Introduction

On April 1 2016 the Court of Final Appeal brought an 11-year dispute between the founders of the first Itamae Sushi chain restaurant in Hong Kong to an end, dismissing the appellant's appeal by way of a majority judgment.(1) The history of the case is set out in "Final appeal serves up sushi".

The judgment confirms that the duty of a director is to act in the best interests of a company, which encompasses the 'no-conflict' rule. By establishing competing sushi restaurants using the same trademark and name as a restaurant operated by Smart Wave (the second respondent, of which the appellant was the sole director), the appellant was prima facie in breach of the no-conflict rule. The majority of the Court of Final Appeal was not convinced that the evidence adduced was sufficient to rebut this presumption.

Issues

The issues before the Court of Final Appeal were whether:

  • the no-conflict rule applied to a director of a chain business where the agreed modus operandi was to have one company for one agreed operation and that company was of a limited nature with the agreed modus operandi of operating only one restaurant; and
  • the principle set out in In re Duomatic Ltd (ie, informal unanimous consent of the shareholders to authorise the director's conduct) applied, as the Court of Appeal found that it did.

A further issue, relating to whether the only nominal representative who had agreed to the modus operandi of one restaurant per company was entitled to rely on a contrary or inconsistent stance in the derivative action, was not entertained by the Court of Final Appeal. This was on the basis that it was inappropriate for the appellant to raise this issue, without having adduced any evidence in respect of it, for the first time on a final appeal.

No-conflict rule

The no-conflict rule is that a fiduciary may not put himself or herself in a position where his or her interest and duty conflict. This conflict must be a "real and sensible possibility of conflict".(2)

The appellant argued that Smart Wave was established as a single-purpose company to operate a single restaurant, and therefore the scope of his fiduciary duty as a director did not extend to his conduct in establishing and operating other sushi restaurants. Given this limited scope, he argued that there was no conflict.

Justice Spigelman, who delivered the lead judgment, held that the onus was on the appellant to prove that this single-purpose restraint was binding on Smart Wave. He found that this was not proven on the facts, thereby dismissing the appeal.

Comment

While the decision was a three-to-two majority, the reason for the split was based on an application of the facts. The Court of Final Appeal was unified on the application of the law – namely, that the sole director of Smart Wave was not entitled to make a profit or put himself in a position where his interest and duty conflicted, unless Smart Wave could be taken to have agreed otherwise. As Smart Wave was the first restaurant in what was to become a chain of restaurants, it had an interest in the establishment and operation of the chain as it developed. The appellant therefore breached the no-conflict rule by setting up competing restaurants that could potentially divert business opportunities from Smart Wave – and this conduct was not authorised or acquiesced by the shareholders of Smart Wave.

The case also gave the Court of Final Appeal an opportunity to revisit and reinforce the law on fiduciary duty and conflict of interest. Significantly, Spigelman rejected the appellant's assertion that Mashonaland(3) and Bell v Lever Brothers(4) stood for the propositions that a director had no fiduciary duty in a matter in which the company had no concern, and that there was no rule against being a director of a competing company. He considered that any such propositions were either trite or based on a misconception of those cases, and had been taken out of context in modern-day society. Those cases stood for no wider proposition than "the law will not interfere in the absence of evidence of a real possibility of breach of fiduciary duty, including of the conflict rule".(5)

For further information on this topic please contact Rebecca Wong or Gary Yin at Smyth & Co in association with RPC by telephone (+852 2216 7000) or email (rebecca.wong@rpc.com.hk or gary.yin@rpc.com.hk). The RPC website can be accessed at www.rpc.co.uk.

Endnotes

(1) Poon Ka Man Jason v Cheng Wai Tao [2016] HKEC 759, FACV 17/2015. Spigelman, Ribeiro and Fok (in a majority); Tang and Bokhary dissenting (on the application of the facts).

(2) Boardman v Phipps [1967] 2 AC 46 at 124 per Lord Upjohn.

(3) London and Mashonaland Exploration Co Ltd v New Mashonaland [1891] WN 165.

(4) Bell v Lever Brothers Ltd [1932] AC 161 at 194-195.

(5) Supra note 1, Spigelman at paragraph 104.

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