Li Jian Chao v. Tc Orient Lighting Holdings Ltd

HCA 1228/2016

[2022] HKCFI 2324

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1228 OF 2016

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BETWEEN

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Before: Deputy High Court Judge Winnie Tsui in Court

Dates of Hearing: 25, 26, 27 and 29 October 2021

Date of Judgment: 3 August 2022

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JUDGMENT

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INTRODUCTION

1.The plaintiff, Mr Li Jian Chao, was appointed as an executive director and chief executive officer of the defendant, TC Orient Lighting Holdings Ltd, on 1 September 2014. He resigned with immediate effect on 5 June 2015. The defendant is a listed company in Hong Kong. I shall refer to the plaintiff and the defendant below as “Li” and “the Company” respectively.

2.This action is about the validity of four resolutions which the Company’s board of directors purportedly passed to pay bonuses or special bonuses to Li (among others) at four meetings held on 30 December 2014, 26 January 2015, 14 April 2015 and 4 June 2015 respectively. I shall refer to the four board meetings in question as “the 1^st, 2^nd, 3^rd and 4^th purported meetings” and the resolutions in question “the 1^st, 2^nd, 3^rd and 4^th purported resolutions”.

3.Li commenced the action in May 2016. His claim concerns the 4^th purported resolution only. His pleaded case is that the Company had resolved to pay him a special bonus of $3,680,000 in two equal instalments. The first instalment had become due and had been paid. However, the second instalment had become due on 18 April 2016 and has not yet been paid. He now claims the outstanding sum of $1,640,000, together with interest.

4.The Company’s case is that the 1^st to 4^th purported resolutions were all invalid. Pursuant to the four resolutions, the Company had paid Li a total sum of $5,240,000. It now makes a counterclaim against Li for that sum on the basis of unjust enrichment. It also denies that it is liable to pay the sum of $1,640,000, as claimed. Alternatively, the Company contends that Li was in breach of his fiduciary duties owed to the Company in procuring and taking part in the passing of the 1^st to 3^rd purported resolutions.

5.The action and the counterclaim primarily turn on the application of the Company’s Articles of Association and the Terms of Reference of the Remuneration Committee. They also turn on the resolution of factual disputes over the circumstances in which the purported meetings were held and the circumstances in which the bonuses or special bonuses were purportedly approved.

6.In this action, Li was legally represented from commencement up to just about one month before the trial. He attended the trial in person and testified for himself. He had no other witness.

7.The defendant called one witness, Mr Chai Chung Wai (“Chai”). He is the chief financial officer of the Company and is responsible to handle the action on its behalf. However, he was not involved in the Company’s affairs around the time of the four purported resolutions. In other words, he has no first-hand knowledge of what had happened at that time. As Chai himself confirmed, the Company’s case relies largely on documents retrieved from its files and his evidence was mainly to provide a context against which to understand the documents.

8.I should also note at the outset that it appears to be the case that no one within the present management of the Company has any first-hand knowledge of the disputes, as there has been substantial restructuring of the management since the time of the purported resolutions.

9.By contrast, Li was personally involved in the disputed events.

10.The directors who feature more prominently in the Company’s documents, including Mr Chen Jing (“Chen”) and Mr Wang Shi Jin (“Wang”), were not called to testify by either party.

11.At the trial, the Company was represented by Ms Astina Au, counsel.

FACTUAL BACKGROUND

12.I first set out the background facts which are not in dispute or uncontroversial.

The service agreement

13.Li and the Company entered into a service agreement dated 1 September 2014 (“the service agreement”). It governed the terms of Li’s appointment. The relevant clauses are reproduced below.

14.The Recital stated:

“The Company has agreed to employ the Executive [ie Li] and the Executive has agreed to serve the Company as executive director of the Company on the terms and conditions set out below.”

15.Clause 2.1 provided that the appointment was for an initial term of two years from 1 September 2014, which shall be automatically renewed for another one year. The appointment may be terminated at any time by either party by giving four months’ notice or payment in lieu.

16.Clause 5.1 provided that Li’s monthly salary was $200,000 and he was entitled to a “double pay” in the sum of one month’s salary at year end or a pro rata amount in respect of the period of time he was employed in that year.

17.Clause 5.3 provided:

“The Executive may be entitled to a discretionary bonus in respect of each financial year of the Company in an amount to be determined by the Board in its absolute discretion.”

Change in management in 2014

18.Between September and December 2014, the Company’s board underwent a restructuring. This resulted in the appointment of new directors and officers. Chen became the new chairman and Li the new chief executive officer. Ms Kimberley Chan and Ms Patricia Chan were appointed company secretary and coordinator respectively.

19.In January 2015, Wang was appointed as an executive director.

The Articles and the Terms of Reference of the Remuneration Committee

20.I set out below the relevant terms of the Company’s constitutional documents which are presently material.

21.Article 86(3) provides for the board’s power to appoint additional director:

“The Directors shall have the power from time to time and at any time to appoint any person as a Director either to fill a casual vacancy on the Board or as an addition to the existing Board. Any Director so appointed by the Board shall hold office only until the next following annual general meeting of the Company and shall then be eligible for re-election.”

22.Article 99 provides that payment to a director as compensation for loss of office should be approved in general meeting:

“The Board shall obtain the approval of the Company in general meeting before making any payment to any Director or past Director of the Company by way of compensation for loss of office, or as consideration for or in connection with his retirement from office (not being payment to which the Director is contractually entitled).”

23.Article 103(1) deals with the situation where a director is materially interested in a matter that is to be voted on by the board.

