News
News //
Submitted by // K Bowers, Partner / Solicitor Advocate
11 November 2017


DON'T BE GREEDY! 

Update on Shareholder's Inspection of Company Documents

Introduction 

In two recent cases, the Court of First Instance considered applications for inspection of company documents under s. 740 of the Companies Ordinance ("CO"). In the first case of Wong Sau Man, Samuel v Wong Kan Po, Wilson and Others1 , the application was rejected on the grounds that it was a fishing exercise. However, in the second case of Fung Chuen v Sandmartin International Holdings Ltd2 , the application was allowed. The contrasting outcomes of the two cases provide a useful update on the Court's approach to s. 740 of the CO. 

Shareholder's right under s. 740 of the Ordinance 

Under s. 740(1) of the CO, the Court has the power to order production of company documents on an application by a shareholder in a company. However, under s. 740(2) of the CO, the Court must be satisfied that that the requirements of "good faith" and "proper purpose" have been met before it will allow an order for inspection. Although the terms "good faith" and "proper purpose" are not defined in the CO, a body of case law has developed in Hong Kong since the leading cases of Wong Kar Gee Mimi v Hung Kin Sang Raymond3 and Re Lehman Brown Ltd4 which clarifies the scope of the two-limb test under s. 740(2).

Case 1: Wong Sau Man, Samuel v Wong Kan Po, Wilson and Others

Background 

This case concerned a dispute between a father and his son over financial assistance provided by the father. The company in this dispute was acquired by the father in 1992 as a corporate vehicle to hold various property assets. From 1992, the father held 46% of the shares in the company and the son held 17%. During the dispute, the father made an offer to acquire the son's shares, but the offer was rejected. In April 2015, the son initiated proceedings under s. 740 to inspect books and records of the company. 

Consideration of Good Faith and Proper Purpose 

In considering the requirements of "good faith" and "proper purpose", the Court followed the approach set down in the leading cases of Wong Kar Gee Mimi and Re Lehman Ltd. The following principles were held to be relevant:-
 

(1) the valuation or assessment of an applicant's shareholding should not constitute a "proper purpose" if the applicant does not have a legal right to have his/her shares bought out by the defendant or other parties5 . In this case, the company was a private company and the father had withdrawn all offers when the application was taken out. The son had no legal right for his shares to be bought out by his father or other parties; 

(2) s. 740 is not an opportunity for shareholders to undermine entrenched company law principles to challenge the commercial decisions of the company’s management6 . In this case, the purported reason for inspecting company documents was to conduct a "forensic investigation" into the affairs of the company, which the Court viewed as interference with the management of the company; and 

(3) if the purpose behind obtaining company documents is to investigate alleged misconduct, there must be cogent evidence to support a reasonable case for investigation, taking into account any explanations offered by the defendant7 . In this case, whilst the son raised concerns over the rental income generated by properties owned by the company and a lack of available detail about loan transactions entered into by the company, the Court accepted that the company had provided reasonable explanations for these transactions. 

The Court criticised the wide scope of documents requested by the son, which encompassed almost all the company documents since 1992. Additionally, the son failed sufficiently to link the requested documents to the alleged mismanagement. This, in the Court's view, "strongly suggests a case of a fishing expedition" and showed a lack of "proper purpose" for inspecting the company's documents.

Taking into account the above circumstances of the case and the relevant principles, the Court held that the son had failed to show that the application had been made in "good faith" and for a "proper purpose". Accordingly, the application was dismissed. 

Case 2: Fung Chuen v Sandmartin International Holdings Ltd 

Background 

This case concerned a dispute over company loans to two corporate debtors in Nepal and investments made by the defendant company in a company incorporated in Dubai. The applicant shareholder in this case alleged that these loans and investments were dubious and/or constituted connected transactions and that consequently, he was applying for leave to inspect the company's documents to further investigate these transactions. 


Consideration of Good Faith and Proper Purpose


In considering the requirements of "good faith" and "proper purpose", the Court in this case also followed the two-limb test as established in Wong Kar Gee Mimi and Re Lehman Ltd (as applied in Veron International Ltd v RCG Holdings Ltd8). The relevant points from this case included that:-

(1) hostility on the part of the applicant does not of itself negate "proper purpose", provided that the application is made in "good faith" and that the primary or dominant purpose is proper; and 

(2) an order for inspection can be made where a shareholder reasonably takes the view that a transaction could adversely affect his/her investment and he/she seeks to investigate the transaction for the purpose of determining what action he/she should take. The fact that the applicant may have other means of obtaining the information elsewhere does not mean that he/she cannot satisfy the two requirements. 

