CHINA AGRI-PRODUCTS EXCHANGE LTD v. WANG XIU QUN AND ANOTHER

HCA 1807/2011

[2022] HKCFI 1533

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1807 OF 2011

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BETWEEN

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DECISION ON INTEREST

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1.  On 18 January 2021, I handed down the judgment of the trial of this action (“the Judgment”). This is the Decision on Interest in respect of the awards made in the Judgment.

2.  The background of this action and the reasons for my judgment have been fully set out in the Judgment itself and I do not want to repeat the same here. In this Decision on Interest, I will adopt the same abbreviations that I used in the Judgment.

3.  After trial, I granted judgment in favour of the Plaintiff against the Defendants in the sums of RMB 510 million for the Overpayment Claim, HK$54,211,000 for the Profit Guarantee Claim and HK$1 for the Land Indemnity Claim.

4.  In the Judgment, I granted liberty to the parties to come back to the court to argue on the question of interest.

5.  The parties had engaged in correspondence but failed to reach an agreement. The difference between them boils down to the following issues:

(i) When should the pre-judgment interest payable by the Defendants start to run in respect of the Overpayment Claim, the Profit Guarantee Claim and the Land Indemnity Claim (“Issue 1”);

(ii) Whether there should be a 50% discount to the pre-judgment interest payable by the Defendants by reason of the alleged delay on the part of the Plaintiff in bringing the matter to trial (“Issue 2”); and

(iii) Whether the interest payable under the Instruments is simple interest or compound interest (“Issue 3”).

Issues 1 & 2: Starting time for the computation of the pre-judgment interest and the question of delay

6.  Issues 1 and 2 are related and so I will deal with them together.

7.  S 48(1)(b) of the High Court Ordinance (Cap 4) (“HCO”) provides that the court may award simple interest on any claims for damages for all or part of the period between the date when the cause of action arose and the date of judgment.

8.  An award of interest is to compensate the claimant for being deprived of the money during the relevant period. In commercial cases, such compensation is reflected in interest at a rate at which a person in similar position as the claimant generally would have had to pay to borrow money.[1] For such cases, prime plus 1% should be the starting point and interest would be awarded at such rate unless there is evidence to persuade the court that time has come to move away from such rate.[2]

9.  Delay may be a factor taken into account by the court in considering the question of interest. In Remedy Asia Ltd v Patrick Tong Hing Chi[3], Coleman J summarised a number of principles for the exercise of jurisdiction under s 48 of the HCO, in particular:

(i) The court may take into account delay on the part of the claimant and reduce the award of interest accordingly. The rationale is that it would be wrong in principle that interest should accrue during a time when the claimant has been guilty of unreasonable delay, thereby keeping them out of the sum awarded by their own fault.[4]

(ii) A broad-brush approach to questions of delay is appropriate. That requires being realistic, and considering the character of the delay making due allowance for the circumstances. Essentially, the court is concerned to see whether the claimant has neglected or declined to pursue or prosecute their claim for a significant period. If so, the logic of disallowing or reducing an award of interest for that period comes into play.[5]

10.  In commercial disputes, the following principles adopted by DHCJ Eugene Fung SC in Wan Chi Hing v Lau Wai Fan are also relevant:[6]

(i) Where a claimant has delayed unreasonably in commencing or prosecuting proceedings, the court may exercise its discretion either to disallow interest for a period or to reduce the rate of interest.

(ii) In exercising that discretion the court must take a realistic view of delay. In the case of business disputes, litigation is for all parties an unwelcome distraction from their proper business. It is not reasonable to expect any party to take every litigious step at the first possible moment, or to concentrate on litigation to the exclusion of all else. Delay should only be characterised as unreasonable for such purposes when, after making due allowance for the circumstances, it can be seen that the claimant has neglected or declined to pursue their claim for a significant period.

(iii) When determining what disallowance or reduction of interest should be made to mark a period of unreasonable delay, the court should bear in mind that the defendant has had the use of the money during that period of delay (though it may not always excuse the fault of the claimant^[7]).

11.  In the present case, the Plaintiff’s position is that pre-judgment interest should run from the date of the accrual of the cause of action of the respective claims:

(i) The cause of action for the Overpayment Claim arose on 5 December 2007 when the Plaintiff completed the acquisition of 90% interest in BSZ.[8]

(ii) The cause of action for the Profit Guarantee Claim arose on 1 January 2008 when the Profit Guarantee Period came to an end.[9]

(iii) The cause of action for the Land Indemnity Claim arose on 5 December 2007 when the transaction was completed as the 1^st Defendant was in breach of her “best endeavours” obligations under Clause 8.3.[10]

12.  On the other hand, the Defendants’ position is that pre-judgment interest should only run from the date these claims were “properly introduced and particularised” by the Plaintiff, namely either the date of the writ of summons (i.e. 24 October 2011) or alternatively the date of the Re-Re-Amended Statement of Claim (“SOC”) (i.e. 7 May 2015). The Defendants also allege that there was “substantial unjustifiable delay” on the Plaintiff’s part.

13.  I agree with Mr Ho SC, counsel for the Plaintiff, that there was no unreasonable delay on the part of the Plaintiff in prosecuting its claim before the date of the writ. In anything, the lapse of time was caused by the Defendants’ own wrongful conduct.

14.  It cannot be disputed that the Plaintiff encountered considerable difficulties in obtaining control of BSZ and access to BSZ’s financial information and documents from completion on 5 December 2007 to November 2010. In the Judgment, I found that:

(i) the Plaintiff “encountered tremendous difficulties and resistance in seeking to gain control over the operation and management of BSZ and access to BSZ’s financial information and documents”[11];

(ii) the Defendants “were still in control of BSZ until at least November 2010”[12] and the Plaintiff was “shut out from its use of the Market after completion and only managed to take physical control of the Market in November 2010”[13].

15.  With these findings that the Defendants were responsible for the delay in the handover of BSZ to the Plaintiff, it would be quite impossible for the Defendants to argue that the Plaintiff was responsible for any delay in bringing the present proceedings against them. After all, the Plaintiff had had more urgent matter to attend to, i.e. in trying to gain control of BSZ, at least before November 2010 and it should not be criticized for not immediately taking legal actions against the Defendants.

16.  I also agree with Mr Ho that the less than 1-year gap between November 2010 and 24 October 2011 (i.e. the date of the writ) should be viewed realistically. Time must be allowed for the Plaintiff to conduct proper investigation and analysis of the Electronics Ledgers of BSZ after the handover. The voluminous documents in this case[14] and the “great difficulty in quantifying the extent of inflation” of the Management Accounts[15] must also be taken into account in assessing the time taken by the Plaintiff to commence this action. Further, the Plaintiff is a commercial party (a listed company that needs to account to public shareholders for the use of its coffers) and it would be unreasonable to expect it to resort to litigation at the first possible moment in November 2010.

17.  The Defendants seek to rely on the dicta made by the courts in Cyberworks Audio Video Technology Ltd v Mei Ah (HK) Co Ltd^[16] and 廣東省廣業環保集團有限公司 v Po On Construction Engineering Ltd^[17] to argue that there should be no award for pre-judgment interest for the period prior to the issue of the writ. For the present purposes, it suffices for me to say that such dicta would have to be understood in the context of the facts of those cases. In light of the findings of this court as mentioned in §§13 and 14 above, there is simply no justification to deny the Plaintiff’s request for pre-judgment interest for the period from the dates of accrual of the respective causes of action of the claims to the date of issue of the writ.

18.  On Issue 2, the Defendants contend that there should be at least 50% discount on the interest payable by the Defendants to the Plaintiff. The Defendants rely on a number of matters relating to the Plaintiff’s alleged “delay in prosecuting the present action”. Issue 2 is therefore directed at the period of time from commencement of the action on 24 October 2011 to trial starting on 19 February 2019.

19.  There is again no substance in the Defendants’ criticisms.

20.  The Defendants complain that it took the Plaintiff some 8.5 years to bring the present action to trial. However, both parties may be responsible for the time taken for the legal proceedings, and so the Defendants would have to identify the periods under which they complain that the Plaintiff had been dragging on its feet or had been acting unreasonably which prolonged the litigation. Sweeping allegation without specifics like the one made by the Defendant is not enough.

21.  It is quite clear that in the early stage of the proceedings, the Plaintiff had to make considerable effort to effect service of the writ outside jurisdiction. As expected, there were challenges on service and jurisdiction grounds, and the matters took some time to resolve. By reason of these challenges, the Defence was only filed in January 2014 after the making of an unless order. After that, the Plaintiff applied to strike out certain parts of the Defence. After the hearing and the appeal, one paragraph of the Defence was eventually struck out. With such result, there is at least some justification for the Plaintiff’s striking out application. Unless there is anything to suggest that the Plaintiff had been dragging on its feet or had been acting unreasonably in this period of time, which there is none, I do not accept that the Plaintiff should be held accountable for such delay.

22.  Furthermore, the progress of this case has to be judged realistically given: (i) the complexity of this case; (ii) the need to adduce expert evidence from multiple disciplines; (iii) the existence of parallel Mainland proceedings; and (iv) the Defendants’ own conduct of the litigation. In fact, the Plaintiff was placed in a very difficult position in investigating and pursuing the claim in view of the hostile and uncooperative attitude of the Defendants and their reluctance in handing over the control and financial documents of BSZ to the Plaintiff.

23.  As I understand it, the main complaint of the Defendants is that the Plaintiff had made a few attempts to amend the SOC: the first amendment on 17 July 2012, the second amendment on 11 October 2012, the third amendment on 7 May 2015, the fourth amendment on 23 November 2018 (with the addition of the Dishonest Assistance Claim) and the fifth amendment with leave granted on the second day of the trial.

24.  According to Mr Lin, counsel for the Defendants, the Plaintiff’s Overpayment Claim, Profit Guarantee Claim and Land Indemnity Claim did not begin to take shape or were not properly formulated in the pleadings until 7 May 2015 when leave to amend its Re-Amended SOC was granted. By such amendment, the length of the SOC was doubled from 28 pages containing 73 paragraphs to 69 pages containing 86 paragraphs. Mr Lin submits that interest should only run from 7 May 2015 when the 6 heads of claim were formulated for the first time. As the Plaintiff was responsible for the proper formulation of its claim, the Defendants should not be asked to pay for the interest resulting from the delay in such formulation.

25.  Despite the able submissions of Mr Lin, I do not agree with his argument. The bases of the Overpayment Claim, the Profit Guarantee Claim and the Land Indemnity Claim were already pleaded in the original SOC on 24 October 2011.[18] Hence, these three claims were not new claims in 2015 but have always been part of the Plaintiff’s pleaded case right from the beginning of this action. Furthermore, as the determination of all these claims requires expert evidence from multiple disciplines, I agree with Mr Ho that it is completely unrealistic to expect the Plaintiff to be in a position to plead all the particulars and the exact figures of the respective claims at the earlier rounds of pleadings.

26.  There is also no justification to deny interest to the Plaintiff by reason of the subsequent amendments:

(i) The amendment in November 2018 for the addition of the Dishonest Assistance Claim had little impact on the progress of the case. In any event, any prejudice suffered by the Defendants had been compensated by the adverse costs order made against the Plaintiff on an indemnity basis.

(ii) The amendment made on the second day of the trial had no real impact on the progress of the case.

27.  I also agree with Mr Ho that the time span of this litigation has to be considered against the overall complexity of the case and the vast amount of factual and expert evidence adduced at the trial, which are to a great extent reflected in the length of the trial (lasted for 23 days) and the length of the Judgment (consisted of 212 pages). In a case of this magnitude, the length of time taken from the commencement of the action to the conclusion of the trial cannot be said to be extraordinary, and the Plaintiff should not be held accountable or penalised for the same.

28.  Mr Lin also submits that the accrual of the cause of action for the Land Indemnity Claim could not have arisen as early as 5 December 2007 (i.e. the time when the Plaintiff completed the acquisition of the 90% interest in BSZ) when the 1^st Defendant’s “best endeavours” obligations under Clause 8.3 was to be discharged only after completion.

29.  As I had only awarded nominal damages to the Plaintiff for the Land Indemnity Claim, the dispute between the parties in respect of the interest for the award under such claim is academic. In any event, since it is very difficult to assess as to when the Defendants should have done certain things to discharge the “best endeavours” obligation or when the Plaintiff had started to suffer actual damages, I agree that, in principle, the interest for the award of such claim should only start to run from the date of the writ.

30.  For the above reasons, I hold that:

(i) the interest for the award under the Overpayment Claim should start to run from 5 December 2007 to the date of judgment at the rate of prime plus 1%;

(ii) the interest for the award under the Profit Guarantee Claim should start to run from 1 January 2008 to the date of judgment at the rate of prime plus 1%; and

(iii) the interest for the award of the Land Indemnity Claim should start to run from 24 October 2011 to the date of judgment at the rate of prime plus 1%.

Issue 3: Interest payable under the Instruments

31.  As pointed out in §566 of the Judgment, the Plaintiff still owes the amounts due under the two respective Instruments plus any interest stipulated therein to the Defendants. There is now dispute between the parties as to whether such interest should be simple interest or compound interest.

32.  Clause 2 of the Instruments provides an undertaking to pay “適用于每天結餘的年利率為5%的利息(利息以一年365天為基準)”.

33.  According to the Defendants, the definition of compound interest as commonly understood is that interest is to be calculated on the principal amount and also on the accumulated interest of previous periods (be it on daily, monthly or quarterly intervals), thus being regarded as “interest on interest already accrued”, whereas the definition of simple interest is that interest is merely to be calculated upon the principal (i.e. the original amount of the loan). It then follows from the words “每天結餘” in Clause 2 that interest is to be accrued at an annual interest rate of 5% compounded on a daily interval.

34.  In support of such contention, Mr Lin relies on:

(i) the dicta of Mr Recorder Edward Chan SC in Hang Seng Bank Ltd v Highfit Development Co Ltd[19], which suggests that a similar worded clause should carry the meaning of the interest to be calculated on compound basis; and

(ii) the figures in the annual and interim reports of the Plaintiff, in which the sums for the amounts due under the Instruments were not calculated by way of simple interest.

35.  In case of any ambiguity in the meaning of Clause 2, Mr Lin also rely on the contra proferentem rule to argue that the clause should be construed against the interest of the Plaintiff as it was party who drafted the terms of the Instruments.

36.  Again I have to reject Mr Lin’s argument on such issue.

37.  An express contract for payment of interest will normally specify the interest rate, and it may further specify the method of computing interest and whether interest is to be compounded. I agree with Mr Ho that computing of interest must be distinguished from compounding. The latter is the capitalisation of interest so that interest itself yields interest.[20]

38.  As pointed out by Mr Ho, the courts have emphasised that a construction for charging compound interest should be supported by the wording of the relevant clause.[21] The party claiming for compound interest has the burden to prove the contractual terms for charging compound interest and the rate thereof.[22] In Brice v Chambers[23], it was held that the fact that interest was stated in the relevant clause to accrue from day to day is “neutral”. The court also held that if it were the intention of the parties that the interest accruing daily be capitalised, it would be surprising that there was no reference to compound interest or capitalisation of interest in the relevant clause.

39.  In the present context, had it been the intention of the parties that the interest under the Instruments is to be compounded daily, they could have easily provided for it by stipulating, for example, the payment of “複利息” or “複利率” (i.e. the Chinese term for compound interest). Yet there are no such words in Clause 2.

40.  I therefore agree with Mr Ho that the combined effect of the words “每天結餘” and the subsequent phrase “利息以一年365天為基準” is that the annual interest rate of 5% would be divided by 365 to produce a daily interest factor, which can then be multiplied by the number of days for which the loan is outstanding.[24] The words “每天結餘” themselves are neutral as to whether the interest charged is simple or compounded in nature. They do not, without more, support a construction that interest is to be compounded or capitalised daily.

41.  The decision in Hang Seng Bank Ltd v Highfit Development Co Ltd[25] is of limited assistance in this case. Quite apart from the fact that there seemed to be no arguments on the proper construction of the interest-charging clause in that case, the undertaking itself provided that “interest was to be debited to the account on a monthly basis”. That may provide some justification for the capitalisation of interest at a regular interval. In contrast, the language in Clause 2 of the Instruments is quite different as there is nothing in support of the debiting or capitalisation of the daily interest in the clause itself.

42.  I also agree with Mr Ho that the calculations in the Plaintiff’s interim and annual reports in 2018 to 2020 do not assist the Defendants’ case either. First, post-agreement conduct and statements of the parties are not generally relevant in construing the terms of an agreement made earlier.[26] Second, even if the calculations in the Plaintiff’s interim and annual reports can be used as an aid in the construction exercise, the figures extracted from these reports do not tally with either the calculation of simple interest or compound interest. If anything, the amounts adopted in these reports are substantially less than the amounts derived from the Defendants’ calculation based on daily compounded interest. I therefore agree with Mr Ho that, in the absence of any opportunity for the Plaintiff to file evidence to explain the basis of the accounting approach adopted in the various reports, the Defendants are not entitled to rely on the figures in such reports to support their claim for compound interest.

43.  Finally, there is no room for the application of the contra proferentem rule in the present case:

(i) As analysed above, the meaning of Clause 2 is clear. Since the rule is only confined to cases of genuine ambiguity[27], there is no justification to resort to such rule in the present construction exercise.

(ii) The modern view is to recognise that commercial parties are entitled to make their own bargains and that the task of the court is to interpret fairly the words they have used.[28] In relation to commercial contracts negotiated between parties of equal bargaining power, the contra proferentem rule has a very limited role.[29] The evidence of this case shows that the SPAs were commercial contracts negotiated between parties of equal bargaining power, and so the rule has no role to play in resolving the issue of construction.

44.  For these reasons, the interest payable under the Instruments is only simple interest.

Conclusions

45.  I will therefore leave it to the parties to work out the exact quantum of the interest and the set-off in accordance with the rulings in this Decision on Interest. I imagine this only involves arithmetic calculation and I do not anticipate that the parties will have to trouble the court again on the question of interest.

46.  Since the Plaintiff can be regarded as the successful party in these arguments on costs, I make a costs order nisi that the costs associated with the argument on interest be to the Plaintiff with certificate for 2 counsel which shall be made absolute 14 days after the date of the handing down of this Decision on Interest. For only argument on interest, I have reservation as to whether the Plaintiff need to engage senior counsel to deal with the matter. But since it is a taxation issue, I leave it to the taxing master to decide.

Mr Ambrose Ho, SC, Ms Bonnie YK Cheng and Mr Jeff Chan, instructed by DLA Piper Hong Kong, for the Plaintiff

Mr Kenny C P Lin and Ms Sabrina Leung, instructed by David Lo & Partners, for the 1^st and 2^nd Defendants

HCA 1807/2011

[2021] HKCFI 137

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1807 OF 2011

____________________

____________________

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JUDGMENT

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1.  This action was commenced by the Plaintiff, China Agri-Products Exchange Ltd, against the 1^st Defendant, Madam Wang Xiu Qun (“Wang”) and the 2^nd Defendant, Wuhan Tianjiu Industrial Trade Company Limited (“Tianjiu”) for breaches of two sale and purchase agreements by which they sold their shares in one Wuhan Baishazhou Agricultural By-Product Grand Market Co Ltd (“BSZ”) to the Plaintiff.

2.  As I see it, the final submissions of the Plaintiff provide a good structure for me to approach the numerous issues raised in this case.  Hence, I will adopt a similar framework in this Judgment.

PART A: BACKGROUND

A.1   The Plaintiff’s acquisition of BSZ

3.  In December 2003, Wang and her husband, Mr Zhou Jiu Ming (“Zhou”), caused BSZ to be incorporated in the Mainland.  Zhou and Wang have at all times been in control of Tianjiu.

4.  BSZ operated a market in Wuhan selling a variety of food and other products (the “Market”).  Despite several changes in its shareholding, BSZ had remained in the control of Zhou and Wang.  Zhou was a director of BSZ until 12 August 2010.

5.  In May 2007, the parties entered into the following agreements by which the Plaintiff, which was a listed company in Hong Kong, was to acquire a 90% interest in BSZ from Wang and Tianjiu^[1]:

(i)   a sale and purchase agreement dated 2 May 2007 (the “1^st SPA”) by which Wang agreed to sell her 70% interest in BSZ to the Plaintiff for a consideration of HK$900,000,000 to be paid by cash, a “promissory note” and convertible notes issued by the Plaintiff; and

(ii)  a sale and purchase agreement dated 2 May 2007 (the “2^nd SPA”), as amended by a supplemental agreement dated 10 May 2007, by which Tianjiu agreed to sell its 20% interest in BSZ to the Plaintiff for a consideration of HK$256,000,000 to be paid by a “promissory note”.

6.  The execution of the 1^st SPA and 2^nd SPA (collectively the “SPAs”) took place in Hong Kong.  The 1^st SPA was signed by Mr Fu Jie Pin (“Fu”), then an executive director and chief executive officer of the Plaintiff, and Wang.  The 2^nd SPA was signed by Fu and one Mr Li Jun (“Li Jun”) who, according to the payroll list of BSZ in June 2007, was a driver of “Director Zhou”, i.e. Zhou.  Both SPAs were witnessed by Mr Yang Zong Lin (“Yang”), an executive director of the Plaintiff since 29 April 2007.

7.  For the purpose of the present action, the material terms of the SPAs relate to the following matters:

(i)  conditions precedent to the completion of the acquisition;

(ii)  warranties given by the Defendants to the Plaintiff regarding, inter alia, the management accounts of BSZ which were included in Annex 2 to each of the SPAs (the “Management Accounts”), which cover the financial years ended on 31 December 2004, 31 December 2005 and 31 December 2006 and the first three months of 2007 ended on 31 March 2007;

(iii) Wang’s guarantee that the audited net profit of BSZ for the year ending 31 December 2007 (the “Profit Guarantee Period”) would not be less than HK$150,000,000 (the “Profit Guarantee”); and

(iv) the Defendants’ warranties and obligations regarding the use of the land in which the Market is situated.

8.  In an announcement (the “10 May Announcement”) issued by the Plaintiff’s board of directors (the “Board”), which at the time included Fu and Yang, on 10 May 2007:

(i)  the material terms of the SPAs were set out;

(ii)  it was stated that the consideration under the SPAs was negotiated on an arm’s length basis and was agreed between the parties on normal commercial terms by reference to, among other things, the recent operating and financial performance of BSZ and the potential growth in the profitability of BSZ in the near future;

(iii) it was stated that the Plaintiff’s directors (the “Directors”) were of the view that the consideration and the terms of the acquisition were fair and reasonable, they were optimistic about the future development of BSZ, and the acquisition was in the interest of the Plaintiff and its shareholders as a whole; and

(iv) the unaudited net asset value of BSZ as at 31 December 2006 according to the management accounts of BSZ, and the unaudited results of BSZ for the three financial years ended 31 December 2006 were set out.

9.  On the first page of the 10 May Announcement and in bold it was stated that:

“Shareholders shall note that in arriving at the consideration for the Proposed Acquisition, no valuation had been performed on the properties owned by or the business of [BSZ]. The Directors has only made reference to an acquisition of a similar business in another province of the [Mainland] by a listed company in Hong Kong”.

10.  Later, in a circular issued by the Board (the “8 June Circular”), which again included Fu and Yang, on 8 June 2007, the Plaintiff’s shareholders were further presented with an accountant’s report on BSZ and an analysis of BSZ’s financial situation for the years ended 31 December 2004, 2005 and 2006, both of which were, according to the Plaintiff, prepared on the basis of the Management Accounts annexed to the SPAs.

11.  The SPAs and the transactions contemplated thereunder were approved by the Plaintiff’s shareholders at a special general meeting on 27 June 2007 (the “SGM”).

12.  It is common ground that the Plaintiff by that time did not have the resources to finance the acquisition.  Hence, the acquisition was conditional upon, inter alia, the Plaintiff raising HK$600 million to finance the transaction and the Mainland government granting approval for the shares transfer.  The financing was raised with Cazenove Asia Limited (“Cazenove”) which was an investment bank acting as the placing agent to place 300 million new shares at $2 per share.  The placing exercise was completed in around July 2007 and the proceeds were held in escrow pending completion of the transaction.

13.  It was stated in the SPAs that the shares transfer had to be approved by the relevant Mainland authority.  Pursuant to the SPAs, the approval of the Ministry of Commerce of the Mainland for the transfer of shares in BSZ from the Defendants to the Plaintiff (the “MOFCOM Approval”) was granted on 26 November 2007.  A Certificate of Approval (批准證書) for Establishment of Enterprises with Investment of Taiwan, Hong Kong, Macao and Overseas Chinese in the Mainland (the “Certificate of Approval”) was granted to the Plaintiff on 27 November 2007.

14.  The Board also made an announcement on 27 November 2007 (the “27 November Announcement”) announcing that the MOFCOM Approval had been obtained, all the conditions precedent had been fulfilled and the Plaintiff would proceed to completion of the transaction.  Another announcement was issued on 28 November 2007 (the “28 November Announcement”) holding back the earlier announcement of the satisfaction of all conditions precedent to the SPAs.  On 3 December 2007, the Board made a third announcement to extend the long stop date for completion to 5 December 2007 by reason that “[the] approval of the [MOFCOM] for the Proposed Acquisition has been obtained and the Board requires further time to discuss with its [Mainland] legal advisors as to whether all conditions precedent to [the SPAs] have been fulfilled.  The [Plaintiff] will proceed to complete those agreements only if all conditions have been fulfilled.”

15.  Following a Board meeting held on 5 December 2007 where the contents of a legal opinion (the “Mainland Legal Opinion”) from a firm of Mainland lawyers appointed by the Plaintiff (the “Mainland Legal Advisers”) were discussed amongst the Directors present, the Plaintiff made the announcement on 5 December 2007 (the “5 December Announcement”) that all conditions precedent had been fulfilled and completion of the SPAs had taken place.

16.  In fact, completion of the Plaintiff’s acquisition of the 90% interest in BSZ from the Defendants took place on the same day.

17.  Pursuant to the SPAs, the Plaintiff paid the consideration for the shares transfer in cash in the total amount of HK$270,883,158 on 10 May, 7 and 26 December 2007 respectively.

18.  The Plaintiff also issued convertible notes to Wang in the amount of HK$360,000,000 on 5 December 2007. Wang converted all the convertible notes into 180,000,000 ordinary shares of the Plaintiff on 8 January 2008, and became the Plaintiff’s second largest shareholder between 8 January 2008 and 21 April 2010.

19.  Further, the Plaintiff executed the two “promissory notes” (承付票據) (the “Instruments”) in the favour of the Defendants on 5 December 2007, including the “promissory note” issued in favour of Wang in the sum of HK$120,000,000 (“Wang’s Instrument”) and another “promissory note” issued in favour of Tianjiu in the sum of HK$256,000,000, which had been booked in the Plaintiff’s financial statements. 

20.  An amount of HK$150,000,000 was paid to an escrow agent on escrow as security of the Profit Guarantee provided by Wang under the 1^st SPA.  In the audited report of BSZ dated 28 April 2008 prepared by Deloitte Touche Tohmatsu (the “Deloitte Report”), the former auditors of the Plaintiff, the audited net profit of BSZ for the Profit Guarantee Period was stated to be HK$94,162,000.  On 3 June 2008, the Plaintiff refunded HK$74,967,575 to Zhou from the escrow amount after the deduction of net profit shortfall pursuant to the Deloitte Report.  However, it is the Plaintiff’s case that the figure was arrived at on the basis of the Management Accounts, which contain sets of income that are fictitious.

21.  At the time of the events set out above, the chairman and largest shareholder of the Plaintiff was Mr Chan Yeung Nam (“Chan YN”), who held his shares in the Plaintiff through a company called Velocity International Limited.  In October 2008, Chan YN sold his 27.14% interest in the Plaintiff to a subsidiary of a Hong Kong listed company named Leroi Holdings Limited, which was later renamed PNG Resources Holdings Limited (“PNG”).  This resulted in subsequent changes in the Board and the Plaintiff’s management.

22.  Fu and Yang ceased to be directors of the Plaintiff in February and June 2009 respectively, although Yang remained a director of BSZ from December 2007 until August 2010.  New directors, including Mr Chan Chun Hong Thomas (“Thomas Chan”) who is the current chairman of the Plaintiff, and independent non-executive directors (“INEDs”) were appointed to the Board on 10 February 2009 in the place of the old Board.

A.2  Difficulty in gaining control of BSZ and the Market

23.  It is the Plaintiff’s case that the new Board encountered tremendous difficulties and resistance in seeking to gain control over the operation and management of BSZ and access to BSZ’s financial information and documents, which is not seriously disputed by the Defendants. In fact, such resistance on the part of Zhou and the management of BSZ has been supported by various contemporaneous records.

24.  On 10 August 2009, the Plaintiff had to issue an announcement to inform shareholders that, despite repeated requests, the Plaintiff had not received BSZ’s financial information for the preparation of interim results for the six months ending 30 June 2009.

25.  The Plaintiff then sought assistance of the Mainland authorities including the Police.  In August 2010, the Plaintiff managed to replace the directors and legal representatives of BSZ.  In September 2010, the relevant authorities issued BSZ with new company chops and business registration certificates.

26.  In August or September 2010, the Mainland Police inspected the office premises of BSZ and seized various accounts, books and records and other documents. Among them was a document entitled “detailed schedule of fictitious construction works” (虛擬工程明細)(the “Schedule of Fictitious Construction Works”) seized from the office of one Mr Zhou Guobin (“Zhou GB”), then BSZ’s vice president, and imprinted with his fingerprint.  As explained below, it subsequently came to the Plaintiff’s knowledge that the Management Accounts of BSZ, which were annexed to the SPAs, had been falsely and substantially inflated by reason of, inter alia, the incorporation of inflated and fictitious construction costs to third parties.

27.  The Plaintiff claims that it also discovered in around August 2010 that, despite Wang’s obligation under the 1^st SPA to assist the Plaintiff and BSZ and to acquire the necessary Land Use Certificate (土地使用權證) and Property Ownership Certificate (房產證) for 318 mu of land neighbouring the registered address of BSZ, such certificates were in fact absent.  This means that, of the 721 mu of land which is the total area of the Market, only 403 mu of land had the requisite certificates.

28.  It is also the Plaintiff’s case that during its quest to gain control of BSZ, various persons representing Zhou, including Zhou GB and Yang, made it clear to members of the Plaintiff’s new Board that Zhou would not relinquish his control over BSZ.  The Plaintiff was also told that Zhou, with his powers and connections in Wuhan, would resort to extreme measures to maintain his control over BSZ and the Market.  The Plaintiff also claims that members of the new Board (including Thomas Chan) became the subjects of threats and blackmailing, and four employees of the Plaintiff were physically assaulted at the Market on 20 October 2010.

29.  According to the Plaintiff, on 1 November 2010, its representatives, along with security guards, government representatives and the Police went to the Market to negotiate and request for the handover of BSZ.  The Defendants’ representatives asked for 20 days for a “proper handover”.  It transpired that nearly all fixtures and fittings in the Market were destroyed and valuables including computers were removed before the Plaintiff finally managed to gain physical control over the Market on 21 November 2010, with the assistance of the Mainland authorities and the Police.

30.  In December 2011, the Mainland Police commenced criminal proceedings (the “Mainland Criminal Proceedings”) against Zhou GB and other members of BSZ’s former management for misappropriation of the assets of BSZ.  These individuals were found guilty by the Wuhan Intermediate People’s Court of Hubei Province (the “Wuhan Court”) in October 2013.  The Wuhan Court identified fictional transactions relating to BSZ which were calculated to, and did in fact significantly, inflate its income.  It is the Plaintiff’s case that, from the evidence accepted by the Wuhan Court, it is clear that in many instances the orchestration of an artificial flow of funds was conducted by Zhou to and from companies he controlled.

A.3    The Plaintiff’s investigations and follow-up actions

31.  After taking over control of BSZ and reviewing its accounts, books and records, the Plaintiff alleged that many financial documents were missing.  Upon gaining control, the Plaintiff’s current management was able to obtain the electronic ledgers of BSZ (the “Electronic Ledgers”) and compile an analysis of assets register (the “Analysis of Assets Register”).  The Electronic Ledgers are records of the transactions entered into by BSZ which are stored in electronic form; whereas the Analysis of Assets Register is a database compiled by the current management of BSZ based on raw data in the assets register (which in turn is an accounting record of BSZ’s assets) and the Electronic Ledgers.  In the Analysis of Assets Register, BSZ’s assets are re-categorised by reference to their nature and substance.  These documents were later supplied to the Plaintiff’s experts on quantity surveying and forensic accounting for investigation.

32.  According to the Plaintiff, it was found after the investigation that both the assets and income of BSZ as stated in the Management Accounts had been falsely inflated by the incorporation of inflated or fictitious construction costs and the inclusion of income which was not genuine in the Management Accounts. The extent of falsification was substantial.  The Plaintiff claims that it had paid considerably more for the 90% interest in BSZ than it was actually worth.

33.  Furthermore, the Plaintiff claims that BSZ did not have the necessary certificates for 318 mu of land.  In April 2014, BSZ managed to obtain the Land Use Certificate for 67 mu of land in a public auction.  However, the Plaintiff still cannot obtain the certificates for the remaining 251 mu of land.

A.4    Proceedings in Hong Kong

34.  The Plaintiff therefore commenced the present action in 2011 against the Defendants making the following 6 claims:

(i)  For the overpayment claim (the “Overpayment Claim”), the Plaintiff claims for loss and damages suffered in that the value of BSZ’s shares was substantially less than what the Defendants warranted because of the inflation of assets and income in the Management Accounts.  The amount of the Plaintiff’s Overpayment Claim is RMB 510,000,000.

(ii)  For the claim of fraudulent misrepresentation and/or under the Misrepresentation Ordinance (Cap. 284) (the “Misrepresentation Claim”) which is an alternative claim to the Overpayment Claim, the Plaintiff claims for the same RMB 510,000,00 or such sum to be assessed for being fraudulently induced to purchase the shares of BSZ at a consideration of HK$1,156,000,000 in total.

(iii)  For the profit guarantee claim (the “Profit Guarantee Claim”), the Plaintiff seeks a declaration that Wang’s Instrument in the sum of HK$120,000,000 is to be set off by the amount of HK$54,211,000 being the net profit shortfall.

(iv)  For the claim relating to the Instruments (the “Instruments Claim”), the Plaintiff seeks an order that the Defendants be restrained from enforcing payment under both Instruments for the reasons, inter alia, that: (a) Wang’s Instrument is not a promissory note or a bill of exchange in law; (b) the Defendants are not entitled to enforce the Instruments which were executed by the Plaintiff in consideration for shares in BSZ; and (c) the Defendants are liable to indemnify in cash on demand to the Plaintiff by reason of, inter alia, Clause 6.3 of the SPAs.

(v)  For the dishonest assistance claim (the “Dishonest Assistance Claim”), the Plaintiff claims that:

(a)  on the case of the Defendants[2], Fu and Yang would have been in breach of their fiduciary duties to the Plaintiff, and the Defendants would have dishonestly assisted in the breach of fiduciary duties by Fu and Yang; and

(b) the Defendants are liable to account to the Plaintiff for the same RMB 510,000,000 or such sum to be assessed as constructive trustees on the ground of their dishonest assistance.

(vi)  For the land indemnity claim (the “Land Indemnity Claim”), the Plaintiff claims:

(a) RMB 224,870,000 or RMB 112,550,000 (depending on the valuation date), being the costs of obtaining the Land Use Right Certificates for the 318 mu of land (the “Land Use Certificates Claim”);

(b) RMB 30,650,000, being the penalty costs for failure to obtain the Property Ownership Certificates for buildings illegally constructed in the Market (the “Penalty Costs Claim”); and

(c) RMB 1,200,000, being the costs associated with the demolition of structures built outside the permitted site area (the “Demolition Costs Claim”).

35.  The Plaintiff was granted leave to serve out of jurisdiction the Concurrent Amended Writ of Summons on the Defendants.  After the Plaintiff was able to effect service on Wang on 2 April 2012 following several failed attempts, Wang’s solicitors refused to accept service on Tianjiu’s behalf.  The Plaintiff then applied for leave to serve on Tianjiu by way of substituted service.  Eventually, on 22 June 2012, service was acknowledged on behalf of Tianjiu by those acting on behalf of Wang.

36.  On 3 September 2012, the Defendants took out an application to, inter alia, set aside service on them on forum non-conveniens and other grounds.  The application was dismissed by DHCJ Marlene Ng (as she then was) on 5 November 2013.  As part of the application, the Defendants alleged, for the very first time, that the MOFCOM Approval was invalid and the relevant conditions precedent in the SPAs had not been fulfilled.

37.  In the Defence filed on 13 January 2014, the Defendants contend, inter alia, that:

(i)  Prior to the signing of the SPAs, Fu and a representative of Cazenove considered the draft Management Accounts which contained the figures proposed to be included in the Management Accounts to be annexed to the SPAs. All substantively unfavourable facts or issues regarding BSZ’s financial position or prospects, of which the Defendants were aware, were disclosed to the Plaintiff.

(ii)  Fu and Cazenove proposed and the Defendants agreed that certain figures in the draft Management Accounts should be amended. Such figures included items in the construction costs and income of BSZ.

(iii) On the instructions of Yang, a sale and purchase agreement between the Plaintiff and the Defendants in respect of 90% interest in BSZ was prepared for obtaining the MOFCOM Approval (the “89.8 Million Agreement”).  The 89.8 Million Agreement fixed the price of acquisition at RMB 89,817,930 in cash, which was less than the actual price stated in the SPAs, and included the signatures of Fu and Wang.

(iv) The MOFCOM Approval was granted on the basis of the 89.8 Million Agreement instead of the SPAs. As such, the conditions precedent in Clause 4.1(g) of the 1^st SPA and Clause 4.1(e) of the 2^nd SPA had never been satisfied, and the SPAs terminated or ceased to have any legal effect in accordance with Clause 4.4.  The Plaintiff therefore has no right under the SPAs to claim damages and the transaction under the SPAs should be reversed.

(v)  Regarding the issue about the Land Use Certificate and Property Ownership Certificate of the land, Wang does not claim that she had taken any steps to obtain the necessary certificates for BSZ, but contends that the Plaintiff had not requested her assistance.  She further alleges that the Plaintiff had in fact acquired 243.98 mu of land for use as opposed to just 67 mu.

38.  In the witness statements filed on behalf of the Defendants, it is further alleged that:

(i)  Before the signing of the SPAs, Fu had agreed and requested that the figures in the Management Accounts be amended, exaggerated or otherwise falsified.

(ii)  Fu and Yang knew at all times that the said figures had been so amended, exaggerated or falsified pursuant to the understanding or agreement among Fu, Cazenove, the Defendants, Zhou and Zhou GB, and it was impossible that the Profit Guarantee would be met.

(iii) Fu had requested BSZ to cooperate in creating a revenue of RMB 150 million in 2007, i.e. falsely inflate a revenue of RMB 70 million.  Zhou GB then fabricated some contracts to inflate about RMB 70 to 80 million of contracting income of BSZ from December 2007 to January 2008.

(iv) Fu had assured Zhou and Wang that the Defendants would not in the future question or seek compensation in respect of the amendment, exaggeration or falsification of the Management Accounts.

(v)  Yang had requested BSZ’s employees to forge the 89.8 Million Agreement and the signatures of Fu and Wang thereon.

A.5    Proceedings in the Mainland

39.  Apart from this action in Hong Kong, the parties had been embroiled in various proceedings in the Mainland.

40.  In about January 2011, the Defendants commenced an action in the Mainland against the Plaintiff (the “Mainland Action No 1”) seeking: (i) a declaration that the 89.8 Million Agreement was invalid; and (ii) the reversal of the transfer of shares in BSZ.  Wang testified that it was Zhou who arranged for the Defendants to take out such proceedings.

41.  It is not seriously disputed that the Defendants had not made any complaint about the validity of the transaction before the commencement of the Mainland Action No 1.  To the contrary, they actively performed the SPAs and received substantial benefits therefrom.

42.  Then, in September 2011, the Defendants filed an administrative complaint with the Mainland Ministry of Commerce, commonly known as “MOFCOM”, and asked MOFCOM to revoke the MOFCOM Approval.

43.  In May 2014, the Higher People’s Court of Hubei Province (the “Hubei Court”) dismissed the Defendants’ claim in the Mainland Action No 1.  The Defendants appealed to the Supreme People’s Court.

44.  In December 2014, the Supreme People’s Court ordered that the judgment given by the Hubei Court be revoked, and held that the 89.8 Million Agreement was void.  According to the Judgment of the Supreme People’s Court:

(i)   Wang not only knew about the signing of the 89.8 Million Agreement but she also gave her approval for the making of such agreement; and

(ii)  the Defendants were jointly in charge of the operation and management of BSZ and controlled the appointment of its directors and managers in the period from 2 May 2007 to 10 December 2007 when they remained as shareholders of BSZ.

45.  In January 2015, the Defendants submitted an application to MOFCOM and requested that the MOFCOM Approval be revoked.

46.  In May 2015, the Defendants commenced administrative proceedings against MOFCOM (the “Administrative Proceedings No 1”) and asked for an order that MOFCOM should perform its statutory duty and revoke the MOFCOM Approval.

47.  In May 2015, the Plaintiff commenced legal proceedings against the Defendants in the Hubei Court (the “Mainland Action No 2”) seeking an order that the Defendants should assist BSZ to discharge its contractual duties under the SPAs to make the necessary filing with MOFCOM for their approval of the SPAs.

48.  In respect of the Administrative Proceedings No 1, the Second Intermediate People’s Court of Beijing, in December 2015, ordered MOFCOM to perform its statutory duty and reconsider the application by the Defendants for revocation of the MOFCOM Approval within 30 days.

49.  MOFCOM then conducted a hearing on 15 February 2016 for reconsideration of the MOFCOM Approval. On 19 May 2016, it announced its decision that the validity of the MOFCOM Approval and the Certificate of Approval were maintained and not to be revoked (“MOFCOM Decision”).  MOFCOM took the view that:

(i)   By signing the 89.8 Million Agreement and submitting it to MOFCOM, the parties obtained the MOFCOM Approval illegally contrary to Article 69(2) of the Mainland’s Administrative Approval Law (行政许可法).  All parties involved including the Defendants should bear the legal consequences for their actions in accordance with Article 79 of the Administrative Approval Law.

(ii)  However, revoking the MOFCOM Approval might cause great harm to the public interest given the importance of the Market in supplying agricultural products to its surrounding areas. Further, the transfer of the interest in BSZ had been executed 7 years ago and had remained the status quo ever since.

(iii) Therefore, given the above circumstances and pursuant to Article 69(3) of the Administrative Approval Law, MOFCOM decided that the MOFCOM Approval was not to be revoked.

50.  In August 2016, the Defendants commenced a further set of administrative proceedings in the Beijing court against MOFCOM (the “Administrative Proceedings No 2”) to seek to set aside the MOFCOM Decision.

51.  In March 2017, the Second Intermediate People’s Court of Beijing dismissed the application by the Defendants in the Administrative Proceedings No 2.  The Defendants appealed to the Higher People’s Court of Beijing.

52.  By its Final Judgment (終審判決) dated 20 December 2018 (the “Final Judgment”), the Higher People’s Court of Beijing dismissed the appeal.  It was held in the Final Judgment that:

(i)   The Higher People’s Court of Beijing agreed with MOFCOM’s evaluation that the conditions of BSZ had undergone significant changes over the past 10 years while extensive, complicated and irreversible economic and legal relationships have been established. In the event that the MOFCOM Approval is revoked, such that the shareholding structures of the parties are to be restored to the status prior to the acquisition, significant impacts may result for matters such as validity of such economic and legal relationships and performance of the relevant contracts. This will disturb the stability of transactions and protection of legal rights of innocent third parties which have relied on the MOFCOM Approval over the past 10 years.

(ii)  The Higher People’s Court of Beijing also agreed that if the shareholding structures of the parties are to be restored to the status prior to the acquisition, an agreement shall have to be reached on matters such as the return of payments made for the acquisition and the distribution of the proceeds subsequent to the acquisition.  In view of the conflicting interests between the parties in the present case, the operation of BSZ will become seriously unstable and may even cease entirely or go into liquidation should the parties fail to reach an agreement on the above matters. This will cause material impacts on the stable operation of the Market, which serves an important role in supplying agri-products to cities and provinces of the Mainland, such as Wuhan and the Central Mainland area.

(iii) MOFCOM’s evaluation that revoking the MOFCOM Approval and the Certificate of Approval may cause great harm to the public interest is correct and adequately justified. MOFCOM had followed the correct legal procedure in deciding not to revoke the MOFCOM Approval and the Certificate of Approval.

(iv) The decision of the Second Intermediate People’s Court of Beijing to dismiss the application by Wang and Tianjiu to revoke the MOFCOM Decision is correct and to be upheld.

B    FACTUAL EVIDENCE AT THE TRIAL

53.  From the pleadings, it is clear that one of the main issues in this case is the validity of the SPAs.  The Defendants claim that as the conditions precedent agreed by the parties have not been fulfilled, the SPAs shall cease to have effect and the position of the parties should be restored to that before the making of the SPAs.  Without the SPAs, the court does not need to begin to assess the merits of the other different claims brought by the Plaintiff.

54.  I will therefore address this particular issue first.  But before I do so, I must first deal with the factual evidence in this case.

55.  At the trial, the Plaintiff’s factual witnesses were Thomas Chan, Mr Ng Cheuk Wing Eddie (“Ng”) and Mr Tong Ka Ming Patrick (“Tong”).  On the other hand, the Defendants’ factual witnesses were Wang and Yang.

56.  Shortly before the trial, there was an application by the Defendants for Yang to testify via video link.  I refused the application due to the lack of supporting evidence about his medical condition.  Yang eventually decided to come to Hong Kong to testify in person at the trial.

57.  The Plaintiff also had difficulty in securing the attendance of Mr Sin Ka Man (“Sin”), who was the company secretary of the Plaintiff at the material time, to testify at the trial.  Sin had made a witness statement for the purpose of the trial and he was one of the witnesses in the Plaintiff’s list.  At the time of the trial, Sin was in Sydney in Australia.  For some “family reasons”, he did not fly back to Hong Kong to testify for the Plaintiff.  In view of such new development, the Plaintiff had issued hearsay notice in respect of the contents of his witness statement, which was opposed by the Defendants.  Following the court’s ruling rejecting Yang to testify via video link, Mr Ho, SC, counsel for the Plaintiff, withdrew the hearsay notice in respect of Sin’s witness statement.  In other words, the court would ignore his witness statement for the purpose of the trial.

58.  From the list of witnesses, one can immediately see that a number of key players in the transaction are missing, such as Chan YN, Fu, Zhou and Zhou GB.  I would discuss the implications of the absence of these potential witnesses in the latter part of this Judgment.

B.1    Credibility of the Plaintiff’s factual witnesses

59.  Thomas Chan has been the Plaintiff’s chairman since February 2009.  Since he only joined the Plaintiff after the shares acquisition in 2007, he could not provide the court with any first-hand knowledge about what happened in 2007 about the making of the SPAs. Nevertheless, I find him to be an honest witness.  He was forthcoming in his answers, while fairly acknowledging that he had no personal involvement in the material events.  His evidence is helpful in assisting the court to understand the quantum of the Plaintiff’s claim.

60.  Thomas Chan also gave the court a reliable account of what happened to BSZ after he joined the Plaintiff.  He also provided the court with the reasons as to why Sin and Fu could not come to court to testify.  There is no reason for the court to doubt the credibility of his explanations.

61.  I also reject the submission of Mr Chan, SC, counsel for the Defendants, that, just because of Thomas Chan’s experience as a seasoned accountant well conversed in the takeover field, he was evasive in the discovery exercise and the selection of witnesses to be called or not to be called.  There is simply no basis to support these allegations.

62.  There is one specific attack on the credibility of Thomas Chan’s evidence.  In a hearing apparently held in MOFCOM on 15 February 2016 relating to the present dispute, Thomas Chan seemed to say that he was only aware of the 89.8 Million Agreement when the Defendants sued the Plaintiff in the Mainland, presumably referring to the Mainland Action No 1 in 2011.  Mr Chan submits that this could not be right as the Plaintiff must have been aware of the 89.8 Million in December 2007.

63.  In my judgment, one should not read too much into the record of the hearing.  In any event, Thomas Chan was not involved in the actual management of the Plaintiff before PNG acquired the shares of the Plaintiff, and so he would not be able to tell when the then management of the Plaintiff was first aware of the 89.8 Million Agreement.  Furthermore, it is clear that the Plaintiff was keen to uphold the MOFCOM Approval when the hearing was conducted in February 2016.  As the SPAs had been performed and the consideration for the shares acquisition had been paid, one cannot criticise Thomas Chan for his effort in upholding the MOFCOM Approval.

64.  I then turn to the evidence of Ng.  Ng was since April 2009 the Plaintiff’s senior business development manager and later general manager until he left the Plaintiff’s employment in August 2017.  His answers were consistently clear, direct and forthright.  He was well-versed in the procedures and practicalities of land acquisitions in the Mainland and was directly involved in matters pertaining to the Plaintiff’s Land Indemnity Claim. He is also the person who compiled records of meetings between the parties at the relevant time.  Again, I have no reason to doubt the credibility of Ng’s evidence or the reliability of the contemporaneous records made by him at the material times.

65.  There is an outstanding issue about the admissibility of §§9-17 of Ng’s 2^nd witness statement.  While the remaining of the statement concerns only the competing markets claim which the Plaintiff no longer pursues, §§9-17 refer to entities that feature in the Plaintiff’s case on the inflation of BSZ’s accounts.  Hence, there is no reason for the court to exclude his evidence in this regard.

66.  Tong was the Plaintiff’s INED and member of the Plaintiff’s audit committee from 23 June 2006 to 21 December 2007.  He did not attend the Board meeting on 5 December 2007 (i.e. the completion date of the SPAs), and he resigned about 2 weeks thereafter.  He is and was a professional accountant.  When he was acting as an INED of the Plaintiff, he was also the financial controller of Ocean Grand Chemicals Holdings Limited (海域化工集團有限公司).

67.  After hearing his evidence, it is clear that Tong’s performance as an INED was far from satisfactory.  In respect of the operation of the Plaintiff, he relied very much on the information provided by Sin who was his friend, without taking any active steps in verifying the information concerned.  There is certainly weight in the criticism that “he did nothing more than rubber-stamping the acquisition of [BSZ] by the Plaintiff”. Due to his limited participation, it is only natural that his memory of the events back in 2007 is hazy and limited.

68.  Despite these criticisms, I agree with Mr Ho that this is not a trial of Tong’s performance as an INED.  For our present purpose, I accept that Tong had not made any attempt to exaggerate his evidence or to cover up his poor performance as INED.  He was a candid witness giving straightforward and spontaneous answers.  So far as the events that he could recollect, I accept his evidence as the truth.  Nor was he defensive when criticised by Mr Chan many times in cross-examination.  Further, there is nothing surprising that he did not know about the case until November 2018 when he was asked to be a witness in this case.  Though he might have business association with Thomas Chan and Sin, they might not have discussed everything relating to the Plaintiff, in particular Tong was not keen to know about the operation of the Plaintiff.

B.2    Credibility of the Defendants’ factual witnesses

69.  I then turn to the Defendants’ factual witnesses.

70.  Wang was a poor witness, and her evidence cannot assist the court in understanding the background of the case.  I agree with the observation made by Mr Ho that she was either genuinely clueless about the transaction and the parties’ litigation, or extremely evasive and economical with the truth depending on the issue that was asked of her. 

71.  Firstly, she could not explain why she did not file a witness statement in these proceedings until January 2019, which to me is very surprising.  If she was clearly involved in the transaction, it is hard to explain why she filed her witness statement so late.  I therefore have reason to believe that she was only put forward as a “puppet” with a view to protect those who were mainly responsible for the transaction including her husband.  Secondly, she was very evasive when asked about the role of her husband.  She was “unsure” if Zhou was the person in control of Tianjiu, and asked if she could refrain from replying on whether she represented Zhou in these proceedings.  Thirdly, she purportedly could not remember where the signing of the SPAs took place and who were present.  Fourthly, there were remarkable inconsistencies between her oral and written evidence.  For example, she could not even relate the crux of the alleged promise made by Fu referred to in §7 of her witness statement, i.e. the promise not to sue the Defendants or Zhou for the falsification of the Management Account, which forms an important part of the Defendants’ case.  In the latter part of this Judgment, there are also other instances showing that Wang is not a reliable witness.

72.  Having heard the evidence in this case, I have strong reasons to believe that Zhou was the mastermind and the person behind the scene conducting the shares acquisition transaction.  That is the reason why Wang knew so little about the transaction itself and was evasive when she was asked about the role of Zhou.  That also explains why her testimony is full of inconsistencies.

73.  Yang was even a worse witness.  His answers and attitude show him to be a thoroughly unreliable and untrustworthy witness.  He maintained a completely cavalier attitude about the submission of false documents to MOFCOM, which was done on his instructions.   As I will demonstrate in the latter part of this Judgment, he disowned his testimony to the Mainland court but showed no sign of worry or remorse.  When asked about the consequences of the Defendants’ alleged scheme on the minority shareholders of the Plaintiff, he contended, rather perversely, that such shareholders had benefited from the acquisition of BSZ albeit at a substantial overvalue.

74.  Yang is an important witness for the Defendants’ case who gave evidence about the alleged scheme of reverse takeover and inflation of the Management Accounts.  When I deal with the specific factual findings in the following part of this Judgment, I will explain why I find Yang to be an untruthful and unreliable witness.  I also find him to be a close associate of Zhou taking care of his interests in the whole transaction.

B.3   Unavailability of certain witnesses

75.  It is clear that some of the key persons who may shed light as to what really happened in 2007 are missing in the present case. Both camps ask the court to draw adverse inferences against the other side for the unavailability of certain witnesses.

76.  In Pacific Electric Wire & Cable Company Limited v Texan Management Limited & Ors[3], Kwan JA approved the dicta of Brooke LJ in Wisniewski v Central Manchester Health Authority[4] about the principles governing the drawing of adverse inference where a party fails to call a particular person as witness:

“(1) In certain circumstances a court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action.

(2) If a court is willing to draw such inferences, they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, adduced by the party who might reasonably have been expected to call the witness.

(3) There must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue.

(4) If the reason for the witness’s absence or silence satisfies the court, then no such adverse inference may be drawn. If, on the other hand, there is some credible explanation given, even if it is not wholly satisfactory, the potentially detrimental effect of his/her absence or silence may be reduced or nullified.”

77.  In Li Sau Keung v Maxcredit Engineering Ltd[5], it was held by the Court of Appeal that where a person without explanation fails to call as a witness a person who he may reasonably be expected to call, it is open to the court or the jury as appropriate to infer that that person’s evidence would not help that party’s case.

78.  I deal with the Plaintiff’s complaint first.

79.  For myself, I am very surprised as to why Zhou did not come forward to testify at the trial.  The evidence overwhelmingly points to Zhou as the mastermind of BSZ and the related entities.  It is quite clear that Wang was not directly involved in the operation of BSZ or made the decision to sell the shares under the SPAs.  From her testimony, she did now know much about these matters.  She was only put forward by Zhou as the front for the making of the SPAs, and for dubious reasons, Zhou was not willing to come forward to testify in the court.

80.  I agree with Mr Ho that Zhou’s absence is conspicuous and inexplicable, especially when Mr Chan is at pains to deny that Zhou has been subject to an Interpol notice.  His wife Wang could not explain his failure to testify, but admitted that he has been handling the present litigation. Further, unlike persons such as Chan YN and Sin, Zhou has an interest in the outcome of the proceedings and this makes his absence more difficult to explain.

81.  Another notable potential witness for the Defendants’ case is Zhou GB.  He was the deputy general manager of BSZ at the material time.  The Defendants filed his statement in August 2014, but subsequently informed the court their decision not to call him at trial.  Unlike Tao Xin, another witness that Defendants did not call, the Defendants did not tender Zhou GB for cross-examination or ask to adduce his statement by hearsay notice.

82.  Again, Zhou GB’s absence is inexplicable given the serious allegations against him, including that his fingerprint was imprinted on the Schedule of Fictitious Construction Works retrieved from his office.  He never refuted the allegation.  Further, by reason of his position in BSZ at the material time, he would have known about the various matters which are relevant to the Plaintiff’s claim on quantum of the various heads of claim.  As the Plaintiff had been put in a very difficult position in trying to ascertain the wrongdoings of the management of BSZ before the takeover and the quantum of its loss, the court would be safe to draw adverse inferences on quantum against the Defendants by reason of Zhou GB’s absence.

83.  It is an important part of the Defendants’ case that the “beautification” of the Management Accounts was made with the knowledge or at the instigation of the Plaintiff.  The Defendants would have the evidential burden to establish the alleged knowledge or instigation.   Zhou, given his role in the transaction, must have had direct knowledge about such matter.  His absence, together with my rejection of the evidence of Wang and Yang, lead to my factual finding that the Defendants have failed to discharge the burden of establishing such serious allegation.

84.  The Plaintiff also complains about the absence of certain directors and employees of BSZ at the material time, including Mr Luo Hong who was a director and legal representative of BSZ and Mr Zhou Jun who is Zhou’s nephew and was also a shareholder of related entities such as Jiang Nan Seafood[6] and Rui Tian Properties[7].  They were not the key players in the making of the SPAs.  Yet, they would have direct knowledge of the circumstances in which the Management Accounts came to be inflated.  Further, the Defendants have pleaded that they were the ones instructed by Yang to forge signatures and company seals of the documents submitted to MOFCOM.[8]  No reason has been given as to why they were not asked to testify.  The court will certainly take into account their absence in assessing the evidence on the relevant issues.

85.  On the other hand, the court is also concerned with the absence of certain potential witnesses for the Plaintiff’s case.

86.  The first one is obviously Fu who was the chief executive officer and executive director of the Plaintiff at the material time.   The Defendants claim that he was actively involved at all stages of the acquisition and he was named as one of those who were privy to the request to BSZ to “beautify” its accounts.  Fu and Chan YN were on record the 2 directors who approved the making of the SPAs.  His signature appears on the 89.8 Million Agreement as well as many other documents submitted to MOFCOM for its approval.

87.  Yet his absence is understandable.  Thomas Chan approached Fu in 2014, who was upset and did not want to have anything further to do with this matter after the sulphuric acid attack on him in November 2008 that caused permanent injury to his face.  According to a letter by Fu’s lawyer, three persons were arrested for the attack and sentenced to 13 years’ imprisonment in the Mainland.  One of them, Li Jun, was apparently Zhou’s driver.  This was confirmed in BSZ’s payroll list and by Wang on the stand.  Li Jun also appears to be the person who signed the 2^nd SPA on behalf of Tianjiu.  In any event, Fu is out of the jurisdiction in the Mainland and the Plaintiff would not be able to serve a subpoena on him.

88.  Mr Chan submits that the sulphuric acid attack occurred in November 2008 which was well before the change of the control of the Plaintiff in February 2009.  The relationship between the Plaintiff and the Defendants under the leadership of Fu had always been a smooth one, and the conflict only occurred after the change of control of the Plaintiff with the new management wanting to take over the running of the Market, and so the allegation that the Defendants or Zhou was the mastermind of the crime simply cannot stand.  Further, Mr Chan argues that there is no direct evidence to show that the attacker Li Jun was the same Li Jun who was Zhou’s driver.

89.  Despite such contentions, it has all along been the Plaintiff’s case that one of the offenders who participated in the sulphuric acid attack was Zhou’s driver or was closely associated with Zhou, or at the very least Zhou was behind the attack.  Yet the Defendants have called no evidence to rebut such allegation.  Under such circumstances, I have reason to believe that the same Li Jun was involved in the attack.  In any event, it is understandable that Fu would have genuine concern if he were to come to Hong Kong to testify at the trial, as he believed that the attack was related to his involvement in the shares acquisition transaction and Zhou was behind the attack.  Though he might be a key witness, I am satisfied that the Plaintiff had made all the necessary effort to secure the attendance of Fu at the trial but without success.  Hence, I would not hold against the Plaintiff for his absence at the trial.

90.  The second potential witness is Chan YN who was the chairman and the major shareholder of the Plaintiff at the material time.  Chan YN has been the Chairman of the listed company Huayu Expressway Group Limited (華昱高速集團有限公司)(“Huayu”) since 2 July 2009.  According to the explanation of Thomas Chan, he has not thought about approaching Chan YN who is a busy businessman, has no further commercial dealings with the Plaintiff and Chan YN is really under no obligation to help. However, without further details about the background of Chan YN, it is difficult for the court to decide whether there is good reason to explain his absence, in particular the Plaintiff has not even asked him to testify at the trial.

91.  Despite that, most of the allegations made by the Defendants are not directed against Chan YN.  Some allegations may concern him, such as the allegation of reverse takeover, and the court will certainly take into account his absence in the deciding the relevant factual issues in the latter part of this Judgment.

92.  The third one is Sin who was the company secretary of the Plaintiff from 1 April 2004 to 12 February 2009.  The Plaintiff called Sin as a witness and filed his statement back in October 2014 when parties filed their first round of statements.  There is no real dispute that Sin has emigrated to Australia for years, though he would return to Hong Kong occasionally.  As confirmed by the affidavits by both Thomas Chan and Sin, the Plaintiff had made efforts up to the eve of the trial to secure Sin’s attendance but could not do so due to “family reasons” on his part.

93.  “Family reasons” is obviously a vague term.  Further, Sin is currently the company secretary of Huayu and an INED of another listed company Easy One Financial Group Limited (易易壹金融)(“Easy One”) since January 2007.  The current chairman and managing director of Easy One is Thomas Chan. Given that Sin still has ties with these companies in Hong Kong and without knowing the details of the “family reasons”, it is difficult for the court to decide whether there is good reason for Sin not to fly back to Hong Kong to testify, in particular he was still in Hong Kong at least a month before the trial.  Despite that, the evidence of the case does not suggest that Sin was the person who could make material decisions regarding the deal itself.  There are some allegations made against Sin, in particular as to whether he knew about the inflation of the Management Accounts.  In determining these issues, the court will take into account his absence in assessing the evidence concerned.

94.  The fourth one is Mr Yiu of Cazenove (“Yiu”) which was the placing agent for the Plaintiff’s placing exercise in July 2007.  Yang alleged that a Mr Yiu from Cazenove had “proposed” to them that certain figures in the Management Accounts should be “amended”.  However, as I shall demonstrate in the latter part of this Judgment, Yang’s evidence is always shifting and there is no basis for the court to believe his allegation.  In any event, Thomas Chan had approached Yiu and relayed the allegation. Yiu denied it, but politely declined to be involved in the case after seeking legal advice. Thomas Chan explained that he did not wish to subpoena Yiu, whom he considered a fellow professional and businessperson, in these circumstances.

95.  Mr Chan suggests that the reason given by Yiu for not testifying is indicative of something improper on his part, but it would not be right for the court to speculate on the real reason behind his absence.  It may be the case that Cazenove just wants to avoid any possible civil claim against it for breach of professional duty and not because of any deliberate wrongdoing on its part.  In any event, based on the aforesaid considerations and the further analysis in the latter part of this Judgment, the absence of Yiu is not material in determining the final outcome of the case.

96.  Neither can the Defendants rely on the absence of the other formers directors of the Plaintiff in support of their case, as Thomas Chan does not know them and some are now staying in the Mainland. Further, the Defendants have not put to Thomas Chan that he should have called the then financial controller of the Plaintiff and other witnesses from Deloitte and CCIF CPA Ltd (“CCIF”) to testify[9], and so no serious argument can be advanced by the Defendants for their absence.

B.4    The relevant factual findings

97.  It is clear that some of the persons who may have direct knowledge of or participation in the material events are either unavailable or wholly unreliable as demonstrated in the latter part of this Judgment.  Under such circumstances, contemporaneous documents play an important part in assessing the evidence in the present case.  Inherent probabilities is also a relevant consideration.[10]

98.  In considering some of the Defendants’ serious allegations, such as those concerning the wider “scheme” of conspiracy as mentioned below, the more serious the allegation, the more cogent the evidence relied upon to support it must be.[11]

99.  I then proceed to make certain factual findings which I believe are material in determining the overall merits of the claim.

B.4.1  The making of the deal and the roles of Zhou and Yang

100.  The evidence suggests that Yang first acted as a middleman between Zhou and the Plaintiff.  Yang’s hometown is Wuhan, where he is well-connected, and he claimed to know BSZ’s management.  On the other hand, Yang was acquainted to Fu who was the Plaintiff’s then executive director.  At the time, Yang occupied no position in the Plaintiff. There is no evidence that there was other prior connection between Yang and the Plaintiff.

101.  The documentary evidence indicates that the parties had decided on a deal by April 2007.  There was a shareholders’ resolution of BSZ dated 24 April 2007 ostensibly signed by Wang and on behalf of Tianjiu.  It was resolved that Wang and Tianjiu would transfer their respective 70% and 20% shares in BSZ to the Plaintiff at HK$89,817,930. The stated consideration is different from that in the SPAs.

102.  The evidence clearly shows that Zhou was all along the mastermind behind BSZ.  He was a director until December 2007.  The Plaintiff’s witnesses who had dealt with him directly or indirectly, including Thomas Chan and Ng, all understood him to be the “real boss”.  Yang also said BSZ was Zhou’s company.  Wang accepted that Zhou remained in control until November 2010.  This was confirmed by Ng’s contemporaneous records of the meetings post-completion in which Zhou sent his representatives to negotiate with the Plaintiff.

103.  Wang accepted in the stand that Zhou has had many other businesses in Wuhan and is very well-connected.  This shows that Wang was evasive when she described herself and Zhou as “average Mainland peasants” in her statement.

104.  There is much controversy about the role of Yang in the whole transaction, but I agree with Mr Ho that the evidence tends to suggest that he had been acting for Zhou all along.

