DACHENG ENTERPRISE CO v. GLOBAL BIO CHEM TECHNOLOGY GROUP CO LTD

HCA 2738/2017

[2018] HKCFI 2556

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2738 OF 2017

____________

____________

_______________

JUDGMENT

_______________

Introduction

1.  The application before the court is the substantive hearing of the defendant’s (“D”) application that the plaintiff’s (“P”) claim be struck out under Order 18, rule 19 of the Rules of the High Court (“RHC”) on the grounds that it (1) discloses no reasonable cause of action and/or (2) is frivolous or vexatious.

2.  In support of the strike out application D has filed an affirmation of Liu Shuhang, the Executive Director of D, an affirmation of Lee Chi Yung, the company secretary of D and an affirmation of Chan Sing Fai, who has taken over from Lee Chi Yung as company secretary.

3.  In opposition to the application P has filed an affirmation by Pang Ben Bai (“Bai”), the Chairman of P.

Background facts

4.  P is a company incorporated in Nevada in the United States.

5.  D is a company listed on the Hong Kong Stock Exchange and has been so listed since 16 March 2001.

6.  From 16 March 2001 to 15 October 2015 Mr Liu Xiaoming (“Liu”) was an Executive Director and Chairman of D.  From 21 August 2001 to his death on 20 August 2012 Mr Xu Zhouwen (“Xu”) was also an Executive Director of D.  From around 10 February 2004 until his death Xu was also the co-Chairman of D together with Liu.

7.  P’s claim against D is based on a written document dated 29 November 2011 (“2011 Agreement”).  On the face of the 2011 Agreement there were signatures purportedly by Xu and Bai.

8.  P’s case is that Xu’s signature on the 2011 Agreement binds D as a party to such agreement; in other words it is P’s case that Xu had D’s authority to enter into the 2011 Agreement.

9.  The rest of the Statement of Claim are matters of background only.  I summarise them for convenience as they were summarised in Mr Ho SC’s skeleton argument at paragraph 8 with which Mr Chain took no issue:

(1) In around 1997, P alleged to have made an investment of no less than US$800,000 in return for 16% shareholding of Changchun Dacheng Corn Development Co Ltd (“Changchun Dacheng”).

(2) A written agreement was purportedly signed by P and one Global Corn Investment Limited (“Global Corn”) dated 18 December 1997 (“1997 Trust Agreement”) to the effect that P’s 16% shareholding in Changchun Dacheng was held on trust by P for Global Corn.

(3) A further written agreement was purportedly signed by P and Global Corn dated 6 October 1999, whereby P’s 16% shareholding in Changchun Dacheng held by P was transferred to Global Corn (the "1999 Agreement").

(4) Global Corn became a subsidiary of D prior to the latter’s listing in March 2001.

(5) P and Bai were not aware of, and did not sign, the 1997 Trust Agreement and the 1999 Agreement to give up P’s beneficial interest in Changchun Dacheng.  It is P’s case that Liu and Xu, by using the forged 1997 Trust Agreement and the forged 1999 Agreement, devised a plan to deprive P and/or Bai of their interest in Changchun Dacheng when D went for initial public offering.

(6) On 9 March 2011 (ie 10 years after D’s listing), P alleged thatXu confessed and apologised to P and Bai that D, Global Corn, Liu and Xu made use of the 1997 Trust Agreement and the 1999 Agreement to deprive P’s legitimate interest in Changchun Dacheng.

(7) Subsequent to Xu’s confession., Bai (representing P) and Xu (representing D) had orally agreed to the following:

(i) D would issue shares to P in an amount to be verified according to the actual investment contributions of Bai and/or P;

(ii) the said shares to be issued by D would be duly registered by D and would be tradeable in the HKSE; and

(iii) D would also pay to P all dividends it was entitled to receive from the date of illegal transfer up to the date where the shares were actually issued to Bai and/or P.

(collectively, the “Promised Acts”).

