HCA992/2010
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
NO 992 OF 2010
____________
BETWEEN |
| | MACAU FIRST UNIVERSAL INTERNATIONAL LIMITED
（澳門第一環球國際有限公司） | Plaintiff |
and |
| | DING XIAO HONG（丁小紅） | 1st Defendant |
| | DING YU（丁育） | 2nd Defendant |
| | HONG KONG FIRST MAINLAND COMPANY LIMITED
（香港第一大陸有限公司） | 3rd Defendant |
| | (By Original Action) | |
| ____________ |
| AND BETWEEN | | |
| | DING YU（丁育） | Plaintiff |
and |
| | DING GANG（丁鋼） | 1st Defendant |
| | MACAU FIRST UNIVERSAL INTERNATIONAL LIMITED
（澳門第一環球國際有限公司） | 2nd Defendant |
| | (by counterclaim) | |
| ____________ |
| Before: Hon Au-Yeung J in Court |
Dates of Hearing: 1, 4-8, 11-15, 18, 19, 21, 22 & 25-28 March,8-10, 15‑18, 22-26, 29 & 30 April, 2, 3, 6-10, 13 & 14 May and 19-21 June 2014
Date of Judgment: 20 August 2014
_______________
J U D G M E N T
_______________
A. EXECUTIVE SUMMARY
1. It is the dream of any businessman: to own a valuable piece of land with a prestigious tower erected on it at the centre of Shanghai. The dream became a nightmare when he had to fight bitterly with his brother over the issue of who really owned the land and tower, causing a complete destruction of brotherhood. To decide the case, this court has to consider evidence from liars (principally siblings) on both sides.
2. The Ding family started off in poor circumstances in Shangrao city. Ding Xiao Hong (“DXH”), Ding Wei (“DW”) (not a party to this case), Ding Yu (“DY”) and Ding Gang (“DG”) are siblings. Their parents are the late Ding Mian (“the Father”) and Fang Mei Hua (“the Mother”). DG was a favoured child of the family born in 1968. His former wife was Su Xiao Ping (“SXP”). DY’s wife is Jiang Wen.
3. The main protagonists are DG and DY, whose cases are diametrically opposite. There is a dispute as to which of them earned the first pot of gold in the 1980s and gradually built up a business empire.
4. 1993 was a critical year in which 2 guakao companies (explained in Section I5 below) were set up –上海浦饒物產工貿公司 (“Purao”) and上海鼎泰物產國際貿易有限公司(“Dingtai”).
5. Purao was set up in April 1993. There is a dispute as to whether DG or DY provided the initial capital of RMB 1m for setting it up and the additional capital of RMB 10m in October that year. DG claimed to have accumulated wealth from his sole-proprietorship to pay for the capital. DY claimed to have wealth of about RMB 150m by 1993, including 3 companies he and DW set up in Hainan (“the Hainan Companies”) and other assets. He said he provided the capital.
6. On 6/6/1993, a 財產分約 (“Property Division Agreement”) and a 贈送書 (“Gift Agreement”) were executed at the direction of the Father. The former divided up assets between DY and DW. The latter was for DY and DW to make a gift worth about RMB 2m to DG who did not have much earning capacity. DG disputed the authenticity of the 2 Agreements and denied ever receiving the gift.
7. In November 1993, to take advantage of the tax benefits provided by the Waigaoqiao Tax Region (“the WGQ Tax Region”), Dingtai was set up. Again, each of DG and DY claimed to be the owner who had provided the initial capital of RMB 10m．
8. By 1996/1997, DY has lost millions through speculation in futures. DG claimed that as a result, DY had lost all his wealth and Dingtai was brought into serious financial difficulties. DG claimed to have retrieved control over Dingtai and paid off its debts. DY disputed these. He claimed to still have RMB 50-60m even after losing in futures.
9. In 1997, the land at No. 33, Hua Yuan Shiqiao Road, Puding New District, Shanghai, PRC (“the Land”) was purchased in the name of Dingtai. The price was US$27,720,000 (about RMB 230,000,000 at that time). The Land remained undeveloped until about 2001. Funds had to be borrowed.
10. Dingtai entered into a joint venture with one Balin (HK) Company Limited (“Balin”). They incorporated Shanghai Bading Property Development Co Ltd (“Bading”), which held the Land and eventually the Citicorp Tower (“the Tower”) built over it. Dingtai initially held 40% shares of Bading, whereas foreign investors (“the Foreign Investors”) held 60%.
11. There is dispute as to who negotiated for the purchase of the Land, raised the Land premium and brought in the Foreign Investors.
12. In 1998, funds were injected into Bading by 2 Railway Companies, ie Railway Redevelopment Co Ltd (“Railway Redevelopment”) and Railway Commercial Co Ltd (“Railway Commercial”) which DG and DY each claimed to be his.
13. In 2000, Dingtai was privatized as a result of national policy. The shares were transferred into the names of DY, SXP and a Shangrao company. There is dispute as to why the shareholding was like that and who raised the money for the privatisation.
14. The Land premium was fully paid by June 2002.
15. The Asian financial crisis occurred soon after the Land was purchased. The Foreign Investors gradually withdrew. In 2000, the Shanghai Holding Companies (上海申鑫Shanghai Shenxin and 上海鼎興Shanghai Dingxing) and the Shangrao Companies (上饒三鑫Shangrao Sanxin, 上饒三清Shangrao Sanqing and 上饒鼎興Shangrao Dingxin) were set up. They directly or indirectly held Bading shares took over from the Foreign Investors.
16. By 2003, the last Foreign Investor, Lee Tung, was bought out at a consideration of RMB 150m (being RMB 149,990,000 advance dividends and MOP 10,000). By then, all the shares in Bading became wholly owned by persons or companies which DG and DY each claimed to be his nominees or corporate vehicles.
17. In 2003, DY was removed as legal representative of Dingtai. In the same year, DY transferred all his shares in Dingtai to DXH. Notwithstanding that DY claimed to be in control of Bading internally and externally, he claimed that the handover of control to DG was because of a 白曉江事件(“the Bai Incident”) in 2003.
18. The Tower built over the Land was completed on 27/9/2004. Each of DG and DY claimed that the construction of the Tower (“the Project”) was carried out with him as the fund raiser and decision maker.
19. On 7/2/2004, DXH and SXP executed notarized deeds of gift (“the DXH Gift Agreement” and “SXP Gift Agreement” respectively) to acknowledge DG’s ownership in various assets and companies, including all those which held interests in Bading.
20. On 1/9/2004, the 3rd defendant (“Hong Kong First”) was set up. DXH held 95,000 shares (95%) and DY 5,000 (5%). Up to 25/7/2006, they had been the only 2 shareholders and directors.
21. By a series of transfers and use of corporate vehicles, the shares in Bading have been ultimately owned, since July 2006, by Hong Kong First.
22. On 23/1/2006, the plaintiff (“Macau First”) was set up. The shareholders were DG (85%), DY (5%), DXH (5%) and SXP (5%).
23. On 22/2/2006, Hong Kong First allotted 4,900,000 new shares to Macau First (“the HKF Allotment”). Hence Macau First became a 98% shareholder of Hong Kong First.
24. On 3/7/2006, DXH and DY transferred their respective 95,000 and 5,000 shares in Hong Kong First to Macau First (“the 2006 Transfers”). Macau First thus became 100% owner of Hong Kong First. DG and DXH were the only 2 directors of Macau First before the Impugned Transfers of shares referred to below.
25. On12/7/2006, DY, DXH and SXP respectively transferred 5%, 4% and 5% shares in Macau First to DG. Hence DG became 99% and DXH 1% shareholder of Macau First.
26. Shortly after the 2006 Transfers, on 25/7/2006, DY resigned as director of Hong Kong First. He was reappointed as director on 20/5/2010, and since then, he and DXH were the only 2 directors of Hong Kong First.
27. For about 4 years since July 2006 until the Impugned Transfers, Macau First had been the sole registered owner of all the shares in Hong Kong First. Hong Kong First held all the shares of Bading. Bading held the Land and the Tower. Each of DG and DY claimed that the shares in Hong Kong First and Macau First were held by nominees on his behalf.
28. In 2005 and 2007 respectively, DG and DY applied for immigration to Australia under the category for entrepreneurs and senior staff respectively.
29. The direct events that led to this litigation were as follows: according to DY, dispute between him and DG arose in about March and April 2010 when DG refused to release profits and loan proceeds of Bading to DY for him to invest in new projects. DG also allegedly refused to let DY inspect the books and accounts of Bading. With a view to protecting his own investments and regain control over Bading, DY, together with DXH, carried out the Impugned Transfers.
30. On 19/5/2010, DXH caused Macau First to transfer all its shares in Hong Kong First to DY (95%) and herself (5%) (“the Impugned Transfers”). There is no dispute that there was no resolution of the board (comprising DG and DXH) of Macau First and the purported consideration of HK$5m had never been received by Macau First. In any event, HK$5m was a gross undervalue because the underlying assets (including the Land and Tower) were worth billions of RMB as at the date of the writ.
31. After the Impugned Transfers, DY and DXH removed Yu Xia An (“YXA”), the then legal representative of Bading and nephew of DY and DG, and appointed DY in his place. They also tried to remove Bading’s seals and business certificates in June 2010 by force. The staff of Bading reported to the Mainland police and DG. It was then that DG discovered the Impugned Transfers, so he commenced the present action.
B. THE PARTIES’ RESPECTIVE CASE
32. The substance of this dispute is who, DG or DY, owned the beneficial interest in the shares of Hong Kong First and Macau First. DXH was a nominee of either DG or DY.
33. The case of Macau First is simple. The Impugned Transfers were wrongful. They should be rescinded, or there should be a declaration that the shares in Hong Kong First currently registered in the names of DY and DXH are held by them on trust for Macau First.
34. As against DXH, Macau First claims for damages or equitable compensation for her breach of fiduciary duties in stripping Macau First of its sole asset at effectively no consideration. It is said that she breached the self-dealing rule which prohibits a trustee from selling trust property to herself and the transaction is voidable by the beneficiary.
35. Macau First also claims against DXH and DY for damages for conspiracy. It avers that the Impugned Transfers are liable to be set aside on the basis of the "fair-dealing rule" unless DXH and DY can discharge the burden of demonstrating that the Impugned Transfers represented a fair dealing of assets of Macau First.
36. DY’s pleaded case is that there was an agreement or trust arrangement under which DG, DXH and SXP held the shares in Macau First (“the MF Trust”) and Hong Kong First (“the HKF Trust”) on his behalf (“the claim in trust”).
37. DY’s original claim that he was the real beneficial owner of the Land and the Tower was abandoned. Instead, he rests his case on being beneficial owner of the shares in companies starting from Purao and all intervening companies up to Hong Kong First and Macau First, set up allegedly with his money or at his direction (“the claim in beneficial ownership”).
38. DY seeks a declaration that he is the sole beneficial shareholder of Macau First and Hong Kong First; that the shares held by DG in Macau First is and has been held by him as nominee and/or trustee for DY; and that prior to the Impugned Transfers, Macau First held the shares in Hong Kong First as nominee and on trust for DY. He seeks an order for DG to transfer the Macau First shares to him (prayer nos.1-3)
39. DY seeks consequential relief including his replacement of YXA as legal representative of Bading; and accounts and enquiries to ascertain monies which have been paid to DG by virtue of his being the registered shareholder of Macau First (prayer nos. 4-5).
40. DY no longer seeks damages and/or equitable compensation or accounts or tracing of assets obtained by DG as a result of DG’s alleged wrongful acts (prayer no. 6-6A).
41. In considering the veracity of each party’s case, I bear in mind (1) the burden of proof; (2) the principles for resolving conflicts in evidence; (3) the overview of the credibility of witnesses in this case; and (4) the effect of not putting one’s case to the opposing party’s witnesses.
C. THE BURDEN OF PROOF
42. The case of Macau First is one built on its legal ownership. Legal title carries with it all rights. Unless and until there is a separation of the legal and equitable estates, there is no separate equitable title: see WestdeutscheLandesbank Girozentrale v Islington LBC [1996] AC 699 at 706F (per Lord Browne-Wilkinson).
43. The legal title will be the starting point. The onus is then on the party who contends that the beneficial interests are divided between them otherwise as the title shows to demonstrate this on the facts. See Stack v Dowden [2007] 2 AC 432, at §4-5 (per Lord Hope) and §68 (per Baroness Hale).
44. The legal ownership in this case is supported by registered shareholding. The starting point must be that DG is entitled to judgment unless DY can establish the so called beneficial ownership.
45. Mr Chan SC, counsel for DY, submits that the burden of proof lies upon the party who substantially asserts the affirmative of the issue: Phipson on Evidence (17th ed) at §6-06; Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd & Anr (unrep) HCA 1957/2005 & Ors, 28 July 2011, Poon J at §16.
46. With respect, this may well be true in respect of individual issues of fact, but this does not detract from the overall burden of proof in this case that it is for DY to establish sufficient bases to show that the beneficial ownership is different from the legal ownership.
47. DY has an uphill fight in the face of corporate documents of Hong Kong First and Macau First. On top of these are the DXH Gift Agreement, SXP Gift Agreement and written acknowledgements of nominees produced by DG, whereas DY has nothing comparable.
D. PRINCIPLES FOR RESOLVING CONFLICTS IN EVIDENCE
48. In resolving disputes of facts happening years ago, one should give heavy regard to contemporaneous documents and inherent probabilities rather than demeanour of witnesses.
49. In Esquire (Electronics) Ltd v Hong Kong And Shanghai Banking Corp Ltd [2007] 3 HKLRD 439, events took place 17 years before trial. It was held that:
“In such circumstances contemporaneous documentation is usually of the highest importance.” (at §446D-E, per Rogers VP)
“… the truth ... can best be tested by reference to contemporaneous documentation where it exists, or to its absence where one would expect it to have been created, as well as to inherent probabilities (though bearing in mind that there may be occasions where the truth may run against that particular grain) having regard to all the facts that are known. This is particularly so in a case such as the present, where events have taken place so long before trial and where there exists a mountain of contemporaneous documentation that can be used to point the way.” (at §135, per Stock JA (as he then was))
50. See also Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd & Anr (unrep) HCA 1957/2005 & Ors, 28 July 2011, Poon J, at §12-21; Lam Rogerio Sou Fung v Tan Soon Gin George (unrep) HCA 2576/2005, 5 May 2011, Chu J (as she then was) and R v Ng Wing Ming [1995] 1 HKCLR 64 at 65.25 and 67.20, Litton JA (as he then was).
51. The proper approach is to start from the undisputed facts. Then add to them such other facts as seem very likely to be true, as for example, those recorded in contemporary documents or spoken to by an independent witness. A witness may be found to be unreliable if his evidence is, in any serious respect, inconsistent with these undisputed or indisputable facts, or if he contradicts himself on important points. There should be as little reliance as possible on such deceptive matters as his demeanour. Having separated the true from the false by these more or less objective tests, the court will find whether the plaintiff or the defendant’s story seems to be the more probable. See Lam Rogerio Sou Fung v Tan Soon Gin George, §40.
52. It is essential to have regard to the entirety of a witness’ evidence. Witnesses can make mistakes, but the mistakes do not necessarily affect other parts of their evidence. Likewise, witnesses can regularly lie. However, lies themselves do not mean necessarily that the entirety of that witness’ evidence is to be rejected. A witness may lie in a stupid attempt to bolster his case, but the actual case nevertheless remains good irrespective of the lie. See Lam Rogerio Sou Fung v Tan Soon Gin George, §41.
53. The documentary evidence was not complete or conclusive in the present case since many documents could not be found or even destroyed legitimately (eg upon closing down of a company or sale of shares) at a time when litigation was not in sight. Banking documents were only kept for 15 years in the Mainland. The authenticity of some documents was questioned. The context in which the documents emerged had to be explained by witnesses, some of whose credibility was in doubt. The court has to do its best to weigh the evidence.
54. DG and DY accused each other of late or non-disclosure of material documents.
55. DY explained that he has lost his status as legal representative of Dingtai, and resigned as a director of Hong Kong First in 2006. He had no access to documents of these and the intervening companies. A lot of documents in the possession, custody or power of DG that might prove eg the source of capital injected by DY into various companies, or on his operation of the businesses have allegedly not been disclosed by DG.
56. DY claimed that a lot of documents had been stolen from his office at Zhongyu Building since this litigation has commenced. He also claimed that his former solicitors, Messrs King & Wood, held his papers by virtue of a solicitor’s lien. He therefore allegedly lost a lot of documents relevant to the litigation, eg his invitation on behalf of Bading for the tender of the design, choice of materials and suppliers and price, lifts and air-conditioning.
57. Despite this court’s order that all interlocutory applications had to be taken out on or before 15/12/2012, neither party had applied for specific discovery. Therefore, unless otherwise specified, the allegation of late or non-discovery shall not be held against any party. In fact, even without the undisclosed documents, there are sufficient materials before me to safely assess the strength or weakness of each party’s case.
58. One special category of documents which DY was said to have refused to but eventually disclosed was from what could be termed as “the Jiang Wei proceedings”. Those proceedings were commenced in Shanghai by Jiang Wei (DY’s brother-in-law) on 29/5/2012, to recover RMB 198,000 from DXH (as a member of the winding-up committee of Dingtai) and DY. That was 17 years after the cause of action first arose. See the judgment of the Shanghai City Putuo District People’s Court.
59. The Jiang Wei proceedings were strange. DY was made a party instead of a witness for no logical reason. If someone needed to handle the litigation, it should have been劉竹英 (DG’s ex-mother-in-law) the legal representative of Dingtai. Instead, DXH was brought in and she claimed to be a nominee of DY, the real shareholder and person in control of Dingtai. The history relating to setting up to Purao and Dingtai and the injection of capital was referred to in those proceedings.
60. DY admitted owing Jiang Wei the sum sued upon. He did not pay. It could not have been due to interests, as DXH suggested, in view of DY’s admission. It could not have been due to Jiang Wei’s refusal to settle, as Jiang Wei had given an affirmation to support DY and must have been on good terms with DY.
61. DY claimed that he was advised by his Mainland lawyers that he could make use of the Jiang Wei proceedings to obtain documents. See search order dated 24/7/2012 listing documents that DY had wanted to obtain, although the banks could not produce those beyond 15 years. That could not be the sole reason because, having obtained the documents before trial, DY and DXH chose to continue and dropped the defence in limitation despite prompting from the Shanghai Court.
62. Then DXH appealed on behalf of Dingtai for no valid reason. She was evasive and confused when explaining why she appealed. Both DXH and DY would not admit that the purpose of the Jiang Wei proceedings was to prove that DY was the owner of Dingtai and to avoid the present litigation.
63. Mr Chan SC pointed out that DG was not a party to the Jiang Wei proceedings and any judgment obtained could not bind him. DY had all along maintained that papers in the Jiang Wei proceedings were irrelevant and hence never produced them. DG’s solicitors only demanded for production of the papers for the Jiang Wei proceedings on 14/2/2013. DY’s solicitors asked for relevance. Before an answer came, DG had taken out a summons. To avoid unnecessary arguments, DY disclosed the documents. DY had never refused to provide those documents.
64. I accept that DY had never refused to provide those documents. However, the purpose of the inspection order was stated to be “to further prove that DY was the actual investor of the subject company”. DY’s Mainland lawyers had put forth a lot of evidence to the Shanghai Court to show that Dingtai belonged to DY, when ownership was not in dispute. DY sought to distance himself from “his lawyer’s decision” as if the lawyer had acted without instructions. Even the Shanghai Court stated that the statements and conduct of all parties aroused suspicions of conspiracy (通謀的嫌疑). Jiang Wei had agreed to be DY’s witness in December 2010 but has not attended the trial.
65. I am not satisfied that the Jiang Wei proceedings were maintained or appealed against for genuine debt recovery purpose. Apart from obtaining documents, the irresistible inference is that DY had wanted to rely on findings in the Jiang Wei proceedings as to ownership of Dingtai to try to influence the outcome of this litigation.
E. AN OVERVIEW OF THE CREDIBILITY OF WITNESSES
66. I have kept detailed notes of the witnesses’ demeanour which I will refer to if necessary in this judgment. But in fact there is ample evidence for me to test the truthfulness of the witnesses’ evidence.
67. The witnesses have been heavily cross-examined on their prior affirmations. (All references to “affirmations” in this judgment are to those filed in the receivership proceedings launched by DY but failed.) I bear in mind that inconsistencies in the affirmations and witnesses’ evidence at this trial might be inevitable due to preparation of affirmations under great pressure of time and incomplete discovery.
68. I am mindful of the stress that a witness had to undergo inside the witness box. Witnesses can be forgiven if sometimes they do not answer questions directly, or give unnecessary answers for fear that a point would be missed by the court. This court would not exclude the possibility that witnesses, even in an attempt to honestly recount and explain events, might have made genuine mistakes and, upon discovery of documents, refreshed their memory and hence “corrected” or “reconstructed” their version. However, that was very different from making up stories as one went along.
69. The chief protagonists from the Ding family who gave evidence were in 2 camps. DG himself was in one camp. Other family members, namely, the Mother, DXH, DW and DY were in the other. There were other witnesses for each camp.
70. Regrettably, I find all the 4 siblings in the Ding family to be liars. This case was flooded with lies, concoction, half truth, exaggeration, inconsistent evidence, false documents produced by DG and DY and collusion of witnesses. There was conduct that put into question commercial integrity, eg signing in another’s name or applying another’s personal chop, injecting capital into a company for a short time just to meet the capital verification requirement in the Mainland and then withdrawing the capital immediately; and misstatements to the banks of the purposes of loans.
71. Whilst a witness might have forgotten about minor details due to the lapse of time, he/she would hardly forget major events and what governed his/her own conduct. As will be demonstrated, DY and DG respectively exposed their ignorance of certain major events, thus casting doubt on their credibility. Both of them have made up part of their case as the evidence went along, which could not be explained away by faulty memory, lack of access to documents and extreme time pressure.
72. DG was an unreliable witness. He knew the details of his case well, but there were numerous occasions when he was evasive. That could not be explained by the fact that he had never been involved in litigation before and this was his first time as a witness. He tried to mislead the Court in various ways. This was most obvious in relation to his case on the first pot of gold, and ownership of Purao and Dingtai. He produced admittedly false evidence in relation to the Railway Companies. Unless otherwise specified, I reject his evidence for the period before 1995/96 but largely accept his evidence for the period thereafter.
73. DY was a shrewd businessman and smart in giving evidence. He was very familiar with the details in evidence and his response was quick. However, he has been wholly shaken in cross-examination in relation to events after 1995/96. Without details, he gave bold assertions in his affirmations and witness statements without qualification, only to have to resile from them in the witness box. Though I accept that a witness might not in the urgent circumstances of receivership proceedings have full memory, he would not have missed a fact as important as how eg the deposit for the Land was funded, how the last Foreign Investor of Bading was bought out, and yet DY just got the primary facts wrong. There were numerous examples of his evidence being self-contradictory and inconsistent with documentary evidence. He has put in forged documents (eg the statement in proof of his business with one Baosteel Company). He used the Jiang Wei proceedings for ulterior purpose. He made unfounded allegations of DG’s witnesses receiving benefits from DG’s side (eg Sun Huiding’s wife and Guy McComb). He colluded with his witnesses. He was an unreliable witness. Save where expressly specified, I reject his evidence concerning the period after 1995/96.
74. DW has lied to the authorities when he applied to become a person in charge of an enterprise. He stated that he had worked at 上饒水動力厰when in fact he was imprisoned for 2 years from1988 to July 1990. I accept that it was because he felt aggrieved and did not want to disclose his criminal record. I also accept that since his release from prison in 1990, he had been working with DY in the steel business. From 1996 to 2007 when he retired, he had been a civil servant at Shangrao Foreign Trade Office 外貿部. He was not an eloquent witness and in fact could be quite rough at times with answers. He would give an answer even though he was not sure, only to be immediately contradicted by himself. On issues such as the Property Division Agreement, the Gift Agreement, and why 3 Hainan Companies were incorporated, he gave numerous inconsistent answers. He got confused with the chronology of events, eg when he talked about what assets he had before entering into the Property Division Agreement and his subsequent discussion with DY on division of assets. He clearly felt antagonized by what he perceived to be an improper way DG treated DY in this litigation. DW was obviously a partisan witness, keen to stand for DY. He was not a reliable witness. Save where expressly specified, I reject DW's evidence.
75. DXH was wholly shaken in cross-examination. She heavily contradicted herself, eg in relation to whether DY knew about the HKF Allotment and 2006 Transfers, why she executed the DXH Gift Agreement and transferred 6 properties under her name to DG. She was clearly a partisan witness who would just say anything to advance DY’s case. Her siding with DY might have been motivated by the fear of being sued by DG for misappropriation of funds. Save where expressly specified, I reject her evidence.
76. The Mother was aged 81 at the time of the trial. She was born in 1933. She has misstated her age in her witness statement/affirmation but that did not affect her overall credibility. She was calm, careful, and not hurried. She spent 30 minutes in the box reading her witness statement and 10 minutes reading the original Property Division Agreement and Gift Agreement before answering questions. She could distinguish between hearsay (eg that DY was more successful because DY told her that business was good and gave the Father pocket money when he went home) and first-hand knowledge, eg the job of DW. She did not pretend to know eg the reasons for this litigation. She had made a sweeping comment in her affirmation about DG distorting the truth[1]. I disregard that comment as being her perception without sufficient basis, as she could not have read DG’s reply document which was in English. I remind myself not to rely too much on her perception of the success of each son and his ownership of companies. There were matters governing beneficial ownership which she clearly was unable to understand. I find the Mother to be an honest and reliable witness and I accept her evidence, save where otherwise specified. There might have been some inconsistencies between her written and oral evidence, probably due to the use of English in the written version. Where there was conflict, I accept her oral evidence.
77. Specific examples to illustrate my view of the Dings’ evidence and credibility of other witnesses would be given when I analyze their evidence under various issues. Many of the witnesses (or their relatives) from DG’s side have ended up with a post in Bading (eg 幸霓爾, son of 鮑栽萍). I do not find such witnesses to be unreliable solely because of their connection with Bading. It was the substance of their evidence that mattered.
78. Statements of witnesses who have not given evidence shall be disregarded save where agreed to by the parties.
79. There was one document which featured prominently in DG’s case – a letter to the High Court of Hong Kong signed by all the staff of Bading (except DXH and her son 朱嘉) (“the staff letter”). Not all the staff members who appended their signatures to it had first-hand knowledge of the contents or the full contents. For example, 鮑栽萍only knew that DY had a “little girl” and his lifestyle was lax; yet she subscribed to a sweeping remark that DY “早年間丁育曾經賺了些錢，可是很快這些財富就因爲丁育沉緬于酒色，揮霍無度而所剩無幾, ……” Some of the content was false, eg the reference to DG sending DY on overseas business visits. At best, the staff letter showed the staff’s perception of who the CEO of Bading was. The affirmative statement that ownership of Bading was in DG was opinion evidence without evidential basis. Therefore, regardless of some staff having confirmed the contents in the witness box, I attach very little weight to the staff letter in assessing their credibility or in deciding the question of beneficial ownership.
F. EFFECT OF NOT PUTTING ONE’S CASE TO THE OPPOSING PARTY’S WITNESSES
80. It is a well-settled proposition endorsed by the Court of Final Appeal that “fairness requires that the adverse findings which the judge will be invited to make should have been put squarely to the witness in cross-examination, so that he can have the opportunity of offering an explanation”: see Aktieselskabet Dansk Skibsfinansiering v Brothers & Others (2000) 3 HKCFAR 70 at 91J-92A, Lord Hoffmann NPJ.
81. If a party has decided not to cross-examine on a particular important point, he will be in difficulty in submitting that the evidence should be rejected: see Phipson on Evidence (17th ed) §12-12.
82. In Rahme v Smith & Williamson Trust Corporation Ltd [2009] EWHC 911 (Ch), Morgan J observed (at §90) that:-
“… Every counsel should know the general rule that it is not open to counsel to invite the court to reject the evidence of a witness as deliberately untrue when the witness was not challenged in that way… The need for cross-examination which specifically challenges the truthfulness of the witness’ account is clearly established … Whilst this approach may be open to some very limited exceptions, there is no possible exception relevant in the present case. In view of the failure to put to Mr Haddad that his evidence was a concoction, it is not open to me to consider that possibility. It would be completely unfair to Mr Haddad to make such a finding against him. Similarly, it would be completely unfair to him even to hint at what I might have thought if my hands had not been tied in this respect by the failure to challenge his evidence in this respect. I will therefore proceed on the basis that Mr Haddad’s evidence was honestly given.”
83. Where an allegation of grave or even criminal conduct is made in civil case, it is all the more important that such allegation is put squarely to the relevant witnesses. This is different from just putting one’s case to the witness generally. Whilst the burden of proof on all issues at a civil trial remains the same, the more serious the act alleged, the more inherently improbable must it be regarded; and the more inherently improbable it was to be regarded, the more compelling would be the evidence needed to prove it on a preponderance of probability: see Aktieselskabet Dansk Skibsfinansiering v Brothers, above,at 78F-G; Solicitors (24/07) v Law Society of Hong Kong (2008) 11 HKCFAR 117 at §§72-84 (per Bokhary PJ). It is against the notion of fairness for the court to make any finding of grave or even criminal conduct when the person who was accused of such conduct was not given a fair opportunity to answer such accusation.
84. This court has indicated to the parties at the pre-trial review on 24/1/2013 that it would not be necessary for the parties to put the respective cases to the witnesses (“the deemed put procedure”). I agree with Mr Tong SC, counsel for DG, that such indication was only given on the basis that this was a civil case where the parties have already set out their respective cases clearly in their witness statements. That basis did not cover (a) witnesses who have not filed any evidence which was responsive to the evidence of either side; (b) new allegations which have not been previously raised in the parties’ witness statements; and (c) serious allegations of grave or even criminal conduct.
85. In any event, even when the deemed put procedure was adopted for the purpose of saving time, it would still be preferable for important aspects of a party’s case to be specifically put to the witnesses on whose evidence they may impact, so as to afford such witnesses a full and fair opportunity to comment on, or respond to, those matters: Aspial Investment Ltd & another v Mayer CorporationDevelopment International Ltd CACV 162/ 2012, 24 May 2013, per Barma JA, at §59.
86. I bear in mind that many aspects of what DG’s witnesses said have not been challenged. Of course that would not prevent me from assessing their reliability when weighed against other evidence. However, as I will demonstrate, new allegations have emerged whilst DY, DW and DXH gave evidence, which were never put to DG or his witnesses.
87. I now proceed to analyze the claims in trust and beneficial ownership. I will largely follow the sequence of events in the Executive Summary. A summary of my findings and conclusion can be found in Sections AD to AG below.
G. THE CLAIM IN TRUST
G1. DY’s pleaded case
88. Put simply, DY grew his business empire since 1980s. Gradually, he required the assistance of people whom he could trust and rely on. Amongst them were DG, DXH (both on good terms with him) and SXP, who were made his nominees at different stages for the purpose of holding or managing assets on his behalf through various corporate vehicles including Macau First, Hong Kong First and Bading (§§5, 18(4), 18(5) of the re-amended defence).