“A Director shall not vote (nor be counted in the quorum) on any resolution of the Board approving any contract or arrangement or any other proposal in which he or any of his associates is materially interested, but this prohibition shall not apply to any of the following matters namely: [exceptions not applicable here]”

24.Article 103(4) provides for the determination by the chairman on the issue of materiality or a director’s entitlement to vote:

“If any question shall arise at any meeting of the Board as to the materiality of the interest of a Director (other than the chairman of the meeting) or as to the entitlement of any Director (other than such chairman) to vote and such question is not resolved by his voluntarily agreeing to abstain from voting, such question shall be referred to the chairman of the meeting and his ruling in relation to such other Director shall be final and conclusive except in a case where the nature or extent of the interest of the Director concerned as known to such Director has not been fairly disclosed to the Board. If any question as aforesaid shall arise in respect of the chairman of the meeting such question shall be decided by a resolution of the Board (for which purpose such chairman shall not vote thereon) and such resolution shall be final and conclusive except in a case where the nature or extent of the interest of such chairman as known to such chairman has not been fairly disclosed to the Board.”

25.Article 116(1) sets out the quorum for a board meeting:

“The quorum necessary for the transaction of the business of the Board may be fixed by the Board and, unless so fixed at any other number, shall be two (2). …”

26.Clause 16(d) of the Terms of Reference of the Remuneration Committee reads:

“The Remuneration Committee shall have the following specific duties:

…

(d) to review and approve the compensation payable to the Executive Directors and Senior Management in connection with any loss or termination of their office or appointment to ensure that such compensation is determined in accordance with relevant contractual terms and that such compensation is otherwise fair and not excessive for the Company; …”

The purported resolutions

27.At the time of the 1^st purported meeting (30 December 2014), the Company had seven directors. The minutes show that four of them, including Chen and Li, attended the meeting. The 1^st purported resolution read:

“3. SPECIAL BONOUS

It was noted and resolved THAT:

Due to recently significant workload, the following directors and staff are entitled to a special bonus to be payable before 31 Dec 2014:

- Chen Jing: HK$1,000,000

- Li Jian Chao: HK$800,000

- Patricia Chan: HK$600,000

- Kimberly Chan: HK$600,000

- Chen Zheng Xue: HK$50,000

- Lai Sze Ngot: HK$50,000”

28.Among the four directors who were present, three of them were entitled to receive the special bonuses under the purported resolution.

29.At the time of the 2^nd purported meeting (26 January 2015), the composition of the board remained the same. The minutes show that five of them, including Chen and Li, attended the meeting. The 2^nd purported resolution read:

“3. SPECIAL BONOUS

It was noted and resolved THAT:

Due to recently significant workload, the following directors and staff are entitled to a special bonus to be payable before 31 March 2015:

- Chen Jing: HK$1,100,000

- Li Jian Chao: HK$1,000,000

- Zhu Jianqin: HK$100,000

- Chen Zhengxue: HK$150,000

- Lai Sze Ngot: HK$150,000

- Patricia Chan: HK$950,000

- Kimberly Chan: HK$950,000

- Leung Wah: HK$50,000

- Shi Qiu Yu: HK50,000”

30.All of the five directors who were present were entitled to receive the special bonuses under the purported resolution.

31.At the time of the 3^rd purported meeting (14 April 2015), the Company had 11 directors. The minutes show that nine of them, including Chen and Li, attended the meeting. The 3^rd purported resolution read:

“2. BONUS

It was noted and revolved that the following directors and staff are entitled to a bonus for their contribution to the improvement of the year end results:-

Chen Jing 1,800,000

Li Jian Chao 1,800,000

Zhu Jianqin 1,800,000

Chen Zeng Xue 1,600,000

Shi Qiu Yu 1,600,000

Kimberly Chan 1,600,000

Pat Chan 1,600,000

Wang Shi Jin 1,200,000

Zeng Xiang Di 1,200,000

Leung Wah 400,000

Lai Sze Ngot 400,000

Lo Chi Ko 300,000

Luk Chi Keung 300,000 ”

32.All of the nine directors who were present were entitled to receive the special bonuses under the purported resolution.

33.After the 3^rd purported meeting and before the 4^th, there was a dramatic turn of events affecting the composition of the board.

34.According to its announcement dated 30 April 2015, the Company became aware that Chen had caused the Company and its subsidiaries to enter into arrangements under which the Company and two of its subsidiaries in the PRC became liable for Chen’s personal debts, without the knowledge of the board. In view of the seriousness of the matter, the Company resolved to suspend the functions of Chen as executive director and chairman until further notice. At the request of the Company, trading in its shares on the Stock Exchange had been halted with effect from 24 April 2015.

35.On 1 June 2015, a board meeting was held at around 6:30pm (“the 6:30 meeting”) during which Chen challenged the validity of the purported suspension of his functions. The board resolved as follows:

(1) The purported suspension of Chen was not valid;

(2) To strengthen the board, five new directors be appointed with immediate effect.

36.Before the appointment of the five new directors, there were a total of 11 directors. The resolution passed at the 6:30 meeting increased the total number to 16.

37.Later that evening, at or around 8:30pm, another board meeting was called to discuss the 6:30 meeting (“the 8:30 meeting”). But no resolution was passed at the 8:30 meeting.

38.In the meantime, Chen was looking for investors to take over his shares in the Company.

