GRAND FIELD GROUP HOLDINGS LTD v. TSANG WAI LUN WAYLAND AND OTHERS

HCA841/2009 & HCA873/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 841 OF 2009

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DECISION

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Introduction

1. Registered in Bermuda, Grand Field Group Holdings Limited (“the Company”) is a publicly listed company in Hong Kong.  At the material times, two camps of protagonists were embroiled in the fight over the control of the Company’s board.  At a board meeting held on 27 November 2008, the 6 current directors of the board (“the 6 Directors”), including Au Kwok Chuen Vincent (“Au”) purported to appoint 5 more directors (“the 5 Directors”) to the board.  One of the 5 Directors resigned shortly after her appointment.  I shall refer to those remaining as “the 4 Directors” below.

2. Rhenfield Development Corp. held 22% of the issued share capital of the Company.  It was controlled by Tsang Wai Lun Wayland (“Tsang”) and his wife, Kwok Wai Man Nancy (“Kwok”).  Pursuant to Rhenfield’s requisition, the Company’s shareholders held a special general meeting on 2 December 2008.  At that meeting, 8 directors (“the 8 Directors”) including Francis Lim (“Lim”) were appointed.  One of the 8 Directors resigned in January 2009.  I shall refer to the remaining ones as “the 7 Directors” below.  (Another also resigned later but he remained on the board at all material times.)

3. The boardroom battle cumulated in four actions :

(1) HCA300/2009, a common law derivative action commenced by Tsang and Lim in February 2009 against the 6 Directors and the 5 Directors, in which the validity of the appointments of both the 5 Directors and the 8 Directors was challenged.

(2) HCA771/2009, a statutory derivative action commenced by Tsang against the 6 Directors and two former directors.

(3) HCA841/2009 (“the 1^st Action”), commenced on 25 March 2009 by the Company against Tsang, Kwok and the 8 Directors.

(4) HCA873/2009 (“the 2^nd Action”), commenced on 27 March 2009 by the Company against the 8 Directors.

4. In both the 1^st and 2^nd Actions, the Company was represented by Messrs Kennedys.  Kennedys’s case is that they had been duly authorized by the Company to commence the 1^st Action and 2^nd Action by the board resolutions dated 19 and 27 March 2009 (“the 19/3 Resolution” and the 27/3 Resolution”) respectively.

5. By summons dated 31 March and 29 April 2009 filed respectively in the 1^st and 2^nd Action (“the Authority Summonses”), Lim applied for consolidation of the two Actions and for an order that the Actions be stayed on the ground that Kennedys had no or no proper authority to act for the Company in instituting them.  On 21 July 2009, I adjourned the Authority Summonses for argument.

6. In early August 2009, HCA300/2009 came before Reyes J for trial.  In the judgment handed down on 12 August 2009, the learned judge found that the 8 Directors were validly appointed but the 5 Directors were not.  He accordingly made a declaration that the 8 Directors were validly appointed and set aside the appointment of the 5 Directors.

7. Kennedys then applied for and obtained leave to cease to act for the Company in both the 1^st and 2^nd Actions.

8. By two summonses both dated 22 September 2009, Lim applied to dismiss the Actions and sought an order that Kennedys do pay his costs personally (“the Dismissal Summonses”).  On the following day, Kennedys took out two summonses for an order to intervene in the Actions (“the Intervening Summonses”).

9. The Authority Summonses, the Dismissal Summonses and the Intervening Summonses all came before me on 25 September 2009.  At that hearing, I dismissed the Actions and the Intervening Summonses.  I made no order on the Authority Summonses save and except that the costs be reserved and to be dealt with together with Lim’s application for costs against Kennedys personally under the Dismissal Summonses.  I then adjourned the outstanding matters for argument.

10. This is the decision on Lim’s application and the costs of the Authority Summonses.

The applicable principles

11. The applicable principles are well settled.

12. When a solicitor purported to act for a client in an action, he impliedly warranted that he had the authority to represent the client.  When it later transpired that in fact he did not have such authority, he had acted in breach of the implied warranty.  The court would normally order him to personally pay the costs needlessly incurred by the opposing party.  It matters not whether the solicitor had acted bona fide and in reasonable reliance of the instructions; or that he had been deceived into believing that he had the authority to act for the client; or that quite innocently he did not know that there was no authority or the authority once existed had ceased to exist.  See Yonge v Toynbee [1910] 1 KB 215, per Buckley LJ at pp.224-225, Swinfen Eady J at pp.233-234; Babury Limited v London Industrial PLC & Another, The Times, 20 October 1989.

