YIP LAI FONG AND ANOTHER v. SIN TUNG HNG AND OTHERS

CACV 116/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 116 OF 2003

(ON APPEAL FROM HCMP No. 2423/2002)

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J U D G M E N T

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Lam J (giving the judgment of the Court):

1. This is an appeal against the decision of Chu J made on 2 May 2003 striking out and dismissing the Re-re-amended Petition in HCMP 2423 of 2002 against the 3rd, 4th and 5th Respondents. References to the Petition in this judgment are references to the Re-re-amended Petition instead of a Re-re-re-amended Petition. Although Chu J granted conditional leave to re-re-re-amend the Petition on 28 April 2003, the Petitioners elected on 29 April 2003 not to make the re-re-re-amendments in order to avoid an adjournment of the trial of the petition. The striking out took place on the first day of the trial.

2. By that Petition, the Petitioners sought relief under Section 168A of the Companies Ordinance in respect of the affairs of Full Billion Shipping Limited, the 2nd Respondent. The 1st Petitioner and the 1st Respondent are and were at all material time the only shareholders and directors of the 2nd Respondent. It is alleged by the Petitioners that the affairs of the 2nd Respondent were being conducted in a manner unfairly prejudicial to the Petitioners.

3. The 2nd Petitioner is the ex-husband of the 1st Petitioner and it is alleged in the Petition that the 1st Petitioner was holding the shares in the 2nd Respondent as trustee for herself and the 2nd Petitioner. In Paragraph 14 of her judgment, Chu J dealt with the lack of locus on the part of the 2nd Petitioner. Although the 2nd Petitioner was a party to the appeal in the Notice of Appeal dated 15 May 2003, by a Supplementary Notice of Appeal dated 10 March 2004, those acting for the Petitioners indicated that the 2nd Petitioner would not take part in the appeal.

4. It was further indicated in the said Supplementary Notice that the 1st Petitioner would not challenge the decision of Chu J in striking out the Petition against the 5th Respondent.

5. Therefore, apart from question of costs, the appeal is confined to the striking out of the petition as against the 3rd and 4th Respondents.

6. Since the striking out was granted on the ground of no reasonable cause of action, the appeal should be considered on the basis that the facts as pleaded in the Petition were true.

7. A major asset of the 2nd Respondent was the 80% shareholding in the 3rd Respondent. The 3rd Respondent in turn held 90% of the interest in a Sino-foreign cooperative joint venture called Lishui Fresh Fruit & Food Wholesale Market Limited Company.

8. Mr Leong SC invited this court to read the Petition by dividing it into two distinct parts: the first part being Paragraphs 1 to 29 concerned the sale of the 1st Petitioner and the 1st Respondent's shares in the 2nd Respondent; the second part being Paragraphs 30 to 36 concerned the sale of 2nd Respondent's shares in the 3rd Respondent. He further submitted that the second part was pleaded as a case of fraud.

9. We do not find such dichotomy of the Petition helpful. As observed by Ma CJHC in Paragraph 30 of his judgment in Tan Man Kou v Chime Corporation CACV 124 of 2003, 20.2.2004, it is essential to view the Petition as a whole in order to see how each component fits into the general picture. As we see it, the allegations concerning the manner in which the 1st Respondent disposed of the interest of the 2nd Respondent in the 3rd Respondent behind the back of the Petitioners form an integral part of the Petitioners' case of unfair prejudicial conducts of the 1st Respondent in the affairs of the 2nd Respondent.

10. In Paragraph 12 of the Petition, it is averred that in early 2002, there was an understanding between the 1st Respondent and the 2nd Petitioner (presumably acting also on behalf of the 1st Petitioner) that they would both sell their shares in the 2nd Respondent. Originally, the Petitioners were under the impression that the negotiations were about the sale of the shares held by the 1st Respondent and the 1st Petitioner in the 2nd Respondent to the 4th Respondent. Paragraphs 13 to 27 of the Petition pleaded the development of such negotiations in which the 2nd Petitioner also took part. The 2nd Petitioner had reservations about the proposed sale to the 4th Respondent and declared to the representatives of the 4th Respondent that the Petitioners would not sell their shares in the 2nd Respondent until he had full details of the 4th Respondent's identity, background and source of finance (see Paragraph 20 of the Petition). In mid-June 2002, the representative of the 4th Respondent told the 2nd Petitioner that the 1st Respondent had sold his shares and the 2nd Petitioner were told to complete the procedural matter. That culminated in a meeting between the representative of the 4th Respondent and the 2nd Petitioner on or about 14 June 2002.

