FIRST LASER LTD v. FUJIAN ENTERPRISES (HOLDINGS) CO LTD AND ANOTHER

HCA 4414/2001

[2020] HKCFI 2536

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4414 OF 2001

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D E C I S I O N

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Introduction

1.  This is the Defendants’ application for stay of execution of my judgment handed down on 8 April 2020 against them in favour of the Plaintiff in the sum of HK$250,168,048 with interest and costs. 

2.  The action had a long history.  The Plaintiff (“First Laser”) is a company incorporated in Macau.  The Defendants are “window companies” of the Fujian Provincial Government of the People’s Republic of China.  The Plaintiff commenced this action in October 2001, suing under the First Laser Agreement claiming that it is the beneficial owner of 51% of the shares in Fujian Casix Laser Inc (福建華科光電有限公司) (“FCL”) held by the 1^st Defendant (“FEHC”), which FEHC sold, together with its own 49% interest, to JDS Uniphase China Holdings Company for US$60 million.  The proceeds of sale were remitted to the Fujian Provincial Government through the 2^nd Defendant (“Jian An”), save for US$9 million which was subsequently paid into court pursuing to an order of this court.  On 5 February 2008, I handed down judgment in favour of the Plaintiff.  On 4 January 2011, the Court of Appeal allowed the Defendants’ appeal and remitted the issue of restitution to this court for determination under Mainland law.  The Plaintiff’s appeal to the Court of Final Appeal was dismissed on 6 July 2012.  On 8 April 2020, I handed down judgment against the Defendants in favour of the Plaintiff in the remitter proceedings (“Remitter Judgment”).  The Defendants appeal my Remitter Judgment and apply for stay of execution pending appeal.

The applicable legal principles on stay of execution

3.  The legal principles applicable to stay of execution are well established: see Star Play Development Ltd v Bess Fashion Management Co Ltd[1], per Ma J, as he then was.  Prima facie, a successful litigant is entitled to have the fruits of the litigation.  Unless an applicant can justify a stay of execution, one will not be granted.  The burden is on the applicant to justify a stay by showing that there are good reasons for a stay.  The starting point is the existence of an arguable appeal.  The existence of a strong ground of appeal or strong likelihood of success on appeal is by itself a good reason for stay.  In the majority of cases, it is undesirable and unnecessary to go deeply into the merits and strength of an appeal.  If an applicant only has an arguable appeal, he will have to provide additional reasons as to why a stay is justified.  But, even where a compelling reason is shown, the question remains a matter for the court’s discretion upon balancing the risk of injustice to the parties which an order for stay or a refusal to make such order would cause: see Sunico AS & Ors v Revenue and Customs[2] and Hammond Suddard Solicitors v Agrichem International Holdings Ltd[3].

4.  In Hammond Suddard, Clarke LJ (as Lord Clarke then was) held that in considering whether an appeal will be stifled if a stay is refused, the court takes a holistic approach and considers all the circumstances of the case including balancing the risk of injustice to the applicant against that to the respondent, first one way and then the other as in the case of making an interlocutory injunction.  In particular, the court considers what are the risks of the appeal being stifled if a stay is refused?  What are the risks of the applicant being unable to recover monies paid from the respondent, if the stay is refused and the appeal succeeds but the judgment has been enforced in the meantime?  On the other hand, what are the risks that the respondent will be unable to enforce the judgment as a result of assets having been dissipated during the interim period between stay and the determination of the appeal, if a stay is granted and the appeal fails?  To guard against such risks of injustice, the court may impose conditions, such as payment of the judgment sum or such part of it into court or furnishing adequate securities by either or both parties.

5.  Mr Yu SC, leading counsel for the Defendants, submits that the principles discussed in Hammond Suddard and the line of authorities cited by Mr Chan SC, leading counsel for the Plaintiff, are not relevant as Hammond Suddard is a decision based on the CPR rules 52.3 and 52.9 in the United Kingdom (“UK”) of which there are no equivalents under our Rules of the High Court.  CPR rule 52.3 provides that permission to appeal is required in a case such as that one before the UK Court of Appeal.  CPR 52.9 is about payment of or security for the judgment debt as a condition for permitting an applicant to proceed with his appeal.  In the present case, leave to appeal is not required.  The Defendants may appeal as of right. 

6.  With respect, the distinction is more apparent than real.  The requirement under CPR rule 52.3 would be met by the applicant showing the existence of a strong ground of appeal or strong likelihood of success on appeal.  The same is required under our legal principles even in the absence of an equivalent provision under the Rules of the High Court.  Putting CPR rule 52.3 aside, the legal principles applicable to stay of execution under the law in the UK and in Hong Kong are the same. The Hong Kong court’s power to impose conditions when ordering a stay of execution is practically the same as its counterpart’s in the UK under CPR rule 52.9.  There is no reason why the rationale behind the legal principles applicable to CPR rule 52.9 should be any different from those for granting conditional stay of execution in Hong Kong.  The applicable legal principles must also be the same.

7.  A commonly recognized good reason for granting a stay of execution is that an appeal will be stifled or rendered nugatory without a stay.  The most common ground relied on by the applicant is its own impecuniosity.  A judgment on the merits has been obtained against the applicant.  As the starting point is that a litigant is entitled to have the fruits of his litigation, the applicant not only has the burden of showing that his appeal will be stifled without a stay, he has to adduce compelling evidence in support and he has to be full and frank in his evidence.  He may not disclose just partial or superficial facts and let the truth be hidden in what is untold.  He has to adduce cogent evidence that there is a real risk of injustice if enforcement is allowed to take place.

8.  In considering the applicant’s impecuniosity, the court does not just look at the balance sheet or the means of the applicant alone, but also considers whether the applicant has other resources or access to other resources which would enable it to pay the judgment debt: see Hammond Suddard[4], Sunico[5]and Hearst Holdings Inc & Anor v AVELA Inc & Ors[6].  Mr Yu SC referred to my previous decision in this case[7] in which I declined to extend the principle in Yesland Limited & Others and China Furniture City Limited[8] of requiring a company’s directors and shareholders to provide security for costs in such an application to an application for stay of execution because of the principle of corporate personality.  I was not informed of the Hammond Suddard line of authorities which are directly on the point.  My previous decision was obviously per incuriam.

9.  In an appropriate case, it is open to the court to also look at the means of those behind the applicant who have an interest in the appeal, such as its backers and those who have been funding the litigation, or in the case of a company, its shareholders and directors.  These people clearly have an interest in the appeal succeeding.  They are also the best judges (and, in my view, even better judges than the applicant’s legal team) of the chance of success of their appeal and the risk of prejudice.  If even these interested people would not lend financial support to the applicant in prosecuting the appeal, it may well be that they are not as optimistic about the chance of success as represented by the applicant to the court.  Of course, that may well be a commercial decision than anything else after balancing their view of the prospect of success against the costs of pursuing the appeal including paying the judgment debt if stay is denied and having to pay further adverse costs if they lose. 

The grounds of appeal

10.  The Defendants’ notice of appeal is a 49-page document containing 79 paragraphs attacking almost every one of my decisions in the Remitter Judgment.  I shall comment briefly on what appears to be the strongest grounds relied on by the Defendants.

11.  First, the Defendants complain that the Plaintiff should not have been permitted to run a new case.  I have dealt with this issue fully under the sub-heading of “Whether First Laser is running a new case beyond the remitter” in paragraphs 97 to 101 of the Remitter Judgment.  I am conscious of the fact that the Plaintiff’s claim is founded on a new or different agreement, but this agreement is precisely what formed the basis of the restitution claim which is remitted to this court for determination.  The factual basis of the Plaintiff’s claim is the same First Laser Agreement, the Hang Wo Agreement, the COM Agreement (collectively, the “three agreements”) and the 1998 Memorandum which were held by the Supreme People’s Court and the Court of Final Appeal to be of no effect.  There is no substance in this ground of appeal.

12.  Second, the Defendants complain about a lack of pleading of the existence of the nominee investment agreement.  I recognise the force of this argument at the remitter hearing.  I did not shy away from the fact that the Plaintiff’s pleading is unsatisfactory.  I have dealt with this issue fully under the sub-headings of “What has First Laser to plead and prove” and “Has First Laser’s case been adequately pleaded”in particular in paragraphs 102 to 116 of the Remitter Judgment.  There are two thrusts in the Defendants’ complaint.  First, they argue that the Plaintiff has to plead and prove that it has obtained a finding by a Mainland court that the nominee investment contract was of no effect.  I disagree with such a restrictive view and have dealt with it fully in paragraphs 104 and 105 of the Remitter Judgment.  Second, the Defendants complain that the Plaintiff’s case has not been adequately pleaded.  The difficulties facing by the Plaintiff were caused by the fact that the action commenced 19 years ago on a different basis or claim and that there was a change in the Mainland law in the meantime.  I have dealt with this complaint fully in paragraphs 107 to 116 of the Remitter Judgment.  There is no doubt that First Laser has impliedly pleaded a nominee investment contract and the Defendants knew what case it had to meet and responded appropriately.  The Defendants have not been prejudiced. This complaint is highly technical and artificial.

13.  Third, the Defendants complain that there was an absence of primary evidence as to the existence of the nominee investment agreement.  I have considered such evidence fully in paragraphs 183 to 202 of the Remitter Judgment.  A “nominee investment agreement” is a legal concept under Mainland law.  There is incontrovertible evidence on which the existence of the nominee investment agreement may be inferred.  I have fairly considered the expert evidence of the parties and accepted the evidence of the Plaintiff’s expert.  That is a finding of fact, which cannot be said to be palpably wrong.

14.  Fourth, the Defendants complain that this court erred in holding that there was no need for a prior ruling that the nominee investment is void.  I have dealt with this in paragraphs 102 to 116, 205 and 206 of the Remitter Judgment.  The remitter was predicated upon the three agreements and the 1998 Memorandum all being held void.  These facts are not disputed.  As the nominee investment agreement stands or falls with these three agreements, it must necessarily be void and of no effect.  For reasons as explained in paragraphs 102 to 116 of the Remitter Judgment, there is no basis in the Defendants’ argument that this court has no jurisdiction to make a finding on whether the nominee investment agreement was void and that the nominee investment agreement must have been found to be void by a Mainland court before this court has jurisdiction to order restitution.

15.  Fifth, the Defendants heavily attack the Remitter Judgment on the basis that this court has made findings which are incompatible or inconsistent with previous ruling and/or finding of the Court of Final Appeal.  In paragraph 147 of the Remitter Judgment, I have reminded myself that the findings of the Court of Final Appeal are binding on me and have steered carefully within permitted waters.  In paragraphs 147 to 172, I considered the five findings of the Court of Final Appeal.  I accepted those findings and did no more than explaining the truth underlying those findings which is fully supported by incontrovertible evidence and evidence from the Defendants.

16.  In particular, the Defendants attack paragraph 133 of the Remitter Judgment in that my finding of the spirit of the First Laser Agreement is inconsistent with the Lord Collins NPJ’s finding that “the overall picture is that the terms of the joint venture agreement were never agreed and that decisions were made on ad hoc basis; and that the parties/ relationships were constantly shifting”.  That the terms of the joint venture agreement were never agreed does not mean that there was no agreement in principle reached or that the spirit of the First Laser Agreement could not exist.  The fact that decisions were made along the lines of the First Laser Agreement on ad hoc basis is evidence of the existence of the spirit of the First Laser Agreement.  The 1998 Memorandum expressly mentioned “the spirit of the First Laser Agreement”.  It is the best documentary evidence of the existence of the spirit of the First Laser Agreement.  From the paragraphs I quoted above, it can be seen that the parties conducted their affairs in accordance with the spirit of the First Laser Agreement.

17.  In my view, the grounds are no more than repetitions of arguments already considered and rejected by this court after careful deliberation.  I am not satisfied that there is any substance in these grounds of appeal.  I am conscious of the difficulties of being one’s own judge.  Since leave to appeal is not required, I respect the Defendants’ right to appeal.  I am prepared to proceed on the basis that the Defendants have an arguable appeal.  But, in my view, no palpable errors have been identified by the Defendants.  I am unable to come to any view that there is such a strong likelihood of success in this appeal that upon sight of the grounds of appeal the Defendant is entitled to an unconditional stay.  This appeal is not one for which the successful Plaintiff should be delayed of its fruits of the litigation.  The Defendants are at best only entitled to a conditional stay of execution.

FEHC’s resources or access to resources

18.  The Defendants argue that in the absence of any stay of execution pending appeal, they would suffer deleterious consequences rendering the appeal nugatory.  They rely on the financial reports of FEHC and Jian An for the year ended 31 December 2019 (respectively, the “2019 FEHC Report” and “2019 JA Report”) and 31 December 2018 (respectively, the “2018 FEHC Report” and “2018 JA Report”). 

19.  The financial position of FEHC for the three years ending 31 December 2017, 2018 and 2019 as shown in the 2018 and 2019 FEHC Reports is as follows:

	Note	2019  (HK$)	2018 (HK$)	2017 (HK$)
Asset
Fixed asset:
Motor car		901,082	335,680	475,159
Properties		236,714	249,470	262,227
Investment in subsidiaries	12	100	100	100
Current asset:
Cash at bank		337,845	432,014	194,094
Receivables	13	2,091,176	2,058,596	2,029,693
Total asset:		3,566,919	3,075,862	2,961,273
Liabilities
Capital and reserves		30,000,000	30,000,000	30,000,000
Accumulated loss		-2,326,964,749	-2,323,452,679	-2,357,592,787
Deficit in net asset		-2,296,964,749	-2,293,452,679	-2,327,592,787
Accounts payable	16	-1,516,021,156	-1,512,018,030	-1,546,043,550
Estimated liabilities	17	-784,510,511	-784,510,511	-784,510,511
Total liabilities		-2,300,531,668	-2,296,528,542	2,330,554,061

20.  These reports paint a hopelessly impecunious picture with a deficit in net asset in the amount of HK$2,296,964,749 for the year ending 31 December 2019.  The deficit consists of accounts payable and estimated liabilities in the total amount of HK$2,300,531,668 less total assets of HK$3,566,919. 

21.  Both the 2019 and 2018 FEHC Reports are qualified reports in one very important respect in the circumstances of this case.  The auditors expressed reservation because FEHC did not disclose the consolidated financial statements of its subsidiaries.  The reasons for non-disclosure as stated in Note 12 of the 2019 and 2018 FEHC Reports are that no shareholders had indicated disagreement with the directors’ opinion; that preparation of consolidated financial statements would occasion delay and expenses; and that the consolidated financial statements would not be of significant value to the shareholders.  These may well be good reasons for non-disclosure from FEHC’s shareholders’ point of view.  But, in the context of FEHC’s application for stay, financial information of the subsidiaries is particularly important from this court’s point of view, since practically all the deficits of FEHC are debts and liabilities of its subsidiaries and FEHC is relying on its impecuniosity as a ground for stay. 

22.  However, what is untold in notes 12, 13, 16, 17 and 19 is of significance.  Notes 12 and 13 provide as follows:

Note	Description	2019 (HK$)	2018 (HK$)	2017 (HK$)
12	Investment in subsidiaries:
	Unlisted companies at costs	56,554,415	56,554,415	56,554,415
	Depreciation	-56,554,315	-56,554,315	-56,554,315
	Net investment	100	100	100
13	Receivables:
	Receivables	223,296,737	223,267,111	223,257,848
	Deposits & other receivables	513,112	514,998	514,998
	Receivables from subsidiaries	546,395,970	546,391,130	546,371,490
	Total receivables	770,205,820	770,173,240	770,144,337
	Provisions for bad debts	768,114,644	768,114,644	768,114,644
	Net receivables	2,091,176	2,058,596	2,029,693

The first thing to note is that all but HK$100 investment in the subsidiaries are written off, a sum of more than HK$56 million.  Second, almost all receivables from the subsidiaries are discounted as provisions for bad debts.  Without a consolidated statement, there is no information as to which are the subsidiaries, what are the receivables, why are the receivables not recoverable and why are the provisions for bad debts made. Note 13 appears to be a convenient way of reducing assets of HK$770 million to just HK$2 million.  It does not appear convincing.  These notes raise serious questions as to the true financial position of FEHC. 

23.  Note 16 provides details of trading debts and other accounts payable in the sum of HK$1,516 million.  These liabilities are as follows:

Note	Description	2019 (HK$)	2018 (HK$)	2017 (HK$)
16	Interest payable	659,284,851	659,284,851	659,284,851
	Account payable and fees	58,731,884	54,075,261	53,802,307
	Secured short term loans	466,886,188	466,886,188	499,755,205
	Loans by shareholders	240,862,381	240,862,381	240,862,381
	Current account with subsidiaries	90,255,850	90,909,348	92,338,804
	Total:	1,516,021,156	1,512,018,030	1,546,043,550

Absent explanation, this note does not make sense.   

24.  The total indebtedness as at 31 December 2019 was HK$1,516 million, of which HK$659 million was attributable to interest.  Capital indebtedness was HK$857 million.  The interest payable is a staggering amount equivalent to 76.90% of the capital indebtedness.  It is not known over what period of time was this amount of interest accumulated.  But, what is remarkable is that the interest payable for 2019 is identical to the amount payable in 2018 and 2017.  Was the amount just carried over from 2017 and that no interest was charged since 2017 or even earlier?  Were the loans interest free?  Since when were interest charged?  How was this huge amount of interest calculated or accumulated?  Information is totally lacking.  The interest payable is not supported by any consolidated financial statement.  It appears to be a convenient figure to boost up impecuniosity.

25.  The amount of secured short term loans also raises problem.  These loans totalled HK$466 million.  Since these are secured loans, there must be assets worth more than HK$466 million owned by FEHC being used as security for the loans.  But no such assets are shown in the 2019 FEHC Report.  As discussed below in relation to Note 17, these short term loans were probably bank loans assumed by Fujian Development and indemnified by FEHC.  Again, without a consolidated financial statement, there is no way to know.

26.  According to Note 19, FEHC mortgaged some assets of its subsidiaries worth HK$49 million at costs with Fujian Development as security for the short term loans.  This security could not support short term loans of HK$466 million.  This observation also casts serious doubts on the credibility of the interest and assets as reported in FEHC’s 2019 Report and 2018 Report.

27.  FEHC’s 2019 Report and 2018 Reports were prepared by qualified auditors.  I do not pretend to be qualified to challenge their reports.  On the face, the reports raise numerous apparently unanswerable questions relating to the indebtedness of FEHC’s subsidiaries.  The auditors have expressed reservation in the reports because of FEHC’s deliberate decision not to produce consolidated financial statements with its subsidiaries.  In this case, it is the indebtedness of the subsidiaries which formed the basis of FEHC’s case of impecuniosity for resisting execution.  Perhaps, there may be good answers to the questions I raised.  FEHC’s company secretary who exhibited the reports did not deal with these obviously questionable points in his affirmation.  The applicant for stay of execution bears the burden of proving on cogent evidence that it would suffer deleterious effect if no stay is granted.  FEHC presented financial reports which on the face are of questionable credibility.  They are inherently incredible.  FEHC has been less than full and frank in its evidence.  I can give those reports little weight.

28.  The 2019 JA Report and 2018 JA Report shows that Jian An had no business activities for those two years, fixed assets of HK$100,250 and accumulated loss and debt payable to a related company of HK$138 million.  Jian An is a window company with no trading.  The question which immediately arises is how was this staggering loss incurred.  Note 8 which purports to explain the loss actually offered no explanation or details.  Note 9 indicates that the amount is an inter-company debt.  It is not known who is the inter-company creditor.  The reports do not show a true and fair picture of the financial position of Jian An.  Jian An’s evidence has not been full and frank also.  I can give those reports little weight.

The backers behind the Defendants

29.  Note 17 of the 2019 FEHC Report is interesting.  It reads:

「預計負債

本公司、附屬公司及華閩投資發展有限公司（「華閩發展」）簽定協議書，華閩發展同意為本公司之附屬公司償還銀行債務（「債務」），銀行將有關債務權益轉讓予華閩發展，同時本公司向華閩發展作出擔保，保証華閩發展不會因附屬公司沒有能力償還有關債務而引致損失。由於附屬公司已蒙受嚴重損失，沒有能力償還有關債務，因此董事會為此承擔作全數預提。此外，本公司於往年度出售一附屬公司權益，由於原訴人聲稱擁有該投資百份之五十一權益，本公司被指非法出售股權，基於穩健的情況下，管理層把百份之五十一投資收益記錄在預計負債上。」

Translation

“Estimated liabilities

FEHC, its subsidiaries and Fujian Investment and Development Company Limited. (“Fujian Development”) had signed an agreement under which Fujian Development agreed to repay debts owed by FEHC's subsidiaries to the banks (“debts”). The banks transferred their rights under the debts to Fujian Development. At the same time FEHC guarantees Fujian Development that Fujian Development would not incur losses as a result of the inability of FEHC’s subsidiaries to repay the relevant debts. Since the subsidiaries have suffered severe losses and are unable to repay their debts, the board of directors (of FEHC) undertakes to make full provision for theserelevantdebts. In addition, FEHC had sold its interest in one subsidiary company in the previous years. As a plaintiff claimed to have 51% interest in that subsidiary, FEHC was accused of illegally selling the equity in that subsidiary. As a matter of prudence, the management recorded 51% of the proceeds of sale as estimated liabilities.”

This note is repeated in the 2018 FEHC Report.

30.  This note suggests that there are financial backers behind FEHC.  It is not known what is the relationship between Fujian Development and FEHC.  According to the note, Fujian Development agreed with the banks to repay the loans owed by FEHC’s subsidiaries, while the board of directors of FEHC undertook to indemnify Fujian Development of its loss.  All these companies are inter-related.  Fujian Development is probably a company with higher credit rating than FEHC.  It may be an associated company within the group of companies under the control of the Fujian Provincial Government. On the other hand, the indemnity was stated to be given by the board of directors of FEHC and not by FEHC.  It must have been given by the directors in their personal capacity.  There is no dispute that the shareholders and directors of FEHC are provincial officials holding shares or office in FEHC as nominees of the Fujian Provincial Government.  They have no personal interest in FEHC.  Thus, when they undertook to make full provision for the debts of the subsidiaries, they must have done so as agents of the Fujian Provincial Government.  The debts of the subsidiaries are backed by Fujian Development, and in turn by FEHC and its board of directors who will ultimately be backed by the Fujian Provincial Government.

31.  On paper, FEHC and Jian An are hopelessly impecunious and in deficit to the extent of HK$2,300 million.  Yet they are able to engage in this long and wasting litigation in the past 19 years, instructing a strong legal team with top senior and junior counsel.  According to FEHC, it had hitherto incurred legal costs of over HK$28.86 million.  But no attempt has been made to explain how this litigation is being funded.  The existence of financial backers behind FEHC is obvious.  Again, the Defendants have been less than full and frank in their evidence.

32.  I have already commented on the audited reports of FEHC and Jian An.  I do not accept them as evidence of the true financial position of FEHC and Jian An.  Even according to the FEHC 2019 Report, FEHC has receivables of HK$770 million which it almost entirely discounted by provision for bad debts of HK$768 million.  It should be noted from Note 17 discussed above that FEHC’s estimated liabilities included provision for First Laser’s claim of 51% of the sale proceeds of the FCL. Thus, even on the basis of the 2019 FEHC Report, the receivables are more than sufficient to cover the judgment debt under the Remitter Judgment.

33.  FEHC never explained what happened to the proceeds of sale of the FCL shares.  It should be recalled that all except US$9 million paid into court had been remitted to the Fujian Provincial Government.  That included a sum of US$5 million remitted after service on FEHC of the Plaintiff’s summons applying for injunction.  At the hearing in 2008, the Defendants submitted that the proceeds remitted was for restructuring.  In rejecting that argument, I held at paragraph 14 of my decision[9]:

“14. … On the evidence now available to me, it appears that what those behind the Defendants have done is to strip the Defendants of their assets and then to restructure them in such manner as to leave the Plaintiff with an empty judgment and without the Plaintiff being given the benefit of participating in the restructuring at all. Save that US$51 million had been transferred to the Fujian Provincial Government, I am not satisfied as to the purpose of the transfer and I am far from being satisfied that there was any restructuring negotiation underway. I reject Mr Shieh SC’s submission of deleterious effect.”

34.  The Defendants now argue that they are window companies of the Fujian Provincial Government.  Their function is to remit money to the Fujian Provincial Government.  I also reject that argument.  However laudable be their function, that does not explain how FEHC could have lawfully dissipated US$51 million of its own assets to the Fujian Provincial Government, apparently for no consideration and without regard to the rights of its creditors.  Such conduct is evidence that FEHC was acting in concert with the Fujian Provincial Government on which the inference could be drawn that the government has a reciprocal arrangement to back FEHC in its litigation relating to the funds remitted. 

35.  All in all, I am satisfied that the Defendants are not alone in this litigation.  They are backed ultimately by the Fujian Provincial Government.  Whether the government will in fact do so at this stage of the proceedings is its commercial decision.

Whether appeal will be rendered nugatory

36.  The litigation has been fought almost for 20 years.  It has gone all the way up to the Court of Final Appeal and is about to embark on a second similar journey.  However, this time the situation is different.  No stone has been left unturned.  The Plaintiff’s case under restitution is on firmer grounds.  No strong grounds of appeal have been shown.  The Plaintiff is entitled to have the fruits of its litigation.  I respect the Defendants’ right to appeal.  I shall consider the prejudice to the Defendants first assuming no stay is granted and then the prejudice to First Laser if conditional stay is granted.

37.  The Defendants contend that they are so impecunious that they cannot meet any conditions of full or partial payment of the judgment debt imposed on a conditional stay.  They argue that imposing such a condition effectively means that the Plaintiff will be able to levy execution against them leading to their winding-up and thereby rendering the appeal nugatory.  I disagree. On their own case, the Defendants are impecunious.  They cannot pursue the appeal without financial support from their backers.  The Fujian Provincial Government has to come forth to fund the appeal, regardless whether a stay is granted.  Thus, even if FEHC is to be wound-up, if it is able to satisfy the liquidators that it has a meritorious appeal (which is a condition precedent to an appeal even from FEHC’s own point of view) and if the Fujian Provincial Government will come forth to fund the appeal (which it must in any event because of FEHC’s impecuniosity) and indemnify the liquidators of the costs, the appeal may still proceed.  It will not be rendered nugatory, if the appeal succeeds.  The Defendants are concerned that the Plaintiff is a foreign corporation with no assets in Hong Kong and that any sum levied against them may not be recoverable if the appeal is successful.  Their concern can be easily addressed by ordering any sum paid or levied in execution be paid into court.

38.  The only prejudice I can think of is that their backers would have, in addition to fund the appeal, to indemnify the liquidators of their costs, if the appeal fails.  This is the usually consequence of a failure.  The Defendants cannot expect to walk out of an unsuccessful appeal without costs consequences.  Neither can their backers.  To argue that they can walk out without costs consequence by relying on FEHC’s impecuniosity is in fact a prejudice to the Plaintiff which this court cannot ignore.  The Defendants’ and their backers’ position will most likely be the same, even if a stay is refused.  They will suffer no prejudice.

39.  On the other hand, if an unconditional stay is granted, the litigation will carry on for a few more years.  Further costs will be incurred by both parties.  If the appeal is successful, First Laser would be rightly deprived of its fruits of litigation obtained at this stage of the proceedings.  It only has itself to blame for all further costs incurred.  The Defendants would win the appeal.  Neither party would suffer any prejudice.

40.  If the appeal fails, the Plaintiff would have been wrongfully denied of the fruits of its litigation.  It would have been kept out of whatever money it could have recovered at this stage.  Not only that, the Defendants are impecunious.  Mr Yu SC argues that that would make no difference because the Defendants are all along impecunious.  I respectfully disagree.  The Plaintiff would have to incur more costs on appeal which would be irrecoverable because the Defendants are impecunious now and would be so at the conclusion of the appeal.  But, not only that, with passage of time, whatever assets now in the hands of the Defendants which would be available for execution would have disappeared lawfully in funding the appeal which turned out to be unmeritorious and would perhaps have been wrongfully dissipated.  The Defendants’ disclosure of their financial position has been less than full and frank.  They have demonstrated a propensity to dissipate their assets even in the face of an injunction.  Without a conditional stay, most probably, the Defendants would literally walk out of an unsuccessful appeal relying on their own impecuniosity.  But the Plaintiff would suffer severe and irreparable prejudice.

41.  Thus, the balance weighs heavily in favour of refusing the application for unconditional stay of execution and granting a stay on condition of payment or furnishing security into court of the full judgment debt including interest less US$9 million and accumulated interest which has already been paid into court or failing that on payment into court of all sums levied on execution.  The sum to be paid is rounded down to HK$518 million. Of course, the Defendants and their backers have the option of not meeting the condition for commercial consideration and thereby confining the loss to the assets in the hands of the Defendants and saving the risk of loss to the backers.

Conclusion

42.  For the above reasons, I refuse the Defendants’ application for unconditional stay of execution and order that the execution be stayed on condition of payment or furnishing security of HK$518 million into court less the said sum of US$9 million and accumulated interest within 28 days or failing that on payment into court of all sums levied on execution.  The Defendants shall pay the Plaintiff’s costs of this application with certificate for two counsel, to be taxed if not agreed.

HCA 4414/2001

[2020] HKCFI 495

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 4414 OF 2001

____________

______________

JUDGMENT

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INTRODUCTION

Introduction

1.  This is the trial of the issue of restitution remitted to this court by the Court of Final Appeal. The original trial of this action took place in October 2007.  On 5 February 2008, this court handed down judgment in favour of the plaintiff (“First Laser”) on the basis that the agreements in issue between the parties were governed by Hong Kong law (the “CFI Judgment”)[1]. On appeal, the Court of Appeal held on 4 April 2011 that the agreements were governed by Mainland law[2]. It allowed the defendants’ appeal, set aside the judgment of this court and ordered the issue of restitution under Mainland law (返還) be remitted to this court for determination (the “CA Judgment”).  First Laser appealed.  On 6 July 2012, the Court of Final Appeal dismissed First Laser’s appeal and directed the issue of restitution under Mainland law be remitted this court for determination[3] (“CFA Judgment”).

The background

2.  The background of this case was summarized in paragraphs 5 to 33 of the CFA Judgment and in greater details in paragraphs 6 to 49 of the CFI Judgment.  Neither the Court of Appeal nor the Court of Final Appeal has overturned the factual findings of this court. The following is a recapitulation of the essential facts for the purpose of this trial.

3.  The 1^st defendant, Fujian Enterprises (Holdings) Company Limited (華閩(集團)有限公司) (“FEHC”), and the 2^nd defendant, Jian An Investment Limited (“JAIL”), are window companies of the Fujian Provincial People’s Government (“Fujian Government”) of the People’s Republic of China (“the PRC”), incorporated in Hong Kong. 

4.  In 1992, FEHC and Fujian Research Institute of Material Structures of the Academy of Science of the PRC (中國科學院福建物質結構研究所) (“FRIMS”) had set up an equity joint venture (中外合資企業) with FEHC under the name of Fuzhou Castech-Phoenix Inc (福州科鳳激光有限公司) which was mainly engaged in the production of two kinds of non-linear crystals commonly known as LBO crystal and BBO crystal.  In about June 1996, following a dispute with FRIMS over its patented technology, namely the incubation furnace, FEHC bought out FRIMS’ interest.  Since then, the equity joint venture became a wholly foreign‑owned enterprise (外商獨資企業) and changed to its present name, Fujian Casix Laser Inc (福建華科光電有限公司) (“FCL”).

5.  FEHC had two other subsidiaries, namely, Casix Limited which is a company incorporated in Hong Kong and Fujian Kexin Technology Development Company (福建科星技術發展公司) (“Fujian Kexin”) which is a company incorporated in the Mainland.  In June 1995, these two subsidiaries together set up Fuzhou Casix Optronics Inc (福州科騰光電技術有限公司) (“FCO”) as an equity joint venture.  Until March 1997, FCO was wholly owned by FEHC.

6.  FEHC caused part of FCL’s business involving the patented technology to be transferred to FCO with a view to relocating the incubation furnace and related operations outside the Mainland to avoid further disputes with FRIMS.  Wang Hongrui (“Wang”), formerly from FRIMS, led his team of scientists and technologists to join FCL and FCO.  They continued to work in the same factory premises as before and used the same machinery.  However, at the time FEHC was in financial difficulties and short of funds.  It urgently searched for a new joint venture partner outside the Mainland who would be willing to pay substantial capital within a short time to buy into FCL and FCO.

7.  It was under those circumstances that Mr Ngan In Leng (顏延齡) (“Ngan”), a Macanese businessman of some substance, and companies owned or controlled by him, came into the picture.  These companies include:

(1)  First Laser;

(2)  Hang Wo Properties Investment and Management Company Limited (恆和物業投資管理有限公司) (“Hang Wo”);

(3)  Casix Optronics Manufacturing Limited (宇星光電企業製造有限公司) (“COM”);

(4)  Bao Shing (Group) Company Limited (寶盛集團有限公司) (“Bao Shing”) which is in fact Ngan’s joint venture with the Fujian Government;

(5)  Fujian Ocean Communication Company Limited (福建大洋通訊器件有限公司) (“Fujian Ocean”); and

(6)  Jenwing Holdings Limited (“Jenwing”).

It would be convenient to refer to Ngan and his companies as “Ngan’s camp”.  It should also be noted that Ngan had no regard to the principle of corporate personality and treated these companies as his alter ego; and FEHC adopted the same attitude in respect of Ngan’s camp.

8.  As result of negotiation between Ngan and Kong Fanli (孔凡立) (“Kong”), the then chairman of the board and general manager of FEHC, Ngan and FEHC agreed to enter into a joint venture under which Ngan was to purchase 51% of the shares in each of FCL and FCO at the total price of US$3,187,500, which was agreed to be HK$24,640,000.  For the purposes of the joint venture, Ngan entered into three separate agreements on behalf of First Laser, Hang Wo and COM with FEHC for the sale and purchase of the shares in FCO and in FCL (collectively, the “three agreements”).  This joint venture was “the Agreement” pleaded by First Laser in paragraph 10 of its Re‑Amended Statement of Claim (“RASOC”).  First Laser further pleaded in paragraph 11 that insofar as the Agreement is in writing, it is evidenced by the following three agreements:

(1)  An agreement dated 12 December 1996 between FEHC and Hang Wo under which FEHC would transfer all its shareholding in FCL and FCO to COM to be held by COM in the ratio of 51:49 for Hang Wo and FEHC respectively (the “Hang Wo Agreement”);

(2)  An agreement dated 12 December 1996 between FEHC and COM under which FEHC would sell all its shareholding in FCL and FCO at the valuation of US$6,250,000, but COM would only have to pay FEHC US$3,125,000, (the “COM Agreement”); and

(3)  An agreement dated 28 December 1996 between FEHC and First Laser (the “First Laser Agreement”) setting out some detailed terms of First Laser’s participation in FCO and FCL after the transfer of the shares in FCO and FCL. 

9.  Under the Hang Wo Agreement, FEHC agreed to transfer all its shareholding in FCL and FCO to COM to be held by COM in the ratio of 51:49 for Hang Wo and FEHC respectively.  Under the COM Agreement executed on the same date, FEHC agreed to sell all its shares in FCL and FCO to COM for US$3,125,000 against a total valuation of US$6,250,000. The net effect was that COM would pay US$3,125,000 to FEHC, which was slightly less than 51% of the valuation; and that COM was to hold 51% of the shares in FCL and FCO for Hang Wo and 49% for FEHC in accordance with the Hang Wo Agreement.  COM would not have to pay for the 49% shareholding as it would be holding it for FEHC.  Effectively, the COM Agreement would be the performance of the Hang Wo Agreement.  Then, about two weeks later, FEHC did not like the idea of having Hang Wo, a property investment company to be its joint venture partner in this high-tech joint venture in optronics.  It suggested setting up another company to replace Hang Wo and even suggested the name “First Laser”.  However, in total disregard of the principle of corporate personality, the parties drafted the First Laser Agreement stating in the preamble about an earlier agreement between them for the sale and purchase of 51% of the investment in the optronics project in Fuzhou.  Then, they increased the consideration to 51% of the valuation and set out payment terms.  That was why I accepted Ngan’s evidence that the First Laser Agreement superseded the Hang Wo Agreement and the COM Agreement.

10.  Then, Ngan caused COM to pay FEHC HK$10 million on 31 December 1996 and caused First Laser to pay FEHC another sum of HK$10 million on 30 April 1997 towards the purchase price of 51% of the shares in each of FCL and FCO.  A balance of HK$4,640,000 was agreed to have been paid by First Laser by treating part of the capital investment in the sum of about HK$9 million incurred by First Laser in setting up COM as FEHC’s contribution to its 49% share capital in COM.  This agreement was confirmed in a memorandum dated 13 March 1998 executed by Kong on behalf FEHC (the “1998 Memorandum”).  Ngan’s camp therefore fully performed COM’s or First Laser’s payment obligation under the COM Agreement or the First Laser Agreement.

11.  On 30 December 1996, i.e. one day prior to the payment of the first sum of HK$10 million by COM to FEHC, the board of directors of FCO passed a resolution consenting to transfer all the shares in FCO to COM in accordance with the COM Agreement, but none of the shares in FCL was transferred to Ngan’s camp.  On Ngan’s evidence, COM would be held by Hang Wo and Jenwing in the ratio of 51:49 for First Laser and  FEHC.  Had all the shares in FCL been transferred to COM, the shareholding in COM would be properly split in the ratio of 51:49 between First Laser and FEHC.  That never happened. 

12.  On 17 July 1997, Wang on behalf of FCL submitted a feasibility study report on production of a special optical fibre instrument (光纖無源器件項目) (“the Project”) to FEHC for consideration.  On 21 July 1997, Kong rejected the proposal and suggested Wang to enquire if Ngan would take on the Project as a personal investment.  Ngan agreed and caused Bao Shing to remit two sums of RMB500,000 to FCL in August and October 1997, a sum of US$500,000 and a sum of US$100,000 to Casix Inc on 12 August 1997 and 17 April 1998 respectively for the purpose of funding the Project.  The two sums of RMB500,000 were acknowledged by FCL as having been received from COM.  Subsequently, Casix returned US$110,000 to Ngan.  Ngan also paid Wang HK$8,000 a month for 26 months for managing the Project, i.e. HK$208,000.  Thus, Ngan’s investment in the Project consisted of RMB1,000,000, US$490,000 and HK$208,000.

13.  On 13 March 1998, about a month before Kong was due to leave FEHC to take up the post of Chief Executive Officer of Bao Shing as representative of the Fujian Government, he signed the 1998 Memorandum setting out the rights of the parties and capital arrangement of COM and FCL.  The memorandum explained that because of some possible legal disputes relating to FCO and the under‑capitalisation problem of FCL, the shares in FCO and FCL were temporarily held by COM and FEHC respectively; that when the problems were resolved, First Laser’s and FEHC’s shareholding in COM and FCL would be regularised (理順股權關係) in the ratio of 51:49; that prior to the said regularisation, COM’s and FEHC’s investments and rights in respect of FCL, COM and FCO shall be governed by three agreements; and that First Laser’s outstanding payment in the amount of HK$4,640,000 under the First Laser Agreement was treated as having been paid by First Laser and representing FEHC’s contribution to the share capital of COM.  The 1998 Memorandum evidenced what I called, “the spirit of the First Laser Agreement”.

14.  In May 1998 Xu Meixing (許美星) (“Xu”) replaced Kong as the deputy chairman of the board of directors of FEHC and the shares in FEHC were reassigned to Sun Ming (孫明), Yang Dongcheng (楊東成) (“Yang”), Chen Ruizeng (陳瑞曾) and Li Jinlin (李金林).  A few months after that the relationship between the parties took a turn.

15.  The conflict between Ngan and FEHC became overt since August 1998.  At a meeting on 18 August 1998, Xu attempted to re‑negotiate the terms of the joint venture with Ngan by suggesting to reverse the share ratio between First Laser and FEHC in COM to 49:51. Ngan refused.  The negotiation continued, but without success.  Ngan sought help from the Governor and other senior officials of the Fujian Government to resolve their dispute, but to no avail.

16.  On 29 September 1998, Ngan wrote to FCL requesting the transfer of the Project to Fujian Ocean which was a Fujian company set up by him specifically for the purpose of taking over the Project.  Wang confirmed to FEHC that the Project was funded by Ngan and sought instruction to effect the transfer after discounting for the costs of the research and development as well as depreciation of plant and equipment used in connection with the Project.  FEHC instructed Wang not to effect the transfer because there were other accounts in relation to other joint ventures with Ngan and his group of companies and other outstanding issues relating to the present joint venture which had not yet been resolved.  Then, presumably for the purpose of tightening his reign over FCL, Xu appointed himself as chairman of the board of directors and Wang and two others as directors of FCL on 3 February 1999.  On 15 April 1999, Xu also appointed Wang as general manager of FCL.

17.  Knowing that FEHC would not allow him to have the Project, Ngan had, since 16 April 1999, been repeatedly requesting FEHC to return his funds invested in the Project.  FEHC ignored his requests. 

18.  On 6 January 2000, Ngan wrote to Xu complaining about the proposed sale of the shares in FCL without COM’s consent.  On 12 January 2000, FEHC replied that the production of LBO crystals and BBO crystals by FCO was in violation of the rights of FRIMS, that FEHC was the 100% legal owner and had de facto control of FCL and that FEHC had full right to dispose of FCL.

19.  On 29 February 2000, FEHC entered into an agreement to sell all its shares in FCL, including the Project, to JDS Uniphase China Holdings Company (“JDS”) for US$60 million.  It is not known when the sale and purchase was completed, but a handover reception was held on 15 May 2000.

20.  On 3 October 2000, the parties accompanied by their lawyers attended two meetings in Zhuhai in an attempt to resolve their dispute, but no settlement could be reached.  However, they recorded their common understanding and their differences in the minutes of the meetings (the “2000 Minutes”).  The 2000 Minutes contained a statement of the above facts mutually agreed to by the parties and acknowledged the contents of the 1998 Memorandum.

The litigations

21.  On 9 October 2001, First Laser commenced the present action against FEHC and JAIL in Hong Kong.  At about the same time, the FEHC commenced legal proceedings in Fujian Higher People’s Court, (福建省高級人民法院 (2001) 閩經初字第43號), seeking a declaration against Hang Wo, COM and First Laser, that the Hang Wo Agreement, the COM Agreement, the First Laser Agreement and the 1998 Memorandum were of no effect (無效).  Ngan’s camp disputed the jurisdiction of the Fujian Higher People’s Court over the agreements.  The Fujian Higher People’s Court held it had jurisdiction.  Ngan’s camp appealed.  Their appeal was dismissed by the Supreme People’s Court on 22 July 2002 and the action was remitted back to the Fujian Higher People’s Court for adjudication.  On 18 July 2003, the Fujian Higher People’s Court delivered judgment declaring that the Hang Wo Agreement, the COM Agreement and the First Laser Agreement were of no effect but dismissing the FEHC’s claim that the 1998 Memorandum was of no effect.  Ngan’s camp appealed to the Supreme People’s Court (中華人民共和國最高人民法院 (2003) 民四終字第19號).  On 3 December 2004, the Supreme People’s Court allowed the appeal in part, but effectively dismissed it.  The Supreme People’s Court held that the Hang Wo agreement, the COM Agreement, the First Laser Agreement and the 1998 Memorandum to the extent that they relate to the transfer of shares in FCO and FCL were all of no effect.

22.  On 17 May 2010, five and half years after the decision of the Supreme People’s Court and well before the hearing of the appeal in the Court of Final Appeal, the Supreme People’s Court issued a judicial interpretation, 《Provisions of the Supreme People’s Court on Several Issues concerning the trial of disputes involving Foreign-Owned Enterprises (I) 》(《最高人民法院關於審理外商投資企業糾紛案件若干問題的規定(一) 》) (“《Provisions (I) 》”) which took effect on 16 August 2010.

23.  The Hong Kong proceedings took much longer to completion.  The parties took seven years to bring the action to trial. Unfortunately, this court went wrong in holding that the First Laser Agreement was governed by Hong Kong law, resulting in appellate proceedings which took another four years.  On 6 July 2012, the Court of Final Appeal held that the First Laser Agreement which was the basis of First Laser’s claim in this action is governed by Mainland law[4] and directed that the issue of restitution under Mainland law be remitted to this court for determination.  Then, six years afterwards, First Laser sought and was granted leave to re‑amend its statement of claim by introducing a new paragraph 38A pleading 《Provisions (I)》.  Another round of witness statements and expert opinions was filed.

First Laser’s case on restitution

24.  First Laser’s primary claim is founded on Articles 18 of 《Provisions (I)》 which came into effect almost two years after its appeal had been dismissed by the Court of Appeal.  This new claim is premised on the innocent party’s right to restitution upon a contract to invest in a foreign-owned enterprise between him as an actual investor（實際投資者）and a nominee shareholder of that enterprise（外商投資企業名義股東） (“nominee investment contract”) being found to be void or of no effect.  Article 18 provides that under those circumstances if the value of the equity held by the nominee shareholder is higher than the value of the actual investor’s investment, whether in the form of money (“investment money”) or property, the actual investor is entitled to be returned his investment money or property plus a reasonable distribution of the enhancement in value of the equity in the enterprise, subject to the nominee shareholder’s claim for a reasonable distribution for his contribution to the enhancement.  The claim is not founded on the First Laser Agreement or any of the three agreements or the 1998 Memorandum.

25.  First Laser’s alternative claim is founded on article 58 of 《The Contract Law of the People’s Republic of China》 (《中華人民共和國合同法》) (“《Contract Law》”) and article 61 of《The General Principles of the Civil Law of the People’s Republic of China 》) (《中華人民共和國民法通則》) (“《GPCL》”).  This claim is premised on First Laser being entitled under these articles to the return of the actual investment sum of HK$24,640,000 as property acquired by FEHC by reason of the First Laser Agreement, which is found to be void and of no effect.  Under article 131 of 《The Opinion of the Supreme People’s Court on Several Issues in Implementing the General Principles of the Civil Law of the People’s Republic of China (Trial Implementation) 》(《最高人民法院關於貫徹執行《中華人民共和國民法通則》若干問題的意見（試行）》) (“《GPCL Opinion》”), the property to be returned includes the original subject matter (「原物」) and “the fruits arising from the original subject matter” (「原物所生的孳息」).  On a proper application of article 58 of 《Contract Law》 and/or articles 61 of 《GPCL》, article 92 of《GPCL》, the “improper profits regime” (「不當得利制度」) and the “principle of fairness” (「公平原則」) under Mainland law, the scope of restitution covers not only the original subject matter transferred under the First Laser Agreement and dividends but also other benefits generated from the original subject matter received by FEHC.  This alternative claim will yield more or less the same result as the primary claim under article 18 of 《Provisions (I)》.  

FEHC’s case on restitution and counter-restitution

26.  FEHC advances ten grounds in opposition to First Laser’s claim.  These are:

(1)  It is not permissible for First Laser to run in the trial of the remitted issue a claim based on article 18 which is a completely new case. 

(2)  The claim under article 18 of 《Provisions (I)》is not pleaded.

(3)  It is not open to First Laser to rely on the “combined effect” of the three agreements, which is also un-pleaded.

(4)  It is not open to First Laser to rely on article 92 of《GPCL》 in its argument based on improper profits under article 91 as article 92 is un-pleaded, has not been addressed by its own expert on Mainland law and has not been put to FEHC’s expert. 

(5)  The evidence of First Laser’s expert on Mainland law must be rejected as its expert is biased and a hired gun.

(6)  On the question of the amount to be returned to First Laser as a reasonable distribution for its contribution to the enhancement in value of FCL’s shares pursuant to article 18 of 《Provisions (I)》, the evidential basis of the First Laser’s contribution is misconceived.

(7)  Article 18 of 《Provisions (I)》 is inapplicable to First Laser’s claim because the First Laser Agreement, which is the basis of First Laser’s claim, is a share transfer agreement and not an agreement between an actual investor and a nominee shareholder of a foreign-owned enterprise.  Furthermore, article 18 is not applicable by reason of article 23 because a final determination has been made by the Supreme People’s Court (已經終審) on the case (案件) in these proceedings[5].

(8)  First Laser’s reliance on article 131 of《GPCL Opinion 》in respect of its claim under article 58 of 《Contract Law》 or article 61 of 《GPCL》 is misconceived according to its own expert on Mainland law.

(9)  Pursuant to article 58 《Contract Law》 or article 61《GPCL》, First Laser is only entitled to be returned the purchase price of HK$20 million and interest as property received by FEHC under the First Laser Agreement.

(10)  The amount which has to be returned to First Laser would be more than offset by the value of the FCO shares which First Laser is liable to return to FEHC by way of counter‑restitution.

27.  Putting aside the pleading point, the procedural objections and the criticisms on First Laser’s Mainland law expert, the main thrusts of FEHC’s defence are that 《Provisions (I)》 is not applicable to the dispute by reason of article 23; article 18 is inapplicable as there was no nominee investment contract between First Laser and FEHC; and there is no evidential basis to support First Laser’s entitlement to a reasonable distribution for its contribution to the enhancement in value of FCL’s shares.  FEHC also relies heavily on the finding of fact of the Court of Final Appeal in paragraphs 112 to 115 of the CFA Judgment which is binding on First Laser making it impossible for First Laser to advance a case of nominee investment contract.

A GLOSSARY OF SOME MAINLAND LAW TERMS

Judicial interpretation

28.  A term which surfaced frequently in the experts’ evidence is “judicial interpretation”.  Judicial interpretations are sometimes titled as “interpretation” (「解釋」), “opinion” (「意見」), or “provisions” (「規定」) in relation to certain specified issues or questions.  It is common ground between the experts that judicial interpretations are not statutory enactments.  They do not create new laws. They are the Supreme People’s Court’s interpretation of existing statutory provisions.  Accordingly, they have effect along with the statutory provisions they interpret.  As such, article 84 of 《The Law on Legislation of the PRC》(《立法法》) against retroactivity does not apply.  Usually, there is no issue of retroactivity of a judicial interpretation.  But, as I shall demonstrate later, judicial interpretations sometimes deal with the issue of retroactivity or non-retroactivity of the statutes they interpret.

29.  Under article 25 of 《Provisions of the Supreme People’s Court on Judicial Interpretation》 (《最高人民法院關於司法解釋工作的規定》), a judicial interpretation takes effect on the date of promulgation, except as otherwise provided for in the judicial interpretation.  The general significance of the date of promulgation is that with effect from that date the judicial interpretation may be invoked by the litigants.

30.  The following judicial interpretations are referred to in this judgment:

(1)  《Provisions of the Supreme People’s Court on the Judicial Interpretation》(《Provisions on Judicial Interpretation》 (《最高人民法院關於司法解釋工作的規定》);

(2)  《Provisions of the Supreme People’s Court on Several Issues concerning the trial of disputes involving Foreign-Funded Enterprises (I) 》 (《最高人民法院關於審理外商投資企業糾紛案件若干問題的規定(一)》) (“Provisions (I)”);

(3)  《The Opinion of the Supreme People’s Court on Several Issues in Implementation of《General Principles of the Civil Law of the People’s Republic of China (Trial Implementation) 》  》 (《最高人民法院關於貫徹執行《中華人民共和國民法通則》若干問題的意見（試行））》(“《GPCL Opinion》”);

(4)  《The Interpretations by the Supreme People’s Court on Several Issues Regarding the Application of 《Contract Law》 (I)》 (《關於適用《中華人民共和國合同法》若干問題的解釋（一）》) (“《Contract Law Interpretation (I) 》”);

(5)  《The Interpretations by the Supreme People's Court on Several Issues Regarding the Application of 《Company Law of the PRC》 (III)》 (《最高人民法院關於適用《中華人民共和國公司法》若干問題的規定（三）》)(“《Judicial Interpretation on Company Law (III) 》”).

31.  Usually when a judicial interpretation is issued, China Legal Publishing House will publish an explanation on the application of the judicial interpretation edited by a panel of senior judges of the Supreme People’s Court.  Such an explanation was published in relation to 《Provisions (I)》 titled 《Understanding and Application of 《Provisions of the Supreme People’s Court on Several Issues concerning the trial of disputes involving Foreign-Funded Enterprises (I) 》》 (《最高人民法院關於審理外商投資企業糾紛案件若干問題的規定(一)條文理解與適用》) (“《Provisions (I) U&A》”).  It is an authoritative work on the understanding and application of 《Provisions (I)》 relied on by legal practitioners in the Mainland including the experts of both parties.

Legal facts     

32.  One important term which as pointed out by the authors of 《Provisions (I) U&A》 and which must be borne in mind in understanding the application of 《Provisions (I) 》is “legal fact” (「法律事實」).  The authors wrote at page 224:

「引起糾紛的法律事實不僅包括當事人的行為也包括事件。依据法理學原理，法律事實是引起法律關系產生、變更、消滅的行為或者事件，法律事實依其是否由當事人主觀意志決定而分為行為和事件。因此，這里引起糾紛的不僅包括行為還包括事件。」

(Translation:

“The legal fact which caused the dispute include not only the conduct of the parties but also the incident. According to jurisprudence, legal facts are conducts or incidents that creates, changes or extinguishes the legal relationship. Depending on the subjective intention of the parties, legal fact may be divided into conduct and incident. Therefore, the dispute hereby caused includes not only conduct but also incidents.”)

The term “material facts” as understood in the common law concept may not be a near equivalent.  It is also important to note that conduct depends on the subjective intention of the parties, but incidents do not.

“Final adjudication” or “final judgment”(「終審」), “trial de novo” (「重審」) and “re-trial” (「再審」)

33.  Two other important terms are “final adjudication” or “final judgment” (「終審」) and “re-trial” (「再審」).  Despite its similarity to the name of the Court of Final Appeal in Chinese (終審法院), “final adjudication” or “final judgment” (「終審」) in the context of Mainland law is a concept different from the Hong Kong concept of a final appellate judgment.  As explained by the authors of 《Provisions (I) U&A》, “final adjudication” or “final judgment”  means a final judgment on the merits by the first instance or the second instance people’s court, as the case may be, which has come into effect[6]. The Mainland legal system adopts a two instance trial of which the second instance is final (兩審終審制). Litigants proceed to trial at the first instance and obtain a judgment.   If the parties do not appeal within the time limit for appeal, the judgment, even though at first instance, becomes effective and final.  The case has been finally adjudicated.  If a party appeals, the case will undergo a trial de novo(「重審」) at the second instance.  Once a judgment is issued by the court of second instance, regardless it is a judgment of the Higher People’s Court or the Supreme People’s Court, it is a final judgment, which is final and effective.

34.  As explained by the authors of 《Provisions (I) U&A》, “re‑trial” (「再審」) is a special concept under the Mainland legal system which is different from trial de novo (「重審」).  It is invoked by statutory organs in the exercise of their power of adjudication supervision in respect of a decision which has become final and effective.  According to the 《Civil Procedure Law of the People’s Republic of China》 (《中華人民共和國民事訴訟法》), such power of adjudication supervision may be exercised by the People’s Court, People’s Procuratorate (人民檢察院) and the litigant on the grounds that the original court of trial had erred in applying the law.

EXPERT EVIDENCE AND CREDIBILITY OF EXPERT WITNESSES

The approach for receiving and considering expert evidence

35.  This case is founded on Mainland law.  Foreign law has to be pleaded.  It is a fact to be found by the court on the basis of expert opinion.  Each side called one expert in Mainland law.

36.  The proper approach for receiving and considering expert evidence on foreign law was summarised in Shenzhen Development Bank Company Limited v New Century Int’l (Holdings) Limited[7].  Whilst the Court must derive assistance from the expert on foreign law, the court has to consider the expert’s evidence against the expert’s own reasoning and legal analysis.  It may also weigh the expert’s evidence against that of the other party in evaluating what is credible.  In the evaluating process, the Court is entitled, indeed duty bound, to use its own understanding of the Chinese language and contribute its own legal skill and experience to consider the relevant statutes and primary materials in reaching its conclusion, even if such conclusion differs from the experts’ opinions.

First Laser’s expert - Professor Yin

37.  Professor Yin Fei is First Laser’s expert on Mainland law.  He is a professor and dean of the Faculty of Law of the Central University of Finance and Economics.  He has a Ph D degree in laws from the Renmin University of China (中國人民大學).  His major areas of specialty are civil law, property law, law of debts, contract law, law of tort and law of immovable property.  He is a highly qualified academic lawyer.  FEHC has no dispute as to his status as an expert in Mainland law.

38.  Professor Yin was heavily criticized by Mr Yu SC as being a hired gun, biased and playing the role of an advocate for First Laser.  Mr Yu SC even accused Professor Yin of admitting that he was trying to tailor the facts for First Laser.  He produced the relevant part of the transcript in support of his accusation.  That is a very serious accusation to be made against an expert witness.  The alleged admission is also too bizarre to be credible.  A careful reading of the transcript showed that Professor Yin was recorded to have said in Putonghua something inaudible followed by “….我在裁剪事實 (… I am tailoring the facts)” while the interpreter was recorded to have interpreted “唔係我係喺度裁剪事實”.  The inaudible part was obviously caused by the witness continuing with his evidence before what he had said earlier was interpreted.  As it often happens, a witness is speaking so fast and continuously that what is supposed to be consecutive interpretation becomes simultaneous interpretation with parts of what is said by the witness overlapping with what is interpreted by the interpreter making parts of what is said by either of them inaudible.  To my recollection, this was indeed what happened.  It was a misunderstanding.  Counsel was viewing Professor Yin’s evidence with an eye too critical.

39.  The main criticism of impropriety against Professor Yin as an expert arose out of his opinion that there was an agreement of holding (代持) and cross holding (雙重代持) of shares arising out of the relationship between the parties and his avoiding the question of restitution based on an ineffective share transfer agreement.  The criticism is misconceived.  Firstly, it is based on the FEHC’s notion that a share transfer agreement could not at the same time have the effect of an agreement for holding of shares and cross holding of shares arising from the factual circumstances.  That is precisely a matter for expert evidence.  It is wrong to assume, as Mr Yu SC did that there was no such holding of shares under Mainland law and hence Professor Yin was biased. Secondly, the criticism wrongly assumed that in describing an agreement as an agreement for share transfer the Hong Kong courts had intended to say that the only effect of the agreement between the parties was to provide for a share transfer and nothing else.  The essence of Professor Yin’s opinion is that one must look at all the surrounding circumstances and not just the agreement or the words used by the Hong Kong courts in isolation.  That really is a question for this court to decide based on the experts’ evidence.  It is wrong to accuse an expert witness as biased or being a hired gun for advancing an opinion in support of his client’s case.  Mr Chan SC did not make such accusations against Mr Bai for advancing a contrary opinion in support of FEHC’s case and rightly left it to this court to assess his credibility according to applicable legal principles.

40.  Mr Yu SC accused Professor Yin of ignoring highly material rulings of the Court of Final Appeal in paragraphs 112 to 115 of the CFA Judgment.  He quoted as a glaring example that in setting out his assessment of the reasonable distribution of the enhancement in value in FCL shares, Professor Yin ignored Lord Collin’s observation that FEHC contributed US$4 million to the capital of FCL in 1997, 1999 and 2000. Obviously, Professor Yin excluded those contributions because on the basis of incontrovertible evidence the contributions came from FCL’s dividends and reserves from receivables of Casix Inc.  These facts are supported by undisputed documents before this court during the original trial.  These documents were not included in the appeals bundle before the Court of Final Appeal as First Laser thought that issue was outside the scope of the appeal.  However, at the hearing before Lord Collins NPJ, FEHC produced the capital examination reports which led Lord Collins NPJ to make the above observation.  Professor Yin had good reason based on First Laser’s case and incontrovertible evidence for excluding those contributions as coming from FEHC.  In short, those contributions came from common funds according to the spirit of the First Laser Agreement.  It should not be regarded as one party’s sole contributions in exactly the same way as FCO’s dividends applied to purchase staff quarters for the staff of FCO and FCL was treated.  FEHC is now trying to capitalize on an unfair advantage it had obtained before the Court of Final Appeal to discredit Professor Yin. Mr Yu SC’s criticism is not entirely fair.  Paragraphs 161 to 168 contain a full analysis of the contributions to FCL’s capital.

41.  Mr Yu SC criticized Professor Yin as playing the role of an advocate.  The criticism arose out of Professor Yin’s assertion of the existence of a nominee investment contract by conduct and the cross holding of FCO shares and FCL shares (雙重代持) arising from the FEHC refusal to perform its obligation of causing FCL to seek approval for transferring 51% of the shares in FCL to First Laser while he was being repeatedly cross-examined on the basis that the three agreements were only agreements for sale and purchase of shares and the absence of a contract document evidencing the nominee investment contract.  In inferring an agreement one is entitled to have full regard to the background and factual matrix and sometimes also the conduct of the parties both before and after the completion of the agreement.  Professor Yin was advancing his view that a relationship of cross holding of shares or nominee investment contract may co-exist with a share purchase agreement under the special factual matrix of this case.  There was some impatience on the part of Professor Yin in that his point of an agreement by conduct was to his mind not being understood by counsel or being distorted.  Counsel may disagree with his view, but I do not think as such Professor Yin could be unduly criticized as being biased for advancing it.

42.  Professor Yin was criticized for having made an analysis of fact allegedly for the purpose of advancing First Laser’s case.  Mr Chan SC submits that there is nothing wrong with an expert explaining how in his view the law ought to be applied to specific facts in his report or how he interpreted certain primary facts or documents in the context of Mainland law.  In Shenzhen Development BankCompany Limited v New Century Int’l (Holdings) Limited[8], Deputy High Court Judge Lam (as he then was) held that one of the functions of an expert witness on foreign law is,

“where there is no authority directly in point, to assist the English judge in making a finding as to what the court's ruling would be if the issue was to arise for decision there.”

An expert could not properly discharge that function without setting out the factual basis so as to enable him to assist the court in understanding how the foreign court would have applied foreign law to those facts. Professor Yin purposely prepared a separate Appendix 2 (專家意見所依據的案件材料和事實) to clearly set out the facts, findings and supporting materials upon which his opinion was based in order to separate it from the main body of his report containing his opinions on the contents of Mainland law.  The sources of the facts, caveats and assumptions were clearly identified.  In his evidence, Professor Yin explained that he could not discharge his function by talking in vacuo without reference to the facts.  He said[9]:

「因為雖然我向本案提供的是一個中國法律專家的意見，但是我想它肯定應該是建立在一定的事實上，事實上的基礎上的。所以說我不可能完全脫離所有的事實來空講中國法。否則的話，法庭只要看，拿一本中國的法典就夠了，不需要我。但是為咗謹慎起見，我的第一份專家意見裡面我仍然刻意的把有些內容作了些區分。所以附件二本身我還是為了方便起見，我先歸納了我所認識到的事實。然後正文主要是在討論法律問題。」

(Translation:

“Because although the opinion I provided in this case is that of a Mainland legal expert, I think it must be based on certain facts, factual basis. So I can’t talk about Mainland law completely devoid of the facts. Otherwise, the court just needs to pick up some Mainland law authorities and read, I may be dispensed with. But for the sake of caution, I still deliberately made some analysis of facts in my first expert opinion. Therefore, for the sake of convenience, I first summarize the facts I reckon in Annex II. And then discuss the legal issues in the main body of the opinion.”)

I think what Professor Yin did was un-reproachable and there is no merit in the suggestion that he was biased.

43.  Mr Yu SC argues that Professor Yin’s opinion about cross holding of FCL and FCO shares is inconsistent with First Laser’s conduct in selling FCO’s equipment without informing FEHC and in disposing of FCO’s platinum furnace which is FCO’s major asset without informing FEHC.  Sale of FCO’s equipment took place in July 2008 after FEHC had unequivocally repudiated the Agreement and the three agreements and when FCO has ceased business: see also paragraphs 288 to 292.  As for the platinum furnace, it was removed from Fujian to Macau in accordance with the Agreement to relocate production from Fujian to Macau.  The furnace had not been sold and is still standing in FCO’s premises in Macau: see paragraph 295.  There is no factual basis to launch these criticisms.

44.  Mr Yu SC argues that Professor Yin’s opinion is unsound and lacks legal reasoning.  He submits that if Professor Yin’s opinion were to be followed, it would effectively remove all distinctions between a valid contract under which a purchaser of shares would be entitled to sale proceeds of the shares and an invalid contract under which it would not. That is an over-sweeping statement.  It is not Professor Yin’s opinion that this would happen in all cases.  The peculiar features in this case according to First Laser are the parties’ conduct over a period of ten years, the cross holding of shares and First Laser’s or Ngan’s contribution to the Project. The outcome depends on the circumstances of the particular case.  If justice so requires, there is nothing wrong or unsound about Professor Yin’s opinion.  After all, 《Provisions (I)》 was issued to enable proper adjudication of disputes under a void contract.

45.  There are other complaints of inconsistencies in Professor Yin’s opinions and unsound legal reasoning.  I do not find it necessary to deal with all of them.  Suffice it is that I have considered them in the context of the parties’ case and tested them against logic and the opinion of Mr Bai.  Viewed in the round, I consider Professor Yin’s evidence credible.

FEHC’s expert - Mr Bai

46.  Mr Bai is a practising lawyer since 1985.  He graduated from the Renmin University.  He practised in Beijing, Shenzhen and Hong Kong.  He had vast experience in foreign investment law and practice.  He had given evidence as Mainland law expert in the Hong Kong courts before.  First Laser has no dispute as to his expert status.

47.  First Laser did not launch any attack on Mr Bai’s expertise or credibility.  Mr Bai’s demeanour is satisfactory.  His interpretation of the law is rigid and literal.  Though he accepted that 《Provisions (I) U&A》is an authoritative work on the issues of law in dispute in this case, some of his opinion is inconsistent with 《Provisions (I) U&A》.  I evaluate his evidence in the way as I have indicated above.  For reasons as I shall explain in the course of my analysis of his evidence, I do not find his evidence credible.

CREDIBILITY OF FACTUAL WITNESSES

First Laser’s factual witnesses

48.  Ngan In Leng (“Ngan”) testified in the original trial.  His evidence was largely unchallenged and accepted by this court.  He did not testify at this trial because of his ill health, presumably arising out of his old age.  There was no challenge to his evidence and no request for him to be called for cross-examination.  I accept his evidence as I did in the original trial.

49.  Fong Wai Man (“Fong”) is the deputy general manager of Hang Wo in the headquarters in Zhuhai.  She has been the vice president of  the board of directors and deputy general manager of FCO since 2002.  She is a business manager and secretary to Ngan and had been involved in the business of COM since July 1997.  She gave evidence to supplement Ngan’s.  Her evidence is primarily about the payment of additional salaries of HK$8,000 per month to Wang, the distribution of dividends by FCO and the purchase of staff quarters for the staff of FCL and FCO.  In her position, she had direct personal knowledge of the matters in her evidence.  Her evidence is largely supported by incontrovertible documentary evidence and appeared credible.

50.  She was criticized for confirming the accuracy of Appendices 2 and 3 in Professor Yin’s expert report.  What she confirmed as true and correct was, as she expressly stated, “the calculations and the facts stated therein, which are derived from documents and evidence adduced in this action”.  As she explained, she did not draft the appendices and the appendices are accompanied by references to the primary documents or the Hong Kong court judgments, including the CFI Judgment and the CFA Judgment.  She was not adopting or confirming Professor Yin’s opinion on Mainland law which she was in no position to do.  I find her a credible witness and accept her evidence.

FEHC’s factual witnesses

51.  FEHC filed statements from seven witnesses, including Wan Hing Kin (“Wan”), but chose not to call any of them in the original trial.  For the purpose of this trial, it filed a witness statement from Zheng Kaiyuan (“Zheng”).  In his witness statement, Zheng adopted the witness statements and affirmations filed by Wan because Wan died on 4 February 2018 and hence could not come to testify.  However, he offered no explanation for the failure to call Wan and the other witnesses at the original trial or at this remitted trial.  In the circumstances, I excluded the witness statements from Wan as well as the other six witnesses.  I also struck out irrelevant allegations in Section N of Zheng’s witness statement.

52.  Zheng testified.  He claimed to be a finance manager of FEHC since 1993.  But under cross-examination, he admitted he was stationed in Dongguan where he worked for a toy business owned by FEHC until 2011.  That was long after the events in this action and even after the original trial.  Zheng only started to assist Wan in preparing for this action in 2015.  He has no personal knowledge of the matters in dispute.  His evidence is largely made up of his views and speculations based on his reading of documents in preparing for this trial.  Most of his evidence was proven to be incorrect. He gave evidence on accounting principles which he was not qualified to give. Such evidence is inconsistent with common sense.  His evidence, particularly those in Section J and Section K of his witness statement showed that he was incredible and exaggerating.  He readily indulged in speculation.  I do not find him credible.  I give little weight to his evidence, save as supported by credible documentary evidence.

WHETHER 《PROVISIONS (I)》 IS APPLICABLE – ARTICLE 23

Whether 《Provisions (I)》 interprets《Contract Law》 and《GPCL》.  

53.  《Provisions (I) 》 was promulgated on 5 August 2010 to take effect on 16 August 2010.  That date has no bearing on the retroactivity or otherwise of the legislations it interprets.  All that date means is that with effect from that date, the judicial interpretation may be invoked by litigants for the purpose of interpreting the relevant legislations construed by the judicial interpretation.  It is not a date on which the law interpreted by the judicial interpretation takes effect.  The law has always been there and it has effect, retroactive or otherwise, according to its own provisions or, if there is no, according to the judicial interpretation which interprets it.

54.  According to Mr Bai 《Provisions (I)》is not intended to explain or interpret the laws listed in its preamble, including 《Contract Law》 and 《GPCL》 on which First Laser’s claim is founded.  The preamble of 《Provisions (I)》 states as follows:

「為正確審理外商投資企業在設立、變更等過程中產生的糾紛案件，保護當事人的合法權益，根據《中華人民共和國民法通則》、《中華人民共和國合同法》、《中華人民共和國物權法》、《中華人民共和國公司法》、《中華人民共和國中外合資經營企業法》、《中華人民共和國中外合作經營企業法》、《中華人民共和國外資企業法》等法律法規的規定，結合審判實踐，制定本规定。」

(Translation:

“These provisions are formulated to enable proper adjudication of disputes arising from the establishment and changes relating to foreign investment enterprises, and to protect the lawful rights and interests of the parties, according to the General Principles of the Civil Law of the People's Republic of China, the 《Contract Law》of the People's Republic of China, the Property Law of the People's Republic of China, and China The Law of the People's Republic of China, the Law of the People's Republic of China on Sino-foreign Joint Ventures, the Law of the People's Republic of China on Sino-foreign Cooperative Enterprises, and the Law of the People's Republic of China on Foreign invested Enterprises, are formulated in conjunction with trial practice.”)

The thrust of his argument is that those laws are the legal basis for formulating 《Provisions (I)》, but do not form part of the subject matter for interpretation by the provision.  His argument is based on page 11 of 《Provisions (I) U&A》where the authors said that the scope covered by 《Provisions (I)》 is limited to “disputes arising from the establishment and changes relating to foreign investment enterprises”.  Hence, he argues that the purpose of《Provisions (I)》is to resolve practical problems in adjudicating such disputes and not to interpret or explain the various laws stated in the preamble.  