105.  As mentioned above, Yang had no prior positions in or connections with the Plaintiff.   He became a director of the Plaintiff on 26 April 2007^[12], just two days after BSZ’s shareholders’ resolution dated 24 April 2007 on the acquisition and shortly before execution of the SPAs on 2 May 2007.  Both Yang and Wang said in their statements that Zhou and Wang would appoint their management into the Plaintiff’s Board upon the acquisition.  While Yang denied being the person so appointed, the evidence of the case as elaborated below shows that Yang was a person trusted by Zhou.

106.  Yang signed both SPAs as a witness.  Although he was already a director of the Plaintiff, he witnessed not the signatures of Fu (who signed on the Plaintiff’s behalf) but those of Wang and Li Jun (who signed on Tianjiu’s behalf).

107.  Yang was appointed a director of BSZ on 10 December 2007.  He remained in the position until 12 August 2010.  This was more than a year after he ceased to be the Plaintiff’s director on 8 June 2009, and at a time when the Plaintiff and the Defendants were at an impasse over the control of BSZ.  Yang could not possibly have maintained his directorship in BSZ unless he was trusted by Zhou or at Zhou’s service.

108.  Indeed, the evidence shows that Yang was doing Zhou’s bidding even while he was a director of the Plaintiff.

109.  First, as evidenced by the correspondence exchanged on behalf of Thomas Chan and Wang, they together with Yang met in Melbourne in March 2009.  When asked, Wang’s spontaneous response was that Zhou had instructed Yang and herself to attend the meeting.  She also accepted that Yang had to fly from the Mainland to Melbourne for that purpose.  She then claimed that Yang had arranged the meeting.  Despite such oral testimony, she denied in re-examination that Yang was representing her husband altogether.  This inconsistency certainly undermines the credibility of her evidence, and I agree with Mr Ho that Wang’s desperate attempts to retract her evidence must be rejected.  Further, Yang himself, after long struggles and multiple attempts to evade the question, had to accept that it could only be Zhou or Wang who asked him to go to Melbourne on that occasion.

110.  Secondly, it was recorded in Ng’s record of a meeting on 12 April 2009 (when the parties were still negotiating for the takeover of BSZ) that, according to Mr Gong Li Bun (“Gong”) who was the then director and general manager of BSZ, Zhou (though he was still in Australia) had actively arranged Yang to station in BSZ with a view to dissipate the cash and assets of BSZ.  Though it was denied by Yang, there is no reason for the court to doubt the credibility of such contemporaneous record.

111.  Thirdly, Yang continued to serve and represent Zhou after ceasing to be the Plaintiff’s director.  On 23 June 2009, Yang conveyed Zhou’s requests and proposals to the Plaintiff’s representatives including Thomas Chan.  Yang said Zhou did not behave like a normal person and would resort to violent measures.  Further on 9 September 2009, Gong told the Plaintiff’s representatives that Zhou, tough he was not in the Mainland, had already arranged Yang to be the “actual operator” (全盘操作人).  Zhou was the mastermind behind the scene.  Through his connections and influence in Wuhan, he could instruct Yang to control BSZ and the Market.

112.  For these reasons, though the Plaintiff is not able to prove any actual monetary incentives provided by Zhou to Yang which would have been something between themselves, I find that Yang should have been very much involved with Zhou throughout.  He had been conducting the shares acquisition transaction on behalf of Zhou.  He was the “agent” of Zhou taking care of his interest.  Further, I have reason to believe that, taking into account the timing of the transaction and his appointment, his appointment as a director of the Plaintiff was made specifically for the purpose of overseeing the shares acquisition transaction.

113.  In the course of his testimony, Yang tried to distance himself from Zhou and he was evasive when asked about their relationship.  In my judgment, his denial does not sit well with the evidence mentioned above and that is another reason as to why I do not find Yang to be a truthful witness.

B.4.2  The allegation of reverse takeover

114.  Both Wang and Yang alleged that the SPAs were “part of a scheme for the reverse takeover” of the Plaintiff.  Specifically, they claimed that Chan YN agreed to sell his shares to Zhou and Wang after the acquisition of BSZ so that they would become the Plaintiff’s largest shareholders and remain in control of BSZ.  Apparently, the object of this alleged “secret agreement” for reversal takeover was to avoid the regulatory requirements for formal “reverse takeover” imposed by the regulatory authority of the Hong Kong stock market.  Mr Chan also submits the whole arrangement for the payment of consideration for the shares transfer was designed in such a way so as to give the impression that the transaction was not a reverse takeover but in fact it was one.

115.  Fu may have knowledge about such matter but it is understandable why he did not want to testify in court.  Two of the other key persons who may have more information about such matter are Chan YN and Zhou.  Both of them, for some reasons, were not present in court to testify. As they were representatives from each side of the transaction, I cannot draw any adverse inference against either side for their absence in court.

116.  In such circumstances, the court can only determine such allegation in light of the existing evidence.  Having carefully considered the matter, I reject such serious allegation by the Defendants.

117.  Firstly, it directly contradicts the terms of the SPAs, which made it a condition that the transaction was not to be a reverse takeover.[13]  As further elaborated below, the SPAs also obliged the Defendants to hand over the control of BSZ to the Plaintiff on completion.

118.  Secondly, it is wholly unbelievable.  The alleged agreement was made only orally according to Wang.  There was no mention of the price at which Chan YN was to sell his shares.  Yang said these were due to the “good relationship” and “trust” Zhou or Wang had with Chan YN, but it does not make much commercial sense given the supposed critical importance of the agreement to Zhou and Wang and their lack of any prior dealings with Chan YN.  One must not forget that Zhou is also an experienced businessman.

119.  Thirdly, Wang could not explain why they took no action whatsoever against Chan YN for breach of the alleged agreement when he sold all his shares in the Plaintiff to PNG in October 2008.

120.  Fourthly, as with other parts of his testimony, Yang’s evidence on the alleged agreement was ever-shifting.  Initially he accepted that this was a side deal between Chan YN and Zhou and Wang which the Plaintiff did not know about.  Then he said persons like Fu, Sin and the Plaintiff’s senior management (高管) “should” know.  A short while later he said the scheme of reverse takeover was actually “designed” by the “investment bank” (投行), presumably referring to Cazenove.  Coupled with the other observations made earlier about the credibility of Yang’s evidence, it would be dangerous for the court to rely on his ever-shifting evidence to establish such serious allegation.

121.  For these reasons, I reject the allegation of reverse takeover.

B.4.3  Inflation of BSZ’s Management Accounts

122.  The inflation of BSZ’s Management Accounts, whether it was done at the instigation of the Plaintiff or with its knowledge, whether the parties had made a collateral agreement not to sue on the falsification of the Management Accounts, whether the Plaintiff had actually relied on the Management Accounts in entering into the shares acquisition transaction, are some of the main factual issues in this case.

123.  It is the Defendants’ admitted case that the Management Accounts attached to the SPAs had been inflated.  Specifically, the Defendants plead that the inflated items were included in the construction costs and income of BSZ.[14]  The inflation has been repeated multiple times in the Defendants’ Reply to Request for Further & Better Particulars of the Defence.  It is also what Yang said in his statement (“夸大了一些资产及利润”, translated as “exaggerating certain assets and profit”).

124.  In examination-in-chief, Yang changed the said evidence to “收入及利润” (translated as “income and profit”).  When asked about the inflation of construction costs, he simply refused to provide an answer.

125.  The fact that the construction costs, income and profit of BSZ had been inflated is also supported by the evidence concerning the quantum of the Overpayment Claim which will be further elaborated in the latter part of this Judgment.  The issue here is whether the “beautification” of the Management Accounts was done at the instigation of the Plaintiff or with its knowledge.

126.  In Wang’s statement, she said Fu was the one who requested BSZ to beautify its accounts.  But in her oral evidence, she admitted that she had not heard Fu saying such a thing.  She also claimed she was confused and had no clear recollection about such matter.

127.  Yang’s statement, on the other hand, pointed fingers at Cazenove, Fu, Sin, the Plaintiff’s then chief financial officer Choi Mun Tuen (蔡敏端)(“Choi”). These people were said to have laid down certain indicative figures (指針性的數字), with which BSZ was to cooperate (配合) in inflating the accounts.  Yang also alleged that the Plaintiff had its auditor to cooperate and accept (配合接受) BSZ’s accounts as representing a true and fair view of BSZ.

128.  In his oral evidence, Yang tried to cast his net even wider to implicate the Plaintiff’s “VP” (presumably referring to vice-president), other members of senior management (高管) and “4 to 5 members” in the Cazenove division^[15], none of whom he was able to name, even when specifically prompted to do so in re-examination.  Yang sought to describe an elaborate process in respect of the inflation of accounts, involving meetings with investment bankers and due diligence in Wuhan by an unidentified auditing firm prior to the deal.   Quite surprisingly, these purported details appear nowhere in his witness statement, and so I have reason to believe that Yang was fabricating the evidence as the needs arouse.

129.  In his final submissions, Mr Chan submits that Chan YN was plainly aware of the falsity of the Management Accounts.  Yet, such allegation is wholly unsupported by evidence or pleading.

130.  It is also hard for me to believe that so many professional as alleged by Yang, including investment bankers and accountants, were involved in such a massive exercise with the ultimate effect of deceiving the shareholders of the Plaintiff.  More concrete evidence has to be produced to substantiate such wide and serious allegation.

131.  Yang sought to maintain in the stand that the Plaintiff’s auditor had cooperated and accepted the inflated figures.  Yet he could not even identify CCIF, which was the Plaintiff’s accountant at the time, had not read CCIF’s report (which formed part of the Plaintiff’s circular to shareholders)[16] and ultimately had to admit that he was only speculating.  Yang also had to accept that it was not clear to him whether the Plaintiff’s INEDs were involved.

132.  Further, the Defendants have not identified any figures and produced no document to substantiate Yang’s extravagant allegations.  They have chosen not to call anyone from BSZ, not even Zhou GB (who filed a statement in this action) who were supposed to know what the alleged “indicative figures” were and who had proposed them, and to be intimately involved in “cooperating” and beautifying the accounts.  Hence, the Defendants have failed to establish that the inflation of the Management Accounts was done at the instigation of the Plaintiff or with its knowledge.

133.  In reaching such conclusion, I have already taken into account that the Plaintiff has not called anyone from the then management of the Plaintiff, Cazenove and CCIF to rebut the allegation. However, the Defendants bear the evidential burden to prove that the Plaintiff instigated or was aware of the falsification.  As the Defendants’ evidence is so weak and not capable of being believed, no adverse inference should be drawn against the Plaintiff on such issue for the absence of witnesses.

134.  I must also emphasise here that, as further elaborated in the latter part of this Judgment[17], the result of the case would be the same even if the Plaintiff’s management was guilty of participating in the falsification exercise.

135.  The Defendants further allege that the Plaintiff had agreed not to enforce the SPAs against them for breaches of warranties relating to the truth and fairness of the Management Accounts.

136.  On the facts, I do not find that there was indeed such an agreement.  Wang said in her statement that the promise was allegedly made to her, her husband and Tianjiu by Fu.  She resiled from this in her oral testimony, saying that she might have heard about it from her husband but could not remember any details.  She could not even recount in broad terms what her own witness statement says to be the content of the alleged promise.  This is wholly unbelievable when the promise forms such a critical part of the Defendants’ pleaded case.  Hence, I accept that the alleged collateral agreement was only a fabrication made up by the Defendants as a defence to this action.  Indeed, if there were any truth in such allegation, it is Zhou who should have come forward to testify on such issue, as one cannot expect Fu to be a witness in view of the sulphuric acid attack.

137.  Further, even if such agreement had indeed been made, the Defendants would be precluded to rely on such agreement as a defence to the Plaintiff’s claim by reason of the “entire agreement” clause in the SPAs.[18] This is a classic case for the application of the “entire agreement” clause, as it would prevent the parties from making any under-table agreement at the expense of the shareholders of the Plaintiff.

138.  I then deal with the issue as to whether the Plaintiff had, as a matter of fact, relied on the Management Accounts in making the deal.  Obviously, this issue is based on the premise that the inflation of the Management Accounts was not done at the instigation or with the knowledge of the Plaintiff’s management.  If the Plaintiff’s management was aware of the falsification, one cannot possibly say that it had relied on the accuracy of the Management Accounts in the decision making process.  However, the position may be very different if the Plaintiff’s management was not guilty of participating in the falsification exercise.

139.  There is no serious argument that the Plaintiff’s other shareholders were not aware of the inflation of the Management Accounts at the time of the SGM.  The Defendants may seek to argue that the shareholders might have relied on the CCIF Report and not the Management Accounts in approving the deal.  But as I will demonstrate below, there is absolutely no merit in such contention.

140.  According to the Defendants, the Plaintiff must have carried out its own due diligence investigation on BSZ, and so the Plaintiff had not relied on the Management Accounts in making the deal.

141.  In asking the court to draw adverse inferences against the Plaintiff, the Defendants rely on the following:

(i)   The Plaintiff has given no discovery of any document relating to its due diligence study of BSZ or any other earlier documents concerning the acquisition.

(ii)  The Plaintiff cannot explain why the Plaintiff’s Board meeting authorizing the signing of the SPAs was not held until 3 May 2007 and this Board meeting was only attended by Chan YN and Fu.  There is also no evidence adduced by the Plaintiff as to how the SPAs came to be agreed and how the Board came to approve of the transaction.

142.  In contending that the Plaintiff had not relied on the Management Accounts in making the deal, the Defendants also rely on the following:

(i)   The bold passages in the 10 May Announcement to the effect that, in arriving at the consideration for the proposed acquisition, the Board stated that no valuation had been performed on the properties owned by or the business of BSZ, and the Board had only made reference to an acquisition of a similar business in another province of the Mainland by a listed company in Hong Kong.

(ii)  The 8 June Circular, which gave notice for the holding of the SGM to obtain the shareholders’ approval of the SPAs, contained an accountants’ report on BSZ issued by CCIF (the “CCIF Report”).  The CCIF Report made it clear that CCIF had “carried out an independent audit procedures on the Financial Information in accordance with the Hong Kong Standards on Auditing issued by the HKICPA”, and there was also the usual statement that, in the opinion of CCIF, the financial information in the report gave a true and fair view of the state of affairs of BSZ as at the end of 2004, 2005 and 2006 and of the cash flows of BSZ for the relevant periods.  In the CCIF Report, the financial information on BSZ was allegedly different from that set out in the 10 May Announcement, and was also not the same as that set out in the Management Accounts.  There is also suggestion in the report that, in preparing the CCIF Report, CCIF had access to the audited financial statements of BSZ for the years 2004 to 2006.  Hence, the Defendants contend that the shareholders of the Plaintiff had relied on the CCIF Report and not the Management Accounts in deciding whether to enter into the deal.

(iii) Since Chan YN was holding 74.89% of the shares of the Plaintiff at the material time and he was one of the only 2 directors present at the Board meeting on 3 May 2009 approving the making of the SPAs, it is reasonable to infer that he must have voted in favour of the acquisition of BSZ at the SGM.  Hence, the resolution to approve the acquisition of BSZ would have been passed at the SGM anyway irrespective of any opposition from the minority shareholders who would not have any means of blocking the acquisition.

143.  The Plaintiff has not called any witness to deal with this particular issue.  The person who may have direct knowledge on such matter are Fu and Chan YN.  As mentioned above, the court can understand why Fu did not testify in court, and so no adverse inference should be drawn against the Plaintiff for his absence.  The absence of Chan YN is more conspicuous. However, it has never been the Defendants’ case, whether by way of pleading or evidence, that Chan YN instigated or was aware of the falsification, and so his absence has to be considered in such context.  Another potential witness is Sin, but there is no evidence that he, being only the company secretary at the time, had played any material role in deciding whether to make the acquisition, and so his absence is not significant.

144.  Despite the absence of these potential witnesses, Mr Ho submits that there is ample documentary evidence to support the Plaintiff’s case in this regard.

145.  On 23 April 2007, the Plaintiff issued an announcement on the possible acquisition of interest in a company operating an agricultural products exchange in the Mainland.

146.  The resolutions of the Board which approved the SPAs and various related matters are contained in the minutes dated 3 May 2007 of a meeting attended by Fu and Chan YN.  Both Thomas Chan and Tong frankly accepted that they did not understand why the minutes were dated 3 May rather than 2 May 2007, i.e. date of the SPAs.

147.  Despite such confusion in the date, it was clearly recorded in the minutes that:

“(a) the Directors considered the Proposed Acquisition can diversify the [Plaintiff’s] investment into the agricultural exchange business in the [Mainland], in addition, the geographical advantage of [BSZ] can help the [Plaintiff] to develop itself into a supply and logistic centre in the central part of the [Mainland]. Moreover, the Proposed Acquisition will broaden the income base and strengthen the cash flow of the [Plaintiff]. As such, the Directors consider that the acquisition of [BSZ] is consistent with the [Plaintiff’s] business strategy and in the interest of the [Plaintiff] and its shareholders as a whole;

(b) consideration for the Proposed Acquisition was negotiated on an arm’s length basis and was agreed between the parties to the [SPAs] on normal commercial terms by reference to, among other things, the recent operating and financial performance of [BSZ], the financial performance and valuation of other companies engaging in similar businesses in the [Mainland] and their future prospects”.

148.  Later, the 10 May Announcement set out the terms of the acquisition and explained that the consideration under the 1^st SPA^[19] “was negotiated on an arm’s length basis and was agreed between the parties…on normal commercial terms by reference to, among other things, the recent operating and financial performance of [BSZ], the financial performance and valuation of another company engaging in similar business in the [Mainland].”

149.  The 10 May Announcement also set out the historical information of BSZ, including the following:

“[BSZ] is principally engaged in the operation of an agricultural products exchange in the city of Wuhan, Hubei Province, the [Mainland] since 2003. According to the management accounts of [BSZ], its unaudited net asset value as at 31 December 2006 was approximately RMB150 million. The unaudited results of [BSZ] for the three financial years ended 31 December 2006 are set out below”.

150.  The unaudited results tally with the figures in the Management Accounts attached to the SPAs, as illustrated in the following table:

	For financial year ended 31 December
	2004 RMB (‘000)	2004 income statement	2005 RMB (‘000)	2005 income statement	2006 RMB (‘000)	2006 income statement
Net profit (loss) before taxation etc.	(2,713)	-2,713,135.41	8,750	8,748,703.91	87,460	87,460,647.02
Net profit (loss) after taxation etc.	(2,713)	-2,713,135.41	8,750	8,748,703.91	74,148	74,147,618.49

151.  Hence, the financial information of BSZ based on its Management Accounts had been presented to the Plaintiff’s shareholders.

152.  In trying to establish that the Plaintiff had not relied on the Management Accounts in making the deal, the Defendants rely heavily on certain bold passages in the 10 May Announcement.  They are similar and one of the passages reads as follows:

“Shareholders shall note that in arriving at the consideration for the Proposed Acquisition, no valuation had been performed on the properties owned by or the business of [BSZ]. The Directors has only made reference to an acquisition of a similar business in another province of the [Mainland] by a listed company in Hong Kong. However, taken into account (i) progress of the transformation of the agricultural products exchange operated by [BSZ] from a fixed rental exchange platform to a transaction-based exchange platform; (ii) potential growth in the profitability of [BSZ] in the near future; and (iii) valuation of other agricultural products related listed companies in Hong Kong, the Directors are of the view that the consideration for the Proposed Acquisition is fair and reasonable”.

153.  The Defendants interpret the above bold passages as meaning that the Directors had referred “only” to an acquisition of a similar business in the Mainland and nothing else, and that they simply took into account forward-looking considerations and not the past financial history of BSZ in the decision making process.  There is also a suggestion that the Directors included the statements in bold to avoid liability.

154.  Despite the able submissions of Mr Chan, the 10 May Announcement, when read as a whole, does not suggest that the Plaintiff’s Directors had “only” referred to the acquisition of a similar business in the Mainland and nothing else.  The announcement clearly included the historical information of BSZ, including its unaudited financial results,and so it would be absurd to suggest that the Board had only referred to a similar acquisition in determining the purchase price.  If that was the case, there was simply no need to make reference to such additional information in the announcement.

155.  Further, as explained by the Plaintiff’s business valuation expert, Mr Mark Bezant (“Mr Bezant”), one does not consider a similar transaction in the abstract, but uses it as a reference point or benchmark and applies it to the actual circumstances of the company in question in order to arrive at a price.  In any event, it is wrong to say the Plaintiff’s Directors considered only a similar transaction, as the 10 May Announcement and 8 June Circular expressly stated that the Directors took into account, among other things, the valuation of other agricultural products related listed companies in Hong Kong.

156.  According to Mr Bezant, any projection of the future profit or growth of a company must be made upon a baseline, which is the level of its historic profits, and so it is illogical and unrealistic for the Defendants to divorce the past performance of a company from an assessment of its current value or future prospects.^[20]  As summarised by Mr Bezant, “you have the historic baseline of profits that you expect to improve upon if you’re growing your business and changing your business model, so you can’t jettison the historic position when deciding what this business is worth”.  The information presented to shareholders about BSZ and the acquisition was a “package of expectations for the future informed by the performance in the past”.

157.  In my judgment, the evidence of Mr Bezant makes a lot of commercial sense, which only reflects what a reasonable businessman would have taken into account in making the decision on an acquisition.  On the basis that the Plaintiff’s management was not aware of the inflation of the Management Accounts, it would be quite unrealistic to suggest that any sensible businessman would have ignored the past financial performance of the target company before determining the acquisition price, in particular the Plaintiff is a listed company subject all sorts of regulatory control.  Further, if the Defendants’ contention were true, there would have been no point for the SPAs to include the Management Accounts of BSZ for the past years.

158.  In the 8 June Circular which informed shareholders of an upcoming SGM for voting on the transaction, similar information was presented.  The 8 June Circular also contained detailed business review of BSZ for the years 2004 to 2006.  It further provided that various documents, including the SPAs (defined as “Material contracts” therein), would be made available to shareholders for inspection. 

159.  Mr Ho submits that the Board in the 8 June Circular had referred to the audited results of BSZ for 2004 to 2006[21] which do not on their face match with those in the Management Accounts. 

160.  I accept the submission of Mr Ho that the simple explanation for this is that: (a) the audited figures came from the accountant’s report on BSZ prepared by CCIF at Appendix II to the 8 June Circular; (b) CCIF had applied accounting adjustments according to the Hong Kong accounting standards.  Yet, according to Thomas Chan, Tong and Mr Bezant, the Management Accounts remained the starting point and the source data.  In Mr Bezant’s words, the audited figures in the 8 June Circular are simply “the Hong Kong accounting-standards-based presentation of the same information as in the [Management Accounts]”.  The Defendants have simply not put forward any positive analysis to demonstrate that the difference in the figures was due to anything other than accounting adjustments.

161.  More importantly, the Management Accounts and the audited results set out in the 8 June Circular show the same trajectory of BSZ as explained by Mr Bezant:

“they both show a business whose turnover is growing strongly and whose profits are growing strongly. They’re produced on different presentational formats for accounting purposes but they are describing what is understood to be the same underlying business performance and business economics…

…you have a business whose being…described – to shareholders as growing strongly at the revenue line and moving from losses to profits and then increasing profits at the profit line. That’s information being described to shareholders and it’s the same, in effect, it’s the same picture as to the performance of this business whichever set of accounts you use. It’s this same broad picture.”

162.  Hence, the said financial information of BSZ formed the basis on which the Plaintiff’s shareholders approved the SPAs and the transactions thereunder at the SGM on 27 June 2007.[22]  Indeed, if the Defendants contend that the then management of BSZ had supplied further or different documents to CCIF for the preparation of the CCIF Report, they should have been able to produce documents or evidence to substantiate such allegation.

163.  If it were true that the Plaintiff’s Board and CCIF had instigated or were privy to the inflation of BSZ’s accounts as contended by the Defendants, it would virtually mean that what was stated in the 10 May Announcement and 8 June Circular, about the acquisition being negotiated on an arm’s length basis and agreed on normal commercial terms etc., would have been deliberate misstatements.  There were public documents. Without solid evidential foundation supporting such serious accusations against members of the Plaintiff’s Board (some of whom, such as Tong, were qualified professionals) and a professional accounting firm, it is difficult for me to accept that they would have made such deliberate public misstatements.  In this regard, even Yang, who was a member of the Board at the material time, could not provide a satisfactory explanation about his involvement in the issue of these public documents.

164.  Mr Chan complains about the lack of discovery of documents such as due diligence reports, documents on the deliberation of the Plaintiff’s Board on the acquisition and documents as to how the shareholders had voted in the SGM.  However, the Board’s consideration and resolutions were already set out in the relevant minutes.  Further, as explained by Thomas Chan, based on his experience, such minutes do not have any standard form and need not necessarily be detailed or elaborate.  It is also hard to understand the relevance of documents as to how the shareholders had voted in the SGM.  What is important is that the SPAs were approved in the SGM.   In any event, the Defendants had not asked for specific discovery of these documents.  Thomas Chan had also caused further searches to be conducted through the Plaintiff’s records, and no further relevant documents was retrieved.  There is simply no basis for the court to doubt his explanation or to suggest that the Plaintiff had deliberately concealed the relevant documents such as due diligence reports.

165.  Mr Chan also submits that the deal would have proceeded in any event as Chan YN, being the controlling shareholder, would have approved the deal irrespective of whether the Management Accounts had been inflated.  However, as mentioned above, it is no part of the Defendants’ pleaded case or evidence that Chan YN was privy to the falsification exercise. Hence, the Defendants have no basis to contend that he was somehow different from the other shareholders of the Plaintiff when it came to the voting at the SGM.

166.  Mr Chan also complains that Mr Bezant could not give evidence on how the CCIF Report was prepared.  He was not called as expert on how the said report was prepared and the terms of his appointment did not cover this area at all.  However, there was no challenge to his evidence in the course of Mr Bezant’s testimony and so the court is entitled to take into account his evidence in this regard.  In any event, the Defendants have simply not put forward any positive analysis to demonstrate that the difference in the figures was due to anything other than accounting adjustments.  As mentioned above, if the CCIF Report was prepared based on some additional or different documents, the Defendants should have been able to provide evidence to substantiate such allegation.

167.  Finally, Mr Chan has raised an argument, apparently for the first time in the reply final submissions, that according to the purported minutes of the shareholders’ meeting of BSZ on 27 April 2007, the assets of BSZ was only RMB 89,817,980 which was less than the amount shown in the Management Accounts.  This was one of the documents submitted to MOFCOM for approving the shares transfer.  Hence, at least by time of the completion on 5 December 2007, the Defendants say that the Plaintiff must have been aware that the Management Accounts could not be accurate.

168.  Again, the Plaintiff was not offered an opportunity to deal with such allegation, which had never been raised in pleading or witness statements.  Apart from the fact that it is not clear whether the Plaintiff was actually aware of such document before completion, it is also difficult to see the basis for the Defendants to say, just because of such figure in the minutes, the Plaintiff must have been aware of the falsities in the Management Accounts.  The Plaintiff must not have been taken to know the context in which such figure was presented in the shareholders’ meeting, and so there is no merit in such argument.

169.  For the above reasons, I find as a matter of fact that the Plaintiff, including its management and its shareholders, had relied on the Management Accounts in deciding whether to enter into the deal for the shares acquisition.  However, as I will elaborate in the latter part of this Judgment[23], the result of the case would be the same even if the Plaintiff’s management was aware of the falsification of the Management Accounts.

B.4.4  The alleged wider “scheme” of conspiracy

170.  In their oral testimony, the Defendants’ witnesses even went further and raised a new allegation about a massive conspiracy involving the following:

(i)   The acquisition under the SPAs was a pretext for the Plaintiff to raise financing by way of placement and drive up its share price.

(ii)  The exercise enabled Chan YN to sell his interest in the Plaintiff to PNG on attractive terms.

(iii) The “beautified” Management Accounts of BSZ served the dual purposes (一物二用) of: (a) supporting the acquisition price; and (b) allowing the Plaintiff’s new management to turn around and sue the Defendants.

(iv)  The INEDs turned a blind eye to the scheme (視而不見).  The misstatements in the accounts were left deliberately undetected.

171.  The Defendants also claim that the Plaintiff, though a listed company, had very little assets in 2007.  As at 31 December 2006, its total assets less liability was only HK$61,511,000 and the Plaintiff had been suffering loss for at least 3 consecutive years.  The bank balance and cash of the Plaintiff’s group was about HK$2.1 million only.  On 2 May 2007 when the SPAs were signed, the Plaintiff was not in a position to pay for the acquisition and had no banking facilities in place for the acquisition.

172.  I do not find that there is any basis to support such serious allegation.

173.  In my judgment, the alleged scheme simply defies commercial sense.  On the Defendants’ logic, the Plaintiff entered into the acquisition just so that it could raise circa HK$591 million through a placement, the bulk of which (HK$410 million) it had to pay over to Wang or Zhou. The Plaintiff was then left with less than HK$200 million and a total liability of HK$376 million under the two “promissory notes”.  Further, the Plaintiff would also have no control of BSZ.  As Thomas Chan aptly put it, this smacks of a ridiculous business venture.

174.  The alleged scheme would also expose the Plaintiff and all persons involved to grave risks including potential criminal liability. Should any party to the scheme such as the Plaintiff’s INEDs, Cazenove and CCIF deflect, the whole scheme would fail and everyone would be losers.  One would certainly ask why these persons (professionals included) would assume or turn a blind eye to such risks just so to benefit Chan YN and the Plaintiff’s coffers. Under such circumstances, Tong’s adamant response that he would have objected and immediately resigned had he known the figures in the accounts were false had the distinct ring of truth.

175.  Another reason is that the Defendants’ extremely serious allegations were not even backed up by Yang.  As mentioned above, Yang’s evidence on the CCIF Report is confusing, and even he was unable to say whether the INEDs were implicated.  There is also not a shred of evidence that Chan YN’s sale of his stake to PNG (which happened in October 2008) was contemplated back in May 2007 when the Plaintiff entered into the SPAs.

176.  As to why the falsities in the Management Accounts were not detected, the simple reason is that they were not examined by forensic accountants at the time.  As explained by Thomas Chan and Tong, both of whom are qualified accountants, and Mr Kenneth Chen (“Mr Chen”) who is the Plaintiff’s forensic accounting expert, the scope of work and expertise of general accountants or auditors do not include uncovering falsities such as forged documents.

177.  Indeed, from the beginning, the SPAs specifically provided that the Plaintiff was to secure financing in order to fund the acquisition and not the other way around.  This was also highlighted in the 10 May Announcement.  Further, a Board meeting attended by, inter alia, Fu, Yang, Tong and Sin was held on 4 July 2007 to approve the intended placement.

178.  Mr Chan queries why there are so few documents on the discussions relating to the placement terms.  Further, the placing agreement was conditional on the Plaintiff having entered into service agreements with the executive directors for not less than 2 years, and all 6 Directors took part in voting unanimously for approving the placing agreement without any declaration of interest or query by any Director.  Mr Chan therefore submits that the said meeting on 4 July 2007 was nothing more than a formality to pass the resolutions to approve the placing agreement and there was no genuine discussion amongst the Directors in the said meeting about the placing.

179.  However, I agree with Mr Ho that it is neither unusual nor inherently suspicious that all the details of such discussions were not minuted.  The Board held a meeting on 4 July 2007 to discuss the placement terms, which was attended by 7 persons including Fu, Chen Hong Bo who was the nephew of Chan YN, Yang, Tong and Sin.  The minutes show that that the Directors held discussions on the finalised draft of the placing agreement (which was tabled before them) and considered the placing price to be fair, reasonable and in the Plaintiff’s best interest.  It was not unusual that they did not record all the details leading to the final decision.  Further, it would be one thing to say that the Directors had not followed the rule in making declarations of their interests, it is another to allege that they were involved in a conspiracy using the placement exercise to raise fund for the Plaintiff for improper purposes.  More evidence needs to be adduced to substantiate such serious allegation, not just by raising some queries about the meeting itself by reference to its minutes.

180.  Subsequently on 5 July 2007, the Plaintiff issued an announcement to inform the shareholders of the terms of the placement.  It is worth noting that, though Cazenove was specified to be the Plaintiff’s placing agent, sole bookrunner and lead manager, the Plaintiff’s financial advisor was a separate entity called Somerley Limited, which was already stated to be the Plaintiff’s financial advisor back in the 8 June Circular.  This again undermines the Defendants’ case that Cazenove was somehow involved from the start in advising on the structure and terms of the acquisition.

181.  For these reasons, I do not find that the Plaintiff’s placement exercise was conducted for some other ulterior purposes or there was a conspiracy as alleged by the Defendants.

B.4.5  The application for the MOFCOM Approval

182.  The obtaining of the approval of MOFCOM for the shares acquisition was one of the conditions precedent specified in the SPAs.

183.  According to the documents, BSZ made the application to MOFCOM for such approval on 15 June 2007.  A number of documents were submitted to MOFCOM for such purpose.

184.  There is no serious dispute that the 89.8 Million Agreement allegedly made between Tianjiu, Wang and the Plaintiff was submitted to MOFCOM for consideration of the application.  It provided that Tianjiu and Wang were to transfer 90% of the interest in BSZ to the Plaintiff at a total consideration of RMB 89,817,930.[24] It was ostensibly signed by Fu on behalf of the Plaintiff (with the Plaintiff’s company chop), Wang and one Zhong Ling (锺翎) on behalf of Tianjiu. 

185.  Probably because of the delay in the decision of MOFCOM, the parties entered into agreements on 2 August 2007 to extend the long stop date for the SPAs to 2 October 2007, namely, 5 months after the signing of the SPAs.  On 2 October 2007, the long stop date was again extended to 30 November 2007, and later to 2 December 2007 and finally to 5 December 2007.

186.  On 27 September 2007, the Plaintiff issued a public announcement stating that: (i) the long stop date in the SPAs had been extended; (ii) the application had already been made to MOFCOM for approval of the shares transfer; and (ii) according to the Plaintiff’s Mainland legal advisers, there were no legal obstacles to obtaining the relevant approval under Mainland law.

187.  The MOFCOM Approval was obtained on 26 November 2007.  The Plaintiff initially published the 27 November Announcement saying that the approval of MOFCOM had been obtained and the Plaintiff would proceed to complete the shares transfer under the SPAs.  Then one day later, the Plaintiff published the 28 November Announcement stating that the Plaintiff need to have further time to discuss with its Mainland legal advisers regarding the conditions precedent.  By then the latest, the Plaintiff’s Board should have been aware of the existence of the 89.8 Million Agreement.

188.  On 5 December 2007, the last extended date of the long stop date, the Plaintiff held a Directors’ meeting.  According to the minutes produced by the Plaintiff, with the exception of Tong, all Directors of the Plaintiff were present.  Amongst the documents tabled in the meeting were the MOFCOM Approval and also the Mainland Legal Opinion dated 5 December 2007. After discussing the Mainland Legal Opinion, the Plaintiff’s Board decided to complete the transaction and to issue the 5 December Announcement that all the conditions precedent to the completion of the SPAs were fulfilled.

189.  Though a few supporting documents were ostensibly signed by Fu on behalf of the Plaintiff, it is clear that the Defendants and Zhou were privy to, and their subordinates in BSZ intimately involved in, the steps leading up to the granting of the MOFCOM Approval and Certificate of Approval on 26 and 27 November 2007.

190.  Firstly, most of the documents submitted to MOFCOM or relevant to the application came into being before completion of the acquisition when BSZ was in the Defendants and Zhou’s ownership and exclusive control.  It is worth noting that BSZ’s shareholders’ resolution dated 24 April 2007 pre-dated even the SPAs.

191.  Secondly, Yang admitted to both this court and the Mainland court that he instructed BSZ personnel, notably Luo Hong and Zhou Jun, to put together the application materials.  This part of his evidence was corroborated by Luo Hong and Zhou Jun in their evidence in the Mainland proceedings.  According to Luo Hong, it was Zhou Jun who forged the signature of Fu in the 89.8 Million Agreement.

192.  Thirdly, the first instance Hubei Court in the Mainland Action No 1 commenced by the Defendants had found against Wang on her disclaimer of knowledge and responsibility in relation to the 89.8 Million Agreement.[25]  While the first instance judgment was reversed by the Supreme People’s Court, the said finding about Wang’s knowledge and responsibility was upheld by the appellate court.[26]  The court also accepted that, at the time when BSZ was still under the control of Wang and Tianjiu, BSZ was involved in the preparation and submission of the 89.8 Million Agreement.

193.  In Wang’s witness statement in this action, she completely sidestepped the 89.8 Million Agreement and matters concerning the MOFCOM Approval.  In her oral testimony, she sought to disclaim knowledge of the documents and deny that the signatures on them were hers, which she never disputed in the Mainland Action No 1.  There is an issue between the parties as to whether Wang is bound by the Mainland court’s findings by reason of the principle of estoppel per rem judicatam.  For my part, I do not find it necessary to resolve such difference between the parties.  After all, whether Wang herself knew about the 89.8 Million Agreement is neither here or there.  If necessary, I would arrive at the same findings about Wang’s role for the reasons given by the Mainland courts in the Mainland Action No 1.

194.  In her oral evidence, Wang also sought to question Zhou’s signatures on the cover page of BSZ’s application materials to MOFCOM and his 2^nd statutory declaration dated 6 December 2007 (“Zhou’s 2^nd Statutory Declaration”)[27].  Earlier, Mr Chan had put to Thomas Chan that the contents of the documents involved in the application process, including the letter dated 9 October 2007 by BSZ (the “9 October Letter”), the supplemental information dated 11 October 2007 by the Plaintiff and the confirmation dated 1 December 2007 by BSZ, were all false.  However, one of these documents, ie. the 9 October Letter, was exhibited to Zhou’s 2^nd Statutory Declaration, and the confirmation dated 1 December 2007 was actually issued by BSZ.  Without having Zhou or anyone in BSZ at the time to testify on such issue, I reject such challenges lodged by the Defendants.

195.  There is an issue about the extent of the Plaintiff’s involvement in the application process.  Mr Chan points out that the impediments leading to the withholding of approval would appear to be the provision on the convertible notes and also the provision for the governing law to be Hong Kong law contained in the SPAs.  To get the approval, some flexibility (變通) was therefore required.  Having realized the problem, Yang so informed the Plaintiff and Cazenove and he was asked to take some flexible measures.  In that context, everyone would understand that to take flexible measures would mean something improper would have to be done.  It is Yang’s evidence that the Plaintiff did not know how he would effect the flexible measures.  Presumably this would mean that Yang did not in fact tell the Plaintiff what exactly would be done to obtain the approval.  What Yang then did was to tell Luo Hong, the legal representative of BSZ and the director in charge of making the application, that they should do whatever would be required by MOFCOM for the purpose of getting the approval, and where necessary even to create some false documents.  According to Yang, even though he so authorised the staff of BSZ, he, at the time, did not know exactly what was to be done and what document was to be created.   The Defendants therefore say that in the circumstances, Yang as director of the Plaintiff must have known that something illegal would be done in order to obtain the approval.

196.  Although Yang suggested that Fu was involved in something improper, such allegation does not sit well with the contents of 2 statutory declarations: (i) the one made by Fu dated 5 December 2007; and (ii) Zhou’s 2^nd Statutory Declaration made by him in the capacity as being a director of BSZ.

197.  The main purpose of the statutory declaration of Fu was to exhibit a copy of a letter from the Plaintiff to the Mainland Foreign Exchange Authority (“FEA”), informing the FEA of the details of the payment of the price for the acquisition to the Defendants as provided for in the SPAs and also informing the FEA of the Plaintiff’s intention to raise further capital in the 2^nd half of 2008.  In other words, the Plaintiff had informed the FEA the correct purchase price which does not suggest any wrongdoing on its part.

198.  In Zhou’s 2^nd Statutory Declaration, Zhou exhibited the 9 October Letter from BSZ to the FEA, informing the latter the reason as to why the purchase price in the 89.8 Million Agreement was different from the purchase price stated in the Plaintiff’s public announcements in Hong Kong.  According to the 9 October Letter, the purchase price stated in the 89.8 Million Agreement was set based on the valuation of the assets made in the Mainland, adopting valuation principles different from those outside the jurisdiction.  Apparently, this explains the difference in the purchase prices set out in the SPAs and the 89.8 Million Agreement.  As I see it, this explanation has some truth as there was indeed a valuation report (评估报告) by Wuhan Rai Fung Asset Valuation Firm (武汉瑞丰资产评估事务所) dated 30 April 2007, valuing 100% of BSZ as RMB 99,797,700 and 90% at RMB 89,817,930.

199.  Mr Chan queries the genuineness of these 2 statutory declarations.  Firstly, from the reference printed at the bottom left of these statutory declarations, they were all prepared by the same person who prepared the minutes of the board meetings of the Plaintiff, and Sin, being the company secretary of the Plaintiff at the time, was the one responsible for the preparation of the Plaintiff’s minutes.  It is therefore reasonable to infer that these statutory declarations should also have been prepared by him. Secondly, there is no evidence to suggest that the two letters to the FEA were in fact sent, or that MOFCOM was aware of such correspondence with the FEA. Neither has the Plaintiff given any reason as to why these communications were necessary.  Hence, Mr Chan submits that the purported communications were only to create a façade as if the Mainland authorities were made aware of the SPAs when the key Mainland authority for the transaction, namely, MOFCOM, was not.

200.  In my judgment, there is simply insufficient basis to support such serious allegation.  Firstly, the presence of the reference is neither here or there.  I can think of many administrative reasons as to why the same reference appeared in all these documents.  Secondly, the statutory declarations were made on oath or affirmation, and so there is no reason for the court to doubt the genuineness of these documents on their face value. Thirdly, such kind of transaction involved cross-jurisdiction monetary transfer and so it is not surprising that the FEA was involved.  If there was no need for such exchanges, the Mainland Legal Advisers should have known about that.  Whilst I agree that there is no evidence to suggest that MOFCOM was aware of such exchanges, these documents at least support that no one had made any attempt to conceal the existence of the 89.8 Million Agreement.

201.  Yang had testified unequivocally in the Mainland Action No 1 that the Plaintiff had no knowledge of the matter at the time.  According to Yang, the Plaintiff only knew about the 89.8 Million Agreement after the granting of the MOFCOM Approval in late November 2007.  Further, in his deposition by Wang’s Mainland lawyers, Luo Hong confirmed that the Plaintiff did not provide any instruction or authorisation on the compilation of the application materials.  Further, it was Zhou Jun who forged Fu’s signatures in the relevant documents.

202.  In Yang’s witness statement in this action, he departed from his testimony to the Mainland court.  He claimed that the Plaintiff first became aware that the transaction might not be approved by MOFCOM given the restrictions in the No 10 Document under the Regulations Concerning the Acquisition of enterprises within the jurisdiction by Foreign Investors (《关于外国投资者并购境内企业的规定》的10号文)(“No 10 Document”) after signing of the SPAs.  In his evidence to the Mainland court, Yang said the Plaintiff only knew about the situation in December 2007.  Further, Yang alleged that the Plaintiff’s Directors including Fu considered bypassing the No 10 Document, and Fu agreed that he would take charge of the matter and liaise with Luo Hong of BSZ.  Although Yang mentioned “the Plaintiff’s directors”, he only named Fu specifically in his statement.  Yet Yang failed to explain why it was necessary for Zhou Jun to forge Fu’s signature or the Plaintiff’s company chop in the application materials if Fu had all along agreed to the course.

203.  Again this shows that Yang was always prepared to shift his evidence whenever he wanted to achieve different purposes.  His latest version is that the Plaintiff’s Directors, senior management, Hong Kong lawyers, Mainland lawyers and investment bankers had known all along about the difficulties of obtaining MOFCOM approval and authorised him to improvise in order to bypass any restrictions.  However, when Yang was pointedly asked in re-examination who had authorised him to improvise, he could name no one but Fu.  He also had to accept that he was only guessing that Sin and Choi might know about the matter.

204.  Yang’s evidence on the MOFCOM application vividly demonstrates that he had no hesitation to lie and mislead.  In addition to the examples above, Yang insisted that the shareholders’ resolution of BSZ was a document prepared for the Plaintiff’s financing.  When the absurdity of that answer was pointed out to him, he said the document was “problematic” and fake, and sought to dismiss any further questions on it.  Further, he claimed that the MOFCOM application process only started after the Plaintiff’s placement which took place in July 2007.  This was again refuted by the application materials which were all dated 15 June 2007.  Even if those materials were forged, there would have been no reason (and Yang could supply none) to put down a false date.

205.  The Defendants rely on the Mainland Legal Opinion with a view to show that the Plaintiff must have been aware of the existence of the 89.8 Million Agreement much earlier, or the Plaintiff was directly involved in the preparation of such document.  Firstly, they complain that the Plaintiff had not disclosed all the documents listed out in the Mainland Legal Opinion or sent to the Mainland Legal Advisers for consideration.  Neither had the Plaintiff disclosed the instructions given to such legal advisers. Secondly, the Plaintiff must have been in possession of the 89.8 Million Agreement before 5 December 2007, as this would have been a document supplied to the Mainland Legal Advisers for consideration.  Thirdly, the Mainland Legal Opinion contained an express disclaimer of liability relating to accounting reports, auditing and profit forecast, which suggested that some of these documents might have been supplied to the Mainland Legal Advisers and they might be aware of some matters which might show that these documents might not be accurate.  Fourthly, the Plaintiff gave an express assurance that the documents supplied to the Mainland Legal Advisers were genuine, and so the Plaintiff was prepared to vouch for the authenticity of the 89.8 Million Agreement.

206.  Further, Mr Chan complains that the Plaintiff should have disclosed more documents about the MOFCOM application to the court.  For instance, according to the terms of the placing agreement as recorded in the Plaintiff’s Board minutes of 4 July 2007, the Plaintiff would have to produce to the placing agent a copy of the letter from MOFCOM confirming that the application for approval had been received and also a legal opinion to confirm that it was likely that the application would be approved. The Plaintiff should be in a position to produce copies of these documents which would undoubtedly shed more light on the stage of the application.

207.  Again I have to reject Mr Chan’s submissions in this regard.  The Mainland Legal Opinion had been disclosed by the Plaintiff in its 1^st List of Documents filed back on 17 June 2014.  It is true that the Plaintiff had not disclosed other documents which may relate to the Mainland Legal Opinion, such as the instructions given to the Mainland Legal Advisers and all the documents supplied to them for advice, and perhaps the documents sent to the placing agent.  However, without any request for specific discovery of these documents, one should not criticise the Plaintiff for not disclosing further documents which may not be relevant or necessary for the determination of the issues in this case.   It lies ill in the mouth of the Defendants to say that some other documents are relevant without taking steps to pursue for their discovery.  In particular, the documents are voluminous in this case and it would be difficult for a party to judge the relevance of a particular document without knowing the precise challenge.  Further, it is not appropriate or indeed fair to the Plaintiff by construing the disclaimer or assurance given in the Mainland Legal Opinion in a particular manner.  The Defendants’ suggestions about these matters are nothing more than mere speculation.

208.  In my judgment, the overall evidence is consistent with the fact that, as admitted by Yang in the Mainland proceedings, the Plaintiff only knew about the 89.8 Million Agreement when the MOFCOM Approval was granted on 26 November 2007.  This also explains the series of announcements in late November 2007 when the Plaintiff was grappling with the issue on an urgent basis with the assistance of its Mainland Legal Advisors.

209.  As mentioned above, it would be very difficult to expect Fu to have come forward to clarify the matter, in particular as to why his alleged signature appeared in the 89.8 Million Agreement.  But equally important is that Zhou had not made any attempt to explain the matter.  Neither had the Defendants called anyone from the then management of BSZ who should have known about the matter.  Hence, I have reason to believe that, as confirmed by Luo Hong in the Mainland proceedings, it was Zhou Jun who forged the signature of Fu in the 89.8 Million Agreement.

210.  Mr Chan also complains that the Plaintiff’s position on the 89.8 Million Agreement was not consistent.  According to him, Thomas Chan admitted that when litigating in the Mainland, the Plaintiff’s stance was that the 89.8 Million Agreement was valid, thereby impliedly admitting that Fu’s signature on the document was genuine.  However, the Plaintiff’s stance in the present proceedings is that the document was forged. Again, I do not accept such submission.  It is clear from the evidence that the Defendants were privy to the MOFCOM application.  Even Yang admitted in the Mainland proceedings that the Plaintiff did not know about the 89.8 Million Agreement before December 2007, and it has been pleaded by the Defendants that Yang had instructed Zhou Jun and Luo Hong to take care of the matter including falsifying the supporting documents.  As mentioned in §§62 and 63 above, the Plaintiff was eager to uphold the MOFCOM Approval after the payment of consideration and the performance of the SPAs, and so one cannot criticise the Plaintiff for its then effort in protecting its interest in the transaction. 

211.  For these reasons, I reject the evidence of Yang and Wang in its entirety.  In respect of the MOFCOM application, I find that: (i) the Defendants and their subordinates in BSZ were all along privy to how the MOFCOM Approval and Certificate of Approval came about; and (ii) the Plaintiff’s Board, with the exception of Yang, only became aware of the matter, in particular the existence of the 89.8 Million Agreement, around the time when the MOFCOM Approval was granted.

B.4.6  Wang’s allegation about the dilution of her shares

212.  There is no dispute that, as part of the consideration for the shares transfer, the Plaintiff issued convertible notes to Wang in the amount of HK$360,000,000 on 5 December 2007.  Wang converted all the convertible notes into 180,000,000 ordinary shares of the Plaintiff on 8 January 2008, and became the Plaintiff’s second largest shareholder between 8 January 2008 and 21 April 2010.

213.  As part of her case, Wang claimed that, after the acquisition by PNG, the Plaintiff had conducted various placement and allotment exercises which resulted in substantial dilution of her shares.  However, I do not see how such allegation, even if true, would be relevant to the issues in the present case.  In any event, Wang could have chosen to redeem the convertible notes instead of converting.  She was also fully entitled to participate in the said exercises to maintain her level of shareholding upon conversion.  Either way it was entirely her choice.  Wang claimed she did not understand her options, but pleading ignorance surely does not assist her.  In particular, it is quite clear that Zhou was the mastermind of the deal, and it would be absurd to suggest an experienced businessman like him would not have taken the necessary steps to protect his business interest.  Further, as Thomas Chan explained, the Plaintiff had required the financing from those exercises for various legitimate purposes such as expanding its working capital and acquiring further lands and markets in the Mainland.  The Plaintiff cannot be faulted for doing what was in its commercial interests.

B.4.7  Difficulty on the part of the Plaintiff in obtaining control of BSZ and the Market and the Plaintiff’s investigation

214.  It is clear to me that the Plaintiff had encountered tremendous difficulties and resistance in seeking to gain control over the operation and management of BSZ and access to BSZ’s financial information and documents.  Such findings can be supported by the following:

(i)  the oral testimony of Thomas Chan and Ng;

(ii)  the Plaintiff’s contemporaneous records of various meetings made by Ng or one Mr Ying Yat Man, including the meetings on 12 April, 14 May, 21 May, 23 June and 9 September 2009;

(iii)  the documents and public announcements relating to the delay in announcing the interim results of the Plaintiff caused by the unavailability of financial information about BSZ;

(iv)  the steps taken by the Mainland Police and authorities, including the issue of the new company chops and business registration certificates;

(v)  the chaotic conditions of the Market as shown in the photos taken post-handover;

(vi)  the assault of 4 Plaintiff’s employees in the Market on 20 October 2010; and

(vii)  the dissipation of the assets and funds of BSZ.

215.  In fact, the Defendants are not seriously challenging the Plaintiff’s case in this regard.

216.  After the Plaintiff gained control of BSZ and the Market, the Plaintiff’s current management was able to obtain the Electronic Ledgers and compile the Analysis of Assets Register.

217.  Mr Chan raised queries on the provenance of the Electronic Ledgers and Analysis of Assets Register for the very first time in this action during cross-examination of the Plaintiff’s experts.  These documents were explained in Thomas Chan’s first witness statement filed back in October 2014.  They were also specifically referred and exhibited in full to the expert report of Mr Kenneth Chen filed back in January 2015.   No questions were ever raised about them.  No expert was engaged by the Defendants to examine them.  Indeed, Mr Chan had not even put their queries to Thomas Chan, which is the least that they should have done as a matter of basic fairness. Under such circumstances, the Defendants’ challenge to these documents has no substance at all.  Coupled with the fact that the Defendants had not arranged anyone from the then management of BSZ to contradict the information in these documents, there is no reason for the court to doubt the accuracy of these documents.

218.  Mr Chan also challenges the authenticity of the Schedule of Fictitious Construction Works allegedly seized from Zhou GB’s office.  He queries whether a person would document his own fraudulent acts in full and stamp his own fingerprint on the same document.  The way in which Thomas Chan obtained the document is also open to question.

219.  Again I reject all these challenges.  It is the Defendants’ pleaded case that the Management Accounts had been inflated and falsified, including items in construction costs and income.  The Plaintiff, or at least the existing management, had great difficulty in quantifying the extent of the inflation.  There was ample opportunity to the Defendants to adduce evidence to challenge the data in the Schedule of Fictitious Construction Works, and yet they decided not to do so.  Further, as I will further elaborate in the latter part of the Judgment, the data in such documents tally with the figures of inflation assessed by the Plaintiff’s experts.  Hence, there is no basis to these challenges.

C    DEFENCE AND COUNTERCLAIM FOR THE NON-FULFILMENT OF THE CONDITIONS PRECEDENT AND THE “REVERSAL” OF THE SPAS

220.  Having made the aforesaid factual findings, I then deal with the defence and counterclaim for the non-fulfilment of the conditions precedent and the “reversal” of the SPAs.  Without the SPAs, there is no point in discussing the other claims of the Plaintiff.

C.1    The plea of the Defendants

221.  In §24 of the Re-Re-Amended Defence and Counterclaim, the Defendants plead that:

“By reason of the matters pleaded above, the conditions precedent specified in Clause 4.1(g) of the 1^st SPA and Clause 4.1(e) of the 2^nd SPA had never been satisfied. The SPAs terminated and/or ceased to have any legal effect in accordance with Clause 4.4. In the premises, the Plaintiff has no right under the SPAs to claim any damages as alleged or at all. The transaction under the SPAs should be reversed in accordance to the terms of the SPAs, including reversing the transfer of the shares and the repayment of the consideration”.

222.  The plea is repeated at §26H:

“In any event the refusal to revoke the MOFCOM Approval would not affect the termination of the SPAs in accordance with Clause 4.4 as aforesaid.  In the premises, the transaction under the SPAs should be reversed in accordance with the terms of the SPAs, including reversing the transfer of the shares as pleaded in paragraph 24 hereinabove which the Plaintiff has wrongfully failed to do, and the Plaintiff has since been holding all the shares in the Company so transferred by the Defendant to the Plaintiff under the SPAs (the “Baishazhou Shares”) on constructive or resulting trust for the Defendants”.

223.  The Defendants counterclaim for, inter alia, the following reliefs:

(i)  a declaration that the Plaintiff has been holding the BSZ shares on constructive or resulting trust for the Defendants and is liable to account the same to the Defendants and an order that the Plaintiff do transfer or dispose of the same at the direction of the Defendants;

(ii)  an order that the Plaintiff do cause and/or procure the BSZ shares to be transferred to the Defendants; and

(iii)  an account of all the money received and/or profits made by the Plaintiff from the BSZ shares and an order for payment to the Defendants of all sums found due on the taking of the account.

C.2    The relevant contractual terms

224.  The following provisions in Clause 4 of the SPAs (which bears the heading “Conditions Precedent”) are relevant:

(i)  Clause 4.1(g) of the 1^st SPA (similar provision in Clause 4.1(e) of the 2^nd SPA):

“完成目标权益买卖的先决条件为……

“所有买方、卖方及目标公司有关本协议的签署、执行及完成交易或履行其各自在本协议项下的任何责任所必要的(包括任何政府、官方机构或监管机关(包括但不限于中华人民共和国商务部))同意均已取得，且无任何政府、官方机构或监管机构提出、颁布或采纳的法令、法规、规章或决定禁止、限制目标权益之转让；”

(ii)   Clause 4.2 of the 1^st SPA(similar provision in Clause 4.2 of the 2^nd SPA):

“买方可随时以书面方式通知卖方，放弃第4.1条中所列的全部或任何先决条件(第4.1(b)至(g)和(j)款中所列的先决条件除外)。卖方无权放弃第4.1条中所列的任何先决条件。”

(iii)  Clause 4.3 of the 1^st SPA (similar provision in Clause 4.3 of the 2^nd SPA):

“在交易完成日或該日之前，賣方應盡其最大努力促使第4.1(g), (i)和(k)款中所列的先決條件被滿足，而買方應盡其合理努力促使第4.1(a)至(h)和(j)款中所列的先決條件在第4.1條中所列的其他所有先決條件被滿足時實現。”

(iv) Clause 4.4 of the 1^st SPA (similar provision in Clause 4.4 of the 2^nd SPA):

“如果至远期终止日或在各方书面约定的更晚的日期之前，第4.1条中所列的任何先决条件未能被满足(或按照第4.2条的规定被放弃)，或者第4.1(b)至(g)款中所列的先决条件在其他所有先决条件已被满足或被放弃时未能实现，则除继续保持有效的第1、4.5、10、11、12、13、14、15和16各条外，以及除就因先前对本协议的违反而引起的索赔外，本协议不再有任何效力。”

C.3 The Defendants’ case

225.  It is common ground that, under the Mainland regulation[28], the transfer of the shares in BSZ from the Defendants to the Plaintiff, being an acquisition of shares in a Mainland company by a foreign investor, required the approval of MOFCOM.

226.  It is the Defendants’ case that the SPAs now sued upon had not been submitted to MOFCOM for approval.  Instead, it was the 89.8 Million Agreement that was submitted.  The 89.8 Million Agreement differs from the SPAs in a number of respects, e.g. the amount of the consideration, the manner of payment of the consideration, the governing law and the forum for dispute resolution.

227.  Given that Clause 4.1(g) of the 1^st SPA and Clause 4.1(e) of the 2^nd SPA expressly provided for “all relevant governmental consent to be obtained in relation to this SPA” (有關本協議…所必要的…同意均已取得), no MOFCOM approval was obtained in relation to the SPAs, and the MOFCOM Approval obtained on the basis of the 89.8 Million Agreement cannot satisfy the conditions precedent as set out in Clause 4.1(g) of the 1^st SPA and Clause 4.1(e) of the 2^nd SPA.  This is so irrespective of whether MOFCOM is to revoke the MOFCOM Approval dated 26 November 2007 or not.

228.  Further, the Defendants claim that, by taking out the Mainland Action No 2, the Plaintiff had acknowledged that the 89.8 Million Agreement had been declared to be void, and as a result the Plaintiff was asking the Defendants to render assistance to make another application to MOFCOM.  The conditions precedent specified in the SPAs have never been satisfied.  The SPAs have therefore been terminated or ceased to have any legal effect in accordance with Clause 4.4 of the SPAs.  As a result, the Plaintiff has no right under the SPAs to claim damages and the transaction under the SPAs should be reversed in accordance to the terms of the SPAs, including reversing the transfer of the shares and the repayment of the consideration.

C.4    The alleged non-fulfilment of the conditions precedent

229.  Despite the able submissions of Mr Chan, there is simply no basis to substantiate the Defendants’ contentions.

230.  Firstly, it is wrong to contend that the conditions precedent in Clause 4.1(g) of the 1^st SPA and Clause 4.1(e) of the 2^nd SPA were not satisfied.  These clauses make it a condition precedent for all approvals necessary for the execution, implementation, completion of or performance by the parties or BSZ of any obligation under the SPAs to be obtained (所有买方、卖方及目标公司有关本协议的签署、执行及完成交易或履行其各自在本协议项下的任何责任必要的…同意均已取得). While the MOFCOM Approval was granted on the basis of the 89.8 Million Agreement, what it approved was the same transaction (transfer of 90% interest in BSZ) between the same parties, i.e. the Plaintiff and the Defendants.

231.  Although the 89.8 Million Agreement had been declared void in the Mainland Action No 1, it can be seen from the history of the Mainland proceedings above that MOFCOM had not formally revoked the MOFCOM Approval.  After the adjudication of the Mainland Action No 1 and the Administrative Action No 1, the matter was revisited by MOFCOM.  Eventually, MOFCOM decided that the MOFCOM Approval was not to be revoked, which was upheld by the Final Judgment of the Higher People’s Court of Beijing.  Whether MOFCOM or the Beijing court affirmed the MOFCOM Approval only on the ground of public interest or not, it did not alter the objective fact that the MOFCOM Approval had never been revoked.  That was the crux of the relevant conditions precedent, i.e. the granting the approval of the shares transfer by MOFCOM rather than the approval of the proper signing and due execution of the SPAs.

232.  There can be no doubt that the Final Judgment is the final verdict of the Mainland court on the matter. The judgment was expressly stated to be a “final judgment” (終審判決). Under Articles 7 and 88 of the Mainland Administrative Proceedings Law (中華人民共和國行政訴訟法), Mainland courts adopt a two-tier appellate system (兩審終審制度) in relation to administrative proceedings. The Final Judgment took legal effect immediately under the two-tier system.^[29]While there exists in theory a re-trial procedure under the Mainland law, to which the Defendants have alluded, such procedure is generally not open to parties to a final judgment in the absence of limited and exceptional circumstances, and the Defendants have simply failed to point to any such circumstances.^[30]

233.  Further, the Defendants are also precluded from challenging the effect of the MOFCOM Approval, a matter that has been determined conclusively against the Defendants in the Mainland’s Administrative Proceedings No 2.  All the conditions for an issue estoppel to arise have been satisfied[31], and so the Defendants cannot be allowed to undo the effects of the MOFCOM Approval in this action, having failed to achieve precisely that in the Mainland proceedings.

234.  One must bear in mind that the Plaintiff is not seeking to rely on any factual findings made by a court outside jurisdiction. What matters here is whether MOFCOM has granted the approval for the shares transfer.  It is solely a matter to be decided by MOFCOM and the Mainland court in case the MOFCOM’s decision is challenged by way of administrative proceedings.

235.  Mr Chan also seeks to rely on Advertasia Street Furniture Ltd v China Outdoor Media Investment (Hong Kong) Co Ltd[32], which was a case about whether the condition precedent set out in a contract relating to the granting of certain approval by the Mainland authority had been satisfied.  However, there are material differences between the two cases.  In Advertasia, completion never took place, and the issue was whether the defendant was entitled to refuse completion on the ground that the relevant joint venture contracts were invalid.  It is clear from the judgment that the discussion on whether the relevant approval from the Mainland authority had been obtained was highly fact-sensitive and based on the overwhelming evidence in that case.[33]  No general proposition can therefore be extracted from the decision and applied to this case.  In any event, the case differs materially from the present case in that the MOFCOM Approval has been upheld in the Mainland proceedings.

236.  There is also no merit in the argument that, by taking out the Mainland Action No 2, the Plaintiff had “acknowledged” that the 89.8 Million Agreement had been declared to be void, with the result that the Plaintiff also somewhat “acknowledged” that the conditions precedent have not been satisfied.  Apart from the fact that such issue had never been put to the Plaintiff’s witnesses^[34], it has always been the Plaintiff’s position that the Mainland Action No 2 was merely taken out as a protective measure done out of abundance of caution. Hence, there was no such “acknowledgment” as alleged by the Defendants.

237.  For the above reasons, the conditions precedent relating to the approval of shares transfer by MOFCOM have been satisfied as a matter of fact.

238.  Secondly, even if such conditions precedent were not satisfied as a matter of fact, the Defendants have lost the right to rescind or otherwise “reverse” the SPAs given their affirmation of the same. All the evidence points to the Defendants having affirmed the SPAs with clear knowledge that the MOFCOM Approval was granted on the basis of the 89.8 Million Agreement, and the Defendants were privy to the application process.  These were also the conclusions of the Mainland courts.

239.  In any event, the Defendants would have known about the content of the MOFCOM Approval, and hence their alleged “right to rescind”, by the time it was granted in November 2007.  Despite that, they continued to perform, and press for performance of, the SPAs with absolutely no qualm or qualification.  It was only in January 2011 and September 2012 that they sought for the very first time to impugn the SPAs in the Mainland and Hong Kong proceedings respectively.  By reason of the dicta of the Court of Appeal in Super Keen Investments Limited v Global Time Investments Limited & Anor^[35], the Defendants had lost the right of rescission by their affirmation of the SPAs.

240.  In his final submissions, Mr Chan submits that, since the conditions precedent relating to the MOFCOM approval had not been fulfilled, any completion of the SPAs could not have been done in pursuance of the terms of the SPAs and the completion could at most only be viewed as an ad hoc transfer of the shares for the consideration paid subject only to the normal implied term of any sale and purchase of shares.  However, I cannot see the basis for such argument.

241.  Thirdly, for the same reasons, the Defendants are also estopped from challenging the validity, subsistence or enforceability of the SPAs or contending that any condition precedent remains unsatisfied.

242.  In Unruh v Seeberger, Ribeiro PJ restated the essential elements of an estoppel by convention:^[36]

(i)  the parties entered into some transaction or legal relationship on the basis of an assumption that was shared by or common to them both, and it was the element of commonality of the assumption that marked out estoppel by convention as a distinct form of estoppel (§133);

(ii)  it must be shown that assumption was communicated between the parties and acted upon, and there must be some mutually manifest conduct by the parties (§135);

(iii)  there was no necessity for the parties to believe that the assumed state of affairs was true, nor was there any necessity for the parties to have been mistaken (§136);

(iv)  what is important is for them to act in the belief, manifested by words or conduct, that they are both proceeding with the transaction on the basis of the same shared assumption (§137);

(v)  the contents of the common assumption must be sufficiently certain to enable the court to give effect to it (§138);

(vi)  estoppel by convention is concerned with a common assumption relied upon as a basis upon which the persons sharing such assumptions enter into a transaction or legal relationship (§142); and

(vii) there must be an attempt by one party to depart from the common assumption which departure would be unjust because of the part taken by him in occasioning its adoption by the other party, and the other party would suffer detriment arising out of his having entered into the relevant transaction on the basis of the common assumption if the opposite party were afterwards allowed to set up rights inconsistent with the assumption (§150).