11. On or about 26 June 2002, the Petitioners discovered that the 1st Respondent had purported to act on behalf of the 2nd Respondent in entering into an agreement dated 30 May 2003 with the 4th Respondent to sell the 2nd Respondent's shares in the 3rd Respondent to the 4th Respondent. Certain documents were obtained by the Petitioners pursuant to an order for discovery made by Kwan J on 26 June 2003 and they were referred to in Paragraph 34 of the Petition. For present purposes, it would be sufficient to quote from Paragraph 34 (d) to (i),

" d) An undated note from the 1st Respondent stating that there was no board resolution of the 2nd Respondent regarding the sale of its 8,000 shares in the 3rd Respondent. The said note was addressed to PT.

e) An undated minutes of a meeting of the board of directors of the 2nd Respondent signed by the 1st Respondent purportedly as chairman where it was purportedly recorded that the 1st Petitioner was present at the meeting held at the registered office of the 2nd Respondent whereby it was purportedly resolved that the 2nd Respondent do sell its 8,000 shares in the 3rd Respondent to 4th Respondent for HK$118,908,748.80 and that the 1st Respondent was authorized to sign all relevant documents in connection therewith. In truth and in fact, the 1st Petitioner neither attended the meeting nor approved the purported resolution. She was not even given notice of the meeting. In the circumstances, the said board resolution is invalid and has no legal effect.

f) An agreement no. NHXG20020501 purportedly made between the 2nd Respondent and the 4th Respondent and signed by the 1st Respondent on 30 May 2002 purportedly on behalf of the 2nd Respondent and signed by Lam on 8 June 2002 on behalf of the 4th Defendant whereby the 2nd Respondent purportedly agreed to sell its 8,000 shares of the 3rd Respondent to the 4th Respondent for RMB$126,400,000. In truth and in fact, the Petitioners have no knowledge of this agreement. There was no valid board resolution of the 2nd Respondent authorizing such a sale, or authorizing the 1st Respondent to enter into such an agreement on itself behalf. The purported agreement is accordingly invalid and has no legal effect.

g) Unstamped bought and sold notes dated 18 June 2002 pertaining to the purported sale of the 2nd Respondent's 8,000 shares in the 3rd Respondent by the 2nd Respondent to the 4th Respondent.

h) An undated document purporting to be a letter of resignation signed by the 1st Respondent purportedly on behalf of the 2nd Respondent to tender resignation of the 2nd Respondent from its directorship in the 3rd Respondent. There were no valid board resolution of the 2nd Respondent to effect that the 2nd Respondent should resign as director of the 3rd Respondent or to authorize the 1st Respondent to sign this document on its behalf. Hence, the purported letter of resignation of no legal effect.

i) A document purporting to be the minutes of a purported shareholders' meeting of the 3rd Respondent held on 18 June 2002 with purported to approve the resignation of the 2nd Respondent as a director of the 3rd Respondent with effect from 18 June 2002. By reason of what is pleaded in paragraph 346(h) above, the letter of resignation is of no legal effect and the purported approval of the purported resignation is of no legal effect."

12. The Petitioners' case is that the Petitioners had no prior knowledge nor did they give any consent for this sale by the 2nd Respondent to the 4th Respondent. Whilst Mr Leong was correct in contending that the Petition pleaded that the whole transaction was a massive fraud perpetuated against the Petitioners (see Paragraphs 31 and 35 of the Petition), we do not read the allegation of fraud as being essential to this part of the Petitioners' case. Mr Leong was probably correct in criticizing the lack of particulars in the allegation of fraud. In fact, Mr Chain did not seek to defend such allegation. He was contented to argue the appeal without relying on the element of fraud.

13. The crucial plea was that the sale was unauthorized and therefore not binding on the 2nd Respondent. The relief sought by the Petitioners includes declarations concerning the validity of the sale under the agreement of 30 May 2003 and the 2nd Respondent's status as director and shareholder of the 3rd Respondent. The Petitioners also prayed for an order rectifying the register of members of the 3rd Respondent.

14. The learned judge's primary reason for striking out the Petition as against the 3rd to 5th Respondents can be found at Paragraphs 6 to 7 of her judgment. Her Ladyship was of the view that the Petitioner had not pleaded a reasonable cause of action to set aside the sale by the 2nd Respondent to the 4th Respondent. Due to the lack of averment of knowledge on the part of the 4th Respondent as to the alleged impropriety on the part of the 1st Respondent, the judge was of the view that the Turquand rule must apply and the interest of the 4th Respondent would not be affected by the lack of authority on the part of the 1st Respondent.

