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Submitted by // K Bowers, Partner / Solicitor Advocate; P Yeung, Senior Associate
16 April 2018

 

With Great Power Comes Great Responsibility...

Background

A de facto director is someone who acts as a director of a company, but who has not been formally appointed as one. Acting as a director (despite not being appointed as one) comes with the responsibility of complying with various directors' duties, under both common law and Hong Kong legislation. These duties include acting in the best interests of the company, exercising care, skill and diligence in making decisions, avoiding conflicts of interest with the company, and not gaining any personal advantages or benefits by virtue of his/her position as a director.

In the recent case of South China Media Ltd and Others v Kwok, Yee Ning and Others [2018] HKCU 580, a senior employee was found to have acted as a de facto director of the plaintiff company as a result of her position and responsibilities within the company. Consequently, the employee was held to be in breach of the fiduciary duties which she owed to the company by diverting business opportunities away from the company and making unauthorised use of the company's resources.

South China Media Ltd and Others v Kwok, Yee Ning and Others

Kwok was employed by the second plaintiff, SCM Management, as its "advertising director". She was primarily responsible for a magazine published by the third plaintiff, Whiz Kids.

The Court held that although Kwok was not formally appointed as a director of Whiz Kids, she was a de facto director as she had assumed the powers and functions of a director. The Court applied the objective test by looking at what the individual had actually done to assess whether she had assumed the responsibilities of a director and disregarded the individual's personal motivation and belief. The Court placed emphasis on Kwok's authority to negotiate and enter into contracts with clients, as well as the fact that she was held out as a "director" to clients (given her title of "advertising director") in concluding that she had acted as a de facto director of Whiz Kids.

As a de facto director, Kwok owed fiduciary duties to Whiz Kids, which included a duty not to usurp or divert business opportunities to another person or company with whom she is associated. Kwok was found to have diverted business opportunities to a company controlled by her husband, by providing him with a copy of a draft contract which he had used to make a similar offer to a mutual target client on behalf of his company.

Kwok was also found to have breached her duties of loyalty and fidelity to the company by allowing unauthorised use of the Whiz Kids name and logo by her husband's company. As a result of this conduct, Kwok was found to have placed herself in a position of conflict, acted for the benefit of a third party without the informed consent of her principal, and failed to act with single-minded loyalty to Whiz Kids - all duties which are owed by a director to a company.

In addition to breaching her fiduciary duties, Kwok was also found to have breached her post-termination restrictive covenants. The Court rejected Kwok's argument that the non-solicitation and non-competition clauses that formed part of the terms of her employment were too unreasonable, too wide, or too restrictive. The restrictions ran for a period of 12 months from the date of termination of Kwok's employment and were held to be no greater than were reasonably necessary to protect the group's legitimate business interests.

Kwok's husband and his companies were also held liable for dishonest assistance and procuring Kwok's breach of contract. Kwok's husband was aware of Kwok's position and responsibility with regard to Whiz Kids and should have known that it would be unlawful for a senior employee of the company to divert business opportunities to a competitor. The Court held that at the very least, Kwok's husband "…closed his eyes and ears; and deliberately refrained from asking questions about Kwok's misconduct". Kwok's husband's knowledge was imputed to his company. The defendants were ordered to pay Whiz Kids equitable compensation and SCM Management damages with interest.

Comment

Senior employees (who are not formally appointed as a director of a company) should be aware of the risk of being liable as de facto directors once they assume the full responsibilities and authorities of a director.

Whilst there is no one definitive test for a de facto director, the Courts will consider the position, function, and responsibilities of an employee in making a determination. Liability cannot be avoided by demonstrating that the employee truly believed, in good faith, that he or she was not acting as a director. Employees should therefore ensure that their role and functions are clearly defined and should not deviate from this in practice. They should also refrain from holding themselves out to clients and other third parties as "directors".

Employers should also be aware of this risk, and make sure to clearly define the role and functions of each employee. They should also ascertain whether their directors and officers liability insurance policies cover shadow and de facto directors.


About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; and financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.

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News //
Submitted by // K Bowers, Partner / Solicitor Advocate
16 April 2018


Does the right to free and uninterrupted passage to water confer rights to construct pipes over common parts?

383HK Ltd v The Incorporated Owners of Tak Bo Building [2018] HKCA 164

This case involves a building management dispute over the common parts of a building.

Facts

Tak Bo Building ("Building") is a multi-purpose building with both residential and commercial use floors. The building was built in the 1970s with no fresh water or drainage pipes to the individual shops on the ground floor shopping arcade. The Appellant, 383HK Limited ("383 HK"), was the registered owner of a shop on the ground floor shopping arcade of the Building. The Respondents were the incorporated owners of the Building ("IO").

