LAM PING WAN AND ANOTHER v. IP LAM ON

HCA 12791/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12791 OF 1999

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J U D G M E N T

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INTRODUCTION:

Background:

1. The 1st plaintiff, Lam, was the owner of 30 million shares of Easy Concepts International Holdings Limited (hereinafter called "Easy Concepts") of Stock Code 241 listed in the Stock Exchange of Hong Kong. He alleges that on or about 15 December 1998 he transferred the shares through his broker, the 2nd plaintiff, to the defendant pursuant to an oral agreement whereby he agreed to sell and the defendant agreed to buy the shares at $1 per share. Under the terms of that oral agreement, the defendant would pay the purchase price of $30 million within six months from the date of receipt of the shares; but if the defendant failed to pay he would have to return the shares and pay $9 million as agreed compensation. It was also a condition that the defendant shall not sell the shares unless and until he has paid for them. After eight months, the defendant failed to pay and on or about 2 August 1999 started selling 3,200,000 shares. Lam stopped further sale by undercutting the defendant's offer. The plaintiffs obtained an interlocutory injunction restraining the defendant from further disposing of the shares and now seek to restrain the defendant from selling and disposing of the balance of unsold shares, the agreed compensation of $9 million, damages for conversion of the 3,200,000 shares sold, secret profit and interest.

2. The defendant does not dispute that the shares were transferred to him but claims that they were so transferred from a third party, Koon Wing Yee, who incidentally was the then chairman of Easy Concepts, in satisfaction of a debt of $30.5 million owed to him and his partner Li Hung Hon Johnny by Koon. Starting from March 1998, he lent Renminbi (RMB) in amounts of 0.5 million to 3 million yuan to Koon in return for repayment in the same amount in Hong Kong dollars after three months. The arrangement worked well until December 1998 when the outstanding loan amounted to $30.5 million. Then Koon agreed to repay the loan by transferring 30 million shares in Easy Concepts to the defendant. Implicit in that defence is that Koon was the beneficial owner of the shares. The defendant seeks to discharge the interlocutory injunction and claims for damages.

Dramatis persona:

3. The following background of the parties and their witnesses are not in dispute or seriously challenged.

4. The 1st plaintiff, Lam Ping Wan, was formerly a Customs and Excise officer. He resigned from government service in September 1992 and operated the Hong Ping Label Factory with another partner. He started trading in stocks and shares in 1990 with a group of about six friends. They strategically targeted a particular stock and then accumulated them until the share value reached their target. He had been extremely successful and by about 1997 have earned about $30 to $40 million. Then he started to trade on his own. He and his friends maintain close relationship and finance each other's trading activities.

5. He came to know Koon through his friend who was an employee of Koon. In due course, he developed a business relationship with Koon who placed orders for labels from his factory. Since August 1997, he started accumulating shares of Easy Concepts. At the beginning, he did not know that Koon was its chairman.

6. Koon is and was the chairman of Easyknit International Holdings Limited (hereinafter called "Easyknit"). He acquired Shui Hing Company Limited, which operated a department store in Hong Kong and Shanghai. He became the chairman of Shui Hing Company Limited and changed its name to Easy Concepts. Easy Concepts has properties in Hong Kong, Shanghai and New Zealand. In 1998, he came to know the defendant as a potential purchaser of his properties through the introduction of his property agent, Au Wing Wah. He developed an acquaintance with the defendant, though the defendant did not purchase any of his properties.

7. The 2nd plaintiff operates a securities company. Lam opened a trading account in his company on 10 March 1997 and has since been trading through his company. On 10 December 1998 Koon introduced the defendant to open a trading account in the 2nd plaintiff's company. The 2nd plaintiff handled just one transaction for the defendant and that was the cross trading in the 30 million shares in Easy Concepts between Lam and the defendant. Apart from that transaction, he had no business dealing with the defendant.

8. The defendant and Li are business partners. They operate a number of businesses in Hong Kong, Shenzhen and Zhuhai through corporations in Hong Kong and in China. They invest in the property market in Hong Kong. In China, they operate restaurants, a hotel, a karaoke bar, fashion shops and manufacture water heating equipment. They are also the agent of Motorola International Limited in trading paging network equipment and mobile telephones. They have quite a substantive business in Hong Kong and China.

THE PLAINTIFFS' CASE:

The negotiation of the alleged contract:

9. In about November or December 1998, Lam came across Koon and the defendant while they were having lunch in a restaurant. Lam had been told by Koon's staff that the defendant was in the property developing business on a prior occasion when he saw the defendant in Koon's office, though without having been properly introduced. He exchanged a few words with Koon and remarked that his Easy Concepts was under performing in the stock market. Koon replied that the defendant had been talking to him about the shares and was interested in them. He asked Lam if he was interested to sell. Lam replied that he might be. The conversation ended as Lam left Koon's table.

10. Some days later, in early December, Koon telephoned Lam and told him that the defendant was interested to buy his shares and asked if he was interested to sell. Lam replied that he was. On the following day, after setting up a meeting for Lam and the defendant in the conference room in his factory, Koon retired to his office. He did not wish to take part in the negotiation as he was the chairman of Easy Concepts. The defendant asked how many shares Lam had and then offered to buy Lam's 30 million shares at $1, but said that he would only pay within six months or if he could not pay within six months he would return the shares with a compensation. Lam did not like the idea of payment in six months and was not interested in compensation. That meeting concluded with Lam telling the defendant that he would think about the offer. After the meeting, Lam asked Koon if the defendant was trustworthy. Koon replied that the defendant was doing big business in property development.