55.  Mr Bai’s opinion is inconsistent with his opinion expressed elsewhere in his expert report. He does not dispute that judicial  interpretations do not create new laws but are explanations or interpretations by the Supreme People’s Court regarding application of  existing laws.  The preamble clearly states that the purpose of 《Provisions (I)》 is to enable proper adjudication of dispute according to the various laws stated therein.  The purpose could not a subject matter for 《Provisions (I)》 to interpret.  Obviously, that purpose is to be achieved by interpreting the laws stated in the preamble according to which the parties’ disputes are to be adjudicated.  As submitted by Mr Chan SC, it simply defies logic to say that being an interpretation, there are no subject laws to be interpreted. 

56.  It is also Mr Bai’s opinion expressed on various other occasions that《Provisions (I)》 is formulated in specification of (細化) or in specialization of (具體化) or extension of (擴展) article 58 of 《Contract Law》 and article 61 of 《GPCL》.   Such opinions contradict his argument that 《Provisions (I)》 does not interpret 《Contract Law》 and 《GPCL》.

57.  Furthermore, article 18 of 《Provisions (I)》 is a clear example of an interpretation of provisions of 《Contract Law》 and 《GPCL》 on the consequences of a contract being found to be void. As stated by the authors of 《Provisions (I) U&A》, in that area of dispute involving nominee investment contracts the legal consequences are more complicated than in the case of dispute under an ordinary contract and there is need for further explanation to be provided by 《Provisions (I)》.

58.  With respect to Mr Bai, his opinion is quite a biased and self‑serving view which I am unable to agree. It is just a desperate attempt to remove the legal basis of First Laser’s claim under a void nominee investment contract.  I accept Professor Yin’s opinion that 《Provisions (I)》 interprets the various statutes set out in its preamble, including 《Contract Law》 and 《GPCL》.  As both experts also agree that 《Contract Law》 and 《GPCL》 are applicable to the three agreements, I find that 《Provisions (I)》is also applicable to a nominee investment contract pleaded by First Laser.

Construction of article 23 and retroactivity

59.  Article 23 is the application provision which sets out the circumstances when 《Provisions (I)》 may be applicable.  It is Professor Yin’s opinion that《Provisions (I)》 is applicable to a case to which 《Contract Law》and/or《GPCL》apply if that case has not been finally adjudicated at the time when 《Provisions (I)》 came into force, regardless whether the legal facts giving rise to the case occurred before or after that date.  The basic thesis of his opinion is that there is no question about non-retroactivity of 《Provisions (I)》 which is not a new legislation but a judicial interpretation which interprets existing law, namely《Contract Law》and《GPCL》which had been in force before the legal facts in issue occurred.  According to Professor Yin, the test of applicability of 《Provisions (I)》 is simply whether the case has been finally adjudicated when 《Provisions (I)》 came into force.  For reasons as I shall explain, this approach is over-simplistic and inconsistent with the view of the authors of《Provisions (I) U&A》.  

60.  According to Mr Bai, 《Provisions (I)》has no retroactive effect and does not apply directly to legal facts which occurred before the date of promulgation regardless whether the case has been finally adjudicated.  It applies by direct application to legal facts which occurred after 《Provisions (I)》has come into force and the case arising from those legal facts has not been finally adjudicated; and indirectly by reference to cases arising from legal facts which occurred before 《Provisions (I)》has come into force, if there were no provisions under the legislations or judicial interpretations then in force applicable to the case but there are applicable provisions under《Provisions (I)》.  I agree with his approach.  But then, he made a quantum leap based on his indirect application mode to argue that 《Provisions (I)》does not apply if there were applicable provisions under the pre-existing legislations or judicial interpretations as well as under《Provisions (I)》.

61.  Before considering the experts’ opinions, it is necessary to understand the development of the non-retroactive principle of the law in China.  That principle is at the heart of this issue of whether 《Provisions (I)》has retroactive effect.  The authors of《Provisions (I) U&A》 said that on the question of retroactivity of the law（在法律溯及力問題）, the principle adopted in《Provisions (I)》is the non-retroactive principle.  By the phrase “question of retroactivity of the law”, the authors must mean retroactivity of statutory enactments and not retroactivity of judicial interpretations.  In the discussion that followed from pages 221 to 224, the authors indeed discussed about retroactivity of legislations and how that question was dealt with by various judicial interpretations. Hereunder is a summary.

62.  China was very much behind the rest of the world in the concept of non-retroactivity of the law.  Except during the Han Dynasty and the Yuan Dynasty, the law in China was basically retroactive. It was only until the end of the Qing Dynasty and the beginning of the Republic of China in 1928 that the concept of non-retroactivity found its way in the criminal codes.  At that time, the principle of non-retroactivity was basically to apply the pre-existing law to conducts which occurred before the new law but to adopt the more lenient punishment under the new law （從舊兼從輕）[10].  This historical background and philosophy have deeply influenced the development of the principle of non-retroactivity of the law in the PRC.

63.  In the Mainland, the principle of non-retroactivity was first legislated in the Criminal Code in 1979 and later in the civil law in 2000  under article 84 of《The Law on Legislation of the PRC》.  Understandably, against the above background, the non-retroactivity principle which evolved was basically to apply the pre-existing law to conduct before the new law with the benefit under the new law （從舊兼有利）[11].  Therefore, in principle, the law is not retroactive but the new law applies where it better protects the personal rights and freedom of the individuals.  This principle is usually adopted in the criminal law.  In the Criminal Code as amended in 1997, it is expressly provided that the law is not retroactive, but it is retroactive where the punishment under the new law is lighter or where the activity is not criminal or not punishable under the new law.  Thus a defendant has the benefit of the new law in respect of his criminal activity before the new law has come into effect.  In constitutional law or other areas of the law, such as civil law, the statutes seldom contain provisions on non-retroactivity.  In practice, this issue is resolved by judicial interpretations giving explanations on whether the legislations they interpret have or have no retroactive effect.  Some judicial interpretations adopt the principle of retroactivity, others adopt the principle of non‑retroactivity. There are also judicial interpretations which adopt both principles. 

64.  The non-retroactivity principle was adopted in article 196 of 《The Opinion of the Supreme People's Court on Several Issues in Implementing 《The General Principles of the Civil Law of the People's Republic of China (Trial)》》issued in 1988 (《1988 年最高人民法院關於貫徹執行《中華人民共和國民法通則》若干問題的意見（試行）》) which came into effect on 1 January 1987.  Article 196 provides that in respect of cases filed after 1 January 1987 in relation to civil conducts which occurred before 1987, the law then existed is applicable; but if the law then existed did not have specific provision governing the dispute, the relevant provisions in that judicial interpretation may be applicable.  The non-retroactivity principle of following the pre-existing law with the benefit under the new law was adopted.

65.  The retroactivity principle was adopted in 《Judicial Interpretation on Guarantee Law》(《擔保法解釋》).  Article 133(3) of that judicial interpretation provides that since the implementation of 《Guarantee Law》, 《Guarantee Law》and this judicial interpretation apply to cases arising out of conducts relating to contracts of guarantee, if the case is in the course of first or second instance trial.  Similarly, 《Contract Law Interpretation (I)》 makes it clear that 《Contract Law》 is retroactive.  Article 2 of that judicial interpretation provides that where a contract is established before the implementation of 《Contract Law》 but the period of performance under the contract overpasses or commences after the implementation of 《Contract Law》, disputes arising from the performance of the contract shall be governed by relevant provisions of Chapter 4 of 《Contract Law》. 

66.  There is also a hybrid situation where the principle of retroactivity and the principle of non-retroactivity were adopted within the same judicial interpretation as in《Opinion on Law of Succession》(《繼承法意見》).  Article 64(1) of that judicial interpretation provides that in a case which had been finally adjudicated but which was ordered to be re-tried after implementation of 《Law of Succession》pursuant to the trial supervision process, the pre-existing law and not 《Law of Succession》is applicable.  In this respect, 《Law of Succession》 is not retroactive.  But article 64(2) provides that in respect of cases which commenced before the implementation of 《Law of Succession》 but have not been finally adjudicated at the date of implementation, 《Law of Succession》 is applicable.  To such cases, 《Law of Succession》 is applicable and retroactive. This judicial interpretation adopted the principle of “segmental application” (「分段適用」). The dividing line is whether a case has been finally adjudicated at the time when the new law comes into force.  This principle was adopted in article 23 of 《Provisions (I) 》.

67.  After considering the historical development of the non-retroactivity principle, the authors concluded at page 224 as follows[12]:

「從以上立法和司法解釋的規定可以看出，我國立法在法律溯及力問題上，基本上采用從舊兼有利原則，即新法原則上沒有溯及力，在有利于當事人時可以適用。我國民事司法實踐中，對於新法對以前發生的事件和行為，根據不同的情況，實行“分段適用”的原則，即對于新法實施前尚未終審審結的案件，適用新法；對于新法實施前已經終審審結的案件，不適用新法。」 (重點以斜體及粗字體顯出)

(Translation:

“From the provisions of the above legislations and judicial interpretations, it can be seen that on the question of retroactivity of the law, China basically adopts the principle of applying the pre-existing law with the benefit under the new law, that is, in principle the new law has no retroactive effect but may be applied when it benefits the parties.  In China’s civil judicial practice, in relation to facts and conduct which occurred before the new law, it adopts the principle of “segmental application” according to the different circumstances, that is, the new law applies to cases which have not been finally adjudicated before the implementation of the new law; in relation to cases that have been finally adjudicated before the implementation of the new law, the new law does not apply.”

(emphasis highlighted in italic and bold print) )

On the issue of retroactivity or otherwise of the law, the principle is to “apply the pre-existing law with the benefit under the new law” (「從舊兼有利原則」).  The new law is non‑retroactive in the sense that basically it is not retroactive, but it may apply retroactively by segmental application （分段適用）if it is beneficial to the parties (which must mean beneficial to the party whose rights have been infringed or beneficial in the overall interest of justice).  Thus, the new law is also applicable to legal facts which occurred before the new law has come into effect, if the cases arising from those legal facts have not been finally adjudicated; but is inapplicable to cases which have been finally adjudicated.  The dividing line is whether the case has been finally adjudicated.  The new law applies not as a matter of exception, but as an overriding principle to benefit the parties.   Thus, the Mainland concept of non-retroactivity of the law is a fluid concept very different from the concept under the common law.  It may even not be wrong to suggest that the concept of non-retroactivity under Mainland law is only partial non-retroactivity or partial retroactivity under common law.  When considering the issue of non-retroactivity under Mainland law, one must bear in mind the above concept and put aside the common law concept.

68.  Article 23 must be construed against this principle of non-retroactivity of the law in the context of Mainland law.  Article 23 was drafted in simple language.  It reads:

「第二十三條 本規定施行後，案件尚在一審或者二審階段的，適用本規定；本規定施行前已經終審的案件，人民法院進行再審時，不適用本規定。」 (以斜體及粗字體顯出重點)

(Translation:

“Article 23. As to a case which is still in the course of first or second instance trial after these Provisions came into force, these Provisions shall apply. As to a case for which a final judgment has been made before these Provisions come into force, if the People’s Court re-tries the case, these Provisions shall not apply.”) (emphasis highlighted in italic and bold print) )

69.  On a plain reading of the article, it is amply clear that whether a case has been finally adjudicated is a criterion for determining whether 《Provisions (I)》is applicable.  However, according to the authors, that is not the sole criterion.   At page 220 of 《Provisions (I) U&A》, the authors identified two aspects in that article.  They wrote:

「(一)本司法解釋施行後的行為或者事件引發的糾紛而涉訴的案件尚在一審或者二審階段的，該案件尚未終審、當事人的權利義務關系尚未確定，故應適用本解釋的規定。

(二)本司法解釋施行時已經終審後的案件, 當事人申請再審或者人民法院按照審判監督程序決定再審的, 不用本適用本規定。」 (重點以斜體及粗字體顯出)

(Translation:

“(1) Where the acts or facts which brought about the disputeoccurred after these Provisions had come into forceand the case concerned is still pending under the first or second instance trial, the case has not been finally adjudicated, the rights and obligations of the parties have not been ascertained, the provisions under 《Provisions (I)》 are therefore applicable.

(2) Where the case had been finally adjudicated at the time when these Provisions came into force, the parties apply for re-trial or the People’s Court decides to re-try the case in accordance with the adjudication supervision procedure, these Provisions do not apply.”)

(Emphasis highlighted in italic and bold print) )

Under the first aspect, the authors introduced in their explanation the phrase “the acts or facts which brought about the dispute (giving rise to the case)” to qualify the word “case”.  That phrase has to be read together with the phrase “occurred after these Provisions had come into force”.  Taken together, it would appear to be the authors’ opinion that the determining factor as to whether 《Provisions (I)》applies is not just whether the case has been finally adjudicated at the time when 《Provisions (I)》came into force, but also whether the acts or legal facts occurred after《Provisions (I)》came into force.  This is the simple application of the non-retroactivity principle.  Thus, Professor Yin’s opinion may be an over simplification. 

70.  Then, at page 224 of《Provisions (I) U&A》, the authors drew the readers’ attention to four practical points.  The first two are straight forward.  Under Point 1, they reminded the readers that legal facts include the parties’ conducts as well as incidents which are independent of the parties’ subjective intention.  Under Point 2, they drew the distinction between single act and continuous act and said that in determining whether 《Provisions (I) 》 is applicable, the issue is whether those acts transgress the date of implementation of 《Provisions (I) 》. 

71.  Points 3 and 4 are pertinent.  They show how the non-retroactivity principle in the context of Mainland law applies.  Under Point 3, the authors explained that the non-retroactivity principle anticipates that the new law applies to legal facts which occurred after the law has come to effect.  Hence the new law is applicable to disputes arising from legal facts which occurred after the new law or judicial interpretation has been implemented.  This explains why in relation to the first aspect of the article the authors introduced the phrase “the acts or facts which brought about the dispute (giving rise to the case)” to qualify the word “case”.   The authors were applying the basic principle that the new law has no retroactive effect and therefore has no application to legal facts or conducts which occurred before the new law comes into force.

72.  But the authors did not stop there.  Under Point 4, the authors discussed the scenario where the legal facts occurred before 《Provisions (I)》has come into force.  They wrote at page 225:

「盡管引起糾紛的法律事實發生在的本司法解釋之前，但之前的法律或者司法解釋沒有規定，而本司法解釋有規定的，應參照本司法解釋的規定。」

(Translation:

“Despite the legal facts which brought about the dispute occurred before this judicial interpretation, if there were no provisions under the legislations or judicial interpretations then in force but there are such provisions under this judicial interpretation, reference shall be made to provisions in this judicial interpretation.”)

73.  Even if the legal facts which brought about the dispute occurred before 《Provisions (I)》has come into effect, 《Provisions (I)》is applicable if there are no applicable provisions under the pre-existing legislations or judicial interpretations then in force, but there are under 《Provisions (I)》.  This is the indirect application mode according to Mr  Bai.  Under such circumstances, 《Provisions (I)》has retroactive effect.  This is application of the overriding principle that the new law applies if it is more beneficial to the parties than the pre-existing law.  It is important to note that the authors used the description “no provisions under the pre-existing legislations or judicial interpretations” to describe the circumstances when the new law has retroactive effect.  The same description was used in some of the judicial interpretations reviewed by the authors in paragraphs 64 to 66.  However, according to the principle of non-retroactivity in the context of Mainland law, the new law applies if it is more beneficial to the parties and not where there is a lacuna. The test is whether the new law is more beneficial to the parties or better serves the interest of justice.  It is reasonable to assume that if there are no applicable pre-existing provisions, the new law must be more beneficial which must be at least one of the reasons why the new law is made.  Of course, in reality, if the new law is more beneficial than the pre-existing law, it must necessarily be a situation where there is no provision under the pre-existing law which was as beneficial, i.e. there is no applicable provisions under the pre-existing law.  The description used by the authors as well as in the other judicial interpretations discussed practically covers all circumstances where the new law is more beneficial to the parties or to the interest of justice.  The description used by the authors is probably a convenient and practical shorthand.  Up to this point, I am in agreement with Mr Bai.

74.  However, based on Point 4, Mr Bai argues that in the reverse scenario where there are applicable provisions under the pre-existing legislations, 《Provisions (I)》is inapplicable.  Mr Chan SC disagrees.  He argues that there is nothing in 《Provisions (I) U&A》 to suggest a reverse scenario must necessary lead to a contrary result.  The authors have not specifically discussed about such a scenario.  I agree with Mr Chan.  In relation to human conduct, the inference suggested by Mr Bai may be drawn, but not in relation to interpretation of statutory provisions, particularly in the light of the principle of non-retroactivity in the context of Mainland law.  While the principle is that the new law is basically non-retroactive, the overriding principle is that the new law is applicable if it is more beneficial.  If there are applicable provisions under the pre-existing law which are inconsistent with those in 《Provisions (I)》,《Provisions (I)》is applicable under the overriding principle, if it is more beneficial to the parties.  In a scenario involving inconsistent or conflicting provisions, 《Provisions (I)》would only be inapplicable if it is less beneficial than the pre-existing law.   I think Mr Bai’s argument is an impossible quantum leap.

75.  Other than a bald assertion that there are pre-existing laws applicable to First Laser’s case of nominee investment contract, Mr Bai could not pin-point to any such legislations or judicial interpretations.  There are provisions under《Contract Law》and《GPCL》 providing for restitution of properties passed under a contract or civil act which is found to be void.  But those provisions do not cover the distribution or return of properties acquired under such a contract or civil act.  There is no evidence of any pre‑existing provisions applicable to First Laser’s case of nominee investment contract, let alone that such provisions are as beneficial as article 18.  《Provisions (I)》is certainly more beneficial to the parties and better serves the interest of justice.  In that sense, there is no applicable pre-existing provisions.  《Provisions (I)》is therefore applicable to First Laser’s case indirectly by reference subject to meeting the requirement for segmental application, i.e. that the case has not been finally adjudicated. 

76.  The authors’ second proposition is quite straight-forward.  It explains and amplifies the second aspect of article 23. It applies to a case pending re-trial invoked pursuant to the adjudication supervision procedure.  Such a case has actually had a final adjudication.  The re-trial was ordered because the original trial court might have erred in applying the law then applicable to the parties’ dispute.  The court of re-trial has to determine if the original trial court had so erred.  Therefore, it is only logical that the parties’ rights and obligations should be adjudicated according to the law then applicable at the time of the original trial. 《Provisions (I)》 is therefore inapplicable to the cases mentioned in the second aspect.  Final adjudication is only relevant for the purpose of segmental application.  It should not be taken as the sole criterion for determining the application of《Provisions (I)》

77.  In conclusion, I find, on the true construction of article 23, 《Provisions (I)》 is applicable basically to cases arising from legal facts which occurred after《Provisions (I)》 has come into effect.  In addition, by the operation of the non-retroactivity principle in the context of Mainland law and the judicial practice of segmental application, 《Provisions (I)》may apply indirectly to cases arising from legal facts which occurred before 《Provisions (I)》has come into effect, if there were no applicable provisions under the pre-existing law but there are under 《Provisions (I)》, or if 《Provisions (I)》is more beneficial to the parties.  But, only cases which have not been finally adjudicated when《Provisions (I)》comes into force may qualify for segmental application.  The legal facts in issue in First Laser’s case of restitution occurred before 《Provisions (I)》has come into force.   As there is no evidence of any pre-existing legislations or judicial interpretations which are similar to article 18 of《Provisions (I)》, article 18 is applicable to First Laser’s case of restitution, if it has not been finally adjudicated. 

Has First Laser’s case been finally adjudicated

78.  In paragraph 38.2.(8)(b) of the Re-re-re-amended Defence and Counterclaim (“RRRADC”), FEHC pleaded that “the plaintiff’s cases were finally adjudicated under the PRC Judgment” and that “it is averred that 《Provisions (I)》 have no application”.  Mr Chan SC submits that it is not clear what “the plaintiffs’ cases” refers to.  Despite the ambiguity, there could be no misunderstanding between the parties.  The parties’ focus was on the remitted issue and whether 《Provisions (I)》is applicable to the alleged nominee investment contract.  That must be “the plaintiff’s cases”.

79.  First Laser’s contention is that no final judgment having been made regarding its claim on restitution either in the Mainland or in Hong Kong, 《Provisions (I)》 shall apply.  FEHC’s contention is that the crucial term used in article 23 is “case” (「案件」) as distinguished from the term “issue” or “question” (「問題」) in the context of “a case which is still pending under the first or second instance trial” or “a case for which a final judgment has been made”.  In that context, Mr Yu SC contended in his opening that the “case” (「案件」) had gone to the Court of Final Appeal and therefore had been finally adjudicated.

80.  Professor Yin’s opinion is that there is no distinction between the term “case” and “issue” or “question”.  These terms may be used interchangeably depending on the context. He accepts that the Supreme People’s Court has made a final judgment on the question of whether the three agreements were void but argues that the question as to the effect of these agreements being found to be void, i.e. the remitted issue, had never been adjudicated on, whether by the Hong Kong courts or the Mainland courts, let alone a final judgment.

81.  Mr Yu SC argues that such opinion should not be accepted as Professor Yin accepted under cross-examination that the case had been finally adjudicated (這個個案件已經終審了)[13].  With respect, Mr Yu SC is quoting what Professor Yin said out of context.  That answer was made in the context of what Professor Yin said immediately preceding that.  As the transcripts show, Professor Yin first referred to the parties’ case before the Fukien People’s Court and then the Supreme People’s Court.  Then he said that the dispute between the parties was the validity of the three agreements and the 1998 Memorandum.  It was in that context that Professor Yin said that the case had been finally adjudicated. Despite the imprecise language used, it was obvious that what Professor Yin said had been finally adjudicated was the validity of the three agreements and the 1998 Memorandum, not the “case” meaning the entirety of the parties’ dispute. He was also using the term “case” and “issue” interchangeably. 

82.  I agree with Professor Yin.  The word “case” as used in article 23 does not have a technical meaning.  There may be many facets or issues in a case.  If one only of those issues had received final adjudication, it does not mean all issues had been adjudicated, let alone finally.  The words “case”, “issue” and “question” may be used interchangeably.  The issue of restitution has been remitted by the Court of Final Appeal to this court for a determination.  It has never been adjudicated.  As submitted by Mr Chan SC, the matter can be tested by asking what was the result of such adjudication on the issue of restitution.  The answer must be that the case is pending the determination of this court.  In my view, the issue of restitution has not been determined.  《Provisions (I)》 applies to the parties’ case on restitution.

THE PLEADING AND THE REMITTER

Introduction

83.  First Laser’s case on restitution is founded on a void nominee investment contract between First Laser as the actual investor and FEHC as the nominee shareholder and article 18 of 《Provisions (I) 》.  FEHC raised strong objections to the way First Laser’s case is pleaded.  It attacks First Laser’s pleadings on two fronts.  First, a remittance cannot go beyond the reference and that the trial of a remitter must proceed on the basis of the pleadings existing at the time of the original trial and finding of fact.  It is not open to First Laser to plead a new case of nominee investment contract. Second, First Laser’s case of nominee investment contract has not been sufficiently pleaded.  To establish a claim under article 18 of 《Provisions (I) 》, First Laser has the burden of pleading and proving that a nominee investment contract was concluded between First Laser as the actual investor and FEHC as the nominee shareholder.  Such particulars are lacking.  First Laser may not advance a case which has not been pleaded. 

84.  First Laser’s general response is that it is not running a new case and that FEHC’s criticism is based on the misconceived notion that a share transfer agreement could not at the same time also have the effect of a nominee investment contract.  Moreover, FEHC’s objections had been repeatedly advanced and rejected by this court and the Court of Appeal before when contesting First Laser’s application for leave to file expert evidence relating to 《Provisions (I)》and to re-amend the Amended Statement of Claim (“ASOC”).

The remitter

85.  Mr Yu SC referred to the Privy Council case of Sans Souci Limited v VRL Services Ltd[14] and submits that in considering the scope of the remitter, the court must have regard to the relevant background leading to the order of remission.  From the commencement of this action in October 2001 up to the conclusion of the appeal in the Court of Final Appeal in July 2012, all parties have been proceeding on the basis of the First Laser Agreement being an agreement for sale and purchase of shares.  This was also the position when the matter was litigated before the Fujian Court and the Supreme People’s Court.  At paragraph 60(1) of the CA Judgment, the Court of Appeal specifically held that restitution under Mainland law was to “restore the parties to their pre-contract position”.  At paragraph 58 of the CFA Judgment, Lord Collins NPJ was of the same opinion.  However, in 2016 First Laser suggested for the very first time that it was an actual investor and FEHC was a nominee shareholder in a nominee investment contract to which article 18 of 《Provisions (I)》 applies. 

86.  Against the above background, Mr Yu SC submits that when the Court of Appeal and the Court of Final Appeal ordered remittance of the issue of restitution to be determined by this court, both courts were intending to direct this court to determine what should be returned under the First Laser Agreement, being an agreement for sale and purchase of the FCO and FCL shares.  First Laser may not alter its case as originally pleaded and advance a new case of a nominee investment contract.  He argues that the remitter must logically be the first issue to address, yet First Laser made no attempt whatever to deal with it in its 92-page closing submission.  He suggests that First Laser knew this point is fatal to all its arguments in reliance on Article 18 of 《Provisions (I)》 and has no answer to FEHC’s objections.  The other side of the coin is that the very heavy ammunition engaged by FEHC in the pleading arguments reflects a self-recognition of the lack of substance in its defence.

87.  I shall first turn to Mr Yu SC’s observations on the dicta from the CA Judgment and CFA Judgment.  The sentiment of the courts would be clearer if the two paragraphs in the judgments are read together with the immediately preceding paragraph.  In paragraphs 59 and 60(1) of the CA Judgment, Cheung JA said:

“(III) Consequence if proper law is Mainland law

59. Because of the Judge’s decision that the proper law of the contract was Hong Kong law, he dealt with the consequence arising therefrom only in the context of Hong Kong law. As a result this Court is handicapped in addressing fully the consequence in the context of Mainland law because of the absence of findings on this issue.

Contract invalid and the result

60. If Mainland law was the proper law of the contract, then the expert evidence clearly showed that the contract was invalid. The contract was invalid by reason of FCL not having obtained approval to dispose of its shares. Under Mainland law, the innocent party is entitled to two remedies :

(1) Restitution : the parties will be restored (返還) to their pre-contract position.

(2) Compensation : the party at fault (過錯) is liable to pay compensation to the other party.”

88.  In paragraphs 57 and 58 of the CFA Judgment, Lord Collins NPJ said:

“57. The Court of Appeal was handicapped in deciding what First Laser’s remedies were in the event of invalidity of the agreement or agreements under Mainland law. Because the trial judge had dealt with the consequences on the basis of his decision that the proper law of the contract was Hong Kong law, he did not choose between the conflicting evidence of Mainland law on the consequences of invalidity. As the Court of Appeal said (at [59]), it was handicapped in addressing fully the consequences in the context of Mainland law because of the absence of findings on this issue.

58. The experts on Mainland law were agreed that if Mainland law is the proper law of the contract, and the contract is invalid under Mainland law by reason of FCL not having obtained approval to dispose of its shares, the innocent party is entitled to two remedies under Mainland law: first, restitution, or restoration of the parties to their pre-contractual position; second, compensation from the party at fault [過錯].”

89.  In paragraph 59 of the CA Judgment and paragraph 57 of the CFA Judgment, Cheung JA and Lord Collins NPJ said that the court was handicapped in deciding what remedies First Laser was entitled to and were not comfortable with drawing any definitive conclusion on the scope of restitution under Mainland law, which was why the order for remission was made.  When paragraphs 59 and 60 of the CA Judgment and paragraphs 57 and 58 of the CFA Judgment are read together, it is clear that both judges were just quoting their understanding of the general propositions of Mainland law as represented by the legal experts in their reports.  The issue of restitution under Mainland law had not been fully argued before the courts.  The phrase “restoring to the pre-contract position” also begs the question of what the scope of restitution is under Mainland law.  If restitution under Mainland law, then or as it has now developed, includes improper profits (不當得利) or, in an appropriate case, reasonable distribution of the fruits of investment (合理分配股權收益） between the actual investor and the nominee shareholder of an enterprise in issue, I am unable to see why these issues do not fall within the terms of the remitter.  The dicta quoted were far from limiting the scope of the remitter to restitution only to the extent of restoring the parties to their pre-contract position. 

90.  Sans Souci Ltd is an appeal from Jamaica to the Privy Council.  It is a very strong authority binding on this court.  The principles are well‑established. In that case, the hotel manager sued for damages under three heads.  The major head was for gross management fee.  The hotel proprietor disputed mainly on the ground that the correct measure of damages was the manager’s loss of profit, and that in arriving at the loss of profit it was necessary to deduct from the gross fees the so-called “unrecoverable expenses”.  These were expenses which, according to the proprietor, the manager would have incurred in performing its functions and could not have recovered under the terms of their agreement.  The main issue was whether the so-called “unrecoverable expenses” were really unrecoverable.  After the arbitrators issued the award, the proprietor applied to court to have the award set aside or remitted to the arbitrators.  One of the grounds of the application was that the arbitrators had not dealt with the “unrecoverable expenses”.  Harris J dismissed the proprietor’s application.  The proprietor appealed.  The Court of Appeal agreed with the judge except on the ground based on the “unrecoverable expenses”.  It held that the arbitrators had failed to make appropriate finding about the expenses, or to take them into account in assessing damages, or to explain why they had not done so.  The Court of Appeal ordered a remission back to the arbitration tribunal to determine the issue of damages only.

91.  When the matter came back before the tribunal, the proprietor sought to raise two points on damages in addition to the question of “unrecoverable expenses”, and sought to lead fresh evidence in support of those points.  The tribunal refused to entertain either point.  It ruled that the award had been remitted to them for the limited purpose of dealing with the “unrecoverable expenses” to be deducted from the future management fees. It was therefore not entitled to reassess the value of the management fees.  This is similar to Mr Yu SC’s argument today. The proprietor appealed arguing that the Court of Appeal had remitted the question of damages generally, and that in principle all points relevant to damages were open before the arbitrators.  This was rejected by the High Court, again by the Court of Appeal and eventually by the Privy Council.  In delivering the decision of the Privy Council, Lord Sumption held[15]:

“11.  It is apparent from the reasons given by the Court of Appeal in December 2008 that, in ordering a remission, they were concerned only with the way in which the arbitrators had dealt with, or failed to deal with, the “unrecoverable expenses”.  Harrison P., delivering the leading judgment, identified the error or oversight which justified the remission at paragraph 69:

‘Whether or not expenses incurred by the Respondent were in fact ‘unrecoverable’, as claimed by the appellant in its Points of Defence, or reimbursable as contended by the Respondents, should have been determined by the arbitrators. The arbitrators were required to demonstrate in their award that they accepted that the expenses were ‘unrecoverable’, or alternatively payable by the Appellant. At its lowest, the arbitrators should have demonstrated that they considered the issue of ‘unrecoverable expenses’ as contended for by the Appellant.’ 

No other matter is identified by the Court of Appeal as warranting a remission.  Indeed, no other criticism was made of the way in which the arbitrators had dealt with damages.”

After giving a lengthy discussion on the principle of construction of court orders, Lord Sumption rejected the proprietor’s argument that the remitter was ambiguous and dismissed the appeal.  I do not find it necessary to quote those passages as there is no issue of ambiguity about the remitter here.

92.  There are two peculiar features in the present case which distinguish it from Sans Souci Ltd.  First, though the terms of the remitters are very similar, it is crystal clear from the judgments that the remitting court in Sans Souci Ltd was concerned only with the way in which the arbitrators had dealt with, or failed to deal with one specific issue in relation to the expenses, i.e. the “unrecoverable expenses”.  The Court of Appeal specifically directed the arbitrators “to demonstrate in their award that they accepted that the expenses were ‘unrecoverable’, or alternatively payable by the Appellant.”  All but one specific issue relevant to the claim in damages had been resolved, which was whether the expenses were unrecoverable or payable.  The issue remitted in that case was very narrow and limited to one very specific issue. 

93.  In the present case, there was no such concern expressed by the Court of Appeal or Court of Final Appeal.  The issue of restitution was remitted because this court, regrettably erred in its finding on the law applicable to the First Laser Agreement.  As a result, this court totally failed to consider the entire issue of restitution, as if the issue had never come before the court.  What this court has to consider is the entire issue of restitution and not just a specific or defined issue.  The issue of restitution under Mainland law had not been argued or considered by the Court of Appeal or Court of Final Appeal.  In the context of this case, restitution is like an alternative cause of action.  It is almost like an entirely new cause of action or a cross‑claim. There are so many issues, particularly issues relating to 《Provisions (I) 》which was then unknown to the Court of Final Appeal, which is another distinguishing feature I shall next turn to.  But on this basis alone, the present case is distinguishable from Sans Souci Ltd.  The Court of Final Appeal could not have limited the remitter to “restitution under the First Laser Agreement which is an agreement for sale of shares” as submitted by Mr Yu SC.   

94.  Second, there is an important foreign law element in this case which is absent in Sans Souci Ltd.  The Court of Final Appeal ordered that “the issue of restitution under Mainland law” be remitted to this court for determination. Mainland law is not part of the laws of Hong Kong.  Being foreign law, it must be pleaded.  In the meantime, 《Provisions (I)》 was promulgated.  First Laser applied for leave to adduce the joint Mainland law expert report in January 2016.  In contesting that application, similar arguments had been advanced by FEHC albeit with lesser force.  The argument was rejected.  In allowing First Laser’s application, this court held that 《Provisions (I)》 was promulgated in 2010 after the original trial and could not have been pleaded then but is prima facie applicable[16] (the “January 2016 Decision”).  In the absence of an express direction from the appellate court restricting admission of fresh evidence at the hearing of the remitted issue, this court has wide discretion to admit fresh evidence and permit amendment of pleadings and even to re‑open a party’s case.  FEHC sought leave from the Court of Appeal to appeal the January 2016 Decision after this court had refused leave.  It ran the same arguments.  The Court of Appeal gave a short shrift to the arguments and upheld this court’s decision[17]. 

95.  Following that, First Laser applied for leave to amend its ASOC, as new Mainland law issues were raised and foreign law must be pleaded.  Again, FEHC objected and repeated the same arguments before this court.  The principles in Sans Souci Ltd quoted by Mr Yu SC were forefront in the mind of this court when considering First Laser’s application.  A nominee investment contract is not the same as a contract for sale and purchase of shares. If restitution under Mainland law is available to a contract to which article 18 of 《Provisions (I)》 applies and this court is directed to determine the issue of restitution under Mainland law, there is no reason not to allow First Laser to plead 《Provisions (I)》 and the facts in support of a claim under 《Provisions (I)》, provided that the facts pleaded are not inconsistent with the original pleading and the findings of this court.  I consider the amendments sought within the permissible limits of the remitter and granted leave to First Laser to amend the ASOC in July 2016.  FEHC did not appeal against that order.  Amended pleadings were filed by both parties.  I have digressed into the application for leave to file further expert evidence and to amend the ASOC which occurred after the remitter was ordered.  The purpose is to demonstrate the importance of the foreign law element in the trial of the remitted issue.  The foreign law element, including 《Provisions (I)》, existed at the time the remitter was ordered.  It is an important distinguishing feature which must be taken into consideration when construing the remitter. 

96.  The scope of a court order is a matter for construction.  As submitted by Mr Yu SC, a court order has to be construed against the factual matrix.  Though the remitter in the present case is in similar terms to the one in San Souci Ltd, the factual matrix of the two cases are wholly distinguishable.  The terms of the remitter in Sans Souci was tightly defined by Harrison P; while the terms of the remitter in the present case is uncharted.  Another significant distinguishing feature is the additional foreign law element.  On a proper construction against the factual matrix in this case, other than the usual restriction that a party may not run a case inconsistent with the case it has originally pleaded and the facts found in the original trial and the express exclusion of the issue of compensation, the remitter is unrestricted.  It is open to First Laser to plead a contract to which article 18 of 《Provisions (I)》 applies even if it is a new case, so long as its case as pleaded is within the above parameters.  There is no justification to restrict the remitter in the very limited way as submitted by Mr Yu SC.

Whether First Laser is running a new case beyond the remitter

97.  FEHC argues that from the commencement of this action in October 2001 up to the conclusion of the appeal in the Court of Final Appeal in July 2012, all the parties have been proceeding on the basis of the First Laser Agreement being an agreement for sale and purchase of shares and hence it is not permissible for First Laser to change its factual case in the trial of this remitted issue to a case of nominee investment contract based on 《Provisions (I)》. Having reached the conclusion as to the scope of the remitter, FEHC’s argument has to be confined to whether the new case as pleaded is beyond the bounds of the remitter as I have found in the preceding subsection. 

98.  In gist, First Laser’s case under the remitter is that the First Laster Agreement and/or the 1998 Memorandum (construed in the context of the factual background, together with the Hang Wo and COM Agreements), collectively or individually together with the conduct of the parties constitute a nominee investment contract.  Though the claim is founded on a new or different agreement, First Laser is relying on the same three agreements and the 1998 Memorandum which were held by the Supreme People’s Court and the Court of Final Appeal to be of no effect.  It only argues that the combined effect of the three agreements, the 1998 Memorandum and the parties’ conduct constitutes or has the same effect as a nominee investment contract.  Insofar as this nominee investment contract is a new fact and constitutes a new case, it is permissible under the RASOC so long as the primary facts which proves that contract are not inconsistent with the pleadings and the finding of this court in the original trial.

99.  First Laser pleaded no new facts other than the various provisions of Mainland law and adduced no new evidence other than that which is related to determination of the value of the property acquired by FEHC under the void agreements and the increase in value of the shares in FCL by reason of the Project.   Mr Yu SC objects to First Laser pleading 《Provisions (I)》. 《Provisions (I)》 was promulgated in 2010 after the original trial.  It could not have been pleaded before.  This judicial interpretation explains the legislations applicable to First Laser’s claim on restitution.  It is illogical to tie First Laser to its pleadings before 《Provisions (I)》 was promulgated.  It is also illogical that the court should turn a blind eye to this judicial interpretation which is likely to have a significant impact on the determination of the remitted issue.  It  must be borne in mind that judicial interpretations are not new enactments.  They are explanations on existing laws. 《Provisions (I)》 is a judicial interpretation of Mainland laws, including, 《Contract Law》 and 《GPCL》 which fall within First Laser’s fallback claim of restitution.  As submitted by Mr Chan SC, it is absurd to suggest that this court should ignore a source of foreign law which on First Laser’s case is applicable to the issue being tried, particularly when such issues have been fully ventilated in the pleadings and expert evidence. 

100.  Mr Yu SC argues that First Laser should not be allowed to advance a case inconsistent with the findings already made by the court on the basis of the then pleadings.  Otherwise, First Laser would be allowed to challenge the findings of fact already made by the courts through the backdoor.  He referred to the CFA Judgment and argues that all the three courts proceeded on the basis that First Laser’s case was premised on the First Laser Agreement under which the relationship between the parties was one between a purchaser and a seller of shares.  There was no finding that FEHC agreed to invest in 51% shareholding in FCL for and on behalf of First Laser.  He was relying heavily on Lord Collins NPJ’s  findings in paragraphs 107 to 115 of the CFA Judgment.  He further argues, quoting Magic Score Ltd v The Hongkong and Shanghai Banking Corporation Ltd & Anr[18] that any evidence to the effect that the three agreements and the 1998 Memorandum would give rise to a nominee investment contract is inadmissible. 

101.  I am in general agreement with Mr Yu SC’s propositions of the law.  However, I am satisfied that First Laser is not seeking to challenge any finding of this court in the original trial or the finding of the Court of Final Appeal.  So long as First Laser’s factual case on the events which transpired between the parties remain the same as in the original trial, it is open to First Laser to argue on the strength of those primary facts that it has proved its new case of nominee investment contract as pleaded in the RASOC.  As Mr Chan SC rightly submits, a nominee investment contract by conduct may co‑exist with the three agreements and the 1998 Memorandum.  There is no finding whatever by the Court of Appeal or the Court of Final Appeal that a nominee investment contract never existed.  At trial, no new evidence about this nominee investment contract has been adduced.  First Laser only relied on inference to be drawn from facts or evidence presented during the original trial.   Though the case of a nominee investment contract is new, I think First Laser has stayed well within the parameters of the remitter and the RASOC.  I shall take care not to allow any other evidence to slip in through First Laser’s expert on Mainland law and ensure that FEHC would suffer no prejudice or unfairness.

What has First Laser to plead and prove

102.  FEHC argues that to establish a claim under article 18, First Laser has the burden to plead and prove:

(1)  a contract concluded between First Laser as the actual investor and FEHC as the nominee shareholder of a foreign-owned enterprise falling within the scope of article 18;

(2)  that First Laser has obtained a finding of such a nominee investment contract;

(3)  that the nominee investment contract was held to be of no effect; and

(4)  that the value of the shareholding held by the nominee shareholder was higher than the value of the investment put in by the actual investor.

FEHC argues that it is on this basis and upon an application to be made that the court may make an order for reasonable distribution of the gains and benefits from the shareholding after taking into account the actual state of the investment and the nominee shareholder’s contribution to the management of the foreign-owned enterprise. 

103.  First Laser has no dispute that it has to prove requirement (1), i.e. a nominee investment contract.  But I think the phrase “falling within the scope of article 18” means nothing other than such a contract which meets the other requirements.

104.  As for requirements (2) and (3), FEHC’s contention is that it is not the function of this court to determine whether such a contract existed.  It is not what the Court of Appeal and Court of Final Appeal remitted to this court for determination.  First Laser must show that there is already a finding by some other unidentified court that there was a nominee investment contract existing between the parties and that such contract was of no effect.  If not, that must be the end of the restitution claim. 

105.  I am unable to find any justification for such a restrictive view of what was remitted to this court for determination.  There is no doubt that the actual investor has the burden of proving the nominee investment contract and that it is void.  But I am unable to read into article 18 the requirement that there must be a separate finding by another court, firstly, that there was a nominee investment contract; and secondly, that it was void, before the actual investor could invoke article 18.  There is also no expert evidence to support this proposition. The proposition would make an ass of the law.  Carried to the extreme, it would take three sets of legal proceedings before the actual investor could obtain restitution.  Not even the court which annulled the contract has jurisdiction to order restitution in the same set of proceedings.  That cannot be right. There is no reason why a court tasked with determining the issue of restitution, whether in Hong Kong or the Mainland, may not determine the issue of restitution in the same set of proceedings as it determines the existence, validity or otherwise of a nominee investment contract.  Had this court correctly found that the First Laser Agreement was governed by Mainland law and was void, it would have made a determination on restitution (albeit not under 《Provisions (I)》which not existed then) in the same set of proceedings.  I think requirement (2) is superfluous and requirement (3) is met if that the party seeking restitution has pleaded the fact that the parties had entered into a nominee investment contract and that it was void.  The party may prove that the contract has been held to be void in a previous court ruling or may prove it is void in the restitution proceeding. 

106.  I agree that requirement (4) is a requirement which has to be met.  I should add that upon proving requirements (1) and (3), the actual investor has to prove the value of the foreign-owned enterprise based on the actual state of the investment and the nominee shareholder has to prove its contribution to the management of the enterprise if it wants to claim a reasonable distribution.  But that does not prevent actual investor from proving his contribution to counterbalance the nominee shareholder’s.

Has First Laser’s case been adequately pleaded

107.  The parties lodged almost 340 pages of written submissions, approximately half of which is about pleading.  The central issue in dispute about pleading is which is the contract to which article 18 of 《Provisions (I)》 applies and which First Laser is relying on in support of its case on the remitted issue.  FEHC argues that First Laser has not pleaded the nominee investment contract.  The only agreement pleaded and sued upon by First Laser is the Agreement pleaded in paragraph 10 of the ASOC, i.e. the Agreement, which insofar as it is in writing is evidenced by the First Laser Agreement.  All along, the courts in Hong Kong and the Mainland adjudicated on the basis that the First Laser Agreement was an agreement for sale and purchase of 51% of the shares in each of FCL and FCO and that it superseded the earlier Hang Wo Agreement and the COM Agreement.  It is never pleaded that the 1998 Memorandum constituted a contract between the parties.  FEHC complained particularly that First Laser never pleaded that the First Laser Agreement constituted a nominee investment contract which is an important element in First Laser’s new case on restitution or that a nominee investment contract was formed by the combined effect of the three agreements and the 1998 Memorandum.  FEHC further argues that the Hang Wo Agreement, the COM Agreement and the 1998 Memorandum were irrelevant because the two agreements were superseded and in any event First Laser is not a party to those agreements and First Laser’s claim was also not founded on the 1998 Memorandum. 

108.  First Laser could not have pleaded 《Provisions (I)》in the ASOC as it was not yet promulgated at the time First Laser commenced this action.  However, 《Provisions (I)》and various other provisions of Mainland law were pleaded in the RASOC.  First Laser also repeated its reliance on paragraphs 17, 18, 20 to 24 of the ASOC and paragraphs 6, 17, 19, 25A(4), (5), and (8) to (10) of the Re-Amended Reply.  Along with those amendments, First Laser pleaded in paragraph 38A(a)xi:

“Under Article 18, “the actual investor” in 51% equity of FCL was the Plaintiff, whereas “the nominal investor (sic)” in that 51% was the 1st Defendant.”

There was no mention of a nominee investment contract.  But in the context of paragraph 38A, a nominee investment contract must have been put in issue or implied.  “The actual investor” and “the nominal investor” must mean an actual investor and nominee shareholder of a nominee investment contract under article 18.  Otherwise, the phrase “under article 18” would be superfluous.

109.  In response, FEHC raised the issue of estoppel arising from the judgment of the Supreme People’s Court and the CFA Judgment.  It asserted in paragraph 38.6(4) of its RRRADC:

“On a proper reading and interpretation of the said two Judgments, each of them held that the facts of the case gave rise to a relationship of agreement for transfer of shares, rather than a relation where the Plaintiff provided actual investment and that the 1st Defendant was to be a shareholder nominally.”

(Emphasis highlighted in italic and bold print)

Again in paragraph 38.6(5), FEHC pleaded:

“In the alternative, the Plaintiff is estopped from raising the argument that the Plaintiff and the 1st Defendant were respectively “實際投資者” (i.e. actual investor) and “名義股東” (i.e. nominal shareholder). Any argument that the primary facts pleaded by the Plaintiff gave rise to a relationship whereby (i) the Plaintiff was the party providing the actual investment and (ii) the 1st Defendant was to be a shareholder nominally could, and should, have been raised by the Plaintiff before the Courts in Hong Kong in its attempt (albeit under Hong Kong law) to obtain a declaration of beneficial interest over the 51% of the shareholding in FCL.”

(Emphasis highlighted in italic and bold print)

110.  These two sub-sub-paragraphs indicate FEHC understood First Laser’s case is founded on the same primary facts as pleaded and found by this court in the original trial as giving rise to a relationship or contract of actual investor and nominee shareholder.  The word “relationship” instead of “contract” was used in the plea probably because FEHC was asserting issue estoppel.  But there should be no doubt in its mind that the nominee investment contract is the article 18 contract relied on by First Laser.

111.  From its RRRADC, I am satisfied that FEHC knew what contract is being relied on by First Laser as the article 18 contract.  From the voluminous expert evidence filed by the parties, particularly the list of agreed and disagreed issues, I am well satisfied that FEHC was adequately informed of the case it has to meet and was well prepared to meet that case.  This is also the impression I formed while following the experts’ evidence and cross-examination by Mr Yu SC.  It is clear that the alleged nominee investment contract arose from the parties’ conduct or performance of the three agreements which were found to be void. 

112.  In response to FEHC’s criticism on inadequacy of First Laser’s pleading in its opening submission, First Laser replied in paragraph 4.2 of The Plaintiff’s Note of Reply (Opening) (“The Note”) as follows after quoting paragraphs 10 and 11 of the ASOC:

“This Agreement was achieved by the combined effect of the First Laser Agreement (3^rd Agreement) dated 28 December 1996, the Hang Wo Agreement (1^st Agreement), the COM Agreement (2^nd Agreement) and the Memorandum of 13 March 1998 (“1998 Memorandum”) set out at paragraphs 25-27 and 42 of the CFI Judgment and analysed in the CFI Judgment.”

113.  This reply is very confusing.  The term “this Agreement” in the context of The Note after quoting paragraphs 10 and 11 of the RASOC, to an objective understanding, must refer to “the Agreement”, i.e. the joint venture agreement between Ngan and FEHC before any of the three agreements was entered into as pleaded in paragraphs 10 and 11 of the ASOC, not the First Laser Agreement or the nominee investment contract. Anyway, “the Agreement” was apparently not relied on by First Laser as the nominee investment contract. Against the background of FEHC’s criticism, First Laser must have used the term “this Agreement” as meaning the nominee investment contract.  Indeed, that was so understood by FEHC as reflected in its complaint that this “combined effect” was also not pleaded.  In the face of the plea of 《Provisions (I)》, it must be obvious to any legal practitioner that the “combined effect” is the formation of a relationship of actual investor and nominee shareholder which is central to the issue of First Laser’s restitution claim.  What brought about this combined effect is a plethora of facts in the factual matrix, including the Agreement, the three agreements, the 1998 Memorandum and the parties’ conduct.  Though the nominee investment contract was not clearly identified, it is obvious that it is not an independent or standalone contract but one which arose by the parties’ conduct under the circumstances. 

114.  In paragraph 9.2 of First Laser’s Reply Closing Submission First Laser formally identified the “combined effect” and the nominee investment contract.  Mr Chan SC said:

“Hence, the pertinent question that the Court has to decide is not the open question of whether a contract between “實際投資者” and “名義股東” existed and that such contract is held to be of no effect. Instead, the Court must determine whether the First Laster Agreement and/or the 1998 Memorandum (construed in the context of the factual background together with the Hang Wo and COM Agreements and the parties’ conduct), all of which were already held by the Supreme People’s Court and Court of Final Appeal to be of no effect, collectively or individually constitute a contract between “實際投資者” and “名義股東” within the meaning of Article 18《Provisions (I)》 in order to decide what provisions of Mainland law on restitution are applicable to the plaintiff’s claim.” (Emphasis highlighted in italic and bold print.)

First Laser’s plea is unsatisfactory.  But there is no doubt that First Laser has impliedly pleaded a nominee investment contract.  It was so understood by FEHC.  Effectively, First Laser identified the nominee investment contract as a relationship of or contract between an actual investor and nominee shareholder which co-exists with a relationship of vendor and purchaser of shares under the First Laser Agreement.  This relationship of actual investor and nominee shareholder was created by the factual matrix including the Agreement, the three agreements created pursuant to the Agreement, the 1998 Memorandum and the conduct of the parties.  If FEHC wants to identify a nominee investment contract required under article 18, the short answer is that it is a contract created by conduct under the above circumstances.

115.  If one were to start afresh to plead a case of nominee investment contract based on 《Provisions (I)》, one could have done so with the admirable clarity as suggested by Mr Yu SC.  However, First Laser had commenced proceedings 19 years ago before 《Provisions (I)》was promulgated.  It is now stuck with pleadings which it cannot undo but can only add to.  The difficulties it faced are understandable.  Undesirable as First Laser’s pleading may be, FEHC knew what case it had to meet and responded appropriately.  It is not prejudiced.  Its complaint is artificial.  There is no merit in its objection.  If FEHC really did not know what case it had to meet, it would have and should have asked for further and better particulars. Had it done so, it would have been informed of the contents in paragraph 9.2 of Mr Chan SC’s submission.  Alternatively, it should have applied to strike out First Laser’s pleading.  For FEHC to raise the issue of inadequacy of the pleading at the closing submission stage is regrettably too late and would serve no useful purpose.  It cannot expect this court to dismiss First Laser’s claim for inadequacy of pleading after spending ten days hearing the merits and experts’ evidence, particularly when it is manifestly obvious that FEHC knew the case it has to meet.  Justice requires the merits to be determined on the basis of the nominee investment contract as understood by FEHC, albeit badly pleaded by First Laser.

116.  FEHC criticized First Laser’s failure to plead that the nominee investment contract was found to be void.  In my view, it is not necessary.  It suffices if First Laser is able to show that the nominee investment contract is void.  Even if there is any failure in this aspect of the pleading, FEHC would suffer no prejudice as a result.  The failure is technical and can be rectified.

Failure to plead article 92 of GPCL

117.  FEHC  objects  to  First  Laser’s  reliance on  article  92  of  《GPCL》 quoted by Mr Chan SC in his opening.  Article 92 provides:

「第92條 沒有合法根據, 取得不當利益, 造成他人損失的, 應當將取得的不當利益返還受損失的人. 」

(Translation:

“Article 92 If profits are acquired improperly and without lawful basis, resulting in another person’s loss, the illegal profits shall be returned to the person who suffered the loss.”)

FEHC argues that the article has not been pleaded or addressed in First Laser’s written opening or The Note. There is no expert evidence from First Laser’s expert, while FEHC’s expert was not cross-examined at all.

118.  First Laser’s response is that this article has been pleaded “by implication” because it has expressly pleaded article 131 of 《GPCL Opinion》 which explains the effect of article 92 of 《GPCL》. In paragraph 38.17 of the RRRADC, FEHC responded to First Laser’ plea.  It is impossible to apply article 131 of 《GPCL Opinion》 without having regard to article 92 of 《GPCL》.  That was this court’s observation in the January 2016 Decision when granting leave to file expert evidence.  As result, experts of both parties addressed article 92 of 《GPCL》 in their expert opinions.  The suggestion that First Laser’s expert had not given evidence to that effect is incorrect.  Moreover, First Laser had expressly made reference to the principles of Mainland law already pleaded in the Reply, including paragraph 25A(9) which referred to FEHC’s “liability under accepted principles of Mainland civil law in respect of restitution, return, unjust enrichment, return of the purchase price and/or monies paid/transferred over, as well as all improper/unjust gains and/or profits”; and paragraph 25A(10) which referred to “the notions and doctrine of honesty, fidelity and integrity, and equity and fairness in relation to, inter alia, the remedies available to the Plaintiff under Mainland law”.

119.  Furthermore, First Laser is not asserting a standalone cause of action under article 92 of 《GPCL》. First Laser’s fallback position is to rely on article 58 of 《Contract Law》 or article 61 of 《GPCL》 and article 131 of 《GPCL Opinion》.  Article 131 of 《GPCL Opinion》, along with other applicable principles such as the principle of fairness and the improper profits regime, define and explain the scope of restitution under those articles of 《Contract Law》 or 《GPCL》.  Thus, the court simply cannot ignore the improper profits regime when considering the scope of restitution under article 58 of 《Contract Law》 and article 61 of 《GPCL》.  FEHC’s complaint is frivolous.  In any event, the absence of express pleading of article 92 is highly technical and can be rectified without any prejudice to FEHC.

Conclusion

120.  Having resolved the criticism about the pleading, the pertinent issue between the parties is whether the First Laser Agreement and/or the 1998 Memorandum construed, in the context of the factual matrix together with the Hang Wo Agreement, the COM Agreement and the 1998 Memorandum, all of which were already held by the Supreme People’s Court and the Court of Final Appeal to be of no effect, collectively or individually constitute a nominee investment contract between First Laser as the actual investor and FEHC as nominee shareholder within the meaning of article 18 of 《Provisions (I)》 which co-exists with the First Laser Agreement. 

THE FACT

Introduction

121.  In this section, I shall expand on some of the facts found in the original trial which provide the basis on which a new relationship of actual investor and nominee shareholder of a nominee investment contract may be inferred.  I shall highlight facts which evidence that the parties were conducting their affairs in accordance with the spirit of the First Laser Agreement.  This spirit of the First Laser Agreement only featured once in paragraph 92 of the CFI Judgment because it has little bearing in an action for breach of that agreement, but it assumed great significance in this trial. This spirit laid the foundation of First Laser’s case of nominee investment contract.

122.  I shall also elaborate on the five findings of fact by the Court of Final Appeal which are heavily relied on by FEHC as setting the factual limits within which First Laser may run its case of nominee investment contract.  Those facts are binding on this court.  The finding in this section is not to be taken as a challenge of the findings of the Court of Final Appeal.  It only explains the truth underlying the facts found by the Court of Final Appeal and put them in the proper context or perspective.  Indeed, I shall demonstrate in the next section that the finding of facts in this section only compliment and supplement those of the Court of Final Appeal and are in no way inconsistent with them.

The legislation framework under which foreign-owned enterprises operate

123.  Before analyzing the facts, it would be helpful to understand the legislation framework under which foreign-owned enterprises operate in the Mainland.  Setting-up of foreign-owned enterprises is strictly controlled in the Mainland under《The Law of the People’s Republic of China on Foreign Capital Enterprises》 (《中華人民共和國外資企業法》) which is among one of the statutes construed by 《Provisions (I)》.  The Bureau of Industry and Commerce is the administrative authority responsible for approving the setting up of such foreign-owned enterprises.   It ensures among other things that only foreign enterprises of benefit to the Mainland would be allowed to be established in the Mainland and that their capital must come from a foreign source.  The policy reason is to attract investments, in terms of both technology and funds, beneficial to the Mainland from outside the Mainland.  Hence, there is a system of capital verification requiring that the capital must be provided by the foreign investors, i.e. the shareholders on record.  Funds coming from any other source will not qualify for that purpose.  Even if paid by third parties, such contributions will be recorded as having been made by the shareholders on record.  In other words, it is impossible for First Laser or anyone other than the shareholder on record, i.e. FEHC, to contribute to the authorised capital of FCL.  Similarly, transfer of shares in such enterprises has to be approved by the bureau.  This is to ensure that these enterprises will only be operated by qualified investors and for the purposes for which they were established.  Such transfer will not be approved unless the authorized capital has been fully paid up.  The process for approval would take some time.

124.  In the Mainland, dividends of a company could only be paid to and received by the shareholders on record.  Hence, the dividends of FCO could only be paid to and received by COM while those of FCL could only be paid to and received by FEHC.  That is why Lord Collins NPJ observed in paragraph 107 of the CFA Judgment that First Laser did not receive dividends from FCL; and in paragraph 115(3) that dividends from FCL were paid to FEHC.

The background and making of the Agreement and the three agreements

125.  FEHC was in financial difficulties in 1996 as a result of the Asian financial crisis.  In fact, it could not overcome its difficulties even in 2008.  Following its litigation with FRIMS, it planned to relocate FCO’s and FCL’s operation to outside the Mainland to avoid infringement action by FRIMS arising out of FCL’s and FCO’s continued use of the incubation furnace technology.  It urgently searched for a new partner outside the Mainland who would be able and willing to pay a substantial price to buy into FCL and FCO and to provide substantial funds for the companies’ development within a short time.  It was under that setting that Kong of FEHC invited Ngan to discuss about a joint venture with FEHC in optronics business.

126.  The parties hastily entered into the joint venture agreement without having agreed to all the terms.  That agreement is described as “the Agreement” in paragraph 10 of the ASOC.  As Lord Collins NPJ observed in paragraph 116 of the CFA Judgment, the terms of the joint venture were never agreed and decisions were made on an ad hoc basis.  The Agreement was not a binding or enforceable agreement.  It was just an agreement to agree.  But pursuant to this agreement to agree, Ngan’s camp and FEHC entered into the three agreements.  On 12 December 1996, Hang Wo and FEHC entered into the Hang Wo Agreement while FEHC and COM entered into the COM Agreement for the sale of all the shares in FCO and FCL to COM.  COM was the intended investment vehicle to hold all the shares in FCO and FCL.  The COM Agreement was the performance of the Hang Wo Agreement.  About a fortnight later, FEHC and First Laser entered into the First Laser Agreement because FEHC did not like the idea of having a joint venture in high-tech optronics industry with Hang Wo which is a property development company.  The First Laser Agreement was to supersede the Hang Wo Agreement and the COM Agreement.  Under the First Laser Agreement, 51% of the shares in each of FCO and FCL were to be transferred to First Laser, FEHC was to keep the remaining 49% shareholding as its interest in the joint venture.

The First Laser Agreement

127.  The First Laser Agreement is not merely an agreement for sale and purchase of shares.  It is of the nature of a joint venture agreement under which First Laser shall actively and immediately participate in the operation and management of FCO and FCL.  Actually that agreement was never performed.  First Laser contends that FEHC was in breach. FEHC contends that the three agreements, including the First Laser Agreement, were void.  That contention was accepted by the Supreme People’s Court. Nevertheless, these agreements do not disappear like a puff of smoke in the air.  They are part of the background in First Laser’s claim in restitution. Particularly, they are evidence of the parties’ intention on which the relationship of actual investor and nominee shareholder may be inferred.  

128.  The preamble of the First Laser Agreement states that FEHC had agreed to sell 51% of its investment in the optronics project in Fuzhou for the purpose of setting up a joint venture.  It then set out the valuation of the investment to be US$6,250,000 and stipulated that First Laser would pay US$3,187,500 for the 51% interest (agreed to be HK$24,640,000) and the payment terms.  The preamble reads:

「為共同發展高科技項目，[華閩] 、[第一激光] …同意將[華閩]… 的光電子項目中的51%的股權轉讓給 [第一激光] …」

(Translation:

“For the purpose of joint development in high technology projects, FEHC and First Laser … agree to … transfer 51% of FEHC’s interest in its optronics project to First Laser.”)

From this preamble, it is clear that the common intention with which the parties conducted their affairs in the three years which followed was to jointly develop the optronics project or business carried out by FCO and FCL.  And as the terms of the agreement show, First Laser was intended to actively and immediately participate in this joint venture. 

129.  The First Laser Agreement contained the following terms:

(1)  upon completion of the share transfer（股份轉讓之後）, the ratio of the shareholding of FEHC and First Laser would be 49:51;

(2)  the net asset value of the project to be sold was agreed to be US$6,250,000, hence, FEHC would sell 51% of its shareholding to First Laser for US$3,1875,000 (agreed to be HK$24,640,000);

(3)  upon admission of First Laser into the business（介入後）, the boards of directors of FCO and FCL would be reorganized, the composition of the new boards would be subject to consultation;

(4)  upon admission of First Laser into the business, both parties agree to bear all the debts of the business according to ratio of their shareholding;

(5)  If First Laser so requests, FEHC would provide all financial and company documents relating to the project;

(6)  at the request of First Laser, part of the production line would be relocated to Macau, FEHC agreed to provide full assistance; both parties would try their best endeavour to maintain smooth production and sale in Fujian and Macau;

(7)  First Laser would pay FEHC HK$10 million within ten days of execution of the agreement and the balance by two instalments within three months; and

(8)  both parties would form a working party as soon as possible for the purpose of liaison and handling the related matters and would instruct lawyers in the PRC to handle matters relating to the change in ownership of the relevant companies.

130.  Clause (1) is a re-statement of the ultimate goal of shareholding ratio between the parties in FCO and FCL.

131.  Clauses (7) and (8) demonstrate that although the parties contemplated that the formal transfer of shares would require further procedures requiring a working team, the services of PRC lawyers and an indefinite period of time to complete, about half of the purchase price must be paid within 10 days of execution of the agreement, i.e. by 7 January 1997, and the balance within three months.  This reflected FEHC’s dire need for finance and urgency in transferring the optronics business out of Fujian. 

132.  More importantly, these clauses explain why clauses (3) and (4) made specific provision for the reconstruction of the boards of directors and assumption of rights and obligations of FCL and FCO, particularly their debts or liabilities, immediately upon First Laser’s admission into the business; and made specific provision for immediate payment of the first instalment of the purchase price instead of upon transfer of the shares which the parties contemplated would take an indefinite period of time. 

133.  The First Laser Agreement is not merely an outright sale and purchase agreement of shares as a passive investment.  The preamble and the terms of the agreement manifestly demonstrated that the purpose of the sale of the shares in FCL and FCO to First Laser was to enable the parties to jointly develop a high-tech project and that First Laser being the majority shareholder will take an immediate role and actively participate in the optronics project.  Though the agreement was void and of no effect, the parties’ express intention and the parties’ conduct during the three years which followed do not vanish as if they never existed. They stand as evidence of the spirit of the First Laser Agreement on which a relationship of an actual investor and nominee shareholder under a nominee shareholding agreement may be inferred.

Performance of the Agreement and the spirit of the First Laser Agreement

134.  Then the parties came to realize there were two problems which prevented them from proceeding in accordance with the First Laser Agreement. First, FEHC anticipated some possible litigations by FRIMS against FCO (and FCL as well as shown in the 2000 Minutes later).  Second, as FCL is a foreign-owned enterprise, the transfer of its shares required approval from the Bureau for Industry and Commerce.  Since FEHC was unable to meet the capital contribution requirement and had no means to do so, the transfer could not be effected.  The parties anticipated that the transfer of FCL’s shares may take an indefinite period of time to complete.  As indicated in the 1998 Memorandum and again in the 2000 Minutes, to protect First Laser from litigation, the parties agreed to revert back to the arrangements under the COM Agreement by transferring all the shares in FCO to COM temporarily instead of to First Laser and for FEHC to retain the shares in FCL until the capital contribution requirement of FCL could be met.  Then, the parties’ shareholdings in FCO and FCL would be regularized in accordance with the First Laser Agreement.  This is the underlying reason which explains why, as Lord Collins NPJ observed in paragraph 112 of the CFA Judgment, what the parties did bore little relationship to the First Laser Agreement.  But what the parties did was strictly in accordance with the spirit of the First Laser Agreement at least until late 1998 before FEHC had a change of mind. 

135.  Ngan’s camp promptly paid the first instalment of HK$10 million within three days, the second instalment of HK$10 million within three months according to clause (7) of the First Laser Agreement and the balance by way of set-off.  On the same day of payment of the first instalment, Ngan conducted a board of directors meeting of COM in which a resolution was passed appointing himself as managing director and Wang as general manager of FCL in accordance with clause (3) of the First Laser Agreement.  On 20 January 1997, COM issued a notice appointing Ngan, his daughter and Wang as directors of FCL.  These appointments were invalid because of Ngan’s habitual disregard of the concept of corporate identity. Nevertheless, they showed his subjective intention in immediately participating in the management of FCL.

136.  As I have found in paragraph 40 of the CFI Judgment, since 31 December 1996, FEHC, FCL and FCO treated Ngan’s camp as a shareholder of FCL and FCO.  Ngan and his daughter actively participated in the management of FCL and FCO as de facto directors.  Decisions regarding the operation and management of FCL and FCO were referred to Ngan and Kong for their joint approval.  Financial statements of FCL and FCO, requests for increase in remuneration for staff of FCL and FCO, request for purchase of staff quarters for FCO and FCL, reports on construction of a building complex for FCL, requests for payment of construction costs of the complex, requests for funds for setting up a branch office of FCL and recommendation of a bonus share scheme for the staff of FCL were referred to both Kong and Ngan for consideration and approval. 

137.  COM purchased factory buildings to house the plant and machineries of FCO and FCL.  Ngan caused FCO to apply its dividends in purchasing staff quarters for staff of FCO and FCL without requiring contribution from FCL or FEHC.  Not only did FEHC give the Project to Ngan, it permitted Ngan to carry it out under the wings of FCL using FCL’s manpower, equipment and resources.  These were not unilateral acts on the part of Ngan or First Laser.  FEHC encouraged and acknowledged Ngan’s participation in the management of FCO and FCL and consulted him on management issues of both companies.  Their conduct went well beyond casual or mere consultation.  It is evidence of active participation by Ngan as a business partner in the management and important decision making of FCL and FCO.  All these events would not have occurred if First Laser and FEHC did not regard First Laser as a participating investor of FCO and FCL.  It is important to note that these events occurred before the shares in FCL were transferred to COM or First Laser.  Obviously, the parties were acting in accordance with the spirit of the First Laser Agreement with a common intention for a mutual purpose and benefit.  These findings have not been disturbed by the Court of Final Appeal.

138.  The parties even went that far as to agree that FCO’s dividends should be applied as the parties’ joint contribution to the capital of FCL. Their intention was that when the two problems were resolved, the parties’ shareholdings in FCO and FCL would be regularized in accordance with the First Laser Agreement.  The first step FEHC or FCL took to solve FCL’s under‑capitalization problem was to apply to the authorities on 21 April 1997 for reduction of its authorised capital from US$15.15 million to US$7 million.  On 29 September 1997, FCL passed a resolution at its third board meeting acknowledging that as the shareholders’ relations had not been regularized, certain unpaid dividends would be temporarily placed in FEHC’s account and not to be distributed.  The intention was to keep the funds in the account for use as the parties’ joint contribution to the capital of FCL subsequently.

139.  By March 1998, fifteen months lapsed since the execution of the First Laser Agreement.  First Laser had performed its part of the agreement and was actively participating in FCO and FCL.  It also invested in the Project.  However, the under-capitalization problem of FCL remained un‑resolved. Kong was about to leave FEHC to take up appointment as the Chief Executive Officer in Bao Shing as Fujian Government’s representative.  On 13 March 1998, he signed the 1998 Memorandum[19] setting out the parties’ agreement under the First Laser Agreement, their respective contribution, the performance of the First Laser Agreement as at that date.  The 1998 Memorandum stated as follows: 

「根據 [FEHC] 與 [First Laser] 96年12月簽署的 “關於轉讓福州光電子項目” 的協議精神， … 一些財務問題進行磋商，形成以下備忘錄。

一、鑒於一些歷史原因，如 [FCL] 的700萬美元的注冊資本金尚有250萬美元未到位；[FCO] 亦有一些法律糾紛未理順。因此，目前在法律上 [FEHC] 暫時全資擁有 [FCL] ，COM（現由First [Laser] 的股東全資擁有）暫全資擁有 [FCO] 。待上述問題解決之後，應即理順股權關系。[COM]和[FCL]的股比為[First Laser]股東51%，[FEHC] 49%。

二、雙方同意在目前暫時未理順法律關系的情況，關於上述3個企業 ([FCL] 、[COM] 、[FCO] )，的投資和權益仍按雙方96年協議定的條款執行。

三、鑒於 [First Laser] 在組建 [COM] 時投入了大量的資金且在理順法律關系之後[FEHC]亦是 [COM]的持股49%股東，為此，[First Laser] 要求將尚未支付給 [FEHC] 的轉讓51%上述企業股權的尾數港幣464萬港元轉為 [FEHC] 對 [COM] 的出資。考慮到 [First Laser] 的意見，[FEHC] 同意將上述的464萬港元轉為 [FEHC] 對 [COM] 的出資，但由於日前 [FEHC] 在法律上暫不是 [COM] 的股東，因此，上述出資在帳務處理上安排為可轉貸款（不計息）體現，待法律關系理順之後即可將貸款轉為股權。

四、… 」 (重點以斜體及粗字體顯出)

(Translation:

“In accordance with the spirit of the [First Laser Agreement] signed by [FEHC] and [First Laser] in December 1996, … some financial issues were negotiated, reached the following memorandum.

