Man Luen Corporation (A Firm) v. Sun King Electronic Printed Circuit Board Factory Ltd

HCA007521/1980

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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Coram: Fuad, J.

Date of Judgment: 23rd December, 1981.

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JUDGMENT

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1. By this action the plaintiff, Man Luen Corporation ("the Firm" or "Man Luen") claims the balance of the price of goods sold and delivered to the defendant, Sun King Electronic Printed Circuit Board Factory Limited ("the Company" or "Sun King"). The Firm also claims a sum of money in respect of a letter of credit opened at the Company's request to settle a particular invoice for goods sold to them by a third party. The total sum, upon which interest is also claimed, amounts to $813,977.46.

2. The defence puts the Firm to strict proof in respect of these claims and pleads that the relevant transactions were "illegal, void and unenforceable" because the directors running the Company had, in breach of section 162 of the Companies Ordinance, failed to declare their interest in those transactions. By way of counterclaim, it is averred that three named directors had "acted fraudulently and/or in breach of their fiduciary duties" in that they had not disclosed their interest in the transactions either at a meeting of the Board or in any general meeting of shareholders. The Company counterclaimed the specific sum of $802,195.47 from the Firm as being the amount of the profit made by the directors in breach of their fiduciary duties on the basis that the Firm was liable to account to the Company. At the hearing the claim for that sum has abandoned, but the prayer for relief still includes a general claim for an account of profits. The Company also counterclaims the sum of $129,062.50 in respect of one particular lot of goods which were damaged by fire and therefore reduced in value.

3. It will be seen at once that this is not by any means an ordinary sale of goods action. The sole partners who made up the Firm (Messrs. Ma Wen Pin, Lam Tak Sun and Liu Wing Fook) were at material times three of the eight directors of the Company. It is the alleged breach of their statutory obligations and of their fiduciary duties, and the consequences that follow any breach that is proved, which is central to the issues that fall to be resolved.

4. Before I go any further, I should mention that early in the trial I posed a procedural question that was worrying me, and it was this. Since any duty to account, by reason of a breach of fiduciary duties by the directors, is to the Company, notwithstanding that the three directors concerned, and only they, comprised the Firm, could the Company counterclaim for an account against the Firm? I was apparently unduly concerned, and perhaps wrong, for both counsel saw no difficulty in the position as the pleadings stood, and Mr. Eddis for the Firm was content to let the matter rest. Certainly if the difference in capacities had been an impediment a suitable amendment, which I would readily have allowed, could have been made.

5. Mr. Geoffrey Ma, for Sun King, was quick to acknowledge that the defence had not called evidence that could be said to cast any real doubt upon the facts and documents that founded Man Luen's general claim. He conceded that the documents were apparently in order and that there was no evidence that the goods were not sold and delivered at agreed prices, and indeed used, by Sun King. He explained that since the three directors who were running Sun King at the time were also the partners of Man Luen, he was simply not in a position to adduce such evidence. However he submitted that there were two lots of goods in regard to which Man Luen's claim ought to be reduced.

6. The first of these matters concerns two of the invoices produced in evidence by the Firm. These were invoice Nos. 1085 and 1086 dated the 4th and the 8th July 1980 respectively. Upon each the director who was responsible for the Company's accounts, Mr. Liu Wing Fook, had noted the following, "The goods come from Selat Sunda to be resold to Sun King. Price at original cost and charges to be raised later. Collected payment for goods in advance ($25,000 and $15,000) which have already been entered in Man Luen's current account." Mr. Liu Wing Fook agreed in evidence that on the face of it the notes on the invoices indicated that Man Luen had made two payments of $40,000 but said that the ledgers showed only one payment ($25,000 plus $15,000). He might, he said, have made the same entry on both invoices in error and only one credit of $40,000 was in fact due to Sun King. Or it might have been that since post-dated cheques were so often used, the ledger only reflected amounts paid by cheques that had actually been honoured. Mr. Liu, however, felt bound to admit that the accounts sometimes got mixed up and that it was possible that he had omitted, by mistake, to allow a second credit of $40,000 to the Company. In view of this, I think it would be right to determine this matter in favour of Sun King and to reduce, by $40,000, the ultimate sum found to be due to Man Luen.

7. The other amount claimed by the Firm which Mr. Ma says must be reduced, is reflected in invoice No. 1062 which is for $184,375.00. It is common ground that this particular batch of goods was damaged by sea water from the hoses of the firemen who put out a fire in the place where the goods were stored before they were delivered to Sun King. On this point, Mr. Ma Wen Pin admitted that Man Luen had made an insurance claim (initially based on 80% loss, later reduced to 30%) and had been paid $75,000 by the insurance company. Mr. Geoffrey Ma pointed out that the claim in favour of the firm had been met in March 1980 and although Mr. Ma Wen Pin had said that in the event the goods could be used by extra polishing to remove the effects on the laminates of the sea water, and were almost perfectly fit for the purpose for which they were sold and bought, he had made no attempt to repay the $75,000 to the insurance company or to give any allowance to Sun King for damaged goods. When all this was put to Mr. Ma Wen Pin he said that the preferred to await the outcome of this trial and dispose of the insurance money or reduce his claim on Sun King, as the Court might direct.