11. After a few days, the defendant telephoned Lam about the offer. At the time as the market for Easy Concepts shares was thin, Lam became attracted to the offer. He suggested to discuss about the compensation. A few days later, they met in the conference room in Koon's factory. As in the previous occasion, Koon did not participate in the meeting. Lam suggested a compensation of $9 million and return of the shares if the defendant could not pay and an additional condition that the defendant shall not sell the shares unless he had paid for them. The defendant agreed. They then went to inform Koon about the deal. The defendant asked Koon if he could introduce a broker who would charge a lower commission. Since Lam had an account with the 2nd plaintiff, Koon suggested introducing the defendant to the 2nd plaintiff to open a trading account.

12. In respect of this part of the plaintiffs' case, the defendant's defence is one of total denial. The defendant says he had no dealings with Lam and had no knowledge of him until Lam instituted the present proceedings.

Transfer of the shares:

13. On 10 December 1998, Koon, the defendant and Au went to the 2nd plaintiff's company. There Koon introduced the defendant to Ng of the 2nd plaintiff to open an account. The defendant signed the account opening document dated 10 December 1998. The defendant requested Ng to charge him the minimum commission, to which Ng agreed. There was no transaction done on that day. Then a few days later, on 15 December 1998, Lam telephoned Ng and instructed him to conclude the sale of 30 million shares of Easy Concepts with the defendant. Lam gave him an authorisation dated 15 December 1998 to release the shares without receiving payment from the defendant. The defendant also telephoned him about the deal. He accordingly effected the cross trading.

14. The defendant does not dispute opening a trading account with 2nd plaintiff and signing the account opening document on 10 December 1998 but says that he and Li together with Koon attended the 2nd plaintiff's company on 15 December 1998 to effect the share transfer. For reasons as will become apparent in the later part of this judgment, my finding of fact on what happened on 15 December 1998 has significant bearing on the conclusion that I am going to reach.

DEFENCE CASE:

The loan arrangement:

15. The defence case is that the defendant came to know Koon in mid 1997 through the introduction of his friends over meal. Then he developed a business relationship with Koon. In February 1998, Koon suggested to purchase a residential property in Shanghai for joint development. After viewing the properties, he gave Koon RMB 1 million yuan in Shangrila Hotel in Tsimshatsui East as his contribution to the joint investment. Koon gave him a handwritten receipt. After a week, Koon told him that the investment was not feasible and asked if he was in urgent need for the return of the money. Koon asked for two months to return him the money and promised to repay in Hong Kong dollars at the exchange rate of 1 to 1 in two months. He agreed and in late April 1998, Koon repaid him HK$ 1 million.

16. Just before that repayment, Koon asked if he could provide him regularly with RMB in cash because he had a lot of business in China demanding RMB. As the defendant had a lot of receipts in RMB through his various businesses in China, he agreed. In return Koon would repay within three months in Hong Kong dollars at the exchange rate of 1 to 1. Since then, they had numerous transactions ranging from RMB 0.5 to 3 million yuan. All these transactions were in cash. Koon gave him a receipt every time the defendant lent him money. The receipt was returned to Koon when he repaid. The arrangement worked well until late November 1998. In early December 1998, Koon started to fall behind in repayment. The total amount of outstanding loan amounted to RMB 30.5 million yuan. The defendant started to chase Koon for repayment and stopped further loan.

The agreement to repay the loan by shares:

17. On 10 December 1998, Koon suggested to repay by 30 million shares in Easy Concepts which was then trading at about $1.20. The defendant said he had to discuss the offer with Li. However, before doing so, he went with Koon to the 2nd plaintiff's company to open a trading account. He signed the account opening document dated 10 December 1998. At the time, the defendant had his own brokers but was persuaded to open an account with the 2nd plaintiff as Koon said it would be more convenient.

18. On the following day, Koon asked him to bring along all the receipts and to go to Shanghai with him the next day as he might have cash to repay the loan. He went with Koon to Shanghai on 12 December. While on the plane Koon suggested the defendant to take his properties in Shanghai in settlement of the debt instead. The defendant declined.

19. In the morning of 13 December 1998 in Shanghai, Koon asked the defendant to go to his room in the hotel with the receipts. After checking the receipts with the defendant which amounted to RMB 30.5 million yuan, Koon told him that he did not have money to repay him and asked him to take his properties instead. He then gave him a pre-printed master receipt in the amount of RMB 30 million yuan, of which Exhibit D-1 is a copy. He also gave him a list of properties owned by Easy Concepts bearing the stamps of Easy Concepts and the defendant's signature both at the top and bottom of the list, Exhibit D-2. There was also an acknowledgement that the properties in the list could provide security for the loan of RMB 30 million yuan. He said that the defendant could show the list to Li so as to ease his worry about the loan.

20. After discussing with Li when he returned to Hong Kong, the defendant informed Koon on 14 December that they decided to accept the shares in settlement of the outstanding loan. Koon asked him to bring along the printed receipt and to meet him the following morning. On the following morning, the defendant went with Koon to a solicitor's office in central in relation to some other business and then went to Chinachem Building to meet Li. Then together they went to the 2nd plaintiff's company where Koon told Ng to effect the share transfer. He returned the master receipt for RMB 30 million yuan to Koon. At his request, Koon made a photocopy of the master receipt and gave it to him which the defendant produced as Exhibit D-1. That explained why he no longer had the original copy of the master receipt.

