HENRY LO HON YIU v. THE QUEEN

Company law - statutory duty of director to lay annual accounts before company in general meeting - failure to do so within statutory time limits - whether director has taken all reasonable steps if he has honestly acted on advice of solicitors and auditors - whether power of director to delegate duty extends beyond delegating to other directors and if so whether auditors and solicitors may be delegates - Held: 1. Director took all reasonable steps by obtaining and acting on advice of solicitors and auditors; 2. Director may delegate to non-director employees who are in a position to discharge duty but may not delegate duty to solicitors, auditors or other professional advisers; 3. Appeal upheld; convictions quashed - Section 122(1)(2)(3) Companies Ordinance Cap.32.

IN THE SUPREME COURT OF HONG KONG

(Appellate Jurisdiction)

Magistracy Appeal No. 198 of 1985

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BETWEEN

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REASON FOR JUDGMENT

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1. The appellant being a director of Chintex Oil and Gas Co.Ltd. (hereinafter called "Chintex') was convicted on 23rd January 1985 of two offences under the Companies Ordinance, Cap.32 of failing to take all reasonable steps to lay certain accounts before a general meeting of Chintex during 1983. The first charge in respect of the profit and loss account was brought under Section 122(1) and 122(3). The second charge in respect of the balance sheet was brought under Section 122(2) and 122(3). After trial the appellant was convicted of both charges. On the first charge he was convicted and discharged but ordered to pay $1000 costs towards the prosecution while on the second charge he was simply convicted and discharged. From both convictions he now appeals.

2. The appellant was jointly charged with two other directors one of whom was James Coe. Both the other directors were acquitted. Coe was a director of Chintex holding at least 90% of the issued capital. He effectively controlled the Company at the material  time as well as controlling a number of related companies. There were substantial inter-Company loans including one for $43,384,498 for which Coe had ultimate liability.

3. In 1981 Coe sought a person to take over the business administration of Chintex and the appellant, who was then a young university graduate, was employed. In 1982 he was made a director of Chintex and by 1983 had become Chairman of Directors although effective control remained with Coe. The annual general meeting of Chintex for 1983 was scheduled to be held on 31st December 1983 at which meeting the directors were obliged in terms of Section 122, to lay before the meeting the profit and loss account for the appropriate period and the balance sheet as at the appropriate date.

4. During 1983 the auditing of the annual accounts for the annual general meeting was delayed because verification had to be supplied to the auditors of transactions of Chintex with Coe and the related companies of which the appellant was neither a shareholder, director or other officer. The appellant's duties included the control of the accounts department which was directly responsible for the preparation of the annual accounts and arranging for them to be audited before presentation to the annual general meeting.

5. When Coe gave evidence he generally praised the appellant's ability and performance and stated that he found him to be man of "great calibre". I observe that the previous year's annual meeting was held on 31st December 1982 when the appellant was responsible for the audited annual accounts to be presented to that meeting when they were approved. So in 1982 all the requirements of the Companies Ordinance were duly complied with under the appellant's supervision and direction.

6. The following year's annual accounts were in respect of the financial year ending 31st March 1983 and it was these accounts which were intended to be presented to the annual meeting on 31st December 1983. The accounts were to be prepared on a going concern basis which tended to increase the verification required by auditors of current transactions. During this period Chintex was involved in a multi-million oil refinery project to be built in China and was also rearranging its finances for the project with different banks. Coe in giving evidence alleged that he accepted the appellant's opinion that in order to give the maximum information to shareholders at the annual meeting it was desirable to delay the preparation of the accounts until the progress of the oil refinery project had become clearer and the financial rearrangement completed.

7. When the appellant gave evidence, he stated that the only reasons for the auditing delays were that in November the auditors requested verification of the necessary financial support far the oil refinery project from the related campanies and from Coe personally; and verification of the recoverability of an unsecured loan due by the director of one of those companies. According to the appellant it was only Coe who could supply the material the auditors sought. The appellant stated that he asked Coe for these verifications but they were not immediately forthcoming. At the same time the financial rearrangements were continuing. The outcome of those arrangements would not have affected the auditing of the annual accounts for the year ended 31st March 1983 but I infer that if they were successfully concluded before the annual general meeting that was post-balance date information that would have been of considerable interest for the shareholders attending the meeting. In fact Coe supplied this information by a letter to the auditors dated 12th March 1984.

8. Returning to November 1983, the appellant stated that faced with the delay in providing the auditors with the verifications sought, he considered whether the annual general meeting could lawfully be postponed. The appellant stated that he sought the advice of Chintex's auditors and solicitors on the possibility of postponement and these enquiries culminated in a meeting at the auditor's office early in December 1983 attended by the appellant, and senior members of the auditors and solicitors firms. Coe when he earlier gave evidence, stated that he was aware that the appellant at this time was holding meetings with the auditors and solicitors, in order to ascertain whether the annual general meeting could be postponed.

9. The appellant stated that at these meetings Sections 111 and 122 were considered and that the joint advice he received from the auditors and solicitors was that the annual general meeting could lawfully be postponed up to 31st March 1984. This advice was conveyed to Coe who stated that he accepted the advice. What then happened was that the annual general meeting was held on 31st December 1983. However, due to the absence of annual accounts the meeting was formally adjourned to 30th March 1984.

