Yifung Developments Ltd v. Liu Chi Keung Ricky and Others

HCA 1341/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1341 OF 2014

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J U D G M E N T
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A. THE APPLICATION

1.The plaintiff (“YDL”) claims against the defendants, its ex‑directors, for injunctions restraining them from holding themselves out as directors and to deliver up corporate records and assets to YDL.

2.D1 (“Ricky Liu”) applies to strike out the writ of summons on the ground of want of authority (“the authority summons”).  He asserts that the issue of the writ was in contravention of the Articles of Association of YDL (“the Articles”); and so were the purported ratifications by shareholders, the board of directors and Receivers.

B.  UNDISPUTED FACTS

3.I adopt the abbreviations in my decisions dated 17 November 2014 (“the injunction decision”) and 19 October 2015 (“the strike-out decision”).

4.YPL and Wonder Earn are the shareholders of YDL.  They pledged their shares in YDL to secure a loan from MSC to YDL.  YDL owns a valuable WFOE in the Mainland.

5.YDL defaulted in repayment of the loan.  MSC declared an event of default and appointed Mr Fok and Mr Gronow as Receivers of the YDL shares.  MSC exercised its rights by completing pre-signed resignation letters, causing the defendants to “resign” and appointing Mr Fok and Mr Gronow as directors of YDL.  Despite the appointments, the YDL shares have remained registered in the names of YPL and Wonder Earn to date.

6.On 18 June 2014, Mr Fok and Mr Gronow purported to commence proceedings in the name of YDL in the Mainland against WFOE and its incumbent officers (including Ricky Liu) (“the Mainland proceedings”) for delivery up of WFOE’s assets.  The Mainland court has not yet granted any relief as of the date of hearing of the authority summons.

7.The present action (“the Action”) was commenced on 16 July 2014 in the name of YDL.  An interim injunction has been granted against the defendants. See the injunction decision and the Court of Appeal’s judgment dated 3 June 2015 refusing leave to appeal.

8.A substantive part of the defence relating to what were known as the No Event of Default Point, the Implied Terms Point, the MLO Point, the Estoppel Point and the Invalid Appointment of Receivers Point has been struck out.  See the strike-out decision. 

9.Meanwhile on 21 July 2015, Ricky Liu issued the authority summons. 

10.YDL has 4 broad grounds in opposition:

(a) That Ricky Liu has no locus to raise the issue of authority;

(b) That on a proper construction, Reg 13.1(t) of the Articles does not apply where there is no Lender Director and if necessary a term should be implied.  Moreover, Reg 13.1 does not operate beyond an event of default;

(c) That there had been ratification; and

(d) That issue of the authority summons was an abuse of process.

11.The Receivers and MSC are not parties to this authority summons.  Nor have they filed affirmations.

C.  LEGAL PRINCIPLES ON AUTHORITY TO SUE

12.The Court has inherent jurisdiction to strike out a plaintiff’s name for want of authority. The burden lies with those suing in the name of the plaintiff to prove authorization. Subject to any subsequent ratification (where necessary) of the action by the company, the action will stand or fall depending on the court’s determination of the question of authority.  If the standard of proof is not achieved, then there is no consent and the name of the company must be struck out and the action dismissed. Put another way, either there was authorization or there was not.  See Kammy Town Ltd v Super Glory Corporation Ltd (unreported, HCA 3524/2003, 14 January 2005), §§11-14, 21.

D.  LEGAL PRINCIPLES ON ARTICLES OF ASSOCIATION

13.Articles of association (being part of the company’s constitution) constitute a statutory contract between the company and all its members inter se and is enforceable amongst them: Gower & Davies, Principles of Modern Company Law, 9^th ed., §§3-18; BVI Business Companies Act 2004 s11, Companies Ordinance (Cap 622) s86(1)(a) & (2). 

14.Where the articles of association have become a public document (in this case by registration), they represent the company’s regulations and cannot be rectified or supplemented by implied terms. This has been explained in Gower,at §§3-19 and 3-20.

“Although the articles of association have a contractual status, they are clearly more than a private bargain among the company and its members. The company’s articles become a public document at the moment of formation … Thus, those who deal with the company have a legitimate expectation that the registered articles represent an accurate statement of the company’s internal regulations.

From this situation the courts have concluded that standard contract law should apply to the articles only with certain qualifications. In particular, the courts are reluctant to apply to the statutory contract those doctrines of contract law which might result in the articles subsequently being held to have a content substantially different from that which someone reading the registered documents would have understood them to have. Thus, the Court of Appeal has held that articles cannot later be rectified to give effect to what the incorporators actually intended but failed to embody in the registered document, since the reader of the registered documents could have no way of guessing that any error had been made in transposing the incorporators’ agreement into the document [citing Scott v Frank F. Scott (London) Ltd [1940] Ch 794, 801 (CA)].  Equally, that Court has refused to imply terms into the statutory contract from extrinsic evidence of surrounding circumstances where that evidence would probably not be known to third parties who would thus have no basis for anticipating that any such implication was appropriate [citing Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693, 696f-697f, 698f-i (CA); Towcester Racecourse Co Ltd v Racecourse Association Ltd [2003] 1 BCLC 260]…”

15.As part of his duty to act in good faith in the interests of the company, a director is under a duty to act in accordance with the company’s constitution. This is because the corporate constitution can define and set the limits of the company’s interests. The constitution may do so either by purporting to prohibit the company from undertaking certain activities, or by limiting the powers of the board (perhaps by requiring shareholder approval for certain matters).  See Ford’s Principles of Corporations Law, 15^th ed, at §8.160.