ASSESSMENT OF THE PARTIES' CASE:

21. Both counsel submit that the case of the other side is improbable. Essentially this is a case which turns on credibility and inherrent probability. This is a strange case. Despite his remarkable success as a share speculator, at the time of the transaction Lam's net worth was less than $40 million and a residential flat in Kowloon Bay of insignificant value. He hardly know the defendant. He had seen him in Koon's office on a number of occasions, but without talking to him. He passed by the defendant's table in a restaurant after which he had two meetings with him. He had never done any business with him before. Yet in those circumstances, he parted with shares worth $30 million representing more than three quarters of his net worth, without a single piece of document in support of the agreement or any form of security. Mr Grossman SC submits that no sensible person would behave in such a bizzare and irrational manner. I agree. But the question is did Lam behave so irrationally.

22. On the other hand, the defendant's case is no less bizarre than the plaintiffs'. While I accept that the defendant and Li were carrying on substantive business in China and had access to large amounts of RMB, their story that they were carrying millions of yuans of RMB in cash in paper bags delivering them over to Koon and receiving repayment in cash is hard to imagine. These huge amounts of loan were unsupported by any documents, bank statements or contemporaneous record. They kept no account of the amount of money lent and repaid and the dates of the transaction. Above all, they had no security for this large amount of loan. This is just as bizzare as Lam's case in transferring $30 million worth of shares without any written contract and security. Again, the question is did it happen that way.

23. The defendant's case is just as improbable as the 1st plaintiff's. However, there is no dispute that the defendant received the 30 million shares from Lam. The essence of the defendant's case is that Koon offered to repay his outstanding loan by shares and it was pursuant to that agreement Lam transferred the shares to him which Lam held on trust for Koon. The ultimate and most crucial issue therefore is did Koon owe the defendant $30 million. I shall start my fact finding with the events on 10 December 1998 about which there is uncontrovertable documentary evidence in support and documents do not lie.

Account opening:

24. The defendant signed the account opening document on 10 December 1998. Both Ng's and the defendant's evidence is that the account was opened on that day in the 2nd plaintiff's company. In addition, according to Ng, Au was in the company of Koon and the defendant when they went up to the 2nd plaintiff's company. Mr Grossman SC suggested to Ng that it was Li, whom he saw and not Au. Ng responded spontaneously that it was Au who was present with the defendant and Koon making a party of three. He was able to remember that because Au presented his name card to him, but he had no recollection about seeing Li at all. Ng also remembered that on 10 December 1998 Koon stayed only for a while whereas the share transfer on 15 December 1998 was effected over the telephone and both Lam and the defendant phoned him. With respect, counsel's suggestion does not fit into the evidence of the defendant, not at least as to timing. Ng was very clear and firm that the account opening and share transfer took place on two separate occasions. The defendant said he went to the 2nd plaintiff's company to open an account on 10 December 1998. That is consistent with Ng's evidence and the date on the account opening document, which is also consistent with Koon's evidence. So the occasion when Li went to the 2nd plaintiff's company, if ever he did go, would be a separate and later occasion on 15 December. However, this second visit on 15 December does not tie in with Ng's evidence who said that the transaction on 15 December was effected over the telephone by both Lam and the defendant.

25. Having considered the totality of the evidence, I consider Ng an honest and credible witness. He impressed me with his demeanour, and his spontaneous response in cross examination. His evidence was not seriously challenged, except as to whether he had mistaken Li's identity for Au. But I am satisfied with his spontaneous answer and his recollection of having seen Au producing his name card. I accept his evidence that it was Au and Koon who accompanied the defendant on 10 December 1998 to open an account with the 2nd plaintiff. At the time Au was a very active figure. He sold some of the properties for Koon and introduced the defendant to him. According to Koon, Au also went to Shanghai with him and the defendant two days later to view the properties Koon had for sale. It is not surprising that Au was with Koon and the defendant a couple of days before the trip. I am satisfied that Ng was not mistaken about the identity of Au and I accept his evidence about the meeting on 10 December 1998.

The share transfer:

26. Accepting Ng's evidence as I do, the defendant and Li did not visit the 2nd plaintiff's company on 15 December 1998. In fact there was no need to. The account opening document had been signed. Lam's telephone instruction to transfer the shares from his account to the defendant's account would have been sufficient. There is no need for the defendant to be there. Even on the basis of the defendant's case that Lam had never appeared in the picture and the deal was between him and Koon, there is no need for them to attend the 2nd plaintiff's company as the defendant had already opened an account, and instruction from Koon or Lam would suffice. In any event, according to Ng's evidence, they never went there on 15 December 1998 and Li was not there at all. I reject the defendant's evidence that he and Li went to the 2nd plaintiff's company with Koon to effect the transfer of the shares on 15 December 1998.

27. The authorisation which Lam gave to Ng is another good starting point of my fact finding. I accept Ng's evidence that after giving telephone instruction to transfer the shares Lam came to his office and gave him the authorisation. That is a contemporaneous document, the authenticity of which is not challenged. This document authorised the 2nd plaintiff to transfer the 30 million shares without first receiving payment from the defendant because, as stated in the authorisation, Lam had agreed that the defendant need not pay at once. If the shares were transferred to settle Koon's debt, Lam would not have mentioned about the defendant not having to pay at once, but would have confirmed that payment had been received. This is a contemporaneous document. Unless Lam and Koon had set up a trap for the defendant well beforehand, and I am satisfied that they had not, Lam would not have planted this sentence in the authorisation and planted the document a year ahead in the 2nd plaintiff's files. I give full weight to this document.