(8) On around 29 November 2011, Xu (representing D) and Bai (representing P) entered into the 2011 Agreement, in which:

(i) Clause 2 states that Bai’s contributions to Changchun Dacheng in the sum of US$800,000 was recognised, and such contribution represented 8.89% of the total interest of Changchun Dacheng;

(ii) Clause 3 states that the actual total number of shares to which Bai (and/or P) is entitled would be 68,400,000 shares;

(iii) Clause 4 states that the above-mentioned investment contributions and shareholdings were duly verified and the parties have agreed to them with no objection.  In the future, the Promised Acts would be done in accordance with the content of this agreement.  No variation is allowed.

(iv) Notwithstanding P’s repeated request, the Promised Acts and the 2011 Agreement were not honoured and performed by D, hence the present claim to seek damages for breach and loss of dividends etc.

10.  The legal principles I need to apply in approaching this application are not in dispute either.  I should exercise the power only in a plain and obvious case; the claim must be obviously unsustainable even when taking disputed facts in favour of the plaintiff; the pleadings must be unarguably bad; and it must be impossible, not just improbable, for the claim to succeed.  Hong Kong Civil Procedure §§18/19/4, 18/19/5 and 18/19/7.

The Defendant’s case

11.  I accept that the factual background needs to be taken as read, although I am entitled to note, as Mr Ho has urged upon me, that the chronology extends back to 1997, some 13 or 14 years before D came into existence, such that P’s case is founded on events, for which it submits D has in some way inherited responsibility because of the involvement in these events of an individual who subsequently became the co-Chair and an Executive Director of D.

12.  I do not need to explore the background in any detail, nor do I need to try to unwind the relationship between Bai and P in relation to the events dating back to 1997.  I say this because the claim is founded on an alleged agreement to do certain Promised Acts and the 2011 Agreement both of which are said to have been concluded by Xu on behalf of D.

13.  Mr Ho says I should strike out the claim as impossible to succeed on the basis that Xu had no authority whether actual or apparent toenter into these arrangements and further that this must have been obvious to Bai, even though he does not need to go this far if he can establish the case on lack of authority.

14.  The Statement of Claim is somewhat confusing given the chronology to which I have referred, but the nub of P’s allegation is that Xu and Liu devised and directed the plan to deprive P and/or Bai of their interest in a company called Changchun Dacheng and thus D utilizing the 1997 Trust Agreement and the 1999 Agreement for this purpose, both of which were forged.

15.  At paragraph 14 of the Statement of Claim Xu is said to have confessed and apologized to P and Bai that D, Global Corn and he himself had made use of the forged documents to deprive P of its interest in Changchun Dacheng and thus its interest in D.  As a result it is said the parties agreed a number of remedial steps which are set out at paragraph 15 which are together referred to as the “Promised Acts”.

16.  It is important to note the extent of these steps said to have been agreed:

(1) D would issue shares to P in the amount to be verified according to the actual investment contributions of Mr Bai and/or P;

(2) the shares to be issued by D in sub-paragraph (1) above would be duly registered by D and would be tradeable in the Hong Kong Stock Exchange like all circulating ordinary shares at that time; and

(3) D would also pay to the Plaintiff all dividends it was entitled to receive from the date of illegal transfer up to the date wherethe shares in the amount to be verified were actually issued to Mr Bai and/or P.

17.  After doing various calculations it is said that D, represented by Xu, and P, represented by Bai entered into the 2011 Agreement in which:

(1) Clause 2 states that Mr Bai’s contributions to Changchun Dacheng in the sum of US$800,000 was recognised, and such contribution represented 8.89% of the total interest of Changchun Dacheng.

(2) Clause 3 states that after considering the mergers of four companies prior to the initial public offering of D, Mr Bai (and/or P) shall have 56,700,000 shares (4.45%) of D.

(3) Clause 3 also states that since there was a “one for five” bonus share issue after the listing of D, the actual total number of shares to which Mr Bai (and/or P) is entitled shall be 68,400,000 shares.

18.  It is this Agreement which P alleges has not been complied with and which forms the basis of their claim against D.

19.  Stopping there I accept for the purpose of the strike out that I should take these facts as I find them in favour of P.