16.A director also has a duty to follow the procedures in the company’s constitution, in particular to disclose his personal interest: Clark v Cutland & ors[2003] 2 BCLC 393, at §21, Arden LJ:

“… It is the duty of directors to follow the appropriate procedures in the company’s constitution as much as it is their duty to apply corporate property only for proper purposes. Failure to obtain appropriate approval and insufficient disclosure is a serious matter. Disclosure plays an important role in company law and the quality of disclosure is important. Disclosure is required for many purposes and it performs at least two valuable functions. It ensures that information is passed from the directors to the shareholders or from one director to another. It also acts as a deterrent against self-dealing...”

17.Where the directors carry out a transaction without obtaining proper authorisation in accordance with the articles of association, the consequence is that the transaction is without legal effect and not merely voidable. This was explained by Arden LJ in Clark v Cutland, at §§26-27:

“[26]…Under this article, directors were not entitled to any remuneration unless it was authorised by the company in general meeting. The judge held that there was no such authorisation in the present case. It follows that the payments of pension contributions to the pension fund trustees were without legal effect and not merely voidable….

[27]…However, where an agent carries out a transaction without authority, the consequence is (as I have stated) that the transaction is without legal effect. This consequence is more serious in law than that which attaches to a transaction which is voidable since the right to rescind a voidable transaction can be lost. Because the sanction attaching to an unauthorised transaction is more serious, it must supersede the sanction of voidability that would otherwise attach in the present case.”

18.I now turn to each ground of opposition.

E.  GROUND 1 – LOCUS OF RICKY LIU

19.Mr Bartlett SC submits that Ricky Liu was a former director but not a member of YDL.  He was not a party to the Articles and should not be permitted to invoke them to challenge the present action.  See Beattie v E&F Beattie Ltd [1938] Ch 708, 721-722; Newmark Capital Corp Ltd v Coffee Partners Ltd [2007] 1 HKLRD 718, §§80-82, Recorder Paul Shieh SC.  In Beattie in particular, a company director (who was not a member) who wanted to refer his dispute with the company to arbitration pursuant to the articles was not permitted to do so.

20.Want of authority may mean that the act in question (issue of the writ) was void: Clark v Cutland, at §§26-27; or a nullity so that the action can be stayed: Danish Mercantile Co Ltd & ors v Beaumont & anor [1951] 1 Ch 680, at pp 683, 687-688.  It is thus open to a third party to challenge the lack of authority of the company to issue the writ.  By way of example, in Airways Ltd v Bowen & anor [1985] BCLC 355, the company sued the directors for misuse of company property.  The directors (not being members of the company and hence a “third party”) raised the issue of want of authority.

21.I reject Mr Bartlett SC’s submission that Ricky Liu has no locus to raise the issue of authority.

F.  GROUND 2 – PROPER CONSTRUCTION OF YDL’S ARTICLES AND THE IMPLIED TERM

F1.  The relevant Articles

22.The following regulations (referred to individually as “Reg”) in YDL’s Articles are relevant:

“8.4 [MSC] and any person to whom it assigns and/or transfers its rights and/or obligations in accordance with and under the Investor Rights Deed (the “Lender”) shall have the right from time to time by notice in writing to require the appointment of its nominee as a director (any such director being a “Lender Director”) and by like notice to require the removal of such Lender Director and the appointment of another nominee to act in place of such Lender Director. No Lender Director may be removed otherwise than in accordance with this Regulation 8.4.

…

9.1 The business and affairs of the Company shall be managed by, or under the direction or supervision of, the directors of the Company. Subject to the requirements and restrictions contained in Regulation 13, the directors of the Company have all the powers necessary for managing, and for directing and supervising, the business and affairs of the Company. The directors … may exercise all such powers of the Company as are not by the Act or by the Memorandum or the Articles required to be exercised by the Shareholders.

9.2 Each director shall exercise his powers for a proper purpose and shall not act or agree to the Company acting in a manner that contravenes the Memorandum, the Articles or the Act. Each director, in exercising his powers or performing his duties, shall act honestly and in good faith in what the director believes to be the best interest of the Company.

…

9.8 Save and except that the specific prior written consent of the Lender Director is required for the purposes set out in Regulation 13 below, the Lender Director shall not be entitled to vote with respect to the executive management of the operation of the business of the Company…

…

10.4 … if any resolution in respect of any of the matters described in Regulation 13 is to be considered at a meeting of the directors (each such meeting being a ‘Restricted Meeting’), the agenda of each Restricted Meeting shall be available to all directors at least ten (10) Business Days before such Restricted Meeting is held.

10.6 The quorum for any meeting of the directors shall be two (2), provided always that the quorum at any Restricted Meeting [as defined in regulation 10.4] shall include at least one Lender Director or his alternate…

…

13.1 Notwithstanding any other provisions in the Memorandum or the Articles, the Shareholders and the directors of the Company shall procure that the Company shall not (and the directors (and any committee of the directors) and the Shareholders may not) resolve, pass any resolution with respect to, approve, undertake, action or do any of the matters described below in respect of the Company without the prior specific written consent of the Lender Director:

…

(t) Commencement or settlement of any material litigation or arbitration or other proceedings.

