Fang Ankong v Green Elite Ltd

• Jurisdiction: British Virgin Islands
• Judge: Smith JA
• Judgment Date: 09 January 2023
• Neutral Citation: VG 2023 CA 1
• Docket Number: BVIHCMAP2022/0013
• Court: Court of Appeal (British Virgin Islands)

THE EASTERN CARIBBEAN SUPREME COURT

IN THE COURT OF APPEAL

Before:

The Hon. Mr. Mario Michel Justice of Appeal

The Hon. Mr. Paul Webster Justice of Appeal [Ag.]

The Hon. Mr. Godfrey Smith Justice of Appeal [Ag.]

BVIHCMAP2022/0013

Between:

[1] Fang Ankong

[2] HWH Holdings Limited

Appellants

and

Green Elite Limited

(in Liquidation)

Respondent

Appearances:

Mr. Andrew Ayres, KC, Mr. John Carrington, KC with them Mr. Matthew Chan and Ms. Reisa Singh for the Appellants

Mr. John Machell, KC with him Mr. Peter Ferrer, Mr. Christopher Pease and Mr. Zachary Van Horn for the Respondents

Commercial Appeal — Sale of shares — Duomatic Principle — Whether judge applied wrong legal test in ascertaining whether the Duomatic principle applied — Duomatic assent — Whether there was an “understanding” between the shareholders of Green Elite assenting to payments made — Whether a particularized and comprehensive agreement was necessary for establishing Duomatic assent — Section 175 of the BVI Business Companies Act, 2004 (“BCA”) — Whether payments were subject to the approval and authorization requirements of section 175 — Whether disposition of sale proceeds was in the usual or regular course of business — Section 121 of the BCA — Whether directors personally liable for repayment of funds

The respondent, Green Elite Limited (in Liquidation) (“Green Elite”) is a British Virgin Islands (“BVI”) incorporated company. It is the product of a joint venture between, Mr. Fang Ankong (“Mr. Fang”), acting through HWH Holdings Limited (“HWH”), and Delco Participation BV (“Delco”). HWH and Delco are each 50% shareholders in Green Elite. Delco is owned beneficially in equal shares by Mr. Herman de Leeuw and Mr. Stephan van Ooijen while Mr. Fang is the sole shareholder and director of HWH. At all times, Green Elite had four directors: Mr. Fang and three employees, namely, Mr. Gu Liyong, Mr. Fang Anlin and Ms. Ding Li (“the Three Employees”). There was no representation on Green Elite's board from the Delco side.

In 2008, Delco and Mr. Fang decided that their business should be floated on the Hong Kong Stock Exchange in an initial public offering (“2008 IPO”). Chiho-Tiande Group Limited (“CT”) was incorporated in the Cayman Islands to serve as the vehicle for the flotation. As part of the arrangements for the IPO, there was an “understanding” between Delco and Mr. Fang that there would be an incentive scheme for certain key employees to be rewarded.

For the purpose of the 2008 IPO, the company New Asset Holding Ltd. was incorporated in the BVI in July 2008 and in August 2008, Mr. Fang, as settlor, and Standard Chartered Trust (Cayman) Ltd. (“SC”), as trustee, created a settlement- the FDG Trust. The FDG Trust was the initial vehicle through which the “understanding” was to be carried out. The shares in New Asset Holding Ltd. were transferred to SC as trustee of the FDG Trust on a discretionary trust, with the beneficiaries being the Three Employees. The 2008 IPO was aborted however it was revived in 2010. As part of the preparation for the 2010 IPO, the FDG Trust was unwound and the CT shares were re-transferred to Delco and HWH without there being any agreement as to what would become of the consideration paid to Delco for the shares at the time that the FDG Trust was established.

Green Elite was incorporated in the BVI in January 2010 and its shares issued to HWH and Delco equally. Its sole purpose was to effect an employee share benefit scheme for the Three Employees in order to reward them for their service upon the listing of CT. By an agreement dated 2 ^nd April 2014, Green Elite agreed to sell the CT shares to a third party, Tai Security Holding Limited (“Tai Security”), for approximately HK$150 million. On 4 ^th April 2014, the CT shares were transferred and subsequently, Tai Security paid the purchase price of HK$150 million for the CT shares in three tranches to Mr. Fang's bank account (the “sale proceeds”). Mr. Fang did not tell his joint venture partners, Mr. de Leeuw and Mr. van Ooijen, that he had kept the proceeds. Mr. Fang then held on to the proceeds for about a year and then, through a series of further transactions, he caused the proceeds, as well as dividends received from the CT shares to be paid to the Three Employees equally.

