HECTOR FINANCE GROUP LIMITED & Anor v CHAN CHEW KEAK

Facts

Hector Finance Group Limited, a BVI company, heads a group making paper packaging in China and Southeast Asia. Huizhou Xinsheng Paper Industry Co. Limited, incorporated in China in August 2018, is an indirect subsidiary. Chan Chew Keak held at least 20% of Hector through Caldicott Worldwide Ltd and was a director of both plaintiffs. The court found that from 2005 until disputes arose in 2019 he exercised ultimate management control over the group through force of personality, with the two day-to-day managers, Mr Siong and Mr Ching, deferring to him.

He proposed that the group invest in a sheet board plant in China, a departure from its box plant business. In January 2019 a group company transferred RMB 30m to Huizhou Xinsheng, and between January and March 2019 he caused it to lend RMB 10m and then RMB 4m to Li Yuanchang under two loan agreements for "land purchase at industrial park", at 3% a year for two years. In July 2019 Hector's directors resolved not to proceed with the plant. Mr Li refused to repay, paid only RMB 150,000 of interest, and became uncontactable. The plaintiffs sued in Suit No 233 of 2020 for breach of directors' duties under BVI and PRC law and, alternatively, conspiracy, alleging the loans were a pretence to move money to a close associate.

Issues

1. Whether Hector could sue for breach of duty without pleading or proving any loss of its own.
2. Whether the defendant breached the PRC duty of fidelity by misappropriating funds or lending without approval.
3. Whether he breached the PRC duty of diligence by advancing the money to Mr Li on those terms.
4. Whether he conspired with Mr Li to injure the plaintiffs, and what relief followed.

Holding

The High Court allowed the claim in part, giving Huizhou Xinsheng judgment for RMB 14m in damages for breach of the duty of diligence, with interest at 5.33% a year from the date of the writ, and dismissed all other claims, including Hector's claims, the fidelity and conspiracy claims, and the claims for unpaid loan interest, investigation expenses and an account of profits; form of judgment and costs were left for further hearing.

Reasoning

Hector's claim failed because loss is essential to a non-custodial breach of fiduciary duty and to breach of the duty of diligence, and it alleged none. The RMB 30m belonged to a subsidiary, whose loss could not be treated as Hector's under the reflective loss principle or by viewing the group as one economic unit.

On fidelity, the court accepted that the loans' stated purpose was the true one. The plant had been discussed repeatedly from December 2017, quotations and financing had been sought, and contemporaneous documents described Mr Li as the group's land consultant. The plaintiffs did not show Mr Li was an interested party: the claimed intimate relationship between the defendant and a woman he described as his personal secretary rested on rumour and photographs, and no admissible evidence showed she received any money. No adverse inference arose from the absence of Mr Li and her, who were outside Singapore. On lending without approval, the court accepted that Hector's directors approved the plant at the April 2018 meeting, and that in this group's management culture Mr Siong's and Mr Ching's knowledge and silence amounted to approval of the loans. A later amended version of those minutes was regrettable, but immaterial.

On diligence, the business judgment rule was not shown to be part of PRC law. The loans gave the company no control over the money, no security and no way to call it back early; experts agreed escrow or custody arrangements were usual; and he took no lawyer's input. He admitted the decision was "totally ill advised". A reasonable administrator would not have advanced the money this way.

The conspiracy claims failed: there was no combination with Mr Li, no unlawful act against Hector, and no intention to injure, since the loans were openly recorded and any loss would rebound on him. The court called the case theory "a conspiracy theory of a case". The contractual interest was not recoverable because he was not a guarantor of Mr Li and it was unpleaded special damage; the investigation costs were incurred by another group company.

From the judgment