14.1 A director of the Company shall, forthwith after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by the Company, disclose the interest to all other directors of the Company in writing.

…

14.3 A director of the Company who is interested in a transaction entered into or to be entered into by the Company may with the prior approval of a Restricted Meeting:

(a) vote on a matter relating to the transaction;

(b) attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the meeting for the purposes of a quorum; …”

(all emphases added)

F2. The parties’ respective construction

23.Ms Linda Chan SC submits that the writ was issued in breach of Reg 13.1(t).  On the other hand, Mr Bartlett SC submits that Reg 13.1(t) only applied where there was a Lender Director.  If necessary, a term should be implied into Reg 13.1(t) such that after the words “the Lender Director”, there should be added “provided that this Regulation shall only operate if a Lender Director is appointed” (“the Implied Term”).  If no Lender Director is appointed, then the Company would simply operate “normally”.  He also submits that Reg 13.1(t) did not operate beyond an event of default.

F3. The proper approach

24.To start with, the Articles cannot be supplemented by implied terms: Gower, §§3-19 to 3-20.

25.To imply a term, one has to satisfy 5 requirements, namely, that (i) the proposed term is reasonable and equitable; (ii) it is necessary to give business efficacy to the Articles, so that no term will be implied if the Articles are effective without it; (iii) it must be so obvious that it goes without saying; (iv) it must be capable of clear expression; and (v) it must not contradict any express term of the Articles: Kensland Realty Ltd v Whale View Investment Ltd &  anor (2001) 4 HKCFAR 381,at §59, following BP Refinery (Westernpoint) Pty Ltd v Shire of Hastings (1978) 52 AJLR 20, at p26.  This is a binding Court of Final Appeal authority.

26.In Attorney General of Belize & ors v Belize Telecom Ltd & anor [2009] 1 WLR 1988, at §§21-27, in particular §27, Lord Hoffmann says that this list is best regarded, not as a series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means, or in which they have explained why they did not think that it did so.

27.AG of Belize was followed by the Hong Kong Court of Appeal in Guo Jianjun & anor v Dragon Fame Investment Ltd [2015] HKCU 2196, §§20-25, which used context as the starting point instead of looking at what may be the natural and ordinary meaning of words. Provisions must be construed by having regard to the agreement as a whole.  The overriding question for the court is to find out what the instrument would convey to a reasonable person against all the background knowledge.  The relevant provisions would be considered together with the implied term question.  The court should only imply a term if it can be satisfied that this must be what the contract means to such a reasonable person. 

28.The House of Lords has since held that AG v Belize should not be interpreted as diluting the traditional test of necessity for implying a term: Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd & anor [2015] 3 WLR 1843, §§18-31, 57-74, 76-77, in particular §§23-24. Lord Neuberger added 6 comments (at §21) to the 5 requirements in BP Refinery:

(i) The implication of a term was “not critically dependent on proof of an actual intention of the parties” when negotiating the contract but was concerned with what notional reasonable people, in the position of the parties at the time at which they were  contracting, would have agreed.

(ii) A term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them.  Those are necessary but not sufficient grounds for including a term.

(iii) It is questionable whether the first requirement of reasonableness and equitableness, will usually, if ever, add anything.  If a terms satisifes the other requirements, it is hard to think that it would not be reasonable and equitable.

(iv) Although the 5 requirements are otherwise cumulative, business necessity and obviousness can be alternatives in the sense that only one of them needs to be satisifed.

(v) If one approaches the issue by reference to the officious bystander, it is vital to formulate the question to be posed by him with the utmost care.

(vi) Necessity for business efficacy involves value judgment.  The test is not one of “absolute necessarily”.  It may well be that a more helpful way of putting the 2^nd requirement is that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.

29.Lord Hoffmann in AG v Belize suggested that the process of implying terms into a contract was part of the exercise of the construction, or interpretation, of the contract.  There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understand to mean?  Lord Neuberger in Marks and Spencer reiterates that construing the words used and implying additional words are different processes governed by different rules.  It is only after the process of construing the express words is complete that the issue of an implied term falls to be considered (at §§26 & 28).

30.Further, Lord Neuberger explains that whether a term is implied is to be judged at the date the contract was made and the reasonable reader of the contract would consider the term to be so obvious as to go without saying or to be necessarily for business efficacy. (at §§22 & 23)

31.In the light of all these authorities, the proper approach is to construe Reg 13(t) in the context of the Articles to ascertain what they would convey to a reasonable person with all the background knowledge.  Considering whether or not a term should be implied follows.  The 5 requirements adopted in Kensland Realty remain valid considerations.

F4. Application of the legal principles on construction

32.I agree with Ms Linda Chan SC that on a proper interpretation of the cited Regulations:

(1) The commencement of an action is a “restricted matter” under Reg 13 (“Restricted Matter”);

(2) The shareholders and the directors of YDL shall procure that YDL shall not pass any resolution with respect to such Restricted Matter without the prior specific written consent of the Lender Director;

(3) The quorum for a board meeting at which the board resolves to commence an action is 2 directors, one of whom must be a Lender Director appointed by MSC;

(4) The directors of YDL shall not act in contravention of the Articles and can only exercise their powers for a proper purpose and in the interest of YDL; and

(5) Where the directors have conflict of interests, they shall disclose their interests in writing to all other directors, and the directors can only vote on a matter relating to the transaction in which he is interested with the prior approval of a Restricted Meeting.