39.Accordingly, at the time of the 4^th purported meeting (4 June 2015), the Company had 16 directors. (In this action, Li had previously taken the position that the appointment of the five new directors was invalid. However, at the trial, he accepted that the appointment was valid.) The minutes show that six of them, including Chen (but not Li), attended the meeting. The 4^th purported resolution read:

“董事會同意即時以港幣一千萬元正(HK10,000,000)發放特別奬償給予以下董事及員工，以感謝他們對公司作出之貢獻，該一千萬元正(HK10,000,000)將按照以下形式分批支付。

			即時支付	餘下在復牌 後支付
3,280,000	LI JIAN CHAO	HK$5,200,000	50%	50%
200,000	LEUNG WAH	HK$312,000	50%	50%
200,000	LAI SZE NGOT	HK$312,000	100%	−
200,000	MICHAEL LO	HK$312,000	100%	−
200,000	KELVIN LUK	HK$312,000	100%	−
2,960,000	KIM CHAN	HK$4,680,000	50%	50%
2,960,000	PAT CHAN	HK$4,680,000	50%	50%

所有以上人員必須把所有職位，文件及工作於本會議日期起計七天內交接，即不遲於11/6/2015(首尾兩日包括在內)。”

40.It was a pre-typed document, with handwritten words inserted at various places. The underlining in the extract above is added by me. The underlined words represent the handwritten words.

41.On 5 June 2015, Li and the other recipients under the 4^th purported resolution resigned from the Company with immediate effect.

42.I now turn to the parties’ cases. The Company’s case covers all of the four purported resolutions whereas Li’s case concerns just the 4^th one. It is more convenient for me to set out the Company’s case first, to be followed by Li’s.

THE COMPANY’S CASE

43.The Company’s case on the 1^st to 3^rd purported resolutions is the same. It makes different contentions in respect of the 4^th. In gist:

(1) The 1^st to 3^rd purported resolutions were invalid because the meetings at which they were passed were inquorate. Alternatively, if they were valid, the Company contends that Li acted in breach of fiduciary duty in procuring and taking part in passing them.

(2) As for the 4^th resolution, the Company challenges its validity on three alternative grounds. First, it was not a board meeting. Second, if it was, notice of the meeting was not given to all directors. Third, the bonus was compensation for loss of office and the requisite approvals from the general meeting and the Remuneration Committee were not obtained.

The 1^st, 2^nd and 3^rd purported resolutions were invalid

44.Under Article 116(1), the quorum for board meetings is two.

45.Under Article 103(1), a director shall not vote, nor shall he be counted in the quorum, on any resolution of the board approving any arrangement in which he is materially interested.

46.The 1^st to 3^rd purported resolutions were resolutions to pay special bonuses or bonuses to directors. The directors, who would receive the bonuses under the resolutions if passed, were therefore materially interested in the arrangements. They were therefore disqualified from voting and did not count towards the quorum on each occasion. Accordingly, the number of eligible directors to vote at the 1^st to 3^rd purported meetings were accordingly one, nil and nil – see paras 28, 30 and 32 above. It follows that all the three purported meetings were inquorate and the three purported resolutions were invalid.

47.It should be observed that there were a number of recipients under each resolution. Is there any room for arguing that, in respect of the bonus payable to any one recipient, only that recipient and no other directors was disqualified and excluded from the quorum? If so, the three meetings would be quorate. Ms Au said no and submitted that it is clear on the face of the minutes that only one composite resolution regarding the payment of “a special bonus” or “a bonus” was passed at each meeting. Hence all the receiving directors were disqualified from voting on the one composite resolution on each occasion.

Li was in breach of fiduciary duty by taking part in the passing of the 1^st to 3^rd purported resolutions

48.Ms Au’s submissions are as follows.

49.As a director of the Company, Li owed general fiduciary duties to the Company.

50.If a director chooses to participate in the management of the company and exercises powers on its behalf, he owes a duty to act bona fide in the interests of the company. He must exercise the power solely for the purpose for which it was conferred. To exercise the power for another purpose is a breach of his fiduciary duty. A director cannot be excused on the ground that he blindly followed the lead of another: Bishopsgate Investment Management Ltd (in liq) v Maxwell (No 2) [1993] BCLC 1282, at 1286c-d.

51.As to the burden of proof:

(1) Where a fiduciary relationship between the parties may be the occasion of unfair advantage to one of them, the burden lies on that party to show that he has not used that advantage for his own benefit: Ratiu v Conway [2005] EWCA Civ 1302 at para 121.

(2) Thus, once it is shown that there is a transaction which calls for an explanation, it is for the director to explain the transaction in question. A fiduciary is obliged to account for his dealings with a trust estate: Re Idessa (UK) Ltd (in liq) [2012] 1 BCLC 80 at paras 24 to 28.

(3) Where it is shown that a director has given away company assets for no consideration, this was prima facie use of his powers as a director for an improper purpose and the burden falls upon him to demonstrate the propriety of the transaction: Bishopsgate Investment Management Ltd at 1286d-e, i.

52.The Company highlights the following features which can be gleaned from the contemporaneous documents and objective facts:

(1) The 1^st to 3^rd purported resolutions were passed successively in a short time span of less than four months (from 30 December 2014 to 14 April 2015). Such frequent payment of bonuses is prima facie unusual, to say the least.

(2) The total amount of the purported bonuses under these resolutions was $33,200,000. Out of that, a total of $6,880,000 (being the highest amount) was payable to Li. This is 34.4 times his monthly salary of $200,000. Such an amount is extravagant and extraordinary on any reasonable view.

