TELINGS INTERNATIONAL HONG KONG LTD v. JOHN HO AND OTHERS

HCA 2114/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2114 OF 2005

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BETWEEN

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J U D G M E N T

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Introduction

1.  The plaintiff (“Telings”) commenced this action in October 2005 claiming a sum of $136.24 million (and interest) against all 3 defendants. The 3^rd defendant (“Ho King”) is sued as a principal debtor (being the purchaser of the shares of one Uniplan Assets Ltd. (“Uniplan”); Telings was the vendor thereof). The 1^st and 2^nd defendants (respectively “Ho” and “YS Chan”) are sued in essence as the guarantors of the said purchase. Judgment against Ho King was entered by default on 29 December 2005.

2.  The written agreement for the said sale and purchase was executed on 15 December 2003. In the course of the trial, it has come to be known as the “Ho King Agreement” and shall be so called below. It is undisputed the contract price for the shares was $141 million according to the Ho King Agreement.

Background

3.  Quite a number of the factual details were disputed at trial. But if the ultimate issue in this action is deciphered, the overall relevant factual framework leading to (and surrounding) the Ho King Agreement is in fact largely undisputed.

(a)  The Property Investment in Lanzhou

4.  YS Chan and his business associates in Hong Kong went to Lanzhou to invest in around 1993. Through a joint-venture corporation (involving also the Mainland “partners”), they commenced land development (commercial and residential properties) there. The YS Chan camp took part through a Hong Kong company called “Ming Kong Property Investment Ltd.” (“Ming Kong”) which held about 60% of the issued capital of the joint-venture, a Mainland company called “Lanzhou International Trade & Building Co. Ltd.” (“the Lanzhou company”; also called “LITBC” by the parties).

5.  By 2000, the Mainland “partners” transferred some of their interest in the joint venture to Ming Kong. Ming Kong then became the owner of 99% of the shares in the Lanzhou company. The plaintiff came on the scene at around this time.

6.  Financial and management problems appeared in the Lanzhou company in about 2000. Further, as a result of the change in the PRC government’s economic policy, the Mainland camp had to withdraw its share from the Lanzhou company. Cash was needed to deal with these issues. The YS Chan camp wanted to find a new “partner” who could provide the funding.

7.  The parties dispute as to whether the new “partner” was Mr George Tan himself (who was widely known for his connection to the Carrian group of companies and its demise) or his daughters (George Tan being their “adviser” only). The dispute is however not crucial to the determination of this action. For convenience, the word “Tan” is used below to stand for George Tan and/or his daughters (unless the context requires the individual’s identity to be specified).

8.  Tan agreed to inject capital in return for part of the Lanzhou company’s shares. Ignoring the details of the transaction, Tan ended up with 75% of the Lanzhou company’s shares while the YS Chan camp retained about 24% thereof. Tan’s portion of the Lanzhou company’s shares was held by Uniplan. Telings was Uniplan’s parent company (in other words, Uniplan’s shares were held by Telings).

(b)  Initial Attempts to Get Listed

9.  According to the defence, Tan’s vision was to turn the Lanzhou company into a large business consortium. For such purpose, Tan wanted to have the Lanzhou company become a publicly listed company in Hong Kong. He proposed a “reverse take-over” or “reverse listing” scheme. Very briefly, the idea was to find a listed company which is considered to be financially unsound, then use the shares of the Lanzhou company to swap with the shares of that listed company, thereby taking over its ownership (and management).

10.  The first attempt to do so was targeted at a Hong Kong listed company, CIL Holdings Ltd., in June 2001 but this was unsuccessful.

11.  In July 2001, Tan asked for help from his friend in London, one Mr Desmond Bloom (“Bloom”). Bloom was to help in the reverse take-over of a London-listed company, Eurocity Property Plc (“Eurocity”). This attempt also failed when Eurocity refused to acquire the Lanzhou company’s shares.

12.  The listing plan was then changed. In March 2002, Tan caused an Eastern Wind Investments Co. Ltd. (“Eastern Wind”) to be incorporated. The goal was for it to be listed in London. This again failed (the parties differ as to the precise cause of the failure).

13.  During the second half of 2002, yet another plan was devised. A company called Hemisphere Properties Plc. (“Hemisphere”) would get listed in London. Tan (through Telings, the holding company of Uniplan) would sell all of Uniplan’s shares (in other words, Tan’s portion of the Lanzhou company’s shares) to a company called International Operation Ltd. (“IOL”) (a company controlled by Ho and YS Chan). In return, IOL would procure about 213 million of Hemisphere’s listed shares to be transferred to Telings.

14.  Hemisphere was listed in London in August 2003. However, by about September to November 2003, it became increasingly apparent the new plan got into trouble again.

15.  As a result, in November 2003, Tan, Ho and YS Chan (through Ho) entered into discussion about the listing plan. The outcome of the discussion is in effect the main dispute in this action.

The Main Dispute

16.  The main dispute in this action can be summarized as this.

17.  Telings’ case is that the Ho King Agreement (which, as aforesaid, was executed on 15 December 2003) was a genuine sale and purchase. The reason for the transaction is said to be that Tan was upset by the earlier attempts to get the Lanzhou company listed, and did not mind selling Tan’s portion of the Lanzhou company’s shares. On the other hand, Ho and YS Chan wanted to make a profit out of the exercise. They wanted to try it on their own and planned to pay off Telings with the fund which (they hoped) could be obtained through the listing exercise. It is unclear if Bloom was also one of the “purchasers”. It would appear from some of the contemporaneous documents that he was (see para. 33 to 45 below). But it is unnecessary to resolve this point in this action.