33.Mr Gronow suggests that the Action is not litigation touching upon MSC’s security but, rather, “domestic litigation” directed to something as basic as the recovery of company property from the ex‑directors. 

34.Without disrespect, this is a wholly unmeritorious argument.  The Action is an attempt to recover assets which, in turn, will enable YDL to take control of WFOE and reduce the debt due to MSC.  I cannot think of more “material litigation” under Reg13.1(t) than the Action.  Mr Bartlett SC does not press hard to the contrary.

35.Issue of the Writ was not preceded by a board resolution authorizing it. The only Lender Director, Mr Kawaii, had resigned the day before the Writ was issued.  YDL has now conceded that Mr Fok and Mr Gronow were ordinary directors and not Lender Directors.  Issue of the Writ was in contravention of Reg 13.1(t). 

F5. Does Reg 13.1 only operate when a Lender Director has been appointed by MSC?

36.Reg 13 is framed in mandatory terms by the use of the word “shall”.  It is to apply “notwithstanding any other provisions in the Memorandum or the Articles” and that would mean “notwithstanding Reg 8.4” as well.  On a proper interpretation, consent of the Lender Director cannot be dispensed with in the context of the Articles. Operation of Reg 13(t) is not limited to where there is a Lender Director.

37.Mr Bartlett SC submits that (i) appointment of a Lender Director is a right and not an obligation given to MSC under Reg 8.4; and (ii) the lack of a Lender Director for the relevant period was because MSC has controlled YDL’s board of directors and MSC had assumed rights over all the shares in YDL. Accordingly Reg 13(t) only operates when a Lender Director has been appointed.

38.I agree with point (i).  Reg 13.1(t) was added by way of amendments to the Articles on 14 September 2010 at the instigation of MSC in view of the loan made to YDL.  There is no dispute that Reg 13.1 was intended to protect MSC so that material litigation would not be commenced without its consent. Otherwise, costs may be incurred which would impinge on the security held by MSC. I do not think YDL could unilaterally waive the requirements in Reg 13(t).

39.However, I disagree with point (ii).  Mr Bartlett SC submits that it was MSC who had taken control of the shares and appointed Mr Fok and Mr Gronow.  MSC would have been comforted by the fact that they were new and independent appointees, unconnected with former management and the shareholders, He also submits that the directors’ normal duties undergo a fundamental change when a company is insolvent.  The duties of directors are owed to MSC, as stakeholders in insolvency, ie balance sheet or cash flow insolvency: Company Law in Hong Kong – Insolvency 2015, §§1.016 to 1.017; Butterworths Hong Kong Company (Winding-up and Miscellaneous Provisions) Law Handbook, §177.06.

40.With respect, Mr Bartlett SC’s submission as to MSC’s state of mind is not supported by evidence from MSC. The directors (including the Lender Director) owe their duties to YDL and not MSC: Palmer’s Company Law, §8.2402. It was all the more important to preserve MSC’s veto power under Reg 13.1(t). Anyhow, it has now been conceded that Mr Fok and Mr Gronow were ordinary directors and not Lender Directors.

41.YDL may be cash flow insolvent but it was not balance sheet insolvent because WFOE has net asset value of RMB1.7 billion.  Even if YDL were involvent, I do not agree that the duties of the directors were owed to MSC, as opposed to the general body of creditors.

42.The definition of “Resolution of Directors”, Reg 9.1, 9.5, 10.4, 10.6, which circumscribe the powers of directors, are all directed at “Restricted Matters” and “Restricted Meetings” rather than the Lender Director. I agree with Ms Linda Chan SC that Mr Bartlett SC’s argument would require those Regulations to be re-written.

43.I reject the construction that Reg 13.1 only applies where there is a Lender Director.

F6. Should the Implied Term be implied?

44.Applying the 5 requirements in Kensland Realty, the Implied Term only meets the 4^th one in being capable of clear expression. 

45.In respect of the 1^st requirement, instead of being reasonable and equitable, the Implied Term will take away the business efficacy of Reg 13.1 and defeat the whole purpose of including Reg 13.1 in the Articles.  It will mean that if there is no Lender Director, MSC need not even be informed of the intended litigation. 

46.In respect of the 2^nd requirement, Reg 13.1 is effective without the implied term.  It appears that a Lender Director can be appointed with ease at any time, as could be seen from the ratifications.

47.In respect of the 3^rd requirement, an officious bystander would hardly say that the Implied Term goes without saying in view of the purpose of the inclusion of Reg 13.1.

48.In respect of the 5^th requirement, the Implied Term contradicts the express mandatory terms of Reg 13, which requires every shareholder and director to procure YDL not to approve any action without the written consent of the Lender Director.  It also defeats Reg 9.1, 9.5, 10.4 and 10.6.

49.Even applying the contextual approach in Guo Jianjing, knowing the scheme of the loan, the documentation involved, the request of MSC to include Reg 13.1(t) in the Articles, I do not think a notional reasonable person in the position of MSC and YDL at the time the Articles were amended would come to a different conclusion from mine.

