Rule in Turquand’s case – Loan agreement signed by borrower’s directors without approval at properly convened board meeting – Treasurer of borrower made positive statement that board meeting had been held to authorise transaction – Whether lender had been put on inquiry – Whether lender entitled to rely on apparent regularity of execution of loan documents – Conveyancing and Property Ordinance (Cap 219) s 20

Debenture – Whether floating charge on company assets validly created in favour of lender and enforceable by lender against company in liquidation – Whether certificate issued by Registrar of Companies was conclusive for all Companies Ordinance (Cap 32) purposes as to date of creation of charge in respect of which it was issued – Companies Ordinance (Cap 32) s 83(2)

RE MOULIN GLOBAL EYECARE HOLDINGS LTD [2010] 1 HKC 90
Court of Final Appeal
Final Appeal No 14 of 2009 (Civil)
Bokhary, Chan and Ribeiro PJJ, Litton and Lord Walker NPJJ
9, 26 November 2009

Daniel R Fung SC, Catrina Lam and Gary Lam (Vincent TK Cheung, Yap & Co) for the appellant.
Barrie Barlow SC (Richards Butler) for the respondents.

The appellant, Active Base Ltd (Active Base), was a licensed money lender; Ms Yvonne Louie and Ms Irene Wong were the directors bearing primary responsibility for its lending activities. The 1st respondents (the Liquidators) were the joint and several liquidators of the 2nd respondent, Moulin Global Eyecare Holdings Ltd (Moulin), which was a company in compulsory liquidation. Moulin had acquired a listing on the Hong Kong Stock Exchange; its line of business was the design, manufacture and sale of optical products. Among Moulin’s 10 directors, five were members of the Ma family, including the chairman, Mr Ma Bo Kee (Mr Ma).

In late 2004, Moulin entered into an agreement in partnership with a private equity firm to acquire a 56% interest in the third largest operator of optical retail stores in the United States. The acquisition was to be financed in part through borrowings. In February 2005, Mr Ma asked Ms Louie for an urgent personal loan of HK$50 million for three months. He indicated that the money was required to complete Moulin’s acquisition scheduled to take place at the end of that month. Ms Louie said that she preferred a loan to Moulin.

On 23 February 2005, Ms Wong asked the treasurer of the Moulin group, who was Mr Ma’s sister-in-law, to make sure that a board meeting of Moulin could be arranged in case Active Base decided to lend the loan to Moulin. The treasurer then requested Ms Wong to ask Mr Bosco Tso, whose solicitors’ firm acted for Active Base, to help prepare a draft of the board minutes of Moulin, and to put the names of the five Ma directors under the column ‘present’ in the draft minutes. Mr Tso was informed that the board meeting would be held on 24 February 2005 by telephone conference and that only the five Ma directors would attend. Both Ms Wong and Mr Tso knew that under the Hong Kong Stock Exchange’s rules governing the listing of securities (the Listing Rules), Moulin must have at least three independent non-executive directors on its board. Sometime during the late afternoon that day, Active Base’ s directors made the decision that the loan should be granted to Moulin and not to Mr Ma personally.

Ms Wong informed Mr Ma of the decision in the morning of 24 February 2005. Then in the late afternoon or early evening, Ms Wong and Mr Tso attended Moulin’s offices for the execution of the loan documents. At that execution meeting, the treasurer of the Moulin group told Mr Tso that the board meeting had been held, and two documents were, in Mr Tso’s presence, signed by Mr Ma and his son (the chief executive officer) and affixed with Moulin’s common seal. One of the documents was an agreement for a three-month loan for HK$50 million by Active Base to Moulin (the Loan Agreement), and the other was a debenture securing that loan by way of a first floating charge over all Moulin’s undertaking, property, assets, goodwill, rights and revenues (the Debenture).