18.  On the other hand, the case of the defence is that Tan still wanted to realize his vision of getting the Lanzhou company publicly listed. Because of the obstacle posed by the requirement to disclose his connection with the listed company, Tan asked Ho and YS Chan to be his “fronts” to conceal this from the London listing authorities.

19.  Thus, the contracting parties never intended the Ho King Agreement to be performed. Telings, Ho, YS Chan and Ho King signed the Ho King Agreement on that understanding.

The Ho King Agreement

20.  The main terms of the Ho King Agreement are undisputed:-

(a)  the total sum payable for all of Uniplan’s shares was $141 million;

(b)  $10 million was to be paid upon its execution;

(c)  the completion date was to be 27 February 2004;

(d)  the remaining $131 million was to be paid within 24 months from completion date;

(e)  interest was payable on $131 million from completion date to the date of payment at 4% per annum in arrears on half-yearly basis;

(f)  if Ho King should default in the payment of interest, the whole $131 million would become immediately due and payable.

21.  Ho and YS Chan jointly and severally and unconditionally and irrevocably guaranteed the due and punctual performance and observance of and compliance with the Ho King Agreement.

22.  It is common ground the entire share-holding of Uniplan was transferred by Telings to Ho King on 27 February 2004: para. 10, amended statement of claim and para. 7, defence.

Witnesses’ Credibility and Reliability

23.  The defence called YS Chan, Ho and Bloom to testify. A Mr Tommy Wong, Ms Yeung and Mr Zhan also testified for the defence. The plaintiff did not call any witness.

24.  The testimony of most witnesses covered quite a number of facts some of which are in dispute. I have not restricted myself to the matters expressly spelt out below when assessing credibility and reliability. The matters specifically set out below are so as to give an indication of how this aspect has been addressed.

(1)  Relevant E-mails / Correspondence

25.  Of the various contemporaneous documents in the trial bundles, Telings lays particular emphasis on a number of e-mails passing among Ho, Bloom and (to a lesser extent) YS Chan from 16 September 2002 to 1 December 2004.

26.  Because these e-mails are important to the assessment of the defence witnesses’ testimony, the more salient passages in these e-mails are quoted below (in chronological order).

27.  Further, where appropriate, other correspondence is also summarized below.

28.  Several matters referred to in the e-mails need a brief explanation.

29.  To recap, various attempts have been made to “reverse take-over” a publicly listed company (first in Hong Kong and later in London) so that the Lanzhou company could be “injected” into the company. The attempts made prior to mid-December 2003 failed. The parties dispute the true reason(s) for the pre-15 December 2003 failure.

30.  It is Telings’ case the attempts failed because of the problematic accounts of the Lanzhou company. The defence denies that and contends the failure was caused by Tan’s refusal to comply with the requirement imposed by the London stock exchange to disclose George Tan’s connection to the publicly listed company.

31.  Further, it is Telings’ case that the Ho King Agreement was an arm’s length transaction in fact (because Tan was only interested in selling off his interest in the Lanzhou company) whereas it is the defence case that it was an arm’s length transaction in appearance only.

32.  The references in the e–mails/correspondence to:-

(1)  the Hemisphere shares could not “end up in the Tan ownership” (see the e-mail of 20 October 2003 (para. 34 below));

(2)  an “arm’s length” transaction (see the hand-recorded note of 16 December 2003 (para. 37 below)),

have to be understood in the light of the matters summarized above.

Pre-15 December 2003 (Ho King Agreement)

33.  On 16 September 2002, Bloom wrote to YS Chan (via Ho):-

“… I am extremely interested in acquiring the shareholding of the ‘Tan’ family which I understand is approximately 35% of the total issued equity.  I would be prepared to submit an offer at a price of £9.75M … I would seek payment in the form of a loan note from the vendors repayable after three years … The loan note could be secured against the shares so that in the event of non-payment, ownership of the shares would revert to the original owners. …

I would also be prepared to acquire the shareholding owned by the Thai interests on a similar basis if this was required … ”.

34.  On 20 October 2003, Bloom wrote to Ho:-

“… The stock exchange … are not happy for any Tan shareholding in Hemisphere …

It’ll be necessary for the Tan shareholdings to be disposed of as quickly as possible to enable us to press ahead with the deal …

I understood that the Tan shareholdings were intended to be disposed of anyway …

I would be prepared to acquire the Tan shareholdings if deferred payment of say 24 months could be obtained.  It would probably not be acceptable for the shares to be used as security because in the event of default they would end up in the Tan ownership but I would be happy to provide a personal guarantee … ”.

35.  On 8 December 2003, Ho wrote to Bloom:-

“I have a lengthy meeting with [George Tan] and Mr. Wu this morning, it was finally agreed as follows : -

1.  the Purchase price of Telings is [HK$141 million].

2.  the deposit of HKD10M be paid on signing of the Agreement for Sale and Purchase …

3.  …

I also have lengthy meeting with the Lender this afternoon, it was finally agreed as follows:-

1.  Loan amount of HKD10M …

2.  Interest on the loan …

…

I suppose we have reached a better deal than before with the Lender (originally HKD7.5M for 10% of Ho King but now is HKD10M for 10% of Ho King) … ”.