50.The Implied Term fails to satisfy 4 out of 5 requirements in Kensland Realty and lacks necessity or business efficacy when applying the contextual approach in Guo Jianjun.  I decline to imply it.

F7.  Does Reg 13(t) operate past an event of default?

51.Mr Bartlett SC submits that the draftsman did not apply his mind to how things would operate on the occurrence of an event of default.  The event of default would introduce other forms of protection and control of MSC so that MSC would no longer need a Lender Director.

52.With respect, there is no reference to an event of default in either Reg 8.4 or 13.1(t).  The 2 Regulations are widely drafted to cover a situation where eg YDL is solvent but wants to sue a contractor for defective services. MSC should have a say in that kind of litigation. 

53.Further, the Articles form a public document.  An ordinary reader of the Articles would not know if an event of default has occurred or has been declared. There needs to be extrinsic evidence, which is not permissible: Bratton v Seynour, 696d-697g; AG v Belize (which did not question the principle but found it inapplicable), §§35-37.    

54.I find that Reg 13.1(t) operates whether there is an event of default or not.

G. GROUND 3 - RATIFICATION

G1. Legal principles on ratification

55.Danish Mercantile v Beaumont explains the wide powers of ratification of an action commenced (in that case by a director) without authority of the company:

“… it is open at any time to the purported plaintiff to ratify the act of the solicitor who started the action to adopt the proceedings, to approve all that has been done in the past, and to instruct the solicitor to continue the action. When that has been done, then, in accordance with the ordinary law of principal and agent and in accordance with the ordinary doctrine of ratification, in my view, the defect in the proceedings as originally constituted is cured; and it is no longer open to the defendant to object on the ground that the proceedings thus ratified and adopted were, in the first instance, brought without proper authority.” (per Jenkins LJ, at 687-688)

56.Ms Linda Chan SC does not dispute that there could be ratification.  The only question is how it should have been done.

57.Where there is an effective board of directors, the company in general meeting cannot, short of altering the articles, usurp the board’s power: John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 at 134 per Greer LJ and at 143 per Slesser LJ; followed in Broadview Commodities Pte Ltd v Broadview Finance Ltd [1983] 2 HKC 578 at 581D per Commissioner Denis Chang QC.

58.Where the board is ineffective, the power which in effect has been delegated by the articles to the directors reverts to the person or persons who delegated, namely the company in general meeting: Miracle Chance Ltd v Ho Yuk Wah David [1999] 3 HKC 811, at 815 C‑E.

59.Where the exercise of a power vested exclusively in a board of directors is invalid, it is for the board to ratify the invalidity. The company in general meeting has no right to intervene.  A fortiori when the shareholders had agreed specifically that certain matters required their joint consent and had confided the giving of that consent particularly to the directors.  See Breckland Group Holdings Ltd v London & Suffolk Properties Ltd & Ors (1988) 4 BCC 542, at 545, 546, 547. 

60.In Breckland Group, the shareholders’ agreement agreed for P to appoint 1 director and D2 to appoint 2.  There had to be written consent of P’s appointee and one of D2’s appointees to commence material legal proceedings. No such consent was given.  Harman J held that since the relevant article confided the management of the business to the directors, it was not for the general meeting to interfere. 

61.The shareholders’ unanimous consent will bind the company, even on matters that the articles reserve to the directors.  In re Duomatic Ltd [1969] 2 Ch 365, 373C-D, Buckley J held that

“where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.”

Gower & Davies, §14.15-14.17, 15.15-15.21.

62.Re Torvale Group Ltd [1999] 2 BCLC 605, 617e-g explains the Duomatic principle:

“The essence of the Duomatic principle is that, where a statue or a company’s articles provide that a course can be taken only with the sanction of a certain group, which sanction is to be given in accordance with a prescribed procedure, then, provided that all the members of that group agree to that course, the presecribed procedure is not normally treated as being of the essence. This is particularly likely to be the case if (i) the court is satisfied that the sole purpose of the prescribed procedure is for the protection of the members of the relevant group, and (ii) the prescribed procedure enables a majority of that group to bind the minority in relation to the course in question. The articles constitute a contract, and if the parties to that contract, or if the parties for whom the benefit of a particular term has been included in that contract, are happy unanimously to waive or vary the prescribed procedure for a particular purpose, then, unless there is a ground of the sort considered in Peak and in Wright for the Duomatic principle not to be applied, it seems to me that there is no good reason why it should not be capable of applying.”

63.The Duomatic principle applies to directors meetings: Base Metal Trading Ltd v Shamurin [2005] 1 WLR 1157, at §§83-84. In Company Law in Hong Kong, Practice and Procedure 2015.

64.However, unanimous consent can operate to waive formalities required for the protection of shareholders, but not those required for the protection of other parties, notably creditors: Gower & Davies, §15-20.

G2.  The purported resolutions in ratification

65.Mr Bartlett SC relies on 4 sets of resolutions in ratification:

(a) YDL’s shareholders’ resolution dated 26 November 2014;

(b) YDL’s board resolution dated 31 July 2015;

(c) YDL’s shareholders’ resolution dated 31 July 2015; and

(d) YDL’s shareholders’resolution dated 7 September 2015.