89. Re Macau First, it is DY’s case that DG, DXH and SXP had, whilst being registered owners, been holding the shares in Macau First as nominees of or on trust for DY pursuant to or as a result of the MF Trust. DG, DXH and SXP had never contributed to the issued capital or provided consideration for the Macau First shares. It was DY who nominated DG and DXH as his nominee directors. See §11 of the re-amended defence and counterclaim.
90. Re Hong Kong First, it is DY’s case that the shares in it were held in the names of Macau First and DXH as nominees of or on trust for DY under the HKF Trust. It was DY who initiated the incorporation of Hong Kong First to hold his interests in Bading, which in turn held the Land and the Tower.
91. Gradually, as DY’s focus of investment shifted from Hong Kong and Mainland China to other countries and due to the Bai Incident, he allegedly maintained a low profile and entrusted his Mainland business (especially the daily operations of the Tower) to DG. When agreeing to assist DY, DG allegedly requested to be made the nominee owner so that he, ostensibly as the boss to outsiders, could be more assertive in front of other people and it would be more effective for managing the Land, the Tower and Bading. DY allegedly agreed.
92. DY claimed that prior to the HKF Allotment and the 2006 Transfers, it was orally agreed amongst him, DXH and DG that Macau First would only be a nominee shareholder of Hong Kong First and would hold the shares in Hong Kong First on DY’s behalf. (See §18 of the re-amended defence.)
93. The ultimate issues are whether the 2 Trusts existed as a matter of fact and whether they could exist as a matter of law.
G2. Whether the Trusts existed as a matter of fact
94. There was absolutely no evidence of express trusts and their terms. There was no evidence that DY had disclosed to the alleged nominees his intention of entering into any trust arrangements, or that there was mutual/tacit understanding between DY and the alleged trustees.
95. For 4 to 6 years since the HKF Trust or MF Trust could have arisen in 2004 or 2006 respectively until issue of the writ on 3/7/2010, there had been no acknowledgement of any kind from DG, DXH and SXP as to DY’s interests in Macau First or Hong Kong First. There was no distribution to DY of benefits accrued to those 2 companies. Rather, Hong Kong First had given its dividend income to DG. There had been no account of assets and income from the alleged nominees/trustees to DY. Nor had DY demanded for the same before action.
G3. The HKF Allotment, the 2006 Transfers and DY’s resignation as director in 2006
96. The HKF Allotment, the 2006 Transfers and DY’s resignation as a director of Hong Kong First effectively excluded all possibilities of the existence of the HKF Trust and MF Trust.
97. DY had given 4 inconsistent versions as regards the HKF Allotment.
98. The 1st version was in DY’s 1st affirmation (§§113 & 115) and §49 of DXH’s 2nd affirmation. The HKF Allotment and the 2006 Transfers were said to be done on DY’s express instructions to DXH, acceding to DG’s request to be a nominee shareholder: It was DY’s deliberate decision to make Macau First 100% shareholder of Hong Kong First since Macau First had no business operation. Hence, DY was not denying that he had signed some documents and he did sign for a purpose.
99. Until August 2011, the defence (verified by a statement of truth from DXH) has maintained this part of DY’s case. DXH said she thought the HKF Allotment was “nominal” as no consideration was provided. She did not think it important that after the 2006 Transfers, Macau First would own the Tower. DY gave the incomprehensible explanation in his oral evidence that DXH had a pre-conceived notion (先入爲主).
100. The 2nd version was in DY’s witness statement (§19.6), wherein he refuted the 1st: “因爲年代久遠, 當時又無確切資料可以查證, 以上的説法應該不準確。”DY and DXH claimed that DY did not know about the HKF Allotment or the 2006 Transfers until the start of this litigation in 2010. Under cross-examination, DY very loudly asserted that DXH had not informed him that DG had told her to do the HKF Allotment. In my view, if DY did not know, there could not have been any agreement for the alleged trustees to hold on trust for DY.
101. DXH admitted under cross-examination that she knew that between 2004 and 2005, DY put all entities that held Bading shares under Hong Kong First. It was most incredible, in my view, that DXH would have taken such a draconian step of transferring the entire ownership of Hong Kong First to Macau First behind DY’s back. All the more so given her understanding that DY had previously rejected DG’s request to become Hong Kong First’s shareholder. DG made several requests to her. In the end, she persuaded DY to transfer shares to DG. See her statement to the Prosecution of Macau dated about 17/9/2011.
102. DY’s alleged ignorance of the HKF Allotment and the 2006 Transfers was of course contradicted by the minutes of EGM and board resolution of Hong Kong First which bore his and DXH’s signatures. In his oral evidence, DY denied having signed the minutes and board resolution but admitted having signed the instrument of transfer.
103. Under cross-examination, DY explained that he saw some documents after filing his 1st affirmation and realized that he had no knowledge of the HKF Allotment and the 2006 Transfers. He and DXH were told by their previous solicitors, King & Wood, that they could not change their case unless they had proof, otherwise they would be criticized for lying. So DY left out the “true” version from his 3rd affirmation.
104. Mr Chan SC refers me to the history of these proceedings when DY changed his solicitors to Orrick due to a dispute with King & Wood over fees. DY was thus deprived of access to documents due to the solicitors’ lien and had to face many interlocutory applications. It was when the parties exchanged their witness statements in August 2012 that DY was told by Orrick to tell the truth and so he corrected the errors made in his affirmation and defence.
105. I reject these explanations. DY carried out the Impugned Transfers in May 2010 before commencement of this action. If he had not known about the HKF Allotment and the 2006 Transfers, he must have been very surprised to find that all the shares in Hong Kong First previously held by DXH and himself had gone into the hands of Macau First. It was impossible for DY not to raise alarm until he prepared the 3rd affirmation. In any case, who was holding the Hong Kong First shares was an all too important matter that DY would not require documents to jog his memory. He could not point to any specific document anyway.
106. DY had made a very serious allegation against King & Wood who was never given the opportunity to answer it. In any event, it was inconceivable for King & Wood to have advised him not to change his case until there was proof. What proof could there be for a negative averment of absence of knowledge?
107. Further, DY’s serious accusation against King & Wood was contradicted by his own conduct after engaging Orrick in August 2011. According to DY, he had immediately told Orrick about the 2nd version. Despite that, DY (accompanied by Orrick) maintained in his report to the Commercial Crime Bureau on 27/10/2011 that he was aware of the transfer of all shares in Hong Kong First to Macau First. When asked why DY did not tell Orrick something to the effect that he had not got documents to confirm if he had signed the documents instead of stating affirmatively a wrong version, DY simply said he maintained the original version (沿用原來的話). He then changed his evidence and said that he only discussed the mistake with Orrick when they prepared his witness statement, about 2 months after he instructed Orrick.
108. I find no truth in the 2nd version. The allegation against King & Wood was most unkind against a firm who had done well for DY in the receivership proceedings.
109. The third version appeared in DXH’s 3rd affirmation dated 8/3/2013, namely, a bare allegation that she signed for DY on the relevant resolutions. Under cross-examination, DXH even said that it was DG who told her to sign for DY. That was clearly a recent invention. DXH had not pointed to any other instance when DG had dared to ask her to sign on behalf of DY.
110. The fourth version emerged only during cross-examination of DY, namely, that 徐民良(“Xu”) (法務督導副總裁 of Bading) had given the transfer documents for him to sign without the chop of Macau First and DXH was not present then. DY did not know what he had signed until his Hong Kong solicitor showed it to him. This eleventh-hour version has never been put to Xu.
111. Notwithstanding the unchallenged evidence of Tam Kwan Yip (accountant and secretary to Hong Kong First) that copies had been taken by DXH in June 2010, the board resolutions concerning the HKF Allotment were only produced during the trial. None of the reasons given by DXH could explain the late production. In my view, her conduct reflected an intention to hide material evidence and that DY and DXH took time to make up their stories.
112. These inconsistent versions made DY totally unreliable. I place the greatest weight on documents and find that DY did know about the HKF Allotment and the 2006 Transfers when they were executed. He signed the board resolutions and transfer documents without protest or reservation. He resigned as a director of Hong Kong First, relinquishing all control, just after Macau First became 100% owner of Hong Kong First. All in 2006.
113. I find that the MF Trust or HKF Trust did not exist.
G4. Whether the 2 Trusts are sustainable as a matter of law
114. The “reflective loss” principle is such that a shareholder has no legal or equitable interest in a company’s property: Macaura v Northern Assurance Co Ltd [1925] AC 619, at 626-627; Good Profit Development Ltd v Leung Hoi [1993] 2 HKLR 176, at 179-181; Luo Xing Juan v Estate of Hui Shui See (2009) 12 HKCFAR 1, at §34.
115. In Oriental Peer Co Ltd v Terrian Ltd [1987] 2 HKC 61 (CA), at 72D-G:
“… Terrian, as a shareholder of Polly Jack, has no legal or equitable interest whatsoever in the property (if any) of that company.
This is trite law but it is too often overlooked and, as Lord Russell of Killowen observed in EBM Co Ltd v Dominion Bank [1937] 3 All ER 555 (PC) at p 564 it is ‘of supreme importance that the distinction should be clearly marked, observed and maintained between an incorporated company's legal entity and its actions, assets, rights and liabilities on the one hand, and the individual shareholders and their actions, assets, rights and liabilities on the other hand.’
As the English Court of Appeal emphasized in Prudential Assurance Co Ltd v Newman Industries (No 2) Ltd(9), 223A-B, shares are merely a right of participation in the company on the terms of the articles of association. The same point was made by Lord Buckmaster in Macaura v Northern Assurance Co Ltd(10), 626 where he indicated that the shareholder has no right to any item of the company's property, but is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up.” (emphasis added)
116. If a shareholder who has provided the capital were to be able to acquire direct beneficial ownership to the underlying assets, it would be wholly unfair to the creditors of the relevant company.
117. In Hui Yin Sang v Tsoi Ping Kwan [2010] 1 HKC 585, the plaintiffs sought to assert a trust claim in respect of some underlying assets held through some intervening companies based on the alleged common understanding between the ultimate shareholders. The claim was struck out. Au J stated (at 594E-G) that:-
“(5) Secondly, under the principle against recovery of reflective loss, a shareholder is not entitled to recover a reflective loss, being a loss that can be made good if the company enforces its rights against the defendant. The underlying rationale is that if a shareholder is permitted to recover such a loss, then either there will be double recovery at the expense of the defendant, or that the shareholder will recover at the expense of the company and its creditors: Landune International Ltd v Cheung Chung Leung [2006] 1 HKC 517, [2006] 1 HKLRD 39 (CA) at 47B-D.
(6) The 1st and 2nd Plaintiffs’ claim that they still acquired the direct beneficial ownership in the New Plaza Project despite the intervening companies simply because of their common understanding and dealings that they were partners of the project is against the underlying rationale of the principle against recovery of reflective loss. The trust claims as pleaded as such are also bound to fail.”
118. DY’s counterclaim is brought in his personal capacity. Even if the initial capital in Hong Kong First or Macau First could be traceable to the various companies that DY set up in the 1990s, the Land and the Tower would still belong to those companies that hold them and not DY in his personal capacity. He is not entitled to seek loss suffered by the intervening companies, Hong Kong First or Macau First as a direct or indirect shareholder because of the reflective loss principle.
119. There is simply no answer to this legal issue in Mr Chan SC’s final submission. The claim in trust must fail. This is sufficient to dispose of the case and entitle DG to judgment.
H. THE CLAIM IN BENEFICIAL OWNERSHIP
120. Assuming I am wrong in my conclusion in para 118, I have proceeded to consider DY’s claim in beneficial ownership. This is on the premise that if he can prove his case on the facts, directions will be given to enable shares in the relevant companies to be retransferred to him.
121. The Land was acquired in the name of Dingtai at a time when Dingtai did not have funds of its own. All the funds for acquisition of the Land, the Project and buying out the Foreign Investors of Bading were borrowed. As the ownership of Dingtai was disputed, on DY’s case, it was necessary to trace the source of capital of Dingtai and Purao and subsequent funding arrangements. This part of the case involved examination of DY and DG’s conduct from 1980s to 2010.
122. In his opening submission, Mr Chan SC submitted that the answers to 3 questions (“the 3 Questions”) would be determinative of this case:
(1) Who paid the RMB 1m to set up Purao in March 1993?
(2) Who paid the RMB 10m for increase of Purao’s capital in October 1993?
(3) Who paid the RMB 10m capital of Dingtai in November 1993?
He submits that the answers to the 3 Questions were “DY”.
123. In his closing submission, Mr Chan SC sought to show that the companies set up subsequent to Dingtai belonged to DY beneficially and that at each stage, for each change of nominees, there had been no consideration.
124. DG denies DY’s case. Mr Tong SC submits that the acquisition of the Land and the setting up of Bading to hold all the interest in the Land represented “the fresh start of a new project” in which only DG (but not DY) had direct and indirect personal financial contributions. The objective evidence showed that DG was in control of Bading. Throughout the years, DXH had acted upon DG’s instructions without reference to DY and executed the DXH Gift Agreement to acknowledge DG’s ownership. Even after learning of the brothers’ conflict, DXH had continued to act upon DG’s instructions and transferred funds to DG without DY’s consent.
125. In the following analyses, a reader should note the period from 1980s to early 1993 (when there was early accumulation of wealth). Thereafter the most significant events happened in 13 years between 1993 and 2006. The relevant year will be highlighted in each section heading.
I. 1980s TO EARLY 1993: EARLY ACCUMULATION OF WEALTH OF DG AND DY
126. How DG or DY accumulated his first pot of gold was highly relevant in proving, on a balance of probabilities, which of them had the financial strength to set up Purao and later Dingtai. DG’s version was that he accumulated wealth as a sole proprietor through various businesses. DY said that he accumulated wealth through the steel business. He said that DG could not even finish apprenticeship and was financially dependent on DY.
I1. DG’s version on his first pot of gold
127. There is not much dispute that DG’s early businesses were in transportation, logistics, sale of vehicle components and household electrical appliances: Exhibit P2, DG’s original licenses for transportation.
128. DG claimed that in delivering goods, he had established connections with various people who invited him to participate in their trades. Hence he also (i) sold cigarettes; (ii) sold down jackets and duvets; and (iii) engaged in certain business ventures with DY.
129. DG had no business licences, no business address, no telephone numbers, and did not pay tax. He claimed to have accumulated about RMB 2-3m in 4 years by early 1993 and he kept the money at home without a bank account. He spent RMB 500,000 to 600,000 to purchase a Santana vehicle, a matrimonial property and a property in Shanghai. He invested his money allegedly in shares in Luyin (魯銀股), from which he generated the capital to invest in Purao.
130. As a sole proprietor and not expecting this litigation, the lack of contemporaneous documents in the 60 trial bundles to show DG’s business was not surprising and should not be counted against him.
131. DG might have seized on every opportunity to trade on ad hoc basis, as Mr Tong SC submits in closing. I also bear in mind that doing business by cash without a bank account might well sound strange to Hong Kong people but that in itself was not sufficient for me to disbelieve DG. He has explained that sole proprietors were not permitted to open a cheque account. Likewise, the failure to obtain a business license and to pay tax might have been in breach of Mainland law, but it was not sufficient to dissuade me from finding that DG had operated some business(es) beyond transportation.
132. There was a resume of legal representative (法人履歷表) dated 12/12/1998 setting out DG’s credentials when he set up Railway Redevelopment. Although the contents were said to have been filled in by Su Jian (SXP’s brother, a cheeky and unreliable witness who pretended to be precise), DG did confirm the same by signing. The resume filled in the “working unit/department” of DG from September 1986 to November 1998 but made no mention of his various businesses. I do not find that surprising. After all, his sole proprietorship could hardly fit into the description of “working unit/department” on the resume. And even if he were to fill in “sole proprietor”, one could hardly expect him to put down such details as “trading in down products and cigarettes”.
133. What worked against DG, rather, was the way in which he presented the evidence, the inherent improbabilities in his version and the lack of corroboration by his own witnesses. Even the Mother did not support his version.
134. Firstly, the most lucrative business of sale of down jackets and duvets (making several hundred thousands of RMB in one deal) was first mentioned only 2 weeks before trial in DG’s 2nd supplemental witness statement. His explanation was that he could not raise it until he could secure documentary evidence in the form of a statement dated 16/2/2013 from one 王建峰(“Wang”) of Shangrao Down Products Factory to support him. That was a most ridiculous explanation. DG had never felt inhibited from describing on affirmation his other businesses that was not supported by documentary evidence either.
135. Secondly, Wang has given a witness statement in the first round of exchange of witness statements in August 2012. He never mentioned such lucrative business of DG.
136. Thirdly, Wang’s evidence contradicted DG’s evidence. Whilst DG’s oral evidence in chief was that DG started his transportation business together with Wang in 1988, Wang’s evidence was that he worked in logistics and transportation only since 1995. There was no mention of any joint business venture with DG.
137. Fourthly, Wang’s statement dated 16/2/2013 was not a contemporaneous document. Wang never appeared for cross-examination.
138. Fifthly, DG was evasive when cross-examined on his business in down products. He evaded the question of whether he had entered into any written contracts in respect of such goods or whether there was a single sheet of paper in proof.
139. Sixthly, there was no mention in any other witness statements (eg SXP) of DG’s business in cigarettes or down products.
140. Seventhly, according to DG, he did not have to find suppliers or purchasers. The suppliers would directly invoice his end-purchasers for the price commanded by DG. DG did not even have to be troubled with payment of tax because “he thought” the suppliers would have done it for him. DG simply could not explain why the suppliers would have invoiced customers for a higher price commanded by him, which meant the need for the suppliers to pay more tax. He dodged the issue by saying he had “agreed” with the suppliers. Such easy way of making profits that ran into hundreds of thousands of RMB at the cost and trouble of the suppliers was inherently improbable.
141. Eighthly, as admitted by DY, the sale of cigarettes was monopolized by the Mainland government. It was improbable for DG to have run that business. In any case, DG was not even able to estimate his costs and gains in that business.
142. The more improbable the act in question, the more compelling the evidence needed: Aktieselskabet Dansk Skibsfinansiering v Brothers (2000) 3 HKCFAR 70 at 78. I place no weight on Wang’s statement. DG simply dared not go into details. He has concocted the story about the business in cigarettes, down jackets and duvets to boost his weak case on accumulation of wealth. His income from business (para 127 above), which I accept, was low – about a few ten thousand RMB per year of “hard earned money”, in his own words.
143. As for DG’s business with DY, DG has changed his story as the case progressed.
(i) DG denied that DY operated a business as金山五交化物資供應站 (金山五交化) and insisted that DY was only an employee there. DG never mentioned in his pleadings, affirmations or witness statements that he participated in that business. However, in his oral evidence, he accepted that DY ran and subcontracted金山五交化.
(ii) DG put DY to strict proof that the latter had run a business of selling steel through上饒茅家嶺供銷公司 (“Maojialing company”). In his oral evidence, DG changed his stance and asserted that he took part in that business of DY.
(iii) DG admitted that he had not injected capital into the businesses of DY and the 2 brothers never discussed how to distribute the profits.
144. I reject DG’s version that he had done business with DY.
I2. DG’s trading in Luyin shares
145. It follows that I do not accept that DG had money to invest in Luyin shares. In any case, I disbelieve his story on the Luyin shares.
146. The lack of documentary proof of trading in Luyin shares was not surprising so many years after the alleged trading. What was incredible about DG’s case was reflected in his 3 different versions:
(1) In his 3rd affirmation, DG said that in about 1992, he purchased around 1,000,000 original Luyin shares at RMB 1 per share. In 1997, he sold them at around RMB 20 per share and earned a handsome profit of over RMB 10m (not RMB 19m). Such profit would have eroded all difficulty in raising the RMB 2m deposit for purchasing the Land but, as one shall see, it did not. In my view, it was not that DG had made an arithmetical error by “understating the profit” by RMB 9m, but that he had made up the story. He even admitted under cross-examination that RMB 10m was only “gross” return without taking into account “deductions”. What deductions could have run into millions of RMB?
(2) In his witness statement, DG stated that he used RMB 1m to purchase an unknown quantity of staff shares (職工原始股). He allegedly sold part of them in about April/May 1997 at RMB 26 to RMB 34 per share. He sold another lot in about late 1999 at around RMB 13 to RMB 14. He was able to recall such details of 16 years ago in the absence of documents but was unable to state the profit.
(3) The 魯銀實業集團股份有限公司董事會魯銀實業集團股份有限公司股票上市公告書dated 21/12/1996 stated that the 5th largest shareholder held 1.21m shares only. When that was shown to DG in cross-examination, DG changed his version to say that he bought about 200,000 to 300,000 shares for a total sum of RMB 1 million. He said that the face value was RMB 1 per share but with premium up to a maximum of RMB 3 per share. He suggested for the very first time that the shares were registered in the name of several ten employees of Luyin. His friend in Shandong (who sold fruits) was the middleman. He got the profits in several tranches. In 1997, DG allegedly got back the original RMB 1 million he paid, with certain sums being deducted by the middleman as his remuneration. Another lot of shares was sold in about 2000 and DG said that he got profits of about “5-6 million”. The trading was in cash.
147. DG said he earned profits of RMB 400,000 out of the Luyin shares which he might have injected into Dingtai or paid directly to Fortune World for the Land premium in 1997. In my view, there was no reason why he just invested RMB 400,000 when RMB 230m was needed.
148. He gave a suspicious account as to how he treated the money from the Luyin shares, ie he might have deposited the same with DXH or SXP or other nominees although he had bank accounts. He explained that it was to maintain a “low key” and “avoid publicity”. One wondered what publicity could be attracted from selling shares.
149. DG’s version was inconsistent and another concoction. Mr Tong SC simply avoided any comment on the investment in Luyin shares in his closing submission. I reject DG’s version on the Luyin shares entirely.
150. On the other hand, DY claimed that DG first started off as an apprentice, filling the vacancy left by the Mother from her retirement. Later, DG left the factory and learnt to drive. DY gave him a truck to enable him to run a sole proprietorship in transportation. DG was financially dependent on him. DY relied on the company records of Haikou Materials and employment contracts signed by DG and SXP with Haikou Nanzhou, both being DY’s companies. DG simply was not in a position to accumulate wealth.
151. It might well be true that DY had put in names of the Ding family members as employees to make his companies appear stronger than they really were. It might also be true that the employment records wrongly stated DXH’s husband as holding the position of a driver when he was an officer (業務員). However, these would not undermine the fact that DY, who was in a stronger financial position and in good relationship with DG, supported DG financially and employed him.
152. I accept DY’s case on DG’s financial position in the 1980s to early 1993 and reject DG’s version. DG had blatantly lied to boost his case on early accumulation of wealth. His case on setting up of Purao and Dingtai with his own funds naturally could not stand.
I3. DY’s version on his first pot of gold
153. DY claimed that he had worked at 金山五交化, underwrote at 物資調劑站 and the Maojialing company. He was corroborated by the Mother. His trading covered metals, chemicals and electrical appliances.
154. Mr Tong SC does not dispute that DY obtained profits in metals trading but submits that he had exaggerated the profitability of his trades, made bare assertions without documentary proof or was contradicted by available documents.
155. The documentary proof for DY’s early businesses was limited. I place no weight on the witness statements of 李初興 and 蔣淑芳 who did not give evidence.
156. With regard to the Maojialing company, there was an underwriting contract dated 26/9/1989 entered into between DY and the legal representative 饒賢林for 3 years from December 1989 to December 1992. DY said that the company earned profits of RMB 1m in 1989 and RMB 2-3m in 1990. Mr Tong SC submits, however that the 企業法人分支機構年檢報告書 dated 6/3/1991 showed the tax to be RMB 500, the total annual sales to be only RMB 61,000 and profits RMB 300. With respect to Mr Tong SC, that annual report was related to a different company called 上饒市茅家嶺物資供應站.
157. With regard to other businesses, the working notes of DY (which I find to be a reliable record) gave a glimpse of the scale of DY’s metal business. Back in 1987, a single deal of DY involved 102.7 metric tons of round nails, worth more than RMB 150,000. In respect of other businesses, however, the working notes showed the turnover to be small, as not exceeding a few hundred or thousand dollars.
158. To boost his case, DY had produced an admittedly forged letter from上海寶山鋼鐵股份有限公司 (“Baosteel”) to prove that in 1991, he and DW traded in steel supplied by that company and earned sales income of RMB 60m. DY accepted that part of this letter relating to the transactions in 1997 to 2000 in which Dingtai ordered about 10,000 tons of product was wrong. I attach no weight to the forged letter.
159. Anyway, the undisputed evidence was that in 1990-1991, DY had rented a small flat of around 20 square metres at the Shanghai Luwan Cinema as residence and business premises for DW, DG, YXA and himself. They slept on the floor and had to use the washroom in the cinema. Such modest standard of living was inconsistent with the alleged huge sales income.
160. In summary, I find that DY did have his own business in Shangrao and Maojialing although the scale was not as large as he wanted this court to believe. The significance, rather, was that he had started the steel business which built up his financial strength.
I4. From Shangrao to Hainan
161. Hainan was a special economic region in the Mainland. DY set up 3 companies there: 海口市物資總公司業務部 (“Haikou Materials”), 海口南州工貿有限公司(“Haikou Nanzhou”) and 南海(海南)物業發展總公司(“Nanhai Properties”). He continued his steel business from Maojialing whilst the work was done in Shanghai.
162. DY was challenged in cross-examination as to why he set up companies there instead of in Shanghai. The answer was obvious and which I accept – for tax benefits. See Exhibit P30 《企業所得稅 – 國務院關於鼓勵投資開發海南島的規定》. A Hainan enterprise had only to pay 15% profits tax (Art. 12 of Exhibit P30 and Art. 3 and 4(5) of 《海南省人民政府 － 關於鼓勵投資的稅收優惠辦》). Contrast a state enterprise which had to pay 55% tax (Art. 4 of《中華人民共和國國營企業所得條稅草案》) and a private enterprise 35% (Art. 3 of 中華人民共和國國務院令).
I5. Haikou Materials
163. Haikou Materials was set up in February 1992, pursuant to a guakao arrangement (掛靠). DW was the legal representative of Haikou Materials. It had registered capital of RMB 1m.
164. Under the guakao arrangement (a common mode of doing business in the Mainland at that time), a company would be established ostensibly as a state-owned enterprise with a supervising bureau (主管部門) as its shareholder. In this case, the supervising bureau was 海南省海口市物資總公司. The capital would be contributed wholly by the private entity although, on paper, the capital would appear to have been injected by the state-owned supervising bureau. The guakao company was to be responsible for its own finance without any assistance from the supervising bureau, and operate with independent accounts.
165. DG contended that the capital of RMB 1m was never paid, relying upon the corporate information of Haikou Materials. However, the corporate documents relied on by DG showed the status of the company as at 30 December 2010. The company’s legal representative was 李虎章, who was wholly unrelated to DY.
166. DG’s contention overlooked the contemporaneous documents attached to the search record page, showing the position at incorporation in 1992. The Capital Verification Report (海口會計師事務所驗資報告書), bank certificate (銀行資訊証明), and credit guarantee certificate (資信擔保証), all dated February 1992, and item no. 78 in the accounts for the year ended 1993, confirmed that Haikou Materials had registered capital of RMB 1m injected in cash. Those were weighty evidence and I accept the same to be true.
167. According to DY, the RMB 1m capital came from profits of Maojialing, which I find to be likely true, having regard to his business in the 1980s.
168. The major business of Haikou Materials was trading of steel and non-ferrous metals. This was consistent with DY’s trading in steel before establishment of Purao, whereas DG did not have such experience prior to setting up of Purao.
169. DY has produced some contemporaneous documents to support his business deals in 1993. He purchased 10,000 tons of hot rolled steel coil (熱軋卷板) for RMB 16m, which he on sold to 中國第二汽車製造廠 (later known as 中國東風汽車公司) for RMB 32m.
170. To have a glimpse of the business scale of Haikou Materials:
(i) The receipt dated 11 May 1992 for tax for the 2nd quarter of 1992 showed that the business tax payable (10%) by Haikou Materials was RMB 94,827.94.
(ii) According to the 資金平衡表 as of the end of 1992, the total assets in 1992 were of the value of RMB 1,309,727.81.
(iii) As shown in its 資產負債表, up to 31 December 1993, its total assets were of the value of RMB 1,357,482.30.
171. It was suggested to DY in cross-examination that there was no record of income from sale of goods or stock. Further, the生產經營和財務狀況appeared to relate to the loss of around RMB 3,750 in 1993; it stated that the loss was due to “經營不善”.
172. DY said that he did not know accounting and did not understand the financial statements. He insisted that Haikou Materials had sales of about RMB 50m in 1992. I cannot accept this explanation. DY was sensitive to figures, as demonstrated by his reference to transactions and calculations of income from his steel business in his oral evidence. He could not have failed to understand the financial statements. His evasive evidence showed that he might have been exaggerating the income and level of stocks of Haikou Materials.
173. There also appeared to be some contradiction in the documentary evidence. DY alleged that he and DW had ceased underwriting the business of Haikou Materials since 1993. The corporate record showed that since about 21 April 1993, one譚傳顏 (who had nothing to do with DY) had replaced DW as legal representative. On the other hand, after April 1993, DY and DW continued to hold property and bank accounts in the name of Haikou Materials. DW confirmed his interest in Haikou Materials had not changed after the Property Division Agreement dated 6/6/1993, implying that Haikou Materials had not ceased operation. On 10 May 1993, RMB 700,000 was even remitted from Purao’s account to Haikou Materials’ bank account.
174. I find that although DY had exaggerated the income and level of sales of Haikou Materials, this company did have assets to the value of RMB 1.3m as stated in the financial statements of 1993. I also find that Haikou Materials had operated beyond June 1993.
I6. Haikou Nanzhou
175. By a written agreement dated 8/9/1992, DY and DW set up Haikou Nanzhou. It was a private company incorporated on 20/11/1992 without any guakao arrangement. The business was trading of steel. DW was the legal representative. The office was inside premises at 海口市大英村bought in the name of DW back in June 1992. DG and SXP were employees of Haikou Nanzhou.
176. The registered capital was RMB 5m, of which RMB 3m was from DW and RMB 2m from DY. It came in the form of cash or bank deposit. This was supported by a payment slip showing that 市物資總公司業務部 paid to Haikou Nanzhou a total sum of RMB 5m and the Capital Verification Report of Haikou Nanzhou dated 19/10/1992. The company was deregistered on 28/8/1996. In his closing submission, DG’s counsel have avoided the question of where the registered capital had come from. I accept DY’s version on the source of capital.
177. There was no dispute that there was a joint venture between Haikou Nanzhou and 江蘇省昆山市物資局下屬金屬材料總公司 (“Kunshan”) to trade in 40,000 metric tons of steel, worth US$1.36m or RMB 118.3m. The agreement between Haikou Nanzhou and Kunshan was to “共同出資，共同銷售 …… 利益均等分配” (“the Kunshan deal”). The dispute was on how and to what extent that agreement was implemented.