(3) The financial health of the Company, especially in terms of its liquidity, was doubtful and did not objectively justify the payment of such frequent and extravagant bonuses:

(a) The Company reported a significant loss of $116,419,000 in the year ended 31 December 2014. Although this was an “improvement” from the previous year, the significance of a “loss” is that shareholders would not be paid any dividends on their investments. In those circumstances, any additional bonuses in an amount as high as 34 times a director’s monthly salary require compelling justification.

(b) With respect to the 1^st and 2^nd purported resolutions (30 December 2014 and 26 January 2015), while the Company was stated to have a cash and bank balance of $167,319,000 as at 31 December 2014, its trade payables and bills payables due within two months exceeded $120,000,000. There being no certainty over when receivables would be received, the Company must be looking at the net sum of less than $50,000,000 as its liquid asset when resolving to pay a total of $7,600,000 under these resolutions. This is not an insignificant percentage (15.2%).

(c) With respect to the 3^rd purported resolution, Wang sent an email to other directors two days after the resolution stating his view that it was not appropriate to pay bonuses in light of the poor state of the Company’s financials. Ms Au highlighted that Wang himself was an intended recipient under that resolution.

(d) Wang wrote:

“在昨天下午執行董事工作會議上關於是否應當給公司董事及部分高管發放BONUS的議題，我已經陳述了不贊成的理由，現再次重申如下，請各位董事再次考慮:

…

2. 公司目前財務狀況十分艱難，我們昨天會議討論的第二個議題即是公司主體中山公司的運營資金嚴重不足，如何應對的問題。我們公司的現金雖然年度報表賬面表示還有1億元多點，但昨天會上黎總通報實際僅有3000多萬元，在這種境況下，此次再發放1500萬元，這對公司財務是雪上加霜，會加重財務危機狀態。

3. 公司目前仍然處於虧損狀態，業績不良。我想不出發BONUS的合適理由。

4. 公司管理長期處於半停狀態，自從董事會改組至今，董事會連一次經營會議都沒有開過，我作為董事覺得羞於拿BONUS的。

5. 公司資金是屬於全體股東的，我們作為董事在管理資金時要合法、合規、合理，要有道德操守水平。平白能夠拿到100多萬的BONUS，這確實很有誘惑力，但我覺得這種發放很難經得起股東們的質疑。為了信譽計，我建議同事們還是以慎重為上。” (original in simplified Chinese) (underline added)

53.Ms Au submitted that Li has failed to discharge his burden in explaining the propriety of these purported bonus payments. I shall return to Li’s explanation in the section below.

54.In sum, the Company contends that the objective facts show that the 1^st to 3^rd purported resolutions to pay bonuses were prima facie misuse of directors’ powers and call for an explanation but Li has to date failed to provide one. In the circumstances, Li was acting in breach of his fiduciary duties in taking part in the passing of the three resolutions. The Company has suffered loss and damage as a result. It seeks an account or damages from the defendant.

The 4^th purported meeting was not a board meeting

55.The Company’s pleaded case is that on 4 June 2015, Wang and four other directors were summoned to attend a meeting at Kwun Tong held between Chen and Li. At that time, the board consisted of 16 directors. The five new directors appointed at the 6:30 meeting on 1 June 2015 were not notified and did not attend the meeting.

56.In the re-re-amended defence and counterclaim, the Company pleads that by reason of the above matters, the 4^th purported meeting was not a board meeting.

57.In her closing submissions, Ms Au relied on other factual allegations to support that the meeting was not intended to be a meeting of the board. Rather, the meeting was intended to deal with the tension between the Chen camp and the Li camp. Among other things, she referred to the minutes of a board meeting of the Company held on 13 May 2016. The minutes recorded the recollection of Wang of the 4^th purported meeting. He recalled that it started off as a closed-door tripartite meeting among Chen, Li and a prospective investor. Five other directors were later summoned to the meeting and asked to sign on the 4^th purported resolution to confirm the outcome of the tripartite meeting. This could not, Ms Au submitted, on any view be regarded as a board meeting.

58.I should immediately say that I am not prepared to give much weight to the factual matters stated in the above paragraph and relied on by Ms Au in this regard. They were not mentioned in the Company’s pleading. Furthermore, as noted at the outset, the present management of the Company does not have any first-hand knowledge of what had happened at the 4^th purported meeting. Wang was not called as a witness in this action.

59.What I have before me is the minutes of the 4^th purported meeting, which apparently bears the signatures of the attending directors. On the face of it, I am prepared to proceed on the basis that the meeting on 4 June 2015 was a board meeting.

Notice was not given to all directors for the 4^th purported meeting

60.It will be recalled that six directors attended the 4^th purported meeting. The Company contends that notice of the meeting was not given to the remaining directors (excluding Li). That included the five new directors appointed at the 6:30 hearing on 1 June 2015, just three days earlier. It was Chai’s evidence that he personally checked with the five new directors and four of them replied that they did not receive notice of the meeting. Hence the meeting was invalidly convened.

61.In this action, Li’s case before the trial had been that the appointment of those five directors was not valid as the 6:30 hearing was not a validly convened meeting. That was what he pleaded in his re-amended reply and defence to counterclaim. In cross-examination, Li admitted that he had no knowledge about how, or to whom, notice was given in respect of the 4^th purported meeting. More significantly, he further admitted that the resolutions passed at the 6:30 hearing were in fact valid.

62.Ms Au therefore concluded in her closing submissions that it is beyond question that at least the five new directors had not been notified of the 4^th purported meeting. This invalidates the 4^th purported resolution.