36.  On 10 December 2003, Ho wrote to Bloom:-

“The Lender’s solicitors have sent me the following documents for approval …

In case you receive the engagement letter … please arrange GBP93,000 to be remitted to my firm’s account … so that I can complete the deal with [George Tan] before he changes his mind … ”.

Post-15 December 2003 (Ho King Agreement)

37.  On 16 December 2003, YS Chan hand-recorded his discussion on that day with Bloom. One matter recorded was:-

“I told [Bloom] John Ho has the way out for arms’ length”.

38.  On 18 February 2004, Ho’s firm (Ho, being a practising solicitor, has been a partner of that firm) wrote to Messrs. Fred Kan & Co., Telings’ solicitors (“Fred Kan”), to seek to postpone the completion of the Ho King Agreement. On 19 February 2004, Fred Kan wrote to refuse the request but agreed to extend the payment date for another 3 months upon the payment of interest. The offer was accepted by Ho’s firm on the same day.

39.  On 3 June 2004, Bloom wrote to YS Chan (copied to Ho):-

“…

I assume that George Tan is now aware that the LITBC/Hemisphere deal has been done and presumably he must be much happier with the situation now.  He will take comfort from the knowledge that he is likely to get his money one way or another which did not appear to be a real prospect just a few weeks ago.  Perhaps it might be possible to gently open negotiations to roll up the debt and even perhaps to discuss the possibility that some of the Ho King shares might be transferred to his nominee companies as a way to repaying certain debts”.

Post-15 June 2004 (Hemisphere London Listing)

40.  According to the defence, Telings started to ask for payment pursuant to the Ho King Agreement since 15 June 2004. The shares of Hemisphere began to be traded at the London stock exchange since then; however, the share price has fallen below the initial offer price since that time (p. 13, defence written chronology; defence verbal final submissions).

41.  On 24 June 2004, Ho wrote to Bloom:-

“The first interest payment on HK$10M in fact was due …

Unfortunately I have received no response from you regarding such payment.  Please note that not only the Loan expenses etc. had been paid by me, … air passages hotels and Vigers fees was settled by me personally on behalf of Hemisphere. …

Please let me know when you are able to send me [the] interest payment amounting to GBP15,000 asap”.

42.  On 6 July 2004, YS Chan and Ho wrote to Bloom:-

“This may not be a pleasant mail but we must call a spade a spade. … despite our previous emails to you regarding the overdue interest of 15,000 pounds to [George Tan] last month and the forthcoming due in mid-August for another appr. 190,000 pounds …

… You must also understand that we have advanced a substantial payment on behalf of Hemisphere out from our pocket and we are exhausted.

We urge you to give serious consideration to the urgency of this matter … ”.

43.  On 19 August 2004, Ho wrote to Bloom:-

“… YS and I have been worrying about and devoting our time on the interest payment due to Telings during the past months much much more than Hemisphere and LITBC.  It was made very clear to you at the very beginning that there is no room for bargaining on the 1st interest payment and we were assured by you that you would take care of it. … Please note that not only our reputation is jeopardized … but also my professional career will be ended in the event of default.  The message that it is mandatory to pay the interest has been conveyed to me otherwise legal proceedings will be instituted against me and YS.

With great pain and difficulty, I manage to find a private financier to fund the first half yearly interest payment of HK$2,820,000. … ”.

44.  On 19 August 2004, Bloom wrote to Ho (copied to YS Chan):-

“… Each time there has been a problem you have managed to negotiate a way around it … I have never believed that [George Tan] would resort to legal action and I have thought that his loan to HoKing will eventually be paid from sale of the HoKing shares in Hemisphere. … ”.

45.  On 1 December 2004, Ho wrote to Bloom (copied to YS Chan) demanding Bloom to indemnify him and YS Chan by paying the interest payable under the Ho King Agreement.

46.  On 11 March 2005, Ho’s firm paid interest of $26,200 for the 3-month time extension relating to the Ho King Agreement. On the same day, there was correspondence between Ho’s firm and Fred Kan regarding further time extension.

(2)  YS Chan and Ho

47.  The testimony of YS Chan and Ho need not be set out in detail. Suffice it to say their testimony purports to support the defence case that the Ho King Agreement was a “sham” transaction orchestrated by George Tan. The goal was as set out in para. 18 above. They claim in essence that they were merely “fronts” acting as directed by George Tan.

48.  Such a case, however, cannot be credible in the face of the e-mail/correspondence summarized above.

49.  In its verbal final submissions, the defence contends the e-mails and correspondence written before 15 June 2004 (the day when the Hemisphere shares started to be traded at the London stock exchange) were part of the “sham” put up by (or for) George Tan. In other words, although the e-mails and correspondence appear to be contemporaneous private communication, they were intended to be shown to whoever may query the propriety of the Ho King Agreement.

50.  The contention is inconsistent with:-

(a)  YS Chan and Ho shouldering up the payment of various sums pursuant to the Ho King Agreement.  The sums paid included $10 million (being the deposit paid on 15 December 2003), $2.6 million (being the interest paid on 26 August 2004) and $26,200 (being the interest paid on 11 March 2005);

(b)  the post-15 June 2004 e-mails/correspondence.

51.  The defence has not been able to satisfactorily explain why the post-15 June 2004 e-mails/correspondence were so expressed.

52.  In its final submissions, the defence does not say that these communications were for “window-dressing”. Judging from their contents, they cannot have that effect. More important, by then it should be apparent to Ho and YS Chan Tan was seeking payment from them. It therefore does not make sense for them to “play along” and continue to act as his “fronts”.