28. In the light of these two uncontroverted documents and the facts that I have found, why then do the defendant and Li lie about the incident on 15 December 1998? The reason is simple and will become apparent in the later part of this judgement. They wanted to explain away why they did not have receipts for the individual loans they alleged and why they could not produce the original copy of the master receipt of which Exhibit D-1 is a copy.

Receipt for the loan: Exhibit D-1:

29. It is convenient to consider the copy of the master receipt, Exhibit D-1, here. The defendant relied heavily on Exhibit D-1 as evidence of the outstanding loans. The defendant could not produce the individual loan receipts as he had, according to his account, returned them to Koon on the morning of 13 December 1998 when checking them with Koon. Then Koon gave him the master receipt for RMB 30 million yuan. Koon denied making or signing the original copy of the receipt. He never saw it until the present litigation.

30. The reason given by the defendant for the trip to Shanghai is unconvincing. After opening an account with the 2nd plaintiff Koon asked the defendant to bring along all the individual loan receipts to Shanghai as he might have $30 million to repay him. If he had not agreed to accept the shares as repayment of the loan, he would not have opened an account with the 2nd plaintiff. Similarly if the defendant had agreed to accept the shares, Koon would not have suddenly on the following day asked him to go to Shanghai to collect payment in cash. Further, it is a strange way to collect payment. Why should the defendant wish to assume the risk of collecting $30 million in cash and smuggling it out of Shanghai, let alone the risk of theft or loss on transit? Why should he not have Koon to bring the money to Hong Kong and collect it in Hong Kong or even at the airport and have the money banked immediately? The purpose of the trip does not accord with common sense. The logic does not flow from what happened on 10 December 1998.

31. According to Koon, he was selling his properties at the time. His agent Au who managed to sell some of the properties of Easy Concepts and Easyknit introduced the defendant to him as a potential buyer for his properties in Hong Kong and China. Hence he went to Shanghai with Au and the defendant. The visit was for Koon to show the defendant the properties he had for sale. Under cross examination, he identified the itinerary prepared by his staff which showed that the visit was orientated for that purpose. There were some handwritten prices against the properties to be visited. Koon's account appears more credible.

32. This receipt was not written or printed contemporaneously at the time of his discussion with Koon on 13 December 1998. It was pre-printed and presumably brought over from Hong Kong and given to him in the hotel room in Shanghai. If it was prepared in Hong Kong, it was pre-dated 13 December 1998 and the amount was pre-printed and not after verification with the individual loan receipts. There is nothing to suggest that it was printed in the hotel or in Koon's office in Shanghai. It is inherently improbable for Koon to have so prepared the receipt without checking if the amount of outstanding loan tallied with the individual receipts.

33. It is an admitted fact that the signature of Koon as appearing on that receipt is a photocopy of a facsimile signature of Koon appearing in the Annual Reports of Easyknit. It is also improbable that for someone to use his facsimili signature on a document except in some printed copies such as company reports. Anyone seeing a receipt with a printed signature and not a handwritten one would have rejected it. Both Koon and the defendant are big businessmen. One wonders why Koon would have printed instead of signing his signature on the receipt and why the defendant would have accepted a receipt with a printed signature.

34. There could be two possibilities. First, the master receipt was a fabrication by the defendant lifting Koon's signature from the annual report of Easyknit. The other is that Koon deliberately set a trap to deceive the defendant into returning the individual receipts for the worthless master receipt with a printed signature which would most unlikely be given any weight in a court of law.

35. Mr Swaine SC submitted that the master receipt (Exhibit D-1) and the list of property (Exhibit D-2) were not raised until recently and were recent concoctions. Mr Grossman SC ingeniously argued that the receipt suffered the fate of all receipts when a matter has been settled and became lost or misplaced. He also argued that the defendant and Li had mentioned them to their solicitors but it is a matter for the solicitor to decide whether to mention them in the affirmations used in the earlier proceedings. I do not think it necessary for me to find who has the better wisdom. The fact is on my finding there was no visit to the 2nd plaintiff's company on 15 December 1998. The defendant's evidence that he returned the original master receipt to Koon on that day is therefore not to be believed. Neither could I give any weight to a copy of that master receipt when I am not satisfied as to the existence of the original receipt. Of the two possibilities I mentioned above, it is more likely than not that Exhibit D-1 is a fabrication by the defendant.

The list of property: Exhibit D-2:

36. The defendant also relied on Exhibit D-2 which is a list of property given to him by Koon in Shanghai together with the receipt, Exhibit D-1. On the list is an endorsement acknowledging the RMB 30 million yuan loan. The endorsement on the list was written before it was handed to the defendant.

37. Koon denied that the endorsement was written by him. His version of the event is that the list was prepared by him at the request of his property agent Au who wanted to be armed with some sort of evidence that he has authority to negotiate for the sale of Koon's properties. He stamped the list both at the top and at the bottom. He gave the original to Au which became Exhibit D-2 and made a photocopy. He then discussed with Au about the sale of the properties in the list and made certain remarks, signs and different colour high-lighting. There is no acknowledgement of any loan on this copy which is produced as Exhibit P-3. He could not explain how the original copy has found its way to the defendant and how the endorsement came to be on the list.

38. Interestingly, this is the reverse situation of Exhibit D-1. Here the defendant has the original document and Koon seeks to prove using a copy that the original has been tampered with by the defendant adding an endorsement which never was on the original. It is inexplicable that Koon would have prepared this list beforehand and written down the endorsement without first reaching a consensus with the defendant and then writing that down in the defendant's presence. Further, if Koon was minded to type a printed receipt beforehand, why didn't he have the endorsement properly typed as well, and why should he casually add the endorsement on the list.

