6.3  Mr Coleman leading counsel for the Company said in his skeleton submissions that “this is untrue and misleading as it ignores the profits generated by [VB] since the acquisition (which would be no less than HK$250 million if nothing else than by reason of the profits guarantee)”.

6.4  However there is no evidence before us that any profits had been generated.  The “profits guarantee” at best amounted to no more than a reduction in the acquisition cost.

Strong Arm

7. 1  As for SA, the Company acquired 70% of the shares in 2010 for a total consideration of $185m, comprising more than $37m in cash and the rest in shares issued at a price of $8.2.  An announcement was made in this regard on 26 April 2010.  One year later, the Company disposed of the shares for $3,000. 

7.2  There is some evidence that during the year ended 31 December 2010, a profit of $149m was made.  However the Company has disclosed (albeit after the judgment) that 6 months later, at the 2^nd quarter of 2011, SA was loss-making (although the reason for that is disputed). 

The Applicant’s case

8. 1  According to the Applicant, it sought inspection of the Company’s records relating to the acquisition of these 2 investments, not only because of the substantial losses made and their disposal (which came after the proceedings commenced), but also because of certain matters (discussed below) which led to a reasonable suspicion that the Company’s directors had failed to perform their duties to the Company when they decided to make these investments. 

8.2  For convenience, this has been referred to as the “directors’ due diligence” point.  It should however be noted that it is common ground that there is no established definition of the term “due diligence”.  One must therefore be careful when using the term. 

8.3  The Company says “due diligence” had been performed by a firm of Malaysian lawyers before the Company acquired VB, and by a firm of PRC lawyers before it acquired SA.

8.4  However what the Applicant means by that term in the present case is an exercise that the directors should have undertaken to assess the risks and verify matters which were material to the decision whether to acquire shares in VB and SA.  The Applicant says that it has a reasonable suspicion that the directors had not performed that duty and the application for inspection of the Company’s records was for the Applicant

“to investigate and consider whether it should take steps or what steps it should take with a view to protecting directly or indirectly its investment in the Company, including seeking advice on and considering whether the Company’s directors have been or are in breach of their duties vis-a-vis the acquisition of shares in [VB] and [SA] and commencing any proceedings against the directors or any other parties” (Robert George Clark I, para. 38).

Concerns over the Company’s acquisition of VB and SA

9. The Applicant’s concern over the Company’s acquisition of VB stemmed from discrepancies between two press releases and the Company’s listing document.

10. 1  The press releases were issued by the Company for the purpose of compliance with AIM rules.

10.2  In the press release of 16 May 2008 (“Press Release 1”) on the Company’s acquisition of a majority interest in VB, the Company announced that it had secured contracts with at least 19 major hospitals on the mainland to supply, install and maintain RFID tags for patients.  The release said:

“the hospitals commit to [VB] to purchase in-patient and out-patient RFID tags over a fixed period, with options for an extension to the contract. ... The contracts secured by [VB] to date include 19 major hospitals in China and are valued at HK$448.4 million ... over a period of five years with an option for a further five-year extension. This hospital group has committed to purchase 10 million and 400,000 out-patient and in-patient tags respectively per year.” (Emphasis added).

The 19 major hospitals were said to include Tianjin Central Hospital, Shanghai RuiJin Hospital and JiNan QianFoShan (“the 3 named hospitals”).

10.3  Six months later, the Company issued another press release on 17 November 2008 (“Press Release 2”) on the Company’s acquisition of an additional 20% equity interest in VB.  It was announced that VB

“has secured major contracts for the design and supply of RFID ... tags, RFID enabled equipment, software and middleware to the ... healthcare industry. ... [VB] ... is currently working to deploy its healthcare solutions for hospital patients tagging and tracking to several hospitals in the PRC ... .”

There was no correction or withdrawal of any statements made in Press Release 1.

11. 1  Three months later, the Company’s listing document (“the Listing Document”) was issued on 4 February 2009 for the purpose of its listing by way of introduction on 10 February 2009.  The business model revealed in the Listing Document showed that VB would not be providing RFID technology to end users (such as hospitals) directly, but had contracted with only 4 distributors.  The Listing Document said (p.92):

“[VB]’s major assets are contracts entered into with its customers. As at the Latest Practicable Date [30 January 2009], VB had four customers and had entered into long term supply contracts with three of them:

- Bellson

- Top Venture

- Tianjin Huajian Kongbao Shuang Mao Co Ltd” (“THJ”).