53.  The defence offers the excuse that Ho and YS Chan (especially Ho, who is a practising solicitor) have to choose between the lesser of two evils: either refute Telings’ demand for payment and “expose” the improper nature of the transaction, or rely on the indemnity executed by Bloom to cover their financial exposure. They chose the latter course.

54.  I reject the excuse as untruthful. The e-mails/correspondence were private communications. There is no need to hide the truth from Tan who, according to the defence, well knew what the Ho King Agreement was about. In fact, to warn Telings/Tan that the true nature of the transaction would be exposed if he should persist in his demand may be a more effective means of deterring him from commencing legal action. Finally, according to Ho’s testimony, he did not consider Bloom to be a man of means (see also para. 65, defence written final submissions).

55.  The testimony of Ho and YS Chan is rejected.

(3)  Bloom

56.  Bloom was an untruthful and evasive witnesses. His testimony is likewise also rejected.

57.  He could not come up with satisfactory answers when asked about the contemporaneous e-mails/correspondence. In fact, towards the later stage of his cross-examination, he boldly claimed that no matter how many such e-mails/correspondence were shown to him (including those which have already been shown to him during cross-examination), he did not expect his memory would be assisted as to why he wrote them, or what facts they would reflect.

(4)  Tommy Wong

58.  Tommy Wong’s role in the transaction was limited. His knowledge of factual matters relevant to the determination of this action is also limited.

59.  According to his witness statement, since about 2001 he acted essentially as a go-between for Tan and YS Chan (who was then residing in Australia).

60.  Little weight is placed on his testimony.

(5)  Ms Yeung

61.  Ms Yeung was Ho’s personal assistant/secretary. Her role in the transaction was also limited. Her knowledge of the relevant facts is even less than that of Tommy Wong.

62.  Her witness statement focused entirely on a lunch meeting between Tan and Ho in June or July 2004. Even on that occasion, there was a period when Tan and Ho talked downstairs in private while she waited upstairs.

63.  She claimed Tan uttered words during lunch which indicated Tan’s interest in the Hemisphere shares. For two reasons I do not believe her claim:-

(1)  Tan and Ho considered it necessary to discuss in private.  There is no suggestion the discussion concerned matters other than the Lanzhou company affair.  It does not make sense for Tan then to utter those words in Ms Yeung’s presence after the discussion in private;

(2)  her witness statement was prepared more than 6 years after the event.  She did not claim she had kept contemporaneous notes of those events.

64.  Ms Yeung was also cross-examined on matters beyond those covered in her witness statements. She testified against Telings’ case regarding those matters. But it is obvious she came to know of them from either Ho or YS Chan. No weight is placed on this part of her testimony.

65.  Generally, I do not regard her a reliable witness. She demonstrated a tendency to side with Ho and YS Chan irrespective of the true state of affairs.

(6)  Zhan

66.  Mr Zhan was one of the Chinese “partners” of the Lanzhou company. He did not claim to know anything of relevance to the determination of this action.

Other Matters

67.  The defence relies on ICS v. West Bromwich Building Society [1998] 1 WLR 896 for the proposition that events which happened after the transaction are irrelevant for ascertaining the contracting parties’ intention.

68.  The test propounded in the ICS decision was about construing the true meaning of contract terms. In relation to whether there was a contract, the test is different. As Chitty on Contracts (1999) 27^th Ed. said:-

“Subsequent actions are … inadmissible to interpret a written agreement, although they are admissible to show whether there was a contract and what the terms of the contract were … or as the basis for an estoppel”: para. 12-124, n. 38 citing James Miller & Partners Ltd. v. Whitworth Street Estates (Manchester) Ltd. [1970] AC 572, 615 (emphasis supplied).

69.  The defence argues the Ho King Agreement cannot be a genuine sale and purchase transaction because the defendants were made to sign a number of documents as a result: a share mortgage was signed by Ho King; in addition, Ho and YS Chan were required to sign:-

(a)  blank instruments of transfer;

(b)  blank powers of attorney;

(c)  letters of resignation;

(d)  an undertaking to approve the share transfer pursuant to the share mortgage.

70.  The defence queries why the vendor in such a transaction should retain the right of disposal of the shares if the transaction was genuine. However, the Ho King Agreement was in gist a sale involving a deferred payment of price. The documents set out above make business sense because the vendor’s position could be protected pending full payment. As the defence appears to admit, none of the defendants has the means to pay: para. 47, defence written final submissions.

71.  The defence places importance on a letter dated 4 December 2003 signed by Tan’s daughter (especially the highlighted part) (para. 7(e) and 42, defence written final submissions):-

“… we have received green light from both the Leading Counsel of London and our Malaysian partner to the proposed S&P Agreement drafted by [Ho’s firm] with your minor amendments … our direct and friendly discussion with [Ho] at noon time on 2^nd December 2003.

During the said discussion, [Ho] was very kind to understand that the transaction must not only be seen to be arms-length but also must to be done as arms-length … ” (highlight supplied).

72.  But the highlighted part can be understood to mean that the transaction should not only be seen to be genuine, it should in fact be genuine. Some of the statements therein are consistent with that understanding:-

“… our Malaysian partner was greatly concerned of the security provided by the Purchaser which the proposed securities to guarantee this HKD131 million are Ho King’s promissory note and personal guarantees from [Ho and YS Chan]. … ”.