243.  I agree with Mr Ho that this is a classic case for the operation of the principle of estoppel by convention.  The Plaintiff and the Defendants have each completed and performed the SPAs on the shared assumption that the SPAs are valid and enforceable and all conditions precedent, including clause 4.1(g) of the 1^st SPA and clause 4.1(e) of the 2^nd SPA, have been satisfied.  In particular, the Defendants were involved in the first application of the MOFCOM Approval, and they proceeded on the basis that the MOFCOM Approval, which was made based on the 89.8 Million Agreement, was good and proper.  Under such circumstances, the Defendants’ attempted unilateral departure from the common assumption would be unjust and detrimental to the Plaintiff, who has conducted its affairs in reliance on the assumption all along.

244.  In challenging the application of the principle of estoppel by convention, Mr Chan argues that:

(i)  without calling any evidence on why the Plaintiff proceeded to completion, the Plaintiff has not established that it had proceeded to completion on the alleged common assumption;

(ii)  the availability of this estoppel by convention is “subject to questions of illegality and any overriding public policy”[37], and “an estoppel by convention cannot make lawful a transaction that was unlawful” and  “public policy may exclude the raising of an estoppel”[38];

(iii)  the estoppel pleaded in §12 of the Re-Re-Re-Amended Reply and Defence to Counterclaim is not engaged, because what the Defendants are challenging is not the validity of the SPAs but rather whether the conditions precedent of the SPAs have been fulfilled; and

(iv)  the estoppel is not applicable because of the “non-waiver” clause provided in Clause 4.2 of the SPAs and the “entire agreement” clause in Clause 16.2 of the 1^st SPA and Clause 14.2 of the 2^nd SPA.

245.  I reject these challenges.  Taking into account the history of the transaction, it is quite clear that one of the main reasons delaying the completion was the pending MOFCOM Approval.  It would be absurd to suggest that, under such circumstances, the parties had not based on the said common assumption (i.e. the MOFCOM Approval, which was made based on the 89.8 Million Agreement, was good and proper) in completing the transaction. Further, MOFCOM and the Mainland court did not revoke the MOFCOM Approval and so there is no public policy preventing the application of the principle.  I also take the view the fulfilment of the conditions precedent and validity of the SPAs are two ways of saying the same thing.  In fact, Clause 4.4 links the two concepts together.  Finally, I do not accept that the “non-waiver” and “entire agreement” clauses prevent the application of the estoppel.  Though Clause 4.2 provides that the vendors, i.e. the Defendants, cannot waive the non-fulfilment of the conditions precedent, the present case is not one concerning waiver.  It is a case where the parties proceeded to completion on the common assumption that the conditions precedent had been satisfied.  Despite the knowledge of the 89.8 Million Agreement, the Defendants still went ahead with the completion. Further, this is not a case that the parties are trying to introduce new terms in the agreements, and so the “entire agreement” clause is not applicable to prevent the application of the estoppel. 

246.  Fourthly, the Defendants are under an obligation to satisfy clause 4.1(g) of the 1^st SPA and clause 4.1(e) of the 2^nd SPA.  Assuming the conditions precedent were not satisfied, this would represent a failure by the Defendants to perform their obligation.  They would be prevented from avoiding the SPAs in these circumstances by the principle that a party is not permitted to take advantage of its own wrong.[39]

247.  One has to bear in mind that the Defendants were responsible to make the application to obtain MOFCOM’s approval for the shares transfer.  They proceeded with the performance of the SPAs on the basis that the MOFCOM Approval had been properly obtained and all the necessary conditions precedent had been properly satisfied.  To allow the Defendants to rely on their own wrongs to escape from their obligations under the SPAs is totally inappropriate.  In particular on the facts of the present case, there is no danger that the Mainland authority would block the shares transfer after so many years.

248.  Mr Chan complains that the Plaintiff is also not coming with clean hands as its management clearly knew about the 89.8 Million Agreement before the completion on 5 December 2007.  However, based on my findings in Section B.4.5 above, the Defendants and not the Plaintiff were privy to the MOFCOM application.  Before the completion, the Plaintiff had also obtained advice from the Mainland Legal Advisers about the matter.  Hence, I reject Mr Chan’s complaint in this regard.

249.  For these reasons, there is no basis to substantiate the Defendants’ contention as to the non-fulfilment of the conditions precedent.

C.5    The claim for the “reversal” of the SPAs

250.  The Defendants go further and ask for the “reversal” of the SPAs.

251.  I agree with Mr Ho that there is simply no basis for the pleaded request of a “reversal”.  The SPAs do not provide for “reversal” of the transaction.  All Clause 4.4 of the SPAs says is that if any of the relevant conditions precedent are not satisfied, then subject to the keeping in force of certain clauses and any existing claims for damages for breach of contract, the agreement no longer has any effect (本协议不再有任何效力).  It goes no further.

252.  There is thus no contractual basis at all for a “reversal” as alleged in the Defendants’ pleadings.  If the Defendants seek to invoke any common law ground (such as mistake or total failure of consideration) to unwind the SPAs, that ought to have been specifically pleaded.  There is no such plea.

253.  It is clear from Defendants’ pleaded reliefs that they are seeking to unwind the effect of the SPAs.  The language of Clause 4.4 makes it plain that the consequence of non-fulfilment of a relevant “condition precedent” is prospective as opposed to retrospective, i.e. the SPAs shall no longer have any effect (本协议不再有任何效力).  The SPAs had already come into force and became binding immediately upon execution by both parties on 2 May 2007.  The so-called “conditions precedent” relate only to the parties’ obligation to complete and provide no cause of rescission.  Further, the provision preserving the right to damages arising from any antecedent breach of the SPAs (除就因先前对本协议的违反而引起的赔偿外) leaves no room for any argument that a party may unravel the transaction by invoking the clause.

254.  In their opening submissions, the Defendants contend that their counterclaim is for the rescission or reversal of the transaction in which case the cash consideration, the Instruments and 180 million of the converted Plaintiff’s shares together with dividend (if any) would have to be returned to the Plaintiff and the Plaintiff would have to transfer back the 90% BSZ shareholding to the Defendants.  However, the purported counterclaim for rescission and the legal basis in support of it are nowhere to be found in the Defendants’ pleadings.

255.  In any event, it is difficult to see how the Defendants can claim rescission even if it were pleaded.  The essence of rescission is that a party to a contract has a right to avoid the contract because of some defect at the time the contract was made.[40] Usual examples are mistake, misrepresentation, duress etc.  Mere non-fulfillment of conditions precedent does not fall within the same category.

256.  In fact, a plea for rescission would also be fundamentally incompatible with the Defendants’ existing plea for termination. A contract cannot be rescinded and terminated at the same time.

257.  Mr Ho suggests that if there is a legal basis for the Defendants’ intended counterclaim, the closest one would appear to be restitution of an unjust enrichment. Yet such a claim, including the unjust factor the Defendants intend to rely on (which seems to be total failure of consideration here) must, again, be specifically pleaded.[41]  I agree with Mr Ho that the lack of a proper plea for rescission or restitution, whichever is intended by the Defendants, is therefore fatal.

258.  The Defendants make the same complaint against the Plaintiff for its lack of a proper plea of the impossibility of restitutio in integrum.

259.  In their opening submissions, the Defendants have offered to return, inter alia,“the 180 million of the converted Plaintiff’s shares” to the Plaintiff.  However, on their own case, these shares have substantially depreciated in value.  According to Wang[42], the shares were worth around HK$34 as at January 2019.  Mr Ho therefore submits that the Defendants would be barred from making a claim for rescission or restitution because restitutio in integrum would be impossible in this case.

260.  As I understand it, Mr Ho just raises such plea in case that the court were to conclude there is a proper plea for rescission or restitution in the Defendants’ pleadings in the first place.  Due to my earlier ruling on the lack of a proper plea for rescission, this court does not even need to address the plea of the impossibility of restitutio in integrum. 

261.  If I am wrong on such issue, I would make the following observations about such plea.

262.  The restitutio in integrum bar to rescission protects the defendant, i.e. the Plaintiff in the present case insofar as the Defendants’ claim for rescission is concerned, from being put, upon rescission, in an unjustifiably worse position than he occupied before the contract was made.[43] In the context of restitution and under the law of unjust enrichment, the relevant enrichment is tested and valued at the date of receipt.[44] This means that, prima facie, the Defendants’ enrichment is measured by the value of the convertible notes at the date of issuance, and the Defendants must restore the same under counter-restitution.

263.  There are indeed authorities suggesting that rescission is not barred merely because the property transferred under a contract had depreciated in value as a result of the ordinary play of market forces, and that upon rescission that person only needs to restore the value of the depreciated property surviving in his hands as counter-restitutio.[45] However, as explained in The Law of Rescission:[46]

“once a claimant sufficiently learns of his right to rescind, the position changes and any substantial depreciation in the value of the asset he must return occurring before he determines his election will usually render restitution in integrum impossible. This is particularly so where it is foreseeable that the asset might decline in value, as in the case of speculative assets. In cases of this type a claimant must act quickly once he learns of his rights or risk losing them. Certainly a claimant cannot knowingly speculate at the defendant’s risk, hoping to keep the asset if it performs well and return it if not”.

264.  It is clear that Wang decided to convert all the convertible notes on 8 January 2008, which was well after the Defendants learned of their “right to rescind”.  The said passage from The Law of Rescission therefore applies on all fours and the Defendants cannot offer the depreciated shares to the Plaintiff now as counter-restitution.

265.  In fact, according to the reasons identified in the Final Judgement of the Higher People’s Court of Beijing, there had been significant changes to the Market over the last 10 years since the acquisition.  Hence, it would be practically impossible to reverse the transfer of the BSZ shares to the Defendants.

266.  Mr Chan complains that the Plaintiff has failed to identify or particularise the changes of the Market which have made it impossible to reverse the transfer of shares to the Defendants.  Further, no such evidence has been adduced by the Plaintiff.  As I see it, all these issues arise due to the absence of a proper plea for rescission of the SPAs by the Defendants.  There is simply no basis for the Defendants to lodge such complaint when they themselves have not made out a case for the rescission of the SPAs in the first place.  There is no such provision for “reversal” of the position of the parties in the SPAs, and the Defendants have not pleaded any recognised principles for rescission in the pleadings.  Under such circumstances, if the court has to consider the issue of restitutio in integrum, there is no reason why the court should not also consider the plea of its impossibility based on the available evidence before the court.

267.  Further, the Plaintiff in §31 of its Re-Re-Re-Amended Reply and Defence to Counterclaim has expressly referred to the Final Judgment, including the specific findings that the conditions of BSZ had undergone significant changes over the past 10 years and that if the shareholding structures of the parties were to be restored to the status prior to the acquisition, it would cause serious impact on the stable operation of the Market, which serves an important role in supplying agri-products to cities and provinces of the Mainland.  The Defendants have failed to articulate any reason why the Plaintiff is not entitled to rely on the reasoning set out in the Final Judgment as part of its defence to Defendants’ counterclaim.  The allegation of lack of particularity is thus without substance. 

268.  In short, if the court were have to consider the plea of restitutio in integrum, the depreciation in the value of the converted shares and the change in the conditions of the Market make counter-restitutio impossible.

269.  For all the reasons given above, there is simply no basis for the Defendants’ claim for the non-fulfilment of the conditions precedent or “reversal” or rescission of the SPAs.

D   THE OVERPAYMENT CLAIM

270.  Having dealt with the validity and the effect of the SPAs, I then address the different claims of the Plaintiff.  I first start with the Overpayment Claim as the quantum involved is most substantial.

D.1    The relevant clauses in the SPAs

271.  Clause 6.3 of the SPAs is the contractual basis for the Overpayment Claim, which provides for compensation or damages to be paid in the case of any breach of warranties or promises made in the SPAs.  The amount of the compensation shall be such that it would place the BSZ in the same financial position as if there is no breach of such warranties or promises.  The compensation shall also include any reasonable expenses caused directly or indirectly by such breach.  The original text of the clause reads as follows:

“（在不以任何方式限制买方任何其他权利的情况下，包括买方以其他依据就卖方违反其承诺索取损害赔偿的权利），卖方承诺，如果卖方违反任何卖方承诺，其将以保证赔偿方式按买方要求立即用现金向买方（或如果经买方要求，向目标公司）（合称“受保障人”）支付一笔等同于以下各项总和的款项：（i）如果目标公司收到该款项，则能使目标公司处于有关卖方承诺未被违反时对本该存在之财务状况；及（ii）买方或目标公司因卖方违反卖方承诺而之直接或间接遭受或招致的一切合理费用。”

272.  The SPAs contain various warranties given by the Defendants as to the truthfulness, accuracy and completeness of the financial information of BSZ which they provided:

(i)  information provided to the Plaintiff for preparation of the Management Accounts is true, accurate and not misleading (Clause 1.1 of Schedule 3 to 1^st SPA and 2^nd SPA):

“准确性

为了编制管理账目向买方或其代表和顾问提供的关于所有目标公司的所有資料，均真实、准确、完整、不具误导性，并且未包括任何对某一重要事实的不真实陈述，或者对于需在資料中作出陈述的重要事实，或未在资料中作出陈述即会引致误导的重要事实未作陈述。”

(ii)  no fact or issue reasonably foreseeable to be substantively unfavourable to BSZ’s financial or trading position or prospects (Clause 1.2 of Schedule 3 to 1^st SPA and clause 1.1 of Schedule 3 to 2^nd SPA):

“违漏

不存在其他可能被合理地预期对目标公司的财务或营业状况或前景产生任何实质性不利效果的事实或事项。”

(iii)  the Management Accounts are a true and fair representation of the factual situation of BSZ’s financial results with regard to the dates and periods they cover (Clause 3.1(a) of Schedule 3 to 1^st SPA):

“管理账目

管理账目就其所列日期及期间呈列了真实公平的事实状况和目标公司的财务结果。”

(iv)  financial information provided to the Plaintiff is not in any substantive way misleading, has not substantively exaggerated BSZ’s assets and revenue, and has not substantively under-reported BSZ’s liabilities (Clause 3.1(c) of Schedule 3 to 1^st SPA):

“提交给买方或其代表和专业顾问的财务资料，没有在任何实质性方面令人误解，没有实质性地夸大截至该等資料编制日的目标公司资产价值，没有实质性地少报截至该等資料编制日的目标公司负债，也没有实质地夸大目标公司在有关财务期的利润。”

(v)  the financial and trading position and the prospects of BSZ did not significantly deviate from that of the Management Accounts, and no events had occurred that may cause such significant deviation (Clause 3.2(a) of Schedule 3 to 1^st SPA):

“自管理账目日以来，且和管理账目作比较，财务或交易状况或目标公司的前景均未有重大逆转(同类事件在同等程度上有可能在总体上对从事类似业务的所有公司造成的影响除外)，而且未发生任何有可能导致任何该等转变的任何事件、事实或事项。”

(vi)  BSZ’s accounting books and other records include a full and accurate set of records that are required to be so recorded (Clause 3.5(a)(ii) of Schedule 3 to 1^st SPA):

“(a)目标公司的帳册和其他记录：… …

(ii)包含了要求在其中进行记录的所有資料的完整和准确的记录；”

(vii)  the aforesaid warranties (among others) are true, accurate and not misleading, and were repeated at completion (Clause 4.1(i) of 1^st SPA, 4.1(g) of 2^nd SPA):

“完成目标权益买卖的先决条件为：

(i)  所有卖方承诺保持真实、准确、无误导性，如同在交易完成时以及在自本协议日期起至交易完成止期间内所有时间重述一样；”

273.  It is the Defendants’ admitted case that the Management Accounts were falsely inflated.  There can thus be no dispute that the warranties mentioned above had been breached.

274.  In respect of the quantum of the Overpayment Claim, the Plaintiff claims for the amount necessary to put BSZ into the financial position it would have been in had the relevant sellers’ warranties not been breached.  To ascertain the financial position of BSZ that would have existed had the warranties not been breached, the court needs to determine the value of BSZ as warranted under the SPAs.  To arrive at the amount necessary to put BSZ into such a financial position, the court needs to determine the value of BSZ as was actually delivered.  The contractual formulation is therefore in line with the normal measure of damages for a breach of warranty claim under common law, which is the value of the shares as warranted less the value in fact at the date of the transaction.[47]

D.2    The Plaintiff’s alleged knowledge of the falsification of the Management Accounts and the Plaintiff’s reliance on the Management Accounts are irrelevant

275.  In opposing the Overpayment Claim, the main thrust of the Defendants’ case is that: (i) the inflation of the accounts was known to and even instigated by those representing the Plaintiff; (ii) there was a collateral agreement made between the parties that the Plaintiff would not sue the Defendants for the falsification of the Management Accounts; and (iii) the Plaintiff has failed to establish that it had relied on the Management Accounts in completing the shares transfer transaction.

276.  As mentioned in Section B.4.3 above, I find against the Defendants on all these factual issues, and so the Defendants’ defence to the Overpayment Claim must fail.  However, as I will demonstrate below, the result of the case would be the same even if I were to rule these factual matters in favour of the Defendants.

D.2.1 Contractual Estoppel

277.  Firstly, nothing in Clause 6.3 requires the Plaintiff to show: (a) causation (other than the financial position BSZ would have been in had there been no breach); or (b) reliance of the Plaintiff on any of Defendants’ warranties.

278.  I agree with Mr Ho that, as a matter of law, the mere fact that the purchaser knew of a defect in the subject matter of the contract or even instigated the defect will not provide a defence to the purchaser’s claim, unless the relevant knowledge or instigation amounts to a recognised defence, such as an express qualification of the warranty in the contract, an estoppel, a waiver or a collateral agreement varying the main contract. Failing the establishment of such a defence, it is hard to see how, under the principles of contract law, the presence of a defect would preclude a breach of warranty or an indemnity claim (such as one under Clause 6.3).

279.  In this regard, the Defendants allege that the Plaintiff is bound by an estoppel or alternatively a collateral agreement, both on the premise that the Plaintiff knew and had requested the Management Accounts to be inflated and had agreed not to take objection to them or enforce the relevant warranties in the future.  As mentioned above, I find against the Defendants on the issue of the collateral agreement.

280.  Further, these allegations are in conflict with the entire agreement clauses in the SPAs.[48] More importantly, the Defendants expressly acknowledged in Clause 6.1 that the Plaintiff was induced by and had relied upon their warranties in entering into the SPAs.  Clause 6.2 further provided that any Plaintiff’s knowledge, whether such knowledge was obtained from the investigation or due diligence conducted by the Plaintiff, would not affect its claims under any of the warranties.

281.  The original text of the said clauses reads as follows:

“6.1  卖方承认买方是依赖卖方承诺签订本协议，并且买方在签订本协议时受到了卖方承诺所劝诱。

6.2  买方已知悉的（事实或经推断）与卖方有关的任何资料及买方或代表买方作出的调查均不影响买方根据卖方承诺提出的任何索赔或用于扣减任何可应获得赔偿的款项，并且就此的责任不应限于在交易完成前所发现的违约。”

282.  I agree with Mr Ho that Clauses 6.1 and 6.2 of the SPAs create a contractual estoppel which precludes the Defendants from alleging that the actual facts are inconsistent with the state of affairs so specified in these clauses.  A convenient summary of the doctrine can be found in Chitty on Contracts (33^rd ed):[49]

“This form of ‘estoppel’ is said to arise when contracting parties have, in their contract, agreed that a specified state of affairs is to form the basis on which they are contracting or is to be taken, for the purposes of the contract, to exist. The effect of such ‘contractual estoppel’ is that it precludes a party to the contract from alleging that the actual facts are inconsistent with the state of affairs so specified in the contract.”

283.  The doctrine was recognised by the Court of Appeal in Nokia Corporation v TCT Mobile Limited^[50] as being firmly established in English law and has now been adopted as part of Hong Kong law for reasons that it would promote certainty in contractual relationships and reduce the scope for disagreement and disputes in the working out of the contract.

284.  As demonstrated by the facts of the present case, disapplying the doctrine would create much undesirable effect.  The transaction concerned an acquisition of shares of a company outside the jurisdiction by a listed company in Hong Kong.  The shareholders of the Plaintiff might not have a clear picture about the negotiation leading to the transaction and the various matters relating to the operation of the company outside jurisdiction, i.e. BSZ.  Apart from promoting certainty in contractual relationships and reducing the scope for disagreements and disputes, the application of the doctrine would reduce the possibility of malpractices and under-table promises.  For such kind of transactions, there is much benefit for holding the parties to their promises made in the written contracts.

D.2.2 Non-attribution of the alleged knowledge of the falsification of the Management Accounts to the Plaintiff

285.  I also accept the Plaintiff’s submission that, even assuming the issue of knowledge were somehow relevant to the Plaintiff’s claim, the alleged acts or knowledge of Yang, Fu, Sin, Choi and Cazenove^[51] cannot be properly attributed to the Plaintiff.

286.  In Moulin Global Eyecare Trading Ltd v Commission of Inland Revenue[52], Lord Walker NPJ explained that:

“Attribution means, in this context, the process of legal reasoning by which the conduct or state of mind of one or more natural persons (that is, human beings) is treated as that of a non-natural person (that is, a company) for the purpose of determining the company’s legal liability or rights in civil proceedings (in particular, its liability or rights in contract, in tort or for unjust enrichment) or its criminal liability.”

287.  In considering the issue of attribution, the court has to consider the following two questions:

(i)  whether, on the facts of the present case, the relevant actions or knowledge should, as a matter of general principle, be attributed to the Plaintiff; and

(ii)  if the answer is yes, whether the matter nevertheless falls within the “breach of duty” exception to the general principles of attribution.

288.  Though these are two separate questions, Lord Mance in Bilta (UK) Ltd (in liquidation) v Nazir[53] observed that the so-called “exception” is merely an aspect of the general rule.

289.  In any event, I answer both questions in favour of the Plaintiff.

290.  In Bilta, Lord Sumption JSC summarised the effect of the leading modern authority on the subject, Meridian Global Funds Management Asia Ltd v Securities Commission[54], as follows:[55]

“The question what persons are to be so far identified with a company that their state of mind will be attributed to it does not admit of a single answer. … The primary rule of attribution is that a company must necessarily have attributed to it the state of mind of its directing organ under its constitution, ie the board of directors acting as such or for some purposes the general body of shareholders. …The directing organ of the company may expressly or implicitly have delegated the entire conduct of its business to the relevant agent, who is actually although not constitutionally its “directing mind and will” for all purposes. … Such a person in practice stands in the same position as the board. The special insight of Lord Hoffmann … was to perceive that the attribution of the state of mind of an agent to a corporate principal may also be appropriate where the agent is the directing mind and will of the company for the purpose of performing the particular function in question, without necessarily being its directing mind and will for other purposes …”

291.  It is an important context of this case that the Plaintiff was a public listed company.  Fu and Yang did not constitute the majority of the Plaintiff’s Board and could not be regarded as the Plaintiff’s “directing mind and will” for the purpose of the acquisition.  Sin, Choi and Yiu of Cazenove were not even members of the Board.  Apart from these persons, there is no suggestion that the shareholders or other directors of the Plaintiff knew of the alleged inflation of BSZ’s accounts.

292.  This case is therefore readily distinguished from cases such as Stone & Rolls Ltd v Moore Stephens[56], Bilta[57] or Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd[58], which all concerned “one-man” or “puppet” companies, where there were no shareholders or directors who were not complicit in the fraud.

293.  Furthermore, despite Yang’s position as a director of the Plaintiff, the evidence clearly demonstrates that he was at all material times acting on instructions of Zhou and the Defendants and in their interest.[59]  One cannot therefore say that Yang was then a “directing mind and will” of the Plaintiff.

294.  In any event, even assuming that the conduct or knowledge in relation to the inflation of the Management Accounts could be attributed to the Plaintiff, the “breach of duty” exception would apply in this case to negate that attribution.

295.  This issue involves the consideration of two sub-questions: (a) whether the relevant conduct was such as to engage the “breach of duty” exception; (b) whether the “breach of duty” exception can apply in circumstances where (as in the present case) the company’s claim is against third parties (the Defendants for dishonest assistance) rather than against the defaulting directors (Fu and Yang).

296.  The starting point for the modern law in this area is the decision of the English Court of Appeal in Belmont Finance Corporation Ltd v Williams Furniture Ltd & Ors[60], the facts of which have certain resemblance with those of the present case.  As summarised by Lord Sumption JSC in Bilta:[61]

“… That case arose out of an elaborate scheme, to which Belmont's directors were party, to extract value from Belmont by causing it to buy the shares of a company called Maximum at a considerable overvalue. This was a breach of the fiduciary duties of the directors. Their object was to recycle the profit on the sale of Maximum so that it could be used to fund the purchase by three companies associated with the directors of Belmont's own shares. This was not only a breach of the directors' fiduciary duty but a criminal contravention of what was then section 54 of the Companies Act 1948. Belmont subsequently went into liquidation, and an action was brought in its name by receivers for damages for breach of duty against the directors who had authorised the transaction, and for an account on the footing of knowing receipt against the three companies. The plaintiff was met by the illegality defence. The judge dismissed the action at the close of the plaintiff's case on that ground, holding that the company was a party to the conspiracy. This was because it must be taken to have known, through its directors, that the asset was over-valued and that the purpose of the transaction was to fund the purchase of Belmont's shares. Reversing the judge, Buckley LJ said, at pp 261-262:

“But in my view such knowledge should not be imputed to the company, for the essence of the arrangement was to deprive the company improperly of a large part of its assets. As I have said, the company was a victim of the conspiracy. I think it would be irrational to treat the directors, who were allegedly parties to the conspiracy, notionally as having transmitted this knowledge to the company; and indeed it is a well-recognised exception from the general rule that a principal is affected by notice received by his agent that, if the agent is acting in fraud of his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal. So in my opinion the plaintiff company should not be regarded as a party to the conspiracy, on the ground of lack of the necessary guilty knowledge.”

297.  This approach finds its modern expression in Bilta[62] in the statement of principle by Lord Neuburger of Abbotsbury PSC (seeking to synthesise the views of Lords Sumption, Toulson and Hodge JJSC) that:

“Where a company has been the victim of wrongdoing by its directors, or of which its directors had notice, then the wrongdoing, or knowledge, of the directors cannot be attributed to the company as a defence to a claim brought against the directors by the company's liquidator, in the name of the company and/or on behalf of its creditors, for the loss suffered by the company as a result of the wrongdoing, even where the directors were the only directors and shareholders of the company, and even though the wrongdoing or knowledge of the directors may be attributed to the company in many other types of proceedings.”

298.  In some earlier authorities, considerable stress was laid upon the idea that, for the “breach of duty” exception to apply, it was necessary that the company itself should be the intended victim of the breach. However, Bilta provides the answer to that.  In that case, it was argued by the defendants that the true victim of the fraud was HMRC (Her Majesty’s Revenue and Customs) and not the company, and so the “breach of duty” exception did not apply.  But the court accepted the following argument made by the claimants’ counsel:

“The argument that the victim was not the company, Bilta, but its creditor, the revenue, overlooks the fact that the wrong complained of is breach of fiduciary duty which is necessarily a wrong against the company because the duty was owed to the company and not to its creditors. The fraud is one which gives rise to a right of action by the company for breach of fiduciary duty: there is no right of action by the creditor and, had the revenue brought a claim for breach of fiduciary duty by the directors, it would have been struck out. The same would apply to claims for dishonest assistance or knowing receipt. The loss to creditors is a reflective loss in respect of which it would not be allowed to sue.” (§8E-F)

299.  Further, Lord Sumption, after observing that it was “unrealistic” to ignore the fact that the ultimate loser was HMRC[63], went on to state that his analysis of the true basis of the rule:

“… makes it unnecessary to address the elusive distinction between primary and secondary victimhood. That distinction could arise only if the application of the breach of duty exception depended on where the loss ultimately fell, or possibly on where the culpable directors intended it to fall. If, however, the application of the exception depends on the nature of the duty and the parties as between whom the question arises, the only question is whether the company has suffered any loss at all …”[64]

300.  In the present case, assuming Yang and Fu had known about or instigated the inflation of the Management Accounts, they would have been in breach of their fiduciary duties to the Plaintiff for the reasons elaborated in the latter part of this Judgment.[65]  The “breach of duty” exception is thus fairly and squarely engaged.  The said breaches have not been excused by any shareholders’ consent.  There can be no dispute that the Plaintiff and its shareholders, which were made to approve and pay for an acquisition that was significantly overpriced, were the true victims of the breaches of duties.

301.  As to whether the “breach of duty” exception remains applicable where, as here, the claim is against third parties rather than the delinquent directors, I agree with Mr Ho that the answer is clearly affirmative, as the third parties against whom the claim is made (i.e. the Defendants) were, by their own admission, complicit in the directors’ wrongdoing, rather than innocent third parties.

302.  In Bilta, Lord Sumption JSC identified three situations in which the question of attribution may arise:[66]

(i)  a third party may sue the company for a wrong such as fraud which involves a mental element;

(ii)  the company may sue either its directors for the breach of duty involved in causing it to commit that fraud, or third parties acting in concert with them, or (as in Bilta itself) both;

(iii)  the company may sue a third party who was not involved in the directors' breach of duty for an indemnity against its consequences.

303.  Lord Sumption’s discussion in §89 of the second of these three situations refers only to a claim by a company against its directors as “the paradigm case for the application of the breach of duty exception”, without expressly mentioning claims against “third parties acting in concert with [the defaulting directors] or … both”.  However, it is clear that the discussion is concerned not only with claims against the defaulting directors alone, but also (as presaged in §87) with claims against those who are regarded as having accessory liability in equity for the director’s primary wrongs.

304.  That position is even clearer in the judgment of Lord Toulson and Lord Hodge JJSC, who stated the central question in Bilta as follows:[67]

“When the directors of a company involve it in a fraudulent transaction, is the company barred by the doctrine of illegality from suing them and their accessories for losses caused by their breach of fiduciary duty?”

305.  Their Lordships proceeded to discuss the claim in conspiracy against those complicit with the fraudulent directors in the following terms:[68]

“For the reasons explained we have concentrated on the claim against the directors for breach of fiduciary duty, which the appellants are said dishonestly to have assisted. It is difficult to see that the claim for conspiracy adds anything. Mr Maclean argued that the real conspiracy was to injure HMRC and that it is artificial to regard there as having been a conspiracy against Bilta, when it was in truth nothing more than a vehicle for defrauding HMRC. It may be that Bilta will fail to establish the conspiracy alleged, but the merits of that argument are not fit for determination on a summary application. Bilta has a triable case, and the only issue before the court is whether it must fail for illegality. In that respect the appellants are on no stronger ground in relation to conspiracy than in relation to the breach of fiduciary duty relied on as the unlawful means. It is perhaps worth observing that in Berg Sons & Co Ltd v Mervyn Hampton Adams [1993] BCLC 1045 Hobhouse J noted that there was no allegation of conspiracy by the accountants and Mr Golechha to defraud the company (p 1066), implying that this would have made a potential difference. In this case there is an allegation of conspiracy between the directors and others to defraud the company. It does not alter the analysis to say that the aim of the dishonest director shareholders was to make a dishonest profit for themselves and their accomplices at the expense of HMRC, for this itself involved a breach of fiduciary duty towards Bilta (representing the interests of its creditors) and the intentional causation of loss to Bilta.”

306.  As regards attribution, their Lordships’ conclusion clearly supports Mr Ho’s submission:[69]

“… where the company claims against a third party, whether or not there is attribution of the director's or employee's act or state of mind depends on the nature of the claim. For example, if the company were claiming under an insurance policy, the knowledge of the board or a director or employee or agent could readily be attributed to the company in accordance with the normal rules of agency if there had been a failure to disclose a material fact. But if the claim by the company, for example for conspiracy, dishonest assistance or knowing receipt, arose from the involvement of a third party as an accessory to a breach of fiduciary duty by a director, there is no good policy reason to attribute to the company the act or the state of mind of the director who was in breach of his fiduciary duty. If the company chose not to sue the director who was in breach of his duty, the third party defendant could seek a contribution from him or her under the Civil Liability (Contribution) Act 1978. We have set out above why we consider that the defence of illegality is not available to a company's directors or their associates who are involved in a conspiracy against the company or otherwise act as accessories to the directors' breach of duty. Equally, there is no basis for attributing knowledge of such behaviour to the company to found an estoppel.”

307.  In conclusion, the application of the aforesaid principles means that the “breach of duty” exception is engaged in the present case, and the acts or knowledge of Fu or Yang should not be attributed to the Plaintiff in a claim against the parties who were complicit in those directors' breaches of the fiduciary duties owed to the Plaintiff, i.e. the Defendants.  Hence, even if Fu and Yang (or even other persons as suggested by the Defendants) knew of or instigated the falsification of the Management Accounts, it provides no defence to the Defendants for the Overpayment Claim.[70]

D.3    Preservation of the claim for loss

308.  I have already explained in Section C above why the Defendants have failed to show, or are estopped or precluded from contending, that the conditions precedent in clause 4.1(g) of the 1^st SPA and clause 4.1(e) of the 2^nd SPA had not been satisfied.

309.  Yet even supposing that the conditions precedent were unsatisfied and the SPAs ceased to have any effect (本协议不再有任何效力) pursuant to clause 4.4, the Plaintiff’s Overpayment Claim under Clause 6.3 for the Defendants’ breaches of warranties is expressly preserved by Clause 4.4, which provides that claims arising from any prior breach of the SPAs will survive (除就因先前对本协议的违反而引起的赔偿外).  The Defendants had been in breach of the relevant warranties (on the truthfulness, accuracy and completeness of the financial information of BSZ) since the SPAs were executed in light of the falsities in the Management Accounts which were specifically attached to the SPAs.  This was prior to the alleged non-fulfilment of conditions precedent and the purported cessation of effect of the SPAs.

D.3    Quantum of the Overpayment Claim

310.  The Plaintiff claims the sum of RMB 510,000,000 as damages for the Overpayment Claim.

311.  The Plaintiff tries to ascertain the quantum of the inflation of the Management Accounts.  After ascertaining such figure, the Plaintiff then seeks to establish the amount that it had overpaid for the acquisition of the BSZ’s shares caused by such inflation of the Management Accounts.

312.  The Plaintiff has called 3 expert witnesses to substantiate the quantum of the Overpayment Claim: (i) Mr Raymond Chu (“Mr Chu”) who is an expert in quantity surveying; (ii) Mr Chen who is an expert in forensic accounting; and (iii) Mr Bezant who is an expert in business valuation.  The Defendants have adduced no expert evidence on the issue of quantum.

D.3.1 Bird-eye view of the Plaintiff’s approach in assessing the quantum of the Overpayment Claim

313.  The Plaintiff’s current management had supplied BSZ’s Electronic Ledgers and Analysis of Assets Register to its experts for further analysis.  The data from these documents are organised and presented in Appendix 2F to Mr Chu’s report.  Item A9 in Appendix 2F is from the Management Accounts at Schedule 2 to the SPAs.

314.  Mr Chu’s report assesses the actual values of these various items of construction works and compares them against the purported costs of these works as were booked in BSZ’s accounts.  According to Mr Chu, remarkable discrepancies are identified.  For instance, up to 2006, the difference between the construction costs booked in BSZ’s accounts and Mr Chu’s assessment is RMB 76,254,142.[71] Even on his alternative calculation (on the basis that the overall site area of the Market was 721 mu as opposed to 702.1 mu which underpinned his original calculation), the difference is RMB 72,964,142.[72]

315.  Mr Chen’s report, in turn, presents the findings of his forensic investigation of BSZ’s accounting records and analyses how the Management Accounts came to be inflated.  In summary, the expert finds that there were: (a) inflation of construction costs in the pre-profit guarantee period (i.e. 2 December 2003 to 31 December 2006)(the “Pre-Profit Guarantee Period”); (b) inflation of income in the Pre-Profit Guarantee Period; and (c) inflation of income in the Profit Guarantee period (i.e. 1 January 2007 to 31 December 2007)(the “Profit Guarantee Period”) in BSZ’s accounts.[73]

316.  Insofar as BSZ’s construction costs are concerned, Mr Chen finds that the majority of such costs were purportedly paid to one Wuhan Long Xiang Trading and Development Company (武漢龍祥經貿發展有限公司)(“Long Xiang”) and one Hubei Huang Xin Construction Work Head Company/BSZ Branch Company/Wuhan Branch Company (湖北黃鑫建設工程總公司/白沙洲分公司/武漢分公司) (“Huang Xin”), the top two contractors of BSZ during the relevant period.  According to Mr Chen, Long Xiang and Huang Xin were related to Zhou or the Defendants.

317.  Since the books and records of Long Xiang and Huang Xin and the bank statements of BSZ during the relevant period are unavailable, Mr Chen cannot identify conclusively which of the transactions with Long Xiang and Huang Xin are misstated.  But according to the expert, there is nevertheless compelling evidence casting serious doubt on the genuineness of these transactions.

318.  To illustrate the extent of inflation, Mr Chen adopts the figures from Mr Chu’s report and apportions the inflated amount against the construction costs in relation to Long Xiang and Huang Xin.  Apportionment is needed as there were contractors other than Long Xiang and Huang Xin during the relevant period.^[74] For example, as mentioned above, Mr Chu finds that the difference up to 2006 between the construction costs booked in BSZ’s accounts and his original assessment is RMB 76,254,142.  Upon apportionment by Mr Chen, the figure becomes at least RMB 51,100,000.[75]  Based on Mr Chu’s revised assessment at RMB 72,964,142, Mr Chen’s apportioned figure is adjusted to RMB 48,316,000.[76]

319.  Insofar as BSZ’s income is concerned, Mr Chen finds that BSZ’s accounts included fictitious income in the amount of RMB 23,000,000 in the Pre-Profit Guarantee Period and RMB 80,350,000 in the Profit Guarantee Period.[77]  According to the expert, the agreements which purportedly generated such income are highly dubious, and he is able to identify circular flow of funds which suggests that certain “income” was parked into BSZ’s accounts during the Profit Guarantee Period but transferred out of BSZ shortly thereafter.

320.  Pausing here, one must not forget that it is the Defendants’ own pleaded case that the figures in respect of the construction costs and income/profit in the Management Accounts had been inflated.

321.  Mr Chen’s findings on the misstatements in BSZ’s accounts, including the said figures of RMB 48,316,000, RMB 23,000,000 and RMB 80,350,000, are in turn taken into account in Mr Bezant’s report.[78]  Mr Bezant adjusts BSZ’s warranted financial performance for these misstatements to identify its corrected financial performance and position.[79]

322.  Taking into account the difference between BSZ’s warranted and corrected financial performance and applying various valuation multiples, Mr Bezant values the shares of BSZ as warranted and as delivered.

323.  Having given such bird-eye view about the Plaintiff’s approach, I will deal with the methodology adopted by each expert in reaching their conclusions.

D.3.2 Mr Chu’s report

324.  Mr Chu’s report contains his assessment of the actual values of various items of construction works and compares them against the purported costs of these works as booked in BSZ’s accounts.

325.  Mr Chu assesses the estimated value of the construction works at the Market: (a) as at 31 December 2006; and (b) from 1 January to 31 December 2007.

326.  His assessment on the estimated construction costs is detailed in Part A of his report.  Part A is in turn divided into 5 sub-subsections, namely A1 (Site Formation Works), A2 (Road and Underground Services Works), A3 (Superstructures), A4 (Green Area Formation Works) and A5 (Miscellaneous).[80] Mr Chu has prepared 5 coloured tables summarising the methodologies and findings of his assessment on items A1 to A5.

327.  In these summary reports, Mr Chu indicates the methodology he adopted for each item by reference to the coloured legend at the top right-hand corner.  The details of these methodologies are explained in the body of his report, including the 6 methods used (the “6 Methods ”) being: (i) detail valuation[81], (ii) cost estimation[82], (iii) sanity check of the Defendants’ valuation reports[83], (iv) technical audit[84], (v) potential valid item but without details - allowed 50/50[85], and (vi) ambiguous items and without details – disallowed[86].

328.  In order to keep this Judgment to a reasonable length, I do not propose to set out how Mr Chu came to the figures in details, which can be found in the report itself.  I will only try to give a brief summary here.

329.  Item AI relates to Site Formation Works, consisting of both General Site Formation Works and Other Works.

330.  For the General Site Formation Works in item A1.1, Mr Chu is of the view that the figure in the Management Accounts is purportedly based on the valuation reports made by Tai Hua Valuation (the “Tai Hua Reports”). However, he disagrees with the Tai Hua Reports on two aspects, namely, quantities of filling and profit percentage.  For quantities of filling, Mr Chu used objective evidence, namely, the data in the site investigation report (the “Wuhan Surveying Report”) by one Wuhan Ground Construction Works Surveying Institute (武汉地质工程勘察院)(“Wuhan Surveying”), to determine the depth of formation.  For profit percentage, Mr Chu adopted 2%, which is in line with the local construction market, as opposed to the abnormally high level of 7% in the Tai Hua Reports.  According to Mr Chu, the rate of 7% was so out of line that led him to doubt whether the Tai Hua Reports were addressing the same subject matters as he was.

331.  For Other Works under item A1.2, Mr Chu is of the view that the valuations of work stated in the Tai Hua Reports are not substantiated with details.  He made certain adjustments and came to a lower figure.  As a result, he arrived at a lower figure for the General Site Formation Works: RMB 76.2 million as assessed as opposed to RMB 165.2 million booked in the Management Accounts.^[87]

332.  For Road and Underground Services Works under item A2, he explained the methodology used in his report including some of the 6 Methods.  Some of the figures he assessed under the sub-items are actually higher than the ones stated in the Management Accounts.  Having used some of the 6 Methods, he arrived at a lower figure for the Road and Underground Services Works: RMB 46.9 million as assessed as opposed to RMB 75.6 million booked in the Management Accounts.[88]

333.  For Superstructure Works under item A3, he explained the methodology used in his report including some of the 6 Methods. References were also made to the total construction floor area.  He also explained why he disallowed certain items.  As a result, he arrived at a lower figure for the Superstructure Works: RMB 111.5 million as assessed as opposed to RMB 128.3 million booked in the Management Accounts.[89]

334.  For the Green Area Works under item A4, Mr Chu explained the methodology used in his report including some of the 6 Methods.  As a result, he arrived at a lower figure for the Superstructure Works: RMB 1.6 million as assessed as opposed to RMB 2.7 million booked in the Management Accounts.[90]

335.  For the Miscellaneous Works under item A5, Mr Chu explained the methodology used in his report including some of the 6 Methods. As a result, he arrived at a lower figure for the Miscellaneous Works: RMB 16.4 million as assessed as opposed to RMB 24.4 million booked in the Management Accounts.[91]

336.  The total of A1 to A5 represents the findings of Mr Chu in Part A of his report on Estimated Construction Costs.  The findings are summarised as follows:

	Management Accounts	Mr Chu’s assessment	Difference
Part A – Estimated Construction Costs
2006 or before	304,187,142	231,223,000	(72,964,142)
2007 Q1	2,060,220	1,665,000	(395,220)
2007 Q2 to Q4	89,970,863	19,695,000	(70,275,863)
Total (A1 to A5)	396,218,225	252,583,000	(143,635,225)

337.  I agree with the observation made by Mr Ho that Mr Chu’s report is meticulous and thorough.  He conducted site visit and digital measurement for verification and cross-checking of the information in the layout plan and the data provided by Wuhan Xingxin Estate Mapping Company Limited (which was engaged by the Plaintiff to survey the superstructure in the Market).  On various occasions, Mr Chu gave the benefit of doubt to the Defendants and made assumptions in their favour, for examples: (i) in allowing 50% the costs in respect of potential valid items in the Management Accounts which were without details; (ii) in assuming the entire site was ponds which required filling.

D.3.3 Mr Chen’s report

338.  I then turn to Mr Chen’s report.  As mentioned above, his report contains his analysis and findings of BSZ’s accounting records in respect of the different periods.

339.  I first deal with the construction costs in the Pre-Profit Guarantee Period.[92]

340.  Mr Chen concludes that the transactions between BSZ and Long Xiang and Huang Xin were highly suspicious and the construction costs recorded in the accounts of BSZ (as fixed assets (at costs) and construction in progress (CIP)(at costs))[93] may not reflect the true value and may indeed have been materially misstated:

(i)  The authenticity of certain construction contracts between BSZ and Long Xiang or Huang Xin is highly doubtful.[94]

(ii)  A substantial number of the purported payments were not supported (as they should be) by tax invoices or official receipts.  Also, while the purported payments to Huang Xin were spread over 9 months, some of the receipts issued by Huang Xin were in sequence.[95]

(iii)  Abnormalities are identified in respect of various transactions between BSZ and Long Xiang or Huang Xin.  For example, certain payments by BSZ to other third parties for unrelated purposes were falsely recorded as payments of construction costs to Long Xiang or Huang Xin. In one instance, a RMB 300,000 was booked under construction payment to Long Xiang according to the relevant voucher, but it was in fact collected by Zhou for some “payment to the suburban government” (支付乡政府) as per the cash collection slip.  The sum was apparently collected by Li Jun on behalf of Zhou and approved by Luo Hong.[96]

(iv)  Long Xiang was related to the Defendants in that Zhou is the brother of one Zhou Huan Qing, who at the material time owned 98% of the equity interests in Long Xiang.  Long Xiang was furthermore a 86% shareholder of Tianjiu from September 2006 to October 2008.  Huang Xin was also related to the Defendants in that Zhou has been a 49% shareholder and the supervisor of Huang Xin since 10 August 2007.[97]

(v)  A substantial amount was paid to Long Xiang through accounts that do not belong to BSZ but to related companies.[98]

341.  Turning to the income in the Pre-Profit Guarantee Period[99], Mr Chen finds that two sums of respectively RMB 13,000,000 and RMB 10,000,000, recorded as Other Operating Income in the profit and loss accounts of BSZ for the year ended 31 December 2006, relate to the following contracts:[100]

(i)  an undated agreement between BSZ and one Jiang Nan Seafood Market Company (江南海鮮市場有限公司)(“Jiang Nan Seafood”), by which the operation rights of a seafood market owned by Jiang Nan Seafood (the “Seafood Market”) were purportedly sub-contracted to BSZ for the period from 1 March 2005 to 1 March 2009 for free (the “March 2005 Agreement”);

(ii)  an agreement dated 20 December 2005 among BSZ, one Zhang Song and one Yuan Zheng Wei, by which the operation rights of the Seafood Market were purportedly sub-contracted by BSZ to Zhang Song and Yuan Zheng Wei for RMB 13,000,000 per year from 1 January 2006 to 31 December 2008 (the “December 2005 Agreement”); and

(iii)  an agreement dated 30 September 2006 between Jiang Nan Seafood and BSZ, by which Jiang Nan Seafood was to pay RMB 10,000,000 to BSZ before 29 November 2006 for the transfer of the investment resources of the Seafood Market (招商資源的所有權) from BSZ to Jiang Nan Seafood (the “September 2006 Agreement”).

342.  The evidence, as analysed by the expert, shows that the above agreements were highly suspicious arrangements and the “income” derived from them to BSZ could not have been genuine:

(i)  The March 2005 Agreement and September 2006 Agreement were purportedly entered into and affixed with the company stamp of Jiang Nan Seafood before Jiang Nan Seafood was even incorporated.

(ii)  Under the March 2005 Agreement, BSZ was required to pay nothing for the operation rights of the Seafood Market, but it was then purportedly able to earn RMB13,000,000 per year by further sub-contracting the operation rights to Zhang Song and Yuan Zheng Wei.

(iii)  The March 2005 Agreement provided that the tenants’ resources (客戶資源) of the Seafood Market would be returned by BSZ to Jiang Nan Seafood at zero consideration upon the expiry of the agreement.  However, under the September 2006 Agreement, Jiang Nan Seafood had to purchase the investment resources of the Seafood Market, which should include the tenants’ resources, from BSZ at RMB 10,000,000.

(iv)  The March 2005 Agreement, December 2005 Agreement and September 2006 Agreement were drafted in vague terms.

(v)  The payment of RMB 13,000,000 to BSZ pursuant to the December 2005 Agreement was made by neither Zhang Song nor Yuan Zheng Wei, but by five different companies on divers dates.  At least one of the payers, Wuhan San Qing Demolition Company (武漢三青拆遷有限公司)(“San Qing Demolition”), was shown to be related to Zhou.  It has subsequently been proved that San Qing Demolition collaborated with the former management of BSZ to create fictitious transactions to inflate income in the Profit Guarantee Period.

(vi)  Jiang Nan Seafood was related to the Defendants in that it was at the material time controlled by parties related to Wang, Tianjiu or Zhou.

343.  Finally, I deal with the income in the Profit Guarantee Period.  In this regard, Mr Chen finds that “incomes” from the following contracts (the “7 Dubious Agreements”) had been recorded as Operating Income or Other Operating Income in the profit and loss accounts of BSZ:[101]

Agreement	Date	Amount (RMB)
The December 2005 Agreement among BSZ, Yuan Zheng Wei and Zhang Song	20 December 2005	13,000,000
Cooperative Agreement between BSZ and Hainan Yong Qing Agricultural Company Limited (“Hainan Yong Qing”) in relation to the sales of harmless fruits and vegetables from Hainan (“Hainan Yong Qing Agreement”)	18 October 2006	36,000,000
Sub-contracting Agreement between BSZ and Wuhan Jiu Hui Logistics Company Limited (“Jiu Hui Logistics”) in relation to the operation rights over a logistics centre and transport trunk lines (“Jiu Hui Logistics Agreement”)	25 November 2006	13,000,000
Sub-contracting Agreement between BSZ and Wuhan Hongshan District Feng Huo Steel Products Loading Team (“Feng Huo Steel Products”) in relation to the operation rights of secondary water supply and water filling stations at the Market (“Feng Huo Steel Products Agreement”)	25 November 2006	3,000,000
Sub-contracting Agreement between BSZ and Wuhan Chang Nian Hao Green Products (“Chang Nian Hao”) in relation to the operation right of intensive processing, distribution and testing of trading goods (“Chang Nian Hao Agreement 1”)	5 December 2006	8,300,000
Rental Agreement between BSZ and Wuhan Wuchang District Shuang Ying Oil Operating Department (“Shuang Ying”) in relation to land use right over an area at the western part of the District No.6 of the cereal and oil section in the Market (“Shuang Ying Agreement”)	16 December 2006	850,000
Sub-contracting Agreement between BSZ and Chang Nian Hao in relation to operation rights of auxiliary services for industrial development, product manufacturing, supply and sales (“Chang Nian Hao Agreement 2”)	28 December 2006	6,200,000
	Total	80,350,000

344.  The evidence, as analysed by the expert, shows that the 7 Dubious Agreements and the “incomes” derived from them are fictitious. They are arrangements deliberately put in place to create a false picture that BSZ had earned the relevant “income” as profits during the Profit Guarantee Period when it had in fact not.[102]

345.  Regarding the December 2005 Agreement:

(i)  The December 2005 Agreement is, as explained above, a fictitious agreement.  The alleged payment of RMB 13,000,000 during the Profit Guarantee Period was purportedly received by Tianjiu on behalf of BSZ.  The purported payment was recorded as profits to BSZ by virtue of the relevant accounting treatments, even though no real profits were in fact generated to BSZ.

(ii)  Both the December 2005 Agreement and the March 2005 Agreement were terminated by a termination agreement among BSZ, Jiang Nan Seafood, Zhang Song and Yuan Zheng Wei on 25 December 2007, shortly before the end of the Profit Guarantee Period.

346.  Regarding the Hainan Yong Qing Agreement and Jiu Hui Logistics Agreement:

(i)  The purported payment of RMB 49,000,000 (i.e. RMB 36,000,000 + RMB 13,000,000) to BSZ under the Hainan Yong Qing Agreement and Jiu Hui Logistics Agreement originally came from Wang or Tianjiu.  It was injected into BSZ via Hainan Yong Qing and Jiu Hui Logistics, and was subsequently transferred out of BSZ to San Qing Demolition. There were further transfers of funds from San Qing Demolition, some of which eventually went back to Wang or Tianjiu.  According to the expert, the circular flow of funds is therefore cogent evidence of the orchestration of fictitious payments, to which the Defendants never offered any countervailing explanation.[103]

(ii)  Both the Hainan Yong Qing Agreement and Jiu Hui Logistics Agreement were terminated prematurely, i.e. with effect from 1 April 2008 and 1 June 2008 respectively, for no apparent reasons.

(iii)  According to a defence (答辯狀) filed by San Qing Demolition in a Mainland action commenced by BSZ in 2012 against, inter alia, San Qing Demolition and one Rui Tian Properties Company (瑞天置業公司)(“Rui Tian Properties”), it was admitted that there was never any sub-contracting relationship between BSZ and Hainan Yong Qing or Jiu Hui Logistics, and the purported income of RMB 49,000,000 was fictitious income.

(iv)  Further, according to a list of evidence submitted by Rui Tian Properties in the aforesaid Mainland action, the purported income of RMB 49,000,000 from Hainan Yong Qing and Jiu Hui Logistics was fictitious.

(v)  Wang submitted a list of evidence (被告王秀群举证一览表)(“Wang’s List of Evidence”) in another Mainland action, in which she referred to a letter from Wuhan Zheng Hao Certified Public Accountants Co. Ltd (武漢正浩會計師事務有限公司)(“Zheng Hao”) to the Wuhan Public Security Bureau and stated that BSZ had entered into fictitious agreements (虛簽合同) with several entities, which included Hainan Yong Qing and Jiu Hui Logistics.[104]

347.  Regarding the Feng Huo Steel Products Agreement:

(i)  The purported payment of RMB 3,000,000 originally came from Long Xiang which was related to the Defendants.  It was injected into BSZ via Feng Huo Steel Products, and was subsequently transferred along with other funds out of BSZ to parties related to the Defendants.

(ii)  The Feng Huo Steel Products Agreement was terminated prematurely with effect from 1 January 2009, for no apparent reasons.

(iii)  The entities which Wang admitted in the Mainland proceedings to have entered into fictitious agreements with BSZ included Feng Huo Steel Products.

348.  Regarding the Chang Nian Hao Agreement 1 and Chang Nian Hao Agreement 2:

(i)  The purported payments of RMB 8,300,000 and RMB 6,200,000 originally came from Long Xiang.  The funds were injected into BSZ via Chang Nian Hao, and were subsequently transferred along with other funds out of BSZ to parties related to the Defendants.

(ii)  BSZ had waived the income payable to it under the Chang Nian Hao Agreement 1 in 2008 for no apparent reasons.  Further, there was no record in BSZ’s accounts of any income payable to it under either the Chang Nian Hao Agreement 1 or Chang Nian Hao Agreement 2 in 2009.

(iii)  The entities which Wang admitted in the Mainland proceedings to have entered into fictitious agreements with BSZ included Chang Nian Hao.

349.  Regarding the Shuang Ying Agreement:

(i)  The purported payment of RMB 850,000 originally came from Long Xiang.  It was injected into BSZ via Shuang Ying, and was subsequently transferred along with other funds out of BSZ to parties related to the Defendants.

(ii)  The entities which Wang admitted in the Mainland proceedings to have entered into fictitious agreements with BSZ included Shuang Ying.

D.3.4 Further corroborating evidence

350.  I also agree with the submission of Mr Ho that the analysis by Mr Chu and Mr Chen on the inflation of BSZ’s Managing Accounts is further corroborated by the following documentary evidence: (i) the Schedule of Fictitious Construction Works; and (ii) investigation report prepared by Zheng Hao, an accountants’ firm in the Mainland, as instructed by the Wuhan Security Bureau (the “Zheng Hao Report”).

351.  The Schedule of Fictitious Construction Works was seized by the Mainland Police in or around August and September 2010 during inspection of the office premises of BSZ.  It was signed by Zhou GB with his fingerprint imprinted thereon and stamped by the chop of the Mainland Police dated 20 November 2010.  In Section B.4.7 above, I have already rejected the challange against the authenticity of such document.

352.  Regarding the construction of the Food and Cooking Oil Building (粮油大楼)(the “FO Building”), the figure of “57,745,511” was stated in the Schedule of Fictitious Construction Works to be the final price payable to Huang Xin, which was the second largest contractor of BSZ and a company related to Zhou.  The figure of “57,745,511” corresponds to the total of “36,800,000” recorded as genuine payment (真實應付款) and “20,945,511” recorded as fictitious payment (虚擬應付款) in the same row.  The figure of “57,745,511” very much matches with the figure of “57,746,000” booked in the Management Accounts.  The above figures concern the construction costs relating to Huang Xin only.  The total amount of construction costs (including those relating to other contractors) booked in the Management Accounts in respect of the FO Building as at 31 December 2008 is “65,552,000”.  The figure of “65,552,000” matches with the figure as at 31 December 2008 stated in “A3.54 粮油大楼 (the FO Building)” in Appendix 2F of Mr Chu’s report.

353.  By reason of the above, Zhou GB essentially admitted in the Schedule of Fictitious Construction Costs that, out of the about RMB 57.7 million booked as construction costs of the FO Building by Huang Xin, RMB 36.8 million represents genuine construction costs whereas RMB 20.9 million represents fictitious construction costs.

354.  Such admission by Zhou GB is consistent with Mr Chu’s assessment of the relevant construction works concerning the FO Building by Huang Xin.  As explained in Mr Chu’s report, the construction of the FO Building (Structure Reference 105 to 111: see Table 4.3) was completed in 2007.  The corresponding figure in Appendix 2F for “A3.54 粮油大楼 (the FO Building)” as at 31 December 2007 is 35,589,000.  Mr Chu’s assessment for the construction costs of structure reference 105 to 111, i.e. the FO Building, can be found in Appendix 7 of his report.  In short, if one adds up the corresponding amounts of structure reference 105 to 111 on the last column, the total amount of the assessed construction costs is 17.3 million.  Reflecting the 53.9% adjustment which arises from the booking pattern as explained in Mr Chu’s report, the assessed figure of 17.3 million representing the position in 2007 translates into around 32 million (17.3 million / 53.9%), representing the cumulative position.  This amount of 32 million is comparable to 36.8 million, i.e. the genuine payment stated in the Schedule of Fictitious Construction Works.

355.  According to Mr Ho, this only serves as an example to show that the expert analysis on fictitious construction costs is consistent with available documentary evidence, and the same exercise can be carried out for the other expenses.  Based on such analysis, I agree with Mr Ho that the expert’s assessment is corroborated with the data in the Schedule of Fictitious Construction Works as admitted by Zhou GB.

356.  I then turn to the Zheng Hao Report, which was prepared after the arrest of Zhou GB and Luo Hong by the Mainland Police in or around October 2010.  Such report was prepared under the instruction of the Wuhan Security Bureau for the investigation into the financial records and other documents of BSZ.

357.  According to the findings of Zheng Hao: (i) certain payments between BSZ and Huang Xin were fictitious from 1 January 2005 to 30 June 2010; and (b) certain payments between BSZ and Long Xiang were fictitious.  These findings are summarised in the flow chart attached to the Zheng Hao Report.  Again, the Defendants have not proffered any innocent explanation for the evidence.

358.  For these reasons, I agree with Mr Ho that the analysis made by the experts is corroborated by these materials.

D.3.5 Mr Bezant’s report

359.  The purpose of Mr Bezant’s report is to assess the difference between the value of the Defendants’ 90% interest in BSZ as warranted and the value as delivered.[105]

360.  The expert values BSZ on two bases: the “CAPE Basis” and the “Objective Basis”.[106]

361.  Under the CAPE Basis, the assessment was made on the basis of the difference between the amount the Plaintiff actually paid for the interest in BSZ (based on its warranted financial information) and the amount the Plaintiff would have been willing to pay for the interest in BSZ if the Plaintiff had been provided with true financial information.  According to Mr Bezant, the former figure is RMB 1,140,000,000 and the latter figure is RMB 630,000,000, and hence the difference is RMB 510,000,000.[107]

362.  The first figure is a factual figure.  It is what the Plaintiff had contracted to pay under the SPAs (RMB 1,140,000,000 being the equivalent of HK$1,156,000,000).[108]

363.  The second figure involves the expert determining the value of 100% of BSZ, based on its true financial information, and then determining the amount that a buyer would have been willing to pay for 90% of BSZ under the terms of the SPAs.[109]

364.  In determining the value of 100% of BSZ based on its true financial information:

(i)  The expert refers to BSZ’s warranted financial performance, which is presented at Table 7-1 of his report.  The figures came from BSZ’s Management Accounts and are set out in greater detail at Appendix 9.1-1 to Mr Bezant’s report (with updated version in the supplemental report).

(ii)  The expert considers the misstatements in BSZ’s accounts identified by Mr Chen[110], which are summarised in Table 4-3 of his report.  He then adjusts BSZ’s warranted financial performance for these misstatements to identify its corrected financial performance and position.[111]

(iii)  The difference between BSZ’s warranted and corrected financial performance is set out in Table 9-1 (updated version in the supplemental report) and (in greater detail) at Appendix 9-1.   According to Mr Bezant, there are very significant discrepancies in BSZ’s revenue, profits and growth rates on the basis of its warranted and corrected financial information.[112] The 2006 profit was around half of the warranted figure, and the 2007 profit fell short of the Profit Guarantee by RMB 127 million.

(iv)  The expert then works out the valuation ratios derived from the Plaintiff’s acquisition of BSZ.  The ratios (based on BSZ’s earnings, adjusted revenue, net assets, etc.) are set out in Table 9-2 of his report.

(v)  Based on a comparison between BSZ’s warranted and actual growth in 2006, the expert considers it reasonable to apply a 25% reduction to the valuation ratios.[113] The Defendants have not offered any basis, whether by expert or factual evidence, to justify why 25% is not an appropriate discount in the circumstances.  The reduced multiples are applied by Mr Bezant to the corrected (a) revenue, (b) earnings and (c) net assets figures of BSZ.[114]  On the basis of the results, he concludes that the value of 100% of BSZ based on its true financial information would be RMB 650,000,000.[115]

365.  At the trial, it was discovered that the construction costs estimate made by Mr Chu need to be further revised. However, Mr Bezant has explained in §§17-20 of his supplemental report dated 11 March 2019 and in his oral testimony as to why his valuation of the shares as delivered under the CAPE Basis is unaffected by the revised construction costs estimate.  According to him, the assets were the means by which the company generated its profits and they could not be separately realised (unlike the situation of an investment property business).  The valuation based on profits is the most reliable means of assessing the value of the company.  Also, it would be wrong to adopt a value of higher than RMB 700 million, which was based on a valuation of 50.0, because that would imply BSZ was even more valuable in the delivered state than it was in the warranted state.

366.  Mr Bezant then calculates the amount that the Plaintiff would have been willing to pay for 90% interest in BSZ under the SPAs:

(1)	Taking the valuation of 100% of BSZ, as determined above	RMB 650,000,000
(2)	Reducing the amount by RMB 100,000,000. Under clause 8.3 of the 1st SPA, a buyer would have expected to incur an additional RMB 100,000,000 of costs in relation to the 318 mu of land. That reduces the amount that a buyer would be willing to pay for 100% of BSZ	–RMB 100,000,000
	Adjusted value (100% ofBSZ)	= RMB 550,000,000
(4)	Calculating the pro-rata value of a 90% interest	x 90% = RMB 500,000,000
(5)	Adding the Profit Guarantee amount. Under clause 8.1 of the 1st SPA, a buyer of the 90% interest would also have expected to receive RMB 130,000,000 (the equivalent of HK$150,000,000) in this scenario as the payment under the Profit Guarantee, over and above the value of the business (by reference to its true financial position). This increases the amount that the buyer would be willing to pay	+RMB 130,000,000
	Value of 90% ofBSZunder the SPAs	= RMB 630,000,000

367.  The difference between the amount paid (RMB 1,140,000,000) and the value of 90% of BSZ under the SPAs determined by the expert (RMB 630,000,000) under the CAPE Basis is therefore RMB 510,000,000.[116]

368.  I then turn to the Objective Basis.  Under this basis, the expert does not consider what was paid and what would have been paid as under the CAPE Basis.  Instead, the expert considers the warranted value and the true value in an objective sense.[117]  Under this basis, the Plaintiff’s loss is further assessed under two approaches, i.e. the “Primary” and the “Alternative”:[118]

		Primary	Alternative
(1)	The warranted value of 90% interest in BSZ, based on its warranted financial information	RMB 1,140,000,000	RMB 1,350,000,000
(2)	The true value of 90% interest in BSZ, based on its true financial information	–RMB 630,000,000	–RMB 850,000,000
	Difference between (1) and (2) = valuation on the Objective Basis	RMB 510,000,000	RMB 500,000,000

369.  Under the Primary Approach, the expert assumes that the Plaintiff’s acquisition of the interest in BSZ is the best evidence of the objective value of that interest.  There is no need to assess the objective value in any other way, and the value is HK$1,156,000,000 (RMB 1,140,000,000) because that is what was agreed between an actual buyer and seller.  The expert therefore repeats all of the same steps under the CAPE Basis, and the loss is identical, i.e. RMB 510,000,000.[119]

370.  Under the Alternative Approach, the expert assumes that the Plaintiff’s acquisition of the interest in BSZ does not provide evidence of value.[120]  The expert therefore performs his own valuation analysis of BSZ, based on both its warranted financial information and its true financial information.