Sometime before lunch on 25 February 2005, Ms Wong received certain documents from Moulin by fax. Those included four signed pages of the loan documents, complete with the signatures of the three Ma directors who were not in Hong Kong. Ms Wong executed the corporate loan documents on behalf of Active Base later that afternoon. The HK$50 million was then transferred to a wholly-owned subsidiary of Moulin.

The Debenture was not dated until 6 May 2005 and was only registered on 7 June 2005. On the date of registration, the Registrar of Companies issued a certificate pursuant to Companies Ordinance (Cap 32) s 83(2). Moulin defaulted on the payments of interest and the repayment of principal due under the Loan Agreement. It went into liquidation in June 2006. On 21 June 2006, Active Base lodged a proof of debt for $76,500,780, which was rejected by the Liquidators. Active Base issued two summonses to challenge that rejection.

By a decision handed down on 4 June 2008, Kwan J (as she then was) dismissed Active Base’s summonses (see [2008] HKCU 856). On 21 May 2009, the Court of Appeal (Le Pichon JA and A Cheung and Poon JJ) dismissed Active Base’s appeal against the judge’s decision (see [2009] HKCU 733; [2009] 4 HKLRD 203). The courts below decided against Active Base on two grounds. The first was that Active Base was not entitled to rely on the apparent regularity of the execution of the loan documents because it had been put on inquiry of an irregularity, namely, the lack of a properly convened board meeting by Moulin to: (i) approve entering into the Loan Agreement and issuing the Debenture; and (ii) authorise Moulin’s signatories to sign the same. The second ground was that the Debenture was invalid and not within the exception under the Companies Ordinance s 267 because the loan was advanced before the date stated on the certificate issued by the Registrar of Companies. Active Base appealed to the Court of Final Appeal.

Held, unanimously, dismissing the appeal:

Per Bokhary PJ (Chan and Ribeiro PJJ and Lord Walker NPJ concurring) The primary facts proved or admitted were, putting it as its lowest, fairly capable of supporting the inference concurrently drawn by the courts below that Active Base, through its director Ms Wong and its solicitor Mr Tso, had been put on inquiry of the lack of a properly convened Moulin board meeting to approve entering into the Loan Agreement and issuing the Debenture. Under cross-examination, Mr Tso in effect admitted that he knew that there were only two ways in which Moulin could have validly approved entering into the Loan Agreement and issuing the Debenture. One was a circular resolution signed by all the directors. The other was a resolution passed at a board meeting of which all the directors had been notified.However, he drew up minutes for a Moulin board meeting attended only by the Ma directors. Since notice of a board meeting could not be withheld from directors on the basis that they would be outvoted anyway, the fact that the non-Ma directors could have been outvoted through the use of Mr Ma’s chairman’s casting vote to break any deadlock in favour of the Mas was nothing to the point. Further, it was on 23 February 2005 that Ms Wong asked Mr Tso to draft minutes leaving out the non-Ma directors, and he admitted to having completed such drafting by the evening of 23 February 2005. There was no evidence from either of them or indeed any other source that they believed that the non-Ma directors had been given notice of the board meeting in question, or that a Moulin board meeting including the non-Ma directors had been held by teleconference sometime on 24 Februar y 2005 prior to their (ie Ms Wong and Mr Tso’s) attendance at Moulin’s offices that afternoon.

The ‘on inquiry’ inference did not rest solely on the fact that the non-Ma directors were excluded from the minutes which Mr Tso drafted at Ms Wong’s request. There were a number of other facts to be borne in mind. First, the business to be transacted at the board meeting in question was far from ordinary. It was to approve (i) the taking by a public company of a substantial loan to help finance a major acquisition and (ii) the creation of a floating charge over all its undertaking in order to secure that loan. Secondly, Mr Ma had wanted the loan to be one personal to him, which was difficult to understand having regard to the corporate purpose for which the money was required. Pressing for the loan to be made to him personally indicated a reluctance, for some reason or other, to have Moulin named as the borrower, notwithstanding the avowed corporate purpose of the loan. Thirdly, the directors whom the minutes included were all members of the Ma family while the directors whom the minutes excluded were not. Half of Moulin’s board was formed by the five excluded directors, three of them being independent nonexecutive directors serving on the board pursuant to a requirement of the Listing Rules. That Mr Tso was asked to draft minutes showing the participation of only the Ma directors (even before the availability and terms of the loan were known) was a matter crying out for an explanation, as the inference would seem irresistible that the staff members handling the matter for Moulin had intended at the outset to exclude the non-Ma family members of the board from any knowledge of the transaction.