178. In his 1st supplement witness statement, DG claimed that all those payments marked for Kunshan [eg D1/120, 149, 150, 159] were in fact Purao’s own business. This version was clearly unbelievable, as there was nothing pointing to Purao having steel trading before this deal.
179. In the witness box, DG claimed for the first time that, rather than 共同出資, the entire sum of US$8.73m was to be paid by Kunshan, representing the entire cost of 30,000 metric tons in the agency agreement among Haikou Nanzhou, Kunshan and one 中國五礦產進出口總公司(“China Five Metals”). He said he was told by DY that Haikou Nanzhou only acted as intermediary in the Kunshan deal, collecting and paying funds on behalf of Kunshan (代收代付). He had no idea about the profits brought in, the substantial part of which went to Kunshan.
180. This version never appeared in DG’s witness statements or opening submission and was his recent invention. If, as DG claimed, Purao was his company and he had invested RMB 700,000 (representing about 1/3 of his then alleged wealth) in it in April 1993, it was incredible that he had so little idea about the Kunshan deal. I reject his evidence.
181. On the other hand, DY’s version appeared in his very first witness statement (§§2.5 and 2.6). It included details like the supplier of steel, problem with foreign exchange, mode of payment, arrival of the steel in 2 lots, name of the ocean liners and difficulty in unloading. He also produced some documents of an account of Purao controlled by him to show payments totalling RMB 6m made to Kunshan [D2/149, 150 and 159] in July 2003. According to DY, Kunshan provided US$8.73m capital. The balance was borne by him from profits earned by Haikou Materials, Haikou Nanzhou and the Maojialing company. DY was responsible for customs, loading, transportation and storage.
182. I have taken into account Mr Tong SC’s closing submission that DY’s supporting documents did not show transactions involving the full quantity of 40,000 metric tons. Further, the agreement between Haikou Nanzhou and Kunshan showing the terms of cooperation was not produced. DY’s oral evidence that profits distribution with Kunshan was done after the sale of the steel and the preparation of a table was not supported by documentary evidence. There were no documents evidencing sale by Haikou Nanzhou to end-customers, or accounts of Haikou Nanzhou. The bank records showing payments of Kunshan were for the period between May and December 1993, long before what DY claimed to be completion of the sales in February 1994. Further, despite giving a long narrative under cross-examination, DY was unable to state where his profits from the Kunshan deal had gone.
183. One could not expect DY’s documentation to be complete after so many years but from the piecemeal evidence something was clear:
(i) On the face of the 代理進口協議(“the Import Agency Agreement”), China Five Metals was Party A. Both Kunshan and Haikou Nanzhou were Party B, liable to pay 3% agency fee to China Five Metals. This refuted DG’s case that Haikou Nanzhou was just an agent as against Kunshan.
(ii) There were vouchers evidencing payments by Purao to Kunshan from an account operated by DY (“the Purao-DY- 339-account”), disclosed by DG in the course of the trial. They showed payments totalling about RMB 6.8m in the first 2 months of 1994. None of the documents were marked as 代收代付but stated to be 貨款.
(iii) There were bank documents showing that the Purao-DY-339-account paid a total of RMB 40m to Kunshan from May to July 1993 and another RMB 1m in October. They supported DY’s case on distribution of profits to Kunshan.
(iv) Such flow of huge funds between Haikou Nanzhou/Purao and Kunshan was consistent with a business relationship as described by DY. Otherwise, there was no reason why Kunshan should trust Haikou Nanzhou or Purao to collect such huge sums and no reason why Haikou Nanzhou would have 代收代付without apparent benefit to itself.
184. I accept DY’s version on Haikou Nanzhou and the Kunshan deal. The setting up of Haikou Nanzhou with RMB 5m initial capital was consistent with the scale of the Kunshan deal expected and actually done. I also accept DY’s evidence that Purao did not have steel trading before this; its role was to collect proceeds of sale for Haikou Nanzhou.
I7. Hainan Properties 南海（海南）物業發展總公司
185. This was established by DY and DW under a guakao arrangement on 12/4/1993. It was registered on 6/5/1993 and deregistered on 19/9/2003. DW was the legal representative.
186. The registered capital of RMB 10m was provided by DY in one go on 12/6/1993 as stated in the Capital Verification Report. Having regard to his steel business, I am satisfied that DY did have the financial resources and reason to set up such a substantial company.
187. Apart from submitting that DY had grossly exaggerated the size and profitability of Hainan Properties, DG was unable to refute the evidence as to the capital injection from DY’s side. The fact that Nanhai Properties was running at a loss of RMB 953,000 in 1993 and RMB 550,000 in 1994 was irrelevant as it was not DY’s case that he relied upon any profit of Nanhai Properties to set up Purao. In any case, Purao was set up earlier than Nanhai Properties.
I8. Weighing each party’s case on his first pot of gold
188. DY’s financial history was corroborated by the evidence of the Mother, DXH and DW. I cannot see why the Mother, who is respected by all the children and has nothing to gain from this case, should lie. I do not expect her to have a detailed knowledge of her sons’ respective wealth but her view of the general financial strength of each son could not be doubted. I accept her evidence that Haikou Materials was DY’s company and that the business grew quickly. The Mother’s evidence was that it was DY and DW who brought about the improvement in standard of living of the Ding family in Shangrao. She confirmed that it was DY who brought her to Shanghai.
189. There was ample evidence to show that DY had been doing business in Shangrao, moved to Hainan to set up 3 Hainan Companies with DW by injecting RMB 16m capital and engaged in multi-million RMB steel business including the Kunshan deal. There was no suggestion that DY needed to raise a mortgage or bank loan then. Although DW claimed to have an undefined share in the Hainan Companies, probably due to his contribution of efforts and capital, DW had not asserted contribution to the capital of Purao.
190. DG’s challenge to DY’s setting up of the 3 Hainan Companies was clearly a desperate attempt to deny DY’s early accumulation of wealth before 1993.
191. DY and DW had also been busy buying vehicles and landed properties (including 4 units in Zhongyou Building (中友大廈) to house the Ding family and DY’s office) in the early 1990s.
192. If DG had accumulated savings of RMB 2-3m and had bought his own matrimonial property, why would he have lived at Zhongyou Building?
193. DG might have accumulated some wealth but the more probable scenario was that he was then only carrying on a sole proprietorship of transportation and relying on DY’s financial support. I am not satisfied that he had enough capital to set up Purao. I have no hesitation in finding that DY accumulated the first pot of gold much earlier and heavier than DG’s to be able to set up Purao.
J. 1993: THE SETTING UP OF PURAO
J1. Undisputed facts
194. Purao was set up in April1993 under a guakao arrangement with 上饒市糧油貿易公司 (“Shangrao Cereal”) as the state-owned supervising bureau. (It was in the same month as when Hainan Properties was set up.) 田仕雲 (“Tian”) was the general manager. DG was the deputy general manager and legal representative.
195. A business contract dated 12/5/1993 was signed by DG andTian on behalf of Shangrao Cereal for 6 years. It contained a personal obligation for DG to pay management fees to Shangrao Cereal.
196. Purao had registered capital of RMB 1m at its incorporation. It was a lot of money in those days, having regard to the fact that the average yearly income of an average person was only RMB 3,000. The Capital Verification Report dated 19/4/1993 stated that the source of the RMB 1m was 上級撥款 but there was no dispute that the supervising bureau had not provided the capital.
197. In October 1993, Purao increased its capital by RMB 10m, of which RMB 5m was injected in the form of stock-in-trade.
198. Purao had 2 accounts at the Agricultural Bank of China (“ABC”), one operated by DG and another by DY.
199. The issue on ownership of Purao centred on who provided the RMB 1m and RMB 10m capital.
J2. DG’s case on the setting up of Purao and provision of capital
200. According to DG, he transferred his employment dossier to Shangrao Cereal in 1992. He then entered into the guakao arrangement[2], which was made with employees. Tian, the then legal representative of Shangrao Cereal, said he only communicated with DG but not DY. Purao was allegedly DG’s 1st company which had nothing to do with the Hainan Companies. DG provided the capital from his previous businesses and his investments in the stock market: §17(5) of the reply.
201. DG’s case on Purao was a half truth. All that he mentioned in his 1st witness statement about Purao could be ascertained from public documents. The true part was that he took the administrative steps of setting up Purao.
202. The untrue part was his assertion that he provided the capital. DG claimed to have paid the RMB 1m in cash to Shangrao Cereal. He produced a receipt concerning the RMB 1m which did not state the source of the money. He referred to Shangrao Cereal’s 記帳憑證 dated 31/3/1993 which recorded that RMB 1m 自籌資金was paid into Shangrao Cereal’s bank account before transferring to the auditor.
203. I have already found against DG on his version of the early accumulation of wealth. Despite calling Tian as a witness, DG has not seen fit to ask him to verify how the RMB 1m initial capital was injected. In any case, Tian was not a reliable witness as he had previously acceded to DW’s request to provide a statement but subsequently turned round to say that the statement he signed did not represent the truth.
204. According to DG’s evidence in chief, he was at the material time living in Shanghai at the Luwan District Theatre (盧灣區電影院). It was incredible that he would have brought such a large amount of cash all the way to Shangrao instead of using a cheque or bank transfer. The documents produced by DG himself showed that even for the annual management fee of RMB 20,000 paid to Shangrao Cereal in 1993 and 1994, the payments were effected through bank transfer.
205. DG referred to the record of interview of the auditor 嚴家慶 (“Auditor Yan”) dated 25/1/2012 disclosed by DY to support his case that DG paid in cash. It stated that “這100萬鈔票進來後，我們收到以後 … 鈔票進來後，我們就要開收據給丁鋼，對吧？”
206. Without disrespect, Auditor Yan’s narration was difficult to follow. At one stage he mentioned bank notes; at another, he mentioned a cheque which needed to be presented for payment. I am unable to place much reliance on the record of interview. But even if RMB 1m cash had been deposited into Shangrao Cereal, the fact was that the Shanghai auditor had verified the capital.
207. Moreover, DG’s evidence, if accepted, could not explain why he needed to set up Purao when he was running a cash business, was not paying tax and was not expecting any business expansion. As confirmed by Tian, DG was only doing transportation business whereas the main business of Purao was steel, which was hardly his trade.
208. I reject DG’s case.
J3. DY’s case on Purao
209. As regards purpose of setting up, DY said that Purao did not have business of its own but was incorporated in Shanghai to take over the business of Haikou Nanzhou, thereby averting the problem of “異地經營” (ie companies incorporated in Hainan running business in Shanghai). Part of the steel imported by Haikou Nanzhou was applied to provide the RMB 1m and RMB 10m capital. Moreover, DY had also wanted to obtain tax benefits available to Shanghai companies during the first East Asian Games (以捐代稅).
210. According to DY, it was DW who had good relationship with Shanghai Cereal. He discussed with Tian to establish a platform in Shanghai to operate the business of the Hainan Companies. It was easier to obtain approval for the guakao arrangement if a staff member was appointed as the legal representative of Purao. Hence, DG had his dossier transferred to Shanghai Cereal, without having worked there.
211. Mr Tong SC submits that there was simply no point for DY/DW to set up a guakao company in Shanghai. DY and DW had allegedly been told by one Mr Yu of the risk that assets of a guakao company could be confiscated by the state, so they set up Haikou Nanzhou as a private company. If so, it would have been unlikely for them to set up Purao as a guakao company. Mr Tong SC further submits:
(i) DY already had Haikou Materials which was an underwriting company (承包公司); Haikou Nanzhou which was a private company; and Hainan Properties which was a guakao company. DY could have set up a private company in Shanghai instead of resorting to a guakao arrangement with a modest capital of RMB 1m. Even if he needed a guakao company in Shanghai, he could have arranged for a Hainan state-owned enterprise to establish one, which was accepted by DY as feasible. There was no evidence of any requirement that only employees of a state-owned company could establish a guakao company with it. In fact, neither DY nor DW were employees of the relevant state-owned company with whom they guakao the Hainan Properties.
(ii) To address the concerns of 異地經營 and 以捐代稅， DY and DW could have caused the Hainan Companies to set up a branch office in Shanghai. In fact, there was a branch in Shanghai established on 3/6/1993.
(iii) If DY’s sole purpose of setting up Purao was to receive the sale proceeds of steel, there was no need to include trading in “agricultural products and electrical components” in the corporate documents. I place little weight on this, as neither would DG need to put in “agricultural products”, which was not his past business.
212. It is not for the court to examine with hindsight the business wisdom of DY in using guakao arrangement or other modes. The use of the guakao arrangement did not make DG’s case more credible. What was important was that, on balance, DY had stronger reasons for setting up Purao than DG. I see no illogicality in DY starting his first company in Shanghai with a “modest” initial capital. As will be demonstrated below, the evidence showed that the DY’s purposes for setting up Purao were met.
213. As regards capital injection, DY’s case was that he caused Haikou Materials to remit RMB 1m to the auditors directly in March 1993. Seven months later, he provided another RMB 10m.
214. At one stage, DY pointed to a document dated 1/4/1993 retrieved from the Pudong New District Industrial and Commercial Bureau 浦東新區工商局 (“thePudongICB”) and alleged that he had intended Purao’s initial capital to be RMB 10m. That new story never appeared in his pleadings, affirmations or witness statements. DY never explained why he needed a RMB 10m company to receive the proceeds for his steel business, why he had the means to provide RMB 10m and why he eventually settled with RMB 1m. It was more probable, as Mr Tong SC submits, that the RMB 10m stated in the document was a clerical mistake of the staff of the Pudong ICB when preparing the record. I reject DY’s new story as an opportunistic move to bolster his case but that did not undermine his overall credibility on why Purao was set up.
215. DY’s financial strength could be seen from the 3 Hainan Companies that he had set up with a total capital of RMB 16m, and the various properties that he and DW bought back in 1992 and 1993.
216. I place little reliance on the 進帳單which showed the transfer of RMB 1m from one account of the auditor to that of another as it did not show the source of the money.
217. Considering the evidence in its totality, I find that the source of RMB 1m was from DY. The auditor verified the existence of this sum.
J4. Refund of the RMB 1m initial capital
218. After verification of capital, RMB 700,000 was returned by the auditor to DG and the rest to DY. According to a 劃還驗資貸款申請書dated 3/5/1993 (disclosed by DG after commencement of trial), it was DG who applied to the auditor for refund. The money first went into an ABC bank account operated by DG (“the Purao-DG-333-account” [3]). Immediately on the same day, RMB 700,000 was transferred to Haikou Materials as “price of goods” (貨款).
219. DG said that he wanted to contribute to the “Kunshan deal”, so he paid Haikou Materials RMB700,000. When it was pointed out to him that the RMB700,000 were proceeds of sale of goods, DG said he could not recall due to the long lapse of time.
220. DG’s explanation was, in my view, a fabrication. In his 1st witness statement, DG stated that Purao had nothing to do with the Hainan Companies. If Purao/Haikou Nanzhou was to 代收代付, why would it require DG’s “contribution”? It was a huge sum, being about 25% of his then alleged wealth of RMB 2-3m and 70% of the initial capital of Purao. How could DG fail to know how it was spent?
221. On the other hand, DY’s explanation was equally difficult to understand. Why did he not ask for return of the full amount to his own account? His explanation was that the account which he controlled (the Purao-DY-339-account [4]) was only set up on 14/5/1993. In any event, he had directed the return of the RMB 1m back to Haikou Materials or Haikou Nanzhou.
222. That explanation raised more questions than it answered. Why did he set up a bank account under DG’s control earlier than the one under his control? Since there did not appear to be any urgent need for the RMB 1m, and Purao was his company, why would DY not keep the money in the Purao-DG-333-account? Why was the money described as “price of goods” instead of “repayment” to DY?
223. Moreover, there was no credible evidence to show that the RMB 1m was returned to Haikou Materials or any of DY’s personal accounts or companies. On DY’s own case (mentioned for the first time at the trial), he and DW had ceased the underwriting business of Haikou Materials since April 1993 but had kept the bank account. This was incomprehensible.
224. The half truth in each of DG and DY’s case made it difficult to decide where the RMB 1m had ultimately gone. However, it did not undermine DY’s case that he had provided the initial capital.
J5. The business carried on by Purao
225. The evidence showed that DY and DG were each ignorant of what the other was doing in Purao.
226. DY claimed that Purao was established as a “shell” for the sole purpose of collecting proceeds of the Kunshan deal on behalf of Haikou Nanzhou. He also said that all the deposits into the Purao-DG-333-account came from the Purao-DY-339-account.
227. Contrary to DY’s assertions, apart from steel, Purao had traded in various commodities like construction materials, foodstuff and metal products. This was borne out by the invoices during 1993-1999 and the credit vouchers (進帳單) in 1993.
228. On the other hand, the Kunshan deal was for very substantial amounts and DG seemed not to be bothered. The accounts of Purao had not reflected this deal. He did not know if Haikou Nanzhou had given the RMB700,000 to Kunshan. No goods were sent to Purao in relation to this amount. DG did not know the terms of the Kunshan deal. In answer to a simple question repeated by Mr Tong SC at least 4 times, DG admitted that DY had told him that there would be profit-splitting with Kunshan but did not tell him how.
229. Likewise, Mr Chan SC has asked at least 8 times whether DY told DG what the expected profit was, to which DG could only say that the profits were “considerable”. After 10 minutes’ questioning by Mr Chan SC, DG said he knew that the RMB700,000 had no return, and that was in September/October 1993. The principal of RMB 700,000 was repaid to Purao. When pointed out that the Purao accounts did not show such repayment, DG claimed that repayment was through other companies but he did not know through which company or in which year he was repaid. He did not know if the Kunshan deal was profitable or not, which meant he had paid out ¼ of his wealth for unknown return.
230. I find it unbelievable that DG would have entered into a deal like this for his 1st company. The truth, I find, was that it was DY who was handling the Kunshan deal without the need for DG’s knowledge or consent.
231. Further, contrary to DG’s assertion, Purao was closely related to the Hainan Companies. Purao used the same telephone number (216-2256) of Haikou Nanzhou and the same property in Zhongyou Building bought by DY. See the letterhead of Haikou Nanzhou. The Mother confirmed that the office of Purao was at Zhongyou Building.
232. The inference is that the 2 brothers each used Purao as his company without accounting to the other.
J6. The 2 bank accounts of Purao
233. The Purao-DG-333-account was a basic account (基本賬戶) held at the Yangpu branch of the ABC. It was operated by DG with his personal chop and Purao’s finance chop. It existed for 10 years since 4/5/1993 until Purao ceased business in 2003. The deposits were connected with the business in foodstuff, cement and commodities that DY was not involved in. The annual management fees to Shangrao Cereal were paid out of this account. It used to be common ground that this account was controlled by DG until DY gave oral evidence.
234. The Purao-DY-339-account was a general account (一般賬戶) held at the Putuo branch of the ABC. It was set up on 14/5/1993, 10 days after the Purao-DG-333-account. It was closed around 1½ years later in September 1994. DY could not operate this account solely with his own chop since DG was in control of the finance chop.
235. DG said that he “allowed” DY to use the Purao-DY-339-account. I do not accept it. If DY had wanted to use someone else’ account, he could have used the Hainan Companies’ in Shanghai. To the contrary, it was more like DY allowing DG, the legal representative, to open and use the first bank account for Purao.
236. DY explained in his 3rd affirmation that: “為保證我的這批鋼材銷售匯款的安全，控制資金風險，在浦饒已有基本賬戶的情況下”, he opened the Purao-DY-339-account as his exclusive account (專用帳戶).
237. The questions were: if the Purao-DG-333-account was his anyway, why would DY need another bank account? Why would placing money in the general account be more risk-free than placing it in the other account? If he did not trust DG, why let DG operate the basic account in the first place? Even for the Purao-DY-339-account, there was evidence to show that some of the money therein represented proceeds of DG’s business: seepayment slips showing remittances from 西北金屬材料in July and August 1993.
238. The Purao-DY-339-account was short-lived. It was closed about 7 months after completion of the Kunshan deal. The balance was deposited into the Purao-DG-333-account. DY did not say that he had carried out any business through Purao after September 1994. He accepted that Purao continued to conduct business through the Purao-DG-333-account but was unable to explain why. All that he could tell was that DG traded in securities and an employee閻曉新 traded in steel.
239. Contrary to DY’s assertion in his 3rd affirmation, the Purao-DG-333-account was active. Upon discovery of the frequent transactions in that account, DY changed his evidence on day 35 of the trial. He claimed for the first time that he was in control of the Purao-DG-333-account; that he had the personal chop of DG but it was returned to DG in 1995 when Purao’s business was largely wound down[5]. On day 37, DY even said that DG subsequently changed the operating chop without his knowledge. Such new allegations were never put to DG in cross-examination. In any case, DY could not explain the business (which was not his usual business) purportedly coming through this account.
240. How could DY fail to remember that all the accounts of Purao were controlled by him (if that was the case) and that some business was done through the Purao-DG-333-account?
241. The above strange features in respect of the bank accounts strengthen my view that the 2 brothers each used Purao as his company without accounting to the other. Purao continued to be used by DG after DY virtually abandoned it upon closure of the Purao-DY-339-account.
242. It was not either party’s case that there was a kind of partnership between them but that he solely owned Purao. Taking all circumstances into account and on balance of probabilities, I am of the view that Purao was set up as DY’s company with the initial capital paid by him to operate the steel business from Haikou Nanzhou. However, he permitted DG to trade through Purao and operate Purao-DG-333-account for DG’s sole benefit.
243. I agree with Mr Tong SC that if in all the circumstances the court finds that a party did pay the RMB 1m initial capital, the increase in capital would not change the nature of the ownership as it was neither party’s case that there had been such change. However, for completeness sake, I also deal with the circumstances leading to the increase in capital, as they were compelling in showing that DG could not be the owner.
J7. The increase in Purao’s capital by RMB 10m
244. There was no dispute that on 8/10/1993, ie 6 months after its set up, Purao increased its capital to RMB 11m. DY had reason to increase the capital, because of the anticipated increase in volume of steel trading. In contrast, DG never suggested any. In fact, the loss of RMB2.5m that Purao suffered just before October (see bank statements) would not have justified DG’s decision (if at all) to increase the capital.
245. In his pleaded case, 3rd affirmation and 1st witness statement, DG stated that it was he who provided the sum of RMB 10m from his previous business in logistics, etc and stock investments. However, his only proof was simply 2 pages of the Capital Verification Report obtained from the ICB without any attachments [H93-94].
246. In about February 2013, shortly before the trial commenced, the Capital Verification Report with attachments[H130-139 or F4974 to 4981]were obtained by DY from Auditor Yan. They showed that the following assets were provided to the auditor for verification of capital:
(i) RMB 5m by cheque from the Purao-DY-339-account; and
(ii) RMB 5m worth of stock-in-trade, being the subject matter of the Kunshan deal.
247. The attachments to that Capital Verification Report included:
(i) An agency agreement (代理進口協議書) executed on 14/2/1993 among China Five Metals, Haikou Nanzhou and Kunshan. It was for the import of 20,000 tonnes of hot rolled steel coils and 10,000 tonnes of hot rolled flat open steel (熱軋平板).
(ii) An invoice dated 15/6/1993 issued by RIMACO to China National Metals and Minerals Import and Export Corp. About 10.3 metric tonnes of hot rolled steel worth US$2.97m were to be shipped by the vessel泰華海.
(iii) A 存根聯issued by China Five Metals to Haikou Nanzhou dated 1/7/1993 bearing the details on the invoice.
(iv) A 發票聯 issued by 五礦國際貨運上海公司 to Purao dated 23/7/1993, containing all the details on the invoice. The 發票聯 related to certain handling charges or transaction fees. It stated that Purao had to pay 自提定額費 in the sum of RMB 30,930.69.
(v) 3 copies of 物資入庫儲存憑証 issued to Purao – all dated 24/7/1993 – showing part of the shipment being stored at certain places.
248. DG explained that Purao ceased business in 2003. When he obtained Purao’s Capital Verification Report from the ICB, he was not told that there was another version. His further efforts in speaking to the auditor had not brought him the attachments to the Report either.
249. I do not believe that the ICB did not have the attachments to the Capital Verification Report. Even giving DG the benefit of doubt that he has not deliberately withheld the attachments from disclosure, his complete change of version in his 2nd supplemental witness statement after DY’s disclosure cast grave doubt on his credibility. DG alleged that part of the RMB 10m was “borrowed” from the stock in trade of Haikou Nanzhou but the stock was not injected into and hence did not belong to Purao; as the verification process was less regulated then, the auditor did not inspect the stock.
250. It might be true that, as confirmed by Auditor Yan, there was no physical inspection of the stock-in-trade. I would be surprised if the converse had happened. However, what was important was that there were documents to satisfy Auditor Yan that the cash and stock did exist.
251. The evidence of DY was weighty. Firstly, RMB 5m came from the Purao-DY-339-account, as evidenced by 2 cheques dated 19/9/1993 and 7/10/1993.
252. DG admitted in the witness box that it was difficult to raise the RMB 10m with his or Purao’s means. He alleged that he was advised by the auditor that the money temporarily deposited for the Kunshan deal in the Purao-DY-339-account belonged to Purao from the angle of auditing, and could be used for capital verification. He said, for the first time in the witness box, that RMB 5m was taken out of the cash that was supposed to be received and disbursed on behalf of Kunshan, which wholly contradicted his original version that the money all came from him. See also his completely evasive version in his supplemental witness statement that Purao was in fact not doing 代收代付.
253. Mr Tong SC submits that funds derived from the Kunshan deal could not be said to be Haikou Nanzhou’s since Kunshan had an interest in them. Nor could they be regarded as DY’s personal assets as they were Haikou Nanzhou’s (belonging to DY and DW).
254. With respect, this desperate argument hit DG with the same force, as he had to rely on exactly the same funds to substantiate his case on increase in capital. The argument dodges the real effect of the evidence: that those funds were wholly connected with DY and not DG. The cash capital injection came from DY’s side.
255. Secondly, physical existence of the stock-in-trade was proved by the photos of the ship Taihuahai and the steel showing the contract number, the name of RIMACO and the destination Shanghai, all in accordance with the invoice in the attachments.
256. Thirdly, the attachments to the Capital Verification Report showed that DY had appropriated the stock-in-trade of RMB 5m to Purao:
(i) The 3 sets of 物資入庫儲存憑証 in respect of 2,562 mt of rolled steel coils were all issued to Purao and not Haikou Nanzhou.
(ii) Adopting the unit price of US$288 per mt, the total value of such stock-in-trade (without taking into account the resale value) was: US$288 x 2,562 = US$737,856.00. At a conversion rate of US$1 to RMB9, that was equivalent to RMB 6.64 million.
257. Fourthly, Purao’s balance sheets supported DY’s case:
(i) The balance sheet as at 31/7/1993 showed that Purao’s capital was of RMB 1m.
(ii) After the increase in capital in October 1993, the balance sheet as at 31/12/1993 recorded實收資本as RMB 11m, clearly appropriating the RMB 5 million stock-in-trade.
(iii) Purao’s 1994 annual report dated 16/1/1995 also showed the increase in registered capital from RMB 1m to RMB 11m.
258. Fifthly, the profit and loss accounts for the months of October and November 1993 relied on by Mr Tong SC did not show substantial stock or income from sales. However, the following financial statements of Purao did show that stock-in-trade in the sum of RMB 5m were appropriated to Purao, as opposed to Haikou Nanzhou:
(1) The profit and loss account in December 1993 showed that Purao derived income from sale of goods in an aggregate sum of RMB 3,409,981.20.
(2) The balance sheet as at 31/12/1993 showed the stock-in-trade to be of RMB 3,193,686.26.
(3) Such significant amount of stock or sale was only explicable by reference to the appropriation of the stock-in-trade injected into Purao. DG has not suggested any other source of stock-in-trade or provided rebuttal evidence.
259. If the stock was “borrowed” as DG alleged, there was no evidence of “return” of the borrowed stock to the real owner. (Compare this to the return of the RMB 1m capital after the capital verification process.) Mr Tong SC’s submission that all the proceeds of sale were booked in Haikou Nanzhou’s accounts and that there was no evidence of Haikou Nanzhou passing title of the steel in the Kunshan deal to Purao could not be substantiated.
260. Sixthly, there were 2½ bundles of documents showing substantial deposits into the Purao-DY-339-account soon after Purao’s incorporation in May 1993.
(i) In the first 2 weeks, the balance in that account rose from RMB 10,000 to RMB 7,769,542.
(ii) Between 15 and 31 May 1993, there were substantial deposits in the region of RMB 13,318,000.
DG had never explained the source of these deposits. On balance of probabilities, they clearly came from DY’s steel business.
261. As one will see in the analyses below, in 1 month’s time, Dingtai was also set up with initial capital of RMB 10m. The capital of Dingtai was injected partly in the form of cash and partly in stock-in-trade in a similar manner as for Purao. DG could not have forgotten how capital injection had happened if Purao (and Dingtai) were his company.
262. I find that the Capital Verification Report with attachments correctly recorded the increase of Purao’s capital by RMB 10m in the manner as described by DY. DY would not have increased the capital so significantly if Purao was not his company. DG was making up the story as he went along. He had clearly lied to boost his case on the increase in capital of Purao, which I reject in its entirety.
J8. Disposal of the RMB 10m capital
263. Subsequent to the capital verification, the RMB 5m cash was disposed of as follows:
(i) RMB 1.5m was returned by the auditors to the Purao-DG-333-account;
(ii) RMB 3.5 million was (contrary to DG’s request to the auditors) returned by the auditors to the Purao-DY-339-account. DG offered the answer that Kunshan was in urgent need of money and so he and 閻曉新 asked the auditor for such return. However, this only accounted for, at most, the return of RMB 1.1m and RMB 400,000.
(iii) Subsequently, when cash was required for Dingtai’s capital injection, a sum of RMB 3.8 million was paid by a cheque drawn from Purao-DY-339-account.
(iv) Notwithstanding that the money was drawn from the Purao-DY-339-account, after the capital verification process of Dingtai, a substantial part (in the aggregate amount of RMB 1.3 million) was returned to the Purao-DG-333-account.
(v) There is no evidence of the final destination of the balance.
264. Mr Tong SC submits that this flow of RMB 5m was consistent with the case that the cash used for the purpose of capital increase either belonged to or was borrowed by DG.
265. I reject this submission. DG has failed to answer the question posed by Mr Tong SC 3 times: why were there 3 cheques for the return of the capital? Neither could he explain why the bulk of the money was returned to DY’s account. He was totally evasive. In any case, the destination of the RMB 5m could not undermine the fact that it had originated from DY.
J9. Other evidence showing ownership of Purao
266. There was a certificate of provision of capital (出資證明)dated 28/10/1993 purportedly issued and chopped by Purao to Haikou Nanzhou produced by DY [Exh D-128A]. There was also evidence of third parties treating DY as the boss.
267. The certificate of provision of capital certified that:
(i) The RMB 1m for setting up Purao was wholly provided by Haikou Nanzhou.