20.  Subsequently D, apparently puzzled by the case they were asked to face, sought Further and Better Particulars, and specifically for the purpose of this application made requests under paragraphs 15 and 17 to which P responded. Those requests and P's answer are as follows:

"  Under Paragraph 15

Of: ‘Following the above confession of Xu Zhouwen, the parties had agreed to take remedial actions as follows:- … (Altogether, the ‘Promised Acts’)’

Request

2.   Please state:

i.  who were the ‘parties’ referred to in paragraph 15;

ii.  If one of the ‘parties’ was the Defendant, who was the alleged representative of the Defendant;

iii.  Whether the alleged authority of the alleged representative of the Defendant was actual or apparent; and

iv.  The basis/bases of the alleged actual or apparent authority of the alleged representative to act on behalf of the Defendant, and all facts and circumstances relied upon in support of the same.

3.   Please state:

i.  Whether it is the Plaintiff’s case that the alleged agreementto take the remedial actions identified as the Promised Acts constituted a binding agreement between the aforesaid parties;

ii.  If the answer to (i) is positive:

a.  Under what circumstances, including but not limited to the date and time, the alleged binding agreement was reached;

b.  Whether the alleged binding agreement was oral or written;

c.  Whether the Promised Acts constituted the entirety of the alleged binding agreement, and if not, what were the additional terms and their respective sources; and

d.  What was the consideration given by both sides of the alleged binding agreement.

Answer

2.   The ‘parties’ were the Defendant as represented by Mr Xu Zhouwen and the Plaintiff as represented by Mr Pang Ben Bai. Subject to further discovery, Mr Xu Zhouwen’s authority was at least apparent as he was the co-chairman as well as an executive director of the Defendant at the material times, not to say that he was also a substantial shareholder of the Defendant.

3.   The Promised Acts, which was orally made, were binding.  The Promised Acts shall be construed and read together with the 2011 Agreement and all the circumstances, including but not limited to the Plaintiff’s giving up of right to sue (among other people) the Defendant for misappropriation of the Plaintiff’s private property and the Plaintiff’s giving up on claiming the Defendant for all investments made.  For details, please see Answer to Requisition 5.

Under Paragraph 17

Of: ‘after the said calculation was completed and to remedy the invalid share transfer and carry out the Promised Acts, the Defendant (represented by the late Xu Zhouwen) and the Plaintiff (represented by Mr. Bai) entered into a shareholding confirmation agreement (the ‘2011 Agreement’), in which:-‘

Request

4. Please state:-

i.  Whether the alleged authority of Xu Zhouwen to represent the Defendant in entering into the 2011 Agreement was actual or apparent; and

ii.  The basis/bases for Xu Zhouwen’s alleged authority as stated in (i), and all facts and circumstances relied upon in support of the same.

5. Please state:

i.  Whether the 2011 Agreement was a binding agreement;

ii.  If the answer to (i) is positive:

a.  Under what circumstances, including but not limited to the date and time, the alleged binding agreement was reached;

b.  Whether the alleged binding agreement was oral or written;

c.  Whether it was the entirety of the alleged binding agreement, and if not, what were the additional terms and their respective sources; and

d.  What was the consideration given by both sides of the alleged binding agreement.

Answer

4. The Plaintiff repeats its Answer to Requisition 2 hereof.

5. The 2011 Agreement was a binding written document.  It was drafted personally by Mr Xu Zhouwen and then typed up (in simplified Chinese characters) by one Mr Yang Dong, who was the manager for asset management of the Defendant, after the verification of the investment amount by one Ms Lei Ling, the assistant to one Ms Wang Gui-feng who was an executive director responsible for overseeing the finance, management accounting and treasury functions of the Defendant.  The 2011 Agreement was then signed by Mr Xu Zhouwen on behalf of the Defendant and Mr Pang Ben Bai on behalf of the Plaintiff on or about 29 November2011.  Subsequently, the Plaintiff and the Defendant agreedto revise the number of shares stated in the 2011 Agreement.  The 2011 Agreement as revised was typed up (in traditional Chinese characters) by a Ms Cheung, a secretary of the Defendant, and was re-signed by the Plaintiff (represented by Mr Pang Ben Bai) and the Defendant (represented by Mr Xu Zhouwen) on 20 February 2012.  Subject to further discovery, there are no other written terms in the 2011 Agreement.