(Emphasis added).

11.2  At p.93, it said:

“ ... [THJ] acts as provider of RFID patient tags at various hospitals in the PRC”.

11.3  At p.94, it said:

“[THJ] is a PRC company engaging in the provision of RFID backend solutions to hospitals, including in-patient and out-patient tagging systems and solutions. Under two agreements both dated 2 May 2008 entered into with [THJ], [THJ] has agreed in total to purchase from [VB] a minimum of 0.4 million RFID in-patient tags and 10 million RFID out-patient tags per annum at a specified price for a period of 10 years from 2008 to 2018. ... The Company confirms that Bellson, Top Venture, [THJ] and Distant Ltd [VB’s 4^th customer] and their respective ultimate beneficial owners are Independent Third Parties.”

(Emphasis added).

12. 1  The business model announced in the Listing Document (where VB contracted with only 4 customers, of which THJ would distribute the technology to end-user hospitals) is therefore different from that announced in the Press Releases (where VB secured contracts with 19 major hospitals which had “committed to [VB]” to purchase RFID tags).  

12.2  It is important to note that (i) according to the Listing Document, VB’s agreements with THJ were made on 2 May 2008 (“VB-THJ agreements”), two weeks before Press Release 1, and six and a half months before Press Release 2, and (ii) the press releases were issued for compliance with the AIM rules.  Thus it may be reasonably expected that the press releases had been verified as correct, in which case doubt would be thrown on the real date when the VB-THJ agreements were actually signed.

13. The other concern of the Applicant over VB is that according to reports from its investigators, only 1 of the 3 named hospitals existed and used VB’s RFID technology.  The other 2 did not exist at all.  A number of hospital staff interviewed by the investigators said they had not heard of VB or THJ or any products supplied by them. 

14. As for SA, the Applicant’s suspicions at first were not as particularised as those regarding VB, but fresh evidence before this court has bolstered them.  This will be discussed later.

Summons to add fresh evidence

15. At the appeal, the Applicant applied to add fresh evidence of the Company’s announcement dated 19 December 2012 (after the judgment) on the disposal of its interests in VB and SA.  It was agreed between the parties that the fresh evidence could be considered de bene esse but in my view the conditions of Ladd v Marshall are clearly satisfied. 

Law

16. I shall first discuss the law relating to applications under s.152FA.

17. The section provides:

“(1)  Subject to sections 152FD and 152FE, on application by such number of members of a specified corporation as is specified in subsection (2) (in this section referred to as “applicant”), the court may make an order—

(a)    authorizing the applicant or any one or more of such members applying as applicant to inspect any records of the specified corporation; or

(b)    authorizing a person (whether or not a member of the specified corporation) other than the applicant to inspect any such records on behalf of the applicant.

  (2)  For the purposes of subsection (1), an application may be made by—

(a)    any number of members representing not less than one-fortieth of the total voting rights of all members having at the date of the application a right to vote at a general meeting of the specified corporation;

(b)    any number of members holding shares in the specified corporation on which there has been paid up an aggregate sum of not less than $100000; or

(c)    not less than 5 members.

  (3)   The court may only make an order under subsection (1) if it is satisfied that—

(a)    the application is made in good faith [“the 1^st condition”] ;   and

(b)    the inspection applied for is for a proper purpose [“the 2^nd   condition”].

  (4)   Any person who is authorized by the court to inspect the records of a specified corporation may make copies of the records unless the court orders otherwise.

  (5)   A person who complies with an order made under this section or section 152FB to produce records for inspection shall not be liable for any civil liability or claim whatever to any person by reason only of that compliance.”

18. It is clear from the language of the section that:

(i)  a shareholder or shareholders would first need to be qualified under any of the subsections in s.152FA(2) to make an application;

(ii)  he/they must then satisfy the court of the two conditions under s.152FA(3), first that the application is made in good faith, and secondly, that the inspection applied for is for a proper purpose;

(iii)   even if those conditions are satisfied, the court still has a discretion whether or not to grant an order for inspection.

19.   The relevant principles have been set out in Acehill Investments Pty Ltd v Incitec [2002] SASC344 at para. 29, adopted by this court (Chu JA, Suffiad and Bharwaney JJ) in Lehman & Co Management Ltd v Effiscient Ltd [2011] 5 HKLRD 668, C.A. at para. 31, which is set out below for ease of reference.   