1. that for some historical reasons, such as the fact that US$2.5 million of the registered capital of US$7 million had not yet been injected into [FCL] and that there were some outstanding legal disputes relating to [FCO], [FEHC] was still temporarily wholly holding [FCL] while [COM] was still temporarily wholly holding [FCO]; when the above problems were resolved, [First Laser’s] and [FEHC’s] shareholding in [COM] and [FCL] would be regularized in the ratio of 51:49;

2. that prior to the said regularisation, [COM’s] and [FCL’s] investments and rights in respect of [FCL], [COM] and [FCO] shall be governed by the agreements of 1996; and

3. that as [First Laser] incurred significant costs in setting up [COM] and as [FEHC] would hold 49% of the shares in [COM] upon the said regularisation, the outstanding payment in the amount of HK$4.64 million due from [First Laser] to [FEHC] under the First Laser Agreement was treated as having been paid by [First Laser] and representing [FEHC’s] capital contribution to [COM].”) (emphasis highlighted in italic and bold print)

140.  Under the memorandum, FEHC acknowledged that it and COM were holding the shares in FCO and FCL respectively as a temporary arrangement pending resolution of the two problems.  It assured First Laser that it would perform its part of the agreement and the shareholding in FCO and FCL would be regularised in time.  By “regularised”, FEHC was assuring First Laser that it would have its 51% interest in FCL and at the same time asserting its right to 49% interest in FCO held by COM.  When that regularisation would happen was indefinite.  But the parties were still committed towards performing the First Laser Agreement.  FEHC assured First Laser that until that happened, the parties’ relationship would continue to be governed by the agreements of 1996, i.e. the three agreements.  The memorandum explained why the shares in FCO were transferred to COM and not to First Laser and why FEHC was still holding all the shares in FCL.  It explained not only why what the parties did bore little relationship to the First Laser Agreement, it expressly acknowledged in the preamble that what they did were in accordance with the spirit of the First Laser Agreement. 

141.  All went very well until May 1998 when Xu and a new management replaced Kong and his team.  After an incubation period of about three months, Xu had second thoughts and started to wriggle out of the First Laser Agreement. FEHC dragged its feet in resolving FCL’s under-capitalization problem.  Despite the previous agreement to apply the dividends from FCO and FCL as the parties’ joint contribution to the capital of FCL as mentioned in paragraph 138, FEHC ignored Ngan’s request to acknowledge his intended contribution as the parties’ joint contribution. 

142.  In the meantime, the Project turned out to be successful.  In October 1999, the prospect of a sale of FCL together with the Project at an unthinkable profit surfaced after the Project was showcased at an international exhibition.  As reported by Wang in a board meeting of FCL on 13 October 1999, the Project achieved commendable results and attracted off-shore buyers.  FEHC and Xu with their control over FCL harboured the intention of touting the success and prospects of the Project and decided to explore the possibility of selling FCL with the Project as a whole secretly.  As noted in paragraph 3 of the minutes of that meeting, the board resolved that the prospect and negotiation of the sale be restricted to within the board of FCL and FEHC.  Ngan’s camp was deliberately excluded, whereas previously Ngan was kept in the loop even for minor matters such as treatment of FCL’s interest income. 

143.  On 8 December 1999, FEHC passed a board resolution to approve the intended sale of its 100% shareholding in FCL to an “international corporation in the industry” (「國際上有關企業」) which as FEHC pleaded at 29(1) of its RRRADCC referred to JDS.  On 13 December 1999, the reduction in FCL’s authorised capital was approved.  Shortly after that, FEHC paid up the reduced authorised capital using loans and dividends from FCL.  It then obtained approval from the Bureau for Industry and Commerce and completed the sale of the shares in FCL to JDS in February 2000.  This shows that approval from the bureau for transfer of the shares in FCL to First Laser was not an impossible hurdle.  FEHC dragged its feet in processing the transfer because it reneged from the First Laser Agreement or its spirit in order to tout the success and prospect of the Project.  When the occasion presented itself, FEHC sold FCL to JDS for a huge profit to solve its own financial problems.  

144.  The disagreement between the parties became overt after the sale of FCL to JDS on 29 February 2000.  The parties had a negotiation meeting in Zhuhai on 3 October 2000 in an attempt to settle their dispute.  No agreement was reached.  But the minutes of that meeting recorded the events leading to the making of the First Laser Agreement, First Laser’s participation in the Project and the reasons why the shares in FCL had not been transferred to First Laser.  It acknowledged and adopted the 1998 Memorandum and confirmed that Ngan solely funded the Project.  The minutes noted the following:

「一、 雙方達成以下共識：

1、 有關華閩向寶盛轉讓光電子項目部分股權的背景和過程，97年6月5日華閩給省政府辦公廳《關于對福州光電高科技項目處理情況的匯報》作了基本描述。

2、 96年12月12日華閩與恒和簽訂了《關于設立澳門宇星光電企業有限公司的協議》，但未對宇星的注冊資本作出約定。同日，華閩與宇星簽訂了《關于轉讓福州光電子項目股權的協議》。經過雙方當事人的確認，簽署上述兩份協議是為了應付物構所可能對華科和科騰提起的訴訟保全而採取的措施。…

3、 98年3月13日，華閩…與第一激光 …，就澳門宇星光電企業製造有限公司和福建華科光電有限公司權益和資金安排等問題進行了磋商，并簽訂了《關於澳門宇星光電企業製造有限公司和福建華科光電有限公司權益和資金安排問題的備忘錄》(下稱《備忘錄》)。雙方約定，在未理順法律關係的情況下，關於華科、宇星、科騰的投資和權益仍按雙方96年協議議定的條款執行。

4、 第一激光在華閩認可的期限內支付了2000萬港幣的股權轉讓金，轉讓金尾款464萬港幣的處理已在《備忘錄》中另有約定。

5、 鑒於一些歷史的原因(詳見《備忘錄》)與《協議》，有關的華科股東變更的批准登記手續沒有辦理。

6、 光電子項目包括了華科、科騰、宇星，在工商登記上，華科是華閩全資擁有，科騰和宇星則是顏延齡先生全資擁有，雖然沒有文字上的明確約定，實際上雙方都參與了華科、科騰和宇星的經營管理。

  7、  光纖無源件項目的開發研製階段是在華閩不同意立項的情況下由顏延齡先生單方出資進行的，在研製完成後繼續進行的生產開發和銷售階段，是在華科進行的。」

(Translation:

“I. The two sides have reached the following consensus:

1. A description about the background and process of the transfer of part of the equity in the optronics project from [FEHC] to [Bao Shing], was given by [FCHC] to the Provincial Government Office in its “Report on the Processing of Fuzhou Optronics High-tech Projects on June 5, 1997”

2. On December 12, 1996, [FEHC] and [Hang Wo] signed the [Hang Wo Agreement], but no provisions was agreed on the capital funding of [COM]. On the same day, [FEHC] and [COM] signed the [COM Agreement]. Both parties confirmed that the two agreements were signed as protective measures in dealing with possible litigations by FRIMS against [FCL] and [FCO]. ...

3. On March 13, 1998, [FEHC] ... and [First Laser] ... entered into negotiation on the rights and funding arrangements of [COM] and [FCL] and signed the [1998 Memorandum] (hereinafter referred to as “Memorandum”). The two parties agreed that before the legal relationship had been regularised, the investment and rights of [FCL], [COM] and [FCO] will still be governed by the terms agreed by the two parties under the 1996 agreements.

4. First Laser paid the transfer fee of HK$ 20 million within the period allowed by [FEHC], and the payment of the remaining balance of HK$4.64 million had been agreed in the Memorandum.

5. For some historical reasons (see the Memorandum for details), the approval for change of shareholders of [FCL] under the Agreement have not been processed.

6、 In the registered record of the Bureau of Industry and Commerce, the optronics project includes [FCL], [FCO] and [COM]. [FCL] is wholly-owned by [FEHC], [FCO] and [COM] are wholly-owned by Ngan. Though there was no express agreement, in reality both parties participated in the operation and management of [FCL], [FCO] and [COM].

7. The development phase of the optronics component project was carried out by Ngan who solely funded the project when FEHC did not agree to proceed with the project. After the development phase was completed, the phase of manufacturing and sale of the components was continued by FCL.”)

145.  The 2000 Minutes confirmed the contents of the 1998 Memorandum.  In particular, paragraph 2 confirmed that the Hang Wo Agreement and COM Agreement were signed as protective measures against possible litigations against FCO and FCL by FRIMS; paragraph 4 confirmed that the sum of HK$4,640,000 paid by Ngan in setting up COM be treated as FEHC’s contribution to the capital of COM and as Ngan’s payment of the outstanding balance payable under the COM Agreement; paragraph 6 acknowledged that both parties participated in the operation and management of FCO, FCL and COM; and paragraph 7 acknowledged that the research and development of the Project was funded solely by Ngan.  Thus, even ten months after the sale of FCL to JDS when FEHC has clearly repudiated the First Laser Agreement, FEHC acknowledged that prior to that the parties had been conducting themselves in accordance with the spirit of the First Laser Agreement.

146.  It would be reasonable to assume that had FEHC performed its part of the agreement, Jenwing, including its 49% interest in COM, would have been transferred to FEHC and inter-company shareholding would have been arranged to reflect First Laser’s 51% interest in FCO.  That did not happen because FEHC decided to renege from the First Laser Agreement towards the end of 1998.  While what the parties did bore little relationship to the First Laser Agreement, it is beyond dispute that until the end of 1998 what they did was according to the spirit of the First Laser Agreement and with the intention that when the two problems were resolved steps would be taken resulting in the First Laser Agreement being performed to the letter.  The transfer of 100% interest in FCO to COM was only a temporary arrangement.  It was not a sale and purchase of shares in FCO simpliciter, but part of a bigger arrangement, the ultimate aim of which was to create a joint venture with First Laser holding 51% of the shares in each of FCO and FCL and FEHC holding the remaining 49%.  It was one of the ad hoc arrangements under the joint venture.

FINDING OF THE COURT OF FINAL APPEAL

Introduction

147.  FEHC relied heavily on the following finding of fact by the Court of Final Appeal in support of its defence:

(1)  The First Laser Agreement was an agreement relating to the sale and purchase of the FCL and FCO shares; and that the arrangement was in the nature of a joint venture, the terms of which were never agreed: paragraphs 10, 18, 111-116 of the CFA Judgment.

(2)  The evidence does not support First Laser’s case that the First Laser Agreement was treated as binding and effective by the parties, or that there was any requisite reliance: paragraph 13 of the CFA Judgment.

(3)  First Laser did not participate in the capital contributions for FCL that took place after December 1996: paragraph 115(1) of the CFA Judgment.

(4)  The 1998 Memorandum made it clear that ownership in the FCL shares had not been transferred to First Laser; and that FEHC was still holding them (and in context this did not mean holding them for First Laser: paragraph 115(2) CFA Judgment.

(5)  Only FEHC received dividend payments from FCL while First Laser did not: paragraph 115(3) CFA Judgment.

These findings are binding on this court.  Mr Yu SC submits that First Laser may not run a case inconsistent with those facts. I have no disagreement with his propositions.  But “not inconsistent” is not the same as “contrary” or “otherwise than”.  There can be room for other findings which are not inconsistent with those facts found by the Court of Final Appeal. 

148.  The purpose of the analysis in this section is not to question those findings but to put the findings in their proper context and to explain the truth underlying those findings. First, it must be noted that those findings were made in the context of whether the First Laser Agreement was a valid agreement under Hong Kong law.  They may not have the same significance when considering the parties’ conduct in the context of Mainland law which is what this remission hearing is about.  Second, I shall demonstrate below that there are incontrovertible evidence explaining those findings.  Of particular importance are the reasons why the shares in FCO were transferred to COM and not to First Laser and why FEHC continued holding the shares in FCL.  Once the underlying reasons for these facts are known, one understands why what the parties did bore little relations to the First Laser Agreement.  If what the parties did is viewed against the parties’ intention as expressed in the 1998 Memorandum, one immediately sees that what the parties did were in fact in accordance with the spirit of the First Laser Agreement.  It was the parties’ intention that once the two problems (possible litigation against FCO and FCL’s under-capitalization problem) were resolved, steps would be taken to ensure what the parties had done would fall in line with the First Laser Agreement.  This spirit of the First Laser Agreement assumes great significance in First Laser’s case based on a void nominee investment contract.

Finding (1): The joint venture the terms of which were never agreed and what the parties did bore little relationship to the First Laser Agreement

149.  The first finding is extracted from paragraphs 10, 18, 111-116 of the CFA Judgment.  Paragraphs 18 and 112 are pertinent.  At paragraph 18, Lord Collins NPJ said:

“The First Laser Agreement was an agreement relating to the sale and purchase of the FCL and FCO shares, and in commercial terms was only part of the transaction. The reality of the matter was that the arrangement was a joint venture. But the terms of the joint venture were never agreed, and the relationship between the parties was fluid and decisions were taken on an ad hoc basis without reference to any underlying agreement.”

At paragraph 112, Lord Collins NPJ said:

“What the parties did bore little relationship to the First Laser Agreement.”

150.  Lord Collins NPJ rightly observed in paragraph 18 of the CFA Judgment that the First Laser Agreement was an agreement relating to the sale and purchase of the FCL and FCO shares but that was only part of the transaction.  Throughout this trial, FEHC repeatedly emphasized the first part of the above dictum, arguing that the First Laser Agreement is a simple agreement for sale and purchase of shares and nothing else.  It totally ignored what Lord Collins NPJ said in the second part of that dictum that the agreement was only part of the transaction.

151.  The finding of fact in the previous section has brought out what Lord Collins NPJ said about the other parts of the transaction or joint venture and the spirit of the First Laser Agreement.  It accords entirely with both of Lord Collin’s observations.  That joint venture is, in fact, “the Agreement” pleaded in paragraph 10 of the ASOC.  This joint venture agreement is identified and described in paragraph 11 as an agreement which insofar as it is in writing, is evidenced and/or contained by a written agreement dated 28 December 1996, which was the First Laser Agreement.  First Laser went on to plead that the First Laser Agreement superseded two earlier agreements, i.e. the Hang Wo Agreement and the COM Agreement.  This Agreement is the joint venture referred to in paragraphs 1 and 2 of the CFI Judgment.  It is also the joint venture referred to in paragraph 116 of the CFA Judgment.  As Lord Collins NPJ said, “the overall picture is that the terms of the joint venture were never agreed” and “decisions were made on an ad hoc basis”.  The Agreement is not a valid and binding agreement.  It is an agreement to agree or a gentlemen’s agreement.  The agreement sued in this action was “the Agreement”, i.e. the joint venture agreement.  But, as the subject matter of First Laser’s claim whether under the Agreement or the First Laser Agreement is the shares in FCL, the focus at trial conveniently fell on the First Laser Agreement.  Furthermore, as the parties’ dispute could be sufficiently resolved by looking at the agreement in the context of an agreement for transfer of shares, that description was adopted by the court as a general description and as a matter of convenience.  There was no determination as to what the Agreement or what the First Laser Agreement was not.  There was no consideration or determination as to whether the First Laser Agreement also involves a relationship between actual investor and nominee shareholder.  That could not have been an issue as 《Provisions (I)》 had not yet been promulgated.

152.  The Hang Wo Agreement, the COM Agreement and the First Laser Agreement were ad hoc arrangements entered into pursuant to the Agreement or its spirit.  There was an agreement to agree on a 51:49 joint venture but decisions on how it was to be carried out were made on an ad hoc basis.  Otherwise, First Laser would not have paid HK$20 million to FEHC, all the shares in FCO would not have been transferred to COM, the 1998 Memorandum and the 2000 minutes would not have been signed, Ngan would not have paid for the building of a complex for FCL and for setting up a branch office for FCL; he would not have used dividends from FCO to subsidise staff of FCO and FCL in purchasing staff quarters; and all the communications between FEHC and First Laser about capital contribution to FCL would not have happened, just to mention a few.

153.  At paragraph 112 of the CFA Judgment, Lord Collins NPJ said that what the parties did bore little relationship to the First Laser Agreement.  His Lordship must be particularly referring to the transfer of the shares in FCO to COM instead of to First Laser and the total failure to transfer the shares in FCL to First Laser.  The findings in the previous section accord entirely with what Lord Collins NPJ said at paragraph 112.  Those findings supplement Lord Collins NPJ’s observation with more examples of what the parties did which were not done by or for First Laser, but they supplement Lord Collins NPJ’s observation with the underlying reasons or explanations for those conducts (i.e. possible litigations from FRIMS and FCL’s under-capitalisation problem).  Those explanations are evidenced in writing in the 1998 Memorandum and again in the 2000 Minutes.

154.  FEHC argues that the 1998 Memorandum was found to be void by the Court of Final Appeal.  That does not mean the memorandum just vanished in thin air.  The document is here.  What had been done in accordance with the 1998 Memorandum are facts and not in dispute.  The 1998 Memorandum and those facts do not cease to be part of the background to be consider in this remission hearing.

155.  It is important to note that as stated in the preamble, the 1998 Memorandum was entered into in accordance with the spirit of the First Laser Agreement. That is an acknowledgement by the parties that in 1998 they were acting in accordance with the spirit of the First Laser Agreement.  It is equally important to note that the overall theme of the memorandum is that once the problems mentioned therein were resolved, everything will be regularised in accordance with the First Laser Agreement, not just its spirit.  The First Laser Agreement will be followed to the letter.  The joint venture will take the form of COM, which will be held by First Laser and FEHC in the ratio of 51:49, holding 100% of the shares in FCO; and First Laser holding 51% of the shares in FCL and FEHC continue holding 49% of the shares in FCL.

156.  Paragraph (1) of the 1998 Memorandum acknowledged that there were legal disputes relating to FCO and the under-capitalization problem in FCL.  Impliedly the reason for transferring the shares in FCO to COM instead of to First Laser was because of the legal disputes which was why “COM was still temporarily wholly holding FCO”.  The legal disputes were probably some pending or possible litigations by FRIMS (物購所) as stated in paragraph 2 of the 2000 Minutes made shortly before the present litigation commenced[20].  The reason for not transferring the shares in FCL was because the authorised capital had not been fully injected into FCL and approval for the transfer would not be given until the capital had been fully injected into FCL.  That was why FEHC acknowledged that “FEHC was still temporarily wholly holding FCL”.  What is significant is that FEHC went on and gave an assurance that “when the above problems were resolved, First Laser’s and FEHC’s shareholding in COM and FCL would be regularised (理順股權關係) in the ratio of 51:49”.  Thus the holding by COM of all the shares in FCO and by FEHC of all the shares in FCL was only a temporary arrangement.  In other words, when the problems were resolved, steps would be taken to transfer 51% of the shares in FCL to First Laser so that First Laser would hold 51% interest in FCL and to adjust the shareholding structure in COM (by transferring the shares in Jenwing to FEHC so that FEHC would hold 51% interest in COM.  Thus, in March 1998, the parties were working towards the performance of the First Laser Agreement in accordance with its terms.  In the interim period, they were conducting themselves in accordance with the spirit of the First Laser Agreement.  That was also why FEHC said that prior to the regularisation, the parties’ rights and obligations were to be governed by the three agreements.  Thus, although what the parties did bore little relations to the First Laser Agreement, they were in fact acting according to the spirit of the First Laser Agreement.  These findings have not been emphasised strongly enough in the CFI Judgment as the focus at the original trial was on breach of the First Laser Agreement.

157.  The above findings are totally consistent with Lord Collins NPJ’s observations.  They are findings made in the original trial which were not disturbed by the Court of Appeal and Court of Final Appeal.  These findings explain the truth underlying the observations of the Court of Final Appeal.  They explain why this court held that the parties conducted their affairs in accordance with the spirit of the First Laser Agreement, a finding which has not been overturned.  These findings are not inconsistent with or  contrary to the findings of the Court of Final Appeal.  They only supplement those findings with the underlying truth, lest the findings of the Court of Final Appeal be misunderstood or misconstrued.

Finding (2): No evidence that First Laser Agreement was treated as binding and effective by the parties and no reliance by FEHC

158.  In dismissing First Laser’s case of estoppel by convention Lord Collins NPJ said at paragraph 113 of the CFA Judgment:

“… the evidence does not support First Laser’s thesis that the First Laser Agreement was treated as binding and effective by the parties, or that there was any requisite reliance (in the context of estoppel by convention) …”

159.  This court is bound by this finding.  This finding mirrors Finding (1).  As explained in the above subsection, because of the two problems, the parties partially reverted back to the COM Agreement. Hence, there is no evidential nexus between the parties’ conduct and the First Laser Agreement.  However, the unequivocal intention as expressed in the 1998 Memorandum is that when the two problems were resolved, steps will be taken to regularise the parties’ shareholding in FCO, FCL and COM.  Again, what underlies the parties’ conduct is the spirit of the First Laser Agreement.  In any event, Finding (2) is irrelevant insofar as First Laser’s case of nominee investment contract is concerned. 

Finding (3):  First Laser did not participate in capital contribution of FCL

160.  Lord Collins NPJ held at paragraph 115(1) of the CFA Judgment that First Laser did not participate in the capital contributions which took place after December 1996.  That is a true statement but it must be understood in the factual context that under Mainland law only the shareholder on record may contribute to the share capital of a foreign-owned enterprise.  Even if the funds actually came from First Laser, it would be recorded as coming from FEHC.  The statement may therefore be supplemented with further unchallenged evidence of the underlying truth at the original trial.  Such supplement should not be regarded as inconsistent with the finding of the Court of Final Appeal.

161.  As already set out in the background, at the time FEHC was in financial difficulties.  It had no means to contribute to the outstanding capital required for FCL and was urgently looking for a partner who was able to provide funds to buy into FCO and FCL and to relocate the operation of these companies to outside the Mainland.  Then Ngan came into the scene.  As indicated in the 1998 Memorandum, the parties understood right from the beginning that FCL’s under‑capitalisation problem was the major impediment to the approval required for the transfer of 51% of its shares to First Laser.  The first step FEHC or FCL took to solve this problem was to apply to the authorities on 21 April 1997 for reduction of its authorised capital from US$15.15 million to US$7 million.  In accordance with the spirit of the First Laser Agreement, FCL passed a resolution at its third board meeting on 29 September 1997 acknowledging that as the shareholders’ relations had not been regularized, certain unpaid dividends would be temporarily placed in FEHC’s account and not to be distributed.  The intention was to keep the funds in the account for use as the parties’ joint contribution to the capital of FCL subsequently.

162.  As at March 1998, when FEHC signed the 1998 Memorandum, the undoubted intention of the parties was to solve the under-capitalization problem of FCL and have 51% of the shares in FCL transferred to First Laser after that problem was resolved. Their plan was to meet FCL’s capital contribution requirement by using the dividends from their joint venture, i.e. FCO and FCL.  Since the parties had agreed to the 51:49 ratio for their respective investment in both FCL and FCO, contributing the dividends from these two companies to the share capital of FCL was in reality equivalent to the parties each making the capital contribution in the same ratio. 

163.  Pursuant to the 1997 resolution[21], FCL expressly mentioned in a fax dated 6 August 1998 to FEHC, the plan of applying the profits of FCL and FCO in the sum of around US$826,000 towards solving the under-capitalization problem of FCL.  This fax was before this court at the original trial but not before the Court of Final Appeal as it was considered outside the scope of the appeal.

164.  On 12 August 1998, Wang wrote to the boards of FCL and FCO about the pressing need to resolve the under-capitalization problem.  This letter was also before this court but not the Court of Final Appeal for the same reason. 

165.  On 17 August 1998, COM reiterated to FEHC the need to resolve the under‑capitalization problem by using the dividends of FCL and FCO.  A similar message was repeated by Ngan on 25 September 1998.

166.  On 19 October 1998, FEHC wrote to COM agreeing to apply the dividends of FCL and FCO for 1997 for resolving FCO’s under-  capitalization problem and asked COM to remit the dividends from FCO to FCL for that purpose.  This is strong evidence of FEHC’s acknowledgment of its status as a nominee shareholder for COM or First Laser. 

167.  In a follow up letter dated 21 October 1998, First Laser requested Wang for a written confirmation that FCO’s dividends to be applied as capital for FCL would be regarded as capital contribution by both FEHC and First Laser.  On the same day, FCO made a written request to Ngan’s son to arrange for FCO’s dividend of US$718,731.92 to be paid to FEHC’s account.  On 3 November 1998, FCL replied to First Laser that after consulting FEHC, it was agreed that all of FCL’s and FCO’s dividends shall be applied to solve the under‑capitalization problem.  On 17 November 1998, presumably out of extra caution, First Laser wrote to FEHC requesting for such a confirmation.  Several requests and letters were exchanged, but no confirmation was forthcoming from FEHC.  Those correspondence were also before this court at the original trial but not before the Court of Final Appeal as being outside the scope of the appeal.  Ultimately, the plan fell through because FEHC ignored First Laser’s request for confirmation which First Laser reasonably sought. Hitherto, only FCL agreed to give the confirmation but FEHC did not.  The parties were in a deadlock since November 1998.  FCO’s dividends were not remitted to FEHC due to want of a confirmation from FEHC.  By this time, FEHC was clearly wriggling out of the three agreements and the 1998 Memorandum.

168.  On 13 December 1999, the reduction in FCL’s authorised capital was approved.  Shortly after that, FEHC paid up the reduced authorised capital using loans from Casix Inc and dividends from FCL.  It then obtained approval from the Bureau for Industry and Commerce and completed the sale of the shares in FCL to JDS in February 2000.  This also shows that approval for share transfer from the bureau is not an impossible hurdle.  However, FEHC took advantage of the Mainland law and its position as the sole shareholder of FCL on record and argued before the Court of Final Appeal that no dividends were ever paid to First Laser and that First Laser never contributed to the capital of FCL since December 1996.  Though factually correct, the argument was made of half-truth only.

169.  On First Laser’s case, the funds from FCL and its subsidiary used to contribute to the share capital of FCL were common funds belonging to First Laser and FEHC in the agreed ratio.  In a letter to the Fujian Government dated 3 July 2000, FEHC mentioned its financial difficulties and explained how the under-capitalization problem was ultimately resolved by means of capital reduction, FCL’s dividends and a loan of US$874,000 from Casix Inc.  FEHC also acknowledged that although the capital was fully paid up to facilitate the sale of FCL to JDS, FEHC was still indebted to FCL in the sum of US$874,000.  This letter was only disclosed by FEHC two years after the conclusion of the hearing before the Court of Final Appeal.  On First Laser’s case, First Laser was entitled to 51% of the dividends of FCL and the loan from Casix Inc as acknowledged in the 1998 Memorandum.  Thus, the capital contribution purportedly made by FEHC was jointly made by FEHC and COM or First Laser in the agreed ratio.  The evidence of FEHC’s contribution made at a time when the parties’ relationship had turned sour and when FEHC was acting contrary to the spirit of the First Laser Agreement or in breach of the 1998 Memorandum is of little probative value in deciding who actually contributed to the capital of FCL

170.  The above facts are not in dispute. They are supported by incontrovertible evidence before this court during the original trial.  In addition, they are supported by FEHC’s letter to the Fujian Government.  On my finding, the funds used by FEHC to contribute to the capital of FCL after December 1996 were common funds belonging to FEHC and COM or First Laser under the spirit of the First Laser Agreement.  This finding is not inconsistent with the finding of the Court of Final Appeal.  It explains (but not disputes) why on record First Laser had not participated in the capital contribution of FCL after 1998, but in truth it had contributed in the agreed ratio.  It complements Lord Collins NPJ’s finding by putting it in the proper context of capital contribution to a foreign-owned enterprise under Mainland law and the factual context of what the parties had agreed on how to contribute to the capital of FCL when the shareholding has not been regularised. It is wrong to construe his Lordship’s finding in the absence of the above context. 

Finding (4): FEHC not holding shares in FCL for First Laser

171.  At paragraph 115(2) CFA Judgment, Lord Collins NPJ held that the 1998 Memorandum made it clear that ownership in the FCL shares had not been transferred to First Laser; and that FEHC was still holding them (and in context this did not mean holding them for First Laser).  FEHC placed heavy emphasis and reliance on this finding.  That observation was made when Lord Collins NPJ was considering whether “FCL shares were treated as owned as to 51% by First Laser” plainly through the prism of Hong Kong law under which the concepts of legal and beneficial ownerships are well recognized.  Those observations may not have the same significance in this remission hearing when this court is required to consider the issue of restitution under Mainland law.  In terms of context, it was in the context of shareholding under Mainland law because the 1998 Memorandum was written in the Mainland by a mainlander relating to shares of mainland enterprises and agreements (or at least the First Laser Agreement) governed by Mainland law.  In terms of time, the 1998 Memorandum was written in March 1998.  In March 1998, FEHC was indeed still holding all the shares in FCL. 

172.  There is no concept of trust or equitable interest under Mainland law.  A shareholder on record owns and holds the shares for himself.  He cannot hold them for another.  On the other hand, there is a concept of nominee shareholding under Mainland law as recognised in article 18 of 《Provisions (I)》.  As the authors of《Provisions (I) U&A》 explained, a nominee shareholder has all the rights of a shareholder.  He holds the shares for himself and not on trust for another and is entitled to dividends from the shareholding.  Understood strictly in this light, Lord Collins NPJ’s dictum is also correct even when viewed in the context of Mainland law.  But, it is not to be understood or construed (as Mr Yu SC tries hard to impress upon this court) as his Lordship’s finding that FEHC was not or could not be a nominee shareholder holding 51% of the shares in FCL for First Laser as the actual investor in the context of Mainland law.  Such finding, if indeed made, is not inconsistent with the finding of the Court of Final Appeal made in the context of Hong Kong law, with which I am in total agreement.

Finding (5): Only FEHC received dividends from FCL

173.  At paragraph 115(3) of the CFA Judgment, Lord Collins NPJ held that FEHC received dividends from FCL and noted that at FCL’s board meeting in September 1998 it was resolved that the undistributed profits in the amount of RMB 10,986,000 be distributed to FEHC. As already discussed above, under Mainland law, only the shareholder on record may contribute to the capital of the enterprise and, likewise, only the shareholder on record may receive dividends despite that he is only a nominee shareholder.  As discussed above, during its communication with First Laser between October and November 1998, FEHC acknowledged that the dividends from FCL would be applied as the parties’ joint contribution towards FCL’s capital according to the agreed share ratio in just the same way as FCO’s dividend would be applied.  If the dividends did not belong to the parties in the agreed ratio, there was no reason why FEHC should have so acknowledged.  In effect, FEHC was acknowledging that it held 51% of the dividends of FCL as nominee shareholder of COM or First Laser and at the same time asserting that COM held 49% of the dividends of FCO as nominee shareholder of FEHC.  In so doing, the parties were conducting themselves according to the 1998 Memorandum and the spirit of the First Laser Agreement.  For the same reasons as stated in the preceding subsection, this finding is not inconsistent with Lord Collins NPJ’s finding.  It is an incontrovertible truth underlying the finding of Lord Collins NPJ, which this finding does not seek to challenge.

Issue estoppel

174.  Issue estoppel was raised by FEHC at the eleventh hour in its supplemental closing submission. FEHC argues that First Laser is estopped from disputing what the Court of Final Appeal has found. Having shown that the above findings are not inconsistent with the findings of the Court of Final Appeal, FEHC’s objection based on issue estoppel does not arise.

175.  No authority has been cited by FEHC as to how the principle operates.  Mr Chan SC referred me to three authorities.  In Spencer Bower and Handley on Res Judicata, the authors succinctly stated the subject matter of issue estoppel as follows[22]:

“An express decision will not necessarily create an issue estoppel. Only determinations which are necessary for the decision, and fundamental to it will do so. Other determinations, however positive, do not.”

In Blair v Curran[23], the court cited Spencer Bower and defined the meaning of “fundamental determination”.  It said:

“in the phraseology of Lord Shaw, “a fact fundamental to the decision arrived at” in the former proceedings and “the legal quality of the fact” must be taken as finally and conclusively established (Hoystead v Commissioner of Taxation (2). But matters of law or fact which are subsidiary or collateral are not covered by the estoppel. Findings, however deliberate and formal which concern only evidentiary facts and not ultimate facts forming the very title to rights give rise to no preclusion.”

These principles are well established and were applied in Hong Kong in Cheung Ting Kau Vincent v Koo Siu Ying[24].  I also adopt the same principles.

176.  The facts relied on by FEHC are facts which the Court of Final Appeal found in rejecting First Laser’s argument that it had an arguable case of estoppel by convention.  Lord Collins NPJ said at paragraph 107:

“This question does not arise in view of my conclusion as to applicable law, but since the matter has been fully argued I will express a view.”

Thus, in view of his Lordship’s conclusion that estoppel by convention was a matter of substantive rather than procedural law which did not exist under the governing Mainland law, the question of estoppel by convention does not arise.  The plea of estoppel by convention stood to be rejected whether or not the facts supported it.  The Court of Final Appeal’s subsequent comments on whether the facts arguably supported an estoppel by convention cannot possibly be “essential” to the conclusion reached.  The dicta in the entire subsection from paragraph 107 to 116 are clearly obiter.  They are not fundamental to the decision arrived at in the former proceedings and could not give rise to issue estoppel. 

177.  FEHC suggests that the concept of obiter findings only apply to propositions of law and not to findings of fact.  That is plainly wrong in the light of the decisions in Parakou Shipping Pte Ltd v Jinhui Shipping and Transportation Ltd[25].

178.  Furthermore, it is trite that issue estoppel only arises where the issues are the same: see Spencer Bower[26]. Here, the Court of Final Appeal was dealing with the question of estoppel by convention and whether there was a sufficiently certain assumed state of affairs, namely that the First Laser Agreement was valid and that First Laser was treated as the 51% beneficial owner of FCL, to support an estoppel under Hong Kong law.  It is a different issue from the one at hand, which is whether there was a nominee investment contract between First Laser and FEHC for the purpose of article 18 of 《Provisions (I)》.

A NEW RELATIONSHIP AND NOMINEE INVESTMENT CONTRACT

A new relationship

179.  Though the First Laser Agreement is an agreement for sale and purchase of shares, it is not an agreement for sale and purchase of shares as a passive investment only, which was what Mr Yu SC repeatedly tried to impress upon this court as the true nature of that agreement and that the only relationship between the parties was one of vendor and purchaser.  As Lord Collins NPJ said, that (sale and purchase of shares) is not the entirety of that agreement.  The true nature of the agreement was a joint venture and the true relationship between the parties was one of partnership which co-exists with the relationship of vendor and purchaser shares.   The joint venture was to jointly develop a high-tech optronics project represented by FCO and FCL under which First Laser would immediately and actively participate in FCO and FCL as an equal if not the majority participating shareholder. 

180.  Because of the problems caused by possible litigations from FRIMS and FCL’s under-capitalization issue, the shares in FCO were transferred to COM instead of to First Laser, while the shares in FCL were continued to be held by FEHC.  That was a temporary arrangement only.  The parties’ common intention was that when the two problems were resolved, the shareholding in FCO and FCL would be regularised and steps would be taken to ensure what the parties had done would fall in line with the First Laser Agreement.  The parties anticipated that the share transfer would take an indefinite period of time to complete.  Despite that the shares in FCL were not transferred to First Laser in accordance with the First Laser Agreement, First Laser promptly made the first instalment payment for the shares within days and the second instalment by cheque and the balance by way of set-off within 3 months as required under the First Laser Agreement.  Most importantly, Ngan’s camp immediately and actively participated in FCO and FCL.  COM purchased factory premises for FCO and FCL and paid for the building complex for FCL etc.  Ngan made important decisions for FCL and caused COM to apply the dividends from FCO towards payment for staff quarters for staff of FCO and FCL. 

181.  By March 1998, the parties had carried on this de facto partnership for fifteen months.  The shareholding in FCO and FCL were still not regularised.  However, the parties were committed not only towards regularising the shareholdings but also in running the joint venture through their joint participation in FCO, FCL and COM.  Though what the parties did had little relationship with the First Laser Agreement, they were in fact carrying out the joint venture in accordance with the spirit of the First Laser Agreement.  Kong executed the 1998 Memorandum acknowledging that the COM and FEHC were temporarily holding the shares in FCO and FCL respectively.  While in the context this did not mean COM was holding any of the shares in FCO for FEHC nor was FEHC holding any of the shares in FCL for First Laser as there is no concept of beneficial interest under Mainland law, there was an understanding that when the two problems were resolved, the shareholdings in FCO, FCL and COM would be regularised and the First Laser Agreement would be performed to the letter.  How much longer it was going to take for the share transfer to complete remained indefinite and uncertain.  First Laser legitimately expected to acquire its 51% shareholding in each of FCO and FCL under the First Laser Agreement and the 1998 Memorandum.  First Laser’s expectation to acquire the interest in FCL must increase with time and with its contribution to the joint venture by way of operation and management of FCO and FCL.  Under the circumstances, a closer and tighter relationship must have arisen from the special circumstances of the case since the 1998 Memorandum as the parties were working towards their ultimate goal of acquiring 51:49 interest in each of FCO and FCL in the years to come.

182.  This new relationship co-exists with the existing vendor and purchaser relationship as well as partnership relationship.  Had FEHC not changed its mind, the shareholdings in FCO and FCL would have been regularised and the shares in FCL would have been transferred to First Laser in just the same way as they were transferred to JDS.  Though the three agreements and the 1998 Memorandum were held to be invalid, the above relationship and the parties’ conduct pursuant to that relationship did not disappear. FEHC cannot brush off this new relationship, the de facto partnership relationship in the joint venture, the de facto partnership relationship in FCO and FCL, and First Laser’s expectation by obstinately arguing that the relationship between the parties was just one of vendor and purchaser of shares.

The nominee investment contract

183.  At common law, it would not be difficult to infer a trust arising from such a tight relationship.  But the concept of trust and beneficial interest is unknown to Mainland law.  However, according to  Professor Yin, there is a near equivalent concept of share-holding    （代持）between an actual investor and a nominee shareholder under an  “anonymous investment contract” or “nominee investment contract” (「穩名投資協議」).  Under such a contract, the purchaser of shares is the investor while the vendor who is the shareholder on record intending to sell is the nominee shareholder.  As the term suggests, the relationship under such a contract is one of a relatively long or even indefinite duration when the nominee shareholder holds the shares for the actual investor particularly under situations where the actual investor actually participates in the enterprise invested.  Such relationship does not exist in a sale and purchase agreement for shares as a passive investment in which the share transfer would be completed within a reasonably short period of time.

184.  Professor Yin further opined that under 《Contract Law》 a contract may be created in writing, orally or by conduct, just as it is under common law.  The background of this case, the three agreements, the 1998 Memorandum, the conduct of the parties, particularly the fact that Ngan on behalf of First Laser was actively participating with FEHC in the operation and management of FCO, FCL and COM, and that FEHC had received the proceeds of sale in full for fifteen months are legal facts on which a contract by conduct may be inferred.  Having regard to these legal facts, Professor Yin is of the opinion that the relationship between the parties was a share-holding relationship（代持）to enable First Laser to acquire the benefit of 51% of the shares in FCL and a cross share-holding arrangement（雙重代持）to enable FEHC to acquire the benefit of 49% of the shares in FCO pending regularisation（理順）of the shareholdings in FCO and FCL.  He was able to infer such a nominee investment contract between First Laser and FEHC.

185.  Mr Bai disagrees.  The basis of his argument is that there is no express or written nominee investment contract and that the relationship between the parties is just one of purchaser and vendor of shares as a passive investment.  This first limb of his argument may be readily dismissed by reason of article 10 of 《Contract Law》which provides:

「當事人訂立合同，有書面形式、口頭形式和其他形式。

 法律、行政法規規定採用書面形式的，應當採用書面形式。當事人約定採用書面形式的，應當採用書面形式。」

(Translation:

“A contract may be made in a writing, in an oral conversation, as well as in any other form. A contract shall be in writing if a relevant law or administrative regulation so requires. A contract shall be in writing if the parties have so agreed.”)

There is no evidence that such a nominee investment contract is required to be in writing by law or by the parties’ agreement.  Even if there is such a requirement in respect of nominee share-holding in a foreign-owned enterprise and the nominee investment contract is void for want of writing or state approval, it is not fatal to First Laser’s claim which is rested on the premises that such a contract is void.  As I have found that the First Laser Agreement is not merely a simple sale and purchase agreement for shares, but a joint venture agreement, the true nature of the parties’ relationship was one of partnership relationship under a void agreement.  The second limb of Mr Bai’s argument may also be dismissed for comparing like with unlike.  He deliberately confined his vision to the First Laser Agreement as an agreement for sale and purchase of shares only and turned a blind eye to the bigger arrangement of a joint venture of which the agreement form part.

186.  In my view, Professor Yin’s opinion is very logical.  All the factual circumstances and the parties’ conduct I have mentioned above are legal facts which create a legal relationship with legal consequence.  Legal facts need not be the result of the parties’ intentional or conscious conduct.  They may arise from factual circumstances independent of the parties’ intention and may create legal consequences, including contractual consequence.  I accept Professor Yin’s opinion.  This nominee investment contract arose from the factual background including the Agreement, the three agreements, the 1998 Memorandum and the parties’ conduct.  The parties conducted themselves in accordance with the spirit of the First Laser Agreement as if they were partners in the joint venture and shareholders of FCO and FCO.  The fact that the FEHC permitted First Laser to participate as de facto partner in the joint venture and de facto shareholder in FCL and FCO is its recognition that its rights as shareholder of FCL and FCO is somehow and in some way subject to the rights of First Laser.  These legal facts enable this court to draw as the only irresistible inference that FEHC and First Laser were engaged in a relationship of nominee shareholder and actual investor under a nominee investment contract.  This contract is collateral to the Agreement, the three agreements, individually or collectively, which have been held to be void.  Under this nominee investment contract, which I conveniently call “collateral contract” using the common law term, FEHC was to hold 51% of the shares in FCL as nominee shareholder for First Laser and the balance of 49% in its own right as shareholder and actual investor until the shareholdings in FCO and FCL were regularized.  Similarly, COM was holding 49% of the shares in FCO as nominee shareholder for FEHC and the balance of 51% in its own right as shareholder and actual investor. 

187.  Mr Yu SC argues that the parties and terms of this contract has not been pleaded.  This has not been raised by the pleading.  Being a collateral contract and having regard to the background, the parties must be First Laser and FEHC and the aforesaid terms could be readily inferred or implied into this collateral contract.  This collateral contract co-exists and stands and falls with the three agreements and 1998 Memorandum.  It governs the parties’ relationship, rights and obligations under the three agreements and 1998 Memorandum for as long as that relationship is extant.  It would cease to exist if the First Laser Agreement were valid and has been fully performed.  It would be void if the 1998 Memorandum and the three agreements including the First Laser Agreement, individually or collectively, are held to be void. 

Whether the nominee investment contract constitutes an article 18 contract

188.  Mr Bai argues that the relationship of actual investor and nominee shareholder only exists in the case of fresh capital injection into a newly set up foreign-owned enterprise.  He emphasized the distinction between “capital injection” (「出資」) and “share transfer” (「轉讓」).  In his opinion, the relationship between an actual investor and a nominee shareholder does not exist in a relationship between a purchaser and vendor of shares.  His opinion is premised on his obstinate view that the First Laser Agreement is an agreement for sale and purchase of shares as a passive investment only and his obstinate refusal to accept that the parties were engaged in a joint venture. He argues that a nominee investment contract only arises in capital injection in the setting-up of a foreign-owned enterprise.  However, there is no express provision at all, either in Article 18 or in any other articles of 《Provisions (I)》, stating that nominee investment contract only exists in the setting up of a foreign-owned enterprise. 

189.  It is important to note that the term used in article 18 is “actual investor” (「實際投資者」) and not “party actually providing the capital” (「實際出資人」).  Mr Bai accepts that “investing” (「投資」) is a broader concept and necessarily includes the concept of “providing capital” (「出資」).  But he could not offer any reason why the restrictive meaning should be adopted in construing the term “actual investor” (「實際投資者」) in Article 18, which is a term of wide import. 

190.  Mr Bai called in aid《Judicial Interpretation on Company Law (III) 》 in which the terms “providing capital” (「出資」) and “party providing capital” (「出資人」) are used.  He suggests that the concept of “anonymous investment” or “nominee investment” (「隱名投資」) is in fact about “providing capital” (「出資 」).  The subject matter of that judicial interpretation is about a contract between “the party actually providing capital” (「實際出資人」) and “the party in name providing capital” (「名義出資人」)[27].

191.  Mr Chan SC submits that if Mr Bai were correct, article 18 would have used the same definitions as well.  The fact that different terms are used only show that what article 18 intends to cover is not limited to the setting-up situation as suggested by Mr Bai but the wider concept of investment, including investment by way of acquisition of shares. 

192.  I am unable to see how Mr Bai could draw any support from《Judicial Interpretation on Company Law (III) 》.  As stated in its preamble, that judicial interpretation deals with the applicable law in adjudicating disputes about “setting up companies” (「公司設立」), “contributing to its share capital” (「出資」), and “confirmation of shareholding rights” (「股權確認」).  The subject matters considered in that judicial interpretation are setting up of a company and the provision of its capital by “promoters” (「發起人」) and the first shareholders.  The context is about investment in the narrow sense.  It is therefore appropriate to use the term “providing capital” (「出資」).  Throughout that entire judicial interpretation, it is only article 18 that provides for transfer of share by an existing shareholder to a purchaser or transferee.  In that context, it is about a transfer of investment in the broad sense.  But the subject matter in that transfer is shares in respect of which the capital has not been fully paid.  In reality, the issue is about “providing capital” (「出資」).  In my view, this judicial interpretation does not support Mr Bai’s thesis that the term “investing” or investment” (「投資」) as used in article 18 of 《Provisions (I)》 should be construed in the narrow sense.

193.  Usually, in the context of Mainland law, a sale of shares involves the seller, being “the original investor” (「原投資者」), selling his “investment” (「投資」) in the subject company to the purchaser whereupon the purchaser is treated as the investor even though no further capital injection is to be made by the purchaser.  This concept is manifested in paragraph 1 of the approval document issued by Bureau of Foreign Economic and Trade (對外經濟貿易局) in respect of the sale of the shares in FCO to COM[28], in which the sellers, i.e. the two original shareholders of FCO, were described as “the original investor” (「原投資者」) and the subject matter of sale is described as “investment” (「投資」) . 

194.  Mr Bai relied on the following passage at pages 154 and 155 of 《Provisions (I) U&A》 to support his opinion that a nominee investment contract only exists in the case of providing capital in setting up a new foreign-owned enterprise:

「隱名投資一般表現為，隱名投資人作為實際投資者，單獨或與具名人共同投資，在我國境內設立外商投資企業。隱名投資人還有可能是藉用或者冒用他人的名義在境內設立外商投資企業。本司法解釋沒有對借用或者冒用他人的名義在境內設立外商投資企業的情形予以規範。」

(以斜體及粗字體顯出重點)

(Translation:

“The usual feature of an anonymous investment is that an anonymous investor as the actual investor sets up, alone or jointly with a named person, a foreign-funded enterprise in the Mainland. An anonymous investor may also borrow or fraudulently use the name of another to set up foreign-funded enterprise in the Mainland. This judicial interpretation does not regulate the establishment of foreign-funded enterprises in the Mainland by borrowing or fraudulently using the name of another other.”)

(Emphasis highlighted in italic and bold print)

195.  Mr Chan SC submits that what the authors described is the “usual feature” of a nominee investment contract but not the only or exclusive feature which such a nominee investment contract must have.  Furthermore, even the authors also expressly stated that there may be other situations where a nominee investment contract may exist.  Mr Bai’s opinion is clearly too narrow to be correct.

196.  Mr Bai relied on his experience as a practitioner in the law and practice of foreign-owned enterprises that he had never seen a nominee investment contract in a share transfer transaction.  Mr Chan SC submits the fact that Mr Bai did not have such experience does not mean that article 18 is confined to the situation where the expert had experience on.  The reality may well be that investors are more ready to engage the services of lawyers in the setting up of an enterprise while vendors and purchasers of shares are less inclined to do so, as in the present case and despite the size of the investment.  I can give Mr Bai’s experience little weight.

197.  Again, Mr Bai sought to rely on his own experience that share transfers do not generally take a long period of time for approval and there would be no need for “transitional” arrangements of the type put forward by Professor Yin.  His opinion was in general terms which was more applicable to a simple agreement for sale and purchase of shares without active participation by the purchaser and long and indefinite transitional duration of the type as in the First Laser Agreement. The transfers Mr Bai talked about have no similarities with the First Laser Agreement.  Contrary to Mr Bai’s contention, the authors of 《Provisions (I) U&A》 also recognised at page 118 that share transfers may take a long period of time for approval and may result in the purchaser participating in actual management for a very long period of time before the transfer is complete[29].

198.  Indeed, as pointed out by Mr Chan SC, the requirement for approval is recognised by the authors of 《Provisions (I) U&A》 as a common source of dispute when the nominee shareholder took advantage of the lack of approval resulting in the contract being found void to deprive the actual investor of the fruits of his investment (which is what this case is about), and the unfairness which the laws as interpreted by《Provisions (I) 》 are designed to redress.  The authors wrote at page 168 and 169:

「有時候，名義股東甚至會以未經審批等藉口主張合同無效，意圖獨占實際投資者的投資收益。對這種違反誠信原則的行為，如果實際投資者因不能實現其合同目的而請求解除合同、由名義股東承擔違約責任，人民法院應予支持。」

(Translation:

“Sometimes, nominee shareholders may even suggest that the contract is invalid on the pretext that approval was not forthcoming, with intention to take over the investment income of the actual investor. Towards such violation of the principle of good faith, if the actual investor requests to terminate the contract because the underlying purpose cannot be achieved and seeks to hold the nominee shareholder liable for breach of contract, the people's court shall give support to such claims.”)

The authors’ observation suggests that delays in obtaining approval from the approving authorities for transfer of shares in foreign-owned enterprises are not uncommon.  I prefer Professor Yin’s which is consistent with that of the authors of《Provisions (I) U&A》.

199.  Mr Bai relied on the authors’ observation that “nominee investment arrangements are used for the purpose of circumventing the need for administrative approval” (「隱名投資行為本身就是規避審批機關審批的行為」) to support his argument that a relationship of actual investor and nominee shareholder under a nominee investment contract could not exist in a share transfer transaction since share transfers require approval from relevant administrative authorities.

200.  As submitted by Mr Chan SC, such argument defies logic since approval from administrative authorities is not only required for setting up foreign-owned enterprises but is also required for transfer of shares in such enterprises as well.  There is simply no difference as far as the requirement for administrative approval is concerned.  The kind of relationship in the present case is an interim one covering a long transitional period pending approval.  Furthermore, circumventing approval (規避審批) is plainly not a prerequisite for the formation of a nominee investment contract.  In any event, the transitional arrangement between the parties in the nature of a nominee investment contract was in some sense an arrangement to avoid the consequence of lack of approval.  Mr Bai’s argument is unconvincing.

201.  Mr Bai argues that there are necessary contents (必備內容) in a nominee investment contract, including the parties’ agreement that the nominee shareholder acts on behalf of the actual investor in exercising shareholders’ rights; and that the actual investor acquires profits/income of its investment from the nominee shareholder, etc.

202.  Mr Bai was unable to quote any authority to support the requirement of such necessary contents.  I am unable to find any such requirements in 《Provisions (I)》, particularly the requirement to make provision for distribution of investment income.  Quite to the contrary, the authors of 《Provisions (I) U&A》wrote at page 166 that distribution of income from investment is a matter of agreement.  Furthermore, article 15(3)[30] provides that in the absence of agreement, the court should support the actual investor’s claim for investment income as well as the nominee shareholder’s claim for reasonable remuneration.  Such a term may be readily implied into a contract.  Mr Bai’s opinion about the requirement of necessary contents in a nominee investment contract simply cannot be correct.  Mr Yu SC accused Professor Yin of acting as an advocate for his client.  Apparently, Mr Bai was a more aggressive advocate.

Whether First Laser is estopped from proving the share-holding relationship (代持) by reason of the CFA Judgment

203.  FEHC argues that by reason of the Court of Final Appeal’s finding in paragraphs 112 to 116 of the CFA Judgment First Laser is estopped from asserting a case of share‑holding relationship. This question of issue estoppel has already been considered relating to the specific findings of the Court of Final Appeal in those paragraphs.  Here, FEHC’s argument is launched on a broader base that the CFA Judgment is a bar to the finding of the existence of this relationship.

204.  In paragraphs 107 to 116 of the CFA Judgment, the Court of Final Appeal was considering whether, on the assumption that Hong Kong law were applicable to the First Laser Agreement, there would have been an arguable case on estoppel by convention.  Thus, the focus of the Court of Final Appeal was to find if the acts and conducts relied upon by First Laser showed that there was a common assumption that the First Laser Agreement and 1998 Memorandum were valid and subsisting sufficient to establish an estoppel by convention such that notwithstanding the absence of approval for the transfer of the FCL shares, the First Laser Agreement was valid under Mainland law and that First Laser had a 51% shareholding.  Neither of those two common assumptions which First Laser failed to establish is relevant to the issue at hand, which is whether First Laser can be regarded as an actual investor and FEHC a nominee shareholder in respect of the 51% shareholding in FCL.  The nominee share-holding concept under Mainland law is wholly different from the common law concept of beneficial shareholding which does not exist under Mainland law.  In conclusion, the two common assumptions which First Laser failed to establish are not the same as the issues raised by First Laser’s case of nominee investment contract and for reasons as explained in the preceding sections the various findings of the Court of Final Appeal relied on by FEHC, properly understood in their context, actually support First Laser’s case of nominee investment contract.

Conclusion

205.  All in all, I reject Mr Bai’s opinion and accept Professor Yin’s as more logical.  For reasons as I have already explained, I find that a new relationship was born out of the special circumstances of the case by the time of the 1998 Memorandum.  The relationship is one which exists between an actual investor and nominee shareholder under a collateral nominee investment contract.  This relationship and contract co-exists with the relationship of a vendor and purchaser of shares in a contract for sale and purchase of shares, such as the First Laser Agreement.  It stands or falls with the First Laser Agreement.  As the First Laser Agreement was held to be void, so too must the collateral nominee investment contract. 

206.  On the true construction of article 18 of 《Provisions (I)》, the article may be invoked without the nominee investment contract being first held by a court to be void.  There is no dispute that the value of the 51% shares in FCL is higher than the equity value of FCL at the time of its sale to JDS.  The nominee investment contract having now been found by this court to be void, First Laser is entitled to restitution under article 18(1) of 《Provisions (I)》.

RESTITUTION

Introduction

207.  First Laser’s primary claim in restitution is founded on articles 58 and 59 of 《Contract Law》, articles 61 and 92 of 《GPCL》, article 131 of 《GPCL Opinion》and article 18 of 《Provisions (I)》which construes these articles.  The parties have lodged almost 900 pages of expert evidence for the purpose of this remission trial.  Insofar as the voluminous evidence on the construction of these articles is concerned, I do not find it necessary to analyse the experts’ evidence and opinion in great detail.  Suffice it is to say that I have read them, understood them and come to a concluded view on the proper construction of the article.  In broad terms, Professor Yin’s opinion is largely in line with the views of 《Provisions (I) U&A》 and with common sense. 《Provisions (I) U&A》 is an authoritative work by senior and well-respected judges of the Supreme People’s Court.  It deserves much weight.  Mr Bai’s opinion insofar as it contradicts 《Provisions (I) U&A》 has to be disregarded.  I agree with most of the opinion of Professor Yin and disagree with Mr Bai’s where it differs from Professor Yin’s. 

Application of《GPCL》and 《Contract Law》

208.  This right to restitution of property transferred under a contract which is found to be void is founded on articles 58 and 59 of 《Contract Law》and article 61 of 《GPCL》.  《GPCL》 was promulgated on 12 April 1986 and came into force on 1 January 1987.  It is a piece of general legislation which regulates people’s civil rights and liabilities in the Mainland.  It is applicable to the parties’ dispute.

209.  《Contract Law》 was promulgated 15 March 1999 and came into force on 1 October 1999.  It governs specifically the rights and liabilities of the parties to a contract.   Though 《Contract Law》came into force after the parties had entered into the Agreement, it is applicable to the Agreement and the three agreements by virtue of the second limb of article 1 of 《Contract Law Interpretation (I) 》.  There is also no issue about retroactivity.  Articles 1 to 3 provide as follows:

「第一條　合同法實施以後成立的合同發生糾紛起訴到人民法院的，適用合同法的規定；合同法實施以前成立的合同發生糾紛起訴到人民法院的，除本解釋另有規定的以外，適用當時的法律規定，當時沒有法律規定的，可以適用合同法的有關規定。

第二條　合同成立於合同法實施之前，但合同約定的履行期限跨越合同法實施之日或者履行期限在合同法實施之後，因履行合同發生的糾紛，適用合同法第四章的有關規定。

第三條　人民法院確認合同效力時，對合同法實施以前成立的合同，適用當時的法律合同無效而適用合同法合同有效的，則適用合同法。」

“Translation:

“Article 1. If a dispute on a contract established after the implementation of 《Contract Law》 is brought to the people's court《Contract Law》 shall apply. If a dispute on a contract established before the implementation of 《Contract Law》 is brought to the people's court, except this judicial interpretation provides otherwise, the legal provisions then existing shall apply; where there was no such legal provision, relative stipulations in《Contract Law》 may apply.

Article 2. Where a contract is established before the implementation of《Contract Law》 but the period of performance under the contract overpasses or commences after the implementation of 《Contract Law》, a dispute arising from the performance of the contract shall be governed by relevant provisions of Chapter 4 of《Contract Law》.

Article 3. In determining the validity of a contract before the people's court, if a contract established before the implementation of《Contract Law》 is void according to the legal stipulations then existing but valid according to《Contract Law》, 《Contract Law》 shall apply.”)

Thus, insofar as the provisions in《Contract Law》provide more specificity than《GPCL》or there are no applicable provisions under 《GPCL》, the provisions in《Contract Law》apply by virtue of article 1 of 《Contract Law Interpretation (I) 》

The right to restitution

210.  The right to restitution is founded on Article 61 of 《GPCL》and article 58 of《Contract Law》.   Article 61 of 《GPCL》provides:

“民事行為被確認為無效或者被撤銷後，當事人因該行為取得的財產，應當返還給受損失的一方。有過錯的一方應當賠償對方因此所受的損失，雙方都有過錯的，應當各自承擔相應的責任。

雙方惡意串通，實施民事行為損害國家的、集體的或者第三人的利益的，應當追繳雙方取得的財產，收歸國家、集體所有或者返還第三人。 (重點以斜体體和突體顯示）

(Translation:

“After a civil act has been determined to be null and void or has been rescinded, the party who acquired property as a result of the act shall return it to the party who suffered loss. The defaulting party shall compensate the other party for the losses it suffered as a result of the act; if both sides are at fault, they shall each bear their proper share of the responsibility.

If the two parties maliciously collude together to carry out a civil act that harms the interests of the state, the collective unit, or a third parties, the property acquired by both parties shall be recovered and returned to the state or the collective unit or returned to the third parties.”

(emphasis highlighted in bold and italic print)

211.  Article 58 《Contract Law》provides:

「合同無效或者被撤銷後，因該合同取得的財產，應當予以返還；不能返還或者沒有必要返還的，應當折價補償。有過錯的一方應當賠償對方因此所受到的損失，雙方都有過錯的，應當各自承擔相應的責任。」

          (重點以斜體和突體顯示）

(Translation:

Property acquired as a result of a contract shall be returned after the contract is confirmed to be null and void or has been rescinded; where the property cannot be returned or the return is unnecessary, it shall be reimbursed at its estimated price. The party at fault shall compensate the other party for loss incurred as a result therefrom.  If both parties are at fault, each party shall respectively be liable.)

(emphasis highlighted in bold and italic print)

Article 59 of 《Contract Law》provides:

「當事人惡意串通，損害國家、集體或者第三人利益的，因此取得的財產收歸國家所有或者返還集體、第三人。」

(Translation:

“If the parties maliciously colluded together to harm the interests of the state, the collective, or a third parties, the property obtained was returned to the state or returned to the collective or a third parties.”)

212.  Professor Yin and Mr Bai have no dispute that both 《Contract Law》 and 《GPCL》 are applicable to the parties’ dispute and that there is no issue of retroactivity.  《Contract Law》 provides more specificity in content than 《GPCL》 in respect of one particular class of civil act, namely, contract. Articles 58 and 59 taken together have the same effect as article 61 of 《GPCL》 except that article 58 provides for the additional situation where property acquired as a result of the contract, i.e. the original subject matter, cannot be returned or its return is unnecessary.  A property cannot be legally returned where title in the property has been lawfully passed to a third parties.  It cannot be physically returned if it no longer exists or has been destroyed.  If property has been incorporated into another property under circumstances such that the costs or inconvenience of its removal outweigh the value of the property, its return is unnecessary.  Under such circumstances, the obligation of the party who has acquired the property is to “reimburse the estimated value of the property acquired” (「折價補償」) as a result of the contract which was void.

213.  There is also no dispute, whether applying Article 61 of 《GCPL》 or applying Article 58 of 《Contract Law》, that the property acquired as result of the act (因該行為取得的財產) or property acquired as result of the contract (因該合同取得的財產) shall be returned when the relevant contract or act is held to be void.  Whether the restitution claim is founded on 《GCPL》 or on《Contract Law》, the legal consequences are the same.  The primary obligation is on the party in receipt of property acquired as result of the contract (因該合同取得的財產) to return the property or to “reimburse the estimated value of the property acquired” (「折價補償」), if it could not be returned; and to pay compensation according to fault.  Compensation is outside the scope of this remission trial. 

214.  FEHC argues that the property acquired being money could be returned in species.  Alternatively, the value of the property to be reimbursed is just the value of the actual investment sum, i.e. what First Laser had paid for the shares in FCL.  This would be the position under common law.  First Laser argues that as the property could not be returned FEHC has to reimburse the value of the property, including, the value of the property and the enhancement (or such portion of it as this court may decide) in value of the shares in FCL which the property acquired by FEHC would otherwise have earned for First Laser, had the contract not been held to be void.  According to Professor Yin, under Mainland law, this dispute has to be determined according to the juridical basis of “the right to claim” (「請求權」).  Mr Bai has no dispute that this is the proper approach under Mainland law.  There is a fundamental difference in approach between the common law and Mainland law, which must necessarily lead to different results.

Juridical basis of right to claim reimbursement value of property acquired

215.  According to Professor Yin, the juridical basis of the right to claim for return of the property acquired as the result of a void contract may be a “right to claim rights in property” (「物權請求權」) or a “right to claim improper profits” (「不當得利請求權」); but if the property acquired could not be specifically returned, a claim for reimbursement of the value of the property acquired could only be a right to claim improper profits.   Mr Bai disagrees.  He argues that a claim for reimbursement of the value of the property acquired may be a right to claim rights in property or a right to claim improper profits.  But other than quoting some academic articles, Mr Bai could offer no explanation how such a claim, not being one for return of specific bank notes or coins, could be founded on a right to claim rights in property.  The most he could say, treating the price paid by First Laser as cash, is that money is species goods (種類物).  It is a fungible that could be replaced by items of the same species.  That argument could only apply to specific bank notes or coins, but First Laser’s payment was made by cheques and set-off.  Moreover, Mr Bai’s argument is flawed because under Mainland law, ownership of or property in money passes when the money is transferred to another person.  Like common law, ownership in chattel passes with possession. The right to claim rights in property is extinguished when the money was handed over.  Therefore, the only available right of claim is a right to claim improper profits.  Furthermore, according to Professor Yin, the word “property” under Mainland law (「物」) refers to movable or immovable property, but and money is neither.   This is all the more so in the case of money represented by cheques, credit cards or, as is very common nowadays in the Mainland, by electronic money.  Mr Bai has no dispute with this proposition.  Thus, a claim for return of money cannot be made under a right to claim rights in property.   Moreover, according to the authors of 《Provisions (I) U&A》, even in the case of a claim for return of purchase price paid under an ordinary agreement for sale and purchase of shares, the juridical basis is a right to claim improper profits.  The authors wrote at page 97:

「在股權轉讓合同的情況下，如轉讓人已經受領了轉讓款的，應根據不當得利規則返還受讓人該筆款項。」

(Translation:

“In the case of a share transfer contract, if the transferor has already received the transfer money, the transferee should return the money in accordance with the principle of improper profits.”

Furthermore, it defies logic to say that there is no need to apply the improper profits regime when Article 18 of 《Provisions (I) 》, as a judicial interpretation, deals with exactly the same issue of restitution when a contract is held to be void or of no effect. 

216.  As I have said, I shall not go into details of the experts’ arguments.  I accept Professor Yin’s proposition as it is in line with the opinion of the authors of 《Provisions (I) U&A》 at page 181[31]:

「根據《民法通則》等61條和《合同法》第58條的規定… ，當事人要求返還原物時，其請求權基礎可以是物權請求權，也可以是不當得利請求權；但如果是主張折價補償，則當事人的請求權基礎就只能是不當得利返還請求權。」

(Translation:

“According to the provisions of article 61 of 《GPCL》 and article 58 of 《Contract Law》 … when the party requests for return of the original property, the basis of its right to claim may be a right to claim rights in property, it may also be a claim for improper profits; but if the claim is for reimbursement of the property at its estimated price, the basis of the party’s claim could only be a claim for unlawful profit.”)

217.  The authors went on to explain that as the nominee shareholder had acquired the status of shareholder of the foreign-owned enterprise, the actual investor may not ask to substitute himself for the nominee shareholder as the shareholder on record of the enterprise.  He may not require the nominee shareholder to transfer the shares to himself as such transfer requires approval by the bureau responsible for administration of such enterprises.  If the actual investor has contributed to the share capital by way of property, he cannot seek return of the property as the property has become vested in the enterprise.   Then the authors concluded at the end of page 181 that the actual investor may only claim for return of improper profits by invoking the improper profits regime.  They wrote:

「… 在隱名投資協議認定為無效的情形下，實際投資者只能依據不當得利制度請求外商投資企業名義股東，將所獲得利益返還給自已，因為名義股東，沒有以實際投資者的財產出資，但獲得了股權。」

(Translation:

“In the case where the anonymous investment agreement is found to be invalid, the actual investor can only invoke the unlawful profit regime to require the nominee shareholder of the foreign-funded enterprise to return the benefit obtained to himself, because the nominee shareholder acquired the shares but had not actually contributed the capital contribution by himself as the actual investor.”)

218.  Again, at page 191, the authors wrote:

「在對上一條 [Article 18 of Provision (I)] 的說明中，我們已經談到，關於因合同無效引起的返還財產問題，如果請求返還的對象是原物，則在我國不承認物權行為理論的背景下，請求權基礎既可以是物權請求權，也可能是不當得利返還請求權，但如果返還的對象不是原物，而是折價補償，則只能以不當得利為請求權基礎……在隱名投資協議被認定無效的情形下，由於實際投資者請求返還的對象不能是名義股東所持股權本身，也不能是實際投資者已經投入企業的實物資產，只能折價補償，因而其請求權基礎只能是不當得利。」

(Translation:

In the commentary on the preceding article [article 18], we have discussed the issue of return of property arising from a void contract, if the subject matter of the request for return is the original property, then on the premise that the Mainland does not recognise the theory of right to claim rights in property, the basis of claim may be either a right to claim rights in property, or it may also be a claim for unlawful profit; but if the claim is for reimbursement of the property at its estimated price, the basis of the party’s claim could only be  a claim for unlawful profit. … In the case where an anonymous investment agreement is found to be invalid, since the subject matter to be returned as claimed by actual investor cannot be the shares held by the nominal shareholder itself, or the actual property which the actual investor has invested in the enterprise, he can only be reimbursed the estimated value of the property, thus the basis of its claim can only be a claim for unlawful profit.”

219.  The authors’ comments are very authoritative statements in relation to a claim under article 58 of 《Contract Law》 and article 61of 《GPCL》.  The reasons advanced by the authors as quoted in the above passages have put it beyond dispute that the juridical basis of a claim by an actual investor of a nominee investment contract for reimbursement of his investment sum when such contract is held to be void may only be founded on a right to claim improper profits. What makes the profits improper is the fact that they were acquired by the nominee shareholder without having actually contributed to the capital investment needed to generate the profits.

220.  Moreover, on the facts, there is no room for an argument of a claim founded on the right to claim rights in property.  The purchase price for FCO’s and FCL’s shares were paid by way of two cheques of HK$10 million each issued by COM and by First Laser and a set-off of HK$4,640,000.  There is no argument that FEHC was in the position to return those cheques.  Even if it could, a cheque is a chose in action such that the cashed cheque is not the same as the un-cashed cheque.  The set-off is also a chose in action.  These are not physical properties.  Insofar as these payments are treated as payments in money, the money is neither movable nor immovable property under Mainland law and is not capable of providing the basis for the claim of a right to claim rights in property.  First Laser’s claim for reimbursement of price paid could only be founded on a claim in improper profits in that FEHC was paid the price, kept it for its own use and as a result obtain improper profits at the expense of First Laser.

Improper profits regime

221.  Having decided the juridical basis of such a claim, the authors went on at page 182 to consider the obligation of the party who had received the improper profits.  They referred to article 92 of《GPCL》 which defined the improper profits regime.   Article 92 provides: -

「沒有合法根據，取得不當利益，造成他人損失的，應當將取得的不當得利返還受損失的人。」

(重點以斜體和突體顯示）

(Translation:

“If profits are acquired improperly and without a lawful basis, resulting in another person’s loss, the improper profits shall be returned to the person who suffered the loss.”)

(Emphasis highlighted in italic and bold print)

222.  Article 131 of the 《GPCL Opinion》is a judicial interpretation which construes article 92 of 《GPCL》.  It provides:

「返還的不當利益，應當包括)原物和原物所生的孳息。利用不當得利所取得的其他利益，扣除勞務管理費用後，應當予以收繳。」 (重點以斜體和突體顯示）

(Translation:

“The improper profits to be returned shall include the original subject matter and the fruits arising therefrom. Other benefits obtained by using the improper profits net of the labour service overheads shall be forfeited.” )

(Emphasis highlighted in italic and bold print)

Article 131 introduced the term “original subject matter” (「原物」) which must refer to the property acquired as result of the civil act or contract.  It defined “improper profits to be returned” (「返還的不當利益」) as including the “original subject matter” and the “fruits arising from the original subject matter” (「原物所生的孳息」).  It also referred to “other benefits” obtained by using the improper profits (「其他利益」) which has to be forfeited to government after deducting labour service and overheads.  According to Mr Bai, under Mainland law damages arising from a void contract do not include a share in profits or dividends, whether actually obtained or should have obtained, had the contract not been found to be void.  He is therefore of the view that the improper profits to be returned under article 131 is limited to the original subject matter and benefits arising from the original subject matter, i.e. interest or dividends.  All other benefits, net of labour costs obtained by using the improper profits shall be forfeited to the government.  Hence, he argues that even if a claim for reimbursement is founded on improper profits, the reimbursement does not include the benefits obtained by using the property acquired as a result of a void contract.  But Mr Bai could offer no explanation for the distinction between benefits arising from the original subject matter and other benefits obtained by using the property acquired.  Nor could he cite any authority in support of his proposition.

223.  Mr Bai’s opinion is obviously based on his misunderstanding of article 131.  He classified improper profits into two categories, benefits arising from the original subject matter and other benefits which shall be forfeited to the government under article 131. According to his opinion, enhancement in value of the shares in FCL which FEHC tried so hard to keep has to be forfeited to the government.  That could not be what FEHC is contending.  His opinion is confusing.  As pointed out by the authors of 《Provisions (I) U&A》 at page 181 and 182, the second sentence of article 131 about forfeiture of other benefits is to be construed restrictively in the light of article 61(2) of 《GPCL》[32] to benefits acquired by the parties maliciously colluding together in using the improper profits to harm the interests of the state, collective units and third parties.

