LOCKIA DEVELOPMENT LTD v. CHAN, LAU & WAI, SOLICITORS (a firm)

HCA564/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.564 OF 2003

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REASONS FOR DECISION

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1. This is an appeal from the decision of Master S. Cheung made on 23 May 2003 striking out the Statement of Claim of the plaintiff Lockia Development Limited ("Lockia") against the defendant Messrs Chan Lau & Wai ("CLW"), and dismissing Lockia's Order 14 summons. The Notice of Appeal filed on 5 June 2003 did not refer to the dismissal of the Order 14 summons. However, Mr Anselmo Reyes SC, leading counsel for CLW, did not object to Lockia's application to extend the appeal to cover the dismissal of the Order 14 summons. At the end of the hearing on 4 July 2003, I dismissed Lockia's appeal with costs to CLW, to be taxed if not agreed. I now give the reasons for my decision.

Background

2. Lockia is the registered owner of certain properties known as All Those Aberdeen Lot Nos.206, 207 and 208 situated at Nos.65, 67 and 69, Shek Pai Wan Road, Aberdeen, Hong Kong ("the Properties"). In or about December 1998, Lockia instructed CLW as its solicitors to sell the Properties by public tender and deposited the title deeds to the Properties with CLW. The public tender was aborted but the title deeds were not immediately retrieved by Lockia from CLW.

3. The two shareholders in equal shares of Lockia were Chan Kwai Hung ("Chan") and Hui Dip Fun ("Hui"), who were also the only directors of Lockia prior to Chan's death on 9 October 1999.

4. Lockia was involved in two pending High Court actions. HCA No.8062 of 2000 was commenced by Hui Kwan Ying who is the sister of Hui ("Hui's sister") against the personal representative of Chan and one Kwai Hung Realty Limited ("Kwai Hung") for breach of contract. HCA No.3280 of 2001 was commenced by Kwai Hung against Lockia for repayment of a HK$50 million loan allegedly used by Lockia to purchase the Properties. A further action between Hui and Chan's two daughters seeking declarations that certain board resolutions of Lockia were invalid was settled prior to the events in issue.

5. Sometime in December 2002, Hui's sister attended the office of CLW and requested the return of the title deeds to the Properties. That request was not acceded to.

6. By a letter dated 13 December 2002 to CLW, Messrs Chan & Cheng ("CC"), purporting to act for Lockia, demanded the return of the title deeds to the Properties and enclosed a copy of a letter dated 12 December 2002 to CLW signed by Hui purportedly on Lockia's behalf authorizing CC to deal with the Properties and requesting CLW to release the title deeds to CC.

7. On the same day, CLW received another letter dated 13 December 2002 from Messrs KC Kung & Co. ("KCY"), solicitors acting for Kwai Hung and Mou Shek Lan who is the widow and personal representative of Chan ("Mou"), alleging inter alia that Hui was not in a position to solely resolve to appoint the other director or to retrieve the title deeds. KCY asked CLW not to release the title deeds without the joint consent of Mou and Hui.

8. By their reply letter dated 13 December 2002 to CC, CLW stated :

"We shall be much obliged if you would give us a certified copy of the minutes of the duly convened meeting of the Board of Directors of your client resolving that the instructions mentioned in your letter be given to your firm. We make this special request because we are given to understand that a director of your client was and still is not properly appointed and hence, the instructions of your client to your firm may not be valid. Because of our understanding, we are not entitled to rely on the Rule in the Royal British Bank v. Turquand and s.157 of the Companies Ordinance."

9. Subsequently, in or about mid December 2002, CC was replaced by Messrs Ng & Lam ("NL") as solicitors purporting to act for Lockia.

10. By a letter dated 16 December 2002, KCY requested NL for a copy of the resolution appointing Faith Brain Limited ("FBL") as a director of Lockia and a copy of the resolution whereby the directors of Lockia resolved to issue a letter authorizing CC to obtain the title deeds.

11. In their reply letter sent on 2 January 2003 (wrongly dated 31 January 2003) to KCY, NL admitted inter alia the following :

" With regard to letter dated 16-12-02

We would like to inform you that there is no resolution to appoint Faith Brain Limited as a director and there is no resolution to issue the authorization letter to Messrs. Chan & Cheng Solicitors."