Approvals were not obtained for the bonuses payable under the 4^th purported resolution

63.Article 99 provides that the board shall obtain the approval of the Company in general meeting before making any payment to any director by way of compensation for loss of office. Clause 16(d) of the Terms of Reference of the Remuneration Committee provides that the committee shall review and approve the compensation payable to executive directors and senior management in connection with any loss of their office. See the extracts reproduced in paras 22 and 26 above.

64.The Company submits that both provisions are engaged because the proposed payment of $10,000,000 under the 4^th purported resolution is in the nature of compensation for loss of office or compensation payable in connection with loss of office.

65.Although the 4^th purported resolution describes the relevant sums as “特別獎償”, such a label is not conclusive. The court must ascertain the true nature of such purported payments by reference to all the objective circumstances prevailing at the time:

(1) The content of the 4^th purported resolution makes it clear that while the named individuals would be given the “special bonus”, they must also perform handover of their positions, documents and duties within seven days. In other words, it was already contemplated that the recipients would terminate their offices or employment with the Company. The two obligations (payment and departure handover) are obviously inter-linked.

(2) The original typed-up version of the document did not contain any reference to departure or handover. The eventual addition of the new term by hand regarding handover shows that a quid pro quo arrangement was intended – in return for payment, the recipients, including Li, would have to leave the Company and see to the handover in the meantime.

66.It is not in dispute that the board had not at any time obtained the approval from a general meeting or the Remuneration Committee. As such, the 4^th purported resolution was invalid.

LI’S CASE

67.I now turn to Li’s case. It is notable that he considerably expanded his case by making a number of new revelations in cross-examination. These revelations touched on some of the material issues in dispute. In respect of each topic, I shall first set out his case as contained in his pleadings and witness statements. That will be followed by the new evidence in his oral testimony, if any.

The 1^st to 3^rd purported resolutions were valid

68.In his pleadings, Li denied that any of the 1^st, 2^nd or 3^rd purported resolutions would fall within the ambit of Article 103(1). It was stated that he shall refer to that article for its full terms and effects at trial.

69.In his witness statement, Li said of the passing of the 1^st to 3^rd purported resolutions:

“… 有關這一方面，我想強調的是這些款項都是根據公司章程和董事局的決議恰當地和合法地作出的。

…

有關的款項的發放，也是因為收取者對公司的貢獻而作出的，也沒有被告人所說的違反公司章程AA103(1)或AA116(1)的情況。我相信這方面是一個法律問題，我會留待我的法律代表在審訊時處理和作出陳述。”

70.That was Li’s case in respect of the validity of the 1^st to 3^rd purported resolutions before the trial.

71.Notwithstanding the above, in cross-examination, Li took the position that the three resolutions were valid by reason of Article 103(4). That sub-paragraph in Article 103 had never before been mentioned in either his pleadings or witness statement. In the witness box, he revealed for the first time that at each of the three meetings, he and the other directors disclosed their interests in the proposed bonuses to the chairman of the meeting pursuant to Article 103(4) as they did not want to give up their voting rights. Each time, the chairman of the meeting decided that they could vote. Hence, the resolutions were valid.

No breach of fiduciary duty in respect of the 1^st to 3^rd purported resolutions

72.In respect of the Company’s accusation that he was in breach of his fiduciary duties by taking part in the passing of the 1^st to 3^rd purported resolutions, Li pleaded that the special bonuses were approved and paid to him because of his significant contributions made to the Company and they were paid in recognition of such contributions. The payments were not in conflict with the Company’s interests and he was not acting in breach of his fiduciary duties when he participated in the passing of these three resolutions.

73.This is what Li said in his witness statement:

“我也不承認我曾經有在作為公司的董事的情況下，作出有違反受信責任的事。被告人說我和其他董事收取Special Bonus，是違反我們當時作為董事對公司的受信責任，這點我是完全不同意的，正如之前所述，有關的款項的發放，是因為我和其他董事對公司所作出的貢獻而作出的，和公司的利益是一致的。再者，據我所知，所有這些有關款項的發放，一從來沒有在公司的周年會員大會(AGM)中被質疑。” (underline added)

74.It can be seen from the underlined words that Li’s explanation for the bonuses was generic.

75.This is to be contrasted with the more detailed account which he gave in cross-examination.

76.In respect of the 1^st purported resolution:

(1) The resolution expressly referred to the “[recent] significant workload” as the reason for the special bonus.

(2) There was no elaboration on what that meant in Li’s pleadings or witness statement.

(3) In his oral testimony, he revealed for the first time a new reason behind the 1^st purported resolution.

(4) He explained that in early 2014, Chen approached him asking him to join the Company and try to “save” it as it had been badly managed. Although his service agreement was signed on 1 September 2014, he had in fact worked for the Company for a few months before that. The Company therefore suggested that he should be compensated for his hard work and contribution using the monthly salary of $200,000 as the benchmark for the four months that he had worked (ie May to August 2014). That was how the special bonus of $800,000 awarded to him under the 1^st purported resolution was arrived at.

77.In respect of the 2^nd purported resolution:

(1) The resolution expressly referred to the “[recent] significant workload” as the reason for the special bonus.

(2) Again, there was no elaboration on what that meant in Li’s pleadings or witness statement.

(3) In his oral testimony, it was pointed out to him that the 1^st and 2^nd purported resolutions were only 27 days apart and yet a special bonus was given to him (among others) again due to the identical reason of “[recent] significant workload”. At that juncture, he revealed a new reason behind the 2^nd purported resolution.

(4) By that time (30 December 2014), the preliminary financial figures of the Company for the year became available. The loss of the Company was drastically reduced from about $300 million for 2013 to about $110 million for 2014. It was a significant improvement. It was therefore suggested that a bonus should be given to encourage all those who had helped to bring about the reduction of $200 million in loss. Even though at that time the final figures were not yet ready, the directors knew that the Company was moving in a positive direction.