8. Mr. Lau Wee Hung, who is the Factory Manager of Sun King and who held that position when the laminates in question were delivered to the factory and later used, gave evidence for the defence about them. He recalled the particular consignment very well. The sea water had caused many of the laminated boards upon which printed circuits were to be made to oxidize. Since these were laminates from Britain they did not ordinarily need polishing but this process was necessitated in view of the condition of the consignment. Although this rendered the laminates "almost perfect" they could not all be used and some had to be discarded.

9. In the circumstances it would have been extraordinarily difficult, if not impossible, for precise evidence to be given to assist the Court in assessing the proper measure of damages due to Sun King for the defective consignment. Indeed to expect such evidence would seem to me to be quite unrealistic. I am satisfied that extra work had to be done to make most of the boards useable, that there was more wastage than usual, and that some of the boards could not be used at all. This is the kind of situation which calls for the application of judicial common sense if justice is to be done. Doing the best that I can, I assess that the amount at which the consignment was priced should be reduced by 30% so that a "damaged goods price allowance" is made in favour of the Company. Sun King, therefore, is entitled to set off another $55,312.50 from the total amount due to Man Luen.

10. I find on overwhelming evidence that the Firm has made out its claim in respect of goods sold and delivered (and not paid for) and in respect of the letter of credit, reduced by the two amounts. If my arithmetic is right, Sun King owes Man Luen the sum of $718,664.96 with interest at an appropriate rate.

11. I now turn to the real issue in this case and that relates to the claim that the three directors of Sun King who were the sole partners of Man Luen must account to Sun King for the profits that they made on the contracts out of which this action arises. Mr. Geoffrey Ma very rightly conceded that whatever remedies might be available to the Company against the three directors who formed Man Luen, it was far too late to ask for recission of the contracts. The claim for an account rests on the obligations upon directors imposed by section 162 of the Companies Ordinance and on the general law relating to the fiduciary relationship of directors toward their company. I will deal first with the statutory position.

12. Section 162 of the Companies Ordinance (the equivalent of section 199 of the U.K. Companies Act of 1948) imposes a duty on a director interested directly or indirectly in any way in any contract or proposed contract with a company of which he is a director, to declare the nature of his interest at a meeting of the Board of Directors, on pain of a fine in default. The other provisions of section 162 do not concern us here, but it is to be noted that the section is expressed not to prejudice any rule of law restricting directors of a company from having any interest in a contract with the company. I should mention here that all the evidence shows that Sun King was in serious financial difficulties by the early part of 1979 and it is clear that the formation of Man Luen, even if that were not the only option available, did in fact enable the Company to continue in business, which it does to the present day.

13. The three partners of Man Luen who were also directors of Sun King all testified that two Board meetings were held on the 19th February 1979, the first at the Company's factory mananagement offices and the second in the Hong Kong Hotel. Depending on how one looks at it, it might be that it could be said that the meeting began at the factory and, after a break for a meal, continued at the hotel. Certainly it seems that any notices that were given for the first meeting were not repeated for the second. The evidence of the three directors who were in partnership as Man Luen regarding these meetings was supported by another director who said he was present at both, Mr. Chen Kim Hung. The only other director said also to have attended the meetings, Mr. Chu Siu Ngai, was not called by either side.

14. I am asked by Mr. Geoffrey Ma to find that the first meeting at the factory premises never took place and that the minutes purportedly of that meeting, signed by the four directors who swore they had attended it and by Mr. Chu Siu Ngai (showing that the remaining three directors, Mr. Ma Sing Tai, Mr. Wong Kam Chuen and Mr. Chu Lai were absent) was a forgery. He submitted that everything pointed that way for the following reasons:-

15. I think it will be convenient here to set out the minutes of the disputed meeting which, as had been noted, recorded that three of the directors had been absent, and which was signed by the five directors said to be present, under the chairmanship of Mr. Ma Wen Pin:-

"Discussion Topic and Matter resolved:-

16. Mr. Geoffrey Ma also asks me to hold that if the meeting did take place, it was invalid for want of notice to all the directors. I am bound to say that the directors who are also partners of Man Luen should not be surprised that the defendants have sought to persuade the Court that the earlier of the two meetings on the 19th February 1979 at which it is said that the Board took a decision to form Man Luen, never took place. Mr. Geoffrey Ma's submissions on this matter were highly cogent.