371.  Mr Bezant first takes the following steps to assess the warranted value of BSZ under the Objective Basis/Alternative approach:

(i)     To estimate the value of the 90% interest in BSZ based on its warranted financial information, the expert considers valuation multiples observed in transactions in comparable companies.[121]   The expert considers transactions in both mature markets and new markets, and applies the valuation multiples in these transactions to the warranted 2006 financial information and guaranteed 2007 performance of BSZ.[122]

(ii)    The expert then cross-checks these valuation multiples analysis using: (i) discounted cash flow (DCF) valuation analysis based on information in the Plaintiff’s audited financial statements[123]; and (ii) the observed change in the Plaintiff’s market capitalisation following the acquisition.[124]

(iii)   The expert concludes on a value for 100% of BSZ, based on its warranted financial information, of RMB 1,600,000,000 or more. This implies a value for 90% of at least RMB 1,350,000,000.[125]

372.  To assess the true value of BSZ under the Objective Basis/Alternative approach:

(i)     The expert applies the same valuation multiples to assess the true value of BSZ, based on its true financial information.  The expert adopts various reference points for this purpose, including revenue, net asset and site area.[126]

(ii)    The expert concludes on a value for 100% of BSZ based on its true financial information, and ignoring the actual acquisition multiple, of RMB 900,000,000.[127]  For similar reasons as stated in §365 above, the expert considers that Mr Chu’s revised construction costs estimate does not affect his overall conclusion on value.[128]

(iii)   To calculate the value of 90% under the terms of the SPA, the expert repeats the calculation performed under the CAPE Basis as mentioned above and arrives at a value of RMB 850,000,00.[129]

373.  The difference between the objective value of the 90% interest as warranted (at least RMB 1,350,000,000) and the objective value of the 90% interest under the SPAs as received (RMB 850,000,000) is therefore at least RMB 500,000,000.[130]

374.  Hence, Mr Bezant’s quantifications assessed under each of the above approaches have turned out to be very similar.[131]

D.3.6 Relationship with the Profit Guarantee Claim

375.  As mentioned above, there is a profit guarantee clause in Clause 8.3 of the 1^st SPA.  The merits and quantum of the Profit Guarantee Claim will be addressed in the latter part of this Judgment. However, I find it convenient here to deal with the following issues about the relationship between the two claims:

(i)     whether there is double recovery and double counting between Mr Bezant’s assessments of the Overpayment Claim and the Profit Guarantee Claim; and

(ii)    the effect of Wang’s Profit Guarantee of HK$150 million on the expert’s valuation of the overpayment.

376.  In his oral testimony, Mr Bezant explained that there are no double counting between the two claims.  In assessing the value as warranted, the parties had already taken into account the warranties and guarantees as provided for in the SPAs.  In the case that the warranties are true, the “as-warranted” value is zero because they expected the warranties to be met.  On the other hand, in assessing “as-delivered” value, one has to look at the true profits.  If the profits do not meet the level as warranted, that has to be taken into account in assessing the loss.[132]

377.  As to the effect of the Profit Guarantee on his valuation, Mr Bezant explained that the profit guarantee, which signals the profit-generating potential of the business at large, is a very important factor in the valuation of a business.  It is also highly relevant as to how a purchaser would appraise the business and in assessing the purchase price.[133]  In the case of a false expectation as to the profit guarantee or profit potential, it would lead to an overvaluation of a company generally.  Hence, the Profit Guarantee would have an impact on the quantification of the Overpayment Claim.

378.  Ultimately, these are matters to be decided by the court with the assistance of expert evidence.  Having heard Mr Bezant’s testimony, I find his explanations both credible and reliable. In the absence of any contrary expert evidence, I accept these explanations by Mr Bezant as to how the quantum of the Overpayment Claim and the Profit Guarantee Claim should be assessed by the court.

D.3.7 Quantum claimed by the Plaintiff

379.  According to the Plaintiff, the quantum of its loss is to be determined under Clause 6.3 of the SPAs by ascertaining the amount necessary to put BSZ into the financial position it would have been in had the relevant sellers’ warranties not been breached, which involves assessing the objective value of BSZ as warranted and as delivered.  The Plaintiff claims that this is in line with the normal measure of damages for a breach of warranty claim under common law.

380.  Based on the above analysis, Mr Bezant’s valuation can be summarised as follows:

Value of 90% of BSZ (RMB million)	CAPE basis	Objective basis
		Primary	Alternative
As warranted	1,140	1,140	≥ 1,350
As delivered	(630)	(630)	(850)
Difference	510	510	≥ 500

381.  Mr Ho submits that the Objective/Primary Basis should be adopted by the court as the proper valuation of the Plaintiff’s loss, i.e. RMB 510,000,000.  This approach produces the objective valuation of BSZ as warranted and as delivered, as required by Clause 6.3 and under common law.  In so doing, it takes the Plaintiff’s acquisition of BSZ as the best evidence of the objective value of that interest.  It also defeats the Defendants’ argument in relation to the Objective/Alternative Basis, namely, that the “as warranted” value is (as Mr Chan argues) higher than what the Plaintiff (the purchaser) had in fact paid for the acquisition.  According to Mr Ho, the Objective/Primary approach produces a valuation that is identical or similar to those under the CAPE Basis and the Objective/Alternative Basis, which serve as useful cross-checks.

D.3.8 Challenges made by the Defendants against the expert evidence

382.  The Defendants have not called any expert evidence to rebut the Plaintiff’s case on quantum.  Yet Mr Chan seeks to challenge the expert evidence in the following ways.

383.  Mr Chan challenges Mr Chu’s evidence as follows:

(i)  Mr Chu is not qualified to give any opinion on the penalty liability for the illegal structures in the Market as this is outside the expertise of quantity surveyor or cost engineer.

(ii)  Mr Chu has not given his opinion on whether the amount claimed for the demolition of the illegal structures in the Market is reasonable.

(iii)  In relation to his valuation opinion on the cost of the reclamation and construction of the Market, Mr Chu was not able to carry out any survey on the original condition of the site before the reclamation work as the Market had already been built.

(iv)  Insofar as Mr Chu is seeking to rely on the site investigation report by other institution, i.e. Wuhan Surveying, there is no evidence about the authenticity of the report and the qualifications of the relevant experts.

(v)  The assumptions made by Mr Chu about the actual conditions at the site may not be correct.

(vi)  The profit percentage and the other assessment or allowance adopted by Mr Chu are open to question.

384.  On the other hand, Mr Chan challenges Mr Chen’s evidence as follows:

(i)  Mr Chen is not a qualified expert as he has not obtained any professional qualification as a forensic accountant.  He has no accounting or auditing qualification in the Mainland and he has no previous experience working in Wuhan.  He also lacks the qualification or experience to give his opinion on various matters of the case.

(ii)  Mr Chen’s expert evidence had been rejected by the court before.[134]

(iii)  Mr Chen’s report contains a number of general limitations[135], which in turn undermine the reliability of his conclusions.

(iv)  Mr Chen is a biased witness as he always assumes that the information provided by the Plaintiff is true.  He also failed to verify the truthfulness of the information and the basis of his assumptions.[136]  He was unable to verify the relationship between Zhou and some of the persons whom Mr Chen believed to be Zhou’s nominees or working under Zhou’s instructions.

(v)  Mr Chen has failed to specify the source of various information which forms the basis of his assessment.

(vi)  Mr Chen wrongly equates “red flags” as conclusive findings.  He was able to identify certain “red flags” associated with BSZ’s transactions with Long Xiang and Huang Xin, but given the limited information available, it is unreliable to rely on the accumulation of these “red flags” to draw the conclusion that the transactions with Long Xiang and Huang Xin were bogus.

(vii)  There is grave doubt as to the whether the method of apportionment adopted by Mr Chen is appropriate.  His methodology is not one that is supported by literature or any known arithmetic or accounting principle.  As such, there is no means of testing whether this is the proper mathematical formula to calculate the extent of overstatements and the accuracy of his conclusions.  Even if his methodology is correct, the percentage he adopts for his calculations represents Long Xiang and Huang Xin’s entire share of BSZ’s total construction costs.  By using these percentages, Mr Chen’s assumption is that all underlying contracts entered between BSZ and Long Xiang or Huang Xin and the transactions pertaining to it were entirely fictitious. Yet there is no basis to support such assumption.  Further, the results of his apportionment would unfairly attribute costs for items that are wholly unrelated to Long Xiang or Huang Xin.

(viii)  In assessing the fictitious income during the Pre-Profit Guarantee Period, Mr Chen raised a number of “red flags” and suspicions about the March 2005 Agreement, the December 2005 Agreement and the September 2006 Agreement. But these suspicions are not enough to support the conclusion that RMB 23,000,000 of the income recorded in BSZ’s accounts during the Pre-Profit Guarantee Period was fictitious.

(ix)  The same point can be made about the assessment of the fictitious income during the Profit Guarantee Period and Mr Chen’s reliance of the 7 Dubious Agreements in arriving in his conclusion that these were bogus transactions.  In particular, Mr Chen relied on one-sided allegations in making his assessment and he was not qualified on the accounting abnormalities in respect of some of these transactions.

385.  Finally, Mr Chan challenges Mr Bezant’s evidence as follows:

(i)  Mr Bezant’s findings are neither reliable or realistic as he has omitted to consider a number of pertinent factors which were crucial to the parties during the acquisition of BSZ:

(a)  Crucial documents relating to the acquisition were not made available to Mr Bezant and he had placed too much reliance on the information supplied by Sin but not Yang in reaching his conclusion.

(b) Mr Bezant would not have been able to know what would have been in the mind of the Plaintiff’s then Directors in deciding whether to make the acquisition.  In particular, the circulars and announcements issued by the Plaintiff are of limited value, and Mr Bezant had failed to take into account Yang’s evidence that the past financial history of BSZ played no or little part in setting the acquisition price of the shares.  Instead, the future potential of the Market (such as transforming BSZ from being a fixed rental exchange platform to being a transaction based exchange platform or expanding its business through consolidation with smaller players in the market) rather than its past performance might have carried more weight in the mind of the then Directors in deciding whether to proceed with the acquisition.

(c) In making his opinion, Mr Bezant has failed to take into account the fact that the Plaintiff would still have proceeded with the shares acquisition irrespective of the inflated Management Accounts.  In particular, Chan YN, Fu and Yang were aware of the falsification of the Management Accounts and Chan YN was holding 74.89% shareholding of the Plaintiff at the time of the SGM.

(d) Mr Bezant’s calculation is made by reference to the theoretical value of BSZ, and there are many factors, including the sentimental value to the Defendants, to support that the Defendants might not have sold BSZ to the Plaintiff at such a low value.  In particular, there were many distinctive and unique features that justified the Defendants to sell their shares with an additional premium on top of its minimum selling price, such as the Market’s unique and dominant position in the Central Mainland region.  Further, Thomas Chan confirmed that the Defendants had actually made the same offer to Wang On Group, who had considered but subsequently decided not to purchase BSZ back in 2007 given its high price.

(ii)  The comparables chosen by Mr Bezant are not appropriate comparables, and there is also no information on how exactly the comparable companies operated their markets.

D.3.9 Analysis of the expert evidence on quantum

386.  In my judgment, the Defendants’ approach to expert evidence is both unprincipled and unjustified.  On the issue of quantum, the Defendants have chosen not to advance any positive case, call any expert, or identify any issue of disagreement with the Plaintiff’s experts.  The Defendants only attempt to locate some conceivable gaps in the expert reports and then invite wholesale acceptance by the court of their theories or methodologies which have no factual or expert underpinnings.  The Defendants are also completely silent on what the court should do with those parts of the Plaintiff’s expert evidence which are completely unchallenged.  As further elaborated below, the Defendants’ challenges of the Plaintiff’s experts are either flawed or trivial in nature, and they should not in any way affect the overall reliability of the Plaintiff’s expert evidence.

387.  Firstly, the challenges against Mr Chu’s evidence are unjustified.  Mr Chan contends that Mr Chu was not given any information on which structures were to be demolished.  This is an incorrect reading of Mr Chu’s report.  In §5.1.1 of his report, Mr Chu explained that he was provided with a plan with boundary of the site outlined in red and that “on the south and north sites of the side, there are chains of superstructures which footprints are sitting beyond the red line, i.e. built on public roads”. Furthermore, the Defendants’ criticism that Mr Chu did not use his cost engineering expertise to give an opinion on whether the amount claimed by Plaintiff on demolition costs was reasonable is completely unfounded, since the question of reasonableness of the costs does not form part of the expert direction at all.  In any event, Mr Chu considered the receipts and payment records and confirmed that they are genuine records and have been paid.  The Defendants do not challenge this conclusion and have not specified which particular item of costs is unsupported by the documents specified in the table for demolishing expenses and compensation for the illegally constructed building.

388.  On Mr Chu’s reliance on the Wuhan Surveying Report, the Defendants contend that there is no information on the status and standing of the institution concerned, i.e. Wuhan Surveying, and challenge the “authenticity” of the report.  However, such contention ignores the fact that information such as “certificate number (证书编号)”, “qualification class (资格等级)” and “issue department (发证部门)” can be clearly seen at the top left-hand corner on the first page of the report.  It is Mr Chu’s evidence that these pieces of information show that the institution is an officially recognised institution.  As to the Defendants’ suggestion that the Wuhan Surveying Report was merely a template into which anybody could fill the relevant information, Mr Chu’s response, which makes eminent sense, is that procedures had to be performed in order to arrive at the relevant data and that the data, which themselves carry certain meaning, cannot be plucked out of thin air.  The Wuhan Surveying Report remains an objective piece of evidence to determine the depth of the site formation work.  Without adducing expert evidence on their own or informing the Plaintiff of such challenges before the trial, such kind of attacks are not fair to the Plaintiff and it can only be seen as a desperate attempt by the Defendants to find some gaps in the Plaintiff’s evidence.

389.  The Defendants challenge Mr Chu’s opinion on the volume of the earth fill in the Market by using the average depth of filling of 12 bore holes.  This challenge has no substance at all.  As explained by Mr Chu, it is common practice to use the average depth of the bore holes for projection.  More importantly, Mr Chu explained that these 12 bore holes were evenly distributed within the site in terms of location and covered different areas of the site.  Hence, it is Mr Chu’s considered opinion that the average of the 12 bore holes truly represents the earthwork fill information of the site.  With no contrary expert evidence, there is no reason for me to doubt the reliability of Mr Chu’s explanation.

390.  There are many instances where the Defendants simply invite the court to speculate the premise of Mr Chu’s report without any evidential basis to support whatever contrary conclusion which Defendants may seek to advance.  For example, the Defendants appear to suggest that the level of earthwork fill in 2012 when the site investigation report was made was not the same as the ground of the Market in 2007.  However, the Defendants have adduced no evidence to show that additional filling was carried out after 2007, bearing in mind that the Defendants were still in control of BSZ until at least November 2010 and should know or have access to information as to whether such additional filling in fact took place.  Similarly, the suggestion that both sides of the boundary line were covered by water is inconsistent with the aerial photos in Mr Chu’s report, which show that the site was never a body of open water.

391.  Another area of the Defendants’ challenge concerns Mr Chu’s assumption that the earthwork fill would be lower for roads and buildings.  As explained by Mr Chu, the Defendants’ challenge is itself based on another assumption, namely that there would be “double handling” of earthwork fill, and Mr Chu has explained that such “double handling” was unlikely to occur due to the additional time and costs that had to be incurred. Again, as the Defendants have adduced no contrary factual and expert evidence to contradict Mr Chu’s evidence, there is no reason for me to reject Mr Chu’s evidence in this regard.

392.  On the benefit of doubt given by Mr Chu for “potentially valid item but without details”, Mr Chu allows 50% of the items, which are taken from the Management Accounts.  The suggestion that Mr Chu allows 50% of the items found in the Tai Hua Reports is therefore an incorrect reading of his report.

393.  On the 2% profit percentage, Mr Chu has already explained why he considered the 7% level in the Tai Hua Reports is abnormally high.  As to the Defendants’ suggestion that the contractors concerned might have overcharged BSZ for the work done, there is no evidence from the Defendants to support this speculation or contradict Mr Chu’s evidence that the 2% figure was in line with the local construction market.  Further, Mr Chen has given evidence on the identity of these contractors and the questionable nature of the agreements signed between BSZ and these contractors.

394.  For the evidence on forensic accounting, the Defendants have persistently attacked Mr Chen’s independence and objectivity. Though Mr Chen’s evidence might have been rejected in HKSAR v Yip Kim Po & Ors^[137], his formal qualification as forensic accountant had not been challenged.  The Court of Appeal stated that what was in issue was whether he had sufficient knowledge to speak on matters about which there was no formal or recognised body of knowledge or experience.[138] In the present case, Mr Chen testified as a forensic accountant and there can be no doubt that he is properly qualified to do so and that forensic accounting is a recognised area of expertise.

395.  The Defendants also suggest that Mr Chen was unversed in the culture of business in Wuhan.   However, I cannot understand how “cultural difference” has any role to play in a case where there are admitted falsities in the financial accounts of a company.  Furthermore, “cultural difference” should not be a serious concern for a forensic accountant whose task is to find out from the accounts of a company the figures that have been inflated.

396.  Nor is there any basis to the Defendants’ allegation that the expert was favourably predisposed to the Plaintiff.  Mr Chen explained how he approached the documents, including those supplied by the Plaintiff’s current management, from a neutral standpoint and repeatedly tested his assumptions about them.  For instance, the expert had compared item by item in the Management Accounts against BSZ’s electronic trial balance and ledger and made certain reclassifications to align the two sets of data.  He explained how reconstruction of the documents by the Plaintiff’s management would not have been possible, given that the opening and closing balances for each accounting year, which provided a snapshot of BSZ’s financial position, were matching.  Hence, there is no basis to support the Defendants’ belated suggestion that the Plaintiff’s current management might somehow have tampered with BSZ’s accounts or financial documents before passing them to the experts.  This has never been part of the Defendants’ pleaded case and there is no basis to support such serious allegation.  In fact, Mr Chen fairly explained that he would welcome and actively consider any expert analysis or factual information from the Defendants that may affect his own analysis, but none had been forthcoming.

397.  As I see it, the limitations highlighted in Mr Chen’s report demonstrate precisely that the expert is committed to presenting his findings fairly and objectively to the court.  The Defendants ought to be in a position to proffer relevant evidence in respect of all three limitations, i.e. the lack of (a) bank statements of BSZ’s accounts, (b) opportunity to confirm or clarify findings with BSZ’s former management or employees and (c) access to books and records of related parties, but have chosen not to do so.  Mr Chen’s use of the method of apportionment was also necessitated by these limitations and represents the best the expert could do in the circumstances.  As explained in his report, given the limited documents available, such as there being no books and records of Long Xiang and Huang Xin, no bank statements of BSZ’s bank accounts from 2003 to 2007 and the absence of third party confirmation, he had difficulties in conclusively identifying which particular transactions with Long Xiang and Huang Xin were bogus transactions.  However, that should not undermine the credibility of his evidence.  Mr Chen considered multiple factors, such as commerciality of contract terms, relationships between parties to the transactions, flow of funds, inexplicable absence of tax invoices or official receipts in support of payments, before drawing conclusions about the available materials.  I accept his approach is a sound one.

398.  Indeed, the difficulties faced by Mr Chen was, to a great extent, caused by the Defendants’ failure to hand over BSZ’s records and documents to the Plaintiff on completion as required by Clause 5.2(A)(a)(ii) of the SPAs.  If there is any uncertainty resulting from the unavailability of the documents, facts should be presumed against the person responsible for the same, i.e. the Defendants.[139]

399.  As to Mr Chen’s view that certain persons were related to Zhou or working under his instructions, I accept that there is sufficient basis to support his view given the overall circumstances of the case including the shareholdings and positions held by these persons in the related companies.  Again, the Defendants have chosen not to adduce any evidence to rebut Mr Chen’s observations and conclusions in this regard.

400.  Finally, I accept Mr Ho’s submission that the Defendants’ criticisms do not do justice to the in-depth and comprehensive analysis presented in Mr Chen’s expert report.  Many of the Defendants’ arguments are in any event made without evidential basis or upon incorrect premises.  For example, it is asserted that Mr Chen accepted that a subsidiary may make payments on behalf of its parent company so long as there are proper booking records.  But the situations addressed in Mr Chen’s report are not about parent company and subsidiary.  More importantly, the issue is not about a company making payments on behalf of another company with proper booking records.  The issue is that BSZ used bank accounts of related companies for receipts and payments and recorded 189 banking transactions in BSZ’s ledger as if they were BSZ’s own bank accounts.

401.  Further, Mr Chen did not conclude there was fictitious income in the Pre-Profit Guarantee Period just because the relevant contracts were “too good to be true”.  Instead, the expert had considered multiple factors.  Even on the commercial realism of the contracts alone, the expert, unlike the Defendants, conducted a holistic assessment of all three contracts, i.e. the March 2005 Agreement, the December 2005 Agreement and the September 2006 Agreement.  In my judgment, there is sufficient basis for Mr Chen to say that the three contracts, when viewed together, do make very little commercial sense.

402.  The Defendants challenge that early termination of certain contracts did not mean that those contracts were fictitious.  As explained by Mr Chen, the problem lies not only in the early termination itself.  The early termination should be considered together with the lack of apparent reasons for not pursuing any penalty from the sub-contractors as a result of the early termination and the fact that so many sub-contractors decided to terminate the contract after the end of the Profit Guarantee Period.  These were very suspicious indeed.

403.  On the purported income of RMB 13,000,000 under the December 2005 Agreement, the Defendants seem to suggest that there is nothing wrong with this and that BSZ did not attempt to sue Tianjiu for the payment.  Mr Chen explained that the problem lies in that BSZ did not receive any real benefits from this transaction, yet the amount of RMB 13,000,000 was recognised as profits to BSZ.  It is difficult to understand why BSZ’s attempt (or the lack thereof) to sue Tianjiu has any relevance at all, and in any event there is no evidential basis to suggest that BSZ would have any basis to recover the purported sum from Tianjiu.

404.  There is also basis for Mr Chen to rely on certain documents filed in the Mainland proceedings.[140]  These documents were filed by the said parties in proceedings commenced by the current management of BSZ against them.  In stating that the relevant incomes or agreements were fictitious, these parties were not making self-serving statements.  They were making admissions which could potentially attract criminal liability.  Hence there is some truth in these admissions, and Mr Chen is certainly entitled to accord due weight to these documents.  If the Defendants seek to argue that these documents do not mean what they say, they should have produced evidence to support their case.

405.  In an attempt to challenge Mr Bezant’s evidence, Mr Chan submits that the expert was putting undue weight on Sin’s evidence, which should not have been admitted as evidence as he was not called as a witness. However, under the Objective Basis, which the Plaintiff commends to be the proper basis for valuation of the Plaintiff’s loss, how the Plaintiff arrived at the price for the shares in BSZ is not a relevant question in itself.  Mr Bezant relies upon the price as the “as warranted” value, on the basis that it was agreed in those circumstances, and then refers to that value in determining the objective “as delivered” value.  Adopting such approach, a full factual understanding of the circumstances in which the price was arrived at is not a necessary piece of the puzzle for this analysis to be performed.

406.  Notwithstanding the above, Sin’s evidence was consistent with the information in the 10 May Announcement and the 8 June Circular in relation to how the price of the acquisition was determined.  Hence, as confirmed by Mr Bezant, his evidence would be the same even without the consideration of Sin’s evidence.

407.  Indeed, both Sin’s evidence and the aforesaid documents refer to factors that were considered at the time, including market conditions, historical financial information and the Profit Guarantee.  These are factual matters which an objective valuer in Mr Bezant’s position is entitled to take into account.

408.  The Defendants also contend that the historical financial position of BSZ had little or no bearing on valuation.  However, as mentioned above and confirmed by Mr Bezant in his oral testimony, any projection of the future profit or growth of a company must be made upon a baseline, which is the level of its historic profits, and it is illogical and unrealistic to divorce the past performance of a company from an assessment of its current value or future prospects.  The way in which a reference point transaction is applied to the actual circumstances of the company in question is commonly by reference to historical financial information.

409.  The Defendants also contend that the Plaintiff’s Directors or shareholders would not have acted differently even if presented with the true information about BSZ.  This contention is premised on the Defendants’ factual case which has been rejected by me in the earlier part of this Judgment.[141] In any event, it is not part of Mr Bezant’s job, as valuation expert, to speculate on what a specific shareholder or director would have done with the true information.

410.  It is also submitted by Mr Chan that that Defendants would not have sold their shares at the “as delivered” valuation.  However, this point was neither raised in the Defendants’ evidence nor put to Mr Bezant during his cross-examination.  In any event, the point is irrelevant under the Objective Basis, where the measure of loss is by reference to the value of the shares received, and not the price that would hypothetically have been agreeable to the Defendants.  Mr Chan also refers to an earlier offer that the Defendants made to sell BSZ to another party at the same price.  However, it is not clear whether the Defendants had presented the same set of inflated Management Accounts to that party, and in any event that price had not been agreed by then.  Hence, this does not suggest that the price was the value as received.

411.  Finally, the Defendants seek to criticise Mr Bezant’s choice of comparables.  But, first of all, these comparables are only relevant to the Objective/Alternative Basis and not the Objective/Primary Basis which the Plaintiff commends the court to adopt.  As a matter of common sense, when one throws out the best piece of evidence (i.e. the transaction itself) for valuation under the Objective/Alternative Basis, one is bound to be left with less precise and relevant evidence.  In any event, while it is true and inevitable that the expert was only able to identify imperfect comparable companies about which limited information is available, there was a clear process to identify the comparables and they were all markets performing the same economic functions, which is relevant to value. As such, the Defendants’ criticisms have no merit.  In any event, the Defendants have not called expert evidence on other appropriate comparables.

412.  I therefore accept all the Plaintiff’s experts on quantum to be reliable witnesses.  There is no dispute that the Defendants had inflated the Management Accounts, and the Plaintiff is facing great difficulties in trying to ascertain the exact amount of the inflation as they do not have all the necessary documents.  With the passage of time, it is also not possible for the expert to know the exact condition of the site when the construction works were done.  Hence, the Plaintiff’s evidence on quantum cannot be perfect.  With the unknowns, the Plaintiff’s experts are bound to make assumptions and inferred factual basis based on the surrounding circumstances. The necessary documents should have been in the possession of BSZ, which was under the control of the Defendants and Zhou before the handover.  Yet the Defendants have adduced no factual evidence to challenge the factual basis or assumptions made by these experts in their investigation of the inflation of the Management Accounts or the reduced value of the acquired shares.  Neither have they adduced any expert evidence to put forward a different approach of the assessment and valuation.  Under such circumstances, the court is entitled to make adverse inferences against the Defendants on quantum based on the documents available to the Plaintiff and the sound methodologies adopted by the Plaintiff’s experts.

D.3.10  Whether the quantum of the Overpayment Claim is limited to the amount of the inflation in the Management Accounts?

413.  Finally, Mr Chan submits that the quantum of the Plaintiff’s claim for breach of warranties cannot exceed RMB 99,649,000 for the reason that the assets and the income of BSZ have been inflated by RMB 76,649,000^[142] and RMB 23,000,000^[143] respectively and that should be the extent of the damages payable to the Plaintiff.  According to Mr Chan, the present case was a warranty on the accuracy of the historical figures in the Management Accounts and not the warranty of the value of the shares.  Insofar as reliance is sought to be placed on the Profit Guarantee by Wang, the warranty of profit clause clearly set out what was the agreed consequences if the Profit Guarantee was not met, and so there should not be any further liability arising from the breach of that warranty.

414.  I agree with Mr Ho that there is no merit in such argument as the same is premised upon an erroneous construction of Clause 6.3 of the SPAs.

415.  By Clause 6.3, the Defendants undertake that if they are in breach of any of the sellers’ warranties under the SPAs, they will on demand immediately compensate the Plaintiff in cash as a guarantee indemnity (保证赔偿) in an amount necessary to put BSZ into the financial position (财务状况) which would have existed had such warranties not been breached.  The “financial position” in Clause 6.3 must be construed in its proper context, i.e. a sale and purchase agreement of the shares of BSZ.  Given such context, the “financial position” in Clause 6.3 can only refer to the value of the shares of BSZ as a whole, as opposed to merely the asset or income position of BSZ.  This makes perfect legal and commercial sense given that the Plaintiff, who is a party to the agreement, was purchasing the shares and not the asset or income in BSZ’s books as such.  Hence, to ascertain the financial position of BSZ which would have existed had the warranties not been breached, the court needs to determine the value of BSZ as warranted under the SPAs.

416.  There is accordingly no basis to construe Clause 6.3 of the SPAs in such a way as to confine the Plaintiff’s Overpayment Claim to the extent of the inflation in the asset and income figures in the Management Accounts. Such construction is unduly narrow, ignores the relevant contractual context and defies commercial sense.  Further, a claim based on Clause 6.3 is an indemnity claim, and there is nothing in such clause requiring the Plaintiff to show causation and reliance.

417.  In any event, the Defendants’ attempt to limit the Plaintiff’s loss to RMB 99,649,000 is unsound under common law principles.  Under common law, the normal measure of damages for a breach of warranty claim is the value of the shares as warranted less the value in fact at the date of the transaction.  The purpose of awarding damages is to put the Plaintiff into the same position had the contractual warranties not been breached.  The court therefore has to consider the value of BSZ as warranted by the Defendants to the Plaintiff under the SPAs and the value of BSZ as was delivered to the Plaintiff.  The breach of warranties has plainly caused loss to the Plaintiff. Further, as demonstrated in the earlier part of this Judgment, the Defendants’ argument that the Plaintiff would have entered into the acquisition at the same price anyway are unsupported by reliable evidence and untenable in law.

418.  For these reasons, I accept the submission of Mr Ho and adopt the Objective/Primary Basis and assess the quantum of the Overpayment Claim in the sum of RMB 510,000,000.  In any event, the other approaches produce more or less the same result.

E  THE MISREPRESENTATION CLAIM

419.  In view of my aforesaid decision on the Overpayment Claim, it is not necessary for me to consider the alternative Misrepresentation Claim.

420.  In any event, there can be no dispute that the representations by the Defendants as to the financial position of BSZ in its Management Accounts were made fraudulently or at least recklessly.  The measure of damages for misrepresentation is that the Plaintiff ought to be put back in the financial position it was in before the SPAs were made, i.e. the difference between the price paid and the fair value of the shares.  As such, the proper valuation for the Plaintiff’s loss under its claim for misrepresentation would be the same RMB 510,000,000, whether it is to be assessed according to the CAPE Basis (which assesses what the Plaintiff had contracted to pay for BSZ under the SPAs and the fair value of BSZ based on its true financial information) or the Objective/Primary Basis which I have adopted in assessing the quantum of the Overpayment Claim.

421.  As I see it, the only issues which may be relevant are: (i) whether the inflation of the Management Accounts was done under the instigation of the Plaintiff or with its consent; and (ii) whether the Plaintiff had been induced by the alleged misrepresentation in making the shares acquisition.

422.  As the Misrepresentation Claim may be classified as a tortious claim, the Plaintiff may not be able to rely on the provisions in the SPAs such as Clauses 6.1 and 6.2 to establish contractual estoppel against the Defendants.  In other words, the Plaintiff has to establish actual reliance on the alleged misrepresentation.

423.  Based on my ruling above, it is quite unnecessary for me to deal with these differences between the parties.  It suffices for me to say that, based on my analysis in Section B.4.3 above, I find as a matter of fact that the Plaintiff was not aware of and did not instigate the falsification of the Management Accounts, and the Plaintiff had relied on the inflated Management Accounts in entering into the shares acquisition transaction.  Further, based on my analysis set out in Section D.2.2 above, even if Fu or Yang was aware of the falsification of the Management Accounts, such knowledge should not have been attributed to the Plaintiff.

424.  For these reasons, there is also no defence to the alternative Misrepresentation Claim.  However, since this is an alternative claim and I have already found in favour of the Plaintiff on the Overpayment Claim, there is no need for me to make any further order under the Misrepresentation Claim.

F    THE PROFIT GUARANTEE CLAIM

F.1    The basis of the claim and the issues involved

425.  The Plaintiff’s Profit Guarantee Claim is based on the amended Clause 8.1 of the 1^st SPA, which provides for a warranty by Wang that the audited net profit of BSZ in the Profit Guarantee Period, calculated with generally accepted accounting principles, would not be less than HK$150,000,000, and in the event that the audited net profit is less, the Plaintiff would be entitled to claim against Wang for the shortfall and to make corresponding adjustment on the amount payable to Wang under Wang’s Instrument.

426.  The original text of the amended Clause 8.1 reads as follows:

“8.1卖方于此不可撤回及无条件地保证，目标公司截至2007年12月31日止的财政年度根据香港每没被接受的会计原则、标准及守则（包括所有适用的标准会计准则条文）计算出的经核算纯利将不少于港币150,000,000元(“保证盈利”）。如根据上述方法计算的目标公司经核算纯利（“实际盈利”）最终低于保证盈利或目标公司出现实际亏损（“实际亏损”)，买方将有权根向卖方追讨保证盈利与实际盈利（或实际亏损）之间的差额，并据承付票据的条款及条件对承票据项下应付予卖方的金额作出相应调整。

卖方保证，若买方根据本条向卖方追讨的金额超出买方于承付票据项下应付予卖方的金额：卖方将在收到向买方通知后马上向买方支付超出的金额部分。

为免生疑，双方于此同意，买方根据本条向卖方追讨的款项可超过港币150,000,000元”

427.  The Plaintiff also relies on the following provisions:

(i)     Clause 4 of Schedule 6 of the 1^st SPA (or Clause 4 of Wang’s Instrument), which provides for the deduction of the shortfall from Wang’s Instrument in case that the audited net profit of BSZ during the Profit Guarantee Period is less than the Profit Guarantee:

“如王秀群根据股权买卖协议第8.1条项下所出的有关目标公司截至2007年12月31日止的财政年度根据香港一般被接受的会计原则、标准及守则(包括所有适用的标准会计准则条文)计算出的经核算纯利(“经核算纯利”)少于港币150,000,000元(“保证盈利”), China Velocity有权从本承付票据项下需付[予]王秀群的金额中扣除保证盈利与经核算纯利两者之间的差额。”

(ii)    Clause 3.2(d) of the 1^st SPA, which provides for the remaining HK$120,000,000 for the purchase price shall be paid as deferred consideration upon Wang’s Instrument upon completion:

“就对价的其余部分港币120,000,000元，以延期对价的方式并于交易完成时以承付票据偿付。”

(iii) Clause 2 of Schedule 6 of the 1^st SPA (or Clause 2 of Wang’s Instrument), which provides for an undertaking by the Plaintiff to pay Wang the remaining purchase price of HK$120,000,000 plus interest at an annual interest rate of 5%:

“鉴于已收取代价，此承付票据的签署人，China Velocity，现承诺将向受益人王秀群支付一笔本金数额为港币壹亿贰仟万元正(HK$120,000,000)之款项(“该本金总数”)，加上适用于每天结余的年利率为5%的利息(利息以一年365天为基准)。”

428.  In summary, the effect of these provisions is that:

(i)  Should the audited net profit of BSZ be less than HK$150,000,000 for the Profit Guarantee Period, the net profit shortfall shall be deducted from the HK$120,000,000 which is payable to Wang by the Plaintiff under Wang’s Instrument.

(ii)  If BSZ suffers a net loss in the Profit Guarantee Period, the Plaintiff is entitled to be indemnified for the outstanding amount by Wang after deducting all HK$150,000,000 from Wang’s Instrument.

429.  The arrangements after the completion of the SPAs were that:

(i)  An amount of HK$150,000,000 was paid to an escrow agent on escrow as security of the Profit Guarantee provided by Wang under the 1^st SPA.

(ii)  In the Deloitte Report dated 28 April 2008 prepared by Deloitte, the former auditors of the Plaintiff, the audited net profit of BSZ for the Profit Guarantee Period was stated to be HK$94,162,000. It is unchallenged evidence that the Deloitte Report was prepared based on the financial information and documents supplied to Deloitte by the former management of BSZ which was under the Defendants’ control at the time.[144]

(iii)  The Plaintiff and Wang reached an oral agreement that certain items stated in the Deloitte Report, including the valuation gain in properties, government subsidies and certain travelling expenses incurred by Wang and Zhou, were not to be included in calculating the net profit of BSZ under the Profit Guarantee Period.

(iv)  Upon making the various adjustments, the net profit shortfall of BSZ came to HK$75,032,425, which the Plaintiff deducted from the HK$150,000,000 held in escrow.  At the Defendants’ request, the Plaintiff refunded the balance of HK$74,967,575 to Zhou.

430.  It is the Plaintiff’s case that it subsequently discovered that the figure of the Deloitte Report was arrived on the basis of the Management Accounts provided by the former management of BSZ, which contain sets of income that are fictitious.  The Plaintiff’s expert concludes that a total of RMB 80,350,000 had been wrongfully treated as the income of BSZ during the Profit Guarantee Period.

431.  As explained by Mr Bezant, upon adding back the turnover tax of RMB 4,660,000 and profits tax of RMB 24,978,000 to the fictitious income of RMB 80,350,000, the net profit of BSZ during the Profit Guarantee Period should be reduced by RMB 50,172,000 (i.e. HK$54,211,000).  The Plaintiff therefore claims a set-off of HK$54,211,000 against Wang’s Instrument pursuant to the amended Clause 8.1 of the SPA.

432.  The use of the phrase “irrevocably and unconditionally warrants (卖方于此不可撤回及无条件地保证)” in the opening sentence of the amended Clause 8.1 clearly means that the Profit Guarantee is a standalone warranty and not just a promise.  As the profit guarantee clauses only appear in the 1^st SPA and Wang’s Instrument, the Profit Guarantee Claim is only made against Wang and not Tianjiu.

433.  From the submissions made by the parties at the trial, the main issues under this head of claim are:

(i)  whether the Profit Guarantee Claim had been settled by the parties;

(ii)  whether the profit guarantee provision is some sort of a wager agreement, which is a suggestion raised by the Defendants only in the course of the evidence; and

(iii)  whether the Plaintiff’s expert evidence proves the alleged quantum of the Profit Guarantee Claim.

434.  I will deal with these issues in turn.

F.2    Alleged settlement of the Profit Guarantee Claim

435.  It is the Defendants’ case that the Plaintiff, with the consent or connivance of Wang, had appointed its auditors, Deloitte, to conduct an audit and made a report to ascertain the net profit of BSZ.  Such move was made with the intention of ascertaining the net profit of BSZ for the purpose of deciding whether the warranty as to the Profit Guarantee had been met.  By agreeing to the net shortfall of HK$75,032,425 and refunding the balance of HK$74,967,575 to Zhou after ascertaining the net profit of BSZ, the Defendants claim that the parties must have had made a settlement for the Profit Guarantee Claim.

436.  I do not find that the alleged settlement does provide a defence to the Profit Guarantee Claim.

437.  Firstly, the Defendants have not made out a proper case on the pleading. 

438.  In §58 of the Defendants’ Re-Re-Amended Defence and Counterclaim, it is pleaded that “the parties had reached an agreement … … … to treat the shortfall as HK$75,032,425.”  However, the Defendants have not gone further to plead that the effect of such agreement was to settle the Profit Guarantee Claim such that the Plaintiff would have no entitlement whatsoever to claim under the amended Clause 8.1 of the 1^st SPA.  In fact, the Defendants’ existing plea is consistent with the Plaintiff’s case that the adjustments made to the figure in the Deloitte Report were the result of the oral agreement between the Plaintiff and the Defendants on the calculation of the net profit shortfall.  However, in the absence of an express plea of a settlement agreement, the Defendants are not entitled to run an un-pleaded case of settlement in this trial.

439.  Secondly and more importantly, there is simply no evidence to substantiate the existence of any settlement agreement to the effect that the Plaintiff is not entitled to make the Profit Guarantee Claim. There is nothing in the witness statement of Yang or his oral testimony which supports the making of any settlement agreement.  Furthermore, the alleged settlement was, on the Defendants’ case, reached between Wang and the Plaintiff.  It is remarkable that the alleged settlement is not mentioned in Wang’s witness statement at all.  In fact, based on my observations made in the earlier part of this Judgment, it is extremely unlikely that Wang would have had any first-hand knowledge of the making of any settlement agreement between the parties.

440.  Thirdly, even if there was a settlement agreement which I do not find it to be the case, the agreement would have been set aside on the ground of fraud.

441.  It is trite that “fraud unravels all” and vitiates contracts and transactions.[145] The same applies to any alleged settlement agreement reached between the Plaintiff and the Defendants.  If the Plaintiff can establish that the income in the Profit Guarantee Period is fictitious, the alleged settlement agreement would have provided no defence to the Defendants.  Indeed, the discovery of the fictitious income is the basis upon which the current Board of the Plaintiff decided to pursue the Profit Guarantee Claim in the first place.

442.  For these reasons, the purported defence on the alleged settlement must fail.

F.3   Alleged wager

443.  In the course of the evidence, the Defendants suggested that the profit guarantee provision is a kind of wager in the sense that if the profit guarantee is not met, the known consequence would be that the purchaser in effect would pay a lesser purchase price for getting the benefit of the difference between the actual profit and the guaranteed profit.

444.  In his final submissions, Mr Chan does not pursue the “wager” argument.  In any event, such argument has no merit whatsoever.

445.  Firstly, this point is not pleaded in Defendants’ pleading as a defence to the Profit Guarantee Claim.  It was never part of Defendants’ pleaded case that the effect of the amended Clause 8.1 is that of a wager provision as suggested by the Defendants.  Nor was there any plea that the parties knew full well the alleged known consequences when the profit guarantee is not met.

446.  Secondly, this assertion of a wager is inconsistent with the wording of the amended Clause 8.1 of the 1^st SPA.  On a proper construction, the amended Clause 8.1 is a free-standing warranty by Wang on the financial performance of BSZ and spells out the consequences in the event of a failure to meet the Profit Guarantee.  Nothing in the amended Clause 8.1 or any other provision remotely suggests that Wang did not mean to warrant the profit prospect of BSZ for the Profit Guarantee Period.

447.  Thirdly, the wager argument is premised on Yang’s oral evidence that the profit guarantee provision is a wager agreement (對賭協議).  Apart from my general observations about the credibility of Yang’s evidence as mentioned in the earlier part of this Judgment, his evidence on such matter is also full of inexplicable gaps.  He was unable to give any satisfactory explanation on how the figure of HK$150,000,000 was arrived at if the effect of the profit guarantee provision is a wager.  His only explanation was that the figure was set by the investment bank.  Yang also could not explain why it was never disclosed to the public that the profit guarantee of HK$150,000,000 was never meant to be met or identify the individuals in the Plaintiff at the time who were aware of this.  Hence, I reject Yang’s evidence on this wager issue.

F.4    Quantum of the Profit Guarantee Claim

448.  The Plaintiff relies on the expert evidence of Mr Chen on the fictitious income in the Profit Guarantee Period.  Mr Chen concludes that BSZ’s income during the Profit Guarantee Period had been overstated by RMB 80,350,000.[146]

449.  The Defendants have adduced no contrary evidence to challenge the findings of Mr Chen.  In addition, the Defendants did not plead any positive case to contradict the Plaintiff’s case on the fictitious income of RMB 80,350,000 during the Profit Guarantee Period.  In fact, Defendants pleaded that Wang and/or Zhou had fully informed the Plaintiff of the “exact nature” of the 7 Dubious Agreements relied upon by Mr Chen in assessing the quantum of the fictitious income.[147] It must follow that it is not open to the Defendants to challenge that the RMB 80,350,000 income is not fictitious.

450.  Given that the Defendants were in control of BSZ at the time of the Profit Guarantee Period and that it was part of the Defendants’ pleaded case that they were aware of the nature of the 7 Dubious Agreements, the Defendants at least bear the evidential burden if they wish to contradict Mr Chen’s analysis of the nature of these agreements.  In this trial, the Defendants produced no evidence to support the genuineness of these agreements.  The Defendants’ challenge to Mr Chen’s evidence therefore lacks evidential foundation.

451.  In any event, some of the issues raised by the Defendants during the cross-examination of Mr Chen have been addressed by me in Section D.3.9 above.  Hence I accept Mr Chen’s evidence on the amount of the fictitious income during the Profit Guarantee Period.

452.  Mr Bezant quantifies the Profit Guarantee Claim by taking into account the fictitious income of RMB 80,350,000 identified by Mr Chen.  Upon adding back the turnover tax and profits tax to the fictitious income, Mr Bezant concludes that the net profit of BSZ in the Profit Guarantee Period should be reduced by HK$54,211,000.[148]

453.  Again the Defendants have adduced no contrary evidence to contradict Mr Bezant’s analysis.

454.  Apart from the issue of double recovery which I have addressed in Section D.3.6 above, the only substantive challenge by the Defendants on Mr Bezant’s analysis on the Profit Guarantee Claim is that a finding on fictitious income by Mr Chen does not necessary mean that there is an extra finding of profit reflecting the same sum of fictitious income.  The Defendants suggest that if the sole basis of a finding of fictitious income is the circular fund flow, then it would not result in any profits in the books.

455.  However, Mr Chen’s conclusion on the fictitious income was not derived solely from the circular fund flow.  As mentioned above, he also looked at other aspects of the 7 Dubious Agreements.  The premise of this challenge is therefore false.  In any event, Mr Bezant explains that if the circular fund flow is designed to misrepresent the revenues of the business, then the flow of funds does not alter the fact that the revenues and the profits of the business have been inappropriately overstated.  According to Mr Bezant, the Defendants’ challenge confuses what may be represented in the balance sheet and that in the profit and loss accounts. If the effect of the overall mechanism is to increase revenues and profits, then the profits would have been overstated.  It has got nothing to do with whether the funds have been moved around in a circle.  In the absence of contrary expert evidence, there is no reason for me to doubt Mr Bezant’s explanation in this regard.

456.  For these reasons, I accept the Plaintiff’s evidence on the quantum of the Profit Guarantee Claim and the Plaintiff is therefore entitled to set-off the amount of HK$54,211,000 from the sum due by the Plaintiff to Wang under Wang’s Instrument.

G       THE DISHONEST ASSISTANCE CLAIM   

457.  The Plaintiff’s Dishonest Assistance Claim only becomes relevant if the court were to accept the Defendants’ evidence that the figures in the Management Accounts were amended, exaggerated or falsified at the instigation of or otherwise with the knowledge of the Plaintiff.  Since I reject the evidence of the Defendants in this regard, it is quite unnecessary for me to consider the Dishonest Assistance Claim.  However, in the event that this case goes elsewhere and a contrary view is taken about my findings, the merits of the Dishonest Assistance Claim become relevant.

458.  In that scenario, the Plaintiff’s alternative case is that Fu and Yang would have been in breach of their fiduciary duties to the Plaintiff and that the Defendants would have dishonestly assisted in the breach of fiduciary duties by Fu and Yang.

459.  The Dishonest Assistance Claim was only introduced by way of amendment of pleading on 22 November 2018.  Though there was delay on the part of the Plaintiff in making the amendment application, I took the view that, based on the Defendants’ own case on their roles in the falsification of the Management Accounts, there would be great injustice if the Plaintiff would not be allowed to pursue such claim at the trial.  Further, the risk of the proposed amendments in derailing the trial was remote.  Apart from the introduction of expert opinion on Mainland law, other preparation works should have been minimal taking into account that the parties were familiar with the factual background and the allegations concerned.  I therefore allowed the amendment application introducing the Dishonest Assistance Claim in November 2018.

460.  Based on the contentions of the parties at the trial, the first issue for the Dishonest Assistance Claim is whether, based on the Defendants’ scenario, the Defendants committed dishonest assistance in Fu or Yang’s breach of fiduciary duties under Hong Kong law.  Further, as the Defendants take the point that the alleged dishonest assistance, if any, was committed outside Hong Kong, there is an additional issue as to whether the principle of double actionability applies, and if so, whether the Plaintiff’s claim is actionable under Mainland law.  I will deal with these issues in turn.

G.1    Whether the Defendants committed dishonest assistance?

461.  There are four requirements for the imposition of liability for dishonest assistance: (i) a breach of trust or fiduciary duty by someone other than the defendant, (ii) the defendant’s assistance, (iii) dishonesty, and (iv) resulting loss.[149]

462.  For the first requirement, it is beyond doubt that, as the Plaintiff’s directors, Fu and Yang owed fiduciary duties to the Plaintiff, including the duties to: (i) act honestly and in good faith in the interests of the Plaintiff; (ii) act for proper purposes; and (iii) disclose all relevant information to the Plaintiff and its shareholders, including any matter that could materially affect the interests of the Plaintiff and its shareholders.

463.  It is Defendants’ own case and evidence that: (i) Fu had agreed and requested that the figures in the Management Accounts be falsified; (ii) Fu and Yang knew at all material times that the falsification was pursuant to an agreement among Fu, Cazenove as the Plaintiff’s adviser and the Defendants and that the Profit Guarantee would be impossible to be met; and; (iii) Fu assured the Defendants that the Plaintiff would not in the future question or seek compensation in respect of the falsification of the Management Accounts.

464.  In such scenario, this would mean that Fu and Yang: (i) facilitated the conclusion of the SPAs in full knowledge of the matters mentioned above; (ii) were complicit in committing the Plaintiff to a transaction with a view to injure the interests of the Plaintiff; (c) acquiesced or failed to alert the Plaintiff or its shareholders to matters which were detrimental to the Plaintiff’s interest; and (d) issued the 10 May Announcement and the 8 June Circular which they knew containing false or misleading information.  Fu and Yang were thus clearly in breach of their fiduciary duties to the Plaintiff.

465.  For the second requirement as the Defendants’ assistance, the Defendants, on their own case, were involved in the falsification of the figures in the Management Accounts, and Wang knew that it was impossible that the Profit Guarantee would be met.  In Wang’s evidence, she claimed that the Defendants “co-operated” (配合) with the Plaintiff in accordance with the instructions of Fu.  In such scenario, the Defendants knew or must have known that entering into the SPAs on the basis of the falsified Management Accounts would be detrimental to the Plaintiff’s interests and they had assisted in deceiving the Plaintiff by entering into the SPAs, and the Defendants had clearly assisted Fu and Yang to act in breach of their fiduciary duties to the Plaintiff.

466.  For the third requirement as to dishonestly, it is trite that dishonesty is an objective standard and the court would apply the normally acceptable standards of honest conduct in determining whether the accessory is dishonest.[150] Once a person’s actual state of mind as to knowledge or belief as to facts is established, the question whether his conduct was honest or dishonest is to be determined by the fact-finder by applying the objective standards of ordinary decent people.  There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest.[151]

467.  In the present case, the evidence shows that Defendants knew that: (i) the figures in the Management Accounts were false and the Defendants were involved in the falsification; (ii) it was impossible that the Profit Guarantee would be met; (iii) there were other shareholders in the Plaintiff at the time of the transaction.

468.  In light of the Defendants’ knowledge of these matters, there can be no doubt that the Defendants’ conducts were plainly dishonest according to the objective standard.  Any ordinary decent people would conclude that the Defendants’ act of falsifying the figures in the Management Accounts in these circumstances was intended to deceive the Plaintiff and its shareholders as to the true financial position of BSZ and that the Defendants could receive a higher amount of consideration from the Plaintiff for the sale of their shares in BSZ.

469.  Mr Chan submits that, according to Wang’s testimony, she thought that the falsification of the Management Accounts was in best interest of the Plaintiff since Fu, being the chief executive of the Plaintiff, clearly knew better than what she did.  Without knowing the sophisticated listing rules in Hong Kong, the Defendants considered that they were only helping the Plaintiff with no viable business or assets to gain a substantial and promising business, and so there was no dishonesty involved. However, as I reject the Defendants’ evidence in its entirety, in particular their allegation about the wider “scheme” of conspiracy[152], there is no substance in such contention.

470.  For the last requirement as to resulting loss, based on the Defendants’ own scenario, it is clear that, but for the breach of fiduciary duties by Fu and Yang and the dishonest assistance of the same by the Defendants, the Plaintiff and its shareholders would not have been presented with the false or misleading information in the 10 May Announcement and the 8 June Circular.

471.  The court can also safely infer that, had the Plaintiff and its shareholders been aware of the true financial position of BSZ, the price to be paid by the Plaintiff would be substantially less than HK$1,156,000,000 for BSZ’s shares.

472.  To oppose the claim, the Defendants raise as a defence that the Plaintiff should have held a shareholders meeting to decide whether its shareholders would have in any event approved the SPAs on the same terms or would have paid the same price of HK$1,156,000 to the Defendants.[153]  However, not only is the holding of such a shareholders meeting irrelevant to the Dishonest Assistance Claim, it is commercially absurd to suggest that the Plaintiff and its shareholders would have entered into the transaction on the same terms had they been aware of the true financial position of BSZ, which is worth substantially less than what it had been warranted.

473.  It appears that the Defendants seek to rely on the CCIF Report at Appendix II to the 8 June Circular and assert that the Plaintiff’s accountant had carried out independent audit procedure.  Insofar as the Defendants are trying to contend that this somehow breaks the chain of causation between their dishonest assistance and the resulting loss, such contention is not pleaded.  In any event, the evidence shows that the Management Accounts remained the starting point and the source data for the accountant’s report.[154]  In the absence of any contrary evidence, the suggestion that the Defendants’ dishonest assistance had no role to play in the Plaintiff’s shareholders’ approval by reason of the CCIF Report is unfounded.

474.  For the other arguments raised by the Defendants about the lack of causation between the falsification of the Management Accounts and the eventual completion of the shares transfer transaction, I have already rejected them in Section B.4.3 above.  Hence, the loss resulting from the Defendants’ dishonest assistance is the loss arising from the Plaintiff overpaying the Defendants for the purchase of the 90% shares in BSZ.

475.  Since all the elements for imposing liability of dishonest assistance are satisfied, the Defendants are liable to account to the Plaintiff for RMB 510,000,000, being the same quantum as the Overpayment Claim, as constructive trustees for their dishonest assistance in the breach of fiduciary duties by Fu and Yang towards the Plaintiff.

G.2    The defence based on the double actionability rule

476.  The Defendants also rely on the double actionability rule and contend that, in order to succeed in its claim in dishonest assistance or constructive trust in Hong Kong, it is necessary at common law for the Plaintiff to plead and prove that the Defendants are civilly liable under Mainland law to the same extent as under Hong Kong law.

477.  According to the Defendants’ case as pleaded:

(i)  All the essential and predominant acts of the alleged dishonest assistance complained of including the falsification of the Management Accounts and the request made by Fu or Yang for doing so were committed or took place in the Mainland.[155]

(ii)  Fu and Yang are all Mainland nationals and Tianjiu is a Mainland company while the Plaintiff is a Bermudian company.  In the premises, the alleged dishonest assistance or breach of constructive trust was committed in the Mainland.[156]

(iii)  The Mainland law does not recognise any civil wrong or concept of “dishonest assistance” or “constructive trust” and so the Dishonest Assistance Claim is not actionable in Hong Kong.[157]

(iv)  Further, according to Articles 135 and 137 of the Mainland General Principles of the Civil Law (《中華人民共和國民法通則》), the time limit for a civil claim is 2 years which begins when the plaintiff has or ought to have knowledge of the violation of his rights.  In the present case, the Plaintiff has or should have known of the alleged violation of its right on 14 August 2014[158] by the latest, and yet the Plaintiff only amended the pleading on 22 November 2018 to introduce such claim for the first time.  Under such circumstances, the Plaintiff’s claim is not actionable under the Mainland law.

478.  There is no reference to Bermudian law in the pleadings, and so Bermudian law should not be an issue insofar as the defence of double actionability is concerned.

G.2.1 The double actionability rule

479.  The double actionability rule is a choice of law principle under the common law.  In the leading authority of Boys v Chaplin[159], Lord Wilberforce stated the basic rule as follows:

“I would, therefore, restate the basic rule of English law with regard to foreign torts as requiring actionability as a tort according to English law, subject to the condition that civil liability in respect of the relevant claim exists as between the actual parties under the law of the foreign country where the act was done.”

480.  In other words, for foreign tort to be actionable in Hong Kong, the matter must be actionable both under the lex fori and under the lex loci delicti.

481.  The basic rule is subject to an exception that a particular issue between the parties may be governed by the law of the country which, with respect to that issue, has the most significant relationship with the occurrence and the parties.[160]

482.  The double actionability rule was abolished in the United Kingdom after the enactment of the Private International Law (Miscellaneous Provisions) Act 1995.  In Hong Kong, there is no equivalent legislation and the common law double actionability rule continues to be applicable.[161]

483.  Based on the Defendants’ case as pleaded, the main issue here is whether the wrong of dishonest assistance was a foreign tort committed in the Mainland.

G.2.2 Whether the Defendants’ dishonest assistance was committed in the Mainland?

484.  I agree with Mr Ho that the wrong of dishonest assistance, whether it is characterised as a tort or not, was in substance committed in Hong Kong.

485.  For the purpose of deciding whether the relevant tort or wrong had been committed in the forum or some other country, one applies exclusively the lex fori and this involves the application of a “substance” test.  The court will look back over the series of events constituting it and ask the question: “Where in substance did this cause of action arise?”[162]

486.  The “substance” test was further elaborated in Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc^[163]as follows (446A-447E):

“… if a person by an act or acts committed in a foreign country has caused injury or damage to a person in this country, we see no reason in principle why he should necessarily be able to invoke a plea that the act (or one or more of a series of acts) which caused the damage was performed in a country whose civil law rendered it non-actionable. Everything must depend on the facts of the case. …

In our judgment, in double locality cases our courts should first consider whether, by reference exclusively to English law, it can properly be said that a tort has been committed within the jurisdiction of our courts. In answering this question, they should apply the now well familiar “substance” test previously applied in such cases as Distillers Co. (Biochemicals) Ltd. v. Thompson [1971] A.C. 458 , Castree v. E.R. Squibb & Sons Ltd. [1980] 1 W.L.R. 1248 and Cordoba Shipping Co. Ltd. v. National State Bank, Elizabeth, New Jersey [1984] 2 Lloyd's Rep. 91 . If on the application of this test, they find that the tort was in substance committed in this country, they can thenceforth wholly disregard the rule in Boys v. Chaplin [1971] A.C. 356 ; the fact that some of the relevant events occurred abroad will thenceforth have no bearing on the defendant’s liability in tort. On the other hand, if they find that the tort was in substance committed in some foreign country, they should apply the rule and impose liability in tort under English law, only if both (a) the relevant events would have given rise to liability in tort in English law if they had all taken place in England, and (b) the alleged tort would be actionable in the country where it was committed.

We appreciate that the application of the substance test may give rise to difficult problems on the facts of some cases, but double locality cases are bound to give rise to difficult problems and we see no reason to suppose that it would be likely to give rise to injustice or greater difficulty than any other test.

The rule in Boys v. Chaplin is essentially a rule which defines the circumstances in which an act done abroad is actionable here as a tort. Whether as a matter of justice, comity or public policy, we see no reason why our courts should necessarily have to allow a person who does abroad something which is directed against persons in this country, or is foreseeably likely to injure persons in this country, to claim exemption from liability in tort under English law by reference to the laws of the country where some or all of his acts were performed. In such circumstances it may be by no means unreasonable to expect the doer to have some regard to the laws of this country as well as the laws of the place of the act. …

As to comity, while this is an important consideration, public policy surely requires that our courts should not in all cases, for the purpose of the law of tort, be obliged to turn a blind eye to damage intentionally or negligently caused to persons within this jurisdiction merely because the acts which did the damage were performed abroad in a country which rendered them non-actionable.

If in any given case the court concludes that under English law a tort has both been committed by the defendant and committed in this country, we see no reason either on principle or on authority why he should be entitled to claim exemption by reference to some foreign law, and we so decide.”

487.  In Yugraneft v Abramovic[164], a case relied on by Mr Chan, the court considered a number of factors in determining whether the dishonest assistance was in substance committed in Russia.  The connecting factors with Russia included: the place of the EGMs approving the transaction in breach of fiduciary duty, the nationality and residence of the individuals, and the loss sustained by the claimant.[165]

488.  Whilst Metall itself was overruled in Lornho v Al-Fayed[166] on a different point, the holding on the double actionability rule remains good law and has been followed in the local case of Hong Kong Exchanges and Clearing Ltd v Shi Huaifang[167].

489.  Applying the broad “substance” test, it is clear that the dishonest assistance committed by the Defendants took place in Hong Kong.

490.  Firstly, it is undisputed that the SPAs were signed in Hong Kong by Fu on behalf of the Plaintiff and Wang and Li Jun on behalf of the Defendants.  The place of signing the SPAs is obviously significant since it was the act of entering into the SPAs which committed the Plaintiff to the deal and caused substantial loss to the Plaintiff.

491.  Though it may be argued that the inflation of the Management Accounts and the alleged assurance by Fu were made in the Mainland (which might not be the case as the latest version of the Defendants’ case covered a lot of other people in Hong Kong), one cannot ignore the reality that the inflation and the assurance were not made in isolation.  They were made as part and parcel of the share sale transaction culminating to the SPAs, which were envisaged to be and were executed in Hong Kong and governed by Hong Kong law.

492.  Secondly, on Yang’s own evidence, the inflation of the Management Accounts would benefit the minority shareholders in Hong Kong and attract more investors into a Hong Kong listed company, even though he did not accept that this amounts to a deception on the minority shareholders.

493.  Clause 4.1(b) of each of the SPAs provided that the completion of the SPAs was conditional upon the approval of the Plaintiff’s shareholders.  On the basis of the circumstances surrounding the SPAs and the financial performance of BSZ as set out in the 10 May Announcement and the 8 June Circular, the Plaintiff’s shareholders approved the transaction at the SGM on 27 June 2007.  The shareholders’ approval and the factual background of such approval all took place in Hong Kong.

494.  On any view, the Defendants’ acts of falsifying the Management Accounts of BSZ were clearly directed against persons in Hong Kong or were foreseeably likely to injure persons in Hong Kong (i.e. the investing public in Hong Kong) in order to deceive them as to the true financial position of BSZ.  Wang also accepted in cross-examination, albeit evasively, that she was aware that there were other shareholders in the Plaintiff at the time of the transaction.  Hence, there can be no question that the injury resulting from the Defendants’ act of dishonest assistance was sustained in Hong Kong.

495.  Thirdly, Fu and Yang were the Plaintiff’s directors and owed directors’ duties to the Plaintiff.  Their conducts, if they amounted to any breach of duties, were subject to the regulation of listed companies in Hong Kong.  It can hence be said that the place where their fiduciary duties were breached is Hong Kong.

496.  The Defendants emphasise that Wang, Fu and Yang are Mainland nationals.  However, this factor is evened out by the fact that the Plaintiff, who is a party to the SPA, is a company listed in Hong Kong.  Hence, looking at the matter broadly and taking into account the series of events in question, I agree with Mr Ho that the substance of the Defendants’ dishonest assistance was committed in Hong Kong and not in the Mainland.

497.  Given that the “tort” was in substance committed in Hong Kong, the double actionability rule is not engaged in the present case.

498.  In the course of the arguments, there is an issue as to whether dishonest assistance is a tort for the purpose of the application of the double actionability rule.  Further, Mr Chan relies on Yugraneft v Abramovic[168] with a view to establish the proposition that double actionability rule applies to equitable dishonest claim, but Mr Ho asks me to limit the application of this case as it was only an English first instance decision which has never been applied in Hong Kong.  For myself, I do not find it necessary to resolve this particular academic issue.  Even if double actionability rule is applicable to a dishonest assistance claim, it can only be applied if the wrong was committed outside Hong Kong.  As mentioned above, I take the view that the wrong herein was in substance committed in Hong Kong, and so there is no room for the application of the double actionability rule even on the basis of the Defendants’ alleged scenario.

G.2.3 Whether the Dishonest Assistance Claim is actionable under Mainland law?

499.  This would have been sufficient to dispose of the defence.  However, in the event that this case goes elsewhere and a different view is taken about the application of the double actionability rule, I then have to deal with the question as to whether the Dishonest Assistance Claim is actionable under Mainland law.  Foreign law is an issue of fact and so the trial judge has a duty to determine this particular matter.

500.  It is common ground that there are no equivalent concepts of dishonest assistance and constructive trust under Mainland law. However, in the application of the double actionability rule, it is not necessary for the act or omission to be characterised as a tort or delict under the foreign law, provided there is a right of recovery to a similar extent by way of civil action.  So far as acts or omissions on the part of a defendant or defendants may give rise to a liability in tort under the lex fori, there is no requirement that such conduct must be tortious by the lex loci delicti.  All that is required is that it should be "civilly actionable" there.[169] Further, there is a presumption that foreign law is the same as the lex fori unless the contrary is proved as a fact, the burden lies upon the defendant to plead and prove that his conduct is not actionable under the lex loci delicti.[170]

501.  In relation to the question of whether the Defendants are civilly liable under Mainland law for the Dishonest Assistance Claim, the Plaintiff and the Defendants have called Mr Wang Fei (“Mr Wang”) and Mr Hong Qun Jun (“Mr Hong”) respectively as their experts.

502.  The key differences of opinion between Mr Wang and Mr Hong are:

(i)  whether the Mainland Tort Liability Law (中华人民共和国侵权责任法) is applicable; and

(ii)  whether the Dishonest Assistance Claim must be pursued as a contractual claim and governed by the Mainland Contract Law (中华人民共和国合同法), with the effect that it would preclude a claim under the Mainland Tort Liability Law.

503.  Regarding the applicability of the Mainland Tort Liability Law, Mr Wang’s opinion is that, on the pleaded facts, the Plaintiff has a cause of action under Mainland law against the Defendants for violation of civil rights (侵害民事权益), including property rights (财产权益), under the Mainland Tort Liability Law.  This is not a bare assertion as contended for by Mr Chan.  In fact, Mr Hong cannot rule out that the Dishonest Assistance Claim can in principle be classified as a tortious claim under Mainland law.  In his oral evidence, he accepted that the pleaded facts of dishonest assistance would amount to a tortious act.  It follows that such claim is civilly actionable under Mainland law.

504.  The present case is therefore different from Xiamen Xinjingdi Group Ltd (廈門新景地集團有限公司) v Eton Properties Ltd (裕景興業有限公司)[171],where it was held by the Court of Appeal that the plaintiff had failed to prove there was a civil wrong of inducing breach of contract in the Mainland, and since the act in question was not actionable in the Mainland, the plaintiff had failed to satisfy the double actionability rule.

505.  The Defendants challenge the applicability of the Mainland Tort Liability Law on the ground that the statute was passed in 2010 but the relevant tortious act occurred in 2007.  The Defendants rely on paragraph 1 of the Supreme People’s Court Notice relating to the Mainland Tort Liability Law (最高人民法院关于适用《中华人民共和国侵权责任法》若干问题的通知)(the “SPC Notice”).