39. The list does not logically fit into the scene. According to the defendant's evidence, Koon initially offered to repay by shares, then Koon changed his mind and said he would pay by cash in Shanghai. That is already illogical for reasons as explained above. Then, according to the defendant, in Shanghai Koon offered his properties in settlement. If in fact Koon wanted to settle by sale of his properties, the parties only had to pick and choose the properties and settle the valuation. Why should Koon write down the endorsement? The endorsement suggests that the defendant and Li may set their minds at ease about the loan as Koon is a person of wealth with shares and properties which would supply the securities needed for the loan to continue. Impliedly the purpose of the list is to ask the defendant and Li not to call on the loan. The list with the endorsement just does not fit into the scenario.

40. The defendant and Li have proven to be incredible about the events on 15 December 1998, the purpose of the Shanghai trip and the master receipt. The list with the endorsement is also straining on the defence case. On the other hand, no handwriting expert was called to support Koon's evidence that the endorsement was not written by him, though such an expert was engaged to prove that the signature on the master receipt, Exhibit D-1, was a facsimile. No explanation was given as to why Au was not called. However, having regard to all these, I find, on balance, Koon's evidence more credible. On his account, if Au would have given the list to the defendant, it is unlikely that Au would be a good witness to be called for the plaintiffs.

Lam's shares v Defendant's receipt of the loan:

41. Lam started accumulating shares in Easy Concepts in August 1997. He had 20 brokers and he traded through five or six of them in relation to Easy Concepts shares. In January 1998, following the collapse of a brokerage firm, he became concerned about the creditworthiness of his brokers and he transferred most of his shares from those brokers to OCBC Securities (Hong Kong) Limited, which is a member of the OCBC Bank Group. He then transferred 30 million shares from OCBC Securities (Hong Kong) Limited to the 2nd plaintiff for the purpose of completing the sale. He was able to produce monthly statements from his brokers since July 1997 showing his acquisition of most of the shares until their transfer to the defendant through the 2nd plaintiff. He was able to trace about 75% of the shares which eventually were transferred to the defendant.

42. He was unable to produce monthly statements from one of his brokers, Jin Loong Securities Company Limited which had closed down. He wrongly included 114,000 shares, which after a ten for one split became 1,140,000 shares, held in Magnum International Securities Limited as among the 30 million shares transferred. Under cross examination, he said he acquired all his shares through the Stock Exchange. He was mistaken as 0.992 million shares, which after the ten for one split became 9.92 million shares, were acquired through private placement through ASG Brokerage Limited. He was again proven to be wrong when he said that he paid the ASG Brokerage Limited for the shares when the truth was that he paid Easy Concepts direct.

43. Mr Grossman SC criticized Lam for not being able to account for the source of about 25% of the shares and for the inaccuracies in his evidence about the source of the shares. In my view, the 25% of the shares which he was unable to account for is of a small proportion. His mistake about the 9.92 million shares obtained by placement is an innocent one. He had nothing to hide and the necessary documentation based on which Mr Grossman SC was able to cross examine had been fairly disclosed during discovery. Given the passage of time, Lam's difficulties in obtaining full documentation in respect of each and every one of such a large quantity of shares is understandable. So too is his failure in recollecting whether he purchased the 9.92 million shares or subscribed for them through private placement. Furthermore, there is nothing unusual for a subscriber to pay the company direct or to pay through a broker. I do not think Mr Grossman SC's criticism in this respect justified. I am satisfied that Lam was the owner of the shares transferred to the defendant and that he had acquired them since August 1997. But in contrast, the defendant is unable to provide any satisfactory evidence of receipt of the loan or satisfactory account for the lack of original master receipt.

Lam's source of funds for shares v Defendant's source of funds for loan:

44. Lam produced bank statements which showed that most of the shares were acquired by funds from his bank account. Though the statements are incomplete, they showed the source of funds in respect of most of Lam's acquisition. An analysis of these statements by Mr Grossman SC showed that during those three months over $155 million was deposited into his accounts, of which $73.6 million was in cash. Lam explained that the cash flow was the result of his regular share trading activities. That is certainly true to a large extent. But his explanation as to why $73.6 million of that cash flow was in cash lacks credibility. He said that the cash deposits emanated to a significant extent from a circle of borrowings from his friends. Members among this circle helped each other in their share trading activities. Money was lent on the strength of post dated cheques or pieces of receipts and returned or destroyed when repaid. He was unable to give any account of those borrowings or repayments or his own loans to his friends in the circle. These deposits were not by way of inter or intra-bank transfers, or by money orders, or cheques or marked good cheques. They are all by way of cash over the counter and in millions of dollars. In particular, there was a cash deposit of $11,953,136.52 into his account to pay for the private placement of the 992,000 shares mentioned above. He could not remember who lent him the money but the deposit matched the amount required for the private placement down to the cent. There must be more that he was not prepared to disclose.

45. As for the defendant's source of the funds from which the loans to Koon were made, he said that they came from his various businesses in China and as and when necessary, he would purchase RMB in Hong Kong with funds from his companies. The RMB from China were either brought over from China by his staff or through "window companies" of Chinese enterprises. I have no doubt that he would have a supply of RMB from his businesses in China. But he and Li admitted that when that was not enough they would purchase RMB locally.

