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24 January, 2017
In the recent case of HKSAR v Luk Kin Peter Joseph & Yu Oi Kee (FACC 8/2016), the Hong Kong Court of Final Appeal (CFA) clarified the scope of agency in the context of group companies for private sector offences under the Prevention of Bribery Ordinance (POBO).
The case involved the disposal of a subsidiary by China Mining Resources Group Limited (China Mining). Joseph Luk (Luk) and Yu Oi Kee (Yu), directors of the subsidiary, were alleged to have made false declarations of interests on the board minutes authorising the disposal. The CFA examined whether an agency relationship existed between directors of a subsidiary as agent and the parent company as principal, and held that for the purpose of section 9 of POBO, an agency relationship can arise without any pre-existing duty (legal, contractual or fiduciary). The mere acceptance of a request to act in relation to the principal’s affairs or business may itself create an agency relationship. The CFA unanimously dismissed the appeals and upheld Luk's and Yu's convictions.
This is an interesting decision for directors, particularly in the context of group companies in Hong Kong. It is common for companies to adopt a group structure whereby the various businesses of the parent company are conducted through its directly-owned and/or indirectly-owned subsidiaries, with different people holding directorships in the parent company and the subsidiaries. The CFA's broad interpretation of "agent" under section 9 of POBO means that directors should be more cautious of whether a duty to act with good faith has been imposed on them with respect to their conduct of affairs related to companies in which they do not hold directorships.
The case also highlights a further POBO private sector offence: corrupt transactions with agents under section 9(3), for which no monetary or other benefit need be transferred. If an agent, with intent to deceive his/her principal, uses a receipt, account or document in which the principal is interested, which contains false or incorrect statements intended to mislead, an offence is committed. Here, the board minutes were the document in question and contained false statements that Luk had no interest in the acquiring company. He was in fact its beneficial owner. This offence is of practical relevance but may be overlooked in the purview of bribery offences, as no transfer of advantage is involved.
Background
Hong Kong-listed China Mining wholly owned Biogrowth Assets Limited (Biogrowth), which in turn wholly owned Cell Therapy Technologies Centre Limited (Cell Therapy). Luk was the former Chief Executive of China Mining. At the material time, Luk and Yu were the only directors of Biogrowth but not directors of China Mining.
It was originally proposed that Cell Therapy would be sold to Luk, but this would constitute a connected transaction and the Hong Kong Stock Exchange's approval would be required. The transaction did not proceed, and Luk told the Chief Executive of China Mining, Richard Leung (Leung), that he would find an independent buyer for Cell Therapy.
United Easy Investments Limited (United Easy), a company controlled by the aunt of Luk’s wife (but ultimately found to be owned by Luk), arranged to acquire Cell Therapy from Biogrowth (Acquisition). On the board minutes (Board Minutes) of Biogrowth authorising the Acquisition, Luk and Yu signed and stated that none of Bio growth's directors was interested in the Acquisition.
Luk and Yu were charged with conspiring as agents to commit an offence under section 9(3) of POBO (Conspiracy Charge). By using the Board Minutes, which falsely stated that Luk was not interested in the Acquisition, to deceive and mislead their principal, Bio growth and/or China Mining, it was alleged that they had committed the offence. Separately, Luk was charged with offering, and Yu as agent of China Mining, with accepting, a bribe of 1.5 million shares in China Mining as an inducement for Yu’s participation in the conspiracy (Bribery Charges).
District Court and Court of Appeal decisions
At trial, the judge found that Luk was the beneficial owner of United Easy such that the sale was a connected transaction requiring disclosure of Look's interest in the Board Minutes. The judge held that Luk and Yu used the Board Minutes to deceive their principals, being Bio growth and/or China Mining. The judge convicted Luk and Yu of the Conspiracy Charge. The judge also found that Luk gave Yu 1.5 million China Mining shares as an inducement to secure Yu's participation in the conspiracy, and convicted them of the Bribery Charges.
