James Henry Ting: The Privy Council on Duress

Written by  //  November 7, 2010  //  Corporate Law and Business  //  Comments Off on James Henry Ting: The Privy Council on Duress

As Krishnaprasad noted in his post, the question of to whom directors of a company owe fiduciary duties has generated considerable disagreement. In this context, a recent decision of the Privy Council, in Cosimo Borelli v James Henry Ting makes for interesting reading. As is well known, Mr. Ting was formerly the Chairman of the Akai Group that collapsed spectacularly in 1999. At the time of its collapse, it was estimated to have a net asset deficiency of over $1 billion. The narrower context before the Privy Council was an order that Hong Kong and Bermuda courts had made to wind up Akai and distribute its assets to creditors. To fully appreciate the controversy, it is necessary to give a somewhat elaborate account of the facts.

The dispute had its roots in a decision by the liquidators of Akai to sell its listing on the Hong Kong Stock Exchange, with the object of realising whatever value they could from the failed company. To do so, however, they were required under local law to enter a scheme of arrangement, which in turn needed the approval of a majority of shareholders, and the sanction of the court. Anticipating that Mr. Ting would not take kindly to the effort to sell, the liquidators obtained an ex parte order allowing them to temporarily disregard his companies’ votes, subject to a court hearing to assess the validity of those votes. At the relevant meeting, attorneys sought to act as proxies for the Ting companies, and were not allowed to do so, on the basis that the letter of authorisation was simply signed by Mr. Ting, without the necessary seal of the companies in question. In the ensuing litigation, it was found, as a matter of fact, that Mr. Ting, when told of this difficulty, had arranged for a board resolution to be typed up and for his signature to be forged. Armed with this “authorisation”, the Ting companies voted against the scheme – those votes were temporarily disregarded in accordance with the ex parte order, and the stage was set for protracted litigation.

There is little doubt that the litigation would have vindicated the position of the liquidators. However, the buyer had the right to withdraw from the scheme unless the Akai shareholders approved it by 31 December, 2002, and the prospect of obtaining a successful order by then, over the opposition of the Ting companies was remote. Indeed, three judges recused themselves from hearing the case after Mr. Ting’s objections, and the liquidators entered negotiations with Mr. Ting to arrive at a settlement, although they now had evidence that his signature had been forged. The liquidators undoubtedly acted in the best interests of the company, for pursuing litigation beyond the 31 December, 2002 deadline would have would brought no more than a pyrrhic victory.

Mr. Ting took full advantage of this opportunity, and entered into an agreement [“Settlement Agreement”] with the liquidators whereby he withdrew his opposition to the scheme, in consideration for their agreeing to “irrevocably covenant” to not sue him or pursue any claim of any nature against him, whether for past, present or future rights etc. The effect of the Settlement Agreement, if valid, was to grant Mr. Ting immunity from virtually any claim that could be brought in a court of law. His opposition was withdrawn, and the scheme went through.

In 2005, the liquidators uncovered evidence suggesting that Mr. Ting may have been guilty of substantial misappropriation of funds. Alleging that the Settlement Agreement was not binding, they commenced proceedings alleging misappropriation of over HK$400 million. Mr. Ting then brought an action to declare that the Settlement Agreement was valid and to restrain the liquidators from proceeding.  The Chief Justice of Bermuda rejected the application, finding Mr. Ting had engaged in “sharp practices”, approached the court with “unclean hands” and that he had committed numerous violations of statutory and fiduciary duties. The Court of Appeal reversed this decision, holding that Mr. Ting owed no duty of disclosure to the liquidators, and that any “sharp practice” or “unclean hands” was covered by the broad terms of the Settlement Agreement. The liquidators appealed to the Privy Council.

In an interesting decision, the Privy Council upheld the claim of the liquidators and denied Mr. Ting immunity. The purpose of this post is not to consider the Board’s analysis of insolvency principles – indeed, those did not directly arise for consideration. The Board instead found that Mr. Ting had opposed the scheme in bad faith and for an improper motive, and noted that had litigation continued at the relevant time, his votes would undoubtedly have been disregarded by the court. Secondly, it held that Mr. Ting had, instead of cooperating with the liquidators as he was bound to do under insolvency law, “opposed the scheme for purely personal and selfish reasons, in the process using forgery and false evidence.” Based on these findings, the Board found that the Settlement Agreement had been entered into “under duress” and consequently not binding.

Two points are noteworthy. First, it settled that the “exercise of a legal right” is not grounds for a finding of duress even if it constitutes enormous hardship to the other party. Exceptions do exist, and while “mala fide” is a test that normally triggers the exception, it does not always do so. Readers will find the relevant principles set out by Mance J. (as he then was) in Huyten v Peter Cramer, [1999] CLC 320.Thus, the question is – was Mr. Ting entitled to oppose a scheme of arrangement, in his capacity as a shareholder, and if he was, did the manner in which he chose to exercise that right attract the exception? The answer to the first part of the question is probably in the affirmative, since shareholders owe no fiduciary duty to the company, subject to legislative provisions to the contrary.

That, then, leads to the second point – it is important to not read the Board’s decision as altering the law on fiduciary duties. The decision instead appears to have upheld the right of the liquidators to avoid the Settlement Agreement for duress because specific duties imposed by insolvency law were not complied with, and/or Mr. Ting’s mala fide acts were sufficient to displace the usual presumption that the exercise of a legal right does not trigger duress. While the Board does not explicitly rest its conclusion on this basis, it is unlikely that it intended to effect so fundamental departure from settled law, especially in a case that did not question the rule. It remains an interesting example of the willingness of English courts to expand the horizons of economic duress in negativing agreements.

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