The quoted statement shows that the letter’s author desired better security for the sale and purchase.

73.  Finally, the defence relies on the practice that where a litigant chooses not to call evidence, the court is entitled to be bold and can draw from the facts all reasonable inferences as to what facts may have been withheld: see Insurance Commissioner v. Joyce (1988) 77 CLR 39, 49; SS Pharmaceutical Co. Ltd. and Another v. Qantas Airways Ltd. [1991] 1 Ll Rep 288, 293; British Railways Board v. Herrington [1972] AC 877, 930.

74.  I have borne the above in mind. However, the fact remains the testimony of the defence witnesses has either been rejected or given no (or little) evidential weight. Moreover, in the absence of sufficient evidential basis to contradict it, the Ho King Agreement (and the related contractual documents) should be given the evidential weight which it deserves as a solemn document.

Findings of Fact

75.  By reason of the matters aforesaid, I find that:-

(1)  the Ho King Agreement was a genuine sale and purchase (of the Uniplan shares by Telings to Ho King);

(2)  Telings has transferred those shares to Ho King;

(3)  the defendants have breached the Ho King Agreement and the related personal guarantee respectively by failing to pay in full as agreed.

Conclusion

76.  I find that Telings has established its claim against Ho and YS Chan. Judgment is therefore entered against them as prayed for in the amended statement of claim. The counterclaim is dismissed.

Costs Order

77.  The parties agree the usual rule that costs should follow the event is applicable. There will accordingly be a costs order that the costs of this action be paid by Ho and YS Chan to Telings.

78.  However, the defence indicates it may object to the court certifying the trial to be fit for the attendance by two counsel (though the defence was itself so represented). The following directions are given in the event the defence should maintain that objection:-

(a)  the defence be at liberty to lodge with court and serve submissions on the subject within 7 days from the date of this judgment;

(b)  Telings be at liberty to lodge with court and serve submission in response within 7 days thereafter.

HCA 2114/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2114 OF 2005

______________________

______________________

______________________

J U D G M E N T

______________________

Introduction

1.  This is an appeal from an order by Master de Souza dated 20 September last year [D/53] on a summons by the Plaintiff [A/91] applying for an order in the following terms:

“

Each of the 1st and 2nd Defendants do within 14 days from the date hereof swear and file an affidavit stating whether he has at any time had in his possession custody or power the classes of documents stated in the Schedule hereto and insofar as any such documents are no longer within his possession custody or power when he parted with those documents and what has become of them.”

The Schedule at A/93 then sets out the four classes of documents.

2.  Having heard the argument on the summons, the learned Master made an order in terms of the summons save that in respect of paragraph 1 of the Schedule he removed the words “but not limited to” appearing on the 4^th line of this paragraph immediately after the word “including” and before the word “all”, taking the view that this expression placed an imprecise obligation on the Defendants to comply with this part of the order.  Apart from that the Plaintiff had succeeded in full from which order the Defendants now appeal on a broad range of issues which I will have to deal with in the course of this judgment.

An Overview of the Action and the Issues Involved

3.  The Plaintiff makes concurrent claims against the three Defendants in the sum of $136,240,000.  It is based on a sale and purchase agreement in writing dated 15 December 2003 under which the Plaintiff agreed to sell to the 3^rd Defendant all the share capital in a company called Uniplan Assets Limited (“Uniplan”) for $141,000,000.  The 1^st and 2^nd Defendants are guarantors for the 3^rd Defendant’s obligation to pay the Plaintiff the purchase price.

4.  Part of the terms of the agreement stipulated a completion date on 27 February 2004.  A sum of $10,000,000 was to be paid on the signing of the Agreement.  The balance of $131,000,000 was to be paid on the Payment Date being 24 months from the Completion Date.  Interest was to be payable by the 3^rd Defendant on the $131,000,000 from the Completion Date up to the date of payment at the annual rate of 4% and in the event of default of an interest payment, payable half yearly in arrears, the balance of $131,000,000 would become due and payable.

5.  The 1^st and 2^nd Defendants assumed joint and several liability as guarantors of the 3^rd Defendant, expressed to be in consideration of the Plaintiff entering into the sale and purchase agreement with the 3^rd Defendant.

6.  By a letter dated 19 February 2004, the Completion Date was extended to 27 months from the Completion Date with the interest chargeable for the extended three-month period increased from 4% to 5%.

7.  Purportedly pursuant to the said Agreement, the share capital of Uniplan was transferred by the Plaintiff to the 3^rd Defendant on 27 February 2004.

8.  Save for an interest payment of $26,200 to cover the period of the three-month extension on the original payment date, the 3^rd Defendant has failed to pay two six-month interest payments being the second, on 28 February 2005 and the third, on 27 August 2005 resulting in the balance of $131,000,000 being payable forthwith.  The claim of $136,240,000 is for the outstanding balance and the two outstanding interest payments, against the 3^rd Defendant as principal debtor, and the 1^st and 2^nd Defendants as guarantors.

9.  That rather simple exposition of the way that the debt is said to arise does no credit to the convoluted background as to how this has all come about.  I propose to set out this background, in as brief a way as possible, in order to provide an understanding as to how the issues are said to lie, which in turn inform the application for discovery, in a case where the Defendants have already made a substantial amount of discovery.

