Yifung Developments Ltd v. Liu Chi Keung Ricky and Others
Read the full judgment text of CACV 118/2016 on BabelCite. This Court of Appeal judgment was delivered on 29 August 2017.
1. I respectfully agree with the judgment of Cheung JA. In respect of the argument of Ms Chan SC on conflict of interest, I would add that, for my part, I am unable to see how the solicitor could seek any indemnity from Mr Fok and Mr Gronow. It was the duty of the solicitor to examine carefully the question of authority before the commencement of the action. They should have done so in light of the provisions in the articles of association. There is no suggestion that Mr Fok and Mr Gronow had do
Cited by 1 case · Cites 3 cases
|
CACV 118/2016 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 118 OF 2016 (ON APPEAL FROM HCA NO. 1341 OF 2014) ________________________ BETWEEN
________________________
________________________ J U D G M E N T ________________________ Hon Lam VP : 1.I respectfully agree with the judgment of Cheung JA. In respect of the argument of Ms Chan SC on conflict of interest, I would add that, for my part, I am unable to see how the solicitor could seek any indemnity from Mr Fok and Mr Gronow. It was the duty of the solicitor to examine carefully the question of authority before the commencement of the action. They should have done so in light of the provisions in the articles of association. There is no suggestion that Mr Fok and Mr Gronow had done anything to mislead the solicitor or to conceal from them any material facts. Even assuming there were uncertainties as to their status, the solicitor should have verified if one of them was a Lender Director by calling for the relevant instrument appointing them as such before the solicitor deemed fit to act on the basis that they were so. Hence, there is simply no nexus between the potential liability of the solicitor for costs and the position of Mr Fok and Mr Gronow in consenting to the board resolution of 31 July 2015. Hon Cheung JA : I. Introduction 2.The 1st defendant (‘Ricky Liu’) applied by summons (‘the authority summons’) to strike out the plaintiff’s (‘YDL’) action on the ground that the plaintiff had failed to observe its Articles of Association and was therefore incompetent to commence the action. After the summons was issued, YDL passed a board resolution dated 31 July 2015 (‘the Board Resolution’) to ratify the omission. Au-Yeung J held that the relevant provisions of the articles were not observed but the omission was ratified by the Board Resolution and dismissed Ricky Liu’s authority summons. Ricky Liu now appeals. II. Background 3.1The background is succinctly summarised by the Judge which I would gratefully adopt. 3.2YDL is a BVI company. By this action it claims against the defendants, its ex‑directors, for injunctions restraining them from holding themselves out as directors and to deliver up YDL corporate records and assets. 3.3YPL 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 company known as WFOE in the Mainland. 3.4YDL 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. 3.5On 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. 3.6YDL commenced the present action on 16 July 2014. An interim injunction has been granted against the defendants. III. The relevant articles 4.1Regulation 8.4 of YDL’s articles provides that MSC has a right to nominate a Lender Director (as defined in the articles) to YDL’s board. While the Lender Director has limited participation rights in the executive management of YDL, Regulation 9.8 provides that the specific prior written consent of the Lender Director is required before YDL can undertake certain ‘restricted matters’ prescribed in Regulation 13. ‘Restricted matters’ include the commencement of material litigations which cannot be undertaken without the ‘prior specific written consent of the Lender Director’ (Regulation 13.1(t)) :
4.2Regulation 10.4 provides for a restricted meeting :
4.3Regulation 10.6 provides that the quorum for a board meeting at which the board resolves to commence legal proceedings (i.e. a restricted meeting) is two directors, one of whom must be a Lender Director. 4.4Regulation 14.3 provides that where the directors have conflict of interests, they can only vote after disclosure of such interest and with prior approval of a Restricted Meeting. 4.5Regulation 9.2 provides that YDL’s directors shall not act in contravention of the articles, and can only exercise their powers for a proper purpose and in the interest of YDL. IV. Ratification 5.1That Regulation 13.1(t) had not been observed by YDL before it commenced the present action is no longer in issue. The argument in this appeal focuses on the Judge’s decision on ratification and the application of the Duomatic principle (Re Duomatic Ltd [1969] 2 Ch 365). 1) Board Resolution 5.2The resolution is as follows :
2) How an omission can be ratified 5.3The Judge correctly identified the principle of ratification :
5.4The point taken by Ms Linda Chan SC (together with Mr David Chen) for Ricky Liu is that :
