Publications | 14 February 2017

CFA gives a broad interpretation to the meaning of "agent" under the Prevention of Bribery Ordinance

In a recent bribery case[1] involving a "connected transaction" under the Hong Kong Listing Rules, the Court of Final Appeal ("CFA") has confirmed that the term "agent" will be interpreted broadly in the context of s.9(3) of the Prevention of Bribery Ordinance ("POBO") which establishes the offence of corrupt transactions with agents.

Two directors were convicted for the section 9 offence (as well as for bribery offences) after having falsely stated in board minutes that they had no interest to declare in a transaction being completed by their employer's parent company. One of the directors was in fact the ultimate beneficial owner of the purchaser in that transaction.

The CFA determined that, even though the directors had no pre-existing legal, contractual or fiduciary relationship with the parent company, they had acted as its agents for the purposes of the offence. A person may become the agent of a company where he/she is in a position to act on behalf of a company and voluntarily decides to do so.

This case serves as another reminder for directors to be aware of the duty to act in good faith in all of their dealings, even when they are not acting for their direct employer but for another company within the wider group structure. Company compliance policies should also reflect this, making it a requirement that appropriate disclosures are made by management and employees for all transactions.

The CFA also provided clarification on the definition of "document" under section 9(3) and considered the law regarding when acts, knowledge or the state of mind of individual directors may be attributed to the company on whose board they act.

Background 

The appellants, Mr Luk and Miss Yu, were the sole directors of Biogrowth Assets Limited (“Biogrowth”), a wholly owned subsidiary of China Mining Resources Group Limited (“China Mining”) which is a company listed on the Hong Kong Stock Exchange. Biogrowth, in turn, wholly owned a subsidiary Cell Therapy Technologies Centre Limited (“Cell Therapy”).

In 2008, Mr Luk and Miss Yu authorised the sale of Biogrowth's shares in Cell Therapy to United Easy Investments Limited (“United Easy”), a company controlled by the aunt of Mr Luk’s wife, for HK$15 million. Mr Luk and Miss Yu confirmed in the Board minutes that they signed on behalf of Biogrowth to authorise the sale that they had no interest to disclose in the transaction. This enabled China Mining to notify the Stock Exchange that United Easy and its owners were independent of the company and its connected persons.

At trial it was revealed however that Mr Luk was the ultimate beneficial owner of United Easy, meaning that the transaction was a "connected transaction" under the Hong Kong Listing Rules and that Mr Luk should have accordingly disclosed his interest to the Stock Exchange and obtained the approval of China Mining's independent shareholders. It was also found that Mr Luk had given 1.5 million shares in China Mining to Miss Yu as an inducement to sign the Board minutes.

On consideration of Mr Luk and Miss Yu's appeal, the CFA confirmed that both had conspired to commit an offence under section 9(3) of POBO, having used the Board minutes to deceive and mislead their principal, China Mining.

Mr Luk was further convicted under section 9(2)(a) of offering a bribe as an inducement for Miss Yu’s participation in the conspiracy, and Miss Yu was convicted under section 9(1)(a) for accepting the bribe.

Key issues considered by the CFA

The first question put before the CFA was whether Mr Luk and Miss Yu were acting as agents of China Mining within the terms of section 9(3) of POBO. The appellants submitted that they could not be, as they were not directors or employees of China Mining and thus owed no legal or fiduciary duties to it. The CFA ruled however that, although he had no pre-existing legal, contractual or fiduciary obligations to act in its affairs or business, Mr Luk had been acting as an agent of China Mining. By agreeing to find a buyer of Cell Therapy, he had created a reasonable expectation to act in the interests of China Mining and had assumed a duty to act in good faith and not deceive China Mining into making a false statement to the Stock Exchange. As for Miss Yu, the Court held that it was sufficient for her to have been aware of the basis upon which Mr Luk put forward United Easy as a buyer for her to be found liable in the conspiracy.

The second issue for the CFA to consider was whether the Board minutes fell within the scope of "any receipt, account or other document", a necessary element of the offence under section 9(3) of POBO. The Court held that the meaning of "any… other document" was not restricted to financial documents (i.e. documents of the same type as "receipt" or "account") and that it could mean any document in respect of which the principal is interested and which contains a false or erroneous statement intended to mislead.

Finally, the CFA asked (although it was not necessary for the purpose of convicting the Defendants given the conclusion that they had been acting as agents of China Mining) whether Biogrowth was capable of being deceived by Mr Luk and Miss Yu where they were its sole directors. This concerned the application of the common law principles, here in the context of conspiracy to defraud or theft (R v McDonnell [1966] 1 QB 233 and Attorney-General's Reference (No.2 of 1982) [1984] QB 624 were cited), of whether a director's knowledge, acts or state of mind can be attributed to its employer company. The Court of Appeal had held that Biogrowth could not have been deceived by its own sole directors, as they represented the company's knowledge and state of mind meaning that the company had been aware of and approved of the bribe and false disclosure. The CFA disagreed however and found that Mr Luk's and Miss Yu's knowledge (and approval) of their own breach of duty could not be attributed to the company. The CFA said that in every case the criteria for attribution must give effect to the purpose and policy of the relevant substantive rule – in this case the provisions of POBO.   

Conclusion

The Court gave a broad interpretation to the meanings of "agent" and "document" for the purposes of section 9(3) of POBO. In relation to what state of mind should be attributed to a limited company, the Court took a flexible approach, having regard to the purpose and policy of the statute. In the present case, it would be contrary to the objectives of POBO to acquit the directors of the conspiracy and bribery charges. This case serves as another reminder that effective compliance policies need to be in place that ensure that  employees and management are regularly reminded of their duties to declare an interest in transactions. In particular, policies need to be applied robustly across the group structure.

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