12. This reply letter dated 2 January 2003 was copied to CLW. By a letter dated 3 January 2003 to NL, CLW stated they were :

"... always ready and willing to deliver the title deeds and documents of the Property to the Company upon proper and valid direction and instruction from the Company to do so. .... As we are given to understand that Madam Hui Dip Fun might not be authorized to give such instruction to Messrs. Chan and Cheng (which incidentally is confirmed by your firm in the last paragraph of your letter) because one of the directors of the Company might not be properly and validly appointed, we requested for a certified copy of the minutes of the duly convened meeting of the board of directors of the Company resolving that such instruction be given to Messrs. Chan and Cheng ... Up to the present moment, we have still not received any response from Messrs. Chan and Cheng."

13. In the same letter of 3 January 2003, CLW also warned NL to satisfy themselves that they had been properly and validly appointed by Lockia to institute legal proceedings against CLW.

14. By a letter dated 8 February 2003 to CLW, and purportedly acting for Lockia, NL demanded the return of the title deeds on or before 11 February 2003. In support, NL enclosed a resolution for the re-appointment of FBL as director of Lockia ("the Resolution Re-appointing FBL"). It was dated 21 January 2003 and signed by Hui as "sole continuing director". It reads :

"I, the undersigned, being the Sole Continuing Director of the Company for the time being, under my residuary powers in the Company, hereby RESOLVE that FAITH BRIAN LIMITED (FBL) be appointed as a Director of the Company to fill the vacancy created by resignation of FBL just took effect before those Resolutions in Writing."

15. CLW replied to this demand by letter dated 10 February 2003 whereby they enclosed a number of letters between KCY, CC, NL and CLW and stated the following :

"In particular, we noted that you have not responded to our letter to you dated 3rd January 2003."

16. The matters to which NL was asked to respond pursuant to CLW's letter of 3 January 2003 included the provision of "proper and valid direction and instruction" from Lockier to deliver the title deeds, the production of a "certified copy of the minutes of the duly convened meeting of the board of directors of the Company resolving that such instructions be given to Messrs. Chan & Cheng", and CLW's warning that NL might not be validly or properly instructed by Lockia.

17. It is significant to note that before NL issued the letter of demand on 8 February 2003, Hui and FBL had purportedly signed a written resolution dated 22 January 2003 agreeing to appoint NL as Lockia's solicitors to obtain all title deeds from CLW and to authorize Hui to give instructions to NL on Lockia's behalf ("the Resolution Appointing NL"). The resolution reads :

"We, the undersigned, being all the Directors of the Company for the time being, hereby RESOLVE that the Company do agree to appoint Messrs. NG & LAM as the Company's Solicitors to obtain all the title deeds and documents in relating to the properties know as 65, 67 and 69 Shek Pai Wan Road, Hong Kong from Messrs. Chan Lau & Wai and institute legal proceedings against them, if necessary, Madam Hui Dip Fun is authorized to give instruction and to deal with this matter on behalf of the company."

18. The Resolution Appointing NL, however, was not provided to CLW prior to commencement of this action on 13 February 2003. According to Hui's 2nd Affirmation filed on 26 April 2003, the Resolution Appointing NL was not produced to CLW under the cover of NL's letter dated 8 February 2003 together with the Resolution Re-appointing FBL because it was caught by legal professional privilege. In the same affirmation, Hui stated that the privilege was waived and produced the Resolution Appointing NL as an exhibit to the affirmation.

19. As mentioned, it was on 13 February 2003 that Lockia commenced the present action against CLW for conversion and breach of contract as bailee. By summons dated 18 March 2003, Lockia applied for summary judgment against CLW.

20. By a cross summons dated 20 March 2003, CLW applied to strike out the Statement of Claim on the ground that it was frivolous, vexatious and/or an abuse of the process of the Court. In his first Affirmation filed also on 20 March 2003, Chan Sze Hung of CLW made it clear that one reason for the striking-out application was Lockia's failure to produce any board resolution authorizing Hui to give instruction to CC and/or NL to demand the return of the title deeds. The commencement of this action was thus premature and could easily have been dealt with by Lockia complying with CLW's reasonable request.

21. As mentioned above, it was in the 2nd Affirmation of Hui, served on CLW on 29 April 2003, that the Resolution Appointing NL was first produced to CLW. Upon receipt of the Resolution authorizing NL, CLW released the title deeds to NL on 2 May 2003.