During 2009, 383HK bought unit 17 located on the ground floor of the Building. 383HK sought consent from the IO for the installation works in respect of fresh water and drainage pipes for the shop unit on the basis that under the Building's Deed of Mutual Covenant ("DMC"), it had a right to access the main pipes of the Building for water supply and drainage (on the condition that no damage is caused to the Building). The IO withheld consent.

It was common ground that the installation works, which would include installing pipes on the surface of the ceiling canopy of the ground floor and the external walls of the Building (i.e. the common parts of the Building) constituted unauthorized building work.

Court of First Instance ("CFI")

383HK claimed against the IO in the CFI on grounds that the IO had breached the terms of the DMC by unreasonably withholding consent to the proposed works. The Deputy High Court Judge held that the drilling of the holes through the canopy ceiling would damage the Building, and that the Building Management Ordinance (Cap. 344) ("BMO") and the DMC do not provide for, or entitle an owner the right to encroach on the common parts of the Building.

Court of Appeal

383HK appealed against the CFI's decision and argued that under the proper construction of the DMC, it has a right to free and uninterrupted passage and running of water and sewage.

Clause 3(c) of the DMC provides that:-

"Each owner shall hold his part of the said building and the said premises subject to and with the benefit of the following rights privileges and obligations namely:-

(c) The free and uninterrupted passage and running of water sewage gas and electricity from and to his part of the said building through the sewers, drains, watercourses … which now are or may at any time hereinafter be in under or passing through the said premises and building or any part or parts thereof"
[emphasis added].

The Court of Appeal upheld the CFI's decision that Clause 3(c) of the DMC did not create a right for individual owners of the ground floor units to install pipes over common parts of the Building. Clause 3(c) of the DMC set out the Appellant's right to free and uninterrupted passage and running of water and sewage from and to its unit either through (1) water and drainage pipes already constructed at the time of the DMC or, (2) any future pipes to be installed in the Building. There was no mention under the DMC or Clause 3(c), of the right for individual owners of the ground units to install future water and drainage facilities.

The Court of Appeal decided that it was unlikely that the contractual intention of the DMC was that owners of the Building's ground floor units had a right to make a connection to the main water supply and drainage pipes, seeing as the installation of the pipes would concern common parts of the building.

Conclusion

Under section 34I of the BMO, an owner is deemed to be in breach of an obligation imposed by the DMC if he/she uses or converts a common part of a building for his/her own exclusive use. In circumstances where the DMC provides a right of free and uninterrupted passage and running of water, an owner is not in breach if existing pipe lines are used in exercising his/her rights to access water. However, no separate right is conferred to construct new pipes. Any construction of new pipes over common areas of the Building by individual owners should be in breach the DMC and the BMO. 

 

About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; banking; financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

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News //
Submitted by // K Bowers, Partner
13 April 2018

 

Waddington Ltd v Chan Chun Hoo Thomas and Others [2018] HKCU 914

Introduction

In Waddington Ltd v Chan Chun Hoo Thomas and Others [2018] HKCU 914, the Court of First Instance ("CFI") considered the Plaintiff's application for further disclosure by Reed Smith Richards Butler ("RSRB"), the 5th Defendant's solicitors. The Plaintiff's application was in support of its intended application for a non-party costs order (a costs order against an individual who is not a party to the proceedings) against the 5th defendant's funder. This was the Plaintiff's 3rd application for disclosure and on this occasion, the Plaintiff's application was refused because the Court found that the further disclosure would likely lead to more satellite litigation, which is not the purpose behind the Court's general discretion to make non-party costs orders.

Background

The applications for disclosure orders arose from the cost order in a multiple derivative action brought by the Plaintiff. The 1st Defendant was ordered to pay costs to the Plaintiff and the Court further ordered that the 5th Defendant should:

i) indemnify the Plaintiff in respect of its costs incurred, but not recoverable from the 1st Defendant;
ii) further indemnify the Plaintiff in respect of its costs incurred in respect of the appeal; and
iii) pay to the Plaintiff the costs of the interlocutory applications in relation to an interim payment to the Plaintiff.

Since the 5th Defendant had been voluntarily wound up at the start of the proceedings (and was only restored by the Plaintiff to pursue these proceedings against it), the purpose of the Plaintiff's applications for disclosure by RSRB was to obtain information for its intended application for a non-party costs order under s. 52(A)(2) of the High Court Ordinance (Cap. 4) ("HCO") against the 5th Defendant's funder.