224.  The terms “the original subject matter” (「原物」) and “fruits arising from the original subject matter” (「原物所生的孳息」) were introduced by article 131.  The term “original subject matter” is in simple language.  It means what it says.  But the term “fruits arising from the original subject matter” (「原物所生的孳息」) is not without significance.  As a legal term, it owes its origin to the Latin word “fructus” meaning produce of the land, including fruits from trees, eggs from hens and cubs from livestock etc[33].  It is a term relative to and distinguishable from the term “original subject matter”.  The term 「孳息」(“fruits”) is not to be misunderstood as「之息」 (“interest arising from something”).  It originated from《Theory on Migration》by Jiang Tong of Western Jin Dynasty (晉江統《徙戎論》)[34], which is a theory advocating for repatriating Hun (匈奴) settlers to their place of origin.  The term basically means breeding and breathing.  The word 「息」carries with it the sense of “breath” or “breathe” and not “interest” as it is used in the commercial sense nowadays.  It is more than milk from a cow, but includes the cubs it reproduces.  In terms of investment, it has a wider meaning than “interest” or “dividend”.  It includes both dividends and capital growth.  It is this wider meaning which was adopted by the authors in 《Provisions (I) U&A》. I make no secret of the fact that the above analysis of the term 「孳息」is derived from my knowledge of the Chinese language and not from 《Provisions (I) U&A》. The authors of《Provisions (I) U&A》are Chinese scholars.  The meaning of the term must be so well known to them that they did not find it necessary to give any explanation.  But it is necessary in the context of this judgment to enable better understanding of a Chinese term in the English language.  I feel duty-bound to apply my knowledge of the Chinese language in construing this term.

225.  Understood in this light, the term “fruits arising from the original subject matter” (「原物所生的孳息」) in article 131 should be given the widest possible meaning as meaning any benefits except “other benefits” (「其他利益」) within the meaning of article 61 of 《GPCL》 and 59 of 《Contract Law》; and the term “other benefits” (「其他利益」) should be construed restrictively to mean only benefits acquired by using the improper profits (including the original subject matter and the fruits) in harming the interests of the state, collective units or a third parties.  Thus, the term “fruits arising from the original subject matter” includes interests, dividends and capital growth or enhancement in value arising from the original subject matter.  The term “other benefits” are not part of the fruits but secondary benefits obtained by using the original subject matter and the fruits to harm the interests of the state, collective units and third parties.

Article 18 of《Provisions (I) 》 - Distribution of improper profits

226.  First  Laser’s  primary  claim  is founded  on  article 18(1)  of 《Provisions (I)》. That article sets out the principle on how improper profits are to be distributed between the actual investor and nominee shareholder, if the “value of the equity” (「股權價值」) held by the nominee shareholder is higher than the “actual investment sum” (「實際投資額」).  That article provides as follows:

「實際投資者與外商投資企業名義股東之間的合同被認定無效，名義股東持有的股權價值高於實際投資額，實際投資者請求名義股東向其返還投資款並根據其實際投資情況以及名義股東參與外商投資企業經營管理的情況對股權收益在雙方之間進行合理分配的，人民法院應予支持。」

(Translation:

“Where a contract between the actual investor and the nominee shareholder of a foreign-funded enterprise is determined to be void, if the value of the equity held by the nominee shareholder is higher than the actual investment value, and the actual investor requests the nominee shareholder to refund the investment money and pleads for reasonable distribution of the equity proceeds between both parties on the basis of the state of the actual investment as well as the nominee shareholder’s participation in the business management of the foreign-funded enterprise, it shall be upheld by the people’s court.”)

If a nominee investment contract is void or held to be void, the innocent party may claim restitution under article 18(1) if the “value of the equity” (「股權價值」) held by the nominee shareholder is higher than the “actual investment sum” (「實際投資額」) or under article 19(1) if that value is less.

227.  After explaining the meaning of the term “original subject matter”, “fruits arising from the original subject matter” and “other benefits”, and after discussing the different theories and the obligation of restitution from page 182 to 185, the authors concluded at page 185[35] that the subject matter to be returned under the improper profits regime includes not only the original subject matter but also the fruits arising from that original subject matter (原物所生的孳息) such as interests, dividends, and enhancement in value of the investment.  They recommended the mode of distribution of the enhancement in value as follows: 227*

「我們認為，不當得利返還請求權的客體不僅指原物及原物所生的孳息，也包括基於原物產生的其他收益，如投資收益，對此，應無疑問。雖然不當得利返還請求權的範圍應僅包括所受利益的客觀價值，而不是指受益人所獲得的全部益，但並不意味著受損人不能張超過客觀價值的利益。根據《民法通則》的平原則，對於超過客觀價值的那部分利益的歸屬，應按照創造該部分利益的貢獻大小米進行分配，而不應簡單的將其劃歸益人或受損人。將這一原則適用到實際投資者和外商投資企業名義股東之間，則得到如下結論：對於超過實際投資額及其受益的客觀價值的那部分利益，如果實際投資者的實際投資額的貢獻大，則他就應獲得較大份額，而如果是名義股東參與管理的貢獻更大，則他應獲得較大份額。也就是說，對於超過實際出資者額的股權價值，在扣除可帶來的平均收益之後應將其他超過部分在實際投資者與名義股東之間進行分配，而分配的基礎，就是實際投資款與名義股東的經營管理在股權收益作出的貢獻大小。」

(重點以斜體和突體顯示）

(Translation:

“In our opinion, the subject matter of the right to claim improper profits not only refers to the original subject matter (given to the recipient under the contract which is found to be void or of no effect) and the fruit derived from that original subject matter, but also other income arising from that original subject matter, such as investment income, there should be no doubt about this. Although the scope of the right to claim illegal profit should only include the objective value of the (original) thing given to the receiving party, rather than all the benefits received by the receiving party, it does not mean that the (the party giving the original subject matter) cannot claim the benefits which exceed the objective value (of the original subject matter). According to the principle of fairness under the 《General Principles of Civil Law》, the benefit which exceeds the objective value should be distributed according to the contribution of the parties creating that benefit, rather than simply allocating it to the party receiving or the party giving (the original subject matter). Applying this principle to the actual investor and the nominal shareholder of the foreign-invested enterprise, the conclusion is: that part of the benefit which exceeds the objective value of the actual investment amount and the its (income), if the actual investor’s contribution is large, he should get a larger share, and if the contribution of the nominee shareholder in the management of the enterprise is greater, he should get a larger share. That is to say, the equity value (of the enterprise) which exceeds the actual investor's amount net of the probable average income that can be obtained (from the enterprise) should be distributed between the actual investor and the nominee shareholder, and the basis of the distribution is the actual investment amount (of the actual investor) and the nominee shareholder’s contribution by way of operation and management of the enterprise.”)

(Emphasis highlighted in italic and bold print)

(The translation is a little awkward, being constrained by the language used by the authors.  Words in parenthesis were added to put the terms in the proper context in which they were used.)

228.  Accordingly, I find that in a claim under article 18(1), the actual investor is entitled to be returned the value of the actual investment sum, interests, dividends, and a reasonable distribution of the benefits arising from the investment represented by the enhancement in value of the equity based on the actual value of the enterprise invested at the material valuation date.  Prima facie, the actual investor is entitled to receive as a reasonable distribution of the benefits a portion of the enhancement in value which his actual investment sum has to bear on the overall value of the enterprise invested at the time when the nominee investment contract was made (the “investment ratio”) subject to a discount representing a reasonable remuneration for the nominee shareholder’s participation, if any, in the operation and management of the enterprise.  The burden is on the actual investor to prove the value of the enterprise, his actual investment sum and the investment ratio.  If the nominee shareholder wishes to seek a reasonable distribution for his contribution to the operation and management of the enterprise, he has the burden of proving the value of his contribution.  Though not expressly so required, there is nothing to prevent the actual shareholder from adducing evidence of his contribution to operation and management to support a higher distribution or to counter-balance the nominee shareholder’s claim for contribution.  But even without so doing, the actual investor is, per se, entitled to distribution of the enhancement in value according to the investment ratio. 

229.  As for the date of valuation of the equity for the purpose of assessing a reasonable distribution of the enhancement in value of the equity, that date should be the date when the party seeking to avoid the nominee investment contract successfully repudiated or avoided the contract and informed the other party or when the contract was held by a court to be void whichever the earlier.  The shares in FCL were sold to JDS on 29 February 2000.  By that sale, FEHC has put the shares in FCL beyond recall. FCL had obtained approval from the administrative authorities for the transfer of its shares to JDS.  The transfer could not be reversed nor could COM or First Laser compel JDS to transfer the shares to either of them.  The date of sale is the appropriate valuation date and the sale price provided the best evidence of the value of the shares in FCL.

The parties’ case

230.  First Laser claims return of the purchase price and a reasonable distribution of the dividends and enhancement in value arising from FCL’s shares for the period from the date of the First Laser Agreement to the date of sale of FCL’s shares to JDS calculated on a ratio in excess of 51%.  It advanced three basis for a higher distribution ratio.  First, the value of FCL was very much enhanced by the value of the Project which was solely contributed by Ngan.  At paragraph 26 of the RASOC, First Laser pleaded:

“JDS purchased all the shares in FCL solely because of the value of the Project as evidenced by the fact that JDS only took over the Project but not the other production facilities of FCL on completion of the purchase.”

Second, First Laser contributed RMB6,38,099.44 by applying the profits of FCO in purchasing staff quarters for employees of FCO and FCL in Fuzhou as pleaded in paragraph 19(d) of the Re-amended reply.  Third, it paid Wang a monthly sum of HK$8,000 for 26 months as remuneration for his management of the Project. 

231.  FEHC disputes First Laser’s claim but has not put forward any positive case regarding the impact of the Project on the value of FCL or the contributions it had made since the First Laser Agreement which caused or contributed to the enhancement in value of FCL.  At paragraph 28 of its RRRADC, it only puts First Laser to strict proof of its pleaded case.  Even in response to the RASOC filed specifically in 2016 for the purpose of the remitter, FEHC chose not to specifically traverse or address First Laser’s allegation at paragraph 26 of the RASOC.  It only denied that the Project substantially enhanced the value of FCL and repeated its demand for strict proof.  The only new point pleaded is its contention that this court found that the investment in the Project was made by COM and not by First Laser. 

232.  Presumably, FEHC is relying on paragraph 114 of the CFA Judgment when Lord Collins NPJ was considering First Laser’s case of estoppel by convention.  His Lordship dismissed First Laser’s reliance on the investment in the Project on the basis that the investment was made not by First Laser but “as the judge found, by COM”.  While it is true that the funds were remitted by COM, this court’s finding is that having regard to the various admissions contained in the contemporaneous correspondence, the payments were made at the direction of Ngan or First Laser.  There is nothing unusual about a payment being made by one on behalf of another, whether it be COM or even a third party.  At paragraph 126 of the CFI Judgment, I found:

“126. … Though the money was remitted by COM, it was not disputed that the money came from Ngan’s camp. There were numerous correspondences from the 1^st Defendant and FCL confirming that the investment came from Ngan’s camp. The best evidence relating to the Project is the agreement of the parties as recorded at the meeting on 3 October 2000 in which the parties agreed that Ngan provided the capital for the research and development while FCL provided the manpower and facilities for the subsequent product development and sale. In the light of the evidence, though the payments were made by COM, I accept that they were made at the direction of the Plaintiff and were payments by the Plaintiff.”

(Emphasis highlighted in italic and bold print)

There is no reason to assume that the Court of Final Appeal intended to overturn the above finding of fact.  In fact, at paragraph 83 of the CFA Judgment, Lord Collins NPJ referred to the last sentence of the above quoted paragraph without the slightest indication of disapproval.  I do not think the Court of Final Appeal ever intended to overturn that finding of this court.  Moreover, FEHC has not advanced any basis for assuming that finding of this court was overturned.  In the absence of any factual appeal, there is simply no basis to so assume.  FEHC’s plea is an erroneous contention contrary to the express finding of this court at paragraph 126 of the CFI Judgment which has not been overturned by the Court of Appeal or Court of Final Appeal and against which finding there was no appeal. 

233.  FEHC offered little by way of pleading other than putting First Laser to strict proof.  The one really substantial defence put up by FEHC is counter-restitution.  It is not a counterclaim.  FEHC’s case is that if First Laser is entitled to restitution, FEHC is entitled to counter-restitution as First Laser is required to restore FEHC to its pre‑contract position by returning the monetary value of 100% of the shares in FCO transferred to COM plus all the dividends received by COM since the transfer. FEHC asserted that that value is more than enough to off-set First Laser’s claim in restitution.  FEHC would forgo the surplus as there is no counterclaim.

234.  First Laser also advanced some evidence to support the Project’s contribution in enhancing the value of FCL’s shares. FEHC disputed the evidence.  In my view, the dispute is a meaningless and futile exercise.  Whether the Project enhanced the value of the shares of FCL is academic because the value of the shares in FCL has indisputably been enhanced and First Laser is, per se, entitled to a reasonable distribution of the enhancement according to the investment ratio, i.e. the agreed share ratio subject to FEHC’s proof of its contribution to the operation and management over and above its 49% obligation.  While there is no dispute that Ngan solely funded the project, there is also no dispute that the project was carried out using the manpower and facilities of FCL.  In the original trial, I assumed that the parties’ contribution to be the same as the agreed share ratio.  Apart from Ngan’s funding, there is no evidence to show either party has contributed to the operation and management over and above its respective obligation. 

Some finding of fact in the original trial

235.  I adopt my finding about the background of this case.  I repeat and adopt the following findings at paragraphs 2, 41, 117 and 128 of the CFI Judgment;

“2. … The Project was about research, development and production of fibre collimator, fibre optic isolator, fibre optic circulator and fibre coupler. That Project turned out to be a success and enhanced the value of the shares in FCL.

41. On 17 July 1997, Wang Hongrui, on behalf of FCL, submitted a feasibility study report on production of a special optical fibre instrument (光纖無源器件項目) i.e. the Project, to the 1^st Defendant for consideration. On 21 July 1997, Kong rejected the proposal and refused to inject funds into FCL’s subsidiary in the United States, Casix Inc for implementing the Project because of the business risk involved. He suggested Wang Hongrui to enquire if Ngan would take on the Project as a personal investment. As a result, Ngan remitted RMB 1 million to FCL on 1 August 1997, US$500,000 to Casix Inc on 12 August 1997 and US$100,000 to Casix Inc on 17 April 1998 for the purposes of the Project.

117. This is an obvious case of a state-owned corporation while in the progress of performing the balance of its obligation in transferring the shares in FCL, took advantage of its own default by not obtaining the necessary approval when it realised that the value of the shares in FCL had been significantly enhanced by the Project invested by the Plaintiff and then unconscionably sold all the shares of FCL in breach of its contractual obligation for its own benefit.

128.  However, the Plaintiff could find comfort in that the award under the proprietary claim or contractual claim would also include 51% of the enhancement in the value of the FCL shares as a result of the Plaintiff’s investment in the Project.”

236.  The above findings were never challenged on appeal.  The Court of Final Appeal referred to the above findings in paragraphs 25 and 83 of the CFA Judgment but did not disturb these core findings. Paragraphs 2 and 41 of the CFI Judgment are factual background leading to the Project.  Paragraph 117 is the inference drawn by this court from FEHC’s conduct including in particular its change of mind since a change in its management and shareholders in May 1998.  When the prospect of sale of FCL with the Project surfaced, FEHC decided to depart from the spirit of the First Laser Agreement, appropriated the Project to FCL and sold it together with FCL to JDS.  That finding has been further explained in paragraphs 142 and 143 above.

The purchase price First Laser paid for the shares in FCO and FCL

237.  Another finding of fact made in the original trial which needs elaboration as result of the new arguments advanced by FEHC is the purchase price First Laser paid for the shares in FCO and FCL.  At the original trial, there was no dispute that the purchase price for First Laser’s 51% interest in FCO and FCL was HK$24,640,000, of which HK$20,000,000 was paid by cheque issued by COM and First Laser and the balance of HK$4,640,000 was treated as having been paid by First Laser setting off against FEHC’s capital contribution to its share capital in COM as acknowledged in paragraph 3 of the 1998 Memorandum.  The parties proceeded on that basis during the original trial.  Now that the issue of the parties’ respective contribution is raised for the purpose of determining the reasonable distribution, FEHC changed its stance.  Mr Yu SC argues that the price paid by First Laser was only HK$20,000,000, which is what FEHC is prepared to return to First Laser, and not HK$24,640,000 as claimed by First Laser.  He argues that the amount of HK$4,640,000 treated as having been paid was just an accounting entry, which had not been paid and could be reversed.  As this issue was not fundamental to the CFI Judgment, I allow this issue to be re-opened.

238.  The overwhelming and incontrovertible evidence is that the parties agreed that the price First Laser or COM had to pay for 51% of the shares of each of FCO and FCL was HK$24,640,000 based on the valuation of US$6,250,000 for the two companies and that First Laser paid HK$20 million by cheque.  The only question is not what was the agreed price for the shares but whether the sum of HK$4,640,000 had been paid.  The only available and incontrovertible evidence is to be found in paragraph 3 of the 1998 Memorandum in which FEHC acknowledged:

“that as [First Laser] incurred significant costs in setting up [COM] and as [FEHC] would hold 49% of the shares in [COM] upon the said regularisation, the outstanding payment in the amount of HK$4.64 million due from [First Laser[ to [FEHC] under the [First Laser Agreement] was treated as having been paid by [First Laser] and representing [FEHC’s] capital contribution to [COM].”

239.  FEHC acknowledged that First Laser or Ngan’s camp incurred significant costs in setting up COM.  During the original trial Ngan said under cross-examination that his investment in FCO through COM was to the tune of over HK$30 million.  He produced a list of expenditures which he paid on behalf of FEHC.  The expenditures included payment for factory building of HK$1 million and other deposits into the account of COM.  All these payments added up to HK$4,639,311.70 which is just HK$700 short of the amount acknowledged in the 1998 Memorandum.  These payments were not disputed.  By inference, these payments must be part of the “significant costs” acknowledged by FEHC in the 1998 Memorandum which “was treated as having been paid by First Laser and representing FEHC’s capital contribution to the share capital of COM. 

240.  Mr Yu SC argues that Ngan’s investment of over HK$30 million in COM was not pleaded or mentioned in his affirmation or witness statement.  I need not make any finding on that piece of evidence.  But Ngan’s evidence about the sum of HK$4,639,311.70 was admitted in evidence in the original trial.  It is admissible to explain the 1998 Memorandum.  This evidence was not really challenged during the original trial.  It is highly credible.  The joint venture could not operate merely by transferring the shares in FCO and FCL to COM and by COM paying FEHC HK$20 million.  COM did not play a passive role as a holding company only.  The production lines, the plant and machinery and inventories etc could not be transferred to Macau without further working capital being invested in COM to pay for relocation and installation costs, to acquire factory buildings for housing the production lines, stock, plant and machinery and to acquire new equipment such as vehicles etc.  FEHC could not expect receiving the consideration of HK$24,640,000 without having to plough back any of it for the purpose of advancing the joint venture just as Ngan did in incurring setting up costs for COM.  The parties’ contributions to the working capital of COM were obviously result of decisions made on ad hoc basis.  The acknowledgement by FEHC in the 1998 Memorandum is credible. Likewise, with FEHC’s contribution of HK$4,640,000 as capital for COM, Ngan’s camp was also required to make a matching contribution of HK$4,829,388.  These two sums and the HK$20 million paid to FEHC made up about HK$30 million.  I accept Ngan’s evidence that this sum of HK$4,640,000 was treated for a good reason and for good consideration as the balance of First Laser’s or COM’s payment for the purchase price for 51% of the shares in FCO and FCL under the First Laser Agreement.  It is also evidence of the parties’ observance of the spirit of the First Laser Agreement.  Accordingly, the total price paid by First Laser for the shares in FCO and FCL was HK$24,640,000.

241.  Another upshot arising from this piece of evidence is FEHC’s interest in COM, but that is outside the scope of this remitter.  It has not been pleaded.  The COM Agreement may also be governed by Macanese law.  The parties’ legal team may be grinding their axes for another long drawn piece of litigation.

First Laser’s contribution – Wang’s remuneration

242.  There is no dispute that Ngan took up the Project after Kong, on behalf of FEHC, expressly denounced it.  Ngan invested US$410,000 and RMB1,000,000.  There is no dispute that he paid Wang HK$8,000 for 26 months during the span of the Project until the sale to JDS.  The dispute is as to whether the payments were for Wang’s remuneration for his work on the Project.  Another major dispute is whether the Project enhanced the value of the shares in FCL.  In addition, another important issue is how to quantify this contribution, if the contribution is proven.

243.  FEHC relied on Section K of Zheng’s witness statement regarding Casix Inc and an entity named Telelight Communication Corp (“Telelight”) to challenge First Laser’s evidence as to the purpose of the remuneration to Wang.  Mr Chan SC objected to inclusion of Section K as the issue had not been raised at the original trial and did not feature in FEHC’s amended pleadings for the remitted issue.  Particularly, this court had made a finding in the original trial on this issue.  Mr Chan SC complains that as a result, First Laser had no opportunity to investigate into the assertions and respond.  I do not consider this court’s previous finding about this remuneration fundamental to the decision.  I am prepared to re-open this issue as the parties’ contribution is at the heart of this remission hearing. According to FEHC, the evidence about Telelight goes to explain the reason for Ngan’s monthly payments of HK$8,000 to Wang.  In light of the above, I would be more relaxed about procedural objections.  I admitted the evidence on de bene esse basis. 

244.  Zheng advanced a conspiracy theory between Kong, Ngan and Wong unknown to FCL and FEHC to take the Project out of FCL by Kong formally rejecting it and Ngan picking it up.  He added colour to that conspiracy by asserting that after Kong left FEHC, Kong joined Bao Shing as Chief Executive Officer.  Based on the timing when Telelight was set up and that Ngan and Kong were its directors, Zheng suggested that the Project was carried out by Telelight and the monthly sums paid to Wang were remunerations for this secret Project undertaken by Telelight.  He said that FCL sold crystals worth US$208,614 and US$457,442 to Telelight in 1999 and 2000 respectively not knowing that Telelight was owned by Ngan, Kong and Wang, seemingly suggesting that they were used in the Project.  He further suggested that Ngan, Kong and Wang profited from the Project when Telelight was acquired by Oplink Communications Inc (“Oplink”) in April 2000 at the price of US$12 million.  These are new evidence.  The conspiracy is contrary to the finding made in the original trial based on unchallenged evidence.  Without clear pleading, it is impossible for First Laser to know the precise issues in respect of which the evidence is sought to be adduced and what investigation and response to make.

245.  Furthermore, some of the assertions are clearly unfounded. Telelight was not set up by Ngan, Kong or Wang.  It was not until 8 February 1999 that Ngan became the secretary and one of the two directors of Telelight. Kong had no role at all, though there is evidence from a hearsay source that he is the president on a date unknown and when Telelight was inactive.  The evidence about the acquisition by Oplink is fragmented and obscure.  As shown by the Agreement of Merger dated 24  March 2000 and other related documents[36] produced by Zheng, the acquisition was more complicated than what Zheng suggested.  It involved three parties, namely Oplink, its subsidiary, Oplink Acquisition Corp (“Oplink Sub”) and Telelight.  Under the Agreement of Merger, Oplink Sub was to merge into Telelight.  There were 100,000 Oplink Sub common shares created as a result, which had a price US$12 million in the stock market.  There is no evidence who, and if Ngan, Kong and Wang, were the owners of those 100,000 Oplink Sub shares.  Without more evidence about details of the acquisition and US company law, it is dangerous to assume that Ngan and Kong profited US$12 million from the acquisition. 

246.  Zheng had no personal knowledge of the facts which he asserted.  His assertions are mostly speculative and founded on erroneous basis or without any basis at all.  His evidence is fragmented. There is no nexus between Telelight and the Project.  As already pointed out above, the issues raised by his evidence are un-pleaded and un-defined.  Having heard the evidence, I consider its prejudicial effect heavily outweighs its probative value.  I exclude Section K of his witness statement.  What remains is the unchallenged evidence that Ngan paid Wang a subsidy of HK$8,000 per month for 26 months as his remunerations for the managing the Project, i.e. HK$208,000.

247.  Zheng’s assertion about Kong being employed by Ngan in Bao Shing as Chief Executive Officer demonstrates his ignorance about the facts of this case or his irresponsible attitude as a witness.  He relied on Exhibits ZKY-29 and YDC-34 to support his allegation about Kong’s appointment as Chief Executive Officer of Bao Shing.  Ngan had not concealed anything about Kong’s appointment in Bao Shing.  In paragraphs 119 and 120 of his witness statement, Ngan disclosed his relationship with Bao Shing and Kong’s relationship with Bao Shing.  Though Ngan regarded Bao Shing as his company, it is a joint venture owned by Ngan and the Fujian Foreign Trade Centre Group which is a state enterprise.  In paragraph 120, Ngan said that after Kong left FEHC, Kong was appointed by Fujian Foreign Trade Centre Group as its representative in Bao Shing in the capacity of Chief Executive Officer.  Kong was just as much an official of the Fujian Government in Bao Shing as he formerly was in FEHC.  The colour painted by Zheng is wholly unjustified and misleading.

First Laser’s contribution  – Purchase of staff quarters

248.  FCO and FCL share common staff who came from FRIMS.  On 19 May 1997, the finance department of FCO submitted a report to FEHC stating that “the company plans to purchase 31 houses in the urban area of Fuzhou city in order to solve the housing problems of its 33 employees transferred from FRIMS to FEHC.”  The report suggested that that staff should contribute part of the purchase price according to the standards applicable to sale of public houses belonging to the state, which amounted to approximately RMB1,660,000 and the balance of about RMB7,030,000 should be met by FCO using the dividends of 1996 declared and distributable to its shareholder.  The report was approved jointly by Kong on behalf of FEHC and by Ngan on behalf of Ngan’s camp.  It is not disputed that Ngan applied dividends payable by FCO to COM towards purchasing staff quarters for staff of FCO and FCL in accordance with the arrangement previously agreed between the parties.  In the end, 32 staff quarters were purchased for 32 employees including general managers, assistant general managers, management and technical personnel of FCO and FCL with funds of RMB6,638,099.44 from FCO’s dividends distributed to COM. 

249.  There was some argument that the staff quarters purchased were FCO’s investment.  Such argument could not stand as the quarters were acquired by the staff in their own names with subsidies from FCO.  The subsidies were business expenses for the common staff of FCO and FCL.  The expenses were approved by FEHC and Ngan according to the spirit of the First Laser Agreement.  According to the same spirit, the funds were also common funds belonging to First Laser and FEHC in the same share ratio of 51:49 in the same way as would FCL’s dividends belong to the parties.  It cannot be treated as First Laser’s own contribution to their joint investment over and above its obligation under the joint venture.

First Laser’s contribution - The Project in enhancing value of FCL’s share

250.  There is no dispute that the Project was solely financed by Ngan.  In paragraph 70 of his witness statement, Ngan asserted that the Project turned out to be extremely successful and the products therefrom were publicised and gained fame at an international exhibition.  At paragraph 104, he said he believed that JDS purchased FCL solely or predominantly because of the Project, since JDS only took over the Project but did not want any of the production lines and facilities of FCL which were transferred to FCO upon completion of the purchase.  Ngan was cross‑examined in respect of his belief and understanding at the original trial, but his evidence was not seriously challenged.  His evidence may be summarised as follows:

(1)  The development of the Project was successful; the technology developed was showcased at an international exhibition which attracted interest from offshore corporations.

(2)  JDS was interested in purchasing the Project only and did not want the other aspects of FCL’s business.

(3)  JDS had an eye on FCL’s capability in manufacturing optronics instruments (光纖無源器件) which could not be achieved without the development of the Project.

(4)  JDS had a strategy of buying up all businesses capable of  manufacturing optronics instruments in order to monopolize the market, and was at the time in the process of acquiring six or seven other similar businesses around the world.

(5)  JDS even agreed to the first asking price of US$60 million without trying to negotiate it downward.  JDS snapped up the deal to avoid losing it due to the low acquisition cost compared to its other acquisitions, the smallest being US$300 million in value.

Points (1) and (5) were not challenged at the original trial.  No evidence has been adduced by FEHC to contradict them at this hearing.  I accept those facts as proved.  Though points (2), (3) and (4) were not challenged at the original trial, they are now being disputed.  They are of the nature of hearsay and the source of the information was unidentified.  I shall re-open those issues.

251.  Ngan’s oral evidence was supported by the following contemporaneous documents:

(1)  After funding the Project, Fong was updated on the progress of the Project regularly by Wang on how the funds injected were being applied for the purpose of the Project.  This is supported by a letter dated 24 March 1998 from Casix Inc to Wang seeking directions for accounting treatment of interest income of Casix Inc.  Wang forwarded it to Fong. This is also evidence of First Laser’s participation in management of FCL.   This letter was issued at about the same time as the 1998 Memorandum when both parties were acting in accordance with the spirit of the First Laser Agreement.

(2)  As recorded in the minutes of a board meeting of FCL dated 13 October 1999, Wang reported to the board of FCL[37] the development, production, business operation, market analysis and future prospect (開發、生產經營情況、市場分析以及遠景預測) of the Project.  He reported at paragraphs 1 and 2 of the report as follows:-

「1、 開發光纖元器件項目已經取得可喜的成果；該項目發展前景廣闊，是公司今後發展的主幹項目，也必須看到該項目的發展將會遇到激烈的競爭，有機遇，也有挑戰。…

2、會議認為，當前光纖無源器件市場看好，國外同業有意向收購，估計整體轉讓能夠爭取好的價格。會議同意進行整體轉讓的探討，由王洪瑞董事放出整體轉讓的意向，若有具體對象意向收購，由周惠源董事主持…進行具體洽商；洽商情況應及時報告董事會。轉讓方案由董事會確定後報華閩（集團）董事會確認方可實施。」 (重點以斜體和突體顯示）

(Translation:

1. The development of fiber optic component project has achieved commendable results; the project has wide prospects for development and is the major item of the company's future development. We certainly anticipate that the development of this project will encounter fierce competition, there will be opportunities and challenges ...

2. The board meeting considered that the current market for fiber optic components is promising, and foreign counterparts have intentions of acquiring it. It is estimated that the sale of the project as a whole will secure a good price. The meeting agreed to explore sale of the project as a whole. Director Wang Hongrui may release an intention of sale of the project as a whole. If there a prospective purchaser has intention to acquire the project, Director Zhou Huiyuan will take over ... and conduct negotiations; the negotiations should be reported to the board of directors forthwith. The sale proposal shall be confirmed by the board of directors and submitted to the board of directors of FEHC for ratification before implementation.”)

(Emphasis highlighted in italic and bold print)

252.  This report was written by Wang who was a director of FCL.  It was attended by six members of the board of directors of FCL including Yang and chaired by Xu who was the chairman of the board of FEHC.  Yang, who had filed a witness statement as a representative of FEHC at the original trial, was ultimately not called as a witness.  No explanation has been given as to why he was not called as a witness at the original trial and in the trial of the remitted issue.  Xu who was the chairman of FCL and FEHC and who attended that board meeting was also not called to testify.  In the circumstances, I consider the contents of the minutes unchallenged and credible.

253.  Paragraph 1 of the minutes is evidence of the success of the Project and that the Project was going to be the major contributor in FCL’s future development.  Paragraph 2 of the minutes evidenced the interest expressed by foreign investors in the project and FCL’s intention to sell the Project with FCL as a whole to secure a good price.  Thus, to the controlling mind of FCL, the Project was the essence of the sale and the rest of FCL was ancillary.  But there is no evidence that JDS thought likewise.  The minutes support points (1) and (3) of Ngan’s evidence.  These points are also supported by the documents produced by Zheng considered towards the end of this subsection.  In the circumstances, points (1) and (3) of Ngan’s assertion in the preceding paragraph must be taken as proved.  The undisputed evidence that FCL’s production line and facilities were transferred to FCO also partially supports point (2) of Ngan’s evidence.  But JDS’ strategy is not a matter known or obvious to Ngan.  In the absence of evidence as to the source of the information or Ngan’s belief, I cannot be satisfied that the Project was the sole or predominate reason for JDS’ acquisition.  Likewise, I can give no weight to point (4) of Ngan’s assertion.  Having tested Ngan’s evidence against the totality of evidence, I am not satisfied that Ngan’s evidence goes that far as to prove that the Project was the only or predominant reason for JDS’ acquisition.  It was probably a happy speculation on the part of Ngan. 

254.  FEHC relied on Section J of Zheng’s witness statement on this issue of the parties’ contribution to the value of the shares in FCL.  Mr Chan SC objected to inclusion of Section J regarding Casix Inc as the issue has not been raised at the original trial and did not feature in FEHC’s amended pleadings for the remitted issue.  Mr Chan SC raised similar complaints as those relating to Section K of Zheng’s witness statement.  Casix Inc represents the Project and the evidence goes to show that JDS’ purchase of the shares in FCL had nothing to do with the Project.  Prima facie the evidence is relevant.  For that reason, I would be more relaxed about procedural objections.  I admitted the evidence on de bene esse basis. Having heard the evidence, I consider the issues raised are manifestly obvious.  Zheng’s witness statement was filed 16 months ago.  The argument that First Laser did not have proper opportunity to investigate is disingenuous.  It was First Laser’s conscious decision not to investigate or respond.  I admit Section J into evidence.

255.  Zheng’s evidence is that Casix Inc was incorporated by Wang and three others in 1996 in Los Angeles.  It had an office only.  Its principal business was to provide technical support and sale service.  It did not carry out any production or research.  It was merely a sales agent for FCL.  Zheng produced an internal report and a memorandum of FCL dated 31 March 2000 and 26 October 2000 respectively and a report from FEHC to the Fujian Government dated 3 July 2000 as basis for his evidence.

256.  The internal report stated that Casix Inc was incorporated in early 1996 as a subsidiary of FCL for the purpose of FCL’s business in north America.  It mentioned that since 1998 the headquarters of Casix Inc, which must be referring to FCL, had undergone some strategic adjustment (戰略性調整）and moved from its traditional business to optronics communication area.  There is no dispute that Casix Inc was in operation before the Project commenced.  The internal memorandum noted that Casix Inc had a turnover of US$15 million and pre-tax profit of US$47,721.  The report also mentioned a loan of US$874,006 to FEHC which was used to contribute to FCL’s capital.  The fact that Casix Inc was conducting business as a sales agent of FCL is not inconsistent with First Laser’s case that it also carried out the Project on behalf of Ngan.  The fact that the Project was not mentioned in the report is neither here nor there because that might not be the purpose of the report. Furthermore, there is no surprise that the Project was not mentioned as it was a side-line and capital incurring activity expressly agreed to be outside the scope of FCL’s operation.  The reliance placed by FEHC on its report to the Fujian Government is its own statement that Casix Inc was a subsidiary of FCL for the purpose of conducting its business in America.  For the same reasons, it is neither here nor there.

257.  But the point which Zheng sought to prove is inconsistent with incontrovertible evidence that Kong refused to inject funds to Casix Inc to implement the Project, that between August 1997 and April 1998 Ngan remitted RMB1,000,000 to FCL and US$600,000 to Casix Inc (but a surplus of US$190,000 was returned to Ngan) through COM for the Project.  While it was possible that prior to August 1997 Casix Inc operated solely as a sales agent of FCL, it is unlikely that its role would not have expanded thereafter upon receiving Ngan’s funds of RMB1,000,000 and US$410,000 (total equivalent of HK$4 million).  FCL’s report and memorandum are internal documents of FCL and FEHC. FEHC’s report to the Fujian  Government was prepared by FEHC for the purpose of seeking directions for return of FCL’s authorised capital.  There is every reason not to mention the Project as it was an independently funded operation outside the business of FCL.  All these documents were created after the dispute have turned overt and when it was FEHC’s intention to seize the Project from Ngan or First Laser.  Viewed against the background and the incontrovertible evidence, these documents are clearly self-serving.  I give them little weight.

258.  One important fact mentioned in the report is FCL’s strategic change from the traditional technology to optronics communication technology.  This statement supports First Laser’s evidence that the Project proved successful and upon completion, the technology was transferred to FCL for production. The turnover of US$15 million probably included optronics components produced and sold as result of the Project.

259.  Zheng’s further evidence is that JDS is a leading player in the industry and the real purpose of the acquisition was to expand its production base by relocating its production lines to the Mainland so as to increase its production capability within a short time and to strengthen its global competitiveness.  One of the conditions of the acquisition as stated in clause 6.3(a) of the Equity Transfer Agreement is that FEHC shall “take any steps necessary to wind up, dissolve and liquidate Casix Inc”.  JDS did not keep any of Casix Inc’s facilities.  The acquisition had nothing to do with the Project. 

260.  The major thrust of Zheng’s argument is based on clause 6.3(a).  In my view, the inference goes against the thrust of his argument.  Both JDS and FCL are in the optronics industry.  JDS wholly acquired FCL, including Casix Inc and therefore the Project.  Apart from requiring Casix Inc to be wound up, JDS also required FEHC to covenant not to use the word “Casix” in the name of any of its subsidiaries.  The most obvious reason for requiring Casix Inc to be wound up and liquidated was to exterminate it so that it will never be a competitor against JDS, that it will never make any claim, in industrial property rights or whatever, against JDS and will never be a source of liability.  The inference must be that JDS was very concerned about the industrial property right and goodwill Casix Inc had or might have over the Project rather than that JDS was not interested in the technology developed by Casix Inc as a result of the Project.  Otherwise, why should JDS not allow Casix Inc to exist under FCL’s wings as before and to prohibit FEHC from using the word “Casix” in its subsidiaries.  Casix Inc and therefore the Project must be a material consideration for the acquisition.

261.  Zheng relied on the following articles or newspaper cuttings in support of his assertions.  First, Zheng referred to a statement released at the reception ceremony for the transfer of the shares in FCL to JDS on 15 May 2000.  It introduced JDS as a famous optronics enterprise ranking 82^nd amongst 500 enterprises in the industry in the world.  It stated that FCL was JDS’ first acquisition in South-East Asia region; it will inject significant capital into FCL to carry out research, expand its production and at the same time to relocate some of its production lines in United States and Canada to FCL.  The tone conveyed by this statement is that the acquisition was to expand JDS production capability.  Nothing was mentioned about the Project or FCL’s significance in the industry.  It lends weight to Zheng’s evidence.

262.  Second, Zheng referred to a newspaper cutting from Fuzhou Evening News dated 18 May 2000 reporting as follows:

「JDS名列世界500強第82位，是全球最大的光纖通訊器件跨國公司。

被并購的FCL是國際光電領域出色的高科技生業，專為世界各地的許多知名公司和研究機構提供各類高品質的電子元器件。…

據介紹，FCL最大的制約因素是資金短缺 … 并購 “華科” 代表了JDS全球制造戰略的一項重安轉移，“華科” 先進的材料科學專長是通向下一代光通訊網絡器件的鑰匙。」

(Translation:

“JDS ranks 82^nd among the world’s top 500 and is the world’s largest cross-national company in fiber optic communication devices.

FCL acquired is an outstanding international high-tech enterprise in the field of optronics, providing various high-quality optronics components for many well-known companies and research institutions around the world. ...

As introduced, FCL’s biggest constraint is the shortage of funds ... Acquisition of FCL represents a relocation of JDS’ global manufacturing strategy. FCL’s advanced expertise in material science is the key to the next generation of optronics communication network devices.”)

This report was published three days after the above statement.  It mentioned the value of FCL to JDS’ business operation as an outstanding international high-tech enterprise in the field of optronics.  Certainly, JDS would not have spent US$60 million to purchase merely a company in optronics with some land and buildings in the Mainland and some relatively small production capability.  It must be because of some intrinsic value to JDS’ optronics business.  It could not be anything but FCL’s optronics business which FCL switched to and what Wang reported as “commendable result” of the Project carried out by Casix Inc.

263.  Third, Zheng referred to a newspaper cutting from Fuzhou Daily News dated 30 August 2000.  It repeated more or less the contents of the statement issued at the reception ceremony.  But it quoted an interesting remark from Wang:

「… 當時FCL的母公司（FEHC）因在東南亞金融風暴中受重創，已無力對FCL進一步注入新的發展資金。同時，FEHC本身由於債務纒身同樣面臨資產重組，為使FCL不受FCHC巨額債務影響，為FCL引入新的股東，成為FEHC的必然選擇。」

(Translation:

“At that time, FCL’s parent company (FEHC) was severely hit by the South-east Asian financial crisis and was unable to further inject new funds for development into FCL. At the same time, FEHC itself also was facing restructuring due to its debts. In order to protect FCL from the huge debt of FCHC, introducing new shareholders to FCL has become FEHC’s inevitable choice.”)

Worth noting from this newspaper report is FEHC’s open admission to the press of its financial difficulties.  Three years and eight months down in time since Ngan came into the scene, FEHC was still in dire financial condition, laden with debts and facing re-structure.  Its financial condition explains FEHC’s change of mind and gave it the motive and urge to seize the Project from Ngan to save itself.

264.  Next, Zheng referred to a newspaper cutting from Fujian Daily News dated 16 November 2001 which reported that JDS had transferred some of its production lines to FCL in Fujian and another company in Shenzhen as evidence that its acquisition of FCL was not for the Project. Zheng also produced some documents about winding up of Casix Inc.  These newspaper cutting and documents have nothing to add to those discussed above.

265.  Stripped of the publicity element in documents of this kind, the overall impression from Zheng’s evidence considered against the totality of the evidence is that the principal purpose of JDS’ acquisition of FCL was to expand its business and production capability in the PRC and that FCL with its technology in optronics, experience and goodwill provided the springboard for that purpose.  The Project enhanced the overall image and the value of FCL.  It probably was one of the major reasons for the acquisition, but not the sole or predominant reason as Ngan asserted.

266.  In conclusion, I find that the Project carried out by Casix Inc was successful.  The technology developed was transferred to FCL and turned into production.  It was showcased at international exhibitions which attracted interest from offshore corporations.  JDS’ principal purpose in acquiring FCL was to use it as a springboard to the PRC and to take advantage of the investment environment there in expanding its business and production capability.  While the Project enhanced the overall image and the value of FCL and was probably one of the major consideration for the acquisition, it was not the sole or predominant reason.  The Project did enhance the value of the shares in FCL.  But for Ngan’s vision and funding the Project, JDS would not have set its eye on FCL.  Ngan has some contribution in enhancing the value of FCL.  Given the state of the evidence, I am unable to assess quantitatively the bearing the Project had in JDS’ mind when making the acquisition. 

267.  At the original trial, I took a pragmatic approach and assumed that while Ngan contributed the capital, FCL contributed the manpower in developing the Project.  Having re-opened the issue and heard more evidence, I do not think that approach fair.  Ngan’s camp contributed by way of capital and remuneration paid to Wang.  Wang could not have carried out the Project in the United States while he was working full time for FCL and FCO in the Mainland or Macau.  The Project must have been carried out by Casix Inc which was a subsidiary of FCL as evidenced by Wang’s note to FEHC in September 1998[38]. FCL must have contributed significantly to the success of the Project by way of manpower.  But FCL’s contribution, including Wang’s initiative, could not have been treated solely as FEHC’s.  Ngan’s camp also had a 51% share in that contribution.  Ngan’s capital contribution is something over and above the agreed share ratio.   The evidence does not make it possible for a quantitative assessment of how much over and above the agreed share ratio Ngan’s camp has contributed by reason of the Project.  On the other hand, there is no evidence of FEHC having contributed anything over and above the agreed share ratio.  Again, I have to adopt a pragmatic approach.  The fairest approach is to adjust the agreed ratio upwards by giving credit to Ngan’s monetary contribution to the Project. 

268.  Under the COM Agreement, the total value of FCL and FCO was  agreed  to  be  US$6,250,000,  based  on  their  net  asset value  as  at 31 December 1996 of RMB32,207,987.67 and RMB21,519,788.21 respectively, totalling RMB53,727,775.88.  The exchange rate adopted was RMB8.596444[39] per US dollar.  Under the First Laser Agreement, the purchase price for 51% of the interest in FCL and FCO was agreed to be US$3,187,500, equivalent to HK$24,640,000.  On this basis, the exchange rate for HK$/US$ was 7.730196[40] and that for RMB/HK$ was 1.112060[41] in December 1996.  The price First Laser paid for 51% of the shares in  FCL was HK$14,770,848.10[42].  The value of 49% of the interest in FCO kept by FEHC was HK$9,482,128.86[43].

269.  There are three currencies involved in this action.  The HK$/US$ rate is very stable because of the peg.  The RMB/US$ rate as well as the RMB/HK$ rate fluctuate somewhat and more so since the turn of the century because of the fast economic development in the Mainland.  For the purpose of assessing restitution and counter-restitution, I shall use the Hong Kong dollar as the base currency.  I shall use the HK$/US$ rate of 7.730196, the RMB/US$ rate of 8.596444 and the RMB/HK$ rate of 1.112060 in relation to transactions around the time of the three agreements.  As for the RMB/HK$ rate at other material times, I shall adopt the exchange rate published by the Inland Revenue Department.   Renminbi  appreciated to 1.068823 per Hong Kong dollar in April 1998[44]; 1.065687 in February 2000[45]; and 0.883475 in December 2008[46].

270.  The parties’ combined investment in FCL was RMB32,207,987.67 or HK$28,962,454.97[47].  First Laser’s 51% investment in FCL was RMB16,426,073.71[48], equivalent to HK$14,770,848.10[49].  The  parties’ combined investment in FCO was RMB21,519,788.21, equivalent to HK$19,351,283.39[50].  FEHC’s 49% investment in FCO was RMB10,544,696.22[51] equivalent to HK$9,482,128.86[52].

271.  Ngan’s capital contribution to the Project included US$410,000, equivalent to HK$3,169,380.36[53]; RMB1,000,000, equivalent to HK$935,608.61[54]; and HK$208,000 being the subsidy to Wang.  His total capital contribution to the Project was HK$4,312,988.97[55]. Thus, Ngan’s or First Laser’s total investment in FCL, inclusive of the Project, was HK$19,083,837.07[56] and the parties’ total investment was HK$33,275,443.94[57].  The revised share ratio is therefore 57.35 : 42.65[58].  The share ratio in respect of the parties’ investment in FCO remains unchanged.

Conclusion

272.  In paragraph 228, I have found as a matter of Mainland law that the scope of restitution in the case of a nominee investment contract which is void or held to be void and to which article 18 of 《Provisions (I)》applies includes the original subject matter, i.e. the investment money, and the fruits arising from that original subject matter which the actual investor would have obtained if the contract were not void or had it not been held to be void.  Those fruits include the usual profits of the investment, i.e. dividends and enhancement in the value of the investment.

273.  First Laser’s claim in restitution includes:

(1)  the investment amount of HK$14,770,320 paid under the First Laser Agreement in respect of the shares in FCL;

(2)  its investment in the Project in the amount of HK$4,313,011,

(3)  its expenditure in purchasing staff quarters in the amount of RMB6,638,099.44;

(4)  reasonable distribution of the proceeds of sale of FCL’s shares to JDS in the amount of US$60 million as determined by this court;

(5)  interest in respect of the investment amount;

(6)  interest in respect of the investment in the Project; and

(7)  interest in respect of the reasonable distribution of proceeds of sale of FCL’s shares.

274.  I reject First Laser’s claim for the expenditure in purchasing staff quarters as the expenditure was, according to the spirit of the First Laser Agreement, from common funds spent for common purpose.  I also reject its claim for interest on the investment amount and on the investment in the Project as those funds were used to produce the enhancement in the value of the shares in FCL which is reflected in the adjustment in the sharing ratio and which First Laser benefitted from.  Such claims would be double counts.

275.  At paragraphs 237 to 240, I dealt with the parties’ argument about a sum of HK$4,640,000 which was treated as having been paid by Ngan’s camp towards the balance of the purchase price for 51% of the shares in each of FCL and FCO by way of set-off against FEHC’s contribution to the capital of COM.  Mr Yu SC argues that this amount was treated as having been paid by way of accounting treatment and should be reversed by way of accounting treatment.  With respect, I do not agree.  There was real cash paid by Ngan’s camp on behalf of FEHC as its contribution towards the share capital of COM twenty-three years ago.  It was not a mere accounting entry.  Even if it were, a reversal now would only produce a debt which is statute barred.  This sum of HK$4,640,000 has to be treated as having been paid to FEHC and as part of the purchase price for 51% of the shares in FCL and FCO.  I have assessed First Laser’s investment amount under the First Laser Agreement in FCL to be HK$14,770,848.10 and the investment in the Project to be HK$4,312,988.97, totalling HK$19,083,837.07.  This sum of HK$19,083,837.07 is the original subject matter acquired by FEHC under the void nominee investment contract which should be returned to First Laser in full.

276.  The equity value of FCL is represented by the proceeds of the sale of its shares to JDS of US$60 million, i.e. HK$463,811,760[59] which also includes the capital investment by the parties and First Laser’s investment in the Project. First Laser should only be allowed a reasonable distribution of the equity value net of their combined investment in FCL and the Project.  Otherwise, there would be   double counts.  The net enhancement value is therefore HK$430,536,316.06[60].  For reasons as explained in paragraph 271, I have adjusted First Laser’s sharing ratio upwards to 57.35 : 42.65.  Accordingly, I assess the reasonable distribution to First Laser to be HK$246,912,577[61].  First Laser should also be entitled to interest on the said sum at the rate of 1% above the prime rate from the date of completion of the sale of the shares in FCL to JDS.

277.  Mr Yu SC argues that for First Laser to be restored to the pre-contract position under the remitter First Laser is only entitled to be returned the price and interest.  He criticises First Laser’s claim as being the same as a claim for damages for breach of the First Laser Agreement.  With respect, his argument is based on his misconception that restitution under Mainland law is the same as that under common law.  As explained in paragraphs 215-220, under Mainland law First Laser is entitled to claim return of property acquired by FEHC as result of the contract which is held to be void or reimbursement of the value of the property if it could not be returned.  FEHC is unable to return the property acquired.  The juridical basis of a claim for reimbursement of the value of property acquired under a void nominee investment contract is a right to claim improper profits which includes value of the original subject matter and the fruits arising from that original subject matter.  In the circumstances, there is no surprise that the results are similar to a claim for breach of contract under common law, but the juridical basis and approach are different.  Furthermore, article 18 of 《Provisions (I)》has removed the restrictions created as result of a void contract and enables justice to be better served according to the spirit of the agreement which the parties had entered into.  The scope of restitution available to First Laser is wider than that under common law.   It is guided by the notions of fairness.  It requires the court to gauge the parties’ contributions to the enhancement in value to FCL.   The same is very often true under Hong Kong law in a claim founded in breach of contract and one founded in professional negligence, though the tests for remoteness of damages are different.

278.  The value of the original subject matter and the fruits arising therefrom are HK19,083,837.07 and HK$246,912,577.00, respectively.  Accordingly, I assess the sum to be returned to First Laser to be HK$265,996,414[62].

COUNTER-RESTITUTION

The parties’ case

279.  Originally, FEHC pursued a counterclaim in this action for a declaration that each of the three agreements and the 1998 Memorandum is invalid, of no effect and not binding on FEHC.  That counterclaim was withdrawn at the original trial with leave of this court.  As Mr Yu SC rightly admitted, FEHC has no counterclaim as such.

280.  In the amendments made in response to First Laser’s claim under article 18 of 《Provisions (I)》, FEHC raised for the first time a plea of counter-restitution in paragraph 38.20 of its RRRADC as follows:

“Even if, which is denied, the Plaintiff is entitled to restitution under Mainland law, this is subject to the Plaintiff’s liability to procure counter-restitution to be made (1) for the value of 100% shareholding in FCO to be assessed (or credit to be given for such value) and (2) the dividends declared by FCO at least I thee sum of about RMB 13,138,492.27”

FEHC claims the return of all dividends distributed to COM in the sum of RMB23,802,718.60; value of the fixed assets represented by the precious metal in the sum of RMB14,735,670.26; all accumulated profits in the sum of RMB27,380,435.80; and the proceeds of sale of FCO in the amount of RMB1,600,000. The total amount of claim is RMB54,381,332.19. 

281.  Mr Chan SC submits that FEHC cited no principle or provision under Mainland law to support the counter-restitution plea, the scope of counter-restitution or the basis on which First Laser should be made liable for the shares received by COM.  He argues that First Laser is somewhat handicapped in dealing with this aspect of FEHC’s case in that the factual and legal basis for counter-restitution is not entirely clear. 

282.  With respect, I do not see it that way.  “Counter-restitution” just means restitution claim by the opponent under the same Mainland law as relied on by First Laser under its claim in restitution.  It is the reverse of First Laser’s case in respect of the shares in FCO.  The factual basis relied on by FEHC are the same nominee investment contract and First Laser being the nominee shareholder with FEHC being the actual investor in respect of 49% of the shares in FCO.  First Laser knows the case it has to meet and has adequately prepared to meet it as amply demonstrated by Fong’s witness statement.  Its case is that FCO ceased business after 2008 and its current equity value is less than the original investment sum.  Article 18 of 《Provisions (I)》is inapplicable.  First Laser has no dispute that it is obliged to return part of the dividends distributed to COM and part of the current equity value of FCO to FEHC in accordance with article 19.

FCO’s dividends

283.  In paragraph 38.20 of its RRRADC, FEHC claimed restitution of the dividends in the amount of RMB13,138,492.27.  That was based on the first two distributions of 1996 and one in 1997.  In his affirmation, Ngan disclosed those three distributions of dividends.  Before the hearing, Fong voluntarily disclosed two further distributions in 2002 and 2003 in the respective amounts of RMB8,465,226.13 and RMB2,200,000, even though no claims have been made by FEHC in respect of these dividends.  First Laser has no objection for those amounts to be included in FEHC’s claim. But according to First Laser, a substantial part of the dividends in the amount of RMB6,638,099.44 had been applied towards subsidising the staff of FCO and FCL in purchasing staff quarters.  The disposal of these dividends is summarised as follows:

Year	Amount of dividend RMB	Date of receipt by COM	Amount applied towards housing subsidy	Amount retained by COM
1996	2,300,000.00	04/08/1997	2,300,000.00	0.00
1996	1,200,000.00	22/08/1997	1,200,000.00	0.00
1996	3,689,188.97	11/05/1998	3,138,099.44	551,089.53
1997	5,949,303.50	13/10/1998	0.00	5,949,303.50
2002	8,465,226.13		0.00	8,465,226.16
2003	2,200,000.00		0.00	2,200,000.16
Total	23,803,718.60		6,638,099.44	17,165,619.60

FCO was quite a successful company.  It made profits of nearly RMB24 million in seven years.  Had it not been for its contribution to the housing subsidy, it would have fully recovered its capital investment in six years by way of dividends.  Had FCL contributed a proportionate share in the subsidy, FCO would have broken even well before 2002. 

284.  As I consider the housing subsidy was part of the business expenses of FCO and FCL under the spirit of the First Laser Agreement, it should be treated as the parties’ joint contribution from their common funds to the operational expenses of FCL and FCO in the agreed share ratio.  It is not subject to counter-restitution. Therefore, only dividends net of the said contributions are subject to counter-restitution, i.e. RMB17,165,619.60.  These are fruits obtained through the joint efforts in operation, management and funding in the agreed ratio of 51:49.  Accordingly, FEHC is only entitled to 49% of the above sum, i.e. RMB8,411,153.60[63].

Article 19 of 《Provisions (I) 》 – Distribution of the equity value of FCO

285.  Under article 19 of《Provisions (I)》, where the nominee investment contract is found to be void, the actual investor is entitled to be returned the equivalent value of the shareholding.  Alternatively, if the nominee shareholder unequivocally indicates his intention to abandon the shares or to continue to hold them, the court may order them to be sold by auction and have the net proceeds of sale returned to the actual investor.  Article 19 provides:

「實際投資者與外商投資企業名義股東之間的合同被認定無效，名義股東持有的股權價值低於實際投資額，實際投資者請求名義股東向其返還現有股權的等值價款的，人民法院應予支持；外商投資企業名義股東明确表示放棄股權或者拒絕繼續持有股權的，人民法院可以判令以拍賣、變賣名義股東持有的外商投資企業股權所得向實際投資者返還投資款。」

(Translation:

“Where a contract between the actual investor and the nominee shareholder of a foreign-funded enterprise is determined to be void, if the value of the equity held by the nominee shareholder is lower than the actual investment sum, and the actual investor requests the nominee shareholder to return the price equivalent to the current value of the equity, it shall be upheld by the people’s court; if the nominee shareholder of a foreign-funded enterprise unequivocally indicate its intention to forego the equity or refuse to continue to hold the equity, the people’s court may order the equity held by the nominee shareholder of a foreign-funded enterprise to be auctioned or sold and the proceeds be returned to the actual investor.”)

First Laser or COM on its behalf has no intention to abandon the shares in FCO.  The issue is therefore whether the current equity value of FCO is less than its value at the time of the COM Agreement.  If it is higher, then distribution under article 18 is appropriate.  If it is less, article 19 applies.

The approach in valuation

286.  According to Zheng, FCO had been sold at an undervalue for RMB1,600,000 and the net asset value as shown in FCO’s Audit Report for the financial year ended 31 December 2008 prepared by Fujian Zhongzhicheng Certified Accountants Ltd（福建眾智成會計師事務所有限責任公司） (the “2008 Audit Report”) produced by Ngan is unreliable.  Hence, he argued that the equity value of FCO as at 31 December 2008 should be assessed as the sum of the book value of precious metal of RMB14,735,670.25 among the fixed assets, the profits after tax of RMB27,380,435.80 and the proceeds of sale of FCO in the sum of RMB1,600,000.  On that basis, the equity value of FCO as at 2008 was RMB43,716,106.06.  Zheng was a witness as to fact but attempted to give evidence as an accounting expert in advising this court how the valuation should be made, which he is not entitled to do.  His evidence, even if he were an expert, does not make sense.  He totally disregarded other important data in the valuation reports, such as current assets, current liabilities, and fixed assets other than precious metal.  He just picked and chose what he thought would give a higher equity value.  There is also no reason why profits after tax of the various years which do not appear in the balance sheet of 2008 should be taken into account and cumulatively.  Profits after tax is, in simple terms, the difference between income and expenditure after allowing for profits tax.  They are represented by the assets in the company.  Unless the profits were distributed as dividends, they would simply be booked as retained profits and carried forward to the next financial year and reflected in its net asset value and undistributed dividends.  If the profits were distributed, the net asset value would be reduced.  Current assets and some fixed assets may have been sold to generate the cash required for making distribution.  That is why a corresponding liability item of undistributed dividends is recorded in the balance sheet.  By adding these profits year after year as Zheng suggested would be to create double entries upon double entries.  I reject his evidence as un-principled.

287.  Mr Bai advanced a different approach in valuation.   In short, he takes the view that all the shares in FCO were transferred to COM under a separate share transfer agreement which was valid and had been formally approved by the Bureau of Foreign Economic and Trade. The shares cannot be returned.  There is no scope for the restitution of the FCO shares or purchase price, and that the remedy available to FEHC is a claim for a reasonable price for the shares which were transferred to COM. Mr Bai adopts the value of 100% of the shares in FCO under the COM Agreement or First Laser Agreement, i.e. RMB21,519,788.31 or HK$19,351,283.39.  The fallacy of his opinion is that FEHC lawfully sold all the shares in FCO to COM under a valid agreement and was paid HK$24,640,000.  Yet, on his expert opinion, FEHC can still have a further remedy against a non-party to the COM Agreement, i.e. First Laser, under the First Laser Agreement or under a nominee investment agreement which are both void for HK$19,351,283.39.  I have to rhetorically ask what damage has FEHC suffered and why should it be paid the price twice.  Such reasoning is, with greatest respect, unbalanced and smells strongly of smoke from a hired gun.

288.  Understood in terms of Mainland law, FEHC is claiming return of the value of property acquired by First Laser as result of the void nominee investment contract, i.e. all the shares in FCO transferred to COM.  The shares were transferred with the approval of the Bureau of Foreign Economic and Trade.  They cannot be returned.  FEHC’s right to claim can only be a right to claim for improper profits.  It is entitled to claim the value of the original subject matter and fruits arising from that subject matter, including dividends and enhancement in value of the equity, if any under article 18 of 《Provisions (I)》; or under article 19 if the value is less than the value of the original subject matter.  Since FEHC is claiming 100% of the value of the shares in FCO, its claim must be subject to counter-counter-restitution by First Laser in respect of the purchase price it paid for the 51% shares in FCL.  Though there was no plea of counter-counter-restitution by First Laser as such, it is not necessary as FEHC has to show its entitlement against the undisputed fact that First Laser had paid for 51% of the shares in FCO.  Furthermore, if FEHC is entitled to counter-restitution, it must be on the basis that First Laser has established its case of nominee investment contract and is therefore holding 49% of the shares in FCO as FEHC’s nominee shareholder and the other 51% as the actual investor who had paid the purchase price under the nominee investment contract which was held to be void.

289.  Hereunder, I shall analyse the parties’ evidence and make my valuation as to the equity value of FCO as at 31 December 2008. Based on that valuation, I shall assess the value to be returned to FEHC after taking into account counter-counter-restitution to First Laser in respect of the price it had paid for 51% of the shares in FCO.  

The proceeds of sale of FCO

290.  Zheng adopted Wan’s affirmation and alleged that in July 2008, Ngan sold FCO together with its production lines and transferred its staff to Caston (福州科彤光電技術有限公司). The basis of his allegation is a webpage statement from Caston to that effect[64].  Hence, he suggested that FCO is now an empty shell with no assets and that the valuation of FCO as at 31 December 1996 should be adopted for the purpose of counter-restitution. 

291.  Ngan denied that COM had sold FCO to Caston but instead asserted that FCO had sold certain fixed assets and inventories together with various ancillary instruments and materials to Lu Wensheng（陸文勝）under an Equipment Transfer Agreement in for RMB1,600,000 on 5 July 2008.  After that FCO ceased business.  Despite requests, First Laser

was unable to produce a schedule of assets sold under the Equipment Transfer Agreement.  Eventually, First Laser’s solicitors confirmed that the schedule could not be located.  The situation is unsatisfactory.  However, the balance sheet in FCO’s 2008 Audit Report as compared with that in the audit report for 2007 showed a reduction in value of fixed assets in the amount RMB2,076,121.28 and a reduction in current liability in the amount of RMB808,828.18[65].  The cash flow table also showed a receipt of RMB1,236,800 as proceeds from disposal of fixed assets, intangible assets and long term assets[66].  These entries are supportive of First Laser’s case.  More significantly, fixed assets in the value of RMB14,455,830.43 is still shown in the balance sheet suggesting that the platinum furnace is still recorded as an asset of FCO.  Though the auditors stated that they were unable to verify the fixed assets as they were situated outside Fujian, Fong confirmed that to her knowledge the platinum furnace is still being kept in FCO’s factory premises in Macau.  All these support Ngan’s evidence that what were sold were just some plant and equipment, not production lines or FCO as a whole including the platinum furnace.  There is no indication that a sale of the magnitude as suggested by FEHC had been covered up in the 2008 Audit Report. 

292.  FEHC complained that it was not until seven years and two months after the sale that First Laser first disclosed the sale in Ngan’s 4^th Affirmation filed on 14 September 2015 and only upon sight of Wan’s affirmation filed on behalf of FEHC.  FEHC suggests that First Laser withheld the information from FEHC while the appeals were being heard with the motive of removing the assets out of reach of FEHC in case it lost the appeal.  It argues that these facts indicated that FEHC was never a 49% actual investor of FCO; First Laser never held those shares as nominee of FEHC; and that COM did not hold the shares in FCO for FEHC.  FEHC also argues that adverse inference may be drawn from such secrecy. 

293.  There is nothing seriously adverse to be drawn from First Laser’s withholding information about the sale.  At least until 4 January 2011, First Laser had a judgment from this court for damages for breach of the First Laser Agreement and FEHC’s position was that it was the sole owner of the shares in FCL while COM was the sole owner of FCO.  FEHC’s stance was confirmed by the Court of Appeal and Court of Final Appeal.  Under that situation, there was no reason why First Laser or COM should inform FEHC about the sale.  Zheng’s suggestion that the subjective intention or belief of First Laser and FEHC that they were respectively not nominee shareholder and actual investors in respect of 49% of the shares in FCO is neither here nor there.   This is because under Mainland law legal consequences may arise as result of incidents or legal facts independent or regardless of the parties’ subjective intention.  In just the same way as I have found there was a relationship of actual shareholder and nominee shareholder created by the conduct of the parties under the special circumstances of this case in respect of 51% of the shares in FCL, I find the same relationship was created in respect of 49% of the shares in FCO with First Laser as the nominee shareholder and FEHC as the actual investor.

294.  I accept Ngan’s evidence that what were sold were just some plant and equipment and not entire production lines or all major assets of FCO including the platinum furnace or FCO as a whole.  The proceeds of sale under the Equipment Transfer Equipment and the platinum furnace had been entered into the books of FCO and reflected in the balance sheet.  The 2008 Audit Report provides a reliable basis for assessing the net equity value of FCO.

Value of fixed assets represented by precious metal – the platinum furnace

295.  Zheng argued that the valuation in the 2008 Audit Report is unreliable because it had wrongly excluded the value of the platinum furnace which had a book value of RMB14,735,670.25 plus appreciation in value of platinum over the years.  He produced FCO’s audit reports for 1999 and 2008 prepared by Fujian Huaxing Certified Public Accounts Ltd[67], presumably on the instruction of FCO while under the management of Ngan’s camp.  They were obtained by FEHC from the Fuzhou Bureau of Industry and Commerce.  The auditors certified that subject to the inability to verify the fixed assets including the platinum furnace and to carry out actual stock checking of other assets which were all located outside the Mainland, the reports complied with the relevant accounting regulations and substantially reflected the financial position of FCO for the respective years.  These are contemporaneous documents submitted by FCO to the Fuzhou Bureau of Industry and Commerce for official purposes.  Some of these reports were submitted before litigation commenced.  I consider the valuation contained in these reports reliable. 

296.  The value of fixed assets throughout 1996 to 2008 fluctuated between RMB14 million to RMB17 million.  Sometimes, the reports contained specific mention of the book value of precious metal among the fixed assets. Sometimes they did not.  The audit report for 2007 showed that the fixed assets had a book value of RMB21,114,285.51 and a discounted value of RMB16,531,951.71 after allowing for depreciation.  In the report, the auditors stated that they were unable to verify the fixed assets in precious metal with a book value of RMB14,386,748.23 as it was located in Macau.  The precious metal must refer to the platinum furnace.  The 2008 Audit Report showed that the fixed assets had a book value of RMB16,044,193.55 and a discounted value of RMB14,455,830.43 after allowing for depreciation.  In the report, the auditors stated that they were unable to verify the fixed assets with a book value of RMB16,044,193.55 as it was unable to make a physical inspection.  The auditors did not mention what the fixed assets were and whether they included precious metal.  But the value of the fixed assets is about the same.  This indicated that the book value of the furnace of about RMB16 million had always been taken into account in the audit reports for the various years, including 2008.  Zheng’s assertion that the platinum furnace had “disappeared” and had not been taken into account in the 2008 Audit Report is a speculative and a rather irresponsible statement.  Furthermore, if the furnace had been secretly sold as part of the production lines, FCO would have to account for the value as stated in the 2008 Audit Report just the same.

297.  The only remaining criticism is that the appreciation in the value of platinum has not been taken into account in the valuation.  But FEHC produced no evidence at all on the value of platinum.  The value of platinum fluctuates with time.  A quick check on the internet[68] showed that the spot price of platinum fluctuated between a low of US$248.50 per ounce on 11 March 1985 to a high of US$960.00 per ounce on 3 March 1980 before the date of the First Laser Agreement.  The spot price as at the date of valuation of FCO and FCL under the three agreements was US$367.90 per ounce and as at the date of the sale of the shares in FCL to JDS was US$463.50 per ounce.   Hereunder is a table summarizing the spot prices on or around these various dates:

Date of spot price	Spot price US$ per ounce	Reference dates
29/12/2008	946.70	Date of 2008 Audit Report
28/02/2000	463.50	Date of sale to JDS
27/12/1999	423.80	Date 2000 Audit Report
30/12/1996	367.90	Date of the First Laser Agreement
03/04/1995	457.10	Date before the First Laser Agreement
22/07/1991	368.70	Lowest price since decline in 1990
30/07/1990	488.10	Date before the First Laser Agreement
11/03/1985	248.50	Date before the First Laser Agreement
03/03/1980	960.00	Date before the First Laser Agreement

298.  There is no evidence when the furnace was acquired.  As the spot prices between 3 April 1995 and 30 July 1990 show, it could have been acquired at a value higher than that as at the date of the First Laser Agreement.  There is no evidence how the value of the furnace is related to the spot price of platinum in the precious metal market or how the platinum in the furnace could be converted into marketable platinum to be traded on the spot market and the cost of such conversion.  Though there was a 150% appreciation in the value of platinum in the precious metal market between the date of the First Laser Agreement and 31 December 2008, it is nevertheless within the range between 1980 and 2008.  As there is no evidence when the furnace was acquired, this court is handicapped from assessing its appreciation in the value.  I have to accept the book value of the furnace for the purpose of assessing the equity value of FCO.  This value has been reflected in the balance sheet in the 2008 Audited Report.  It should not be separately taken into account as suggested by Zheng.

FCO’s equity value

299.  The asset, liability and net asset value of FCO as at 31 December 2007 and 31 December 2008 are summarised in the table below:  

Item	Value as at 31/12/2007 RMB	Value as at 31/12/2008 RMB
Current assets	2,232,918.72	1,164,419.25
Fixed assets	16,531,951.71	14,455,830.43
Other assets	20,420.59	17,425.87
Current liabilities	-5,073,416.96	-4,264,588.78
Net asset value	13,711,874.06	11,373,086.77

300.  Having analysed the various heads of FEHC’s claim as suggested by Zheng above, I come to the conclusion that Zheng’s and Mr Bai’s approaches in assessing FCO’s equity value are flawed and there is no reason to doubt the reliability of the valuation of RMB11,373,086.77 as at 31 December 2008 as stated in 2008 Audit Report.  In reality, FCO was not a loser because its equity value plus the dividends generated during the 12 years of operation totaled RMB28,538,707.37, which was much higher than its original valuation as at 31 December 1996.

Distribution of the equity value of FCO

301.  The valuation of FCO at the time of the COM Agreement or First Laser Agreement was agreed to be RMB21,519,788.21.  That is the original investment sum.  The equity value of FCO as at 31 December 2008 was RMB11,373,086.77 only, which is less than the original investment sum.   FEHC is therefore only entitled to a distribution according to article 19 of《Provisions (I)》.

302.  FEHC claims return of 100% of the shares in FCO.  Though FEHC is entitled to be returned the value of all the shares in FCO, there is no dispute that it received the purchase price for 51% of the shares.  It is therefore only entitled to be returned 49% of the equity value, i.e. RMB5,572,812.48.  First Laser is entitled to the other 51% either in its own right as the actual investor or by way of counter-counter-restitution.

