Speed Read: Justin Bong-Kwan discusses the Hong Kong Court of Final Appeal’s interpretation in HKSAR v Luk Kin Peter Joseph (FACC 6/2016) of when a fiduciary relationship may arise under the Prevention of Bribery Ordinance (Cap. 201) as well as the implications such an interpretation may have in relation to section 3 of the Fraud Act 2006 (UK).
The Hong Kong Court of Final Appeal in HKSAR v Luk Kin Peter Joseph (FACC 6/2016) (‘Luk’) has clarified the meaning of “agent” under the Prevention of Bribery Ordinance (Cap. 201) (“POBO”). Now, in group company scenarios, directors of a subsidiary who do not owe any pre-existing fiduciary duties toward the principal or to act in respect of the principal’s affairs may nonetheless still be considered agents of the principal for the purposes of section 9 of the POBO. As there remains uncertainty over circumstances in which a duty to disclose information can be said to be owed under section 3 of the Fraud Act 2006 (UK) (‘the Fraud Act’), the approach recently taken in Hong Kong is instructive. Luk suggests that a fiduciary relationship may exist between the officers of a subsidiary and the principal company, giving rise to a duty to disclose information.
Under section 9(3) of the POBO, any agent who, with intent to deceive his principal, uses any receipt, account or other document: (a) in respect of which the principal is interested; and (b) which contains any statement which is false or erroneous or defective in any material particular; and (c) which to his knowledge is intended to mislead the principal, shall be guilty of an offence. It follows that a pertinent issue in determining whether an offence has been committed under section 9 is to determine when a principal/agent relationship would arise. Section 2(1) of POBO merely defines an “agent” as someone who is ‘a public servant and any person employed by or acting for another.’ The Court of Final Appeal has made it clear in the past that this definition is not exhaustive.
In Luk, Biogrowth Assets Limited (‘Biogrowth’) was a subsidiary of China Mining Resources Group (‘China Mining’), a company listed on the Hong Kong Stock Exchange. Biogrowth wholly owned Cell Therapy Technologies Centre Limited (‘Cell Therapy’), which was acquired by United Easy Investment Limited (‘United Easy’) (the ‘Acquisition’). Mr Luk and Ms Yu (the ‘Defendants’) were sole directors of Biogrowth Assets. Mr Luk agreed with Richard Leung, who was the Chief Executive China Mining, that Mr Luk would find a third-party purchaser for China Mining’s blood cord banking business, namely Cell Therapy.
The Acquisition had to be authorised by the Board of Directors of Biogrowth Assets, and the Board minutes required disclosure of any interest held by the directors in the acquisition. In accordance with the Stock Exchange Listing Rules, China Mining was required to disclose any such interest to the Stock Exchange, obtain independent financial advice and secure shareholder approval in a general meeting as the Acquisition constituted a “connected” transaction. Despite United Easy being a company controlled by the aunt of Mr Luk’s wife, Mr Luk and Ms Yu signed board minutes authorising the Acquisition and declaring that neither one of the directors had an interest in the Acquisition. Indeed, Mr Luk secured Ms Yu’s cooperation with a bribe.
The District Court convicted the Defendants of offering and accepting a bribe contrary to section 9(1) and (2) of the POBO (i.e. Charge 2 and 3) and of conspiracy to commit an offence under section 9(3) (i.e. Charge 1). In respect of Charge 1, the District Court held that Mr Luk was the true beneficial owner of United Easy, and as such the Acquisition constituted a connected transaction. Judge Browne reasoned that the Defendants were agents of “Biogrowth and [China Mining]” and acted with intent to deceive “Biogrowth and/or [China Mining]”. However, the Court of Appeal was of the opinion that the Defendants could not have intended to deceive Biogrowth since they were Biogrowth’s only directors. Nonetheless, the Court of Appeal held that Mr Luk and Ms Yu were agents of China Mining because an “agent” under the POBO includes “any person […] acting for another”.
The Court of Final Appeal agreed that the Defendants acted as agents of China Mining and held that a pre-existing contractual or fiduciary relationship is not a precondition for someone to be deemed an agent under the POBO. The Court opined that accepting a request to act may give rise to a duty to do so in good faith, noting that this has traditionally been the position in Hong Kong. In fact, Lord Hoffmann NPJ further noted that even in the absence of a request a person acts as an agent if he is in a position to act on behalf of another and assumes the responsibility to do so voluntarily. To put it simply:
“…Having agreed with Mr Leung, acting for China Mining, that he would find a buyer for its unwanted blood cord banking business, Mr Luk created a reasonable expectation that he would act in the interest of China Mining and to the exclusion of his own interest. More specifically, he assumed a duty to act in good faith and not to deceive China Mining into making a false statement to the Stock Exchange. Miss Yu was aware that this was the basis upon which he was putting forward United Easy as a buyer and participated in his deception. That is sufficient for liability under Charge 1.”
The decision in Luk holds relevance to the UK. In the UK, the principal/agent model regarding bribery and corruption was discarded when the Bribery Act 2010 superseded the Prevention of Corruption Acts, but has been retained in relation to section 3 of the Fraud Act. Under section 3, a person only commits fraud by failing to disclose information when he is under a legal duty to do so and has the requisite mens rea. The Fraud Act offers little guidance on what the nature and extent of the legal duty is or on when it may arise. The duty is a general one and its existence is a question of law for the judge to decide. In the Law Commission’s view, however, one of the possible situations in which a legal duty arises is that “[s]uch a duty may derive from […] the existence of a fiduciary relationship between the parties (such as that of agent and principal).” Yet it is unclear when such an agent-principal relationship arises under section 3, resulting in uncertainty over the circumstances in which a duty can be said to be owed. There are certain relationships that have traditionally been recognised as fiduciary relationships such as the relationship between a trustee and a beneficiary or a director and a company. However, an exhaustive list of fiduciary relationships does not exist and conduct that would be tantamount to a breach of a fiduciary duty does not necessarily signify that a fiduciary relationship exists. Further, reported UK cases considering section 3 have not to date concerned agent-principal relationships but rather situations where an individual has failed to disclose material information to a government department or financial institution.
It is conceivable that the approach adopted by the Hong Kong Court of Final Appeal regarding when an agency relationship arises can be used in relation to section 3. Being unaware of the existence of a legal duty is not a valid defence and there is no qualification that the information to be disclosed must be material. Practitioners should therefore be alive to the possibility that in Hong Kong a fiduciary relationship may arise between the officers of a subsidiary and the principal company when determining whether information needs to be disclosed.