CHEEROLL LTD. v. PHILIP LEIGH TOSE AND OTHERS

CACV 208/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 208 OF 1999

(ON APPEAL FROM HCA 15993/1998)

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J U D G M E N T

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Godfrey, J.A. :

Introduction

1. This is an appeal from an order of Waung, J., made on 17 June 1999, striking out certain parts of the statement of claim in an action brought by Cheeroll Limited ("the plaintiff") against four directors ("the defendants") of Peregrine Investment Holdings Limited ("the company") in which the plaintiff is a shareholder.

The issue

2. One issue in the action arises out of the contents of an announcement made by the company on 26 October 1997 which is said to contain a number of statements said to have been made negligently. The issue is whether the defendants as members of the board of directors of the company assumed personal responsibility for the contents of the announcement. If they did, and if the statements were made negligently, the plaintiff may well succeed in its action. If the defendants did not assume personal responsibility for the contents of the announcement, that part of the plaintiff's case which is based on it will fail. The defendants say that the statement of claim does not contain any assertion of their assumption of personal responsibility and is accordingly defective.

The judgment below

3. The judge, after a careful review of the law and of the contents of the statement of claim, held that the pleading was defective. He struck out paragraphs 7 to 14 of the statement of claim. Those paragraphs read as follows :-

"7. On Sunday 26th October 1997 the Defendants were present at a board meeting of Peregrine convened to discuss and deal with the widespread rumours as to Peregrine's financial difficulties.

8. On 26th October the Defendants issued an announcement (the 'Announcement') and caused the same to be published in the press, including The South China Morning Post on the following day, Monday 27th October 1997. An extract of the text of the Announcement is reproduced as schedule 1 hereto though the Plaintiff will refer to and rely on the full text of the Announcement as necessary at trial.

9. The Defendants made the Announcement and caused the same to be published with the intention of re-assuring and/or to represent to, inter alia, Peregrine's shareholders that Peregrine was not in financial difficulty and that rumours of Peregrine's financial demise were completely false.

10. The Plaintiff will allege and/or ask the court to infer that the Defendants' purpose for making the Announcement and causing the same to be published was that the Defendants intended and/or wished to influence and/or ensure that those involved with Peregrine, including then shareholders of Peregrine such as the Plaintiff, retained confidence in Peregrine and did not cease to be involved with Peregrine; which in the case of shareholders, such as the Plaintiff, involved an intention to dissuade shareholders from selling their shares and/or an intention that shareholders should be persuaded to hold their shares in the medium term and at least until the next audited accounts of Peregrine were published.

11. In making the Announcement and/or causing the same to be published in the press, the Defendants undertook and/or owed a duty of care to and/or assumed a responsibility to and/or a relationship with, Peregrine's shareholders, including the Plaintiff, to ensure that the contents of the Announcement were true and accurate and would not mislead Peregrine shareholders, including the Plaintiff.

12. The Defendants knew, or ought to have known and been aware of and/or contemplated, that then shareholders of Peregrine such as the Plaintiff would be influenced by and place reliance on the accuracy and truthfulness of the contents of the Announcement in deciding whether they should sell or retain their Peregrine shares in light of the said rumours.

Particulars

Pending discovery and/or interrogatories herein the Plaintiff relies, in addition to the wording of the Announcement itself, on the following matters:

(1) Pending release of the audited accounts of Peregrine, the Defendants as executive directors and/or officers of Peregrine were in a privileged position to know and/or ascertain and comment upon the true financial position of the Peregrine group; outside shareholders were not in such a position and hence it was more probable than not that reliance would be placed on the Announcement made by the Peregrine board, the Announcement being reasonably expected to contain the best source of information as to the true position of Peregrine and its subsidiaries and/or guidance as to what to do at a time when rumours as to Peregrine's demise were rife;

(2) The Announcement was specifically addressed inter alia to Peregrine's shareholders;

(3) The Announcement was a formal one given by order of the Peregrine board, not comments made on a social occasion or in an informal context; and

(4) The defendants, unlike the Stock Exchange of Hong Kong Limited, attached no disclaimer of responsibility and/or liability for the contents of the Announcement.

13. In reliance on the truth of the facts and/or matters contained in the Announcement and induced thereby, the Plaintiff's board resolved on 12 December 1997 to reclassify 3,750,000 shares in Peregrine to be held as a long term investment instead of selling those shares.

14. In breach of duty and/or negligently the Defendants gave misleading and false information in the Announcement and/or omitted to give information in the Announcement which made statements therein misleading."

(Particulars are given of the allegation in paragraph 14, but I need not read them.)

4. It is necessary to add only that the announcement contained no express assumption of personal responsibility. No such statement as "The directors collectively and individually accept full responsibility for the accuracy of the information contained in this announcement" is to be found in it.

The defendants' case

5. The case for the four defendant directors is that this announcement was an announcement made for the company. The defendants say that it is not pleaded against them that it was an announcement for which they assumed personal responsibility. They say that, even if it had been so pleaded, the plea would be bound to fail, since it is plain and obvious, reading the announcement, that it was made for the company alone.

Conclusion

6. In my judgment, the judge was wrong to strike out those paragraphs of the statement of claim which I have set out above. As it seems to me, this announcement was indeed made for the company; but that does not exclude the possibility that it was an announcement made in terms from which it can properly be inferred that the defendants were assuming personal responsibility for its contents.

7. As was pointed out by Seagroatt, J. in the course of the argument, paragraph 11 does contain an averment that, in causing the announcement to be published, the defendants assumed the responsibility to Peregrine shareholders to ensure that the contents of the announcement were true and accurate. The suggestion, in these circumstances, that the statement of claim does not sufficiently plead that the announcement was one for which the directors are said to have assumed responsibility cannot be supported.

