LU YUGUANG AND ANOTHER v. NEW HORIZON INVESTMENT (HONG KONG) LTD

HCMP 167/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 167 OF 2014

———————

IN THE MATTER OF Best Pacific Investment (Hong Kong) Limited

IN THE MATTER OF Section 122(1B) of the Companies Ordinance, (Cap 32) and Order 102, r 2 Rules of the High Court (Cap 4A)

BETWEEN

LU YUGUANG 1st Applicant
ZHANG HAITAO 2nd Applicant
WU SHAOLUN 3rd Applicant
and
BEST PACIFIC INVESTMENT (HONG KONG) LIMITED Respondent

———————-

AND

HCMP 168/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 168 OF 2014

———————

IN THE MATTER OF Best Pacific Textile Limited
IN THE MATTER OF Section 111(2) and 122(1B) of the Companies Ordinance, (Cap 32) and Order 102, r 2 Rules of the High Court (Cap 4A)

BETWEEN

LU YUGUANG 1st Applicant
ZHANG HAITAO 2nd Applicant
WU SHAOLUN 3rd Applicant
and
BEST PACIFIC TEXTILE LIMITED Respondent

———————-

AND

HCMP 169/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 169 OF 2014

———————

IN THE MATTER OF Best Pacific Textile (Hong Kong) Limited
IN THE MATTER OF Section 122(1B) of the Companies Ordinance, (Cap 32) and Order 102, r 2 Rules of the High Court (Cap 4A)

BETWEEN

LU YUGUANG 1st Applicant
ZHANG HAITAO 2nd Applicant
WU SHAOLUN 3rd Applicant
and
BEST PACIFIC TEXTILE (HONG KONG) LIMITED Respondent

———————

AND

HCMP 170/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 170 OF 2014

———————

IN THE MATTER OF New Horizon Elastic Fabric (Hong Kong) Limited
IN THE MATTER OF Section 122(1B) of the Companies Ordinance, (Cap 32) and Order 102, r 2 Rules of the High Court (Cap 4A)

BETWEEN

LU YUGUANG 1st Applicant
ZHANG HAITAO 2nd Applicant
WU SHAOLUN 3rd Applicant

and

NEW HORIZON ELASTIC FABRIC (HONG KONG) LIMITED Respondent

———————-

AND

HCMP 171/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 171 OF 2014

———————

IN THE MATTER OF New Horizon Investment (Hong Kong) Limited
IN THE MATTER OF Section 111(2) and 122(1B) of the Companies Ordinance (Cap 32) and Order 102, r 2 Rules of the High Court (Cap 4A)

BETWEEN

LU YUGUANG 1st Applicant
ZHANG HAITAO 2nd Applicant

and

NEW HORIZON INVESTMENT (HONG KONG) LIMITED Respondent

———————-

(HEARD TOGETHER)

Coram: Hon Harris J in Chambers

Date of Hearing : 12 June 2014
Date of Decision: 12 June 2014

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D E C I S I O N

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1. I have before me five originating summonses issued pursuant to section 111(2) and section 122(1B) of the Companies Ordinance Cap 32.

2. By these originating summonses, the applicants seek orders curing breaches of those two sections.

3. I will dismiss all five originating summonses. My reasons for doing so are as follows.

4. In the case of HCMP 168/2014 and HCMP 171/2014, the breaches that have been identified all occurred more than three years ago and,as a consequence, cannot by virtue of section 351(A), Companies Ordinance, Cap 32 be prosecuted.

5. In the case of HCMP 171/2014, there is an additional reason in respect of the application in regards to the laying of the auditedfinancial statements for the financial year ending 31 December 2009 before the company in an annual general meeting.

6. The company held two annual general meetings in 2010. The first was on 15 June 2010. At that meeting, the audited financial statementswere not put before the company. A second annual general meeting was held on 16 September 2010. The audited financial statementswere put before the shareholders of the company at that meeting. Both annual general meetings were held within the nine-month timeperiod specified in section 122(1A).

7. It may be that there is a technical argument that as the section does not envisage two annual general meetings it should be readas requiring the audited financial statements to be put before the first annual general meeting, if there was more than one, howeverit is self-evident, I would have thought, that any such breach is so technical that there is no risk at all, assuming section 351Adoes not apply, of a company or its directors ever being prosecuted. If any mistake has been made by the board, it is that theyseem to have been excessively diligent in convening general meetings.

8. In the case of the other three originating summonses, namely, 167, 169, and 170 of 2014 those applications were all made withoutregard to my decision in Re Fu Shou Yuan Group (Hong Kong) Ltd [2014] 1 HKLRD 415. Mr Matthew Ho, who appeared for the applicants was, however, aware of the decision and he quite properly reminded me of it in hiswritten submissions.

9. The facts of the three originating summonses are all similar to those in Fu Shou Yuan decision. The companies all held annual general Meetings before the end of their first accounting period. As a consequence, theydid not have audited financial statements to put before the companies’ shareholders at the general meeting.

10. As I have previously held, this in my view does not give rise to a breach of section 122. It also seems to me to be quite obvious that even if I am wrong about that, the breaches are so technical and have clearly causedno prejudice to anybody, quite the contrary, that there is no risk of any prosecution.

11. As I have emphasised in a number of recent decisions, I do expect parties and their solicitors to adopt a sensible approach to thesekinds of cases. The Companies Court has started to hear a very large number of these applications only in the last couple of years. This is obviously not because there has been a dramatic increase in the number of board of directors who are failing to comply withsections 111 and 122 of the Companies Ordinance.

12. As I have explained elsewhere, the origin of this dramatic increase in applications was an understanding on the part of prospectiveapplicants for listings on the Hong Kong Stock Exchange, that the Stock Exchange required breaches of these sections to be remedied. It has now been made clear by the Stock Exchange that this is generally not the case.

13. What, I think it is reasonable to assume, happened historically was that during due diligence exercises solicitors and accountantsidentified breaches of sections 111 and 122, but it was recognised that they were normally technical breaches and the Stock Exchangewould not be concerned about them. It would also have been recognised, I think it is reasonable to assume, that such breaches werenever likely to be prosecuted either because they were outside the time period specified in section 351A, or because the realitywas that the Companies Registry would never become aware of them, or that such breaches were so technical in nature that in the unlikelyevent that the Companies Registry did become aware of them, that the Registrar of Companies would not consider it appropriate toexpend the Department’s limited resources on prosecuting them.

14. What now seems to have happened is that as a result of the initial spate of applications prompted by the assumed requirements ofthe Stock Exchange, a small cottage industry has developed which involves solicitors advising their clients to apply to remedy thesebreaches regardless of whether viewed practically it is necessary. These five originating summonses seem to be a particularly goodexample of this.

15. I would like to emphasise that I expect legal advisers to give sensible, practical advice to their clients and not to encourage unnecessaryapplications under sections 111 and 121 and their equivalent provisions in Cap 622.

(Jonathan Harris)
Judge of the Court of First Instance
High Court

Mr Matthew Ho, instructed by Stephenson Harwood, for all applicants

The respondents in all cases were not represented and did not appear