The Issue and the Law

22. The Court will strike out a Statement of Claim only in plain and obvious cases. However, it is also trite law that if an action cannot possibly succeed, it is liable to be struck out on the ground that it is frivolous.

23. Mr Reyes SC referred me to a passage in Bowstead & Reynolds on Agency (17th ed.) para.6-008, Article 39, as follows :

"(1) Subject to any special circumstances indicating the contrary, the agent is bound to obey all lawful and reasonable instructions of his principal in relation to the manner in which the agent carries out his duties.

(2) In determining what is reasonable the court will have regard to all the circumstances of the case, including the nature of the agency and the customs, practices and ethics of the business to be undertaken by the agent."

and comment on the article at para.6-009 :

"There is little direct authority for the proposition contained in this Article, for it is almost self-evident. The instructions must not extend the ambit of the original contract; they must not compel the agent to do anything not originally contemplated as coming within the scope of what he promised to do. On the other hand, in most contracts, there will be an area within which most instructions may properly be given and must be obeyed. Instructions which involve the performance of an illegal or void act normally need not be obeyed. In the case of a professional person he or she will be bound to a considerable extent by the rules and ethical standards of the profession and could not be required to perform an act which was contrary to those rules and standards."

24. In my view, the issue in this case is not on the reasonableness of a principal's instructions but rather on the reasonableness on the agent's conduct in refusing to obey an instruction coming from a corporate principal in circumstances where the validity and propriety of such instruction are suspect. However, I agree that, where the agent is a solicitor, the reasonableness of his conduct should also be examined against his obligation to observe the rules and ethical standards of the profession and he could not be required to perform an act which was contrary to those rules or standards.

25. Lockia's cause of action essentially sounds in conversion. However, to constitute conversion there must be a positive wrongful act of dealing with the subject matter inconsistent with the owner's rights. Where there is a demand for the return of the subject matter by some person allegedly on behalf of the owner, the person on whom the demand is made must have a reasonable opportunity to inquire into the authority of the person making the demand. For a refusal to deliver to become conversion, such refusal must be wrongful. A qualified or justifiable refusal to deliver up the subject matter on the ground of doubts on the authority of the person making the demand cannot be evidence of conversion. The narrow issue here is whether CLW's refusal to return the title deeds at the time when the writ was issued was justified or wrongful.

26. Mr Raymond W.N. Tsui, Counsel for Lockia, very fairly conceded that as a firm of solicitors acting prudently, CLW would have to make sure there was proper authorization conferred by Lockia on NL before CLW could release the title deeds to NL.

27. Indeed, as was submitted by Mr Reyes SC, with which I agree, the insistence on proof of proper authorization in this regard must be part and parcel of CLW's duties owed to Lockia as their principal and for the purpose of protecting Lockia's own interests. The mere refusal to deliver up the title deeds to NL as Lockia's alleged agent except on production of evidence that NL was properly authorized and entitled to demand them is not conduct adverse to Lockia's title.

Lockia's contentions

28. Before me, Lockia no longer contended that CLW was acting wrongly in refusing to return the title deeds to CC back in mid December 2002. In fact, no such contention could have been sustainable as CC plainly had not been properly authorized by Lockia to obtain the title deeds from CLW on 13 December 2002. Firstly, the absence of any resolution to appoint FBL as director and to authorize CC to retrieve the title deeds was expressly admitted by NL in its letter of 2 January 2003. Secondly, the purported re-appointment of FBL by the resolution dated 21 January 2003 is a tacit acknowledgment on Lockia's part that any purported appointment prior to that date was likely to be invalid.

29. Nor did Mr Tsui contend that CLW was guilty of wrongful detention of the title deeds when they did not immediately return the title deeds upon being provided with the Resolution Re-appointing FBL.

30. Instead, Mr Tsui argued that CLW became liable for conversion and breach of the contract of bailment when they failed to indicate in their letter of 10 February 2003 as to whether or not they accepted the validity of FBL's appointment as director of Lockia, thus leaving Lockia with no alternative but to commence proceedings. He said that by the 10 February 2003 letter, CLW still raised doubt and sought proof that the board of Lockia had been "duly convened" notwithstanding the production of the Resolution Re-appointing FBL. There was nothing Lockia could have done except commencing proceedings for the return of the title deeds.