8. The other point that, even if pleaded (as I have concluded that it was), the plea will be bound to fail, since it is plain and obvious that the announcement was one made for the company alone, cannot be supported either. It is, I think, not plain and obvious at all. I accept that, at the trial, the judge may well come to the conclusion in relation to this announcement that it was made for the company alone, without any assumption of personal responsibility on the part of the defendants. The absence of any such words as "The directors collectively and individually accept full responsibility" for the announcement is a pointer in the defendants' favour, and it is, of course, the law that directors will not be held liable for acts of the company of which they are directors unless they are to be taken as having assumed personal responsibility for them. But these are matters which need to be considered by the trial judge. It would, in my judgment, be wrong to drive the plaintiff from the seat of judgment on the sort of points taken today. In my judgment, the case for the plaintiff is adequately pleaded, and it is not one of which it can be said that it is bound to fail.

9. For these reasons, I would allow this appeal.

Rogers, J.A. :

10. This is an action in negligence for economic loss sustained because of alleged negligent misstatements. For such a cause of action to subsist, there must be a special relationship. That is necessary because statements can be made on many occasions when they are not intended to be relied upon, e.g. social occasions or other informal occasions. Furthermore, the damage which can result from statements might be far wider than the physical damage which is suffered from a normal negligent act; for those reasons, it has been appreciated that in the case of statements alleged to give rise to an action in negligence, actionability depends upon a special relationship being established. The existence of a special relationship entails, amongst other things, that the statement was made for a particular purpose known to the adviser that the adviser knew that the statement would be communicated to the advisee and it was made in circumstances such as would be regarded by a reasonable man as one that was to be taken seriously and relied upon.

11. Liability for negligent misstatements is not a liability which arises from a tort of strict liability as in the case, for example, of copyright and patent infringement. In such cases, it is sufficient to show that the director was implicated by having authorised or procured the act wherein the tort was committed. This is exemplified by what was said in cases such as Evans v. Spritebrand [1985] 1 W.L.R. 317 @ 329 and PLG Research Ltd. v. Ardon International Ltd [1993] F.S.R. 197 @ 238. In cases where it is sought to make a director liable for negligent misstatements said to have been made by a company, it is necessary to go further than showing authorisation or procurement because to show that the director himself had, in effect, all the ingredients of the tortfeasor, in the language that has been used in the cases, it must be shown that he has assumed personal responsibility.

12. Turning to the pleadings in this case, the first point to be noted is that the allegation is that the Defendants issued an "Announcement" or made the statement which is relied upon. The Defendants are individuals and they all are members of the Board. In paragraph 8, it is said :-

"8. On 26th October the Defendants issued an announcement (the 'Announcement') and caused the same to be published in the press ..."

In paragraph 9, it is said :-

"9. The Defendants made the Announcement and caused the same to be published with the intention of re-assuring and/or to represent to, inter alia, Peregrine's shareholders ..."

13. The kernel of the announcement is set out in the schedule of statement of claim. The full announcement has, indeed, been shown to us, but it is of significance to note that the schedule sets out, first of all, the circumstances in which the announcement came to be made. Those circumstances were, in brief, that there were rumours circulating in the market that Peregrine had suffered severe financial losses. It is then said that "In order to end these rumours and re-assure Peregrine's clients and counter parties, bankers, shareholders and employees, the Board of directors ("the Board") of Peregrine has decided to make this announcement ..." There are other references to the Board in that announcement which is set out in the schedule e.g. it is said that "the Board believes that these reserves are adequate" in respect of certain matters. The whole matter is summarised. There are two references to the Board in the Summary . In paragraph 8 is said :-

"The Board confirms there are currently no discussions taking place with another party to acquire a substantial shareholding in Peregrine and that there is no substance in the rumour that Mr. Philip Tose may be leaving Peregrine."

14. An analysis of that statement alone must show that, on the face of the matter, it was the Board making the statement, indeed it would seem that the final words of that paragraph could probably only have come from the member of the Board who happens to be the first named Defendant.

15. Paragraph 9 states that :-

"The Board confirms that, save as disclosed in this announcement, it is not aware of any matter disclosable under the general obligation imposed by paragraph 2 of the Listing Agreement, which is or may be of a price sensitive nature."

It concludes that :-

"Rumours of losses by Peregrine running into hundreds of millions of US dollars and of Peregrine's financial demise are completely false."

16. The statement concludes that it was made by order of the Board of Peregrine Investment Holdings Limited. It is signed by the company secretary, namely the 4th Defendant who also was, of course, a member of the Board.

17. It seems to me, that it is clearly arguable that the statements in the Announcement were made by the Defendants.

18. Mr. Fung, S.C., on behalf of the Defendants, has manfully argued that such an argument is not sustainable. In my view, it is an argument which is clearly on its face sustainable that the Defendants made these statements. They were statements similar, I would suggest, to statements made in a prospectus. There is per force an argument that they were made to a clearly identifiable class of persons, namely the shareholders.

19. In my view, the pleading in paragraphs 8 to 12 of the Statement of Claim on that footing alone is sufficient. But I also agree with what Godfrey, J.A. has said that if it is regarded that this was a corporate statement, there is sufficient that has been pleaded for it to be argued that the Defendants have undertaken personal responsibility in respect of the statements made in the Announcement.

20. In my view, this appeal should be allowed.

Seagroatt, J. :

21. For the reasons given by my Lords, Godfrey and Rogers, J.J.A., I also would allow this appeal.