The Plaintiff also avers that the 2011 Agreement shall be construed and read together with the Promised Acts and all the circumstances.  It is the Plaintiff’s case that the investment it contributed to the Defendant (or to ChangchunDacheng) over the years had been over the USD800,000 as verified and stated in the 2011 Agreement.  The Plaintiff, in reliance on the Promised Acts and the 2011 Agreement, has given up the right to sue (among other people) the Defendant for misappropriation of the Plaintiff’s private property and also the right to claim and recover the Plaintiff’s investments beyond the verified amount as stated in the 2011 Agreement.”

21.  Mr Ho submits that the answer is evasive as to whether P is seeking to rely on actual authority and this notwithstanding the request asked for facts and circumstances supporting P’s case.  P’s response was that the apparent authority rested on the capacity of Xu as Co-Chair and Executive Director.  Mr Ho says that this allegation is unsustainable as a matter of law and that is what founds D’s application.

22.  Xu is, as I have said, now deceased and so he cannot be asked about the matter and Mr Ho’s case is that there was clearly no authority of any kind which would justify P having relied on Xu being able to bind D in the way it said he did.

23.  Mr Ho pointed to a number of factors supporting this conclusion in his submission:

(1) There is no company chop on the document.

(2) There is nothing in the pleaded case suggesting the involvement of D’s Board.

(3) Xu’s role as a shareholder of D is irrelevant for this purpose.

(4) The substance of the Agreement was clearly not within the ordinary course of business of even a Managing Director.

(5) D is a public company listed on the Hong Kong Stock Exchange main board, with all of the regulatory scrutiny and oversight that comes with that and it is plainly absurd to suggest that Xu had and apparent authority to allot, nearly 5% of the company’s shares to P without Board approval and the necessary public disclosure.

24.  In any event, submits Mr Ho, it is apparent on its face that the 2011 Agreement was not in D’s interests, even if it was in P’s and in signing the document Xu had a fatal conflict of interest which was patent and therefore obvious to P.

25.  Mr Ho points to the evidence filed in support of the applicationand says that whilst it is inevitably difficult to prove a negative, D has done all they could faced with the Statement of Claim and the particulars given and in particular referred the court to paragraphs 7 and 8 of the affidavits of Lee Chi Yung:

“ 7. Following from the meeting with the Defendant’s legal advisers and shortly after the Plaintiff’s filing of the F&BP, Mr. Liu Shuhang, one of the executive directors of the Defendant, instructed me to conduct a search of the minutes of the board meetings and resolutions passed during the years of 2011 and 2012 to ascertain whether the Defendant’s board of directors hadever discussed the alleged ‘2011 Agreement’ and the ‘Promised Acts’.

8. On the basis of my understanding of the Plaintiff’s allegations as set out in the Statement of Claim and the F&BP, in the search I particularly looked for whether there were (i) anydiscussions or resolutions for any proposed allotment of shares to the Plaintiff, or (ii) any discussions or resolutions regarding entering into agreement with the Plaintiff or Mr. Bai to such effect; or (iii) delegation of any authority to Mr. Xu to act on the Defendant’s behalf to enter into the alleged 2011 Agreement with the Plaintiff or to agree to perform the alleged Promised Acts (‘Target Materials’).”

26.  As a result of the evidence given by Bai and there being some confusion over the dates, a further affirmation of Chan Sing Fai was filed confirming that a similar search had also been carried out of D’s Board minutes and resolutions up until 2012.  That search reached the same conclusion in terms of there being no evidence of relevant Board minutes relating to the 2011 Agreement or the Promised Acts.

27.  In addition he says nothing in the Listing Rules or the company’s Memorandum and Articles gives any comfort to P that D could be liable in such circumstances.

28.  Accordingly Mr Ho speculates that in all of the circumstances if P has a cause of action, it is not against D and so the case is tantamount to a ‘try on’.