(5) Li said that the giving of the bonuses was reasonable in the circumstances.

(6) When asked by counsel why he did not mention the reduction of loss as the reason in his witness statement, Li replied that one could tell by looking at the financial statements. The reduction was very obvious.

78.In respect of the 3^rd purported resolution:

(1) The resolution expressly stated that the named directors and staff “are entitled to a bonus for their contribution to the improvement of the year end results”.

(2) Similarly, there was no elaboration on that in Li’s pleadings or witness statement.

(3) In cross-examination, it was pointed out to him that in light of his latest explanation for the bonus given in the 2^nd purported resolution, it would follow that the reasons for the 2^nd and 3^rd purported resolutions would be the same and bonuses were given in the space of three months for the very same reason.

(4) To this, Li explained that at the time of the 2^nd purported resolution, they only had the preliminary figures whereas at the time of the 3^rd purported resolution, the formal figures were available. With the formal figures before them, the directors felt that they should be further encouraged for their contributions to bring down the loss by $200 million. For Li, in particular, his contributions were the greatest and he should be given proper recognition for that.

79.Overall speaking, Li contends that the bonuses approved and paid to him in the three resolutions were reasonable as they were given in recognition of the significant works which he had done for the Company. By taking part in those resolutions, he was not acting in breach of any fiduciary duty owed to the Company. He stressed that the present management of the Company in fact did not know what had happened back in 2014 and 2015 and that one should evaluate the reasonableness of the bonuses by considering the facts then existing.

The 4^th purported resolution

80.In respect of the 4^th purported resolution, Li’s pleaded case is that the special bonuses were approved in recognition of the significant contributions made by the recipients. They were not meant to be paid in connection with any loss or termination of office. The special bonuses were not compensation of any kind to any of the directors, including Li. Hence, they were not subject to any approval by the general meeting or the Remuneration Committee.

81.It was further pleaded that in any event, none of the members of the committee have ever raised any objection to or disapprove the minutes of the 4^th purported meeting. There is no reason to suggest that the committee or any of its member would have objected to or otherwise disapproved of the same.

82.In his witness statement, Li reiterated the above and added that there was no objection or query ever raised over the special bonus at the annual general meeting of the Company.

83.In cross-examination, Li made the following new revelations:

(1) It was Chen who proposed the 4^th purported meeting. Li did not know whether notice was given to other directors. When he himself arrived at the meeting venue, the resolutions had already been passed and he was asked to sign a document.

(2) Before the meeting, on 1 June 2015, Li and Chen had a conversation. (The two of them were classmates in the PRC.) Li told Chen that he had wanted to manage the Company but now Chen had messed it up. Then Chen told Li that Chen intended to leave the Company. At that point, Li said in that case, he would not remain and that as he had served the Company, he should be given bonus. Chen replied that he would make arrangement.

(3) On 4 June 2014, Chen called Li at around noon and told him that there would be a meeting in the afternoon.

(4) In light of the bonuses Li had already received in the past three resolutions, counsel asked him to explain the basis on which a further bonus should be given in June 2015. Li explained that the bonus was for the hard work that he had put in between January and May 2015. Furthermore, Li followed Chen and decided to leave the Company and he asked – as executive director, shouldn’t he be given bonus?

84.In closing, Li maintained that the bonus given to him under the 4^th purported resolution was a bonus and was not compensation for loss of office. Hence, Article 99 and clause 16(d) of the Terms of Reference were not engaged. No approval from the general meeting or the Remuneration Committee was needed, as contended by the Company. He should be entitled to keep the first instalment of that bonus and the Company is liable to pay him the second instalment.

85.In addition to the above, Li repeatedly made two points at the trial. First, he complained that the Company is seeking repayment of the bonuses from him only, but not the other recipients. In his view, this is not reasonable. Second, the bonus payments to him (and others) were recorded in the Company’s employer’s tax returns and annual reports.

THE EVIDENCE

86.The factual disputes in this case are not extensive. As noted at the outset, the Company’s case is largely based on its documents. Chai’s evidence does not really add much. My task is primarily to evaluate the credibility of Li’s testimony. More particularly, I need to assess the veracity of his latest revelations concerning (1) his disclosure of interest and the chairman’s decision at each of the 1^st to 3^rd purported meetings pursuant to Article 103(4), and (2) the various justifications for the bonuses approved under the four resolutions. The former has a material bearing on the validity of the resolutions. The latter goes to the allegation of breach of fiduciary duty.

87.Li’s evidence should be assessed against the backdrop of undisputed and indisputable facts. I am to weigh the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events. Generally speaking, contemporaneous documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility. The internal consistency (or inconsistency) of the witnesses’ evidence should be taken into account. The court would also be guided by its overall impression of the characters and motivations of the witnesses. The court should caution itself against the dangers of too readily drawing conclusions about the truthfulness and reliability solely or mainly from the appearance of the witnesses. See, eg, Re B (Children) [2009] 1 AC 11, para 31; Standard Chartered Bank v Li Wai Ping HCA 10587/2000 and 3575/2003, 17 February 2011, para 19; Hui Cheung Fai v Daiwa Development Limited HCA 1734/2009, 8 April 2014, paras 76 to 82.

88.It is plain that Li made a number of new allegations for the first time while he testified. These allegations concerned the material issues in dispute.