46. In response to the plaintiffs' request, the defendant's solicitors gave a handwritten list of withdrawals and deposits from the accounts of the defendant's various companies prepared by Li saying that the withdrawals and deposits represented respectively part of the cash provided to and repaid by Koon. Thus impliedly each and every item on the hand written list prepared by Li is related to the loan but the list is not exhaustive. The total amount of withdrawal was $43.5 million while the total amount of deposit was $17.6 million, with a shortfall of $25.9 million representing presumably part of the $30.5 million outstanding loan. However, under cross examination, the defendant said only a few of the transactions in the list were related to the loan and repayment. Neither he nor Li who prepared the list could explain why his solicitors would have represented that the deposits and withdrawals on the list represented part only of the loans and repayment and not that only some of the transactions on the list are related to the loans and repayment. Li cannot explain why he did not isolate the relevant transactions before passing the information to his solicitors. This reflects that neither the defendant nor Li had quite made up their minds what their defence is and are changing in their evidence.

47. An analysis of the list shows that in respect of 11 of the 15 deposits, there were corresponding withdrawals of identical amounts from the account of another of the defendant's companies on the same day; and in respect of 2 of the deposits, there were also corresponding withdrawals of similar amounts from the account of another of the defendant's companies on the same day. That leaves only two deposits without a corresponding withdrawal from an associated company's account. On my analysis, these 13 deposits were just inter-company transfers to reduce the overdraft in overdrawn accounts. I find that the list was produced with the purpose of pulling wool over my eyes. I do not find the defendant and Li credible.

48. On this comparison, Lam is able to show substantially that the money used for the acquisition of the shares came from funds in his account, but there is some doubt as to who really was the owner of those funds. But the defendant is unable to satisfy me that funds from his accounts have been used to purchase RMB for Koon and that Koon's repayments were deposited into his accounts as alleged.

Improbability of the 1st plaintiff's agreement for sale:

49. Mr Grossman SC argued that it is improbable that anyone in his senses would have entered into such an agreement with someone who is almost a total stranger and parted with shares worth $30 million without payment or security or any document as evidence of the agreement. Mr Swaine SC comes to Lam's rescue by submitting that the defendant is a friend of Koon. Koon was himself a big businessman, being the chairman of Easy Concepts and Easyknit owning substantial property in Hong Kong and Shanghai. He was told by Koon's staff that the defendant was in the property business and doing big business. He was told the same by Koon whom he trusted.

50. Mr Grossman SC attacked the terms of the alleged agreement as being vague and senseless. He asks what if there had been partial payment, why the defendant was obliged not to sell even if there had been partial payment, what if the defendant got killed before payment or pledged the shares, and why not keep the shares in the broker's account until payment. These are very sensible questions for which a well advised party would have sought legal advice in view of the magnitude of the transaction and would have reduced the answers in a written contract. I do not think there could be any sensible answers to these rhetoric questions because the agreement is not one which any sensible person in his senses would have entered into, and neither would I.

51. The only question in these series of questions raised by Mr Grossman SC that could be answered is why Lam was willing to sell at $1 and for deferred payment when the market price was $1.20. Lam explained that the market was very thin. If 30 million shares were released into the market, the price would drop to about 80 cents and the average price of $1 was not unreasonable.

52. Mr Grossman SC criticised Lam's and Ng's evidence as to the circumstances under which the agreement was made because they bear no relation to the further and better particulars given. According to the particulars dated 3 May 2000, the agreement for the sale and purchase of the shares was made over the telephone. Mr Grossman SC submits that these particulars are fundamental contradictions of the evidence of Lam and Ng. However, the plaintiffs have obtained leave from a master on 19 May 2000 to serve further particulars which are consistent with the plaintiffs' evidence at trial. From the proximity of the two dates, it is obvious that the particulars dated 3 May 2000 was the result of a misunderstanding of client's instruction which the plaintiffs' solicitors promptly rectified. I do not think any criticism should be attached to the honesty Lam or Ng because of those inaccurate particulars.

53. As part of his submission on improbability of the agreement Mr Grossman SC argues that Lam's failure in pursuing the defendant is inexplicable. He did not take action even when the defendant hanged up the telephone when he pressed for payment. I think Lam has monitored the situation closely and took action to under cut the defendant's sale of the shares and instituted the present action in August which was less than two months when the payment should have been made. I also consider his asking Koon, a common friend, to press the defendant for payment reasonable.

54. Mr Grossman SC submits that the compensation of $9 million represents an interest at the rate of 60% per annum. He argues that it is extravagant and unconscionable and cannot be a genuine pre-estimate of Lam's potential loss but a penalty which is irrecoverable at law. Apart from the question of penalty, Mr Grossman SC submits the term for compensation renders it unlikely that there was such an agreement and that the defendant had agreed to it.

55. With respect, I cannot agree. If I am to accept Lam's evidence, the sale is not an outright sale, but a conditional sale. The market for the shares was thin and price could be very volatile, particularly for this type of shares. Movement by 50% either way would not be a surprise. If the value of the shares appreciated, the defendant would reap a profit and would have no problem paying, selling and profiting from the transaction. But if the value of the shares depreciated by 30% to 50%, he would be losing $9 to $15 million. If there was no market for these shares, his loss would practically be the entire investment of $30 million. Under the terms of this conditional sales agreement, the defendant was at liberty after six months to return the shares and pay $9 million and thereby limiting his loss and passing the loss in excess of $9 million with the shares back to Lam. Lam bore the risk of a drop in the value of the share beyond 30%. If the agreement was an outright sale, I would agree with Mr Grossman SC's entirely. In the case of an outright sale, the seller's right is in the price agreed and the compensation representing an exorbitant amount of interest must be a penalty.