29.  Mr Ho then took me the authorities and drew my attention to the Court of Appeal decision in Akai Holdings Limited (In liquidation) v Kasikornbank plc (CACV 177/2008, 10 August 2009) and specifically to paragraph 44:

“ 44. Authority can be conferred expressly, for example, by a board resolution, or it can be implied, for example, by appointment to office of managing director, which would impliedly authorize the person so appointed to do all things following within the usual scope of the office, Lord Denning MR in Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 at 583. However, the grant of actual authority is impliedly subject to a condition that it is to be exercised honestly and on behalf of the principal."

30.  He then referred to the limitations even on a Managing Director’s authority and the statement made at paragraph 194:

“ 194. In my view, it seems clear from the passages cited from Hely-Hutchison and Freeman & Lockyer that far from establishing that a managing director (and for that matter a CEOand chief executive) has untrammelled authority to commit his company to any transaction without board sanction, they show that parameters do exist. While what contracts fall within the ordinary ambit of the authority of an executive chairman, CEO and/or managing director may be a matter of debate, there is an ambit to that authority. The relevant question is whether the transaction is of a kind a managing director would in the normal course be authorised to enter into on behalf of the company. As, Mason CJ observed in Northside Developments Ply Ltd v Registrar General [1989–1990] 170 CLR 146 at 159,

‘ the company would not have been bound had it not been one of that kind.’

Moreover, it should not be overlooked that we are dealing here with a publicly listed company.”

31.  He emphasized to me the last paragraph given D’s status as a publicly listed company in this case also; that carries with it, he submitted, the implication that a Managing Director’s powers are circumscribed by the regulatory regime attaching to public companies.  He then referred to the finding in the Akai case that whilst Mr Ting, who was the senior executiveinvolved in that matter, had authority to negotiate and arrange loans for the purposes of Akai’s own business, including the pledging of its assets as security, the particular transaction which was the subject of the challenge in that case was of a different order:

“ But the switch transaction was not such a transaction: it was nothing less than assuming the debt of another company and securing the indebtedness by pledging Akai’s own assets in the process with no apparent benefit to Akai discernible from the face of the transaction.” (paragraph 196)

32.  Mr Ho says that this summary of the law accords with the law on implied actual authority set out by the learned authors of Bowstead & Reynolds on Agency at Article 29:

“ An agent who is authorised to conduct a particular trade or business or generally to act for his principal in matters of a particular nature, or to do a particular class of acts, has impliedauthority to do whatever is incidental to the ordinary conduct of such trade or business, or of matters of that nature, or is within the scope of that class of acts, and whatever is necessary for the proper and effective performance of his duties: but not to do anything that is outside the ordinary scope of his employment and duties.”

33.  A comment to that article gives an example which Mr Ho cited as being particularly pertinent; he drew my attention to the illustrations at paragraph 3-029 and particularly that at (4):

“ (4) Individual directors of companies, at least those withoutan executive role, have little usual authority to bind the company:The managing director of a company has a broad authority (subject to the company’s constitution) to make decisions for the company in the ordinary course of business ....

  A managing director would not have usual authority to make extraordinary decisions (those would normally need to be taken by the board of directors)….”

34.  Mr Ho submits that there is simply no authority to compromisea claim said to have arisen by virtue of the individual director’s own conduct—thereby giving him an irreconcilable conflict on its face, by agreeing the allocation of approaching 5% of D’s, a public company, shares withoutspecific Board approval.  In support of his submission Mr Ho referred the court to the Court of Final Appeal decision in Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479.  Mr Ho drew my attention to what is said at (3) and (5) of the headnotes as follows:

“ (3) … it was very unlikely that an agent’s own unauthorised statement could clothe him with apparent authority. …

