Members Right to Inspect Company Financial Statements after Open Company in HK


Not only members have the right to receive copies of the annual financial statements of the company and other reporting documents after setting up an office in Hong Kong instead members of the company are entitled to inspect certain company’s confidential and conventional records which includes:

  • Minutes of the annual general meetings.
  • Company’s register of members.
  • Company’s register of directors.
  • Company’s register of secretary.
  • Company’s register of debentures holders.
  • Company’s register of charges.

It is quite possible that constitution of the company may allow members of the company to inspect company’s documents and this would be more possible in the case of Model Articles after setting up an office in Hong Kong. But where such right is to be conferred to the members of the company then permission of such right is subjected to the approval of company’s directors or by the approval from the members of the company in its general meeting. If we talk of present situation then as of now, statutory right is conferred to the members of the company to inspect company’s documents such as company’s accounts and this has been enforced since 2005. This statutory right was conferred to the members of company on the basis of Australian provisions and were enforced solely to reform the corporate governance and also to have say and authority of minority members over the affairs of company. Cap. 622 enacts these provisions in Div. 5 Pt. 14 of Cap. 622.

After HK business registration the next question is that how member can apply for the inspection? What legal matters and stages does he have to cover to get access to the company’s records and documents. As per the Section 740 (6) of Cap. 622; those members who satisfy any of following criteria, stands eligible to apply to courts to inspect company’s records. These criterions are:

  • The plaintiff member holds minimum of 2.5% of voting rights in the company.
  • There must be at least five or more members, who accompany him/her in these proceedings of inspection.

Eligibility Criteria for the Inspection

Corporate culture is nothing but the ocean of rules and regulations and this is the reason there are certain criterions, upon fulfilment of which plaintiff is granted the right to inspect company’s records. Under the Section 740 of Cap. 622, court has the discretion whether to grant permission to applicant to inspect company’s record or not. Under the Section 740 (2) of Cap. 622 court shall only allow the inspection if court finds that following circumstances exists in the case:

  • There is no doubt on the intention of application and that application is made in good faith.
  • There is no probability of any misappropriation and inspection is solely for some proper and useful purpose.

To see how court proceeds with the matter using the Section 740 of Cap. 622, one may refer to the recent case of Wong Sau Man Samuel.

The above-mentioned principles deem to stop the abuse of law because possibility exist that members of a HK business registration may apply to use Section 740 of Cap. 622 as the source to harass company and that there is no useful and legitimate purpose exist in deemed inspection of company’s records. Thus, it is upon the applicant to prove that there exist a good faith and proper purpose behind deemed inspection. It must be noted that both requirements of establishment of good faith and proper purpose is mandatory. Merely that it has been established that there exists a proper purpose so there must be a good faith and hence this hypothesis would not work here.

There is some confusion to start up business Hong Kong and sort of uncertainty in the interpretation of this principle and legal obligation that; whether the legal requirement of good faith and proper purpose constitutes the composite test for determination or there exist two separate tests for determination of this and whether the test to ascertain “good faith” is of objective nature or subjective. Now we shall present both these situations with reference to case laws so that readers would better understand the vitality and may conclude a better conclusion:

1st view: Two separate tests?

The case of Wong Kar Gee Mimi presents of the situation where Judge Harris communicated that; there exist two distinct and separate tests to address the requirement. So, as far as issue of “good fair” is concerned there is the need to apply subjective test to find whether there exists a good faith or not? While for the determination of “proper purpose” there exist an objective test. Subjective test of good faith requires that; applicant proves that there exists an honesty in the purpose of him/her to inspect company’s records and this purpose is proper also. Objective test of proper purpose demands that; court should look at the circumstances of case and determine that what purpose does the intention of inspection has and whether this intention is proper or not? Judge Harris didn’t confined to this case and related these propositions in the case of Re Bank of East Asia Ltd and this approach of Harris J was accepted and endorsed by the Recorder Anderson Chow SC in the case of Leung Chung Pun and by the Deputy Judge William Wong SC in the case of Wong Sau Man Samuel.

2nd View: Composite test?

Unlike what Harris J communicated, court of appeal in the case of Re Lehman Brown Ltd cites an Australian case and thus on the grounds of this accepts that there exists a composite test to determine the good faith and proper purpose behind the application of inspection. So, court must ascertain this criterion by applying an objective test. One may confuse and assume that; composite test means that where proper purpose is established, good faith shall automatically be established hence this is not what composite test communicates. To make it clearer let’s refer to the Australian case of Sherwin Pastoral Company Ltd where Justice Brooking explained that:

To establish good faith, it would not be sufficient to say that as proper purpose exists so there definitely exist the good faith. Instead to ascertain the proper purpose court must go out of the box to determine what result would applicant excerpt from the sought inspection and of what extent is this inspection. The statutory provision requires that court must order inspection if it sees that there exist purpose and there is no doubt on the good faith of the applicant and thus application for inspection is of “good faith and proper purpose”.