56. Lam and defendant are experienced speculators. They knew the nature of the risk involved in a transaction involving shares of this nature. The compensation was not intended to compensate for being kept out of the money but for risk in a falling market. Hence interest rate consideration is irrelevant. I find the compensation a genuine pre-estimate of Lam's loss, if I am to accept there was an agreement for the sale and purchase in the terms as Lam said in his evidence. The agreement is not at all improbable in this light. Indeed it would be improbable to have such an agreement without a provision for liquidated damages.

Improbability of the loans to Koon:

57. Koon denied having borrowed any money from the defendant. He admitted that he or his companies had cash flow problem but seemingly he managed with selling some of his properties and winding up Shui Hing department store in Shanghai. On the other hand, at the material time, both the defendant and Li were facing a multitude of legal actions from banks and financial institutions. The defendant said that the actions were related to facilities by their companies and they were sued as guarantors when the value of the properties used as security fell below the outstanding loans. He had reached some sort of a settlement with the banks and financial institutions by selling some of the properties. I have no doubt this was so. It was a common phenomenon among businessmen at the time, particularly those who had investment in properties. The actions may be related to the defendant's inability to top up the value of his collateral. I would not draw any adverse inference against him in respect of those actions.

58. However, there was a writ issued against the defendant by the Commissioner of Inland Revenue on 14 July 1998 for $111,510 in respect of outstanding tax. Before the writ was issued, there must have been a series of reminders and letters before action. It is difficult for these to have been ignored or overlooked. All these happened at a time when the defendant said he was making RMB 30.5 million yuan loan to Koon. If he could not pay $111,510 tax, it is hardly convincing that he could have thirty times that amount to lend to anybody.

59. Likewise, there were two writs issued on 4 February and 28 July 1999 in respect of outstanding instalments of the defendant's Mercedes Benz. In respect of the former writ, he was sued for $103,350 in respect of three outstanding instalments since 3 November 1998. He was sued again under the same hire purchase agreement in the amount of $68,900 in respect of two outstanding instalments since 3 May 1999. His explanation that he defaulted payment as he was intending to sell his car is hardly credible, not at least when he defaulted on the second occasion. Obviously, he settled or paid the outstanding amount under the first writ with costs and then he defaulted again. Though these two actions were in respect of debts incurred after August 1998 when the alleged loans were made by him to Koon, they show that he was impecunious at about that time.

60. His partner Li faced similar actions from banks and financial institutions in respect of their companies' debt which he guaranteed. But in addition, he had three writs from the Commissioner of Inland Revenue issued on 13 June 1997, 24 November 1998 and 17 August 1999 in respect of outstanding tax in the amounts of $24,570, $18,942 and $7,161 respectively. He put the blame on his staff's default for three consecutive years. Given the usual reminders and letters before action, I think he had adequate notice of his outstanding tax but was unable to pay them. I have serious doubts whether in the months before November 1998 when the demand for tax must have arisen he and the defendant had the funds to lent to Koon.

Koon's involvement:

61. Mr Grossman SC submits that Koon's fingerprints are everywhere on this transaction. He put Lam and the defendant together on two occasions in his factory to discuss the sale and purchase. On his evidence, he enquired Lam if he had made up his mind and Lam asked him about the defendant's creditworthiness. He introduced the defendant to the 2nd plaintiff to open an account and the transaction was completed through his broker. Of course, I would have no doubt that at the time the defendant had his own brokers. Lastly, Lam also asked him to chase the defendant for payment.

62. All these are not in dispute and one wonders why he was so involved. At the time he had a close relationship with the defendant. The defendant had indicated interest in buying his properties and had obtained valuation reports in respect of some of his properties from surveyors. He trusted the defendant so much he gave him copies of his passport and tax returns for the defendant to negotiate for finance in respect of his acquisition of properties in Singapore. He is a common friend of Lam and the defendant and instrumental to their agreement. In the circumstances, it is reasonable that he introduced the 2nd plaintiff to the defendant so as to reduce the commission for the cross trade between Lam and the defendant. Having considered the totality of the evidence, I think his involvement is not inexplicable in the circumstances.

Finding:

63. I am faced with two accounts, both are inherently improbable. Lam has proven to be evasive as to the source of funds for the acquisition of the shares and in particular as to the identity of the mysterious person who funded the private placement of 992,000 shares, which after the split became 9,920,000 shares. At the time, apart from holding shares in Easy Concepts, he held a significant amount of shares in Koon's other company, Easyknit. This suggests his relationship with Koon is closer than what the two of them were prepared to admit. As the defence unfolds, this relationship is one of the two crucial issues of the defence, namely firstly that Lam held the shares in trust for Koon and secondly Koon transferred the shares through the plaintiffs to repay his loans.

64. On the other hand, the defendant's account is also improbable. He was obviously impecunious at the time. He was hard pressed by banks and financial institutions because of the drastic drop in value of the properties he used in securing banking facilities. He was being sued as guarantor under a number of those loan agreements. He did not even have money to pay his tax of $111,510. He was being sued in respect of arrears in his motor car instalments. His story that he was delivering paper bags containing millions of yuans in RMB to Koon is hardly believable. His bank statements do not support his story of withdrawals and deposits related to the lending and repayment. Worst still, his story is tainted by his dishonesty in fabricating the copy of master receipt, Exhibit D-1. It is unlikely that he would have RMB 30 million yuan to lend to Koon or had in fact lent Koon that amount of money.

