Introduction

Can a company be deceived? If the answer to this question is yes, then one would logically think that it is the directors or officers of the company being deceived, but not the company itself. Companies do not have minds, the people running them do.  That leads to the next question: if a person is the only director or officer of a company, can he deceive the company?

In the recent decision of HKSAR v Luk Kin Peter Joseph [2016] HKEC 2655, the Court of Final Appeal (“CFA”) gave an answer to this question in the context of s.9(3) of the Prevention of Bribery Ordinance (“POBO”).

Background

In 2005, Innomaxx Biotechnology Group Limited (“Innomaxx”), a listed company in Hong Kong, through an intermediate holding company Biogrowth Assets Limited (“Biogrowth”), held a company Cell Therapy Technologies Centre Limited (“Cell Therapy”) carrying on the business of blood cord banking. One of its directors and principal shareholders was the first defendant Luk Kin Peter Joseph (“Mr Luk”). In 2006, Innomaxx turned into a mining company and had its name changed to China Mining Resources Group Limited (“China Mining”) after a takeover by a finance company. A year later, Mr Luk resigned from China Mining but remained as a director of Biogrowth, carrying on the blood cord banking business.  The other director of Biogrowth was Miss Yu Oi Kee (“Miss Yu”), an accountant of China Mining and the 2nd Defendant in this case.

After the takeover, China Mining wanted to sell blood cord business. Mr Luk, who was no longer on the board of China Mining, proposed to purchase the business. However, the sale did not proceed. In the following year, Mr Luk agreed to look for a buyer for the unwanted business and found an interested buyer United Easy Investments (“United Easy”), a company controlled by the aunt of Mr Luk’s wife. Biogrowth later sold Cell Therapy to United Easy for HK$15 million (“Transaction”).

As seller, the board of Biogrowth had to pass a resolution to authorize the Transaction, and in doing so the directors (i.e. the defendants) were required to declare if they had any interest in the Transaction to be authorized. If any of the directors were interested in the Transaction, the Transaction would be classified as a “connected transaction” and be subjected to special disclosure and approval requirements under the Stock Exchange Listing Rules.

Mr Luk and Miss Yu, as the sole directors of Biogrowth, both signed a Board Minutes (“Board Minutes”) to authorize the Transaction.  In the Board Minutes Mr Luk and Miss Yu declared that none of them has any interest in the Transaction.  However, it was found that both directors were well aware that Mr Luk was the true beneficial owner of United Easy.  It was also found that Mr Luk offered 1.5 million shares in China Mining to Miss Yu for giving the false statement in the Board Minutes.

Charges

Mr Luk and Miss Yu were charged for, inter alia, having committed an offence under section 9(3) of the POBO by using the Board Minutes, which falsely stated that Mr Luk was not interested in the Transaction, to deceive and mislead their principal i.e. Biogrowth and China Mining (“Charge”).

District Court / Court of Appeal rulings

During trial in the District Court the issue of agency was not in dispute. Both Mr Luk and Miss Yu were convicted for the Charge.

When the defendants brought the case to the Court of Appeal, the agency issue became the major battlefield. The defendants argued that they could not have been China Mining’s agents, because they were not its directors or employees.  They were indeed directors (and thus agents) of Biogrowth but they were incapable of deceiving their principal Biogrowth because to deceive Biogrowth would logically mean to deceive themselves being its sole directors. The defendants further argued that, as the sole directors of Biogrowth, their state of mind should have been attributed to that of Biogrowth.  Therefore the defendants’ knowledge of the conspiracy would mean that Biogrowth was well aware of the conspiracy but nevertheless approved it.  As such, the Charge ought to fail.

The Court of Appeal accepted the defendants’ argument that they could not have deceived Biogrowth, but upheld the conviction on the ground that they were agents of China Mining, despite the fact that they were not its directors or employees. The Court of Appeal referred to the definition section of POBO, which provided that the term “agent” included “any person… acting for another”.  Hence Mr Luk and Miss Yu in finding a buyer to purchase Cell Therapy were acting as an agent of China Mining.

The defendants appealed to the CFA.

Court of Final Appeal Judgment

The CFA eventually dismissed the appeal on the basis of, inter alia, the following issues:-

• Meaning of “agent” for the purposes of section 9 of POBO

The CFA affirmed the Court of Appeal’s ruling that the defendants were agents of China Mining. The CFA further ruled that it was not necessary to have some pre-existing legal, contractual or fiduciary obligation to act in relation to that person’s affairs or business in order to become an agent. An acceptance of a request to act may itself create a duty to do so honestly and in good faith. In addition, a person who was in a position, either by accepting instructions or to voluntarily act on behalf of another, may be sufficient to assume fiduciary duties as well.

• Sole directors deceiving the company

The CFA disagreed with the Court of Appeal on whether the defendants were capable in deceiving Biogrowth. The CFA ruled that the deceiver does not need to have in mind the particular person whose state of mind would count as that of the principal.

In addition, the CFA commented that, it is not in each and every case that the Court would attribute the state of mind of the directors to the company. To allow the defendants to attribute their state of mind to that of Biogrowth, namely, that Biogrowth had full knowledge of and approved the conspiracy, would defeat the purpose and policy of the rule.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.