ET-china.com International Holdings Ltd v Cheung

The dispute between ET-china.com International Holdings Ltd and Cheung concerned the transfer of shares within the company and the potential breach of directors' duties. The High Court of Australia was asked to consider the circumstances under which the shares were transferred, and whether the directors had breached their duties by causing a rights issue and special distribution to shareholders. The case involved the parent company's chief executive officer and founding director, who had been convicted of corporate crimes in China and imprisoned. The subsidiaries of the company had an indirect interest in a travel business conducted in China, with the balance of the interest held by a Chinese state-owned corporation. The Chinese corporation contended that the subsidiaries' interest was obtained corruptly. The directors caused shares to be transferred on a reversible basis, so that a Chinese national appeared to control the subsidiary. The first defendant ultimately paid $2 million for the shares, but it was argued that the shares were transferred for "nil" consideration and as a gift. The directors were also said to have caused a rights issue and special distribution to be effected to disguise these activities.

The legal issues before the court included whether the directors had breached their duties concerning the rights issue and special distribution to shareholders, and whether the directors' duties amounted to fiduciary duties. The court had to determine whether the remaining defendants were knowingly involved in a breach of those fiduciary duties or knowingly received property through that breach of fiduciary duty. The court considered the nature of the directors' duties, the circumstances of the share transfer, and the impact of the rights issue and special distribution on the shareholders.

The court found that the directors had breached their duties by causing a rights issue and special distribution to be effected to disguise the share transfer. The court held that the directors' duties were fiduciary in nature, and that the remaining defendants were knowingly involved in a breach of those fiduciary duties. The court ordered the directors to account for the profits they had made from the share transfer and to pay damages to the company. The court also ordered the remaining defendants to compensate the company for their involvement in the breach of fiduciary duty.

The court's decision emphasised the importance of directors acting in good faith and in the best interests of the company, and highlighted the potential consequences of breaching those duties. The decision also highlighted the need for companies to be aware of the risks associated with doing business in foreign jurisdictions, and to take steps to mitigate those risks. The court's decision was a significant one for corporate governance in Australia, and has implications for directors and officers of companies operating in complex and challenging environments.