(ii) DY decided to set up a company at the WGQ Tax Region which would guakao Purao. DY was the only capital provider owning 100% of Dingtai.
(iii) Out of the capital of RMB 10m, RMB 6.2m worth of steel unloaded from the vessel泰華海was taken as injection of capital; another RMB 3.8m cash came from a bank account at Putuo branch of the ABC, being a designated account to receive proceeds of sale of steel of Haikou Nanzhou. (Note: this part of the contents was, I find, independently proved to be true. See under Section L on Dingtai below.)
(iv) The 2 injections of capital did not come from the state-owned Purao but DY himself.
268. In §2.3 of his 2nd supplemental witness statement, DY explained that he was anticipating setting up Dingtai which would require a lot of capital and steel of Haikou Nanzhou. He was concerned that with a change in personnel, disputes about who funded the capital would arise. Hence this certificate was made. He produced Exhibit D-128A, which was a colour copy, allegedly found from Huagao No.1 Estate (華高一村).
269. DG challenged the certificate as fake.
270. Although DY first mentioned this certificate in his witness statement filed in November 2012, the late discovery spoke volumes. He could not explain why he did not produce the original allegedly kept at the Zhongyou Building in the receivership proceedings in July 2010, well before an alleged burglary occurred in October 2012[6] there. In fact, he never mentioned about the burglary in the receivership proceedings.
271. There were other doubts. DY could not identify the writer of the certificate. Nor could he explain why a colour copy was necessary in those days and why this was the only colour copy amongst all documents in the 60 trial bundles. By October 1993, there were already Purao documents bearing serial numbers of 018 or 020[7] and yet the certificate dated 28/10/1993 bore an earlier serial number of 93/015.
272. DY’s explanation as to why the certificate came into existence was illogical:
(i) There were no similar certificates for Haikou Materials and Nanhai Property which were also guakao companies and had contracts with the supervising bureau.
(ii) The certificate was not binding on Shangrao Cereal at all.
(iii) It would have been simpler to ask Tian, whom DW was very familiar with, to give a certificate to a similar effect for DY’s protection. In fact, Shangrao Cereal had issued one on 17/9/1998 concerning the status of Purao.
(iv) DY did not ask DG (legal representative of Purao) to sign this certificate.
273. Considering all circumstances, I am not satisfied as to the genuineness of the certificate. Even if it was genuine, I place no reliance on it as a self-serving statement.
274. As for evidence from third parties, I accept the authenticity of the 調查筆錄 [H185-192] of the People’s Procuratorate obtained in the Jiang Wei Proceedings. Those documents came about because a person called 邵毅 was prosecuted for the offence of職務侵佔罪. The 調查筆錄dated 24/9/1997, ie 16 years ago, was made of 周德林as a witness who gave information concerning 邵毅 who had made illegal gains from a tax scheme known as 以捐代稅. DY was also a witness. I agree with Mr Tong SC that 周德林was mistaken in saying that Purao was a subsidiary of Haikou Nanzhou (instead of Shangrao Cereal) and that DY was Purao’s legal representative.
275. I do not read these documents from third parties as proof of DY’s ownership of Purao. In my view, the proper interpretation of the third parties’ documents is that DY (through Haikou Nanzhou) had experience in trading of steel and his scale of business was great, as evidenced by the quantity of 20,000 mt ship plates and the tax of over RMB 10m. DY (through Purao incorporated in Shanghai) took advantage of the 以捐代稅for the East Asian Games. Clearly Haikou Nanzhou was related to Purao, which supported DY’s evidence.
J10. The truth lay somewhere in between
276. The truth probably lay somewhere in between DG and DY’s versions. Whilst DG’s evidence was evasive and full of inconsistencies, there were ample indisputable contemporaneous documents to show that DY engaged in multi-million business. The tax was over RMB 100,000 for one month and donation in millions. DY could explain the tax advantage and purpose in setting up a company in Shanghai and where Purao’s substantial steel business had come from. He had the financial strength to afford the RMB 1m and RMB 10m capital. These contrasted starkly with DG’s hollow assertion of provision of capital and lack of reason for the substantial increase in capital. DG only did the administrative work for incorporation, opened the basic account and paid the annual management fee.
277. Each of the 2 brothers apparently treated Purao as his company to trade individually with his own bank account under the name of Purao. As will be demonstrated in Section L on Dingtai, when the purpose of Purao had been served and a new company Dingtai was set up, DY moved on to deal with Dingtai. That could explain why Purao “lived on” but was “controlled” by DG. It did not bother DY, who at that time was in good relationship with DG. It was neither party’s case that there was a partnership. I find that DY was the real owner of Purao.
K. 1993: THE PROPERTY DIVISION AGREEMENT AND THE GIFT AGREEMENT
K1. DY’s case
278. The Father was an authoritative figure in the family. According to the Mother, on 6/6/1993, after dinner at home, the Father directed DW and DY to stay and divide up their assets. The Father’s principle was that “even blood brothers ought to have clear accounts” (親兄弟，明算帳). For fear that DW would renege, the father required something in writing and DXH drafted the Property Division Agreement. It recited the business relationship between DY and DW since July 1991 and divided the fixed assets and profits between them. DW and DY put their fingerprints and signed the Agreement in triplicate, which were kept by DY, DW and the Mother. DG was present at that time.
279. Again, according to the Mother, after DW and DY divided their assets, the Father said that DY and DW brought DG to Shanghai at the end of 1992 but DG had no source of income and yet had a family. The Father suggested that they should each make a gift of RMB 1m to DG. DW was not happy about it but did as his Father wished. DXH drafted the Gift Agreement which recited as follows:
“玆有丁蔚，丁育合作經商后, 因需用人，92年將三弟丁鋼帶在身邊，協助經商。現因丁鋼自立門戶，獨立經商，需要資本，兄弟倆經協商后 ……”
280. DY and DW made gifts to DG, being the sum of RMB 1.3m as capital, a property at Room 505 Yinpu Building (including interior furniture and fittings) worth RMB 500,000, a Sontana car worth RMB 180,000, a property in Shangrao worth RMB 20,000 and credit card value of RMB 50,000. The total was stated to be RMB 2.05m. These gifts were confirmed by the Mother to have been given by DY to DG.
281. DG challenged the authenticity of the Property Division Agreement and the Gift Agreement (collectively “the 2 Agreements”). He asserted that the car was bought by him. He challenged the value of the furniture and fittings of the Yinpu Property as too high.
282. In his closing submission, Mr Tong SC, challenges the 2 Agreements from 4 angles:
(1) Last-minute disclosure of just one set of the original;
(2) The peculiar way of drafting the 2 Agreements;
(3) The information wrongly stated in or curiously omitted from the 2 Agreements; and
(4) The alleged performance of the 2 Agreements.
K2. Last minute disclosure of one set of the originals
283. Exhibits D-2and D-3 are the original of the 2 Agreements produced from the Mother’s custody. Mr Tong SC questions whether 3 sets of originals were indeed executed on 6/6/1993 or only one set was created by DY’s camp for the purpose of these proceedings.
284. According to the Mother, she has kept Exhibits D-2 and D-3 inside a locked drawer at the instigation of the Father for fear that DW might renege from what was agreed. She produced Exhibits D-2 and D-3 to DW/DXH when the litigation first began and she had not seen it again until she attended trial. This contradicted:
(i) DY’s 9th affirmation wherein he said that he obtained the Mother’s set in September 2012 and kept them in a safe in Shanghai; and that due to certain investigations he was prevented from going to Shanghai to get it back.
(ii) DXH’s version that she and DW did not take the originals when the Mother showed them to her in 2010. The originals were obtained from the Mother subsequently when documents were submitted to the court.
285. I cannot see how the late production should cast doubt on the Mother’s version of evidence. She produced the originals on her own initiative, clearly with a view to assisting the court in resolving any dispute. She had not taken sides. She did not even know the details of the litigation. She has identified Exhibits D-2 and D-3 as genuine and could give details of the circumstances surrounding their making.
286. DG was the favoured child of the family. In particular, DXH (13 years older than DG) had all along been on very good terms with DG since his childhood. When the dispute first arose, DG asked DXH to fly back from Hong Kong to Shanghai to mediate the matter.
287. Yet all the family members, except DG, spoke with one voice as regards the authenticity of Exhibits D-2 and D-3. It is inconceivable that if they conspired to prepare 2 false documents, they dragged in the Mother and went to the extent of forging even the signature of the Father. To borrow the same logic relied on by DG, the more serious the act alleged, the more inherently improbable must it be regarded and the more compelling would the evidence be to prove on balance of probabilities: Aktieselskabet Dansk Skibsfinansiering v Brothers (para 83 above).
288. DG attacked the credibility of his own Mother by cruelly referring to her bitter personal history which I do not see the necessity to repeat here. I have no hesitation in accepting the Mother’s denial of DG’s allegation. In his closing submission, Mr Tong SC cannot offer any reason for the Mother to lie.
289. In my view, the Mother’s evidence should be accorded the greatest weight. I find the 2 Agreements to be genuine.
290. The other 3 challenges by Mr Tong SC become unimportant but I will deal with them briefly.
K3. Peculiar way of drafting the 2 Agreements
291. Mr Tong SC questions why there were blanks in the Property Division Agreement where the value of assets was supposed to be inserted. DY and DW explained that it was the Father’s idea to avoid revealing their true wealth. DXH also said that the steel transaction under clause 2 of the Property Division Agreement was yet to complete and the value could not be computed; this was not corroborated by DW or DY.
292. Mr Tong SC submits that the drafting would not conceal DY and DW’s wealth as the assets had already been identified in the Property Division Agreement itself. Even if the value was uncertain then, the value of fixed assets could be calculated and stated in the Property Division Agreement. He invites the court to compare that Agreement with the Gift Agreement in which the value of the gifts to DG was mentioned.
293. With respect, the 2 Agreements were drafted by a non-lawyer inside her home. The Father’s directions were to be abided by, regardless of whether they appeared logical to outsiders. Litigation was not anticipated. I do not find it surprising that there was no mention of the value in one Agreement but express mention in another.
294. Mr Tong SC also questions why DG was not asked to sign on the Gift Agreement. Unlike the Property Division Agreement, the Gift Agreement did not bear the fingerprints of DY and DW. It was not signed by DXH as the draftsman, nor the parents who were present. The Mother could not recall why DXH did not sign the Gift Agreement.
295. Again, I see no difficulty with these. As the 2 Agreements affected the business and assets of DW and DY, it was important for them to sign and apply their fingerprints to bind them. On the other hand, as the Mother said (twice), DG was the donee and it was not his assets that were divided; that was why he need not sign the Gift Agreement.
K4. Information wrongly stated in or curiously omitted from the 2 Agreements
296. A property at 寳鋼九村bought with funds of Haikou Materials or Haikou Nanzhou was omitted from the Property Division Agreement. DW’s explanation as to the 寳鋼九村was inconsistent and unbelievable.
297. As to the Yinpu Property mentioned in the Gift Agreement, DY gave inconsistent versions:
(i) That the Yinpu Property was purchased in 1992 and he had made a gift to DG prior to the Gift Agreement. It was contradicted by contemporaneous documents which showed that the Yinpu Property was purchased at about RMB 346,000, earliest, in March 1993 by DG and SXP through SXP’s maternal uncle, 劉勇軍 (“Liu”). See代理購房協議書 dated 23/3/1993, 商品房交付通知書dated 9/5/1993 and the payment slips relating to the purchase issued to Liu.
(ii) In his supplemental witness statement, DY purported to explain that Liu was appointed to handle the purchase as it was a regulation that only persons with Shanghai native registration could purchase a property in Shanghai. This explanation was unsustainable because (a) DY could have purchased the Yinpu Property in the name of one of his Hainan Companies (e.g. the Zhongyou Building units were purchased in the name of Haikou Materials); or (b) DY could have signed the代理購房協議書 with Liu in his own name; or (c) DY could have asked someone closer to him who had Shanghai homeland registration (such as his wife or Jiang Wei) to act as his agent to purchase the property.
(iii) During cross-examination, DY said, for the first time, the idea came from his Father after signing of the Property Division Agreement. He claimed that he allowed DG to make arrangement with Liu as he had already decided to give the Yinpu property to DG in February 1993, prior to the execution of the Gift Agreement. DY said that the parents and DG knew about it but DW did not. It was also contradictory to DXH’s evidence (that DY and DW funded the purchase in 1993 and gave it to DG under the Gift Agreement) and the Mother’s evidence in her witness statement that the decision to give the Yinpu Property to DG was only made after the signing of the Property Division Agreement.
298. I find that DY was making up evidence to bolster his case. The truth probably lay somewhere in between his and DG’s case. I prefer the Mother’s evidence. But regardless of who had bought the Yinpu Property, the intention of the Gift Agreement was to attribute a value to it. Regardless of the fact that the decoration was completed only in 1994, the intention of the Gift Agreement was for DY to provide the costs of furniture and fittings. I accept that such costs were incredibly high for a residential unit worth RMB 346,000. However, the wish of the Father was to be met. Given the good relationship of DY with DG and DY’s wealth, I am not surprised at the generosity in such costs.
299. With regard to the steel transaction, DW and DY might have failed to give a satisfactory explanation of how the 50,000 mt steel came about. I note that the Property Division Agreement was talking about imported steel from July 1991 until the stock-in-trade was to be sold out. I am not convinced that 50,000 mt was made up having regard to the steel business of Purao and Dingtai.
300. Mr Tong SC also challenged if DW had anything to divide in between him and DY. Although he claimed to have set up the Hainan Companies with DY, DW was most unclear as to what capital he had provided, his share in DY’s business and the bases thereof. DY was in charge of finance and there had been no distribution of profits. DW admitted receiving money from DY to purchase properties in the names of DW and Haikou Material in 1992 [H/12, 13, 14]. He agreed the properties were not his but were used as office for the business and residences for him and DY.
301. DW might have contributed in some form. DY never denied that DW had a share in DY’s business. Given their good relationship, DY and DW might not have defined their interests in business and assets clearly. It is not for outsiders to comment on their business relationship. Suffice to say that they did consider themselves as having joint assets and that those should be divided in accordance with the Father’s wish.
K5. Alleged performance of the 2 Agreements
302. DW reluctantly disclosed in court that he received RMB 25m under the Property Division Agreement. He confirmed that after the division, his interests in Hainan Properties had not changed.
303. The documentary evidence produced by DY in support of part of the payment to DW was hard to accept. Some showed payment out of the Purao-DY-339-account to various entities that seemed to be government bureaus like 上饒衞生局, or were on dates in 1995 and 1996, well beyond completion of the Kunshan deal in February 1994.
304. There was also no evidence of the joint account intended to be opened by DY and DW pursuant to the last paragraph of the Property Division Agreement.
305. I am unable to rely on DW’s evidence as to performance. His evidence was illogical and inconsistent. According to him, 1-2 days following the Property Division Agreement, he had a further discussion with DY at DW’s home at Leshan Road as to how to divide their assets. It was decided that the properties bought in DW’s sole name (though using company funds) should be given to him, ie 2 properties in Haikou and a villa in Huizhou[8]. DW also got 7 vehicles and RMB 25m. Those landed properties were worth about RMB 1m. Yet, in the same witness statement, DW claimed that he received landed properties to the value of RMB 4m, when some properties were not yet in existence[9] at or about the time of the Property Division Agreement. DW later changed his evidence to say that the discussion took place some time later.
306. There was insufficient evidence as to how the Property Division Agreement was performed and DW and DY had given inconsistent and unbelievable evidence in this aspect. They might have varied the terms but that was not really the issue before the court and it did not affect the authenticity of the 2 Agreements.
307. As to the Gift Agreement, according to the Mother, DY asked his wife Jiang Wen to issue a cheque of RMB2m to DG on the following day. Together with the properties it was RMB2.7m. DW also confirmed that it was DY who paid DG.
308. The cheque relied on by DY appeared to be one for 貨款 issued out of the Purao-DY-339-account to a 上饒市鴻宇工貿物資供應站. There was no reason why the payment to DG had to be in this convoluted mode and there was no proof of the connection between DG and上饒市鴻宇工貿物資供應站.
309. DY has failed to satisfy the court as to how the RMB 2m was paid to DG pursuant to the Gift Agreement. This was not surprising after such long lapse of time. DY might have, yet again, tried to bolster his case by producing unrelated documents. However, on balance, I am satisfied from the Mother’s evidence that DY did make the gift to DG.
K6. Findings with regard to the 2 Agreements
310. The impressive efforts of Mr Tong SC to challenge the 2 Agreements go nowhere near casting doubt on the evidence of the Mother. If anything, his challenges go towards showing the spontaneous creation of the 2 Agreements and the informality one often finds in home-made documents. The cross-examination might have thrown the credibility of DY and DW in doubt as to what assets they revealed to their Father on 6/6/1993 and how they performed the 2 Agreements but these did not undermine the authenticity of the 2 Agreements.
311. The 2 Agreements were made just 2 months after Purao was set up. If Purao were DG’s company, the Father would not have missed it. The Gift Agreement would not have recited that DG wanted to 自立門戶or that DG needed anymore capital in the future tense.
312. I find that DG’s version was not a failure of memory. It was a complete lie and shameless denial of the favours done to him by DY. The 2 Agreements showed that DY was much wealthier than DG and that he financially assisted DG. DG knew full well that they would have supported DY’s case on the first pot of gold and ownership of Purao.
L. 1993-1997: DINGTAI
L1. Undisputed facts
313. In early 1993, WGQ Tax Region was set up in Shanghai. It gave tax benefits to companies set up in that region, Dingtai was set up there in November 1993, using a guakao arrangement with Purao. DY was the legal representative of Dingtai until he resigned in 2003. The office was at Zhongyou Building with the same telephone number as Purao.
314. Dingtai had registered capital of RMB 10m and its balance sheet for 1993 showed 實收資本 as RMB 10m. For capital injection purpose, a cheque for RMB 3.8m was drawn from the Purao-DY-339-account; and there was injection in terms of stock-in-trade to the value of RMB 6.2m.
L2. The issues
315. The issues were who provided the capital and hence was the real beneficial owner of Dingtai. There were other issues on whether DY was in control of Dingtai’s business and whether DG had completely “retrieved” control of Dingtai.
L3. Who provided the capital for setting up Dingtai?
316. Originally, as with the case of increase in RMB 10m capital of Purao, DG had not provided proof of his capital injection into Dingtai. Then DY produced the Capital Verification Report of Dingtai obtained from the auditors with attachments on 25/1/2013. DG changed his evidence completely even after seeking leave (at the pre-trial review in January 2013) to serve his draft 2nd supplemental witness statement.
317. In the latest version, DG no longer maintained his plea in para 18(2) of the amended reply that the capital injection came from Purao’s assets and profits. He accepted that RMB 3m came from the Purao-DY-339-account account but asserted that the contract (between Haikou Nanzhou and others regarding imported steel) was borrowed from DY and the goods did not belong to Purao. He claimed that the capital verification of Dingtai was “hollow” (只是虛的驗資).
318. Before reaching the undisputed version in para 314, DY’s version on the cash injection had undergone some changes:
(i) In his 1st affirmation, DY stated that RMB 4m was borrowed from an outsider and he even gave the cheque number of the outsider.
(ii) In his 3rd affirmation, he said that the RMB 4m came from his personal funds from the Kunshan deal. He refuted the version of borrowing without giving an explanation.
(iii) His witness statement stated that the money came from funds of Haikou Nanzhou received by Purao and the goods used for injection came from the steel imported by Haikou Nanzhou.
319. Version (i) was indisputably wrong. With his wealth, DY simply did not need to borrow. He said he saw a cheque number on the ICB form and relied on it to say that the funds were borrowed. It reflected his desperate attempt to bolster his case in order to obtain the receivership order. The court has to be cautious with his explanation of the contemporaneous documents.
320. Versions (ii) and (iii) were all along part cash-part goods injection although details were missing.
321. The final undisputed version was firmly supported by documents. On cash injection, DY was cross-examined as to the availability of funds at the end of October and in early November 1993. He said that his original intention was to inject RMB 4m. However, he feared that a cheque he received at the end of October for RMB 975,000 would bounce. Relying on the handwritten accounts in hand (instead of only bank statements which he would only receive once a month), he decided to inject what he could afford, ie RMB 3.8m.
322. Working on handwritten accounts was in accordance with commercial sense. DY could mention the name of the issuer of the cheque, the date and amount, in the witness box without a document in hand. The cheque did bounce and he was able to refer to the chain of documents in proof. I find the final version of DY as to the source of the cash capital from his Purao-DY-339-account to be genuine.
323. As for the injection by stock-in-trade, the mode was similar to that for Purao. The attachments to the contemporaneous Capital Verification Report of Dingtai showed that:
(1) The 代理進口協議書 dated 14/2/1993 entered into among China Five Metals, Haikou Nanzhou, and Kunshan, together with a contract between China Five Metals and RIMCAO for the import of:-
(a) 20,000 mt of hot rolled steel coils; and
(b) 10,000 mt of hot rolled flat open steel.
(2) A contract dated 8/3/1993 (with Maison F. Mathieu being the seller) for 20,000 mt of “hot rolled ship building plate” (“the Maison Contract”). Haikou Nanzhou was stated to be the accounting unit (結算單位) and receiving unit (收貨單位). At US$337 per mt, the total value of the goods was US$6.76m x RMB 9 = RMB 60.84m.
324. The Maison Contract showed that:
(1) The auditors had asked for evidence of additional stock for the purpose of verification of Dingtai’s capital. The steel building plates, worth about RMB 60.84 million, was well beyond the capital requirement of RMB 6.2m for Dingtai. The Maison Contract, refuted Mr Tong SC’s submission that the same assets had been used for the capital injection of both Purao and Dingtai.
(2) The Maison Contract demonstrated yet again the link between Haikou Nanzhou on the one hand and Purao or Dingtai on the other. The stock of Haikou Nanzhou was injected into Dingtai as its capital.
325. Further, contrary to DG’s arguments, Dingtai’s books and records were all consistent with RMB 10m being injected. In Dingtai’s audited account for the year ended 1994:-
(1) When Dingtai was just set up and had not started operation, there was lack of stock-in-trade in the 1993 balance sheet and no record of sales in the profit and loss accounts. However, as at 31/12/1994, its balance sheet showed that the paid-up capital (實收資本) was RMB 10m. Thus, contrary to DG’s argument, the stock-in-trade was injected into Dingtai.
(2) As shown in its profit and loss account (損益及利潤分配表), Dingtai derived an enormous sum of RMB 158m from the sale of its stock (商品銷售收入淨額). Such income within a year of incorporation was only possible because of the injection of stock-in-trade.
(3) DG could not provide any explanation as to why there was so significant stock being sold in just a year (especially when he thenceforth did not have much experience in steel trade).
326. I find DY to be mistaken initially but his case was eventually firmly established by contemporaneous documents. The capital verification of Dingtai was not a hollow paper exercise as DG described.
327. Moreover, bank statements of the Purao-DG-333-account showed that DG’s business did not perform well. In about September 1993, the bank balance of RMB 282,000 was not even enough to settle a loan of RMB 4m. DG/Purao could not even afford to fund the increase of RMB 10m capital of Purao in October. There was simply no cause for DG to incorporate Dingtai. DG has deliberately lied in order to bolster his case, as Dingtai was the entity which purchased the Land.
328. I have no hesitation in holding that it was DY who injected the capital and owned Dingtai.
L4. Why was DY the legal representative?
329. DG’s oral evidence was that Tian advised him of a policy[10] that an individual could not act as a legal representative for 2 or more state-owned companies, including those established pursuant to a guakao arrangement. Tian never corroborated DG. Anyhow, DG’s evidence was contradicted by certificates of corporations which showed that陳志強 did act as legal representatives of 3 state enterprises in about the same period, ie (i) 上饒市商業儲運公司 on 4/3/1993; (ii) 江西特種汽車總廠上饒分廠 on 13/5/1993; and (iii)上鐃市輕型車輛廠 on 22/5/1993. I reject DG’s evidence.
330. It was natural for DY, the owner, to be the legal representative.
L5. The business of Dingtai
331. Dingtai effectively took over Purao’s trade of steel. DY had produced some steel contracts for the period covering 1996 and 2000, showing that hundreds of thousands of tons of steel were involved, running into millions of RMB.
332. DG said very little about Dingtai’s business. He never explained where he could have sourced such volume of steel and why DY had to assist him when DY had his own Hainan Companies to run. In the closing submission, Mr Tong SC has not identified Dingtai’s business.
L6. Who controlled Dingtai?
333. It was DY, rather than DG, who was in control of Dingtai’s business initially. DY was the “administrative leader” (行政領導) or person in charge (負責人) and his wife Jiang Wen was the person in charge of accounts (會計主管人員/財務主管) as evidenced by various auditors’ reports, financial statements and tax returns submitted to the Shanghai government between 1995 and December 1997.
334. DG claimed that DY could not be managing Dingtai during June to late 1994 when DY was detained for an offence for up to 12 months. This was a half truth. Although DY had violated the law, DW had, I accept, signed an undertaking which caused DY to be released after one month and to receive non-custodial training for one year. DG had exaggerated the length of DY’s detention. I find that DY was able to manage Dingtai in 1994.
335. There was other evidence to show that DY was in control of Dingtai:
(i) There was a 代開百萬元增值稅專用發票申請書 dated 24/7/1996, indicating a single transaction of Dingtai for more than RMB 5m signed by DY.
(ii) There was a 蘆潮港協議 dated 23/5/1995 signed by DW on behalf of Dingtai to purchase land rights worth RMB 9m. It was impossible for DG to have authorized DW to sign because, on DG’s own admission, he was on bad terms with DW who had tried to prevent him from incorporating Purao under the guakao arrangement with Shangrao Cereal.
336. The analyses in this Section up to this point are sufficient to enable me to find that DY was the true owner of Dingtai. DG’s submission that the steel business was insignificant compared to the acquisition and development of the Land dodges the issue.
L7. DY’s loss in wealth in futures speculation
337. DY accepted that in 1995/1996 he suffered loss of RMB 9m from speculating in futures (apparently treating Dingtai’s money as his). He accepted that the statements of the futures trading accounts in his or Dingtai’s name were genuine. He denied causing Dingtai financial difficulty as a result and claimed to still possess RMB 50-60m.
338. DG’s case was that DY had lost all his wealth to the extent of pledging the Zhongyou Building units and went into hiding. This was corroborated by 奕印敏 who assisted Dingtai in the trading of futures.
339. The loss from speculation in futures was clearly reflected in the financial statements of Dingtai:
(i) In 1995, despite having sales of over RMB 46m, Dingtai suffered loss of about RMB 75,000. It was specifically pointed out by the auditors that “有一筆膠合板期貨虧損數額較大直接影響當期利潤”;
(ii) In 1998, part of the account receivables related to loss of over RMB 3m in trading through Hainan Futures;
(iii) In 1999, the loss from trading through Hainan Futures increased to over RMB 8.47m.
The loss was also corroborated by 鮑栽萍 (accountant of Dingtai since July 1994; financial consultant of Bading since 2012), whose evidence I accept. She confirmed that Dingtai was in a better financial shape when it engaged in steel business. Where DY has taken out money for speculation, she would record it in Dingtai’s accounts as “amount receivable” or prepaid amount”. Those amounts were never repaid.
340. Mr Tong SC relies on DY’s selective disclosure of personal financial documents for the period of 1995/6 to show that DY had lost all his wealth in 1995/6. I place little weight on the limited disclosure after so many years. Rather, I place more emphasis on circumstantial evidence:
341. Firstly, what was undisputed was that DY left the Zhongyou Building and resided in a rented flat at the junction of 東方路and 張楊路. DY’s explanation was that he wanted to avoid being reported for breaching the one child policy, his wife then bearing a second child. His version was supported by the Mother.
342. In this respect, I reject the Mother’s evidence. Moving could hardly prevent exposure of DY having a second child. Moreover, having a second child would only expose DY to financial penalty, which he could undoubtedly afford with his alleged wealth of RMB 50 to 60m.
343. Secondly, DY had failed to pay the management fees of RMB 37,872.60 for Zhongyou Building for 3 years between January 1998 and February 2001: see demand note dated 20/2/2001. The Mother confirmed the non-payment. Ironically, DY denied knowledge of it, despite his alleged use of Zhongyou Building as his office.
344. Thirdly, DY had moved to live at 華高一村in 1999, a cheap estate located at the outskirt of Shanghai. According to DY, the Father used his savings/pension of RMB 280,000 to purchase 4 units there and gave one to DY. DY claimed to have moved there with his family as the Father was very ill. This was incredible. There was no reason why a wealthy man like DY should have allowed his Father to pay for such a modest unit for him, than to house his Father in better accommodation with carers.
345. I find it that DY had lost all his wealth through speculation in futures. He pledged Zhongyou Building and went into hiding. He did not have the RMB 50-60m wealth as he claimed.
L8. Debts of Dingtai
346. Dingtai owed money to (a) 上海保稅商品交易市場第二市場有限公司(“theNo.2 Market”) and (b)上海秦浦物產開發公司 (“Qinpu”).
L8(a) Money owed to the No.2 Market
347. Bank documents [D30/6824-6829] showed that as of August 1996, Dingtai owed the No.2 Market a principal sum of RMB 8.5m.
348. Post-1997 (ie after acquisition of the Land), Dingtai still owed No.2 Market:
(i) In 2000, as shown in the financial statements, over RMB 3m;
(ii) In 2001, as recorded in Dingtai’s Letter of Undertaking dated 8/1/2001, over RMB 1.2 million.
349. It was only in 2002 that Dingtai finally settled all the debts owed to No.2 Market. See收款說明dated 20/11/2001 and 19/11/2002.
350. DG has called an independent witness 孫惠定 (“Sun”), former President of No.2 Market to give evidence on Dingtai’s loans. Sun’s evidence was supported by very limited documents. I accept that he did not personally possess any material document except the agreement signed between No.2 Market and Dingtai appointing him as deputy managing director. He confirmed that Dingtai had fully repaid the debt. But for this case, Sun would have no connection with this matter. There was no way for him to go back to No.2 Market to get documents. I make no findings of non-disclosure against him.
351. Sun was not familiar with some documents as some transactions were done by his subordinates. Under cross-examination, he gave different figures as the amount owed by Dingtai to No.2 Market, eg RMB 10m by the end of 1996 (§6 of his witness statement) and over RMB 5m (record of conversation between Sun and DG’s lawyer dated 11/11/2010). He could hardly be blamed for mistake over figures after so many years. I prefer to rely on the objective bank documents.
352. Mr Chan SC cross-examined Sun as to whether or not No.2 Market had a business of lending; how the No.2 Market, with registered capital of only RMB 58m, could have lent so much to Dingtai. He also pointed out that the balance sheet of Dingtai for the year ending 31/12/1996 showed the total debt owed by Dingtai to all creditors was just RMB 11m.
353. Despite such challenge, I accept Sun’s evidence that Dingtai obtained substantial funds from No.2 Market through the use of the purchase and sale agreements (ie Dingtai would buy steel and sell to No.2 Market) [eg D2/323]. It was Dingtai which failed to abide by the arrangement in issuing very few invoices for sale of goods through No.2 Market. Moreover, DY did not apply the funds received from steel trading as promised but, speculated in futures.