13. The rationale behind the rule, as explained by Swinfen Eady J, ibid, is this :

“The manner in which business is ordinarily conducted requires that each party should be able to rely upon the solicitor of the other party having obtained a proper authority before assuming to act.  It is always open to a solicitor to communicate as best he can with his own client, and obtain from time to time such authority and instructions as may be necessary.  But the solicitor on the other side does not communicate with his opponent’s client, and, speaking generally, it is not proper for him to do so… It is in my opinion essential to the proper conduct of legal business that a solicitor should be held to warrant the authority which he claims of representing his client; if it were not so, no one would be safe in assuming that his opponent’s solicitor was duly authorized in what he said or did, and it would be impossible to conduct legal business upon the footing now existing; and, whatever the legal liability may be, the Court, in exercising the authority which it possesses over its own officers, ought to proceed upon the footing that a solicitor assuming to act, in an action, for one of the parties to the action warrants his authority.”

14. This is, however, not an inflexible rule.  It may sometimes have to yield to special circumstances.  For example, in a case where the opposing party’s solicitor is informed that there is a doubt about the solicitor’s authority, there may be no unequivocal representation of authority.  Or the facts of the case are such that it may be right to leave the aggrieved party to his remedy in an action in damages for breach of warranty of authority against the solicitor.  That said, when a solicitor who clearly acted without authority, causing by his representation of authority the opposing party to incur wasted costs, must usually expect to be ordered to pay his costs.  See Babury Limited v London Industrial PLC & Another, supra, per Steyn J.

15. The jurisdiction to order costs against the solicitor acting without authority personally is a summary jurisdiction.  Although the court will give the solicitor a fair opportunity to be heard, it should be remembered that it is not a fully blown action against him.  The court will normally deal with the matters summarily on affidavit evidence.  Cross-examination of the deponents of the affidavits will be extremely rare.

Discussions

16. As can be seen from above, back in March and April 2009, the board of the Company consisted of 17 Directors : the 6 Directors and the 4 Directors on one hand and the 7 Directors on the other.

17. As noted, Kennedys relied on the 19/3 and 27/3 Resolutions.  Further, at the board meeting held on 16 April 2009, the board of the Company, by a majority of 10 (the 6 Directors together with the 4 Directors) to 7 (the 7 Directors), passed a resolution to rectify the 19/3 and 27/3 Resolutions (“the 16/4 Resolution”).

18. Lim challenged the validity of all the 19/3, 27/3 and 16/4 Resolutions, which has to be decided by reference to Bermuda law.

19. Broadly, Lim disputed the validity of the 19/3 and 27/3 Resolutions on two grounds.  First, no board meetings as alleged had ever taken place.  Secondly, even if such meetings had taken place, the 7 Directors had not been notified of the same at all.

20. Lim and Au had filed lengthy affidavits on whether the board meetings on 19 and 27 March 2009 had taken place.  For the reasons given below, I do not think it matters if the board meetings did take place or not.  Even if they did, the 19/3 and 27/3 Resolutions were plainly invalid on the ground that no notice of the meetings had been given to the 7 Directors.

21. Bye-law 137 of the Company’s Bye-laws provided :

“A Director may, and on the request of a Director the Secretary shall, at any time summon a meeting of the Directors which may be held in any part of the world provided that no such meeting shall be summoned to be held outside the territory in which the Head Office is for the time being situate without the prior approval of the Directors.  Notice thereof shall be given to each Director and alternate Director in person orally or in writing or by telephone or by telex or telegram or facsimile transmission at the telephone or facsimile number or address from time to time notified to the Company by such Director or in such other manner as the Directors may from time to time determine. …”

22. It is beyond doubt that the 7 Directors had not been notified of the two board meetings.  Au did not expressly deny that.  Neither did the handling solicitor Yiu Wing Ching John (“Yiu”) of Kennedys.  More importantly, in a legal opinion dated 18 June 2009 prepared by Sedgwick Chudleigh, the Bermuda lawyer instructed by Kennedys, it was expressly stated as part of their instructions that no notice of the two meetings had been given to the 7 Directors.

23. Sedgwick Chudleigh did not deal with the legal effect of lack of notice.  In his opinion dated 5 February 2009, Andrew Martin, Lim’s expert on Bermuda law, said that in the absence of proper notice to all directors, a board meeting is not properly convened and any purported resolutions passed at the meeting is invalid and of no effect.  I entirely agree.

24. Yiu sought to argue in his affidavits that under Bye-law 110(H) of the Company’s Bye-laws, the 7 Directors could not have voted on the 19/3 and 27/3 Resolutions any way because they were materially interested in the subject matters, the 1^st and 2^nd Actions.  That may well be true.  But it does not distract from the fact that proper notice had to be given to the 7 Directors and the legal position that in the absence of such notice, the 19/3 and 27/3 Resolutions were invalid and of no effect.

25. Kennedys then prayed in aid of the 16/4 Resolution.  According to Sedgwick Chudleigh, the 19/3 and 27/3 Resolutions could be subsequently ratified by a majority of the board at a meeting for which due notice was given to the entire board.  They based their opinion on the well known authority of Re Portuguese Consolidated Copper Mines Ltd (1889) 42 Ch. D 160, CA (Eng).

26. When Sedgwick Chudleigh prepared their opinion, the court had yet to rule on the validity of the appointment of the 5 Directors.  They acted upon the assumption that the 5 Directors were validly appointed in accordance with all relevant Bye-laws and statutory provisions applying in Bermuda at the material times : see para.5.1.2 of their opinion.  They did not deal with the effect of the 16/4 Resolution if the appointment was in fact invalid, which is the current position.  Neither did Andrew Martin, Lim’s expert.  In the absence of any expert evidence, I will proceed on the presumption that the position under Bermuda law is the same as that under Hong Kong law.

27. Yiu, in his 7^th affidavit, sought to rely on Bye-law 143 of the Company’s Bye-laws, which read :

“All acts bona fide done by any meeting of the Directors or by any such committee or by any person acting as a Director shall, notwithstanding that it shall be afterwards discovered that there was some defect in the appointment of such Director or persons acting as aforesaid or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a Director or member of such committee.”

He argued that despite Reyes J’s judgment, that would not affect the validity of the votes cast by the 4 Directors in favour of the 16/4 Resolution.

28. In Morris v Kanssen [1946] AC 459, the House of Lords held that Article 88 in Table A of the Companies Act 1929, which was almost identical to Bye-law 143, was designed as machinery to avoid questions being raised as to the validity of transactions where there had been a slip in the appointment of a director and not to override substantive provisions relating to such appointments.  It could not be invoked when there was no appointment.

29. In his judgment, Reyes J found that the 6 Directors had abused their fiduciary power in appointing the 5 Directors.  Their act was improper and void : see paras.55, 56 and 89.  It follows from Reyes J’s finding that there was no appointment of the 5 Directors from the outset at all.  So Morris v Kanssen applies and Bye-law 143 avails Kennedys nothing.  The 16/4 Resolution, which could not have passed by majority without the votes of the 4 Directors, is incapable of ratifying the 19/3 and 27/3 Resolutions.

30. For the above reasons, I find that Kennedys did not have the authority to commence the 1^st and 2^nd Actions.

31. Mr Lee, for Kennedys, took a number of points.

32. He first submitted that Kennedys might not have unequivocally represented that they had authority to act for the Company.  That must be wrong.  For Kennedys had all along remained adamant that they did have authority to act for the Company.

33. Mr Lee then submitted that if Kennedys were held to be liable, then whenever there is a battle for boardroom control in a listed company, the solicitors for the company, with absolutely no exception be at risk on costs, subject to any separate recovery on indemnity from those instructing them.  He said that is most unattractive from a public policy standpoint.

34. For my part, I can see no particular hardship against the solicitors as envisaged by counsel.  It is up to the solicitors to decide if they wish to represent a company embroiled in a boardroom battle.  Before accepting instructions to act for the company, the solicitors must obtain all necessary instructions from those instructing them on the matters pertaining to authority.  They should then exercise their professional judgment to decide if, based on the instructions, they have the requisite authority to act for the company.  When they do decide to act for the company, they must be taken to have been satisfied that they have the authority to do so.  If it later turns out that they do not have the authority, I can see no reason why they should not be held responsible for all the consequences flowing from their error of judgment.

35. Lastly, Mr Lee sought to apply for leave to file and use the 8^th affidavit of Yiu, which dealt with the criminal conviction of Tsang and Kwok in March this year in DCCC24/2008 for conspiracy to defraud.  He argued that their criminal conviction inferentially cast doubt on the validity of the appointment of the 8 Directors, which might in turn vitiate their acts qua directors of the Company.  Mr Lee’s submission is speculative and more importantly amounts to a collateral attack against Reyes J’s finding on the same issue.  That is not permissible.  I reject his submission and refuse to grant Kennedys leave to file and use Yiu’s 8^th affidavit.

Orders

36. For the above reasons, I allow Lim’s application and order that Kennedys do pay his costs of the 1^st and 2^nd Actions, including all the costs reserved, to be taxed if not agreed.

37. In light of my finding that Kennedys did not have authority to represent the Company, I order them to pay Lim his costs of the Authority Summonses, to be taxed if not agreed.

38. Finally, I make an order nisi that Kennedys do pay Lim costs of his application, to be taxed if not agreed.