(6) Here, T did not have apparent authority to commit C to theSwitch Transaction.  First ignoring the Minutes, the onlybasis upon which B had and could have put its case that Crepresented that T had authority to commit it to the Switch Transaction was that he was authorised by C to manage its affairs, by virtue of being its executive chairman and chief executive officer.  It was clear that in such capacity, T would have had a large measure of apparent authority — indeed also of actual authority.  However, while that authority would extend to entering into many types of contract including those which might involve C incurringa US$30 million liability, the nature and circumstances ofthe Switch Transaction were so peculiar that T did not haveapparent authority to commit C to the Switch Transaction, in the sense that he was not clothed with the authority to commit C to it.  And even if he had otherwise been clothed with such authority, B was simply irrational in its belief when it relied on that authority.  B appeared to be in dire financial straits at the relevant time and the enormousattraction of the transaction to it could easily have caused a normally responsible banker to depart from his or her rational approach.”

The Plaintiff’s Response

35.  Mr Ho’s submission is that whatever may be within the ambit of the ordinary business of a managing director, or in this case the Co-Chair/Executive Director, was not clothed with authority to commit D to the 2011 Agreement.

36.  Mr Chain for P did not take issue with the law as stated by Mr Ho but said his submissions were largely founded on what he described as two important procedural observations:

(1) D has to establish that P’s case is impossible to succeed and that is a very high standard.

(2) The court has to accept the evidence in the Statement of Claim and that the facts must be presumed to be true for present purposes.

37.  He said that it was striking that Mr Ho had taken me to the Statement of Claim and read it with an eye sympathetic to D’s case when in his submission it could equally be read differently and sympathetic to P’s case.

38.  He took me to paragraph 4 and submitted that the transfer the subject of the allegedly forged 1999 Agreement was to a company which was to become a subsidiary of D, namely Global Corn.  He conceded P could have made a claim against Global Corn, but submitted that it was one of a number of companies consolidated into the subsequently formed listed company namely D.

39.  On the facts he concluded that there were significant benefits to D in Xu concluding the 2011 Agreement on behalf of D not least, he submitted, it would ensure P’s fraud allegation were not ventilated since D would be able to control the communications surrounding the reasons for having settled P’s claim.

40.  I find this submission unimpressive and indeed very surprisingsince it appeared to contemplate D hiding a fraud allegation made against itby some form of misleading public announcement which would need to be made by it as a public company in relation both to the alleged settlement proposed and the necessary share allocation.

41.  Again though it seems to me these facts are irrelevant to the question before me.  Mr Chain’s case is that P dealt primarily with Xu who signed the Agreement on behalf of D.  The negotiations leading to the Agreement had extended over 10 years and during that time P had had various unspecified contacts with others including D and including in particular Liu.

42.  His case on authority based on the pleadings and his answer to the particulars was that Xu had “at least apparent authority” and when I asked him what was meant by this he said that it might be that once discovery had taken place he could amend the pleading to suggest a different basis for Xu’s authority to act.  Whilst I accept parties may amend their claims this particular contention struck me as no more than a fisherman’s hope that in casting a line something might bite.

43.  Mr Chain submitted however that P was in fact relying on implied actual authority and whilst this was not stated explicitly anywhere in the pleading or the answer to the Further and Better Particulars, he said it was inherent in the Statement of Claim.  To the extent that there is argument about this Mr Chain submitted that this was essentially fact driven since one has to look into the context for and terms of the Agreement concluded.  He referred the court to Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 and the judgment of Lord Denning MR at page 584:

“ … But I think he had authority implied from the conduct of the parties and the circumstances of the case. …

   The judge held that Mr. Richards had ostensible or apparent authority to make the contract, but I think his findings carry with it the necessary inference that he had also actual authority,such authority being implied from the circumstance that the board by their conduct over many months had acquiesced in his acting as their chief executive and committing Brayhead Ltd. to contracts without the necessity of sanction from the board.”

44.  Thus he submitted that, notwithstanding the pleadings, P’s case was that Xu had implied actual authority, express actual authority or apparent authority.

45.  Mr Chain’s submission was that this established the need to look at the facts and circumstances surrounding the conduct of the parties over a period of time to ascertain the degree of acquiescence there had been by D in what Xu had been doing.