“1. The requirement that the applicant is acting in good faith and that the inspection is to be made for a proper purpose expresses a composite notion and the court will determine whether each has been demonstrated by applying an objective test: Barrack Mines Ltd v Grants Patch Mining Ltd [1988] 1 Qd R 606; Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Ltd (1989) 7 ACLC 536 at 540-541.

2. The onus is on the applicant to demonstrate that he is acting in good faith and that the inspection is for a proper purpose: Intercapital Holdings Ltd v M E H Ltd (1988) 6 ACLC 1068 at 1074.

3. The section operates where the applicant seeks to protect some specific or personal right by the making of the order. Examples are where a shareholder contemplates proceedings under s 233 of the Corporations Act (the statutory successor of s 320 of the Companies Code); Re Augold NL[1987] 2Qd R 297 at 308-309; Re Humes Ltd [1987] VicRp 43; (1987) 5 ACLC 64 at 68-69; Grants Patch Mining at 107; or where a shareholder reasonably takes the view that a transaction could adversely affect his investment and he seeks to investigate the transaction for the purpose of determining what action he should take: Intercapital Holdings at 1074-1075; or where a shareholder seeks to ascertain facts for the purpose of considering a takeover offer: Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Ltd at 539. Other examples are provided in a number of the cases listed in the appendix.

4. If the applicant's primary or dominant purpose is a proper purpose, it is not to the point that an inspection may be of benefit to the applicant for some other purpose: Re Humes Ltd at 70; Grants Patch Mining at 109-110; Cescastle Pty Ltd v Renak Holdings Ltd (1991) 9 ACLC 1333 at 1335.

5. The rights provided by s 247A should not be regarded as affecting the basic rule of company law that a shareholder should not ordinarily have recourse to the courts to challenge a managerial decision made by or with the approval of the directors: Re Humes Ltd at 68-69; Grants Patch Mining Ltd at 614.

6. Since every shareholder has a right to apply under the section for an inspection order, it is no answer to an application that, if an order is made, the applicant may acquire information not available to other shareholders and thereby be in a more advantageous position than those shareholders: Re Humes Ltd at 70; Grants Patch Mining at 615.

7. Applicants do not necessarily lack a proper purpose merely because

(a) they are hostile to other directors; or

(b) they will, after inspection, have more information than other members: Re Humes Ltd at 70.

8. The procedure under s 247A is not intended to be a process as wide-ranging as the process of discovery of documents so that, as a general rule, inspection will be confined to, say, the results of decisions of directors rather than all the documents such as board papers leading to decisions: Re Claremont Petroleum NL (No 2) [1990] 2 Qd R 310 at 314. I emphasize that this is a general rule. There may be occasions where it is proper to admit inspection of board papers. I examine this question in a moment.

9.   Even where an applicant is acting bona fide and has shown a proper purpose, the court has a discretion whether to order inspection: Re Humes Ltd at 70.”

20. 1  During the course of this appeal, it was argued that there were two approaches to applications under s.152FA, a “liberal” approach adopted by Harris J in Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD and a “less liberal” approach adopted by Deputy Judge Coleman SC at first instance in the Lehman & Co case. 

20.2  At first instance in the present case, Barma J thought it unnecessary to decide whether there was a difference in approach, and if so, which one was to be preferred, as he was not inclined to order inspection even on a more generous approach to the section.  

20.3  For my part I do not find it constructive to enter into an academic discussion as to whether there were two approaches, and if so, which one should prevail.  

20.4  Nor do I see why the legislation should be applied differently in the case of a listed company as compared with a private company.  Whilst there may be more information in the public domain for listed companies, shareholders of a listed company lack the personal relationships that are normally present in private companies which enable shareholders to know more or less how the company is being run.

20.5  In my view the real issue is how the court, guided by the principles set out in the preceding paragraph, should apply the legislation to the facts of the individual case.

Barma J’s judgment

21. 1  Briefly, Barma J accepted that the application was made in good faith (i.e. the 1^st condition) but he held that it lacked proper purpose (the 2^nd condition).  Regarding the latter he held in respect of the Applicant’s concerns over VB, that:

-  the Listing Document would be expected to be more accurate than the Press Releases;

-  the Listing Document had provided information about the independent valuation of VB, including the valuer’s methodology and assumptions;

-   there were flaws in the process adopted by the investigators which may have led to inaccurate answers from the hospital staff questioned; and

-  the fact that VB had been disposed of at a loss after 3-4 years did not mean that the directors had been at fault in its acquisition.