354. I also accept Sun’s evidence that Dingtai’s debts increased but DY was untraceable. Sun contacted DG, the legal representative of Purao (Dingtai’s parent company). DG acknowledged his obligation to repay Dingtai’s debts.
355. DY claimed that the loans from No.2 Market had been applied in obtaining steel to the value of RMB 20-30m for sale, but Dingtai was unable to collect a large part of the proceeds of sale from the customers. This version was not supported by the financial statements of 1996 and 1997, which did not record any stock or sale of steel worth RMB 20-30m but huge receivables to the tune of RMB 9.9m.
356. DY claimed to have sued defaulting customers. However, the only Mainland judgment dated 20/6/1996 which he referred to concerned a transaction in 1994, totally unconnected to the alleged unpaid transactions since 1996.
357. I find that Dingtai did owe No.2 Market about RMB 8.5m by 1996 as a result of DY’s speculation in futures. DY was untraceable. It was through DG’s effort that the debt was fully repaid by 2002.
L8(b) Money owed to Qinpu
358. It is DG’s case that DY also caused Dingtai to borrow funds from Qinpu for speculation in futures: see貼現憑證 dated 26/12/1996 showing part of the loans.
359. When Qinpu was put into liquidation, the official List of Outstanding Debts Payable to Qinpu as of 31/7/2000 showed that Dingtai still owed it around RMB 670,000.
360. DG called紀步連 (“Ji”) (Qinpu’s accountant between 1994 and 2001), and劉玉春 (“Liuyuchun”) to give evidence on the loans and that許建平(“Xujianping”) found DG, who promised to repay by instalments. See also the statement (情況説明) signed by Xujianping.
361. Mr Chan SC managed to show, under cross-examination, that the debt was owed by Dingtai instead of DY personally. Mr Chan SC was also able to show that Ji did not have personal knowledge of the matter and he had to rely on what his colleagues, Xujianping and Liuyuchun, told him. I also find that when Liuyuchun said that DG had, through Dingtai “and other companies controlled by him” repaid the debts owed by Dingtai to Qinpu, there was no proof that the debt was repaid by other companies. In any case, DG never mentioned that the debt was repaid by any company other than Dingtai.
362. I find that Dingtai did owe Qinpu RMB 670,000. Despite what Mr Chan SC established in cross-examination, the true picture remained that DY’s major company, Dingtai, fell into heavy debts. There was no evidence that, despite his alleged wealth, DY settled those debts. The inference was clear – DY and Dingtai were in financial difficulties, latest by 1996. It was DG who settled those debts.
L9. DG’s repayment of the debts of Dingtai
363. One may wonder why DG was willing to repay substantial debts if he was not the true owner of Dingtai. I find that quite apart from DG’s good relationship with DY, it was because as legal representative of Purao, DG regarded himself as liable in law for Dingtai’s debts.
L10. Taking over control of Dingtai
364. Three incidents showed DG to have taken over control of Dingtai:
(a) Obtaining of a letter of authorization from DY;
(b) Gaining possession of Dingtai’s finance chop and DY’s personal chop; and
(c) Gaining possession of Jiang Wen’s personal chop.
L10(a) Obtaining of a letter of authorization from DY
365. DY executed an undated letter of authorization authorizing DG to exercise all his powers as Dingtai’s legal representative (“DY/Dingtai LoA”). The dispute was whether he did so in late 1996 or early 1997 as a result of his mismanagement of Dingtai (DG’s version), or only in May 2003 (DY’s version).
366. DG’s version has supported by circumstantial evidence. Though DY was the legal representative of Dingtai between 1996 and 2003, DG had executed many agreements on behalf of Dingtai as legal representative or authorized representative. The most important documents were the Land Transfer Agreement dated 25/3/1997 executed between Fortune World and Dingtai (“the SPA"), and related agreements such as the Memorandum dated 26/3/1997 for Dingtai to postpone payment of the Land premium, and Memorandum dated 25/7/1997 for Bading to replace Dingtai as the purchaser under the SPA. To protect its interest, Fortune World and the notary public required DG to show the requisite authority to sign the SPA on behalf of Dingtai. The DY/Dingtai LoA was the only letter of authorization produced by DY in the present action. DY could not point to any other letter of authorization.
367. On the other hand, DY’s version had been wholly discredited under cross-examination. DXH had replaced DY as a legal representative, latest by March 2003: see Dingtai’s shareholders’ resolution dated 31/1/2003 and approval of change in company information dated 21/3/2003. DY had to admit under cross-examination that he had no authority and no reason to sign the DY/Dingtai LoA in May 2003, ie half a month before he transferred his shares in Dingtai to DXH on 5/6/2003.
368. DY vividly described signing the DY/Dingtai LoA as “like giving away his own baby”. He had struggled for half a month before doing so. After all, he had grown the enterprise and there was no reason to give it over to DG. (That was of course contradictory to DY’s prior version on affirmation that he had no firm recollection as to when the DY/Dingtai LoA was given to DG.)
369. I find DY’s vivid description to be the true intent and effect of his signing the DY/Dingtai LoA. He had knowingly accepted the consequences of leading Dingtai into the dire financial situation, acknowledged the fact of DG’s help to clear its debts and hence surrendered control in Dingtai to DG. I find that the DY/Dingtai LoA was executed in late 1996/1997 as DG alleged.
L10(b) Gaining possession of DY’s personal chop
370. There was no dispute that as its legal representative, DY had, since the incorporation of Dingtai, been operating the basic account at ICBC with his personal chop. Some of Dingtai’s general accounts at the ABC were also operated with that chop.
371. It was DG’s case that when he took over control of Dingtai, DY handed over DY’s personal chop for Dingtai’s bank accounts to him. DY denied in his witness statement that the chops had ever been with DG.
372. DG produced the finance chops and DY’s personal chops at the trial as Exhibit P31. DY accepted Exhibit 31 as genuine. He explained that he had given those chops to DXH in 2003.
373. That explanation was not plausible. As a legal representative, all that DXH needed would be the finance chop but not DY’s personal chop. DY had clearly lied to conceal the fact that he had handed over control of Dingtai to DG. I accept DG’s version.
L10(c) Gaining possession of Jiang Wen’s personal chop
374. It was not in dispute that Jiang Wen’s personal chop has been in DG’s personal possession before trial. DY said that he gave it to DG for him to handle Dingtai’s liquidation in 2006. If that was the reason, DY should have handed it over to DXH, who was a member of the liquidation committee whilst DG was not. Further, DY should have got back Jiang Wen’s chop after completion of the liquidation process. DY’s version was incredible.
375. DG’s version was that Jiang Wen possessed an accountant’s certificate. Her chop was kept by 鮑栽萍, who would affix it on Dingtai’s financial statements prepared by鮑栽萍 [eg H/167, 169, 176-178, 211, 214, 219-221]. Where the names of DY appeared, they were written (not signed) to show that he was the legal representative. His signature was different from the written form of his name.
376. 鮑栽萍was a very careful witness whose evidence was not really challenged. Her evidence corroborated DG’s. Viewed against the backdrop that the personal chops of both DY and Jiang Wen fell into the hands of DG and that DG was in control of Dingtai, 鮑栽萍and DG were credible and I accept their evidence.
L11. Findings re Dingtai
377. I find that Dingtai was set up as DY’s company. DY had remained in control until about 1996 when Dingtai ran into financial difficulties as a result of his speculation on futures. DG repaid the debts of Dingtai. There had been no change in ownership of Dingtai but the real control had gone into the hands of DG through obtaining the DY/Dingtai LoA executed at the end of 1996/early 1997, and the personal chops of DY and his wife. DG would not admit the lack of ownership because the Land was purchased in the name of Dingtai. On the other hand, DY had understated the impact of the speculation on his financial state. He would not admit the loss of control because he wanted to retain the chance of claiming beneficial ownership of the Land (his original case) or the subsequent companies. It was also to conceal the fact that he had no means to acquire or exercise control over development of the Land.
M. 1997: ACQUISITION OF THE LAND
378. In 1997, the Land was purchased for US$27,720,000 (equivalent to about RMB 230,000,000 at that time), to be paid in instalments. The vendor was Fortune World.
379. If matters had stopped here, the Land would undoubtedly have belonged to Dingtai, owned by DY. It mattered not who had sought the funding or given instructions for development. However, because of DY’s loss of control in Dingtai, examination of events thereafter were important in showing why the shares in companies subsequently set up to hold interests in the Land and Tower were in the names of DG and his nominees, and where the beneficial ownership of those companies ultimately rested with.
380. I will first deal with the period between 1997 and 2001 when the Land remained undeveloped. The most important things to do were (1) to negotiate for acquisition, (2) raise 30% of the Land premium; and (3) find investors. Each of DG and DY claimed to have a leading role in these 3 aspects.
M1. Negotiation for the acquisition of the Land
381. All the agreements with Fortune World were signed by DG. They included:
(i) The SPA dated 25/3/1997;
(ii) The Memoranda respectively dated 26/3/1997, 25/7/1997, 26/3/1998, 25/8/1998 and 29/10/2001; and
(iii) The Supplemental SPA dated 17/6/2002.
382. DG’s assertion that he did the negotiation was corroborated by witnesses from Fortune World who gave evidence that they only negotiated with DG.
(i) 崔冰, an officer of Fortune World’s Sales Department, stated that she only met DY many years after the Land was acquired by DG. She explained why she had a vivid memory of the negotiation of the terms of sale and purchase for one month with DG, by reference to the age of her child and her being prevented from going home after the usual office hours because of the need to collate the terms of discussion for the supervisor’s approval on each morning. Her evidence was well-particularized and her witness statement was admitted without challenge. I accept the same to be true.
(ii) 幸霓爾, vice manager of Fortune World’s Sales Department also gave unchallenged evidence as to DG’s keenness in buying the Land and negotiated the details for a month. He is now an employee of Bading but that in no way compromised his credibility. His evidence was also well-particularized and I accept his evidence in full.
383. On the other hand, DY had only his own word. In his closing submission, Mr Chan SC has not identified evidence showing DY’s participation in the negotiation for the acquisition of the Land or authorization to DG to do so. What was incredible was that DY (if he had remained in control of Dingtai at that stage), would have left DG (his alleged driver with no experience in grand business) to do such important things as negotiation and signing of the SPA and related Memoranda. DY was not even present at the signing ceremony of the SPA.
384. I find that it was DG who negotiated for the purchase of the Land and signed the SPA and related Memoranda without the need for DY’s authorization.
M2. Payment of the deposit of RMB 2m for the Land
385. Fortune World required an initial deposit of RMB 2m (“the Deposit”) before it would sign the SPA. This formed part of the 30% Land premium. It was clear that Dingtai had no money of its own. All the funds for purchase, including the Deposit, were thus borrowed.
386. DG’s case was that the RMB 2m came in the form of a cheque directly delivered by the No.2 Market to Fortune World. In fact, Sun of the No.2 Market had approached Fortune World directly for information as to the Land. There was trust between the No.2 Market and Fortune World, which were both government entities. It was agreed that if the purchase would not proceed, the money had to be repaid to No.2 Market and not Dingtai.
387. DG’s case was firmly supported by a cheque dated 10/3/1997, a receipt, a payment slip and a confirmation dated 10/3/1997. His case has never changed from the outset since he filed his 3rd affirmation. He was corroborated by Sun.
388. I am satisfied from Sun’s evidence that DG had provided his own car and landed property worth RMB500,000 as guarantee for repayment of all debts due from Dingtai. I am also satisfied that, by a written agreement signed by the supervising bureau of No.2 Market dated 16/12/1997, Sun was appointed as an enterprise consultant and director of Bading to supervise repayment by Bading. Such appointment ceased after repayment of a major portion (not all, as mistakenly stated in Sun’s oral evidence) of Dingtai’s debt. Sun confirmed that Dingtai and Bading had repaid all debts in full.
389. On the other hand, DY’s case had changed several times.
(i) In his 1st affirmation dated 14/10/2010, DY stated that he directed Dingtai to pay the Deposit.
(ii) Both DY and DW categorically denied that the Deposit came from the No.2 Market. They claimed that it was陳躍進 (“Chen”) who paid it. See DY’s 3rd affirmation adopting the version in DW’s affirmation.
(iii) In his witness statement dated 7/8/2012, DY admitted that, from further information obtained through his instructions, the RMB 2m was paid by the No.2 Market.
(iv) Even with this admission, DY denied that it was an additional loan. He claimed that it had come from the unused credit line granted by the No.2 Market under a sale and purchase agreement with Dingtai dated 4/3/1996. However, it was clear on the face of that sale and purchase agreement that it only concerned funding in 1996 and had nothing to do with the Deposit in 1997. Dingtai already owed a principal sum of RMB 8.5m as of August 1996. There was no unused credit which it could have utilized. Sun also confirmed that it was a separate loan.
(v) In the witness box, DY explained that he decided to borrow the Deposit for fear of forfeiture. It was completely illogical. If DY failed to honour the SPA, the Deposit would be forfeited and he would have to repay the loan in any event.
390. Mr Chan SC submits that DY and DW’s errors were due to lapse of 16 years since the event and then made without the benefit of contemporaneous documents. It was entirely innocent.
391. With respect, I cannot agree. DY knew how his own conduct had brought about the financial difficulties of Dingtai. He could not have forgotten that the Deposit had come from borrowing, all the more so since DG had already given a version in his 3rd affirmation which would have jogged DY’s memory. Yet DY simply made up the story (with DW) as he went along.
392. Further, the need to borrow a mere RMB 2m was incredible in the light of DY’s claimed wealth of RMB 50-60m. It was also incredible that he had not borrowed from DW (who possessed personal wealth of RMB 60-70m), with whom DY was on good terms. Clearly, it was because the Land was purchased at the instigation of DG who was not DW’s favoured brother.
393. DW’s evidence was equally incredible. He claimed in the witness box to have found Chen only after the Deposit was paid, which contradicted his affirmation evidence that he asked Chen to pay the Deposit. The truth, in my view, could be inferred from DW’s answer given under cross-examination – that he personally did not think the Land had development potential and was told that nobody would have wanted a piece of land like this. That explained why he would not assist even if he had the money.
394. I find that the Deposit was arranged by DG seeking an additional loan from the No.2 Market.
M3. Raising 30% of the Land premium
395. 30% of the Land premium amounted to about RMB 70m: see confirmation from Fortune World dated 28/1/1998. Once that was paid, the Land title certificate would be issued (see clause (二) 2 of the Memorandum to the SPA). The Land title certificate could then be used as security to raise further bank loans to complete the acquisition and the construction. The Land title certificate was actually issued on 12/2/1998 and the loan agreements of Dingtai thereafter were secured by Bading (eg the ICBC loan agreement dated 10/11/1998).
396. Out of the 30% Land premium, the Foreign Investors paid RMB 56m: see confirmation from Fortune World dated 7/7/2000. Dingtai paid the remaining RMB 14m.
397. On DG’s case, apart from the Deposit, he raised funds exceeding RMB 14m:
(a) RMB 400,000 under the 特種轉賬貸方傳票 dated 5/6/1997;
(b) A loan of RMB 3m from Chen dated 20/9/1997;
(c) A loan of RMB 1.5m from Chen dated 3/1/1998;
(d) A loan from 上海大華裝飾工程公司 for the sum of RMB 10m on 15/8/1997; and
(e) Revolving loans of RMB 2m from ABC.
The documents in support of (a)-(c) were produced belatedly by DG on 26/2/2013, about a week before trial. They were never referred to in his affirmations, witness statements or even counsel’s opening submission.
M3(a) RMB 400,000 under the 特種轉賬貸方傳票
398. The sum was transferred from DG to Dingtai. DY accepted the injection of this money but questioned the source and its purpose.
399. DG asserted in his evidence-in-chief that however little he could raise, he had injected as the Land premium. Under cross-examination, he could not confirm if the RMB 400,000 came from the sale of his Luyin shares. He was not clear what a特種轉賬貸方傳票was but said that the money was transferred from his credit card account. He could not tell what his credit card limit was. He was also unable to confirm that this RMB 400,000 fell within any of the sources of funds[11] referred to in para 60(9) of the amended reply. On such evasive answers, I am unable to place any weight on the 特種轉賬貸方傳票, which appeared from nowhere for an unknown purpose.
M3(b) Two loans of RMB 1.5m and 3m from Chen
400. DY admitted that the 2 sums were paid into Dingtai’s account, as evidenced by the pay-in slips. The borrowing thus came as a result of DG’s effort, whether it was on behalf of himself or Dingtai.
401. DG did not have the borrowing slips in his own record. The copies were allegedly given by Chen to DG in early 2013. Both DG and Chen had confirmed their signatures on the 2 borrowing slips and Chen had not been challenged in cross-examination.
402. DY disputed the authenticity. Given DY’s admission, it should not be necessary to rely on the 2 borrowing slips. However the challenge over authenticity illustrated DG’s use of dubious documents.
403. The 2 loans were made at a time shortly after the emergence of the Asian Financial Crisis. Chen knew that DG was in lack of funds and yet no security was asked for. The loans were recorded on informal slips of paper that did not specify the date of repayment and interest rate. DG was completely evasive about the date of repayment. He left Chen to answer the question. The answers of Chen were firstly, that they had not talked about the repayment date; secondly, that they had discussed but not with details; thirdly, repayment would have been after operation of the Project. Such wavering answers were unreliable.
404. Mr Chan SC further points out that DG’s signature on the borrowing slips more resembled the style found exclusively in documents from 2010 to 2013 (Exhibit D1). Similarly, Chen’s signatures on the borrowing slips more resembled that appearing on his witness statement, which was very different from those in 1997 (eg the Articles of Bading dated June 1997, the Joint Venture Agreement between Dingtai and Balin and the list of board members and senior management of Bading).
405. The late production of the copy borrowing slips gave DY no opportunity to verify their authenticity. Exhibit D1 was, of course, not conclusive as to DG or Chen’s styles of signing. However, Mr Chan SC’s comments were justified. DG was a liar and, as demonstrated in Section O below on the Railway Companies, DG had produced false documentary evidence. I am unable to accept that the 2 borrowing slips were made on the stated dates as genuine loan agreements.
M3(c) A loan from 上海大華裝飾工程公司to Dingtai for the sum of RMB 10m
406. It was not disputed that DG arranged this loan, which was evidenced by the payment slips and letter of confirmation he produced.
M3(d) Loans from ABC
407. From March 1997 to January 1998, Dingtai borrowed a loan of RMB 2m from ABC on revolving basis (借舊還新). They were arranged through Dingtai’s account, which was operated by DG’s personal chop: see借款借據 dated 28/3/1997; 21/8/1997; 23/1/1998. DY admitted being aware of this account only after litigation started. So he could not have instructed DG to borrow from ABC. If it was DY who had arranged the loans, he would not have deposited them into DG’s account. The irresistible inference was that DG arranged those loans.
M3(e) Business income of Dingtai
408. DY claimed to have contribution in the form of business income of Dingtai. Dingtai had had steel contracts up to 2000, signed after DG had taken over control. However, DG was unable to confirm if he had signed any of them. It was probable, in my view, that though he had lost control, DY still did some business for Dingtai.
409. However, the audited statements of Dingtai for 1997-1999 showed that Dingtai was trading at a loss. DG said the WGQ Tax Region required companies within it to have a certain level of trading. It was upon his instructions that DY carried on the loss-making steel trade in the name of Dingtai to satisfy this requirement. I find this to be probably true.
M4 Bringing in investors
410. To show that he had looked for potential investors to develop the Land, DY produced:
(a) An agreement between Dingtai and 上海申虹貿易實業公司 dated 10/3/1997 (“the Shenhong Agreement”); and
(b) A Letter of Intent between Dingtai and 廣發投資控股公司dated 21/4/1997 (“the Kwong Fat Letter of Intent”).
411. DG disputes the authenticity of those 2 documents.
412. The Shenhong Agreement was described as a “初步協議”. It was in extremely vague terms. Shenhong only had registered capital of RMB 500,000, far below the scale required to acquire and develop the Land. According to the company registration documents, its business was trading in electrical appliances, vehicle component, daily metal and goods but not real estate development.
413. In the witness box, DY came up with a new story that Shenhong had the ability to invest in the Land because of its connection with the military forces and possessed army vehicles.
414. Shenhong never participated in the acquisition and development of the Land and DY never explained why he had ceased cooperation with them.
415. The Kwong Fat Letter of Intent was also in very brief terms. It was not sealed by either Dingtai or Kwong Fat. There was no explanation why DY needed Kwong Fat after entering into cooperation with Shenhong, or why the Letter of Intent did not proceed further.
416. I am not satisfied as to the authenticity of these 2 documents, or that Shenhong and Kwong Fat were ever potential investors.
417. In summary, I find that DG had raised funds for over 30% of the Land premium (being RMB 2m for the Deposit + RMB 4.5m from Chen + RMB 10m from 上海大華裝飾工程公司 + RMB 2m from ABC + RMB 56m from Foreign Investors), totalling RMB 74.5m. DY had not put in a single cent of his alleged wealth of RMB 50-60m or arranged funds. Dingtai was trading at a loss and so the business income from DY’s trading in steel did not contribute to the purchase price. I am not satisfied that DY had ever found potential investors. As for DG’s contribution in bringing in investors, see Section N next.
N. 1997: SETTING UP OF BADING
N1. Undisputed facts
418. It was common ground that after signing of the SPA, attempts were made to find business partners to invest in the Land jointly with Dingtai and to provide the necessary funding. Bading was set up on 14/7/1997 as a joint venture formed by Balin (HK) (as 60% foreign investor) and Dingtai (as 40% local shareholder). Bading had initial capital of US$20m, of which US$8m was arranged for by Dingtai and US$12m by Balin.
419. Chen was appointed by Balin as the first legal representative, managing director and general manager of Bading. DG and DW were appointed by Dingtai to the same position as deputy managing director. DY was one of 2 deputy general managers.
N2. Parties’ respective cases
420. DG claimed to have set up Bading. He relied on the evidence of Chen.
421. DY claimed that the connection with Chen was made through DW. DY also claimed that as it was he who set up Purao and Dingtai, it followed that it was he who set up Bading through Dingtai.
422. In deciding this question, I have considered the documents signed by DG and DY’s side and the role of Chen.
N3. Documents signed by DG and DY’s side respectively
423. Various agreements were signed between Dingtai and the Foreign Investors to confirm the current shareholding, the capital contribution of each party to the joint venture and to authorize the raising of capital. All of these agreements were signed by DG on behalf of Dingtai and Chen on behalf of the Foreign Investors: see 早期合同 between Dingtai, Balin and 香港悅銘有限公司 (“Nicemate”) dated 1/12/1997; and the Supplemental Agreements between Dingtai and 香港新河(集團)有限公司(“Good Way”) dated 9/9/1999 and 13/8/2000 respectively.
424. The following documents were signed by DY/DW:
16/5/97 DY signed the Bye-laws of 上海巴林鼎泰 (the name was subsequently changed to Bading)
16/6/97 DW executed Bading’s Articles of Association
16/6/97 DW executed the joint venture agreement with Balin
425. DW’s involvement was telling. DG was admittedly on bad terms with him since about 1993. He described DW as “his (DY’s) brother”. Yet DG admitted that he had invited DY and DW to join the discussions with Chen and 黃騰 (“Huangteng”) of Balin. DG explained in his oral evidence that he wanted to take the opportunity to mend the relationship with DW and that DW was older and appeared more mature.
426. I find DG’s explanations to be odd, to say the least. There was nothing to show that anyone from Balin found DG too young and immature. Or that having DY (also older than DG) was not enough. It was inherently improbable for DG to have invited DW to participate in a company with registered capital of US$20m. Although DW had accepted the invitation, nothing seemed to have happened to further mend the relationship. DW and DG had not seen each other since 1997 except at the Father’s funeral.
427. On the other hand, if DY was the true decision maker, it would have made perfect sense for DY to have appointed DW having regard to their previous cooperation in the Hainan Companies. I find this unlikely since DY had not taken back control of Dingtai and it was DG who negotiated the acquisition of the Land.
428. DW was a government official at the 上饒市外貿局. He claimed to have enlisted the assistance of Chen. According to DW, since Chen was from Shangrao and might not have understood the Shanghai situation, DW did not disclose that the Land had no potential but lied that the Land which was alongside Huangpujiang was good. However, if he did find Chen, it was odd that DW was not further involved in the Land or Project. I find his version to be unlikely.
429. I do not think that DG, DY or DW had told the whole truth. Their signing of documents of Bading could not assist in deciding who the real decision maker was over the Land or Bading.
N4. The involvement of Chen
430. Chen was the representative of all the Foreign Investors who invested in Bading from time to time. He was personally involved from 1997 until the complete withdrawal of the Foreign Investors in 2003.
431. Chen confirmed that he cooperated with DG in the development of the Land through Bading. He had never discussed with DY about the shareholding of Bading. Chen also confirmed that while DG might have assigned DY and DW to execute some documents on behalf of Dingtai, it was Chen and DG who finalized the terms in those documents. Neither DY nor DW had authority to change those terms.
432. The evidence of Chen was consistent with the letter of authorization dated 10/5/1997 issued by Huangteng to DG for DG personally to handle all the matters relating to the establishment of the joint venture company to develop the Land (“the Balin LoA”). It was also wholly consistent with the fact that DG was then in control of Dingtai. Mr Chan SC did not deal with the evidence of Chen in this respect in his closing submission.
433. DY never disputed the Balin LoA as false but his versions on the Balin LoA were devoid of common sense.
(i) In his 3rd affirmation (§107), DY said that he was not aware of the existence of the Balin LoA at the time.
(ii) In the same affirmation, DY claimed that DG only met Huangteng in May 1997 and had not participated in any negotiation with Chen or Huangteng. If so, Huangteng would hardly have issued the Balin LoA to DG, a stranger.
(iii) Under cross-examination, DY said that he had asked Chen to draft the Balin LoA to facilitate DG’s negotiation with Fortune World. The Balin LoA was just for DG to handle clerical matters relating to the setting up of the joint venture. This version was contrary to the express terms of the Balin LoA, which had nothing to do with Fortune World and did not just authorize DG to handle clerical but all matters.
434. I reject DY’s version. I find that it was likely to have been DG who found Chen. I accept the version of Chen.
435. In summary, DG found Chen and entered into discussions with Chen who acted on behalf of the Foreign Investors. At no stage had DY taken back control of Dingtai. While DW and DY might have signed on some of the documents, it was DG and Chen who could have finalized the terms. I find that it was DG who set up Bading.
O. 1998: RAILWAY REDEVELOPMENT AND RAILWAY COMMERCIAL
O1. Undisputed facts
436. The 2 RailwayCompanies set up in about 1998 were:
(i) 上饒市鐵路站前舊街改造發展有限公司(“Railway Redevelopment”); and
(ii) 上饒市鐵聯站前商務有限公司 (“Railway Commercial”).
437. They were involved in a railway redevelopment and hotel construction project in Shangrao.
438. Railway Redevelopment was set up in December 1998. It had registered capital of RMB 2m. On paper, it was injected through DG’s personal account as evidenced by a payment slip. DG was 85% shareholder. In June 1999, he became 90% shareholder. The other shareholders from time to time were 陳志強，王火根，王桂玲, 徐志良 and 徐梅花.
439. Railway Commercial had registered capital of RMB 300,000. There was no evidence from either side as to how it was paid. The shareholders were SXP and her mother, 劉竹英, who was also Railway Commercial’s legal representative.
440. DG signed all the important documents relating to the redevelopment project, including the 聯合改造上饒新客站解放路鐵路區域合同 (“the Joint Redevelopment Agreement”) with the Railway Bureau dated 8/1/1999and the supplemental agreement 10 days later.
441. There was documentary evidence of remittances of funds from the Railway Companies to Dingtai, Bading and DG’s personal accounts, respectively, during the period of May 1999 to November 2000. They added up to over RMB 12.75m.
O2. Parties’ respective case
442. According to his 3rd affirmation, DG had applied most of the profits derived from pre-sale of the properties of Railway Redevelopment and profits of Railway Commercial into the Land or the Project.
443. On the other hand, DY’s case is that he had funded Railway Redevelopment and beneficially owned it. There had been substantial financial injections by DY through Dingtai between December 1998 and August 2000. He had arranged DG to manage that business. However, Railway Commercial was not profitable at all. In October 1999, DY had asked for the Mother’s ID card, for her to replace DG as the legal representative of Railway Redevelopment.
O3. Analyses of DG’s case
444. DG had indisputably relied on false documents. In §103 of his 3rd affirmation, he claimed that upon full payment of the land premium for the land in the vicinity of the railway station for redevelopment (“the railway land”), Railway Redevelopment obtained the land use permits of the railway land. He exhibited 3 Receipts in respect of its land premium for the total sum of RMB 46.6m [D15/3415-3418, at 3417]. The proper interpretation of such evidence was that the RMB 46.6m was paid by Railway Redevelopment to the Shangrao Railway Bureau in respect of the railway land premium. It was intended to create the impression that the redevelopment project was very significant and the profits obtained as a result was substantial.
445. Through the efforts of DY and DW, the 3 Receipts were subsequently established to have been false, which DG never disputed.
446. To try and explain away his use of false documents, DG did not say that he was so angry that he confronted whoever was responsible for giving him the false receipts. Instead, when the time for filing witness statements and interlocutory applications had all gone past, DG filed the 4th list of documents and produced the records of investigation 調查筆錄 (all dated 19/1/2013) prepared by his Mainland lawyers on his instructions. Those lawyers investigated :
(i) 汪涵芬, retired engineer [D31/7077 to 7085];
(ii) 王火根, 上饒車務段駕駛員 and staff of Railway Redevelopment [D31/7086 to 7100]; and
(iii) 黃有根, retired 上饒車務段段長 [D31/7101-7115].
447. The relevant parts of the調查筆錄were as follows:
(i) 王火根 was asked by 黃有根 to obtain quotation for the Nanchang Railway Bureau on the expenses to be incurred for the redevelopment project [D31/7089].
(ii) He was told by 汪涵芬 (ie the engineer) that the total investment would cost RMB 40 million [D31/7089].
(iii) Then, for the purpose of giving such quotation, 王火根obtained 3 receipts and put in various figures which added up to a total of RMB 46 million odd and put in the land premium. He got a 羅喜根 to sign those receipts. Having made copies, he then gave those false receipts to 黃有根. 黃有根did not find the receipts useful, so he returned them to 王火根. 王火根casually threw them to one side.
(iv) Later, DG asked for copies of documents relating to the railway redevelopment project for the purpose of the litigation. What 王火根 sent to DG included copies of those 3 false receipts.
(v) 王火根stated that DG did not know about (i) and (iii) and had never used the 3 receipts.
448. I find such explanations to be totally incredible. There was a great discrepancy between the amount for the railway land premium (RMB 12.6m) and the amount stated in the 3 Receipts. DG had the audacity to say that he was not aware of the circumstances under which the receipts were produced and he simply produced without relying on them. This did not happen to any other piece of evidence in the present case. This was a clear example of DG being a liar and deliberately producing false documents by way of affirmation to mislead the court.