15. The first point taken by Mr Chain, who did not appear in the court below, is that as a matter of pleadings, the 1st Petitioner need not deal with the question of knowledge in the Petition. He relied on the dicta of Slade LJ in Rolled Steel Products v British Steel Corporation [1986] 1 Ch 246 at p. 285 B to D, where after referring to the Turquand point as a plea of mixed fact and law, His Lordship continued,

"In my opinion, however, it was at the very least incumbent on the defendants, if they wished to take the point, to plead in the alternative that, even if (which they denied) the resolution of 22 January 1969 had not been duly passed, they did not know of this irregularity and were entitled to rely on it as one which had been duly passed. This would have ... put the plaintiff's legal advisers on notice that they had to adduce evidence, they could, to show actual or constructive knowledge of the relevant facts ... and to explore the matters, so far as possible, in cross-examination of the defendants' witnesses."

Mr Chain contended that the rule in Turquand's case is a plea of mixed fact and law and it is therefore a point that has to be taken by the 4th Respondent before it shifts the onus of proof to the 1st Petitioner to rebut the presumption of regularity. In the present case, the 4th Respondent did not file any affirmation and the Turquand point was only raised by way of skeleton submissions at the striking out application and at an earlier hearing on 20 March 2003. In short, Mr Chain contended that until the point had been properly raised in the affirmation, the 1st Petitioner was not obliged to aver either in her pleadings or affirmations that the 4th Respondent could not rely on the Turquand rule due to actual or constructive knowledge on its part. It follows, according to Mr Chain, that Chu J had considered the Turquand point prematurely.

16. We agree. We note that Mortimer VP and Rogers JA in Pacific Foundation Finance v Fairyoung Holdings [1999] 3 HKC 448 at p. 452E and 455F were of the same view as Slade LJ. Hence, it is sufficient for the 1st Petitioner to aver in the Petition that the sale was without any proper authority from the 2nd Respondent. The 1st Petitioner made that allegation in the Petition. It is then up to the 4th Respondent to raise a plea basing on the Turquand rule in its affirmation. Only when this is raised, the 1st Petitioner would need to rebut by averring actual or constructive knowledge on the part of the 4th Respondent. In short, the averment of knowledge is not a material fact that must be included in the Petition.

17. To be fair to Chu J, we were told that this point was not argued before Her Ladyship. However, we are of the view that the 4th Respondent's submission on the Turquand point could not and should not be entertained by reference to the Petition alone. It is for the Respondents to raise the plea and then the Petitioners could, if necessary, respond thereto by way of evidence in reply. To raise the plea, the Respondents should also set out the factual matrix relied upon by them to argue how the 2nd Respondent had held out to the 4th Respondent that the 1st Respondent had apparent authority to enter into the sale on its behalf. After all, the rationale of the Turquand rule is apparent or ostensible authority, see Freeman & Lockyer v Buckhurst Park Properties [1964] 2 QB 480 at p. 504-6. It therefore behoves a party relying on the rule to identify the material facts in respect of the holding out. For this reason, it is not sufficient for Mr Leong to refer to his skeleton submissions of 20 March 2003 as notice of the 4th Respondent's case.

18. In any event, the plea must be considered in the light of all the evidence, not by reference to the lack of any plea of knowledge in the Petition alone. Knowledge, whether actual or constructive, only comes into play after the party dealing with the company, the contractor, raised a proper case of holding out, e.g. by pointing to a minute recording a resolution authorizing the transaction or by the use of the seal of the company in accordance with its articles of association.

19. In this connection, the analysis by Brennan J in Northside Developments v Registrar General (1990) 93 ALR 385 at p. 404 to 406 is instructive. In particular, it was said at p. 404-5,

"The indoor management rule is really a presumption of regularity. ... The presumption is no more than a presumption of fact. Whence does it arise? It arises from the likelihood that a company has given to its officers and agents the authority needed to carry on its business and to act for its benefit within the limits of the authority which officers and agents in their respective positions would ordinarily possess. The presumption might reasonably be made when the officers or agents of a company engage in a transaction for the purpose of a company's businesses or otherwise for the benefit of the company and the transaction is one that officers or agents in their respective positions would ordinarily be expected to have the company's authority to undertake. In that situation, a party dealing with the company in good faith is entitled to presume that the officers and agents had that authority: cf Uxbridge Permanent Benefit Building Society v Pickard [1939] 2 KB 248 at 258. Being a presumption of fact, the indoor management rule is displaced when the circumstances put on inquiry the party seeking to rely on the rule.