The Defences and Counterclaim

10.  Principally, the basis of the Defendants’ case is that the agreement under which the Defendants are sued is a sham and that it has never been the intention of the contracting parties that the Defendants, and for these purposes I am referring to the 1^st and 2^nd Defendants, should assume personal liability under it.  The Defendants’ case is that what this is all about is an attempt by Mr George Tan Soon Gin (he being the Malaysian businessman who had been convicted of massive fraud connected to the Carrian case in the then Supreme Court of Hong Kong in the early 1990s) and his family to have listed on the London Stock Exchange (“LSE”) a Mainland Chinese property holding company which they had bought into.  The suggestion is that because of Mr Tan’s antecedents any attempt at listing a company on the LSE in which he and his family were seen to be connected with was bound to fail.  This being the case, elaborate arrangements had to be devised for the Mainland company, Lanzhou International Trade and Building Company Limited (“Lanzhou”) to carry out a “reverse listing” by using a company which apparently had no Tan connection to achieve that result.

11.  For the purpose of this explanation, I will take the following summary from the skeleton of Mr K M Chong, who appears for the Defendants, which whilst strongly contested by the Plaintiff does, at least, have the merit of establishing the issues that will require resolution at the trial.

12.  Lanzhou’s shares were held as to 75% by Uniplan, Mr Tan’s daughters being its only shareholders and directors, they, according to the Defendants, there to do their father’s bidding.  The 2^nd Defendant held 24% of Lanzhou, with the remaining 1% held by a Chinese corporation.  Because Mr Tan refused to disclose that his daughters and himself had an interest in Lanzhou through Uniplan which would have been necessary under the LSE listing rules, a direct listing by Lanzhou could not be pursued.  Another scheme which was devised with the assistance of Mr Desmond Bloom, a London-based property developer, who in the past had been connected with Mr Tan through business, was for Mr Bloom to use a British company, Eurocity plc which was already listed on the LSE, to acquire Uniplan’s shares in Lanzhou and so achieve a “reverse-listing”.  That also could not proceed because of the disclosure rules which required the Tan family to reveal themselves as being beneficially interested in Uniplan.

13.  A revised scheme was attempted, again with Mr Bloom’s participation, by using another listed company called Hemisphere Properties plc (“Hemisphere”).  This involved the Plaintiff, a company which is a wholly-owned subsidiary of another company called Windway Enterprises Limited (“Windway”) which is controlled by Mr Tan’s three daughters who own 90% of Windway’s shares.  The mechanics of this scheme was that the Plaintiff, which in turn owned Uniplan’s shares, would sell its interest in Uniplan to a company controlled by the 1^st and 2^nd Defendants against the issue of “Consideration Shares in Hemisphere to the value of GBP10.666 million to the Plaintiff or its nominee.  This was to take place on 19 November 2002, being carried into effect by an agreement between the Plaintiff and a company called International Operations Limited (“IOL” and the “IOL Agreement”).  Suffice to say that this scheme as well could not proceed because the advisor to Hemisphere, who was to arrange the flotation on the LSE, refused to continue acting unless the ultimate beneficial interest of Mr Tan and his daughters in Hemisphere was disclosed, which they were unwilling to do.

14.  In view of this impasse, it became necessary to construct another arrangement which found its expression in the agreement which is the subject of the action.

15.  It was decided that to avoid having to disclose the Tan family’s involvement and ultimate control of Hemisphere, the Plaintiff would enter into the Agreement which it now sues on, to sell its share capital in Uniplan for GBP10.666 million without making any reference to the “Consideration Shares” these being 213,333,320 Hemisphere shares.  In order to achieve the “reverse listing” of Lanzhou it was necessary, according to the 1^st and 2^nd Defendants, to give the appearance that this was an arms length transaction.  This was done by making the 1^st and 2^nd Defendants guarantors of the 3^rd Defendant’s obligations under the Agreement, which conveniently can be referred to as the Ho King Agreement and is the subject matter of this action.

16.  I should briefly recount how the 1^st and 2^nd Defendants say that this was to be done.  Firstly, in order to provide the 3^rd Defendant with sufficient funds to pay the initial deposit of $10 million under the Ho King Agreement, Mr Tan and his daughters arranged for a Mr Ng Kin Wah (an associate of Mr Tan) to lend the deposit to the 3^rd Defendant for it to pay the Plaintiff.  Then, in order to protect the 1^st and 2^nd Defendants from incurring any risk of having to pay this amount themselves in the future, Mr Bloom entered into an indemnity to indemnify all three Defendants under the Ho King Agreement.  The effect of all of this, say the 1^st and 2^nd Defendants, was that the 3^rd Defendant company owned Lanzhou, and the other two Defendants, rather than the Tans, would appear to be ultimate beneficial owners of Lanzhou.  Hemisphere’s listing prospectus then showed that 90% of its shares were held by the 3^rd Defendant on trust for Mr Bloom and the remaining 10% by the 1^st Defendant also for Mr Bloom.  Finally, it showed Mr Bloom as owning 35,974,667 ordinary shares in Hemisphere, these being Uniplan’s shares in Lanzhou, in his own right.  And thus, by using nominees in this way, the Tan presence was erased from the corporate structures.

17.  By this means, the 1^st and 2^nd Defendants say that the Tan family, with the vital assistance of Mr Bloom, would have achieved its purpose to list Lanzhou by another corporate persona in London, whilst the 1^st and 2^nd Defendants would incur no personal liability under the Ho King Agreement.

