Introduction
In Yang Yu v HK Huanhai Trade Co. Limited [2024] HKCFI 1495, the Court of First Instance examined the scope and limitations of a shareholder’s right to inspect company records under inter alia section 740 of the Companies Ordinance (Cap. 622). The decision serves as a useful example of how the “good faith” and “proper purpose” tests are applied in practice.
Background
The Plaintiff was a 31% shareholder of a Hong Kong Company (“Company”). He sought to inspect a wide swathe of the Company’s records stemming from the date of its incorporation. His stated purpose was to investigate alleged misconduct by directors, including their unreasonable refusal to declare dividends, misappropriation of company assets, and false accounting.
The Company opposed the application, arguing that it was made in bad faith and for improper purposes, namely to obtain trade secrets and confidential information for the benefit of rival businesses connected to the Plaintiff.
Key Legal Principles
Deputy High Court Judge Kent Yee (“Judge”) reaffirmed and applied the well-settled principles summarized in Wong Sau Man Samuel v Wong Kan Po Wilson [2017] 4 HKLRD 542. The court emphasized the following key points:
- The “good faith” and “proper purpose” requirements are separate and independent tests, both of which must be satisfied by the applicant.
- The burden of proof rests on the applicant to establish both elements.
- Good faith involves a subjective inquiry into whether the applicant acted honestly with a purpose believed to be proper.
- Proper purpose is determined objectively by considering all surrounding circumstances of the case.
- The purpose must be germane to the interests of the applicant as a member of the company, not merely to satisfy curiosity or gather information.
- If the purpose is to investigate alleged misconduct, there must be proper evidence to support a reasonable case for investigation, taking into account any explanations offered by the defendant. Mere assertions of misconduct are insufficient.
- The court retains a discretion to grant or refuse inspection, considering factors such as the potential benefits of inspection and prejudice to the company.
These principles demonstrate the court’s balanced approach in assessing applications for inspection, weighing shareholders’ rights against the need to protect companies from unwarranted intrusion into their affairs.
The Court’s Decision
The Judge dismissed the Plaintiff’s application, finding that he failed to meet both the good faith and proper purpose requirements. The Judge’s reasons included the following:
- Lack of credible evidence: The Judge found the Plaintiff’s allegations of misconduct, including false accounting and misappropriation of assets, to be unsubstantiated and/or unsupported by law (§§73-84).
- Questionable motives: The Judge had little confidence in the Plaintiff’s evidence. He was not frank and forthcoming and tended to make serious allegations casually. Such allegations were easily dispelled upon simple enquiry (§§98-99).
- Excessive scope: The documents sought for inspection were found to be manifestly excessive and unjustified. This further reinforced the Judge’s belief that the Plaintiff’s application was a fishing expedition in search of a cause of action (§102).
- Rival business concerns: While not determinative, the Company had valid concerns that disclosure of the documents sought would result in confidential information being obtained by rival businesses allegedly connected to the Plaintiff (§§89-92).
This decision serves as a reminder that while shareholders may apply to inspect company documents, the right is far from unfettered. Applications for inspection must be carefully framed and supported by credible evidence to meet the good faith and proper purpose requirements and to ensure that the scope of disclosure sought is not unduly wide.
The full judgment is available at: https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=162135&currpage=T
Mr. Lai Chun Ho and Mr. Han Sheng Lim acted for the Defendant.