506.  However, paragraph 2 of the SPC Notice also provides that if the tortious act took place before the passing of the Mainland Tort Liability Law but the consequences of the tort occurred thereafter, the Mainland Tort Liability Law is applicable.  Mr Wang confirmed that if a tortious act has been left uncompensated, the consequences of the tort are continuing (侵權的後果就一直持續存在) and that the present case falls squarely within the situation of paragraph 2 of the SPC Notice.  He therefore maintained the view that the Mainland Tort Liability Law is applicable.

507.  The purported response from Mr Hong was that the entirety of the consequences of the tort must take place after the enactment of the Mainland Tort Liability Law and that paragraph 2 of the SPC Notice is inapplicable to a situation where part of the consequences of the tort occurred before the enactment of the Mainland Tort Liability Law.  He also suggested that the word “出現” in paragraph 2 only means that the first appearance of the consequences of the tort (損害後果第一次出現). However, there is simply nothing in the text of paragraph 2 which supports these artificial distinctions drawn by Mr Hong.

508.  Mr Chan submits that Mr Hong’s view is actually consistent with the common law concept of the accrual of a cause of action as explained by McHugh NPJ in Kensland Realty Limited (in liquidation) v Tai, Tang & Chong (a firm).[172] Despite that, I wonder whether the Supreme People’s Court had actually referred to the common law principles when issuing the SPC Notice.  I agree with Mr Ho that the wordings used in the SPC Notice support Mr Wang’s view on the matter.

509.  For these reasons, I find that the Mainland Tort Liability Law is applicable and the Plaintiff, based on the facts of the Dishonest Assistance Claim, has a cause of action against the Defendants under the Mainland Tort Liability Law.

510.  Regarding the Mainland Contract Law, Mr Hong’s opinion is that the Plaintiff does not have a cause of action against the Defendants under the Mainland Tort Liability Law because the Plaintiff’s claim is a contractual claim and should be governed by the Mainland Contract Law instead of the Mainland Tort Liability Law.

511.  I agree with Mr Ho that this is a complete mischaracterisation of the Dishonest Assistance Claim, which is never based on contract.  The nature of the Plaintiff’s claim is that: (a) Fu and Yang, as the Plaintiff’s directors, were in breach of their fiduciary duties in committing the company to the transaction; (b) the Defendants dishonestly assisted in their breach; and (c) resulting loss was caused to the Plaintiff.

512.  Mr Hong further opined that the Plaintiff must choose between a contractual claim and a tort claim and cannot pursue both claims in the Mainland court.  However, this assertion is not supported by the marine case cited by Mr Hong , i.e. 2016年十大典型海事案例之瓦錫蘭芬蘭有限公司、西特福船運公司與榮成市西霞船業郵箱公司與穎勤發動機（上海）有限公司其他合同糾紛再審案 (the Wartsila case).  Firstly, the Wartsila case only provides that the court should insist to apply the Mainland Contract Law and refuse to grant relief for a claim brought under the Mainland Tort Liability Law when a plaintiff is “purely enforcing its contractual rights” (单纯合同履行利益).  In the present case, the Dishonest Assistance Claim has nothing to do with enforcement of the Plaintiff’s contractual rights.  Secondly, as admitted by Mr Hong, the Wartsila case does not address the present situation where a contracting party with the Plaintiff conspired with others to deceive the Plaintiff because the court in that case simply made no finding of such conspiracy.

513.  Mr Hong sought to get around this problem by suggesting that, in a conspiracy context, a plaintiff must still first pursue a claim under the Mainland Contract Law and later separately sue under the Mainland Tort Law.  In my judgment, this does not make a lot of sense, as this would lead to a curious result that a claim has to be pursued multiple times. In fact, Mr. Hong accepted that the Wartsila case itself does not lend support to the assertion that these claims must be separately pursued.  Further, the Plaintiff’s claim is not for “fraud between contractual parties” but against third parties, and so there is no basis for his conclusion that the Plaintiff must sue for “contractual fraud” and not “tortious tort”.

514.  For these reasons, there is no basis for insisting that the Plaintiff’s claim must be pursued as a contractual claim and governed by the Mainland Contract Law.  I therefore find that the Plaintiff has a civil cause of action against the Defendants under Mainland law in respect of the pleaded facts of the Dishonest Assistance Claim.

515.  The Defendants also argue that the Dishonest Assistance Claim is time-barred under Mainland law.  Again, I find no merit in such contention.

516.  Under the conflict of laws rules, matter of procedure is governed by lex fori and matter of substance is governed by lex causae.[173] As to the question on limitation, a distinction is drawn under the common law between two kinds of statutes of limitation: those which merely bar a remedy and those which extinguish a right.  Statutes of the former kind are procedural, while statutes of the latter kind are substantive.[174]  This distinction remains applicable in Hong Kong where there is no equivalent of the Foreign Limitation Periods Act 1984 in the United Kingdom.[175]

517.  In considering foreign rules as to limitation, the English courts traditionally applied their own classification based on the distinction between barring a right and extinguishing a remedy.[176]  In other words, the classification is to be determined by reference to the lex fori and not the foreign law.

518.  Difficulties can occur in deciding whether the true nature of the foreign rule is to bar a remedy or extinguish a right.  Mr Ho suggests that in cases where a right of the relevant nature may in principle (i.e. not necessarily on the facts of the particular case) still be asserted defensively after expiry of the relevant period, for example by way of set-off, or to resist dispossession, then the foreign rule is clearly of a procedural nature, whereas if a right of that nature may in no circumstances be asserted, then it has in substance been extinguished and the relevant rule should be regarded as substantive.[177]

519.  In the Mainland limitation statutes cited by the Defendants, the limitation rule is formulated by reference to seeking relief from the people’s court for protection of civil rights (向人民法院请求保护民事权利的诉讼时效期间).  Adopting the same differentiating principle, the limitation statutes fall within the category of statutes barring a remedy, as opposed to extinguishing a right.  As a result, the question of limitation period is a matter of procedure and should be governed by the lex fori, i.e. Hong Kong law.

520.  It is trite that any defence of limitation under Hong Kong law must be expressly pleaded.[178] In the absence of any plea of limitation periods under the Limitation Ordinance (Cap 347), the Defendants are not entitled to rely on any limitation defence.

521.  Even if the limitation period is a matter of substantive law, the time limit for bringing a civil claim in the Mainland court can be extended in special circumstances[179], and so the Plaintiff’s claim may not have been time-barred under Mainland law.

522.  As to the remedy of constructive trust, the fact that Mainland law does not have the remedy of constructive trust is irrelevant.  So long as the Plaintiff can establish that the Defendants are under a relevant substantive liability in the Mainland (in this case under the Mainland Tort Liability Law), the Hong Kong court may supply an appropriate remedy to give remedial effect to the Mainland substantive liability.  Hence, the court is entitled to hold the Defendants liable as constructive trustees.[180]

G.3    Conclusion on the Dishonest Assistance Claim

523.  For the above reasons, even if the figures in the Management Accounts were falsified at the instigation of or otherwise with the knowledge of the Plaintiff, which I do not find it to be the case, the Defendants are still liable to account to the Plaintiff for the same amount of RMB 510,000,000 as constructive trustees.

H    THE LAND INDEMNITY CLAIM

524.  As mentioned in §34 above, the Land Indemnity Claim consists of the following:

(i)  the Land Use Certificates Claim which includes the costs of obtaining Land Use Certificates for the 318 mu of land (the “Land Use Certificates Claim”);

(ii)  the Penalty Costs Claim which includes the penalty costs for illegal construction; and

(iii)  the Demolition Costs Claim which includes the costs associated with demolition of structures.

H.1    Costs of obtaining the Land Use Certificates for 318 mu of land

525.  For the Land Use Certificates Claim, the Plaintiff’s case is that Wang was in breach of her obligation under Clause 8.3 of the 1^st SPA, which provides that if before the completion date, BSZ failed to obtain the relevant Land Use Certificates or Property Ownership Certificates for the land and buildings that were by that time being used by BSZ, including the Land Use Certificates for the 318 mu of land neighbouring the registered address of BSZ which was by that time not yet in use by BSZ, Wang would, after the completion date, use her best endeavours to assist the Plaintiff and BSZ to acquire such certificates, however BSZ would have to bear the associated fees so incurred up to a limit of RMB 100,000,000, with any exceeding sum to be borne by vendor, i.e. Wang.

526.  The original text of Clause 8.3 reads as follows:

“卖方承诺,如在交易完成日或以前,目标公司仍未能取得其现时使用的土地及房产的所有相关土地使用权证或房产证,包括取得现时目标公司并未使用的、毗邻于目标公司注册地址的318亩土地的土地使用权证,其将会尽最大努力协助买方及目标公司在交易完成后继续申领并确保取得该等证书,但目标公司需承担因此而产生的费用,以人民币100,000,000元为限,超出此金额的部分,则由卖方承担。”

527.  From such clause, it is clear that not all land being used by BSZ for the Market had Land Use Certificates and not every building in the Market had Property Ownership Certificates.  It was also envisaged that the 318 mu of the land within the Market had not yet been issued with the Land Use Certificates.  The obligation on the part of Wang was to use her best endeavours to assist the Plaintiff to continue to apply to obtain the Land Use Certificates for 318 mu of Land and the Property Ownership Certificates for the buildings within the Market.  Without the Land Use Certificates, there could be no question of obtaining the Property Ownership Certificates for the buildings on the land.

528.  It is part of the Plaintiff’s pleaded case that:

(i)  Wang had failed to use her best endeavours to assist the Plaintiff and BSZ to obtain the Land Use Certificates for the remaining 318 mu of land.

(ii)  As a result of Wang’s failure, BSZ was unable to obtain good title or valid rights to the 318 mu of land.

(iii)  In mitigation of its loss, BSZ acquired Land Use Certificates for an area of 67 mu from the 318 mu site in April 2014 in a public auction, paying a total cost of RMB 40.7 million, comprising RMB 37.05 million (50% of the total transaction price of RMB 74.1 million due to a 50% transfer compensation discount for the original land user) together with taxes and levies of RMB 3.65 million.

(iv)  As to the balance of the 251 mu of land, BSZ would have to bid for the same from the Mainland government and pay RMB 112,550,000 to the Mainland government for the acquisition of Land Use Certificates for the remaining part of the 318 Mu site.

(v)  The breakdown of the Plaintiff’s claim for RMB 112,550,000 is as follows:

Price for bidding 251 mu of land (estimated to be its market value in 2014 according to the valuation expert report of Mr Lau Chun Kong (“Mr Lau”))	RMB 325,000,000
Discounted by 50% (available to a purchase by the original land user)	RMB 162,500,000
Add (discounted) price paid for 67 mu	RMB 37,050,000
Subtotal	RMB 199,550,000
Stamp Duty payable at 4%	RMB 13,000,000
Less: RMB 100,000,000 to be borne by BSZ (pursuant to Clause 8.3)	(RMB 100,000,000)
TOTAL:	RMB 112,550,000

529.  The Defendants’ pleaded defence is that:

(i)  Neither the Plaintiff nor BSZ had ever requested Wang to assist the Plaintiff and BSZ to obtain the Land Use Certificates.  Wang was at all material times ready and willing to provide her assistance when required.

(ii)  The Defendants deny that the Plaintiff had only acquired the Land Use Certificate for 67 mu in April 2014.  Instead, the Defendants contend that the Plaintiff had acquired a land use of 243.98 mu out of the 318 mu site.

(iii)  The Defendants claim that the estimated market value of the 318 mu of land would be approximately RMB 97 million (ie. 74.1 million/243.98 mu x 318 mu), which would be extinguished by the agreed amount of RMB 100 million stated in Clause 8.3 of the 1^st SPA as borne by BSZ.

530.  The main issues of the Land Use Certificates Claim are therefore as follows:

(i)  on liability, whether Wang was in breach of her “best endeavours” obligation under Clause 8.3 of the 1^st SPA, and in particular whether the Plaintiff or BSZ was required to request Wang to provide assistance before her obligation was triggered; and

(ii)  on quantum, whether the Plaintiff was entitled to claim RMB 112,550,000 from Wang for her breach of Clause 8.3 of the 1^st SPA, and in particular whether the Plaintiff had acquired Land Use Certificates for 67 mu of land (as the Plaintiff contends) or 243 mu of land (as the Defendants contend).

H.1.1 Use of “best endeavours” to obtain the Land Use Certificates

531.  The authorities suggest that the person undertaking a “best endeavours” obligation is required to do all he or she reasonably can to obtain the result, including taking all reasonable steps which a prudent and determined person acting in his or her own interests and anxious to obtain the result would have taken.[181] A “best endeavour” obligation is more stringent than a “reasonable endeavour” obligation.[182]

532.  According to Wang, the Plaintiff had never asked her for any assistance and for that reason her obligation under Clause 8.3 of the 1^st SPA was not triggered.

533.  Mr Ho submits that such defence is misconceived as a matter of law.  Firstly, there is nothing in Clause 8.3 of the 1^st SPA stipulating that Wang’s obligation is conditional upon the Plaintiff first seeking her assistance.  Clause 8.3 sets out a standalone obligation to be discharged by Wang after completion and so the Plaintiff’s request for assistance does not come into play at all.  Secondly, Wang is required to take all reasonable steps which a prudent and determined person acting in his or her own interest would have taken in the pursuit of the object of the “best endeavours” obligation.  The initiative of the “best endeavours” obligation should come from Wang and not the Plaintiff. The essence of the “best endeavours” obligation is that Wang should treat the application for the Land Use Certificates of the 318 mu of Land as if it was in her own interest to do so, and so it is wrong to suggest that Wang’s obligation is not triggered until the Plaintiff has requested Wang for her assistance.

534.  Further, Mr Ho submits that, insofar as the Plaintiff’s lack of request for Wang’s assistance is of any relevance, the Defendants had, by their refusal to hand over the control of BSZ and the Market to the Plaintiff, evinced a clear intention not to provide any assistance as may be required under Clause 8.3 of the 1^st SPA.   According to Ng whose evidence I accept to be the truth, the Plaintiff was shut out from its use of the Market after completion and only managed to take physical control of the Market in November 2010.  The Defendants refused to co-operate with the Plaintiff at the time and the Plaintiff was unable to locate people from the Defendants’ side to assist in obtaining the Land Use Certificates after the Plaintiff had gained control of the Market.

535.  In fact, Wang, in her oral testimony, claimed for the first time that Zhou had asked someone from BSZ to assist the Plaintiff to obtain the Land Use Certificates.  This was never mentioned in Wang’s witness statements or any witness statements filed by the Defendants.  Nor was it ever mentioned in the Defendants’ pleadings.  When pressed upon the circumstances of the alleged telephone conversation in which Zhou asked the staff of BSZ to assist the Plaintiff, Wang was unable to provide any meaningful details.  Hence, I have serious doubt about the truth of such allegation.

536.  On the other hand, Mr Chan submits that, from the evidence of Ng, it is quite clear that it is for BSZ to decide when and whether to apply to the Mainland government for offering the land for purchase whether by auction or by tender.  Upon any successful tender or auction, BSZ would have to pay but meanwhile even before the obtaining of the Land Use Certificates, BSZ had in fact had the use of the land and had in fact erected some structures on it without any action taken against it.  The initiative of making the application for such certificates was on the Plaintiff, and the Defendants could not assist without the Plaintiff’s request for assistance or at least without the Plaintiff informing the Defendants that the Plaintiff had made the application and required the Defendants to assist in what way.  According to the evidence, the Plaintiff has never asked the Defendants for any assistance and has not communicated with the Defendants in relation to the application to obtain any certificate.  Accordingly, the Plaintiff is not entitled to make any claim under this head.

537.  Without knowing the procedures for the application of the relevant Land Use Certificates for the Market, for example whether Wang could have made the application for the necessary Land Use Certificates on her own or in her name after the completion of the SPAs, it would be very difficult for the court to know whether the Defendants should have proceeded with the application for the Land Use Certificates without being told or assisted by the Plaintiff.  However, taking into account the difficulties faced by the Plaintiff in gaining control of BSZ and the Market, it would be naïve to suggest that Wang would have offered any assistance to the Plaintiff even if such request was made by the Plaintiff.  Indeed, Ng testified that, after gaining control of the Market, he could not find anyone from the Defendants’ side who could assist the Plaintiff to make the application for the necessary Land Use Certificates.  As the Defendants had evinced clear intention not to allow the Plaintiff to gain control of the Market, I find that Wang was in breach of the “best endeavours” obligation under Clause 8.3.

H.1.2 Quantum of the Land Use Certificates Claim

538.  To me, the main difficulty with the Land Use Certificates Claim is quantum and causation.

539.  Ng claimed that Wang could have obtained the Land Use Certificates if she had done so earlier.  However, despite I find him to be a credible witness, no evidence about the procedures for the application of the Land Use Certificates has been adduced by the parties.  Neither is there any evidence before the court as to the policy of the Mainland government in granting Land Use Certificates for the land in the Market and the land use zoning or planning parameters within the Market.  In fact, according to Ng, there might be changes in terms of development of the city, state policies and costs. The planning parameters could be subject to negotiation with the relevant government authorities.  Whether any adjustment could be made depends solely on the indication of the government authorities.  Without such essential information, it would be difficult for the court to ascertain what would have been the case if Wang had offered the necessary assistance earlier.  It might very well be the case that, due to changes in the government policy, Wang would not have been able to obtain the necessary Land Use Certificates even if she wanted to.  Ultimately, it would be the burden on the Plaintiff to prove the quantum of loss and that Wang’s breach of the “best endeavours” obligation had caused such loss and damage alleged by the Plaintiff.

540.  Mr Ho submits that it has never been part of the Defendants’ pleaded case that it would be impossible for Wang to assist the Plaintiff or BSZ to obtain the Land Use Certificates for the entirety of the 318 mu of land or that she would have encountered any difficulties (including planning conditions imposed by the government) in doing so.  Nor was there any plea of mistake or frustration to that effect.  Mr Ho therefore argues that the Defendants are not entitled to run an un-pleaded case that it was impossible for Wang to obtain the Land Use Certificates for the 318 mu of Land in 2007 or that her obligation would be subject to the planning parameters.

541.  I disagree.  The evidence shows that the Plaintiff had tried to obtain the Land Use Certificates or the ownership of that 318 mu of land after the Plaintiff gained control of the Market.  It could only do so by auctioning for the land in question from the Mainland government. There is no suggestion that the Defendants could have done any other way.  Despite the effort made by the Plaintiff, the Mainland government was only prepared to allow the Plaintiff to obtain 67 mu of land through auction.  As the Plaintiff has to prove the causation of loss, the Plaintiff has to show to the court, irrespective of the absence of any positive case pleaded by the Defendants, what would have been the case had Wang used her “best endeavours” to assist the Plaintiff to obtain the Land Use Certificates earlier, and what would be the quantum of such loss if the Defendants had done so earlier.

542.  Without knowing the proper procedures for the application of the Land Use Certificates and the then policy of the government, it would be quite impossible for the court to know what and when the Defendants could have done to assist the Plaintiff.  Under such circumstances, the court can only award nominal damages to the Plaintiff for the Defendants’ breach of the “best endeavours” obligation.

543.  There are also other issues with quantum.  On 6 July 2016, the Plaintiff eventually admitted through its witness, Ng, that the Plaintiff in fact acquired 243.52 mu from the Mainland government.[183]  The aerial photos of the Market show that the land so acquired was part of the 318 mu of land which were already in use as part of the Market in 2007.  The only reason why the acquisition was for 243.52 mu was that in the Mainland government auction, certain parts of the 318 mu site were left out as they would be used for roads.  The evidence suggests that the Mainland government had offered 243.52 mu of land for acquisition and the Plaintiff caused BSZ to bid for it, but for whatever reason, when the contract was made for the grant of the land, the Mainland government only granted 67 mu and Land Use Certificate was accordingly issued for such 67 mu of land.   Again, there is nothing to suggest that had Wang used her best endeavours the result would be any different.

544.  Furthermore, it is clear from maps and the land auction document that out of the 243.52 mu of the land offered for purchase, the 67 mu of land, which is the subject matter of the Land Use Certificate, was those parts which could be used for building structures for the Market.  The remaining parts were zoned for green use, or protective green use or for road use.  Certainly it was never envisaged that the Market would only consist of land which could be built upon.  Land for parking and transportation would also be part of the Market.  Hence, it might very well be the case that the Plaintiff, even with the assistance of Wang, could not have obtained the Land Use Certificate for the entire 318 mu of land.

545.  Finally, though the Defendants have not filed expert evidence in valuation, there is simply no basis for saying that the claim should be assessed as on any one of the 3 valuation dates (i.e. 31 March 2008, 31 March 2011 or 13 October 2014) in relation to the quantum of this claim.  As mentioned above, without knowing the application procedures, there is no basis to adopt any of these valuation dates.  It is also clear from the evidence of Mr Lau that the comparables used for the valuation were all in relation to land zones for building and not just for the purpose of green area or protection green area or roads.  Further, without knowing the procedures for applying the relevant Land Use Certificates, it was unclear as to when the application would have been approved had the Defendants offered assistance earlier, or that there would not have been new planning restrictions at the time of the intended application.  Hence, the valuation evidence may not be applicable.

546.  For these reasons, I only award $1 as nominal damages against Wang for the Land Use Certificates Claim.

H.2    The Penalty Costs Claim

547.  In support of the Penalty Costs Claim, the Plaintiff relies on, apart from Clause 8.3 of the 1^st SPA, the following clauses in Schedule 3 of the 1^st SPA:

(i)  Wang has sufficient authority and title to own, rent and operate her properties and assets, and to carry out and fulfil her obligations under the SPA (Clause 2.4(a)):

“卖方拥有充分权力和授权拥有、租赁和经营其物业和资产以及执行和履行其在本协议项下的义务。”

(ii)  The assets have to be made available to BSZ after the completion date for BSZ to carry on its business after completion according to the business model prior to the completion date (Clause 6.3(b)):

“目标公司的资产和目标公司有合同权享受的设施和服务包括使目标公司能在交易完成后以和之前的经营方式实质相同的方式开展业务所必要的所有权利、设施和服务。”

(iii)  Other than as claimant in the collection of debts arising in ordinary course of business, BSZ was not a plaintiff, or defendant or a party in any going, threatened, or pending litigation, arbitration or administrative proceedings in connection with BSZ or any of its assets (Clause 9(a)):

“除作为正常业务过程产生债务的原告，目标公司不是任何正进行、可能进行或未裁决或有关目标公司或其任何资产的诉讼、仲裁或行政程序的原告或被告或一方。”

(iv)  There was no ongoing or pending investigations or inquiries of BSZ made by governmental or official agencies (Clause 9(b)):

“无有关目标公司的正在进行或未裁决政府或官方调查或问询。”

(v)  Wang is not aware of circumstances which may lead to any proceedings, investigations or inquiries (Clause 9(c)):

“卖方并不知悉任何可能引起上述(a)或(b)后规定的程序、调查或问询的情况。”

(vi)  BSZ had fully complied with all laws, rules, regulations, decrees, and directives of all relevant jurisdiction (including regional jurisdictions), statutory requirements regarding corporate tax, value added tax, business tax and stamp duty (Clause 12.2):

“遵守法规

目标公司已全面符合其各自司法管辖区的所有法定条款、法规、规定，法令和指令有关利润或公司纳税、增值税、营业税和印花税的法定规定。”

548.  It is the Plaintiff’s case that, as a result of Wang’s failure to use her best endeavours to assist the Plaintiff and BSZ to obtain the Property Ownership Certificates for any of the buildings constructed in the Market, these buildings were considered in the Mainland as illegal constructions:

(i)  As at the date of the signing of the SPAs, 146 buildings in the Market had no Property Ownership Certificates.

(ii)  Some buildings at the Market were illegally built on public roads outside the permitted “red line” area.  Penalties were levied on those illegal structures, while the rest of such buildings were ordered by Urban Planning Land and Resources Commission of Wuhan City Municipality to be demolished.

(iii)  With regard to those buildings on which penalties were levied, the Plaintiff had paid a total sum of RMB 30.65 million to various government authorities so that such buildings could be retained for business operation.

549.  Hence, the Plaintiff claims the sum of RMB 30.65 million against Wang as the penalty costs paid to the Mainland government for the lack of Property Ownership Certificates for buildings illegally constructed in the Market.

550.  On the other hand, the Defendants submit that the Penalty Costs Claim only arose because it is alleged that certain buildings in the Market were not constructed with the authority’s permission.  It is contended that had there been Land Use Certificates and Property Ownership Certificates, these structures certainly would not have been subject to any penalty claim.

551.  Further, Mr Chan submits that the clauses in Schedule 3 would have to be construed together with Clause 8.3 of the same agreement.  While Clause 8.3 makes it clear that there was no property ownership in the Market and that a large area of the Market was not covered by any Land Use Certificates and that the relevant certificates were yet to be obtained, it does not make sense to construe the warranty under the relevant clauses as extending to cover the illegality or lack of authorization arising from structures without Property Ownership Certificates or Land Use Certificates.  Hence, on true construction of the 1^st SPA as a whole, these structures in the Market should not be subject to the warranty covered by the relevant clauses, as Clause 8.3 has made it clear that Wang’s obligation was merely to use her best endeavours to assist the Plaintiff to obtain the relevant certificates and hence to legalise the use of the land and the construction of the buildings.

552.  Mr Ho submits that the Defendants are not entitled to run such construction argument because the same has not been pleaded. Further, he submits that the Defendants’ construction is an erroneous one.  Much clearer and precise wording in Clause 8.3 of the 1^st SPA would have been used if it was intended that the warranties in Schedule 3 would not be applicable.

553.  I disagree.  Since the Defendants have expressly pleaded that they would rely on the full terms of the SPAs, the Defendants should be entitled to advance their case on the construction of the various clauses in Schedule 3.  Further, it is quite clear to me that, at the time of the making of the SPAs, the parties were aware that the Land Use Certificates or land ownership had not been obtained for the 318 mu of land in the Market.  Under such circumstances, the parties could not have agreed that the relevant clauses as extending to cover the illegality or lack of authorization arising from structures without Property Ownership Certificates or Land Use Certificates.

554.  The Penalty Costs Claim is therefore part of the claim arising from the breach of the “best endeavours” obligation under Clause 8.3.  For the same reasons given in the last sub-section, I would only award nominal damages for the Plaintiff’s claim under Clause 8.3.

555.  Based on such ruling, it is not necessary for me to deal with the Defendants’ argument about the lack of evidence on when the illegal structures were built.  In any event, I agree with Mr Ho that such challenge has no merit.  BSZ and the Market had remained in the Defendants’ control for more than 3 years after the signing of the SPAs.  Evidence on the timing of the structures (if any) should have come from the Defendants and not the Plaintiff.  There is no attempt by the Defendants to identify which particular structure did not exist as at the date of the SPAs, and so the court should be entitled to draw the adverse inference against the Defendants that the penalty costs were related to all the illegal structures that were built in the Market before the completion date.

H.3    The Demolition Costs Claim

556.  For the Demolition Costs Claim, the Plaintiff relies on the same breaches of the provisions in the 1^st SPA as set out in last sub-section against Wang and also the corresponding provisions in the 2^nd SPA against Tianjiu.

557.  The Plaintiff claims against the Defendants for RMB 1.2 million:

Demolition Costs	RMB 349,000
Costs incurred in re-accommodating existing tenants	RMB 851,000
TOTAL:	RMB 1,200,000

558.  It is the Plaintiff’s case that the Urban Planning Land and Resources Commission of Wuhan City Municipality had ordered BSZ to demolish some of the buildings which were constructed on public roads illegally.  Demolition costs were incurred by the Plaintiff as a result, totalling a sum of RMB 1.2 million.

559.  After referring to the various notices, Ng clarified in his oral evidence that the correct particulars of the buildings demolished, pending demolition, or subject to the payment of penalties should be as follows:

Particulars	Number
Number of buildings demolished	18
Number of buildings pending demolition	76 (instead of 79)
Number of buildings retained subject to payment of penalties	52 (instead of 49)

560.  Again this claim arose from the fact that certain buildings were constructed on lands without Land Use Certificates.  In such circumstances, I am of the view that: (i) the Demolition Costs Claim is also part of the claim arising from the breach of the “best endeavours” obligation under Clause 8.3; and (ii) only nominal damages should be awarded for the Plaintiff’s claim under Clause 8.3.

I    CONCLUSION AND RELIEF TO BE GRANTED

561.  I do not propose to deal with the Instruments Claim under a separate heading.  There are issues between the parties as to the legal effect of the Instruments and whether they are promissory notes in the strict legal sense.  However, since Clause 4 of Wang’s Instrument makes it clear that the Plaintiff is entitled to set-off any net profit shortfall for the Profit Guarantee Period (which is the difference between the actual net profit for the Profit Guarantee Period and the Profit Guarantee of HK$150,000,000) against the HK$120,000,000 payable under Wang’s Instrument, Wang’s Instrument is not an unconditional order to pay falling within the definition of a promissory note or a bill of exchange as a matter of law.

562.  In any event, the Instruments are subject to set-off against the relief to be granted to the Plaintiff after the trial of this action.

563.  In Chu Tak Yin Winston v General-Tech Electronics Limited[184], the court held that the defendant could point to a “good reason to the contrary” for not honouring the cheques by virtue of a provision (Clause 3.03) in the contract for the purchase of shares between the parties, which provided that the defendant was entitled to withhold part of the consideration upon the happening of a specified event.  In that case, it was held that should “the management accounts reveal a particular picture”, the defendant had a right to withhold the consideration.

564.  The effect of Clause 6.3 of the SPAs herein is similar to the contractual provision in Chu Tak Yin Winston[185]. It is the Plaintiff’s case that the Defendants have breached various warranties in the SPAs and are liable to indemnify in cash on demand to the Plaintiff as required by Clause 6.3.  The Plaintiff also has a clear defence of set-off and counterclaim to any action by the Defendants for enforcing the Instruments. After trial, it is found that the Plaintiff’s claim exceeds the total sum payable under the Instruments, i.e. HK$376,000,000.

565.  For the above reasons, I grant judgment in favour of the Plaintiff against both Defendants in the sum of RMB 510,000,000 for the Overpayment Claim.  As the Misrepresentation and Dishonest Assistance Claims are alternative claims, I make no order for such claims.  I will also allow the Plaintiff to claim the sum of HK$54,211,000 under the Profit Guarantee Claim against Wang and there shall be set-off of such sum from the amount due to Wang under Wang’s Instrument.  I also allow the Land Indemnity Claim but I only award $1 as nominal damages for such claim.

566.  Obviously, the Plaintiff still owes the amounts due under the two respective Instruments plus any interests stipulated therein to Wang and Tianjiu.  The award granted in favour of the Plaintiff should therefore be reduced to reflect these liabilities.  As the quantum of the award is greater than the amounts due under the Instruments, the Defendants should not be allowed to enforce the Instruments against the Plaintiff.  Coupled with my ruling on the Defendants’ claim for the “reversal” or rescission of the SPAs, the Defendants’ counterclaim should be dismissed.

567.  I do not think that the parties have fully addressed me on the issue of interests, both on the Plaintiff’s claim and the amounts due under the Instruments.  I would leave room for further discussion between the parties on such matter.

568.  My provisional view is that the Plaintiff should also get the costs of the action.

569.  I therefore direct the parties to submit an agreed draft order to me for approval within 21 days, which should reflect the decisions I make in this Judgment.  In case of any disagreement on the issues of interests and costs, the parties are at liberty to restore the hearing before me for further argument.

570.  Finally, I am grateful to counsel for all the assistance they have provided to this court.

HCA 1807/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1807 OF 2011

________________________

______________________

_________________________

D E C I S I O N
(Variation of Costs Order Nisi)

__________________________

Introduction

1. Before this court were respective applications by the plaintiff and the defendants to vary the costs order nisi made by this court on 11 September 2014 in the judgment handed down of the same date (“Judgment”).

2. In the present decision, I shall adopt the same abbreviations in the Judgment, unless otherwise indicated.

3. The Judgment was in respect of P’s Striking Out Summons, to strike out 8 paragraphs of the Defence, namely paragraphs 24 and 25, and paragraphs 50 – 55, pursuant to Order 18 rule 19(1)(a) and/or rule 19(1)(c), and/or the inherent jurisdiction of the court.  Alternatively, P had sought an order for trial of a preliminary issue over whether knowledge of P of a breach of warranty would amount to a defence to P’s claims under an indemnity clause under paragraphs 50 – 55.

4. In the Judgment, this court only allowed P to strike out paragraphs 24 and 25 of the Defence, and ordered Ds to pay P 50% of their application, with certificate for two Counsel (“Order Nisi”). 

5. Ds issued a summons on 24 September 2014 to vary the Order Nisi to no order as to costs, and for costs of their variation summons to be paid by P to Ds forthwith to be taxed if not agreed (“Ds’ Summons”).

6. P then followed with a summons on 30 September 2014 to vary the Order Nisi that Ds should pay P’s 50% costs forthwith with certificate for two counsel and that there be summary assessment of such costs, together with costs of P’s variation summons (“P’s Summons”).

Brief Background

7. Paragraphs 24 and 25 of the Defence concerned the MOFCOM approval, which Ds said was never obtained to the agreement in relation to the sale and purchase of shares in a PRC company, namely the SPA. This part of the P’s application was successful, and part of this court’s reasoning was that the 89.8 Agreement was not found by the Hubei Court to be invalid, but since the Judgment, this court was informed that Ds’ appeal to the PRC Supreme People’s Court was successful, and on 31 December 2014, the Supreme Court decided that the 89.8m Agreement was invalid.  However, it appeared that the Supreme Court did not hold that the transfer of shareholding in the Company from Ds to P was invalid, or impugn the MOFCOM Approval in respect of such transfer, and further P was entitled to apply for a re-trial within 6 months.

8. Ds has appealed against the Judgment and the appeal has been fixed for hearing shortly on 21 July 2015.

9. Paragraphs 50 to 55 related to the alleged inflation of assets or income in the Management Accounts.  This part of P’s application failed, and this court held that the defence of estoppel was reasonably arguable by Ds.

10. There was also an alternative application by P for a preliminary issue to be tried in relation to paragraphs 50 – 55.  This part of P’s application also failed, and this court held that the issue was not suitable for summary determination and that a preliminary hearing would tend to increase cost and delay.

11. When making the Order Nisi, this court had stated that as P did not succeed in full with the Striking Out Summons, P was only entitled to 50% of the costs.

12. For the present applications, Mr Ambrose Ho SC appeared for P and Ms Chevette Ip appeared for Ds.

Ds’ Summons

13. Ms Chevette Ip submitted that this court when making the Order Nisi, it did not take into account the fact that Ds had succeeded in respect of part of P’s application, and as costs normally follow the event, there were no reasons for departing from the usual course, and Ds should also be entitled to 50% of their costs in successfully opposing part of P’s summons.  Thus, the court should have ordered no order as to costs.

14. Ms Ip argued that it was unfair that Ds, having succeeded in partly opposing P’s Striking Out Summons, ended up paying 3 times more in costs than that of P’s, namely Ds had to pay the entirety of their own costs, plus 50% of P’s, while P only had to pay 50% of its costs. Further, the part of P’s Striking Out Summons relating to paragraphs 50 – 55 of the Defence was not an insubstantial part of the striking out.

15. Costs are in the discretion of the court.  Order 62 rule 5 sets out in exercising its discretion, the court shall, as may be appropriate in the circumstances, take into account the various special matters set out in Order 62(1).  One of these matters is whether a party has succeeded on part of his case, even if he has not been wholly successful.

16. Mr Ho submitted that even had the Striking Out Summons been related to only paragraphs 24 – 25 of the Defence, the parties would still have instructed both leading and junior counsel for the preparation and attendance of the hearing, given the intricacy of the legal and factual issues involved, and that the hearing would in all likelihood still have been set down for one day.

17. In the Judgment, paragraphs 3 – 54 set out the background of the dispute between P and Ds, paragraphs 55 – 72 set out the PRC actions between P and Ds, paragraphs 73 – 80 set out the relevant matters in the Hong Kong Action, paragraphs 81 – 82 on the relevant clauses in the SPAs, and paragraphs 85 – 88 on general legal principles on striking out. 

18. Ms Ip had argued that the submissions relating to paragraphs 50 – 55 were based on self- contained legal issues.

19. Paragraphs 50 – 55 were in relation to the Management Accounts of the Company and P had alleged there had been inflation in assets and income, and that Ds were in breach of various clauses in the SPAs and further or in the alternative, P was entitled to seek an order for Ds to indemnify P pursuant to an indemnity clause in the SPAs. 

20. Even though Mr Ho’s then arguments in relation to paragraphs 50 – 55 were based mainly on the law in relation to the effect of the indemnity clause in the SPAs, Mr Edward Chan SC who appeared for Ds at the hearing of the Striking Out Summons had submitted at the time the evidence filed were critically important to the issues as P’s claim was premised on the validity/enforceability of the SPA.  Further Mr Chan referred to the evidence supporting Ds’ case including that the Management Accounts were alleged to have been sent over by Ds to P prior to the signing of the SPAs, and that P had requested Ds to amend figures therein, upon which Ds’ plea of estoppel was based as a defence to P’s Indemnity Claim.

21. Thus, the background to the parties’ dispute and the validity/enforceability of the SPAs and other general matters above mentioned would have to be considered by the court whether the Striking Out Summons was an application in relation to only paragraphs 24 – 25 of the Defence, or whether it was in relation to paragraphs 50 – 55 as well. 

22. Having considered both Counsel’s submissions, I maintain my view that the Order Nisi is a fair order in that P was successful with part of the Striking Out Summons, and that on a broad brush approach, 50% entitlement to costs would be fair.

P’s Summons

23. Order 62 rule 9D (1) of RHC provides that “subject to paragraphs (2) and (4), the costs of any proceedings shall not be taxed until the conclusion of the action” and rule 9D (2) provides that “if it appears to the Court when making a costs order that all or any part of the costs ought to be taxed at an earlier stage it may order accordingly”.

24. There was no dispute between Counsel as to the principles relevant to the court’s exercise of its discretion whether to order the costs of an interlocutory application to be paid forthwith[1].  Mr Ho had summarized the matters to be taken into account in the discretionary exercise, such list not being exhaustive:

(a) whether the proceedings in question are severable and self-contained from the rest of the action;

(b) the justice of making the costs order having regard to the effect on the respective parties’ cash flow.  For instance, the court would have regard to the unfairness of keeping the successful party (in the interlocutory application) out of its money until trial;

(c) whether the amount at stake was sufficient to justify the expense of a separate taxation (NB this consideration did not apply here as P was seeking summary assessment);

(d) the underlying objectives in Order 1A rule 1 of RHC.  In particular, Lam J, as he then was, had said in Midland Business Management Ltd v Lo Man Kui (No 2)[2] that it was recognized that the lack of immediacy of orders to pay costs “in the cause” or “in any event” weakens costs as a sanction against unwarranted applications or resistance, and that under the Civil Justice Reform, the court is encouraged to order immediate payment of costs of interlocutory proceedings and if possible by way of summary assessment of costs, and that after Civil Justice Reform “the court is more astute to the impact of costs on legal proceedings and an order for immediate payment of costs will be made more readily as a discipline against unmeritorious interlocutory applications”.

(e) As in any other exercise of its costs discretion, the court is also entitled to consider the conduct of the parties, including the manner in which a party has pursued or defended his case or a particular allegation or issue: Order 62 rule 5 of RHC.

25. I accept that the Striking Out Summons is a completely severable and self-contained from the rest of the action.  The eventual outcome of the trial of this action will not have any impact on the costs order made by the court at this stage.  The costs are not of an insignificant amount, with involvement of Leading Counsel at a 1-day hearing.  There is no suggestion from Ds that immediate payment of P’s costs would have any serious impact on their cash flow or prejudice their positions in the action in any manner.  Ds are not domiciled in Hong Kong.  D1 is believed to be in Australia, while D2 is a PRC company.

26. Mr Ho had submitted that there was no reason as to why P, which had succeeded with part of the Striking Out Summons should be kept out of the amount until trial, which would be a considerable time away.

27. Ms Ip had, however, pointed out that the proceedings are at an advanced stage, with witness statements including expert statements already exchanged, and a case management conference fixed on 29 July 2015. 

28. However, in light of the present state of the High Court’s diary, even though a case management conference has been fixed, the trial is unlikely to take place until sometime next year.

29. Ms Ip submitted that the Striking Out Summons was not a straightforward application as put by Mr Ho, namely considerable background information was relevant which appeared in a number of affidavits : 8 from P and 4 from Ds, and there was bound to be some overlap between the Striking Out Summons and the earlier interlocutory applications.  Ms Ip also pointed out DHCJ Marlene Ng had declined to order summary assessment for those applications before her in her Reasons for Decision on Costs dated 16 January 2014, although she ordered the costs to be taxed , if not agreed and paid forthwith.

30. Having considered Ms Ip’s submissions, even though I accept that the Striking Out Summons was not really that straightforward, and that there could be overlap between the Striking Out Summons and the earlier interlocutory applications before DHCJ Marlene Ng when she declined to order summary assessment, I am of the view that any overlap could be taken into account during the assessment.  Further, P’s costs herein were much less than those in the applications before the learned Judge.  I am therefore of the view that summary assessment is appropriate in relation to the Striking Out Summons.

31. I will therefore allow summary assessment and order that such summarily assessed costs of the Striking Out Summons are to be paid by Ds within 14 days after the assessment.

Conclusion

32. In view of what I have said above, I dismiss Ds’ Summons and will allow P’s Summons.

33. As for costs for the variation, I order Ds to pay costs of both Ds’ Summons and P’s Summons, such costs to be summarily assessed, and to be paid within 14 days after the assessment.  I accept Ms Ip’s submission that there should be certificate for one Counsel only for both these variation summons.

34. P had lodged two statements of costs, one dated 30 September 2014 in relation to the Striking Out Summons and one dated 16 March 2015, in relation to P’s Summons which included two Counsel’s fees, but did not seem to have included P’s costs of Ds’ Summons.

35. In light of my decision herein, I direct P to re-submit their statements of costs within 7 days, D to submit their lists of objections within 7 days thereafter, and any reply by P to be submitted within 7 days thereafter.

[1] see Kickers International SA v Paul Kettle Agencies Limited & anor [1990] FSR 436, 439-440 per Hoffmann J, Naf Naf SA & anor v Dickens (London) Limited & anor [1993] FSR 421, 429-430 per Hoffmann J, Hui Yin Sang & anor v Tsoi Ping Kwan & anor HCA 392/2008, Sakhrani J (unreported, 14 July 2009) at paras 17-19, Midland Business Management Ltd v Lo Man Lui (No 2) [2011] 2 HKLRD 667, 671-673 per Lam J, and The Liquidator of Wing Fai Construction Company Limited (In Compulsory Liquidation) v Yip Kwong Robert & Ors FACV 3/2011 (unreported, 24 May 2012) at paras 4-9 per Ribeiro PJ (adopting the analysis by Lam J (as he then was) in Midland Business Management Ltd)

[2] At paras 9 and 12 of Midland

HCA 1807/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1807 OF 2011

________________________

______________________

__________________

J U D G M E N T

__________________

Introduction

1.  This is an application by the plaintiff company (“P”) to strike out certain paragraphs of the defence (“Defence”), pursuant to Order 18 Rule 19(1) (a) and/or Rule 19(1) (c), and/or the inherent jurisdiction of the court.  Alternatively, P seeks an order for trial of a preliminary issue.

2.  The main action was commenced by P in October 2011.  P’s claims against the 1^st defendant (“D1”) and the 2^nd defendant (“D2”) were, among other things, for damages for breaches of contractual warranties and damages for fraudulent misrepresentation and under an indemnity clause contained in sale and purchase agreements for P’s acquisition of shares held by the defendants (collectively “Ds”) in a company called Wuhan Baishazhou Agricultural By-Product Grand Market Co Ltd/武漢白沙洲農副産品大市場有限公司[1] (“Company”).

Background

3.  P, formerly known as China Velocity Group Limited/中國高速(集團)有限公司, was/is a limited company incorporated under the laws of Bermuda and listed on the Main Board of the Stock Exchange of Hong Kong Limited (stock code: 0149).  It carried/carries on the business of, among other things, leasing of properties and selling food and beverages in Mainland China (“PRC”).

4.  At the material times, the following were the key personnel of P :-

(i) Prior to October 2008, a Mr Chan Yeung Nam/陳洋南 (“Chan Yeung Nam”) was P’s single largest beneficial shareholder of  P holding about 27.14%  of the issued shares through a company called Velocity International Limited, and Chan was P’s Chairman until 29 June 2007; on 30 October 2008, a conditional sale and purchase agreement in relation to the sale of Chan’s 27.14% shareholding was  entered into, which then resulted in the 27.14% shareholding being acquired by a wholly owned subsidiary of a listed  company in Hong Kong now called PNG Resources Holdings Limited (“PNG”);

(ii) Prior to 29 June 2007, a  Mr Fu Jie Pin/符捷頻 (“Fu”) was the Chief Executive Officer of P, and on 29 June 2007, Fu became P’s Chairman, and had remained P’s Chairman until 12 February 2009;

(iii) On 26 April 2007, a Mr Yang Zong Lin/楊宗霖 (”Yang”) was appointed the Executive Director of P; Yang became the Chief Executive Officer from 29 June 2007 to 3 November 2008, and thereafter re-designated as an Executive Director from 3 November 2008 until 8 June 2009[2];    

(iv) Mr Chan Chun Hong (“Chan”) was/is the Chairman and Managing Director of PNG, and he became an executive director of P on 10 February 2009 after PNG’s acquisition of the interest of Chan Yeung Nam, and on 12 February 2009, took over from Fu as Chairman of the board, and has remained in the same position since.

5.  The Company was incorporated on 2 December 2003 as a domestic liability company under PRC laws with an address at 中國湖北省武漢市洪山區青菱鄉張家灣特一號. There were initially 6 founding shareholders, which were various PRC companies.

6.  Upon its incorporation, the Company was granted the right to operate a market until 1 December 2037 at No 1 Special, Zhangjiawan, Changzheng Village, Qingling Township, Hongshan District, Wuhan, Hubei Province, PRC/中國湖北省武漢市洪山區青菱鄉長征村張家灣特一號with an area of approximately 269,000 sq m (“Market”).

7.  After the incorporation of the Company and until 2007, D1 and/or her husband Zhou Jiu Ming/周九明 (“Zhou”) gradually acquired 90% shareholding of the Company, through D1 and/or D2.  The remaining 10% of the shareholding in the Company was held by another company called Wuhan Chuangjie Investment Co Ltd/武漢創捷投資有限公司, later called武漢創泰科技有限公司 (“Wuhan Chuangjie”).  

8.  D1 and Zhou were both PRC nationals at the material times, although D1 is said to be now living in Melbourne in Australia, and so seemed Zhou at one time[3].

9.  D2 was/is a company incorporated on 19 May 2005 under PRC laws.  Zhou was a 95% shareholder from incorporation until 25 December 2006, and he was also a director and the legal representative of D2 from incorporation until 17 April 2006.  It was P’s case that D2 was at material times controlled by Zhou and D1, through other persons or company.  The current PRC legal representative for D2 is Mr Tao Xin (“Tao”).

10.  D2 had originally on 26 April 2007 entered into an agreement with Wuhan Chuangjie whereby Wuhan Chaungjie agreed to transfer its 10% shareholding in the Company to D2, upon compliance with all regulations.  After the completion of the transfer, D2 would then end up holding 30% shareholding of the Company[4].

11.  To summarise, as at 27 April 2007, the registered shareholding of the Company was as follows:

Shareholder	Shares(Total 50m)	Percentage
D1	35m shares of RMB 1 each	70% (“70% Shareholding”)
D2	10m shares of RMB1 each	20% (“20% Shareholding”)
Wuhan Chuangjie	5m shares of RMB1 each	10%(“10% Shareholding”),subject to the completion of the agreement of 26 April 2007 with D2

12.  The Board of Directors of the Company, as at 2 May 2007, consisted of 5 directors (“Former Directors”)[5] and among them were Luo Hong (羅洪) (“Luo”), Chairman of the Board and the Company’s PRC legal representative (法人), and also Zhou.

13.  P entered the picture on 2 May 2007 (“Agreement Date”).  On the Agreement Date, P on one part, and D1 and D2 on the other part, entered into two sale and purchase agreements, as follows :-

(i) one between P and D1 in respect of P’s acquisition of D1’s 70 % Shareholding  for HK$900m  (“1^st SPA”)[6].

(ii) one between D2 and P in respect of  P’s acquisition of  D2’s  20% Shareholding, and the 10% Shareholding to be transferred to D2 from Wuhan Chuangjie, for a total of  HK$384m, of which the part relating to the 20% Shareholding  was  HK$256m, and the part relating to the 10% Shareholding was HK$128 m (“2^nd SPA”)[7].

14.  Thereafter, on 10 May 2007, there had been an amendment agreement relating to the 1^st SPA and one relating to the 2^nd SPA (the amendment agreements, the 1^st and the 2^nd SPA collectively referred to as “SPAs”).  Each of the 1^st SPA and the 2^nd SPA was further subsequently supplemented by 5 supplemental agreements (“Supplemental Agreements”).

15.  Under the 1^st SPA, the consideration of HK$900m was to be paid as follows:

(i) HK$10m to be paid as a cash deposit, within 3 days of the signing of the 1^st SPA;

(ii) HK$410m to be paid in cash on completion;

(iii) HK$360m to be paid by a convertible note for shares in P after completion at HK$2 per share (“Convertible Note”);

(iv) The payment of the balance of HK$120m to be postponed and paid, with interest, by way of a “promissory note”,  which payment may be adjusted according to any amount falling short of the “profit guarantee” by D1 of the Company’s profits of not less than HK$150m as at 31 December 2007[8] (“Profit Guarantee”).

16.  Under the amendment agreement to the 2^nd SPA, the Shareholding to be acquired by P was only D2’s 20% Shareholding.  Thus, the consideration was HK$256m, which was to be postponed and paid, with interest, by way of a “promissory note”.

17.  The completion date under the 1^st and the 2^nd SPA was  stated to be the 5^th business day after the “conditions precedent”   (“Conditions Precedent”) were fulfilled or abandoned or an agreed later date[9], and the “long stop date” was 3 months from the 1^st business day after signing of the 1^st and the 2^nd SPA.  According to P, the completion date under the SPAs was 5 December 2007[10].  This was denied by Ds as their case was that the Conditions Precedent were never fulfilled, and there was thus no completion[11]. 

18.  It was, however, not challenged by Ds that it was clearly stated in the 5^th of the Supplemental Agreements dated 2 December 2007   that the agreed “Long Stop Date” was 5 December 2007[12].  This was thus the relevant date for completion and will be referred to as the completion date in this judgment (“Completion Date”).

19.  On  the Completion Date, P had signed two documents titled承付票據 “promissory notes”[13], as follows:

(i) For a sum of HK$120m to be fully paid to D1 within 5 years from the Completion Date, at an interest of 5% per annum from Completion Date (“1^st Instrument”)[14];

(ii) For a sum of HK$256m, namely the part relating to the 20% Shareholding  to be fully paid to D2 within 5 years from the Completion Date, at an interest of 5% per annum from Completion Date (“2^nd Instrument”)[15].

20.  To summarise, the total consideration for the purchase of  the 90% of the shareholding of the Company (“90% Shareholding”) was HK $1,156,000,000,  the  mode of payment was to be as follows:

(i) A total of HK$420m in cash;

(ii) A total of HK$360m in the form of the Convertible Note;

(iii) A sum of HK$120m under the 1^st Instrument and a sum of HK$256m under the 2^nd Instrument (collectively “Instruments”).

21.  It was P’s case that it entered into the SPAs with the intention to acquire, and it was Ds’ intention to sell, the rights “to dominantly control and operate the Company and the Market” (“Rights”).

22.  Further, on 15 June 2007, P and Wuhan Chuangjie had also entered into a Sino-Foreign equity joint venture agreement (“JV Agreement”) whereby P and Wuhan Chuangjie agreed to terms concerning the operation of the Company after transfer of the 90% Shareholding under the SPAs, and the purpose of entering into the JV Agreement was part of the scheme for P to acquire the  Rights. 

23.  It was provided in the JV Agreement that the Board of Directors of the Company was to comprise of 5 directors, 4 of whom to be appointed by P and the remaining 1 by Wuhan Chuangjie.  It seemed, however, that on 15 June 2007, there were in fact 6 directors were appointed, of which 5 were the Former Directors, and the additional one being D1[16].

24.  Luo continued to be the Chairman of the board and also the legal representative (法人) of the Company.   

25.  Further, according to P, on 10 December 2007, an additional director was appointed to the Board of the Company, and this was Yang who, as stated in the Defence, had been an executive director of P since 26 April 2007 and was re-designated as P’s Chief Executive Officer on 29 June 2007 until 8 June 2009. 

26.  According to Ds, Yang only joined P about a week before the execution of the 1^st and the 2^nd SPA.  Chan had said that Yang was appointed an executive director of P before the scheduled signing of the 1^st SPA and the 2^nd SPA, as by that time it was understood between Chan Yeung Nam and Zhou that the deal would go through, and that Yang was in fact controlled by and acted at all material times in accordance with instructions of Zhou[17].  This was denied of Ds.

27.  It would thus appear that at one stage, there were 7 directors of the Company after the signing of the SPAs.

28.  It was Ds’ case that the intended sale of the Company by Ds and the signing of the SPAs was in fact part of a scheme for the reverse takeover of P.  According to Ds, it was Yang who introduced them and Zhou to Fu in early 2007, and Fu at that time was planning to attract more capital investment in P by injecting attractive assets into P.  It was Ds’ case that Yang was appointed by P to be its executive director in order to represent P to discuss with Zhou and Ds in relation to the acquisition of a stake in the Company, and Zhou’s understanding, and further it was agreed by Chan Yeung Nam, that after injecting the Company and the Market into P, Chan Yeung Nam would relinquish and sell his stake in P to Zhou, so that Zhou and D1 would own the single largest shareholding in P[18].

29.  It was further Ds’ case that the use of the Convertible Note was designed by P’s then investment bank (“Cazenove”) and/or P to avoid contravention of the Takeover Code that was in force at that time in relation to reverse takeover[19].

30.  Ds denied that the JV Agreement was part of a scheme to allow P to gain the Rights, and in fact alleged that the JV Agreement and all other documents related to the JV Agreement submitted to the Ministry of Commerce of PRC (“MOFCOM”) were forgeries[20].

31.  It was Ds’ case that the SPAs were to be subject to a very stringent approval process by MOFCOM before they could become effective under PRC law, and that Yang and Luo, were responsible for preparing the material for the application to MOFCOM.  In order to meet the approval process by MOFCOM, another agreement for sale and purchase of the Company’s shares was in fact prepared under Yang’s instructions bearing the date of 2 May 2007, and the consideration for the purchase of the 90% shareholding in this agreement was stated to be RMB89,817,930 (“89.8m Agreement”)[21].  According to Ds, this agreement was forged.

32.  The 89.8m Agreement was dated the Agreement Date, ie the same date as the SPAs.  There appeared to be, however, at least 5 major areas in the 89.8m Agreement which were different from  the SPAs, namely as follows:

(i) The acquisition in the 89.8m Agreement was in respect of  90% Shareholding in the Company, whereas in the SPAs,  the acquisition was at that time in respect of 100% shareholding in the Company (including the 10% Shareholding held by Wuhan Chuangjie), and it was only subsequently, after the amendment to the 2^nd SPA on 10 May 2007[22], that the acquisition in the SPAs was to be in respect of  the 90% Shareholding held by Ds;

(ii) The consideration for P’s acquisition of the 90% Shareholding was stated to be RMB89,817,930.00 in the 89.8m Agreement, whereas in the SPAs, it was HK$1,156,000,000;

(iii) There was no stipulation in the 89.8m Agreement that the consideration for the 90% Shareholding involved the issue of   the Instruments or the Convertible Note;

(iv) The governing law of the 89.8m Agreement was stated therein to be the PRC law[23], whereas the governing law of the SPAs was stated to be the Hong Kong law[24];

(v) The parties agreed to submit to the jurisdiction of the PRC courts in case of disputes arising out of the 89.8m Agreement[25], whereas in the SPAs, the parties agreed to the non exclusive jurisdiction of the Hong Kong courts[26].

33.  On 26 November 2007, MOFCOM granted its approval  to the transfer of the 90% Shareholding in the Company, based on the 89.8m Agreement[27] (“MOFCOM Approval”), and the Company was granted a licence for a sino foreign equity joint venture company and on 10 December 2007, a  new business licence was  issued to the Company, and the registered shareholders were P holding the 90% shareholding and Wuhan Chuangjie holding the remaining 10%[28] .

34.  According to P, completion then took place on the agreed Completion Date 5 December 2007.  This was further evidenced by a public announcement made by P’s board of directors through the Hong Kong Stock Exchange on the same day[29].

35.  Later, on about 31 December 2007, P changed its name from China Velocity Group Limited to its present name China Agri-Products Exchange Limited.

36.  Ds alleged that the transfer of the funds through the foreign exchange department by P was according to the approved terms of price and timetable set out in the 89.8 Agreement, and that MOFCOM never approved the SPAs, the Conditions Precedent in Clause 4.1(g) of the 1^st SPA and Clause 4.1(e) of the 2^nd SPA had never been satisfied, and thus the SPAs were terminated under Clause 4.4.

37.  In short, it was Ds’ case that the SPAs had been terminated as the transfer of shares could not be carried out legally in accordance with PRC laws, and the SPAs were void and unenforceable being contrary to public policy.

38.  On the other hand, according to P, after the MOFCOM Approval, it had duly paid Ds the consideration in the SPAs by way of :

(i) Cash, which according to P, and as agreed between it and D1, D2 and Zhou subsequent to the 1^st SPA, the sum to be paid in cash was to be HK$270m, and a total of HK$270,883,158 was in fact paid  between 10 May 2007 to 14 December 2007 [30];

(ii) A sum of HK$150m was agreed  to be paid to P’s solicitors to be held in escrow,  for security of  the Profit Guarantee, of which a sum of HK$74,967,575 was subsequently paid to Zhou on 3 June 2008[31];

(iii) The Instruments had been delivered to Ds, the payments under  which would only be due on 5 December 2012; and

(iv) A Convertible Note to D1, which was subsequently converted into shares in P by D1 on 8 January 2008[32].

39.  Ds had not denied that it received at that time about HK$270m in cash from P, and later the HK$75m as the refund of the Profit Guarantee, nor did Ds deny having received the Instruments and the Convertible Note, which was converted to 180,000 shares of HK$2 each in P on 8 January 2008.

40.  Anyway, D1 became P’s second largest shareholder on 8 January 2008, and it seems, had remained so until 21 April 2010.

41.  It would, however, appear, that after Completion Date, the Company and the Market remained under the control and operation of Ds.

42.  Some months later, in about October 2008, P discovered that D1 and/or D2 had set up another market under a company called Wuhan Baishazhou Lenglian Food Company Limited 武漢白沙洲冷鏈食品有限公司 (“Leng Lian”), also at 湖北省武漢市洪山區青菱鄉長征村張家灣特一號 (“2^nd Market”).

43.  Ds did not dispute that in fact on 26 June 2008 a market of the name of the 2^nd Market was set up and wholly owned by a company which they said was named雅润公司, but said that this company operated a “Cold Storage Market” which was to engage in the selling and trading of frozen meat and seafood and to provide cold storage facilities, and thus the 2^nd Market was not in competition with the Market. Further, according to Ds, the 2^nd Market was set up with full endorsement of P, as its then Chief Executive Officer, Fu, had attended the foundation laying ceremony of the 2^nd Market on 20 September 2008 on behalf of P.  

44.  It would seem that after this ceremony, according to P, on 18 November 2008, there was an acid attack on Fu in Shenzhen and that he had suffered severe burns on his face and arms.  Chan had alleged that Zhou was behind this attack, and according to Chan, Zhou was a man who would resort to extreme measures to resolve his problems[33].  All this was denied by Ds.

45.  As mentioned earlier, on 30 October 2008 PNG had entered into a conditional agreement to acquire Chan Yeung Nam’s 27.14% shareholding in P, and in February 2009, Chan took over from Fu as P’s Chairman of the Board.

46.  It would seem that by early 2009, D1 and Zhou were residing in Melbourne, Australia[34].  It was P’s case that at the request of D1, a meeting later took place on 7 March 2009 in a hotel in Melbourne between Chan and P’s senior manager on P’s side, and D1 and Yang on Ds’ side, to try and resolve their disputes regarding the Company and the Market.  Thereafter, there seemed to be further meetings between P’s representative/s and Ds’ representative/s in Hong Kong and in Wuhan, but according to P.  Ds had continued to refuse to hand over the control and the accounts of the Company.

47.  Further, according to P, in about September 2009, it received information that Zhou had earlier set up another company in Wuhan called 武漢白沙洲天恆農産品經營管理有限公司 (“Tian Heng”), and had further arranged for a contract to be entered into by the Company on 15 February 2009 purporting to grant to Tian Heng the right to operate the Market at an annual fee of RMB40m for 10 years, until 14 February 2019[35] (“Assignment Agreement”).

48.  To cut the long story shorter, it was P’s case that after the Completion Date, it had experienced considerable difficulties in trying to gain control of the Company and the Market, and that P was further denied access to the financial information and documents of the Company.

49.  Eventually on 12 August 2010, it appeared that with the intervention of relevant PRC government authorities, P succeeded in replacing the then directors and the legal representative of the Company. In September 2010, again with the intervention of relevant PRC government authorities, the then chops of the Company were nullified and P was issued with a new set, and P also received, among other things, the business licence of the Company.  Finally, on 1 November 2010, the physical control of the Market was handed over to P and/or the Company.

50.  It was P’s case that after gaining physical control of the Market and the Company, it reviewed the accounts, books and records of the Company which finally came to its possession, and it discovered that many financial documents were missing.  P then instructed investigators to carry out investigations.

51.  In the meantime, as a result of a criminal complaint lodged by the Company to the PRC police against the Company’s former management in relation to misappropriation of the Company’s funds, in November 2010, the former general manager of the Company and the former financial controller were both detained by the Wuhan Public Security Bureau, and the Bureau further instructed a PRC accounting firm武漢正浩會計師事務有限公司 to investigate into the financial records and other documents of the Company.  A report was later compiled by the accounting firm (“Zheng Hao Reports”) on 20 March 2011 and 11 November 2011[36].  On 29 August 2011, Luo was also detained and later on 20 September 2011 formally arrested[37].  The three of them were all convicted of misappropriating funds at the first trial and were sentenced to 3 years’ imprisonment, suspended for 3 years.  They then appealed.  In a judgment dated 9 October 2013 handed down by the Wuhan Intermediate People’s Court of Hubei Province[38] (“Criminal Judgment”), their appeal was dismissed and the conviction of the three of them was upheld.

52.  Investigations conducted by P into the management accounts and other financial information and documents of the Company allegedly revealed breaches of the warranties given by  Ds  in the SPAs involving conduct which P alleged amounted to fraud on the part of Ds.  In particular, P alleged that the managements accounts annexed to the SPAs, consisting of balance sheets for the years 2005, 2006 to March 2007, and profit and loss accounts for the years 2004, 2005, 2006 to March 2007 (“ManagementAccounts”) had been manipulated so that the assets and income of the Company had been falsely inflated.

53.  The disputes between P and Ds over the control of the Company and operation of the Market then led to various legal actions in PRC and the present action in Hong Kong.

54.  Ds had also lodged an administrative complaint to MOFCOM on about 7 September 2011 that the 89.8m Agreement, upon which the MOFCOM Approval was granted, was forged and that the SPAs were the genuine agreements[39] (“Administrative Complaint”).  So far, there has been no response to the complaint and no action has been taken by MOFCOM.

PRC Actions

PRC Action No 1

55.  In December 2010, Ds initiated proceedings and on about 4 January 2011, Ds formally commenced a legal action as plaintiffs against P as defendant, in the Higher People’s Court of Hubei Province PRC (“Hubei Court”) with the Company joined as a third party (第三人), namely (2011) 鄂民四初字第1號 (“PRC Action No 1”).  The subject matter of PRC Action No 1 was said to be a dispute in relation to share transfer agreement/股權轉讓協議糾紛, and  Ds claimed[40]:

(i) A confirmation/declaration that  the transfer of shares in the Company from Ds to P under the 89.8m Agreement was void ab initio/自始無效, and to cancel/解除the 89.8m Agreement;

(ii) P to pay Ds the loss of their share of distributed profits for the year 2008, totaling approximately RMB 23m;

(iii) Cancellation of all approvals, certificates and registrations issued by MOFCOM and other relevant authorities on the basis of the 89.8m Agreement;

(iv) Legal costs  to be paid by P

56.  PRC Action No 1 was first heard by the Hubei Court on 5 June 2012, and a 2^nd hearing took place on 10 July 2013.  About 3 weeks prior to the present hearing before this court, on 18 June 2014, P received a judgment dated 30 May 2014 from the Hubei Court (“PRC Judgment”)[41]. Ds did not seem to have pursued their claim for loss of distributed profits but in any event Ds’ claims against P and the Company were all dismissed by the Hubei Court, and Ds were ordered to pay court fees.

57.  Ds had 15 days from the date of receipt of the PRC Judgment to lodge an appeal, and P had 30 days[42].  This court was informed at the hearing of the present application that Ds had lodged an appeal.

58.  There were 3 main issues summarized by the Hubei Court in the PRC Judgment, namely[43]:

(i) 《0.89億股权轉讓協議》是否有關當事人制作的虚假協議, 王秀群對該協議是否知情/Was the 89.8m Agreement a false agreement made by the parties, and did D1 have knowledge of the 89.8m Agreement (“Issue (a)”);

(ii) 《11.56億股权轉讓協議》和《0.89億股权轉讓協議》的相互關係/ the relationship between the SPAs and the 89.8m Agreement(“Issue (b)”);

(iii) 《0.89億股权轉讓協議》的效力/the validity of the 89.8m Agreement (“Issue (c)”).