31. As to the non-production of the Resolution Appointing NL, Mr Tsui argued that because of CLW's attitude, i.e. by not saying they were satisfied with the validity of the appointment of FBL, there was no point in providing CLW with the Resolution Appointing NL, which was the further resolution by the board comprising FBL and Hui on 22 January 2003 authorizing NL to obtain the title deeds.

The need for Lockia to produce the 22 January 2003 resolution

32. I am unable to agree with Mr Tsui's contentions, in particular on his interpretation and treatment of CLW's requests before they would release the title deeds.

33. From the correspondence exchanged between the parties (in particular the letters written by CLW on 13 December 2002, 3 January 2003 and 10 February 2003), what CLW was requesting, which I believe to be quite legitimate, are firstly a resolution by the board of Lockia authorizing CC or subsequently NL to obtain the title deeds on Lockia's behalf, and secondly proof that the board who made this resolution was a properly convened board of Lockia. In this connection, it is noteworthy that in Hui's 1st affirmation filed on 17 March 2003 in support of the Order 14 summons, she did not mention CLW's letter dated 10 February 2003 in reply to NL's demand at all, but appeared to have proceeded as if there was no response whatsoever from CLW.

34. Proof that as from 21 January 2003 Hui and FBL validly constituted the board of Lockia (by the production of the Resolution Re-appointing FBL) does not in any way provide evidence that this board of directors had further proceeded to appoint NL as solicitors to obtain the title deeds on their behalf.

35. The very act of Lockia as principal appointing NL as solicitors to retrieve the title deeds was simply not properly proved. The letter dated 8 February 2003 written by NL to CLW could not serve this purpose. It contained only an assertion by NL, the agent, that they had been so appointed. Representation of an agent's authority cannot be made by the agent himself, but must be made by the principal or other representatives of the principal who have been authorized to appoint such an agent.

36. Without producing the Resolution Appointing NL, what NL said and provided to CLW on 8 February 2003 was simply insufficient to prove NL's authority to obtain the title deeds on Lockia's behalf. Accordingly, CLW was not acting wrongfully in refusing to hand over the title deeds to NL. In these circumstances, Lockia's action for conversion and breach of contract of bailment commenced on 13 February 2003 is bound to fail.

37. From the Bar Table, Mr Tsui suggested that the Resolution Appointing NL was not produced because Lockia considered it pointless to do so in view of CLW not accepting the validity of FBL's appointment as director. This suggestion is, however, contradicted by the affirmation evidence filed on behalf of Lockia. As mentioned, in her 2nd Affirmation, Hui alleged that the reason why the Resolution Appointing NL was not sent under NL's letter of 8 February 2003 was legal professional privilege.

38. There is simply no basis to suggest that this document was covered by legal professional privilege. In fact, Mr Tsui wisely dropped this contention and proffered his own explanation as mentioned above.

39. The fact that Hui and FBL saw fit to prepare the Resolution Appointing NL on 22 January 2003 immediately after making the Resolution Re-appointing FBL on 21 January 2003 indicates strongly Lockia's appreciation that such a further resolution appointing NL was needed to complete the process of authorization and instruction.

40. Moreover, if one compares NL's letter of 8 February 2003 enclosing the Resolution Re-appointing FBL with CC's letter dated 13 December 2002 enclosing the letter dated 12 December 2002 signed by Hui to CLW, one can see the important missing link. In particular, the 12 December 2002 letter reads :

"We hereby instruct Messrs. Chan and Cheng Solicitors to deal with the above properties. Please release and send all the relevant title deeds and documents to Messrs. Chan and Cheng, Solicitors of Room 703, Hang Seng Building, No.77 Des Voeux Road Central, Hong Kong."

CLW returning the title deeds on 2 May 2003

41. Mr Tsui further argued that because CLW decided to return the title deeds on 30 April 2003 (and subsequently did so on 2 May 2003) on the strength of the Resolution Appointing NL, CLW must have accepted the validity of the appointment of FBL as the additional director, so that the board of Lockia authorizing NL on 22 January 2003 to obtain the title deeds was a properly convened board.

42. According to Mr Tsui, by reason of CLW's conduct of returning the title deeds on 2 May 2003 with the above implication, CLW was precluded from arguing that the Resolution Re-appointing FBL was not sufficient proof of Lockia's authorization of NL to obtain the title deeds.