21.2  As for SA, the learned judge held that the Company’s announcement of 26 April 2010 had provided information relating to the valuation of SA.

21.3  However Barma J was not informed that between the date of hearing and the date of judgment, the Company had disposed of SA for $3,000. 

22. The learned judge refused to make an order for inspection, holding that “no proper purpose for inspection has been made out” (para. 44), i.e. the Applicant had failed to satisfy the 2^nd condition.  

23. 1  It is important to note that the learned judge did not refuse the application in the exercise of his discretion. 

23.2  In fact he held that if the Applicant had satisfied the 2^nd condition of proper purpose, he would have made an order but restricted to certain documents only.  He said (para. 44):

“However, having regard to the nature of the concern expressed by the Plaintiff, I would have thought that had there been a case for investigation in relation to the due diligence conducted by the Company in respect of either one or both of the [VB] or [SA] acquisitions, such documentation should be limited to the relevant contractual documents in relation to the acquisitions, the valuations obtained, and the due diligence documentation. I do not think that it would be necessary for this purpose for the Plaintiff to have sight of underlying contracts and orders, or the patent application by Stepfull if these were not documents provided to the Company as part of the due diligence process, and retained by it in its records.”

(Emphasis added).

23.3  The Applicant has not sought to expand the scope of records that the learned judge indicated he would have ordered (ie paras. 1, 2, 3, 5, 6 and 8 of the Schedule to the Amended Originating Summons).

23.4  It would be noted that there is no respondent’s notice from the Company that the application should be refused in any event in the exercise of the court’s discretion.

Position of the appellate court

24. 1  As the learned judge had refused the application because he considered the 2^nd condition for inspection had not been met, i.e. a conclusion drawn from facts disclosed in the documents and affirmations, this court is in the same position as the learned judge to make inferences and draw conclusions from the materials.  This is particularly so in view of the fresh evidence.  

24.2  In any event, I consider that even if the learned judge had refused the application in the exercise of his discretion, this court would find it proper in this case to reconsider the matter, as the Company had failed to inform the learned judge of the disposal of its interests in SA before judgment was delivered.  (There seems to be an inconsistency on the materials as to the date of the Company’s disposal of SA shares.  In some materials the date is said to be 19 March 2012 ie prior to the Company’s announcement on 29 March 2012 of its disposal of VB, and in some materials it is said to be 30 March 2012.  However nothing turns on this for the purposes of this judgment).  

24.3  The disposal of SA at nominal consideration may well have been relevant to the exercise of the learned judge’s discretion, coming as it did soon after the disposal of VB also at nominal consideration.  The disposal of SA as a loss-making business is inconsistent with the picture painted of SA being an ongoing profitable operation. 

24.4  In this respect, on 14 September 2011 Lawrence Ying Kan Man, an Executive Director and Chief Operating Officer of the Company made an affirmation in which he said, in relation to VB:

“the business model of [VB] was (and still is) to sell its products to its key customers” (para. 22(6)(b)),

and in relation to SA:

“[SA] was (and still is) a majority shareholder of Stepfull, which holds and owns the Patent ... which is a technology of high commercial value” (para. 42(5)) (Emphasis added).

In fact, by June 2011, no sales at all had been recorded by VB or SA and their businesses had in effect ceased.

24.5  The accumulative effect of the disposals of both substantial loss-making investments in RFID would have been relevant to the exercise of discretion (had the learned judge got to that stage of the exercise).

Discussion

VB

25. The Applicant’s case stems from its suspicion as to what the Company’s directors knew about the business model of VB, in particular in relation to patient tagging and tracking, whether VB had directly contracted with 19 major hospitals in the PRC (as announced in the Press Releases) or whether VB had contracted only with 1 distributor THJ (as announced in the Listing Document).  Of course there may have been good commercial sense in dealing through a distributor, rather than dealing directly with end users, but the issue is whether the directors of the Company had properly examined VB’s business model, what the risks of that business model were, and whether they considered if VB’s award of the distributorships was beneficial.  The inconsistencies between the Press Releases and the Listing Document (both being documents which would have been vetted by professional advisers before publication) throw up the question when and why VB had decided to contract only with THJ, instead of with the hospitals directly as announced earlier. 