These remarks of Justice Brooking present the composite view thus it would be artificial if some considerations are applied to good faith, rather than to proper purpose and vice versa. Instead they both reinforces and colours each other. Hence, acting in good faith and inspecting for a proper purpose would mean that there exists a bona fide proper purpose in the inspection of company’s records. Another legal reference which assures these remarks are the comments of Deputy Judge Alex Lee in the case of Fung Chuen; where his lordship communicated that; he is bound by the Court of Appeal’s decision in the case of Re Lehman Brown Ltd.

In response to the argument that what if primary purpose is proper but secondary purpose of inspection is not or vice versa? Out of many responses, court accepted the argument or response which says that; if primary purpose of inspection is purpose then it would be irrelevant if application of inspection is side-lined on the basis that improper secondary purpose, court regards such side lining of application as illegitimate because where the primary purpose is proper, there it would be irrelevant to even assess the secondary purpose of inspection. To explain the situation where there exists lack of purpose, legal commentators communicated that it sounds absurd and it shall necessarily not be the case where applicant lags in providing evidence of proper purpose on the basis that he or she has become hostile to the directors or if there exist any hostility between the relevant parties.

What are the documents that can be inspected?

This discussion is of importance because there may exist some confidential documents, concealment which are necessary for the corporate prospect of the company. We shall now look how legislation sees this confidentiality and officiality of the documents to facilitate the start up business Hong Kong.

As per the Section 740 of Cap. 622; members are allowed to inspect any record or document of the company, hence scope of documents which the applicant can inspect, is quite wide. The documents or company’s records which Section 740 of Cap. 622 allows to inspect, must belong or should be owned by the company. There is general misconception which needs to be rectified; the documents or records of subsidiary neither owned nor belongs to the parent company. But if copy of document or record is given or delivered to the parent company so that parent company could retain in its record then that document or record shall be held as the document or record of the company and thus on the basis of this analogy, it shall be considered as being owned and belonged to the parent company. There is another legitimate cross argument which is also correct that; possession of certain documents or records does not make it as if owned and belongs to the company. If due to any reason company has lost the possession of document or record, which it owns for some time then it would be wrong to say that company never owned that specific document or record. As said above not every document shall be held open to inspection, same is what court conceives. Consider the situation where court is ready to grant order of inspection, despite of wider scope of documents which could be inspected, court may cut down the scope of inspection where it deems appropriate.

In the case of Wong Kar Gee Mimi, company agreed to allow inspection of following documents:

  • Contracts and agreements, company went in.
  • Vouchers and journal entries.
  • Inspection of company’s bank statements.
  • Inspection of minutes of company’s board meetings and of company’s general meeting.

But applicant didn’t incline to this offer of inspection and demanded of full inspection rights. Out of disputed documents court allowed the inspection of certain documents, which includes:

  • Inspection of company’s ledgers.
  • Inspection of monthly management accounts.
  • Inspection of correspondence between the company and accountant.
  • Inspection of company’s employees tax returns. This was however limited to only those employees upon which some suspicions were raised by the applicant.

In addition to this, inspection to some supporting documents was also granted by the court so that applicant could properly inspected the suspected wrong doing and may not argue that full access was not granted.

This does not mean that access to all financial and corporal documents were granted. Court considered it appropriate to conceal the revelation of certain documents and following are the documents which court did not allowed to inspect:

  • On account of immunity to the professional legal privilege under Section 742 of Cap. 622, inspection of correspondence of company with its legal advisor was not allowed.
  • Inspection of correspondence with Stock Exchange was not granted because court considered this inspection to be irrelevant from the case and extent of inspection sought by the applicant does not demands this type of inspection.

Miscellaneous Inspection matters

If due to any reason applicant could not inspect the documents then as per the script of Section 740(1)(b) of Cap. 622; applicant’s legal or accounting expert can undertake this inspection of documents on the behalf of applicant. Under the Section 740(3) of Cap. 622; the person who is entitled to inspect company’s documents or records, is also entitled to make copies of inspected documents. As per the Section 740(4) of Cap. 622; court has the prerogative to grant any ancillary order. Under the Section 741 of Cap. 622 there is restriction on the inspection of those documents, inspection of which shall amount to the loss of confidentiality and the information which Section 741 of Cap. 622 restricts from getting inspected or reveal.