449. Reliance on false documents aside, DG never produced the profit and loss accounts of Railway Redevelopment, which he admitted under cross-examination to exist. He purportedly disclosed a set of statistics known as舊街改造合同統計in respect of sale of residential and shop premises but the statistics could not show whether the 2 Railway Companies made a profit or loss.
450. DG only first mentioned the amount of profit made from the 2 Railway Companies on day 8 of the trial as an astounding RMB 30m. He could not have forgotten such substantial profits. It could not be explained away by Mr Tong’s reply submission that the 2 Railway Companies were only intermediaries for transfer of funds and so their profits were not reflected in the financial statements.
451. Appendix 3 to Mr Tong SC’s closing submission purports to show profits of about RMB 30m. With respect, computation of profit was not just about subtracting a few heads of expenses (eg land premium, construction cost, removal cost) from the income (eg contract price, sale price). Such unaudited computation could not take the place of the profit and loss accounts. I reject Appendix 3.
452. The alleged profits were contradicted by the annual examination reports of Railway Commercial produced by DY, whichshowed profits to be about several thousand to just over RMB 10,000 per year. This low level of profits explained, in my view, why DG did not dare to mention the amount of profits in his written evidence and made up the figure of RMB 30m in his oral evidence to bolster his case.
453. DG changed his story upon discovery of documents of Railway Commercial. He suggested in his 1st witness statement that Railway Commercial was a “conduit” for transferring the profits from Railway Redevelopment to the construction of the Tower.
454. Again, with a view to bolstering his case, DG brought in 陳志強 who said that the railway redevelopment project was very profitable and he saw DG carry a suitcase claimed to have held cash. 陳志強 estimated it to contain at least RMB 2.5m, based on his own experience in putting cash into a similar suitcase. Although Mr Chan SC did not challenge some parts of the witness statement of陳志強, that could not preclude this court from assessing the evidence of 陳志強 in the light of other relevant evidence. I find his evidence described in this paragraph, premised on hearsay and speculation, to be unreliable. The Railway Companies had bank accounts, which had been used for transfers in and out. There was no reason why the estimated RMB 2.5m was not done by bank transfer.
455. I reject DG’s case that the 2 Railway Companies had ever made substantial profits for injection into Dingtai or Bading.
O4. Analyses of DY’s case
456. DY’s case was equally hard to believe. He said he had injected RMB 11m through Dingtai into the Railway project. To explain why DG signed all the important documents relating to the redevelopment, DY said that he authorised DG to operate the redevelopment project and DG reported to him regularly: §10.2 of DY’s witness statement. However, evidence showed that DY had little knowledge of fundamental matters relating to the Railway project:
(i) DY seemed not to know that Railway Redevelopment had to pay about RMB 12.6m to the Railway Bureau as consideration for the land, notwithstanding that such payment was prescribed in the Joint Redevelopment Agreement: clause (三); and the computation of the land value was decided by a valuation report. In his witness statement, he said only RMB 630,000 was required.
(ii) DY got the plot numbers that were developed wrong. He claimed that all 9 plots of the land were acquired but only plot nos. 2 and 3 were developed. In fact, although 9 plots with a total area of 11,517.1 sq m were available for sale, only plot nos. 1, 2, 4, 7, 8, 9 were acquired and Railway Redevelopment was only required to pay the consideration for these 6 plots as valued in the valuation report: Clauses (二) 1.2 and (三). To suggest that plot nos. 3, 5 and 6 were also within the scope of the redevelopment but would not be assigned after the completion of the redevelopment was devoid of commercial sense. The Joint Redevelopment Agreement was silent as to how those 3 plots would be dealt with after redevelopment. Compare this to clause (二) 1.3 which dealt with the Railway Redevelopment’s rights and liabilities over plot no. 7 specifically.
(iii) DY got the construction costs (RMB 350 per sq ft instead of RMB 380) and sale price per unit (RMB 500+ to 700+ instead of RMB 520 to 600 per sq ft) wrong. However, I place little weight on such errors. One could not expect DY to be exact about unit prices after so many years.
O5. Which liar to prefer?
457. This was an unpleasant instance where the court has to making findings based on evidence of 2 camps of liars. I place little weight on the fact that the registered capital came from DG’s personal account. As with other companies, the source of the capital was more important.
458. DY’s assertion that the registered capital came from the RMB 11m that he caused Dingtai to invest into the redevelopment project was not supported by evidence. Those bank documents he produced related to fund transfers in 1999 to 2000, which had nothing to do with the RMB 2m capital injected in 1998. In any case, DY had no wealth to inject.
459. Neither DG nor DY could produce evidence of tax payments. DG said that he could not recall the exact amount but it was done through the Railway Bureau. I would not rely on the bare words of this liar.
460. All the shareholders of Railway Redevelopment and Railway Commercial had acknowledged that they were holding their shares in the respective Railway Company on behalf of DG. They had closer connection to DG than to DY.
461. Some of the income from the Railway project was deposited into bank accounts opened in the name of DXH. Her passbooks,the authenticity of which was not denied by DXH, were in the possession of DG. DY seemed not to have any idea about these. DXH only alleged that DG had possession of those passbooks because he was operating certain Shangrao company, a totally illogical explanation.
462. The Mother stated in her witness statement that the Railway Companies belonged to DY. She confirmed that she was DY’s nominee and had never heard of DG saying that he had set up Railway Redevelopment. She said that all of the money was sent to Shanghai by DY. Not only did DG fail to make profits but he took money away. I do not place weight on this part of her evidence as not being borne out by the objective evidence. Her giving the ID card to DY was not conclusive as to DY’s ownership of the 2 Railway Companies.
463. DY could not discharge the burden of showing that the 2 Railway Companies belonged to him. The flow of funds among DG, Dingtai, the Railway Companies and Bading appeared circular and it was difficult to find the true source of capital injection. Based on paras 460 and 461, and his control of Dingtai, I find that they belonged to DG. I find that the Railway Companies had not been profitable as DG claimed nor had they contributed in any substantial way to the Land premium or the Project. Once again, DG has deliberately presented false evidence to bolster his case.
P. 2000: PRIVATISATION OF DINGTAI AND INCREASE IN SHARE CAPITAL FROM RMB 10M TO RMB 100M
P1. Undisputed facts
464. In 2000, due to reform in the Mainland, companies under the guakao arrangement had to dissociate themselves from state-owned enterprises. Hence, on 22/6/2000, Dingtai underwent restructuring so that shares held by Purao were transferred to上饒三鑫 (51%), SXP (24%) and DY (25%): see e.g. share transfer agreement dated 11/5/2000, 投資協議 dated 10 June 2000 amongst 上饒三鑫, SXP and DY and 產權轉讓合同 dated 22 June 2000. DY remained legal representative of Dingtai.
465. About 6 days later, on 28/6/2000, Dingtai increased its registered capital from RMB 10m to RMB 100m without any change to the shareholding: see Capital Verification Report dated 30/6/2000. DY remained the legal representative, chairman and general manager.
466. The increase in capital was provided through 浦鼎 Shanghai Puding Property Consultants Co Ltd (“Puding”). This was a company set up on 26/12/1997. DG was a 60% shareholder and its legal representative. One 姚玲玉 who held 40% has given a notarized declaration dated 11/10/2011 confirming that she was holding her shares for DG and that all capital was put up by DG.
467. As to the RMB 90m needed for the increase in capital, (a) RMB 20m was paid through Puding as evidenced bypayment slips; and (b) RMB 70m came from a loan from Zhongfu中福. There was no fresh injection of money from either DY or DG personally.
468. The issues were (1) who funded the increase in capital; and (2) on whose behalf were the shares in Dingtai held?
P2. Who funded the increase in capital?
469. In his 3rd affirmation, DG claimed that he had instructed 上饒三鑫, SXP and DY to inject RMB 90m in direct proportion to their respective shareholding into Dingtai. He even referred to the Capital Verification Report and 5 pay-in slips, to show that Puding injected capital into Dingtai.
470. DG’s description of Puding’s business was to provide supporting facilities to Bading. Under cross-examination, he was clearly evasive in saying that he could not remember what independent business Puding did which would have earned the very substantial profits to fund even part of the increase in capital. I find that Puding had no independent business.
471. On the other hand, DY said that it was through his connection with one 白曉江 (Bai) that Zhongfu injected substantial funds of nearly RMB 250m into the Project. DG admitted under cross-examination that the capital increase of Dingtai would not have been possible without the funding of Zhongfu. This admission once again showed the evasiveness of DG in his 3rd affirmation in failing to mention Zhongfu. This was also an example of DG pointing to an immediate source of fund from a company, but when traced further, the ultimate source came from DY or his efforts.
472. Mr Tong SC submits that within a week after the capital increase, Bading had fully repaid the RMB 70m to Zhongfu. In 2000 to 2001, Zhongfu had provided short-term loans, which were fully repaid by Dingtai, Bading and/or 上海鼎興 within months, sometimes with commission. Such short term funding could not have contributed to the acquisition or development of the Land.
473. We have seen previous instances where capital injected into eg Purao was transferred out within days after the capital verification was done. Therefore, with respect, Mr Tong SC’s submission cannot undermine the fact that the funds which made capital increase possible had come from the effort of DY and that DG had concealed the truth from the court.
474. I find that RMB 70m for the increase in capital had come from DY. The true source of the rest of the RMB 20m that came through Puding was hard to trace but it probably would have come from DG’s side through borrowings.
P3. The role of Puding
475. At some stage Puding transferred substantial funds for the establishment of上饒三鑫, 上海鼎興 and 上海申鑫; and for the increase in capital of上海鼎興. The fund flow tables prepared by DG or DY were not very helpful in determining ownership of companies as the funds largely came from borrowings and the flow was hard to keep track.
476. DY claimed in his witness statement (§11.6) that he “borrowed” Puding as his “channel” to move funds around. Under cross-examination, he confirmed he was not saying that Puding was his but that RMB500,000 capital was from his company.
477. DY’s assertion that Puding was his channel was unbelievable. Why would he need to use DG’s company when he had other companies allegedly belonging to himself? Under cross-examination, DY put forward some unintelligible answers, e.g. “[浦鼎]這是一個諮詢功能 …… 按理說，錢資金從他那裡過來，從他的經營範圍，可能他含有這種經營範圍。” “這個當時沒有意識的……因為我是出資者……哎，我叫他按照這個意思辦就行了。”
478. What was important, however, was thatDY admitted Puding to be controlled by DG and SXP. DY simply failed to give a valid explanation for the establishment of Puding, the Shangrao Companies and the Shanghai Holding Companies. As shall be seen, DG could explain why all those companies were set up and how they were used.
P4. On whose behalf were the shares in Dingtai held?
479. DG agreed, under cross-examination, that he still harboured fear towards DY’s conduct (心有餘悸) in causing serious financial loss to Dingtai. However, after the restructuring, he still allowed DY to hold 45% of the equity in Dingtai (25% directly and the rest through 上饒三鑫 of which he held 40%), worth about RMB 4.5m.
480. DG explained that, as legal representative of Purao, it was not convenient for Dingtai’s shares to be transferred by him into his personal name: §104 of DG’s witness statement. I fail to see what the inconvenience was. DG has not pointed to any state policy which prevented the shares held by a guakao unit from being transferred to the real owner of a privatized company.
481. DG further explained under cross-examination that (a) in 2000, Dingtai still had a lot of debts; (b) it was necessary for DY to continue being there, “所以我一個需要他還在裏面作為一個，這個所有清結債務不可預見性的存在的延續.” I fail to see how DY’s continued presence in Dingtai would have any impact on the existing debts if it was DG repaying them anyway.
482. A person could not be made a nominee without his knowledge. There was no evidence of a consensus between DG or DY as to who should own the shares of Dingtai. Neither party alleged a change in ownership of Dingtai. I would not rely on the bare assertion of a liar, without contemporaneous document, that he had told DY that the shares in Dingtai were to be held on trust/nomineeship for DG.
483. DY had ceased using Purao for trading. Dingtai was then under the control of DG. SXP was first introduced as a nominee shareholder in Purao and Dingtai. DY had continued to seek substantial funding from Zhongfu for the increase in capital. I cannot exclude the possibility that DY and DG recognized each other’s contribution to Dingtai, in terms of privatisation or repayment of Dingtai’s debts, hence the shareholders included both camps.
484. DG did not have a firm intention to remove DY altogether. This was borne out by the fact that DY remained as the legal representative in name until 2003.
485. If matters had stopped there, I would find that the beneficial ownership followed the legal ownership. To the extent shares were not in the name of DY, the shareholders were DG’s nominees.
Q. 2000: OBTAINING MAJORITY SHAREHOLDING AND CONTROL OVER BADING
486. To recap, when Bading was first set up, Dingtai held 40% shareholding in Bading and Foreign Investors 60%. Thereafter, the shareholding of Bading had undergone changes:
| Date | Local Interest | Foreign Investors |
| 14/7/1997 | Dingtai (40%) | Balin (60%) |
| 10/7/1998 | Dingtai (40%) | Balin (10%)
Nicemate (50%) |
9/10/1999
| Dingtai (40%) | Good Way (60%) |
| 23/8/2000 | Dingtai (40%)
上海申鑫 (20%) | Good Way (40%) |
| 20/3/2001 | Dingtai (40%),
上海申鑫 (20%),
上海鼎興 (15%) | Good Way (25%) |
| 8/7/2001 | Dingtai (40%),
上海申鑫 (20%),
上海鼎興 (15%) | Lee Tung (25%) |
487. On 23 August 2000, Dingtai and上海申鑫together held the majority shareholding of Bading. From that point onwards, DG replaced Chen as Bading’s legal representative and obtained full control of Bading’s company seal until DG was replaced by YXA. All applications for use of the seal had to state the purpose, signed by DG before the seal could be applied on a document.
488. DY alleged that he appointed DG as Bading’s legal representative. He accepted that that appointment had nothing to do with the Bai Incident, which only took place 3 years later in 2003. However, he was unable to come up with a logical reason as to DG’s appointment.
489. Under cross-examination, DY claimed that he had to use Dingtai to obtain finance for the Project. If so, in my view, appointing DY himself as Bading’s legal representative would have enhanced the opportunity to obtain finance for the Project, since both Dingtai and Bading were allegedly his companies.
490. Further, there was no reason why DY permitted DG to hold Bading’s company seal unreservedly. DY said under cross-examination that he believed that DG could not sell the assets of Bading because DG was not the investor. This could not be true. DY clearly knew the effect of being a legal representative and holding a company’s seal.
491. The fact that DG had full control over Bading (by being its legal representative and possessing its company seal) without any protest from DY was, in my view, compelling evidence that DG has always had interest in Bading or was majority beneficial owner of Dingtai.
492. I will come back to the acquisition of Foreign Investors’ interests in Section V.
R. CONSTRUCTION OF THE TOWER
493. There was a sharp contrast between DY and DG in terms of involvement in the Project. In his closing submission, Mr Chan SC summarized DY’s limited involvement with frugal comments:
(a) Liaison with Citibank;
(b) Change of town planning conditions of the Land;
(c) Obtaining RMB 80m loan from the Huaxia Bank; and
(d) Involvement from September 2002 to October 2003.
494. I shall consider and compare these to the involvement of DG in almost every aspect from 7 angles in this Section and in Section S.
R1. Signing of important documents
495. Some of the important documents that DG had signed were (i) the letter of intent dated 24/1/2002 with Citigroup as prospective tenant; (ii) various letters of extension from March 2002 to July 2002 between Citibank NA PRC Office and Bading; (iii) Development Agreement (開發協議) between Bading and Citibank Shanghai Branch on 16/12/2002; (iv) the main contract for construction dated 9/9/2002; (v) the application with Citigroup dated 17/3/2003 for naming the Tower.
R2. Attendance of ceremonies and meetings
496. As President of Bading, DG attended the (i) meeting of experts on 21/6/2001 for the architectural design and assessment of tender; (ii) signing ceremony of the engineering contract on 28/11/2001; (iii) signing ceremony of the Development Agreement on 16/12/2002; (iv) topping out ceremony of the Tower on 27/9/2004; and (v) grand opening of the Tower on 12/9/2005.
497. Mr Chan SC submits that the photos of DG at various ceremonies concerning the Land and the Tower were reported in the media. It was contrary to DG’s alleged wish to keep a low profile. With respect, those media reports were few and far between. On corporate records, DG did manage to keep his ownership out of the picture.
498. Those ceremonies were attended by government officials and Citibank personnel, all of whom required the real boss to be present. And yet DY was conspicuously absent from all of them, notwithstanding that they all took place before or long after the alleged Bai Incident (described in Section T below). From the photos, even though the venue for the ceremony was spacious, DY was not there.
499. There were some meetings attended by DY. For example, 汪新野 (Director of the Town Planning Department of Pudong) said that DY chaired the experts meeting held at 西郊賓館 and DY represented the developer to extend a vote of thanks to the participants. There were meetings attended by DY with金茂 held on 1/8/2001 and CB Richards Ellis held on 17/1/2003. At the meeting held on 12/3/2002, DY was assigned to take charge of matters relating to the contract for the main contractor. At the meeting conducted by DG on 22/3/2002, DY was assigned tasks by DG. I find that all those meetings were for preliminary discussions of which DY did not show a leading role.
500. DY was also virtually absent from all overseas inspection tours.
R3. Selection of architectural design of the Tower
501. DG was part of the tender assessment committee for the architectural design but DY was not: see member list. The assertions of DY and 汪新野in their witness statements that DY had participated in the tender exercise were not corroborated by any of the relevant documents. DY even said that he had no knowledge that he was not in the tender assessment committee, which was unbelievable. I reject both the evidence of DY and 汪新野.
502. No architectural design was chosen at the tendering process. On behalf of Bading, DG entered into the Construction Engineering and Design Agreement 建設工程設計合同 with Nikken (as architect) on 28/11/2001.
503. DY could not satisfactorily explain how Nikken came to be chosen. If it was he who had chosen Nikken, he could not explain why the letter of gratitude from Nikken was addressed to DG but not DY. DY made up a story during cross-examination that he had taken the letter of gratitude to Nikken’s office and obtained confirmation from Nikken’s representative that the letter should not have been issued. This story was directly contradicted by DY’s own evidence in his supplemental witness statement that the letter of gratitude was issued to DG as he represented Bading to sign the 建築設計協定.
504. I accept DG’s evidence and find that it was he who made the important decision of choosing the architect and the design of the Tower.
R4. Entering into the main contract for construction
505. Regarding Bading’s meeting held on 1/3/2002 and conducted by DY, only the mode of sub-contracting承包模式 was discussed (see minutes of meeting). It did not concern the selection of the main contractor. It was DG who signed the main contract dated 9/9/2002 with the main contractor上海建工(集團) 總公司, with a contract sum of RMB 162m. I find that DG had probably concluded the main contract. That was why the letter of gratitude dated 29/10/2009 from上海建工was addressed to DG as President but not DY.
506. DG also signed the建築工料測量顧問服務合同.
507. On the other hand, in 2002, DY procured an undertaking (承諾書) from 上海建工, the main contractor, to complete the Tower works up to 30/F for RMB 80m without asking for further funds. The undertaking was not signed by DY. Given DG’s control over Bading’s finance, I find it unlikely that DY had authority to obtain the undertaking on such terms without DG’s approval.
508. DY also did some liaison work in 2003 concerning aluminium, air-conditioning, glass and paints. In my view, such was relatively minor work compared to what DG did.
R5. Negotiation of terms of cooperation with Citigroup
509. As President of Bading, DG liaised with the Citigroup over construction and tenancy matters.
510. DY claimed that it was he who brought about Citigroup’s agreement to cooperate with Bading through negotiation with 鍾敏敏 (Chief of Staff of Citibank China Region). This was evidenced by the set of minutes of 9/6/2000, which was not challenged by DG. 鍾敏敏 also confirmed DY’s contribution at the initial stage.
511. However, the contents of the minutes of 9/6/2000 showed that the discussion back then was at a preliminary stage. At that meeting, Dingtai/Bading only agreed to give priority to Citigroup when selecting its partner. Citigroup was yet to submit its letter of intent before 30/6/2000.
512. The letter of intent (for Citibank to lease some floors of the Tower) that marked the beginning of the cooperation between Bading and Citigroup was only executed 19 months later on 24/1/2002 by DG and Richard Stanley respectively. This was supported by the minutes of Bading’s internal meeting held on 4/1/2002 (which was not challenged by DY), which recorded that formal negotiation with Citigroup would only commence in January 2002. DY was not even present at the meeting.
513. 鍾敏敏 had already left Citigroup in 2001. He accepted that Richard Stanley was his senior to whom he had to report. 鍾敏敏could not give any useful evidence on Bading’s cooperation with Citigroup although he accepted that Guy McComb and Jun Nepomuceno were the representatives assigned by Citigroup to handle the Project.
514. Guy McComb was the former Executive Vice President and Director of Citigroup’s Global Real Estate Capital Transactions Division from 2000 until he retired in October 2006. After he retired, he continued to provide consulting services to Citigroup concerning major real estate matters through the end of 2011. He gave evidence that the Project was considered one of the major real estate projects for Citigroup. He and Jun Nepomuceno were the 2 most senior management staff of Citigroup who were involved in it. Throughout the Project, Citigroup would only discuss with the ultimate decision maker or owner from the other side and that was DG. Guy McComb had never negotiated with DY. This was never challenged by DY in cross-examination.
515. In trying to prove his case on cooperation with Citigroup, DY produced 2 Chinese letters dated 3/1/2002to support alleged correspondence between him, and Guy McComb and Jun Nepomuceno. Guy McComb has expressly questioned the authenticity of such documents in his witness statement. He said that he and Jun Nepomuceno were illiterate in Chinese and would only send out letters in English in international real estate projects. Any proposed lease terms by Citigroup would have been drafted and sent by its solicitors from Citigroup directly in English only.
516. Guy McComb was not challenged in cross-examination. DY has not even begun to rebut his evidence or confirmed if the Chinese letters were translation of the English originals.
517. DY’s assertions that Guy McComb was employed by or had received fees from DG or Bading were denied by Guy McComb. I accept that Guy McComb had nothing to gain out of this litigation. He was an independent witness. I accept his evidence and find that the 2 Chinese letters had not come from Guy McComb or Jun Nepomuceno. This was an example of DY using false evidence.
518. I accept the evidence of DG. DY’s negotiation with鍾敏敏at the initial stage did not alter the fact that it was DG who decided the terms of cooperation with Citigroup.
R6. Change to town planning conditions of the Land
519. Citigroup wanted the Land to be moved closer to the river bank so that the Tower could stand out and there were also to be changes in construction limit (“the changes”). These were achieved in the end. The building area was increased from 60,000 to 89,000 square metres; and the height from 130 to 180 metres, but with the Land premium and town planning authority’s fees increased by RMB 162.76m.
520. 鍾敏敏 confirmed that without the changes Citigroup was not even prepared to cooperate with Bading. DY claimed that in 2000, he and 鍾敏敏 applied to the city government for changes in land use. 汪新野also confirmed that DY visited his office from time to time to follow up the matter. DY said that once government approval was obtained, payment of the Land premium could be deferred.
521. On the other hand, DG said he was the one who issued Bading’s application document dated 29/12/2000 for the changes. Even 汪新野accepted that the application must be formally made in writing.
522. Such a huge planning exercise had to be subject to the overall planning of the central Liujiazui area and policies of both the city and district government. 汪新野 accepted that he could not make the decision as he was in 規劃處and not 規劃局.
523. DG also pointed out that DY had confused the private rights of Fortune World and the government rights in granting approval. Payment of the Land premium could not simply be deferred. To deal with private rights of Fortune World, Bading entered into an agreement with it dated 17/6/2002 to increase the Land premium. DG signed on behalf of Bading.
524. Whilst I accept that DY had done something in relation to the changes, I am not satisfied that it was so overwhelming as to show him to be a true decision maker. I accept DG’s evidence.
R7. Approval of expenses
525. DY was the department head (分管領導) verifying the applications for reimbursement from 2000 to 2005. Final approval had to be given by DG, the general manager. Expenses of DY for as small as bottles of water, 3 books and entertainment expenses had to be approved by DG. I note that this position of DY had been held even before the Bai Incident.
526. In his closing submission, all that Mr Chan SC can say is that the approval procedure was made to enable the company expenditure to be used for tax reduction purpose. It is not, in my view, an explanation for why DG had the final say in terms of expenses.
527. Likewise, signing of construction contracts (（工程項目）合同簽發箋), had to be approved by DG as General Manager before those contracts could be signed with outsiders.
528. DY’s lack of management power over Bading’s finance was confirmed by 鮑栽萍 whose evidence I accept.
529. The evidence in this Section was overwhelming to show DG to be in true control of Bading. DY could not have possibly entrusted or delegated so much substantial work to DG if the latter was just his driver. Clearly DY was in a subordinate status.
S. ARRANGING FINANCE FOR CONSTRUCTION OF THE TOWER
S1. Loans stamped with the chops of DG and DY
530. There were short-term loans from ICBC to Dingtai stamped with DY’s chop between 10/11/1998 and 28/6/1999, for amounts ranging from RMB 2m to 5m.
531. The rest of the loans to Dingtai, Bading and the Shanghai Holding Companies were stamped with DG’s chop or his nominees, including:
(i) Loans agreement with ICBC for RMB 70m, RMB 80m, RMB 70m loan and a security agreement.
(ii) The cooperation agreement with ABC dated 10/7/2001 whereby ABC would act as the main bank (主辦銀行) and undertook to advance a maximum of RMB 580m. It was signed by DG on behalf of Bading.
(iii) A loan for RMB 680m from ABC secured by the Project. Pursuant to DG’s instruction, 奕印敏 signed the guarantee agreement for the ABC loan as Shanghai Shenxin’s legal representative.
(iv) ABC allowed a 2nd mortgage. SXP signed the RMB 230m Loan Agreement and Security Agreement with Bank of Communications (“BOC”) on behalf of Bading. The evidence of 林健良was that this loan was negotiated by DY. SXP, while stated to be the legal representative, admitted that she was the Chief Finance Officer. It was the understanding of 林健良that DY sent her to sign the loan agreement. I find this to be unlikely as SXP had always been DG’s nominee.
532. Mr Chan SC made little comment on those loans in his closing submission. However, the loans from ICBC and a loan from Huaxia Bank were worthy of consideration.
S2. Loans from ICBC
533. The short-term loan agreements in para 530 were signed by DY for Dingtai and Qin Wei (欽瑋, ICBC支行行長) from 1998 to 1999. The purpose was stated to be for “purchase of materials” or “cash flow”.
534. It is DG’s case that the ICBC loan agreements were concluded by him on behalf of Dingtai. This was supported by the evidence of 張國民 (Deputy Branch Manager of the ICBC WGQ Tax Zone Branch) and 張杰 (Credit Officer of ICBC). In fact 張國民participated in loans to Dingtai, Bading, 上海鼎興，上海申鑫. DY and DXH allegedly just did liaison work like delivering documents required by the bank.
535. DY denied DG’s version. DY claimed that he played a pivotal role in all the loan transactions with ICBC. However, 張國民decided to be DG’s witness, despite a similar invitation from DY. Despite attempts of DY to smear the credibility of 張國民by referring to his previous conviction for the first time under cross-examination, I place little weight on the conviction and draw no inference against 張國民.
536. DY then produced Qin Wei as a witness under the most dubious circumstances:
(i) When DY made his 1st affirmation on 14/10/2010, he never mentioned anything about obtaining loans from ICBC under the topic of “arranging finance for the construction of Citigroup Tower”.
(ii) In response to DG’s evidence that the ICBC loans were handled by 張杰, DY only challenged the position of 張杰but did not mention Qin Wei in his 3rd affirmation.
(iii) DY actively sought out 張國民to be his witness as early as November 2010. However, despite the fact that Qin Wei’s office was only a few blocks away from the Tower, DY made no attempt to ask Qin Wei to be his witness, until DY accidentally ran into him at a restaurant on 17/6/2011.
(v) DY’s explanation was that he had to find evidence for Qin Wei to comment on. This was illogical, for if Qin Wei agreed to be his witness, Qin Wei would have provided the evidence for DY.
537. The inference I draw is that Qin Wei and DY did not play the sort of significant role as DY wanted the court to believe and that 張國民 and 張杰 were the ones who handled the ICBC loans.
538. There were 2 specific loans involving Qin Wei, one for RMB 19 million to 上海鼎興and another RMB 29 million to 上海申鑫respectively. The 2 loan agreements which DG managed to obtain shortly before the trial showed conclusively that the 2 loans were expressly guaranteed by Dingtai. However, both the witness statements of DY and Qin Wei never referred to the Dingtai guarantee but DY had lied in stating that the guarantee was provided by one 北大科技資源股份公司(Beida), a listed company controlled by DY’s personal friend, 成清波.
539. The Beida guarantee was never produced. 成清波 who gave a witness statement did not turn up at trial. It remained a mystery as to why Beida would have provided a guarantee for two private companies in which it had no equity or commercial interest and had not asked for security.
540. Qin Wei confirmed under cross-examination that those 2 loan agreements were shown to him before he made his witness statement. DY had concealed them from the court.
541. Qin Wei suggested in his oral evidence that the Beida guarantee was only used for obtaining the credit line, but was not used to secure the 上海鼎興 and上海申鑫 loans. This begged 2 questions: (a) why did DY and Qin Wei mention the Beida guarantee when it was not used at all? (b) Why did they know that it was not used? I find Qin Wei’s evidence unbelievable.
542. I find that DY had concealed crucial documents to mislead the court as to his involvement in seeking the 2 loans for上海鼎興 and上海申鑫. He had even gone so far as to collude with his other witnesses to give false evidence on his efforts in acquiring funding for developing the Land. I reject DY’s evidence and accept that the 2 loans from ICBC were obtained as a result of DG’s efforts. I also accept that it was DG who arranged the ICBC loans stamped with DY’s chop.
S3. Loan of RMB 80m from Huaxia Bank
543. DG asserted that it was he who had instructed DY to apply for this loan.
544. However, 陸全侃 (Lu, President of Huaxia Bank) gave evidence for DY stating that he knew DY back in 2000. Through enquiries, he realized that DY controlled Dingtai. Lu said he negotiated with DY in respect of this loan and he had never met DG in the course of business.
545. It was DY’s evidence that he managed to locate李安保of 上海市區電力投資發展總公司 (“Shanghai Electricity”) to gave a signed letter of undertaking to DY (acting on behalf of Bading) in respect of the purchase of 2 floors of the Tower for a consideration of RMB 128,267,700 (at US$3,300 per square metre). Lu said that he had contacted李安保and confirmed that he had given the undertaking as per DY’s request. The RMB 80m loan from Huaxia Bank was released only upon receipt of that letter of undertaking.
546. However, 李安保had signed a statement suggesting that that letter of undertaking had nothing to do with Bading but did not explain why. 李安保never attended trial. I reject his statement and place weight on the contemporaneous undertaking.