G3.  Ratification by YDL’s shareholders resolution dated 26.11. 2014

66.This resolution predated the authority summons by 8 months.  It was signed by MSC as attorney and proxy for YPL and Wonder Earn respectively.  It states that “all acts and actions of [Mr Fok and Mr Gronow] … for and on behalf of [YDL] … on or after 4 June 2014 be and are hereby confirmed, ratified and approved” (§§9 and 11).  It did not refer to the present action. 

67.Ms Linda Chan SC challenges the validity of this resolution because:

(a) the validity of the powers of attorney given by YPL and Wonder Earn to MSC (“the PoAs”) has lapsed;

(b) it had not complied with Reg 13.1(t); and

(c) the power to ratify rested with the board of directors but not the shareholders.

68.With regard to point (a), on Mr Fok and Mr Gronow’s own case, YPL and Wonder Earn have, since 18 March 2014 (date of declaration of event of default), ceased to have power to exercise any rights over the shares. Ms Linda Chan SC submits that any power given to MSC under the pre-signed irrevocable PoAs must have lapsed together.

69.I disagree. Unlike a person who has eg become mentally incapacitated, YPL and Wonder Earn as principals have not lost their capacity. The PoAs granted remained valid.  As the PoAs were security for money, and stated to be irrevocable, they were not revocable: Walsh v Whitcomb (1797) 2 Esp 565.

70.YDL produced 2 legal opinions containing inconsistent statements. Harneys’ 1^st opinion dated 12 June 2015 stated that only the Receivers might vote (at §7).  Harneys’ 2^nd opinion dated 7 September 2015 stated that both the shareholders and Receivers might vote.  The bases were contractual and statutory.

71.By contract, under clause 7.1(a) of the Share Mortgage, once an event of default has occurred, YPL and Wonder Earn were precluded by contract from exercising their voting powers.  Instead:

“the Mortgagee [MSC] without further notice to the Mortgagor may, whether acting on its own behalf or through a receiver or agent:

(a) solely and exclusively exercise all voting and/or consensual powers pertaining to the Mortgaged Property or any part thereof and may exercise such powers in such manner as the Mortgagee may think fit.” (emphases added)

72.By statute, s.66 of the BVI Business Companies Act 2004 gave the Receivers the right to vote the YDL shares.

73.I hold that the persons who could exercise the voting powers should be MSC (as mortgagee or under the PoAs) or the Receivers. 

74.With regard to point (b), even if MSC still retained the powers under the irrevocable PoAs, Reg 13.1(t) was a formality for protection of a creditor which cannot be unanimously waived by shareholders: Gower & Davies, §§15-20.  The resolution failed to comply with Reg 13.1(t) for lack of written consent of a Lender Director.  It failed to identify this Action so as to enable the Lender Director to give “specific” written consent. Reg 13.1(t) simply does not permit the grant of blanket authorization to commence actions. 

75.With regard to point (c), Article 9.1 and s.109 of the BVI Business Companies Act 2004 (as amended) provide that the business and affairs of YDL shall be managed by the board of directors.   The board was effective, subject to the appointment of a Lender Director.  No difficulty in such appointment was ever suggested. Applying John Shaw, Broadview Commodities, Miracle Chance and Breckland Group, the shareholders could not usurp the powers of the directors. 

76.I find the board resolution dated 26 November 2014 to be invalid ratification.

G4.  Ratification by YDL’s board resolution dated 31.7. 2015

77.This board resolution referred to, amongst others, the appointment of Mr Batchelor as Lender Director on 31 July 2015, the Action and this strike-out application.  The board unanimously adopted, ratified, confirmed and approved the commencement and carrying on of the Action.  It also stated, for the avoidance of doubt, that the signing of these written resolutions by Mr Batchelor also constituted his irrevocable consent to the resolutions as Lender Director.  The minutes were signed by all 3 directors (Mr Batchelow, Mr Fok and Mr Gronow).

78.This was valid ratification of the Action by the board of directors with specific written consent of the Lender Director.  Even on Ms Chan SC’s own case, ratification should have been done by the board.

79.Ms Linda Chan SC nonetheless challenges the validity of this ratification on the following grounds:

(a) Lack of prior specific written consent of the Lender Director.  Failure to comply with Reg 13(t) was not something which could be ratified.

(b) The 3 directors were in positions of conflict and could not pass any resolution for the purpose of exonerating the default of Mr Fok and Mr Gronow at the expense of YDL. 

80.I am unable to agree with point (a).  Ratification necessarily relates back.  The persons who needed to consent to the issue of the writ in the first place all ratified the Action. Neither MSC nor YDL were prejudiced.  Applying the Duomatic principle, Base Metal and Breckland Group, the board resolution was clearly valid ratification.

81.With regard to point (b), the conflict was said to have arisen in this manner. Ms Linda Chan SC submits that if lack of authority is established, Mr Fok and Mr Gronow as directors who commenced this action on behalf of YDL would be personally liable for costs.  They and their firm (FTI Consulting), with Mr Batchelor as a senior Managing Director would be liable in damages for negligence to YDL.   There was thus a potential conflict with their duties to the principal, YDL.