Active Base would only be a secured creditor if its attacks against both grounds succeeded. Since its attack against the first ground failed, the Debenture would necessarily fall by reason of it having been put on inquiry of the irregularity of the Moulin board meeting at which the issuance of the Debenture was approved. This appeal must therefore be dismissed.

Per Litton NPJ concurring
The Conveyancing and Property Ordinance (Cap 219) s 20 provided that a document was deemed to be duly executed if it purported to bear the seal of the company affixed in the presence of two members of the ‘board or body’. Apart from the signatures of its two principal officers, the Loan Agreement bore Moulin’s seal; on its face, it was a valid and enforceable contract binding upon Moulin. The question that remained was whether, in the circumstances of the case, Active Base was entitled to rely upon the apparent regularity of the transaction as appeared on the face of the Loan Agreement and was not bound to inquire whether acts of internal management were regular.

To what extent a lender had been put upon inquiry was a matter of degree as to which tribunals of fact might properly differ. As a matter of general principle, courts should not be too demanding in requiring vigilance from outsiders to detect lack of capacity on the part of company’s officers. In the present case, it was a crucial finding that when the various persons ultimately attended Moulin’s offices to sign the loan documents, the treasurer of the Moulin group made a positive statement to Mr Tso that a board meeting had been held to authorise the transaction. Whether Active Base should doubt her words was not capable of an easy answer, and there was here a fine balance between competing interests to be weighed. Since Mr Ma was only told in the morning that a personal loan was impossible, the arrangements had to be made in a hurry that day. However, there was still time for a board meeting to be held in the course of that day, albeit that some of the Ma family directors were known to be overseas.

If things stood simply as summarised above, the ‘internal management rule’ as formulated in Royal British Bank v Turquand would apply. But there was more. Some suspicion should have been aroused in the minds of Ms Wong and Mr Tso that a gross irregularity was in contemplation: suspicion reinforced by their knowledge that the loan was required by Moulin to complete the acquisition in the United States and yet, there was Mr Ma, pressing for a personal loan.

Obiter

Per Bokhary PJ
The words ‘when created’ in the Companies Ordinance s 267 referred to the charge having been a floating charge when it was created, and the date of the charge’s creation was the date named in the s 83(2) certificate as the charge’s date. It was conclusive for all Companies Ordinance purposes and there was nothing in the language of s 83(2) that limited its application to Part III only. The language was unqualified and was general in nature. Further, the date on which a charge was created was important for all purposes. That such date should be readily ascertainable from a certificate for some purposes but open to question for other purposes would lead to confusion that the legislature could not sensibly be considered to have countenanced. No such dichotomy could be derived from the words of the legislation or any policy attributable to it.

There was a difference between primary findings of fact and findings of fact reached by drawing inferences from primary facts proved or admitted. Intermediate appellate courts were naturally better (or less badly) placed to review the latter than they were to review the former. That was because the advantages of receiving all the evidence at first-hand did not operate as powerfully in regard to inferential fact-finding as they did in regard to primary fact-finding. Even so, where findings of fact reached at first instance had been affirmed on intermediate appeal, they became concurrent findings of fact whether they were primary or inferential. Even where concurrent findings of fact were inferential, the Court of Final Appeal would not review them save in special circumstances.