Pioneering a new conversation around the issue of ‘improper purpose’ in the context of a director’s right to inspect documents, this recent decision clarifies what “improper purpose” really means.
This recent decision is one of the first cases in Hong Kong where the companies successfully resisted a director’s application to inspect documents on the ground that the application was made for an improper purpose, even though such a purpose did not injure the companies.
Under common law and sections 374-375 of the Companies Ordinance (Cap. 622), a director has a right to inspect the company’s books and records. The relevant principles can be summarized as follow (see Ng Yee Wah v Lam Chun Wah [2012] 4 HKLRD 40):-
(1) The right of inspection flows from the director’s duties to the company and a director does not have to explain why the inspection is sought or demonstrate any particular ground or need-to-know as a basis.
(2) Where it can be proved that the director intends to abuse the confidence in relation to the company’s affairs and to injure the company in a material way, the director’s right of inspection can be interfered with.
(3) The exercise of a director’s right of inspection is not a matter of discretion for the Court.
(4) The onus of establishing that the right of inspection will be exercised for improper purpose lies on the person who asserts it and clear proof is required to satisfy the court affirmatively that the grant of the right of inspection would be detrimental to the interests of the company.
In the past, a company that wished to oppose an inspection application would usually contend that, by making the application, the director sought to abuse the confidence in relation to the company’s affairs and to injure the company in a material way, i.e. relying on principle (2) above. Litigants seemed to equate “abusing confidence to injure the company” with “improper purpose”.
The view changed with the advent of the English case Oxford Legal Group Ltd v Sibbasbridge Services Ltd [2008] Bus LR 1244. In that case, the English Court of Appeal made it clear that the Court would not grant a director’s inspection application if the director was using his right to inspect for improper purposes, even if those purposes did not give rise to injury to the company. In other words, “abusing confidence to injure the company” is merely one example of “improper purpose”.
This proposition has been approved by the Hong Kong Court. Companies in various subsequent cases sought to rely on this “improper purpose” ground but did not succeed, e.g. see Re Fook Lam Moon Restaurant Limited [2011] 1 HKLRD 964 and Tsai Shao Chung v Asia Television Limited [2012] 4 HKLRD 52.
The present case concerns the internal dispute of a family office (an increasingly popular mechanism to provide one-stop financial management services to high net worth families). A director, who was also a shareholder of the parent company, sought to inspect the documents of the parent and the subsidiaries. The Court refused the application for the following reasons:-
(1) The Originating Summons was issued only after it had become clear that the plaintiff would soon inevitably be removed as a director. This was against the background that the plaintiff was making serious allegations against other shareholders, to the extent that litigation would be likely.
(2) The fact that a director would inevitably be removed soon was not per se a reason to refuse inspection. But from the evidence, the Court could draw a clear inference that the plaintiff was making, and continuing with, the application for the purpose of seeking information which may assist him in his own foreshadowed litigation with other shareholders.
Nowadays, in litigations involving shareholders’ dispute, parties who are directors habitually invoke their directors’ right to inspect, apparently hoping to exert pressure on their opponents. This case is significant because it identifies and clarifies what the “tripwire” is and reinforces the scope of a director’s right to inspect. In the words of the Court, “[an] attempt to achieve an advantage in proceedings, anticipated or existing, between various shareholders of the company concerned, if established, would be an improper purpose, as this would not be for the purpose of discharging one’s duties as a director.”
What can you takeaway from this?
- This is a watershed case and directors would do well to remember that the Court will not sanction the inspection of documents where a director seeks to capitalise on an unfair advantage in other proceedings by doing so
- The Court will take a wide angle view and consider the big picture when determining the real reason for inspection
- Causing “injury to the company” is not a prerequisite to finding that inspection is sought for an improper purpose.
Lai Chun Ho represented the Plaintiff.
Patrick Siu represented the Defendants.
Patrick Siu authored this Case Report.
