Cheeroll Ltd v. Philip Lelgh Tose and Others

HCA015993A/1998

IN THE HIGH COURT OF THE HONG KONG SAR

COURT OF FIRST INSTANCE

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Coram: The Hon. Mr. Justice Waung in Chambers

Date of Hearing: 9 and 10 June 1999

Date of Handing Down of Judgment: 17 June 1999

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JUDGMENT

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1. The is an application by all four Defendants in the Action to strike out the Statement of Claim on the ground that it discloses no reasonable cause of action. The Defendants ask in the event of the Court striking out the Statement of Claim that the Action should also be dismissed.

2. In this Action, the Plaintiff claims against the four Defendants in respect of two sets of alleged negligent misrepresentations during the period from October to December 1997 which caused loss and damage to the Plaintiff, said to amount to some $27 million. The Plaintiff was at all material times holder of some 4 million shares of a company called Peregrine Investments Holdings Ltd. ("peregrine"), which was a publicly listed company. Each of the four Defendant was at the material time an executive director of Peregrine. There were at the material time also quite a number of non-executive directors of Peregrine. In the months leading to October 1997, there were persistent rumours that Peregrine and its business were in financial difficulties.

3. On the 27^th of October 1997, there appeared in the South China Morning Post and other papers an announcement by Peregrine ("October Announcement") which was to the effect the Board of Peregrine had decided to make the announcement to dispel the rumours. The October Announcement made the assurance that the rumours of losses by Peregrine were untrue. The case of the Plaintiff is the Defendants issued the October Announcement and that the October Announcement was untrue and that the Plaintiff relied on the October Announcement and did not sell the shares owned by the Plaintiff (paragraphs 7 to 14 of the Statement of Claim). This is first set of negligent misrepresentation, the subject of the Action.

4. The second set of negligent misrepresentations relied on by the Plaintiff consists of;-

I will refer to the above three documents collectively as the "December Documents". The Results were said to be produced to quash rumours about the Peregrine Group and were attached to the Letter and the Circular. In the Letter and the Circular, the Board of Peregrine undertook to advice the shareholders of Peregrine on a proposed new investment by Zurich Centre Investments Ltd. Paragraph 18 of the Statement of Claim pleads the following important words from the Circular:-

It is the case of the Plaintiff that the Defendants issued the December Documents and that the December Documents were untrue and that the Plaintiff relied on the December Documents and did not sell its shares in Peregrine (paragraphs 15-29 of the Statement of Claim).

5. Peregrine the company itself had been wound up by the Court due to its insolvency and the Plaintiff as a large investor in the company which had lost the value of its investment, by this Action seeks to recover its loss from the four individual directors. The question on this strikeout application is whether in respect of each set of the negligent misrepresentation, the Plaintiff has sufficiently pleaded the necessary averments. It is not in dispute that for any negligent misstatement of the company, the Plaintiff can look for recovery against the company Peregrine, the question being whether at law, the Plaintiff can also seek recover against the individual Defendants directors in the legal circumstances pleaded by the Plaintiff.

APPLICABLE LEGAL PRINCIPLE

6. At the hearing before me, the law on the liability of a company director for negligent misstatement is not in dispute. Mr. Whitehead for the Plaintiff, accepts the correctness of the authoritative statement by the House of Lords in Williams v Natural Life Health Foods Ltd. [1998] 1 WLR 831. The facts of the Williams case are far stronger than this Action. Mr. Mistin, the 2^nd defendant became very successful in health food trade and then incorporated his business into the Natural Life Health Foods Ltd., the 1^st defendant becoming himself the managing director. The company was beneficially owned by him. The business of the company was to franchise marketing of health food and as franchisor to advise and assist franchisee about the manner in which the franchisee carried on its health food business. The franchisee paid the franchisor a regular fee. The plaintiff approached the 1^st defendant company as a potential franchisee and was given by the 1^st defendant brochures advertising the skill and experience of the 2^nd defendant in health food. The 2^nd defendant took a large part in the preparation of the plaintiff's financial projections. The plaintiff did not know the 2^nd defendant and had no material dealings with him. The plaintiff became a franchisee but the turnover of the plaintiff turned out to be far less than what was predicted by the 2^nd defendant. The plaintiff sued the 1^st defendant company and when the 1^st defendant became insolvent, the plaintiff joined. the 2^nd defendant as being personally liable to the plaintiff in negligence. At Trial, the Trial Judge held the 2^nd defendant liable and the Court of Appeal by a majority upheld the judgment. The House of Lords unanimously allowed the appeal and held that the 2^nd defendant as director of the 1^st defendant company was not liable to the plaintiff for the negligent misstatement of the 1^st defendant company, prepared largely by the 2^nd defendant. Lord Steyn said that there was nothing done by the 2^nd defendant as to indicate objectively to the plaintiff that he assumed personal responsibility.