82.On a similar vein, YDL’s solicitors may be personally liable for the costs needlessly incurred by the defendants for breach of the implied warranty that they had authority to represent YDL: Grand Field Group Holdings Ltd v Tsang Wai Lun Wayland & Ors [2010] 5 HKC 441 at §§12 and 34, per Poon J (as he then was); Airways Ltd v Bowen 358f to 361g; Danish Mercantile v Beaumont, at p.682, Jenkins LJ.  She submits that YDL may need to indemnity their solicitors pursuant to an indemnity clause in the retainer agreement.

83.Ms Linda Chan SC points out that the purported board resolution did not contain a declaration of conflict of interest of a director, as required by Reg 14.1.  Nor was there evidence of prior approval of a Restricted Meeting under Reg 14.3 authorising Fok, Gronow or Batchelor to vote on a matter in which they were interested.

84.Even if Fok and Gronow are able to demonstrate that they have obtained the prior approval of a Restricted Meeting before passing the board resolution, the grant of authority would not include an authority to act for the director’s own benefit. In Hopkins v TL Dallas Group Ltd & anor [2005] 1 BCLC 543 at §88, Lightman J held that:

“The grant of actual authority to an agent will not normally include authority to act for the agent’s benefit rather than for that of his principal and therefore, without agreement, the scope of actual authority will not include this. The grant of actual authority should be implied as being subject to a condition that it is to be exercised honestly and on behalf of the principal: Lysaght Bros & Co Ltd v Falk (1905) 2 CLR 421. It follows that, if an act is carried out by an agent which is not in the interests of his principal, for example signing onerous unconditional undertakings, then the act will not be within the scope of the express or implied grant of actual authority. As a result there cannot be actual authority.” (emphasis added)

85.Accordingly, Ms Linda Chan SC submits that the board resolution was invalid.

86.For present purposes, I assume without deciding, that Mr Fok and Mr Gronow may face personal liability in costs.  Even so, with respect to Ms Linda Chan SC, her contentions go beyond challenge to procedural error in authorizing commencement of the Action.  It is speculative to talk about the existence of an indemnity clause in the retainer, the motive of Mr Batchelor and to say that YDL would sue the 3 directors for any cause.  As an ex-director and not even a shareholder of YDL, Ricky Liu has no locus to assert any conflict of interest and hence invalidate the board resolution on this ground. 

87.The board resolution was not passed to ratify breach of fiduciary duty of any director (eg in converting corporate assets).  The directors had no personal interest in the Action.  In fact, there was a united front amongst YDL, the Lender Director and ordinary directors in commencing and continuing the Action. The assertion of potential conflict of interest is more theoretical than real.

88.I find that the board resolution dated 31 July 2015 was valid ratification.

G5.  Ratification by YDL’s shareholders resolution dated 31.7.2015

89.This resolution was purportedly passed by the shareholders (with MSC as attorney and proxy for YPL and Wonder Earn).  It specifically referred to the Action and the board resolution of the same date.  It, amongst others, ratified, confirmed, approved and adopted the Action from the date of its commencement.

90.The Lender Director has given his consent. MSC could vote with the valid PoAs. However, shareholders could not usurp the powers of an effective board.  The ratification was invalid.  It was unnecessary too,  as a valid board resolution has been passed on the same date.

G6. Ratification by YDL’s shareholders’ resolution dated 7.9. 2015

91.YPL and Wonder Earn (through the Receivers) passed this resolution adopting, approving, ratifying and confirming the commencement of this action and the PRC Proceedings”.  It referred specifically to this action, the board resolutions dated 31 July 2015 appointing Mr Batchelor and ratifying the action.  It also referred to BVI law under s.66 of the BVI Business Companies Act 2004 and the 2 PoAs. It resolved to ratify, confirm approve and adopt (i) the Action, (ii) all acts of Mr Fok and Mr Gronow and Mr Batchelor in purported exercise of their powers as directors in connection with the action; and (iii) the board resolutions dated 31 July 2015.

92.As held above, the Receivers had power to vote.  However, as Ms Linda Chan SC points out, Mr Fok and Mr Gronow cannot approbate and reprobate.  The Court of Appeal and this court have accepted their contentions that all their acts (including prosecution of the Action) were carried out by them as directors and on that basis, this court struck out the Agency Point: CA decision, at §§27-28 & 38; the strike-out decision at §§90 & 100.  One questions whether Mr Fok and Mr Gronow can turn round to assert their role as Receivers.

93.If I am wrong, their rights as Receivers could not exceed those of the shareholders.  For the same reasons given in paragraphs 89-90, the ratification was invalid.

94.In summary, only the board resolution was valid ratification. 

95.However, one should not lose sight of the bigger picture.  The Court can have regard to the outcome of the shareholders’ resolutions in July and September 2015 to ascertain the wishes of YDL.  Those 2 shareholders’ resolutions involved all stakeholders, ie all the shareholders (votes exercised by MSC), MSC (as Mortgagees invoking the PoAs), the Receivers, the Lender Director and all the directors. There was unity of purpose amongst them in ratifying the Action.  No stakeholder could have been prejudiced by the purported ratifications.  According to Ms Chan SC, the only entity who might have been prejudiced was YDL, who would otherwise be spared from having to pay costs of the various interlocutory orders. 