59.  As for Issue (a), notwithstanding the handwriting forensic report concluded that the purported signatures of D1 and Fu on the 89.8m Agreement were not written by them, the Hubei Court was of the view that such evidence alone could not be sufficient proof that D1 had  had no knowledge of the 89.8m Agreement by reason of the following[44]:

(i) At the time of the application for the approval from MOFCOM, P had not yet sent in its representatives to operate, manage or to control the Company, which was at that time operated, managed and controlled by personnel appointed and sent by D1 and D2, and D2 had already admitted it was aware of the conduct of those personnel, and thus D1 should have knowledge as well;

(ii) According to the regulations issued by the Highest People’s Court《關于審理外商投資企業糾紛案件若干問題的規定 (一) 》第五條之規定, the obligation to apply for approval of share transfer agreement would fall on the transferor and the target company, and further MOFCOM did grant its approval.  Under such circumstances, D1’s claim that for 3 years she had no knowledge of the 89.8m Agreement  was against commercial  common  sense;

(iii) D1 had confirmed receiving an amount which was equivalent to RMB 89.8m, and this was equivalent to the consideration in the 89.8m Agreement and this was not the sum agreed in the SPAs.

60.  After analysis of the evidence, the Hubei Court concluded that the 89.8m Agreement was not prepared by P unilaterally, and rejected D1’s case that she had no knowledge of the 89.8m Agreement.  Further, the Hubei Court was of  the view that even if D1 did not take part personally in the preparation of the 89.8m Agreement, she still had to bear the legal consequences of the conduct of those personnel of the Company who were appointed by her.

61.  As for Issue (b), it was P’s and the Company’s case in the PRC Action No 1 that the 89.8m Agreement and the SPAs were of “主從關係” and that both were valid agreements, namely that the 89.8m Agreement was “主協議” or the main agreement, and the SPAs were “從協議”, or subordinate/supplemental agreements[45].   

62.  The Hubei Court rejected the case of P and the Company that the 89.8m Agreement and the SPAs were of “主從關係” as it was of the view that both sets of agreements were signed on the same day, and that the 89.8m Agreement was for the purpose of applying for approval, and the SPAs were the agreements parties relied on for the actual implementation of the parties’ obligations[46].  The reasons given were as follows:

(i) The term “目標權益” used in the SPAs in fact referred to the same concept as “股權”[47], and the subject matter of the transfer “轉讓標的” in the SPAs and the 89.8m was in fact  the same[48];

(ii) Although the subject matter of the transfer in the SPAs and the 89.8m was the same, there were different terms in relation to the consideration, mode of payment, applicable law and dispute resolution, and the parties’ signing two sets of agreements on the same day with different consideration was against commercial common sense[49].

63.  As for Issue (c), in relation to the validity of the 89.8m Agreement, the Hubei  Court analysed as follows:

(i) The parties complied with the legal requirements of due capacity in entering into the 89.8m Agreement;

(ii) The agreement to transfer of the 90% Shareholding was the true intention of the parties, and the transfer was approved by MOFCOM, which showed that the transfer was not against any legal requirements;

(iii) According to the PRC Contract Law, the invalidity of parts of the agreement would not affect the validity of the other parties, and although the agreed terms relating to the consideration, the mode of payment, the applicable law and dispute resolution in the 89.8m Agreement was only for the purpose for seeking MOFCOM approval, and such terms could not be relied on for confirming the parties’ rights and obligations, the intention in relation to the transfer of the 90% Shareholding was binding on the parties, namely “雖然《0.89億股权轉讓協議》中關于價款的约定系僅為報批之用，但《0.89億股权轉讓協議》中關于轉讓涉案股權之合意對雙方仍具約束力……”[50].

64.  As to the mode of payment of the consideration, according to the PRC Contract Law, if this is not clear, the mode of payment which would facilitate the implementation of the objectives of the agreement may be ascertained in accordance with any supplemental agreement, terms of the relevant agreement, or usual practice of the parties[51]. The Hubei Court then stated that the agreed mode of payment was confirmed and existed in the SPAs, and even though the stated mode of payment in 89.8m Agreement was merely for the purpose of seeking the MOFCOM Approval, the agreed intention therein in relation to the transfer of the 90% Shareholding was still binding[52].

65.  The Hubei Court found that there was agreed intention of the parties to the transfer of the 90% Shareholding, and the MOFCOM Approval had been obtained in relation to the transfer, and only the actual implementation of the transfer was to be in accordance with the terms of the SPAs, and in the circumstances, Ds’ claim for a declaration that the 89.8m Agreement was void and to cancel the entire transaction of the transfer was against the principles of good faith and trust[53], and even though those terms in the 89.8m Agreement regarding consideration, the mode of payment, applicable law and dispute resolute were only for the purpose of seeking the MOFCOM Approval, the entire transaction relating to the transfer of the 90% Shareholding should not declared to be void based on this, and thus the Hubei Court dismissed Ds’ claims[54].

66.  Finally, the Hubei Court stated that whether the parties’ conduct, in setting out those terms in the 89.8m Agreement which were made purely for the purpose of submission for approval to MOFCOM, would affect the MOFCOM Approval would be an administrative matter for MOFCOM and Hubei Court would not deal with this matter[55].

PRC Action No 2

67.  In about April 2011, after the issue of PRC Action No 1, P and the Company also commenced a legal action against Ds and 6 other parties including Zhou, Tian Heng, and others who were former Board members of the Company[56] for, among other things, the loss and damage P and the Company had suffered as a result of the Assignment Agreement, namely (2011) 鄂民四初字第2號 (“PRC Action No 2”).

68.  The Company and P had claimed against all the defendants, among other things, the following:

(i) To return to the Company all its assets and operating profits, estimated to be RMB750,500,000;

(ii) To compensate the Company for “economic losses” for  unlawfully entering into the Assignment Agreement with Tian Heng, estimated to be RMB7,200,000;

(iii) To compensate P for “economic losses” for unlawfully entering into the Assignment Agreement with Tian Heng, estimated to be RMB72,400,000.

69.  In PRC Action No 2, D2 had made a Counterclaim (民事反訴狀) dated 2 May 2012 together with an Application for Additional Counterclaim (增加反訴請求申請書) dated 2 July 2012 and an Application for Amendment of Counterclaim (變更反訴請求申請書) dated 25 July 2012.  What happened was that D2 initially counterclaimed for an order that the 89.8m Agreement was null and void and that P was to return the Company’s shares, but D2 subsequently applied to withdraw such Counterclaim because the reliefs sought thereunder were already covered by its claims in PRC Action No 1.

70.  In September 2012, P and the Company respectively submitted their defence to counterclaim (答辯狀), and subsequently, a hearing took place in the Hubei Court on 12 September 2012.

71.  By the time of the hearing before this court, the result of the hearing in PRC Action No 2 was not yet known.

Other PRC actions

72.  There seemed to be various other PRC actions involving the Company and other PRC companies including Leng Lian, the details of which in my view would not be relevant to the present application, and I do not propose to set them out.

Hong Kong Action

73.  After the PRC Action No 1 and the PRC Action No 2 had commenced, on 24 October 2011, P issued the writ herein with an endorsed statement of claim.

74.  P had obtained leave on 21 December 2011 to issue and serve a concurrent amended writ on Ds out of jurisdiction (“Service Out Order”).  After several attempts, P then obtained leave to serve Ds by way of prepaid ordinary post to various addresses in PRC and by newspapers advertisement in PRC, Hong Kong and Australia.  Eventually Ds’ solicitors acknowledged service, and subsequent thereto on 3 September 2012, Ds issued a summons to set aside the Service Out Order on the grounds of material non-disclosure and for the present action to be stayed on the ground of forum non conveniens.  Their summons was eventually heard by Master Levy in April 2013, and a decision was handed down on 10 May 2013.

75.  In her Decision, the Master dismissed Ds’ summons to set aside the Service Out Order and the overseas service, but granted an interim stay for 6 months or until the final outcome of the PRC Action No 1, whichever was the sooner (“Stay Order”).

76.  P filed a notice of appeal against the Stay Order, and the appeal was later heard by DHCJ Marlene Ng, who handed down a detailed judgment on 5 November 2013 (“Ng Judgment”).  The learned Judge allowed P’s appeal and set aside the Stay Order, and gave further directions.

77.  In the meantime, after Ds had issued their summons, on 17 September 2012, P had issued an ex parte summons, and obtained an injunction restraining Ds from negotiating, transferring etc of the 1^st Instrument and the 2^nd Instrument to any third party   upon their falling due on 5 December 2012.  Subsequently, on the return date, upon certain undertakings provided by Ds, the injunction was continued until further order, which was eventually discharged on 8 March 2013 without prejudice to the continuing effect of the Ds’ undertakings.

78.  On 28 March 2014, P issued the present summons before this court, for orders including certain paragraphs of the Defence be struck out (“Striking Out Summons”)[57].

79.  The Striking Out Summons was directed to two issues raised in the Defence:

(i) Paras 24-25: Ds’ contention that the SPAs should be terminated under Clause 4.4 of each of the 1^st SPA Agreement and the 2^nd SPA Agreement and the transfer of shares/payment of consideration should be reversed;

(ii) Paras 50-55:  Ds’ plea of disclosure/knowledge/non-reliance as a purported defence to P’s indemnity claims.

80.  Further, or in the alternative, P sought an order for trial of a preliminary issue, in relation to issue (ii) above, as to whether disclosure of breaches of various warranties given by Ds as seller to P as buyer of the shares in the Company would amount to a defence to the P’s claims under the indemnity at clause 6.3 of the SPAs[58].

Relevant Clauses in the SPAs

81.  I will first set out those clauses in the 1^st SPA[59] which are relevant to P’s present applications.  There were similar clauses in the 2^nd SPA, and the references were stated in the footnotes.

82.  Clause 4 was headed “Conditions Precedent”.  Clause 4.1(g) of the 1^st SPA[60] is the Condition Precedent relied upon by Ds in paragraphs 24 and 25 of the Defence:

“4.1 (g): All the necessary consents required for the execution of this Agreement, implementation and completion of the transaction or performance of their respective obligations under this Agreement by the Buyer, the Seller and the Target Company (including from anygovernment, official organization or regulatory authority (including but not limited to the Ministry of Commerce of the People’s Republic of China)) have been obtained, and no decrees, statutes, regulations or decisions to prevent or limit the transfer of the Target Equity has been put forward, promulgated or adopted by any government, official organization or regulatory authority.[61] (“Clause 4.1(g)”)

4.3: On or before the Completion, the Seller shall use its best endeavours to procure the satisfaction of the conditions precedent as set out in Clause 4.1(g), (i) and (k), and the Buyer shall use its reasonable endevours to procure that the conditions precedent as set out in Clause 4.1(a) to (h) and (j) be satisfied at the time when all the other conditions precedent as set out in Clause 4.1 are satisfied.[62] (“Clause 4.3”)

4.4: Before the Long Stop Date or a later date as agreed in writing by both parties, if any condition precedent as set out in Clause 4.1 is not satisfied (or is waived in accordance with Clause 4.2), or the conditions precedent as set out in Clause 4.1(b) to (g) are not satisfied when all the other conditions precedent are satisfied or waived, this Agreement will cease to have any effect, except that Clauses 1, 4.5, 10, 11, 12, 13, 14, 15 and 16 and any claims arising from any prior contravention of this Agreement will survive[63]. (“Clause 4.4”)”

83.  Clause 6 was headed “Undertakings of the Seller” and provided as follows:

“6.1: The Seller acknowledges that the Buyer relied on the warranties given by the Seller in signing this Agreement and the Buyer is induced by the warranties given by the Seller at the time of the signing of this Agreement.[64] (“Clause 6.1”)

6.2: The Buyer’s claim arising from the Seller’s warranties would not be affected by any knowledge (of fact or by way of inference) in relation to any information about the Seller nor would it be affected by any investigation done by the Buyer or on behalf of the Buyer, nor will this be used to set off any amount of compensation which the Buyer is entitled to, and such obligation of the Seller is not limited to those breaches discovered before the Completion[65]. (“Clause 6.2”)

6.3: (Without restricting any other rights of the Buyer to claim damages on any basis, including the right of the Buyer to claim damages for any breaches of the Seller on other basis), the Seller undertakes that if any of the warranties is broken, it will, on demand, immediately compensate the Buyer (or the Target Company if so requested by the Buyer) (collectively referred to as “Indemnitee”) in cash as a guaranteed indemnity, in an amount equal to the sum of the following items: (i) an amount necessary to put the Target Company into the financial position which would have existed had such warranty not been broken; and (ii) an amount equals to any reasonable expenses incurred directly or indirectly by the Buyer or the Target Company as a result of the breach of the Seller’s warranty by the Seller.[66] (“Clause 6.3”).”

84.  Clause 16.2 provided:

“This Agreement, including the appendices to this Agreement, shall constitute the entire agreement between both parties and supersedes and terminates any prior agreement or arrangement between both parties on the subject matter of this Agreement; both parties expressly state that any amendment to this Agreement shall be in writing and executed by the respective authorized representative of each party before it takes effect[67]. (“Clause 16.2”)”

General Legal Principles on Striking Out

85.  There is no real dispute between the parties on the general legal principles governing applications to strike out.

86.  Order 18 Rule 19 of the Rules of the High Court (RHC) state as follows:

“(1) The Court may, either of its own motion or on application, at any stage of the proceedings order to be struck out or amended any pleading or the indorsement of any writ in the action, or anything in any pleading or in the indorsement, on the ground that-

(a) it discloses no reasonable cause of action or defence, as the case may be; or

(b) it is scandalous, frivolous or vexatious; or

(c) it may prejudice, embarrass or delay the fair trial of the action; or

(d) it is otherwise an abuse of the process of the court;

and may order the action to be stayed or dismissed or judgment to be entered accordingly, as the case may be.

(2) No evidence shall be admissible on an application under paragraph (1)(a).

(3) This rule shall, so far as applicable, apply to an originating summons and a petition as if the summons or petition, as the case may be, were a pleading.”

87.  Further, Ma J  (as he then was) summarized the principles in Chuang Yuen Chien Eugene v Ho Yau Kwon Kevin [2002] 4 HKC 245 :

“14. In dealing with these Grounds, I bear in mind the relevant principles regarding strike out applications. The approach is set out in the notes to Order 18, rule 19 in Hong Kong Civil Procedure 2002, Vol.1. In particular, I bear in mind that:

(1) It is only in plain and obvious cases that an order should be made to strike out pleadings or parts of pleadings;

(2) Accordingly, it is wrong to expect the court to have to conduct a protracted analysis of affidavit evidence in a strike out application. Only in the rarest of cases will this ever be justified, for example where such an analysis will in the end demonstrate clearly that it is plain and obvious that an order striking out should be made. The justification for the protracted analysis would then almost invariably be that although the underlying facts may be complicated or difficult to grasp easily, the ultimate issue is quite simple.

Questions of law may be dealt with in a strike out application provided that the underlying facts are certain. It is sometimes said that the court may decline to determine difficult questions of law in a strike out application: see Hong Kong Civil Procedure 2002, Vol.1, at paragraph 18/19/4. This would therefore explain why applications such as the present one are sometimes made in the alternative under Order 14A or even Order 33, rule 3: see Hong Kong Civil Procedure 2002, Vol.1, at paragraphs 8/19/3 (at paragraph 5) and 18/19/4. In my view, questions of law can be determined in strike out applications provided that they are crucial and the court has all the relevant facts before it and that these facts are certain. There is, on the other hand, little point in dealing with any points of law, whether in strike out applications or applications under Order 14A or under Order 33, rule 3, if the relevant facts are either not before the court or are in dispute.”[68]

88.  Although the above case was before the Civil Justice Reform, there was no dispute between the parties that what was said above has continued to be the approach of the courts.

Evidence

89.  As set out in Order 18 Rule 19(2), paragraph 18/19/3(4) of the Hong Kong Civil Procedure 2014, Vol 1, and in The Securities and Futures Commission v Young Bik Fung and Others, HCMP 2575 of 2010 (28.10.2013), where the ground for strike out is that there is no reasonable cause of action or that the action is unlikely to succeed under Order 18 rule 19(1) (a), affidavit evidence is inadmissible[69].

90.  Whilst it was accepted  by Mr Ambrose Ho, Senior Counsel for P, that evidence was not allowed under Order 18 Rule (1) (a), he submitted that evidence would be  admissible for striking out under the court’s inherent jurisdiction, and also the other sub-sections of Order 18 Rule (1). This was not challenged by Mr Chan SC.

91.  The Striking Out Summons was supported by Chan’s 4^th affidavit on behalf of P[70], and Ds filed Tao’s 3^rd affirmation and an affirmation from Ds’ solicitor in opposition, the latter exhibiting a copy of the PRC Judgment and stating the purported effect thereof.

92.  According to Mr Ho SC, the purpose of filing Chan’s 4^th affirmation was to summarise the factual and procedural background of the case, and that the determination of the Striking Out Summons did not require the court to adjudicate the factual disputes between the parties.  Thus, Mr Ho had submitted that the repeated contentions in Tao’s 3^rd affirmation that P’s applications were inappropriate due to the factual issues were misconceived.

93.  Mr Chan SC, however, contented that the evidence filed in this action was critically important to the issues in the Striking Out Summons.

94.  Chan was not a member of P’s board at the time of the negotiation of the acquisition of the shareholding in the Company or when the SPAs were signed.  As indicated by Chan, his knowledge concerning the matter was derived from documents and records or information he had received from P’s then company secretary and chief financial officer, a Mr Sin, P but according to Ds, Mr Sin was not the one primarily in charge of the negotiations and did not have first hand knowledge of the negotiations.

95.  In any event, apart from those affirmations filed directly in connection with the Striking Out Summons, some of the parties’ earlier affirmations had also been included in the hearing bundles, with only certain relevant exhibits.  These  were the following:

(i) Chan’s 2^nd and 3^rd affidavit

(ii) Chan’s solicitor’s 6^th, 7^th and 13^th affidavits

(iii) Tao’s 1^st and 2^nd affirmations

96.  Both sides had also referred to and relied on the PRC Judgment.

Striking Out

Generally

97.  It was P’s case that there had already been much delay in the progress of the present action due to service problems, Ds’ applications to set aside service orders and further for a stay, and although the action was taken out by P in October 2011, it was not until 13 January 2014 that the Defence was eventually filed and served.

98.  P’s concern was that it had been cheated out of its money, and it had suffered substantial losses, and the purpose of the Striking Out Summons was to cut through the unsupportable defences raised by Ds and to limit the issues and to reduce the scope of the factual evidence.

Paragraph 24 of the Defence

99.  Paragraph 24  states:

“By reasons of the matters pleaded above, the condition precedent specified in Clause 4.1(g) of the 1^st SPA and Clause 4.1(e) of the 2^nd SPA had never been satisfied. The SPA terminated in accordance with Clause 4.4. In the premises, the Plaintiff has no right under the SPA to any claims in damages as alleged or at all. The transaction under the SPA should be reversed in accordance to the terms of the SPA, including reversing the transfer of the shares and the repayment of the consideration”.

(“Paragraph 24”)

100.  P’s application to strike out Paragraph 24 is made pursuant to Order 18 rule 19(1)(a) and/or Rule 19(1)(c), alternatively under the inherent jurisdiction of the court, on the ground that Paragraph 24 disclosed no reasonable defence and/or tend to prejudice, embarrass or delay the fail trial of the action[71].

101.  Paragraph 24 was under the section headed “Approval From the Ministry of Commerce (“MOFCOM Approval”)” in the Defence (“Approval Section”).  Mr Chan SC submitted that the Defence must be read as a whole, and one should start off with paragraph 12 of the Approval Section which set out the relevant terms of the 1^st and the 2^nd SPA. Further, Mr Chan SC submitted that no part of P’s claims were within the “Surviving Clauses” in Clause 4.4, although the non-completing claims would be one of the Surviving Clauses.  Further, Mr Chan pointed out that Clause 4.3 was not an absolute undertaking, and if P were alleging that Ds had not used best endeavours under Clause 4.3, then such should be pleaded.

102.  Mr Chan had further said that although the 89.8m Agreement was dated the same date as the SPAs, the court could not assume that the 89.8m Agreement was signed on the same date.  On this point, it would seem to this court that there was nothing in the PRC Judgment to indicate that it was Ds’ case that the 89.8m Agreement was signed on a different date.

103.  Anyway, briefly,  the main defence of Ds under the Approval Section was that :

(i) According to the requirements of MOFCOM商務部第六部委令2006年第10号公布《關於外國投資者并購境内企業的規定》 (“No 10 Document”)[72], the SPAs were to be subject to a very stringent approval.

(ii) After signing the 1^st and the 2^nd SPA, P had obtained advice that these would not receive approval from MOFCOM due to the terms therein would not comply with the requirements of MOFCOM;

(iii) As a result thereof, the 89.8m Agreement was forged, and it was on this forged agreement that MOFCOM Approval was granted;

(iv) The transfer of shares was approved under false pretences;

(v) The Conditions Precedent in Clause 4.1(g) were not satisfied.

104.  Mr Ho SC broke down D’s case in Paragraph 24 into 4 Steps, being  as follows:

(i) The Conditions Precedent in Clause 4.1(g) had never been satisfied;

(ii) The SPAs terminated in accordance with Clause 4.4;

(iii) P would, in the premises, have no right under the SPAs to any claims in damages or at all;

(iv) The transaction(s) under the SPAs should be reversed in accordance with the terms of the SPAs, including reversing the transfer of the shares and the repayment of the consideration.

Step 1

105.  It was Mr Ho’s submission that the Conditions Precedent in Clause 4.1(g) had been satisfied prior to the Completion Date.

106.  Mr Chan SC, however, submitted that MOFCOM only granted approval on the basis of, and in relation to the 89.8m Agreement, and never approved the SPAs and these were found in Ds’ favour in the PRC Judgment.

107.  From my interpretation of the PRC Judgment, what was found by the Hubei Court was that there was agreed intention between the parties to transfer the 90% Shareholding, and the MOFCOM Approval had been granted to the transfer, although only the 89.8m Agreement was submitted to MOFCOM when seeking approval, and not the SPAs.

108.  Mr Chan SC further submitted that the Hubei Court held that the SPAs and the 89.8m Agreement could not “co-exist”[73].  From what can be seen in the PRC Judgment, what the Hubei Court had commented was that having two agreements (namely the 89.8m Agreement and the SPAs) of the same date did not make commercial common sense.  

109.  In any event, whether the 89.8m Agreement and the SPAs  could “co-exist” or not, from my interpretation, as I have said earlier,  what the Hubei Court found was that the actual implementation of the terms of the agreed transfer of the 90% Shareholding was to be in accordance with the SPAs, and  that the 89.8m Agreement was made for the purpose of seeking approval, and  further, what was found by the Hubei Court to be approved by MOFCOM was the matter of the transfer of the 90% Shareholding, which was the agreed intention of the parties.

110.  The transfer of the 90% Shareholding of the Company had also been found by the Hubei Court to be the same subject matter in both the 89.8m Agreement and the SPAs, contrary to what had been said by Tao in his 3^rd affirmation, namely that “An alternative way of looking at the matter is that the approval given was not the approval of the SPAsor the subject matter of the contract between the Plaintiff and the Defendants”[74].  

111.  It was also Ds’ own pleaded case in paragraph 15(a) of the Defence under the Approval Section, that it was the acquisition by a foreign company and/or investment by a foreign company which required approval from MOFCOM.

112.  Ds had pleaded and relied on No 10 Document, but did not give particulars as to which provisions they were relying on.  There are 6 chapters in No 10 Document.  As I could see, clause 6 under Chapter 1 of No 10 Document provided that any foreign company investing/purchasing of a PRC company to set up a “foreign investment company” 外商投資企業 would require the approval of MOFCOM[75], and my understanding is that once approval has been granted, such a “foreign investment company” would receive certain benefits including tax benefits, depending on the percentage of the foreign investment, as seen from Chapter 2[76].  Chapter 3 of the No 10 Document then sets out the procedures for application for approval registration.  Chapter 4 is the part relating to the requirements in case of the consideration for the investment/purchase being by way of share rights in the foreign company, including those additional documents which would need to be submitted.  Chapter 5 sets out the non-monopoly requirements, and lastly, Chapter 6 sets out the additional provisions in relation to the applicability of No 10 Document. 

113.  From my reading, the application procedure for the purchase of the 90% Shareholding would be under clause 21 of Chapter 3, and the purchase agreement would be one of at least 10 documents required to be submitted, and clause 22 stipulates that the agreement has to be under PRC law. Further clause 25 then sets out the steps to be taken, after approval has been granted to the foreign investor’s agreed purchase of the PRC company’s shares. Clause 26 further stipulates that the target PRC company should be responsible for the authencity/truthfulness of those documents submitted by the target company at the time of application for registration of the approved “foreign investment company”.  So far as I can see, there are no provisions in No 10 Document as to the effect on the approval that if any of the documents submitted turn out to be false.

114.  I accept that it is stated in clause 22 of No 10 Document that the applicable law for any agreement for such foreign investment should be PRC law.  Also under Chapter 4, if the consideration consists of shares in the foreign company, there will be additional requirements.  

115.  Based on No 10 Document, the approval from MOFCOM is required for the purchase of the shares in a PRC company by a foreign purchaser in order for the target company to acquire the new status of a “foreign investment company”, so as to be entitled to benefits including tax benefits in its new status. 

116.  Based on the finding of the Hubei Court, MOFCOM Approval had be granted for the purchase of the 90% Shareholding, the subject matter of the SPAs, prior to the Completion Date.  Thus, in my view Conditions Precedent in Clause 4.1(g) would have been satisfied.

117.  Even if the Conditions Precedent in Clause 4.1(g) had not been satisfied, in that there had been no MOFCOM Approval, Mr Ho had submitted that the failure to achieve such approval would represent a breach by Ds of their own obligation to use their best endeavours to achieve Clause 4.1(g) under Clause 4.3.  In this respect, Mr Ho relied on the “prevention principle”, and referred this court to what was said by Ribiero PJ in  Kensland Realty Ltd v Whale View  Investment Ltd & Anor (2001) 4 HKCFAR 381, namely the substantive principle that precludes a wrongdoer from taking advantage of his own wrong[77].

118.  Mr Chan SC did not dispute the principle but submitted that Clause 4.3 was not an absolute undertaking on the part of Ds, and further, if the “prevention principle” was applicable, then P was subject to the same principle as P had the obligations to use its reasonable endeavours under Clause 4.3 as well.  However, as pointed out by Mr Ho SC, it was Ds who were trying to rely on Clause 4.1(g) not being satisfied.  It was also not Ds case that P was in breach of Clause 4.3.

119.  Mr Chan SC had further submitted that Ds were precluded from taking advantage of the MOFCOM Approval obtained upon the forged 89.8m agreement prepared under the instructions of P’s then CEO[78].  

120.  First of all, on the date of the 89.8m Agreement, P’s then CEO was Fu.  In the Defence, Ds had averred that it was Yang on behalf of P, and Luo, who were responsible for preparing the material for the application to MOFCOM, and that the 89.8m Agreement was prepared by under the instructions of Yang[79].  Ds had themselves also stated in the Defence that Yang was appointed as executive director of P from 26 April 2007, namely only about a week before the Agreement Date.

121.  As mentioned earlier, it was all along P’s case that Yang was under the control of Ds, and that he was appointed as executive director of P in anticipation of the going ahead of the Company’s share acquisition transaction and the signing of the SPAs.  Tao had, however, said that Yang was P’s representative in approaching Ds to discuss the proposed acquisition of the Company, and that Yang was a friend of Fu, and denied that Yang was controlled by Zhou or acted in accordance with Zhou’s instructions[80].

122.  Further, as mentioned earlier, Yang only joined P about a week before the Agreement Date.  From the PRC Judgment, it would appear that neither Zhou nor Luo appeared at the trial before the Hubei Court, but Yang had turned up to give evidence, on Ds’ or in relation to Ds’ case/evidence, and was cross examined, and that his evidence that the 89.8m Agreement was prepared for seeking MOFCOM Approval, which was consistent with the statements of Zhou and Luo, was accepted by the Hubei Court[81].

123.  Further, whether Yang was under the control of Zhou or not, at the 2^nd hearing before the Hubei Court, D2 had admitted that it had knowledge and had participated in the preparation of the 89.8m Agreement[82].  Also, the Hubei Court rejected D1’s allegation that the preparation of the 89.8m Agreement was with P’s implied consent (默許并認可) or that D1 had no knowledge[83]  and further the Hubei Court found that at the time of the preparation of the 89.8m Agreement, namely 2 May 2007, the Company was managed by personnel appointed and sent by Ds, and that thereafter, Ds had continued to operate and manage the Company[84].

124.  Under Clause 4.3, it was stated that “在交易完成日或該日之前，賣方應盡其最大努力促使第 4.1(g), (i) 和 (k) 款中所列的先決條件被滿足，而買方應盡其合理努力促使第 4.1(a)至(h)和(j)款中所列的先決條件在第4.1 條中所列的其他所有先決條件被滿足時實現”.

125.  Under Clause 4.3, although P also had the obligation to use its reasonable endeavours to implement Clause 4.1(a) to (h) and (j), its obligation only arose  at the time when all the other Conditions Precedent in Clause 4.1, namely Clause 4.1(i) and (k) were satisfied, whereas Ds, as sellers, had the obligation to use their best endeavours to satisfy these Conditions Precedent in  Clause 4.1(g), (i) and (k) in the first place.

126.  In its Re-Amended Statement of Claim, what P had pleaded was that there had been completion under the SPAs and their claims were made under the SPAs.  The issue of the lack of approval, Clause 4.1(g) not satisfied, and the forged 89.8m Agreement were all matters raised by Ds in their Defence.  In its reply to the Defence, in particular Paragraph 24, contrary to Mr Chan’s submission, P did plead that if there had been a failure to satisfy Clause 4.1(g), this would represent a breach by Ds of their own obligations to use their best endeavours to achieve Clause 4.1(g)[85].

127.  Having considered all the above, I accept Mr Ho’s submission that if there had been a failure to satisfy Clause 4.1(g), then Ds should not be allowed to benefit from their own failures/breach of contract under the “prevention principle”.

Step 2

128.  Clause 4.4 referred to termination by reason of the failure to satisfy any of the Conditions Precedent in Clause 4.1, unless waived in accordance with Clause 4.2, prior to the Completion Date, or any agreed later date.

129.  As pointed out by Mr Ho SC, Ds had clearly accepted and received the consideration on Completion Date, and further transferred the 90% Shareholding to P.  There was no suggestion on the part of Ds on the Completion Date that the relevant Condition Precedent in Clause 4.1(g) had not been satisfied.

130.  Mr Chan SC submitted that in the Ng Judgment, it was clear that the learned deputy judge was of the view that both parties’ arguments would be arguable and did not find it possible to form any definitive view on the disputed issues of MOFCOM Approval and the effect of its revocation and the potential outcome of the PRC Actions.

131.  First of all, the Ng Judgment was prior to the PRC Judgment. At the time of hearing before DHCJ Ng, Ds’ then case was that the outcome of the PRC Action No 1 would have a material impact on the present action, and that should Ds fail, their then senior counsel had conceded that Ds could hardly re-argue those matters, namely whether or not (a) the 89.8m Agreement was forged; (b) the MOFCOM Approval was valid; and (c) P remained as lawful owner of the shares, due to  issue estoppel or res judicata, or at least an abuse of process to re-litigate in substance those same issues as canvassed in the PRC Action No 1[86].

132.  Secondly, to put it in context, the main matter before DHCJ Ng at that time was an application by P to appeal against Master Levy’s order for an interim stay of the present action for 6 months or until the final outcome of the PRC Action No 1, and also costs orders, although DHCJ Ng had also considered Ds’ challenge to the service out order and overseas service orders.  As stated by the learned deputy judge, a running theme throughout the hearing before her was whether the subject matter of the PRC Action No 1 (and to a lesser extent PRC Action No 2) was the same as (or similar to) or was different from that of the present action, and whether and if so how the outcome of PRC Actions would impact on the present action.

133.  Ds’ then counsel Mr Lam SC had submitted that any finding of the Hubei Court in relation to the invalidation of the MOFCOM Approval and/or reversal of the transfer of the 90% Shareholding by avoiding the 89.8m Agreement would put an end to the present action.  It was in those circumstances that DHCJ Ng had said that she was doubtful that even if there were to be a reversal ordered by the Hubei Court, whether a reversal would necessarily put an end to the present action and she was of the view that P’s arguments to be arguable whether such cancellation of the MOFCOM Approval years after completion would fall within the provision of Clause 4.4, and that such cancellation would only affect the future and not past legal effect of the SPAs[87].

134.  As it turned out, there was no cancellation of the MOFCOM Approval by the Hubei Court, nor was there any reversal ordered by the Hubei Court.  In fact, on the contrary, the Hubei Court did not declare the 89.8m Agreement invalid, and instead found that the agreed intention to transfer of the 90% Shareholding, which was approved by MOFCOM, was binding on the parties. 

135.  In any event, I accept Mr Ho SC’s submission that even if the MOFCOM Approval is now cancelled by MOFCOM, this is now almost 7 years after completion, and in my view, Clause 4.4 should not be now applicable.

Step 3

136.  Even if Clause 4.4 were to be still applicable, as pointed out by Mr Ho  SC, it would not mean that P had no rights under the SPAs, as there would be rights, as stated in Clause 4.4, which would survive, out of any prior contravention of the SPAs.  This was in fact also pointed out by DHCJ Ng.

Step 4

137.  Although Ds had pleaded that the transactions under the SPAs should be reversed in accordance with the SPAs, they did not identify which provisions in the SPAs they were referring.  As submitted by Mr Ho SC, and which I accept, there were no provisions in the SPAs which dealt with any “reversal”, and that the only remedy was provided by Clause 4.5 in relation to the retention/return of deposit in the event that the parties were not able to complete under Clause 4.4.

138.  Further, as reiterated in the Ng Judgment, Ds had accepted the genuineness of the SPAs and the Supplemental Agreements[88].  

139.  As I understand, the MOFCOM Approval was an administrative approval in order to effect a change of the status of the target company, for tax benefits, and it may be arguable that any cancellation may affect tax liabilities.  So far as I can see, there were no provisions in No 10 Document in relation to any “reversal”, whether any reversal of the transfer of shares and/or repayment of the consideration, in the event of any cancellation of the MOFCOM Approval.  

140.  Even if MOFCOM Approval were to be cancelled by MOFCOM now on the basis that the 89.8m Agreement was a false agreement, I do not see any reason why the SPAs should now be rescinded, or the transaction should now be reversed, bearing in mind that the SPAs are under Hong Kong law and completion was almost 7 years ago.

Conclusion

141.  Having considered all the above, I am of the view that Paragraph 24 discloses no reasonable cause of defence, and it may prejudice, embarrass or delay the fair trial of the action, whether under Order 18 rule 19(1) or under inherent jurisdiction.  I am satisfied P has established there is a plain and obvious case for Paragraph 24 to be struck out.

Paragraph 25 of the Defence

142.  Paragraph 25  states that:

“Further and in the alternative, the transfer of shares could not be carried out legally and in accordance with PRC law and in the premises, the SPA is void and unenforceable as being contrary to public policy.”

(“Paragraph 25”)

143.  P’s application to strike out Paragraph 25 is under Order 18 Rule 19 and/or under inherent jurisdiction on the basis that it discloses no reasonable defence.

144.  As pointed out by Mr Ho SC, what Ds were seeking in Paragraph 25 was a declaratory relief and yet there was no such claim or counterclaim. 

145.  In the Defence, Ds did not provide any particulars, or elaborate on their allegation that the SPAs were void or unenforceable contrary to public policy.  Mr Chan SC, however, submitted that the 89.8m Agreement involved making a misrepresentation to the PRC authorities and that this must be against public policy.

146.  What was pleaded by Ds in Paragraph 25 was (i) the transfer of shares could not be carried out legally; and (ii) in the premises, the SPAs were void and unenforceable as being contrary to public policy. 

147.  There was nothing in the PRC Judgment to indicate that the transfer of shares could not be carried out legally.  As stated earlier, Ds had accepted that the SPAs and all the Supplemental Agreements were genuine.  I agree with Mr Ho’s submission that Ds have not established any basis as to why the SPAs should be treated void or unenforceable.

148.  In light of the above, I am of the view that Paragraph 25 does not disclose any reasonable cause of defence and should be struck out.

Paragraphs 50-55 of the Defence

149.  The above paragraphs in the Defence were under the section titled “The Management Accounts-Inflation of Assets or Income in the Management Accounts” (“Management Accounts Section”).

150.  P had pleaded in its Re-Amended Statement of Claim (“RASC”) that upon investigations into the Management Accounts, and the Company’s other accounting books and records and/or financial information, it was discovered that the assets of the Company as stated in the Management Accounts had been falsely inflated by reason of the payment of inflated and/or fictitious construction costs to third parties[89] (“Inflated Assets”).

151.  P had further pleaded that upon investigations, it was discovered that two incomes of RMB13m and RMB10m as stated in the Management Accounts were not genuine [90] (“Inflated Income”).

152.  Thus P’s case was that Ds were in breach of various clauses in the SPAs, and that P had suffered loss and damage in that the value of the Company’s shares was substantially less than what P had contracted for under the SPAs; and further or in the alternative, P was entitled to seek an order for Ds to indemnify P in cash for its loss pursuant to Clause 6.3 of the SPAs.  P’s claims were thus two folds, (a) under common law (“Common Law Claim”) and (b) under the indemnity Clause 6.3 (“Indemnity Claim”).

153.  Ds made no admission to P’s allegations in relation to the Inflated Assets and Ds had averred that [91]:

(i) Prior to the signing of the SPAs, Fu, on behalf of P, together with the representative of P’s advisor Cazenove, had considered the draft Management Accounts;

(ii) All substantively unfavourable facts or issues regards its financial or tradition position or prospects, of which Ds were aware , were disclosed to P;

(iii) Subsequent to their consideration, Fu and Casenove proposed and Ds agreed that certain figures therein should be amended, and the figures as stated in the Management Accounts, if exaggerated, were exaggerated to the knowledge of P.

154.  In short, Ds defence was, if there had been any inflation of the assets or income in the Management Accounts which was not admitted by them, there had been disclosure to P and/or P had knowledge of the same.

155.  Mr Ho SC first of all complained about Ds’ bare non-admission in Paragraph 50 in the Defence in response to the detailed allegations set out by P in its RASC in relation to the Inflated Assets and the Inflated Income, and submitted that this was not permissible under Order 18 Rule 13, in particular Rule 13(5).

156.  Mr Chan SC, on the other hand, pointed out that it was not in dispute that P had taken control of the Company since 12 August 2010, and that Ds did not have access to the books and records.  The Management Accounts only contained the final figures, and Ds had no supporting documents and therefore it was a matter of common sense that it would be impossible for Ds to deal with each of P’s allegations in this respect.

157.  Another submission made by Mr Chan SC was that paragraphs 49 to 53 had also been repeated in paragraph 56 of the Defence, in relation to Ds’ defence to P’s alleged fraudulent misrepresentation, and that if paragraphs 50-53 were to be struck out, Ds would not be able to provide any evidence regarding those paragraphs in relation to their defence to P’s allegation of fraud and that there could not be right.

158.  In reply to the above, Mr Ho SC submitted that in the event that paragraphs 50-53 under the Inflation Section were to be struck out, then it would be open to Ds to apply to amend their defence to bring those struck out paragraphs back in under its defence to P’s alleged fraudulent misrepresentation.

159.  Anyway, the main submission of Mr Ho SC regarding  Paragraph 50 sub-paragraphs (a), (b) and (c) and Paragraph 51 of the Defence, being one of disclosure to P and knowledge of P, was that such would not amount to a defence to the P’s Indemnity Claim even if the pleaded facts were established by the Ds[92].

160.  The warranties relied upon for P’s Indemnity Claim were set out in paragraph 49 of the RASC, referring to the list at paragraph 47 from Schedule 3 of each of the 1^st and the 2^nd SPAs.  Clause 16.2 of the 1^st SPA (clause 14.2 of the 2^nd SPA) confirmed that the SPAs constituted the entire agreement between the parties.  As accepted by P, the burden of proof that the relevant warranties were broken in order to bring itself within Clause 6.3 would fall on P.

161.  Mr Ho SC, however, submitted that disclosure to or knowledge on the part of the P of the fact that any particular warranty had been broken by the Ds would not, as a matter of law, provide a defence to a claim under Clause 6.3.

162.  In this respect, Mr Ho referred to the comments made in Andrew Stilton on Sale of Shares and Businesses (3^rd ed.), when comparing an indemnity to a warranty :

“If the seller agrees to indemnify the buyer against a particular set of circumstances and those circumstances arise, then (provided that the indemnity is sufficiently widely drawn) the buyer can require the seller to compensate them for all the loss which they suffer as a result of the circumstances in question. An indemnity may therefore have a number of advantages over a warranty:

10.1.3.1. …

10.1.3.2. …

10.1.3.3. …

10.1.3.4.     It will be seen that the seller normally has the right to avoid liability under warranties by making a formal disclosure of circumstances which would otherwise constitute a breach of warranty and this will not normally be the case with indemnities. …[93]”

163.  Mr Ho also referred to Sinclair on Warranties and Indemnities and on Share and Asset Sales (7^th ed) where, again on discussing the use of  an indemnity as opposed to a warranty, it was stated that :

“An additional point which is sometimes made to justify the use of indemnities as an alternative, or in addition to the warranties, concerns the effect of the purchaser’s knowledge of its right to damages for breach of a warranty…

These issues do not arise in relation to indemnities, as knowledge of the purchaser is irrelevant and in the absence of agreement to the contrary-which would be unusual-the extent of the loss suffered by the purchase is irrelevant”[94]

164.  Mr Ho submitted, if necessary, he would also rely on the principle of contractual estoppel to support the true meaning and effect of Clauses 6.1 and 6.2.   He  referred to DBS Bank (Hong Kong) Ltd v San-Hot HK Industrial Co Ltd [2013] 4 HKC 1 where the legal principles of contractual estoppels had been set out and that such clauses such as Clauses 6.1 and 6.2 would  be upheld even if both parties knew that their factual agreement did not reflect reality[95].   

165.  Mr Ho also referred to Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland [2011] 1 Lloyd’s Rep 123 where Clarke J had reviewed the authorities on contractual estoppel and their effect, including authorities in which the doctrine has been applied outside of the context of banking relationships[96].     

166.  To summarise, it was Mr Ho’s submissions that even if the Ds were to succeed in proving the facts set out in these sub-paragraphs, this defence would still be bound to fail as a defence to the Indemnity Claim.

167.  As for Paragraphs 54 and 55,  Mr Ho submitted that, insofar as they were relied upon as a defence to the P’s Indemnity Claim under paragraph 54 of the RASC, these paragraphs in the Defence should be struck out for the same reasons as those set out above in relation to Paragraphs 50 and 51 of the Defence.

168.  As pointed out by Mr Chan  SC,  Ds’ case was  that the drafts of the Management Accounts were sent over to P prior to the signing of the SPAs, and that certain figures contained in the drafts of the Management Accounts (including those items concerning the construction costs and income of the Company, which are now disputed by P) were in fact amended at the proposal of Fu and Cazenove  because P wanted to ensure that the proposed acquisition of the Company would, in turn, be attractive to potential investors in P itself.   Thus, Ds’ defence to P’s Indemnity Claim was not simply premised on “disclosure / knowledge/non-reliance” but that it was P which instigated the amendment to the relevant figures.

169.  In the above circumstances, Mr Chan submitted that P could not have been misled by those figures and P should be estopped from arguing that the figures were untrue or that the Ds were in breach of the warranties given under the SPA, and further it would be grossly unfair for P to be allowed to do so when it was P itself who requested Ds and obtained Ds’ cooperation to amend those figures in order to satisfy Ps’ own purposes.

170.  Mr Chan had referred to those principles which had been set out in Unruh v Seeberger (2007) 10 HKCFAR 31 in relation to estoppel by convention[97].  Mr Chan also referred to the case of Natamon Protpakorn v Citibank N A [2009] 1 HKLRD 455. 

171.  I note the relevant clause in Natamon relied on by the defendant bank was an “entire agreement clause”, which would be somewhat similar to Clause 16.2 in the SPAs.  P’s Indemnity Claim was under Clause 6.3, and not Clause 16.2.  Having said this, I accept that what had been pleaded by Ds as a defence was not simply a “disclosure/knowledge/non-reliance”, but that it was on the instigation on P’s side that certain figures in the drafts, which included the construction costs and income were amended after disclosure of all substantively unfavourable facts or issues regarding the Company’s financial or tradition position or prospects by Ds. 

172.  P had denied what was alleged by Ds, namely that it was P’s side which proposed the amendments in the drafts.

173.  Tao had in her 3^rd affirmation referred to and relied on a circular dated 8 June 2007 issued by P after the signing of the SPAs in relation its proposed acquisition of the Company (“Circular”)[98], and also the Criminal Judgment to support Ds’ allegations, in that Fu had on two occasions requested the Company’s then CEO to amend the figures in the profits for 2007 and the first half of 2008[99]. 

174.  Although the two occasions referred to in the Criminal Judgment were after the signing of the SPAs and not relating to the Management Accounts, having considered what was pleaded by Ds in the Defence, I am of the view that Ds’ plea of estoppel is a reasonably arguable defence to the Indemnity Claim, and requires further investigation, and this cannot be resolved in an interlocutory proceeding and should be canvassed at a full hearing at trial, as seen from the Natamon case[100].

Preliminary Hearing

175.  Further or alternatively, P had applied for the trial of a preliminary issue of law under Order 33 Rules 3 and 4(2) on the issue whether knowledge by P of a breach of warranty would amount to a defence to P’s claims under Clause 6.2.  If this issue were to be decided in favour of P, factual evidence which would otherwise be adduced by Ds to support this defence would be avoided and P would be saved prejudice and delay to the fair trial of this action.

176.  The Court of Appeal has summarised the principles governing applications for the determination of preliminary issues in Lee Yiu Kwan v Ting Yin Wah, CACV 311 of 2002 (21.4.2004), as follows:

“39. We propose to set out some of those principles referred to in Hong Kong Civil Procedure 2004:

The question of law or construction to be determined by the court under the Order should be stated or formulated in clear, careful and precise terms, so that there should be no difficulty or obscurity, still less any ambiguity, about what is the question that has to be determined …

Where the issues of fact are interwoven with the legal issues raised, it will be undesirable for the court to split the legal and factual determination, for to do so would in effect be to give legal rulings in vacuo or on a hypothetical ruling, which the court will not do …

An order for the separate trial of separate issues is a departure from the general rule that all disputes should be tried together, and therefore, generally speaking, such an order should only be made in exceptional circumstances or on special grounds …

The order, as a rule, will only be made if the objection raises a serious question of law, which, if decided in favour of the party objecting, would dispense with any further trial, or at any rate with the trial of some substantial issue in the action …

The order for the trial of a preliminary point of law should not be made where there are facts in dispute, and if made may be set aside at the hearing …

Only such questions of law can properly be raised as preliminary issues as must necessarily arise in the action and the court will not decide fictitious questions or questions in which those who are interested, or are likely to be, are not present or are not in esse …

The House of Lords has strongly protested against the practice of the Court of First Instance allowing preliminary points of law to be tried before and instead of first finding the facts, since this course frequently adds to the difficulties of the Courts of Appeal and tends to increase the cost and time of legal proceedings.

Where for the purposes of deciding questions of law it is necessary or desirable to ascertain the facts beyond those that appear in the pleadings, the court should not order the trial of those questions as a preliminary point of law, especially where the law is itself unsettled or obscure …”

177.  Mr Chan SC also referred to Bank of America NA v Tadjudin Sunny, FAMV 42 of 2010 (20.1.2011), where it was observed by Bokhary PJ at §1: “Even a pure point of law is, at least in general, best resolved in the context of a set of facts found at trial.”[101]

178.  As further submitted by Mr Chan SC, separating the issues in a case into different hearings would usually only have the effect of delaying the final outcome, particularly where each hearing could then the subject of further appeals.  A single hearing would allow all issues (and appeals) to be decided together, avoiding multiplicity of proceedings and the consequential additional delay and expense[102].  

179.  Mr Chan SC also pointed out that both English and Hong Kong courts have strongly protested against the practice of allowing preliminary points of law to be tried before and instead of first finding the facts.  Mr Chan had referred to what was said by Lord Wilberforce in Tilling v Whiteman [1980] AC 1 per Lord Wilberforce  which was cited with approval by the Court of Appeal in Mai Gou v Mak Chik Lun [2001] 3 HKLRD 248[103] .

180.  Mr Chan also referred to Allen v Gulf Oil Refining Ltd [1981] AC 1001, where Lord Roskill urged those whose task it was to decide whether or not the trial of preliminary points should be ordered to be “extremely cautious” before acceding to pleas for the making of such orders as a result of attractively advanced submissions founded upon pleas of supposed economy[104].

181.  Mr Ho SC  pointed out that the above cases were all pre-CJR, and that the “knock-out requirement” should no longer be appropriate after the CJR and that one should  consider  the underlying objectives in Order 1A Rule 1 and also the court’s general powers of management under Order 1B Rule 1(2).

182.  I note that those passages in the textbooks referred to by Mr Ho SC were in relation to the comparison between an indemnity and a warranty, and the advantages of an indemnity over a warranty, and it is stated therein that the seller normally has the right to avoid liability under a warranty by making a formal disclosure of circumstances which would otherwise constitute a breach of warranty but will not normally be the case with an indemnity, and that “indemnities will normally be included in the sale and purchase agreement in order to cover specific risks which are of particular concern to the buyer and, inparticular, issues arising out of the buyer’s due diligence”.  It would appear that whether knowledge and disclosure is a defence to an indemnity clause will still depend on the circumstance of each case.

183.  As stated earlier, Ds’ defence to P’s claim is not premised simply on “disclosure/knowledge/non-reliance” but rather that it was P which instigated the amendment to the relevant figures.  I accept Mr Chan’s submission that this would require the court to determine as a matter of fact, whether or not P did in fact so instigate and then if so, whether P would then be estopped from making its claim.

184.  Further, as submitted by Mr Chan SC, the defence also requires the court to consider whether or not the figures were such as to be in breach of the warranties under the SPAs, and this would require the court to look at all the information that was in fact provided by the Ds to P, both parties’ actions in relation to the amendment to the figures as well as the Management Accounts themselves, and then for the court to consider whether or not in such context, the figures were true, accurate, complete, and/or not substantively misleading, those being the terms of the warranties.

185.  In view of the above, I agree with Mr Chan SC, as the defence involves issues of fact which are interwoven with the legal issues raised, this matter is inappropriate for summary determination. 

186.  I also accept that the reality is any preliminary hearing will tend to increase the cost and time, and is likely to cause further delay to the present action.  Having considered the underlying objectives, I am of the view that there should not be a preliminary hearing.

Conclusion

187.  In the above circumstances, I will only allow the striking out of paragraphs 24 and 25 of the Defence.

188.  As for costs, P has not succeeded in full with the Striking Out Summons.  I will make an order nisi that P is only entitled to 50% of the costs of the Striking Out Summons and there be certificate for two Counsel.  The order nisi shall be made final after 21 days.

189.  Lastly, I thank all Counsel for their submissions and assistance to the court.

Mr Ambrose Ho SC and Ms Bonnie Cheng, instructed by DLA Piper Hong Kong, for the plaintiff

Mr Edward Chan SC and Ms Chyvette Ip, instructed by David Lo & Partners, for the 1^st defendant and 2^nd defendant

[1] It seems the English name of the Company was also Wuhan Baishazhou Terminal Market CN Ltd, as stated in the JV Agreement subsequently referred to in this judgment

[2] Para 3(b), B:85

[3] See paras 19-28, A:130-132

[4] Clause 3, Recital, A:87

[5] B:21

[6] B:2-80

[7] B:84-130

[8] See clause 8.1, B:15, and also clause 4, B:81

[9] See clause 1.1, B:6, and clause 1.1, B:88

[10] Para 16, Re-amended statement of claim, A:16

[11] Para 27, Defence, A:93

[12] Clause 2.1, B:207-1-3; Clause 2.1, B:207-1-7

[13] Notwithstanding the title, these documents may not be promissory notes or bill of exchange in law

[14] B:81-82

[15] B:131-132

[16] Para 37, A:158

[17] Paras 38-39, A:158-159, although Chan seemed to think Yang was appointed about one month earlier

[18] Para 6, A:86-87

[19] Para 7, A:87-88

[20] Para 10, A: 88

[21] B:208-221

[22] B:141-146

[23] Clause 12.1, B:219“雙方同意，本協議的簽訂、履行、解釋及爭議解決等，均适用中華人民共 和國法律”

[24] Clause 17.1, B:19

[25] Clause 12.2, B:220 “凡因簽訂及履行本協議所發生或與本協議有關的一切爭議，… 任何一方可 將爭議提交有管轄權的人民法院通過訴訟解決”

[26] Clause 17, 1^st SPA, B:19, and Clause 14.5, 2^nd SPA, B:98

[27] B:222

[28] Para 1, B:190

[29] B:1-1

[30] Para 35 (1), A:157

[31] Paras 35(2)-(3), A:157-158, and see also the Public Announcement, B:1-2

[32] Para 41, A:159

[33] Para 42, A:137

[34] Paras 19-28, A:130-132

[35] Para 40, A:135; see also B:190

[36] Para 135,  A:193, see also B:151

[37] B:148

[38] B:148 -167

[39] B:234-240

[40] B:240-1 to 240-5

[41] B:168-205, and see also  P’s public announcement dated 19 June 2014 at B:206

[42] B:204-205

[43] B:194

[44] B:194-195

[45] Para (四), B:173

[46] B:195

[47] Para 1, B:196

[48] B:198

[49] Para 1, B:199

[50] Para 1 -3, B:201-202

[51] B:202-203

[52] B:203

[53] “有違誠實信用原則”, B:204

[54] B:203-203

[55] B:204

[56] Zhou, Luo, Yu, Yang Weiyuan, Yang, and Tien Hang

[57] A:122-124

[58]Ibid.

[59] Adopting the English translations as set out in P’s skeleton submissions, 2 July 2014, see paragraphs 10-15, but, for consistency, any reference to “article” has been changed to “clause” in this judgment;

[60] Clause 4.1(e) in 2^nd SPA

[61] B:10

[62] Clause 4.3 in 2^nd SPA

[63] Clause 4.4 , 2^nd SPA

[64] Clause 6.1, 2^nd SPA

[65] Clause 6.2, 2^nd SPA

[66] Clause 6.3, 2^nd SPA

[67] Clause 14.2, 2^nd SPA

[68] At 254F-255C

[69] See para 29, The Securities and Futures Commission v Young Bik Fung and others

[70] A:305

[71] See para 41, P’s skeleton submissions

[72] B:207-1 to 207-20

[73] See para 21.3, Ds’ skeleton submissions

[74] Para 35, A366

[75] B:207-2

[76] Clauses 9-20, Chapter 2, B:207-3 to 207-7

[77] Paras 96 and 97

[78] Para 25.2, Ds’ skeleton submissions

[79] Paras 19-20, Defence, B:91-92

[80] Para 17, A:358

[81] B:180

[82] B:189-1

[83] B:194

[84] B:190

[85] Para 11(4)  and (5), A:110-111

[86] Para 86, Ng Judgment, A:417

[87] Para 100, A 425-426

[88] Paras 41, 97 and 98, A:393,422

[89] Para 48, A:34

[90] Para 52, A:36

[91] Para 50, A:96-97

[92] See para 51 of RASC, A:36

[93] See para 10.1.3, pg 168

[94] Para 1-08 , pg 5

[95] At paras 194-206,

[96] Paras 230-249, pg 165-169

[97] Paras 129-155, pgs 78-87

[98] B:241-358

[99] Para 2 , B:164

[100] Per Cheung JA, at para 35

[101] At para 1

[102] SeeTheSecurities and Futures Commission v Young Bik Fung and Others, HCMP 2575 of 2010 (28.10.2013)at para 32.

[103] At 251 E-F

[104] At 1022 D-E

HCA 1807/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1807 OF 2011

________________________________________________

________________________________________________

Introduction

1. On 5 November 2013, I handed down Judgment (“Judgment”) in favour of the plaintiff in respect of their appeal against the order by Master Levy dated 10 May 2013.  For easy reference, I shall adopt the abbreviations used in the Judgment.

2. By the Judgment, I granted the following order: (a) the Ds’ application to set aside the Service Order be dismissed, (b) the Stay Order and the Cost Order be set aside, and (c) the Ds shall file and serve their Defence within 21 days from today.  I also granted a costs order nisi that the Ds do pay the plaintiff’s costs of the Appeal and of the Summons (including all costs reserved, if any) with certificate for two counsel (“Costs”) to be taxed if not agreed (“Order Nisi”).

3. On 19 November 2013, the plaintiff filed a summons for variation of the Order Nisi to an order that the Ds do forthwith pay the Costs to be taxed if not agreed (“Cost Summons”).

4. However, by a letter from the plaintiff’s solicitors to the Ds’ solicitors dated 6 January 2014 and as confirmed by the written skeleton submissions of Mr Ho SC (and with him Ms Cheng), counsel for the plaintiff, the plaintiff asked for summary assessment of the Costs in lieu of taxation, and a statement of costs (“Costs Statement”) was annexed to such written submissions.

5. The Ds opposed the application. Ms Seto, counsel for the Ds, asked the court to uphold the Order Nisi and dismiss the Costs Summons.

Legal principles

6. Order 62 rule 9D (1) of the RHC provides that “subject to paragraphs (2) and (4), the costs of any proceedings shall not be taxed until the conclusion of the action” and rule 9D (2) provides that “if it appears to the Court when making a costs order that all or any part of the costs ought to be taxed at an earlier stage it may order accordingly”.

7. There is little dispute between counsel as to the well-settled principles relevant to the court’s exercise of its discretion whether to order the costs of an interlocutory application to be paid forthwith.[1]  It is helpful to adopt Mr Ho SC’s summary of the matters which the court takes into account in the exercise of such discretion (but which list is not by any means exhaustive):

(a) whether the proceedings in question are severable and self-contained from the rest of the action;

(b) the justice of making the costs order having regard to the effect on the respective parties’ cash flow, eg the court would have regard to the unfairness of keeping the successful party (in the interlocutory application) out of its money until trial, or alternatively the unfairness of hampering the further conduct of the action by the unsuccessful party or destroying his business;

(c) whether the amount at stake was sufficient to justify the expense of a separate taxation.

8. Further, in Midland Business Management Ltd v Lo Man Kui (No 2),[2] Lam J (as he then was) said as follows:

“9. Under the Civil Justice Reform, the court is encouraged to order immediate payment of costs of interlocutory proceedings and if possible by way of summary assessment of costs. The objective is to discourage unnecessary and disproportionate interlocutory applications. It is recognised that the lack of immediacy of orders to pay costs “in the cause” or “in any event” weakens costs as a sanction against unwarranted applications or resistance”, see paras.529-536 of the Final Report of the Chief Justice’s Working Party on Civil Justice Reform. ……

12. …… after Civil Justice Reform the court is more astute to the impact of costs on legal proceedings and an order for immediate payment of costs will be made more readily as a discipline against unmeritorious interlocutory applications.”[3]

9. Still further, the court is entitled to consider the conduct of the parties, including the manner in which a party has pursued or defended his case or a particular allegation or issue.[4]

10. In the course of her submissions, Ms Seto submits that for the purpose of the Costs Summons the burden rests squarely upon the plaintiff to demonstrate that there are sufficient grounds to justify a departure from the general rule in Order 62 rule 9D (1) of the RHC in all the circumstances of the present action.

Discussion

11. In the present case, the Summons and the Appeal are plainly severable and self-contained from the rest of the action, and there will not be a great deal of difficulty for the taxing master to decide what forms the Costs.  Given their nature, the eventual outcome of the trial of the present action will not have any impact on the costs order made at this stage.

12. Secondly, as evident from (a) the involvement of leading counsel for the Appeal and below and (b) the Costs Statement by which the plaintiff claims $1,779,153 for the Costs, clearly the Costs will be of a significant amount sufficient to justify a separate taxation (let alone any summary assessment which will not incur further costs of a separate taxation hearing).[5]

13. Thirdly, pleadings are not even closed and the trial of the present action will be a considerable time away.  I agree with Mr Ho SC there is no reason why the plaintiff, which has prevailed on all the issues in the Appeal, should be kept out of a substantial sum of money until trial.

14. Fourthly, there is no suggestion that immediate payment of the Costs will have any serious impact on the Ds’ cash flow and/or prejudice their position in the present action in any way.

15. Ms Seto submits there is no suggestion that the Order Nisi, if made absolute, will cause any prejudice to the cash flow of the plaintiff listed company, or that the Ds will be unable to satisfy the Order Nisi, if made absolute, in any event.  It is argued that since the Ds have given the Undertakings not to enforce against the plaintiff payment under the 1^st and 2^nd Instruments (with a total face value of $376 million plus interest at 5% pa), the plaintiff has been afforded with more than sufficient security for their costs, including those awarded under the Order Nisi.

16. But I am unable to see how the Undertakings which relate to substantive disputes in respect of the 1^st and 2^nd Instruments can be viewed as equivalent to security for costs. Balancing the aforesaid considerations, I am of the view that the plaintiff will suffer greater injustice by being kept out of the substantial costs they have incurred until the trial.

17. Mr Ho SC submits that the court should take into account the Ds’ conduct in flouting the well established practice to give notice of their intention to re-open arguments that formed no part of the plaintiff’s Appeal.  As I have found in the Judgment, the Ds were effectively seeking to cross-appeal against the Service Order on juridically distinct grounds outside the realms of the Appeal.  Consequently, the Appeal could not be disposed at the scheduled hearing and had to be adjourned, which resulted in further costs and delay for the plaintiff and which also affected other users of the court.[6] Since the Ds have failed in their “cross-appeal”, Mr Ho SC argues that the order in respect of the Costs should provide for immediate taxation or summary assessment to properly reflect the court’s disapproval of, and serve as a sanction against, the Ds’ unwarranted conduct.

18. Ms Seto reminds that insofar as the plaintiff seeks to argue that the Summons is unmeritorious, one should note the Ds’ application for an interim stay of the present action (albeit dismissed by this court) has found favour with Master Levy.  On such basis, it is said that the Summons is neither “unwarranted” nor a “damaging proliferation of interlocutory or satellite litigation”, and hence distinguishable from Midland Business Management Ltd (involving a claim with no good prospect of success and which needed to be revamped by amendments to pleadings) and The Liquidator of Wing Fai Construction Co Ltd (InCompulsory Liquidation) (involving an application which failed at every stage from first instance to final appeal), which cases warranted an immediate payment of costs.

19. Ms Seto suggests that the Summons was issued with a bona fide view to saving the parties’ time and costs (which resonated with the underlying objectives in Order 1A rule 1 of the RHC) because the Ds then believed that any finding in PRC Action No 1 in their favour might give rise to issue estoppel or res judicata, thus disposing of, or at least reducing the scope of, the issues in dispute between the parties in the present action.  Ms Seto further submits that in paragraph 152 of the Judgment this court acknowledged that even after the plaintiff re-amended the ASoC following the issue of the Summons,[7] a refusal of any stay might still result in some wasted costs.  Thus, although an interim stay of the present action was eventually disallowed, Ms Seto says it does not diminish the fact that the Ds have had proper justification for issuing the Summons and resisting the Appeal in the first place.

20. I am not persuaded that the above arguments carry the Ds’ position any further.  As Mr Ho SC clarifies in his submissions, the plaintiff does not premise the Costs Summons on any lack of bona fides on the part of the Ds in issuing the Summons, resisting the Appeal and pursuing their “cross-appeal”. Quite simply, the Ds’ contentions have been rejected by this court, and in doing so this court has held that their approach to the “cross-appeal” flouted well-established practice.  But as Hoffmann J said in Kickers International SAv Paul Kettle Agencies Limited & anor, “I therefore do not think that it would be right to reserve an order for immediate taxation only for cases in which the court wishes to show disapproval of the way in which the proceedings have been conducted”.[8]

21. In all the circumstances, justice requires the Order Nisito be varied to allow immediate payment. The next question is whether there should be taxation or summary assessment of the Costs.

22. In her written submissions, Ms Seto took an initial procedural point by complaining against the plaintiff’s late announcement of their intention to seek summary assessment of the Costs[9] without formal application to amend the Costs Summons to such effect, and further suggested that such late change in stance should not be lightly condoned.

23. I agree it is preferable for the plaintiff to state clearly in the Costs Summons their primary wish for summary assessment of the Costs, but once the court comes to a view that immediate payment of costs is appropriate, it is quintessentially a matter within the court’s discretion to direct either formal taxation or summary assessment of costs.

24. Bearing in mind the following considerations, I am persuaded that the Costs should be taxed if not agreed rather than summarily assessed:

(a) the Costs at stake in the sum of $1,779,153 as claimed by the plaintiff in the Costs Statement are sufficiently substantial to proportionally justify the costs and efforts of a separate taxation;

(b) leading counsel was involved at the Appeal and below;

(c) the Costs are substantial and complex, eg the Costs Statement refers to 71 hours of attendance by the plaintiff’s solicitors on the plaintiff’s PRC legal representatives ZL under item C1.

25. In respect of (c) above, it will be noted that whilst the court is generally experienced in assessing the value of work done by local practitioners for various applications/hearings before it, there is less experience in assessing the necessary or proper efforts required in communicating with PRC lawyers over an extended period for obtaining both PRC legal opinion and factual legal reporting in respect of the PRC Actions Nos 1 and 2.

Conclusion

26. In the circumstances, at the hearing of the Costs Summons, I ordered that paragraph 3 of my order dated 5 November 2013 be varied as follows: “Costs of (1) the plaintiff’s appeal against the Stay Order and the Cost Order, and (b) the Summons (including all costs reserved, if any) shall be paid forthwith by the defendants to the plaintiff, with certificate for two counsel, to be taxed if not agreed”.

27. There is no reason why the plaintiff should not be entitled to costs of the Costs Summons even though I do not agree with summary assessment of the Costs. After all, they have succeeded in having immediate payment of the Costs. Further, even though this court is grateful for Mr Ho SC’s helpful assistance, the dispute under the Costs Summons falls within a small compass and is plainly within the competence of his learned junior. I do not consider a certificate for two counsel is appropriate.