7. Lord Steyn said at page 835A:-

"What matters is out that the liability of the shareholders of a company is limited but that a company is a separate entity distinct from its directors, servants or agents. The trade who incorporates a company to which he transfers his business creates a legal person on whose behalf he may afterwards act as director. For person purposes, his position is the same as if he had sold his business to another individual and agreed to act on his behalf. Thus the issue in this case is not peculiar to companies. Whether the principal is a company of a natural person, someone acting on his behalf may incur personal liability in Iorr as well as imposing vicarious or attributed liability upon his principal. But in order to establish personal liability under the Headley Byrne, which requires the existence of a special relationship between the plaintiff and the tortfeaser, it is not sufficient that there should have been a special relationship with the principal There must have been an assumption of responsibility as to create a special relationship with the director or employee himself."

Lord Steyn then went on to explain why an objective test has to be applied to ascertain if there is an assumption of personal liability. At page 835F, he said:-

"The touchstone of liability is not the state of mind of the defendant. An objective test means that the primary focus must be on things said or done by the defendant or on his behalf in dealings with the plaintiff. Obviously, the impact of what a defendant says or does must be judged in the light of the relevant contextual scene. Subject to this qualification the primary focus must be on exchanges (in which term I include statements and conduct) which cross the line between the defendant and the plaintiff. Sometimes such an issue arises in a simple bilateral relationship. In the present case a triangular position is under consideration: the prospective franchisees, the franchisor company, and director. In such a case where the personal liability of the director is in question the internal arrangements between a director and his company cannot be the foundation of a director's personal liability in Iorr. The inquiry must be whether the director or anybody on his behalf, conveyed directly or indirectly to the prospective franchaisees that the director assumed personal responsibility towards the prospective franchisees."

8. The first principle which emerges from the Williams judgment is that there must be a special relationship between the plaintiff and the director not just a special relationship between the plaintiff and the company. The second principle which I extract from the Williams judgment is that the touchstone of liability of a director is not the state of mind of the director defendant. As a natural consequence of the second principle, the third principle which emerges from the Williams judgment is that in a triparte situation such as this namely between the Plaintiff, the company Peregrine and each of the director Defendant, the primary focus must be on what were alleged to be the exchanges between a particular director Defendant and the Plaintiff (including action or statement by a particular director Defendant) as to convey to the Plaintiff that the particular director Defendant assumed personal responsibility toward the Plaintiff. Each particular exchange flowing from the particular director Defendant to the Plaintiff must be identified.

9. The fourth important principle which can be extracted from the Williams case is the criterion of reliance by the claimant on the assumption of director's responsibility. At page 836H, Lord Steyn described how the Supreme Court of Canada in Edgeworth Construction Ltd. v Lea [1993] 3 S. C. R. 206 held that by affixing the seals to drawing, the individual engineers of an engineering company did not assume personal responsibility to the plaintiffs which lost money as result of errors in the specifications and drawings prepared by the engineering company. Lord Steyn what La Forest J said in Edgeworth Construction Ltd. thus:-

"......the appellant could not reasonably rely for indemnification on the individual engineers. It would have to show that it was relying on the particular expertise of an individual engineer without regard to the corporate character of the engineering firm. It would seem quite unrealistic, as my colleague observes, to hold that the mere presence of an individual engineer's seal was sufficient indication of personal reliance (or for mater voluntary assumption of risk)."

Lord Steyn then said this at page 837B:-

"The reasoning is instructive. The test is not simply reliance in fact. The test is whether the plaintiff could reasonably rely on an assumption of personal responsibility by the individual who performed the services on behalf of the company."

In contrast to the third principle of looking objectively at the conduct of the Defendant which crosses the line to ascertain if there was personal assumption of responsibility, the rest which emerges under the fourth principle from the Williams judgment is whether the Plaintiff could reasonably be said to rely on the director's personal responsibility as opposed relying on the company's corporate responsibility.