H. GROUND 4 – ABUSE OF PROCESS

96.Mr Bartlett SC submits that the authority summons is an abuse of process, as it is simply a further gambit by Ricky Liu to obstruct the new directors’ attempt to gain legitimate control over WFOE and to frustrate enforcement action in the Mainland.  He says that Ricky Liu (and D2) was avoiding the Mainland proceedings.  The presiding judge commented that Ricky Liu (and D2) had “without justified reasons, refused to appear in court and participate in the proceedings despite [the Court’s] service of summons”. Subsequently YPL commenced New Mainland Proceedings and sought to stay the delivery of a judgment in the Mainland Proceedings on the same basis.

97.This case has gone through hearings for injunctions and striking out of the defence.  It would of course have been better if Ricky Liu had issued the authority summonses before those hearings.  However, I do not agree what he has done was an abuse.  I have found the issue of the writ to be in contravention of Reg 13.1(t).  The arguments were not straightforward.

98.Moreover, the issue of authority has not been decided before in this case.  In any event, principles of res judicata and issue estoppel do not apply to interlocutory application: Chu Hung Ching v Chan Kam Ming & Ors [2001] 1 HKC 396 at 401 E-F (CA), per Mayo VP.

99.Further, as explained in Ricky-7^th, Ricky Liu was not aware that Fok and Gronow had represented to the Mainland Court that they were Lender Directors until their Mainland lawyers filed the Summary of Evidence on 20 April 2015, ie 5 months after the injunction decision.

100.If Ricky Liu had abused the process, YDL has not done much better.  Apart from issuing the writ without authority, it has constantly shifted the goal posts: from representing to the Mainland court that Mr Fok and Mr Gronow were acting “not merely as Lender Directors”, to “not as Lender Directors”, to now conceding that they were ordinary directors.  Harney’s opinions shifted on whether the Receivers and/or MSC were entitled to vote.  Their case that Mr Fok and Mr Gronow were Lender Directors were only withdrawn on 21 September 2015 at the hearing before the Mainland court.

101.Ms Linda Chan SC points out that even before commencement of this action, on 9 June 2014, YDL had passed a resolution to cancel YDL’s then seals and chops.  It was material non-disclosure in the application for injunction and undermined the utility of the Action. 

102.Ms Linda Chan SC may be correct but it is more appropriate for the court to deal with that argument on a separate occasion, after hearing the representations of YDL and its solicitors, than to take this into account on the question of costs in the authority summons.

J. SUMMARY OF FINDINGS

103.Ricky Liu has locus to raise the issue of authority.  Reg 13 is framed in mandatory terms by the use of the word “shall”.  It is to apply “notwithstanding any other provisions in the Memorandum or the Articles.  Consent of the Lender Director cannot be dispensed with in the context of the Articles and the whole scheme of the loan. Operation of Reg 13(t) is not limited to where there is a Lender Director at the material time.  It operates whether or not there is an event of default.

104.The Implied Term fails to satisfy 4 out of 5 requirements in Kensland Realty and lacks necessity and business efficacy when applying the contextual approach.  I decline to imply it.

105.The PoAs granted by YPL and Wonder Earn to MSC remained valid and irrevocable.  Despite YPL and Wonder Earn being the registered shareholders, it was MSC or the Receivers who could exercise the voting powers on the YDL shares.

106.Only the board resolution dated 31 July 2015 was valid ratification as having complied with Reg 13(t).  Ricky Liu has no locus to assert conflict of interest in the directors which might have invalidated the board resolution. The board resolution and 2 purported shareholders’ resolution passed after the authority summons was issued involved all stakeholders, ie all the shareholders, MSC (as mortgagees invoking the PoAs), the Receivers, the Lender Director and all directors.  There was unity of purpose among them and no stakeholder could have been prejudiced by the purported ratifications.

107.There was no abuse of process by Ricky Liu.

K. COSTS

108.The 4 affirmations filed contained lots of legal arguments and costs should be reduced.  On my findings, by 31 July 2015, there would have been valid ratification by the board and yet YDL did not make the concession that Mr Fok and Mr Gronow were ordinary directors until a very late stage before the hearing.  On a nisi basis, I order that:

(a) Ricky Liu should have costs of the authority summons up to and including 31 July 2015.  Solicitors for YDL are to show cause as to why they should not bear such costs within 14 days from the date of this judgment.

(b) Half of the costs of the authority summons from 1 August 2015 onwards shall be paid by Ricky Liu to YDL. 

(c) Costs reserved under the strike out decision dated 19 October 2015 shall be paid by the defendants to YDL.

109.I have at the hearing given leave to file Mr Gronow’s 7^th affidavit to update the court on the Mainland proceedings.  Costs of and occasioned by that affidavit should be to Ricky Liu.  I have also given costs to Ricky Liu upon dismissal of the summons dated 18 January 2016.

110.All costs are to be summarily assessed on 16 May 2016 on the papers without the need for an attendance.  If the receiving party does not adopt the costs statements already lodged, it/he shall revise its/his costs statement 7 calendar days before and the paying party revises its/his 3 calendar days before the summary assessment.

111.I order that the authority summons be dismissed and make the costs order nisi in Section K above.

112.I am most grateful to counsel for their thorough preparation and assistance to the court.

Mr Jeremy Bartlett, SC, instructed by Linklaters, for the plaintiff

Ms Linda Chan, SC and Mr David Chen, instructed by Li, Wong, Lam & W I Cheung, for the 1^st defendant