26. The learned judge held that although at least Press Release 1 contradicted the Listing Document, that did not call for an investigation by way of inspection of the Company’s records, because one would expect the contents of the Listing Document to have been more accurate (para. 34).  

27. 1  With respect to the learned judge, it seems to me that that conclusion failed to take into account the fact that the Press Releases had also been issued for compliance with regulatory requirements (those of AIM), and so one would also expect those announcements similarly to have been carefully verified by the Company’s AIM nominated advisers for accuracy and reliability (see the AIM Rules on disclosure set out in Hui Yip Wing II, para. 24). 

27.2  It is to be noted that there is no evidence to explain why, if the VB-THJ agreements had been signed 2 weeks before Press Release 1, and more than 6 months before Press Release 2, those agreements were not known to the Company.  (Indeed all the distributorship agreements, VB-Bellson dated 26 October 2007, VB-Top Venture dated 12 February 2008 and VB-THJ dated 2 May 2008 pre-dated Press Release 1).

27.3  Nor is there evidence, contemporaneous with the Press Releases, that the distributorship business model was known to the Company but the relevant information had somehow been miscommunicated to their nominated advisers. 

27.4  Nor is there contemporaneous evidence that the Company had properly passed on the relevant information but it had somehow been misunderstood by the nominated advisers to be an arrangement whereby VB contracted directly with the end-users. 

28. The learned judge also held that the Applicant had failed to satisfy the 2^nd condition because the Listing Document had disclosed that an independent valuation had been performed prior to acquisition. 

29. 1  However it is clear that the valuation had been performed on the basis of various assumptions (p.74 of the Listing Document).  Certain information had been reviewed by the valuers, but would not have been verified by them (p.75). 

29.2  More importantly, the valuations were made on the basis of the “income approach”, ie the value of the contracted income under the contracts to which VB was party.  VB itself had only been incorporated 5 months before the Company acquired a substantial holding. As for the income expected, the source were the distributorship agreements VB had with Bellson, Top Venture and THJ, companies with no long term track record with VB and which had been interposed between VB and the end-users. 

29.3  The risk was recognized by the Company at the time of the Listing Document, hence the following statement in the section on Risk Factors:

“[VB] had four customers in total and had entered into long term contracts with three of them. ... If any of these customers fails to fulfil its obligations under these long term supply contracts, ... [VB’s] business may be adversely affected, and in turn, the group’s business, operating results and financial conditions may be materially and adversely affected.”

29.4  Put simply, VB’s business to a large extent would only be as good as their distributors.

29.5  The crux is whether the directors had recognized this risk before the Company acquired VB and had made a proper assessment of the risk.  Although it was stated in the Listing Document that the previous major shareholders of VB “has had a relationship of two to four years” with the distributors, it was not disclosed what these “relationships” were.  As for VB itself, it had a business relationship with Bellson and Top Venture for about 1 year and with THJ for less than 1 year.  There were no profit guarantees from these distributors.  It is noted that according to the Company’s announcement of 19 December 2012, “the recoverability of trade debts owed by customers [presumably meaning the distributors] was considered doubtful and had to be fully provided for”.  The Listing Document did not disclose who were the ultimate beneficial owners of these distributors, nor whether any attempts had been made to see if the distributors were backed up by substantial parent companies, or if they were not, whether personal guarantees were obtained from the ultimate beneficial owners or indeed anyone else.  Not surprisingly the Applicant wishes to know whether the Company assessed and verified these matters before investing $734m in VB.

29.6  This is what the Applicant seeks to find out from the records of the Company and with respect to the learned judge, these are not materials which can be found from those parts of the valuation which were summarized in the Listing Document, nor from any of the affirmations filed on behalf of the Company.  

30. 1  The Company’s case is simply that “due diligence” had been performed by a firm of Malaysian lawyers. 

30.2  As noted earlier, the term “due diligence” does not have an established definition.  There is no evidence before the court on the instructions given to the Malaysian lawyers. Nor is there evidence on the exercise they performed.  It may, or may not, have been simply what might be called a “legal audit”, ie only checking that legal documentation is in place.

30.3  Hence that does not provide an answer to the questions posed in para. 29.5 above.

31. 1  The learned judge also found some flaws in the reports of the investigators retained by the Applicant.  For example, they identified themselves as market survey agents, and consequently the persons they interviewed may not have provided them with correct answers. 