Applying these principles, the Court held that despite the alleged hostility towards the management of the company, investigating suspected wrongdoing by the management provided a "proper purpose" under s. 740. The Court also held that the applicant had fulfilled the requirement of "good faith" as he had "acted out of a genuine and legitimate concern to protect his interests as a shareholder of the company". Accordingly, the application was allowed. 


Comment

The different results of these two recent cases highlight the importance of limiting the scope of an application under s. 740. The Wong Sau Man case shows that where the scope of the document request is too broad, the Court is likely to view the application as a fishing exercise and reject the application completely. In contrast, where the scope of the document request is limited and specific to a particular purpose (such as in the Fung Chuen case), the Court is more likely to grant an order for inspection. 

These differing results confirm that a shareholder's right to inspect company documents under s. 740 of the CO remains a limited one, and that the Court will not allow inspection in the absence of "good faith" and "proper purpose".


1 [2017] HKCU 2052
2 [2017] HKCU 2618
3 [2011] 5 HKLRD 241
4 [2011] 5 HKLRD 668 (a case conducted by HWB's Kevin Bowers)
5 Leung Chung Pun v Masterwise International Ltd [2016] HKCU 848
6 Wong Kar Gee Mimi v Hung Kin Sang Raymond (supra)
7 Re Bank of East Asia Ltd [2015] 4 HKC 137
8 [2013] 3 HKLRD 657
 

 

About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; banking; financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.

› read more
› minimize
News //
Submitted by // K Bowers, Partner / Solicitor Advocate
01 November 2017


Know your obligations under the DMC - No excuses!

Vineberg Property Management Ltd v Lee Chun Fai [2017] HKCU 2497 

Introduction

In the recent case of Vineberg Property Management Ltd v Lee Chun Fai [2017] HKCU 2497, the Defendant who failed to pay management fees or contribute to major renovation expenses was sued for breach of the deed of mutual covenant ("DMC") of an estate ("Estate"). The Plaintiff was the manager of the Estate and the Defendant was the registered owner of a unit in the Estate ("Property").

Pursuant to section 2 of the Building Management Ordinance (Cap 344), a DMC is a document which (a) defines the rights, interests and obligations of owners among themselves, and (b) is registered in the Land Registry. The DMC is legally binding on all property owners in a building.

Summary

In essence, the Plaintiff's case was that, notwithstanding the fact that it had sent the Defendant numerous demand letters, the Defendant had failed to pay management fees or contribute to the major renovation expenses of the Estate. The Plaintiff also claimed interests and collection charges from the Defendant.

The Plaintiff registered two memoranda of charges against the Property in 2010 and 2015 to secure the relevant indebtedness under the DMC. Subsequently, the Plaintiff applied for an order for the sale of the Property under the DMC to satisfy the indebtedness owed by the Defendant to the Plaintiff.

Whilst it was undisputed that the Defendant was liable to pay the management fees and renovation expenses under the DMC, the Defendant argued that the Plaintiff was not entitled to charge any interest, legal costs, or collection charges. The Defendant claimed that he started to pay the management fees by autopay in about 2000, and had only become aware in 2005 that the autopay had stopped working in 2004, and that had the Plaintiff informed him, he would have had arranged an autopay from another bank account. The Defendant also claimed that he was not aware of the Plaintiff's demands for management fees, and argued that the Plaintiff should have sent its written demands to his other address, or contacted him by telephone.

Decision

Having considered the relevant terms of the DMC, the Court decided that the Defendant's challenge was without merit. In particular, the Court found that under the terms of the DMC, the Defendant's obligation to pay the management fees "monthly in advance to the Manager" was not conditional upon any prior notice or demand to be given by the Plaintiff to the Defendant. As such, "…what has been said by the Defendant…cannot be any excuse for the Defendant's failure to pay the management fees on time". Ultimately, the Court allowed the sums claimed by the Plaintiff, and also granted the order for sale sought by the Plaintiff to recover the debts owed by the Defendant.