28. The plaintiff also concedes they will not ask for costs of and occasioned by their ex parte application to the court by letter dated 15 November 2013 for variation of the Order Nisi.  Such approach is inappropriate in view of the guidance in Schindler Lifts (Hong Kong) Limited v Ocean Joy Investments Limited[10] and PCCW-HKT Telephone Limited v Telecommunications Authority.[11]

29. The plaintiff asks for summary assessment of the costs of the Costs Summons. Subject to paragraph 27 above, the Ds have no objection to the plaintiff’s statement of costs submitted for such purpose.

30. For the above reasons, I also granted the following order at the hearing of the Costs Summons:

(a) there be no order as to costs of and occasioned by the letter from the plaintiff’s solicitors to court dated 15 November 2013;

(b) save as aforesaid, costs of the Costs Summons be paid by the Ds to the plaintiff summarily assessed at $37,926 to be paid forthwith;

(c) for the avoidance of doubt, there is no certificate for two counsel in respect of the Costs Summons.

HCA 1807/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1807 OF 2011

_________________________

_________________________

_________________________

J U D G M E N T

_________________________

I.  BACKGROUND

1.  The plaintiff was/is a Hong Kong listed company that carried on business of leasing properties and selling food/beverages in Mainland China.  The 1^st defendant (“Wang”) is the wife of Zhou Jiu Ming (“Zhou”), both of whom are PRC nationals.  The plaintiff claimed the 2^nd defendant (“D2”) was/is a PRC company in Wuhan City, Hubei, PRC and was/is controlled by Zhou and Wang.  Wuhan Baizhazhou Agricultural By-Product Grand Market Company Limited (“Company”) was/is a PRC joint venture company whose principal business was/is the operation of a market in Wuhan City, Hubei, PRC (“Market”).

2.  In/about December 2010, Wang and D2 (“Ds”) commenced legal action against the plaintiff in the Higher People’s Court of Hubei Province, PRC (“Hubei Court”) with the Company joined as a third party (第三人) ([2011]鄂民四初字第1, “PRC Action No 1”).  The subject matter of PRC Action No 1 was said to be “股權轉讓協議糾紛”, and the plaintiff sought inter alia to reverse the transfer of shares in the Company from the Ds to the plaintiff.

3.  In/about April 2011, the Company and the plaintiff commenced legal proceedings against the Ds, Zhou and other individuals who were former members of the board of the Company as well as a PRC company known as Wuhan Baishazhou Tianheng Agri-Products Operation Management Company Limited (“Tianheng”) in the Hubei Court ([2011]鄂民四初字第2號, “PRC Action No2”).  In PRC Action No 2, the Company and the plaintiff claimed for loss and damages as a result of unlawful conversion of the Company’s assets and operational profits, and the unlawful assignment of the right to operate the Market to Tianheng.

4.  On 24 October 2011, the plaintiff commenced the present action against the Ds for inter alia breaches of contractual terms/warranties and fraudulent misrepresentations.  The Statement of Claim (“SoC”) was indorsed on the Writ of Summons.  On 24 November 2011, the plaintiff issued an Amended Writ of Summons with amendments in relation to the Ds’ addresses.

5.  On 28 November 2011, the plaintiff filed an ex parte application by the affidavit of his solicitor Chan Heung Wing (“Mr Chan”) for leave to issue/serve a Concurrent Amended Writ of Summons (“CAWoS”) out of jurisdiction on the Ds.  The plaintiff filed Mr Chan’s 2^nd and 3^rd affidavits on 9 and 15 December 2011 respectively in answer to the court’s requisitions.  On 21 December 2011, Master KK Pang granted leave for the plaintiff to issue a CAWoS against the Ds and to serve the same on them outside jurisdiction at various addresses in Mainland China (“Leave to Serve Out Order”).

6.  On 26 April 2012, after several failed attempts, the plaintiff effected service on Wang.  On 30 April 2012, the plaintiff filed an ex parte application by the affidavit of their chairman and chief executive officer Chan Chun Hong (“Mr CH Chan”) for an order to effect service on D2 by substituted service.  Requisitions were raised by the court, and on 18 May 2012 the plaintiff filed Mr Chan’s 4^th affidavit in answer thereto.  

7.  On 24 May 2012, Wang’s solicitors (“DLP”) filed acknowledgment of service on her behalf.  On 25 May 2012 the plaintiff’s solicitors (“DLAP”) invited DLP to accept service on D2’s behalf, but DLP said the plaintiff’s failure to serve D2 had “nothing to do with [Wang]”.  On 25 May 2012, Master Ho granted leave for the plaintiff to serve a CAWoS on D2 by prepaid ordinary post to various addresses in Mainland China and Hong Kong and by newspaper advertisement in Mainland China, Hong Kong and Australia (“Ho 1^st Order”).

8.  On 5 June 2012, the plaintiff filed an ex parte application by Mr Chan’s 5^th affidavit to vary the terms of the Ho 1^st Order.  On 13 June 2012, Master Ho varied the Ho 1^st Order as to the mode of newspaper advertisement in Mainland China, Hong Kong and Australia (“Ho 2^nd Order”).

9.  On 22 June 2012, DLP filed acknowledgment of service on behalf of D2.  On 17 July 2012, the plaintiff filed the Amended SoC (“ASoC”).

10.  On 3 September 2012, the Ds issued a summons to seek the following reliefs (“Summons”):

(a) leave to issue/serve a CAWoS out of jurisdiction under the Leave to Serve Out Order be set aside on the grounds of material non-disclosure and forum non-conveniens of the local courts;

(b) service (including substituted service ordered under the Ho 1^st and 2^nd Orders) of the CAWoS on the Ds (“Overseas Service”) be set aside accordingly;

(c) alternatively to (a)-(b) above, the present action be stayed pending the final outcome(s) of PRC Actions Nos 1 and 2 (collectively, “PRC Actions”) or until further order.

11.  On 3 September 2012 and 1 March 2013, the Ds filed the 1^st and 2^nd affirmations of Tao Xin (D2’s PRC legal representative, “Mr Tao”) respectively in support of the Summons.  On 11 January 2013, the plaintiff filed Mr CH Chan’s 3^rd affidavit in opposition.

12.  In Mr Tao’s 1^st and 2^nd affirmations, the Ds alleged there was material non-disclosure of the PRC Actions by the plaintiff in their applications for the Leave to Serve Out Order and the Ho 1^st and 2^nd Orders, and the Hong Kong court was not the appropriate forum to try the disputes between the plaintiff and the Ds.  In further support of the application for a stay of the present action, the Ds, apart from contending that the Hubei Court was the more appropriate forum, asserted that the continuation of the present action would be oppressive and unjust since such action and the PRC Actions (a) were between the same parties, (b) concerned the same subject matter, and (c) involved the same and/or similar allegations.

13.  By Mr CH Chan’s 3^rd affidavit, the plaintiff claimed that the Ds’ allegations as to the purported overlap between the present action and the PRC Actions were non-specific, and that upon proper analysis such allegations were wrong and without basis.  The plaintiff claimed that since there was no overlap between the present action and the PRC Actions, the continuation of the present action would not be oppressive and/or unjust to the Ds.  The plaintiff further complained that the Ds, having chosen to delay the present action by evading service, had caused further delay by their application under the Summons.

14.  On 17 September 2012, the plaintiff filed Mr CH Chan’s 2^nd affidavit and Mr Chan’s 6^th and 7^th affidavits in support of an application for interim injunction against the Ds.  On 21 September 2012, the plaintiff filed Mr Chan’s 8^th affidavit in further support of such application.

15.  On 21 September 2012, Poon J granted an injunction restraining the Ds from inter alia indorsing, assigning, transferring or negotiating to any third party two instruments (承付票據) both dated 5 December 2007 and executed by the plaintiff in favour of Wang and D2 respectively (“1^stand 2^nd Instruments” or collectively, “Instruments”) until further order of the court and/or the return day of an inter partes summons by the plaintiff (“Poon Order”).

16.  On 28 September 2012, the plaintiff issued a summons for leave to file a Re-Amended Statement of Claim, a draft of which had been placed before Poon J.  On the same day, DLP wrote to DLAP saying that:

(a) the plaintiff’s application for an injunction was wholly unnecessary and unwarranted:

“…… We are instructed that [the Ds] are still the legal and beneficial owners of the 1^st and 2^nd Instruments …… despite the commencement of these proceedings on 24 October 2011. You are already aware of the position taken by [the Ds] in the PRC proceedings. It would be entirely inconsistent with [the Ds’] case in the PRC proceedings if the 1^st and 2^nd Instruments were to be enforced in Hong Kong by them or by their purchasers.

We also note that you do not consider that the 1^st and 2^nd Instruments are negotiable instruments. [The plaintiff] is perfectly entitled to contest the enforcement or set aside any statutory demand. ……”;

(b) the Ds would need to file further affirmation to deal with the proposed re-amendments to oppose the Summons.

17.  On the return day hearing on 5 October 2012, upon each and every director and legal representative (法人) of D2 undertaking inter alia not to procure D2 to transfer and/or enforce payment under the 2^nd Instrument and upon the following undertakings by the Ds (collectively, “Undertakings”), DHCJ Lok continued the Poon Order until further order and granted liberty for the parties to apply:

(a) Wang undertook until trial or further order not to, whether by herself or by her servants or agents or otherwise, (i) indorse, assign, transfer or negotiate the 1^st Instrument to any third party and/or (ii) enforce payment under the 1^st Instrument by presenting the same to the plaintiff, issuing statutory demand to the plaintiff or otherwise;

(b) D2 undertook until trial or further order not to, whether by themselves or by their servants or agents or otherwise, (i) indorse, assign, transfer or negotiate the 2^nd Instrument to any third party and/or (ii) enforce payment under the 2^nd Instrument by presenting the same to the plaintiff, issuing statutory demand to the plaintiff or otherwise.

18.  DHCJ Lok also gave leave for the plaintiff to file their Re-Amended Statement of Claim (“RASoC”) and to file further evidence in relation to the Summons.  On 11 October 2011, the plaintiff filed the RASoC which set out their claims inter alia as follows:

(a) that the Ds had breached various terms and warranties in the SPAs[1] and were liable to indemnify the plaintiff under the Indemnity Clause[2] and/or to pay damages to the plaintiff;

(b) that the Ds had made misrepresentations which induced the plaintiff to purchase the Company’s shares for the consideration stated in the SPAs[3];

(c) that the Ds be restrained from enforcing payment under the Instruments by presenting the same to the plaintiff or otherwise;

(d) (as against Wang) that the Profit Guarantee[4] was not met and the 1^st Instrument be set-off by the amount specified in the RASoC pursuant to the Profit Guarantee Clause.[5]

On 9 November 2012, DLP confirmed that the Ds would not file any further affirmation to oppose the Summons.

19.  On 8 March 2013, DHCJ Lok discharged the Poon Order without prejudice to the continuing effect of the Undertakings.  The hearing of the Summons came before Master Levy on 29 April 2013 (“Master Hearing”).  Two matters are of note in respect of such hearing:

(a) Although Mr Tao’s 1^st affirmation referred to the alleged overlap between the PRC Actions and the present action, at the Master Hearing the Ds sought to build their case mainly upon the allegation that the outcome of PRC Action No 1 would have material impact on the present action.[6] As Master Levy noted in her reasoned decision dated 10 May 2013 (“Decision”), Mr Lam (now Mr Lam SC), counsel for the Ds, placed little reliance on PRC Action No 2 since it was still at a very early stage.

(b) At the Master Hearing, the Ds also confirmed their willingness to continue with the Undertakings in their present form in the event of a stay.[7] No offer/indication of such willingness was given by the Ds before such hearing.

20.  In her Decision, Master Levy dismissed the application to set aside the Leave to Serve Out Order and the Overseas Service (collectively, “Service Order”), but granted “an interim stay for 6 months or until the final outcome of the PRC Action No 1 i.e. the Forged Agreement[8] led to [the Ds] commencing [PRC Action No 1] in December 2010 against [the plaintiff] (with [the Company] as the third party) in the [Hubei Court], whichever is sooner” (“Stay Order”), and a costs order nisi that the plaintiff shall pay the Ds costs of the Summons including costs reserved together with certificate for two counsel (“Cost Order”) (collectively, “Order”).

21.  The Decision/Order meant that although Master Levy took the view there was material non-disclosure of the PRC Actions in the plaintiff’s applications for leave to serve out of jurisdiction and for substituted service, she refused to set aside the Leave to Serve Out Order and the Overseas Service on the basis that Hong Kong would be the appropriate forum for the present action and there would be little prejudice to the Ds who had acknowledged service.  The only contention by the Ds that ultimately found favour with Master Levy concerned the impact of the outcome of PRC Action No 1 on the present action.  The learned master took the view that “the texture of this claim in terms of the heads of claim and nature of the defence will likely be affected by the outcome of the PRC Action No 1”, and after weighing up the “pros and cons” she decided to grant the Stay Order.

22.  On 13 May 2013, the plaintiff filed their Notice of Appeal against the Stay and Cost Orders (“Appeal”), and applied for an order that (a) the Stay Order be set aside and (b) the Ds to pay the costs of the Appeal (together with the costs of the Summons) to the plaintiff.

23.  For the purpose of the Appeal, the plaintiff filed Mr Chan’s 9^th, 10^th, 11^th and 12^th affidavits respectively on 14 June, 26 June, 7 August and 28 August 2013, and the Ds filed the 1^st and 2^nd affirmations of the Ds’ solicitor Chu Hak Ha Mimi respectively on 21 June and 23 August 2013.  Both Mr Ho SC (with him Ms Cheng), counsel for the plaintiff, and Mr Lam SC (with him Ms Ip), counsel for the Ds, agreed that these affidavits/ affirmations should be adduced for the purpose of the Appeal.

24.  The Appeal came before me on 27 June 2013 (“1^st Hearing”). Counsel’s submissions took longer than expected, and the hearing was only completed on 30 August 2013 (“2^nd Hearing”).

II.  Ds’ CROSS-APPEAL

25.  The Ds did not file any Notice of Appeal or cross-appeal against the Order. But after Mr Ho SC lodged his written skeleton submissions for the Appeal against the Stay and Cost Orders on 24 June 2013 (“Ho Submissions”), Mr Lam SC by his written skeleton submissions dated 25 June 2013 (“Lam Submissions”) set out the Ds’ position, ie a permanent stay should be granted or alternatively, the Order should be upheld.  But at the 1^st Hearing Mr Lam SC conceded that the Ds would not seek any permanent stay.  This must be right since the Summons did not ask for such relief in the first place, and it never featured in the Decision/Order.  But a careful study of the Lam Submissions (as confirmed by Mr Lam SC at the 1^st and 2^nd Hearings) showed that the Ds’ position went beyond upholding the Order.  In fact, they positively sought to overturn the Service Order (which was not a subject matter of the Appeal) by asking the court to set aside the Leave to Serve Out Order and the Overseas Service on the grounds of material non-disclosure and forum non-conveniens of the local courts.

26.  The plaintiff’s Notice of Appeal was issued on 13 May 2013 (ie three days after the Decision was handed down).  Before the Lam Submissions were lodged with the court just two days before the 1^st Hearing, the Ds did not give any notice whatsoever, whether formally or otherwise, of their intention to re-open arguments on the grounds of material non-disclosure and forum non-conveniens and/or to ask for an order to set aside the Leave to Serve Out Order and the Overseas Service (which in effect was to appeal against the Service Order).  The question here is whether the Ds should be permitted to do so without filing any notice of appeal and/or without giving any notice to appeal until the Lam Submissions.

27.  It is trite that an appeal from a master to judge in chambers is dealt with by an actual rehearing of the application which led to the order under appeal, and the judge treats the matter as though it came before him/her for the first time.  The judge will give the weight it deserves to the previous decision of the master; but he/she is in no way bound by it.[9]

28.  Mr Ho SC in his submissions in reply lodged on the day following the Lam Submissions (or, to put it in another way, on the day just before the 1^st Hearing) (“Ho Reply Submissions”) noted even though there was no provision for formal notice of cross-appeal under Order 58 of the Rules of the High Court (“RHC”), long established good practice required that notice be given (to inform/assist the other side and the court and to reduce the risk of embarrassment and/or being taken by surprise) that a party would in fact be seeking an order different to that made by the master.  For example, “where a defendant appeals against a master’s order under O 14 giving conditional leave to defend, and the judge is satisfied that there is no defence to the action, he may properly give summary judgment for the plaintiff notwithstanding that no formal notice of cross-appeal has been given by the plaintiff ……”[10]

29.  In Chinakong Manufactory Ltd v Uniden Hong Kong Ltd,[11] the plaintiff applied for summary judgment, and the master granted conditional leave to defend.  The plaintiff appealed.  The defendant did not, but later sought leave to appeal out of time. Kaplan J said as follows:[12]

“…… I accept, that in circumstances such as those before me, the defendant did not require to serve a formal cross-appeal. However, …… it seems to me to be sensible and courteous for a party in this position to inform the other side and the court that they will be seeking an order different to that made by the Master and different to that being sought by the appealing party. Such a notice, whilst not strictly required by the rules, would be of assistance to the opposing advocate and to the court and would reduce the risk of anyone being taken by surprise or being embarrassed. Good practice requires that such notice should be given.” (my emphasis)

30.  Mr Ho SC submitted that whilst there was all the more reason not to condone any deliberate attempt to defy such requirement after the Civil Justice Reform (“CJR”), the present situation was quite unlike an Order 14 application with the possibility of different results (eg summary judgment, condition leave to defend or unconditional leave to defend). Mr Ho SC argued that here the Service and Stay Orders were made on different juridical bases such that the plaintiff’s challenge against the Stay Order would not open the backdoor for the Ds to revisit the Service Order.  Mr Ho SC therefore submitted that the court should not entertain the Ds’ contentions for setting aside the Leave to Serve Out Order and the Overseas Service, but should the court do so, the order for costs should reflect the court’s disapproval of the Ds’ deliberate/open flouting of the good practice to give notice to the other party and the court.

31.  Mr Lam SC accepted there was no good reason for the departure from the proper and usual practice of giving notice.  Although Mr Lam SC agreed the juridical bases of the Stay and Service Orders were relevant considerations, and the reliefs in paragraph 10(a)-(b) above (which resulted in the Service Order) and the relief in paragraph 10(c) above (which resulted in the Stay Order) were said to be in the alternative, he reminded that the subject matter underpinning such orders (being the transfer of the shares of the Company from the Ds to the plaintiff) was not wholly separate or distinct. He further submitted there would be no surprise, embarrassment or unfairness since the Ds’ challenge against the Service Order merely revisited arguments raised before Master Levy, and the plaintiff managed to lodge the Ho Reply Submissions.  An appeal against a master’s decision was by way of rehearing, so it was suggested that failure to give prior notice would (and should) not have the drastic consequence of preventing the Ds from challenging the Service Order at the Appeal.

32.  But in my view, if a master granted orders on juridically distinct applications at a hearing and a party appealed against the outcome of only one such application, the other party will have to file an independent appeal or cross-appeal if he intends to challenge the outcome(s) of the other juridically distinct application(s).  A respondent to an appeal against an aspect of a master’s order granting, say, leave to inspect property cannot without more challenge another aspect of such order requiring, say, security for costs.  This falls outside the situation contemplated in Chinakong Manufactory Ltd which considered the possibility of different outcomes for the order already under appeal by the appellant. I bear in mind Kaplan J’s observation that formal cross-appeal was not required was confined to the “circumstances such as those before [him]”.

33.  In my view, if an appeal is from part only of the order made by the master below, the whole of the order, or at least the other part of the order premised on different juridical basis, is not open to the respondent who should independently present an appeal under Order 58 of the RHC if he desires to review the whole order or the other part of the order premised on different juridical basis. In doing so, the respondent does not merely defend (or seek a different result in respect of) the part of the order under appeal by the appellant, he actually seeks to improve the overall result in his favour by re-opening other parts of the order not under appeal by the appellant.  Such approach gives a purposive and reasonable construction of the scheme created under Order 58 of the RHC, which must now be viewed through the prism of the CJR and the underlying objectives with their emphasis on justice and efficiency.[13] In such circumstances, the good practice in Chinakong Manufactory Ltd (which, as explained above, caters for a different scenario) is not enough.

34.  Plainly, the Ds here went beyond either defending the Stay and Cost Orders (being the orders under appeal by the plaintiff) on further/other grounds or seeking a different result in respect of such orders.  The Ds were in fact trying to improve the overall result in their favour by seeking to overturn Master Levy’s other order which was not the subject of appeal by any party (ie the Service Order).

35.  But the Service and Stay Orders were grounded on different juridical basis.  The application that resulted in the Service Order[14] sought to set aside the leave granted to serve a CAWoS out of jurisdiction and the Overseas Service (which the Ds disputed on the grounds of material non-disclosure and forum non-conveniens at the Master Hearing), and the application that resulted in the Stay Order[15] was premised on the alternative footing that the Leave to Serve Out Order and the Overseas Service would not be set aside but the present action would be temporarily put on hold pending the resolution of PRC Action No 1 or the expiry of six months, whichever was earlier.  The juridical distinction between the two is evident from the fact that if the Service Order was to be set aside (as the Ds suggested), the present action simply could not proceed and the appeal against the Stay Order would become redundant. It is also reflected in the Ds’ stance vis-à-vis the Undertakings,[16] ie the Undertakings would remain effective until further order including the period of interim stay under the Stay Order, but they would lapse if the Leave to Serve Out Order and/or the Overseas Service were to be set aside (since there would be no inter partes proceedings for the Undertakings to bite).  In my view, the Ds’ challenge against the Service Order is in reality an appeal on a separate cause, ie a cross-appeal against the outcome of a juridically different application.

36.  There are wider ramifications. The post-CJR era recognises the importance of both procedural fairness and substantive justice, and one looks more keenly to having cards on the table.  A last-minute approach puts undue and possibly unfair pressure on the appellant to scramble up a proper response to any late challenge slipped in via the respondent’s written submissions two days before the appeal hearing.[17]  This is important because the appellant’s written submissions should state all the points which he intends to take, and a point not taken or an argument not advanced in his written submissions may not be pursued at the appeal hearing without leave of the court.[18]  For the present Appeal, it is only through fortuity that Mr Ho SC (no doubt with the able assistance of Ms Cheng) had the time and opportunity to lodge/serve the Ho Reply Submissions at the only available time window immediately after receipt of the Lam Submissions, ie on the day before the hearing of the Appeal.  

37.  Still further, the plaintiff as appellant in scheduling the hearing of the Appeal against the Stay and Cost Orders would not be able to foretell the Ds’ undisclosed but intended challenge against the Service Order.  As a result of the Ds’ last minute challenge against the Service Order, the Appeal could not be disposed of at the 1^st Hearing and had to be adjourned, which was unfair not only for the plaintiff who had to suffer unexpected delay caused by adjournment of the Appeal hearing but also for other court users who also had legitimate demands on the court’s finite resources.

38.  In my view, the Ds not having filed any appeal against the Service Order (nor having given notice of any such intention) were not entitled to challenge and/or appeal against the Service Order simply by way of the Lam Submissions and Mr Lam SC’s oral submissions at the 1^st and 2^nd Hearings. But since I have heard arguments on de bene esse basis, I will proceed to consider the merits of such challenge on the assumption (which I disagree) that the Ds were entitled to raise such challenge. But before I do so, I set out below a summary of the plaintiff’s claim (drawn largely from the RASoC and, where appropriate, the plaintiff’s affidavit evidence) to put the Appeal in context.

III.  PLAINTIFF’S CLAIM

39.  The plaintiff claimed that on 2 December 2003 Zhou/Wang caused the Company to be incorporated in Mainland China.  On the same day, the Company was granted the right to operate the Market.  On 27 April 2008, Wang acquired 70% equity in the Company by purchasing D2’s 45% interest and Wuhan Jinding Real Estate Development Co Ltd’s 25% interest.  Until 5 December 2007, Wang, D2 and Wuhan Chuangjie Investment Co Ltd (“Wuhan Chuangjie”) respectively held 70%, 20% and 10% equity in the Company.  In the 2^nd SPA,[19] D2 claimed they were the beneficial owner of 10% equity in the Company held by Wuhan Chuangjie.  The plaintiff claimed that as at 2 May 2007, the five directors of the Company (including Zhou) were under the control of Wang, D2 and Zhou and/or acted as their nominees, and the Company remained under the control of Zhou/Wang.

40.  On 2 May 2007, the plaintiff entered into two sale and purchase agreements with Wang and D2 to acquire 70% and 30% equity in the Company for HK$900,000,000.00 and HK$384,000,000.00 respectively. On 10 May 2007, Wang and the plaintiff entered into a supplemental agreement whereby the parties agreed to amend inter alia clause 8.1 of the sale and purchase agreement (“1^st SPA Amendment”), and D2 and the plaintiff entered into a supplemental agreement whereby the parties agreed to amend the sale and purchase agreement to the effect that the plaintiff agreed to purchase and D2 agreed to sell 20% (instead of 30%) equity in the Company for a consideration of HK$256,000,000.00 to be paid by way of the 2^nd Instrument (“2^nd SPA Amendment”).  The sale and purchase agreement between the plaintiff and Wang and the 1^st SPA Amendment shall be referred to as “1^st SPA”, and the sale and purchase agreement between the plaintiff and D2 and the 2^nd SPA Amendment shall be referred to as the “2^nd SPA” (collectively, “SPAs”). Each of the SPAs was subsequently supplemented by five supplemental agreements.  

41.  The SPAs were executed in Hong Kong and governed by Hong Kong law, and the parties thereto agreed to submit to the non-exclusive jurisdiction of the Hong Kong courts.[20]  Despite the Ds’ allegations disputing the PRC Agt[21] and the MOFCOM Approval[22] discussed below, at the 1^st and 2^nd Hearings Mr Lam SC confirmed that the Ds accepted the genuineness of the SPAs and the supplemental agreements.

42.  On 15 June 2007, as part of the scheme to inter alia allow the plaintiff to gain dominant control over and to operate the Company/Market, Zhou/Wang procured Wuhan Chuangjie to enter into a Sino-foreign equity joint venture (“JV Agreement”) with the plaintiff.  On the same day, pursuant to the JV Agreement, on the advice of the existing directors of the Company and on the suggestion by the Ds, the plaintiff appointed Zhou and some of the existing directors to the Company’s board, and they remained as directors of the Company until 12 August 2010.  The plaintiff claimed these appointed directors were subsequently discovered to be under the de facto control of the Ds/Zhou and/or acted as their de facto nominees.

43.  Upon/after the completion of the SPAs on 5 December 2007 (ie the agreed long-stop completion date (遠期終止日), “Completion Date”),[23] the plaintiff paid the consideration for the SPAs by cash, convertible notes (換股票據) (which were subsequently converted into shares in the plaintiff on 10 January 2008) and by executing two instruments bearing the description of “promissory note” (承付票據) in favour of Wang and D2 respectively (ie the Instruments).[24]  The Instruments, which were governed by Hong Kong law, were executed in Hong Kong, and on their face were supposed to fall due for payment on 5 December 2012.[25]  It was the plaintiff’s case that they had become the lawful owner of 90% equity of the Company (“Shares”) pursuant to the SPAs.

44.  The Company’s management accounts were attached to schedule 2 of both SPAs, and the Ds gave warranties under the SPAs relating to such management accounts and the financial information therein. Clause 6.3 of both SPAs (“Indemnity Clause”) provided a contractual basis upon which the Ds were to indemnify the plaintiff on demand and in cash in the event that any of the Ds’ warranties in the SPAs were broken, untrue and/or misleading.

45.  The plaintiff claimed that in fact the 1^st Instrument was neither a promissory note nor a bill of exchange in law.  Further, clause 3.2(d) and 8.1 of the 1^st SPA (as amended by clauses 2.1(b) of the 1^st SPA Amendment) (“Profit Guarantee Clause”), clauses 2 and 4 of schedule 6 of the 1^st SPA and clause 4 of the 1^st Instrument provided that (a) should the Company’s net profit be less than HK$150,000,000.00 for the year ended 31 December 2007 (“Profit Guarantee Period”), the net profit shortfall shall be deducted from the amount stated in the 1^st Instrument, and (b) for the avoidance of doubt, if the Company suffered a net loss within the Profit Guarantee Period, the plaintiff would be entitled to be indemnified by Wang for the outstanding amount after deducting HK$150,000,000.00 from the 1^st Instrument, which Wang shall pay upon receipt of notice of the same (“Profit Guarantee”).

46.  The plaintiff claimed it was discovered in/about October 2008 that Wang and/or D2 had set up and indirectly owned/operated a market situated next to and in direct competition with the Market (“Competing Market”).  Subsequent to the signing/completion of the SPAs, Wang/Zhou continued to dominate the Company through their influence over the Company’s management and refused to relinquish their control over the Company and their financial information/documents.  Between February and May 2009, the plaintiff experienced difficulties in trying to get control over the Company/Market from the former management and to obtain access to the Company’s financial information/documents.  From June 2009 to February 2010, they had difficulties in registering the Company’s new directors with the relevant PRC government authorities, and only managed to do so and to obtain the Company’s chops in August/September 2010 after intervention by the relevant PRC government authorities.  The plaintiff claimed that on 1 November 2009, with the help of the PRC government authorities, physical control of the Market was finally handed over to them and/or the Company.  The plaintiff also obtained access to the Company’s financial information/documents in November 2009.

47.  After the plaintiff took over the management/control of the Company, Mr CH Chan caused the plaintiff to engage investigators and experts to look into the financial information/documents of the Company, including the information presented in the management accounts that were attached to the SPAs.  The plaintiff claimed that such investigations revealed breaches of the SPAs and various fraudulent acts which formed the basis of the present action.

48.  The plaintiff claimed that by engaging in a business which competed/competes with the Company, ie the Competing Market, the Ds were in breach of the terms of and warranties in the SPAs.[26]  The plaintiff claimed for loss of profits as a result of such breach or alternatively for an order that the Ds shall indemnify them on demand and in cash for a sum to be assessed under the Indemnity Clause (“Ds Indemnity Order”) and for an account of the profits earned by the Competing Market.

49.  The plaintiff also claimed that Wang failed to use her best endeavours to assist the plaintiff/Company to obtain land use certificates for the 318 acres of land neighbouring the registered address of the Company (which were not yet in use),[27] and as a result the Company did/does not have good title and/or valid rights to such land.  In the circumstances, Wang was in breach of the 1^st SPA,[28] and the plaintiff claimed for loss and damages being the cost of bidding for such land from the PRC government (including the market value of such land and stamp duty) less fees up to RMB100,000,000.00 to be borne by the Company,[29] and for an order that Wang shall on demand indemnify the plaintiff in cash for a sum to be assessed under the Indemnity Clause (“WangIndemnityOrder”).

50.  The plaintiff claimed that Wang failed to use her best endeavours to assist the plaintiff/Company to obtain the property ownership certificates for any of the buildings constructed in the Market that were/are used by the Company, which resulted in such buildings being considered as illegal constructions.  The plaintiff claimed Wang was therefore in breach of the 1^st SPA,[30] and further claimed for loss and damages being penalty costs payable to the PRC government for the illegal constructions and for a Wang Indemnity Order.

51.  The plaintiff claimed there were buildings constructed/used by the Company before the completion of the SPAs that were illegally built on public roads, and Wang was therefore in breach of the 1^st SPA[31] and D2 was in breach of the 2^nd SPA.[32]  The plaintiff claimed for loss and damages being expenses for demolition of such buildings that were illegally built on public roads, and for a Ds Indemnity Order.

52.  The plaintiff claimed that upon investigation into and verification of the management accounts attached to the SPAs, the Company’s other accounting books/records and/or financial information supplied to the plaintiff, it was discovered that (a) the assets of the Company as stated in such management accounts had been falsely inflated by reason of the payment of inflated/fictitious construction costs to third parties, and (b) two items of income stated in such management accounts were not genuine.  The plaintiff further claimed that Wang was in breach of the 1^st SPA,[33] and D2 was in breach of the 2^nd SPA.[34] The plaintiff claimed for loss and damages suffered due to the diminution in value of the Shares, and for a Ds Indemnity Order.

53.  The plaintiff claimed the Ds made fraudulent representations as to certain purported construction costs and income in the aforesaid management accounts with a view to induce them to purchase (and in reliance upon such representations they did purchase) the Shares for the consideration as stated in the SPAs.  The plaintiff claimed for loss and damage as they would have paid substantially less than the stated consideration for the Shares.

54.  The plaintiff claimed the Ds were not entitled to enforce (and should be restrained from enforcing) payment under the Instruments by presenting them to the plaintiff or otherwise.  If and insofar as the Ds were to succeed in obtaining judgment against the plaintiff in PRC Action No 1 and in reversing the transfer of the Shares by the Ds to the plaintiff, the Ds would not be entitled to enforce the Instruments which were executed by the plaintiff in consideration for the Shares.  Further, by reason of the operation of the Indemnity Clause, the Ds were liable to the plaintiff for a sum to be ordered by the court.

55.  The plaintiff claimed that certain purported payments to the Company derived from various agreements between the Company and certain third parties were recorded in the Company’s accounts as income for the Profit Guarantee Period when they should not be, so such purported income should be disregarded in ascertaining the audited net profit of the Company for the Profit Guarantee Period.  Further, the total construction costs as valued to have been paid by the Company were substantially less than the total construction costs purportedly paid by the Company.  About 67% of the purported construction costs for the Profit Guarantee Period were paid to only two entities, and a substantial part of such purported construction costs was in fact not paid in consideration of genuine construction works for the Company.  Accounting adjustments should be made to write down the assets of the Company for the Profit Guarantee Period back to its fair value, which would have an adverse impact on the profits of the Company.  By reason of the aforesaid, the plaintiff was entitled to a declaration against Wang that the 1^st Instrument be set-off against the net profit shortfall of the Company under the Profit Guarantee for the Profit Guarantee Period.

IV.  SPAs AND INSTRUMENTS

56.  I set out below some of the relevant terms and conditions of the 1^st SPA (with corresponding provisions of the 2^nd SPA):

“1. 釋義

1.1 在本協議內(包括敍文及附件)，按文議另有所指，下列詞語應俱有以下含義:

……

“交易完成” 指 具有第5.1條界定的含義

“交易完成日” 指 第4.1條載列的所有條件均已被滿足或(視情況而定)被放棄之後的第五個營業日(或各方書面約定的較遲日期)

……

“同意” 指 包括任何証照、批准、授權、命令、允許、豁免或容許 [clause 1.1 of the 2^nd SPA]

……

2. 目標權益的買賣

2.1 根據在本協議條款和條件，賣方將出售，而買方將購買目標權益 …… 。此項交易自交易完成時生效。 [clause 2.1 of the 2^nd SPA]

……

4. 先決條件

4.1 完成目標權益買賣的先決條件為:

……

(g) 所有買方、賣方及目標公司有關本協議的簽署、執行及完成交易或履行其各自在本協議項下的任何責任所必要的(包括任何政府、官方機構或監管機關(包括但不限於中華人民共和國商務部))同意均已取得，但無任何政府、官方機構或監管機構提出、頒布或採納的法令、法規、規章或決定禁止、限制目標權益之轉讓; …… [clause 4.1(e) of the 2^nd SPA]

4.2 買方可隨時以書面方式通知賣方，放棄4.1條中所列的全部或任何先決條件(第4.1(b)至(g)和(j)款中所列的先決條件除外)。…… [clause 4.2 of the 2^nd SPA replaced “第4.1(b)至(g)和(j)款” with “第4.1(b)至(e)、(h)、(j)和(k)款”]

……

4.4 如果在遠期終止日或各方書面約定的更晚的日期之前，第4.1條中所列的任何先決條件未能被滿足 …… ，或者第4.1(b)至(g)款中所列的先決條件在其他所有先決條件已被滿足或被放棄時未能實現，…… 本協議不再有任何效力。[clause 4.4 of the 2^nd SPA replaced “第4.1(b)至(g)款” with “第4.1(b)至(e)款”]

......

5    交易完成

5.1         以先決條件被滿足或被放棄(視情況而定)為前提，本協議的完成(“交易完成”)應在 …… [clause 5.1 of the 2^nd SPA]

……

6 賣方承諾 [clause 6 of the 2^nd SPA replaced “賣方承諾” with “賣方的保証及保証人的承諾”]

……

6.3 …… 賣方承諾，如果賣方違反任何賣方承諾，其以保證賠償方式按買方要求立即用現金向買方 ……支付一筆等同於以下各項總和的款項: (i)如果目標公司收到該款項，則能使目標公司處於有關賣方承諾未被違反時本該存在之財務狀況; 及(ii)買方或目標公司因賣方違反賣方承諾而直接或間接遭受或招致的一切合理費用。[clause 6.2 of the 2^nd SPA]

......

16. 一般條款 [clause 14 of the 2^nd SPA]

……

16.2     本協議，包括本協議附件，構成各方之間的完整協議，並取代及終止各方之間以前就本協議主題事項達成的任何協議或安排; 各方明確聲明，對本協議的任何修改必須是書面的，且須經各方的正式授權代表簽署後方為有效。[clause 14.2 of the 2^nd SPA]

……

17. 管轄法律和司法管轄權

17.1   本協議受香港法律管轄，並應依據香港法律解釋，各方愿就本協議接受香港法院的非專屬司法管轄權。[clause 17.1 of the 2nd SPA]」

57.  The relevant terms of the Instruments were as follows:

“3. 上述本金及利息須在此承付票據發出後5年內付清。期間[the plaintiff]有權一次性或以多次性分期支付的方式支付此承付票據下的本金及利息。

……

8. 此承付票據以契據形式簽立，受中香港法律管轄，並據其解釋。”

58.  I now turn to the allegedly forged agreement which featured in PRC Action No 1.

V.  ALLEGEDLY FORGED AGREEMENT

59.  Mr Tao claimed that the transfer of the Shares from the Ds to the plaintiff was subject to stringent approval process by the PRC Ministry of Commerce (“MOFCOM”), and there would be considerable difficulty because the consideration under the SPAs involved the issuance of the Instruments and convertible notes by the plaintiff as a foreign investor (外國投資者) in exchange for equity in the Company which was a PRC company (境內企業).  Mr Tao further claimed that the Company with the knowledge of the plaintiff’s then management procured the Company’s personnel to forge a share transfer agreement dated 2 May 2007 (“PRC Agt”) for the purpose of submitting the same to MOFCOM for approval so as to avoid tax liability and the uncertainty/delay due to MOFCOM’s approval process for the SPAs.  But Mr Lam SC submitted that for the present purpose it was sufficient for the Ds to proceed on the basis that the PRC Agt was submitted to MOFCOM for approval “[for] whatever reasons”, and I need not be concerned with whether or not the forgery allegation could be made out in due course.

60.  On the face of the PRC Agt, the parties were the plaintiff as purchaser (“乙方”) and the Ds as vendors (“甲方”).  The PRC Agt purported to be a sale and purchase agreement whereby the Ds agreed to sell and the plaintiff agreed to buy the Shares for a consideration of RMB89,817,930.00:

“鍳於:

……

B. 甲方系[the Company]的股東，合共持有[the Company]90%的股權(以下稱“標的股權”); 其中，[D2]持有[the Company’s] 20%的股權; [Wang]持有[the Company] 70%的股權。

......

2. 股權轉讓

2.1 甲方同意依據本協議條款向乙方出售標的股權，乙方同意依據本協議條款向甲方購買標的股權。

……

3. 轉讓價款及支付方式

3.1 雙方同意，…… 擬轉讓的90%股權的評估價值為8981.793萬元人民幣。甲方將以評估值作為確定其向乙方轉讓其所持有的[the Company’s] 90%股權的對價的基礎。……

3.2 乙方於公司獲得有權主管機關頒發《中華民共和國外商投資企業批准證書》/《企業法人管業執照》之日起15個工作日內向甲方繳付全部股權轉讓款的30%; 於公司獲得有權主管機關頒發《中華民共和國外商投資企業批准證書》/《企業法人管業執照》之日起60個工作日內向甲方繳付全部股權轉讓款的70%。

……

4. 生效

4.1 待下列條件成就後，本協議立即生效:

(1) 雙方正式簽署本協議;

(2) 股權轉讓取得[the Company]內部權力機構批准; 及

(3) 本協議得到有權審批機構批准。

……

13. 其他

……

13.4  本協議構成雙方之間就本協議的標的達成的全部協議，並取代雙方於本協議簽署前就本協議項下的標的所作的任何口頭或者書面的陳述、保證、諒解、意向書、備忘錄及協議。”

61.  The Ds claimed there were five areas in the PRC Agt which were different from what was agreed under the SPAs:

(a) (prior to the 2^nd SPA Amendment) the share acquisition was only in respect of 90% instead of 100% equity in the Company (clause 3.1);

(b) the consideration for the plaintiff’s acquisition of 90% equity in the Company was RMB89,817,930.00 and not HK$1,156,000,000.00 (clause 3.1);

(c) there was no stipulation that the consideration of such share acquisition involved the issue of “promissory notes” and/or convertible notes by the plaintiff (clause 3.2);

(d) the governing law was PRC law (clause 12.1);[35]

(e) the parties agreed to submit to the jurisdiction of the PRC courts (clause 12.2).[36]

62.  On/about 26 November 2007 (ie before the long-stop Completion Date on 5 December 2007), MOFCOM approved the plaintiff’s acquisition of the Shares (“MOFCOM Approval”)[37] on the basis of the PRC Agt.

VI.  PRC ACTION NO 1

63.  In/about December 2010, the Ds commenced PRC Action No 1 in the Hubei Court against the plaintiff with the Company joined as a third party (第三人).  In the Statement of Claim (民事起訴狀) filed by the Ds, they claimed inter alia that because of MOFCOM’s stringent approval process the plaintiff permitted/acquiesced in (a) making/forging the PRC Agt (with false contents) by the Company’s personnel and (b) submitting the PRC Agt (with other forged documents) to MOFCOM for approval, and pursuant to the MOFCOM Approval so obtained the plaintiff with the cooperation of the Company registered change of shareholdings of the Company with the PRC authorities.  The Ds applied inter alia for the following reliefs:

(a)   a declaration that the PRC Agt was void (“自始無效”) and an order to cancel (“判令解除”) the PRC Agt and all approvals, certificates and registrations issued by MOFCOM based thereon;

(b)   payment of “已確定的2008年度應得利潤分配損失” in the sum of RMB23,149,985.68 by the plaintiff/Company to the Ds.

64.  The plaintiff and the Company filed their respective Defence on 4 and 5 June 2012.  The plaintiff’s Defence dated 4 June 2012 averred inter alia as follows:

(a)   the PRC Agt “合法有效，並已實際履行”:

“綜上，[the Ds]向[the plaintiff]轉讓[the Company’s]90%股權，已取得了公司全體股東的一致同意，[the Ds]與[the Company]簽的股權轉讓協議合法有效並已實際履行，且已經獲得[MOFCOM]批准，並據此向登記管理機構辦理了變更登記手續。所有手續合國家法律、行政法規的規定”. Further, the Ds had received the consideration of HK$95,612,000.00 (equivalent to RMB89,817,930.00), and had not challenged the validity of the transfer of the Shares for three years until the commencement of PRC Action No 1.

(b)    denial of any allegation of forgery:

“…… 但[the plaintiff]提供的 …… “向商務部申報材料”顯示，[Wang]在股東會決議、員工安置計劃等多份文件上均有簽名，且股東會決議載明全體股東同意[the plaintiff]以8,981.793萬元受讓[D2]拥有的[the Company]20%股權及[Wang]拥有的[the Company]70%的股權”. There were other contemporaneous documents to show that Wang endorsed the transfer of the Shares. Further, Wang failed to adduce evidence to prove the alleged forgery of the relevant signatures, but even if they were signed by Zhou’s nephew such conduct “依法構成表見代理”, and Wang (who would have known of this at the latest by 26 December 2007) failed to raise objection but instead performed obligations under the PRC Agt. Still further, the Ds never denied that the Company’s seal on the PRC Agt was genuine, which meant the Company had acknowledged the validity of the PRC Agt and the company seal thereon.

(c)   denial that the Company “在[the plaintiff]控制下完成虛假審批”:

The PRC Agt could only have been submitted to MOFCOM for approval by the Ds or the directors who were then still in control of the Company.[38] The plaintiff claimed that “…… 無論依據法律規定或是事實情況，[they]均無權辦理股權轉讓所涉申報、工商變更登記手續”, and “辦理商務部審批手續及股權轉讓手續時，掌控[the Company]的主體，仍然是公司原股東、[Wang]、[D2]，[the plaintiff]此時法律上還不是[the Company]的股東”.

(d)    the SPAs and the PRC Agt “均是真實有效的，其中關於[the company]90%股權轉讓事項，無論雙方是否有其他約定，均應以已獲[MOFCOM Approval]的股權轉讓協議為準。[The Ds]試圖反悔一項已經實際履行完畢的股權轉讓交易，此主張缺乏法律依據，不應得以支持”:[39]

The plaintiff explained that the transfer of the Shares had been duly approved by MOFCOM and by the shareholders of the Company at the time, and they claimed that “就[the Company]90%股權轉讓全部事宜，[the PRC Agt]是最終協議，無論雙方是否簽署其他與此有關的協議，均應以[the PRC Agt]約定為準”. The plaintiff went on to aver as follows:

“…… [The SPAs]除了對於獲得商務部審批的[the Company]90%股權轉讓事項進行重複約定外，還包括以下重要內容:

(1) 賣方保証[the Profit Guarantee];

(2) 賣方保証取得毗鄰[the Company]318畝土地的土地使用權証;

(3) 賣方保証[the Company]不會因交易前的行為被索賠;

(4) 賣方須承擔不競爭義務;

(5) 股東轉讓變更登記完成後，仍由賣方原委派的人員繼續經營管理[the Company];

(6) [the plaintiff]未來可能獲得的[Wuhan Chuangjie]10%股權，等等。

[The SPAs]約定[the plaintiff]向[the Ds]支付11.56億元港幣，也是基於前述各項轉讓標的，如[the Ds]未能完成前述任一標的，則[the plaintiff]均有權扣回應向[the Ds]支付的款項。所以[the PRC Agt]與[the SPAs]約定的標的內容存在巨大的不同，轉讓價格及計價依據也是不同的，[the Ds]完全混淆了兩個協議，其主張不應得到支持。

[The plaintiff]作為香港上市公司，其對合同效力的判斷，完全信賴中國商務主管部門的審批。股東轉讓交易已經獲得商務部門同意，合法有效。而[the plaintiff]與[the Ds]在香港簽署的[the SPAs]中與股權轉讓無關的事項，無需再報商務主管部門審批。因此，法院應該以商務部的批覆審查依據，而不能以在香港達成的[the SPAs]或其他約定為依據判斷[the PRC Agt]的效力 ……”

65.  On 5 June 2012, PRC Action No 1 was heard by the Hubei Court, but judgment was still pending.

VII.  PRC ACTION NO 2

66.  Mr Lam SC submitted, as he did before Master Levy, that the Ds would mainly rely on PRC Action No 1, but he would refer to PRC Action No 2 for the sake of completeness.

67.  In/about April 2011, the plaintiff and the Company commenced PRC Action No 2 by filing the Statement of Claim (民事起訴狀).[40]  On 23 August 2011, the plaintiff and the Company made an Application for Amendment of Claim (變更訴訟請求申請書).  According to the Amended Claim, the Company and the plaintiff sued the Ds and others in their capacity as persons/entities formerly in control of the Company, and alleged that Tianheng executed an “assignment agreement” (租賃承包經營合同書) with the Company on 10 February 2009 (“Assignment Agreement”) that purportedly granted Tianheng the right to operate the Market for 20 years at an annual fee of RMB40,000,000.00.  The Company and the plaintiff sought an order that the defendants:

(a) “向[the Company]返還非法侵佔的[the Company’s]資產及經營利潤，暫計人民幣750,500,000 元。同時[Tianheng]就上述款項中的人民幣343,200,000 元承擔連帶責任”;

(b) “向[the Company]賠償其違法將[the Market]承包給[Tianheng]而造成的[the Company]的經濟損失，暫計人民幣7,200,000 元，並且[Tianheng]承擔連帶責任”;

(c) “向[the plaintiff]賠償同其違法將[the Market]承包給[Tianheng] 而造成的[the plaintiff]的經濟損失，暫計人民幣72,400,000 元，並且[Tianheng]承擔連帶責任”.

68.  In PRC Action No 2, D2 also had a Counterclaim (民事反訴狀) dated 2 May 2012 together with an Application for Additional Counterclaim (增加反訴請求申請書) dated 2 July 2012 and an Application for Amendment of Counterclaim (變更反訴請求申請書) dated 25 July 2012. What happened was that D2 initially counterclaimed for an order that the PRC Agt was null and void and that the plaintiff was to return the Shares, but they subsequently applied to withdraw such counterclaim because the reliefs sought thereunder were already covered by their claims in PRC Action No 1.  In September 2012, the plaintiff and the Company respectively submitted their Defence to Counterclaim (答辯狀).  A hearing before the Hubei Court took place on 12 September 2012.

VIII.  PRC EXPERT OPINION

69.  The plaintiff obtained various expert reports on PRC law by their (and the Company’s) PRC legal representatives Zhong Lun Law Firm (“ZL”), and the Ds also obtained various such reports by their PRC legal representatives Jincheng Tongda & Neal Law Firm (“JTN”).  Master Levy noted there was divergence of views between ZL and JTN on a number of matters, including:

“the probabilities of the transfer of the Shares being declared invalid in the PRC Action No 1; whether the subject matter of this action and the PRC Action No 1 is the same; the chance of the Forged Agreement [ie the PRC Agt] being found void; whether there was an overlap of issues between this action and the PRC Actions; the impact of the PRC Action No 1 on the legality of the plaintiff’s shareholding in the Company; the chance of the PRC courts exercising jurisdiction over the dispute, and the prospect of success of the PRC Actions etc.”[41]

The learned master took the view that it was not appropriate or necessary to rely on the opinion evidence of the PRC lawyers, and she was disinclined to give consideration to such evidence.  For the Appeal, both Mr Ho SC and Mr Lam SC agreed it would not be appropriate for me to resolve the differences of opinion on PRC law save to note there was divergence of views and the outcome of the PRC Actions could not be predicted. In a nutshell, ZL considered that the likelihood of the PRC Agt being declared void and the transfer of the Shares being reversed by the Huebi Court was relatively low, but JTN opined there was a high likelihood.

IX. ADMINISTRATIVE COMPLAINT TO MOFCOM

70.  For completeness, I should mention that on/about 7 September 2011 the Ds filed an administrative complaint in relation to the validity of the PRC Agt with the MOFCOM against the plaintiff.  

X. PROGRESS OF THE PRC ACTIONS

71.  In late May 2013, the Hubei Court replaced the original panel of three judges for PRC Action No 1 with a reconstituted court consisting of five judges.  On 31 May 2013, ZL collected 《開庭傳票》, 《出庭通知書》and《舉証通知書》from the Hubei Court that notified a hearing of PRC Action No 1 on 10 July 2013 with fresh opportunity to adduce evidence, but ZL advised “暫無新的証據補充提交”.

72.  On 31 May 2013, ZL reported that the presiding judges “確認需要重新完成全部審理流程”, and “根據 [ZL] 以往的經驗，預計 [PRC Action No 1]完成開庭程序需要花費較長的時間 。…… 由於[PRC Action No 1]屬於涉外民事案件，因此，該案件無審理期限限制。此外，[PRC Action No 1]已被[the Hubei Court]列為重大疑難復雜案件，組成五人合議庭對案件進行審理，因此新的合議庭很可能會花費更多時間了解案情”. ZL opined it might take up to five years or more before judgment would be delivered in PRC Action No 1. As regards PRC Action No 2, ZL understood the Hubei Court “已將 [PRC Action No 2] 列為2012年度標的額最大的案件，且 [the Hubei Court] 一直將 [the PRC Actions] 結合審理。由於 [PRC Action No 1] 需重新開庭，且短期內難做出判決，[ZL]預計 [PRC Action No 2] 如開庭，其開庭時間在 [PRC Action No 1] 開庭之後。并新合議庭將會投入更多時間審理該案件，…… 預計 [PRC Action No 2] 完成開庭程序、作出判決的時間應遲於 [PRC Action No 1]”.

73.  According to JTN’s legal opinion dated 20 June 2013, the Hubei Court had not expressly or implicitly designated the PRC Actions as “重大疑難複雜案件” which was not known to PRC law. In respect of PRC Action No 1, the Ds would not submit new evidence, so if both parties would not adduce new evidence at the hearing on 10 July 2013, “新組成的合議庭會在原合議庭組成人員審理情況的基礎上進行審理”, so even though the new presiding judges “重新開庭進行全部審理流程 ……; 但 …… 鑒於前期已進行審理，如雙方無新的證據提交，庭審過程 ……會比較快地進行。根據上一次審訊經驗，整個庭審過程基本可以在一天內完成”.  According to “《最高人民法院案件審限管理規定》第10 條，涉外、涉港、澳、台民事案件應當在庭審結束三個月內結案”, hence the Hubei Court “應在[PRC Action No 1]庭審結束後三個月內及時審理結案，出具判决 ……”.  Further, JTN said they had not received notice from the Hubei Court that the PRC Actions had been consolidated, so PRC Action No 1 “的判決基本不會受 [PRC Action No 2] 審理程序影響”.

74.  On 26 June 2013, ZL responded to the major points raised by JTN by (a) setting out the basis on which they claimed the PRC Actions were designated as “重大疑難複雜案件”, and (b) confirming the likelihood of the hearing of PRC Action No 1 would not be completed within a day, “合議庭仍有可能根據案件審理需要，要求當事人補充材料，或重新開庭進行調查等”. ZL opined that despite the provisions in “《最高人民法院案件審限管理規定》第10 條”, there was nothing to show that the hearing on 10 July 2013 would be the last hearing. In any event, the Hubei Court had not handed down its judgment in PRC Action No 1 for more than three months since the hearing on 5 June 2012.  ZL therefore opined that PRC Action No 1 “於2013 年7 月10 日結束庭審的可能性較低， [the Hubei Court] 在三個月內作出判決可能性較低。法院 …… 可能花費比一般涉外案件更長的時間來審理 [the PRC Actions]”.

75.  In August 2013, ZL[42] and JTN[43] respectively reported on the hearing of PRC Action No 1 on 10 July 2013.  There was no dispute that at such hearing the Ds abandoned their claim for payment of “已確定的2008 年度應得利潤分配損失”, hence “現訴訟請求僅為請求確認 [the PRC Agt] 無效”.  At the hearing, the Hubei Court also requested the parties to submit further evidence as follows:

(a) Guo Bei Bei (郭蓓蓓), an agent (代理人) of D2 to produce the documents for “公民代理” by 17 July 2013;

(b) D2 to produce their “工商檔案” by 20 July 2013;

(c) the plaintiff to produce the Statement of Claim filed in the present action by 9 August 2013;

(d) each party to produce legal opinion on whether or not “目標權益” was the same concept as “股權” from a Hong Kong legal expert by 9 August 2013 (but according to JTN, “…… 法庭明確表示，無論雙方提供怎樣的香港法律意見、以及無論雙方提供的法律意見是否趨同或參異，均只是作為輔助參考，法庭自會依據大陸法律、通行之法律原則、以及其合理性及交易習慣及慣例做出自己的判斷”).

76.  ZL opined that “雙方按照合議庭定時間提交補充材料後，合議庭將依法進行審查。此外，考慮到此次合議庭要求提交資料較多，且 [PRC Action No 1] 案情複雜，合議庭 …… 可能會花費比一般涉外案件更長的時間對該案件進行審理”. On the other hand, JTN claimed that “法庭已明確表明將擇期判決” and “法庭從未明示或暗示本案件再次安排開庭，也從未表示本案尚存有未經審理清楚之問題”. But ZL disagreed and claimed that “合議庭並未表示將擇日作出判決”.

XI. PRC ACTIONS AND PRESENT ACTION

77.  A running theme throughout the Appeal against the Stay Order and the Ds’ challenge against the Service Order was whether the subject matter of PRC Action No 1 (and to a lesser extent PRC Action No 2) was the same as (or similar to) or was different from that of the present action, and whether and if so how the outcome of PRC Action No 1 (and to a lesser extent PRC Action No 2) would impact on the present action.  I propose to first deal with this matter.

78.  Mr Ho SC argued there was no overlap of issues between the PRC Actions and the present action, and that the present action had a life of its own such that its continuation would not be oppressive or unjust to the Ds.  

79.  In respect of PRC Action No 1, Mr Ho SC pointed out that the subject matter of such action (which concerned the PRC Agt and its validity) and that of the present action (which concerned the SPAs and the parties’ rights/obligations thereunder) were clearly different.  He submitted that the Ds’ forgery allegation was directed solely at the PRC Agt, and they accepted the genuineness of the SPAs which were not canvassed at all in PRC Action No 1. Further, the reliefs sought in the present action for inter alia damages and indemnity for breaches of the terms of and warranties in the SPAs (including the Profit Guarantee Clause) and for Ds’ misrepresentations that induced the plaintiff to purchase the Shares for the consideration stated in the SPAs, and injunction orders in relation to the Instruments executed in Hong Kong and governed by and to be interpreted according to Hong Kong law, and those sought in PRC Action No 1 for the revocation of the PRC Agt, avoidance of the MOFCOM Approval and reversal of the transfer of the Shares were also distinctly different.  Indeed, the governing law of the SPAs (ie Hong Kong law) and that of the PRC Agt (ie PRC law) were different, and the SPAs had a non-exclusive Hong Kong jurisdiction clause whilst the PRC Agt had a PRC jurisdiction clause.

80.  In respect of PRC Action No 2, Mr Ho SC submitted there was also no identity of subject matter between such action (which primarily concerned claims by the plaintiff and the Company against inter alia the Ds and others being former directors previously in control of the Company and Tianheng being the company that purportedly executed the Assignment Agreement with the Company[44] for losses suffered by the Company after 31 December 2007)[45] and the present action (which primarily concerned claims by the plaintiff as purchaser of the Shares against the Ds as vendors of those Shares for losses suffered before 31 December 2007).

81.  On the other hand, Mr Lam SC submitted that it was the PRC Agt and not the SPAs that was approved by MOFCOM, and those two agreements were mutually incompatible since they bore the same date and purportedly dealt with the same subject matter (ie the sale of the Shares) by the same vendors (ie the Ds) and the same purchaser (ie the plaintiff).  He submitted it was impossible for the same vendors to sell the same subject matter to the same purchaser on the same date but for a different consideration and on different terms, especially when each agreement contained an entire agreement clause.[46]  Yet, the plaintiff relied on the SPAs in the present action and inconsistently alleged in PRC Action No 1 that the PRC Agt was not forged and that the transfer of the Shares was properly effected pursuant thereto.  

82.  It was the Ds’ case that MOFCOM would not have approved the SPAs since the consideration therein included cash payment, convertible notes and the Instruments contrary to the provisions/practice of the relevant authority, and this led to the forgery of the PRC Agt for the purpose of seeking the MOFCOM Approval, which approval was void and should be revoked.[47]  Mr Lam SC submitted that the plaintiff’s defence in PRC Action No 1 merely referred to additional provisions in the SPAs on obligations beyond the transfer of the Shares, but failed to explain why two agreements of the same date would deal with the same subject matter on different terms.[48] He claimed that despite the superficial attraction of the suggestion that PRC Action No 1 and the present action involved different “subject matter” (ie the PRC Agt and the SPAs respectively), in substance they concerned the same/similar matter, ie the transfer of the Shares.  Mr Lam SC submitted that the legality of the plaintiff’s ownership of the Shares to be canvassed in PRC Action No 1 directly related to the present action because if the plaintiff never properly/validly held the Shares they should be returned to the Ds in which case the plaintiff could not sue the Ds for damages in respect of their control over the Company.  

83.  In this respect, Mr Lam SC argued that MOFCOM Approval being the only approval granted in respect of the transfer of the Shares was of the utmost significance since such approval was essential for the lawful transfer of the Shares.[49]  It was said that although (a) the MOFCOM Approval had been obtained prior to the long-stop Completion Date and (b) the consideration specified in the SPAs had been paid over for the transfer of the Shares, as a result of the operation of clause 4.1(g) of the 1^st SPA and clause 4.1(e) of the 2^nd SPA (which provided that the approval by MOFCOM was a condition precedent for the execution/performance of the SPAs,[50] and that no waiver of such condition precedent was permitted),[51]  if the Hubei Court in PRC Action No 1 were to declare the MOFCOM Approval invalid/ineffective and to revoke the same, and then go on to reverse the transfer of the Shares, there would be non-fulfillment of the aforesaid condition precedent and (save for a few specific provisions) the SPAs would cease to have legal effect.[52] Mr Lam SC argued there was no question of any “retrospective” triggering of clause 4.4 of the SPAs because (i) the MOFCOM Approval was granted in respect of the PRC Agt and not the SPAs, and (ii) completion under the SPAs was a question of fact that depended on fulfillment of the conditions precedent in the SPAs[53] and not on payment of the consideration which might occur at any time but no later than the time of completion.[54]

84.  Mr Lam SC submitted that if the Hubei Court in PRC Action No 1 were to revoke the MOFCOM Approval, the Shares would revert to the Ds and the parties’ legal rights in respect of the SPAs would be entirely different from those pleaded in the RASoC that were premised on the plaintiff being the owner of the Shares.  Instead, subject to any claim for potential set-off by the Ds, the plaintiff might then be entitled to recover the consideration already paid on the basis of total failure of consideration, but their existing claims in the present action founded on breaches of the SPAs (which agreements would not have survived save for a few specific provisions) and/or based on fraudulent misrepresentations would be unsustainable and liable to be struck out. Mr Lam SC noted that in any event paragraph 65 of the RASoC relied on an alternative case that if the Ds succeeded in PRC Action No 1 they would not be entitled to enforce payment under the Instruments executed by the plaintiff in consideration of the Shares.[55]

85.  Mr Lam SC submitted that evidently the outcome of PRC Action No 1 would have direct relevance to the legal effect of the SPAs, and consequently a direct/significant impact on the plaintiff’s claim in the present action.  He said this was not altered by the re-amendments in the RASoC which removed the allegation in paragraph 47 of the ASoC that the Ds produced the PRC Agt to avoid their obligations under the SPAs, which re-amendments Mr Tai suggested were to distance the present action from PRC Action No 1, but which, Mr Lam SC submitted, did nothing to alter the fundamental issue.

86.  Mr Lam SC further argued that the above contentions would not turn on the chances of success of the Ds’ claim in PRC Action No 1 because the relevant consideration was not the merits of the Ds’ claim but whether the outcome of PRC Action No 1 (whether in favour of the plaintiff or the Ds) would have a material impact on the present action.  If the Ds were to succeed, the judgment/findings would be binding on the parties (including the plaintiff).  Should they fail, Mr Lam SC conceded the Ds could hardly re-argue those matters. Whilst Mr Lam SC accepted one had to look at the reliefs sought in the PRC Actions and the present action, he submitted that any determination and/or findings by the Hubei Court in PRC Action No 1 as to whether or not (a) the PRC Agt was forged, (b) the MOFCOM Approval was valid, and (c) the plaintiff remained as lawful owner of the Shares would amount to issue estoppel or res judicata between the plaintiff and the Ds, or at least it would be an abuse of process to re-litigate in substance those same issues as canvassed in PRC Action No 1.  

87.  In this respect, Mr Lam SC relied on the doctrine against abuse of process discussed in China North Industries Investment Ltd v Chum,[56] which was founded on an extension to the res judicata doctrine to circumstances where a collateral challenge to a previous “final” decision pronounced on the merits by a local or (with certain exceptions) a foreign court of competent jurisdiction offended the principles underlying the doctrine. Given the nature of the conditions precedent to an abuse finding, ie (a) manifest unfairness and/or (b) bringing the administration of justice into disrepute, the resolution of such issue would be highly fact sensitive, and the court would exercise such power (which had the effect of shutting out litigation) only after scrupulous examination of all circumstances.  The burden of establishing abuse rested on the party that relied on the earlier decision.

88.  On the facts of China North Industries Investment Co Ltd, it was held that the Hong Kong proceedings were an attempt to overturn a “final” determination in previous Bermudan proceedings on the very issue, ie the identical fundamental question, determined in those proceedings, and that such procedure offended the spirit of the rule of res judicata and constituted an abuse of process.

89.  In respect of PRC Action No 2, the plaintiff and the Company complained of various wrongdoings committed by the Ds after the transfer of the Shares.  Mr Lam SC submitted that although the specific allegations in the present action that overlapped with PRC Action No 2[57] had been removed in the ASoC, the allegation that the Ds hindered/prevented the plaintiff from gaining control of the Company/Market remained,[58] and the plaintiff continued to rely on the SPAs to assert their right to gain control of the Company/Market.[59]  He submitted that determination of the issue as to the Assignment Agreement in PRC Action No 2 would be directly relevant to such issue and to inter alia the issue of whether there was any financial damage done to the Company and/or any inducement for overpayment for the Shares.  

90.  The Ds argued that it was disingenuous for the plaintiff to suggest that the nature of the present action and PRC Action No 2 was different because the capacities of the parties were different. In both actions, the plaintiff sued as the current owner of the Shares, and any challenge to their capacity or to the legal effect of the SPAs would inevitably have a direct impact on their claims, regardless of whether such claims related to damages suffered before or after 31 December 2007,[60] and regardless whether the Ds were sued as vendors of the Shares or as former directors of the Company.  The plaintiff’s interest in both actions would be called into question if the transfer of the Shares had not been made with proper approval.