89.When a witness makes a new allegation or provides for the first time an account of events at trial on an issue which has long been in dispute between the parties, the court is almost bound to treat the new allegation or the new account with some degree of scepticism. This is particularly so when the issue is all along hotly disputed in pleadings and witness statements. The court would be even more sceptical if the witness is unable to explain why he could not have made the allegation or given the account earlier and well in advance of the trial. In these circumstances, the truth of these last-minute revelations are often very much in doubt.

90.In my view, the present case is one such instance.

91.At trial, he made the fresh allegation that he had disclosed his interest and the chairman of the meeting had determined that he could vote on the resolution in each of the 1^st to 3^rd purported meetings. This factual allegation, if upheld, would allow him to rely on Article 103(4) such that he (and others) would not be disqualified from voting and would be counted towards the quorum of each meeting. The end result was that the meetings would be quorate and the resolutions valid.

92.The validity of the three resolutions have been in issue since the pleadings were served. Nevertheless, Li made no mention of the alleged disclosure and Article 103(4) at all throughout these proceedings save until when he was in the witness box at trial. There is no apparent reason for the omission.

93.Li was repeatedly asked by counsel why he had failed to refer to this material matter earlier on in these proceedings. Li was not able to give any satisfactory explanation for the omission. He sought to say that the article was clearly written. However, that did not account for why he omitted to mention anything about his disclosure of interest and the chairman’s determination in each of the three purported meetings.

94.In these circumstances, I have serious doubt over the truth of the fresh allegation.

95.The same doubt applies to the various justifications for the bonuses which Li put forward for the first time in cross-examination.

96.Similarly, the Company had set out in clear terms in its pleadings the factual basis of its counterclaim based on breach of fiduciary duties. Whether the bonuses were justifiably approved under the 1^st to 3^rd resolutions has all along been a “live” issue. Again, there is no immediately apparent reason why Li had omitted to put forward his own case on the justifications save for a general assertion that they were not in conflict with the Company’s interests.

97.When asked why, Li initially said that he had not previously explained in concrete terms as it was unnecessary to do so. Later on, he added that he had in fact told his lawyers about them but ultimately the explanations were not included in the court documents. He doubted whether his lawyers were up to standard.

98.I am unable to accept the explanation as true.

99.When giving evidence, Li spoke in a clear and articulate manner. He was able to grasp the essence of counsel’s questions quickly and respond readily. He served as the chief executive officer of the Company, a listed company. He came across as an astute and business savvy person. The issues in dispute in this action are not complicated. His witness statement was written in Chinese. He should have no difficulty in knowing what was included and what was not included in it. I find it hard to believe that if the justifications put forward by Li at the trial were true, he would choose to keep quiet about them all along in these proceedings and only chose to reveal them in an elaborate manner at the last minute in his oral testimony.

100.For the above reasons, I reject the fresh allegations put forward by Li at the trial.

101.I wish to add that when I evaluate Li’s credibility, I have not given any weight to the email sent by Wang to the directors two days after the 3^rd purported resolution. The matters contained in the email are controversial in this action. Wang was not called to testify. In the absence of any cross-examination, I do not consider that it is proper to accord weight to the email when determining the veracity of what he said there. In the evaluation process, I have also not given weight to the minutes of subsequent board meetings.

FACTUAL FINDINGS

102.For the above reasons, I decline to find that at each of the 1^st to 3^rd purported meetings, Li had disclosed his interest in the resolution to pay bonus and the chairman had decided that he could vote on it, whether pursuant to Article 103(4) or not. I also decline to find that the reasons for the bonus payments under the 1^st to 3^rd purported resolutions were as alleged by Li in his oral testimony, namely in recognition of his works done between May and August 2014 and the improvement in the Company’s financial position, respectively.

103.I find that the 4^th purported meeting was a board meeting but that notice of the meeting had not been given to at least five of the 16 directors. I accept Chai’s evidence in this regard.

104.I further find that notwithstanding that it was called a “special bonus”, the sums of money approved by the board at that meeting were in fact compensation given to Li and others for their leaving the Company. I arrive at this finding by taking into account the overall circumstances leading to, and surrounding, the passing of the resolution, including:

(1) Li’s own evidence that on 1 June 2015, three days before the 4^th purported meeting, he and Chen had a conversation in which both indicated their intention to leave the Company and Li expressly asked for a bonus for that.

(2) The minutes, as altered manually, stated that those who were entitled to receive the special bonuses were required to hand over their works and documents within seven days.

(3) Those recipients in fact resigned on the following day.

(4) The intention was plainly that the special bonus was paid in return or by reason of the departure of the recipients from the Company.

RULINGS

105.Based on the undisputed facts and the above factual findings, I now address the Company’s counterclaim and Li’s claim in turn.

106.In respect of each of the 1^st to 3^rd resolutions, it is beyond dispute that Li and the other directors named to receive the bonuses or special bonuses were materially interested in the resolution approving the bonus payments. Article 103(1) applied and they were disqualified from voting and did not count towards the quorum. On the facts as found, Article 103(4) was not triggered. Hence, each of the 1^st to 3^rd purported meetings were inquorate. The 1^st to 3^rd purported resolutions were therefore invalid. Li should pay back the three sums to the Company with interest.

107.That would be sufficient to dispose of the Company’s counterclaim.

108.However, if I am wrong on this, I find that in light of the poor financial condition of the Company at the time, the succession of a series of bonus payments within a very short space of time, the large size of the bonuses when compared to the monthly salary of Li, the bonuses under the 1^st to 3^rd purported resolutions call for an explanation. Li was however unable to provide any satisfactory explanation save for a general assertion that the payments were not in conflict with the interests of the Company.