5.5In my view the matter has to be approached on principle. In Danish Mercantile Co. Ltd., Jenkins LJ at 687 described an action commenced without authority as a ‘nullity’. Yet he held the omission can be ratified. The fallacy of the argument advanced on behalf of YDL is that the non compliance in this case is so unique that it is not capable to be ratified. But we are not concerned with, for example, the situation of the directors acting against the interest of the company but rather the procedural requirements for the commencement of the action had not been complied with. I do not see why ratification cannot be applied to cure such an omission so long as the prescribed procedure is observed by the act of ratification. The distinction drawn by Ms Chan between this case and other cases of an action commenced without authority is not of substance. It begs the question why, given proper observation of the prescribed procedure, ratification should not be effected? Non compliance may take different forms due to different terms of the articles adopted by different companies and the result is that the action has no legal effect but nonetheless in an appropriate case ratification will come to aid and cure the omission. It will be pedantic to argue otherwise. What is important is the application of the principle in a given situation rather than whether that situation has or has not been canvassed before in the precedents. Hence I do not accept the omission in the present case by reason of the lack of the ‘specific prior written consent’ of the Lender Director will take the case from the realm of ratification. 5.6Further this argument is similar to the ‘lack of competent principal’ argument raised in Alexander Ward & Co v Samyang Co [1975] 1 WLR 673, an appeal to the House of Lords from the Scottish Courts. 5.7The facts are summarised in the headnote of the judgment. The pursuers were a limited company registered in Hong Kong and the defenders a limited company registered in South Korea. The action was initiated by [Ward] and [Irons] who, acting without the pursuers’ authority took out a summons and warrant for the arrestment of a ship belonging to the defenders lying in a Scottish shipyard, that alone giving the Scottish courts jurisdiction to try the issues between the parties. At the time the pursuers had no directors. They subsequently went into liquidation and, a liquidator having been appointed, he was joined as a party and ratified the proceedings previously taken. The Second Division of the Court of Session having upheld the ratification, the defenders appealed to the House of Lords. Lord Hailsham of St Marylebone at 678 held that :
5.8In that case, it was the lack of directors and the lack of a general meeting which led to the ‘absence of a competent principal’. In this case although the challenge was the lack of the specific prior written consent of the Lender Director, in essence it is another way of expressing the same argument. The lack of specific prior written consent of the Lender Director resulted in the lack of a competent principal. By adopting the same reasoning of Lord Hailsham, YDL was fully competent at the time of proceedings because it could have done so by appointing a Lender Director and by securing his written consent to commence the action. YDL was a competent principal and the ratification principle applies. 5.9Lord Hailsham at 679 specifically stated that there was no distinction between that case and Danish Mercantile Co. Ltd. :
5.10The Judge was clearly correct in holding that the ratification by the Board Resolution cured the omission and there is no question of rewriting the articles. 3) Duomatic principle 5.11The Judge also held that the Duomatic principle applies by taking into account the two shareholders’ resolutions that approved of the commencement of action against the defendants, namely, (1) YDL’s shareholders’ resolution dated 31.7.2015 5.12This resolution was 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. (2) YDL’s shareholders’ resolution dated 7.9.2015 5.13YPL 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 Resolution appointing Mr Batchelor and ratifying the action. It also referred to BVI law under section 66 of the BVI Business Companies Act 2004 and the two powers of attorney. 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 Resolution. 5.14Although the Judge held these two resolutions were not proper resolutions for the purpose of ratification, nonetheless she held that :
5.15Mr Bartlett SC for YDL argued that specifically on the question of prior consent of the Lender Director, Re Torvale Group Ltd [1999] 2 BCLC 605 is a case where the Duomatic principle was upheld even though ‘previous sanction’ in accordance with the article was not obtained in the first place. 5.16Having held that ratification is valid, it is not necessary to address the Duomatic principle and its application to the facts of this case. 4) Evidence of specific prior written consent 5.17Ms Chan maintains that in respect of the Board Resolution, there is no evidence that specific prior written consent by the Lender Director has been given before that resolution was passed on the same day. She argued that the express wordings used in Regulations 9.8 and 13.1 require YDL to follow the procedure precisely and which could not be ignored. 