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Navigating Legal Minefields: Directors’ Dilemmas in Relying on Legal Advice Given to his Company

1. BUSINESS PRACTICE OF SEEKING LEGAL ADVICE

In the ever-evolving business world, legal issues are an inevitable challenge that organizations must navigate to ensure compliance, mitigate risks, and safeguard their interests. Since directors can be held personally liable for companies’ conduct in some cases, out of prudence, it is not uncommon for the directors to seek advice either from external legal advisors or internal legal advisors or both.

It is trite under common law that advice by external legal advisors (i.e. law firms or barristers in private practice) would be covered by legal professional privilege (LPP). LPP is a fundamental right that protects confidential communication between a lawyer and their client from being disclosed without the client’s consent, ensuring that the client can seek and receive legal advice in confidence. Unlike other communication with non-lawyer (such as an accountant), even a law-enforcer empowered to demand for information cannot compile disclosure of material covered by LPP. The case Citic Pacific Ltd v Secretary for Justice (No 2) [2015] 4 HKLRD 20 confirms that such LPP can also be enjoyed for communication with in-house counsel.

A company has to act through individuals. Usually a company’s conduct is directed and done through its directors. In process of seeking legal advice and receiving legal advice, the role of directors is indispensable. Not only directors act on behalf of the company, but also by actively engaging with legal counsel, by signing a retainer with lawyer, giving debriefing on issues at hand, providing instructions to lawyer and corresponding with lawyer on behalf of the company. There is therefore no surprise if directors have the confusion that the advice from the lawyer is given to himself and he could rely thereon for certain personal act.

As a matter of law and the principle of separate legal personality. The legal advice addressed to a company does not belong to the directors. Ownership of LPP is with the company but not the directors. This can potentially cause problems. Imagine a director sought legal advice on behalf of a company and rely on such advice to act in a certain way. Such act by the director was later found to be illegal and the director faced criminal charge. When the director wished to rely on the legal advice as a defence, such evidence was not available because the advice was covered by LPP but only the company, as the owner, could waive the same.

In such hypothetical case, the crucial legal questions would be:-

• Who owns the LPP over the communications with legal counsel (external and internal)? The company (legal person) or the director (natural person), or jointly?
• Who can waive such LPP in litigation to further one’s claim and/or defence?
• Is there any exception to LPP such that LPP can be compelled to be disclosed?

2. HONG KONG POSITION

Ownership of LPP

When a company’s employee, on behalf of company (but not in his/her personal capacity), seeks and receives legal advice from duly qualified legal advisor (external or internal), it is the company who owns the LPP over the communications and documents which are created for the dominant purpose of obtaining legal advice, but not the employee himself/herself, as the Court of Appeal held in Citic Pacific Ltd v Secretary for Justice (No 2) [2015] 4 HKLRD 20 at §59:-

“…It can, we think, be said that the client is simply the corporation, and that the question is really one of which of its employees should be regarded as being authorised to act for it in the process of obtaining legal advice. As we have suggested earlier, there are good reasons why such employees should not be restricted to select members of the corporate legal department and we see no good reason why such restriction is required….”[1]

Provided that a director is authorised to act for the company in obtaining legal advice, it is the company who owns the LPP over the communications and documents.

Absolute nature of LPP and Waiver of LPP under HK law

LPP is a constitutional right entrenched in Article 35 of the Basic Law, which stipulates that “Hong Kong residents shall have the right to confidential legal advice, access to the courts”. The absolute nature of LPP is discussed by Ribeiro PJ in Secretary for Justice v Florence Tsang Chiu Wing (2014) 17 HKCFAR 739, whereby His Lordship stated at §29 that:-

“While an exercise of balancing competing interests is required in deciding whether some should be released from implied undertaking, it is well established that “LPP does not involve such a balancing of interests. It is absolute and is based not merely upon the general right to privacy but also upon the right of access to justice”

As such, LPP entails the right to resist the compulsory disclosure of those communications. Unless the privilege is waived by the client, “once privileged, always privileged”[2]. As privilege of the client, it can be waived, expressly or impliedly, by the client. For example, there is a waiver when the client brings proceedings for professional negligence against the solicitor, or where the client applies for an order of wasted costs against the solicitor[3].

The absolute nature of LP is strict, such that even athird party who has come into possession of a privileged writtencommunication, whether through inadvertence, mistake or even surreptitiousconduct, should not be allowed to give evidence of it unless the client waivesthe privilege[4].

3. CRIME/FRAUD EXCEPTION TO LPP

Although the nature of LPP is absolute, it is settled that privilege does not attach to communications between lawyer and client if the purpose of the client in seeking legal advice is to facilitate criminal or fraudulent conduct[5].

4. PRACTICAL DIFFICULTIES FACED BY A LITIGANT IN WHITE-COLLAR LITIGATION

By reason of the absolute nature of LPP and that the LPP is owned by the company, if a defendant (e.g. director/employee), who is privy to these LPP communications/documents and who wishes to disclose these LPP communications/documents for his defence at criminal trial, he must first seek waiver from the company. As it is the company who owns the LPP and LPP is a constitutional right entrenched in Article 35 of the Basic Law, he must not disclose or refer to these communications/documents without prior waiver from the company, no matter how useful and exculpatory these LPP communications/documents are.

As it is the company who owns the LPP, and that the company and the director/employee are separate legal entities, the company may well elect not to waive its LPP claim over these communications/documents, even though this may be at the expense of the director/employee.

In the event the company refuses to waive its LPP claim over these communications/documents, not only this creates insurmountable difficulties to a defendant’s defence at trial, this, arguably, even renders a trial unfair to a defendant, for he is effectively prevented to refer and rely on relevant and pertinent defence evidence though there is no fault on his own part (assuming crime/fraud exception does not apply). Arguably, the predicament he is caught in is akin to the prejudicial situation where there is a key defence witness absent for the trial.

5. CONCLUSION

The situation where in a criminal trial, a director/employee is unable to refer or disclose communications/documents subject to LPP owned by the company is unsatisfactory, which warrants reform. The position in other common law jurisdictions is different (to be discussed in another article) and Hong Kong may draw reference therefrom. This is more pertinent in the current business landscape than before as regulatory frameworks continue to evolve and expand, the need for ongoing legal guidance has become not just a precautionary measure, but an essential component of sustainable and compliant business operations.

At the same time, legislative reform should be considered to establish a balanced approach that respects the company’s privilege while ensuring director/employee is not unduly hindered in their roles. Such reforms could include statutory exceptions or protocols for accessing privileged documents under specific circumstances, subject to judicial safeguard. By providing clearer legal pathways and updating the legislative framework, the interests of both companies and their director/employee can simultaneously be safeguarded, promoting fairness and efficiency in corporate governance and legal proceedings.

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[1] Citic Pacific Ltd v Secretary for Justice (No 2) [2015] 4 HKLRD 20 at §59
[2] CITIC Pacific Ltd v Secretary for Justice [2012] 2 HKLRD 701 at §§23-24
[3] Johannes Chan SC (Hon) LEGAL PROFESSIONAL PRIVILEGE: IS IT ABSOLUTE? P.465
[4] CITIC Pacific Ltd v Secretary for Justice [2012] 2 HKLRD 701 at §§40-51
[5] CITIC Pacific Ltd v Secretary for Justice [2012] 2 HKLRD 701 at §77

Disclaimer: This article is for reference only. Nothing herein shall be construed as Hong Kong legal advice or any legal advice for that matter to any person. Oldham, Li & Nie shall not be held liable for any loss and/or damage incurred by any person acting as a result of the materials contained in this article.

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