Conclusion

303.  In conclusion, FEHC is entitled to be returned dividends in the sum of RMB8,411,153.60 and the equity value of RMB5,572,812.48, totalling RMB13,983,966.08. Applying the exchange rate of 0.883475 in December 2008, FEHC is entitled to be returned HK$15,828,366.

ALTERNATIVE CLAIM UNDER 《CONTRACT LAW》 OR GPCL

The law

304.  First Laser’s alternative claim is based on article 58 of 《Contract Law》 and/or article 61of《GPCL》; the improper profits regime （不當得利制度） under article 92 of 《GPCL》 as construed by article 131 of the 《GPCL Opinion》; and the fundamental principle of fairness （公平原則）under Mainland civil law.  The advantage of First Laser’s reliance on this alternative claim is that the remedy under these provisions may be invoked upon proof that the contract as result of which property was acquired by FEHC has been found to be null and void or has been rescinded.  There is no need to prove that the contract is a nominee investment contract.

305.  FEHC argues that the principle of fairness has not been pleaded.  In paragraph 25A(10) of the RRADC, First Laser pleaded:

“(10) the Plaintiff shall also rely upon inter alia the notions and doctrine of honesty, fidelity and integrity, and equity and fairness, in relation to inter alia the remedies available to the Plaintiff under PRC law against the 1^st Defendant insofar the same is relevant.”

I think the principle of fairness has been adequately pleaded.  Mr Bai has also given expert evidence on the principle under Mainland law.  FEHC has no misunderstanding about First Laser’s alternative claim.

306.  According to Mr Bai, the principle of fairness is one of the fundamental principles of Mainland Law.  This principle operates only when there are no norms under the civil law regulating certain specific activities.  If relevant norms exist, those civil law norms should be applied first.  It is Mr Bai’s opinion that the principle of fairness has already been built in article 58 of 《Contract Law》. 

307.  This notion or principle of fairness is a very wide one.  It applies to fill in lacunae in the law.  The authors of 《Provisions (I) U&A》 repeatedly mentioned this principle as an underlying principle of《GPCL》.   Indeed, the term “spirit of fairness and reasonableness” (「公平合理的精神」) appeared four times in 《GPCL》 in addition to eight other references to the term “fairness” (「公平」).   Although there is a strong element of fairness incorporated in article 58 of 《Contract Law》, the principle cannot, per se, be said or be deemed to have been excluded by the article, when not even the word “fair” or “fairness” has been mentioned in that article.  

308.  The principle is reflected in article 10 of 《Provisions (I)》 which deals specifically with the scenario of a share transfer contract in respect of which the necessary approval has not been obtained.  It supplements the inadequacy of article 58 of 《Contract Law》 by enabling the purchaser of shares in an enterprise a reasonable distribution not only of the dividends but also of the other fruits of the investment including the enhancement in the value of the investment.   The authors wrote[69]:

“第三，實踐中還有比較特殊的情況，即外商投資企業股權價值經過受讓方經營管理產生了增值，受讓方是否可享有增值的部分利益，對此我國法律也沒有明確規定。王澤鑑先生主張不當得利人實際上獲得的超過所受利益之客觀價值的那部分利益，可以通過無因管理或者侵權制度予以解決，不應由不當得利制度調整。史尚寬先生和孫森焱先生則認為可以通過不當得利制度解決，但應根據當事人的貢獻予以決定。我們認為，如果由於受讓方特殊經營的貢獻使企業價值明顯超過平均收益，可依據公平原則酌情考慮讓受讓方分配部分增值，另如受讓方在經營管理的同時還投入了自有資金，使企業在混合資金的狀態下實現增值，各自資金比例亦可作為增值分配的參考因素。” 。 (重點以斜體和突體顯示）

(Translation:

“Third, in real practice there are special cases, for example, the value of the equity of a foreign-funded enterprise has increased through the effort and management of the transferee. Mainland law has no clear provisions as to whether the transferee can enjoy the enhancement in value of the equity (under such circumstances). Wang Zejian Mr. argues that (the dispute as to) that the part of the benefits received by the person improperly benefited over above the objective value of the benefit given to him can be resolved on the basis of (rights arising from) voluntary management or tort, rather than by the improper profits regime. Mr. Shi Shangkuan and Mr. Sun Senxuan believe that the right can resolved through the improper profits regime, but it should be decided according to the parties’ contributions. In our opinion, if the value of the enterprise is significantly enhanced beyond the average income (of such an enterprise) due to the contribution of the transferee’s special efforts andmanagement, it may be appropriate in the exercise of discretion and in accordance with the principle of fairness allocate to the transferee part of the enhancement in value, in addition, if the transferee also invests its own funds while operating and managing the enterprise, so that the enterprise can enhance its value with the combined funds, the respective capital ratio can also be a factor to be taken into account in distributing the enhancement in value.”)

(Emphasis highlighted in italic and bold print)

The authors emphasized that the court may in the exercise of its discretion and in accordance with the principle of fairness award the transferee, i.e. the actual investor, part of the enhancement in value in recognition of his contribution in the operation and management of the enterprise and if the transferee also invested its own funds a share according to the ratio of his capital contribution.  This article adopted the principle of distribution under article 18(1).

309.  The principle of fairness would be best understood by examining what are improper profits.  According to the authors of 《Provisions (I) U&A》, what makes the profits improper is the keeping of them by someone, who has not put in capital to earn the profits which should have been given to the party contributing the capital, had the contract between them not been held to be void[70].  Article 58 of《Contract Law》sets out the general principle on distribution of property acquired as result of such a contract.  Article 18 of 《Provisions (I)》gives more specific directions on how such property should be distributed between the parties.  It was designed to specifically rectify this inequity by allowing the actual investor a share not only in the dividends but also in all fruits of its investment including its enhancement in value.

310.  Article 18 does not encompass all circumstances.  At least one circumstance which calls for intervention by this principle of fairness is where property has been acquired, on the basis of First Laser’s alternative case, pursuant to some agreement or arrangement which does not qualify as a nominee investment contract which is void or found to be void.   Even accepting Mr Bai’s evidence about the limited scope within which this principle may operate, the facts of the present case, if proven, present a lacuna for the principle of fairness to intervene.

Discussion

311.  All factual issues, including most of the Mainland law issues relevant to the application of this principle of fairness have been discussed when considering First Laser’s primary claim based on a nominee investment contract.  I adopt those findings including in particular,

(1)     that the juridical basis of the right to claim for return of the property acquired by FEHC as the result of a void contract is the right to claim improper profits;

(2)     that reimbursement of the value of property acquired under a void contract includes the value of the original subject matter, i.e. the investment money; the usual benefits arising from that original subject matter, such as interests and dividends; and other benefits, such as enhancement in value of the investment which the actual investor would have obtained if the contract were not void or had not been held to be void; and

(3)     the fair manner of distribution of the enhancement in value of the original subject matter as between the party who contributed it, i.e. the actual investor and the recipient, i.e. the nominee shareholder, as suggested by the authors[71].

312.  This is not a case where the parties mutually abandoned the First Laser Agreement because of some impossibilities.  The fact that dividends from FCO and FCL were paid to COM and FEHC respectively was not because of any change in the parties’ intention, but because of constraints imposed by Mainland company law.  Because of possible litigations from FRIMS and the under-capitalization problem of FCL the parties did not perform the First Laser Agreement to the letter.  Instead, they conducted themselves at least up to March 1998 or possibly the end of that year according to the spirit of the First Laser Agreement with the intention that when the problems were resolved, steps would be taken to have the shares in FCO, FCL and COM regularized and to make everything fall in line with the First Laser Agreement.  That did not happen because of a change of mind on the part of FEHC.

313.  This is not a case where in breach of its obligation, Ngan’s camp refused to contribute to the share capital of FCL to enable the shares in FCO and FCL to be regularized.  Ngan’s camp was prevented from contributing to the share capital of FCL by constraints of the Mainland law and FEHC’s conduct.  Despite agreement to apply dividends from FCO and FCL as contributions to the capital of FCL and despite Ngan’s camp was ready and willing to remit the dividends from FCO to FEHC to solve FCL’s under capitalization problem, FEHC dragged its feet.  On the face, the parties fell out because of FEHC’s failure to give the confirmation that FCO’s dividend would be treated as the parties’ joint contribution to the capital of FCL.  In truth, they fell out because of a change of mind on the part of FEHC following a change in its management team.

314.  This is not a case where approval from the Bureau of Industry and Commerce was not forthcoming which prevented the shares in FCL from being transferred to COM or First Laser.  FEHC had the obligation under the First Laser Agreement, not just its spirit, to cause FCL to seek approval for the transfer of its shares to First Laser.  FEHC deliberately defaulted.  And when the Project funded by First Laser proved to be successful, FEHC decided to appropriate it to FCL to the exclusion of Ngan’s camp or First Laser.  It paid up the outstanding capital of FCL and sold the shares to JDS.  There was no problem in paying up the capital and obtaining approval from the Bureau for transferring the shares to First Laser.  FEHC dishonestly stole the Project and sold it together with FCL to rescue itself from its own financial problems.

315.  This is not a case in which the three contracts were destined to be void.  FEHC took advantage of the Mainland law which puts it in the peculiar position of being able to decide the validity of the First Laser Agreement.  If it performed its part of the agreement (by seeking approval for the transfer of the shares in FCL to First Laser), the agreement would have been valid.  If it refused to perform as it did, the agreement was held to be void.  It deliberately defaulted and craftily engineered a situation to make the three agreements and 1998 Memorandum void.  

316.  This is a case where FEHC had second thoughts on the joint venture after partnering for four years.  Then in view of the tremendous enhancement in value of the shares in FCL by reason of the Project, FEHC decided not only not to honour the spirit of the First Laser Agreement, but also to steal the Project from Ngan’s camp or First Laser by selling the shares in FCL to rescue itself from its own financial problems.  It took advantage of its own default to render the three contracts and the 1998 Memorandum void and successfully sought a declaration from the Mainland courts to that effect.  These facts cry out loudly for the principle of fairness to intervene to right the wrong engineered by FEHC.

317.  As for the scope of restitution, I adopt my findings in relation to First Laser’s primary case.  The property acquired as result of the arrangement or contract which was held to be void was the property transferred to FEHC, i.e. the price of HK$46,400,000 paid by First Laser and COM on the direction and behalf of First Laser.  As regards the portion of the investment relating to FCL, the property to be returned under article 58 of 《Contract Law》 or article 61of 《GPCL》 includes the original subject matter which was the price; and the fruits arising from the original subject matter, namely the dividends and enhancement in value of the shares in FCL.  All these properties are in the possession of FEHC by reason of its status as the shareholder of FCL on record.  FECL’s contributions towards making of these fruits and enhancement in value consisted of its share of the equity, i.e. 49% interest in FCL and its management.  What First Laser contributed which FEHC did not were such part of the purchase price apportioned to its intended 51% interest in FCL; its management; its capital investment in the Project and subsidy to Wang for his management of the Project.  The value of FCL was greatly enhanced.  FEHC sold FCL for a huge profit.  For the same reasons as given by the authors of 《Provisions (I) U&A》, the keeping by FEHC of the entirety of the fruits of the joint investment is improper because FEHC has not provided the entirety of the capital needed to generate those fruits.  The principle of fairness requires that these fruits be distributed between First Laser and FEHC regardless whether there was any nominee investment contract or the nature of the agreement or arrangement between them.  If there was a nominee investment contract which was void, First Laser would be entitled to a reasonable distribution under article 18 of 《Provisions (I)》 as it sought in the primary case.  If there is no, First Laser is entitled to restitution under article 58 of 《Contract Law》 and/or article 61of 《GPCL》, article 92 of《GPCL》as construed under article 131 of 《GPCL Opinion》considered in the light of the principle of fairness.

318.  Even though article 18 of 《Provisions (I)》 does not apply to the distribution of fruits arising from a contract other than a nominee investment contract which is void or found to be void, the principle of fairness requires the same principle of distribution be adopted.  Adopting the principle as suggested by the authors at pages 185 and 186 of 《Provisions (I) U&A》 as quoted in paragraph 227 above, I can only arrive at the same result, i.e. a distribution of the equity value of FCL according to the adjusted ratio of 57.35:42.65[72] by giving credit to First Laser for its extra contribution by way of funding the Project. 

319.  The principle of fairness also requires First Laser to return what FEHC had contributed to FCO and a reasonable distribution of the fruits from FCO, i.e. the dividends and the 49% of the equity value of FCO as at 31 December 2008, there being no enhancement in value.

320.  The approach I took in assessing the value of the property to be returned to First Laser under its alternative claim is same as the approach I adopted in considering its primary claim under article 18.  I can only arrive at the same results.  Accordingly, I adopt the same conclusion as I reached in First Laser’s primary claim under articles 18 and 19 of 《Provisions (I)》.

CONCLUSION

321.  I am satisfied that First Laser is entitled to be returned the sum of HK$265,996,414 by way of restitution and FEHC is entitled to be returned the sum of HK$15,828,366 by way of counter-restitution.  First Laser should be awarded the net sum of HK$250,168,048.  Accordingly, I enter judgment in favour of the plaintiff in the sum of HK$250,168,048 against both defendants with interest.  Interest shall be calculated on the principal sum of HK$265,996,414 from the date of completion of the sale of the shares in FCL to JDS until 31 December 2008, and on the principal sum of HK$250,168,048 from 1 January 2009 until the date of this judgment at the rate of 1% above the prime rate fixed by Hong Kong and Shanghai Banking Corporation and thereafter at judgment rate until payment.  In default of agreement, the date of completion shall be taken to be 1 May 2000 on a convenient assumption that the sale and purchase was completed fourteen days before the handover reception ceremony.

322.  I do not find it necessary to make separate costs orders for the claim in restitution and counter-restitution as the issues involved in both claims are practically the same and FEHC’s evidence on the counter-restitution is mostly rejected.  The plaintiff should be awarded costs as being wholly successful. Accordingly, I make a costs order nisi that the 1^st defendant shall pay the plaintiff’s costs of the remission proceedings with certificate for two counsel and that there be no order as to costs as against the 2^nd defendant.

HCA 4414/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 4414 OF 2001

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D E C I S I O N
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Introduction

1.  On 28 January 2016, I handed down decision (the “Decision”) in respect of the Plaintiff’s application for directions for the trial and the Defendants’ applications for interlocutory relief.  Against that Decision, the Defendants seek leave to appeal to the Court of Appeal.  By a separate summons, the Defendants also seek vary the costs orders I made in my Decision as if those were orders nisi.

2.  The background of this litigation can be found in the Court of Final Appeal’s judgment in First Laser v Fujian Enterprises[1] and in paragraphs 2 to 13 of my Decision.  It will not be repeated in here.  The circumstances leading to the present leave application are as follows.

3.  The Plaintiff commenced legal action against the Defendants in 2001 which took its full course to the Court of Final Appeal.  On 6 July 2012, the Court of Final Appeal remitted the case back to this court for determination of the issue of restitution under Mainland law. A directions hearing was scheduled to be held on 25 September 2015 for the purpose of giving directions for the further conduct of the litigation and payment out of money in court.  One of the directions sought by the Plaintiff was to file an additional expert opinion on Mainland law relating to a new judicial interpretation which came into force on 16 August 2010.  The Defendants also took out a summons on 16 June 2015 seeking an unless order, undertaking as to damages and fortification, and security for costs against the Plaintiff.  That summons was also set down to be heard on 25 September 2015 at the directions hearing.  The parties filed full skeleton submissions and affirmations in support of the various applications.  The following applications were before the court:

(1) the Plaintiff’s application for directions, including leave for filing expert evidence and exchanging witness statements (the “directions application”);

(2) the Defendants’ application for an order that unless the Plaintiff pays all outstanding costs and interests awarded against him within a specified time its statement of claims shall be struck out and dismissed (the “unless order application”);

(3) the Defendants’ application for an order that the Plaintiff gives an undertaking as to damages and fortification (the “fortification application”);

(4) the Defendants’ application for an order that the Plaintiff gives security for the Defendants’ costs in the trial of the remitted issue (the “security for costs application”); and

(5) the Defendants’ payment out application.

4.  At the hearing, despite there was sufficient time to deal with all the applications, after arguing on the directions application, counsel sought to have the hearing of the other four applications adjourned to a date to be fixed in consultation with counsel’s diary.  The adjourned hearing was subsequently fixed to be held on 24 May 2016, eight months later.

5.  In the course of my deliberation on the directions application, I somehow overlooked the fact that the other four applications had been adjourned for hearing and decided those applications on the basis of the affirmations filed by the parties and the counsel’s full written submissions.  On 28 January 2016, I handed down my Decision on all the five applications.  The Defendants now seek leave to appeal against all my orders made in respect of the first four applications.

The applicable legal principles

6.  Under section 14AA of the High Court Ordinance and Order 59, rule 2B(1) of the Rules of the High Court, any party intending to appeal against an interlocutory decision of the court has to apply for leave to the judge against whose judgment or order leave to appeal is sought.  The burden is on the applicant seeking leave to show that he has reasonable prospect of success or that there is some other reasons in the interests of justice why the appeal should be heard.  For the purpose of section 14AA, “reasonable prospects of success” involves the notion that the prospects of success must be more than “fanciful”, without having to be “probable”: see SMSE v KL[2]. The applicant has to show more than just an arguable case, but an appeal that has merits and ought to be heard, although he does not have to demonstrate that the appeal will probably succeed: see Wynn Resorts (Macau) SA v Mong Henry[3].

7.  Appeals against the exercise of discretion, of which case management decision is a species, are subject to a much higher threshold: see Hong Kong Civil Procedure[4].  Even before the Civil Justice Reform (“CJR”), the threshold was deliberately set very high.  The test is that the order sought to be appealed against was “plainly wrong” or “really perverse” before the appellate court will interfere with the exercise of case management discretion of the court below.  In Carrian Investments v Price Waterhouse & Ors[5], Mortimer JA held that where a judge’s discretion in case management is challenged, the appellate court should approach the matter with special caution and the test he adopted was that the point challenged was plainly wrong.  He said at paragraph 12:

The only question this Court has to consider is whether the judge’s decision on the point challenged is plainly wrong (see Ashmore and others v Corporation of Lloyds [1992]1 WLR 446). Where a judge’s ruling on case management is challenged (and this is such a ruling) this Court should approach the matter withspecial caution. The judge assigned will nearly always be in a better position to decide matters of case management than this Court. So it is with this judge. He had a number of applications including a 5-day hearing to amend the pleading. His judgment demonstrates that he balanced the various considerations in giving this direction. He was fully aware of its advantages and disadvantages. For my part, I think it is quite impossible to say that he was plainly wrong in making this direction and I would dismiss this appeal without hesitation.”

(My emphasis underlined)

Sears, J emphasised the judge’s duty as case manager is to ensure that litigation is conducted speedily without undue cost and that the appellate court should support him in the exercise of his case management discretion, unless the decision is perverse.  He said at paragraph 15:

“The modern role of a Judge trying complex civil litigation is to be a Case Manager. His duty is not only to decide the issues, but also to ensure that the litigation is conducted speedily and without undue cost. Keith J. is the designated judge and the Case Manager for this long and difficult trial and he made the order appealed from as part of his duty to keep the case within acceptable bounds. This Court should support him unless it can be shown that his order is really perverse. He approached his decision with care and with the knowledge that it is he who will ultimately have the personal burden of trying the case. Such a burden is heavy and sometimes not recognised either by the parties, or the public, as such.”

(My emphasis underlined)

The same sentiment was expressed by Penlington, J.A at paragraph 17 where he said:

“I have seen the judgment of Mortimer J.A. in draft. I agree with it for the reasons he gives and am satisfied that this appeal should be dismissed. This Court is reluctant to interfere with a judge’s exercise of a discretion. That should be even more so where it is a discretion as to the management of a trial with which the judge is seized.”

(My emphasis underlined)

8.  The rationale for this very cautious approach towards appeal against a judge’s case management discretion was explained by Rogers VP in Lee Tak Yee v Chen Park Kuen & Ors[6] as follows:

“When a matter of case management comes before the Court of Appeal, it is a very high hurdle for those seeking to challenge an order made by a judge below to succeed on an appeal. The Court of Appeal is not the court which will be hearing the case; it is the judge below who will be hearing the case. It is the responsibility of the judge below to order affairs and to order the way in which the case is going to be conducted in the manner which appears best suited to the judge to come to a proper and fair judgment in the matter. The judge below cannot carry out that task if the Court of Appeal is going to direct this, that and the other as to how issues are going to be decided, what issues should be decided first and in what order matters are going to be taken. Those were essentially matters for the judge to decide. Only if the judge has gone clearly wrong and made orders which will clearly involve either an injustice or an inability for the trial court to carry out its task will the Court of Appeal interfere in matters of case management of this sort. In my view, this appeal simply must fail from the beginning.”

(My emphasis underlined)

The Court of Appeal made it very clear that case management decisions are matters for the judge to decide and that same judge will have the further conduct of the case.  Hence, the judge’s exercise of discretion in case management will be carefully guarded.  In respect of appeal against case management discretions, the test is elevated from reasonable prospect of success to the judge having gone clearly wrong and made orders which will clearly involve either an injustice or an inability for the trial court to carry out its task. Clearly wrong or really perverse as the judge’s order may be, the appellate court will not interfere unless it will involve either an injustice or an inability for the trial court to carry out its task.  This is the law applicable to an appeal against a judge’s case management discretion.

9.  Post-CJR, in furthering the underlying objectives of the Rules of the High Court, the judge’s interlocutory orders and case management discretions are guarded with greater caution. The requirement of leave to appeal was introduced to address satellite litigations on interlocutory matters which unnecessarily cause delay and additional costs.  The intending appellant has to apply to the trial judge for leave to appeal his decision.  The trial judge sits as if he were in an appellate court hearing an appeal against the decision of a lower court.  In respect of interlocutory appeals generally, even if reasonable prospect of success is shown, the court has discretion to refuse leave in the interest of procedural economy and proportionality.  In Wong Kar Gee Mimi v Severn Villa Ltd[7], Kwan JA said:

“29. The principles on granting leave to appeal are well established. Leave can be granted if the court is satisfied that: (a) the appeal has a reasonable prospect of success; or (b) there is some other reason in the interests of justice why the appeal should be heard¹². Reasonable prospects of success involve the notion that the prospects of succeeding must be ‘reasonable’ and therefore more than ‘fanciful’, without having to be ‘probable’¹³. As the leave requirement was introduced largely to address satellite litigation on interlocutory issues which almost invariably gives rise to major delay and expense, so for the court to be satisfied that the appeal does have ‘reasonable prospects of success’, merely showing that the appeal is ‘arguable’ and ‘not fanciful’ would not be sufficient¹⁴.

30. Even if the threshold test of reasonable prospect of success is satisfied, the court still retains a discretion whether to grant leave, although the fact there is, ex hypothesi, a reasonable prospect of success would heavily influence the court’s exercise of discretion¹⁵. The court may refuse leave to appeal in the interests of procedural economy and proportionality¹⁶.

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¹²  Section 14AA(4) of the High Court Ordinance (Cap.4)

¹³SMSE v KL [2009] 4 HKLRD 125 at 129, para.17

¹⁴ Ho Yuen Ki Winnie v Ho Hung Sun Stanley (unrep., HCMP 1009/2009, [2009] HKEC 1364), para.16

¹⁵ Ho Yuen Ki Winnie v Ho Hung Sun Stanley (unrep., HCA 391/2006, [2009] HKEC 885), para.3

¹⁶ Ibid., para.8 (concerning leave to appeal an order on specific discovery); and on renewed application to the Court of Appeal, Ho Yuen Ki Winnie v Ho Hung Sun Stanley (unrep., HCMP 1009/2009, [2009] HKEC 1364), para.22 ”

(My emphasis underlined)

10.  The judge’s case management discretion is guarded with even greater sanctity.  The same test applicable in the hearing of the appeal is also applicable to an application for leave to appeal.  In Wong Kar Gee Mimi v Severn Villa Ltd[8], Kwan JA adopted the test stated by Rogers VP in Lee Tak Yee v Chen Park Kuen & Ors and emphasised the very high hurdle which an applicant for leave to appeal has to overcome.  She said:

“31. ... Case management decisions are only subject to appeal in rare circumstances. The appellant faces a ‘very high hurdle’ and must show that the Judge ‘has gone clearly wrong and made orders which will clearly involve an injustice or an inability for the trial court to carry out its task’¹⁷, or if the judge ‘erred in principle or the order was irrational having regard to the issues that had to be resolved’¹⁸. It need hardly be emphasised that generally, an appellate court will not interfere with a judge’s exercise of discretion unless the Judge has misunderstood the law or the evidence or the exercise of his discretion was plainly wrong such that it was outside the generous ambit within which a reasonable disagreement is possible¹⁹.

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¹⁷Lee Tak Yee v Chen Park Kuen [2001] 1 HKLRD 401, 403E to H

¹⁸Kan Miu Wah v Aeroflot Russian International Airlines, (unrep., CACV 142/2006, [2006] HKEC 1658), para.11; Chan Wing Cheung v Ho Shu Yee (unrep., CACV 393/2004, [2005] HKEC 41), para.8

¹⁹ Cheung Kam Wah v Cheung Hon Wah [2005] 1 HKC 136, 142F‑G, para.17; Carlos Manuel Kwong v Lo Kam Wing (unrep., CACV 128/2005, [2005] HKEC 1764), para.28 (concerning an order on specific discovery) ”

(My emphasis underlined)

11.  Summing up, the law is that in respect of application for leave to appeal against an interlocutory order generally, the test is reasonable prospect of success, but the court has discretion to refuse leave in the interest of procedural economy and proportionality.  Case management is the tool to give effect to the underlying objectives of the Rules of the High Court.  Case management discretions are treated with great sanctity.  To obtain leave to appeal against the court’s exercise of case management discretion, an applicant has to overcome a higher hurdle.  He has to show that the judge has gone clearly wrong and made orders which will clearly involve either an injustice or an inability for the trial court to carry out its task.  While the judge has discretion to refuse leave in the interest of procedural economy and proportionality, the occasion when this discretion could be exercised if this threshold is achieved must be very rare.

12.  A specific ground relied on by the Defendants in their application for leave to appeal my orders made in respect of the unless order, fortification and security for costs applications is that those orders were made without the court hearing oral submissions from the Defendants.  This irregularity is not disputed.  Mr Shieh, leading counsel for the Defendants, also relies on the natural justice principle that justice has to be seen to be done such that the court should, before adjudicating the Defendants’ applications, give the Defendants a fair chance to make out their case orally. He submits that the right to have a fair and public hearing is entrenched under article 10 of the Basic Law (I presume he meant article 10 of the Hong Kong Bill of Rights Ordinance because article 10 of the Basic Law is about the national flag and emblem).  Article 10 of the Hong Kong Bill of Rights Ordinance provides that “all persons shall be equal before the courts and tribunals” and “in the determination of any criminal charge against him, or of his rights and obligations in a suit at law, everyone shall be entitled to a fair and public hearing by a competent, independent and impartial tribunal established by law”.  Mr Shieh also quotes the Court of Final Appeal decision in Chow Shun Yung v Wei Pih & Anr[9] and submits that in relation to first instance hearings, the right generally entails an entitlement to an oral hearing held in public unless there are exceptional circumstances that justified dispensing with this right.  Based on these principles, Mr Shieh submits that breach of this right to an oral hearing per se entitles a party to have the order made against him set aside without the need for the applicant to prove a reasonable prospect of success.

13.  I can see the force of that argument in the case of an appeal against a final order in which the parties’ rights and obligations are at issue.  However, in the case of an appeal against an interlocutory order, particularly one which is the exercise of case management discretion, the considerations, as I have explained, are wholly different.  An applicant for leave to appeal has to show that the judge is plainly wrong and his order is really perverse which clearly involves an injustice or an inability for the trial court to carry out its task.  In an appeal against a case management order, to have the order set aside is not the end of the matter.  The matter has to be remitted back to the same judge whose order is being appealed against.  The judge will go through the motion of conducting an oral hearing. If previously he had considered all facts and arguments advanced, he will reach the same decision as he did before.  The net result is a complete waste of time and costs.  The progress of the litigation will be delayed and justice will also be delayed.  This is precisely the type of case where even if the applicant is able to show a good chance of success, leave to appeal should not be granted in the interest of procedural economy and proportionality so that the proceedings could progress forward.  Thus, the irregularity of making a decision without an oral hearing only serves to show, at the highest, that the judge is plainly wrong or his order is really perverse.  But that is only the starting point to consider leave.  Unless it can also be shown that his order clearly involves an injustice or an inability for the trial court to carry out its task, the applicant is not entitled to leave.  To discharge that burden, the applicant has to show that the order was made without the judge having considered all the facts and submissions which the parties could have presented to the court had an oral hearing been held which involved injustice or that as result of the order the trial court cannot carry out its task.  The corollary is that if the judge had in mind those facts and submissions when making the order, there is no question of injustice.  If the applicant relies on inability in the trial court carrying out its task, he has to show how the order could have that effect.

14.  That the orders were made without an oral hearing is not disputed.  The real question is whether the order thus made involves injustice or inability of the trial court to carry out its task.  Here, in anticipation of a full hearing, the parties filed affirmations and skeleton submissions.  The Defendants filed 38 pages of supporting affirmations with 250 pages of exhibits and a written skeleton submission of 13 pages.  All arguments which could have been advanced by the Defendants have been advanced.  All facts in support of those arguments which the Defendants wished to rely on have been presented to the court.  The court had fully considered the skeleton submissions and facts and referred to them in the Decision.  This is not a case where a final decision affecting a party’s right was made without giving that party any opportunity to present his case at all.  Though no oral hearing was held, the Defendants had been heard in the sense that the facts and arguments which they sought to rely on were all placed before the court and were considered by the court.  In effect, the Defendants had been heard.  What was missing was an oral “top up”, which could not have been anything not contained in the written skeleton submissions as Mr Shieh indicated that he only needed five to ten minutes[10].  Mr Shieh has not advanced any argument how the orders would involve an inability in the trial court carrying out its task.  Thus, in respect of the application for leave to appeal these three orders, the question boils down to:

(1) what would have been that oral “top up” which the Defendants could have made but were deprived of the chance of making;

(2) in the light of that oral “top up”, whether the orders would involve injustice and inability of the trial court to carry out its tasks; and

(3) if the answer to (2) is in the affirmative, whether leave to appeal should be refused in the interest of procedural economy and proportionality.

The directions application

15.  The Plaintiff seeks leave to file an expert report on Mainland law in respect of a judicial interpretation which was issued on 17 May 2010 and took effect on 16 August 2010 during the course of the hearing of the appeal against the first instance judgment in this action.  The Defendants raised a number of objections, including “expert shopping” and delay.  I had dealt with all those objections and dismissed them.  However, I accepted Mr Shieh’s fallback position that before leave to adduce this expert report may be granted, the Plaintiff has to put his pleading in order first by raising this new aspect of foreign law. 

16.  The sentiment impressed on me by Mr Shieh at the previous hearing was that if the court considers this new aspect of Mainland law relevant, the Plaintiff must amend his pleading to raise this issue of foreign law; and if the pleading is properly amended, the Defendants would have no objection to the directions sought.  It was with that sentiment, I made no order other than a costs order that the costs of the application be in the Plaintiff’s costs in the cause.  I said in paragraph 36 of the Decision:

“... I trust the parties, having regard to the decision of this court, would in the interest of saving costs agree to amendment of pleadings, directions for filing of expert reports and exchange of witness statements.  Therefore, in respect of this application, I make no order other than that costs of the application be in the Plaintiff’s costs in the cause.”

I was anticipating that the parties would in the spirit of the underlying objectives dispose of all these matters by consent and quickly set the case down for trial.

17. Now, Mr Shieh says that the Defendants’ only position is that I should have dismissed the Plaintiff’s application instead of accepting and proceeding on the basis of their fallback position by making no order.  The grounds of appeal relied on by the Defendants are “expert shopping” and delay which had been advanced by Mr Shieh at the previous hearing.  I had considered those grounds in some length and dismissed them: see paragraphs 20‑23 and 30‑32 of my Decision.

18. Except for reiterating his arguments advanced on the previous occasion, Mr Shieh has advanced no new arguments before me today. In relation to “expert shopping”, he argues that it is unfairness to allow a party to switch to a new expert after having seen the evidence of his earlier expert rejected the court.  He submits that a party has to live with his expert for better or for worse.  The issue which the Plaintiff seeks to raise is a new issue on which the Plaintiff’s former expert had not given any opinion.  The Plaintiff has no idea what opinion that expert would give.  This is not a case of picking and choosing an expert who would give an opinion favourable to the Plaintiff’s case and dropping the earlier expert who has given an adverse opinion.  While the Plaintiff’s choice of a bad expert, one who was disbelieved by the court, may have forensic consequence on the Plaintiff’s case, I do not agree with Mr Shieh that on a separate issue such as this and to be argued for the first time (not re-argued) after eight years, a party should be bound to his expert for better or for worse.  With respect, such argument is absurd.  If an expert has been so severely criticised by the court as biased and unreliable, it defies common sense that the court should still seek his assistance, hear from him in respect of new issues, warn itself against his credibility, and possibly reject his evidence altogether.  What the court needs is assistance on Mainland law.  It needs a balanced and not one-sided opinion of the law. What justice requires is resolution of the parties’ dispute according to their merits and not according to tactical advantage.  I have dealt with Mr Shieh’s arguments in paragraphs 21 and 22 of my Decision.

19. Mr Shieh also argues that in view the long lapse of time, it is possible that the Plaintiff has been seeing ten experts and Professor Wang Li Ming or Professor Yin was the tenth and only ones who would support his case.  I find this purely speculative.  This is a question of credibility which should be left to be determined at trial.  Mr Shieh may test the credibility of this new expert by the evidence of the Defendants’ expert and his cross-examination.  His speculation is not a reason for refusing the Plaintiff leave to adduce the opinion of any expert witness if such opinion becomes a relevant issue with the amendment of the pleading.

20. In conclusion, I am not satisfied that Mr Shieh has demonstrated any reasonable prospect of success on appeal in respect of my order on the directions application.  This is a case management decision aimed at finding out where merit lies.  This leave application lies on the critical path of this action.  The case is approaching its fifteenth anniversary. Another round of appeal to the Court of Final Appeal will mean another two or possibly three years’ delay before this court can even begin to hear expert evidence. Even if there is any reasonable prospect of success, leave should be refused in the interest of procedural economy and proportionality alone.

The unless order application

21.  The Defendants sought an order that unless the Plaintiff pays the taxed costs and interest awarded against him his claim shall be struck out and dismissed.  I made the unless order in those terms except that the costs and interest are to be paid into court instead of to the Defendants.  While the Plaintiff has an indisputable liability to pay taxed costs, he has a substantial claim of US$60 million in restitution against the Defendants.  On the other hand, the Defendants have no assets in Hong Kong and have a record of swiftly removing assets out of the jurisdiction.  I considered there is a real risk that the costs if paid to the Defendants will be removed out of Hong Kong leaving the Plaintiff with an empty judgment in the event that the Plaintiff succeeds in the restitution claim.  Thus, while granting the Defendants the relief sought, I ordered the payment to be made into court.  In my view, with the order I made the interests of both parties are nicely balanced.

22.  Mr Shieh submits that by making the order without giving the Defendants a chance to make oral submissions, the Defendants were deprived of the chance of allaying the court’s concern and persuading the court to order payment to the Defendants.  At the previous hearing, Mr Shieh suggested that he would need five to ten minutes to make oral submissions in respect of all three applications.  Presumably, he had little to “top up” on his already comprehensive written skeleton submissions.  Today, he relies on three new grounds.  But they are nothing new which I have not taken into account in paragraph 39 of my Decision.  First, Mr Shieh argues that the US$9.6 million paid into court could be applied to satisfy judgment, if obtained by the Plaintiff.  Those funds would be part of the US$60 million which the Plaintiff would be entitled if his claim in restitution is successful.  It could offer no comfort as to the balance of US$50.4 million plus interest for sixteen years.  This is just the opposite scenario of what I mentioned in paragraph 39 of the Decision in relation to a similar argument raised by Mr Chan.  Although Mr Shieh had not raised this argument in his previous skeleton submissions, as I have dismissed Mr Chan’s similar argument, I must also have dismissed Mr Shieh’s, had he the opportunity to raised it in an oral hearing.  With respect, that argument simply has no merits at all.  Second, Mr Shieh argues that Plaintiff has in his hands the FCO shares and the dividends received from FCO which should be returned to the Defendants if his restitution claim is successful.  As I have said in my Decision, the value of those shares and dividends are subject to serious dispute, which could not be resolved on affidavit evidence.  Third, Mr Shieh raises some objections to Mr Chan’s submission that the Plaintiff’s claim in restitution was good security for the taxed costs which the Plaintiff was ordered to pay.  I had dismissed Mr Chan’s argument in the first two sentences of paragraph 39 without having heard Mr Shieh’s argument today.  Nothing of what Mr Shieh submits today could have the effect of improving on his written skeleton submissions before the court on the last occasion.  In the affirmations filed by the Defendants there is not the slightest assurance that there will be funds available to meet any judgment made against them.  In my view, no submission by counsel, however brilliant and capable, could change the fact that the Defendants had removed assets out of Hong Kong and in particular after service on them of the court’s injunction order.  No submission by counsel, however brilliant and persuading could change the court’s perception that money paid to the Defendants will be removed out of the jurisdiction rendering any judgment to be obtained against them partially empty.  Thus, nothing of what Mr Shieh advanced today could have the effect of allaying the court’s concern.  Oral hearing or not, the result would still be the same.

23.  On the above analysis, even if the order was plainly wrong and really perverse in that it was made without hearing the oral submissions of the Defendants, it involved no injustice.  There is nothing which counsel could have said in the two to three minutes oral submissions that had not been considered by me.  Even if the order is set aside on appeal and the Defendants heard orally, the new order to be made would still be the same. Besides, this is only an interlocutory order.  It is provisional.  The Defendants have liberty to apply if there are changes in circumstances.  The irregularity was unfortunate.  The Defendants were deprived of a five to ten minutes oral “top up” (ie two to three minutes for each application).  Counsel asked for an adjournment to save those five to ten minutes’ time.  Had I known the adjournment would have taken eight months to accommodate counsel’s diary, I would have refused the adjournment or made an order that those three applications be dealt with on paper without an oral hearing.  Even if there was an oral hearing, the outcome would still be the same.  There is no injustice. Mr Shieh has made no submission that by reason of this order, the court is rendered incapable of performing its task.  Irregular, though, the order may be, it cannot be described as plainly wrong or really perverse.  Even if it were, I would still exercise my discretion to refuse leave in the interest of procedural economy and proportionality.  What turned out precisely demonstrates procedural economy in that the hearing saved has now been gainfully used in dealing with the Defendants’ application for leave to appeal the directions application.  The parties are spared of an eight months’ delay.

The security for costs application

24.  The Defendants seek security in the sum of $4.3 million.  I made an order requiring the Plaintiff to pay security in the sum of $2.5 million.  The Defendants’ costs have consistently been taxed down by about 50%.  The amount ordered is about 58% of the bill of costs tendered by the Defendants and is better off than the rate taxed down by the taxing master. The amount ordered accords with my assessment of what would be reasonable.  Today, Mr Shieh argues that the Defendants’ previous estimate was based on three days hearing with no new evidence but more costs are likely to be incurred because of the new issue to be pleaded.  However, no new bill of costs had been presented at the previous hearing or today.  The security should be assessed on the basis of the nature and complexity of the pleaded case.  On the basis of the pleadings as they now stand, I consider the amount ordered very generous for a three days hearing.  Interlocutory orders are provisional.  If more costs are likely to be incurred based on the amended pleading incorporating the new judicial interpretation issue, the Defendants have liberty to apply.  Mr Shieh’s argument is premature just as was Mr Chan’s argument for leave to file expert opinion.  On these facts, even if the Defendants were given the opportunity to make an oral submission, the result would still be the same.  Mr Shieh has not made any submission why this order would render the court incapable of carrying out its task.  Again, I ask rhetorically, “what is the injustice?” I repeat my views as expressed in paragraph 23 above.  For the same reasons, leave to appeal should be refused.

The fortification issue

25.  The Defendants sought an undertaking in damages and fortification from the Plaintiff.  I ordered an undertaking but no fortification.  The reason for refusing fortification is simply because of the Defendants’ failure to produce credible evidence of likely loss.  The loss alleged is speculative and based on hindsight.  If the Defendants wish to convert the money paid into court into any other form of currency or be placed in long term deposit, they are at liberty to agree with the Plaintiff or to seek the court’s direction.  Besides, the Defendants seemingly have no dispute that they have a liability to return HK$20 million plus interest to the Plaintiff.  That sum together with interest over the past twenty years would be adequate to meet the Defendants’ claim of loss of HK$38 million.  Today, Mr Shieh argues that because a new issue is going to be introduced, the case would take longer time to come to conclusion and the Defendants would be deprived of their funds in court for an unknown period and the court should hear oral submissions before making the order. Rightly or wrongly, the order has been made.  In the absence of supporting evidence, no oral submissions could change the court’s perception that the loss alleged is speculative, unreal and based on hindsight; and the fact that there is a sum of HK$20 million plus interest over a period of twenty years Plaintiff’s money in the Defendants’ pocket.  Again, even if the order is set aside and the Defendants given a chance to make oral submissions, the outcome would still be the same.  The order does not involve any injustice or inability of the court to carry out its task.  Leave to appeal is therefore refused.

Application to vary the costs orders nisi

26.  The various orders I made at the previous hearing were all intended to be final costs orders.  The word “nisi” was not used.  However, the Defendants treated those orders as orders nisi and apply for variation.  I have no jurisdiction to vary those orders.  Mr Shieh argues that I should treat the application as if it is an application for leave to appeal and grant the Defendants leave.  Those orders were carefully made in the exercise of my discretion and after duly considering merits and all the circumstances.  I am not convinced that any of those orders were made contrary to any established legal principles.  There is no reason to grant leave to appeal just for the sake of allowing the Defendants a chance to seek a second determination.  Accordingly, I refuse to treat the application to vary my costs orders as application for leave to appeal and dismiss the application with costs to the Plaintiff.  I state briefly hereunder the reasons for those costs orders.

27.  In respect of the directions application, I made an order that costs of the application be the Plaintiff’s costs in the cause. Mr Shieh argues that the Plaintiff is seeking a huge indulgence and costs should have been awarded to the Defendants.  I would agree with Mr Shieh if this is truly a case of indulgence, but it is not.  The application was made, although prematurely, as a result of a change in Mainland law which occurred during the course of the appeal, long after the statement of claim was filed. The application was late, but was not occasioned by fault or neglect of the Plaintiff and should not be treated as a case of indulgence.  As Mr Shieh rightly pointed out, the application was premature.  The Plaintiff should have amended his pleading to raise the issue of Mainland law first.  However, Mr Shieh chose to take as his primary position to object to the filing of the expert report and the pleading point as his fallback position.  He raised numerous arguments which, with respect, should be raised at the time of hearing the Plaintiff’s application to amend the statement of claim or when directions are sought for filing of expert reports and exchange of witness statements.  Those arguments were unnecessary and were all dismissed as frivolous and unmeritorious.  Accordingly, I consider it appropriate that the Plaintiff should have costs, but only if he succeeds in the cause. 

28.  I awarded costs to the Defendants in respect of the unless order application, in respect of which Mr Shieh could have no complaint.

29.  I made no order as to costs in respect of the fortification application for the simple reason that both parties have something to gain and something to lose.

30.  As for the security for costs application, usually a foreign plaintiff is liable to give security; but if he succeeds, the security need not have been given in the first place.  Costs in the defendant’s cause is the usual and only reasonable costs order to make.

31.  All these applications were simple applications which could have been handled by one counsel.  I did not find it necessary to give certificate for two counsel.  Cost liability was very obvious.  I did not find it necessary to invite submission on costs.

Conclusion

32.  For the above reasons, the Defendants’ application for leave to appeal and application to vary my costs orders are all dismissed.  These applications involve some novel legal arguments.  Both sides are represented by two counsel.  It would be appropriate to issue certificate for two counsel.  Accordingly, I make a costs order nisi that costs shall be taxed with certificate for two counsel, if not agreed. 

HCA 4414/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 4414 OF 2001

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D E C I S I O N

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INTRODUCTION

1. This is the hearing of (1) the Plaintiff’s application for directions for the trial of an issue remitted by the Court of Final Appeal for trial by the Court of First Instance; (2) the Defendants’ summons dated 22 December 2014 seeking payment out of money paid into court directed by the Court of Final Appeal to be dealt with by the Court of First Instance as an issue consequential upon the order for trial of the remitted issue (the “Payment Out Summons”); and (3) the Defendants’ summons dated 16 June 2015 seeking various relief pending trial of the remitted issue (the “Security Summons”).

The background

2. The background of this litigation can be found in the Court of Final Appeal’s judgment in First Laser v Fujian Enterprises[1].  Insofar as is relevant for the purpose of this hearing, it is as follows.

3. The Plaintiff is a Macanese company controlled by Mr Ngan In Leng (“Ngan”). 

4. The 1^st and 2^nd Defendants are “window companies” owned by and representing the Fujian Provincial People’s Government in Hong Kong. At the material time, the 1^st Defendant was the holding company of Fujian Casix Laser Inc (“FCL”) and Fuzhou Casix Optronics Inc (“FCO”). 

5. Between 1996 and 1997, the 1^st Defendant negotiated with Ngan and entered into a number of agreements including one for the sale of 51% of its interest in FCL and FCO to the Plaintiff (the “First Laser Agreement”).  The Plaintiff paid the consideration in full, being HK$20 million in cash and HK$4.64 million in the form of its investment contribution.   

6. Pursuant to the First Laser Agreement, all the issued shares in FCO were transferred to Ngan’s nominee and Ngan has control of FCO.  In 2000, before transferring the shares representing 51% interest in FCL to the Plaintiff, the 1^st Defendant sold FCL to a third party, JDS Uniphase, for US$60 million.  The purchase price was paid in three tranches.  By the time the Plaintiff discovered the sale to JDS Uniphase, two tranches totalling US$51 million had been paid and received by the 1^st Defendant who transferred most of it to the Fujian Provincial People’s Government, leaving only about US$5 million in Hong Kong. 

7. The Plaintiff commenced proceedings against the Defendants on 9 October 2001 and sought an injunction restraining them from removing their assets out of Hong Kong.  However, as soon as the injunction summons was served, the balance was also diverted to Fujian Provincial People’s Government.  Only the third tranche of the purchase price in the sum of US$9 million was left within the jurisdiction.  The Plaintiff’s application for injunction was disposed of by way of voluntary undertakings by the Defendants to pay the US$9 million into a specified interest-bearing account with a bank in Hong Kong and not to dispose of or deal with the said sum.

8. The trial of the action took place in October 2007. On 5 February 2008, I entered judgment in favour of the Plaintiff on the basis that the First Laser Agreement was valid and that Hong Kong law was applicable to the agreement.  The Defendants appealed in CACV 126/2008 and applied for a stay of execution.  As a result, the Court of Appeal ordered the Defendants to transfer the said sum into court, which they did.

9. On 4 January 2011, the Court of Appeal allowed the Defendants’ appeal, holding that the First Laser Agreement was governed by the law of the People’s Republic of China (“Mainland law”) and was invalid thereunder.  Though holding that the Plaintiff is not entitled to its contractual/proprietary or compensation claim against the Defendants, the Court of Appeal ordered the issue of restitution to be remitted to the Court of First Instance for determination under Mainland law.

10. The Plaintiff appeal to the Court of Final Appeal in FACV 6/2011 and applied for a stay of the Court of Appeal’s judgment.  It was against this background that the Court of Appeal ordered the payment into court to continue to remain in court until the determination of the Plaintiff’s appeal to the Court of Final Appeal.

11. On 6 July 2012, the Court of Final Appeal dismissed the Plaintiff’s appeal and ordered the issue of restitution to be remitted to the Court of First Instance for determination under Mainland law.

12. On 22 December 2014, the Defendants issued the Payment Out Summons in the Court of Final Appeal seeking payment out of the money in court.  On 20 March 2015, Ribeiro PJ ordered that the Payment Out Summons be remitted to the Court of First Instance for determination.

The applications before the court

13. The following applications are before the court:

(1) the Plaintiff’s application for directions, including leave for filing expert report and to exchange witness statements;

(2) the Defendants’ application for an order that unless the Plaintiff pays all outstanding costs and interests within a specified time its statement of claims shall be struck out and dismissed (the “unless order application”);

(3) the Defendants’ application for an order that the Plaintiff gives an undertaking as to damages and fortification (the “fortification application”);

(4) the Defendants’ application for an order that the Plaintiff gives security for the Defendants’ costs in the trial of the remitted issue (the “security for costs application”); and

(5) the Defendants’ payment out application.

The outcome of these applications depends very much on whether additional expert reports are necessary.  The necessity for such reports will be considered first.

APPLICATION FOR DIRECTIONS

The basis of the Plaintiff’s application for leave to file expert report

14. The basis of the Plaintiff’s application for leave to file expert report is that subsequent to delivery of the judgment of this court on 5 February 2008, the Supreme People’s Court of the Republic of China (the “PRC”) issued a judicial interpretation, 《最高人民法院關於審理外商投資企業糾紛案件若干問題的規定（一）》 (《Provisions of the Supreme People’s Court on Several Issues concerning the Trial of Disputes Involving Foreign-Funded Enterprises (I) 》) (the “Judicial Interpretation”), which is directly relevant to the remitted issue and has a significant impact on the determination which this court has to make.  That Judicial Interpretation was issued on 17 May 2010 and took effect on 16 August 2010.  The Plaintiff’s application is supported by a joint expert opinion of Professor Wang Li Ming (王利明) and Professor Yin Fei (尹飛).  There is no dispute that under Mainland law judicial interpretations issued by the Supreme People’s Court have the force of law.

15. The basis of the Plaintiff’s claim for restitution is article 92 of the 《民法通則》(《General Principles of the Civil Law of the People's Republic of China》) (the “《Civil Law》”) which provides as follows:

「 沒有合法根據，取得不當利益，造成他人損失的，應當將取得的不當得利返還受損失的人。」

(Translation:

“If profits are acquired improperly and without a lawful basis, resulting in another person's loss, the illegal profits shall be returned to the person who suffered the loss.”)

The Supreme People’s Court had given a judicial interpretation in respect of this article, 《最高人民法院關於貫徹執行〈中華人民共和國民法通則〉若干問題的意見(試行)》(《Opinions of the Supreme People's Court on Several Issues concerning the Implementation of the 〈General Principles of the Civil Law of the People's Republic of China〉 (For Trial Implementation) 》) (the “Judicial Opinion”)  explaining the effect of this article as follows:

「 返還的不當利益, 應當包括原物和原物所生的孳息。利用不當得利所取得的其他利益，扣除勞務管理費用後，應當予以收缴」

(Translation:

“The returned illegal profits shall include the original thing and the fruits arising therefrom. Other interests obtained by using the illegal profits shall be taken over after deducting the labour service overheads.”

The Judicial Opinion, which has the same effect as a judicial interpretation, made no distinction between disputes between PRC parties and disputes between a PRC party and a foreign investment enterprise.  These were the statutory provisions and judicial interpretation applicable to restitution at the time of the trial in 2007.

16. According to Professor Wang Li Ming and Professor Yin, under article 92 of the《Civil Law》and the Judicial Opinion, the illegal profits to be returned to the victim includes not only “the original thing (原物)” (by which term I understand to mean “the subject matter of the restitution claim”) acquired from the victim and profits generated from that subject matter; but also other benefits obtained by the use of the subject matter which shall, after deduction of勞務管理費用 (labour service overheads) (which I assume are government levies), be “taken over” (by which term I understand to mean “forfeited to the government”).  Thus, according to the law as it stood at the time of the trial, the Plaintiff would only be entitled to recover the price paid and interest which would have been generated from that price; but the profits of its investment, had the First Laser Agreement been valid, would be forfeited to government.  That was the position before implementation of the Judicial Interpretation. 

17. According to Professor Wang Li Ming and Professor Yin, the Judicial Interpretation applies specifically to disputes between a PRC party and a foreign investment enterprise; and articles 18 and 19 of the Judicial Interpretation, in very brief terms, permit a foreign investment enterprise to recover the profits generated from the investment with a PRC party under an agreement which was rendered no effect and which but for the interpretation of article 92 of the 《Civil Law》 given by the Judicial Opinion would be forfeited to government.  As FCO and FCL are joint venture companies between a PRC party and a foreign investment enterprise, the Judicial Interpretation is applicable to the First Laser Agreement.  The opinion of Professor Wang Li Ming and Professor Yin is, in gist, that by reason of this Judicial Interpretation, the Plaintiff would be put in more or less the same position as it would have been in had the First Laser Agreement been valid under Mainland law.  The Plaintiff would therefore be entitled not just to interest but also substantial compensation representing the profits it would have made from the investment in FCO and FCL, in particular the proceeds of sale of FCL to JDS Uniphase.

18. Judicial interpretations are not statutes, they are the Supreme People’s Court’s interpretation of statutory provisions and opinion as to how statutes are to be applied.  They have effect along with the statutory provisions they interpret.  Thus, there is no issue of retroactivity as such; and article 84 of《立法法》 (《Legislation Law》) against retroactivity does not apply.  Furthermore, article 23 of the Judicial Interpretation expressly provides that since the date it takes effect, the Judicial Interpretation applies to all cases at first instance or appeal.  It is only inapplicable to cases in respect of which a final determination has been made before the date it took effect.  Although the Judicial Interpretation was issued after the delivery of my judgment on 5 February 2008, as no determination on restitution has yet been made, it is still applicable for the purpose of construing article 92 of the《Civil Law》. 

19. Mr Shieh, leading counsel for the Defendants, says that the Defendants only received the joint report of Professor Wang Li Ming and Professor Yin last week and did not have enough time to obtain opinion from their expert.  The Defendants may have dispute about the opinion expressed in the report.  In the absence of a contrary expert opinion from the Defendants, I do not intend to make any finding of the meaning and effect of this Judicial Interpretation.  But, suffice it is to say, on a fair reading, the Judicial Interpretation is prima facie applicable to this case and is likely to have a significant impact on the determination which this court has to make in due course on the issue of restitution.  It is directly relevant to the remitted issue.  Needless to say, this Judicial Interpretation is a new foreign law not available to the parties at the time of the original trial and not pleaded.  The court needs assistance from experts on this aspect of Mainland law.  The report is sufficient for the purpose of the present application.

“Expert shopping”

20. Mr Shieh strongly objects to the application as a clear and blatant case of “expert shopping” on the part of the Plaintiff.  He refers me to Chinachem Charitable Foundation Ltd v Chan Chun Chuen & Anor[2] and submits that this is an obvious and bad case of the Plaintiff attempting at the pre-trial stage to choose an expert who can express a more favourable view; and that such practice should not be allowed.  He argues that there is no explanation, let alone a satisfactory one, why the Plaintiff could adduce a new expert report from two new PRC legal experts instead of a report from the original expert witness,  Professor Wang Shizhou (王世洲), whose evidence was rejected by this court as containing “serious misrepresentation and misinterpretation of the judgment of the Supreme People’s Court”, being “a careless one, if not an irresponsible one”, and casting “doubts if his opinion was aimed at achieving the desired result for his client rather than to assist the court”. He argues that there is no evidence or suggestion that Professor Wang Shizhou is no longer available and there is no explanation why the Plaintiff should not forward a report by the original expert.  Mr Shieh submits that “expert shopping” in the sense of abandoning an expert after his evidence has already been thoroughly discredited by the court is worse.  He complains that there is no reason why the Plaintiff should call two experts whereas the Defendants should only call one.

21. With respect, I do not consider this is a case of “expert shopping” in the sense, as mentioned in Chinachem, that after one expert reached a view unfavourable to the party, the party seeks to call another expert to adduce a more favourable view.  Such kind of “expert shopping” is undesirable and should not be encouraged.  Here, the Plaintiff raises a new judicial interpretation which was not in existence at the time the earlier expert gave his opinion.  This is a new aspect of foreign law which the earlier expert had not touched upon.  Professor Wang Shizhou had not even given an opinion, let alone one which is unfavourable to the Plaintiff.  

22. With respect to Mr Shieh, I think he has advanced all the reasons why a change of expert is necessary.  Although technically categorised as “fact” to be proved by “evidence”, foreign laws are “factual issues of a peculiar kind ”: MCC Proceeds Inc v Bishopsgate Investment Trust Plc & Ors (No.4)[3].  Unlike a factual witness who testifies as to facts they saw, experts on foreign law testifies as to their knowledge and opinion of foreign law.  The functions of expert evidence on foreign law are to inform the court of the relevant contents of foreign law, identify statutes or other legislation and explain where necessary the foreign court’s approach to their construction; identify judgments or other authorities, explain what status they have as sources of the foreign law; and where there is no authority directly in point, assist the judge in making a finding as to what the foreign court’s ruling would be if the issue was to arise for decision there: MCC Proceeds Inc[4].  Experts owe duty to the court and are to assist the court.  If an expert has been found to be careless, unreliable, or a hire-gun who is likely to misrepresent the foreign law and to mislead the court, the court should reject his evidence.  In an appropriate case, the court should even ban that witness from acting as an expert in other cases.  Given the very adverse criticism this court had made of Professor Wang Shizhou’s opinion, it simply does not stand to reason to call for his assistance again in a new aspect of foreign law which arises for determination.  The court needs an informed and correct view of the foreign law.  If an expert has proven himself to be so unreliable and have been so adversely criticised by the court, there is a real risk that he will not likely be of assistance to the court in respect of the new aspect of foreign law, not to mention that the court will most likely view his opinion with suspect.  To require a party to adhere to calling an expert who had been seriously discredited and criticised by the court would not only be unfair to that party but would also put the court at risk of being misinformed and misled.  Besides, it would in effect deprive the court of having an unbiased and comprehensive view of the foreign law.  It would also be contrary to the underlying objective as stated in Order 1A rule 2(2) of the Rules of the High Court that the primary aim in exercising the powers of the court was to secure the just resolution of disputes in accordance with the substantive rights of the parties. Interest of justice calls for a change of expert.  This is particularly so in the present case in which a new issue of foreign law has arisen.

23. The above only deals with part of Mr Shieh’s complaint of the Plaintiff’s calling two experts.  Mr Shieh also complains that the report which the Plaintiff seeks to introduce was prepared by two professors but Professor Wang Li Ming is not going to attend court for cross-examination. Mr Chan, leading counsel for the Plaintiff, explains that Professor Wang Li Ming is regarded as a “national treasure” and has difficulties seeking permission to travel out of the PRC.  In the circumstances, the Plaintiff should not have attempted to pledge Professor Wang Li Ming’s authority by asking him to append his signature to the report.  Be that as it may, I shall treat the report as having been prepared by Professor Yin alone and give no regard to Professor Wang Li Ming and his status.  That assurance from a professional judge should put the Defendants’ concern at rest.

Whether the Court of Appeal has rejected admission of fresh evidence

24. Mr Shieh refers to paragraph 17 of the judgment of the Court of Appeal in this case in which Yuen JA indicated that given the parties had already adduced expert evidence and had extensive cross-examination, it is neither necessary nor desirable to allow the parties to adduce fresh evidence.  Yuen JA said:

“Further the experts for both parties have already expressed their views on the issue in their respective opinions and a transcript of their oral evidence is available. It would not be necessary (or desirable) to have further evidence on the issue.”

In my view, that was said in the context of the Plaintiff’s application to amend its Respondent’s Notice by adding three grounds.  It was not in response to any application to adduce new evidence in relation to the Judicial Interpretation which was never before the Court of First Instance at trial or the Court of Appeal.  The observation of Yuen JA has no bearing to the Plaintiff’s application to adduce new evidence at the trial of the remitted issue.

Whether new expert evidence is admissible at the trial of the remitted issue

25. Next, Mr Shieh argues that the Court of Appeal and the Court of Final Appeal only ordered that the issue of restitution be remitted and never ordered a “re-trial”.  In particular, he referred to the hearing before the Court of Appeal in which Mr Chan made it abundantly clear that any remittance was to be dealt with “on paper”.  At that time, the Judicial Interpretation had been issued.  The Court of Appeal also specifically indicated that it was not contemplating a hearing de novo. Hence, Mr Shieh submits that the Plaintiff did not contemplate that this new aspect of foreign law will be raised and should not be allowed a second bite of the cherry by adducing “new evidence” and new cross-examination.

26. In reply, Mr Chan argues that at the hearing before the Court of Appeal he was not making an election to have the remitted issue dealt with on paper in preference to any other options suggested by the Court of Appeal.  I agree.  Mr Chan could not be treated as making an election and should not be bound by his expressed intention at that time.  After all, both the Court of Appeal and the Court of Final Appeal remitted the issue to the Court of First Instance for determination without any specific direction whether it be disposed of on paper or without hearing further evidence.  Whether to admit new evidence is usually a discretion for the trial judge.

27. Mr Shieh also referred to the case of Ko Hon Yue and Chiu Pik Yuk and Others[5] in which Chu JA, sitting as an additional judge of the Court of First Instance, refused the plaintiff’s application for leave to adduce a supplemental witness statement with annexes at the trial of a remitted issue.  I think Ko Hon Yue is clearly distinguishable from the present case.  In that case, the Court of Final Appeal remitted the case to the Court of First Instance for making further findings on two issues in accordance with the law as stated in its judgment.  A distinguishing feature in that case is that the law based on which the remitted issues were to be determined were clearly set out by the Court of Final Appeal.  As was held by Chu JA, “it is tolerably clear from reading §79 of its judgment that the Court of Final Appeal has not intended a rehearing or admission of evidence afresh and has intended the determination to proceed on the basis of the evidence already adduced at trial”.  In contrast, in the present case, there is no such clear statement of the applicable foreign law made by the Court of Final Appeal and, of course, no mention could have been made of the Judicial Interpretation.  Another distinguishing feature is that in Ko Hon Yue and Chiu Pik Yuk and Others, the new evidence sought to be introduced was one of pure fact which albeit arose after trial.  In the present case, the expert opinion of foreign law is evidence of fact of a special kind and was not available to the parties at the time of trial.  For reasons as already explained, it is relevant and should be admitted.  In my opinion, by no reading of the judgment of the Court of Final Appeal or the Court of Appeal could it be inferred that either of these courts intended that no new evidence on foreign law may be adduced at the hearing of the remitted issue.

28. It is also worth noting that after making the above observation, Chu JA went on to consider the trial judge’s discretion to admit new evidence.  She held in paragraphs 13 to 15:

“13. That said, however, I accept the trial judge has a discretion to admit further or new evidence at the hearing on the determination. In Charlesworth v Relay Roads Ltd, in allowing in part the defendant’s application, made after judgment was handed down but before the order was drawn up, to amend its pleadings that involved new arguments and further evidence, Neuberger J (as he then was) held that (at 234G-H) as a matter of principle, if “the judge retains control of the case, to the extent of being able to reconsider the matter of his own motion or to hear further argument on a point which he has decided, there must be power to permit pleadings to be amended, even if that involves a new argument being put forward, or further evidence being adduced, or even both.”

14. In my view, this principle also applies here. The issue that falls to be considered is whether the plaintiff ought to be permitted to re-open his case on damages and to adduce the Further Statement and the annexes. I shall first begin with the relevant principles.

15. In Ladd v Marshall, Denning LJ said (at 1491) the three factors “always applied when fresh evidence is sought to be introduced”. In Charlesworth v Relay Roads Ltd, Neuberger J said that (at 237F-H) Ladd v Marshall should be at the forefront of the mind of the court when considering an application to admit new evidence, but that a trial judge is entitled to be somewhat more flexible than the Court of Appeal. It is considered that the trial judge, having heard all the witnesses, would be in a better position to receive fresh evidence than the Court of Appeal, who would have to reassess all the facts or decide what effect the new evidence would have had on the trial judge, or has to take the unsatisfactory course of ordering a retrial. This view was approved in Townsend v Archilleas. Mummery LJ, giving the judgment of the English Court of Appeal, held that there is a good case for the cautious application of a slightly more flexible test for the reasons given by Neuberger J. In Hong Kong, this approach was applied by Deputy High Court Judge Lam (as he then was) in Chow Siu Po v Wong Ming Fung §12 and also by Harris J in Re China Medical Technologies Inc, unreported, HCCW 435/2012 (28 August 2014) §20.”

29. In my view, in hearing a remitted issue, a trial judge has discretion to admit further or new evidence, to permit amendment of pleadings and even to re-open a party’s case.  In a case where the appellate court has not expressly directed that no new evidence may be adduced at the hearing of a remitted issue, it is entirely a matter of case management for the judge hearing the remitted issue to decide, particularly in view of the long lapse of time of almost eight years and the new Judicial Interpretation, how best to proceed.  The most important consideration is to secure the just resolution of dispute in accordance with the substantive rights of the parties.  These two considerations point strongly in favour of admitting the new evidence relating to the Judicial Interpretation.  I also echo the observation of Chu JA that a judge of first instance has greater flexibility in admitting new evidence than has the Court of Appeal under the rule in Ladd v Marshall.

Delay

30. Mr Shieh argues that the Judicial Interpretation was issued in 2011 and could have been raised at the hearings before the Court of Appeal or the Court of Final Appeal, but that was never done.  He therefore submits that the application should be dismissed on the ground of inexcusable delay alone.  He quotes the Court of Appeal decision in PW v PPTW[6]. 

31. PW v PPTW was a case of ancillary relief proceedings.  On 11 October 2013, the trial judge assessed the husband’s interest in a partnership business as a going concern at US$5.9 million on the basis of the evidence then before the court and ordered a distribution.  The husband issued a notice to appeal against the distribution on 25 October 2013.  On 4 November 2013, he agreed to his partner’s proposal to liquidate the business.  Application to fix a date of hearing was lodged on 20 January 2014 and the actual hearing date was fixed with the agreement of the parties on 30 January 2014.  Between December 2013 and September 2014, the husband received payments from the liquidation.  On 7 November 2014, he sought leave to file a witness statement from his partner concerning the valuation of that business which would have an impact on the award to the wife in the amount of HK$3.2 million.  In refusing the husband’s application for leave to file the witness statement on the ground of delay, Lam VP held in paragraph 9:

“9. The unexplained delay was particularly serious given that, as submitted by Mr Pilbrow SC (appearing together with Mr Chan for the wife), there were grounds for disputing whether Mr Sherman’s statement had given us a complete picture of the affairs of Welton USA. The late presentation of such evidence had a disruptive effect on the preparation of the appeal.”

After referring to the authorities and the underlying objective in Order 1A, Lam VP continued in paragraph 12:

“12, In so saying, we are not adopting a dogmatic rule that all late applications will be dismissed without regard to their merits. As observed in Chan Cheung Ming Jacky v Siu Sin Man [2014] 5 HKLRD 89, this is not the correct approach. However, litigants and lawyers will be ill-advised if they shall continue to conduct appeals without regard to proper case management. Gone are the days when an appellant (or a respondent) could put in a last minute summons for admission of fresh evidence simply because the criteria of Ladd v Marshall can be satisfied. It should not come as a surprise that this court takes account of the underlying objectives in Order 1A in deciding how its case management discretion (including the discretion to admit new evidence) is to be exercised. Late applications without any proper explanation (supported by proper evidence) will not be well received.”

Thus, while inexcusable delay has an important bearing on the court’s exercise of discretion in admitting the additional evidence, there is no invariable rule that such application must be refused in all cases of delay.  What the court takes into consideration is not delay as such, but rather the prejudice which such delay causes to the other party.  Merit never ceases to be an important factor to be considered because the underlying objective is just resolution of disputes in accordance with the substantive rights of the parties.  Delay, lack of explanation and prejudice have all to be weighed against the underlying objective of just resolution of disputes in accordance with the substantive rights of the parties.

32. In the present case, while there is inordinate and unexplained delay in making the application, the Defendants are unable to point to any prejudice caused by the delay.  Nor can I think of any.  Besides, unlike PW v PPTW, the evidence which the Plaintiff seeks to adduce is not one of pure fact but a peculiar kind of fact in the form of foreign law. Also, unlike PW v PPTW, a trial date has not been fixed.  There is ample time for the Defendants to obtain a contrary expert opinion.  When considered in the round, just resolution of the dispute must outweigh the delay.

A new plea

33. Mr Shieh argues that not only is the application “dressed up” as an application to adduce fresh evidence under Ladd v Marshall, it is in fact a new plea.  There is no issue of any “dressing up”. This is not an appeal.  It is not Mr Chan’s argument that the principle in Ladd v Marshall applies.  Rather, he only repeats the observation of Chu JA in Ko Hon Yue and Chiu Pik Yuk and Others that a court of first instance has greater latitude in admitting fresh evidence.

34. That said, I am in agreement with Mr Shieh that because the Plaintiff seeks to adduce foreign law which, which is an issue of fact which must be pleaded, new pleadings are required to raise the issue.  The new aspect of foreign law, the new facts relied on, if any, and the compensation sought have to be pleaded.  The new issues have to be crystallised and goal posts set.  The Plaintiff should not be left unchecked as to what it may argue at the remitted hearing.  The Plaintiff need to amend its pleadings first, before it can even talk about adducing new expert evidence and exchanging witness statements in respect of the additional facts it seeks to rely on.

Exchange of witness statement

35. Mr Shieh objects to the Plaintiff’s application to file new factual evidence when the trial was concluded eight years ago back in November 2007 and the final appeal concluded back in 2012.  While a new aspect of foreign law will be pleaded, to make good its claim under that aspect of foreign law the Plaintiff has to rely on new fact(s) to be pleaded.  It is not entitled to “dress up” this application as an update and have a general round of evidence.  No draft witness statement has been produced.  No indication has been given as to the nature of the new evidence.  As the matter now stands, the application is premature.

Conclusion

36. On a fair reading the Judicial Interpretation, it is prima facie applicable to the remitted issue and is likely to have a significant impact on the determination which this court has to make.  It is directly relevant to the remitted issue.  The Defendants’ objections have all been dismissed.  The foreign law relating to the Judicial Interpretation should be adduced in evidence.  However, foreign law is a material fact which must be pleaded.  As submitted by Mr Shieh, before leave to adduce this evidence may be granted, the pleading has to be amended first.  In the circumstances, it would be appropriate not to make any order pending the amendment of the pleading.  The same applies to the exchange of witness statements.  I trust the parties, having regard to the decision of this court, would in the interest of saving costs agree to amendment of pleadings, directions for filing of expert reports and exchange of witness statements.  Therefore, in respect of this application, I make no order other than that costs of the application be in the Plaintiff’s costs in the cause.