547. I reject DG’s assertion and accept DY’s evidence.
548. In summary, the conflicting evidence of DG and DY as to who liaised with the banks shed little light on the question of beneficial ownership of the Land and the Tower. Suffice it to say that DY did make efforts in procuring the Huaxia Bank loan of RMB 80m but he had obviously lied in relation to the ICBC loans. The RMB 80m was relatively small compared to other loans obtained through DG.
T. 2003: THE BAI INCIDENT (白曉江事件)
549. Sections R and S showed that DG was in full control of Bading. DY sought to explain away his own conspicuous lack of control in Bading by what he called “the Bai Incident”.
550. According to DY, he actively participated in Bading prior to August 2003. In about early 2003, DG told him about rumours that Bai of Zhongfu was subject to investigation by authorities in the Mainland for suspected misappropriation of state-owned assets (“the Bai Incident”). DG allegedly said that DY might be investigated and jailed, which would affect the Tower. DY himself was interviewed by the Shanghai Municipal People’s Procuratorate in July 2003 concerning his cooperation with Bai. Although the PRC police confirmed to him after investigation that the Zhongfu loans related to Bai were legal, DY became concerned about legality of the short term loans which Dingtai obtained from ICBC. DY decided to maintain a low profile to outsiders, but remained in active management of Bading behind the scene. He allegedly entrusted DG to deal with the daily operation of Bading as his nominee. He gave a letter of authorization to DG and the shares in Bading to DXH. He turned his attention to business outside PRC.
551. I pause here to note that in 2003 the Tower was in a critical state of construction. The foundation work had been done and contractors were looking for contracts. It was incredible for DY to have spent allegedly 2/3 of his time between 2003 and 2009 out of Shanghai to attend to new businesses abroad, which was of no comparison to the scale of the Project.
552. DY’s story about the Bai Incident was completely illogical.
553. Firstly, DY’s worries were irrational. There was no evidence that the ICBC loans (totally unrelated to the Zhongfu loans) were the subject of investigation.
554. Secondly, despite his concerns as to illegality of the loans, DY could not explain why he had not sought legal advice for 7 years.
555. Thirdly, changing the legal representative would not change the fact that the loans obtained by DY for one purpose had been unlawfully applied for another. The Bai Incident could not explain how resigning and going into hiding would have absolved DY or Bading from criminal liability or saved the Tower from alleged confiscation if illegality was established.
556. Fourthly, DXH replaced DY as the legal representative of Dingtai in January 2003 when DY’s positions as legal representative, general manager and director were wholly removed. (See the shareholders’ resolution dated 31/1/2003.) DY transferred his 25% shares in Dingtai to DXH in June 2003. (See theshare transfer agreement dated 5/6/2003). Both events happened before DY was investigated for the Bai Incident in July 2003.
557. Fifthly, the Bai Incident could not explain why DY was absent from all the important ceremonies in relation to the Land referred to in Section R2 above, all of which occurred before the Bai Incident.
558. Sixthly, whilst DY might have wished to maintain a low profile as against outsiders, that should not have prevented him from exercising full control over Bading internally. And yet, both before and after the Bai Incident, DG maintained full control and possessed the company seal. Sections R and S above clearly show DY’s participation prior to August 2003 as subordinate to DG’s. As to why DG became the legal representative, DY said that DXH had no experience and DW was in Shangrao. In my view, DY had no reason to prefer a driver to DXH and DW who at least had experience in managing the Hainan Companies.
559. Seventhly, despite his alleged fear which lasted until 2010, DY acted as registered shareholder of Hong Kong First and Macau First during 2004 to 2006, thus allowing himself (on record) to be traceable as an owner of the Land and the Tower. Neither could DXH explain how the HKF Allotment to Macau First could have spared DY from investigation in relation to the Bai Incident.
560. Eighthly, despite his extreme concern about the Bai Incident, DY took no steps to follow up its development. Had he done so, he would have discovered that Bai had been acquitted and released since 2005, in which event, DY could have (if so minded) regained control of Bading. DY claimed that he had no channel to contact Bai, which was unbelievable.
561. Ninthly, if DY had entrusted Bading to DG due to the Bai Incident, there was no reason why he should not revoke DG’s authority when (i) he learnt that DG and Chen were wanted for bribery offences in August 2003; and (ii) DG went into hiding for half a year. After all, DY himself had never been wanted.
562. Tenthly, the question of who should be Bading’s legal representative arose in 2000 when Foreign Investors’ interests were reduced to 40% (see Section Q above). DY could not explain why he let DG be the legal representative 3 years before the Bai Incident.
563. Bai had made a witness statement but he had not turned up at the trial to support DY’s case. I find the Bai Incident to be a pack of lies. I find DG’s version more likely to be true. DG’s appointment as legal representative of Bading clearly had nothing to do with the Bai Incident. I do not accept that it was DY who appointed DG as legal representative. Rather, DG’s appointment was the natural consequence of his being in real control of Bading and Dingtai.
564. As stated in para 556, also in 2003, DY lost all his hollow positions (虛職) in Bading. He also lost his status as legal representative and direct shareholding of Dingtai. His indirect interest in Dingtai was lost in 2002 when he transferred his interest in 上饒三鑫 to 劉竹英. According to DG, which I accept, it was because DY had pocketed RMB millions of secret commissions from the Zhongfu loans. These events together with DY’s lack of control over Bading could not be coincidental.
U. HOLDING OF SHARES IN BADING ACQUIRED FROM FOREIGN INVESTORS
U1. Holding of 35% shares acquired from Foreign Investors
565. In 2000, 上饒三清, 上饒三鑫 and上饒鼎鑫 (collectively, “the Shangrao Companies”); and上海鼎興, 上海申鑫 (collectively, “the Shanghai Holding Companies”). These companies did not have any independent business which would have enabled them to earn substantial profit and contribute to the Land premium, the Project costs or the acquisition of the interests in Bading. DG said he merely injected what he earned from Railway Redevelopment into them. Again, their capital came from borrowing and it was impossible to trace the genuine source from DG or DY’s fund flow tables.
566. As depicted in Section Q above, Dingtai initially held 40% shares in Bading. Gradually, between 2000 and 2001, 35% shares of Bading were transferred from Foreign Investors to the Shanghai Holding Companies. The rest of 25% was held by the Foreign Investor Lee Tung.
567. The shareholding of the Shanghai Holding Companies was, at different stages, held by (a) DG himself; (b) individuals acting as DG’s nominees; or (c)the Shangrao Companies. In turn, the shareholding of the Shangrao Companies was held by individuals acting as DG’s nominees.
568. Between 2010 and 2011, those individuals have executed notarized declarations confirming their nomineeship (SXP, YXA, 余霞英, 劉竹英, 高翠珍 who is the grandmother of DG’s 3rd son, 王建鋒, 王火根, 奕印敏). Some of them (eg SXP, 陳志強, 王建鋒) have attended trial to give evidence in favour of DG. All of these individuals had/have a closer connection to DG than to DY. In contrast, there was no evidence of DY instructing any of these individuals to hold shares on his behalf, or instructing anyone close to him to act as nominees.
569. In explaining this phenomenon, DY claimed that DG had changed the nominees to DY’s companies behind DY’s back. DY claimed to have set up the Shangrao Companies as “bridging companies”. Their mission was to set up the Shanghai Holding Companies, also bridging companies, to receive the shares of the outgoing Foreign Investors (接盤).
570. According to DY’s witness statement, the funds flowed from Dingtai into the 2 Railway Companies and then to the Shangrao Companies and the Shanghai Holding Companies. In his oral evidence, DY said that the shares of the bridging companies were “lacking in commercial value”. He did not pay attention to them after they had “completed their historical mission in March 2001”.
571. Under cross-examination, DY changed his evidence and said that the Shanghai Holding Companies were not bridging companies; they only completed their mission in 2005 and 2006, when they transferred their respective shares in Bading to Hong Kong First.
572. These explanations were most astonishing. It was the evidence of 鍾敏敏that he advised DY to take over the shareholding of the Foreign Investors. The “historical mission” of the bridging companies was to hold the shares in Bading. It was impossible for their mission to be completed within a year of their set up in 2000. DY could not have failed to pay attention to who the nominees were when the mission was not yet over. It was also incredible that DY would have regarded their shares as lacking in commercial value.
573. With regard to上海鼎興, DY’s latest stance was that it was not a bridging company. If so, there was no reason why DY would be unaware that DXH was replaced by朱嘉(Zhujia), and Zhujia was replaced by王建鋒, as its legal representative in 2003 and 2004 respectively.
574. Further, DY’s own evidence was that after the Bai Incident in 2003, he reconsidered his choice of nominees. Presumably, that should include nominees for the Shangrao Companies and the Shanghai Holding Companies. Strangely, he used nominee shareholders with closer relationship to DG than to himself without apparent good reasons.
575. DY’s version was totally illogical and unbelievable. Mr Chan SC did not deal with the situation of the bridging companies in his closing submission. I find that the Shangrao Companies and the Shanghai Holding Companies were formed by DG to take over Foreign Investors’ interests in Bading. They beneficially belonged to DG and that was why the nominees were closer to him than DY and DY was not aware of their becoming nominees.
576. Further evidence of DG’s beneficial ownership in the Shanghai Holding Companies could be found from notarized letters of authorization issued by DXH and her son Zhujia to DG.
U2. Notarized letters of authorization executed by DXH in respect of 上海申鑫 and Dingtai
577. DG had from time to time instructed his nominees (SXP, YXA, Zhujia, 王建鋒) to execute notarized letters of authorization in his favour to enable him to manage various companies. Amongst those were 2 notarized letters of authorization executed by DXH in favour of DG, both dated 15/6/2004. Each authorized DG to exercise all her powers as shareholder and director of上海申鑫and Dingtai (“DXH’s Shenxin LoA” and “DXH’s Dingtai LoA” respectively, and “the 2 LoAs” collectively).
578. DXH’s evidence on the 2 LoAs has materially changed:
(i) In her 2nd affirmation (§29), she said that she had no impression of signing the DXH’s Dingtai LoA but believed that she signed it without reading the contents out of her trust on DG. As to the DXH’s Shenxin LoA, she admitted that she had signed it but only did so as she thought that it was authorised by DY (§36). The implication was that she did so without reference to DY.
(ii) In her witness statement (§§20.1-20.2), DXH disowned her previous evidence. She said that she was not aware of signing the 2 LoAs. She alleged that she went to the notary public陳加友 in November 2010, who told her that 徐民良(Xu) prepared some documents. She did not know what she signed because she signed a lot of documents without reading them. This assertion never appeared in her 2nd affirmation filed on 24/1/2011, just 2 months after the alleged conversation with 陳加友.
(iii) In her oral evidence, DXH said that the signatures thereon looked like hers. She was most evasive in repeating, “我沒有單獨簽過這種授權委託書”.
579. Not only was DXH inconsistent, but her version was also illogical. As her witness statement showed (§20.1), she was told by DG to go from Hong Kong to Shanghai for the special purpose of executing a notarized document. The purpose was, amongst others, to authorize SXP to represent DXH to buy, sell and lease properties of DXH in Shanghai.
580. There was no reason why 陳加友did not explain the contents of the 2 LoAs to DXH or ask her to read them. In any case, the 2 LoAs were one-page documents. It would not have taken DXH more than a few seconds to discover the names of Dingtai and 上海申鑫respectively in the first line of the main text and that those companies had nothing to do with her properties in Shanghai.
581. Further, in about June 2004, there was no transaction concerning properties in DXH’s name, whether in Shanghai, Zhuhai, Hong Kong or Macau: Exhibit P28 (agreed table of DXH’s properties). As DXH accepted, she did not participate in the management of the Shanghai Holding Companies or the Shangrao Companies. Therefore, on the occasion when she executed the 2 LoAs, there were unlikely to have been many documents presented to her for signing.
582. I find that DXH executed the 2 LoAs on the instructions of DG, without reference to DY. She well knew the contents of them. She knew and treated DG as the beneficial owner of Dingtai and 上海申鑫.
U3. Notarized letter of authorization executed by Zhujia in respect of 上海鼎興
583. It had always been Zhujia’s evidence in his affirmation and witness statement that he provided the original and copy of his ID card to DG and SXP when he was working in Bading. This indicated that Zhujia was DG’s nominee, allowing DG to make use of his ID card.
584. Zhujia purportedly executed a notarized letter of authorization, which was dated 19/12/2003, authorizing DG to exercise his power as the director and general manager of 上海鼎興.
585. Zhujia claimed that it was forged. This was unbelievable as there was no motive for the notary to notarize a forged document. Nor could Zhujia explain why someone needed to forge his signature in 2003. I find the letter of authorization to have been executed by Zhujia.
586. Mr Chan SC has not dealt with the notarized letters of authorization of either DXH or Zhujia in his closing submission.
V. 2003: BUYING OUT OF THE LAST FOREIGN INVESTOR
V1. Undisputed facts
587. By an agreement dated 12/12/2003, Macau First Investment (not Macau First) bought out the last Foreign Investor, Lee Tung (“the Lee Tung Acquisition”). DY signed the agreement on behalf of Macau First Investment. The event marked the complete withdrawal of the Foreign Investors from Bading.
588. The consideration for the Lee Tung Acquisition was RMB 150m, being (a) RMB 149.99m for the value of 25% Bading shares held by Lee Tung; and (b) MOP 10,000 for the value of Lee Tung as a corporate vehicle.
589. The then directors of Bading (Chen, SXP, YXA, 劉竹英and奕印敏) passed a resolution on 3/12/2003 to approve the advance payment of RMB 149.99m dividends to Lee Tung. All of these individuals confirmed that they acted pursuant to DG’s instructions.
590. MOP 10,000 was paid to施能船, sole owner of Lee Tung, on about 12/12/2003.
V2. The parties’ case
591. According to DG, the Asian financial crisis had gradually gone past but Lee Tung faced cash flow problem. Having heard that Lee Tung might mortgage the shares in Bading, DG brought up the idea of buying out Lee Tung at a price higher than that proposed by Chen. The Lee Tung Acquisition was negotiated and concluded by him and Chen. DY was not involved. It was upon DG’s instructions that DY signed the agreement with Lee Tung. It was also DG’s idea to set up a company outside the Mainland to hold the Lee Tung shares and hence Macau First Investment (99% held by DXH and 1% by YXA) was set up. Xu confirmed that he paid 施能船 MOP 10,000 upon DG’s instructions.
592. DY’s case need only be briefly mentioned to demonstrate its hollowness. In his 1st affirmation, DY completely omitted to mention the consideration of RMB 149.99m but only referred to the MOP 10,000 which appeared on the face of the Lee Tung Agreement. There were no details about the steps he allegedly took to set up Macau First Investment and he did not mention Chen. It was only after DG has set out the details of the Lee Tung Acquisition in his 3rd affirmation dated 10/12/2010 that DY revised his story in his 3rd affirmation dated 24/1/2011. In his witness statement dated 7/8/2012, DY described how Chen allegedly shifted financial responsibilities to DY and pressed DY to return to him the capital investment as banks were hotly demanding for repayment.
593. The way DY presented his case on the Lee Tung Acquisition could not have been a slip of memory. The substantial consideration of RMB 149.99m was unusual when the Tower was uncompleted and Bading was not then making profits. Getting to hold the final 25% shareholding of Bading was too exciting an event for a true owner to forget the path. Mr Chan SC’s closing submission simply avoided any comment on how the Lee Tung acquisition came about.
594. I find that DY has simply played no part in deciding on the Lee Tung Acquisition. It was all DG’s decision. DY’s signing of the Lee Tung Agreement was clearly upon the instructions of DG.
W. 2004: THE DXH GIFT AGREEMENT AND SXP GIFT AGREEMENT
W1. Undisputed facts
595. The 2 most important nominees, DXH and SXP, have executed the DXH Gift Agreement and SXP Gift Agreement on 7/2/2004 (collectively “the 2 Gift Agreements”) acknowledging DG’s ownership of (i) all those companies through which shares in Bading was held, and (ii) 100% shareholding in Macau First Investment and its interest in Lee Tung. They acknowledged that those assets were obtained by DG lawfully and that they were DG’s nominees in holding those shares registered in their names. They agreed to return those assets to DG by way of gift without reservation. Both Gift Agreements were notarized by 陳加友.
596. The discussion among DXH, DG and陳加友at the time of execution of the DXH Gift Agreement was recorded in a set of 談話筆錄signed by the 3 of them, the authenticity of which was not disputed.
597. Further, it was recorded in a court document retrieved from the Jiang Wei Proceedings that DXH had confirmed to the Mainland Prosecutorial Bureau that she had executed the DXH Gift Agreement and had not disowned it.
W2. DXH’s evidence
598. In her 2nd affirmation dated 24/1/2011, DXH said that DG asked her to sign the DXH Gift Agreement, which she did without reading, out of her trust for DG. She never mentioned the presence of Xu.
599. In her witness statement dated 8/8/2012 (§19.1), DXH said that she had no impression of signing the DXH Gift Agreement and she believed that Xu included it in a pile of documents for her to sign at Xu’s dimly-lit office with no windows, and not before any notary public. DXH’s witness statement was simultaneously exchanged with Xu’s and Xu had no opportunity to reply by witness statement.
600. Such evidence could not, of course, establish non est factum. From the contents of the 談話筆錄, DXH clearly knew the nature of the document she was asked to sign and the subject matter; she had confirmed her voluntariness in making the gift to DG.
W3. DG’s case
601. DG, SXP and Xu gave evidence that DXH, SXP and DG had verified the contents of the 2 Gift Agreements before the notary public prior to the execution.
602. Xu was the top man in charge of legal matters in Bading. He had no interest in the outcome of this case. He had no motive to lie to this court. He was not even seriously cross-examined on his evidence about the 2 Gift Agreements. Notwithstanding the deemed put procedure, allegations akin to a conspiracy among Xu, DG, SXP and 陳加友 to perjure was not put to Xu.
603. Xu testified that he had known DY before DG. In fact it was DY who introduced him to DG but it was DG who invited Xu to join Bading. He had come to know DY’s character over a long period. Before joining Bading, he already knew that DY had lost everything because of speculation.
604. According to Xu, he was the contact person in respect of registration matters concerning Dingtai, the Shanghai Holding Companies and Puding. All the nominee shareholders, directors and legal representatives were decided by DG.
605. According to Xu, in 2004, DG wanted to let others know he was the boss insofar as shareholding was concerned. He wanted to do this to facilitate borrowing. At that time, the Tower rights were owned by Bading (1st tier). Bading had 4 shareholders (Dingtai, Lee Tung and the Shanghai Holding Companies) (2nd tier). Those companies had their own shareholders which were the Shangrao Companies (3rd tier). Then there were shareholders who were natural persons (4th tier).
606. Based on his legal knowledge and social experience, Xu reminded DG of the risk of having interests held by nominee shareholders. He suggested that DG should ask for acknowledgement of nomineeship from his nominees, to which DG agreed. Thereupon, Xu drafted the 2 Gift Agreements and got DG, DXH and SXP to confirm the contents first before he made the appointment with 陳加友.
607. I place greatest weight on the evidence of Xu. He was firm and detailed in his testimony. He described himself as a cautious person, which I agree having regard to his evidence.
W4. DY’s case
608. DY denied knowledge of or consent to the signing of those 2 Gift Agreements.
609. Mr Chan SC submits that it was quite surprising that DG had not asked DY to sign a similar document like the DXH Gift Agreement and SXP Gift Agreement in respect of DY’s 5% shares in Hong Kong First and Macau First. In fact, Xu admitted not reminding DG of the risk of placing shares in DY’s name.
610. Mr Chan SC suggests that DG might not want to alert DY of his plan to usurp DY’s interests in the Land. This was denied by Xu who said that it was his boss’ decision to decide whom to get to sign or not.
611. With respect to Mr Chan SC, DG was already in control of all the companies. Should he have any plot against DY, he would not have asked DXH to sign the Gift Agreement, since DXH might read it before signing and expose his plot to DY.
612. The allegation of DY and DXH was that since 2001, DG had kept changing the nominees behind DY’s back, likely by forging signatures. If, on DY’s case, DG had abused the trust DXH had in him by persuading her to carry out the HKF Allotment without DY’s knowledge, DG could equally have achieved his theft of DY’s kingdom without having to ask DXH to sign the DXH Gift Agreement.
613. DY also questioned the notarization. It was not disputed that 陳加友 had notarized DG’s false graduation certificate. Mr Tong SC glossed it over to say that陳加友might have been careless on that particular occasion and could not constitute any cogent evidence to support a serious but unpleaded case of conspiracy against陳加友(presumably with DG) on this occasion.
614. With respect to Mr Tong SC, it is hardly acceptable to suggest that a notary was “careless” when his role was to ensure the genuineness of a document before notarization. The past incident of notarizing a false document could cast doubt on the credibility of the notary in a subsequent occasion.
615. There was no reason why DG should involve陳加友, thereby increasing the risk of exposure of his plot. Having taken into account the cogent evidence of Xu and the 談話筆錄, I find that DXH had knowingly and voluntarily executed the DXH Gift Agreement. The 2 Gift Agreements had been properly notarized before陳加友.
W5. Effect of the DXH Gift Agreement and SXP Gift Agreement
616. The DXH Gift Agreement was executed at a time when the Tower was only a few months away from completion. DXH could not have overlooked the value of the Tower. The fact that DG invited DXH to sign the Gift Agreement was compelling evidence confirming his ownership of Bading at a time when litigation was not contemplated by anyone. The fact that DXH signed it was evidence of her acknowledgement of DG’s ownership.
617. The execution of the SXP Gift Agreement at the same time as the DXH Gift Agreement was not a matter of coincidence. SXP had always been on good terms with DG. There was no suggestion that she ever denied his interests. He could have simply asked SXP to transfer back everything to him without the need to execute a Gift Agreement. Clearly the presence of SXP provided an additional witness to the notarization of the DXH Gift Agreement.
618. For 6 years after execution of the 2 Gift Agreements until the start of this action, DY had done nothing to assert his ownership over Bading or other companies holding interests in Bading.
X. 2004-2006: HONG KONG FIRST AND MACAU FIRST
X1. Payment of the registered capital of Hong Kong First
619. There was no direct evidence as to the source of the initial capital of HK$100,000. DXH’s evidence was that it came from the rental income of 皇朝寫字樓 which DY allegedly purchased in her name using “company’s funds”.
620. DG’s evidence was that the HK$100,000 came from funds which he paid to DXH for use in the Hong Kong and Macau companies: DG’s 2nd supplemental witness statement, §120-121. The payments were evidenced by various receipts admittedly signed by DXH. DXH also accepted that she had received funds from Bading from time to time.
621. Such evidence was not weighty enough for me to find one way or another as to the source of capital although given DG’s overwhelming control of the companies, the capital was likely to have come from him. Resolution of this issue would not have affected the outcome of this case anyway, since that was not how the parties rested their case.
X2. DY’s shareholding in Hong Kong First
622. Hong Kong First was set up on 1/9/2004 with 95% shares held by DXH and 5% by DY. DY earned secret commission from the Zhongfu loans and caused loss to Dingtai. He was removed as legal representative of Dingtai. In such circumstances, it was surprising that DG would have still trusted DY with 5% shares and directorship of Hong Kong First, without any acknowledgement of nomineeship signed by DY. DY’s Dingtai LoA to DG was not enough to cover DG’s rights over those shares. DG was not in lack of nominees. There was also no reliable evidence of any agreement of DY to act as DG’s nominee. But note what happened subsequently.
X3. Hong Kong First becoming sole owner of Bading
623. To recap, since buying out of the last Foreign Investors in 2003, Bading had had 4 registered shareholders: Dingtai (40%), 上海申鑫 (20%), 上海鼎興(15%) and Lee Tung (wholly owned by Macau First Investment) (25%).
624. By a series of transfer agreements, Hong Kong First became the sole owner of Bading:
Date |
Transferor |
Person signing on behalf of the transferor |
Person signing on behalf of Hong Kong First |
| 1/6/2005 | Lee Tung | DXH | DXH |
| 5/9/2005 | Dingtai
上海鼎興 | SXP’ mother
奕印敏 | DXH
DXH |
| 6/6/2005 | 上海申鑫 | 奕印敏 | DXH |
625. All of the signatories (including DXH) have acknowledged in writing that they were nominees of DG.
X4. DY’s shareholding in Macau First
626. Again, DY held 5% shares in Macau First. According to her witness statement, DXH set up Macau First on 23/1/2006 on the instructions of DY. The registered capital was MOP 20m (which was never paid up). DG held 85% shares, DY 5%, SXP 5% and DXH 5%. Xu also confirmed that it was DG’s idea to put in a few nominee shareholders.
627. Within 6 months, in July 2006, the other 3 shareholders transferred their shares to DG, making him 99% shareholder and DXH 1%. This was inexplicable if DY were the real owner of Macau First.
628. DG’s explanation, which I accept, was that if DG had become the sole owner, Macau First would have to add the words “One Man Ltd” to the name of Macau First. He did not regard it as good for trading purpose. Since DXH had not handled many of his companies, so DG kept 1% share in her name.
629. In the document known as 設立公司合同 for Macau First, clause 5 stated that DG (and not DY) had a first pre-emptive right of the shares. The significantly greater shareholding of DG coupled with this pre-emptive right was more consistent with DG being the real owner of Macau First.
630. In the same document, there was a phrase which referred to DY being married and his spouse was Jiang Wen and there was a “分別財產制”. On DG’s case, this clause was to avoid Jiang Wen asserting a right in the Macau First shares in case she was to divorce DY and hence create an “incumbrance” on DY’s shares. I consider that this clause would apply whether DG or DY was the real owner of Macau First. I place little reliance on it.
X5. Resignation of DY as a director of Hong Kong First
631. It would be too much of a coincidence for DG to have picked such time to dishonestly (on DY’s case) persuade DXH to do the HKF Allotment in 2006 which had the effect of making Macau First the ultimate owner of interests in Bading, only to meet with the resignation of DY from Hong Kong First soon afterwards on 25/7/2006. There was no explanation in DY’s affirmation or witness statements for this phenomenon.
632. At the trial, DY explained that the resignation came about because he found it troublesome to fly to Hong Kong to sign documents, eg for opening bank accounts. That was a ridiculous explanation. Opening bank accounts would not have been a frequent occurrence to become troublesome, however busy DY was. Such trouble could not justify his stripping himself of all ownership and decision making power without reservation. Mr Chan SC did not deal with it in his closing submission.
X6. DG’s case
633. It is DG’s case that the incorporation of Hong Kong First, the HKF Allotment, the 2006 Transfers and DY’s resignation from directorship of Hong Kong First were carried out in an organized manner for the purpose of using Macau First as the ultimate holding company to hold his interest in Bading and to show his investors his ultimate ownership in the Land and the Tower.
634. I repeat my analyses on the HKF Trust and MF Trust in Section G above. Viewed against the backdrop of events since 2003 – setting up the Shanghai Holding Companies and Shangrao Companies, removal of DY as legal representative of Dingtai, obtaining written acknowledgements of nomineeship and execution of the 2 Gift Agreements, DG’s version was logical and credible. It was probable that DY and DXH all along knew that DG was the rightful owner of Bading and Hong Kong First and so they did all acts in accordance with DG’s directions. I accept DG’s version.
Y. 2005-2007: DG AND DY’S APPLICATION FOR EMIGRATION TO AUSTRALIA
Y1. Undisputed facts
635. DG obtained his residency in Australia by applying under Class 132 (for entrepreneurs) whereas DY did so through Class 164 (for senior staff). There was no residence requirement for the former but 4 years’ residence was required for the latter. In his application form, DY stated that he was managerial staff of Dingtai and Bading and personally held 2 properties only.
Y2. Analyses
636. The issue was why DY did not apply through the more prestigious class 132. The financial requirement was to show ownership of at least 30% shares of value over A$400,000 in a substantial company for 2 years within the past 4 years. DY could have easily met this by asking his alleged nominee (DXH) to transfer Bading back to him or to sign various declarations to acknowledge his ownership.
637. Alternatively, DY allegedly had shares in Global International (Australia) Property Ltd (“GIAPL”). He allegedly gave 51% to DG and, with a letter from DY’s friend, DG got immigrant status. Why didn’t DY do the same with his own 49% (well above the requisite 30% shareholding)? He has been asked the question 3 times but all that he could say was that Xu got an immigration agent instead of a foreign company to make the application. It was illogical, in my view, that Xu would have taken upon himself to apply under a different, yet more cumbersome class, for a real boss. There was also no reason why the immigration agent would have told DY, as alleged, that mentioning 2 properties was sufficient and disallowed him from mentioning others.
638. DY was shown a letter of GIAPL dated 15/8/2008 in which it was certified that the company received A$3.15m and that the money belonged to DG. DY claimed that the contents were not true as it was DY who had provided the money. According to DY, what happened was that after DG got his green card in 29/4/2005, DG had to undergo a process within 2 years to verify that he had over A$3m, or else he would have lost his immigrant status.
639. There was no apparent reason why the immigration department would have wanted a letter (which stated the historical instead of current capital position of a company) 2 years after DG had got the green card. I do not accept DY’s evidence. The more probable reason was that DY needed to show this letter to the immigration officer to prove that DG (his guarantor) had money in Australia.
640. Further, DY kept saying that his immigration was for the sake of his children’s education and he did not want the application to be too complicated. The irony was that he did it the more complicated way that required residence and a guarantee from DG. It took DY 2 years.
641. I find that the manner in which DY and DG applied for emigration to Australia reflected that DG was the real owner of Bading and that was also how DY viewed it.
Z. DY’S LACK OF KNOWLEDGE AND CONTROL OVER BADING AND HONG KONG FIRST
642. DY did not know that Bading had declared substantial dividends and Hong Kong First had received dividends of HK$48m in 2008 and HK$47.5m in 2010, as borne out by the financial statements of Hong Kong First.
643. Hong Kong First had paid substantial funds to DG personally (eg HK$44.5m in 2010) but no such to DY.
644. In contrast, DY and his wife, received RMB 30,000 and RMB 20,000 respectively as employees of Bading. There was no explanation as to why DY, if he was the true owner of Bading or Hong Kong First, would have permitted this state of affairs to exist and had never requested for payment of dividends to himself.
645. Mr Chan SC submits that since DY spent 1/3 of his time in Shanghai after 2003 and the rest in development business out of China, he might not be interested in asking for dividends. With respect, that might explain DY’s stance, but not DXH’s conduct in distributing dividends to DG without DY’s knowing.
AA. 2010: THE DISPUTE THAT LED TO THIS ACTION
646. It is DY’s case that his dispute with DG started in September/ October 2009 when DG allegedly refused to cause Bading to release funds to DY to invest in a new project. DG allegedly suggested that DY should retire and take a rest. DXH was told about the dispute round about that time.
647. There was no evidence that DY persisted in his request for inspection of Bading’s accounts or rebuked DG for his disobedience. DXH, as director of Hong Kong First and alleged nominee of DY, never demanded Bading to release accounts for DY’s inspection or release funds to DY.