18.  Unfortunately, after having achieved a listing, Hemisphere’s share price on the LSE fell below its initial listed price.  The investment by the Tans’, who had expected to make a substantial profit on a rising share price, failed and now, submits Mr Chong, Mr Tan and his daughters are using the sham Ho King Agreement, by falsely putting it forward at face value and as genuine to recover their failed investment from the 1^st and 2^nd Defendants.

The Central Issue

19.  From this summary, it will be seen that the real question at issue is whether things are as they appear to be on the face of the Ho King Agreement or whether this is a mere device in pursuit of a greater scheme to brush out the Tan family from the listing of Lanzhou.

20.  Stated in this way, the issue is both stark and straightforward.  Nevertheless, a matter of this sort involving the putting together of a listing on the LSE and its financing creates a very substantial paper trail.  The appeal has involved my considering six lever-arch files, most of it being the discovery to date, and hearing detailed argument over the course of two days. 

21.  I think that Mr Ronny Wong SC, who appears for the Plaintiff, has correctly analysed the matter by saying that in deciding whether the 1^st and 2^nd Defendants assumed personal liability under the Ho King Agreement and therefore, that it is not a sham, will principally fall to be decided in the light of their conduct consequent upon the making of that agreement, whilst not forgetting of course that the court will wish to consider all the relevant evidence in the case.

The Law on Discovery

22.  Usually on a hearing such as this a court would take the principles, so well known, as read.  On this occasion, Mr Chong has sought to go back to first principles and thereby demonstrate that no further discovery order is available to the Plaintiff having regard to the discovery already made but if it is, that the discretion should be exercised against further discovery.

23.  He has started by citing the three requirements to be satisfied under O.24 r.7 before discovery will be ordered.  Firstly, evidence of the existence of the document which has not been discovered secondly, its relevance to the issues and thirdly, that it is within the possession, custody or power of the opposing party.

24.  Where the discovery sought is for a class of documents, as in this case, the class he says must not be described so widely as to include documents which are not relevant to the issue.  For this he relies on Re the Estate of Ng Chan Wah [2003] HKEC 317.  In this regard, he submits that the summons offends this principle.

25.  Secondly, where the two Defendants have gone on affidavit to say that they do not have possession, custody or control of a particular document or class of document then the affidavit is to be taken as conclusive.  See for example the Peruvian Guano case itself [1882] 11 QBD 55AC and Cardinal Wu v Tsoi Kung & Ans [1992] 1 HKC 475.  Thirdly, he submits that in such circumstances a party is not entitled to adduce further evidence with a view to show that his opponent’s affidavit on the matter is insufficient or untrue.  And lastly, he makes the very general case that discovery must be limited to what is necessary for the fair disposal of the case [Hong Kong Civil Procedure, para. 24/7/1].

26.  Mr Wong, whilst accepting the general principles put forward by Mr Chong, has I think more correctly set out the position as to whether an opponent’s affidavit is to be treated as conclusive.  He has put forward two qualifications to this general rule.  Firstly, that a party is entitled to a further and better affidavit of documents if on the face of the original affidavit, or from admissions in other documents, the court has reasonable grounds to be certain that there are other relevant documents which ought to be disclosed.  And, in any event, the court retains to itself the general discretion under Order 24 [see 24/7/1].  That this is so was established as long ago as the case of British Association of Glass Bottle Manufacturers v Nettlefold [1912] 1 KB 369 in the Court of Appeal and upheld in the House of Lords at [1912] AC 709.  Mr Wong has cited extensively from the judgment in the Court of Appeal by Farwell LJ at pages 366-367 as approved in the House of Lords by the Lord Chancellor at 714 of the report.  I do not propose to repeat these citations again here — the principle being as I have stated it in the earlier part of this paragraph.

A Consideration of the Further Disclosure That is Asked for

27.  All of this needs to be approached with the issue in the trial in mind as I have already stated it to be.  In terms of the trial process, it seems to me that the judge will wish to examine with great care the antecedent discussions and documents that passed between the parties’ witnesses prior to the conclusion of the Agreement and thereafter, he will need to have regard to the behaviour of the parties.  This he will need to do by examining the documents that came into existence after the Agreement had been signed and what each witness says about any document that he or she can properly be said to be involved with.

28.  As appears in the Schedule to the summons, four classes of documents are asked for [see A/93].  As to classes 1 and 2 both of these are referable to the Defendants’ relationship with Mr Bloom and the litigation between them that followed the collapse of Hemisphere’s share price.  Class 3 relates to the dealings by the 1^st and 2^nd Defendants with Hemisphere.  This of course refers to correspondence passing between them upon the signing of their Agreement with the Plaintiff and following that.  This is further particularised to include the appointment of the 1^st and 2^nd Defendants as Chief Executive and Executive Director respectively of Hemisphere.  It is right to say that the Defendants have gone someway to providing relevant discovery under this class.

29.  Unsurprisingly, much documentation was generated in the course of that relationship.  It is notable that in objecting to further disclosure the Defendants do not take the stance that these documents fail to pass on the test of relevance.  That is a correct position to adopt because, in my judgment, there can be no question that all of this category of document will be relevant.  Whilst all of it may not necessarily be shown to the judge or relied on by either party at the trial, the fact remains that the Plaintiff is entitled to disclosure of all of this class.  Mr Wong in a comprehensive written argument has identified with great particularity the documents that are in existence, are relevant and should be produced.  I will come to the Defendants’ objections presently.