THE UNLESS ORDER APPLICATION

37. As a result of the dismissal of the Plaintiff’s appeals, the Plaintiff owed the Defendants substantial costs.  Allocaturs were issued on 11 September and 27 October 2014 for the Defendants’ taxed costs in HCA 4414/2001, CACV 126/2008 and FACV 6/2011.  As at 31 May 2015, the Plaintiff owed the Defendants HK$8,766,313.14 outstanding costs.  These are made up of the following sums:

Item	Description	Amount (HK$)
1	Outstanding interest accrued on taxed costs in HCA 4414/2001	1,411,584.85
2	Outstanding taxed costs in CACV 126/2008	421,998.89
3	Outstanding interest accrued on taxed costs in CACV 126/2008	1,215,809.69
4	Outstanding taxed costs and accrued interest in FACV 6/2011	5,716,919.71
	Total:	8,766,313.14

38. The Plaintiff is a Macanese company.  There is no dispute that it has no assets in Hong Kong available for execution.  The means of enforcement under Order 45 are illusory.  Mr Shieh argues that in the light of the Plaintiff’s failure to settle the costs despite repeated demands, an unless order requiring payment with the sanction of dismissal of the Plaintiff’s claim is appropriate.

39. Mr Chan’s argument in opposition is that the Defendants still owe the Plaintiff substantial monies under its claim for restitution which is sufficient to pay off the outstanding costs and interest.  This argument is premised not only on the Plaintiff being successful in the remitted issue, but also that the compensation to be recovered would be substantial and sufficient to cover the outstanding costs owed to the Defendants.  From the parties’ affirmations, I can anticipate there will be serious disputes on both of these issues.  The Plaintiff claims it is entitled to the proceeds of sale of the FCL shares.  The Defendants claim that the shares of their other subsidiary, FCO, transferred to the Plaintiff’s nominee in the performance of the First Laser Agreement must be returned, and the benefits received by the Plaintiff from FCO, its current value and its value before the transfer to the Plaintiff must be taken into account.  The Defendants allege that Plaintiff or its nominee had received dividends of over RMB 13 million from FCO which has now substantially lost its value.  The Plaintiff disputes the valuation of FCO and alleges that about half of the dividend received had been reinvested in FCO in purchasing staff quarters. All these disputes remain to be resolved.  It is not possible to form even a provisional view as to which party would succeed and the likely net amount of compensation to be awarded to the Plaintiff.

40. On the other hand, just as the Plaintiff is a Macanese company against which enforcement is illusory, the Defendants had no assets available for execution in Hong Kong but a record of swiftly removing its assets out of the jurisdiction.  If the outstanding costs are paid and in the event that the compensation awarded to the Plaintiff substantially exceeds the value of all the assets of FCO in the Plaintiff’s possession, the Plaintiff would be left with a partially empty judgment.  Having regard to the above, the Plaintiff’s repeated failure to pay taxed costs on demand and the principle that a litigant should not be deprived of his fruits of litigation, I think the best course to take is to order the Plaintiff pay all outstanding costs and interest into court under an unless order.  That will best safe-guard the interest of all parties.

THE FORTIFICATION APPLICATION

41. The Defendants seek an undertaking as to damages and fortification. The basis of the Defendants’ application is that they are concerned that the Plaintiff has no asset available in Hong Kong for execution to meet its undertaking if its claim in restitution is dismissed.  In addition, the Plaintiff has a record of not paying outstanding costs despite repeated demands.  The Defendants allege that they suffered and continue to suffer loss as a result of being deprived of the use of the US$9 million which they paid into court pursuant to the order of the Court of Appeal and it is uncertain when the proceedings would be concluded.  They claim loss in the amount of HK$38 million for being prevented from converting the money into Renminbi at a more favourable exchange rate back in 2007 and depositing the money at the higher rate of interest which could have been earned had the money been deposited in the PRC.

42. The Plaintiff has no objection to giving the usual undertaking as per Practice Direction 11.2 that if the court later finds that the injunction has caused loss to the Defendants and decides that the Defendants should be compensated for that loss, the Plaintiff will comply with any order the court may make.  The Plaintiff objects to providing fortification on the grounds that there is still money in court to pay the damages and that the alleged loss is entirely speculative, hypothetical and unreal in that it is simply not based on facts and the historical events.

43. I reject the Plaintiff’s first ground as being flawed.  It is premised on the Plaintiff being successful in the remitted issue.  Of course, if the Plaintiff is successful, no claim for damages would arise. 

44. However, I agree with the Plaintiff on the second ground.  Initially, the parties had mutually and positively agreed to place the funds on three-month fixed term deposit.  It was later paid into court pursuant to the order of the Court of Appeal.  More importantly, it was never suggested or proposed that the funds should be placed in a higher interest bearing account or for longer fixed deposit terms, or in any specified bank or bank account, or be converted into any particular currency.  The alleged loss is purely speculative and based on hindsight.  Had the Defendants wished to convert the funds into any particular currency and/or be placed in any particular bank, they should have made application to court stating their grounds and their need to do so.  Furthermore, the funds had been deposited in a bank by mutual agreement since October 2001 and later paid into court.  For fourteen years the Defendants had never made an application for fortification on the above reasons.  Their alleged loss is unreal, speculative, hypothetical and based on hindsight.

45. Lastly, during the hearing before the Court of Appeal, the Defendants’ leading counsel made an open offer to the Plaintiff by returning the sum of HK$20 million with interest in satisfaction of the restitution claim.  Therefore, it now seems to be common ground that the Plaintiff is entitled to at least recover the price it paid in the sum of HIK$20 million plus interest.  That is money in the Defendants’ hand which should provide them some comfort. 

46. On balance, I consider the usual undertaking adequate and shall order accordingly.

THE SECURITY FOR COSTS APPLICATION

47. The Plaintiff is a foreign party.  The usual rule is that it has to pay security for costs.  Indeed, such orders had been made on three previous occasions against the Plaintiff.  On 26 November 2003, a sum of HK$3,063,000 was ordered to be paid to cover the costs from the issue of writ to the completion of discovery; and on 9 December 2005, another sum of HK$3,800,000 was ordered to cover the costs from discovery until and including trial.  In respect of its appeal to the Court of Final Appeal, the Plaintiff had also been ordered to provide security for costs of the appeal in the sum of HK$800,000.  There is no change in circumstances or in the respective position of the parties.  It is only appropriate that the Plaintiff should be ordered to pay security to cover the trial of the remitted issue.  The Defendants suggested a sum of HK$4.3 million.  Having regard to the costs taxed this far, I consider the suggested sum excessive.  As the records have shown, the Defendants’ costs assessments have always been taxed down by about 50%.  I consider a sum of HK$2.5 million appropriate and order accordingly.

THE PAYMENT OUT APPLICATION

48. In dismissing the Plaintiff’s appeal on 6 July 2012, the Court of Final Appeal ordered:

“the issue of restitution under Mainland law be remitted to the Court of First Instance for determination;”

49. Then, upon the Defendants’ application for payment out of the money paid into court by the Defendants, Ribeiro PJ ordered:

“[the Payment Out Summons] be dealt with by a Judge of the Court of First Instance as an issue consequential upon this Court’s Order dated 6 July 2012 dismissing the plaintiff’s appeal and directing that the issue of restitution under Mainland law be remitted to the Court of First Instance for determination.”

(My emphasis highlighted)

50. The matter then went to the listing judge of the Court of First Instance for direction.  Poon J, as he then was, directed that the Payment Out Summons be dealt with by me.  On 27 April 2015, Poon J gave further directions by letter as follows:

“1. Pursuant to the order of the Court of Final Appeal dated 6 July 2012, the issue of restitution under Mainland law (“the Issue”) is to be remitted to the Honourable Mr Justice To for determination (“the Order”).

2. Pursuant further to the direction of the Honourable Mr Justice Ribeiro, PJ on 20 March 2015, the defendant’s summons dated 22 December 2014 for payment out (“the Summons”) is to be dealt with by a Judge of Court of First Instance as an issue consequential upon the Order (“the Direction”).

3. When the Order and the Direction are read together, it is plain that the Court of Final Appeal has directed that:

a. The Issue is to be determined by the Honourable Mr Justice To (which remains the case until and unless the Court of Final Appeal directs otherwise); and

b. After the determination of the Issue, the Summons is to be determined by a Court of First Instance Judge.

4. On 14 April 2015, I directed that the Summons be dealt with by the Honourable Mr Justice To. It remains my view that the Honourable Mr Justice To is the most suitable judge to deal with the Summons.

5.  For the above reasons, both that Issue and the Summons are to be placed before the Honourable Mr Justice To for his Lordship’s directions and disposal.”

On the basis of the above directions, Mr Chan submits that the application for payment out should be determined after the determination of the remitted issue.  Mr Shieh seems to accept that to be the position.  In his skeleton argument, he only seeks relief under the Security Summons and does not seek any relief under the Payment Out Summons, which was only mentioned as part of the background.

51. Notwithstanding the above and not with any disrespect to Poon J, I think it is equally open, if not any more so, to construe the words “consequential upon the Order” in the direction of Ribeiro PJ to mean consequential upon the Court of Final Appeal’s order dismissing the Plaintiff’s appeal and remitting the restitution issue for trial or/than to mean consequential upon the determination of the remitted issue by this court.  However, for reasons as are obvious from my consideration of the other three applications, deference of the hearing of the Payment Out Summons to the conclusion of the hearing of the remitted issue must be the obvious, logical and sensible course.  I shall so direct accordingly.

CONCLUSION

52. In respect of the application for directions, I make no order except that costs of the application be the Plaintiff’s costs in the cause.

53. In respect of the unless order application, I make an order that unless by 4:00 pm on 12 February 2016, the Plaintiff pays into court all outstanding taxed costs as at the date of this decision and interest accrued thereon awarded in favour of the Defendants, the Plaintiff’s claim shall be struck out and dismissed.  The Plaintiff shall pay the Defendants’ costs of this application.

54. In respect of the fortification application, I make an order that the Plaintiff shall within 14 days from the date of this decision give the undertaking in the form as per Practice Direction 11.2. There be no order as to costs of this application.

55. In respect of the security for costs application, I make an order that the Plaintiff shall within 14 days from the date of this decision pay HK$2.5 million into court as security for the Defendants’ costs in the remitted issue.  The costs of this application shall be the Defendants’ costs in the cause of the remitted issue.

56. In respect of the payment out application, I make an order that the Payment Out Summons be adjourned to be heard after the hearing of the remitted issue.  The costs of this application be reserved.

HCA 4414/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 4414 OF 2001

_________________________

_________________________

CACV 126/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIAL APPEAL NO 126 OF 2008

(ON APPEAL FROM HCA NO 4414 OF 2001) 

_________________________

BETWEEN

_________________________

____________________

TAXATION REVIEWS

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Introduction

1.  There are two reviews of taxation before this Court, both on fees of Counsel.

Background

2.  The facts of the parties’ disputes are complicated.

3.  For the present purpose, very briefly, the Plaintiff (the Respondent and paying Party) is a Macau Company and the Defendants (the Respondents and Receiving Parties) are window companies of Fujian Provincial People’s Government.

4.  In 1996, the Plaintiff entered into agreements with the 1^st Defendant to purchase, inter alia, 51% of shares in Fujian Casix Laser Inc. (福建華科光電有限公司).  It was said that the Plaintiff paid (or was deemed to have paid) the price in March 1998 but the 1^st Defendant failed to transfer the shares.  Approval was not obtained from the relevant PRC government authorities for the transfer. The 1^st Defendant further sold the shares to a third party for US$60 million, of which was received by the 2^nd Defendant.  

5.  Two pieces of litigation arose.

(a)    The Plaintiff commenced the present proceedings in Hong Kong against the Defendants for, among others, damages or account of profits.

(b)    The 1^st Defendant sued the Plaintiff and others in PRC for declaration that the agreements were of no effect. 

6.  The two set of proceedings went on simultaneously and the PRC proceedings concluded first in December 2004.  The 1^st Defendant won.

7.  Under the proceedings herein, parties raised a number of difficult issues of law, including whether HK or PRC law should apply, the legal effect of the PRC judgment on the HK proceedings, and so forth.

8.  After a trial for 10 days in February 2008, the trial judge entered judgment for the Plaintiff with costs.

9.  The Defendants took up the matter to the Court of Appeal.  

10.  In the meantime, the Plaintiff proceeded to have its costs taxed.  After taxation before a master for 3 days in January 2010, the sums of about $1.4 million and $3.2 million were taxed for the profit costs and disbursements respectively.

11.  However, the Defendants won their appeal in January 2011.  The judgment below was set aside and an issue of restitution under PRC law was remitted to the trial judge for determination.

12.  Although the Plaintiff further brought an appeal to CFA but the same was later dismissed.

13.  In the circumstances, the Plaintiff not only cannot recover any costs from the Defendants, but also has to pay for them in all three levels of the Court.  I dealt with both the bills of the Defendants in the Court of First Instance and in the Court of Appeal for 10 days.

14.  The Defendants thereafter brought review of 4 items of counsel fees under the two bills, particulars of which are as follows.

HCA 4414/2001

Item No.	Description	Fees Claimed	Fees Allowed
78	Counsel Brief	SC - $2,500,000 JC - $730,000	$1,575,000 $378,000
80	Preparation of Closing Submissions	SC - $900,000 JC - $168,000	No No

CACV 126/2008

Item No.	Description	Fees Claimed	Fees Allowed
20	Counsel Brief	SC - $2,500,000 JC - $730,000	$850,000 $297,500
80	Supplemental Brief	SC - 720,000 JC - $240,000	$170,000 $59,500

At the review, Mr. MC Law of Counsel acted for the Defendants and Mr. P Chu of LCD acted for the Plaintiff.  Upon hearing from them, I reserved my decisions to be handed down.  I now do so.

15.  In assessing counsel fee, as in the original taxation as well as in the present review, I asked myself to bear in mind of the relevant principles from the White Book 2014 at pages 1190 - 1194, in particular the followings general principles.

“

Part III – FEES TO COUNSEL
General

(5) Since the Civil Justice Reform amended the wording of paragraph 2 (5) of Part II of the First Schedule to Order 62, counsel’s fees under party and party taxation is no different from taxation of other costs and expenses – the test of “necessary or proper” is applicable… In applying that test the taxing master shall exercise his discretion having regard to all the relevant circumstances and in particular to the matters set out in paragraph 1 (2). They are:

(a) the complexity of the item or of the cause or matter in which it arises and the difficulty or novelty of the questions involved;

(b) the skill, specialized knowledge and responsibility required of, and the time and labour expended by, counsel;

(c) the number and importance of the documents (however brief) prepared or perused;

(d) the place and circumstances in which the business involved is transacted;

(e) the importance of the cause or matter to the client;

(f) where money or property is involved, its amount or value;

(g) any other fees and allowances payable to counsel in respect of other items in the same cause or matter, but only where work done in relation to those items has reduced the work which would otherwise have been necessary in relation to the item in question.

     …

Specific Fees

 Brief fee – A proper measure for counsel’s fees was to estimate what fee a hypothetical counsel, capable of conducting the case effectively, but unable or unwilling to insist on the high fees sometimes demanded by counsel of pre-eminent reputation, would be content to take on the brief; but there was no precise standard of measurement, and the taxing master or the judge must, using their knowledge and experience, determine what was the proper figure…

 It is not a sound principle on party and party taxation to treat the fee paid by the other party as a yardstick…

 In assessing counsel’s fee it is always relevant to take into account what work the fee, together with any refreshers, has to cover. The brief fee covers all the work done by way of preparation for representation at the trial and attendance on the first day of trial…

 Preparation by counsel of his examination-in-chief and cross-examination and of his final submissions is an ordinary part of his conduct of a trial on behalf of his client being all part of the work which counsel accepts an obligation to perform by accepting the brief and for which he is remunerated by the brief and refreshers. They also cover:

(a) Preparation work before the delivery of the brief on the faith of a solicitor’s statement that it will be delivered;

(b) Preparatory work in counsel satisfying himself that he should accept the brief;

(c) Evening preparation;

(d) Any consultations between members of the tem of counsel;

(e) Advising experts at weekends;

(f) Conferring with experts without separate instructions;

(g) Lost opportunities;

(h) Chronologies, etc.;

(i) Skeleton arguments;

(j) Dramatis personae;

(k) Opportunities to prepare further when the court is not sitting;

(l) Preparation of draft terms of collateral agreements…

 Counsel is not normally entitled to be remunerated separately for necessary work which is an incident of the proper representation of the client; …

What was necessary and incidental to the preparation for representation at trial, and hence not chargeable separately, depending on the circumstances of the case. Where counsel was duly instructed to perform other work, in other words, work which was quite separate from the preparation for representation at trial and which was “necessary or proper” within the meaning of O.62 r.28 (2), such work could be claimed as a separate and discrete item of counsels… ”  

16.  Mr. Law made a number of general observations. I agree with them and indeed they were accepted by me at the taxation.

(a) At the taxation, the LCD acting for the Plaintiff had on more than one occasion informed that the Defendants’ bill in HCA 4414/2001 was blatantly excessive, totaling over $15,000,000. i.e. 3 times of the costs taxed at the Plaintiff’s bill. However, I could only refer him and reiterate that it was not a sound principle on party and party taxation to treat the fee paid by the other party as a yardstick.

(b) The action contained complicated facts and law issues. In fact, when I dealt with the brief of counsel at the taxation, I informed parties that:

(i) This was a case touching on complicated facts and difficult law, including dispute on PRC law.

(ii) The subject matter involved claims of over US$ 60 million.

(iii) The consequences of the litigation had important impact on both parties.

   However, at the same time, I also noted:

(iv) The Defendants took the matter very seriously. Without any undue respect to the team of legal advisers for the Defendants, quite some costs spent had been taxed off by me on the ground that they did not fall within party and party costs. 

(v) Counsel, both Senior and Junior, was engaged throughout the whole proceedings.  From time to time, Counsel’s assistance was obtained to assist on pleadings, discovery, expert evidence, witness statements and advices.

(vi) Even I taxed off certain counsel’s fees, both Counsel had received quite some remuneration in the proceedings.

17.  With the above in mind, despite the diligence of Mr. Law, I am afraid that he has not been able to persuade me to change my views at the taxation.

Brief for Trial and Preparation of Closing Submissions

18.  Senior Counsel was called to HK bar in the year of 1978, and Junior Counsel, in 1997.  At the material times, their respective hourly rates were about $15,000 and $2,800.  I took the view that they fell within the usual ranges though the one with Senior Counsel was at the high end and that of his Junior, the low one.  By the time when the case went before the trial judge, SC and JC had been allowed fees by me for over $1,000,000 and $300,000 respectively (out of fees charged for over $2,000,000 and $1,000,000).

19.  The case was set down for hearing of 20 days.  12 trial bundles consisting pleadings, 8 witness statements (1 for the Plaintiff and 7 for the Defendants), documents and expert reports on PRC law and handwriting. Counsel on both sides prepared, inter alia, detailed skeletons with substantial authorities.

20.  The trial eventually only lasted for 10 days.  The Plaintiff’s counsel spent the first 3 days for opening submissions, followed by 5 days for 3 witnesses and then, 2 days for closing submissions of both parties.

21.  At the taxation, I adopted a hypothetical approach, i.e. under party and party taxation, Counsel should have spent the following hours and levied their brief fees accordingly.

Jobs undertaken	Senior Counsel (hours)	Junior Counsel (hours)
Reading/revising papers	15	15
Preparation of skeleton, etc.	25	30
Reading skeleton, etc. of the other side	10	15
Legal research	5	25
Discussion	10	10
Final Submissions	25	25
Conferences during trial	10	10
Day 1	5	5
Total	105	135
Brief	$15,000 x 105 hours = $1,575,000	$2,800 x 135 hours = $378,000

I further allowed both Counsel a refresher based on 7 hours of work each day (i.e. 5 hours of court hearing and 2 hours for preparation, discussion, and so forth).

22.  As I had allowed time for Counsel to prepare final skeleton submissions in the brief fees, I did not allow any extra fees for preparation of closing submissions.

Brief for Appeal and Supplemental Brief thereof

23.  When the Defendants took the matter to the Court of Appeal, the Senior Counsel at the trial below was about to retire.  It necessarily caused a change of leader. Two new Senior Counsel were brought into the picture, charging hourly rates of $6,000 and $10,000 respectively.  The Junior Counsel was retained. However, though they won the appeal, only certificate for two Counsel was allowed.

24.  The appeal was scheduled to be heard for 5 days in June 2010.  The Defendant’s Senior Counsel took up half of the time for his oral submissions.  Then, in the middle of submissions by the Plaintiff’s Senior Counsel, he sought to amend its Respondent’s Notice.  The Defendants also asked for leave to file Rejoinder.

25.  Upon consideration, the Count of Appeal eventually allowed the applications but the appeal was left part-heard and had to be re-fixed for another 3 extra days in August 2010.  Counsel for the Defendants then charged a supplemental brief for the resumed hearing.

26.  Again, I adopted the hypothetical approach in assessing Counsel’s brief.

Jobs undertaken	Senior Counsel (hours)	Junior Counsel (hours)
Reading/revising papers	25	25
Preparation of skeleton, etc.	25	25
Reading skeleton, etc. of the other side	20	20
Conferences/ Discussion	10	10
Day 1	5	5
Total	85	85
Brief	$10,000 x 85 hours = $850,000	$3,500 x 85 hours = $297,500

As to refreshers, I also allowed them on 7 hours of work each day and as such, the sums of $70,000 and $24,500 respectively for both Senior and Junior Counsel.

27.  In allowing the above brief fees and refreshers, I asked myself to bear in mind the fees having charged and allowed by me for Counsel at the trial.  And of course, further fees were spent by Counsel to take up the matter to the Court of Appeal, including perusal of papers, advising in conferences, preparing affirmations, joint note of advice and (supplemental) notice of appeal as well as attendance before the trial judge for one day.  Under the relevant CA bill, before it came to the brief, Senior Counsel claimed over $500,000 and Junior Counsel, about $450,000.  After taxation, I allowed them at about $400,000 and $100,000 respectively.

28.  Supplemental brief is unusual as applications to amend notice of appeal, respondent notice, etc. at the substantive hearing are probably not uncommon even though they are highly discouraged especially after CJR.  However, I was persuaded at the taxation that the “changes” in the middle of the appeal fell outside the original scope of work anticipated by Counsel when they agreed with their brief fees.  Upon going through the new skeletons as submitted by both sides, I allowed an extra 10 hours of work to be spent by both Counsel.  Hence, the supplemental Briefs were allowed at $170,000 ($10,000 x 10 + refresher at $70,000) and $59,500 ($3,500 x 10 + refresher at $24,500).

The Review

29.  At the Review, I had the assistance from the junior counsel who conducted the trial and appeal.  Mr. Law also prepared a short skeleton explaining to me how complex the issues were with highlights at the number of trial bundles and authorities having deposed at different stages of the proceedings.

30.  Mr. Law had an uphill battle.

31.  As pointed out by Mr. Chu, LCD for the Plaintiff, there was no new material before me at the review.  There was also no allegation that discretion of this Court was exercised wrongfully at the taxation.  Those matters mentioned by Mr. Law had been fully ventilated before the Court at the taxation for 10 days.

32.  It is undisputable that the facts and law involved is complex.

33.  Mr. Law specifically suggested that the trial was shortened by 10 days because of the reasonable stance taken by his clients and word done by Counsel.  However, the Court of Appeal apparently took quite a different view when they deprived the Defendants for 45% of the costs in the action below by their Decision on costs handed down on 14 June 2011.  Paragraph 5 thereof states that:

“5. However, we are of the view that the defendants should be deprived of part of their costs below by reason of two matters. First, it had unnecessarily prolonged the trial by relying (which was later abandoned) on the defence of the lack of authority of the persons who signed the contract on their behalf. The plaintiff had to open its case and called evidence with its main witness being cross-examined on this issue. The abandonment only came when counsel for the defendants opened the case. Counsel informed the court that the defendants would not be calling evidence. Witness statements were exchanged. Substantial costs had been incurred and wasted. Second, the defendants failed in their defence that they had not agreed to transfer 51% of FCL to the plaintiff. They also failed in their defence on the issue of the uncertainty of the subject matter of the contract…”

34.  It is also indisputable that the team of counsel acting for the Defendants did an excellent job.  However, when it comes to taxation on party and party basis, one has to bear in mind paragraph 62/App/6 at p.1186 of HKCP 2014:

“Party and party basis … On a taxation of such a basis there shall be allowed all such costs as were necessary or proper for the attainment of justice or for enforcing or defending the rights of the party whose costs are being taxed… the costs chargeable under a taxation between party and party are all that are necessary or proper to enable the adverse party to conduct the litigation, and no more. Any charges merely for conducting litigation more conveniently may be called luxuries, and must be paid by the party incurring them…”

At the end of both the taxation and the review, I remained of the same view that the team of counsel for the Defendants, in respond to the highly demanding clients, had provided luxurious services accordingly.  They therefore should be fully remunerated, but only on solicitor and own client scale, but not party and party scale.

35.  In the circumstances, the Reviews are dismissed. Parties agreed that costs of the review should follow the event and had no objection for a gross sum assessment by me in the form of order nisi.  To wrap up the matter, I therefore allow the sum of $12,900 to the Plaintiff.

Hearings:	5 March 2014 (15 minutes by LCD)	400
	7 July 2014 (2 hours by LCD)	3,200
Preparation:	LCD (3 hours)	4,800
	Solicitor (1 hour at $4,000)	4,000
Miscellaneous		500
		12,900
		=====

Such costs order nisi will become absolute within 14 days from the date hereof.

HCA 4414/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4414 OF 2001

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D E C I S I O N

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Introduction

1.  The Plaintiff is a company incorporated in Macau.  The Defendants are “window companies” of the Fujian Provincial Government of the People’s Republic of China.  The Plaintiff’s case is that it is the beneficial owner of 51% of the shares in Fujian Casix Laser Inc (福建華科光電有限公司) (“FCL”) held by the 1^st Defendant, which the 1^st Defendant sold, together with its own 49% interest in FCL, to JDS Uniphase China Holdings Company (“JDS”) for US$60 million.  The proceeds of sale was remitted to the Fujian Provincial Government through the 2^nd Defendant, save for US$9 million standing in an account with The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) which the Defendants undertook not to dispose of pending the outcome of this action.

2.  On 5 February 2008, I entered judgment in favour of the Plaintiff with costs against the 1^st Defendant (“Judgment”).  The Plaintiff now applies by Summons for payment out of the money it has deposited in court as security for the Defendants’ costs and for interim payment by the 1^st Defendant.  The Defendants apply for stay of execution of the Judgment pending appeal.  I think the application for stay is, to a large extent, determinative of the other two applications.  I therefore deal with the application for stay first.

Stay of execution

3.  The Defendants intend to appeal against the Judgment and apply for a stay of execution pending appeal.  Mr Shieh SC, counsel for the Defendants, has undertaken to file a notice of appeal as soon as possible.  The legal principles governing stay of execution are well established: see Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84 at 87D-89I, per Ma J, as he then was.  The burden is on the defendant to justify a stay of execution by showing that there are good reasons for a stay.  The starting point is the existence of an arguable appeal.  The existence of a strong ground of appeal or strong likelihood of success on appeal is by itself a good reason for stay.  But in the majority of cases, it is undesirable and unnecessary to go deeply into the merits and strength of an appeal.  If an appellant only has an arguable appeal, he will have to provide additional reasons as to why a stay is justified.  A commonly recognized good reason is that an appeal will be rendered nugatory if no stay is granted.  To determine that question, the court must have regard to the nature of the order being appealed against.  An appeal being rendered nugatory does not mean in all cases that without a stay, the appellant will face financial ruin or the loss of all his property.  Demonstrating that the failure to grant a stay will have a serious deleterious effect on the defendant is enough.

4.  Mr Shieh SC puts his appeal no higher than arguable.  Mr Chan, counsel for the Plaintiff, does not seek to argue otherwise.  On this basis, Mr Shieh SC seeks to convince me that the Defendants’ appeal will be rendered nugatory if no stay is granted.

5.  To consider that question, I must first consider the nature of the order being appealed against.  At the same hearing, I approved the order (“Order”) to be made pursuant to the Judgment.  The Order consists of an injunctive part and a monetary part.  Under the injunctive part, the Defendants are ordered not to dispose of their assets and to make disclosures as to the whereabouts of the proceeds of sale of the FCL shares.  Under the monetary part of the Order, the Defendants are required to pay such sums as may have been found to represent the amount or value of the Plaintiff’s 51% interest in FCL. 

6.  In respect of the injunctive part of the Order, Mr Shieh SC submits that the appeal will be rendered nugatory because the information, once disclosed, will be beyond recall.  He concedes that the Defendants do not have a very strong case.  The Defendants are impecunious and have no assets to dispose of, save the US$9 million standing in an account of HSBC which they have undertaken not to dispose of anyway.  There can be no prejudice for the Defendants if the injunction is to continue.  On the other hand, I cannot see any damage which can possibly be done to the Defendants by enforcing the disclosure order.  The disclosures are ordered for the purpose of the tracing exercise.  Should the Defendants be successful on appeal, that would be the end of the Plaintiff’s tracing exercise.  Any information disclosed shall not and cannot be used to the prejudice of the Defendants at all.  On my Judgment, the Defendants are liable to the Plaintiff for at least US$30.60 million.  US$9 million is secured, but the balance of US$21.60 is not.  The Defendants are impecunious.  The Plaintiff’s best chance of recovery is by way of tracing.  The 1^st Defendant unlawfully sold all the shares in FCL to JDS on 29 February 2000.  More than eight years had elapsed since.  The longer the Plaintiff waits, the less likely it will ever be able to effect any real enforcement action and execute upon any substantial property and asset.  On balance, there is absolutely no ground to deprive the Plaintiff of its fruits of litigation, insofar as the injunctive part of the Order is concerned.

7.  The Defendants’ application for stay of execution in respect of the monetary part of the Order is on more substantial ground.  The Plaintiff is a Macanese corporate vehicle without any assets.  It was formed solely for the purpose of carrying out the joint venture between Mr Ngan, a director and shareholder of the Plaintiff, and the 1^st Defendant.  It does not carry on any business and does not own any real property.  Hence, Mr Shieh SC submits this is a classic case where, if stay of execution pending appeal is not granted, any payment made to the Plaintiff will be irrecoverable if the appeal is allowed and there is therefore a serious risk that the Defendants’ appeal will be rendered nugatory to the prejudice of the Defendants.

8.  Mr Shieh SC also referred me to two decisions in support of the Defendants’ application.  In Liu Xian Feng Sam and King Star Computer IncAndLiu Bo & Others (unrep) CACV 112/2006, 31 July 2006, Yam J granted a stay of execution on condition that the defendant shall provide security for costs of the appeal.  Tang JA, as he then was, allowed the defendant’s appeal.  He held at paragraphs 5 to 9:

“5.  It is common ground that the 1^st plaintiff is a resident of the United States of America and the 2^nd plaintiff is a foreign company.  Neither of them has any substantial link with Hong Kong.

6. The 1^st defendant submitted that unless a stay of execution is granted pending appeal, the plaintiffs would be able to obtain payment of sums in bank accounts which have been frozen as a result of a mareva injunction granted in the action.

7.      In that event, his appeal would be rendered nugatory, because he would not be able to obtain repayment from the plaintiffs, should his appeal be successful.  The plaintiffs are not willing to supply any security for repayment in such an event.

8.  It is not known why Yam J imposed the condition when he granted a stay.  If the plaintiffs wished to have security for costs of the appeal, the proper course was for them to apply for security for costs to this court.

  9.  Although we are concerned with an exercise of discretion, we believe we can interfere because we do not believe it was right to make the granting of a stay of execution conditional on the provision of security for costs of the appeal.  Since we do not know the basis upon which the judge exercised his discretion, and the condition being a highly unusual one, we agree with Mr Collins, who appeared for the plaintiffs, that the judge allowed the application for stay of execution to be “intertwined” with an application for security for costs of the appeal.  In other words the judge was influenced by an extraneous consideration.”

The other case quoted by Mr Shieh SC is Shanghai Ornate Candle Art Co Ltd and TransbestHoldings Limited trading as ACME Company (unrep) HCA 1605/1999, 5 May 1999.  In that case, Cheung J, as he then was, upheld the Registrar’s decision to stay the execution of a judgment in favour of a foreign plaintiff because of the serious problems of recovery of money if the judgment sum was paid out.

9.  Mr Chan seeks to distinguish Liu Xian Feng Sam and King Star Computer IncAndLiu Bo & Others from the present case by arguing that the plaintiff’s claim in that case was fully secured but the Plaintiff’s claim in the present case is not.  Hence, the prejudice to the plaintiff in that case was delay simpliciter.  That argument is valid only insofar as staying the injunctive part of the Order is concerned, but not relevant as regards staying of the monetary part.  Another distinction relied on by Mr Chan is that the plaintiff in Liu Xian Feng Sam and King Star Computer IncAndLiu Bo & Others was not prepared to supply any security for repayment in the event that the defendant succeeded on appeal, but he says that the Plaintiff in the present case is prepared to offer security for repayment and has no intention to abscond with the payment out.  I think it is non-sensical to order the Plaintiff to pay into court as security what the Defendants are to pay out to the Plaintiff.  If the court should take such a course, it may as well have the execution stayed.

10.  Mr Chan also seeks to distinguish Shanghai Ornate Candle Art Co Ltd and Transbest Holdings Limited trading as ACME Company by arguing that that case involved an interlocutory default judgment whereas the judgment in the present case was reached after trial on substantive merits.  As I have already indicated, it is undesirable and unnecessary for the court to go deeply into the merit of the judgment, except in one of those rare cases where an application for stay is resisted on the ground that the appeal is not even arguable or that there is no chance of success.  That is not Mr Chan’s position in respect of the Defendants’ intended appeal.  I find the distinction irrelevant.  In any event, I think such factual distinction has no bearing whatever to the legal principles discussed in the two cases.

11.  I do not think the Court of Appeal in Liu Xian Feng Sam and King Star Computer IncAndLiu Bo & Others has made it a rule carved in stone that a stay must invariably be granted if the plaintiff is a foreign plaintiff.  The point of appeal in that case was not whether the order to stay was a proper exercise of the court’s discretion, but whether the Court of First Instance in exercising its discretion to grant a stay of execution has jurisdiction to impose a condition of payment of security for costs of the appeal.  Of course, there must be many cases in which a stay was granted against a foreign plaintiff just as order for security of costs is made against such a plaintiff.  But, whether to grant a stay of execution is one of discretion.  The fact that a plaintiff is a foreign plaintiff with no asset in Hong Kong is one of the factors to be considered by the court in the exercise of its discretion.  What underlies the court’s decision is the seriousness of the problem in recovering money paid to a foreign plaintiff, should the defendant succeeds on appeal.  The discretion is to be exercised in good sense bearing in mind all the circumstances of the case.

12.  Mr Chan submits that the question of rendering an appeal nugatory is to a large extent analogous with the concept of stifling a claim or an appeal.  He submits that the rationale from that line of cases is equally applicable to the question of whether refusal of stay would result in the appeal being rendered nugatory.  He referred to Hin FaiLimited trading as Sun Food Seafood AndLongrace Development Limited and Another (unrep) HCA 1788/2003, 18 July 2003.  In that case, the defendant sought an order pursuant to Order 23 rule 1 of the Rules of the High Court and section 357 of the Companies Ordinance that the plaintiff, who was impecunious, was to pay security for the defendants’ costs.  It was in that context, the court held that in considering whether the action would be stifled by the order, the court will consider the possibility of the plaintiff raising funds from its directors, shareholders or other backers.  Mr Chan also referred to Yesland Limited & Others and China Furniture City Limited (unrep) CACV 39/2006 and CACV 229/2006, 16 February 2007.  In the same context, Tang VP held at paras 34 and 35:

“34.     In this respect, the court’s approach when considering whether or not to order a plaintiff to provide security for costs, which might have the effect of stifling a claim is of interest.

  35.   There the court has to conduct a balancing exercise and ask whether the plaintiff’s claim would in fact be stifled by considering whether the plaintiff can raise funds outside his own resources to conduct the litigation, the onus being upon the plaintiff to satisfy the court that no such resources are available:

 ‘This includes considering the possibility of the plaintiff raising funds from directors, shareholders or other backers.  If these backers are unwilling to pay, but not unable to pay, the alleged stifling effect may not be made out; Hin Fai Limited v Longrace Development Limited & anor, [2003] HKC 1788, 18 July 2003, [2003] HKEC 1367;’ see Hong Kong Civil Procedure 2006, para 23/3/14.”

On these dicta, Mr Chan argues that it is for the Defendants’ backers to either come up with the funds, or they should go on oath and explain with good evidence that they too are unable, and not merely unwilling, to enable the Defendants to honour the Judgment as it stands.  Those behind the Defendants should not be permitted, having pocketed at least US$51 million, including the Plaintiff’s money, to hide behind a restructured and now basically dead company.

13.  With respect to Mr Chan, I do not think it permissible to borrow the principle relevant to ordering an impecunious plaintiff to pay security for the defendant’s costs to stay of execution of judgment.  The former situation concerns an impecunious plaintiff who is financed by its backers to take out proceedings against a defendant when it is in no position to pay the defendant’s costs if it fails.  It is in that context that the court held it would not be stifling a claim to require the backers, who are able as opposed to unwilling to pay, to come up with security for the defendant’s costs in an appropriate case.  That principle certainly has no application to stay of execution, which is governed by the principle as so succinctly stated by Ma J, as he then was, in Star Play Development Ltd v Bess Fashion Management Co Ltd.  To extend that principle to an application to stay tantamounts to doing away with the principle of corporate personality established which had been firmly established since Salomon v Salomon & Co [1897] AC 22.  That could not be right.

14.  Mr Shieh SC further argues that the Defendants will suffer deleterious effects if no stay is granted.  Both the 1^st and 2^nd Defendants are impecunious.  As at 31 December 2007, the 1^st Defendant had net current liabilities of HK$2,083,834,379.93 and a deficit in net assets of HK$2,082,588,435.17. The 2^nd Defendant had net liabilities of HK$138,187,244.14 and a deficit in net assets of the like amount.  The Fujian Provincial Government is in the course of negotiating a debt restructuring arrangement to resuscitate the two Defendants, which included the use of the US$60 million from the proceeds of sale of the FCL shares.  The execution of the monetary part of the Order, including payment out of the US$9 million standing in the HSBC account, will put an end to the negotiation of the restructuring arrangement.  On the evidence now available to me, it appears that what those behind the Defendants have done is to strip the Defendants of their assets and then to restructure them in such manner as to leave the Plaintiff with an empty judgment and without the Plaintiff being given the benefit of participating in the restructuring at all.  Save that US$51 million had been transferred to the Fujian Provincial Government, I am not satisfied as to the purpose of the transfer and I am far from being satisfied that there was any restructuring negotiation underway.  I reject Mr Shieh SC’s submission of deleterious effect.

15.  The fact is the Defendants are indisputably impecunious.  Save for the US$9 million now standing in the bank account with HSBC, there are no assets available for execution.  The furthest the Plaintiff can proceeds is to obtain winding up orders against the Defendants.  The Plaintiff’s real remedy lies in tracing.  There is nothing to suggest that the Plaintiff would suffer any prejudice if the monetary part of the Order is stayed.  The Plaintiff’s position could not be worse off by making an order to stay.  On the other hand, not only that the Plaintiff is a foreign plaintiff, it has no asset either in Hong Kong or in Macau.  Any payment out by the Defendants, including the US$9 million standing in the account with HSBC, will most likely be unrecoverable, should the Defendants be successful on appeal.  I am conscious of the court’s practice not to deprive a successful party of its fruits of litigation.  But this principle must give way if there is a reason for a stay.  Given the nature of the Order appeal against, I think the balance is struck by allowing the injunctive part of the Order to proceed but staying the monetary part.  In the circumstances, I allow the Defendants’ application to the extent that paragraphs 16 and 17 of the Order be stayed pending appeal.  I also make a costs order that the costs of the application be in the costs of the intending appeal.

Interim payment

16.  The Plaintiff seeks an interim payment order that the Defendants pay the Plaintiff US$30.60 million and that the Defendants be at liberty to pay and release the US$9 million with interest standing in the bank account with HSBC in partial satisfaction of such interim payment.  Mr Chan submits that this amount is indisputable in view of my Judgment.  All the shares in FCL were sold for US$60 million.  The Plaintiff’s interest is therefore at least US$30.60 million.

17.  Interim payment is just another facet of stay of execution.  The principle and considerations are the same.  As I find it appropriate to grant a stay, it must necessarily follow that no order for interim payment should be made.  This is primarily because the effect of interim payment in the circumstances of this case, namely a foreign plaintiff with no asset in jurisdiction, will be rendered the appeal nugatory.

18.  However, to reflect the fact that the Plaintiff is successful in the action but at the same time to protect the Defendants from the risk that their appeal will be rendered nugatory, it would be appropriate to order the US$9 million and interest now standing in the bank account with HSBC be released to the Plaintiff but stayed on condition that the funds be transferred by way of payment into court within fourteen days of service of the order on HSBC.  It is appropriate that costs of the application be in the costs of the intending appeal.

Payment out of security for the Defendants’ costs

19.  The Plaintiff, being a foreign plaintiff, has deposited into court a total of HK$6,863,000 as security for the Defendants’ costs.  The Plaintiff now seeks an order for payment out of the said deposit.  The only basis of the Plaintiff’s application is that the Plaintiff has obtained judgment and the usual practice described in Hong Kong Civil Procedure 2008 para 23/3/35.

20.  Mr Shieh SC submits that the usual practice relied on by the Plaintiff has disappeared in the United Kingdom since the decision of Stabilad Ltd v Stephens & Carter Ltd [1999] 1 WLR 1201.  That invariable practice stemmed from the judgment delivered by Lord Sterndale P in The Bernisse and The Elve [1920] P 1 when he refused making an order staying the payment out of security of costs that had been lodged by a foreign plaintiff.  He said at 11:

“The effect … of ordering that money to remain in court would be to give [the defendants] one or other of the two things – either security for the costs of their own appeal, or security for the satisfaction of the judgment which may be given on appeal, and they are not entitled to either.  Therefore, I shall make an order for payment out to the claimants of the money paid in as security.”

That was a first instance judgment but it was approved by the Court of Appeal a few years later in Comitato Portuario d’Importazione dei Carboni Fossili de Genova v Instone & Co [1922] WN 260.  Thereafter, payment out of security for costs deposited by a successful plaintiff was described as the invariable practice.  In 1990s, there were other cases which suggested that the practice ought to be adjusted due to changing requirements of litigation.  In Stabilad Ltd, Sir Richard Scott VC held that it was basically a question of discretion.  He said at 1206:

 “Matters of practice are always being adjusted to take account of changing requirements of litigation.  Moreover, where a discretionary power has been conferred on a court, although authoritative guidance may be given by decisions of superior courts as to the manner in which the discretion should be exercised, it is not possible, in my opinion, for the exercise of the discretion to be limited and confined within rigid boundaries by the authorities.  The exercise of the discretion must always take account of the particular circumstances of the particular case and judicial guidance as to how the discretion should be exercised is always capable of yielding to the particular requirements of a particular case.  In his judgment on the stay point, the judge appears to have concluded that to allow the stay would be an impermissible circumvention of the statutory provisions for enabling security for costs to be made.  There are two relevant statutory provisions. The first is section 726(1) of the Companies Act 1985, the basis of the order made in the present case.  There is also the provision in RSC, Order 23 under which a plaintiff resident out of the jurisdiction, whether an individual or a company, can be ordered to provide security for costs.  The judge appears to me from his judgment to have taken the view that to make an order requiring a sum lodged in court as security for costs to remain in court pending an appeal would be to use those enabling provisions for purposes for which they were not intended.  I take that to be the thought behind his reference to the circumvention of the statutory provisions on security for costs.  If that was what he had in mind, I must respectfully say that I do not agree with it.  If an order is made requiring a plaintiff to provide security for a defendant’s costs to be lodged, it is of course the defendant’s costs of trial that the order is directed to.  If the plaintiff’s action should succeed at first instance and fail on appeal, it will still be the defendant’s costs of trial that may need to be provided for.  And the sum lodged in court by way of security for costs will still be security for the defendant’s costs of trial, even if the order requiring the plaintiff to pay those costs is made not at trial but after a successful appeal.

It seems to me that an order requiring the sum to stay in court pending an appeal is not in any sense a circumvention of the legitimate scope of the jurisdictional basis on which the order for security for costs was made, whether under section 726(1) or Order 23.  It may be that the deputy judge did not have in mind that the court would never have any power to make an order requiring the sum to stay in court.  But, if he did conclude that the court had no such power, in my judgment he was wrong.  Under Ord 59 r 13 the Court of Appeal has power to direct a stay of execution of orders made by the court below.  An order for payment out of a sum lodged as security for costs is an order made below of which, under Ord 59 r 13, a stay can, as a matter of vires, be ordered.  Whether it should or should not be ordered is always, in my judgment, a matter of discretion. It is that matter of discretion to which I will now turn.” 

21.  I think by the above dicta, Sir Richard Scott VC has demolished the rationale of the so called invariable practice, which must now be laid to rest.  The question is one of discretion.  Whether to order security against a foreign plaintiff in the first place is a question of discretion.  So too, it must be a matter of discretion whether the sum lodged should remain in court as security for the defendant’s costs should his appeal be successful.  To order release of the security as an invariable practice upon the plaintiff’s success at first instance would defeat the purpose of providing for security against a foreign plaintiff in the first place.  After trial, the strength or weakness of the plaintiff case or of the defence as a matter of law could be assessed and all the surrounding circumstances of the case became known.  That would provide a good basis to review the appropriateness or fairness of the order of security made in the first place and whether the security should continued to be held during the pending appeal.  Maybe, in the light of the information available after trial, it would be appropriate in the exercise of discretion to order release of the security pending appeal.  But to call it an invariable practice is unduly fettering the discretion of the court.  With respect, I do not think these considerations have been adequately addressed by Lord Sterndale P in The Bernisse and The Elveor the English Court of Appeal in Comitato Portuario d’Importazione dei Carboni Fossili de Genova v Instone & Co.  I agree with and respectfully adopt the approach of Sir Richard Scott VC, which meets the reality of litigation today.  It is all a matter of discretion and balancing where the interest of justice lies.

22.  In the exercise of this discretion, the court must bear in mind that despite his success at trial, the fact that the plaintiff is a foreign plaintiff justifies caution before the security is released in the face of a pending appeal.  The starting point is the existence of an arguable appeal.  If the defendant cannot advance any arguable appeal, there is no reason why the plaintiff should be deprived of the fruits of his litigation and to have his funds tied down pending an unarguable appeal.  But it is undesirable and unnecessary to go deeply into the merits and strength of the appeal, save in exceptional cases.  Whether a stay of execution is granted is in most cases determinative whether the security should continue to remain in court pending appeal.

23.  The Plaintiff is a foreign plaintiff with no assets in jurisdiction.  It is plain that if the security is released, it will be very difficult for the Defendants to recover the costs of trial should they be successful on appeal.  The Defendants will be at risk if the security is released.

24.  What has the Plaintiff to put into the weighing pan to off set the prejudice to the Defendants?  Mr Chan submits that the Defendants are also impecunious.  It is equally unlikely that the Plaintiff’s costs of the appeal will not be satisfied if the Defendant’s appeal should be dismissed.  But that does not, in my view, justify putting the Defendants at risk.  What the Plaintiff should do in that situation is to apply for security for costs of the appeal against the Defendants in the event that the intending appeal is in fact lodged and set down for hearing.  Then, Mr Chan’s earlier argument that the backers behind the Defendants should come forward to pay security for costs of the appeal would become relevant.  There is no suggestion that the Plaintiff would have no financial means to defend the appeal if the security would not be released.  In fact, Mr Ngan who is behind the Plaintiff is a resourceful businessman and has funded the Plaintiff’s action all along. 

25.  In my view, there is nothing that the Plaintiff could put into the weighing pan except for its initial success at trial before me.  That success is now being challenged.  Although the primary rule is that a successful plaintiff should not be deprived of the fruits of his litigation, that primary rule must give way in the light of the pending appeal and when there is a reason for a stay.  In the circumstances, the discretion should be exercised against payment out of the security for the Defendants’ costs.  I also order that the costs of the application be in the costs of the intending appeal.

Conclusion

26.  Accordingly, I grant the Defendants’ application to stay the execution of paragraphs 16 and 17 of the Order.  I grant the Plaintiff’s application for interim payment to the extent of all the funds standing in the bank account with HSBC but that order is to be stayed on condition that the funds be transferred by way of payment into court within fourteen days of service of the Order on HSBC.  I refuse the Plaintiff’s application for payment out of the security for the Defendants’ costs deposited in court.  The costs of these applications be costs in the intending appeal.

HCA 4414/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4414 OF 2001

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J U D G M E N T

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introduction

1.  This is an action for breach of contract and/or breach of trust.  The Plaintiff is a company incorporated in Macau and controlled by Mr Ngan In Leng (顏延齡) (“Ngan”), a Macanese resident.  The Defendants are companies incorporated in Hong Kong.  They are window companies of the Fujian Provincial People’s Government of the People’s Republic of China (“PRC”).  This action arose out of a dispute between Ngan and the 1^st Defendant about a joint venture in optronic business (光電子項目) conducted by two companies incorporated in the PRC, Fujian Casix Laser Inc (福建華科光電有限公司) (“FCL”) and Fuzhou Casix Optronics Inc (福州科騰光電技術有限公司) (“FCO”), which were owned by the 1^st Defendant or its subsidiaries prior to the commencement of the joint venture.  Another company incorporated in Macau by Ngan, known as Casix Optronic Manufacturing Limited (宇星光電企業製造有限公司) (“COM”), was used as the corporate vehicle for carrying out the joint venture.

2.  For the purposes of the joint venture, three agreements were entered into between COM and companies owned and controlled by Ngan (“Ngan’s camp”) on the one part and the 1^st Defendant and its subsidiaries on the other in December 1996.  The three agreements are hereinafter called the “Hang Wo Agreement”, the “COM Agreement” and the “First Laser Agreement”.  In the conduct of the joint venture, the parties, particularly Ngan, had total disregard of the concept of corporate identity under PRC law and Hong Kong law.  Stripped of the legal issues raised by the concept of corporate identity, the Plaintiff’s or Ngan’s case is as follows.  Through the Plaintiff, Ngan purchased from the 1^st Defendant 51% of its shares in FCL and FCO for US$3,187,500 (equivalent to HK$24.64 million), that the 1^st Defendant agreed to transfer all its shares in FCL and FCO to COM which would be held by Ngan’s camp and the 1^st Defendant in the ratio of 51:49.  Part of the purchase price of HK$20 million was paid by COM and the Plaintiff to the 1^st Defendant and the balance of HK$4.64 million was by an agreement dated 13 March 1998 (“1998 Memorandum”) deemed to have been paid as the 1^st Defendant’s contribution for its 49% interest in COM.  All the shares in FCO were transferred to COM in March 1997 but not any of the shares in FCL.  Despite that, the parties conducted the management of FCL and FCO on the basis that they were partners to the joint venture.  In July 1997, at the request of FCL, Ngan provided funds for an optronic project (光纖無源器件項目) (“Project”), which the 1^st Defendant decided would not be undertaken by the joint venture.  The Project was about research, development and production of fibre collimator, fibre optic isolator, fibre optic circulator and fibre coupler.  That Project turned out to be a success and enhanced the value of the shares in FCL.  Then, in breach of the joint venture agreement, the 1^st Defendant sold all the shares in FCL to a third party, JDS Uniphase China Holdings Company (“JDS”) for US$60 million.  The 2^nd Defendant is a nominee or conduit of the 1^st Defendant for the receipt and transfer of the proceeds of sale of the shares in FCL.

3.  The Plaintiff’s claim is founded on breach of contract, breach of trust and as a fall back on restitution.  The contract relied on by the Plaintiff as having been breached by the 1^st Defendant is the latest of the three agreements, i.e. the First Laser Agreement, entered into between the Plaintiff and the 1^st Defendant on 28 December 1996, which superseded the earlier two agreements.  The Plaintiff says that in breach of the First Laser Agreement, the 1^st Defendant failed to transfer to the Plaintiff 51% of the shares in FCL which were sold by the 1^st Defendant to JDS and the sale included the Project which was funded solely by the Plaintiff.  Arising out of the alleged breach of contract, the Plaintiff has a claim for damages and a proprietary claim in respect of part of the proceeds of sale of the shares in FCL to JDS which is attributable to the Plaintiff’s 51% of the shares in FCL.  The Plaintiff further claims that those proceeds are trust assets beneficially belonging to the Plaintiff and held on trust by the 1^st Defendant.  The Plaintiff seeks an account for the Plaintiff’s share of the proceeds of sale from the 1^st Defendant.  In the alternative, if the First Laser Agreement is void, invalid or unenforceable, the Plaintiff claims restitution and tracing.

4.  The Defendants’ main defence is that the dispute between the parties had been litigated in the PRC and the decision of the Supreme People’s Court of the PRC was final and conclusive.  Specifically, the Supreme People’s Court held that the law applicable for determining the validity of the three agreements and the 1998 Memorandum was the law of the PRC.  The Supreme People’s Court held that the three agreements and the 1998 Memorandum insofar as they related to the sale of the shares in FCL to the Plaintiff were of “no effect (無效)”, a term which the legal experts of both parties considered more appropriate than the common law term of “null and void”.  The basis of the Defendants’ defence is that the 1^st Defendant, being a window company of the Fujian Provincial People’s Government, is a state-owned corporation and that FCL is a wholly foreign-owned enterprise.  The 1^st Defendant avers that under the laws of the PRC, prior approval from the Fujian Provincial People’s Government is required before entering into the three agreements.  In addition, the shares of FCL would have to be valued, approved and confirmed by the Fujian Provincial State-owned Assets Administration Bureau (福建省國有資產管理局) pursuant to articles 3, 18 and 19 of Rules on The Evaluation And Management of State Assets《國有資產評估管理辦法》and article 10 of Detailed Rules for the Implementation of The Rules on The Evaluation And Management of State Assets《國有資產評估管理辦法施行細則》and approved by the Fujian Provincial Foreign Trade & Economic Commission (福建省對外經濟貿易委員會) pursuant to article 23 of Detailed Rules for the Implementation of the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises《中華人民共和國外資企業法實施細則》and article 3 of Certain Regulations on Changes to Shareholders’ Rights in Foreign Investment Enterprises《外商投資企業投資者股權變更的若干規定》.  In brief, this defence is that the three agreements and the 1998 Memorandum were of no effect and not binding for want of such valuation, approval and confirmation.  The 1^st Defendant also pleads some minor alternative defences.  The 1^st Defendant denies there were any agreement to sell the FCL shares to the Plaintiff but alleges that the agreement was to sell 100% of the FCO shares to COM for HK$20 million (“FCO Agreement”) and that the FCO Agreement was performed.  Because of the transfer of 100% of the shares of FCO to COM on 3 March 1997, the First Laser Agreement was precluded since then from being submitted to the Fuzhou Municipality Jin An District Foreign Trade & Economic Commission (福州市晉安區對外經濟貿易委員會) for approval.  Furthermore, the proper law of the First Laser Agreement is the law of the PRC which does not recognize any beneficial interest and/or constructive trust of any shareholding in any wholly foreign-owned enterprise incorporated in accordance with the law of the PRC.  In respect of the Plaintiff’s claim under the Project, the Defendants put the Plaintiff to strict proof.  The 1^st Defendant also seeks to counterclaim for a declaration that the three agreements and the 1998 Memorandum are invalid, of no effect and not binding upon the 1^st Defendant.

5.  This case involves a foreign element as it is a dispute between a Macanese party and a Hong Kong party about an agreement entered into in Hong Kong for purchase of shares in the PRC.  The most crucial legal issue in this case is what is the system of law to be applied either to the case as a whole or to a particular issue or issues in dispute.  Having decided the system of law, the dispute will be resolved by applying that system of law to the facts as I find in this case.  Before turning to that legal issue, I shall first outline the facts of this case. 

The facts

6.  Each side called one legal expert on PRC law.  Ngan gave factual evidence on behalf of the Plaintiff.  No factual witness was called by the Defendants.  Ngan’s evidence was not seriously challenged.  Except his evidence of the parties’ intention to avoid the application of PRC law to the agreements specifically referred to below (see paragraph 29), I have no difficulties in accepting Ngan’s evidence.  The Defendants dispute the authenticity of a number of the documents produced by the Plaintiff.  In the absence of contrary evidence from the Defendants, I am satisfied as to their authenticity.  The Plaintiff disputes the authenticity of two versions of an agreement purportedly entered into between COM and two subsidiaries of the 1^st Defendant concerning assignment of all the shares in FCO to COM (“COM/Casix/Kexin Agreement”) produced by the 1^st Defendant.  The Plaintiff explains that the COM/Casix/Kexin Agreement did not represent the whole of the agreement under the joint venture between the parties but was created for the purpose of seeking governmental approval for the transfer of the FCO shares to COM pursuant to the First Laser Agreement.  In the absence of contrary evidence from the Defendants, I do not admit the two versions of the COM/Casix/Kexin Agreement produced by the 1^st Defendant in evidence.  The following facts are based on the pleadings of the parties, incontrovertible documents and the evidence of Ngan.  Those facts are not in serious dispute.

7.  The following are the main characters and corporations involved in these proceedings.

Dramatis personae

8.  Ngan In Leng(顏延齡) (“Ngan”) - Ngan is a Fujianese who migrated to Macau in 1980.  He is now a resident of Macau and a businessman of some substance.  He has investments and businesses in Macau, the PRC, Sydney, Singapore and USA.  His businesses include electronics, food, jewelry, garment, communication, port work, wharfing and real property.  He had business relations with the 1^st Defendant since 1990, mainly through Wang Chengming (王承明) and Kong Fanli (孔凡立)(“Kong”).

9.  Ngan is a director and shareholder of the Plaintiff.  He and his family members are owners of the following companies which are featured in these proceedings: First Laser Limited (the Plaintiff), Bao Shing (Group) Company Limited (寶盛集團有限公司) (“Bao Shing”), Fujian Ocean Communication Company Limited (福建大洋通訊器件有限公司) (“Fujian Ocean”) and Hang Wo Properties Investment and Management Company Limited (恆和物業投資管理有限公司).

10.  Ngan is also a man of substance in the PRC.  He is a member of the National Committee of the Chinese People’s Political Consultative Conference (中國人民政治協商會議全國委員會委員) and a member of the Standing Committee of the Fujian Provincial Committee of the Chinese People’s Political Consultative Conference (福建省人民政治協商會議常務委員會委員).  As revealed in his evidence, he had direct dialogue with senior officials of the Fujian Provincial People’s Government.

11.  Jenwing Holdings Limited (“Jenwing”) - This is a company incorporated in the British Virgin Islands.  The shares in this company are held on trust by Ngan’s camp for the 1^st Defendant.  Hang Wo and Jenwing are the sole registered shareholders of COM.

12.  Casix Optronic Manufacturing Limited(宇星光電企業製造有限公司)(“COM”) - This is a company incorporated in Macau.  It was formerly known as Casix Optronic Enterprises Limited (宇星光電企業有限公司).  It is the corporate vehicle for carrying out the joint venture between the Plaintiff and the 1^st Defendant.  Its registered shareholders are Hang Wo and Jenwing which respectively holds 51% and 49% of the shares in COM.  As from March 1997, COM holds all the shares in FCO.  

13.  Fujian Enterprises (Holdings) Company Limited(華閩(集團)有限公司) (the 1^st Defendant) - This is a window company of the Fujian Provincial People’s Government of the PRC.  It is a company incorporated in Hong Kong.  Its shareholders are nominee shareholders holding shares on behalf of the Fujian Provincial People’s Government.  The directors are appointed by the Fujian Provincial People’s Government.  Its assets are state assets.

14.  Jian An Investment Limited (the 2^nd Defendant) - It is a company incorporated in Hong Kong.  It is a window company of the Fujian Provincial People’s Government.  It shares the same office as the 1^st Defendant and is operated and controlled by the same personnel of the 1^st Defendant.

15.  Fujian Casix Laser Inc(福建華科光電有限公司) (“FCL”) - It was originally incorporated as an equity joint venture (中外合資企業) in accordance with the law of the PRC under the name of Fuzhou Castech-Phoenix Inc (福州科鳳激光有限公司) in 1992.  Its shareholders were Fujian Research Institute of Material Structures of the Academy of Science of the PRC (中國科學院福建物質結構研究所) (“FRIMS”) and the 1^st Defendant.  It was then mainly engaged in the production of two kinds of non-linear crystals commonly known as LBO crystal and BBO crystal.  In about June 1996, following a dispute with FRIMS, the 1^st Defendant bought FRIMS out.  Since then, FCL became a wholly foreign-owned enterprise (外商獨資企業) and changed to its present name.

16.  Fuzhou Casix Optronics Inc (福州科騰光電技術有限公司) (“FCO”) - It was incorporated in June 1995 as an equity joint venture (中外合資企業) between Casix Limited and Fujian Kexin Technology Development Company (福建科星技術發展公司) (“Fujian Kexin”).  The former is a company incorporated in Hong Kong.  The latter is a company incorporated in the PRC.  Both are subsidiaries of the 1^st Defendant.  FCO was spin off as a separate entity from FCL when FCL transferred its incubation furnaces and part of its business to FCO.

17.  Casix Limited - This is a company incorporated in Hong Kong.  It is a wholly owned subsidiary of the 1^st Defendant, which together with Fujian Kexin held all the shares in FCO until March 1997 when all the shares in FCO were transferred to COM.

18.  Fujian Kexin Technology Development Company(福建科星技術發展公司) (“Fujian Kexin”) -This is a company incorporated in the PRC.  It is a wholly owned subsidiary of the 1^st Defendant which together with Casix Limited held all the shares in FCO until March 1997 when all the shares in FCO were transferred to COM.

19.  Casix Inc - This is a wholly owned subsidiary of FCL incorporated in the United States, which carried out the Project.

20.  Wang Chengming(王承明) - He was the director and general manager of the 1^st Defendant between 1990 and 1994.  He became the chairman of the board of directors of the 1^st Defendant from November 1994 to April 1998.

21.  Kong Fanli(孔凡立) (“Kong”) - He was one of the directors and the deputy general manager of the 1^st Defendant between 1990 and 1994.  Kong became its chairman of the board of directors and general manager between November 1994 and May 1998.  In April 1999, Kong joined Bao Shing as its chief executive officer.

22.  Xu Meixing(許美星) (“Xu”) - He succeeded Kong as director and the chairman of the board of directors of the 1^st Defendant since May 1998.

23.  Wang Hongrui(王洪瑞) - He was a scientist who deflected with other scientists and technologists from FRIMS to join the 1^st Defendant’s camp.  He subsequently became the general manager of FCL.

The background leading to the three agreements between Ngan’s camp and the 1^st Defendant’s camp

24.  A litigation arose between the 1^st Defendant and FRIMS concerning FCL’s then use within the PRC of technology in relation to the incubation furnaces for producing LBO crystal and BBO crystal which was subject to the patents held by FRIMS.  FRIMS was successful in the litigation, which resulted in the 1^st Defendant buying out FRIMS’ shares in FCL and FCL was restrained from carrying on its use of the aforesaid patented technology within the PRC.  This led to the change of name of FCL to its present name and the change of its status from an equity joint venture between FRIMS and the 1^st Defendant to a wholly foreign-owned enterprise (though the 1^st Defendant is a window company of the Fujian Provincial People’s Government, for the purpose of classification as a business entity, it is regarded as a foreign enterprise as it was incorporated in Hong Kong).  Part of FCL’s business which was subject to the aforesaid patented technology, namely the incubation furnaces, was transferred to FCO.  Wang Hongrui, formerly from FRIMS, led his team of scientists and technologists to join FCL and FCO.  They continued to work in the same factory premises as before and used the same machinery.  It was under that setting the 1^st Defendant urgently searched for a new partner outside the PRC who would be willing to pay substantial capital within a short time to buy into FCL and FCO, so that the incubation furnaces and related operation could be relocated outside the PRC to avoid further disputes with FRIMS.  Between mid and late 1996, the 1^st Defendant and Ngan conducted negotiations on the above business joint venture and entered into the three agreements.  All the three agreements were executed in the 1^st Defendant’s office in Hong Kong. 

The Hang Wo Agreement

25.  The first agreement between the two camps was entered into between the 1^st Defendant and Hang Wo (“Hang Wo Agreement”) dated 12 December 1996.  In the preamble, it was stated that the parties would make use of the 1^st Defendant’s optronic technology (高科技光電子產業) and to jointly invest US$20 million in a Macanese company to be incorporated and called COM for the purpose of producing crystals.  The parties agreed as follows:

(1)	the 1st Defendant would transfer its 100% shareholding in FCL and FCO to COM and the shares of COM would be held by the 1st Defendant and Hang Wo in the ratio of 49:51 (clause 1);
(2)	Hang Wo would purchase 51% of the 1st Defendant’s shareholding in FCL and FCO by cash (clause 2);
(3)	Hang Wo would be solely responsible for contributing to the initial capital of COM in the amount of US$10 million (clause 3); and
(4)	the parties understood that certain legal formalities were required for the transfer of the shares in FCL and FCO to COM, hence, in the meantime, the 1st Defendant’s shares in COM would be held by Jenwing, a British Virgin Islands incorporation, on behalf of the 1st Defendant and would be transferred to the 1st Defendant when its shares in FCL and FCO were transferred to COM (clause 4).

The COM Agreement

26.  The two camps also entered into a second agreement of the same date (“COM Agreement”).  The parties to the agreement were the 1^st Defendant and COM.  The preamble stated that COM was to acquire the 1^st Defendant’s shareholding in FCL and FCO.  The parties agreed, inter alia, that:

(1)	the 1st Defendant would sell all its shares in FCL and FCO to COM at the valuation of US$6.25 million (clause 1);
(2)	COM would pay the 1st Defendant US$3.125 million within one month of execution of the agreement and the balance within three months (clause 5); and
(3)	the parties would immediately set up a working party to deal with the necessary procedures and instruct lawyers to handle the share transfer in the PRC (clause 6).

The agreement expressly stated that it was executed on 12 December 1996 in Hong Kong.

The First Laser Agreement 

27.  Then the two camps entered into yet a third agreement dated 28 December 1996 (“First Laser Agreement”).  The parties to this agreement were the 1^st Defendant and the Plaintiff.  This is the latest agreement in the series and the one relied on by the Plaintiff as the basis of this action.  The agreement was vague as to the subject matter.  As a result, the 1^st Defendant raises a defence of uncertainty of the subject matter.  The preamble of the agreement states that the 1^st Defendant agreed to sell to the Plaintiff 51% its investment in the optronic project in Fuzhou (福州所投資的光電子項目中的51% 的股權).  The parties agreed, inter alia, that:

(1)	upon completion of the share transfer, the ratio of the shareholding of the 1st Defendant and the Plaintiff would be 49:51 (clause 1);
(2)	the net asset value of the project to be sold was agreed to be US$6.25 million, hence, the 1st Defendant would sell 51% of its shareholding to the Plaintiff for US$3.1875 million (equivalent to HK$24.64 million) (clause 2);
(3)	upon admission of the Plaintiff into the business, the boards of directors of FCO and FCL would be reorganized, the composition of the new boards would be subject to consultation (clause 3);
(4)	the Plaintiff would pay the 1st Defendant HK$10 million within ten days of execution of the agreement and the balance by two instalments within three months (clause 7); and
(5)	both parties would form a working party as soon as possible for the purpose of liaison and handling the related matters and would instruct lawyers in the PRC to handle matters relating to the change in ownership of the relevant companies (clause 8).

The agreement stated that it was executed on 28 December 1996 in Hong Kong. 

28.  According to Ngan, the First Laser Agreement was entered into because the 1^st Defendant felt it inappropriate to enter into a joint venture arrangement in optronic industry with Hang Wo which is a company dealing with property investment and that the name of the Plaintiff was also suggested by the 1^st Defendant.  Ngan said that the parties’ intention was that the First Laser Agreement superseded the earlier two agreements.  In the absence of contrary evidence from the Defendants, I accept Ngan’s evidence.

29.  It is also Ngan’s evidence that during the course of negotiation of the agreements there was never any suggestion that PRC law would or was intended to apply to the three agreements.  Ngan said that in fact it was the 1^st Defendant’s intention not to subject their contractual relationship to PRC law because of the 1^st Defendant’s then intention to avoid disputes and litigations with FRIMS in the PRC and he agreed.  Despite that there is no contrary evidence from the 1^st Defendant, I give no weight to this aspect of Ngan’s evidence.  First, I have difficulties in following the logic of that evidence because according to Ngan, it was the parties’ understanding that FRIMS’ patent right had no protection outside the PRC which was the sole reason behind the sale of the FCO and FCL shares to the Plaintiff.  Second, there was express mention in the Hang Wo Agreement and the COM Agreement that the parties would observe international conventions and the lex situs in respect of intellectual property rights.  Had the parties indeed agreed that PRC law should not apply to the three agreements, they would not have omitted such provision from the three agreements, especially if it was their intention to avoid further litigations with FRIMS in respect of their patent rights.  I find that the truth was that the parties had never directed their minds to the question of applicable law of the three agreements.  In any event, evidence of a party’s intention is not admissible for the purpose of construing the agreement.

The COM/Casix/Kexin Agreement

30.  In addition to the three agreements, COM and the 1^st Defendant’s subsidiaries, namely Casix Limited and Fujian Kexin, also executed another agreement, i.e. the COM/Casix/Kexin Agreement dated 12 December 1996 solely in relation to the transfer or the sale and purchase of the shares in FCOThere are three different versions of this agreement, one produced by the Plaintiff and two produced by the 1^st Defendant.  The Plaintiff disputed the authenticity of the two versions produced by the 1^st Defendant.  Mr Chan Chi Hung SC suggests that the two versions produced by the 1^st Defendant were created by transplanting photocopies of the signatures of COM onto the documents.  In the Plaintiff’s version, Fujian Kexin and Casix Limited agreed to transfer their capital investment respectively in the sum of US$63,000 and US$1,447,000 in FCO to COM and COM agreed to accept the transfer of the investment in the total amount of US$1,510,000 and thereafter to assume all the rights and liabilities of Fujian Kexin and Casix Limited in respect of FCO.  The short version produced by the 1^st Defendant is similar to the Plaintiff’s version.  The 1^st Defendant’s long version alleges an agreement by the Plaintiff to purchase the 1^st Defendant’s shares in FCO for US$3.125 million (equivalent to HK$24.375 million), with an unknown balance to be paid within three months of the date of the agreement.  As the 1^st Defendant called no factual witness to prove the authenticity of either of its two versions of the agreement, I reject the two versions produced by the 1^st Defendant.  I accept the Plaintiff’s version as authentic.  

31.  However, according to Ngan, the COM/Casix/Kexin Agreement did not represent the whole of the parties’ agreement under the joint venture but was a document generated solely for producing to the PRC authorities the purpose of obtaining approval for the transfer of the FCO shares to COM pursuant to the First Laser Agreement.  In the absence of contrary evidence from the Defendants, I accept Ngan’s evidence.  The COM/Casix/Kexin Agreement is not a genuine agreement supported by underlying transaction.  It does not have the effect of replacing or superseding any of the three agreements, particularly the First Laser Agreement which was executed subsequent to the COM/Casix/Kexin Agreement. 