The separate legal personalities of Biogrowth and China Mining were at the heart of the debate in the Court of Appeal (CA). The CA accepted the defendants' argument that they, as the only directors and the "directing minds or brains" of Biogrowth, could not have intended to deceive Biogrowth as principal, as this would be tantamount to them conspiring with each other to deceive themselves. However, the CA held that Luk and Yu were agents of China Mining in finding a purchaser for Cell Therapy. Likewise, in relation to the Bribery Charges, the conspiracy in question was that against China Mining as Luk's and Yu's principal. The CA upheld the first instance decision.
Court of Final Appeal decision
Meaning of "agent" for the purposes of section 9 of POBO
The core question before the CFA was whether the CA was right to find Luk and Yu agents of China Mining. The CFA first acknowledged the definition of "agent" in the POBO to include "any person…acting for another".
It was held that an "acceptance of a request to act may itself create a duty to do so honestly and in good faith". The CFA went further and held that a request to act is not necessary. A person may assume fiduciary duties by being "in a position to act on behalf of another and voluntarily [doing] so", despite not being under any legal, contractual or fiduciary obligation.
By telling Leung, acting for China Mining, that he would find a buyer for Cell Therapy, Luk created a "reasonable expectation that he would act in the interest of China Mining and to the exclusion of his own interest". His duty included not to deceive China Mining into making a false statement regarding the counterparty's independence and not to exploit his position to obtain a bribe. Yu's participation stemmed from her being aware of Luk's basis in proposing United Easy as the buyer.
Whether Biogrowth is capable of being deceived by its only directors
Although the conclusion that Luk and Yu were agents for China Mining for the purpose of section 9 of the POBO made it unnecessary to consider this question, the CFA went on to discuss the CA's view that Biogrowth could not have been deceived, as the only states of mind attributable to Biogrowth were those of Luk and Yu, who knew the true state of affairs.
The CFA held that since the offence under section 9(3) of POBO relates to an "intent to deceive the principal", the deceiver need not have in mind a particular person whose state of mind will count as that of Biogrowth, and the state of mind attributed to Biogrowth, if any, needs not be those of its directors. For example, if the sole director of a company forges an invoice to secure payment from the cashier, there is no reason why the deception of the cashier, who pays out of the company's account, should not count as deception of the company.
Whether Luk's and Yu's knowledge of their breach of duty should be attributed to the company
The CFA also examined whether a defence to the Bribery Charges under section 9(4) of POBO, ie, the agent solicits or accepts a bribe with the permission of his principal, was available to Luk and Yu. It was held that there is no common law principle that the mind and will of the sole director are treated as the mind and will of the company, and that the criteria for attribution in every case depend on the "purpose and policy of the relevant substantive rule". For sections 9(1) and 9(2) of the POBO, it would defeat the purpose and policy of the rule that the directors' knowledge of their own breach of duty by giving and taking a bribe was to be attributed to the company.
Comment
The CFA adopted a broad interpretation of the agency relationship required under section 9 of the POBO. This means that directors and others may be caught by the private sector bribery offence as agents of companies in which they do not hold directorships. Directors should be particularly aware of the scope and nature of duties they owe as a result of their fiduciary relationship with these companies. They should also be aware of any obligations they voluntarily assume. In addition, they should remain live to the fact that disclosures made in documents including board minutes, may trigger breach of the section 9(3) offence, without any advantage changing hands. Intent to deceive a principal through the document – or account – suffices.
This is the first of a number of CFA cases to look into the scope of the private sector bribery offences. The upcoming Stephen Chan appeal is due to be heard by the CFA on 21 February 2017, and in that case, the major argument in the CFA relates to the "reasonable excuse" defence. The appeal is also expected to review the mens rea required for an agent, as well as what it means to be acting in relation to a principal's affairs for the purpose of the offence.
For further information, please contact:
Kyle Wombolt, Partner, Herbert Smith Freehills
kyle.wombolt@hsf.com