46.  He then turned his attention to express actual authority and sought to rely on the provision under article 125 of D’s Memorandum and Articles pursuant to which the Directors were given the usual power to delegate matters from time to time to an officer such as Xu was.  The problem with this submission is that it is not pleaded, nor is there any evidence to suggest that there was such a delegation.  Indeed such evidence as there is and to which I have already referred, specifically confirms that there was no evidence of delegation having been found in D’s Board minutes.  

47.  Finally, Mr Chain then turned to apparent authority and submitted thatthis is founded on the same basis as implied actual authority and consciousof Mr Ho’s reliance on the Akai case he sought to distinguish it on the basis of the court’s finding in the Court of Appeal that the arrangements entered into there had “no discernable benefit to Akai”.  Here on the facts as I already alluded to, Mr Chain submits that there was clearly a benefit to D in ridding itself of a potential claim based on an allegation of fraud.

48.  At base his submission here is that there was no reason on the part of P to question Xu’s authority because, as I am asked to infer, the arrangements were clearly in D’s interests.

49.  But Mr Chain still needs to establish the basis for the apparentauthority on which he relies and in this respect he sought to rely too on what was said in the Court of Final Appeal decision in Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2).  He says D’s act of holding out Xu as co-Chair and Executive Director was enough in itselfabsent there being anything out of the ordinary about the transaction P wasentering into.  In any case P was entitled to and did rely on Xu’s authority based on the holding out.  He too referred the court to paragraphs 81 and 82 and submitted that in any event the appropriate and necessary analysis inevitably involves a detailed factual enquiry of the circumstances given rise to the transaction as was necessary in Thanakharn and he referred me to the relevant circumstances listed at paragraph (6) of the headnote.

50.  The problem with this submission is that the context for whatis said at paragraph 584 is given in the summary in the headnote at page 549 and there is simply no pleaded case to similar effect here.

51.  The Statement of Claim was the subject of a comprehensive request for Further and Better Particulars on this very issue of authority andvery limited evidence was given and nothing pleaded beyond Xu’s capacity as co-Chair and Executive Director.  Mr Ho pointed out that D did not take out a strike out application when the Statement of Claim was served but rather perfectly properly sought Further and Better Particulars in order to understand the case against them better.  Accordingly whilst I do not doubt the importance of the procedural points urged on me by Mr Chain, I am required to exercise my discretion having regard to the case as pleaded.  

The court's findings

52.  I will now detail my findings:

(1) There was no express authority given to Xu pursuant to the Articles on which P can rely.  The ex officio powers conferredon the Chairman under D’s articles are limited and no ex officio roles, duties or authorities are provided for for the position of an Executive Director.  I therefore find that there was no express authority to Xu whether as co-Chairman or Executive Director to agree to the Promised Acts on D’s behalf and commit it to the terms of the 2011 Agreement.

(2) In relation to implied authority whilst this can clearly arise from the act of appointing a person to a certain office, it is clear that this only applies in respect of things which are within the usual scope of that office.  It is plain and obvious to me that the Promised Acts and the 2011 Agreement are not ordinary or usual business and accordingly fall outside any implied authority Xu might have.  The factors which drive me to this conclusion are:

(i) In P’s case, the agreement for the Promised Acts and the 2011 Agreement arose from a serious allegation of misappropriation of P's shares in Changchun Dacheng by way of forged documents which allegedly took place 10 years before the said agreement. Also, P made a specific allegation that statements in relation to the ownership of Changchun Dacheng in the listing prospectus of D were false.  Both allegations carry serious criminal consequences.

(ii) P’s own case is that the purpose of the Promised Acts and the 2011 Agreement was allegedly to admit the serious allegations and to compensate P for its purportedloss of its 16% shareholding in Changchun Dacheng by (i) allotting shares equivalent to a 4.45% holding in D and (ii) retrospectively declaring and paying dividends attributable to such holding since 2001 when Changchun Dacheng became a subsidiary of D.  In other words, it was meant to be a one-off and substantial transaction toput P into a position as if it was a 4.45% shareholder of D at all material times.