43. Mr Tsui said nothing had changed between 8 February 2003 when NL made the demand on the strength of the Resolution Re-appointing FBL and 2 May 2003 when CLW returned the title deeds.

44. That may be true so far as Lockia's internal affairs are concerned : FBL had been re-appointed as director on 21 January 2003 and NL was authorized by Lockia to obtain the title deeds on 22 January 2003. However, that cannot be correct so far as the dealings and communications with CLW are concerned. The Resolution appointing NL was not disclosed to CLW until 28 April 2003, more than two months after the commencement of the action.

45. In any event, I agree with Mr Reyes SC that, in respect of the estoppel argument, one has to consider the position of the parties at the time when the action was commenced. As at 13 February 2003 when the writ was issued, CLW could not possibly be precluded or estopped from raising any argument by reason of what it did over two months later.

46. Of course, in addition to Hui's production in her 2nd Affirmation of the Resolution Appointing NL, there might well be further reasons as to why CLW decided to return the title deeds. They might have found out more information or received further advice from counsel regarding the validity of FBL's appointment. However, ultimately the important point is whether CLW was entitled to refuse to return the title deeds in the absence of the Resolution Appointing NL as at 13 February 2003. I believe they were.

Doubts over FBL's appointment as director

47. Even if I were wrong as regards the need for the production of the Resolution Appointing NL, I believe the circumstances surrounding the appointment or re-appointment of FBL as director of Lockia were so suspect that CLW as prudent solicitors would in any event have been entitled to further assurance from Lockia before releasing the title deeds to NL. Accordingly, CLW's qualified refusal to return the title deeds as at 13 February 2003 when the writ was issued still cannot be considered to be wrongful.

48. Firstly, CLW was made aware of the various disputes between Hui, Mou and the other parties which impinged on the validity of the appointment of FBI as director of Lockia.

49. Secondly, the representations by NL and the documents regarding the appointment of FBL as director are wholly inconsistent. The resolution "re-appointing" FBL as director allegedly on 21 January 2003 was most unusual, especially when seen against the letter written by NL to KCY on 22 January 2003, one day after the said resolution, informing KCY that FBL "was appointed to be a director of the Lockia on 18 May 2001 pursuant to section 154(5) of the Companies Ordinance" and making no mention whatsoever of any resignation or re-appointment of FBL as director. The intimation in this letter of 22 January 2003, in turn, was plainly inconsistent with what NL said in the letter sent on 2 January 2003 admitting there was no resolution to appoint FBL or to appoint CC to obtain the title deeds. It is also inconsistent with the Memorandum produced and signed by Hui which purportedly recorded the appointment of FBL as director on 9 May 2001, as opposed to 18 May 2001. Further, the returns filed by Lockia with the Companies Registry on 15 December 2001 did not record the appointment of FBL on 9 or 18 May 2001.

50. Thirdly, CLW has also put in evidence yet another resolution dated 24 March 2001 signed by Hui purporting to appoint Hui's sister as an additional director of Lockia. This resolution stated inter alia :

"It was resolved that the above appointment be approved and ratified with immediate effect and that the Registrar of Companies be informed accordingly."

If such a resolution is valid, Hui could not have appointed FBL as director on 9 May 2001 or 18 May 2001 or 22 January 2003 in her capacity as the "sole continuing director" of Lockia, pursuant to Article 25 of Lockia's Articles of Association, which provided, inter alia, that the continuing directors may act for the purpose of increasing the number of directors to necessary quorum.

51. Fourthly, the resolution dated 24 March 2001 appointing Hui's sister included a space for confirmation by Mou. This supported KCY's contention that Mou's consent was required for the appointment of any new director.

52. It is trite law that a person who deals with a company and who is on notice of an irregularity in its internal management in connection with the subject matter of the dealings cannot claim the benefit of the rule in Turquand's case.

53. I accept that CLW's eventual return of the title deeds on 2 May 2003 upon the production of the Resolution Appointing NL and nothing else does indicate that by that time CLW must have been satisfied with the validity of FBL's appointment as director. However, as mentioned before, what is important is the situation when the writ was issued on 13 February 2003. Circumstances might have changed since that date. In view of the very many questions surrounding the appointment of FBL as director, CLW's insistence on better assurance and their qualified refusal to deliver the title deeds at the time when the writ was issued could not have been considered wrongful. Thus there was no actionable conversion.