648. DXH’s version on when she first came to know about the breakdown in relationship between DY and DG had changed in the course of evidence. In the defence, she said that their argument started from early 2007 but this was denied in the witness box. Under cross-examination she said that it started in the first half of 2010.
649. DXH even claimed in her witness statement (§26.2) that in March or April 2010, DG told her that “his gang” had deliberated for 2 years and however hard DY tried, DY would not be able to turn the tide. DG also allegedly suggested a settlement under which DXH was to give him all her properties in Shanghai to DG.
“2010年3-4 月份,一次在花旗大樓三樓的會議室,我告訴丁鋼，丁育辛苦了幾十年的心血是不會白白讓給你的。我很清楚記得丁鋼這樣和我說：沒有用的，我一幫人研究了2 年，丁育怎麽也翻不了盤的！丁鋼還說他要丁育搬出大樓。 … … 過了一會兒丁鋼對我說，要他和丁育和解是可以的，但條件是要我把我在上海名下的物業送給他。”
650. DXH simply could not point to any objective evidence to show what DG had done in 2 years to usurp DY’s assets. The best she could point to was the 2006 Transfers of Hong Kong First shares to Macau First 4 years before. When challenged on this aspect, DXH was so hesitant that she could not give a logical answer.
651. What was more incredible was that, despite knowing her brothers’ dispute, DXH disposed of properties in favour of DG without DY’s knowledge or approval:
(i) DXH transferred, at DG’s request in late March 2010, HK$30m and US$3m to DG’s personal account for investment purpose.
(ii) For the year ending 31/3/2010, DXH had paid DG HK$44.5m out of HK$47.5m dividends received by Hong Kong First, in the hope of settling the brothers’ dispute. This was inconsistent with DY’s pleading and prior evidence that DXH was deceived by DG in causing Hong Kong First to pay DG HK$3m (being part of the HK$44.5m) on 4/3/2010. When challenged during cross-examination, DY claimed that he had confused the payment of money to DG with the transfer of 6 landed properties by DXH to DG, which was an entirely different category of assets.
(iii) DXH alleged that there were USA and Canadian companies in which DY had interests. She claimed to have remitted RMB 2m and another RMB 40m to DG’s personal account for those companies. This contradicted DY’s case, who did not know there were dividends received by Hong Kong First which he could have used.
(iv) DXH knew that DY had asked DG for money for a land project but DG said that Bading had no money. DXH knew that Hong Kong First had profits of HK$47m and yet she did not inform DY.
(v) On 29/4/2010, she transferred to DG 6 properties worth over RMB 70-100m allegedly held by her on behalf of DY, in the alleged hope that the brothers would settle their dispute. She said it was at the instigation of DG. She said that since DY bought them in her name, she believed they were hers.
652. DXH’s conduct was totally inconsistent with her alleged role as DY’s nominee. When cross-examined on why she transferred properties under her name to DG, she was very evasive. After a few indirect answers, she admitted that DY realized that he was completely out of control. She said that after March 2010, DY and DG fell out. She tried to mediate in vain. Despite that, DXH still transferred US$3m and HK$30m to DG’s personal account, claiming that she trusted DG. This was completely illogical.
653. Her notion of settlement was naive to the extreme. She had never sat the brothers together, nor requested for a note from DG to prove the settlement. She had seen the need for something in writing when the Father divided the assets of DY and DW, and when DY made a gift to DG in 1993. If her evidence was to be believed, the ungrateful DG was stealing an empire from DY. It was impossible that neither DXH nor DY mentioned in any of their witness statement or affirmation this important “settlement” that might have barred DG from instituting this action. DXH’s settlement without the approval of DY could not be explained by her slogan “親情大於錢情”.
654. I find DXH’s transfers of substantial funds and 6 properties to DG without DY’s approval to be reflective of her recognition of DG’s ownership and her role as DG’s nominee. There was no settlement as she alleged. Nor could the alleged plot by DG’s gang be believed.
655. The more likely scenario, which I accept, was that DG found DXH to be getting greedy. She had been warned by Tam Kwan Yip in 2006 and 2007 against transfer of funds from Bading, Citigroup Property Management Company or unused credit funds of Hong Kong First and unrelated companies into her personal account but she said she would account to the big boss, DG. Therefore DG gradually got back all his assets, including the 6 properties.
AB. 2010: THE IMPUGNED TRANSFERS IN MAY
656. The shares of Hong Kong First were secretly transferred out of Macau First into the names of DY and DXH in May 2010. DXH and DY deposited HK$5m cash into Macau First to create a charade that consideration had been provided, but retrieved the cash immediately.
657. DXH did not instruct Tam Kwan Yip to deal with transfer of shares. She claimed, twice, that he did not have such power, which was untrue. She claimed that her solicitor had not explained to her and DY that the consideration must be commensurate with the value of the shares. Her solicitor did not even tell her to sue DG.
658. If DY was the true owner, there was no reason why he dared not seek return of his assets by legal action. There was not even a demand letter before action. There was also no reason why he needed to provide money consideration. The alleged advice by the Hong Kong solicitor was incredible.
659. I reject DY and DXH’s evidence. The irresistible inference is that DY and DXH did not want DG to know about the transfer. Secrecy was a badge of fraud.
AC. SUMMARY OF OVERALL FINDINGS OF FACTS
660. In the early 1990s when the per capita income of Shanghai was RMB 3,000 per annum. DY had already prospered in his steel business. The first pot of gold was clearly earned by DY.
661. The wealth of DG was much, much lower. He was a sole proprietor in the transportation business. His sole proprietorship had no physical presence, no license, no office, no staff, no bank account and did not have to pay tax. He had not accumulated wealth in the early 1990s to be able to set up Purao, increase its capital or set up Dingtai. Nor did he have reason to set up Purao. His case on the Luyin shares was a pack of lies. He had blatantly lied to boost his case on early accumulation of wealth.
662. DY set up 3 Hainan Companies (2 with DW) to obtain tax benefits in Hainan. The total capital injection for these 3 companies was RMB 16m.
663. In 1992/1993,DY and DW were buying vehicles and properties, whether in their own names or in the name of Haikou Materials. Zhongyou building in Shanghai was bought in this period which was used as residence of the Ding family and office of Haikou Nanzhou. DG and SXP were employees of Haikou Nanzhou.
664. In April 1993, DY paid RMB 1m to set up Purao. He was the real owner of Purao.
665. By then, the wealth of DY and DW was such as to prompt the Father to suggest dividing up assets between them and make a gift to the youngest brother DG. The Property Division Agreement and Gift Agreement, both dated 6/6/1993, were genuine documents made at the direction of the Father. DY did make a gift of RMB 2m to DG. DG was most shameless in denying DY’s financial assistance to him in the early 1990s and claiming to be the real owner of Purao.
666. In October, 1993, DY put up RMB 10m (RMB 5m cash and RMB 5m stock-in-trade) to increase the capital of Purao.
667. One month later, in November 1993, DY put up RMB 10m (RMB 3.8m cash and another RMB 6.2m stock-in-trade) for setting up Dingtai. DY was the real owner of this company. Just the stock-in-trade of Dingtai for 1993 was over RMB 150m.
668. By 1996/97 DY lost all his wealth through speculation in futures. He brought substantial losses to Dingtai. Dingtai owed No.2 Market about RMB 8.5m by 1996 and Qinpu about RMB 670,000. DY was untraceable. He abandoned Zhongyou Building in 1998. He had to live in very modest accommodation at 華高一村in 1999 purchased by the Father. He did not have the RMB 50-60m wealth as he claimed.
669. It was through DG’s effort that the debts of Dingtai were fully repaid to the No.2 Market and Qinpu by 2002.
670. As a result of DY’s mismanagement of Dingtai, he executed the undated DY/Dingtai LoA in late 1996/1997 to surrender control of Dingtai to DG, although DY remained trading in steel in Dingtai. DG also obtained possession of the personal chops of DY and Jiang Wen.
671. In 1997, it was DG who negotiated for acquisition of the Land, signed the SPA and related Memoranda dated 26/3/1997 and 25/7/1997 with the undated DY/Dingtai LoA and raised 30% of the Land premium all without the need for authorization of DY. He pledged his car and property worth RMB 500,000 as guarantee for repayment to borrow the Deposit from No.2 Market.
672. DY had done some steel business through Dingtai but it was trading at a loss and unlikely to have contributed to the Land premium.
673. DG set up Bading to hold and develop the Land. He found Chen and, through him, the Foreign Investors. I am not satisfied that the Shenhong Agreement or Kwong Fat Letter of Intent produced by DY were genuine or that Shenhong or Kwong Fat were ever potential investors found by DY.
674. While DW and DY might have signed on some of the documents of Bading, it was DG and Chen who could have finalized the terms of those documents. Huangteng of Balin gave the Balin LoA to DG which was then in control of Dingtai to handle all the matters relating to the establishment of the joint venture company to develop the Land.
675. The Railway Companies belonged to DG but they had not been profitable, nor had they contributed in any substantial way to the purchase of the Land or funding of the Project. DG had deliberately presented false evidence to bolster his case.
676. In 2000, when Dingtai was privatized, it increased its capital to RMB 100m. DY had contributed to the increase by obtaining short-term loans of RMB 70m for Dingtai from Zhongfu, through his connection with Bai. The source of the rest of the 20% was probably from borrowings through DG. DY’s equity was reduced to 45% (being 25% in his own name and another 20% through his shareholding in Shangrao Sanxin). He remained, on the surface, the legal representative, chairman and general manager of Dingtai until 2003. DG was the majority beneficial owner of Dingtai.
677. In 1997, Puding was set up. With funds flowing through Puding, in 2000, the Shangrao Companies and Shanghai Holding Companies were companies set up. These were all DG’s companies. They did not have independent business to earn profits so as to fund their own capital or the Land premium and acquisition of Foreign Investors’ interests.
678. In 2000, when 上海申鑫 acquired 20% shareholding of Bading from Goodway, DG obtained full control over Bading by being its legal representative in place of Chen and possessing its company seal without any protest from DY. The compelling inference was that DG has always been and regarded by DY as the real boss of Dingtai that held interest in Bading.
679. In the construction of the Tower, DG signed the important documents, attended all the ceremonies and important meetings, selected the architect and design of the Tower, decided the main contractor, negotiated and decided the terms of cooperation with Citigroup, dealt with changes to town planning conditions, and approved expenses of Bading. DG also raised loans from ICBC, ABC and BOC. What DY did was preliminary, relatively minor and subordinate to DG.
680. DY and 鍾敏敏 were involved in the initial stage of the changes to town planning matters but it was DG who issued Bading’s application for the changes to construction limit.
681. DY raised the loan of RMB 80m from Huaxia Bank, having first obtained the undertaking from Shanghai Electricity. However, DY had lied and collaborated with his witnesses in claiming that he had arranged the loans of RMB 19m and RMB 29m for the Shanghai Holding Companies through Qin Wei.
682. DY had no control over Bading. The Bai Incident was a pack of lies. DG’s appointment as legal representative of Bading clearly had nothing to do with the Bai Incident, and was not the result of DY’s decision. It was the natural consequence of DG being in real control of Bading.
683. Bading underwent restructuring in between 2000 and 2003. After buying out the last Foreign Investors on 12/12/2003, the Bading shares were held by Dingtai (40%), 上海申鑫(20%), 上海鼎興 (15%) and Macau First Investment holding Lee Tung (25%).
684. By then, with regard to Dingtai, DG had removed DY’s title as legal representative of Dingtai on 31/1/2003 because DY earned secret commission of RMB millions from the Zhongfu loans and caused loss to Dingtai. DY was replaced by DXH and later YXA as legal representative. DY’s shares were transferred to DXH. DG’s control of Dingtai was evidenced by the notarized DXH’s Dingtai LoA executed in his favour on 15/6/2004 subsequently. DXH executed it without reference to DY and she knew the contents.
685. The Shanghai Holding Companies were at different stages held by DG, individuals acting as DG’s nominees or the Shangrao Companies. In turn, the shareholding of the Shangrao Companies was held by individuals acting as DG’s nominees without DY’s knowing. The nominees were closer to DG than DY. They had confirmed their nomineeship in writing. DY’s description of the Shangrao Companies and Shanghai Holding Companies as bridging companies whose historical mission was completed and that their shares lacked commercial value was untrue.
686. DG’s control of the Shanghai Holding Companies was evidenced respectively by the notarized DXH’s Shenxin LoA dated 15/6/2004, and Zhujia’s LoA concerning上海鼎興dated 19/12/2003 executed in DG’s favour. DXH’s LoAs were executed without reference to DY. She well knew the contents of them. Zhujia’s LoA was genuine and not forged.
687. With regard to Lee Tung, the consideration for the Lee Tung Acquisition was RMB 150m, being (a) RMB 149.99m for the value of 25% Bading shares held by Lee Tung; and (b) MOP 10,000 for the value of Lee Tung as a corporate vehicle.
688. The Lee Tung Acquisition was negotiated and concluded by DG and Chen. DY had simply no power to make the decision on acquisition. He had no knowledge as to how the consideration for the Lee Tung Acquisition was decided. He had not taken part in it except to execute the Lee Tung Agreement on behalf of Macau First on the instructions of DG.
689. On 7/2/2004, at a time when the Tower was only a few months away from completion, DXH knowingly and voluntarily executed the DXH Gift Agreement. The DXH and SXP Gift Agreements were notarized by 陳加友. DXH and SXP did so to acknowledge DG’s ownership of the assets stated therein and their nominee status.
690. For 6 years after execution of the 2 Gift Agreements, DY had done nothing to assert his ownership over Bading or other companies holding interests in Bading.
691. The initial capital of Hong Kong First had likely come from DG. The capital of Macau First was not paid up. DY held 5% shares in Hong Kong First and Macau First respectively when they were first set up, without any acknowledgement of nomineeship signed by DY.
692. By a series of transfers, Hong Kong First became sole owner of Bading.
693. The HKF Allotment and the 2006 Transfers took place in 2006 which had the effect of making Macau First the ultimate owner of Bading. DY knew about the HKF Allotment and the 2006 Transfers when they were executed. He signed the resolutions and transfer documents without protest or reservation because he knew that DG was the true beneficial owner of shares in Bading, Hong Kong First and Macau First.
694. DY transferred all of his Macau First shares to DG on 12/7/2006. On 25/7/2006, DY resigned as a director of Hong Kong First just after Macau First had become the ultimate beneficial owner of Bading.
695. All of these events were carried out in an organized manner for the purpose of using Macau First as the ultimate holding company to hold his interest in Bading and to show his investors his ultimate ownership in the Land and the Tower. DY and DXH all along knew that DG was the rightful owner of Bading and Hong Kong First and so they did all acts in accordance with DG’s directions.
696. DXH transferred substantial funds in Hong Kong First and properties under her name to DG without DY’s approval. Viewed together with her voluntary execution of the DXH Gift Agreement, the transfer was highly indicative of her recognition of DG’s ownership and her role as his nominee. There was no settlement as she alleged.
697. The manner in which DY and DG applied for immigration to Australia reflected that DG was the real owner of Bading whereas DY was merely managerial staff, and that was also how DY viewed it.
698. The Impugned Transfers of shares of Hong Kong First out of Macau First into the names of DY and DXH in May 2010 were done secretly to avoid letting DG know. No consideration was provided.
AD. FINDINGS ON THE CLAIM IN BENEFICIAL OWNERSHIP
699. In his final submission, having abandoned his case on beneficial ownership in the Land and the Tower, Mr Chan SC submits that DY has had full beneficial ownership in shares of various companies, which I tabulate as follows:
Stage |
Event |
Nominee Owner |
Beneficial Owner |
| 1. | Apr 1993: Setting up of Purao | Shangrao Cereal | DY |
| 2. | Oct 1993: Increase in capital of Purao | Shangrao Cereal | DY |
| 3. | Nov 1993: Setting up of Dingtai | Purao | DY |
| 4. | July 1997: Dingtai held 40% of Bading | Dingtai/Purao | DY |
| 5. | June 2000: privatization of Dingtai | From Purao to DY, SXP, 上饒三鑫 | DY |
| 6. | June 2000: increase in capital to RMB 100m | DY, SXP, 上饒三鑫 | DY |
| 7. | Aug 2000: 2 Shanghai Holding Companies set up to acquire 35% of Bading | DG, 上海申鑫, 上海鼎興 | DY |
| 8. | March 2003:
Bai Incident | Change from DY to DXH | DY |
| 9. | Sept 2004: Hong Kong First set up to hold 100% Bading | DY (5%) and DXH (95%) | DY |
| 10. | June 2005: Hong Kong First acquired 25% of Bading from Lee Tung | No change | No change |
| 11. | Sept 2005: Hong Kong First acquired 55% shareholding in Bading, making a total of 80% | No change | No change |
| 12. | Jan 2006: Macau First established | DG (85%), SXP (5%), DY (5%), DXH (5%) | DY |
| 13. | February 2006: the HKF Allotment | Macau First | DY |
| 14. | June 2006: Hong Kong First acquired 20% in Bading, making a total of 100% | No change | No change |
| 15. | July 2006: transfer of shares in Hong Kong First to Macau First | Macau First | DY |
700. With respect to the 3 Questions in para 122 above, I find the answers to all of them to be “DY”, However, contrary to Mr Chan SC’s submission, this is not dispositive of the whole action. In any case, that is not DY’s pleaded case.
701. There might have been strange conduct on the part of DG, eg despite DY’s mismanagement of Dingtai, DG allowed DY to remain as a legal representative of Dingtai but only obtained the undated DY/Dingtai LoA from him. He even allowed DY to become a director of Bading. When Dingtai was restructured, he permitted DY to hold about 45% equity (25% shares in DY’s name and 51% in the name of Shangrao Sanxin of which DY held 40%), worth about RMB 45m. He only removed DY as a legal representative of Dingtai and his “hollow position” (虛職) in Bading in 2003 for earning secret commission. However, DG still trusted DY and asked him to be his nominee in holding the 5% shares in Hong Kong First and Macau First in 2004 and 2006 respectively. Throughout the whole period, DG never asked DY to sign something to acknowledge DG’s beneficial ownership.
702. However, from the findings in Section AD above, one can see that DY’s case broke down in between stages 3 and 4 of the table in para 699 when DG had taken control of Dingtai. DY could not show that Dingtai was holding the Bading shares on trust for him. DY was not able to show that every company set up thereafter up to stage 15 were beneficially owned by him. I judged this from the angles of corporate ownership, nomineeship, control, timing and contribution.
703. In terms of corporate ownership,
(i) DY’s shareholding in Dingtai was cut down to at most 45% after its privatisation. He could not explain why DG’s started to use his nominees.
(ii) DY had no idea as to how Puding, the Shangrao Companies and Shanghai Holding Companies came about and how they came to hold the shares in Bading.
(iii) There was no evidence that DY had personally paid up the registered capital of any of the Shanghai Holding Companies, Shangrao Companies and Macau First Investment. Even on DY and DXH’s own evidence, the funds for setting up Hong Kong First were not paid by DY personally. DY certainly did not pay for the HKF Allotment since he did not even know about it. On DY’s case, the initial capital of Macau First was not even paid up.
(iv) DY gave over the shareholding in Dingtai to DXH for no valid explanation; the Bai Incident was disbelieved.
(v) DY never objected to the meagre 5% shareholding in Hong Kong First and Macau First, and the surrender of them to DG.
(vi) DY/DXH could not explain the HKF Allotment. DY could not explain why he gave up Macau First at the point when it became full beneficial owner of Bading.
704. In terms of nomineeship, DG had consistently brought in nominees from his side since privatisation of Dingtai. All the nominees were closer to him than to DY. All his nominees acknowledged his ownership in writing.
705. On the other hand, DY did not have similar nominees. His alleged nominees, DXH and Zhujia, were disbelieved. DXH acted more consistently with her being DG’s nominee, without the need to inform DY. There was nothing in Mr Chan SC’s closing submission to explain away the DXH Gift Agreement or why DXH should not be held to it. The Mother’s nomineeship was not decisive. She was as close to DG as to DY. DY never asked any of his nominees to return assets to him.
706. In terms of control, DY never resumed control of Dingtai. Unlike DG, he never had control over Bading. In 2003, he gave up both his status as legal representative of Dingtai and directorship in Bading without reservation. In relation to Hong Kong First, he did not even know about receipts of dividends from Bading, let alone control. He resigned as a director of Hong Kong First shortly after Macau First became 100% shareholder of Hong Kong First for no valid explanation. For 6 years since the HKF Allotment and up to the commencement of this action, DG (himself and through DXH) had been controlling Hong Kong First and Macau First and was receiving the dividends without account to DY.
707. In terms of timing, 2003-2006 were critical years when DG took careful steps to remove all traces of DY’s control and shareholding in Dingtai and Bading. DG bought out the last Foreign Investor in 2003, unifying all interests in Bading under his camp. By 2004, DG got written acknowledgement from his nominees, specifically requiring DXH and SXP to sign Gift Agreements. When the Tower was soon to complete, he set up Hong Kong First. After the topping up ceremony of the Tower on 12/9/2005, he set up Macau First on 23/1/2006 to ensure that beneficial interests in Bading could be traceable to him. He removed all traces of DY’s shareholding and directorship in Hong Kong First and Macau First in 2006. All of these took place when litigation was not contemplated by anyone.
708. At least between 2006 and 2010, there had been ample opportunity for DY to assert his interests over Bading or other intervening companies, but he had not.
709. In terms of contribution, it was true that the Land was purchased in the name of Dingtai when the legal ownership of Dingtai was with DY. What Bading had taken over was the Land but not Dingtai. The Land was not fully paid by then. Dingtai or DY could not have afforded the purchase price of the Land. DG’s case on how he funded the purchase price as pleaded in para 60(9)(d) of his Amended Reply had changed. He put in minimal personal wealth as guarantee to borrow the Deposit. The Railway Companies, Shangrao Companies and Shanghai Holding Companies did not have any or any substantial contribution to the Land premium. All the acquisition funds came from borrowing. DG raised 30% of the purchase price without DY’s assistance. He raised many substantial loans for Dingtai/Bading from many banks.
710. Whilst DY had also raised funds and did something for the Project, DY’s conduct was not consistent with a real owner having had the first opportunity in his life to develop such an important piece of land. The conduct of DG was not just that of an over zealous “driver” or even management staff looking after his brother’s interest. The involvement of DG in the Project internally and externally was overwhelming whilst DY’s involvement was subject to the control of DG.
711. DY was simply unable to rationalize his conduct from since 1996/7. The irresistible inference from matters occurring thereafter could only be explained by the fact that both DG and DY held the common perception that DG instead of DY was the true owner of Bading and all subsequent companies.
712. I am aware that a change in beneficial ownership of Dingtai is not the pleaded case of any party. I remind myself that this case is not a contest between DY and DG as to who had raised loans for the Land or who had done more work in relation to the Project. Nor is it either party’s wish for this court to apportion the interests in any company. The counterclaim is for DY to establish his 100% beneficial ownership in Hong Kong First and Macau First. I find that even if Mr Chan SC’s proposition in para 699 above is legally viable, DY simply failed as a matter of fact to show that at every stage he has retained beneficial ownership in all the companies listed in the table.
713. Both DG and DY have lied. However, the lies themselves did not mean necessarily that the entirety of their evidence was to be rejected: Lam Rogerio Sou Fung v Tan Soon Gin George, HCA 2576/2005, at §41. DG has lied to bolster part of his case, especially for the period before the purchase of the Land. That was a wrong attempt but his actual case on ownership of Hong Kong First and Macau First remains good irrespective of his lies.
AE. FINDINGS ON THE CLAIM AGAINST DXH AND dy
714. In making the Impugned Transfers, DXH had acted without authority of the board of directors or consent of DG, and breached her fiduciary duties as director of Macau First. Effectively that stripped Macau First of its rights, amongst others, over the Land and the Tower in favour of DY and DXH. No genuine consideration had ever been provided for the Impugned Transfers.
715. Further, she has breached the self-dealing rule, ie that “if a trustee sells the trust property to himself, the sale is voidable by any beneficiary ex debito justitiae, however fair the transaction”, and that this rule applies to not only trustee but also other persons of fiduciary character: Lewin on Trust (18th ed.) §§ 20-63, 20-84.
716. Likewise, the transfer to DY was also liable to be set aside on the basis of the “fair-dealing rule” as DY could not show that the transfer was at arm’s length and a fair dealing of Macau First’s assets,: Lewin on Trust (18th ed.) §20-62; Newgate v Penfold [2004] EWHC 2993 at §§242-244.
717. I find that DY knew that the Impugned Transfer in favour of himself was made without his being entitled to the shares in Hong Kong First. DY clearly knew that that Impugned Transfer to him was in breach of DXH’s duties as directors of Macau First and nominee of DG. No consideration was provided. He and DXH were holding the Hong Kong First shares on constructive trust for Macau First. See J.J. Harrison (Properties) Limited v Harrison [2001] EWCA Civ 1467, at §§25-26; Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 699 at 705C-G, 707B-F, 716C‑D.
AF. CONCLUSION
718. There was other evidence in this case. It is impractical to set out in detail all the evidence from the 60 trial bundles. Suffice to say that I have considered all the evidence. What has not been set out here, however decided, would not have affected the big picture.
719. DY fails to establish the existence of the HKF Trust and MF Trust for lack of proof of an agreement/trust arrangement. The HKF Allotment, the 2006 Transfers and his resignation as director of Hong Kong First also excludes any possibility of trusts. The trust claim also fails as a matter of law for violating the reflective loss principle.
720. DY’s claim in beneficial ownership fails as a matter of fact. He has failed to discharge the burden of proof that he was 100% beneficial owner of Hong Kong First and Macau First and all intervening companies since he handed over control of Dingtai to DG. DG was the real ultimate beneficial owner of Macau First.
721. Accordingly, the counterclaim is dismissed. Judgment should be entered for Macau First.
722. Costs should follow the event and be to the plaintiff. However, there had been 2 days on which DG sought, belatedly to adduce further witness statements but his applications were rejected. Costs of the hearing on those 2 days should be borne by DG, to be set off against costs in his favour. I make an order nisi on costs accordingly.
723. This is a complex case of facts that justified the use of 2 solicitors for the trial. Ms Chiang of LCP should be allowed a rate of $4,500 and a more junior solicitor at the rate of $3,000.
724. The case justifies certificates for 3 counsel only – Mr Tong SC, Mr Anson Wong (now SC), and Ms Ho. This is entirely without disrespect to Mr Lawrence Cheung who has shown admirable efforts throughout all interlocutory applications and at the trial.
725. For costs reserved at the PTR, I make an order for the grant of certificates for only one junior counsel as those PTRs were in the nature of checklist hearings and counsel had not advanced the case in the sense of assisting the court in narrowing down issues.
AG ORDERS
726. I grant declarations as follows:
(1) That the purported transfers of the shares in the 3rd defendant from the plaintiff to the 1st and 2nd defendants made on 19 May 2010 are null and void and are hereby set aside.
(2) That the shares in the 3rd defendant registered in the names of the 1st and/or 2nd defendants are respectively held by each of them on constructive trust for the plaintiff.
I further order that:
(3) The 1st and 2nd defendants do forthwith take all necessary steps and execute all necessary documents to transfer all the shares in the 3rd defendant registered in their respective names to the plaintiff or such nominee duly appointed by the plaintiff.
(4) There be an account and inquiry to ascertain all such monies or benefits which have been paid or accrued to the 1st and 2nd defendants by virtue of their being the registered holders of the shares in the 3rd defendant.
(5) That the 1st and 2nd defendants do pay to the plaintiff such sums found due from them upon the taking of such account and/or making of such inquiry.
(6) Damages and/or equitable compensation in respect of the 1st defendant’s breach of fiduciary duties to the plaintiff.
(7) Interests are to be paid by the 1st and 2nd defendants to the plaintiff at judgment rate on such sums found due from them
(8) The counterclaim is dismissed.
(9) I make an order nisi that costs should follow the event and be to the plaintiff, except that the plaintiff should bear 2 days’ costs of the defendants to be set off against costs awarded to the plaintiff.
(10) On a nisi basis, there shall be certificates for Mr Tong SC, Mr Anson Wong and Ms Sabrina Ho.
(11) I make an order nisi that there be costs to 2 of the plaintiff’s solicitors for the trial.
(12) Costs reserved at the PTRs should, on a nisi basis, be to the plaintiff, with certificate for one junior counsel and one solicitor at each hearing.
(13) On a nisi basis, the applicable rate for Ms Chiang of LCP should be allowed at $4,500 and a more junior solicitor at the rate of $3,000.
727. I deeply thank both teams of counsel for their able assistance. I thank them for thinking at every step along the trial of how best to assist the court by preparing core bundles of only relevant documents for their opening and closing submissions. It saved me a lot of trouble from ploughing through 60 trial bundles.
728. A special note of thanks to all the junior counsel who, though not having made much oral address, have throughout the trial rendered able and active assistance not only to their leaders but also the court.
729. I also thank the solicitors for having prepared bundles in a comprehensible way. My thanks are extended to Messrs King & Wood (specially Ms Ritz Yeung) and Messrs Orrick (specially Mr Samuel Ngo), former solicitors for the defendants who have spent great efforts in preparation of affirmations in the receivership proceedings and some of the witness statements in this case.
| (Queeny Au-Yeung)
Judge of the Court of First Instance
|
| High Court |
Mr Ronny Tong, SC leading Mr Anson Wong, Mr Lawrence Cheung and Ms Sabrina Ho, instructed by LCP, for the plaintiff (by original action) and defendants (by counterclaim)
Mr Warren Chan, SC leading Mr MC Law, instructed by Dexter Lam & Co, for the defendants (by original action) and plaintiff (by counterclaim)
[1] [C3/602 2nd affirmation §8]
(9) [1982] Ch 204
(10) [1925] AC 619
[2] “自籌資金，自立項目在上海設立獨立的上海浦饒物產工貿公司”，“屬全民所有制性質，實行獨立核算，自負盈虧”，“在滬的所有資產和分支機構及再生公司的一切情況及債權債務均與[上饒糧油]無關”
[3] See further under Section J6 on this bank account.
[4] See further under Section J6.
[5] In 1995, the capital of Purao was reduced to RMB 2m. Business shrank. In 1998, Shangrao Cereal was terminated. In 1999, tax liabilities were cleared. In 2003, DY used 華林鋼材公司to terminate Purao, using his father in law as a guarantor.
[6] He said at the trial that the date of the burglary was not 9/12/2010 as stated in §7.3 of his 2nd supplemental witness statement.
[7] [D2/tab71/201, 227]
[8] [B2/tab44/617] These were the properties listed in §3.1.1 and the first property in §3.1.2 of the witness statement of DW.
[9] [B2/tab44/618] These were properties set out in §§3.1.3 and 3.1.5 of the witness statement of DW.
[10] Such policy was later codified in Art.70 of the Company Law of the Mainland.
[11] ie, his personal savings, borrowings, revenue from the railway redevelopment project and profits of 3 Shangrao companies and Shanghai Puding.
Please refer to CACV190/2014 for the relevant appeal(s) to the Court of Appeal.