In 2018, Green Elite through its appointed liquidators, commenced proceedings against Mr. Fang and the Three Employees claiming breach of their fiduciary duties as directors of Green Elite and or failure to comply with section 175 of the BVI Business Companies Act (“BCA”). The learned judge identified as a key issue the question of whether the Duomatic principle applied to permit the payments to the Three Employees. He found, in summary, that: (i) there was never an agreement between Mr. Fang and Delco at any time, that the shares should simply be given to the employees; (ii) the “understanding” lacked legal effect and the distribution of the funds was not within the “agreed purpose” as there were no meeting of minds; there was no Duomatic assent; (iii) the “usual or regular course of business” exception under section 175 of the BCA potentially applied to the distribution but was negatived by the lack of director approval and shareholder authorisation; (iv) the directors were liable under section 121 of the BCA.

Being dissatisfied with the Judge's ruling, the appellants appealed. The appellants advanced six grounds of appeal against the Judge's decision however the central issue for the disposal of the appeal concerns whether there was Duomatic assent to the distribution of the sale proceeds and dividends received from the sale of the CT shares owned by Green Elite.

Held: Dismissing the appeal; affirming the decision of the learned trial judge and awarding costs to the respondent to be assessed in the court below, if not agreed within 21 days from the date of this judgment, that:

• [1] The Duomatic principle recognizes a situation where members of a company can reach a unanimous agreement on its affairs without the need for strict compliance with formal procedures. The essence of the doctrine is that shareholders, who have the right to attend and vote at a general meeting of a company, can assent to some matter which a general meeting of the company could carry into effect, without the need for a formal resolution. The effect is that the assent is as binding as a resolution in a general meeting would be. However, although characterised by informality, for the Duomatic principle to apply the shareholders must be aware that their assent is being sought to the particular matter and must apply their minds to the issue of assent, that is to say, they must have full knowledge. Additionally, there must also be requisite material from which an observer can objectively discern or infer assent. In re Duomatic Ltd [1969] 2 Ch. 365. applied; Parker and Cooper Ltd v Reading and another [1926] Ch. 975 considered; Herman v Simon (1990) 8 ACLC 1094 considered; Westminster Oil Limited et al v International Investments House Co. LLC (a company incorporated under the Laws of the United Arab Emirates) et al BVIHCVAP2009/0004 (delivered 30th April 2012, unreported) applied; Ciban Management Corporation v Citco (BVI) Ltd and another [2020] UKPC 21 considered; EIC Services Ltd and another v Phipps and others [2004] BCLC 589 applied; Re Tulsesense Ltd [2010] EWHC 244 (Ch) applied.

• [2] It is not in dispute that there was no formal or written resolution of Green Elite's shareholders authorising the payment of the sale proceeds from the sale of the CT shares to Mr. Fang and then to the Three Employees, however whether there was Duomatic assent hinges on what was the “understanding” between the shareholders and the effect of such understanding. Accordingly, the learned judge was obliged to determine whether, objectively, the shareholders, by that “understanding”, assented to the payment made. An appellate court applies restraint not only to the judge's findings of fact but also to the evaluation of those facts and the inferences drawn from them. There was evidence before the learned judge from which he could properly have reached the conclusions about the “understanding” that he did and it cannot be said that the learned judge was plainly wrong so as to warrant this Court's interference.

  Watt (or Thomas) v Thomas [1947] 1 All ER 582 applied; Re Tulsesense Ltd [2010] EWHC 244 (Ch) considered.

• [3] The objective approach contemplated for the ascertainment of assent is broadly similar to the objective approach which must be taken when determining formation of a contract, in that the concepts of intention to create legal relations and certainty of terms come into play. This is not to say that Duomatic assent is subject to general contractual principles. The learned judge was not applying a strict contractual approach when he used the terms “legally binding agreement”, “intention to create legal relations” and “meeting of minds” and cannot be criticised for applying the wrong legal test. Similarly, the appellants' complaint that the judge was wrong to have insisted a level of particularity of the agreement is misconceived. The Duomatic principles require that approval given by an understanding or agreement must be unequivocal, therefore it is unsurprising that, throughout the judgment, the learned judge emphasized the need for there to be a legally enforceable agreement in the context of the understanding and found that key terms such as agreement as to the price or any means of fixing the price and lock-up period, were lacking. Although not a requirement, particularity, to some extent, would aid in establishing intention and in making the assent unequivocal and unqualified.

  CH Trustees SA (as Trustee of the Maple Leaf Trust) v Omega Services Group Limited et al BVIHC(Com) 0037 of 2015 (delivered 22nd November 2016, unreported) considered; Re Tulsesense Ltd [2010]...