10. I record that Chintex had instructed Peter Chan (Secretaries) Ltd. to give notice and attend to all the statutory requirements, other than the presentation of the annual accounts, in respect of both the annual general meeting and the adjourned meeting. The notices for those meetings were produced and they were all signed by Peter Chan (Secretaries) Ltd. by order of Chintex. I record, too, that the notes to the audited annual accounts presented to the adjourned annual meeting together with the contents of the auditors report supported the evidence of the appellant that it was delay in obtaining verifications from Coe, which delayed the audit.

11. Before delivering judgment the learned Magistrate referred to the defences which are available under Section 122. These are two a in number:

12. The learned Magistrate held that Coe, by delegating the duty to the appellant, had done all that was reasonable in the circumstances to ensure compliance and that the other director was in a similar position. Coe and the other director were acquitted. However, it is not entirely clear from the statement of findings whether the, acquittal was on the first or second of the two defences available under Section 122(3).

13. Turning to the appellant, the Magistrate was obviously impressed by the considerable efforts the appellant had made to ensure compliance and while convicting him held that the offences were "of a technical nature only." The learned Magistrate arrived at his finding of guilt largely on the following basis:

14. Ignorance of the law may not be a defence to an absolute offence. With respect to the learned Magistrate, where statutory non-compliance is not an offence if reasonable but unsuccessful steps are taken to ensure compliance, ignorance of the law may, as a matter of fact, be very relevant in determining the issue, whether reasonable steps were taken.

15. This distinction formed the basis of the grounds of appeal. In short, Counsel for the appellant submitted that the appellant had taken all reasonable steps to ensure compliance and alternatively on reasonable grounds he had delegated the duty to comply to competent and reliable persons.

16. As to the first ground, Counsel for the appellant pointed out that the latter had conscientiously obtained the professional advice of the Company's auditors and solicitors on the legality of laying the annual accounts before an adjourned meeting after 31st December 1983 and had conveyed that professional, if inaccurate advice, to Coe. Both Coe and the appellant had accepted and acted upon that advice yet Coe was acquitted and the appellant convicted. Further it was submitted that the appellant's conduct was less blameworthy than Coe. For the appellant had sought from Coe the information required by the auditors and which was exclusively within Coe's knowledge. Coe had been slow in supplying that information. Coe's tardiness was the sole reason why the audit was delayed and was the principal reason why the annual accounts were not available in time for the annual general meeting. Counsel for the respondent accepted that it was a question of fact whether what the appellant had done amounted to all reasonable steps.

17. In respect of the alternative defence, Counsel for the appellant submitted that the appellant reasonably believed the auditors, and solicitors were both competent and reliable persons. As the appellant sought and acted on their advice it was submitted that he had established an alternative defence under the proviso. Counsel for the respondent disputed that claim submitting that the power of delegation was limited. A director, she submitted could only delegate to another director who was also under the same statutory duty to lay the accounts before the company in general meeting. That was what Coe had done in delegating to the appellant and under the proviso the latter had no further power of delegation to a non-director.

18. After reviewing the evidence and considering the very helpful submissions of both Counsel I am satisfied that the appellant, in terms of the first ground of appeal, took all reasonable steps to comply with the Section. For the undisputed evidence is that, conscious of the time limitations, he endeavoured to obtain the necessary verifications from Coe and when these were not forthcoming took steps to ascertain whether the accounts might lawfully be presented to Chintex at an annual general meeting adjourned beyond 31st December 1983. The steps he took were those that not merely a reasonable, but a zealous director, would take to comply with the statutory requirements. He held meetings with Chintex's auditors and solicitors and acted on their professional advice. Unfortunately, but unknown to him at the time, that advice was wrong.

19. Having reached that finding it is strictly unnecessary for me to go on to consider the alternative defence under the proviso. However, in deference to both Counsel's submissions, I would make these limited observations. I reject the appellant's submission that a director may delegate his statutory duty to the company's auditors and solicitors being chartered accountants and solicitors in private practice Certainly they would satisfy the first criteria under the proviso of being competent and reliable persons. However, as they are the company's independent professional advisers or officers and not the company's employees they cannot be under any duty to comply with Section 122. Their duties are quite different.

20. The solicitors are under a professional duty to advise Chintex on any matters on which their advice is sought. Chintex may then either accept or reject that advice. The solicitors cannot compel Chintex to act on that advice. The auditors are under a duty to audit the accounts of Chintex but have no power or duty to play any part in the executive management of the company. The position of the professional secretarial company appointed to arrange the statutory general meetings may be different but Counsel for the appellant did not develope his argument in respect of its precise position and I refrain from making any comments upon that position.

21. On the other hand, I do not consider the power of delegation is limited to the delegatee being another director. In my view directors may delegate their duty to an employee of the company provided under the position the delegatee holds in the Company, he has the power, in terms of the delegation or generally, to discharge the duty of ensuring that the annual accounts are laid before the company in general meeting. 1'Palmer's Company Law' (22nd Edn) 637 it is true, states that the maxim 'delegatus non potest delegate' applies to directors so that, prima facie, they cannot delegate their powers. However, delegation may be authorised by statute and is commonly authorised for certain purposes under a company's articles of association. The proviso to Section 122(3) is a clear species of delegation by directors authorised by statute. I am satisfied that a director may delegate to a non-director thereunder provided the delegatee's character and powers comply with that provision.

22. However, I am content to uphold the appeal on the first ground, that the appellant took all reasonable steps to comply with Section 122. Accordingly both convictions are quashed and the $1000, if paid, shall be refunded to him.