109.It is true that the present management of the Company does not have any first-hand knowledge of the circumstances in which the bonuses were approved. However, the objective facts, as highlighted by Ms Au in her submissions, are plain. These bonuses were extraordinary in size and in frequency. There are serious doubts over their propriety. Li has failed to put forward any proper justification for them. I therefore conclude that by taking part in passing the resolutions, he failed to act in the best interests of the Company and was in breach of his fiduciary duties. The submissions made by Ms Au in this regard are sound and reasonable. I agree with them in general.

110.At closing submissions, as between an account for profits and damages, the Company elected the latter. It would be an appropriate relief and the loss should be assessed in the sum of the three bonus payments made to Li under the three resolutions, together with interest.

111.In respect of the 4^th purported resolution, the 4^th purported meeting was invalidly convened as notice had not been given to all the directors: Palmer’s Company Law Vol 2 at para 8.2112; Gore-Browne on Companies Vol 1 at para 14. For that reason, the 4^th purported resolution was invalid. Li should return the first instalment of the bonus to the Company and the Company is not liable to pay him the second instalment.

112.However, if I am wrong on this, on the facts as found, the bonus to Li was in the nature of compensation for his loss of office. As such, Article 99 and clause 16(d) of the Terms of Reference of the Remuneration Committee applied. Approval was required from the general meeting and the committee. No such approval was obtained. The 4^th purported resolution was therefore invalid.

113.In arriving at the above conclusion, I have taken into account the further points made by Li as set out in para 85 above.

(1) Insofar as Li complains that the Company is prosecuting him selectively, this is in itself not a relevant consideration when it comes to determining the validity of the resolutions. In any event, Chai said in cross-examination that in the present case, it was Li who commenced the action against the Company and, further, taking out legal actions in general would incur considerable costs. This appears to be a fair view.

(2) Insofar as Li is saying that since the bonuses were recorded in the employer’s tax returns and the annual reports, they were confirmed by the Company as valid, there is in my view no merit in this contention. Ratification was never pleaded as part of Li’s case. This is not a matter which Li should be allowed to argue now.

114.Lastly, for completeness, I should deal with two issues relating to, first, the formulation of Li’s pleaded claim and, second, the court’s jurisdiction to hear it, which were discussed in the course of counsel’s opening submissions.

115.As pleaded in the statement of claim, Li’s claim is purely based on the 4^th purported resolution. This raises the question of whether that discloses a viable cause of action.

(1) A board resolution is a decision made by the board. Here, the board made the decision to pay bonus to Li. However, unless the decision is subsequently acted on by the Company, the board resolution itself does not create a binding obligation on the part of the Company vis-à-vis Li.

(2) Analysed this way, Li is in no position to enforce the board resolution against the Company.

(3) The statement of claim therefore arguably discloses no cause of action. The action may be dismissed on this ground alone.

116.It will be recalled that Li entered into the service agreement with the Company. Arguably, Li may rely on clause 5.3 to claim the second instalment of the bonus under the 4^th purported resolution. However, that presents two issues.

117.First, the above clause was not pleaded in his pleadings. The statement of claim made no mention of the service agreement at all. In his re-amended reply and defence to counterclaim, there was only a general statement that Li shall refer to the service agreement for its full terms and effect at trial. That does not seem to me to be sufficient to alert the opponent that clause 5.3 would be in issue for pleading purposes.

118.Second, it is plain from the contractual wording that the relationship between Li and the Company was one of employment. Even if Li should be allowed to rely on clause 5.3 to raise a cause of action based on his employment contract with the Company, he would run into a difficulty of a totally different nature. That is, does this court have the jurisdiction to hear the claim?

119.It would be a claim for a sum of money arising from the breach of a term of a contract of employment. The Labour Tribunal would have exclusive jurisdiction to hear it: see section 7(1) of the Labour Tribunal Ordinance, Cap 25 and para 1(a) of the Schedule.

120.This action not having been commenced in the Labour Tribunal, on the face of it, I do not have jurisdiction to try Li’s claim.

121.Li was acting in person at trial. He did not make any submissions on the above two issues, namely the formulation of his pleaded case and the jurisdiction point.

122.In any event, as far as the 4^th purported resolution is concerned, it forms part of the Company’s counterclaim. I have dealt with the validity of the resolution substantively and found in favour of the Company on its counterclaim, having considered the evidence and the merits of the legal submissions.

123.That would have the effect of disposing of Li’s claim in substance in its entirety. I therefore think it unnecessary for me to comment further on the two issues.

CONCLUSION

124.I order that Li’s action be dismissed.

125.On the Company’s counterclaim, I make the declaration that each of the 1^st to 4^th purported resolutions was invalid.

126.I further order that Li do pay back the sums of (1) $800,000, (2) $1,000,000, (3) $1,800,000, and (4) $1,640,000 to the Company, with interest accruing in each case from the date of payment, namely (1) 30 December 2014, (2) 31 January 2015, (3) 16 April 2015 (for $900,000) and 28 May 2015 (for $900,000), and (4) 4 June 2015, respectively, at the rate of 1% above HSBC prime rate up to the date of judgment and at judgment rate after that until payment.

127.I make a costs order nisi that the Company do have costs of the action and the counterclaim, including all reserved costs, to be taxed if not agreed.

128.If Li wishes to have this judgment translated to him in Chinese orally, he should contact my clerk within 14 days from the handing down of this judgment to arrange for a date.

The plaintiff appeared in person

Ms Astina Au, instructed by Deacons, for the defendant