(iii) One of the purported effects of the Promised Acts and the 2011 Agreement was also to absolve Xu from his potential criminal liability for the alleged forgery and misappropriation.  If that were the case, Xu obviously had a great incentive to accede to P’s demand at the expense of the shareholders of D, instead of consideringoptions in D’s best interest (eg defending the allegation of forgery and/or relying on the defence of limitation).

(iv) In agreeing to enter into the Promised Acts and the 2011Agreement, Xu would be acting in serious conflict withD’s interest.Quite apart from the stringent requirements provided under article 107(G) and (H) of D’s articles providing for a declaration of interest and probably a director from voting should he be interested in a contract or arrangement, it must have been obvious to Bai (the counterparty to the alleged Promised Acts and 2011 Agreement) that Xu could not have been acting for D incommitting to an agreement that was so blatantly against D’s interest.  The arrangement was tantamount to a fraud against the shareholders, the investing public and D as a whole.

(v) Furthermore, the allotment of shares to P in accordance with the Promised Acts and the 2011 Agreement would disturb the existing shareholding structure of D and require D to invoke General Mandates.  The General Mandates were specific approvals granted by the shareholders in the general meeting pursuant to paragraph 13.36 of the Main Board Listing Rules and would only remain valid until the end of the next annualgeneral meeting.  They were therefore the shareholders’specific authorisation to the Board of Directors to perform an act under restricted terms.  Accordingly, anyexercise of the General Mandates could not be regarded as ordinary business of D.  Such Mandates could not simply be invoked by an individual Co-Chairman or Executive Director without thorough consideration, discussion and a resolution of the Board.

53.  In all of these circumstances I cannot find any basis for concluding that Xu had implied authority to enter into the Agreement for the Promised Acts and the 2011 Agreement simply by virtue of his position.

54.  There is no evidence to support an argument that there was any delegation of authority by the Board to Xu; indeed as I have said such evidence as there is points in the opposite direction.

55.  Finally in relation to P’s case that Xu had apparent authority I accept the finding of the Court of Final Appeal in Akai Holdings Ltd (No 2) that it is practically inconceivable to see how an agent without actual authority could cloth himself with apparent authority by his own representation.  The fact of Xu’s appointment as co-Chairman and Executive Director of D, confer no actual authority (whether express or implied) on Xu to enter into the agreement for the Promised Acts and the 2011 Agreement because of their peculiar and unusual nature.  For the same reason such appointment (without more) cannot be a representation of Xu’s apparent authority for agreeing to the Promised Acts and the 2011 Agreement in the circumstances of this case.

56.  The Court of Final Appeal in Akai Holdings Ltd (No 2) further held that any reliance on the apparent authority of an agent could not be “dishonest or unnatural (which includes turning a blind eye and being reckless)”.  The peculiarity of the Promised Acts and the 2011 Agreement strongly demonstrate that P’s purported reliance on the apparent authority of Xu was at least irrational or reckless for the following reasons:

(1) The 2011 Agreement was drafted in extremely brief terms, not self-explanatory and obviously without professional input or advice;

(2) No company chop or seal was applied on the 2011 Agreement;

(3) No resolution of D was referred to in the 2011 Agreement;

(4) D was a listed company and the purported allotment of shares, which had the effect of diluting existing shareholdings (all allegedly for the purpose of compensating an alleged victim of a fraud perpetrated by its Chairman), would obviously give rise to serious regulatory concerns, eg whether the HKSE or the Securities and Futures Commission would intervene given the alleged forgery and false information in the listing prospectus.  However, neither P nor Bai asked for assurance from Xu that such matter had been properly resolved;

(5) P must have known that D as a listed company would have different directors on the Board, including independent non-executive director.  They are there to safeguard the interests of the investing public.  Neither P nor Bai cared to ascertain if such an agreement had received the sanction of the Board;

(6) On P’s own case, Bai was a sophisticated businessman who invested substantial funds in Changchun Dacheng in the 90’s and notwithstanding this, P never requested Xu to provide anyproof of authority by producing any board minutes or resolution.

57.  In all of these circumstances I grant D’s application and make a costs order nisi that P pay D costs, with a certificate for two Counsel, to be taxed if not agreed.