If the rule can found an estoppel against a company, in what does the necessary representation made by the company consist? Clearly enough, the representation required to support an estoppel depends on the subject matter of the estoppel...."

Then at p. 406,

"In transactions other than those engaged in for the purposes of a company's business or otherwise for the benefit of the company, and in transactions where the officer or agent has purported to exercise an authority over and beyond the authority which an officer or agent in that position would ordinarily be expected to possess, a party seeking to bind the company by estoppel must rely on particular representations of authority made by the company ---- that is, by officers or agents of the company having actual or ostensible authority to make those representations."

20. Once the plea is raised, the party challenging the transaction could have two options. He could argue that the matters relied upon by the contractor are insufficient to trigger the Turquand rule or he may file evidence to demonstrate that the rule is displaced by knowledge on the part of the contractor. In the present context, if the 4th Respondent were to rely on the mere fact that the 1st Respondent was the director of the 2nd Respondent, it is arguable that it would not be sufficient to trigger the rule bearing in mind the nature of the transaction and circumstances leading thereto which had been pleaded in the Petition. If the 4th Respondent were to rely on other matters, they would have to be canvassed in evidence and the Petitioner may then file evidence to establish knowledge. However we have not come to that stage because the 4th Respondent simply filed no evidence.

21. Mr Leong relied on the Singaporean case Development Bank of Singapore v Bok Chee Seng Construction Pte Ltd [2002] 3 SLR 547. Insofar as it was suggested in that case that a party could rely on the Turquand's rule without pleading, we would respectfully prefer the views of Slade LJ. In fact, it is doubtful whether the Singapore Court of Appeal went that far. It seems to us that the case only decided that when a party relying on the Turquand's rule had pleaded all the material facts and the other side had pleaded facts to rebut the same, it is not necessary to plead the averment of law that Turquand's rule is applicable.

22. Accordingly, in the present context, the Turquand point cannot be decided merely by reference to the Petition itself. One must have regard to the evidence filed by the parties. In coming to this conclusion, we have not lost sight of the special circumstances leading to the striking out application in the present case, in particular the election by the Petitioners not to proceed with the re-re-re-amendments which averred knowledge on the part of the 4th Respondent. However, as demonstrated by Mr Chain, there was already some evidence about dispute on the authority of the 1st Respondent before the court even in the absence of such re-re-re-amendments, see Paragraph 50 of the 1st Affirmation of the 1st Defendant. In that paragraph, the 1st Respondent referred to a meeting on 8 June 2002 between the 1st Respondent and the representatives of the 4th Respondent and their respective lawyers. According to the 1st Respondent, Mr Paul Tse explained the risk of going ahead with the sale without a signed resolution signed by all the directors of the 2nd Respondent. Notwithstanding that, the 4th Respondent decided to take the risk and signed the contract.

23. Further, the allegations concerning the 4th Respondent's part in the negotiations on the sale of the Petitioners' shares in the 2nd Respondent must also be taken into account. View in this light, the sale of the 2nd Respondent's shares in the 3rd Respondent without the participation of the 1st or 2nd Petitioner should arguably put the 4th Respondent on enquiry. Apparently, this aspect of the case had not been drawn to the attention of the learned judge.

24. The second point taken by Mr Chain is that the 1st Respondent had no apparent authority to bind the 2nd Respondent as he was only one of the directors. He submitted that a company had to act by the board and an individual director has no apparent authority to bind the company.

25. The Petition contained allegations that the 1st Respondent did not have any actual authority to sell on behalf of the 2nd Respondent and no resolution had been passed by the 2nd Respondent to authorize the sale. In the absence of actual authority, if the 4th Respondent wishes to hold the 2nd Respondent to the sale, it must rely on apparent or ostensible authority. For that purpose, there must be some holding out by the company that the 1st Respondent had the authority to bind it. Such holding out must be made by some person or persons who have actual authority from the company to make the representation, e.g. by the board of directors, see Freeman & Lockyer v Buckhurst Park Properties [1964] 2 QB 480 at p. 504-5. The 4th Respondent cannot rely on the representation by the 1st Respondent as to his own authority.

26. It is at least arguable the mere fact that the 1st Respondent was the director of the 2nd Respondent was not sufficient to cloak him with apparent authority to sell the 2nd Respondent's shares in the 3rd Respondent.