5.18I disagree. The Board Resolution was made in response to Ricky Liu’s challenge on authority. Clause 6 of the Board Resolution which specifically stated that the signing by the Lender Director shall constitute his irrevocable consent to the resolutions as Lender Director for the purpose of Article 13.1 clearly constitutes the best evidence that the Lender Director has given his prior written consent to sign that resolution in accordance with Regulation 13.1. V. Conflict of Interest 6.1Ms Chan argued that the Judge failed to take into account the directors were in a position of conflict when they passed the Board Resolution to ratify the action. The argument runs like this : if the action was not ratified, it would be struck out. YDL’s solicitors would be personally liable for costs for breach of the implied warranty that they were authorised to represent YDL (Grand Field Group Holdings Ltd v. Tsang Wai Lun Wayland & Ors [2010] 5 HKC 441 at 444F per Poon J (as he then was)). Acting rationally, YDL’s solicitors would either invoke the indemnity against YDL under the contract of retainer or to recover the costs ordered to be paid to the defendants against Mr Fok and Mr Gronow for damages for breach of implied warranty to instruct them to commence the action. Since the dismissal of the action may result in Mr Fok and Mr Gronow being personally liable in damages, any reasonable, right-minded observer would conclude that their decision to ratify the action would be coloured by their self‑interest to avoid such personal liability, thereby attracting the application of the ‘no conflict’ rule (Bhullar v. Bhullar [2003] 2 BCLC 241 at 252d-253h per Jonathan Parker LJ). Further Mr Batchelor was also in a position of conflict. He is a senior Managing Director of FTI Consulting (the same firm as Mr Fok and Mr Gronow) so his decision was coloured by his personal interest in minimising his firm’s exposure to any potential liability. 6.2This is an extremely strained argument. The personal liability for costs by the directors and Lender Director will only occur if Ricky Liu succeeds in his authority summons which has not happened. In any event, this so called potential conflict of interest is generated by Ricky Liu himself in bringing the authority summons. This is not a case where the directors and Lender Director had done things for their personal interest contrary to the interest of YDL and sought to ratify their own misdeed. What they did by this action is to seek to recover what is due to YDL. The Judge had in effect ruled there was no conflict of interest. Although she said that, for the proceedings it was assumed that the directors may face personal liability on costs, she went on to hold that the assertion of potential conflict of interest is more theoretical than real. The Judge was correct. VI. Locus of Ricky Liu 7.This issue is closely related to the conflict of interest issue. The Judge held Ricky Liu had the locus to issue the authority summons by reason of his position as a defendant but he did not have the locus to raise conflict of interest because he was only a former director and not even a shareholder of YDL. With the challenge on conflict being rejected, there is no need to discuss whether Ricky Liu has the locus to rely on conflict of interest based on the terms of the articles which are only enforceable by the members of YDL. VII. Respondent’s Notice 8.Mr Bartlett referred to the Respondent’s Notice and submitted that the ratification is also supported by the irregularity principle, whereby the lawfulness of a general meeting or a board decision cannot be questioned for mere irregularity if the intention is clear and there is no evidence that the decision of the meeting would have been different had the correct procedure been followed. He also submitted that the situation can be viewed as a waiver by MSC or an election by MSC to waive the Lender Director protections afforded to it by the articles. Having upheld YDL’s case on ratification, it is not necessary for us to address these arguments. VIII. Costs appeal 9.1The Judge made the following costs order nisi :
9.2Ricky Liu applied to vary the first two items of the costs order nisi. The Judge refused. Alternative to YDL’s solicitors’ potential costs liability, Ricky Liu further asked for YDL’s directors (i.e. Mr Fok, Mr Gronow and Mr Batchelor) to pay his costs. 9.3In a subsequent decision, the Judge held that YDL’s solicitors should not be asked to bear costs. She further held that the two directors should not be held personally liable for costs. She made the costs order absolute and ordered Ricky Liu to pay the costs of the application to vary. 9.4Ricky Liu now asks that he should be awarded costs of the hearing below. Alternatively he asks for the following orders :
9.5Ms Chan argued that YDL’s commencement of the action without proper authority (as found by the Judge) and its misrepresentation to the PRC court that its directors were ‘Lender Directors’, led to the present application. YDL’s conduct caused both parties to incur unnecessary costs :
9.6Ms Chan submitted that the alternative costs order represents a fair apportionment of costs between the parties. 9.7In my view the costs appeal is a hopeless one. The Judge has dealt with the dispute of the parties over a substantial period of time. Apart from the dismissal order, she had also given judgments on an injunction application on 17 November 2014 and a strike out application on 19 October 2015. She heard the present application over two days. It has simply not been demonstrated that the Judge had committed any error in her decision on costs. IX. Conclusion 10.The appeal is accordingly dismissed. X. Costs 11.YDL is to have costs of the appeal on a nisi basis save that the costs of YDL’s summons to adduce new evidence which we dismissed should be paid by YDL to Ricky Liu. Hon Kwan JA : 12.I agree with the judgment of Cheung JA
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 1st defendant |
Cases cited in this judgment
Other judgments that cite this case
Further hearings and rulings under CACV 118/2016