Payment of the purchase price for the FCL and FCO shares by the Plaintiff

32.  Pursuant to the First Laser Agreement, Ngan caused two sums of HK$10 million to be paid to the 1^st Defendant.  The first payment was by a cheque issued by COM dated 31 December 1996.  That payment was made within ten days of execution of the First Laser Agreement in accordance with clause 7 of that agreement.  The second payment was by the Plaintiff’s cheque dated 30 April 1997.  That payment was the first of the two instalments to be made within three months of execution of the First Laser Agreement pursuant to clause 7.   The 1^st Defendant does not dispute receipt of those two sums, but argues that the first payment was not paid by the Plaintiff but by COM and the two payments were not made pursuant to the First Laser Agreement but to the FCO Agreement.  Receipt of those payments were acknowledged by the 1^st Defendant as payment for shares of “科鳳”, which was part of the former name of FCL, i.e. Fuzhou Castech-Phoenix Inc.  More importantly, the receipts issued by the 1^st Defendant acknowledged that the payments were made by the Plaintiff.  There is nothing unusual for a party to a contract to cause a third party to perform its payment obligation under the contract, particularly as in the present case where the two parties are related.  There is no dispute that Ngan provided the working capital for COM.  In the circumstances, in view of the acknowledgement by the 1^st Defendant in the receipts, I find that the HK$20 million under the two payments were made by the Plaintiff.  As for the balance of HK$4.64 million, it was agreed under the 1998 Memorandum dated 13 March 1998 to have been paid by the Plaintiff by treating a capital investment in the sum of HK$4.64 million made by the Plaintiff in COM as investment by the 1^st Defendant.  That payment was also made within three months of execution of the First Laser Agreement in accordance with clause 7.   I find that the two payments of HK$10 million and the acknowledgment of HK$4.64 million were referable to the First Laser Agreement.  I further find that the consideration for the full purchase price for 51% of the shares in FCL and FCO were fully paid by the Plaintiff in accordance with the terms of the First Laser Agreement. 

Whether the FCO Agreement was a genuine agreement

33.  At this stage, it would be convenient to dispose of the 1^st Defendant’s pleaded defence that the only agreement between the parties was an agreement by the 1^st Defendant’s subsidiaries to sell all their shares in FCO to COM for HK$20 million, i.e. the FCO Agreement based on the 1^st Defendant’s long version of the COM/Casix/Kexin Agreement.  This defence is based on the two payments of HK$10 million by COM and by the Plaintiff, the 1^st Defendant’s long version of the FCO Agreement and the transfer of the FCO shares to COM in March 1997.

34.  With the 1^st Defendant’s two versions of the COM/Casix/Kexin Agreement out of the way, the 1^st Defendant cannot rely on those documents in support of this defence.  In any event, the consideration stated in the two versions of that agreement produced by the 1^st Defendant do not support that defence.  On the facts, two sums of HK$10 million were paid by COM and the Plaintiff and the amount of HK$4.64 million was agreed under the 1998 Memorandum to be treated as having been paid by the Plaintiff and as the 1^st Defendant’s capital contribution to COM.  For reasons as I have explained in paragraphs 32, viewed objectively, those payments by the Plaintiff, their receipts and acknowledgement by the 1^st Defendant could only be referable to the First Laser Agreement but not to the FCO Agreement.  I reject as unmeritorious this defence of the 1^st Defendant.

Transfer of the shares in FCL and FCO

35.  On 30 December 1996, i.e. one day prior to the payment of the first sum of HK$ 10 million to the 1^st Defendant due under the First Laser Agreement, the board of directors of FCO passed a resolution consenting to transfer all the shares in FCO to COM in accordance with the wishes of its shareholders, Casix Limited and Fujian Kenxin.  It should be noted that no similar board of directors meeting was ever held by the board of FCL approving the transfer of its shares to COM or to the Plaintiff.

36.  On the other hand, on the same day Ngan conducted a board of directors meeting of COM in which a resolution was passed appointing himself as the managing director and Wang Hongrui as general manager of FCL.  This meeting was stated to be the first board of directors meeting of COM and not of FCL.  On 20 January 1997, COM issued a notice appointing Ngan, Miss Ngan and Wang Hongrui as directors of FCL.  The appointments were of course invalid.  However, the meeting was attended by Kong and Wang Hongrui on behalf of the 1^st Defendant and Ngan, Miss Ngan and Huang Xiaodong (黃曉東) on behalf of Ngan’s camp.  It, nevertheless, shows recognition by those who had control of FCL that Ngan’s camp had beneficial interest in the shares in FCL. 

37.  The shares in FCO were properly transferred to COM in March 1997 instead of to the Plaintiff pursuant to the First Laser Agreement.  On 10 May 1997, the PRC State Administration of Industry and Commerce issued a business licence to FCO with Ngan as the chairman of its board of directors and Wang Hongrui as its general manager.  On 30 May 1997, COM issued a letter to FCO appointing Chen Tianbin (陳天彬) as director of FCO in place of Wang Hongrui.

38.  The shares in FCL were never transferred to Ngan’s camp.  Apart from the absence of a board of directors meeting approving the transfer, it appears that the transfer was rendered impossible because governmental approval for the transfer would not be granted as the share capital of FCL had not been fully paid up as indicated in the 1^st Defendant’s letter to Bao Shing dated 19 February 1998 and the 1998 Memorandum.

Carrying out of the joint venture and the Project

39.  In the conduct of the affairs of the joint venture, Ngan, the 1^st Defendant and their staff in FCO and FCL drew no distinction between Ngan’s personal capacity and those of his other companies.  Correspondences to or from Ngan were addressed to or issued by Bao Shing, COM or the Plaintiff.  The concept of corporate identity was completely ignored by the parties.

40.  Since 31 December 1996 when the first sum of HK$10 million was paid, the 1^st Defendant, FCL and FCO treated Ngan’s camp as a shareholder of FCL and FCO and Ngan and Miss Ngan participated in the management of FCL and FCO as de facto directors.  Decisions regarding the operation of FCL and FCO were referred to Ngan and Kong for approval.  Financial statements of FCL and FCO, requests for increase in staff remuneration of FCL and FCO request for purchase of staff quarters for FCO and FCL, reports on construction of a building complex for FCL, request for payment of construction costs of the complex, requests for funds for setting up a branch office of FCL and recommendation of a bonus share scheme for the staff of FCL were referred to both Kong and Ngan for consideration and approval.  There is ample evidence of participation by Ngan in the management and important decision making of FCL and FCO.  In a report to the Fujian Provincial People’s Government dated 5 June 1997, the 1^st Defendant acknowledged that Ngan had 51% interest in the joint venture. 

41.  On 17 July 1997, Wang Hongrui, on behalf of FCL, submitted a feasibility study report on production of a special optical fibre instrument (光纖無源器件項目) i.e. the Project, to the 1^st Defendant for consideration.  On 21 July 1997, Kong rejected the proposal and refused to inject funds into FCL’s subsidiary in the United States, Casix Inc for implementing the Project because of the business risk involved.  He suggested Wang Hongrui to enquire if Ngan would take on the Project as a personal investment.  As a result, Ngan remitted RMB 1 million to FCL on 1 August 1997, US$500,000 to Casix Inc on 12 August 1997 and US$100,000 to Casix Inc on 17 April 1998 for the purposes of the Project. 

42.  On 13 March 1998, about a month before Kong was due to vacate his office in the 1^st Defendant, he signed the 1998 Memorandum setting out the rights of the parties and capital arrangement of COM and FCL.  The 1998 Memorandum explained why the shares in FCL were not transferred to COM.  It acknowledged:

(1)	that for some historical reasons, such as the fact that US$2.5 million of the registered capital of US$7 million had not yet been injected into FCL and that there were some outstanding legal disputes relating to FCO, the 1st Defendant was still temporarily wholly holding FCL while COM was still temporarily wholly holding FCO; when the above problems were resolved, the Plaintiff’s and the 1st Defendant’s shareholding in COM and FCL would be regularised (理順股權關係) in the ratio of 51:49 (paragraph 1);
(2)	that prior to the said regularisation, COM’s and FCL’s investments and rights in respect of FCL, COM and FCO shall be governed by the agreements of 1996 (paragraph 2); and
(3)	that as the Plaintiff incurred significant costs in setting up COM and as the 1st Defendant would hold 49% of the shares in COM upon the said regularisation, the outstanding payment in the amount of HK$4.64 million due from the Plaintiff to the 1st Defendant under the First Laser Agreement was treated as having been paid by the Plaintiff and representing the 1st Defendant’s capital contribution to COM (paragraph 3).

43.  The relationship between the parties took a turn in May 1998 when Xu replaced Kong as the deputy chairman of the board of directors of the 1^st Defendant and the shares of the 1^st Defendant were reassigned to Sun Ming (孫明), Yang Dongcheng (楊東成) Chen Ruizeng (陳瑞曾) and Li Jinlin (李金林). 

44.  The conflict between Ngan and the 1^st Defendant became obvious since August 1998.  At a meeting on 18 August 1998, Xu attempted to re-negotiate the terms of the joint venture with Ngan by suggesting to increase the share ratio between the 1^st Defendant and the Plaintiff in COM to 51:49.  Ngan refused.  The negotiation continued, but without success.  Ngan sought help from the Governor and other senior officials of the Fujian Provincial People’s Government to resolve their dispute, but to no avail.

45.  On 29 September 1998, Ngan wrote to FCL requesting the transfer of the Project to Fujian Ocean which was a Fujian company set up by him specifically for the purpose of taking over the Project.  Wang Hongrui confirmed to the 1^st Defendant that the Project was funded by Ngan and sought instruction to effect the transfer after discounting for the costs of the research and development as well as depreciation of plant and equipment used in connection with the Project.  The 1^st Defendant instructed Wang Hongrui not to effect the transfer for the reasons that there were other accounts in relation to other joint ventures with Ngan and his group of companies and other outstanding issues in relation to the present joint venture which had not yet been resolved. 

46.  Then, presumably for the purpose of tightening his reign over FCL, Xu appointed himself as chairman of the board of directors and Wang Hongrui and two others as directors of FCL on 3 February 1999.  On 15 April 1999, Xu also appointed Wang Hongrui as general manager of FCL.  Knowing that the 1^st Defendant would not allow him to have the fruits of his investment in the Project, Ngan had, since 16 April 1999, been repeatedly requesting the 1^st Defendant to return his funds invested in the Project.  The 1^st Defendant ignored those requests.  On 6 January 2000, Ngan wrote to Xu complaining about the proposed sale of the shares in FCL without the consent of COM.  On 12 January 2000, the 1^st Defendant replied that the production by FCO of LBO crystal and BBO crystal was in violation of the rights of FRIMS, that the 1^st Defendant was the 100% legal owner and had de facto control of FCL and that the 1^st Defendant had full right to dispose of FCL.  On 29 February 2000, the 1^st Defendant sold all its FCL shares, including the benefit of the Project, to JDS for US$60 million.

47.  In October 2000, the parties accompanied by their lawyers attended two meetings in Zhuhai in an attempt to resolve their dispute, but no solution could be reached.  However, they recorded their common understanding and their differences in the minutes of the meetings.  The minutes of the meeting on 3 October 2000, which I shall refer to later, contains a succinct statement of the above facts mutually agreed to by the parties.  

The litigations

48.  On 9 October 2001, the Plaintiff commenced the present action against the Defendants in Hong Kong. 

49.  At about the same time, the 1^st Defendant commenced legal proceedings in Fujian Higher People’s Court, (福建省高級人民法院 (2001) 閩經初字第43號), seeking a declaration against Hang Wo, COM and the Plaintiff, that the Hang Wo Agreement, the COM Agreement, the First Laser Agreement and the 1998 Memorandum were of no effect (無效).  Ngan’s camp disputed the jurisdiction of the Fujian Higher People’s Court over the agreements.  The Fujian Higher People’s Court held it had jurisdiction.  Ngan’s camp appealed.  Their appeal was dismissed by the Supreme People’s Court on 22 July 2002 and the action was remitted back to the Fujian Higher People’s Court for adjudication.  On 18 July 2003, the Fujian Higher People’s Court delivered judgment declaring that the Hang Wo Agreement, the COM Agreement and the First Laser Agreement were of no effect but dismissing the 1^st Defendant’s claim that the 1998 Memorandum was of no effect.  Ngan’s camp appealed to the Supreme People’s Court, (中華人民共和國最高人民法院 (2003) 民四終字第19號).  On 3 December 2004, the Supreme People’s Court allowed the appeal in part, but effectively dismissed it.  The Supreme People’s Court held that the Hang Wo agreement, the COM Agreement, the First Laser Agreement and the 1998 Memorandum to the extent that they relate to the transfer of shares in FCO and FCL were all of no effect.

The Applicable law

50.  Ascertaining the applicable law or the lex causae is a matter of procedure for the court in which the case is tried.  It is therefore to be ascertained according to the domestic law of the forum, i.e. the lex fori. 

51.  However, Mr Warren Chan SC, counsel for the Defendants, refers me to the following dicta of the decision of the Supreme People’s Court in (2003) 民四終字第19號, to which both the Plaintiff and the 1^st Defendant were parties:

「	本案訟爭的三份協議及《備忘錄》均沒有對如何適用法律作出約定，雖然三份協議和《備忘錄》的簽訂者均為中國境外當事人，但由於四份文件涉及的主要內容均為中國企業即華科公司和科騰公司的股份轉讓問題，因此，根據國際私法的“最密切聯系原則”，本案糾紛的解決應適用中華人民共和國法律。對此，本案各當事人均沒有異議。」
[Translation]
“	The three agreements and the memorandum in dispute in this litigation made no provision as to the law applicable to the agreements.  Though the signatories of the agreements and the memorandum were parties outside the jurisdiction, the subject matters involved in the four documents were Chinese enterprises, i.e. FCL and FCO.  Thus, in accordance with the principle of the closest connection under private international law, the law of the PRC should be applied for resolving the dispute in this case.  To this conclusion, all the parties to this litigation had no contrary views.”

Based on the above dicta, Mr Warren Chan SC argues that the question of the applicable law is now resjudicata.  He submits that it is apparent from the dicta that the Supreme People’s Court adopted the same conflict of law rules as those adopted in Hong Kong for the purpose of determining the proper law.  He further submits that in the absence of expert evidence suggesting that the conflict of law rules in the PRC are different from those in Hong Kong, it can be assumed that the conflict of law principles in the PRC are the same as those in Hong Kong.  On that basis, he argues that there is no reason for the Hong Kong court to reach a conclusion on the applicable law different from that reached by the Supreme People’s Court.  Also, arising out of the last sentence of the above quoted dicta, Mr Warren Chan SC argues that the Plaintiff is estopped from asserting that the applicable law is not PRC law.

52.  With respect, I disagree.  I do not think it necessary to refer to the authorities cited by Mr Warren Chan SC.  The principles are trite principles.  When Hong Kong court is applying foreign law, there is a presumption in the absence of expert evidence to the contrary that foreign law is the same as domestic law.  But the presumption does not operate in the reverse direction when a Hong Kong court is applying Hong Kong law to determine whether PRC law is the proper law.  Hence, it is wrong to assume that the conflict of law principles in Hong Kong are the same as those in the PRC.  Furthermore, the Supreme People’s Court was obviously referring to the conflict of law rules under its own private international law, which may not be the same as those under Hong Kong law.  The Supreme People’s Court did not purport to use an international set of conflict of law rules.  And strictly speaking none exists.  But assuming for the sake of argument that such a set of rules can be identified and the Supreme People’s Court was following the international set of conflict of law rules, those rules may not be the same as those under the Hong Kong conflict of law rules, though in many respects Hong Kong follows most of the rules under the Rome Convention.  Very obviously, the Hong Kong conflict of law rules do not simply apply the most closely related principle (最密切聯繫原則) as adopted by the Supreme People’s Court and certain presumptions under the Rome Convention are not applicable to Hong Kong.  The approach in Hong Kong in ascertaining the lex causae is the three stage approach as stated by Staughton LJ in Macmillan Incv Bishopsgate Trust Investment Plc and Others (No. 3) [1996] 1 WLR 387, CA and the test in one of those three stages is the closest and most real connection test (最密切及真實聯繫測試).  If the choice of law rules under the two jurisdictions are different, I do not think the principle of resjudicata applies.

53.  On the question of estoppel, Mr Chan Chi Hung SC, counsel for the Plaintiff, submits that the issues in dispute before the Supreme People’s Court are different from those now before me.  According to Mr Bai Tao (白濤), the  Defendants’ legal expert, the issue before the Supreme People’s Court was the transfer of shares in a legal person in the PRC and the validity of the three agreements and the 1998 Memorandum under the laws of the PRC, whereas the remedy sought was a declaration that the three agreements and the 1998 Memorandum were of no effect.  Mr Chan Chi Hung SC submits that the issues in the present case are the validity of the three agreements, breach of contract and breach of trust under Hong Kong law.  Having read the judgment of the Supreme People’s Court and considered the issues in dispute in this case, I agree with Mr Bai’s opinion.  I am satisfied that the issues before the Supreme People’s Court were different from those now before me.  It is therefore open to me to determine afresh the lex causae according to the domestic law of Hong Kong and not that of the procedural rules of the PRC including its choice of law rules.

The approach

54.  The proper approach in determining the system of law to be applied, or the lex causae, as conflict lawyers call it, was stated by Staughton LJ in Macmillan Inc.  This involves a three stage process: (1) identifying and characterising the issue that is before the court; (2) selecting the rule of conflict of laws which lays down a connecting factor for the issue in question; and (3) identifying the system of law which is tied by that connecting factor to the issue characterised.  His Lordship said at 391 and 392:

“	In finding the lex causae there are three stages.  First, it is necessary to characterise the issue that is before the court.  Is it for example about the formal validity of a marriage?  Or intestate succession to moveable property?  Or interpretation of a contract?
	The second stage is to select the rule of conflict of laws which lays down a connecting factor for the issue in question.  Thus the formal validity of a marriage is to be determined, for the most part, by the law of the place where it is celebrated; intestate succession to moveables, by the law of the place where the deceased was domiciled when he died; and the interpretation of a contract, by what is described as its proper law.
	Thirdly, it is necessary to identify the system of law which is tied by the connecting factor found in stage two to the issue characterised in stage one.  Sometimes this will present little difficulty, though I suppose that even a marriage may now be celebrated on an international video link.  The choice of the proper law of a contract, on the other hand, may be controversial.
	In an ideal world the answers obtained in these three stages would be the same, in whatever country they were determined.  But unfortunately the conflict rules are by no means the same in all systems of law.  In those circumstances a choice of conflict rule may have to be made.  It is clear that, in general, the second and third stages are to be determined by the law of the place where the trial takes place (lex fori).  That law must tell one what the connecting factor is for the issue before the court, and what system of law it points to.”

I shall adopt the three stage approach in ascertaining the lex causae in this case.

Characterisation of the issue

55.  In general, characterisation of the issue is governed by the lexfori.  The rules of conflict of laws must be directed at the particular issue of law which is in dispute, rather than at the cause of action.  The issue of a case is determined by the pleadings of both parties, but very often, it is the defence which identifies the issue rather than the claim.  In relation to characterisation of the issue, Staughton LJ said in Macmillan Inc at 399:

“

I would regard it as plain that the rules of conflict of laws must be directed at the particular issue of law which is in dispute, rather than at the cause of action which the plaintiff relies on.  We should translate lex causae as the law applicable to the issue, rather than the suit.  In this case the issue is whether in law the defendants were purchasers for value in good faith without notice, so as to obtain a good title to the shares.

Macmillan still assert, against Credit Suisse only, a claim in conversion, although the judge thought that it had been abandoned during the trial.  That claim, it is said, must be governed by English law.  But again it is the defence which identifies the issue.”

Thus the proper approach is to look beyond the formulation of the claim and to identify according to the lexfori the particular issue in dispute.  In characterising the issue, one must bear in mind the underlying principle of striving for comity between the competing legal systems.  As was held by Auld LJ in Macmillan Inc at 407, characterisation should not be constrained by particular notions or distinctions of the domestic law of the lex fori, or that of the competing system of law which may have no counterpart in the other’s system, nor should the issue be defined too narrowly so that it attracts a particular domestic rule under the lex fori which may not be applicable under the other system and vice versa.     

56.  The thrust of the Plaintiff’s case, as Mr Chan Chi Hung SC opens it, is the proprietary nature of its claim.  The purpose of Mr Chan Chi Hung SC adopting such an approach is obvious.  This is because once it is established that as a matter of Hong Kong law, the 1^st Defendant held 51% of the shares in FCL on trust for the Plaintiff, the Plaintiff would be able to trace the proceeds of sale of the shares into whosever hands holding them and whatever they have become.  Mr Warren Chan SC refers to paragraph 16 of the Statement of Claim in which the Plaintiff pleads:

“

16.

… by the latest on 13 March 1998, beneficial ownership of 51% of the shares in each of FCL and FCO had passed to the Plaintiff and the 1st Defendant thereafter held the shares on trust for the Plaintiff (hereinafter “the Trust”).”

Mr Warren Chan SC argues that the issue is to be characterised as one of title.  This characterisation is important because how an issue is characterised determines the outcome in the second and third stages in the determination of the lex cause. 

57.  The Plaintiff pleads breach of contract as well as breach of trust.  Despite the emphasis placed on the proprietary nature of its claim, on a proper understanding of the Plaintiff’s case, the Plaintiff’s claim is based on breach of the First Laser Agreement, as a result of which the Plaintiff has a claim for damages for breach of contract as well as a proprietary claim.  The defence is essentially that the three agreements and the 1998 Memorandum were of no effect under the laws of the PRC.  The Plaintiff’s proprietary claim does not and cannot stand on its own.  If the Plaintiff is unable to prove the validity of the First Laser Agreement and its breach, there would be no claim for damages and no proprietary claim at all.  I think Mr Warren Chan SC is over-emphasising the nature of the remedy sought by the Plaintiff as to over-look the real basis of the claim is breach of contract.

58.  In respect of the Plaintiff’s contractual claim, Mr Warren Chan SC argues that the issue raised by the Plaintiff is one of transfer and registration of the FCL shares.  He refers to paragraph 25 of the Statement of Claim under which the Plaintiff pleads:

“

25.

In breach of the Agreement and/or the Trust, the 1st Defendant has failed to transfer and register the 51% of the shares in FCL beneficially belonging to the Plaintiff (hereinafter “the Plaintiff’s Shares”) to and in the name of the Plaintiff, but has made such transfer impossible by the following conduct.”

59.  I think, by this averment, the Plaintiff pleads the fact of breach: the breach being the non-performance of the contractual obligation to transfer and register the shares in FCL and the repudiation by transferring the shares to JDS.  The issue remains whether the 1^st Defendant was under a contractual obligation to transfer the shares in FCL to the Plaintiff.  As was recognised by the House of Lords in The Colonial Bank and Cady and Williams, (1980) 15 App Cas 267, which I shall refer to in the second stage of my determination of the applicable law, what is necessary or effectual to transfer the shares in a company and what governs the rights arising out of a transaction in relation to those shares entered into by parties in England may be subject to two different systems of law.  In characterising the issue, one must first identify the relevant transaction.  The transaction here is the sale and purchase of shares.  It must follow, therefore, that the issue must be validity of or the rights and obligations of the parties to that transaction and not the title or priority to the shares as between the parties.

60.  Mr Warren Chan SC further argues that the place of performance of the obligation of transferring and registering the shares in FCL is Fujian and it would be futile to discuss registration of shares without reference to the law of the place of incorporation.  I am mindful of the defence that the three agreements were of no effect under the laws of the PRC.  I am also conscious that in characterising the issue, it is the defence which carries more weight.  But on the other hand, as observed by Auld LJ in Macmillan Inc at 407, characterisation should not be constrained by particular notions or distinctions of the domestic law of the lex fori or that of the competing system of law which may have no counterpart in the other’s system.  The court would be abdicating its function in characterising the issue by allowing itself to be constrained by a particular aspect of the domestic law or the competing system when determining characterisation of the issue.  That defence may be relevant for the second or third stage of the determination but is not determinative for the purpose of characterising the issue.

61.  I therefore identify the transaction as the sale and purchase of the shares in FCL and characterise the issue as the rights and obligations of the parties to that transaction, i.e. the rights and obligations of the parties to the three agreements, and not as one of title of the shares in FCL.  This is especially so as the claim as it now stands is one between two parties who are transferor and transferee to the transaction and not a claim between non-parties to that transaction.

The appropriate conflict rule

62.  This stage of the determination is the ascertainment of the appropriate conflict of law rule which lays down a connecting factor for the issue in question.  Mr Chan Chi Hung SC submits that a review of the cases shows that there are two lines of authorities on the conflict rule applicable to shares in a company.  He submits that if the issue is one of title of the shares, the applicable rule is the lex situs of the shares, but if the issue is one about the rights and obligations of the parties to the transaction, the applicable rule is the lex loci actus.  He quotes the English Court of Appeal decision in Macmillan Inc in support of the first proposition and the House of Lords decision in Cady’s case in support of his second proposition.  Macmillan Inc is also relied on by the Defendants.  Mr Warren Chan SC seeks to distinguish Cady’s case from Macmillan Inc and argues that the applicable rule in the present case is the lex situs of the shares.

63.  In Cady’s case, the executors entrusted the deceased’s shares certificates in a New York company to their brokers in London for the purpose of registering them in the executors’ names.  The brokers fraudulently pledged the share certificates with the appellant bank.  The House of Lords held that since the dealings with the share certificates were transacted in England by persons domiciled there, the respective rights of the executors and the bank must be determined by English law, i.e. the lex loci actus and not the lex situs of the shares.  Lord Herschell said at 283:

“

I agree that the question, what is necessary or effectual to transfer the shares in such a company, or to prefect the title to them, where there is or must be held to have been an intention to transfer them, must be answered by a reference to the law of the State of New York.  But I think that the rights arising out of a transaction entered into by parties in this country, whether, for example, it operated to effect a binding sale or pledge as against the owner of the shares, must be determined by the law prevailing here.”

In effect, the House of Lords identified the transaction as pledge of share certificates, characterised it as the right arising out of that transaction and held that the applicable law was the lex loci actus, which was the law of England.

64.  Cady’s case was distinguished in Macmillan Inc by Staughton LJ.  In Macmillan Inc, shares in a United States company belonging to the plaintiff, a public company, were transferred to the first defendant as nominee under a nominee agreement which provided that the nominee had no power or right to take any action with respect to the shares without the express consent of the plaintiff and that the nominee agreement was governed by the law of the State of New York.  Some of those shares were used as security for debts owed to creditors of the major shareholder of the plaintiff.  The plaintiff sought a declaration that the shares were held on a constructive trust for damages for breach of trust.  Staughton LJ characterised the issue as whether the defendants have a defence on the ground that they were purchasers for value in good faith without notice of the plaintiff’s claim.  His Lordship then concluded, distinguishing Cady’s case, that the issue in Macmillan Inc was as to title to shares in a company and fell to be decided by the lex situs of the shares. 

65.  These two cases have been vigorously argued by counsel on both sides.  I shall quote extensively from Macmillan Inc.  In that case, Staughton LJ classified the issue as one of title to the shares in dispute, i.e. whether in law the defendants were purchasers for value in good faith without notice so as to obtain a good title to the shares.  In the second stage of his determination, his Lordship considered the conflict rules applicable to property issues in general, i.e. rights to property, chattels, negotiable instruments and choses in action.  He considered the authorities as to shares separately, but against the background of the law relating to land, chattels, negotiable instruments and other debts.  On that basis, he reached the conclusion that the issue as to who has title to shares in a company should be decided by the law of the place where the shares are situated, i.e. lex situs.  In relation to the applicable rule to choses in action to which shares belong, his Lordship said at 400:

“	I turn now to other moveable but intangible property, that is to say choses in action.  The general rule for this kind of property is stated by Dicey & Morris, vol 2, p 979, rule 120 as follows:
	“	(1)	The mutual obligations of assignor and assignee under a voluntary assignment of a right against another person (‘the debtor’) are governed by the law which applies to the contract between the assignor and assignee.  (2)  The law governing the right to which the assignment relates determines its assignability, the relationship between the assignee and the debtor, the conditions under which the assignment can be invoked against the debtor and any question whether the debtor’s obligations have been discharged.”
	Paragraph (1) of the rule raises a topic to which I shall have to return later in relation to Cady’s case (Colonial Bank v Cady and Williams (1890) 15 App Cas 267).  It also leaves a question as to what happens if there is no contract between the assignor and the assignee; but that does not arise in the present case.  The rule is based on article 12 of the Rome Convention on the Law Applicable to Contractual Obligations and the Contracts (Applicable Law) Act 1990.  It is said by Dicey & Morris, vol 2, p 979 to represent the common law.
	The law governing the right to which the assignment relates, in paragraph (2) of the rule, in the case of a debt points to the proper law of the contract or other obligation by which the debt was created.  The corresponding rule in Dicey & Morris, 11th ed, vol 2, p 964, rule 123 was as follows: “The priority of competing assignments of a debt or other intangible thing is governed by the proper law of the debt or the law governing the creation of the thing.”

Thus in respect of choses in action, to which shares belong, rule 120 in Dicey & Morris which represents the common law position applies in England and therefore also in Hong Kong.  This rule recognises the distinction between the mutual obligations between parties to an assignment and the assignee’s rights against the debtor etc.  The former is governed by the law applicable to the contract of assignment, while the latter is to be determined by the law governing the rights to which the assignment relates.

66.  Rule 120 then formed the basis of his Lordship’s finding of the conflict rule applicable to shares and specifically where the issue is one of title to the shares.  His Lordship said at 402 to 404:

“	I now turn to the specific case of an issue as to the ownership of shares in a company.  It is not argued that shares are within article 12 of the Rome Convention on the Law Applicable to Contractual Obligations, and therefore within rule 120 of Dicey& Morris.  Indeed it may be that shares have a rule of their own.  I must consider the authorities as to shares separately, but against the background of the law relating to land, chattels, negotiable instruments and other debts which has already been discussed.  We have the authority of the House of Lords for the proposition that to some extent, as between transferor and transferee, the effect of an assignment of shares is determined by the law of the place where the assignment takes place.  As with rule 120(1) in Dicey& Morris, it is important to determine the limits of that proposition.  The case is Williams v Colonial Bank (1888) 38 Ch D 388 in the Court of Appeal, and Colonial Bank v Cady and Williams, 15 App Cas 267 in the House of Lords.  … ( His Lordship then quoted the facts of Cady’s case).
	The evidence of American law was that the certificates were not negotiable instruments; but that the banks obtained a good title in law and equity because the owners had “so dealt with that certificate as to lead the purchaser for value to believe honestly that he was taking a good title to it.  In other words the foundation rests in the principle of estoppel” (38 Ch D 388, 399).
	In those circumstances it is scarcely surprising that the law of England was held to be applicable.  Cotton LJ at p 399, said that the question whether the bank obtained a good title “depends on transactions in England” and so must be governed by English law, although the law of America would be “properly referred to for the purpose of deciding what would be the effect of a valid effective transfer of the certificates on the title to shares in an American company.” …
	In the House of Lords, 15 App Cas 267, 272, Lord Halsbury LC recorded that the transaction of loan took place in London.  He added:
	“	if it were necessary to consider what law must govern, as between these parties, the right to these certificates on the one hand, and the right to detain them as pledged for the money advanced on them on the other, though the certificates themselves were the certificates of shares in a foreign corporation, I should  not doubt that it is to the law of England you must look, and not to the law of the United Stastes.”
	Lord Watson said, at pp 276-277:
	“	That the interest in the railway company’s stock, which possession of these certificates confers upon a holder who has lawfully acquired them, must depend upon the law of the company’s domicil, seems clear enough, and has not been disputed by the respondents.  But the parties to the various transactions, by means of which the certificates passed from the possession of the respondents into the hands of the appellants, are all domiciled in England; and it is in my opinion equally clear that the validity of the contracts of pledge between Blakeway and the appellants, and the right of the latter to retain and use the documents as their own, must be governed by the rules of English law.”
	Lord Bramwell said, at p 281:
	“	the shares being of an American company domiciled in one of the United States of America, an act effectual by the law of that state to transfer the property, and no other, would transfer it.”
	Lord Herschell said, at p 283:
	“	I agree that the question, what is necessary or effectual to transfer the shares in such a company, or to perfect the title to them, where there is or must be held to have been an intention to transfer them, must be answered by a reference to the law of the State of New York.  But I think that the rights arising out of a transaction entered into by parties in this country, whether, for example, it operated to effect a binding sale or pledge as against the owner of the shares, must be determined by the law prevailing here.”
	Four points are clear from that decision.  First, there is a dual conflict rule, which allocates some issues to one country and others to another.  Secondly, the issue in Cady’s case was as to who was entitled to the certificates, not as negotiable instruments but as pieces of paper.  Thirdly, that issue was to be decided by English law, since the transaction took place here or (per Lord Watson) the parties to it were domiciled here.  Fourthly, any issue as to the effect of possession of the certificates, or as to how shares could be transferred, should be decided by the law of the company’s domicile or (it would seem) its place of incorporation.
	I do not find it easy to determine the precise borderline between points three and four in that case, or for that matter between paragraphs (1) and (2) in rule 120 of Dicey& Morris.  But what is in my judgment clear is that the issue in the present case comes in the second class, and must be decided by the law of New York.  It is not an issue as to the validity of a contract between Macmillan and one or other of the defendants; so far as the facts go they had never met each other and there was no contract between them.  … The issue is whether, in the words of Lord Bramwell and Lord Herschell, there has been an act effectual by New York law to transfer the property in the shares.

67.  Mr Chan Chi Hung SC argues that in the penultimate passage quoted above, Staughton LJ distinguished between four classes of cases and the Plaintiff’s case falls within the third class.  With respect, I think that is a misunderstanding of his Lordship’s judgment.  In my view, the four points mentioned in that passage were not intended by his Lordship as points of categorisation but four observations.  All along, his Lordship was talking about two classes, the rights under the transaction relating to the shares or share certificates and rights under the shares.  That was why in the last passage quoted above, his Lordship referred to points three and four of his observation and paragraphs (1) and (2) of rule 120 of Dicey & Morris and he concluded that the issue fell within the second class, which was title and ownership of the shares.  However, my disagreement with counsel’s submission does not affect the validity of his argument.  

68.  From the dicta of the House of Lords in Cady’s case as quoted by Staughton LJ, it is clear that the House of Lords distinguished between share certificates and shares and also between the issue as to the rights of the parties to a pledge of share certificates and ownership and title to shares.  On that basis, the House of Lords identified the transaction as one of pledge of share certificates and characterised the issue as the rights arising out of the pledge of share certificates by parties in England and not one of ownership or title of the shares of a company in the United States between non parties to the transaction.  The House of Lords then held that the rights arising out of the pledge was governed by the lex loci actus but entertained no doubt that title, ownership, effectiveness of the transfer of the shares and incidence of ownership of the shares were governed by the lex situs of the shares.  Mr Warren Chan SC seizes on that distinction and argues that Cady’s case is applicable to share certificates but not to shares.  As a legal proposition, that must be correct.  He then argues by relying on Macmillan Inc that as the dispute in the present case is about transfer, title or ownership in the shares, the applicable rule is the lex situs of the shares.  However, the issue in the present case as I have characterised it is the rights of the parties under the sale and purchase agreement and not title or ownership in shares.  Macmillan Inc is clearly inapplicable.

69.  It is true that Cady’s case was about pledge of share certificates and not about sale and purchase of shares, but the principle is the same.  If I have to make a determination afresh, I would reach the same conclusion for a transaction involving sale and purchase of shares by adopting the three stage approach in Macmillan Inc.  To begin with, I would identify the transaction as the sale and purchase of shares and characterise the issue as one of the rights and obligations of the parties under the sale and purchase agreement.  The subject matter of the sale and purchase agreement is the shares in FCL.  Share is a particular kind of property.  It is neither land nor chattel.  It is a chose in action.  It is a bundle of rights in a company, as distinct from a share certificate which is a document evidencing the fact that the person stated therein is the holder of a specified number of shares in the company.  Thus an agreement to sell shares in a company is essentially of the nature of an assignment of a chose in action.  The prima facie rule therefore is that as between the transferor and the transferee, the effect of an assignment of shares is to be determined by the law of the place where the assignment takes place, i.e. the lex loci actus.

70.  I now turn to the other authorities quoted by Mr Chan Chi Hung SC.  The first one is North Western Bank, Limited and John Poynter, Son, & Macdonalds [1895] AC 56.  In that case, the pledgors of a bill of lading representing a specific cargo were under a contract to sell a larger quantity of like goods to third parties.  The cargo was on its way from Scotland to England.  The pledgees released the bill of lading to the pledgors to sell on the pledgees’ behalf and to account for the proceeds towards satisfaction of the debt.  The pledgors then transmitted the bill of lading to the purchaser through a creditor of the pledgors.  The question before the court was whether Scottish law or English law applied to the proceeds representing the cargo on its way from Scotland to England then in the hands of a creditor of the pledgors.  Lord Herschel LC held at 66:

“

Now, I cannot help saying at the outset that, in my opinion, it is abundantly clear that the rights of Messrs Page & Co and the bank respectively must be determined, if the strictly legal course is to be followed, by the law of England.  A transaction between a merchant in England and a bank in England, and the rights which arise out of that transaction, cannot, as it seems to me, fall to be determined by anything but the law of England; just in the same way as, if this had been a transaction between a banker and a merchant in Glasgow, and a question had arisen in an English proceeding as to the rights that arose out of that transaction, it would have fallen to be determined according to the law of Scotland.  …

Of course, when I say that the rights arising out of this transaction between these parties would fall to be determined by the law of England, I do not for a moment intend to dispute that, where such a transaction has been entered into, there may be proceedings or transactions in Scotland which would render a recourse to the law of Scotland necessary to ascertain the rights which had arisen in respect of transactions relating to the contract though it had its basis and origin in England.  Those are considerations quite beside the present case; because it seems to me that, in the present case, there is really nothing which needs to be determined for the purpose of arriving at a conclusion in this action, except what was the real nature of the transaction at Liverpool between Messrs Page & Co and the North Western Bank.”

If one has to characterise the issue in that case, it was one of the rights of the parties to pledge of a bill of lading.  Lord Herschel LC held that the rights which arose out of a transaction by parties entered into in England fell to be determined by the law of England.  That was also his Lordship’s view in Cady’s case.  Mr Warren Chan SC seeks to distinguish North Western Bank, Limited by arguing that the question there was one of pledge of bill of lading as was the pledge of share certificates in Cady’s case.  I think the difference is one of no distinction.  The principles are the same.  The conclusion depends on how the issue is characterised.  The issue as I have characterised in the present case is one of the rights of the parties to the sale and purchase agreement which is no different from the rights of the parties to a pledge transaction.  I think the decision in North Western Bank, Limited supports the Plaintiff’s argument.

71.  In In re Smith, Lawrence v Kitson [1916] Ch D 206, a testator charged all his share and interest in an estate in the island of Dominica in West Indies to secure repayment of a loan owed to his sisters and agreed to execute a legal mortgage of the said property whenever required.  By the law applicable to immovables in Dominica, the equitable charge was not sufficient to create a valid incumbrance upon the property.  The sisters issued a summons seeking a declaration that they were entitled to be executed a legal mortgage of the property by the trustees.  In a very short judgment, Eve J granted the declaration.  He held that the agreement entered into in England was a contract to give a mortgage on foreign land which was governed by the law of England.  He said at 209:

“

If the testator were still alive the right of these ladies to their mortgage is established, I think, by the decision of the Court of Appeal in British South Africa Co v De Beers Consolidated Mines [1910] 2 Ch 502, 515, 524.  Cozens-Hardy MR there says: “In my opinion an English contract to give a mortgage on foreign land, although the mortgage has to be perfected according to the lex situs, is a contract to give a mortgage which – inter partes – is to be treated as an English mortgage and subject to such rights of redemption and such equities as the law of England regards as necessarily incident to a mortgage.”

Mr Chan Chi Hung SC submits that In re Smith is on all fours with the present case.  In re Smith was about an agreement entered into in England between parties domiciled in England to execute a mortgage over foreign property.  In the present case, though the Plaintiff is a Macanese party, the 1^st Defendant is a Hong Kong party and the agreement was entered into in Hong Kong for transfer shares in the PRC.  Mr Warren Chan SC seeks to distinguish In re Smith from the present case on the basis that in In re Smith the performance of the obligation, i.e. the execution of the mortgage was to be effected in England, whereas the performance of the obligation in the present case, i.e. the transfer and registration of shares was to be carried out in the PRC.  He also seeks to rely on the distinction between transfer of shares and transfer of interest in land.  I do not think those distinctions material.  They might have some bearing on the third stage of the determination but not on the second stage.

72.  In In re The Anchor Line (Henderson Brothers), Limited [1937] 1 Ch 483, a shipping company registered in England owned heritable and movable property in Scotland.  It created a floating charge in Glasgow over its entire undertaking and assets in favour of a Scottish bank.  The charge was registered in England.  But the concept of floating charge was unknown to the law of Scotland.  The company was wound up.  The bulk of its property had been sold and the proceeds of sale were in the hands of the liquidator.  The liquidator took out an originating summons to determine whether the charge was valid and effectual insofar as it related to the assets situated in Scotland at the commencement of the liquidation of the company.  In a short judgment, Luxmoore J held that the question was whether in the distribution of the assets of the company effect ought to be given to the document creating the floating charge.  He said at 488:

“

The law on this point is correctly stated by Sir Francis Palmer in the 5th edition of Company Law at p 236 : ‘Even without complying with the formalities required by the local law in relation to transfer or mortgages, it is competent to a company to create an effective charge on property belonging to it in a foreign country, for the Court, in virtue of its Chancery jurisdiction in personam, enforces equities in regard to foreign land where the mortgagor company is within the jurisdiction (Penn v Lord Baltimore (1750) 1 Ves Sen 443, 444; Mercantile Investment and General Trust Co v River Plate Trust, Loan and Agency Co [1892] 2 Ch 303; and Westlake’s International Law (1880) 183); and in determining whether there is an equity the Court regards English, not foreign law, and if according to English law there is an equity, e.g., if for valuable consideration a company agrees to give a charge on foreign property, the Court will enforce it, although the equity may be one not recognized by the lex loci rei sitae.”

Mr Warren Chan SC submits that the ratio in that case is that when an English company possesses land abroad and purports to charge it by way of floating charge, the charge amounts to an agreement to charge that land, and is a valid equitable security according to English law.  Hence, that ratio has no application to the present case.  Though that case was decided as a matter of company law and floating charge, the principle as stated by Sir Francis Palmer is of general application.  That principle is supportive of the Plaintiff’s argument of the applicable conflict of law rule.

73.  In In re United Railways of The Havana And Regla Warehouses Ltd [1960] Ch D 52, an English company conducting a railway operation in Cuba leased rolling stock from its own subsidiary which was an American corporation.  The lease was executed in New York.  The consideration for the lease in that case was payable in gold coins.  The parties never intended Cuban law to be the governing law.  The Court of Appeal adopted the closest and most real connection test and held that the proper law of the lease was the law of Pennsylvania.  Under this test, a host of factors has to be taken into account.  The conclusion reached by the court was not surprising.  I agree with Mr Warren Chan SC that that decision was one based on its facts and has no bearing on the present case.  In any event, that case does not decide any principle on the applicable conflict rule.  It may be relevant for the third stage of the determination, but certainly not the second stage.

74.  Having characterised the issue as one of the rights and obligations of the parties to a transaction for sale and purchase of shares and not ownership and title of the shares, I find that the connecting factor for the issue is the place where the transaction was entered into.  On the authorities, I find that the applicable conflict rule is the law of the place where the transaction took place, i.e. the lex loci actus.

The system of law

75.  Usually, the lex loci actus is also the system of law which is tied by the connecting factor found in stage two to the issue characterised in stage one.  The three agreements were all entered into in Hong Kong.  Under Hong Kong law, the system of law to be applied to a contractual dispute is the proper law of the contract.  What is the proper law of a contract is a matter of actual or presumed intention of the parties to the contract.  If the parties have chosen the proper law of the contract, that choice of law shall be binding on the parties.  Parties to a transaction in Hong Kong may by contract provide that their transaction be governed by a foreign system of law.  In the absence of an express agreement on the proper law of the contract, the law implies that the proper law is that system of law which has the closest and most real connection with the transaction.  The connecting factors have to be determined by taking into account all the circumstances relating to the transaction in question.  It is well settled that it is the lex fori which defines what the connecting factors mean and whether the connecting factors link a given issue with one legal system or with another: see para 1-081; Dicey, Morris & Collins on The Conflict of Laws (14^th Edn 2006).   A useful statement as to the kind of factors to be considered is to be found in the following dicta of Jenkins LJ in In re United Railways of The Havana And Regla Warehouses Ltd at 91:

“

In an inquiry as to what is the proper law of a contract in which   the parties have not expressed their own selection of the law to be applied, many matters have to be taken into consideration.  Of these, the principal are the place of contracting, the place of performance, the places of residence or business of the parties respectively, and the nature and subject-matter of the contract (Dicey, pp 719, 720, citing Falconbridge, Selected Essays on The Conflict of Laws, 2nd ed, p 378).  But, as the editor points out, the most satisfactory formulation is that the proper law is the one “with which the transaction has its “closest and most real connection”: (per Viscount Simonds in Bonython v Commonwealth of Australia [1951] AC 201, 219.  “The country in which [the contract’s] elements are most densely grouped will represent its natural seat and the law to which in consequence it belongs.  It may have factual links with several countries, each of which has some claim to be considered. … In most cases, however, an examination of these connecting ties will disclose without undue difficulty the country with which the contract is in fact most closely connected and in which it has its natural seat and centre of gravity.” (Cheshire’s Private International Law, 5th ed, p 207.)”

There is no dispute that the parties have not chosen the proper law of the contract.  The next question is what are the connecting factors and which system of law do the connecting factors point to.  Before examining those factors, it should be noted that under the Rome Convention there are certain presumptions, such as presumption of characteristic performance and presumption that the contract is most closely connected with the principal place of business of the party who is to effect the characteristic performance.  While those presumptions are not available under the common law, inferences as to connection may nevertheless be drawn from those factors.  It is just a question of weight.

76.  Ngan is a Macanese.  The Plaintiff, COM and Hang Wo are companies incorporated in Macau.  The 1^st Defendant is a window company of the PRC.  It was incorporated in Hong Kong and has its principal place of business and central administration in Hong Kong.  Against this background, the fact that the three agreements, in particular the First Laser Agreement, were all entered into in Hong Kong points to a Hong Kong connection.

77.  The Plaintiff’s obligation was to pay for the shares and the 1^st Defendant’s obligation was to transfer 51% of the shares in FCL and FCO to Ngan’s camp.  Payment of money is not the characteristic performance of the agreement and not indicative of any connection to any jurisdiction.  However, the price was stated in US dollars but paid in Hong Kong currency.  Two significant sums of HK$10 million were received and acknowledged by the 1^st Defendant in Hong Kong.  The balance of the purchase price of HK$4.64 million was acknowledged as having been received by the 1^st Defendant under the 1998 Memorandum issued from its Hong Kong office.  Those facts are mildly indicative of a Hong Kong connection and are more consistent with a Hong Kong connection than with a PRC connection.

78.  The 1^st Defendant’s obligation was to transfer the shares in FCO and FCL to Ngan’s camp.  This was the consideration moving from the 1^st Defendant to the Plaintiff under the three agreements and for which the Plaintiff’s payment of HK$24.64 million was due.  This was the essence of the transaction if not the characteristic performance of the transaction.  This performance was to be effected in the PRC.  Under the three agreements, the parties agreed that they would instruct PRC lawyers to handle the share transfer in the PRC.  Under common law, this points strongly to a PRC connection. 

79.  However, on the other hand, this essence of the transaction was to be performed by the 1^st Defendant, which is a company incorporated in Hong Kong and having its registered office and central administration in Hong Kong.  The directors and shareholders of the 1^st Defendant are in Hong Kong and had Hong Kong addresses.  Not only that, the 1^st Defendant conducts its business from its office in Shun Tak Centre in Hong Kong.  All the correspondences in relation to this joint venture or the three agreements were emanated from its office in Hong Kong.  Though the Plaintiff may not rely on the presumptions under the Rome Convention, these are facts on which an inference of Hong Kong connection can be drawn.  This inference offsets, if not outweighs, the inference to be drawn from the fact that performance of the First Laser Agreement was to be effected in the PRC.

80.  Mr Chan Chi Hung SC also seeks to bolster the three agreements’ Hong Kong connection by referring to the factual matrix of the case.  As mentioned earlier, the 1^st Defendant and FRIMS were engaged in a joint venture which turned sour and ended in litigation.  Prior to December 1996 the 1^st Defendant was facing threat of litigation from FRIMS again in the PRC.  To avoid being engaged in further litigation, the 1^st Defendant brought in Ngan’s camp as a foreign investor so that the production lines of LBO and BBO crystals originally in Fuzhou in the PRC would be relocated to Macau.  The Hang Wo Agreement and the COM Agreement were signed just two days after receipt of a letter before action from FRIMS.  In its report dated 5 June 1997 to the Fujian Provincial People’s Government, the 1^st Defendant recited its dispute with FRIMS and its reasons for transferring the production lines out of Fuzhou to Macau to avoid further litigation with FRIMS.   In particular, it sought reliance on the one country two system in Macau and Hong Kong after the return of their sovereignty to the PRC.  It referred specifically to the Sino British Joint Declaration, the Sino Portuguese Joint Declaration, the Hong Kong Basic Law and the Macau Basic Law.  The report stated:

「	… 將該項目控股權轉讓給澳門知名愛國人士顏延齡先生(顏先生現任省政協常委，澳門寶盛集團有限公司總裁)，我方仍保留49% 的股權。同時，也已將雙方爭議的生產部份轉移至澳門，并由中方人員全面負責管理。根據中英、中葡聯合聲明和基本法的規定，港澳地區在主權回歸后有獨立司法地位，福建物構所目前所擁有的晶體生產方法專利權僅在中國境內生效(俄羅斯和美國都在大批生產)，在境外不受任何保護。」
[Translation]
“	… to transfer the controlling shareholding in that item to a well known patriotic Macanese Mr Ngan In-leng (Mr Ngan is currently a member of the Standing Committee of the Fujian Provincial Committee of the Chinese People’s Political Consultative Conference, the Chief Executive of Bao Shing Group of Company Limited), our side still maintains 49% shareholding.  At the same time, (we) have removed the disputed production line to Macau, which shall be managed by Chinese personnel.  According to the SinoBritish Joint Declaration, the Sino Portuguese Joint Declaration, the Hong Kong Basic Law and Macau Basic Law, after the return of their sovereignty to the PRC, Hong Kong and Macau have independent judicial status.  The patent right in the technology of producing crystals in the possession of FRIMS is only effective within the PRC (Russia and the United States are in the process of mass production) and has no protection outside the PRC.”

On the face, the above passage does not suggest that the parties intended any choice of law under the three agreements.  The 1^st Defendant’s intention to rely on the separate judicial and legal system in Macau and Hong Kong was clear.  So too was its intention that the three agreements shall operate outside the PRC.  The parties were clearly distancing themselves from the PRC.  This also points very strongly to a Hong Kong connection than a PRC connection.

81.  Weighing all these factors together, I cannot help but conclude that Hong Kong, not the PRC or Macau, is the place in which these factors are most densely grouped and represent the natural seat of the three agreements and the law to which in consequence they belong and Hong Kong law is the law with which the transaction for sale and purchase of the shares in FCL has its closest and most real connection.  The proper law of the First Laser Agreement is therefore Hong Kong law.

the first laser agreement

82.  The Plaintiff’s claim is based on breach of the First Laser Agreement by the 1^st Defendant.  Its pleaded case is that the First Laser Agreement dated 28 December 1996 superseded the earlier Hang Wo Agreement and the COM Agreement, both dated 12 December 1996.  Some difficulties were created by Ngan’s ignorance of the concept of corporate identity in his dealing with the 1^st Defendant in relation to the three agreements and by his evidence in Court.  Some of the defences are directed at those difficulties, such as uncertainty of the subject matter of the First Laser Agreement and that the parties had reached a different agreement, namely the FCO Agreement (that defence has been dealt with in paragraphs 33 and 34 above).  Mr Warren Chan SC also queries if the Plaintiff has discharged the burden of proof.

Uncertainty of the subject matter of the First Laser Agreement

83.  The 1^st Defendant pleads that the subject matter of the First Laser Agreement, namely 51% of the interest in the optronic project in Fuzhou (福州光電子項目) was uncertain.  Though this plea is raised in the context that the First Laser Agreement is subject to PRC law, I feel I should also consider this defence even though I have found that the applicable law is Hong Kong law. 

84.  Clause (1) of the Hang Wo Agreement clearly referred to the sale and purchase of 100% of the shares in FCO and FCL to COM.  The preamble of the COM Agreement recited the fact that the 1^st Defendant was the owner of FCO and FCL.  Clause (1) of the COM Agreement stated clearly that the 1^st Defendant agreed to sell the shares in FCO and FCL to COM at a valuation of US$6.25 million.  Insofar as those two agreements are concerned, there is no uncertainty in the subject matter.  It was under that factual matrix that the First Laser Agreement was brought into existence.

85.  The title, preamble and clauses (1), (2), (3) and (8) of the First Laser Agreement read as follows:

「	關於轉讓福州光電子高科技項目部分股權的協議
	甲方：	華閩(集團)有限公司
	乙方：	澳門第一激光有限公司
	為共同發展高科技項目，甲、乙雙方代表於1996年12月初經友好協商同意將甲方在福州所投資的光電子項目中的51% 的股權轉讓給澳門第一激光有限公司。鑒此，雙方就股權轉讓中的有關事宜達成以下協議：
	一、	股份轉讓之後，雙方的股權比例為：甲方持股49%，乙方持51%。
	二、	雙方同意，甲方以該項目96年12月31日的公司淨資產值625萬美元作價。因此，甲方將以318.75萬美元的價格轉讓給乙方51% 上述項目的股權。
	三、	乙方介入之後，福州科騰公司、福建華科公司的董事會將進行重組，有關新董事會的組成將另行協商。
		…
	八、	雙方同意將盡快組織工作小組協調和處理有關事宜，並請律師在國內辦理有關公司的變更手續。」

The First Laser Agreement is titled “In the matter of the agreement to transfer part of the shareholding in the high-tech optronic project in Fuzhou”.  The subject matter of the agreement was identified in the preamble as 51% of the shareholding in the high-tech optronic project invested by the 1^st Defendant in Fuzhou.  Though the high-tech optronic project was not further identified or defined in the agreement, clause 3 stated that after the participation by the Plaintiff, the boards of directors of FCO and FCL would undergo re-organisation and the constitution of the new boards of directors would be subject to consultation between the parties.  Clause 8 further provided that the parties would form working party to co-ordinate and handle the relevant matters and instruct lawyers in the PRC to handle the changes in the companies concerned.   FCO and FCL were the only companies mentioned in the agreement and must be the “companies concerned” referred to in clause 8.  Both companies were located in Fuzhou.  If those two companies were not the subject matter of the agreement, there would be no need for the boards of directors of those two companies to undergo re-organisation and for the parties to engage lawyers in the PRC to handle the changes in those two companies.  The intention of the parties as conveyed to a reasonable reader by reading the First Laser Agreement as a whole with knowledge of the factual matrix including the Hang Wo Agreement and the COM Agreement must be that the parties intended to sell and purchase 51% of the shares in FCO and FCL owned by the 1^st Defendant.

86.  Furthermore, as mentioned above, Ngan’s camp participated in the management of FCO and FCL.  The 1^st Defendant also took an interest in COM.  The staff of FCO and FCL treated Ngan and Ngan’s camp as shareholders of FCO and FCL.  The facts show clearly that the parties entertained no misunderstanding that the subject matter of the First Laser Agreement was 51% of the shares in FCO and in FCL.  In a report to the Fujian Provincial People’s Government dated 5 June 1997, the 1^st Defendant acknowledged Ngan’s 51% interest in FCO and FCL.  Even after Xu replaced Kong as the chairman of the board of directors of the 1^st Defendant in May 1998, the 1^st Defendant never disputed its obligation to transfer 51% of the shares in FCL to Ngan’s camp.  Since then, Xu only sought to re-negotiate for a reduction of the amount of shares to be transferred to 49% instead.  The request was made by Xu on 18 August 1998, but was rejected by Ngan.  Then, even as late as 3 October 2000 when the parties attempted to settle their differences in Zhuhai after the FCL shares had been sold to JDS, the 1^st Defendant acknowledged in paragraphs 1.5 and 1.6 of the minutes of that meeting its obligation to transfer the shares in FCL to the Plaintiff and that the subject matter of the three agreements was FCL, FCO and COM.  COM was then holding all the shares in FCO on behalf of the Plaintiff and the 1^st Defendant.  The parties have gone so far in performing the First Laser Agreement for almost four years with no misunderstanding of the subject matter that it is impossible now to argue that there was uncertainty in the subject matter of the agreement.  I find as a matter of fact that the parties had no misunderstanding of the subject matter of the three agreements.  There was no uncertainty in the subject matter of the First Laser Agreement and the other two agreements.  It was the intention of the parties under those three agreements to transfer 51% of the 1^st Defendant’s shareholding in FCO and FCL to the Plaintiff for a consideration of US$3.1875 million, equivalent to HK$24.64 million.

Proving the First Laser Agreement

87.  Mr Warren Chan SC submits that the Plaintiff has failed to discharge the burden of proving the agreement.  His argument is as follows.  On the Plaintiff’s pleaded case there are three different agreements signed in December 1996 with their contents different and mutually exclusive of each other insofar as the transfer of the shares in FCO and FCL were concerned.  Under the COM Agreement, it was envisaged that all the shares in FCO and FCL would be transferred from the 1^st Defendant to COM for US$6.25 million, while under the First Laser Agreement, 51% of the shareholding in FCO and FCL would be transferred from the 1^st Defendant to the Plaintiff at the price of US$3.1875 million.  Thus, should the COM Agreement have been performed with the shares transferred to COM, the First Laser Agreement could no longer be performed.  Furthermore, it is also the Plaintiff’s pleaded case that the First Laser Agreement superseded the Hang Wo Agreement and the COM Agreement.  However, Ngan’s evidence is contradictory.  While in his affirmation, Ngan said that there was never any doubt that the First Laser Agreement superseded the earlier two agreements, in his evidence under cross-examination he said that the three agreements were equally operative.  Mr Warren Chan SC submits that such inconsistency is fatal to the Plaintiff’s case in identifying the exact agreement upon which the Plaintiff is suing and Ngan’s evidence should be rejected.

88.  It would now be appropriate to revisit what was the common understanding of the parties as acknowledged at the meeting on 3 October 2000 just before the litigation commenced.  The minutes recorded as follows:

「	一、	雙方達成以下共識：
		1、	有關華閩向寶盛轉讓光電子項目部分股權的背景和過程，97年6月5日華閩給省政府辦公廳《關于對福州光電高科技項目處理情況的匯報》作了基本描述。
		2、	96年12月12日華閩與恒和簽訂了《關于設立澳門宇星光電企業有限公司的協議》，但未對宇星的注冊資本作出約定。同日，華閩與宇星簽訂了《關于轉讓福州光電子項目股權的協議》。經過雙方當事人的確認，簽署上述兩份協議是為了應付物構所可能對華科和科騰提起的訴訟保全而採取的措施。…
		3、	98年3月13日，華閩…與第一激光 …，就澳門宇星光電企業製造有限公司和福建華科光電有限公司權益和資金安排等問題進行了磋商，并簽訂了《關於澳門宇星光電企業製造有限公司和福建華科光電有限公司權益和資金安排問題的備忘錄》(下稱《備忘錄》)。雙方約定，在未理順法律關係的情況下，關於華科、宇星、科騰的投資和權益仍按雙方96年協議議定的條款執行。
		4、	第一激光在華閩認可的期限內支付了2000萬港幣的股權轉讓金，轉讓金尾款464萬港幣的處理已在《備忘錄》中另有約定。
		5、	鑒於一些歷史的原因(詳見《備忘錄》)，與《協議》有關的華科股東變更的批准登記手續沒有辦理。
		6、	光電子項目包括了華科、科騰、宇星，在工商登記上，華科是華閩全資擁有，科騰和宇星則是顏延齡先生全資擁有，雖然沒有文字上的明確約定，實際上雙方都參與了華科、科騰和宇星的經營管理。
		7、	光纖無源件項目的開發研製階段是在華閩不同意立項的情況下由顏延齡先生單方出資進行的，在研製完成後繼續進行的生產開發和銷售階段，是在華科進行的。」

89.  Paragraph 1.1 of the minutes confirmed the accuracy of the 1^st Defendant’s report to the Fujian Provincial People’s Government.  That report confirmed, inter alia, Ngan’s 51% interest in FCO and FCL.  Paragraphs 1.2 and 1.3 of the minutes confirmed the factual matrix leading to the signing of the three agreements and the 1998 Memorandum.   In particular, paragraph 1.3 acknowledged that further arrangements would have to be made in respect of the capitalisation of FCL and COM and that pending such regularisation, the parties’ rights and obligations in respect of FCO, FCL and COM would be governed by the three agreements.  Paragraph 1.4 acknowledged that the full price of HK$24.64 million under the First Laser Agreement had been paid by the Plaintiff.  Paragraph 1.5 acknowledged that the 1^st Defendant had not performed its obligation to transfer the shares in FCL because of historical reason as stated in the 1998 Memorandum.  The reason stated in the 1998 Memorandum was “historical reason, such as the under-capitalisation of FCL”.  There was no denial of the 1^st Defendant’s contractual obligation under the First Laser Agreement or the three agreements to transfer the shares in FCL to Ngan’s camp.  Paragraph 1.6 recorded the parties’ common understanding that the subject matter of the three agreements was the shares in FCO, FCL and COM.   COM was then holding all the shares of FCO on behalf of the parties.  The parties also acknowledged that though on paper FCL was wholly owned by the 1^st Defendant while FCO and COM were wholly owned by Ngan, both parties participated in the operation and management of FCO, FCL and COM.

90.  It is true that Ngan had no regard for the concept of corporate identity and treated the Plaintiff, Hang Wo, Bao Shing and himself as one in his dealing with the 1^st Defendant.  Had those companies been truly separate from Ngan and had the factual matrix been different, I would agree with Mr Warren Chan SC’s submission.  However, all those companies are owned by Ngan and his family and controlled by Ngan.  The undisputed factual matrix was that the arrangement was to sell 51% of the 1^st Defendant’s shareholding in FCO and FCL to Ngan’s camp so as to enable the 1^st Defendant to transfer the operation of FCO and FCL from Fujian to Macau to avoid litigation with FRIMS.  The Hang Wo Agreement and the COM Agreement were entered into just two days after receipt of FRIMS’ letter before action.  The First Laser Agreement was entered into at the behest of the 1^st Defendant who felt it inappropriate to sell the shares in those companies engaging advanced technology to Hang Wo which is a property investment company.  The name of the Plaintiff was even decided by the 1^st Defendant for the purpose of dressing up the purchaser as an expert in the technology so as to facilitate approval of the sale and purchase by the authority.  All the documents were prepared and drafted by the 1^st Defendant.  None of those evidence is contested by the 1^st Defendant.

91.  More importantly, in the performance of the three agreements, the 1^st Defendant also regarded Ngan and Ngan’s camp as one.  All the shares in FCO were transferred to COM on 13 March 1997 in accordance with the Hang Wo Agreement and the COM Agreement.  Though that was not in accordance with the First Laser Agreement, it was in accordance with the spirit of that agreement as the entirety of the FCO shares were transferred to COM which, on the Plaintiff’s evidence, was held by Hang Wo as to 51% absolutely and by Jenwing as to the balance of 49% on trust for the 1^st Defendant.  Mr Warren Chan SC argues that transfer of all the shares in FCO to COM to the exclusion of the Plaintiff has the effect of excluding the First Laser Agreement and rendering it impossible of performance.  In the light of the peculiar facts of the case and the shareholding structure of COM, I respectfully differ. 

92.  The Plaintiff’s principal obligation under the First Laser Agreement was to pay and that obligation has been fully performed by the Plaintiff in accordance with the terms of the First Laser Agreement.  Under such circumstances, the Court should be slow to find that the First Laser Agreement has been excluded or rendered impossible of performance by the transfer of all the FCO shares to COM.  In approaching the evidence, the Court must bear in mind the factual matrix, the share structure of COM and the participation by Ngan’s camp in the management of FCL.  When the evidence is considered with commercial realism and business sense, I have no difficulties to find that the transfer of all the FCO shares to COM was a varied and part performance of the First Laser Agreement agreed to by the parties and accepted by the Plaintiff within the framework of the First Laser Agreement.

93.  For the above reasons, I am satisfied that the Plaintiff has adequately discharged the burden of proving the First Laser Agreement.  There is no dispute that the 1^st Defendant has not performed its obligation under the agreement insofar as the transfer of 51% of the shares in FCL to the Plaintiff or 100% of the shares in FCL to COM is concerned.  All the shares in FCL were sold to JDS on 29 February 2000.

The contractual claim

94.  In considering the Plaintiff’s contractual claim, it must be remembered that the applicable law of the contract, as I have found it, is Hong Kong law, though PRC law as lex situs of the shares has an impact on the conclusion that I am about to reach.

Breach of agreement

95.  Mr Warren Chan SC submits that even if the First Laser Agreement is governed by Hong Kong law, the Plaintiff has failed to prove breach of the agreement, loss or damage.  The Plaintiff has proved the First Laser Agreement and payment of the purchase price for the shares in FCO and FCL.  There is no dispute that the shares in FCL had not been transferred to the Plaintiff.  This is prima facie evidence of breach of contract and in an ordinary case of sale and purchase of shares listed in the Hong Kong Stock Exchange would have entitled the plaintiff to judgment.  It appears that the Plaintiff is contented to rely on the 1^st Defendant’s failure to transfer the FCL shares as breach of contract.  However, the subject matter in the present case is sale and purchase of shares in the PRC.  According to the lex situs of the shares, approval from the authorities was required for such transfer.  There is no dispute that such approval had not been granted.  Though not specifically pleaded by the 1^st Defendant in the context of Hong Kong law, the want of approval according to the lex situs of the shares may relieve the 1^st Defendant of its obligation to transfer the shares in FCL to the Plaintiff.  The issues raised then are: (1) who was under the obligation to procure the approval; (2) if it was the 1^st Defendant, whether it was in breach of that obligation; and (3) who bears the burden of proof.  These issues were not pleaded by the parties in the context that the applicable law is Hong Kong law but were pleaded and dealt with by their experts in the context that PRC law is applicable to the First Laser Agreement.  I think I should also address these issues in the context of Hong Kong law.

96.  It is trite law that the burden of proof is determined by the pleadings.  If the issues were to be properly pleaded, it would have been for the Plaintiff to plead the 1^st Defendant’s breach by failure to transfer the shares in FCL and then for the 1^st Defendant to rely on lack of governmental approval for the share transfer.  There is no dispute that governmental approval was required for the share transfer.  The evidential burden, at least, must be on the 1^st Defendant to prove that the obligation for procuring the approval was on the Plaintiff or if it was on the 1^st Defendant that it has adequately discharged that burden. 

97.  The three agreements are silent as to who bears the obligation of obtaining approval for the transfer of the shares.  The Plaintiff contends that under the law of the PRC, the 1^st Defendant has a duty to procure and seek the necessary registration and approval for the transfer of the 51% of the FCL shares.  The 1^st Defendant contends that under PRC law, the obligation was on the enterprise itself, which was FCL.  The parties called experts in PRC law in support of their contentions.  As the applicable law of the First Laser Agreement is Hong Kong law, PRC law is not determinative of the issue as to who bears the burden of obtaining approval for the transfer of the shares under the First Laser Agreement.  However, provisions of the PRC law in that respect would assist the Court in ascertaining the presumed intention of the parties to the agreement.

98.  Counsel have no dispute that the expert called by the other side was qualified to give expert legal opinion on PRC law.  However, Mr Warren Chan SC is very critical of the legal expert called by the Plaintiff, Professor Wang Shizhou (王世洲).  He criticized Professor Wang as being biased and his legal opinion as inconsistent with the decision of the Fujian Higher People’s Court and the Supreme People’s Court.  He also criticizes Professor Wang as being wrong about the facts and about very simple legal issues, such as the application ofPRC Contract Law (中華人民共和國合同法)).  He pointed out that Professor Wang’s specialization as shown in his internet information updated to 2003 related to criminal law of the PRC and the United States and constitutional law of Germany, but not foreign investment law and contract law in the PRC.  These are strong criticisms.  Professor Wang gave expert opinion on a vast number of issues on PRC law on the basis that the First Laser Agreement is governed by PRC law.  As I have found that the First Laser Agreement is governed by Hong Kong law, much of Professor Wang’s and Mr Bai’s expert opinion on PRC law is irrelevant.  I do not find it necessary to adjudicate on the criticisms made against Professor Wang in order to dispose of the issue here.  The point of PRC law on which I need expert evidence for the purpose of resolving this issue is a very narrow one, i.e. who bears the burden of obtaining approval for the transfer of the FCL shares under the First Laser Agreement.  Professor Wang’s opinion on this issue is so lacking in legal reasoning and so inconsistent with the relevant statutory provisions that I feel his opinion is only to be rejected.

99.  Firstly, in paragraph 6 of his expert report dated 8 April 2005, Professor Wang relying on the Supreme People’s Court judgment pointed out in unequivocal terms that the 1^st Defendant was under an obligation to procure the necessary approval from the authorities for the transfer of the shares in FCL.  He wrote:

「	6.	最高人民法院在判決中明確指出，是“華閩公司未將上述三份協議報經審批機關審批。”(見附件一)福建省高級人民法院的一審判決中僅僅指出“以上三份協議均未報經審批機關審批。”把一審判決書與終審判決書進行比較，可以看出：最高人民法院已經說明了華閩公司的報批義務。」
[Translation]
“	6.	The Supreme People’s Court clearly pointed out in its judgment that it was “[the 1st Defendant] who did not present the above three agreements to the approving authorities for approval.” (see Annex I)  The Fujian Higher People’s Court only pointed out in the first instance judgment that “the above three agreements had not been approved by the approving authorities”.  By comparing the first instance judgment with the final judgment, it can be seen that the Supreme People’s Court has stated the [1st Defendant’s] obligation in procuring approval.”

In paragraph 9 of his further report dated 12 January 2006, Professor Wang repeated his reliance on the Supreme People’s Court judgment to argue that the 1^st Defendant failed to discharge the duty of obtaining approval.  He wrote:

「	9.	最高人民法院指出，在涉及華科股份轉讓中，合同無 效的原因是“華閩公司未將上述三份協議報經審批機關審批…:」
[Translation]
“	9.	The Supreme People’s Court pointed out that in respect of the transfer of the shares in FCL, the reason why the agreement was of no effect is because “[the 1st Defendant] had not presented the three agreements to the approving authorities for approval;” …”

100.  The quotation from the Supreme People’s Court referred to in Professor Wang’s two reports is just a statement of fact in the Supreme People’s Court’s finding of facts.  The reason for the Supreme People’s Court holding that the three agreements were of no effect as stated towards the end of the judgment was simply lack of approval by the approving authorities as was held by the Fujian Higher People’s Court.  To draw the inference and to assert as Professor Wang did by comparing the two judgments is inappropriate and misleading.  The Supreme People’s Court did not assign the responsibility for the lack of approval or for failure to present the agreements for approval to any party, let alone to the 1^st Defendant.  The issue before the Supreme People’s Court was validity of the three agreements and not remedies for the agreements being of no effect.  The Supreme People’s Court was not asked to determine if any party was at fault under the law of the PRC for the three agreements being of no effect.  Professor Wang admitted under re-examination that that issue was not before the Supreme People’s Court.  With respect to Professor Wang, his opinion is a serious misrepresentation and misinterpretation of the judgment of the Supreme People’s Court.  His opinion is a careless one, if not an irresponsible one.  The mistake is so obvious that it casts doubts if his opinion was aimed at achieving the desired result for his client rather than to assist the Court.