COTOBER ANNOUNCEMENT STRIKEOUT

10. The complain of the Defendants to the cause of action based on the October Announcement is that the Statement of Claim does not disclose a viable assumption of liability by each of the four directors Defendants towards the Plaintiff. The key to the viability of the claim for this first set of negligent misstatement is the statement itself in the form of the October Announcement. The part of the text of the October Announcement relied on by the Plaintiff is set out in Schedule 1 of the Statement of Claim. The text set out in Schedule 1 is quite long but the point emphasised by Mr. Fung for the Defendants is that the text shows clearly that the statement contained in the October Announcement is a corporate statement from and by the company Peregrine and is not a message from or by the individual directors, namely any one of the four Defendants. In my judgment, this submission of Mr. Fung must be correct as can be seen from the following points emerging from Schedule 1 text of the October Announcement:-

1.	The Board of Directors of Peregrine decided to make the October Announcement;
2.	The Board of Directors of Peregrine decided to issue a second interim statement;
3	The company Peregrine was required to make public disclosure under the Listing Agreement with the Stock Exchange if rumoured losses had actually occurred but such losses of Peregrine had not occurred and no disclosure by Peregrine was required;
4	Peregrine has undertaken review of counterparty risks and valuation of Peregrine's bond inventory and had made reserves totally US$60 million and the Board of Peregrine believes that these reserves are adequate;
5.	The company, Peregrine wishes to thank its bankers for their continued support and increased credit;
6	In Summary Peregrine has now no material outstanding underwriting commitments;
7.	In Summary, the Company, Peregrine has bought back 10 million odd shares
8.	In Summary, the Board of Peregrine confirms that there are no discussions with another party to acquire a substantial shareholding in Peregrine;
9.	In Summary, the Board of Peregrine confirms that there is no substance in the rumour that Mr. Tose, the 1st Defendant might be leaving the company, Peregrine;
10.	In Summary, the Board of Peregrine confirms that save for what are disclosed in the October Announcement, the Board is not aware of any matter disclosable as required under paragraph 2 of the Listing Agreement;
11.	The October Announcement is made by Order of the Board of Peregrine.

Both individually and collectively, the above 11 points as well as the text of Schedule 1 unmistakably state and show that the October Announcement was a corporate representation and not a personal or individual representation. It is noticeable that all references in the text were to the company, Peregrine and to the Board of Directors of Peregrine except one, namely when there was the reference to Mr. Tose leaving Peregrine. It is significant that in relation to that reference, it was the Board which confirms that there is no substance rather than Mr. Tose confirming that there is no substance in the rumour. The substance and reality of the October Announcement relied on by the Plaintiff is that the exchange was between the Plaintiff and the company, Peregrine and not between the Plaintiff and any one of the Defendant . In other words by the October Announcement, there was no crossing of the line from any of the four Defendants to the Plaintiff. The Plaintiff therefore falls foul of what I earlier called the third principle of Williams.

11. The Plaintiff had pleaded in paragraph 7 of the Statement of Claim that the meeting which led to the October Announcement was a Board meeting of Peregrine. It also pleaded in paragraph 12(3) of the Statement of Claim that the "Announcement was a formal one given by order of the Peregrine board, not comments made on a social or in an informal context." Mr. Whitehead (who was not the pleader of the Statement of Claim) appreciating the dilemma of the Plaintiff's pleaded case, had to concede that the October Announcement was a corporate act, a corporate representation. The great difficulty of Mr. Whitehead is to contend that not only was the October Announcement a corporate representation but it was also in addition the individual representation of the four directors Defendants. It is difficult, because that approach tends to ignore the two capacities in which directors of companies act as said by Hardie Boys J. in Trevor Ivory Ltd. v Anderson [1992] 2 N. Z. L. R. 517. At page 527/16 of that judgment, the Judge said:-

"Indeed, I consider that the nature of corporate personality requires that this identification normally be the basic premise and that clear evidence be needed to displace it with a finding that a director is acting not as the company but as the company's agent or servant in a way that renders him personally liable." (Italics supplied)

At page 532/28 of the same judgment, McGechan J said:-

"That (company) structure was negotiated and known. There was nothing like the personal superimposition so central to the decision in the Fairline case. There was no r3eperesentation, express or implicit, of personal involvement, as distinct from routine involvement for and through his company. There was no singular feature which would justify belief that Mr. Ivory was accepting a personal commitment, as opposed to known company." (Italics emphasis added)

Nothing had been pleaded in the Statement of Claim of special steps taken by the directors Defendants so as to transgress or displace the fundamental principle that they were acting for the company, Peregrine.