Plaintiff's 1st and 2nd applications for disclosure by RSRB

During January 2017, the Plaintiff applied for an order that RSRB disclose information relating to the identity of the 5th Defendant's funder (the Plaintiff's 2nd application was to amend the 1st application). The Court confirmed its jurisdiction to make a non-party costs order against the funder of a party in an action under s. 52(A)(2) of the HCO. It also confirmed its ancillary jurisdiction to order the party being funded and/or the solicitors acting for that party to disclose the identity of the funder as well as information and documents relating to the funding arrangement. The Court noted that it will take the following factors into account when deciding whether to grant such a disclosure order:-

i) the strength of the application as it now appears unassisted by disclosure;
ii) the potential value to the fair determination of the application of the documents of which the claimant seeks disclosure, and whether they are likely to elucidate considerations highly probative of the exercise of the court's discretion, or threaten to drag the application into a side alley of satellite litigation with diminishing returns for the overall issue;
iii) whether on a summary assessment it is obvious that the documents for which disclosure is sought will be the subject of proper legal professional privilege; and
iv) whether the likely effect of any order the court might be minded to make will be proportionate and just in all the circumstances.

In resisting the application, counsel for RSRB submitted that the 5th Defendant had over HK$51m in assets, which would enable it to comply with the costs order in favour of the Plaintiff. The Court confirmed that the financial position of the party liable to pay costs is a relevant condition, but not a pre-condition to the exercise of power to award costs against a non-party. Further, the HK$51m was solely from the award granted in the multiple derivative action, so it was arguable that this amount should be preserved for the 5th Defendant and its shareholders, and not to be spent on legal costs.

The Court found that information relating to the identity of the funder of the 5th Defendant was of "critical importance to the Plaintiff's intended application", and that such information was not protected by any legal professional privilege. Further, the Court was of the view that RSRB would not incur disproportionate costs in order to comply with the disclosure order.

In the end, the Court granted the disclosure order, but limited the scope (thereby refusing parts of the 1st application and the 2nd application in its entirety), such that the only information to be disclosed was "no more than what is reasonably necessary" to enable the Plaintiff to pursue its intended application for a non-party costs order. In particular, the Plaintiff sought the disclosure of details of the funding arrangement and a breakdown of the costs incurred by the 5th Defendant. This was refused as the Court held that there was no basis to order such disclosure at this stage. The Court noted that a further application may be made by the Plaintiff for the disclosure of additional relevant information after the identity of the funder is provided.

Plaintiff's 3rd application for disclosure by RSRB

In compliance with the Court's order, RSRB subsequently disclosed to the Plaintiff that the 3rd Defendant was ultimately the 5th Defendant's funder. The 3rd Defendant funded the 5th Defendant through PIL Finance Ltd. and Belmont Ltd. by procuring the two entities to advance loans to the 5th Defendant. The Plaintiff, however, was dissatisfied with the information obtained as it wanted to identify "the real individuals, against whom an application for non-party costs should properly be made". This gave rise to the Plaintiff's 3rd application made during December 2017 for an order against RSRB to further disclose information regarding the funder.

The Court eventually refused the Plaintiff's application and held that the purpose of a non-party costs order is primarily for "costs recovery". Therefore, the source of the funds should generally not matter, as long as they are recovered. An application for disclosure is not designed to be used as a means to enable a party to gather evidence of, or pursue other claims against non-parties. The Court stated that if it allowed applications to be made for these collateral purposes, it could become the source of satellite litigation, which is contrary to the objectives of the Civil Justice Reform. The Court found no reason to justify the Plaintiff's attempt to go beyond the identity of the actual funder of the 5th Defendant. In any event, the Court noted that the individuals who control a company should not be personally liable for costs liabilities of the company.

Comment

This decision is a reminder to litigants that an application for disclosure of information in support of an application for a non-party costs order should only be sought to assist with the applicant's recovery of costs. The Court is likely to refuse an application for the disclosure of information if it is found that the information is being sought for collateral purposes (such as obtaining information in order to commence proceedings against another party). The scope of the disclosure order will also be confined to information that is considered to be crucial to the applicant, based on information available at the time the application is made.


About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; and financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.

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Submitted by // B Ho, Partner; A Yung, Partner
09 April 2018

 

Howse Williams Bowers ("HWB"), a leading Hong Kong independent law firm, advised the issuer, Dafeng Port Heshun Technology Company Limited ("Dafeng Port Heshun") (stock code: 8310), whose shares are listed on the GEM of the Hong Kong Stock Exchange, as the Hong Kong legal counsel in relation to the issuance of the aggregate principal amount of US$50 million of 7.5% senior secured bonds due 2021. Industrial Bank Co., Ltd., Hong Kong branch is the placing agent.

Dafeng Port Heshun is principally engaged in trading business, the provision of integrated logistics freight services in Hong Kong, the Pearl River Delta and the Yangtze River Delta regions and the relevant supporting services and petrochemical products storage business.

The HWB team was led by partners, Brian Ho and Antony Yung. The team had the responsibility on legal documentation, advising on commercial issues and undertaking general transaction management.

 

About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; intellectual property; banking; financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.

 
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