101.  Secondly, in his report dated 8 April 2005 Professor Wang reinforced his opinion that the 1^st Defendant was under an obligation to procure the necessary approval by relying on three statutes, namely, article 10 of Law of the People’s Republic of China on Foreign Capital Enterprises《中華人民共和國外資企業法》, article 22 of Detailed Rules for the Implementation of the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises《中華人民共和國外資企業法實施細則》and article 9 of Certain Regulations on Changes to Shareholders’ Rights in Foreign Investment Enterprises《外商投資企業投資者股權變更的若干規定》.  After quoting those provisions, Professor Wang asserted without giving reasons in paragraphs 7 and 8 of his report that the 1^st Defendant was under an obligation to procure the approval.  He wrote in paragraphs 7 and 8 of his report:

「	7.	… 根據這些法律和規定，毫無疑問，申請報批的責任是由華閩一方承擔的。
	8.	根據最高法院的判決和大陸的有關規定，完全可以認定，合同無效是由於華閩公司未將上述三份協議報送審批機關審批造成的，因此，合同無效的責任(或者過錯)應當由完全由華閩公司承擔。」
[Translation]
“	7.	… according to these law and regulations, there is no doubt that the 1st Defendant bears the obligation of applying for approval.
	8.	According to the judgment of the Supreme People’s Court and the regulations of the Mainland, it can be absolutely confirmed that the reason for the agreements being of no effect was caused by failure on the part of the 1st Defendant to present the three agreements to the relevant authorities for seeking approval.  Accordingly, the consequence of the agreements being of no effect (or the fault) should be borne by the 1st Defendant.”

Despite references to the three statutory provisions, Professor Wang’s opinion or conclusion is not a reasoned one.  It is just a bare assertion.  A closer examination of the statutory provisions does not support his conclusion.

102.  Article 10 of Law of the People’s Republic of China on Foreign Capital Enterprises《中華人民共和國外資企業法》provides:

「	第十條		外資企業分立、合併或者其他重要事項變更，應當報審查批准機關批准，並向工商行政管理機關辦理變更登記手續。」
[Translation]
“	10.	In the event of separation, merger or other major changes, an enterprise with foreign capital shall report to and seek approval from the authorities in charge of examination and approval, and register the change with an administrative authority for industry and commerce.”

This legislation was adopted by the National People’s Congress in 1986.  It is of the nature of a superior legislation.  The Chinese version is devoid of a subject.  Article 10 imposes the obligation to seek approval in certain circumstances but does not identify the party on whom the obligation is imposed.  But in the Chinese language, the subject could be readily read in as the enterprise in which the specified events occurred.  This is what is provided in the English version, though the English version is not authentic.  In fact, this is the way the Defendant’s expert, Mr Bai, interpreted article 10.  I agree with that interpretation. 

103.  Article 22 of Detailed Rules for the Implementation of the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises《中華人民共和國外資企業法實施細則》provides:

「	第二十二條	外資企業註冊資本的增加、轉讓，須經審批機關批 准，並向工商行政管理機關辦理變更登記手續。」
[Translation]
“	To increase or assign the registered capital of a wholly foreign-owned enterprise, the approval of examining and approving authorities must be obtained and procedures for registration of the change must be undertaken with an administrative authority for industry and commerce.”

This legislation is of the nature of a subsidiary legislation approved by the State Council and issued by the Ministry of Foreign Economic Relations and Trade in 1990.  Similarly, this article imposes an obligation to seek approval and registration in cases where the registered capital of an enterprise with foreign capital is increased or where its shares are to be transferred.  The article is written in the passive voice without a subject.  The party on whom the obligation is imposed is not identified.  For similar reasons, I agree with Mr Bai’s interpretation that the obligation is imposed on the foreign enterprise the capital of which is to be increased or the shares of which are to be transferred.

104.  Article 9 of Certain Regulations on Changes to Shareholders’ Rights in Foreign Investment Enterprises《外商投資企業投資者股權變更的若干規定》 provides:

「	第九條		由於本規定第二條(一)、(二)項原因需要變更股權的，企業應向審批機關報送下列文件：…」
[Translation]
“	9.	If shareholders’ rights are required to be changed due to the reasons in items (1) or (2) of Article 2 of these Regulations, the enterprise must submit the following documents to the examination and approval authority: …”

This legislation is of the nature of a subsidiary legislation promulgated by Ministry of Foreign Trade and Economic Cooperation and the State Administration for Industry and Commerce in 1997.  It provides for specific issues relating to changes to shareholders’ rights in foreign investment enterprises. This article expressly imposes the obligation to seek approval on the foreign enterprise involved.  Though of the nature of a subsidiary legislation, it clearly reflects the intention of the legislature in article 10 of Law of the People’s Republic of China on Foreign Capital Enterprises《中華人民共和國外資企業法》.

105.  I accept Mr Bai’s interpretation that under these statutory provisions the obligation to procure the necessary approval for transfer of the shares in FCL is on the enterprise concerned, i.e. FCL and not the 1^st Defendant.  In fact, in respect of the transfer of the shares in FCO to COM, it was FCO which procured the necessary approval. 

106.  As a matter of Hong Kong law and as between the Plaintiff and the 1^st Defendant, the question of which party bears the obligation of procuring the approval is a matter of agreement under the First Laser Agreement.  If the agreement is silent, the court may imply such term as will give effect to the presumed intention of the parties by giving business efficacy to the First Laser Agreement in accordance with The Moorcock principle, (1889), 14 PD 64.  In The Moorcock, Bowen LJ explained the nature of the implication at 68 to 70 as follows:

“

I believe if one were to take all the cases, and there are many, of implied warranties or covenants in law, it will be found that in all of them the law is raising an implication from the presumed intention of the parties, with the object of giving to the transaction such efficacy as both parties must have intended that at all events it should have.  In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men.  …  The question is what inference is to be drawn where the parties are dealing with each other on the assumption that the negotiations are to have some fruit, and where they say nothing about the burden of this unseen peril, leaving the law to raise such inferences as are reasonable from the very nature of the transaction.”

107.  Various formulations for the Moorcock test have been adopted in the cases that followed.  In Reigate v Union Manufacturing Co, [1918] 1 KB 592, Scrutton LJ emphasised that a term could only be implied if it is necessary in the business sense to give efficacy to the contract such that if at the time the contract was being negotiated some one had said to the parties: “What will happen in such a case?” they would both have replied: “Of course so and so will happen; we did not trouble to say that; it is too clear.”  In Shirlaw v Southern Foundries (1926) [1939] 2 KB 206, Mackinnon LJ adopted the officious bystander test, i.e. a term will be implied if it is so obvious that if it was suggested to the parties to include it in their agreement during their negotiation they would have said “it goes without saying.” A more recent statement of the test is to be found in Lord Pearson’s speech in Trollope & Colls v North West Metropolitan Regional Hospital Board [1973] 2 All ER 260.  His Lordship emphasised that the term must be so obvious that it goes without saying that the parties must have intended that it formed part of the contract.  His Lordship said at 268:

“

An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract:  It is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them; it must have been a term that went without saying, a term necessary to give business efficacy to the contract, a term which although tacit formed part of the contract which the parties made for themselves.”

108.  In the present case, the Plaintiff and the 1^st Defendant had a long standing business relationship.  Ngan who represents the Plaintiff was described as a patriotic businessman.  He is a member of the National Committee of the Chinese People’s Political Consultative Conference (中國人民政治協商會議全國委員會委員) and a member of the Standing Committee of the Fujian Provincial Committee of the Chinese People’s Political Consultative Conference (福建省人民政治協商會議常務委員會委員).  He has extensive business experience in the PRC and is thoroughly familiar with the business environment and relevant governmental regulations in the PRC.  He was aware of the requirement for governmental approval for the transfer of the shares in FCL.  The 1^st Defendant is a window company of the Fujian Provincial People’s Government and was familiar with such requirements.  The three agreements stipulated that the parties would instruct lawyers in the PRC to handle the share transfer.  In a share transfer transactions such as this in the PRC, approval by the authorities is a necessary condition.  To give business efficacy to the transaction a term must be implied as to which party would procure such approval to be obtained.  If someone had asked this question, Ngan and his counterpart in the 1^st Defendant who must be totally familiar with the three statutory provisions referred to above, must have answered “FCL will obtain the approval and as the 1^st Defendant is the sole shareholder who had control and management of FCL, it goes without saying that the 1^st Defendant will procure the approval”.  I therefore reach the same conclusion as did Professor Wang, but on a different basis which accords with reasoning under PRC law, the opinion of the Defendant’s legal expert in PRC law and also in accordance with the applicable legal principles under the law of Hong Kong.   There is no evidence from the 1^st Defendant that it has discharged or attempted to discharge or otherwise frustrated from discharging the burden of procuring the approval such that it may be excused from transferring the shares in FCL.  I am therefore satisfied that the Plaintiff has proved breach of the First Laser Agreement by the 1^st Defendant.

Proof of loss or damage

109.  Mr Warren Chan SC argues that the Plaintiff has failed to discharge its burden of proving loss and damage.  He submits that in order for the Plaintiff to prove its loss and damage resulting from such breach on the part of the 1^st Defendant, the Plaintiff should have adduced evidence on the market price of the 51% shares in FCL at the contractual time for delivery less the contract price but the Plaintiff has failed to plead either the contractual time for delivery or the market price of the FCL shares thereat. 

110.  Mr Chan Chi Hung SC argues that the contractual time of delivery is the same as the time of breach.  He refers to paragraph 25 of the Statement of Claim in which the Plaintiff pleads:

“

25.

In breach of the Agreement and/or the Trust, the 1st Defendant has failed to transfer and register the 51% of the shares in FCL beneficially belonging to the Plaintiff (hereinafter “the Plaintiff’s Shares”) to and in the name of the Plaintiff, but has made such transfer impossible by the following conduct.”

The conduct referred to in paragraph 25 which rendered the transfer impossible was the sale to JDS.  The pleaded breach of contract was the wrongful sale of the 51% of the shares in FCL to JDS and not non-delivery of the shares or failure to obtain approval or transfer of the shares as such.

111.  The First Laser Agreement does not provide for the time of delivery of the 51% FCL shares.  Time of delivery is therefore not of the essence of the agreement.  The shares may be delivered at such time as may be mutually agreed.  The transfer has to be approved by the authorities.  The evidence shows that the parties had been progressing towards obtaining such approval, at least up until Kong was removed as the deputy chairman of the board of directors of the 1^st Defendant in May 1998.  The progress was delayed because of under-capitalisation of FCL.  The registered capital of FCL had been reduced from US$15.15 million to US$7 million in March 1998.  However, US$2.5 was not yet paid up.  Not until this capital requirement was met could the share transfer be approved by the authorities.  On 19 October 1998, the 1^st Defendant proposed to COM to transfer the profits of FCO and FCL to FCL for the purpose of enabling FCL to fulfil its capital requirement.  On 21 October 1998, the Plaintiff agreed subject to a written confirmation from FCL that the capital was jointly invested by the Plaintiff and the 1^st Defendant.  Since then the communication between the parties on this issue discontinued and FCL was sold to JDS four months later.  From the First Laser Agreement and the conduct of the parties at least up to October 1998, time of delivery of the shares in FCL was not of the essence of the agreement.  The shares in FCO were duly transferred in March 1997 in accordance with the First Laser Agreement.  Ngan and his camp were treated by the 1^st Defendant and FCL as shareholders in FCL up until the sale of the shares in FCL to JDS.   The parties were working out means to solve the under-capitalisation problem of FCL to enable approval for the transfer to be obtained.  I find that the agreement between the parties as to the time of delivery of the FCL shares was that the shares were to be delivered at such time as was mutually agreed after the necessary approval had been obtained.  However, when the 1^st Defendant entered into agreement to sell its shares in FCL to JDS, it evinced an intention no longer to be bound by the First Laser Agreement.  The Plaintiff is entitled to accept that breach and to treat the date of sale to JDS under that agreement as the date of the 1^st Defendant’s breach of the First Laser Agreement.  It is therefore appropriate for the Plaintiff’s loss and damage to be assessed as at that date.  I also accept Mr Chan Chi Hung SC’s submission that the price of sale is the best evidence of the market price of the share at the time of breach.  The purchase price having been fully paid by the Plaintiff, the Plaintiff is entitled to 51% of the total consideration of the sale to JDS, i.e. US$30.6 million.

Public policy and comity

112.  In answer to the Plaintiff’s argument on estoppel by convention, Mr Warren Chan SC argues that as a matter of public policy, the Hong Kong Court should not recognise the Plaintiff’s beneficial interest in the FCL shares, whether by way of recognising the First Laser Agreement or under the estoppel argument.  Mr Chan Chi Hung SC argues that in the absence of a pleaded defence of illegality or breach of statute or public policy of Hong Kong, this defence should not be considered.  However, in view of the judgment of the Supreme People’s Court and the factual circumstances of this case, particularly that the subject matter is shares in a PRC company, I think this defence should be explored and if appropriate leave will be granted for the pleading to be amended.

113.  Mr Warren Chan SC refers to Kuwait Airways Corpn v Iraqi Airways Co [2002] 2 AC 883 at 1108 in which Lord Hope of Craighead emphasized at paragraph 138 that a judge should be slow to refuse to give effect to the legislation of a foreign state in any sphere in which, according to accepted principles of international law, the foreign state has jurisdiction.  Lord Hope of Craighead said at paragraph 138, quoting Lord Cross of Chelsea in Oppenheimer v Cattermole [1976] AC 249 at 277-8:

“

138.

… As Lord Cross recognized in Oppenheimer vCattermole [1976] AC 249 at 277-278, a judge should be slow to refuse to give effect to the legislation of a foreign state in any sphere in which, according to accepted principles of international law, the foreign state has jurisdiction.  Among these accepted principles is that which is founded on the comity of nations.  This principle normally requires our courts to recognise the jurisdiction of the foreign state over all assets situated within its own territories: see Lord Salmon, at p 282.  A judge should be slow to depart from these principles.  He may have an inadequate understanding of the circumstances in which the legislation was passed.  His refusal to recognize it may be embarrassing to the executive, whose function is so far as possible to maintain friendly relations with foreign states.”

114.  It is the “one country, two systems” concept which enables Hong Kong to treat the PRC legal system and its judicial decisions as those of a foreign jurisdiction.  Despite that, because of the constitutional status of Hong Kong vis-à-vis the PRC, the above dicta must apply with much stronger force and comity has a much stronger tie.  The FCL shares are shares of a company incorporated and situated in the PRC.  I fully appreciate the embarrassment I may cause to the Chief Executive if I do not, except on compelling and valid legal basis, recognise the jurisdiction of the Supreme People’s Court over the FCL shares situated within the PRC.  There is no dispute that the transfer of the FCL shares required governmental approval under article 10 of Law of the People’s Republic of China on Foreign Capital Enterprises《中華人民共和國外資企業法》and the other related statutory provisions.  I accept Mr Bai’s legal opinion that the legislative rationale for these statutory provisions was to protect the economic and legal order in the PRC.  But I am unable to accept Mr Bai’s opinion that giving effect to the Plaintiff’s beneficial interest in 51% of the shares in FCL would be damaging to the public interest of the PRC.  This is because the sale of the entirety of the shares in FCL, albeit to another purchaser, was approved.  If the sale of the entirety of the shares did not raise any public interest issue, it is impossible to see how the sale of 51% of the FCL shares to the Plaintiff could be damaging to the public interest of the PRC, especially as the sale to the Plaintiff was a sale to an enterprise subject to the ownership and control of a patriotic businessman as contrasted to the sale to JDS which was to a truly foreign enterprise.  Mr Bai’s opinion on this issue is only an opinion of fact which I am entitled, for the above reasons, to differ.

115.  On a proper consideration of all the circumstances of the case, I do not think giving effect to the First Laser Agreement and giving effect to the Plaintiff’s beneficial interest in 51% of the shares in FCL would offend comity with the PRC.  There is no dispute that the issue before the Fujian People’s Higher Court and the Supreme People’s Court was whether the three agreements were of no effect according to the law of the PRC.  That an agreement is of no effect under the law of the PRC does not mean the agreement is of no consequence whatever.  It is the common opinion of the experts of both sides that under such circumstances the parties will be restored (返還) to their pre-contract position and that the party at fault (過錯) is liable to pay compensation to the other party.  “Fault” is to some degree synonymous with “breach”.  The difference is only one of degree under the two different systems of law.  Whether the payment is called “compensation” under PRC law or “damages” under Hong Kong law is a matter of terminology under the two different systems of law.  Similarly, how that compensation is assessed under PRC law or Hong Kong law is also a matter of quantum under the two different system.  What is common to the two systems is that the party at fault is liable to pay compensation.  In this regard, it is important to note that the issue before the Supreme People’s Court was whether the three agreements and the 1998 Memorandum were of no effect and the further issue of whether any party was at fault was never before the court.  Any decision of this Court on the further issue that any party was at fault or that neither party was at fault would not offend comity.

116.  Though I have rejected Professor Wang’s opinion that the 1^st Defendant was under a statutory obligation to procure the approval, I have no difficulty to find that such an obligation could be implied into the First Laser Agreement as a matter of Hong Kong law.  It is open to me to presume the same is true under PRC law as FCL was under a statutory obligation to procure the approval and the 1^st Defendant was the only shareholder and solely had control and management of FCL.  Thus, under PRC law, the 1^st Defendant was at fault in not procuring the approval and is liable to pay compensation.  A finding of liability against the 1^st Defendant is consistent with the law of the PRC.  The quantum under the two systems may be significantly different.  Such difference would be accommodated under the principle of comity as comity is reciprocal.

117.  As for the question of public policy, I think it is the public policy of the forum which counts.  There is, as Mr Chan Chi Hung SC rightly points out, no plea that enforcement of the First Laser Agreement is contrary to the public policy of Hong Kong.  In any event, there is no argument on how enforcement of the First Laser Agreement would be contrary to the public policy of Hong Kong.  The best one could think of is that because of the home consideration a contravention of the public policy of the PRC is as much a contravention of the public policy of Hong Kong.  As I have already indicated, it is difficult to see how a sale of 51% of the shares in FCL to an enterprise subject to the ownership and control of a patriotic businessman would contravene public policy if the sale of 100% of the shares to a truly foreigner would not.  The 1^st Defendant had agreed to sell the shares in FCO and FCL and had received its consideration in full but had only partly performed the contract by transferring the shares in FCO. This is an obvious case of a state-owned corporation while in the progress of performing the balance of its obligation in transferring the shares in FCL, took advantage of its own default by not obtaining the necessary approval when it realised that the value of the shares in FCL had been significantly enhanced by the Project invested by the Plaintiff and then unconscionably sold all the shares of FCL in breach of its contractual obligation for its own benefit.  There is really no question of public policy, whether of Hong Kong or of the PRC being involved.  If the Hong Kong Government or a statutory body in Hong Kong is in breach of contract, there is no public policy to protect it from the consequences of breach.  Furthermore, the Court will not condone such unconscionable conduct or countenance such commercial immorality.  I think the attitude of the courts in the PRC would be the same.  I therefore conclude that giving effect to the First Laser Agreement or to the Plaintiff’s beneficial interest in the shares in FCL is not contrary to the public policy of Hong Kong or of the PRC.  Accordingly, on the contractual claim, the Plaintiff is entitled to an award of US$30.6 million against the 1^st Defendant.

The proprietary claim

118.  The Plaintiff’s case on the proprietary claim is that having paid the full purchase price for 51% of the shares in FCL, the Plaintiff acquired an equitable interest in 51% of the shares in FCL held by the 1^st Defendant, which were then held on constructive trust for the Plaintiff’s benefit.  The sale of the 51% of the shares in FCL without the Plaintiff’s consent or knowledge by the 1^st Defendant constituted a breach of contract as well as a breach of trust.  The Plaintiff, therefore, has a proprietary claim for the proceeds of sale attributable to 51% of the shares in FCL and may trace the same into whatever they have become.  The Plaintiff also has a proprietary claim against whoever in possession of the proceeds of sale other than a bona fide purchaser for value without notice of the Plaintiff’s interest.

119.  These are trite principles applicable to sale and purchase of land or interest in land: see for example Rose and Others v Watson (1864) HL Cas 672 and 683.  The principles also apply to unique property or contracts which are specifically enforceable or under circumstances where compensation by way of damages would not be adequate: see for example Stucley v Kekewich [1906] 1 Ch 67 at 79-80, Sky Petroleum Ltd v VIP Petroleum Ltd [1974] 1 WLR 576 at 578H and Verrall v Great Yarmouth Borough Council [1981] 1 QB 202 at 220F-221B.  Mr Chan Chi Hung SC submits that the principles are equally applicable to sale and purchase of shares in private companies engaging in specialized business activities, such as FCO and FCL.  He quotes the case of Chattey and another v Farndale Holdings Inc and others [1997] 1 EGLR 153 in support of his proposition.  But, that case was about sale and purchase of land.  However, Mr Warren Chan SC does not argue otherwise.

120.  Shares in a company are a peculiar type of property.  They are choses in action.  Shares are a bundle of rights in a company to which the share certificate relates.  The most widely quoted definition of a share is that of Farwell J in Borland’s Trustee v Steel [1901] 1 Ch 279 at 288:

“

A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with [section 20 of the Companies Act 1948].  The contract contained in the articles of association is one of the original incidents of the share.  A share is not a sum of money … but an interest measured by a sum of money and made up of various rights contained in the contract, including the right to a sum of money of a more or less amount.”

Very often, shares are not regarded as specific goods.  A contract to sell shares need not be for the sale of specific shares identified at the time the contract is made.  In fact, all contracts made on the Hong Kong Stock Exchange are for the sale of unascertained shares and a seller fulfils his obligations by delivering a transfer of any shares which conform to the description in the contract.  For the sale of unascertained shares, it is difficult to see how an equitable interest in shares could arise.  In the case of sale of specific shares, the equitable title to them passes to the purchaser at the time of the contract, and until the legal title is transferred by registration in the register of members, the seller holds the shares as a bare trustee for the purchaser: see Hawks v McArthur [1951] 1 All ER 22 at 26.  If a contract is made for the sale of shares which are not identified in the contract; the equitable title passes to the purchaser only when the seller appropriates particular shares to the contract.  That usually takes place when the seller executes the transfer form identifying the shares by number: see Re London, Hamburg and Continental Exchange Bank, Ward and Henry’s Case (1867) 2 Ch App 431, per Cairns, LJ at 438. 

121.  The FCL shares sold under the three agreements were not specific shares and there is no evidence of appropriation by the 1^st Defendant of any of its FCL shares to the First Laser Agreement.  However, the 51% of the FCL shares to be transferred to the Plaintiff are unique.  They are shares in a private company and all the shares in FCL were held by the 1^st Defendant.  The 51% shares in FCL sold to the Plaintiff are part of an identifiable whole.  They represent the Plaintiff’s partnership rights against the only other partner, i.e. the 1^st Defendant who was holding the remaining 49% of the shares in the company.  I am prepared to hold in the circumstances, that the equitable interest in the shares passed to the Plaintiff on 13 March 1998 when the parties signed the 1998 Memorandum acknowledging that the purchase price had been fully paid.  With effect from that day, the 1^st Defendant held 51% of the whole of its shareholding in FCL under a constructive trust for the benefit of the Plaintiff.  Alternatively and at the latest, when the 1^st Defendant executed the transfer of all the FCL shares to JDS, it must be deemed to have appropriated the particular shares to the First Laser Agreement along with the appropriation of all the shares in FCL for the purpose of completing the sale to JDS.  The Plaintiff’s equitable interest crystallized at the very moment the 1^st Defendant effected the transfer of the FCL shares to JDS.

122.  It is the 1^st Defendant’s defence that under the lex situs of the shares, the transfer could not be effected unless approval from the authorities has been obtained.  Mr Warren Chan SC argues that there is no evidence that such approval would be forthcoming.  I think whether such approval would be granted is irrelevant.  Under Hong Kong law, the 1^st Defendant held 51% of the shares in FCL as a constructive trustee for the Plaintiff until such time as the approval would be granted and the legal title vested in the Plaintiff or as in the facts of the present case until the 1^st Defendant sold all the shares in FCO to JDS when it continued to hold 51% of the proceeds of sale on trust for the Plaintiff. 

123.  Mr Chan Chi Hung SC submits that as the Plaintiff’s shareholding was the majority shareholding, the Plaintiff is entitled to more than 51% of the proceeds of sale under the principle in Denekamp v Pearce (Inspector of Taxes) [1998] STC 1120 at 1127J-1128A.  In that case, a discount of 66% was applied to a minority shareholding of 24%.  Mr Chan Chi Hung SC also refers me to Caton’s Administrators v Couch (Inspector of Taxes) [1995] STC (SCD) 10 in which a discount of 50% was applied to a minority shareholding of 14.20%.  He submits a discount of 30% ought to apply to the 1^st Defendant’s minority shareholding.  The discount for minority interest in those cases cited were justified on the basis that the taxpayer only had a very small slice in the business.  In the present case, the shareholding ratio is 51:49.  The parties were effectively of equal strength.  I am not prepared to apply any discount.

124.  The 2^nd Defendant is a window company of the Fujian Provincial People’s Government.  It is the conduit of the 1^st Defendant for the receipt and transfer of the proceeds of sale.  There is no dispute that it is controlled and managed by the 1^st Defendant or by the same persons as those in control of the 1^st Defendant.  As such, it has full knowledge of the 1^st Defendant’s breach of trust and that part of the proceeds it received from the sale of the FCL shares to JDS is property held on trust for the benefit of the Plaintiff.  The 2^nd Defendant also becomes a constructive trustee of the Plaintiff in respect of 51% of the proceeds of sale.

125.  In the circumstances, in respect of the Plaintiff’s proprietary claim, the Plaintiff is entitled (1) as against both the 1^st and 2^nd Defendants, to the declaration sought under Clause (A) of its claim; (2) as against the 1^st Defendant only, the remedies sought under Clause (C) of its claim; and (3) as against the 2^nd Defendant only, the remedies under Clause (D) of its claim.

The Project

126.  The Plaintiff’s claim in respect of the Project is that it invested US$410,000 and RMB 1,000,000 in the Project and it paid Wang Hongrui additional remuneration of HK$8,000 per month for his work in the Project.  The defence is just one of putting the Plaintiff to strict proof.  However, Ngan’s evidence was not seriously challenged.  The documents show that US$500,000 was remitted from COM to Casix Inc on 12 August 1997 and two sums in the amount of RMB 500,000 were acknowledged by FCL as having been received from COM on 31 October 1997.  The documents also show that on 7 April 1998 Wang Hongrui requested Ngan to remit US$100,000 to Casix Inc and Casix Inc acknowledged receipt of the money from COM on 1 May 1998.  Though the money was remitted by COM, it was not disputed that the money came from Ngan’s camp.  There were numerous correspondences from the 1^st Defendant and FCL confirming that the investment came from Ngan’s camp.  The best evidence relating to the Project is the agreement of the parties as recorded at the meeting on 3 October 2000 in which the parties agreed that Ngan provided the capital for the research and development while FCL provided the manpower and facilities for the subsequent product development and sale.  In the light of the evidence, though the payments were made by COM, I accept that they were made at the direction of the Plaintiff and were payments by the Plaintiff.

127.  Mr Warren Chan SC’s submission is that the proper defendant to the claim in respect of the Project is FCL and not the 1^st Defendant, though the 1^st Defendant was at the material time the sole shareholder of FCL.  It is true that as the sole legal owner of FCL, the 1^st Defendant had the benefit of the Plaintiff’s investment in the Project and it realised the fruit of the Plaintiff’s investment when it sold all the shares in FCL to JDS.  However, the money was received by FCL and the Project was held by FCL.  The trustee of the Plaintiff’s funds and investment in the Project was FCL and not the 1^st Defendant.  I find Mr Warren Chan SC’s submission unanswerable.  The Plaintiff’s claim in respect of the Project must be dismissed. 

128.  However, the Plaintiff could find comfort in that the award under the proprietary claim or contractual claim would also include 51% of the enhancement in the value of the FCL shares as a result of the Plaintiff’s investment in the Project.  If accepting the agreement of the parties as recorded at the meeting on 3 October 2000 that Ngan provided the capital for the research and development of the Project while FCL provided the manpower and facilities for product development and sale, the award probably includes a fair and significant part, if not the entirety, of the Plaintiff’s return under the Project.

conclusion

129.  Accordingly, I enter judgment in respect of the Plaintiff.  The Plaintiff is entitled:

(1)	as against both the 1st and 2nd Defendants, to the declarations sought under Clause (A) of its claim;
(2)	as against the 1st Defendant only, damages for breach of contract assessed in the amount of US$30.6 million with interest from 2 September 2002 and the remedies sought under Clause (C) of its claim; and
(3)	as against the 2nd Defendant only, the remedies sought under paragraph (D) of its claim.

As some of the remedies may overlap, I therefore invite the parties to address me as to precise terms of the order sought. 

130.  I grant leave to the 1^st Defendant to withdraw its counterclaim for a declaration in respect of the three agreements and the 1998 Memorandum.

131.  I make a costs order nisi that the 1^st Defendant shall pay the Plaintiff’s costs of the action with certificate for two counsel and that there be no order as to costs as against the 2^nd Defendant.

HCA 4414/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4414 OF 2001

____________

____________

_______________

J U D G M E N T

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The applications

1. There are two summonses (apart from the summons by the Defendant for leave to use the affirmations filed on 14 November 2002, which I have dealt with on 21 November 2002) before me,

(a) a summons issued by the Defendant on 16 October 2001 asking for the stay of all proceedings in this action on the ground of forum non conveniens ["the stay application"];

(b) a summons issued by the Plaintiff on 7 February 2002 seeking to restrain the Defendant from continuing or prosecuting Case No. 00043 of 2001 ["the PRC action"] in the Higher People's Court of Fujian Province ["the Fujian court"], People's Republic of China ["the anti-suit injunction"].

2. For reasons unknown to me, the applications were not heard earlier. By the time the matter came before me, the PRC action has been tried and judgment was pending. There have been attempts by the Plaintiff to seek a stay of the PRC action in the courts in the mainland. Those attempts failed and it was held by the Supreme People's Court on 22 July 2002 that the PRC action was properly within the jurisdiction of the Fujian court and there should not be any stay notwithstanding the present action being pending in Hong Kong. After that, the trial of the PRC action took place on 25 September 2002 and the lawyers for both parties took part in the trial.

3. In view of such developments, I enquired with Ms Eu SC (leading counsel for the Plaintiff) at the beginning of the hearing whether she still pursued with the application for the anti-suit injunction. She submitted that until judgment is delivered, the Defendants could seek a withdrawal of the PRC action and this is the relief sought by the Plaintiff.

The background

4. Before I deal with the applications, I need to say something about the background of the case and identify the disputes between the parties in this action. Of course, I am not going to decide the merits of the case at this stage. However, in order to resolve the present applications, the court has to apply the principles pertaining to these applications by reference to the issues in dispute raised in the action.

5. The Plaintiff is a company incorporated in Macau. Its shareholders are Mr Ngan In Leng ["Ngan"] and his wife. Ngan is a member of the Political Consultation Committee of Fujian Province and the Central Political Consultation Committee. He was born in Fujian and went to Macau in 1980's. He maintained contacts with the People's Government of Fujian Province ["the Fujian Government'] and had dealings with the government.

6. The 1st Defendant is a window company set up in Hong Kong by the Fujian Government. It carried on business activities in Hong Kong as well as mainland China. Ngan has been doing business with the 1st Defendant since 1992.

7. The 2nd Defendant is also a company incorporated in Hong Kong. It is a company beneficially and wholly owned by the Fujian Government. According to the Affirmation of Wang Jian Ying dated 11 October 2001 filed by the 2nd Defendant, it is a nominee of a working team of the Fujian Government in receiving payment from the 1st Defendant in respect of the sale proceed of a Fujian company called Fuzhou Casix Laser Inc. ["FCL"].

8. FCL was one of the two Fujian companies set up by the 1st Defendant in 1992 engaging in the research and production of optical fibre instruments and laser equipment. The other Fujian company is Fuzhou Casix Optronics Inc. ["FCO"].

9. Five agreements relating to FCL and FCO were entered into in December 1996. The Plaintiff's evidence suggested that all five agreements were made in Hong Kong but this is disputed by the Defendants (see Paragraphs 40 and 41 of the Third Affirmation of Yang Dong Cheng). The Plaintiff relied on three of them and the Defendants referred to the other two. The first one was an agreement dated 12 December 1996 made between the 1st Defendant and a family Macauese company of Ngan called Hang Wo Properties Investment & Management Company Limited ["the Hang Wo agreement"]. That agreement provided for the joint investment for production in Macau in the sum of US$20,000,000 based on the technology in laser and optical fibre possessed by the 1st Defendant. The scheme envisaged by the Hang Wo agreement was to transfer the shares of FCL and FCO to a company incorporated in Macau called Casix Optronic Enterprises Limited ["COM"]. The 1st Defendant would hold 49% whilst Hang Wo would hold 51% of COM. Hang Wo shall acquire that 51% by reference to a price to be agreed upon. Hang Wo would be responsible for the initial investment in the sum of US$10 million.

10. The second agreement was, on its face, an agreement made in Hong Kong on 12 December 1996 between the 1st Defendant and COM ["the COM agreement"]. On the face of it, it was a sale by the 1st Defendant to COM of the shares and assets of FCL and FCO. The price was US$6,250,000. COM was to assume the liabilities of FCL and FCO upon completion.

11. In these two agreements, there were clauses providing that on questions relating to intellectual property rights, they would be dealt with in accordance with international practice and the law of the place where the enterprise situated. Subject to that, there is no choice of law provision.

12. On 28 December 1996, the Plaintiff and the Defendant made another agreement ["the First Laser agreement"]. Again, on its face, it was an agreement made in Hong Kong. Although there were reference to the change in the composition of the boards of FCL and FCO in this agreement, the subject matter of the agreement was described as the investment by the 1st Defendant in Fuzhou in optronics ("在福州所投資的光電子項目"). The agreement provided for the 1st Defendant sale of 51% of such interest to the Plaintiff at the price of US$3,187,500. This price was arrived at by reference to the agreed valuation of the whole of the investment at US$6,250,000. Part of the production line would be moved to Macau but it was envisaged that production in Fuzhou would also be maintained. Payment was to be made within 3 months with the first instalment in the sum of $10,000,000 to be paid within 10 days. Regarding the changes in respect of the companies, the agreement provided for the same to be handled by lawyers in mainland China.

13. I now refer to the two agreements relied on by the Defendants. Both were dated 12 December 1996 and were in respect of the entire shareholding in FCO. Both agreements were made between COM and two companies which claimed to be the owners of FCO, namely Casix Limited and a Fujian company called 福建科星技術發展公司. These two companies were, according to the 1st Defendant, wholly owned subsidiaries of the 1st Defendant. I shall call these the FCO agreements. In one of these agreements, the price was stated to be US$3,125,000. On the other hand, in the other agreement, the price was not stated but it merely referred to the registered capital of FCO was US$1,510,000.

The Plaintiff's case

14. The Plaintiff's case is that the First Laser agreement superseded the two earlier agreements. The subject matter of the sale, as pleaded in Paragraph 10 of the Statement of Claim, was 51% of the shares in FCL and FCO. The Plaintiff contended that the transaction is governed by Hong Kong law.

15. Payment was made in Hong Kong by two cheques, each in $10 million. The first payment was by a cheque drawn by COM dated 31 December 1996 whilst the second payment was by a cheque drawn by the Plaintiff dated 30 April 1997. The receipts issued by the 1st Defendant were made in favour of the Plaintiff. The balance of the purchase price, according to the Plaintiff, was satisfied by treating a capital investment in the sum of $4,640,000 by the Plaintiff in COM as investment by the 1st Defendant. This was acknowledged, according to the Plaintiff, by the 1st Defendant in a memorandum dated 13 March 1998 ["the 1998 Memorandum"].

16. In the 1998 Memorandum, it was recorded that due to the fact that the registered capital of FCL had not been fully injected into the company, the shares of FCL were still held by the 1st Defendant whilst COM held 100% of FCO. The intended arrangement was that when the problems were solved, the 1st Defendant and the Plaintiff would respectively hold 49% and 51% in FCL and COM.

17. The Plaintiff's case is that by 13 March 1998, the purchase price had been paid in full in respect of the 51% interest in FCL and FCO. It is claimed that the Plaintiff became the beneficial owner of the 51% interest in FCL.

18. Further, according to the Plaintiff, in July 1997 the Plaintiff invested a total of US$410,000 and RMB 1,000,000 into a project undertaken by FCL. The Plaintiff said the development of that project greatly enhanced the value of the shares of FCL in the subsequent sale to a company called JDS Uniphase China Holdings Company ["JSD"].

19. By an agreement dated 29 February 2000, the 1st Defendant sold the entire shareholding of FCL to JSD at the price of US$60,000,000. Since that sale included the alleged 51% interest in FCL beneficially owned by the Plaintiff, the Plaintiff is suing in this action for tracing inquiry and account out of the said US$60,000,000 attributable to the Plaintiff's interest in FCL. This is the primary claim of the Plaintiff. Ms Eu, in her skeleton submission of 26 November 2002 and oral arguments, submitted that the claim is a proprietary claim in contract, stemming from the concept that there is a constructive trust over the subject matter of sale in respect of a specifically enforceable contract. She relied on Foskett v McKeown [2000] 3 All ER 97 as to the tracing of equitable proprietary interest when original trust assets were converted into other properties. She emphasized that the present claim is being advanced against the immediate party to the contract (the 1st Defendant) and its nominee, the 2nd Defendant. She said that the Plaintiff is not making any claims against any bona fide purchaser for value without notice.

20. The alternative claim of the Plaintiff is based on restitution, unjust enrichment and mistake. The factual foundation for this claim is that when the payments were made, the Plaintiff mistakenly thought that it was paying for the shares in both FCL and FCO pursuant to the First Laser agreement. If the First Laser agreement turned out to be void or invalid or unenforceable, the Plaintiff said that the 1st Defendant had been unjustly enriched and the Plaintiff should be entitled to relief by way of restitution. The Plaintiff contended that it was also entitled to tracing in respect of the claim in restitution and relied on Chase Manhattan Bank v Israel-British Bank (London) Ltd [1981] 1 Ch 105.

The Defendants' case

21. No Defence has been filed in this action because the Defendants are trying to stay the action. The defence case was summarized in Paragraph 7 of the Affirmation of Guo Jin Ran. The Defendants denied that the person who signed the agreements had the authority to do so on behalf of the 1st Defendant. It is said that the board of the 1st Defendant had never approved of those agreements. This is a separate point from the want of approval from the Fujian Government regarding those agreements. The latter was elaborated by Mr Yang in his first affirmation at Paragraphs 5 and 8. It is alleged that by reason of the fact that the 1st Defendant is a window company for the Fujian Government, the directors of the 1st Defendant were nominated by the Fujian Government and their conducts of the affairs of the 1st Defendant have to be approved by the Fujian Government before making decisions on important matters including disposal of major assets. By reason of the background of Ngan, the Defendants said that he was, or ought to be, aware of this curtailment in the general authority of the management of the 1st Defendant. The Defendants also hinted at irregular dealings between the person who allegedly signed the agreements for the 1st Defendant, Kong Fanli ["Kong"] and Ngan. Kong was dismissed by the 1st Defendant in 1998 and there is evidence that he was employed as the Chief Executive Officer of Bao Shing (Group) Company Limited, a company of Ngan, from April 1999 to March 2001.

22. The Defendants accepted that monies had been paid by the Plaintiff. However, it is denied that they were paid pursuant to the First Laser agreement. The Defendants said that the monies were paid pursuant to the FCO agreements. The shares of FCO had been duly transferred to COM and COM is owned by two companies of Ngan, namely Hang Wo and a BVI company called Jenwings Holdings Limited. Mr Chan told this court that the Defendants are willing to refund the money back to the Plaintiff if the Plaintiff procures the transfer of the shares of FCO back to the 1st Defendant.

23. The Defendants said by way of contrast, the shares in FCL had never been transferred to the Plaintiff in accordance with PRC law. The Defendant also alleged that the Plaintiff and Ngan had not taken part in the management of FCL as opposed to FCO. Ngan and her daughter were not validly appointed as directors of FCL as alleged by the Plaintiff. The Defendants said that FCL had been managed solely by the 1st Defendant until the transfer to JDS.

24. The Defendants contended that the 1998 Memorandum was a forged document. In respect of all the dealings between the Plaintiff and the 1st Defendants relevant to the present action, the Defendants said that they are all governed by PRC law.

25. The Defendants said that there was no concept of "trust" under PRC law. In any event, it is contended that Hong Kong law should not sanction the trust argument of the Plaintiff because to do so would be encouraging breach of PRC law and circumvention of important public policy.

The issues

26. As far as it is possible to identify the issues which may arise at the trial at this early stage, for the purpose of the present applications, by reference to the contentions of the parties, I would broadly pinpoint the following as major issues which the court will have to resolve,

(a) whether the payments by the Plaintiff were made pursuant to the First Laser agreement or the FCO agreements;

(b) whether the person who signed the First Laser agreement on behalf of the 1st Defendant had either actual or ostensible authority to bind the 1st Defendant;

(c) whether there was a requirement of prior approval from Fujian Government before a transaction could be binding on the 1st Defendant and whether Ngan was aware of such requirement. This could be an aspect of (b) or it could be considered independently;

(d) whether the First Laser agreement, even if it were concluded with the proper authority of the 1st Defendant, conferred any beneficial interest on the Plaintiff regarding the FCL shares and if not, what are the legal effects of the same;

(e) if the First Laser agreement was not binding on the 1st Defendant or for some other reasons held to be invalid or unenforceable, whether the Plaintiff could claim any restitutionary relief on the ground of mistake or otherwise;

(f) whether the Plaintiff can rely on tracing to claim an interest in the proceed of sale under the JSD agreement.

There are of course other issues that could be regarded as subsidiary to those major issues. For example, whether the 1998 Memorandum is a forgery, whether the Plaintiff or Ngan took part in the management of FCL, the circumstances under which these agreements came to be concluded, Kong's relationship with Ngan, the alleged admissions by the 1st Defendant in various settlement negotiation meetings, the position of the 2nd Defendant, the investment by the Plaintiff in the 1997 project. I do not propose to list out exhaustively all the disputes between the parties as I do not find this necessary nor profitable for the present purpose. Some of these are factual disputes and some are mixed question of facts and laws.

27. It seems to me that evidence in respect of PRC law would be required even if the transactions were governed by Hong Kong law. As pointed out above, Ms Eu's primary case is based on constructive trust stemming a right to specific performance under the First Laser agreement. However, one must not forget that the First Laser agreement was in respect of the sale and purchase of shares of PRC companies, viz. FCL and FCO. I do not think a Hong Kong court could ignore the PRC law with regard to the transfer of such shares in deciding whether specific performance could be granted in respect of the First Laser agreement. If such shares could not be lawfully transferred or the requisite approval could not be procured under PRC law, it is unlikely that a court in Hong Kong would grant specific performance in respect of the First Laser agreement. It is not clear to me whether there would be any dispute between the parties on PRC law governing the transfer of shares of FCL and FCO.

The applicable law

28. Mr Chan submitted that the issues in the present action should be decided by reference to PRC law. He characterized the primary claim of the Plaintiff as a proprietary claim and the crucial issue is whether the Plaintiff has any title in the 51% shareholding of FCL. By reference to Macmillan Inc. v Bishopsgate Investment [1996] 1 WLR 387 and Re Harvard Securities Limited [1997] 2 BCLC 369, he contended that the applicable law is lex situs, i.e. the place where the share register was situated which is usually the place of incorporation. This points to PRC law.

29. As regards the alternative claim, Mr Chan invited this court to applied Rule 200 in Dicey & Morris on Conflict of Laws, 13th Edn., p.1485 which provides,

"(1) The obligation to restore the benefit of an enrichment obtained at another person's expense is governed by the proper law of the obligation.

(2) The proper law of the obligation is determined as follows:

If the obligation arises in connection with a contract, its proper law is the law applicable to the contract;

...

If it arises in any other circumstances, its proper law is the law of the country where the enrichment occurs."

30. In the application of that rule, Mr Chan submitted that the alternative claim of the Plaintiff falls within Rule 200(2)(a). Para. 34-019 of Dicey & Morris described the situations where a claim of restitution arises in connection with a contract. This includes cases where a party seeks to recover money paid pursuant to an ineffective contract. Mr Chan said the proper law of the contract in the present case is PRC law.

31. On the other hand, Ms Eu argued that the proper law of the contract is Hong Kong law. She relied on the fact that the contract was made in Hong Kong, the 1st Defendant is a Hong Kong company with its center of management in Hong Kong. The monies were paid in Hong Kong in Hong Kong currency although the purchase price was expressed in US dollars. She also referred to evidence by Ngan that he understood the 1st Defendant to be unwilling to have PRC law as governing law.

32. Based on the submission that Hong Kong law was the proper law of contract, Ms Eu argued that the primary claim of trust must also be governed by Hong Kong law. She said legal title to the shares is irrelevant and this action is not about dispute in title. With respect, as explained in Paragraph 27 above, even if I were to agree that the proper law of contract was Hong Kong law, I do not think it follows that PRC law is not relevant. Neither can I disregard the cases cited by Mr Chan just because we are not dealing with questions relating to legal title. Whilst Macmillan Inc. v Bishopsgate Investment [1996] 1 WLR 387 is a case about priority in legal title over shares, Re Harvard Securities Limited [1997] 2 BCLC 369 is a case on equitable interest in shares. I also see no justification for confining the application of these cases to disputes between third parties, viz. disputes other than those between immediate parties to the contract.

33. Different issues in a case may have to be resolved by reference to different systems of law. In Macmillan Inc. v Bishopsgate Investment [1996] 1 WLR 387 Staughton LJ said at p. 399B to D,

"Mr Oliver went so far as to submit that, once one determined the law which governs the cause of action, that same system governed all issues which arise in the suit. That cannot be right.... I would regard it as plain that the rules of conflict of laws must be directed at the particular issue of law which is in dispute, rather than at the cause of action which the plaintiff relied on. We should translate lex causae as the law applicable to the issue, rather than the suit."

To the same effect, Aldous LJ said at p. 418A to B.

"I agree with the judge when he said, 'In order to ascertain the applicable law under English conflict of laws, it is not sufficient to characterize the nature of the claim: it is necessary to identify the question at issue'. Any claim, whether it be a claim that can be characterized as restitutionary or otherwise, may involve a number of issues which may have to be decided according to different systems of law. Thus it is necessary for the court to look at each issue and to decide the appropriate law to apply to the resolution of that dispute."

34. Although this point has been raised by Mr Chan in his submissions, counsel have not analysed the applicable law by reference to individual issues. Rather, as summarized above, they broadly argued on the applicable law by reference to the two causes of action of the Plaintiff. Bearing in mind that the applicable law is only one factor to be considered and the time constraint of the hearing before me, it would not be right for me to make any criticism against such an approach. However, because of such approach being adopted, I am not in a position to make a final ruling as to the applicable law in respect of each individual issue identified by me in Paragraph 26 above.

35. At the hearing, I have raised the possibility that this court could not reach a final conclusion on the applicable law in the context of the present application. Counsel accepted that this is possible given the uncertainty as to how the litigation would develop. In the circumstances, unless I can be satisfied on the basis of the material before me that the resolution of all the issues must be resolved by reference to one system of law, I shall not attach too much weight on this factor in the balancing process in the determination of the present applications. After all, evidence as to foreign law can be adduced if the court shall eventually conclude, after proper arguments on the matter, that a particular issue is to be decided by reference to foreign law. It has not been suggested before me that there are complicated issues of PRC law which this court will find it too difficult to grapple with.

36. In my judgment, this court cannot at this stage completely rule out the possibility that Hong Kong law would be relevant in the determination of at least some of issues raised. By way of example, issues (b) and (c) identified in Paragraph 26 concern the formation of contract and it has to be determined by the proper law of contract (see Cheshire & North's Private International Law, 11th Edn., p. 471-476). Although Ms Eu has advanced arguments to contend that the proper law of contract is Hong Kong law, Mr Chan argued otherwise. I think the strongest point relied on by Mr Chan is that the subject matters of the contract were shares in PRC companies. However, I cannot brush aside the evidence of Ngan that the 1st Defendant did not wish to apply PRC law to the contract. This fact, as well as the fact that the contract was made in Hong Kong, are disputed by the Defendants. Whether there is any implied choice of Hong Kong law as law of the contract has not been argued before me. I do not feel able to conclude at this stage that the proper law of contract must be PRC law.

37. Moreover, the payment being made in Hong Kong in Hong Kong currency, it seems to me that it is at least arguable that Hong Kong law should be applied in the determination of issue (a). I do not know whether there are any conflicts between Hong Kong law and PRC law pertaining to that issue as parties have not addressed me on the same.

38. Mr Chan submitted that the overriding issue must be whether the Plaintiff could assert any beneficial interest in respect of the FCL shares and according to the authorities cited by him, this must be governed by PRC law. I am prepared to assume, without actually deciding, that this is correct. However, this does not dispose of the action completely. There is still the alternative claim based on restitution. If the proper law of contract is Hong Kong law, the restitution claim would also be governed by Hong Kong law in accordance with Rule 200(2)(a) in Dicey & Morris.

39. Even if it were eventually resolved that the proper law of the contract is PRC law, thus the restitution claim is also governed by PRC law, it still does not mean that all the issues pertaining to the restitution claim would be governed by PRC law, see Macmillan Inc. v Bishopsgate Investment [1996] 1 WLR 387. Assuming that the Plaintiff could establish a claim of restitution under PRC law, whether such claim could support a claim of constructive trust against the Defendants could be governed by Hong Kong law. It would depend on the examination of the nature of the obligation of the 1st Defendant owed to the Plaintiff under the law of restitution in PRC, see Chadwick J in Arab Monetary Fund v Hashim, unreported, cited and approved by Nourse LJ in Kuwait Oil Tanker v Al Bader [2000] 2 All ER (Comm) 271 at p. 338-9. One would also need to look into the circumstances under which funds were transferred from the 1st Defendant to the 2nd Defendant. Again, this took place in Hong Kong and is probably governed by Hong Kong law.

40. I note that in his written reply, Mr Chan submitted that as a matter of law, in the context of the restitution claim, the Plaintiff cannot rely on tracing in the absence of any pre-existing fiduciary relationship between the Plaintiff and the 1st Defendant. He relied on the observations made by Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at p. 714C to F and p. 707E to 709. I do not think I could decide in the context of these applications whether the Plaintiff has a sustainable claim in tracing arising from restitution. Firstly, on the material before me, I cannot rule out the possibility that the Plaintiff can show that there was a fiduciary relationship between the parties as quasi-partners when the monies were paid. Secondly, if the restitution claim were held to be governed by PRC law, there is simply no evidence before me as to the nature of the obligation of the 1st Defendant to enable me to assess whether the same amount to an obligation of a fiduciary nature.

41. On the whole, adopting the approach stated in Paragraph 35 above, I am not satisfied that the applicable law element favours the Fujian court as a more appropriate forum than the court in Hong Kong. It may well be that evidence of foreign law will be required whether the action is tried in Hong Kong or Fujian.

The PRC action

42. In the PRC action, the 1st Defendant sought declaratory relief from the Fujian court concerning the validity of the Hang Wo agreement, the COM agreement and the First Laser agreement. The Plaintiff is a party to that action. It does not raise any counterclaim in the PRC action. Hence, even if the Plaintiff succeeds in the action, it would not get any relief which it seeks in the Hong Kong action. Mr Chan fairly accepted that the PRC action only deals with some of the issues raised in the Hong Kong action. Of the major issues outlined in Paragraph 26 above, only issues (b) and (c) were dealt with in the PRC action. In fact, as regards issue (c), I do not think the PRC action would make findings on the knowledge of Ngan. He therefore accepted that he could only rely on the doctrine of lis alibi pendens to a limited extent. His main argument is that the Plaintiff should commence fresh proceedings in Fujian to pursue its claims.

43. Ms Eu submitted that since there is no identity of subject matter, this is not a true lis alibi pendens situation. She referred to the decision of Sakhrani J in Intel Corporation v Via Technologies Inc, HCA 4265 of 2001, 30 July 2002.

44. In my judgment, although there are some overlaps in the issues that the courts have to decide in the two sets of proceedings, the scope of the PRC action is obviously much narrower than the Hong Kong action. The Supreme People's Court also recognized that the cases were different in the judgment of 22 July 2002. I hold that this case is in the same category as Intel Corporation and Ho Siu Pui v Yue Sheng Finance Limited, HCA 3060 of 2001, Kwan J, 27 August 2002.

45. That being so, the existence of the PRC action and the element of comity would only have bearing in the stay application to a very limited extent in the overall balancing exercise. I do not think Intel Corporation laid down any new principles. The applicable law on the stay application can be derived from Spiliada Maritime Corporation v Cansulex Ltd [1987] AC 460 to which I now turn.

The stay application

46. Hunter JA in The Adhiguna Meranti [1987] HKLR 904 at 907E to 908B summarized the proper approach laid down in Spiliada by way of a three-stage test. This has always been followed by the courts in Hong Kong. The three stages are as follows,

"(I) Is it shown that Hong Kong is not only not the natural or appropriate forum for the trial, but that there is another available forum which is clearly or distinctly more appropriate than Hong Kong. The evidential burden is here upon the applicant. The emphasis is upon 'appropriate' rather than 'convenient' because this is not simply a matter of practical convenience. The purpose is to identify the forum 'with which the action has the most real and substantial connection' per Lord Keith in the Abidin Daver [1984] AC 398 ... Failure by the applicant at this stage is normally fatal.

(II) If the answer to (I) is yes, will a trial at this other forum deprive the plaintiff of any 'legitimate personal or juridical advantages'? The evidential burden here lies upon the plaintiff.

(III) If the answer to (II) is yes, a court has to balance the advantages of (I) against the disadvantages of (II), Abidin Daver per Lord Brandon at p. 419. Deprivation of one or more personal or juridical advantages will not necessarily be fatal to the applicant provided that the court is satisfied that notwithstanding such loss 'substantial justice will be done in the available appropriate forum'. The court must try to be objective. Proof of this, which can fairly be called the ultimate burden of persuasion, rests upon the applicant for the stay. By these means he establishes that on balance the other forum is more suitable 'for the interests of all the parties and the ends of justice'. This may be another way of saying that the plaintiff's choice of forum has been shown to be so inappropriate as to deserve the pejorative description of 'forum shopping' and to be restrained accordingly, cp. Lord Reid in The Atlantic Star [1974] AC 436."

47. Ms Eu submitted that in the application of this test, the court should also bear in mind that in the present case jurisdiction in Hong Kong is evoked by the Plaintiff as of right. She referred to Intel Corporation and the Court of Appeal's decision in LG Electronics v Bank of Taiwan, CACV 3153 of 2001, 2 May 2002. In my judgment, those were instances where the courts applied what Lord Goff said in Spiliada at p. 476F:

"The question being whether there is some other forum which is the appropriate forum for the trial of the action, it is pertinent to ask whether the fact that the plaintiff has, ex hypothesi, founded jurisdiction as of right in accordance with the law of this country, of itself gives the plaintiff an advantage in the sense that the English court will not likely disturb jurisdiction so established."

48. In United Phosphorus Limited v China Merchants Shipping & Enterprises, CACV 244 of 1988, 11 February 2000, Keith JA considered weight the court could attach to the fact that the plaintiff sue the defendant in Hong Kong as of right,

"Lord Goff himself recognised that distinctions can be drawn even between plaintiffs who have the right to sue in a particular jurisdiction. Lord Goff gave the example at p. 477F of the case where "the connection of the defendant with the English forum is a fragile one (for example, if he is served with proceedings during a short visit to this country)". That is to be contrasted with corporate defendants, such as the defendant in the present case, who are incorporated in Hong Kong and who hold themselves out as doing business in Hong Kong. In such cases, it is not inconsistent with Lord Goff's statement of principle for the court to give modest weighting to the plaintiff's right to sue in Hong Kong. To apply what Lord Goff said to the Hong Kong context, the more fragile the defendant's connection with Hong Kong, the easier it should be for the defendant to prove that there is another clearly more appropriate forum for the trial than Hong Kong."

49. The availability of an alternative forum is a prerequisite to the court's exercise of discretion in entertaining an application for stay (see S Megga Telecommunications Ltd v Etowaru Co. [1995] 2 HKC 761; Rambas Marketing Co. Ltd v Chow Kam Fai David [2001] 3 HKC 250). In the present case, the Defendants undertook to this court that the Defendants would submit to the jurisdiction of the Fujian court if the Plaintiff commenced fresh proceedings there.

50. With these principles in mind, I now turn to matters relied on by the Defendants to submit that a stay should be granted. The first stage is to consider whether not only Hong Kong is not the natural or appropriate forum for the trial, but also that there is another available forum which is clearly and distinctly more appropriate than Hong Kong.

51. The Defendants have set out the relevant factors in the Affirmation of Guo Jin Ran and the Third Affirmation of Yang Dong Cheng. I have considered each and every one of them. Some of those are rather peripheral, e.g. documents being in simplified Chinese and being located in Fujian, witnesses speak Putonghua, costs and expenses. The more significant factors are the whereabouts of witnesses, governing law and the PRC action.

52. I have dealt with the question of applicable law and the PRC action in earlier sections. With regard to languages and documents in simplified Chinese, I must say these factors, at the most, only have bearing on practical convenience. Judges in Hong Kong, either with or without the assistance of interpreters, are well equipped and qualified to try cases with these elements. In respect of documents, Mr Chan highlighted the fact that some documents are kept by regulatory authority in mainland China or by FCL and FCO. As far as the FCO agreements are concerned, I am not satisfied that it is essential to produce the original of the same at the trial. My understanding is that the Plaintiff did not dispute that these agreements had been signed. The Plaintiff said that the circumstances under which these agreements were signed were set out in the 1998 Memorandum and looking at the matter as a whole, the actual bargain between the parties were set out in the First Laser agreement. Regarding documents of FCL and FCO, I am not satisfied on the evidence before me that the Defendants were not in a position to produce at least copies of the relevant documents if the trial is to take place in Hong Kong. On the relevance of those documents, Mr Chan has only managed to show to me that they would be relevant to the question whether the Plaintiff took part in the management of FCL. Bearing in mind the major issues in the present action, I am not satisfied that on that particular issue it would be helpful to produce voluminous documents concerning the day-to-day operation of FCL. I also note that the Defendants were able to produce some documents of FCL and FCO as exhibits to affirmations filed in this action.

53. As regards witnesses, Mr Yang went into a lot of details in his Third Affirmation to identify the witnesses relevant to some of the issues and their whereabouts. In respect of the main issues, the key witnesses seem to me to be Ngan and Kong. Ngan will no doubt give evidence for the Plaintiff if the trial were to take place in Hong Kong. In respect of Kong, the Defendants were unable to locate him (see Paragraph 19 of the Third Affirmation of Yang) so it makes no difference whether the trial is in Hong Kong or in Fuijian. In respect of other witnesses who were directors of the 1st Defendant at the material time and some other witnesses, some are unwilling to come to Hong Kong and some are imprisoned in the mainland. Mr Yang explained why some of these witnesses would be willing to give evidence in Fujian but not in Hong Kong in Paragraph 21 of his Third Affirmation. Three reasons were given by him: unfamiliar with legal system in Hong Kong, troubles in term of getting permission to come, need of special approval from the government. I do not think these are insuperable difficulties. Ultimately, it is a matter of will and if their evidence were really important for the Defendants, I fail to see why the Defendants could not make the necessary arrangement for these witnesses. As Ms Eu pointed out, there is always a possible option of taking evidence in mainland for the Hong Kong action.

54. I also harbour serious reservations as to whether all the witnesses identified by Mr Yang could give material evidence. As pointed out by me, the role played by the Plaintiff or Ngan in the management of FCL was only a subsidiary issue. In respect of the major issues, most of the evidence is embodied in the documents. Further, it seems to me the major plank of the defence case would be expert evidence on PRC law and regulations and the relationship between Ngan and Kong. To some extent, the former would probably be clarified by the time this action come on for trial by the judgment in the PRC action, in respect of which, for reasons given below, I am not minded to restrain the 1st Defendant from proceeding. I note that on the material available, some of the witnesses referred to by Mr Yang, if all of them were called at the trial, would only give evidence overlapping with each other and their evidence were only of marginal relevance.

55. That said, I acknowledge that the witness factor is slightly in favour of the Defendants. Whether this tilts the balance to show that the Fujian court is a forum distinctly more appropriate than the court in Hong Kong is, however, another matter. There have been cases where despite most witnesses were abroad, an application for stay was unsuccessful (see United Phosphorus Limited v China Merchants Shipping & Enterprises, CACV 244 of 1988, 11 February 2000; Rambas Marketing Co. Ltd v Chow Kam Fai David [2001] 3 HKC 250).

56. Mr Chan laid emphasis on the element of comity. In my judgment, given the limited scope of overlapping between this action and the PRC action, this concern is more apparent than real. If the Defendants were correct that the PRC law should govern the aspects of the dispute touched upon in the PRC action, this court will no doubt accept the judgment of the PRC action as evidence of PRC law on those aspects. In this connection, I regard the proper approach in resolving disputes about foreign law as set out in the judgment of the English Court of Appeal in MCC Proceeds Inc. v Bishopsgate Investment Trust [1999] CLC 417 at 421 to 424. At p. 424 [23], the Court of Appeal summarised the function of an expert witness on foreign law as follows,

"(1) to inform the court of the relevant contents of the foreign law; identifying statutes or other legislation and explaining where necessary the foreign court's approach to their construction;

(2) to identify judgments or other authorities, explaining what status they have as sources of the foreign law; and

(3) where there is no authority directly in point, to assist the English judge in making a finding as to what the court's ruling would be if the issue was to arise for decision there." (my emphasis)

Hence, in the present circumstances, the existence of the PRC action could be complimentary instead of being incongruent to the continuation of this action in Hong Kong.

57. Balanced against the factors relied on by the Defendants, the Plaintiff pointed to the fact that the Defendants are Hong Kong companies. Their registered offices and businesses are in Hong Kong. The action was commenced against the Defendants in Hong Kong as of right. Moreover, Ngan is not a resident of Fujian and the Plaintiff is a company in Macau. Although it is disputed, the Plaintiff's case is that these agreements were made in Hong Kong and the payments were made in Hong Kong. The other company involved, COM, is also a Macau company. Proceeds of JDS sale were transferred from the 1st Defendant to the 2nd Defendant in Hong Kong.

58. View thus, it is not possible to suggest that Hong Kong is not the appropriate forum and I am not satisfied that the Fujian court is a distinctly more appropriate forum for the resolution of all the disputes between the Plaintiff and the Defendants raised in this action. On the whole, it seems to me that this is just another dispute with cross-border elements regarding which more than one court could be the natural forum.

59. It follows that the Defendants cannot cross the hurdle at Stage I under the test of The Adhiguna Meranti. It is unnecessary for me to consider Stages II and III. Therefore, the stay application fails.

The anti-suit injunction

60. The applicable principles are set out in Societe Aerospatiale v Lee Kui Jak [1987] 1 AC 871 and Airbus Industrie v Patel [1999] 1 AC 119. Mr Chan helpfully produced to this court an extract of relevant dictum from the recent authorities on this topic. In the circumstances of the present case, I do not find it necessary for me to review all those authorities. I would confine myself to the following citations. In Airbus Industrie v Patel [1999] 1 AC 119 at p. 133, Lord Goff said,

"The broad principle underlying the jurisdiction is that it is to be exercised when the ends of justice require it. Generally speaking, this may occur when the foreign proceedings are vexatious or oppressive ... But, as was stressed in the Aerospatiale case ..., in exercising the jurisdiction regard must be had to comity, and so the jurisdiction is one which must be exercised with caution ..."

61. In Amchem Products Inc. v Workers' Compensation Board (1993) 102 DLR (4th) 96 at p. 120-1, a decision of the Supreme Court of Canada, Sopinka J said,

"The result of the application of these principles is that when a foreign court assumes jurisdiction on a basis that generally conforms to our rule of private international law relating to the forum non conveniens, that decision will be respected and a Canadian court will not purport to make the decision for the foreign court. The policy of our courts with respect to comity demands no less. If, however, a foreign court assumes jurisdiction on a basis that is inconsistent with our rules of private international law and an injustice results to a litigant or "would-be" litigant in our courts, then the assumption of jurisdiction is inequitable and the party invoking the foreign jurisdiction can be restrained."

To similar effect is the judgment of Lord Goff in Aerospatiale at p. 895E-G and Neill LJ in EI Dupont v Agnew [1988] 2 Ll Rep 240 at p. 249. In the latter case, Neill LJ concluded,

"... where there is a difference of view between the English court and the foreign court as to which is the natural forum, the English court will not arrogate to itself by the grant of an injunction the power to resolve that dispute."

62. In Turner v Grovit [2002] 1 WLR 107, Lord Hobhouse distinguished between applicants who had a contractual right to litigate in a particular forum and those who did not have that right. For the latter, His Lordship said at p. 120 Para. 29,

"Therefore, to summarise, the essential features which made it proper, under English law, for the [court to grant an anti-suit injunction in favour of those who did not have contractual right to litigate in England] are:

(a) the applicant is a party to existing legal proceedings in this country;

(b) the defendants have in bad faith commenced and propose to prosecute proceedings against the applicant in another jurisdiction for the purpose of frustrating or obstructing the proceedings in this country;

(c) the court considers that it is necessary in order to protect the legitimate interest of the applicant in the English proceedings to grant the applicant a restraining order against the defendants."

63. Ms Eu contended that the commencement and continuation of the PRC action by the 1st Defendant are oppressive. She referred to the fact that the PRC action was only commenced after the Plaintiff started the action in Hong Kong and the Defendants took out a summons for the stay of the Hong Kong action. She also highlighted the difficulties the Plaintiff might encounter with regard to the concept of trust under PRC law. She referred to the difference between Hong Kong law and PRC law in respect of the questions of authority and lack of approval from Fujian government. All these, she said, pointed to the conclusion that the PRC action was brought for the dominant and calculated purpose of depriving the Plaintiff of its claims under Hong Kong law. To support her contention, she relied on the decision of the High Court of Australia in CSR Ltd v Cigna Insurance Australia (1997) 189 CLR 345 at 401,

"Proceedings which are brought for the dominant purpose of preventing another party from pursuing remedies available in the courts of another country and not available in this country are "seriously and unfairly ... prejudicial [and] damaging". They are, thus, oppressive ..."

64. The burden is on the Plaintiff to satisfy this court that an anti-suit injunction should be granted. Ms Eu's submission was, in my view, based on two underlying premises,

(a) the claim of the Plaintiff based on trust should be governed by Hong Kong law;

(b) the PRC action would frustrate the Plaintiff's action in Hong Kong.

65. On (b), I have already held that the action in Hong Kong should not be stayed. On (a), as discussed above, I do not think I can come to a final conclusion on the applicable law in respect of each and every relevant issue. In other words, I am not satisfied, on the material available, that all issues in the primary claim of the Plaintiff must be governed by Hong Kong law. On the contrary, as presently advised, I am more inclined (though I still maintain an open mind if this matter shall come back to me later) to the view that at least in respect of some of the issues, they should be governed by PRC law, see discussions in the above section on applicable law.

66. Balanced against that, as I have said in the section dealing with the stay application, there are factors suggesting that the Fujian court could be at least as much a natural forum as the Hong Kong court in dealing with the disputes between the parties. My view is that neither forum can be said to be distinctly more appropriate than the other. Of course, the PRC action is much narrower in scope and I have considered the stay application by reference to the trial of the issues raised in the Hong Kong action instead of the PRC action. Whether the Fujian court would be the appropriate forum for the trial of the PRC action has been litigated in the mainland with the participation of the Plaintiff to the highest court there and the Supreme People's Court has adjudicated on the matter. As Mr Chan pointed out, the approach adopted by the Supreme People's Court in deciding the matter was very much akin to our concept of forum non conveniens. The dicta of Sopinka J cited in Paragraph 61 above is relevant.

67. I have also taken into account of the fact that the trial of the PRC action has taken place and the Plaintiff also took part in it. By comparison, the action in Hong Kong is only at its early stage. I am not aware of a case where anti-suit injunction has been granted in these circumstances and Ms Eu, despite her diligence and that of her juniors, has not been able to refer me to any. The progress of the proceedings in the foreign court must be a relevant factor. I should record that there is no suggestion by the Plaintiff that the proceedings in the Fujian court have been conducted unfairly against it.

68. Moreover, as pointed out in Paragraph 56 above, the PRC action could be complimentary to the Hong Kong action.

69. On the whole I am not satisfied that the PRC action was brought for the dominant purpose of preventing the Plaintiff from pursuing its claims in the Hong Kong action or frustrating the same. Notwithstanding the timing of the commencement of the PRC action, I am of the view that it was quite legitimate for the 1st Defendant to take the view the Fujian court was an appropriate forum and try to have the issues raised in the PRC action to be litigated there. Nor am I satisfied that it is necessary to grant an anti-suit injunction to protect the legitimate interest of the Plaintiff in the Hong Kong action. In short, I am not convinced that it is oppressive for the 1st Defendant to commence or continue with the PRC action and I do not think the ends of justice require an anti-suit injunction to be granted.

70. As observed by Le Pichon JA in Asha Harkishin Premisingh v Harkishin Isarsingh Premsingh, CACV 845 of 2000,

"... the fact that the courts of country X have concluded that country X was the natural forum, does not entitle it on that ground alone to restrain a party from proceeding in the foreign court. It would be inconsistent with comity."

71. For these reasons, the application for anti-suit injunction must be dismissed.

Results

72. Hence, both summonses are dismissed. Mr Chan indicated that parties may be able to agree on directions as to further conduct of the case. I therefore leave that to the parties and their able lawyers. As regards costs, taking into account of the arguments of the parties at the hearing before me, I think the time spent on the preparation of each summons would roughly be the same and the two summonses are inter-related. In the circumstances, I shall make an order nisi that each party shall bear its own costs regarding these two summonses.

73. Lastly, I wish to thank counsel for their assistance. Although the hearing took more than the original time allocated to the matter, having regard to the complexity of the matters involved, counsel for both sides have been very concise and effective in the presentation of their case. They have contributed considerably to the prompt disposal of the hearing.

Representation:

Ms Audrey Eu, SC, Mr Chan Chi Hung and Mr Jeremy S K Chan, instructed by Messrs Johnson, Stokes & Master, for the Plaintiff

Mr Warren Chan, SC and Mr Law Man Chung, instructed by Messrs Koo & Partners, for the Defendants