Comment

This case highlights the importance of property owners knowing and complying with their obligations under a DMC. Clearly, ignorance of those obligations is not a legitimate excuse under Hong Kong law. Interested parties are encouraged to seek legal advice on the terms of a DMC where necessary for a proper understanding of their rights and obligations.

 

About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; banking; financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

› read more
› minimize
News //
Submitted by // K Bowers, Partner / Solicitor Advocate; P Yeung, Senior Associate
31 October 2017

 

NO "DIFFERENTIAL TREATMENT" OF SAME-SEX COUPLES

Introduction

The recent landmark appeal case of QT v Director of Immigration [2016] 2 HKLRD 583 potentially opens the gate of entry into Hong Kong for same-sex partners applying for dependant visas. This appeal together with the recent case of Leung Chun Kwong v Secretary for Civil Service [2017] HKEC 854 where a gay civil servant's husband successfully argued that he should receive the same "spousal benefits" as his heterosexual colleagues' spouses are likely to have far-reaching implications for Hong Kong's LGBT community.

Background

In QT v Director of Immigration, a female British national ("QT") entered into a civil partnership with another female ("SS") in the U.K. QT applied for a dependant visa in Hong Kong with SS as her sponsor. Although SS was in Hong Kong under a valid employment visa and was apparently eligible to sponsor her spouse for residency in Hong Kong, the Director of Immigration rejected QT's application for a dependant visa. The application was rejected on the ground that QT was not a "spouse" within the meaning of Hong Kong's immigration policy ("Immigration Policy").

The Director of Immigration justified the decision by claiming that the Immigration Policy refers to a monogamous and heterosexual marriage as the only valid form of marriage recognised under Hong Kong law. QT subsequently applied for a judicial review to challenge both the Immigration Policy and the decision by the Director of Immigration on the basis that they were discriminatory. Whilst Hong Kong has not enacted legislation prohibiting discrimination on grounds of sexual orientation, QT was able to raise the judicial review by relying on the constitutional protections grounded in the Hong Kong Basic Law and the Hong Kong Bill of Rights Ordinance, as well as on the basis of administrative review.

At First Instance, the Court dismissed QT's application for judicial review and held that neither the Immigration Policy nor the decision by the Director of Immigration was discriminatory on the basis of sexual orientation. The decision was overturned by the Court of Appeal ("CA"), which unanimously held that the Immigration Policy constitutes indirect discrimination on the basis of sexual orientation, which the Director of Immigration had failed to justify.

The CA's landmark decision in favour of QT declares that for the purposes of Hong Kong's Immigration Policy on dependant visas, the Director of Immigration does not have to strictly follow the definition of marital status under Hong Kong law.

Can the differential treatment be justified?

The CA held that the Immigration Policy resulted in "differential treatment" of same-sex couples by reason of marital status. In deciding whether such differential treatment constituted indirect discrimination and whether it was lawful, the CA examined whether the differential treatment could be justified.

"Legitimate aim" and "rational connection"

In this respect, the CA found that the Immigration Policy pursues the legitimate aim of striking a balance between maintaining Hong Kong's continued ability to attract people of the right talent and skills for employment and the need for a system of effective, strict and stringent immigration control.

However, the CA then found that the Immigration Policy is not "rationally connected" to the legitimate aim for two reasons, being: (1) excluding a foreign worker's lawfully married civil partner is counter-productive to attracting the worker to come or remain in Hong Kong for work; and (2) excluding a foreign worker's same-sex civil partner or spouse does not advance or help maintain Hong Kong's immigration policy (which in the present context means controlling the quantity and quality of entrants into Hong Kong).

Ultimately, the CA held that the Director of Immigration had failed to prove that confining the definition of "spouse" to those in marriages recognised by Hong Kong law is "rationally connected" to the aim of striking the balance between attracting talent and immigration control. Consequently, the differential treatment in the Immigration Policy could not be lawfully justified.

Good news for Hong Kong employers

Several large institutions in Hong Kong have applauded the CA's ruling and stated that they believe this judgment will advance Hong Kong's ability to attract world class talent, which is crucial for maintaining its competitive edge as a leading international financial centre.

