Over the past year, the Hong Kong High Court has rejected a number of applications for relief sought in relation to non-compliance with statutory requirements for the holding of Annual General Meetings (“AGMs”) and the laying of accounts. Applicants may now have to additionally justify the necessity of the relief, e.g. by establishing a risk of prosecution if relief is refused.
If default is made in the holding of an AGM in accordance with s.610 of the new Companies Ordinance (Cap. 622) (“the new Ordinance”), the company and every officer who is in default may be liable, on summary conviction, to a fine. However, the court may, on the application of a member of the company, grant relief by calling or directing the calling of a general meeting, as the court thinks expedient, which meeting shall be regarded as the AGM of the company for the defaulting year(s).
Laying of accounts
If default is made in the laying of financial statements etc. in accordance with s.429 of the new Ordinance before the company at an AGM or such other general meeting as directed by the court, the director in default may be liable to imprisonment and a fine. The words of the section in the new Ordinance “or such other general meeting as directed by the Court” indicates that the court continues to have a discretion to grant relief for default in this respect (as it did under s.122(1B) of the old Companies Ordinance (Cap.32), despite the difference in wording, by ordering that the financial statements etc. be laid before another general meeting that it directs. Further, s.122 of the old Companies Ordinance remains largely relevant in respect of accounts for a financial year crossing the commencement date of the new Ordinance, i.e. 3 March 2014.
Relevant factors for exercise of discretion
The court looks at the following factors in exercising its discretion whether to grant relief for default in the laying of accounts:-
These principles have been adopted in numerous cases.
Similar considerations will be taken into account by the court when considering whether to grant relief for default in compliance with the statutory requirements for the holding of AGMs.
Finally, in cases where the relevant companies are seeking listing, it is necessary for the applicant to bring the order to the attention of the relevant stock exchange together with details of the reasons why it was necessary and must also ensure that it is referred to in any prospectus for such listing.
A change in the Court's attitude?
The Court seems to have tightened its approach over the past year where a number of applications for relief have been rejected, where the applicant failed to show why the relief was necessary.
The case of Re Natural Corporation Ltd was one of the first markers laid down by the court that companies should come before it prepared to explain why the relief sought was necessary (as opposed to simply establishing that they had met the usual requirements for the exercise of the court's discretion). In that case, the applicants sought relief for both default in holding AGMs and laying of accounts. Although the court ultimately granted the relief sought, it made it clear that just because the usual requirements have been satisfied, it does not follow that the discretion should be exercised. The court said that where the application is retrospective, and the breaches went back a long period of time, the court's relief is largely academic. Although a prospective listing may be a reason for exercising the court's discretion, no evidence had been adduced before the court to state precisely what the consequences for the prospective listing would be of the court refusing relief.
Subsequently, in Re LWK & Partners (HK) Limited, the court refused to grant relief for default in compliance with the requirements for the laying of accounts on the basis that the relief was not necessary. By the time of the hearing, the listing had already gone ahead. In this regard, the court noted that the breaches were all highly technical and went back a number of years. Importantly, the court took the view that there was no realistic prospect of the company or its director being prosecuted and no reason to think that the refusal to grant the relief would have any adverse consequences, given that the listing had already gone ahead. At the heart of this is the court's dissatisfaction with having to waste judicial resources on applications which seemed to be unnecessary and artificial. Those sentiments were shared in Re Tai Wo Tong Pharmaceutical Limited.
Moreover, there are now indications from the court that relief will not be granted for default which occurred more than 3 years ago, because pursuant to s.900 of the new Ordinance, proceedings cannot be brought for default under the relevant sections after the expiry of 3 years from the date of breach. In Re Modern Automobile Company Limited, only the relief sought in respect of breaches which did not pre-date the limitation period was granted. The court considered that there was simply no justification for the exercise of discretion where there was no risk of prosecution. A similar stance was adopted in Re Tam Pok Man, where the Court also remarked that to grant relief in such cases would simply be to exercise a quasi-administrative function to make life easier for the process of listing (see also Re Joy Excel Consultants Limited).
There are now clear indications from the court that unnecessary applications for relief in respect of non-compliance with the requirements for the holding of AGMs and laying of accounts before the company will not be entertained. An application will not be necessary in the eyes of the court where the limitation period for criminal prosecution in respect of the default has expired.
Clear as it may seem, this is still a developing area of law which companies should keep an eye on. After all, members may (for reasons only known to them) complain about or possibly commence derivative actions against directors who have failed to convene AGMs or prepare audited accounts etc. in accordance with the requirements under the new Ordinance on the basis of misconduct on the part of a director. On this note, 'misconduct' in relation to a statutory derivative action is defined broadly to include default in compliance with any ordinance. Under the common law, as now codified in s.465 of the new Ordinance, directors also owe a duty to exercise reasonable care, skill and diligence in the discharge of their duties to the company.
It remains to be tested whether an evident risk of civil action (as opposed to criminal prosecution) would affect the court's exercise of discretion for relief in respect of default in compliance with requirements for AGMs and laying of accounts, especially given that, unlike criminal proceedings, such civil claims are not subject to any limitation period. This may affect a company seeking listing where the director in default is still on the board. It is suggested that in these circumstances, the dicta in Re Hong Kong Times Investment Limited ought to be considered, i.e. where the substantive, if not the sole purpose of seeking relief, is to relieve a director of potential liability, the court ought to exercise great care, and it would be relevant to examine if the director in question has acted honestly and reasonably and whether having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused.