SHANGHAI FINANCE HOLDINGS LTD v. SUN TAI CHEUNG CREDITS LTD

CACV 91/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 91 OF 2004

(ON APPEAL FROM HCA NO. 200 OF 2004)

____________________

____________________

_________________________

REASONS FOR JUDGMENT

_________________________

Hon Stock JA:

1. I agree with the reasons provided by Le Pichon JA.

Hon Le Pichon JA:

2. This was an appeal from the order of Suffiad J dated 26 March 2004 dismissing the plaintiff's summons for an order that the 3rd defendant disclose to the plaintiff the information and documents described in the schedule to the summons. At the conclusion of the hearing, the appeal was allowed with written reasons to be handed down later which we now do.

Background

3. The plaintiff is a company incorporated in the British Virgin Islands. At all material times, it was a wholly-owned subsidiary of Hong Kong New Noongkai Group Ltd (HKNNG) which in turn was wholly-owned by Mr Chau Ching Ngai ("Mr Chau"). At all material times, the directors of the plaintiff were Mr Chau and the 3rd defendant who is his wife. The 1st and 2nd defendants are indirectly wholly-owned subsidiaries of Sun Hung Kai & Company Limited which, in turn, is controlled by Allied Group Limited, a public company listed on the Hong Kong Stock Exchange.

4. On 31 October 2002, HKNNG acquired the entire issued share capital of Shun Loong Holdings Ltd ("Shun Loong") for $225,435,000 but matters were so arranged that the sale was completed on 20 January 2003 by the transfer of the Shun Loong shares to the plaintiff. On the same day, the plaintiff entered into a loan agreement with HKNNG for an advance of $105,440,000 to be applied towards the purchase of the shares and it also entered into a loan agreement with Standard Chartered Bank ("the SCB loan agreement") whereby the bank agreed to make available a loan facility of up to $100 million towards the purchase of the shares. As security for the SCB loan agreement, Mr Chau provided a guarantee, HKNNG and the plaintiff entered into a Deed of Subordination and Assignment in favour of the bank and the plaintiff executed a Share Mortgage in favour of the bank.

5. As at 31 March 2002, the audited consolidated net tangible assets of Shun Loong was $189,238,000. Less than 3 months later, on 25 June 2003, a series of transactions took place. On that day, the bank assigned to the 1st defendant all its rights, title, benefit and interest in the SCB loan agreement for $35,455,342.47 ("the Sale") which was the amount outstanding under the SCB loan agreement and the 1st defendant, the 2nd defendant and the 3rd defendant entered into a Sale and Purchase Agreement ("the 2003 Agreement") whereby the 1st defendant, as assignee of the Share Mortgage, sold and transferred to its wholly-owned subsidiary, the 2nd defendant, the Shun Loong shares for $36,500,000 subject to certain adjustments. The 3rd defendant purportedly entered into the 2003 Agreement on behalf of herself and the plaintiff.

6. Prior to the June transactions, on 7 June 2003, the court appointed Stephen Liu and Yeo Boon Ann as receivers of the plaintiff. Subsequently, on 28 August, the same receivers were appointed receivers by way of equitable exclusion over certain specified assets of Mr Chau including all his interest in HKNNG. On 4 September 2003, the receivers appointed themselves and removed Mr Chau and the 3rd defendant as directors of the plaintiff.

7. At the time of the transactions in June 2003, the 3rd defendant was the only director of the plaintiff physically present in Hong Kong. Her involvement in the transactions sought to be impugned is apparent from the face of the documents. When these matters came to light, the plaintiff brought the underlying action against the defendants, essentially, to set aside the Sale as well as the 2003 Agreement on the basis that the transactions were at a gross undervalue.

The proceedings below

8. The summons issued on 23 March 2004 sought a mandatory interlocutory injunction under section 21L of the High Court Ordinance and Order 29 of the Rules of the High Court. It sought disclosure by the 3rd defendant in her private capacity as well as in her capacity as a director of the plaintiff of information as to whether she had obtained legal advice, financial advice or any other kind of professional advice in relation to the Sale or the signing of the 2003 Agreement. The judge below was of the view that the order sought was far too wide and that the plaintiff had not shown that it was entitled to any information relating to the 3rd defendant in her private capacity.

9. It would appear that the application was precipitated by a striking out summons taken out by the 1st and 2nd defendants on 27 February 2004. The striking out application was grounded on the fact that certain warranties had been given by the 3rd defendant on behalf of herself and the plaintiff under the 2003 Agreement. In pertinent part, clauses 6 and 10 of the 2003 Agreement read:

"6.3	Each of the Warrantors [i.e. the plaintiff and the 3rd defendant] jointly and severally agrees that the sale and purchase contemplated under this Deed is, taking into account all relevant circumstances, the most advantageous method of sale for the Vendor to obtain the best price for the Sale Shares.
6.4	Each of the Warrantors further jointly and severally acknowledges and agrees that the Sale Shares be sold at the Consideration and the Consideration represents the fair market value of the Sale Shares and an acceptable price for the Sale Shares.
...
6.6	Each of the Warrantors jointly and severally waives any rights they may have to and agree not to challenge or seek to have the assignment under the Deed of Assignment, the transfer and registration of the Sale Shares into the name of the Vendor (and its nominee) and the sale and purchase contemplated under this Deed set aside or rendered void or voidable for any reason.
...
10.10.	Each of the Warrantors jointly and severally acknowledges and confirms that:
	10.10.1	each of them has taken independent legal advice in relation to the transactions contemplated in the Deed of Assignment and this Deed;
	10.10.2	each of them has been advised by their respective legal advisers in relation to the transactions contemplated in the Deed of Assignment and this Deed; and
	10.10.3	each of them has fully understood the terms and provisions of the transactions contemplated in the Deed of Assignment and this Deed."

10. The judge dismissed the plaintiff's summons on the basis that the information sought would not assist the plaintiff in resisting the application made by the 1st and 2nd defendants for striking out. In his view, the 1st and 2nd defendants would be able to rely on the express warranty and acknowledgement contained in clause 10.10 of the 2003 Agreement. He considered that that point alone was sufficient to warrant the dismissal of the plaintiff's summons.

The appeal

11. The appeal raised two issues:

(1) the extent of the fiduciary duty owed by a director to the company after he ceases to be a director; and

(2) whether the judge's exercise of his discretion ought to be disturbed.

Fiduciary duty

12. Mr Yuen SC who appeared for the 3rd defendant accepted that a director owes a fiduciary duty to his company and any knowledge gained in that capacity becomes the property of the company. In the present case, the 3rd defendant was involved in transactions which she purportedly entered into on behalf of the company. It would appear from the face of the 2003 Agreement that in so doing the company had allegedly taken independent legal advice. When a director obtains professional advice for the company, that advice must belong to the company. There is no question but that the company has a proprietary right to the professional advice taken and the purpose for which the plaintiff seeks that information cannot affect its right. Equally the company is entitled to all information regarding the transactions that is within the knowledge of the handling director at the time.

13. Whilst Mr Yuen agreed that the fiduciary duty owed by a director remains after he ceases office, he sought to draw a distinction between the duty of a former director to do something positively and not to do something. By way of illustration, he referred to the duty of a former director not to appropriate corporate opportunities and make a secret profit as an example of the latter. But it was said that as the information and documents sought by the plaintiff requires the former director to do a positive act, namely to provide information gained whilst a director, the position was different. What Mr Yuen was suggesting was that the former director has no obligation to discharge his fiduciary duty where it involves the performance of an act. However, no authority was cited in support of that proposition.

14. For my part, I am unable to discern any valid reason for drawing the distinction. The existence of a fiduciary duty owed by a former director to the company after that director ceases office is not dependant on whether the former director has to perform an act or whether he is merely to refrain from doing a particular act. Where the duty exists, it has to be performed, whether by undertaking a positive act or by desisting from performing a particular act. The proposition put forward by Mr Yuen is therefore to be rejected. Not only is it unsupported by authority, it has no valid legal basis.

Exercise of discretion

15. The plaintiff's appeal was brought on the basis that the judge was in error in approaching the plaintiff's application as having been made on the sole basis that the plaintiff required the information and documents for the purpose of resisting the striking out application. Whilst the striking out application was the reason put forward to show the urgency of the application, the basis of the plaintiff's application was and remains the fiduciary duty owed by the 3rd defendant to the plaintiff and the plaintiff's entitlement to the information and documents. Mr Fung SC who appeared for the plaintiff submitted that this was an appropriate case for the application of the principle enunciated by Lord Diplock in Hadmor v Hamilton [1983] 1 AC 191 at 220B-D.

16. Mr Yuen SC stressed that the only reason that the plaintiff wished to obtain the information was to help it resist the striking out application. He referred to the judgment of Chu J in Allied Group Ltd v The Secretary for Justice, unreported, HCA No. 4246/2001 where the judge made the following observation:

"22. One of the principal grounds for dismissing the appeal against Master Kwan's order is that to request the defendants to make discovery before the striking out applications is tantamount to asking the defendants to assist the plaintiffs to make good their claims by providing documents that may strengthen the claim and will not be subject to the challenge on breach of implied undertaking of non-disclosure. This is effectively reversing the civil burden of proof."

It was said that the plaintiff in the present case was seeking to do precisely what the plaintiffs in the Allied Group case tried to do and that this court ought not to countenance the attempt to obtain information that should have been obtained by the plaintiff through discovery and/or interrogatories in order to resist a striking out by the 1st and 2nd defendants.

17. Mr Yuen's submission does not appear to have merit since if the plaintiff had asked for the information and documents before the commencement of the proceedings or the taking out of the striking out summons, I do not see that there would be any basis for resisting the plaintiff's request. It is quite clear that what the plaintiff is saying is that there is a need to have its own property in order to conduct the litigation. Since it does have a proprietary right to the information and documents in question, I, for my part, cannot see any ground upon which the 3rd defendant could legitimately resist the application. In my judgment, the Allied Group case does not take matters further and certainly does not provide any answer to the plaintiff's application.

18. In my view, the judge erred in overlooking the true basis of the plaintiff's application which is its entitlement to the information and documents sought.