31.2  Whilst that is true, the evidence remains, in my view, disturbing.  Even now Schedule 1 to Mr Ying’s affirmation filed on behalf of the Company refers only to use of the RFID technology by just 1 of the 3 named hospitals in Press Release 1, and provides no information at all about the other 16 “major hospitals” which the Company had announced were committed users.

31.3  Mr Ying’s excuse is that there may have been confusion in the names of the hospitals and the Company’s case is that basically the end-users did not matter.  This is inconsistent with the approach taken by the Company in Press Release 1, where the identities of the hospitals were considered important enough to be disclosed.

32. 1  The learned judge also held that patient tagging and tracking was only one area where RFID technology would be used, as it was also anticipated that it would be used for event ticketing. 

32.2  However the points made about the lack of long term track record for THJ applies similarly to Bellson and Top Venture the distributors for RFID use in event ticketing, and the fact is that the Company has disposed of its interests in VB at a substantial loss due to the failure to recover from its customers which include Bellson and Top Venture.

33. In conclusion I take the view that, with respect to the learned judge, the Applicant has made out a reasonable case that there was a need to investigate what had or had not been done by the directors to safeguard the interests of the Company prior to its acquisition of VB, and inspection of the Company’s records was sought for this proper purpose. 

SA

34. As for SA, the Applicant’s case against the Company is less strong but it was in a similar line of business, the business model was similar, the assumptions made in the valuation were similar, the same income approach was taken in the valuation, the same risk factors were present, SA was also recently incorporated before the Company’s acquisition, there is a similar dearth of information regarding its customers, nothing is known of the scope of the “due diligence” undertaken by the firm of PRC lawyers and similarly a very substantial loss was made by the Company on disposal.  In my view, the application for inspection of the Company’s records on the SA acquisition was also for a proper purpose. 

2^nd Condition satisfied

35. By reason of the above, I find the 2^nd condition under s.152FA(3)(b) has been satisfied for inspection of the Company’s records relating to both VB and SA.

Exercise of discretion

36. At this stage this court would then have to consider whether to order inspection in the exercise of its discretion. 

37. 1  As noted earlier, the judge would have made an order in the exercise of his discretion had he found the 2^nd condition satisfied and there is no respondent’s notice challenging that.

37.2  We have been referred by counsel for the Company to Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Ltd (1989) 15 ACLR 151 where it was held that

“... the court may, as a matter of discretion, consider that not enough is shown to warrant its intervention, there not being a sufficient prospect that anything useful will come out of the proposed investigation” (p157).

I am satisfied that the records sought should be useful to the Applicant in its consideration whether to write off its investment in the Company or seek to recover damages in derivative proceedings against one or some of the Company’s directors or others for breach of duty. At this stage it would not be appropriate to say more.

38. 1  Of course the Applicant could have sought a seat on the board and obtain access to the Company’s records through that route, instead of making an application under s.152FA. 

38.2  The fact that the applicant may have other means of obtaining the information elsewhere does not mean that he cannot satisfy the two conditions (Hanks v Admiralty Resources NL [2011] FCA 891, para. 33(8)), but it is relevant to the court’s decision whether to exercise its discretion to grant an order.

38.3  I am satisfied in the circumstances of this case that even if it is assumed that the Applicant would have been able to obtain a seat on the board of the Company, the duties placed on a director are such that the court cannot insist that the Applicant must seek to become a director to obtain the records it seeks, rather than exercise its statutory rights as a shareholder.  I note that the Company is being investigated by the Commercial Crimes Bureau and so the duties of the directors would be more onerous than usual.

38.4  I also do not find that the Company would suffer any substantial prejudice in complying with an order. 

Order

39. I would make an order in terms of the summons to adduce fresh evidence contained in Robert Clark’s second affidavit.

40. I would make an order in terms of the Amended Originating Summons but restricted to the records listed in para. 44 of Barma J’s judgment (ie paras. 1, 2, 3, 5, 6 and 8 of the Schedule to the Amended Originating Summons).  If the Company has possession of such documents of its subsidiaries, inspection should be given but not otherwise (Wong Kar Gee para. 46).  Although VB and SA have been disposed of, it would be premature at this stage to consider what the effect of that disposal may be on the execution of the order. 

41. I would allow the appeal and also make an order nisi that the costs of the Originating Summons proceedings and of the appeal be to the Applicant, with certificate for two counsel.

Hon Lam JA:

42. I agree with Yuen JA’s judgment.