Despite this development in immigration law, employees and same-sex spouses applying for dependant visas should note that the Director of Immigration still retains the discretion to decide cases on grounds of "administrative workability and convenience". In the present context, the discretion means that eligibility for a dependant visa is not automatic and same-sex couples must still provide evidence of the existence of a spousal relationship (i.e. a civil partnership certificate) in order to apply for a dependant visa.

The decision cannot be construed as a reinterpretation of the term "spouse" in Hong Kong legislation. However, it is certainly a step forward for anyone from the LGBT community who is looking to bring their partner to Hong Kong. This is also a welcome development for Hong Kong, as it should widen the pool of talented people who want to come here to work.


About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; and financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.

› read more
› minimize
News //
Submitted by // K Bowers, Partner; M Withington, Partner
31 October 2017


Silence is not always golden: Insurers have a "Duty to Speak"

Ted Baker v AXA [2017] EWCA Civ 4097

In a recent English Judgment handed down on 11 August 2017, the Court of Appeal considered for the first time the issue of whether, and in what circumstances during the claims process, an insurer might be under a duty to speak out and inform the Insured that its action (or inaction) could risk jeopardising cover.

Background

During December 2008, employees of Ted Baker were arrested and charged with theft. The employees pleaded guilty to conspiracy to steal over a period of 8 years, which caused Ted Baker to suffer a substantial loss of stock from its London warehouse. Ted Baker brought an insurance claim for £1m for the loss of stock and £3m for consequential loss and business interruption.

Ted Baker was insured by AXA (along with two co-insurers) against business interruption losses under a series of policies between 2004 and 2008. The policies covered loss of gross revenue on an "all-risk" basis subject to a per loss deductible of £5,000. AXA declined coverage on the basis that the terms of its policy did not cover claims for employee theft. AXA claimed that Ted Baker would need to take out fidelity insurance coverage for such losses.

Court of First Instance

During 2010, Ted Baker commenced a High Court action challenging AXA's decision. In these proceedings, AXA argued for rectification of the policy on the grounds that neither party intended for the insurance policy to cover employee theft, and that Ted Baker should be prevented from relying on the existing policy wording.

The Court found (at first instance) as a preliminary issue that the insurance policy included theft by employees, and that (1) Ted Baker was in breach of the claims condition by failing to provide profit and loss and management accounts from 2005 to 2008 (copies of which had been requested by AXA's loss adjusters), and (2) Ted Baker could not on the balance of probabilities prove quantum as it was impossible to find any single loss in the series of thefts which exceeded the policy deductible.

Court of Appeal

• Quantum

On appeal, Ted Baker was unsuccessful in respect of quantum because it could not show that each theft had resulted in a loss of profits over the policy excess.

• Condition Precedent

The Court of Appeal reversed the first instance decision in respect of breach of condition precedent. The Court of Appeal referred to the position in general commercial contracts where there is a "duty to speak" in certain circumstances.

AXA's loss adjuster asked Ted Baker to provide a series of documents to substantiate quantum - something which is routine in commercial claims. Ted Baker took the position that it was not required to produce the requested documents (i.e. the management accounts) until the liability issue had been settled, or until insurers had confirmed that the cost of retaining forensic accountants would be covered by the insurance policy. The loss adjuster informed Ted Baker that he would take instructions from AXA and revert, but never did. The request was not renewed by either AXA or the loss adjuster, and AXA pleaded in its defence that Ted Baker's failure to provide the requested documents constituted a breach of the condition precedent.

AXA was ultimately found to have acted inappropriately as it was under a duty to inform Ted Baker that the requested documents were outstanding. The Court of Appeal judgment indicated that, had AXA informed Ted Baker that the requested documents remained outstanding "…the documents would no doubt have been supplied". On this basis, the Court of Appeal concluded that the Court (at first instance) was "…in error in finding that a condition precedent to liability under the policy had not been complied with."

Conclusion

Although the English Court of Appeal accepted that, generally speaking, there is "no duty to warn an insured as to the need to comply with policy conditions", this important decision establishes that there may be circumstances in which an insurer is obliged to spell out to an insured that its action (or inaction) during the claims process may risk jeopardising cover.

Although this is an English judgment, Hong Kong Courts can refer and give weight to the English Court of Appeal's decision. Insurers and loss adjusters should take care during the claims handling process to ensure that an estoppel argument does not accidently arise.


About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; intellectual property; banking; financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.


› read more
› minimize