27. Chu J did not identify in her judgment the acts or representations by the 2nd Respondent that amount to the holding out of 1st Respondent as having the authority to sell the 2nd Respondent's shares. That is not surprising as the 4th Respondent did not do so, whether in skeleton submissions or otherwise. In a way, this defect arose from the failure to observe the rule of pleading mentioned above.

28. When we invited Mr Leong to identify the acts relied upon by the 4th Respondent to contend holding out by the company as to the authority of the 1st Respondent, he referred to the following matters,

(a) Paragraph 17 of his skeleton argument of 20 March 2003 that highlighted the lack of allegation in the Petition that the 4th Respondent had any actual or constructive knowledge of the irregularity;

(b) Paragraph 6 of the Petition which averred that the 1st Petitioner played no role in the management and running of the business of the company. Mr Leong argued it followed that the 1st Respondent, being the other director of the 2nd Respondent, was the only person who could have dealt with outsiders.

29. We are dealing with a sale of a major asset of the company against a background where parties had agreed to explore the disposal of their interest in the company and one of the two shareholders had refused to sell her shares in the company to the same purchaser. It is quite plain to us that Paragraph 6 of the Petition should not be read out of its context and to derive from that paragraph a proposition that the 1st Respondent must have apparent authority to conclude such a sale on behalf of the 2nd Respondent is, with respect, rather unreal.

30. Hence, in effect, Mr Leong was left with the fact that the 1st Respondent was one of the directors of the 2nd Respondent. As mentioned, that is arguably insufficient to trigger the Turquand's rule on the facts of the present case. Therefore, knowledge does not come into play. The 1st Petitioner needed not displace the operation of the presumption by averring knowledge when the presumption did not arise in the first place.

31. Mr Leong argued that was not how those acting for the Petitioners perceived the case at the hearing below. He laid emphasis on the fact that in response to the striking out application by the Respondents, the Petitioners sought leave to plead knowledge by way of re-re-re-amendments to the Petition. Leave was granted by Chu J on 28 April 2003. Hence, according to Mr Leong, those acting for the Petitioners took the view that it was necessary to aver knowledge in the Petition to sustain the cause of action against the 3rd and 4th Respondents. Subsequently, due to the risk of adjournment, the Petitioners decided not to proceed with those amendments. Because of that, Mr Leong submitted that they must accept the consequence.

32. It may be correct that those acting for the Petitioners did consider it necessary to plead knowledge in the Petition. However it is less clear whether such a plea was solely for the purpose of refuting the Turquand's rule. Mr Chain reminded this court that those amendments went beyond pleading knowledge. Allegations pertaining to fraud were added. In the end, it does not matter. Subject to the question of costs, we do not see how the position taken by counsel could bar us from considering whether the Petition against the 3rd and 4th Respondents should be struck out in accordance with the proper analysis as to the triggering and operation of the Turquand's rule set out above.

33. For these reasons, the claims against the 3rd and 4th Respondents should not be struck out and the appeal is therefore allowed insofar as the case by the 1st Petitioner against the 3rd and 4th Respondents is concerned. To that extent (and to that extent only), the order of Chu J made on 2 May 2003 is set aside.

34. In substance, the claim against the 3rd and 4th Respondents is a claim by the 2nd Respondent. It could be litigated by way of a derivative action. In the light of Tan Man Kou v Chime Corporation CACV 124 of 2003, 20.2.2004, that factor alone should not prevent the same claim from being raised in the context of a Section 168A petition. On the facts, we are satisfied that the claims are arguably within the proper scope of Section 168A relief.

35. In fact, there is a derivative action on foot between the same parties in High Court Action No. A1282 of 2003. That action was commenced shortly before the striking out hearing. Mr Chain explained that after the striking out, the action has been prosecuted to an advance stage and there would be a checklist hearing in May 2004.

36. Mr Leong also expressed concern about the allegation of fraud in Paragraphs 31 and 35 of the Petition given the stance taken by Mr Chain in this appeal.

37. We think the future conduct of the Petition, including whether it should be heard together with High Court Action No. A1282 of 2003 should be subject to the directions of the Court of First Instance.

38. As regards costs, bearing in mind that the grounds on which this appeal succeeds were not canvassed at the court below and that the appeal was not proceeded with as far as the 2nd Petitioner and the 5th Respondents are concerned, we think it is appropriate to make an order nisi that,

(a) the 3rd and 4th Respondents shall pay the 1st Petitioner's costs of the appeal;

(b) the Petitioners shall pay the costs of the 3rd to 5th Respondents of the hearing below with certificate for two counsel.