12. In the course of the argument, Mr. Whitehead repeatedly emphasised that the Court must not ignore the pleading;-

(a)	in paragraph 8 of the Statement of Claim that the "Defendants issue" the October Announcement and "caused the same to be published";
(b)	in paragraph 9 of the Statement of Claim that the "Defendants made" the October Announcement and "caused the same to be published".

I have not overlooked these assertions which for the purpose of a striking out application must be accepted to be true just as other paragraphs in the Statement of Claim relating to the October Announcement including in particular the vitally important text set out in Schedule 1 of the Statement of Claim. I do not believe that this changes the position, The context (corporate rumours and the October Announcement) rather than being in favour of the plaintiff as suggested by Mr. Whitehead is in fact against the plaintiff. It is not the publication but the message of the publication which is important. A secretary of the company carrying the message or causing it to be published will be no more responsible for its contents than a director of the company. What is significant is the message (October Announcement) carried home to the recipient of the message, namely the plaintiff, On Monday morning of the 27^th of October 1997, the plaintiff like all other shareholders of Peregrine when it read the text of the October Announcement in the South China Morning Post received one passage, namely that it was a corporate representation made by the Board of Peregrine. The reader of the newspaper of that October Announcement in the from of the Plaintiff, would not know whether any particular director of the company has caused it to be published (such knowledge of the Plaintiff is not pleaded in the Statement of Claim). He would believe it was published, as stated at the end of the October Announcement "By Order of the Board". There was no message capable of being received by any reader of the South China Morning Post or the Plaintiff that contained in the October Announcement, there was a personal representation from any of the four particular Defendants, I therefore conclude that there was no crossing of the line from any of the four Defendants to the Plaintiff in the sense of the third principle of Williams referred to earlier and this conclusion by itself is sufficient for the October Announcement misrepresentation to be struck out.

13. The pleaded case of the Plaintiff on the October Announcement in my view also offends against the second principle extracted from Williams. Paragraph 9 of the Statement of Claim pleads that the Defendants made the October Announcement and caused the publication of the same "with the intention of re-assuring ....". Paragraph 10 of the Statement of Claim pleads that the Defendants' purpose was that the Defendants" intended and/or wished to influence4 ...... the Plaintiff". Further on, paragraph 10 also pleads that ".....involves an intention to dissuade shareholders from selling their shares and/or an intention that shareholders should be persuaded from selling ....". In paragraph 12, it was pleaded that the Defendants "knew, or ought to have known and been aware of .... that the Plaintiff would be influenced by ...". The second principle extracted from the Williams judgments is that the touchstone of personal of personal liability of director is not the state of mind of the defendant. Therefore matters such as intention, wish, knowledge and awareness are all irrelevant being internal to the defendant and not communicated to or crossing the line to the Plaintiff. It is the external acts by the Defendant director to the Plaintiff that the Court looks at for particular, special and personal conduct or representation on which the Court can deduce a possible assumption of personal responsibility. A plentiful pleading of covert activities internal to the Defendant does not in my view make up for the lack of overt external "crossing the line" representation pleading required by the third principle of Williams.

14. It seems to me that the lack of such overt "crossing the line" representation pleading is an inevitable consequence of the lack of a special relationship between the company director and the shareholder which is required by the first principle of Williams. In the Statement of Claim, none of the Defendants was individually characterised apart from being directors and as such, possessive of the usual characteristics of directors of a company. Nor is the Plaintiff in any way individually characterised apart from being a shareholder of the company and as such capable of selling its shares in the open market. What is in the Statement of Claim which brings this October Announcement into a special relationship between the Defendants as individual director and the Plaintiff as ordinary shareholder of the company? Even if the Statement of Claim might reveal any special relationship in respect of the October Announcement between the Plaintiff as shareholder and the company Peregrine, that does not ipso facto create a special relationship between the Plaintiff and the Defendants as individual directors and of anything would suggest the non-existence of such special relationship with the Defendants. No assumption of personal responsibility can arise merely from the four Defendants being executive directors of Peregrine.