65. Starting as I did with the uncontroverted account opening document dated 10 December 1998, I accept Ng's evidence and reject the defendant's about attending the 2nd plaintiff's company on 15 December 1998. I find that he concocted the evidence relating to the events on 15 December 1998 so as to explain away the lack of receipts in support of the various loans he allegedly made. I am then driven to the conclusion that the defendant dishonestly fabricated Exhibits D-1 and D-2.

66. Weighing that against the Lam's attempt to conceal his true relationship with Koon, I find the defendant's dishonesty fatal to his defence. Lam and Koon may have other, though certainly not commendable reasons, for concealing their relationship. Lam may even be holding the shares for Koon so as to enable Koon to avoid restrictions under the securities regulations or Lam had engaged in insider dealing activities. Mr Grossman SC suggests that Lam may be engaged in money laundering. But all these are irrelevant so far as the rights between the plaintiffs and the defendant are concerned, especially if in the ultimate analysis I am not satisfied that Koon was indebted to the defendant.

67. In the end, the ultimate issue, as I have identified in the beginning, is a finding between two alternatives, did Koon owe the defendant $30 million or did he not. If I am satisfied that he did, the plaintiffs fail. If I am satisfied that he did not, then the rest of the defence falls apart and it is more likely than not that the shares were sold under the circumstances as described by Lam. Then Lam's concealment of his relationship with Koon becomes a non-issue.

68. On the facts, I reject the defendant's evidence that Koon agreed to transfer the shares to repay his loan of $30 million. This then makes it likely that the defendant had entered into the agreement as alleged by Lam. The plaintiffs' case is firmly anchored by the defendant's account opening document dated 10 December 1998 and by Lam's authorisation to Ng which shows that he has agreed with the defendant that the defendant need not pay the purchase price at once. That is a contemporaneous document the authenticity of which was not challenged. What is said in the authorisation could not have been a recent concoction. That buttresses the plaintiffs' case that Lam had agreed with the defendant for payment within six months.

69. Though I agree that Lam's behaviour is bizarre, in the light of the evidence as I analyse them, I am satisfied that he and the defendant had entered into the agreement on the terms as Lam alleged. Sometimes, human conduct is incapable of rationalisation. Lam was obviously impressed by the defendant's charisma and influenced by what he had been told by Koon and his staff. On the contrary, the defendant's case is more inherently improbable than the plaintiffs'. His account is built on improbabilities upon improbabilities. Unless Koon, Lam and Ng had put their heads together and set up this very well thought out plot to deceive the defendant, which includes fabricating the authorisation as a contemporaneous document, using a receipt with a facsimile signature to deceive the defendant into surrendering the individual loan receipts and setting yet another trap within this trap for the defendant to walk into by producing Exhibit D-1 thereby destroying his credibility in court, otherwise the defendant's account is impossible. I reject the defendant's evidence and find that the facts were as related to me by Lam. I am satisfied that the plaintiffs have discharged their burden of proof.

CONCLUSION:

70. The plaintiffs claim for the price of the shares or in the alternative their return with compensation and damages for conversion in respect of the 3,200,000 shares sold. I do not think there is any legal basis for awarding the 1st plaintiff with the price when the agreement itself provided for return of the shares if not paid within six months. The 1st plaintiff does not have any option to choose. As the defendant failed to pay within the six months time for payment, justice would require that the defendant shall perform and the 1st plaintiff shall accept performance of the contract in accordance with its terms, i.e. return of the shares with $9 million compensation. The defendant has sold 3,200,000 shares. As Lam has said that it was in his contemplation that even if there had been partial payment, he would still be entitled to full compensation, thus the compensation must be treated as a whole and could not be apportioned. I think it is only right that the parties should be put in the same position as if the contract had been performed in accordance with its terms. The 1st plaintiff shall be entitled to the return of the entire quantity of shares and the compensation and if any of his shares has been sold, he shall be entitled to damages in conversion in respect of the shares sold,

71. 3,200,000 shares had been sold at a profit. The market price of the shares has now fallen to just $0.40 at the conclusion of this trial, far beyond what the compensation has allowed for. Should the defendant be permitted to benefit from his own wrong now that the value of the shares has fallen substantially by keeping the difference between the price at which he sold and the present market value or should he account for the proceeds of sales to the 1st plaintiff whereby the 1st plaintiff will obtain the benefit of the defendant's "foresight" or luck in selling? In my view, public policy requires that no wrong doer should be permitted to benefit from his own wrong. This is a principle which could not be compromised otherwise it will seriously affect the way people conduct their affairs. If the defendant were allowed to keep the profit, the law would be encouraging people to bet on their luck by their tortious conduct. In fact, by the defendant's refusing to return the shares, Lam was denied the opportunity of selling them if he wished and benefit from the market himself. I do not think requiring the defendant to account for the proceeds of sale could be treated as a double benefit for the 1st plaintiff.

72. Accordingly, I make the following orders:

(1) The 26,800,000 shares in Easy Concepts Stock Number 241 be transferred to the 1st plaintiff;

(2) All costs of transfer, including stamp duty, shall be paid by the defendant;

(3) The defendant shall pay the 1st plaintiff $9 million as compensation;

(4) Damage for the defendant's conversion of the 3,200,000 shares of Easy Concepts sold be assessed as the balance of the proceeds of sales inclusive of interest accumulated thereon, which shall forthwith be released to the 1st plaintiff;

(5) The defendant shall pay the 1st plaintiff interest on the said sum of $9 million at judgment rate from 9 August 1999 until payment;

(6) The defendant's counterclaim be dismissed; and

(7) The defendant shall pay the 1st and 2nd plaintiff's costs, with certificate for two counsel, to be taxed if not agreed.