17. I will now say a word or two about the impression I formed of Mr. Ma Wen Pin when giving his evidence. He was, necessarily before me for a long time. He impressed me considerably and I am inclined to believe him, supported as his evidence was by the other three directors who gave evidence for the plaintiff, who also made good witnesses. I became convinced that there was nothing sinister about the formation of Man Luen and, company law apart, nothing reprehensible about what they did, I believe, in a genuine effort to save their company - an effort that seems to have succeeded. There is no suggestion and no evidence that Sun King was not in dire financial trouble or that the company could have raised money to continue in business in any other way. On the evidence as a whole I reach the conclusion that the impugned meeting did take place and that the minutes accurately reflect what was discussed and resolved. The evidence about notice to the directors who did not attend is rather confusing but for reasons which I will presently explain, I do not feel called upon to decide whether the meeting was valid, or indeed, whether the provisions of s.162 of the Companies Ordinance were complied with.

18. It is well settled that provisions similar to s.162 of the Ordinance merely supplement the duties imposed by general law upon directors in relation to their contracts. The statutory duties do not go so far as those insisted upon by the general law and, unlike the latter obligations, they cannot be waived by the articles. I must remark in passing that the articles of the Company were not produced before me in evidence. With respect, I feel I can do no better than to read two passages from Gore-Browne on Companies (43rd Edition). The first passage occurs in para. 27-16 -

19. These equitable rules relating to the duties of directors developed in the cases, are extremely strict. Their foundation is that directors must not place themselves in a position where a conflict with their private interest might arise and to a certain degree their position is not far different from that of trustees. As the passages quoted above indicate, the rule is so strict that the Court is prohibited from going into questions of the fairness or unfairness of a relevant contract.

20. If waiver provisions had existed, Mr. Eddis would, of course, have relied upon them. It is clear that no general meeting was held of the shareholders at which disclosure was made and sanction given. Mr. Eddis, however, made the point that in practice the failure to obtain the sanction of a general meeting made no difference, because the directors who made disclosures to the Board held over 50% of the shares - and there were no other shareholders other than directors. While it is true that where directors are in effective control over the general meeting, such a meeting might be on more than a mere formality, in my judgment this is no answer to the rigid requirements of the general law relating to the fiduciary duties of directors. There is, of course, a great difference between a general meeting and a directors' meeting. For one thing the notice for a general meeting has to be far more particular; for another at such a meeting a director who wishes to keep profits otherwise accountable to the company would have to make full disclosure of the nature and extent of his personal profit and obtain the express sanction of the meeting. A director/shareholder who knew his law, in the absence of waiver provisions in the articles, could feel secure that despite his possible lack of interest in board meetings, none of his fellow directors could lay their hands on profits made in contracts with the company without the sanction of a general meeting which he would be given the opportunity to attend.

21. Mr. Eddis also submitted that there were features in this case that would entitle the Court to refuse to give the Company the equitable relief (an account) that it seeks. The partner/directors had saved the Company; there was no evidence of unfair dealing and it would be unconscionable if the director now running the Company, who did not deign to give evidence, were allowed to benefit from the principles of equity. With due respect to these arguments, and I can well understand the chagrin that no doubt is felt by those who instituted this action, however, I find no valid grounds to decline to exercise my discretion in the Company's favour. Mr. Eddis sought to draw some support for his case in general from an authority cited to me by Mr. Geoffrey Ma: Costa Rica Railway Company Ltd. v. Forward [1901] 1 Ch. 746 but it seems to me that case turned on the proper construction of the company's articles and there is nothing in the decision that keeps him here.

22. I have not referred in this judgment to the other cases cited to me by Mr. Ma. This is because some appeared in the footnotes to the passages I have quoted from Gore-Browne on Companies (passages which Mr. Eddis agrees correctly state the law) while the remainder related to proper notice of meetings, an issue which did not, in the event, fall for decision.

23. For the reasons I have attempted to give, I give judgment for the plaintiff Firm for $718,644.96 on the claim, and judgment for the defendant Company for an account of the profits made by the three directors concerned out of the relevant contracts. Mr. Eddis invited me to do the arithmetic myself to save the parties further costs. Even if I felt qualified to do so, I regret that I must decline the invitation, if for no other reason, because many of the goods were passed on by Man Luen to Sun King at cost price, but it was agreed that relevant expenses relating to interest and godown charges would be due from Sun King. I will now hear counsel on the form my orders should take, on the question of interest on the plaintiff's successful claim and on costs.

Representation:

Mr. Francis Eddis (Lau, Wong & Chan) for plaintiff.

Mr. Geoffrey Ma (Woo, Kwan, Lee & Lo) for defendant.