15. Finally it seems to me that the lack of pleading of:-

(a)	a special relationship between the Plaintiff and Defendants and
(b)	any overt "crossing of the line" representation by the Defendants to the Plaintiff

bring home forcefully the realisation that there could be no reasonable reliance by the Plaintiff on the October Announcement as being the assumption of personal responsibility of the four Defendants. It is to be remembered that the basis of the fourth principle of Williams is that it is not reliance in fact by the Plaintiff which is relevant. The test is by reason of the October Announcement whether the Plaintiff could reasonably rely on the assumption of personal responsibility by each of the Defendants. As I have indicated earlier, any reasonable reader of the October Announcement in the South China Morning Post (including the Plaintiff) would and could only conclude that it was a representation made by the company and not by any one particular individual director. In this context it is to be noted that the October Announcement is totally different from the December Documents in that the Circular contained the express statement that the directors of Peregrine assume collective and individual responsibility for the Circular whereas this express assumption of director's personal responsibility was totally absent in the October Announcement. I can see no basis for any reasonable reliance by the Plaintiff.

16. In the course of the argument, I was referred to a number of authorities ranging for duty of director to shareholder in specific circumstances to the 1999 unreported judgment of the Court of Appeal in the United Kingdom (Electra Private Equity Partners v KPMG Peat Marwick) in the failed strikeout applications against auditors. While I find these cases of interest, they do not really provide me with the central guidance given by the high authority of Williams and the material analysis contained therein of the relevant legal principles.

17. In my judgment, regrettably the Statement of Claim does not reveal an adequate pleading for a claim based on the alleged negligent misstatement of the October Announcement and I must order that paragraphs 7 to 14 of the Statement of Claim to be struck out. In reaching my decision to order the striking out of the October Announcement pleading, I have not overlooked the principle and repeated warnings in cases that the Court should only order a strikeout in plain and obvious cases. In ordering the strike out, I have adopted the high standard imposed by the Court of Appeal in Yue Xiu Finance Co. Ltd. v Agnew [1996] 2 HK 123. In adopting this high standard and then deciding to strikeout, I have also taken into account the submission of Mr. Whitehead that pending further particularisation or discovery or interlocutory of further investigation, etc. the pleadings should not be struck out. My view however is that the crucial material averments are not present in the pleadings and therefore such pleadings of the Plaintiff must be struck out.

DECEMNER DOCUMENTS STRIKEOUT

18. The basis of the strikeout of the December Documents is totally different from the strikeout of the October Announcement. Inadequate pleading of the duty of care or assumption of responsibility is the basis for the October Announcement strikeout. The express assumption of responsibility by every individual director as stated in the Circular made it clear that the Defendants could not contest the assumption of duty. Inadequate pleading as to the breach of duty is the restricted basis for the December Documents strikeout.

19. The strikeout case of the Defendants on December Documents is that there was no proper plea of neglignce. Mr. Whitehead forcefully, on this second part of the strikeout application, referred the Court in particular to paragraph 20,27,29 of the Statement of Claim and the relevant Particulars and contended that there are sufficient and adequate pleadings of breach of duty and reliance by the Plaintiff on the assumption of duty. I agree. Reading the pleaded case of the Plaintiff on the December Documents as a whole, I am of the view that there is a viable cause of action pleaded based on the negligent misrepresentations of the December Documents.

20. In was suggested faintly that the Results ought to attract the same fate as the October Announcement but this is to ignore the fact that the Results were linked to the Letter and the Circular by the plea that the Results were attached to the Circular and Letter. It seems to me, both by date and by circumstances, the Results, the Letter and the Circular were part of the same transaction in mid December 1997. The Plaintiff pleaded in that way and to a certain extent even the presentation of the Defendants at the hearing was on the same basis. Therefore considering the December Documents as a whole I decline to strike out the plea of negligent misstatements based on the December Documents.

CONCLUSIONS

21. The result is therefore that paragraphs 7 to 14 of the Statement of Claim on so far as they contain the pleading relating to alleged negligent misstatement of October Announcement are struck out. This is without prejudice to the right of the Plaintiff to seek later from the Court leave to amend. There is an order of general liberty to apply.

22. As for the costs, having regard to the circumstances of the application and the result, I make a costs order nisi that the Defendants be given half of the costs of the Summons with Certificate for two Counsel.

Representation:

Mr. Daniel Fung, S. C. and Mr. Jonathan Harris instructed by Messrs Richards Butler for the Defendants

Mr. Robert Whitehead instructed by Messrs Clyde & Co. for the Plaintiff

Appeal by the plaintiff allowed. Please refer to CACV208/1999 dated 11 November 1999