Internal Governance vs External Accountability: A Lesson in Directors’ Authority

In Jiang Saizhen v China Come Ride New Energy Group Limited (formerly known as KNK Holdings Limited) [2026] HKCFI 553, the Court delivered a cautionary note for companies seeking to disown their own paper trail, and a reassuring precedent for investors transacting in good faith.

In July 2019, the Plaintiff purchased a 1-year bond in the principal sum of HK$5,500,000 with interest at 6% p.a. (“Bond”) from the Defendant (“KNK”), a listed company whose shares are listed on the Hong Kong Stock Exchange (stock code: 8039). The consideration for the Bond was paid to a wholly owned subsidiary of KNK, i.e. Golden Legend Capital Ltd.

The Bond Agreement was executed by 1 executive director of KNK (Mr Sun) and affixed with its company chop. The Bond Certificate was executed by 2 executive directors of KNK (Mr Sun and Ms Shi). At the material time, KNK did not have any chief executive officer nor managing director.

In July 2020, upon the maturity of the Bond, KNK refused to repay the Plaintiff.

KNK disputed the validity of the Bond by suggesting there is no evidence that Mr Sun and Ms Shi were authorised to execute / issue the Bond Agreement and Bond Certificate on KNK’s behalf. It also relied on an internal document titled “material contracts and legal commitment policy” (“Internal Contracts Policy”) which suggests that the issuance of bonds always requires approval of KNK’s board of directors.

Article 101(2) of KNK’s amended and restated articles of association (“Articles”) states that:

“Any person contracting or dealing with the [Defendant] in the ordinary course of business shall be entitled to rely on any written or oral contract or agreement or deed, document or instrument entered into or executed as the case may be by any two of the Directors acting jointly on behalf of the [Defendant] and the same shall be deemed to be validly entered into or executed by the [Defendant] as the case may be and shall, subject to any rule of law, be binding on the [Defendant].”  (emphasis added)

Question 1: Does Article 101(2) confer actual authority upon any two directors of KNK?

Question 2: Can Article 101(2) be qualified by the Internal Contracts Policy and/or other “rules of law”, including other provisions under KNK’s Articles?

The answer to Question 1 is “yes”:

1. Article 101(2) is not a mere reiteration of the indoor management rule or the Turquand rule at common law (§28). It creates a substantive and affirmative state of affairs where 2 directors would have adequate authority to bind the Defendant in the ordinary course of business (§29).
2. Article 101(2) is plainly engaged on the facts, since the Bond was issued in KNK’s “ordinary course of business” (§50). There is nothing unusual or extraordinary about a listed company, whose objects and functions include holding investments and the interests in subsidiary companies[1], acquiring financing from outsiders (§45). There was also nothing onerous and/or usual about the Bond (§48).
3. This was not only confirmed by KNK’s own witness, a director of KNK prior to August 2024, under cross-examination; but was also supported by a previous example in 2018 where KNK issued a bond in the amount of HK$5mil with 8% p.a. interests to an independent third party (§§44, 47).
4. In this regard, it is important not to confuse “day-to-day” activities with “ordinary” activities. Frequency with which similar transactions take place is merely one of the factors to be considered[2] . The Court cannot see how it can be said that it would be unusual or extraordinary for a listed company like KNK to issue bonds (§47).

The answer to Question 2 is “no”:

5. The Contracts Policy was plainly not part of KNK’s Articles (§34), as there is no evidence showing that KNK had passed a shareholders’ resolution and/or a directors’ resolution to adopt and/or approve it (§35).
6. The purpose of the phrase “subject to any rule of law” in Article 101(2) is to make clear that if the underlying transaction entered into by 2 directors is void ab initio or voidable, neither KNK nor the outsiders dealing with KNK can rely on Article 101(2) to contend that the underlying transaction is otherwise valid and/or enforceable (§54). It cannot qualify Article 101(2).
7. Article 107 of KNK’s Articles, which provides that “The Board may exercise all the powers of the [Defendant] to raise or borrow money and … to issue debentures, bonds” does not mean that such power is conferred exclusively upon the entire Board and not upon any 2 directors of KNK (§65). Otherwise, Article 101(2) would be rendered otiose, contrary to the presumption against surplusage[3] (§66). Further, Article 107 is only permissive (“may be exercised”); whereas Article 101(2) is imperative (“shall be binding”) (§67).
8. Insofar as Active Base Ltd v Roderick John Sutton & Ors (HCCW 470/2005, 4 June 2008) dealt with bye-laws that are almost identical to Article 101(2) and Article 107 of KNK’s Articles, it can be distinguished. The loan transaction in Active Base involved a debenture by which all the assets of the company (e. Moulin) was charged in favour of the lender, so it can hardly be suggested that it was in the “ordinary course of business” (§61). The question of whether certain provisions conferred actual authority upon the directors was also not argued (§62). Ultimately, each case will have to be decided on its own facts (§59).

1. In considering whether a director has actual authority to enter into an agreement / transaction on behalf of a company, the starting point is the company’s articles of association (§25).
2. Whilst each case must be decided on its own (§59), certain articles may be drafted in a way that creates a substantive and affirmative state of affairs where a transaction entered into by 2 directors in the ordinary course of business shall be binding on a company; and does not simply regurgitate the indoor management / Turquand rule (§§28, 29, 72).
3. Guidelines or policies that merely sit in a company’s internal records cannot qualify nor defeat a company’s articles of association, particularly when there is no board / shareholders’ resolution to adopt and/or approve them. Outsiders would not and should not have known about their existence (§35).

Read the judgment here at: https://legalref.judiciary.hklrs/common/search/search_result_detail_frame.jsp?DIS176885&QS=%2B&TP=JU

Mr Kwan Ping Kan and Ms Phoebe Lee appeared for the Plaintiff.

[1] Article 3 of KNK’s Articles suggest that it is an investment holding company established to “acquire, hold, dispose, sell, dealing in or trade…shares, stock, debentures, debenture stock, annuities, notes, mortgage, bonds, obligations and securities, foreign exchange, foreign currency deposits and commodities…” (§43).

[2] See Michael Wilson & Partners v Emmott [2015] EWCA Civ 1028 at §22 per Lewison LJ.

[3] Sir Kim Lewison, The Interpretation of Contracts (8^th Ed) at §7.24.