30.  Class 4 in the Schedule refers to the documents including, but not limited to, correspondence between the 1^st and/or 2^nd Defendants and Hemisphere in respect of share dealing in Hemisphere by the two Defendants and/or members of their family or others on their behalf.  In this regard too this goes to how the Defendants disposed themselves in relation to their apparent ownership of Hemisphere’s shares and clearly passes muster in terms of relevance.

31.  In respect of all of these classes, I am satisfied and, this is not seriously contested by Mr Chong, that the documentation sought is relevant.  As to the existence of the documents that are asked for this too is not contested by the Defendants certainly as to the first 3 classes.  As to class 4, Mr Wong has noted a certain ambivalence on the part of the Defendants about the existence of such documents.  Nevertheless, it strikes me that the defendants’ true position on this aspect is that they do exist which is to be derived from the Defendants’ letter of 25 May 2007 and paragraph 17 of the 1^st Defendant’s third affidavit.  The real objection to disclosure appears to be based on a lack of possession due to the documents being misplaced during the 1^st Defendant’s office move.

The Defendant’s Objections

32.  Their final overall position really appears in their affidavits of 12 September 2007 which was before the hearing of the summons before the Master.  What one gets from these affidavits is that over and above the disclosure that has already been made other relevant documents are in existence.  The real objections from the Defendants is that such outstanding documentation as there may be, is beyond their possession, power and control and for this reliance is placed by Mr Chong on Lonhro Ltd & Anr v Shell Petroleum (1980) 1 WLR 627.  The expression “power” refers to a presently enforceable legal right to obtain inspection of a document from whoever held it without the need to obtain the consent of anyone else.  This test is also reflected in Hong Kong Civil Procedure at 24/2/7.

33.  In regard to the missing documents, Mr Wong has helpfully prepared a list of them.  The helpfulness of this is that in two pages it has isolated under each class what documents are in existence, relevant and as yet not disclosed.  I gratefully reproduce this list here.

“	CLASSES I & II
	1.	There was no disclosure of all documents pertaining to the legal proceedings instituted by Desmond Bloom in the United Kingdom including in particular documents pertaining to the settlement of those proceedings.
	CLASS III
	2.	Final engrossed Share Sale Agreement dated 19th May, 2004;
	3.	Transaction Documents : These are defined in the 17th May, 2004 draft of the Share Sale Agreement to include the following :
		(a)	the Share Sale Agreement;
		(b)	the Disclosure Letter;
		(c)	the Service Agreements; and
		(d)	all the agreements entered into pursuant to the terms of the Share Sale Agreement or any such other agreement.
	4.	Lock-in Undertakings dated 19th May, 2004;
	5.	The completion documents referred to in Clause 8 of the Share Sale Agreement at C2/807 [items 3 – 5 are all documents referred to in Item 2].
	6.	Position of John Ho :
		(a)	Service Agreement dated 18th May, 2004.
		(b)	Service Agreement appointing him as chief Executive.
	7.	Position of Chan Yim Sang :
		(a)	Letter of appointment dated 18th May, 2004;
		(b)	Letter of appointment appointing him as Executive Director of Hemisphere.
	8.	Document in relation to the provision of interest free loan up to £500,000.
	CLASS IV
	9.	Documents evidencing acquisition and/or disposal of shares by John Ho/Chan Yim Sang and their family members and associates.
	10.	Documents evidencing the transfer of beneficial ownership of Ho King Assets Corp. from Desmond Bloom and Ng Kin Wah to John Ho/Chan Yim Sang.
	11.	Documents evidencing the disposal of shares held by Kenneth Chung in favour of employees of John Ho’s firm.
	12.	the waiver referred to at p. 13-14 of the Admission Document.”

34.  It seems to me that one only needs to read this list to realise the obvious relevance of all the documents asked for.

35.  In terms of “power” to call for these documents, I am satisfied that as to all of the Hemisphere documents, given their position as Chief Executive and Executive Director respectively it is fatuous of the Defendants to suggest that the Plaintiff’s solicitors should write to an address in the English Lake District, which is where Hemisphere’s registered offices are, to obtain the documentation that refers to this company.  I find as a fact that all the documentation relating to Hemisphere is in the Defendants’ possession, power and control.  The other point of objection under this head relates to the settlement of the litigation between the Defendants and Mr Bloom.  These two Defendants were parties to that litigation and its subsequent settlement and I have no doubt that they must be able to call for the production of all the papers relating to that litigation after which they must disclose it to the Plaintiff.

Conclusion

36.  I regret that in a case where the Defendants have already disclosed so much that they should now have taken such an obtuse stance on what are after all a fairly limited number of highly relevant documents.  I am satisfied that Mr Wong’s detailed submissions correctly represent the position.  In any event, although Mr Chong had rather presented a broad front of objections, closer analysis shows that the only real ground worth pausing over has been the issue of possession, power and control of the documents asked for and on a proper analysis of those documents and the defendants’ status in relation to them, there is no doubt that they are in a position to direct that these documents should be handed over to them.  Overwhelmingly, the Master was correct in his view of this summons with the result that his order must stand and the appeal will be dismissed with an order nisi that costs should be to the Plaintiff in any event with certificate for two counsel.  The material which required consideration was substantial and the outstanding discovery of sufficient importance to justify the instruction of a leader.

37.  As to the Plaintiff’s “unless” summons, if I can so describe it, I propose to adjourn that generally with liberty to restore, to await the Defendants’ affidavits and disclosure under the Master’s now upheld order.