91.  In my view, there is no doubt that on their face the present action and PRC Action No 1 are quite different.[61]  As Mr Ho SC submitted, what the present action seeks to do is to ask the Hong Kong court to examine the plaintiff’s allegations as to misrepresentations and breaches of the terms of and the warranties in the SPAs such that if the Hong Kong court is with the plaintiff, the Ds will have to pay damages and to honour the Indemnity Clause.  On the other hand, PRC Action No 1 deals with the alleged forgery of the PRC Agt and consequent impact on the MOFCOM Approval. So prima facie the present action and PRC Action No 1 deal with different matters, and indeed the reliefs sought in the present action are outside and not the subject of PRC Action No 1, eg the plaintiff’s claims in relation to the Instruments can only be litigated in the present action.

92.  The rhetorical question is how PRC Action No 1 will affect the present action notwithstanding their prima facie differences.  Mr Lam SC’s arguments that the outcome of PRC Action No 1 has significant impact on the present action boil down to his contention that both the Hong Kong and PRC proceedings share a common fundamental premise, ie the transfer of the Shares, but when the validity of that transfer becomes suspect (as a result of the alleged forgery of the PRC Agt that may lead to revocation of the MOFCOM Approval in PRC Action No 1) the underlying basis for the SPAs also becomes questionable, and the present action will also fall away as an infringement of the issue estoppel or res judicata principle or it will be an abuse of process for either party to run claims/defences contrary to the determination/findings in PRC Action No 1.

93.  Such arguments must be placed in context.  There is no dispute that (a) the MOFCOM Approval was obtained in November 2007 prior to the long-stop Completion Date on 5 December 2007, (b) completion had taken place on 5 December 2007, (c) upon completion the consideration had been paid over to the Ds and the Shares had been transferred to the plaintiff, and (d) both the plaintiff and the Ds had proceeded on the basis (or as if) that the relevant condition precedent[62] had been fulfilled and they had performed their respective obligations under the SPAs.  

94.  Mr Ho SC claimed that Mr Lam SC’s arguments were misconceived in that any order to revoke the MOFCOM Approval and/or to reverse the transfer of the Shares by the Hubei Court years after the completion of the SPAs did not mean that in the first place such approval had never been obtained and that such transfer had never taken place at all, and any such order also would not alter the fact that the plaintiff had complied with their obligations under the SPAs by payment of the cash consideration, execution of the Instruments and provision of the convertible notes (which were converted into shares in the plaintiff on 10 January 2008). Mr Ho SC suggested that even if the Hubei Court were to revoke the MOFCOM Approval in PRC Action No 1, it would not be open to the Ds to rely on clause 4.1(g) of the 1^st SPA and clause 4.1(e) of the 2^nd SPA to retrospectively trigger the operation of clause 4.4 of the SPAs for the SPAs to cease to have legal effect and for the transfer of the Shares to be invalidated.  It was argued that despite clause 5.1 of the SPAs, such subsequent event could not possibly have the effect of unwinding the clock or rewriting history to achieve the effect as desired by the Ds.  

95.  Moreover, Mr Ho SC submitted that even if the PRC Agt and the MOFCOM Approval were to be set aside, the plaintiff’s claim in the present action in respect of the SPAs (the genuineness of which the Ds did not dispute) would not go away.  It did not follow that in such circumstances the plaintiff would necessarily be confined to a claim on the SPAs based on total failure of consideration, and the plaintiff might well choose to enforce secondary obligations pursuant to the terms of the SPAs to claim for loss and damages or to put their claim in the alternative.  The choice of cause of action and relief rested with the plaintiff, so it would be up to them to decide whether to sue on either basis or in the alternative.  Once such flaw in the Ds’ argument was exposed, their entire case on the purported impact of PRC Action No 1 must fall away.  So even if the Hubei Court were to decide PRC Action No 1 in the Ds’ favour, the plaintiff would still be entitled to maintain their claims in the present action for inter alia breaches of the terms of and the warranties in the SPAs and for fraudulent misrepresentations, and contrary to the Ds’ suggestion, such decision would not have any material impact on the present action.

96.  I agree with Mr Ho SC that at this stage of the proceedings it is not possible to form a definitive view that should the Hubei Court decide PRC Action No 1 in favour of the Ds the plaintiff’s claim as pleaded in the RASoC would be so unsustainable that it is liable to be struck out.

97.  In my view, even if the Hubei Court in PRC Action No 1 declares in due course the PRC Agt to be void ab initio due to forgery and on such basis reverses the transfer of the Shares, I am not persuaded that such finding will necessarily have the effect desired by the Ds of putting an end to the present action.  After all, the transfer of the Shares is premised on the SPAs (the genuineness of which is not in dispute), and the completion under SPAs has taken place with the consideration paid over by the plaintiff and the Shares transferred over by the Ds.  So apart from the issue of the MOFCOM Approval discussed below, I cannot say that simply a reversal of the transfer of the Shares by avoiding the PRC Agt will put an end to the present action premised on the SPAs.

98.  But Mr Lam SC goes further to argue that the determination/ findings by the Hubei Court will constitute issue estoppel or res judicata so that plaintiff cannot maintain in the present action that the transfer of the Shares was valid, or at the very least it will be an abuse of process for the plaintiff to mount any collateral challenge against such determination/ finding in the present action.  Again, if we put aside the matter of the MOFCOM Approval for the time being, I am not persuaded by such arguments. First, I believe a respectable argument can be made to the effect that any reversal of the transfer of the Shares based on a finding that the PRC Agt was forged may not amount to issue estoppel or res judicata against any assertion that such transfer is valid under the SPAs (which are admittedly genuine and which sale and purchase transaction had been completed).

99.  Further, there has to be “final” decision by the Hubei Court to support the arguments of issue estoppel, res judicata and abuse of process. This point has not been raised by either counsel, but Mr Lam SC’s reliance on China North Industries Investment Ltd highlights this question for that case concerns the Hong Kong proceedings and a “final” judgment in the Bermudan proceedings.  The state of the authorities suggests that whether PRC judgments are “final” is still an open question as can be seen from the following summary in my decision in 深圳市量子景順投資管理有限公司v Huang Binghuang & anor:[63]

“126.  I have referred counsel to the following decisions of the High Court on the effect of the trial supervision or re-trial system under PRC law on the finality of PRC judgments: (a) 李祐榮訴李瑞群 [2007] 2 HKLRD 749, and (b) Wu Wei (伍威) v Liu Yi Ping (劉一萍) HCA 1452/2004, DHCJ Lisa Wong SC (unreported, 30 January 2009) and on appeal at CACV 32/2009 (unreported, 27 March 2009).

127.  In 李祐榮, the defendant failed at first instance and on appeal to the PRC People’s Courts, and the plaintiff sought summary judgment against the defendant in a Hong Kong court based on the PRC appeal judgment. The defendant argued that such judgment was not final and conclusive and therefore not enforceable in Hong Kong.  It was recognised that under PRC law, apart from a two-tier court system which allowed only one appeal to a higher level People’s Court from a lower level court, the Code allowed for “trial supervision” whereby a party to a case, the People’s Court or the Supreme People’s Procuratorate could, under circumstances specified in Article 179 of the Code, apply to the People’s Court where the original trial took place or to a higher level People’s Court for re-trial.  But in 李祐榮the defendant did not petition for re-trial, and the plaintiff obtained summary judgment against the defendant in Hong Kong.

128.  Cheung and Yuen JJA allowed the appeal on the basis that the issue of whether the “trial supervision” system per se rendered a PRC judgment inconclusive and not final involved complicated legal questions that could not be determined in the absence of trial. Cheung JA said at pp.760-761 as follows:

‘27. 本案涉及的議題明顯是一項具有公眾重要性的議題。雖然王教授[ie the plaintiff’s PRC expert]對本席提供了珍貴的意見，但這也只是訴訟一方所提供的專家的書面意見。袁大律師作為法庭之友對案件持中立態度，他是以專業知識協助法庭，雖然他不是內地法律專家，但本席認為他對王教授的意見所作出的回應並不是泛泛之言，王教授是應該出庭作證、接受盤問及全面解釋他的意見。

……

29.    在這情況下，本席認為適當的做法是案件需要進行正式的審訊。……’

Yuen JA also stated as follows at p.762:

‘36.  況且，原告人的中國法律專家證人的證據也顯示，內地法院到現時為止就審判監督制度對法院判決的影響，看來還在發展階段中，理論上及實行上的限制，還未塵埃落定。因此，本席認為香港法庭決不能在簡易程序的申請中，斷定在審判監督制度下的內地法院判決是否‘最終及不可推翻的’判決。

37.   無論如何，本席認為，香港法院是否應該(1)由於該審判監督制度存在，絕對地否定內地法院的判決是‘最終及不可推翻的判決’，或是(2)在甚麼情況下有關判決可被當作為‘最終及不可推翻的判決’，這重要及影響深遠的決定，應由法院經詳細考慮過雙方的法律專家意見(包括他們經受盤問過的證供後)才作出決定，法庭並不能在一簡易程序的申請中立下判斷。’

129.  Chung J in his dissenting judgment was of the view that the “trial supervision” system under PRC law per se did not render a PRC judgment inconclusive and not final.  He found such system similar to the circumstances under which an appeal could be brought against a judgment made by a Hong Kong court as provided in the RHC. Further, Hong Kong courts also had power to order re-trial.  He noted that these local provisions would not render a Hong Kong judgment inconclusive and not final. In any event, the PRC judgment in that case was not intended to be merely provisional.

130.  In Wu Wei, DHCJ Lisa Wong SC said at para.99 that:

‘99. …… In the context of a PRC judgment, what may potentially render the judgment not final and inconclusive is the “trial supervision” system under Chapter 16 of the [Code] under which in addition to a party to the case, the People’s Court or the Supreme People’s Procuratorate can, under specified circumstances, apply to the People’s Court before whom the original trial took place or to a higher level People’s Court for a re-trial. Essentially, those circumstances were where the judgment were erroneous or based on insufficient evidence, where the judgment was obtained in violation of the prescribed procedure and the judicial officers conducting the original trial were guilty of embezzlement, corruption or other malpractice (Lee Yau Wing v Lee Shui Kwan, supra). Hence, it appears to me that the dismissal of the Plaintiff’s application for a re-trial by [the PRC 3^rd Court] is not a complete answer.

100.   …… In any event, in Lee Yau Wing v Lee Shui Kwan, supra, the Court of Appeal held by a majority (Cheung and Yuen JJA) that whether the existence of the “trial supervision” system per se rendered a PRC judgment inconclusive and not final involved complicated legal questions that could not be determined in the absence of trial.

101.  In the circumstances, the PRC Judgment merely adds to the serious issues to be tried in this action.’

On appeal, Tang VP at para.7 referred to李祐榮and agreed that the question as to whether the PRC judgment in the case before him should be recognised as “final and conclusive” “必須在正審之後才可以作出裁定”.”

In the circumstances, there is doubt whether a reversal of the transfer of the Shares in PRC Action No 1 will necessarily put an end to the present action.

100.  It is perhaps appropriate now to bring the MOFCOM Approval into consideration.  Mr Lam SC argues that invalidation of the MOFCOM Approval by the Hubei Court in PRC Action No 1 will bring about the desired effect he suggests. But this is quite a different situation from one in which the parties fail to obtain approval by MOFCOM or such approval has been revoked before the long-stop Completion Date in which case the SPAs will simply cease to have effect and completion will not take place at all.  Here, any revocation of the MOFCOM Approval will be made years after completion of the SPAs has taken place so that in the ensuing years the parties have altered their respective position by (a) the plaintiff paying over the consideration and the Ds transferring over the Shares, and (b) the plaintiff carrying on business as owner of the Shares and majority owner of the Company. Indeed, it is arguable whether such cancellation of the MOFCOM Approval years after completion will fall within the provision “如果在遠期終止日…… 之前 [ie before the Completion Date]，第4.1條所列的任何先決條件未能被滿足 ……，或者第4.1(b)至(g) [或(e)]條中所列的先決條件在其他所有先決條件已被滿足或被放棄時未能實現，……” (my emphasis) under clause 4.4 of the SPAs to bring about the effect as suggested by the Ds. In any event, the consequence prescribed in clause 4.4 is that the SPAs “不再有任何效力” (my emphasis).  In my view, it is at least arguable that such revocation of the MOFCOM Approval only affects the future and not past legal effect of the SPAs. That being the case, Mr Ho SC’s submissions that it will be up to the plaintiff to decide how to pursue their claim (whether for total failure of consideration or for damages or in the alternative) is at least arguable.

101.  I agree with Mr Ho SC that at best it is for the Ds to plead any favourable outcome/finding in PRC Action No 1 in their Defence to the plaintiff’s claim in the present action and see what the Hong Kong court will say, but it is arguable that the factual allegations in the SPAs will still remain as the backbone of the plaintiff’s claim even though they may need to further plead and deal with any adverse outcome in PRC Action No 1.  However, at this stage this court is not required to (and it is not possible to) come to any final view that the RASoC as pleaded is so unsustainable in light of any determination in PRC Action No 1 in favour of the Ds that it should be struck out, especially when the Ds have yet to articulate their substantive defence to the claims in the RASoC and when clause 17.1 of the SPAs provides that the SPAs are to be construed according to Hong Kong and not PRC law.[64]  Also, this court is not in a position as yet to form any definitive view on the merits of the PRC Actions, and the Ds’ suggestions as to the weaknesses of the plaintiff’s defence in the PRC Actions merely indicate there are different views on the merits.[65]   

102.  Interestingly, at the 2^nd Hearing when I queried what should I make of the Hubei Court’s intention to decide PRC Action No 1 according to PRC law and practice[66] even though it required the parties to produce the Statement of Claim in the present action and expert legal opinion on Hong Kong law for their reference, Mr Lam SC submitted that this was irrelevant because (a) PRC Action No 1 (and hence the Hubei Court) focused on the PRC Agt and not the SPAs and (b) no party had yet commenced proceedings or pursued claims in the PRC Actions concerning the SPAs.  This acknowledgment of the difference of subject matter between the PRC Actions and the present action does not sit well with his other submissions on identity of parties and subject matters for these proceedings, and Mr Ho SC complained that the Ds should not be allowed to blow hot and cold.

103.  In light of the above analysis, there is no need for me to consider Mr Ho SC’s further argument that even if clause 4.1(g) of the 1^st SPA and clause 4.1(e) of the 2^nd SPA have the effect as suggested by the Ds (which the plaintiff denies), such clauses (like the other condition precedents in clause 4 of the SPAs) are clearly inserted for the benefit of the plaintiff as purchaser of the Shares such that the plaintiff can waive such conditions and sue on the SPAs as if the conditions have occurred.[67]  But such argument runs on thinner ice. Mr Lam SC submitted that it was not obvious why clause 4.1(g) of the 1^st SPA and clause 4.1(e) of the 2^nd SPA were inserted for the plaintiff’s sole benefit,[68] and he reminded that clause 4.2 of the SPAs expressly provided that the above condition precedent could not be waived. Further, the terms of the SPAs required any waiver to be in written form, and there was no evidence of any waiver (since it was the plaintiff’s case all along that the MOFCOM Approval had been validly obtained).  The Ds also suggested that since they had exercised their right under clause 4.4 of the SPAs upon failure of the above condition precedent by filing the Statement of Claim in PRC Action No 1, it was too late for the plaintiff to rely on any waiver.[69]  But as explained above, there is no need for me to consider these contentions.

104.  I need only say a few words about PRC Action No 2 given the main focus of Mr Lam SC’s arguments on PRC Action No 1.  Mr Ho SC submitted that PRC Action No 2 had nothing to do with the PRC Agt and it was commenced precisely as a result of Ds’ acts (along with the acts of other individuals formerly in the control of the Company) which caused loss and damages to the Company.  Given Mr Lam SC’s arguments in respect of PRC Action No 2 that it involves the same issues as those (and that depends on the decision) in PRC Action No 1, and it therefore relates to the present action in the same manner as PRC Action No 1, and given my conclusions on the impact of PRC Action No 1 on the present action, I am not persuaded that PRC Action No 2 takes the Ds’ case much further.

105.  Bearing in mind the above analysis, I turn to the Ds’ challenge against the Service Order. But first I set out below the affidavit evidence filed by the plaintiff for seeking the Leave to Serve Out Order and the Ho 1^st Order.

XII.  LEAVE TO SERVE OUT ORDER AND HO 1^ST ORDER

106.  For the Leave to Serve Out Order, Mr Chan’s affidavit referred to the plaintiff, Wang, Zhou, D2, the Company and the SPAs, and summarised the plaintiff’s claim under the SoC.  For the purpose of Order 11 rule 1 of the RHC, he also noted that the SPAs were executed in Hong Kong, and that Hong Kong was the appropriate forum in that the SPAs were governed by Hong Kong law and all of the plaintiff’s witnesses were domiciled in Hong Kong. He referred to a number of addresses of the Ds in Mainland China, some of which could be found in the Statement of Claim (民事起訴狀) in PRC Action No 2 which was exhibited to such affidavit.

107.  Mr Chan’s 2^nd affidavit referred to inter alia the Statement of Claim (民事起訴狀) in PRC Action No 1 which was exhibited and which gave an address of Wang in Mainland China being one of her two addresses found in the Statement of Claim (民事起訴狀) in the PRC Action No 2.

108.  Mr Chan’s 3^rd affidavit exhibited inter alia the SPAs, the JV Agreement, the Assignment Agreement, the audited reports of the Company, a summons (傳票) by the Hubei Court in the PRC Action No 1 and the PRC Agt.

109.  For the Ho 1^st Order, Mr CH Chan’s affidavit noted that Wang had previously instructed Li & Partners (“LP”) in Hong Kong regarding the Shares of the Company. He stated inter alia that in/about December 2010 the Ds (represented by JTN) commenced PRC Action No 1 against the plaintiff, which proceedings were then still ongoing.  Mr CH Chan suggested that substituted service of the CAWoS could be effected by inter alia sending a copy of the CAWoS to LP and JTN.

XIII. SERVICE ORDER: MATERIAL NON-DISCLOSURE

(a) Legal principles

110.  In China North Industries Investment Ltd,[70] Stock JA held that the question of material non-disclosure was one to be determined in isolation, assuming for that purpose that the issues of abuse and forum had not been decided. The learned judge also observed that:

“109. The duty upon an ex parte application of the present kind is to make full and frank disclosure of all material facts, which is to say facts material for the judge to know: …… in determining whether to exercise his power to grant leave to serve out of jurisdiction …… the fact that the proposed Hong Kong proceedings ran the same issues as had been run elsewhere and, later in the piece, that the proceedings constituted a collateral attack on that selfsame issue was highly material for the judge to know. Moreover, the duty of full and frank disclosure is a continuing one: ……”

111.  In Secretary for Justice v Choy Bing Wing,[71] the Court of Appeal in dealing an appeal from an ex parte order said:

“46. We accept that in any ex parte application, an applicant must proceed with the utmost good faith as the court is asked to grant relief without the person against whom the relief is sought having the opportunity to be heard.

47. An ex parte application must therefore make full and frank disclosure of all material facts or else the ex parte order is likely to be set-aside on an application under Order 32 Rule 6 ……

48. Facts are material and should be disclosed if they “are relevant to the weighing operation which the court has to make in deciding whether or not to grant the order” ……” (my emphasis)

112.  In dealing with an application for discharge of an ex parte injunction, Kwan J (as she then was) in Securities and Futures Commission v “A” summarised the relevant principles on material non-disclosure as follows:[72]

“40. For information to be material for this purpose, it must be something which would have affected the judge’s decision on the application. It is a matter relevant to the weighing operation which the court has to make …… Unless the courts use the sanction only when the non-disclosure is of matters which are relevant to the ex parte judge’s weighing operation, an impossible burden would be placed on applicants and their advisers and the court may get itself in a position of what might be called ‘counter-abuse’ ……

41. The answer to the question whether the non-disclosure was innocent, in the sense that the fact was not known to the applicant or its relevance was not perceived, is an important consideration whether the ex parte order should be discharged, although it is not decisive …… In the majority of cases, the matter has to be approached on the basis of considering the quality of the material which was not disclosed without making any final decision whether or not there has been bad faith in the failure to disclose ……” (my emphasis)

113.  Mr Lam SC relied on DHCJ Coleman SC’s observation in Pacific Aerosupplies Ltd v Dakota Air Parts International Inc[73] to suggest that even if “…… the disclosure, if made, might not have changed the order which was in fact made does not mean that the disclosure need not have been made”.  Mr Lam SC submitted it did not mean that the information needed to be disclosed must have changed the outcome because in every case the court would take into account a basket of considerations in coming to its view as to whether to grant leave to serve out of jurisdiction.

114.  Pacific Aerosupplies Limited concerned an application to set aside the order permitting service out of jurisdiction on the ground of inter alia the plaintiff’s failure to make full and frank disclosure of matters material to the court’s determination.  DHCJ Coleman SC referred to the “well settled” principles as follows:

“13. Just as with any other ex parte application, an application for service out carries with it the duty to make full and frank disclosure of all material facts relevant to the consideration of the court. Facts which arematerial to the consideration of an application for service out include all material facts relevant to the consideration as to whether to assume jurisdiction over the defendant and the dispute in question.

14. Materiality is to be decided by the court, and not by one party, and the duty of full and frank disclosure is a continuing duty extending to material changes (or discovery of material information) both up to and after the granting of ex parte order.

15. In most cases, the existence, or prospect, of concurrent and overlapping proceedings in a foreign jurisdiction between the same parties is likely to be a matter of materiality which must ordinarily be disclosed on an application for leave to serve out of the jurisdiction.”

115.  In that case, a Hong Kong company commenced proceedings in Hong Kong against a US company on 13 August 2010, and instructed US lawyers at about the same time.  The ex parte affidavit application was made in September 2010, and the master granted leave to serve out of jurisdiction on 4 October 2010.  On that very day, the plaintiff gave instructions to commence US proceedings against the defendant, which proceedings were commenced on the following day in breach of the Hong Kong exclusive jurisdiction clause.  There was no reference to any or any intended US proceedings in the affidavits in support of the order for leave to serve out of jurisdiction. DHCJ Coleman SC held that the plaintiff’s active preparation for the US proceedings with the assistance of their Hong Kong lawyers was material to the consideration of whether or not to grant leave to serve out of jurisdiction (particularly where that application was based largely upon the existence of the exclusive jurisdiction clause) and should have been disclosed.

116.  In that case, the defendant also took issue over non-disclosure of the fact that the plaintiff’s directors were resident in Australia and Vietnam. The plaintiff suggested inter alia this was not a matter that might have led the court not to grant the order sought, and DHCJ Coleman SC said as follows:

“72. This seems to me to be a clear recognition of the materiality of the place of residence of the controlling mind of the plaintiff. Mr Arthur now wishes to assert that it is material in favour of the plaintiff, but the point is that it was material. That the disclosure, if made, might not have changed the order which was in fact made does not mean that the disclosure need not have been made.

……

76. I consider that there was material non-disclosure, by the incorrect and misleading way in which the plaintiff was described as being resident in Hong Kong, as part of the context why there would be disadvantage to it if it were obliged to bring proceedings in North Dakota.” (my emphasis)

117.  Master Levy drew assistance from the above observation by DHCJ Coleman SC and opined that the question for determining materiality was not whether the court would have granted the leave to serve out, but whether the plaintiff had fully disclosed facts relevant to the consideration of court.[74]  Mr Lam SC supported this view, but Mr Ho SC submitted it was wrong in principle to equate relevance with materiality.

118.  In my view, DHCJ Coleman SC’s above observation does not support the proposition that if the information is relevant then its non-disclosure is material non-disclosure.  When read in its proper context, such observation deals with a different point, ie the plaintiff should have realised the residence of their directors ought to have been disclosed in the affidavits, but DHCJ Coleman SC was not discussing what amounts to materiality for the purpose of deciding what constitutes sufficient non-disclosure to justify setting aside the ex parte order. Under the principles summarised by the Court of Appeal in Choy Bing Wing and by Kwan J (as she then was) in SFC v A, which I respectfully agree, non-disclosure is culpable only when the information goes to the ex parte judge’s “weighing operation”, ie “it must be something which would have affected the judge’s decision on the application”.[75]  Indeed, DHCJ Coleman SC makes the same point in another way by saying that the requisite material facts are those “relevant to the consideration as to whether to assume jurisdiction over the defendant and the dispute in question”.[76]  In that case, the learned judge ultimately found that the material non-disclosure was not the mere failure to disclose the residence of the plaintiff’s directors but the incorrect/misleading way in which the plaintiff described itself as being resident in Hong Kong to explain why there would be disadvantage in bringing proceedings in the United States.

119.  As Mr Ho SC submitted, in most cases there will be a number of relevant matters (some of which may be more remote even though they are still regarded as relevant), but the law does not impose such a low threshold for determining material non-disclosure that requires disclosure of relevant but not truly material matters otherwise it will be open to “counter-abuse” as explained by Kwan J (as she then was).  I agree that if the disclosure will not have affected the order to be made, then non-disclosure will not have qualified as material non-disclosure.  But if my understanding is wrong and DHCJ Coleman SC by his observation was setting such low threshold as the Ds contend, then, with respect, I disagree with such view which misses the concern over “counter-abuse” as explained by Kwan J (as she then was).

(b) Discussion

120.  Mr Lam SC submitted that for the reasons given by Master Levy in the Decision it was wrong in principle for the plaintiff to suggest that the PRC Actions were immaterial and need not be disclosed:

“43. What I find materially lacking in [Mr Chan’s affidavits] is lack of disclosure regarding the material aspects of the PRC Actions such as the fact relating to the identity of the parties, to the fact that the claims involve matters consequent on the sale and purchase of the transfer of the Shares. Relevantly, I also believe that the plaintiff ought to have also informed the court of the progress of the [PRC Actions] especially the fact that the trial of the PRC Action No 1 was concluded ad the parties were waiting for the [Hubei Court] to deliver judgment.

44. …… The mere production of the documents for evidently showing the court where the defendants could likely be found, however, is not sufficient to discharge the plaintiff’s duty of material disclosure.

……

46. …… In this context, the court should have been informed of the identity of the parties, the nature of the claims, the reliefs sought and most important of all, the progress of the PRC Actions and how and to what extent they would likely impact on this action.

47. In the circumstances, having regard to the nature of the claim, I cannot be satisfied that the material facts in relation to the PRC Actions have been disclosed in their proper context, though the disclosure is not deliberate or serious.”

121.  Mr Tao’s 1^st affirmation referred to a series of matters in respect of PRC Actions No 1[77] and No 2[78] which he claimed the plaintiff ought to have disclosed, including the fact that (a) the validity of the PRC Agt was heavily disputed in the PRC Actions, (b) PRC witnesses would have to be called in the present action to give evidence on the MOFCOM Approval, and (c) PRC audit experts would be required to give valuation evidence on the Company’s assets.  Mr Lam SC submitted that although the PRC Actions and the present action were not mirror image proceedings the former would have a material impact on the latter, and DHCJ Coleman SC had observed that the existence or prospect of concurrent/overlapping proceedings in a foreign jurisdiction between the same parties was likely to be matter of materiality which must ordinarily be disclosed.[79]  Mr Lam SC complained that here the culpability lied in not drawing attention to the nature/progress of and the reliefs sought in the PRC Actions.

122.  Mr Lam SC argued that a “passing reference” of material matters in the affidavit would not do,[80] but the only places here where the PRC Actions were mentioned were paragraph 20(ii) of Mr Chan’s affidavit where the Statement of Claim (民事起訴狀) in PRC Action No 2 was exhibited, paragraph 13 of Mr Chan’s 2^nd affidavit where the Statement of Claim (民事起訴狀) in PRC Action No 1 was exhibited, which disclosure was only for the purpose of showing Wang’s address.  Although paragraph 42 of the SoC[81] made reference to a summons issued by the Ds in PRC Action No 1 and to the PRC Agt, it did not reveal any material particulars of the PRC Actions.

123.  It is plain, as Mr Ho SC submitted, that the Ds’ allegation as to the materiality of the PRC Actions was premised on their contention that the present action overlapped with and/or would be materially affected by either or both of the PRC Actions.  However, for the reasons discussed in Part XI above, I am not persuaded that the outcome of the PRC Actions will materially impact on the present action in the sense that even if the matters the Ds have referred to were placed before the court at the time of the plaintiff’s ex parte applications they would not have affected the court’s decision.  Further, for reasons explained below, Hong Kong is the appropriate forum for the present action, so it will not be unjust or prejudicial to the Ds for the court to grant leave for the plaintiff to serve out of jurisdiction and thereby to assume jurisdiction over the present action.  Accordingly, the matters referred to by the Ds do not pass the threshold of materiality for the purpose of determining whether there is material non-disclosure. Further, the need (or otherwise) to call PRC witnesses in the present action are not matters material to the court’s consideration when the plaintiff applied for the Leave to Serve Out Order or for Ho’s 1^st Order.

124.  In any event, the plaintiff has set out in paragraph 42 of the SoC endorsed on the Writ of Summons in the present action the gist of the Ds’ case in PRC Action No 1 with particular reference to the submission of the PRC Agt with the MOFCOM in lieu of the SPAs.  The plaintiff has also referred to and exhibited the Statement of Claim (民事起訴狀) by the Ds in the PRC Action No 1 and by the plaintiff in the PRC Action No 2. Even if there has been any material non-disclosure (which I do not accept), I agree with Master Levy that any such non-disclosure is not deliberate or serious.

125.  If I am wrong and there has been material non-disclosure, the court still has a broad discretion as to how to react to such finding, and if necessary the court may consider whether this is a proper case for service out in any event. In SFC v A, Kwan J (as she then was) said as follows:

“42. Even if it is established there was material non-disclosure which justifies discharge of the ex parte order, the court has a discretion to continue the order or make a new order on terms. The court must assess the degree and extent of the culpability, the importance and significance to the outcome of the application of the matters which were not disclosed, and whether the punishment of discharging the ex parte order would be out of proportion to the failure of the applicant to make full and frank disclosure ……”

DHCJ Coleman SC said as follows in Pacific Aerosupplies Limited:

“16. …… [Material non-disclosure] might, but need not, result in the setting aside of the order made; essentially it is a matter of degree. If there is deliberate concealment, that might be punished by discharge of the order given if the undisclosed information was not central to the decision. But even inadvertent non-disclosure of information which may be central to the decision might lead to the discharge of the order, notwithstanding the lack of personal misconduct by the party or the solicitor concerned.

17. Even if an ex parte order is set aside on the basis of a finding of material non-disclosure, it remains open to the court to make a similar order at the inter partes hearing, if the making of such an order seems just and appropriate in the circumstances.

…..

80. I think the overall degree of materiality of the non-disclosure is serious and it would entitle me in the exercise of my discretion to set aside the order granting leave to serve out of the jurisdiction.

81. Nevertheless, it seems to me that before making that decision, I can consider the practical benefits of setting aside the ex parte order in the light of the other challenge made by reference to forum conveniens generally. If I do not think this is a suitable case for service out, that is probably the end of the matter. If I do not think this is a suitable case for service out, the matters of non-disclosure might probably best sound in costs.”

126.  I agree with Master Levy that even if there has been material non-disclosure (which I do not accept), the court should exercise its discretion to continue or re-grant the Leave to Serve Out Order and (if necessary) the Ho 1^st and 2^nd Orders and not to set aside the Overseas Service.[82]  I have found there has been no deliberate attempt to conceal the PRC Actions from the court.  Also, since the alleged non-disclosure, the plaintiff has filed/served detailed affidavits that disclose full details of the PRC Actions. As seen below, I consider (a) the Hong Kong court to be the appropriate forum in the present action, (b) the plaintiff is entitled to bring proceedings on the SPAs in Hong Kong pursuant to the non-exclusive jurisdiction clause, and (c) the local courts will assume jurisdiction. In any event, both of the Ds have acknowledged service and are legally represented, and will not be prejudiced by any alleged non-disclosure. In my view, it will be disproportionate and unjust for the court to set aside the Leave to Serve Out Order and the Overseas Service.

XIV. FORUM

127.  In an application to serve process out of jurisdiction under Order 11 of the RHC, it must be shown that one of the sub-heads of Order 11 rule 1(1) of the RHC is engaged, and that the case is a proper one for exercise of discretion by the court.[83]  Question as to the appropriate forum to hear the dispute is relevant in the exercise of the court’s discretion in this regard.

128.  In Noble Power Investments Ltd v Nissei Stomach Tokyo Co Ltd, Ma CJHC (as he then was) said as follows:[84]

“22. In this context, the following points should be emphasized:

……

(2) Where, however, a plaintiff institutes proceedings in Hong Kong not as of right (and the present case is one since leave to serve out of jurisdiction was required), the approach of the court to questions of forum is quite different. …… the burden will not be on the defendant to demonstrate that there is an alternative forum which ought to entertain the action. Rather, the legal burden is all along on the plaintiff to show, in seeking to persuade the court to grant an order to serve out, that Hong Kong is clearly the appropriate forum for the trial of the action ……”

129.  Central to this issue is the non-exclusive jurisdiction clauses under the SPAs.[85]  Mr Lam SC acknowledged that prima facie this would be a strong factor supporting the Hong Kong courts as the appropriate forum.  As CJHC Ma (as he then was)  held in Noble Power Investments Ltd,[86] the basic premise (albeit not absolute) was that the courts would hold parties to their contractual bargain, and in the case of a non-exclusive jurisdiction clause it would be important to recognise that the parties had agreed to submit to a named jurisdiction.    

130.  Ma CJHC (as he then was) said as follows:[87]

“31. In considering the effect of a non-exclusive jurisdiction clause, it is critical to recognize that there are differences in approach depending upon where proceedings have been instituted. Where proceedings are instituted in the named forum (to which the parties have agreed to submit), the party who seeks a stay or otherwise to contest the jurisdiction or appropriateness of that forum, has a very heavy burden to discharge, since that party has by definition agreed contractually to submit to the jurisdiction. In other words, he is seeking to avoid a forum to which he has, by contract, agreed to submit. The extent of this burden is discussed below.

……

33. Some simple illustrations to summarize the following propositions might assist:

(1) A sues B in Hong Kong. Hong Kong is named as a non-exclusive jurisdiction to which the parties have agreed to submit in the event of their being sued. The burden on B, if he contests the appropriateness of the Hong Kong courts, is a heavy one.

……

36. The extent of the burden can be put in several ways but the following provides a ready guide : strong or overwhelming reasons or exceptional circumstances must be shown, such as the existence of factors not contemplated by the parties at the time the relevant agreement was made. It perhaps matters not exactly which term is preferred, but the main point to bear in mind is that strong reasons must be demonstrated to the court before it allows the parties to be freed from their contractual bargain. ……

……

40. …… Generally, the existence ornon-existence of connecting factors will be quite irrelevant, certainly much less powerful, unless it can somehow be shown that these may constitute strong reasons as to why the non-exclusive jurisdiction clause should not be enforced. As the authorities make clear, one is really talking about factors that were not in the reasonable contemplation of the parties at the time the agreement was made.” (my emphasis)

131.  Stone J also held that in the case of a non-exclusive jurisdiction clause, the evidential burden fell instead upon the defendant to demonstrate strong reasons why Hong Kong was not appropriate as the trial forum.[88] He referred to Bas Capital Funding Corp &ors v Medfinco Ltd & ors  in which Mr Justice Lawrence Collins observed:[89]

“It would not be useful to speculate on what exceptional circumstances would justify the court in not accepting jurisdiction where the parties had conferred non-exclusive jurisdiction on the English Court, but I accept that one feature which may be highly relevant is whether there are already proceedings in a foreign country which involve overlapping issues, especially if they have been commenced by the party which subsequently seeks to sue in England.” (my emphasis)

The learned judge also cited inter alia the following passage in Antec International Ltd v BiosafetyUSA Inc:[90]

“(iii) Such overwhelming or very strong reasons do not include factors of convenience that were foreseeable at the time that the contract was entered into (save in exceptional circumstances involving the interests of justice); and it is not appropriate to embark upon a standard Spiliada balancing exercise. The defendant has to point to some factor which it could not have foreseen at the time the contract was concluded. Even if there is an unforeseeable factor or a party can point to some other reason which, in the interests of justice, points to another forum, this does not automatically lead to the conclusion that the court should exercise its jurisdiction to release a party from its contractual bargain; …… In particular, the fact that the defendant has, or is about, to institute proceedings in another jurisdiction, not contemplated by the non-exclusive jurisdiction clause, is not a strong or compelling reason to relieve a party from his bargain, notwithstanding the undesirability of parallel proceedings.Otherwise a party to a non-exclusive jurisdiction clause could avoid its agreement at will by commencing proceedings in another jurisdiction ……” (my emphasis)

132.  I bear in mind the plaintiff here did not commence the present action against the Ds as of right since leave to serve out of jurisdiction is required, so the legal burden is on the plaintiff (and not the Ds) to demonstrate that Hong Kong is clearly the appropriate trial forum, and it is insufficient to show that there is no appropriate forum elsewhere.[91]  But in discharging this burden, the plaintiff can do so simply by referring to the existence of the non-exclusive jurisdiction clauses in the SPAs in which the parties have agreed to submit to the jurisdiction of the Hong Kong courts.  It will then be for the Ds to demonstrate the existence of strong or powerful reasons why this contractual bargain should not be upheld.  So practically speaking, the approach will be akin to the situation where a plaintiff has instituted an action as of right.[92]

133.  Mr Lam SC referred to Pacific Aerosupplies Limited as an example where the Court was satisfied that there was a “strong cause” not to give effect to an exclusive jurisdiction clause.  In that case, the plaintiff commenced US proceedings (including a motion for preliminary injunction) in breach of a Hong Kong exclusive jurisdiction clause such that the rationale for holding the parties to their contractual bargain was significantly weakened, and whilst there were in substance no factors connecting the dispute to Hong Kong there were factors which suggested that the matter would probably be best decided in a US court.

134.  Mr Lam SC submitted that the present action was one of those exceptional occasions where there were strong/overwhelming reasons or exceptional circumstances not to give substantial effect/weight to the Hong Kong non-exclusive jurisdiction clauses under the SPAs because (a) it would be against the interests of justice to allow the plaintiff to rely on such provision heavily or at all, and (b) there were factors unforeseen at the time of the conclusion of the SPAs.

135.  In respect of (a), Master Levy held it could not be said the plaintiff had been acting inconsistently by commencing the present action in Hong Kong by relying on the SPAs as the cause of action “while bringing an action on the [PRC Agt] in the PRC proceedings”.[93]  Mr Lam SC complained that such approach was too simplistic and failed to appreciate the consequence of the contradictions between the SPAs and the PRC Agt.  He argued that the plaintiff should not be allowed to blow hot and cold by relying on the PRC Agt (with a PRC jurisdiction clause) and ignoring the SPAs before the Hubei Court, but relying on the SPAs (with Hong Kong non-exclusive jurisdiction clauses) and ignoring the PRC Agt before the Hong Kong court.  Mr Lam SC submitted that since the plaintiff denied any forgery of the PRC Agt,[94] they were in fact choosing to rely on either the PRC Agt or the SPAs (which were mutually incompatible) at their own whim, and such “cherry-picking” would be an affront to any sense of justice.  Mr Lam SC submitted also that since the plaintiff did not show wholehearted respect for the SPAs by choosing to rely on the PRC Agt or the SPAs whenever it suited their purpose, they should not be permitted to rely on the jurisdiction clause in the SPAs.

136.  I do not think that the plaintiff has  been “blowing hot and cold” in the present action and PRC Action No 1. Unlike the plaintiff in Pacific Aerosupplies Limited, the plaintiff did not commence (and in fact it was the Ds who commenced) PRC Action No 1, so the plaintiff did not invoked the PRC jurisdiction clause in the PRC Agt and they did not sue the Ds on the basis of the same.  As explained in Part XI above, the present action has a life of its own quite apart from the PRC Actions, and the cause of action in PRC Action No 1 is not based on the SPAs (which is the basis for the present action) but on the alleged forgery of the PRC Agt.  In this sense, the plaintiff has not “ignored” the SPAs in PRC Action No 1, and the reality is that the validity/effect of the SPAs is not canvassed in the PRC Actions. I am not persuaded that the Ds have raised exceptional circumstances by reason of the above arguments.

137.  In respect of (b), Master Levy was unable to discern evidence that the PRC Agt and the PRC Actions were unforeseen circumstances for the Ds had not provided any evidence to explain why PRC Action No 1, impugning the PRC Agt and the MOFCOM Approval, was only commenced more than three years after the Shares were transferred.[95]  Mr Lam SC submitted it was unforeseen at the time when the SPAs were concluded that the MOFCOM Approval for the transfer of the Shares would be obtained by relying on the PRC Agt which eventually resulted in the PRC Actions.  He argued that if Master Levy’s analysis were correct and the plaintiff succeeded in PRC Action No 1, it would mean that the Hubei Court would uphold the validity of the MOFCOM Approval and the transfer of the Shares on the basis of an agreement that did not reflect the true terms of the parties’ agreement.

138.  Looking first at PRC Action No 2, I agree with Mr Ho SC that such proceedings have nothing to do with the PRC Agt so it is not unforeseeable to the Ds.  Indeed, the plaintiff has commenced such action on the basis that the Ds’ acts (along with the acts of other individuals/entities formerly in the control of the Company) caused loss and damages to the Company.  

139.  As regards PRC Action No 1 which concerns the PRC Agt and its submission to MOFCOM for approval, I find there is some basis for the learned master’s view.  In their Defence in PRC action No 1, the plaintiff denies the allegation of forgery and notes that D2 has never challenged the authenticity of their company chop on the PRC Agt.[96] It is also alleged that the PRC Agt could only have been submitted to MOFCOM for approval by the Ds (rather than the plaintiff), and the Ds would be the ones who would gain a tax benefit by putting forward an agreement that stipulated a lower consideration.[97]  Mr Ho SC fairly concedes that this court cannot be a “final arbiter” of the above dispute, but I agree with him that in light of the conflicting evidence between the parties and bearing in mind the burden is on the Ds to demonstrate the existence of exceptional circumstances, there is insufficient evidence before me to demonstrate that the PRC Agt and PRC Action No 1 are plainly unforeseeable matters to the Ds.

140.  That being the case, the Ds have failed to demonstrate the existence of exceptional circumstances for this court to consider releasing them from their contractual bargain as to the Hong Kong non-exclusive jurisdiction clauses in the SPAs. In such circumstances, Master Levy cannot be criticised for not proceeding to consider the usual factors relating to forum conveniens in any detail.

141.  For completeness, I turn to those matters.  Mr  Ho SC submitted that in addition to the non-exclusive jurisdiction clauses the following factors would demonstrate that Hong Kong was clearly the appropriate forum for the present action:

(a) the SPAs were executed in Hong Kong and governed by Hong Kong law;

(b) the Instruments (which had no bearing whatsoever with Mainland China and/or the PRC Actions) were executed in Hong Kong and governed by Hong Kong law;

(c) the plaintiff was a Hong Kong listed company;

(d) the plaintiff would call as witnesses in the present action Hong Kong based investigators and experts who had investigated into and produced findings about the financial information and documents of the Company;

(e) ZL opined it was highly likely for the PRC court not to exercise jurisdiction over the present action.

142.  On the other hand, Mr Lam SC submitted that the following considerations would demonstrate that Hong Kong would not be the appropriate forum:

(a) the fact that the plaintiff’s shares were listed on the Hong Kong Stock Exchange was of little relevance;

(b) both of the Ds were not residing or had a domicile in Hong Kong, and Wang was then living in Australia;

(c) the fact that the SPAs and other documents were signed in Hong Kong was again of little relevance;

(d) there was no suggestion that the alleged wrongdoings took place in Hong Kong, and the essential concern was about the operation of the Market in Mainland China;

(e) PRC factual and expert witnesses would have to give evidence (eg evidence on the procedure for obtaining approval by MOFCOM, audit evidence on the value of the Company’s assets, etc), and there was no suggestion that Hong Kong based investigators or experts engaged by the plaintiff could not give evidence in Mainland China or that it would be materially more inconvenient for them to do so;

(f) Hong Kong governing law was not a weighty factor in the absence of any difficult legal issue and/or any evidence that a PRC court would/could not resolve such issues;

(g) there were already two existing PRC Actions in Hubei involving the same subject matter and issue as to the validity of the transfer of the Shares so that it made more sense to try all these matters in the same forum;

(h) there was no basis to assert that, if leave to serve out of jurisdiction were set aside, the plaintiff would be unable to obtain reliefs against the Ds as claimed in the present action (after all, ZL merely opined it was likely that the Hubei Court would not assume jurisdiction over the dispute involved in the present action, and it was insufficient to show that there was no appropriate forum elsewhere).

143.  Having carefully considered the basket of factors in paragraphs 141-142 above, I am not persuaded that they are sufficient to show that Hong Kong is an inappropriate forum.  Given the Ds’ failure to demonstrate exceptional circumstances against reliance on the non-exclusive jurisdiction clauses in the SPA, I find the Ds’ contest over the forum of the present action must fail.  It has been suggested that having parallel proceedings in Hubei and in Hong Kong vis-à-vis the same parties on the same subject matter and involving similar allegations would be oppressive to the Ds.  But for reasons explained in Part XI above, I do not find there is such overlap of issues between the present action and the PRC Actions that clearly demonstrates that Hong Kong is an inappropriate forum.

XV.  INTERIM STAY

144.  The common fundamental premise of the Appeal against the Stay Order is that Hong Kong is the appropriate forum for the present action.  I note that although the Ds by the Summons asked for an interim stay of the present action pending the final outcome of the PRC Actions in the Hubei Court or until further order, for the purpose of the Appeal Mr Lam SC only sought to uphold the Stay Order.

145.  In Hyundai Engineering & Construction Co Ltd v UBAF (Hong Kong) Ltd, DHCJ Lok held that:[98]

“37. There is no serious dispute about the following legal principles which apply where a litigant seeks a stay of proceedings pending concurrent foreign proceedings:

(i) the Court must consider what would serve the ends of justice between the parties to the litigation and the administration of justice generally;

(ii) a stay should not cause an injustice to the plaintiff;

(iii) the applicant must satisfy the Court that continuing the proceedings would be unjust to him; and

(iv) where the plaintiff commences proceedings as of right, he should not be deprived of the right to continue those proceedings in the absence of very good reasons. ……”

146.  Kwan J (as she then was) held in Ho Siu Pui & ors v Yue Sheng Ltd [99] that (a) where genuine proceedings had been commenced in a foreign court and had not merely been started but had developed to the stage where they had some impact upon the dispute between the parties, especially if such impact was likely to have a continuing effect, then this might be a relevant factor to be taken into account,[100] and (b) it was sufficient to show that continuing the proceedings would be unjust to the applicant and there was no need for the applicant to show that continuing the proceedings would be oppressive or vexatious to him or an abuse of process.[101]

147.  Two matters are of note. First, the plaintiff did not commence the present action as of right, hence only the first three factors discussed by DHCJ Lok in Hyundai Engineering & Construction Co Ltd will be relevant.  But under the SPAs the Ds have contracted to submit to the non-exclusive jurisdiction of the Hong Kong courts, so it is for the plaintiff to justify why any stay of the present action is warranted at all.  Secondly, as explained in Part XI above, given the differences between the PRC Actions and the present action, this is not a case of lis alibi pendens.

148.  Mr Lam SC submitted that PRC Action No 1 had reached an advanced stage and its outcome would have a significant impact on the present action, and in particular the findings by the Hubei Court on the transfer of the Shares and the MOFCOM Approval (and hence on the question whether the plaintiff was the lawful owner of the Shares) would give rise to issue estoppel or res judicata or it would be an abuse of process to revisit those matters.  It was further suggested that if the result of PRC Action No 1 favoured the Ds the present action (or at least the bulk of it) would be liable to be struck out, and the findings of the Hubei Court would undoubtedly impact on how the Ds’ defence to the remaining part was going to be run.

149.  Mr Lam SC confessed that defences which failed in PRC Action No 1 might no longer be open to the Ds although he claimed that findings in the Ds’ favour might give rise to issue estoppel or res judicata.  In any event, a multiplicity of parallel proceedings would involve additional/unnecessary costs for the parties in both jurisdictions, and there would be a real risk of having conflicting findings in different jurisdictions on common issues between the same parties.  

150.  I am not persuaded by such arguments. As explained in Part XI above, it is unlikely that the PRC Actions will put an end to the present action, and it is unclear whether any judgment that favoured the Ds in PRC Action No 1 will necessarily enable a large part of the plaintiff’s claim in the present action to be struck out. Instead, there is a real likelihood that the plaintiff’s claim in the present action will continue regardless of the PRC Actions. Further, as explained in Part XI above, it is also unclear whether any judgment in PRC Action No 1 will necessarily give rise to issue estoppel or res judicata, and in such circumstances, it appears that the risk of inconsistent findings may well be unavoidable.

151.  I agree with Mr Ho SC that the highest the Ds can put their case is that, if the Hubei Court is to find in their favour in PRC Action No 1, the parties will have to incur some extra costs in amending their respective case in the present action.  Mr Lam SC complained that without any interim stay the Ds would have to defend the plaintiff’s claim in the present action against a tight procedural timetable (to be expected in the post-CJR era) which, given the complexity of the case, would incur substantial time and costs, and these considerations would apply equally to the conduct of the plaintiff’s case. Mr Lam SC endorsed Master Levy’s observations that with an interim stay “…… [the] parties will have certainty of their rights and liabilities that would in turn likely result in significant saving of costs and time.  This will resonate with one of the underlying objectives of the [CJR]”.[102]

152.  In my view, even though a refusal of any stay may result in some wasted costs, it is not a good or sufficient reason for granting an interim stay of the present action. In light of the discussion in Part XI above, I do not envisage any amendments to the plaintiff’s case to be extensive, especially when there is no clear identity of subject matter between the Hong Kong and Hubei proceedings, and in all likelihood the plaintiff may proceed with the claims in the RASoC regardless of the outcome of the PRC Action No 1 in which case the factual allegations in support of the plaintiff’s claims will still be relevant and the Ds will still be required to answer them. Should the plaintiff plead a further or alternative case based on a judgment in favour of Ds in PRC Action No 1, the amendments again will not be extensive or the costs will not be substantial, especially when viewed in the context of the scale of and the amount involved in the present action.  There is no suggestion that the plaintiff being a Hong Kong listed company will be unable to satisfy any adverse costs order against them. 

153.  Further, the Ds are not able to tell when the Hubei Court will deliver judgment in PRC Action No 1. Recent developments with change of the panel of presiding judges of the Hubei Court, the further hearing in July 2013 and the reconstituted court asking for more evidence make it more apparent that the “outcome” may not come about any time soon, especially when one takes into account the real possibility that either party may appeal against the judgment by the Hubei Court.  Even though Mr Lam SC submitted that the plaintiff could be adequately compensated for any delay by an award for interest on damages if they were to succeed at trial, and Master Levy imposed a six-month time limit for the interim stay and granted liberty to apply,[103] in balancing the competing interests of the parties, the above uncertainty in relation to the progress of the PRC Actions works against Mr Lam SC’s suggestion that a stay is warranted in the interests of justice. The prejudice to the plaintiff in the event of any stay (including an interim one) cannot be said to be minimal bearing in mind that the present action was commenced two years ago and the Hong Kong is the appropriate forum. Any stay means the plaintiff is kept out of a just and speedy resolution of the dispute.

154.  Having considered the above matters, I am of the view that the factors that militate against a stay outweigh the factors that favour a stay, and the balance clearly comes down in favour of the plaintiff. The RASoC and in Mr CH Chan’s 2^nd affidavit set out an arguable claim for substantial damages and other reliefs, and to date the Ds have yet to disclose the substance of their defence.  In all the circumstances, no interim stay of proceedings ought to be granted at all. However, by the time this Judgment is handed down, the six-month interim stay granted under the Order has just expired. There is no reason why the present action should not proceed. I therefore direct that the Ds shall file and serve their Defence within 21 days from today.

XVI.  CONCLUSION

155.  In the circumstances, I grant an order that (a) the Ds’ application to set aside the Service Order is dismissed, (b) the Stay Order and the Cost Order be set aside, and (c) the Ds shall file and serve their Defence within 21 days from today. There is no reason why costs should not follow event.  I therefore grant a costs order nisi that the Ds do pay the plaintiff costs of the Appeal and of the Summons (including all costs reserved, if any) with certificate for two counsel to be taxed if not agreed

HCA 1807/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1807 OF 2011

_________________________

_______________

J U D G M E N T

_______________

A.  Background

1.  The defendants apply by summons under O 12 r 8 of the Rules of the High Court (“RHC”) and under the inherent jurisdiction of the court to set aside the leave granted by Master K K Pang to issue and serve a Concurrent Amended Writ out of the jurisdiction, or alternatively, to stay this action pending the final outcome of the PRC proceedings between the plaintiff and the defendants.

2.  In this action, the plaintiff has filed a rather lengthy Re- Amended Statement of Claim.  Parties have also adduced relatively large amount of evidence in this application.  Counsel for the parties, Mr Lam appearing together with Miss Ip for the defendants and Mr Ho, SC, leading Miss Cheng for the plaintiff, have succinctly summarized the relevant facts and the legal principles pertinent to this application.  Thus, I am able to extract most of the background facts from counsel’s helpful submissions.

3.  The plaintiff is a Hong Kong listed company.  The 1^st defendant is a PRC national and the 2^nd defendant is a PRC company.

4.  The 1^st and the 2^nd defendants respectively held 70% and 20% of the shares (collectively referred to as “Shares”) in a PRC company in Wuhan (“the Company”), which has the right to operate a market there.

5.  This claim is premised upon two sale and purchase agreements (“SPAs”) executed on 2 May 2007 between the plaintiff, and the 1^st and 2^nd defendants, for the purchase by the plaintiff of their respective Shares at a total consideration of HK$1.145m (to be paid partly in cash and partly by two instruments (“Instruments”) “承付票據” (which has been translated as “promissory notes”) executed by the plaintiff in favour of the respective defendants.  The date for the presentation for payment under the Instruments was stated to be 5 December 2012.

6.  It is not in dispute that both the SPAs and the Instruments were executed in Hong Kong, and each of the SPAs contains a non-exclusive jurisdiction clause providing Hong Kong to be the governing jurisdiction.

7.  The claim is essentially a claim for the alleged breaches of the various terms of and warranties contained in the SPAs, which will be discussed in greater detail in Section D.4 below.

8.  The plaintiff also asks for a number of reliefs that include loss of profits, an order for an indemnity, damages for breaches and misrepresentation, and an order to restrain the defendants from enforcing the payments under the Instruments.

9.  It is perhaps convenient also to mention, by way of background, that in respect of the Instruments, there are currently in place a number of undertakings given by the defendants in agreeing not to, among others, present the Instruments for payment after an earlier injunction order in relation thereto was discharged by consent.

B.  Matters giving rise to the application

10.  The matters that give rise to this application primarily arose from another sale and purchase agreement (which is abbreviated as the “Forged Agreement” by the defendants, and I will also adopt the same abbreviation for easy identification), and two sets of proceedings commenced in the PRC.

B.1 The Forged Agreement

11.  The Forged Agreement was executed on the same date as the SPAs, that is, 2 May 2007, and by the same parties of the SPAs, and was also purportedly for the sale of the Shares by the defendants to the plaintiff. 

12.  The defendants allege that the Forged Agreement was forged.  They also allege that the Company with the knowledge of the plaintiff submitted the Forged Agreement to the relevant government authority for the approval of the transfer of the Shares to the plaintiff.

13.  Mr Lam has further highlighted a number of terms as found in the Forged Agreement that are found to be materially different to the terms under the SPAs though both agreements are concerned with the same subject matter, that is, the sale and purchase of the Shares.  For example, clause 13.4 of the Forged Agreement provides that the law of PRC is to be the governing law with the parties also agreeing to submit to the jurisdiction of the PRC courts (instead of having Hong Kong law as the governing law and the Hong Kong courts being the governing jurisdiction). Further, the amount of the consideration for the Shares was stipulated to be 11 times less than the amount provided in the SPAs. In addition, the mode of payment was provided to be in cash in RMB (which is different to that of the SPAs as set out in para 5 above).

B.2 PRC Action No 1

14.  The Forged Agreement led to the defendants commencing an action (“PRC Action No 1”) in December 2010 against the plaintiff (with the Company as the third party) in the Higher People’s Court of Hubei.  In the PRC Action No 1, the defendants seek, among others, an order for declaring that the Forged Agreement is null and void and for setting aside the Forged Agreement.

15.  The trial of the PRC Action No 1 already took place in June 2012, and its judgment is currently pending.

B.3 PRC Action No 2

16.  In April 2011, the plaintiff and the Company commenced an action (“PRC Action No 2”) against the defendants (with other parties), also in the Hubei Higher People’s Court for the alleged loss and damages having alleged to have been caused by the latter’s various wrongdoings.

17.  The pleadings in that case are now closed and a hearing had been held before the PRC Court in September 2012.  I was told that there would be further hearings.

C.  The Arguments

C.1 Alleged Material Non-disclosure

18.  One of the grounds of the defendants’ application to set aside the order granting leave to serve out is the allegation of material non-disclosure in the Plaintiff’s ex-parte application for the leave.

19.  The non-disclosure that has allegedly been made concerns the plaintiff’s failure to describe to the court the PRC Actions and produce their related documents in the ex-parte application.  It was submitted that the fact the Plaintiff has made such non- disclosure is relevant to the consideration by the court in deciding whether to assume jurisdiction over the defendants, thus they are material.

20.  For the plaintiff, Mr Ho contends that the facts concerning the PRC Actions are not material for they would not have affected the Master’s decision on the plaintiff’s application, citing the decision of Kwan J (as she then was) in SFC v A, unrep., HCMP 1407/2007 (29 November 2007).

C.2  Forum Non-conveniens

21.  Whilst accepting that the non-exclusive jurisdiction clause provided in the SPAs providing Hong Kong to be the governing jurisdiction will be a strong factor pointing to the Hong Kong courts  being the appropriate forum, Mr Lam however argues that the plaintiff still bears the legal burden in showing that Hong Kong is the appropriate forum for the trial of this action: see Noble Power Investments Ltd v Nissei Stomach Tokyo Co Ltd [2008]5 HKLRD 631 per Ma CJHC (as he then was) at 641, §22(2) citing Spiliada Maritime Corp v Cansulex Ltd [1987] AC 460 at p481E.  Since the defendants are residing outside Hong Kong, the plaintiff cannot sue them as of right, and it requires leave to do so.  It is not enough for the plaintiff to only show that there was no appropriate forum elsewhere: see China North Industries Investment Ltd v Chum [2010] 5 HKLRD 1per Stock JA at 30, §83.

22.  Mr Lam next submits that the evidence shows that there exist strong or exceptional circumstances that justify this court in not giving effect to the non-exclusive jurisdiction clause.  The circumstances Mr Lam referred to are the co-existence of the SPAs and the Forged Agreement dealing with the same subject matter, and eventual institution of the PRC Actions in connection with the subject matter, which events were unforeseen at the time when the parties executed the SPAs.  Thus, it would be unjust, Mr Lam submitted, to allow the plaintiff to rely on the non-exclusive clause of the SPAs by proceeding with the present action in Hong Kong, while the same parties are pursuing remedies in PRC over or arising from essentially the same subject matter in relation to the sale and purchase and the eventual transfer of Shares.

23.  Hence, the existence of the PRC Actions, Mr Lam submitted, cannot be regarded as irrelevant but should be taken into account when the court is considering if the PRC jurisdiction is the appropriate forum for the resolution of the dispute between the parties.  In this case, Mr Lam argued, the PRC Actions are particularly relevant for it has been demonstrated that the actions are genuine and further that with respect to the PRC Action No 1, it has indeed progressed to an advanced stage of proceedings.  Thus, the likely impact of the PRC Actions upon the disputes between the parties is a factor that may show Hong Kong as not being an appropriate forum(Ho Siu Pui & 2 ors v Yue Sheng Finance Limited & anor., unrep., HCA3060/2001 (27 August 2002), Kwan J (as she then was) per §46).

24.  The relevancy, if any, of the PRC Actions, Mr Ho contended, should only be restricted to PRC Action No 1 since Mr Lam has confirmed in his oral submission that the defendants are mainly relying on the former but little on the PRC Action No 2. So far as PRC Action No 1 is concerned, Mr Ho argued that it should have no impact whatsoever on this action despite there being “an identity of parties” in the Hong Kong and PRC proceedings.  Mr Ho contended that the PRC Action 1 is not about a breach of the SPAs as this action is primarily based on. Thus, the Hong Kong action, in the words of Mr Ho, “has a life of its own”.

25.  It is therefore argued on behalf of the plaintiff that since there is no overlap of issues between this action and the PRC Actions, the ends of justice should allow the plaintiff to continue to pursue this action as its entitlement to sue in Hong Kong is independently upon the outcome of any of the PRC Actions.

26.  Furthermore, the PRC Actions, Mr Ho contended, do not in the real sense fall within the so-called doctrine of lis alibi pendens, the existence of simultaneous proceedings elsewhere. In any event, should the PRC Action No 1 be shown to have some impact, it is only an additional factor relevant to the determination of the appropriate forum as the court can allow both sets of proceedings to continue regardless of the existence of the parallel proceedings: see Johnston, The Conflict of Laws in Hong Kong, 2^nd ed., at §3.095.

27.  Apart from the absence of impact of the PRC Actions, the plaintiff further sets out a number of factors that it submitted clearly demonstrate that Hong Kong is the natural and appropriate forum for this action whilst the PRC courts cannot be a “clearly or distinctly more appropriate” forum (See The Adhiguna Meranti [1987] HKLR 904 per Hunter JA at 907 applying the three-stage test in the Spiliada).  The relevant factors are:

(a)  The SPAs and the Instruments were executed in Hong Kong;

(b)      Hong Kong law is the governing law;

(c)  Parties have submitted to the non-exclusive jurisdiction of the Hong Kong court under the SPAs;

(d)      The defendants have provided undertakings in respect of the Instruments.

C.3  Interim Stay

28.  If the court declines to grant a permanent stay, Mr Lam submits that it would be just and convenient to grant an interim stay pending the final conclusion of the PRC Actions, in particular PRC Action No 1.

29.  Mr Lam submission is that the outcome of the PRC Action No 1 would bear a direct impact on how the parties conduct their case in this Hong Kong action after the issues of forgery and the propriety of the plaintiff’s status as the shareholder of the Company are disposed of by the PRC Court. It is because the parties will be bound by the findings of the PRC Court, which findings would determine how the parties would conduct this action.

30.  The lack of identity of subject matter in the two proceedings, Mr Ho contended, takes the matter outside the notion of lis alibi pendens with the result that the outcome of the PRC Action No 1, which the defendants are principally relying on, would have very little impact on this action.  In the event, this action, regardless of the outcome of the PRC Actions, will continue in particular in respect of the claims for damages and loss for the payment of the alleged inflated price, for the breach of the warranty of profit guarantee and for the restraint against the enforcement under the Instruments.

D.  Decision                   

D.1  Preliminary matters

31.  To put the discussion in context, I should also mention three matters that in my view are relevant to the issue of stay:

(A) Reliance on PRC Action No 1 only

32.  The defendants have in the application referred to the PRC Actions but in the event, Mr Lam has expressly indicated that little reliance will be placed on the PRC Action No 2 since it is still in a very early stage.  Thus, so far as the foreign proceedings are concerned, I would attach little weight to the PRC Action No 2, with the discussion mainly focusing on PRC Action No 1.

(B)  Continuation of the undertakings

33.  To counteract, perhaps, the concern Mr Ho raised about the deprivation of the legal address against the defendants in enforcing the undertakings in relation to the Instruments given by the defendants in the event of stay, Mr Lam openly informed the court that the defendants are willing to continue with the continuation of the undertakings in their present form in the event of a stay.

(C)  PRC experts

34.  Both parties have filed PRC expert evidence in this application.  The views as expressed by the respective experts touch upon a number of issues such as the probabilities of the transfer of the Shares being declared invalid in the PRC Action No 1;whether the subject matter of this action and the PRC Action No 1 is the same; the chance of the Forged Agreement  being found void; whether there was an overlap of issues between this action and the PRC Actions; the impact of the PRC Action No 1 on the legality of the plaintiff’s shareholding in the Company; the chance of the PRC courts exercising jurisdiction over the dispute, and the prospect of success of the PRC Actions etc.

35.  Given the almost complete divergence of views of the PRC experts, I do not consider it appropriate or necessary to rely on the experts’ evidence.  I am of the firm view that the arguments can be satisfactorily dealt with by the application of the relevant legal principles to the materials that are placed before me.  There is no real need to engage the assistance of the PRC experts in this application.  Hence, I’d be disinclined to give consideration to the evidence of the PRC experts.

D.2 whether there is any material non-disclosure?

36.  Facts that are relevant to the weighing operation of a court are considered to be material, and are required to be disclosed.  However, if it is established there was material non-disclosure which justified the discharge of the ex-parte order, the court has a discretion to continue the order or make a new order on terms (Secretary for Justice v Choy Bing Wing, CACV 11/2004 (3 December 2004 )  per Yeung, JA, at §48 and  SFC v A , per Kwan J at §§40-42).

37.  Further, it is submitted that the question of material non-disclosure is one to be determined in isolation (China North Industries Investments Ltd v Chum [2010] 5  HKLRD 1 per Stock JA at 38, §112), which elucidation should be understood, in my view, in its context by confining it to a situation where a court is tasked to determine a number of contentions including a contention on forum.  It is indeed not in dispute, as shown by the authorities in the preceding paragraph, that a court is very often required to go on to consider the issue of forum conveniens before deciding whether an action is to be stayed (or for that matter, an ex-parte order is to be set aside) when a case of material non-disclosure is established.

38.  The subject-matter of non-disclosure that the defendants are complaining about is the failure by the plaintiff to disclose the PRC Actions and the related documents in the ex-parte application for leave to serve out. It was submitted that a mere reference to the PRC Actions for the purpose of confirming the whereabouts of the defendants in the PRC could not be a sufficient disclosure.

39.  On behalf of the plaintiff, it was contended that since it had disclosed all the relevant documents in relation to the PRC Actions, it clearly had no intention to conceal them from the court.  In any event, such matters do not have any materiality capable of affecting the court’s decision on the ex-parte application for there is no overlap of issues between this action and the PRC Actions.

40.  An application for service out is made ex-parte.  Thus, it imposes upon an applicant or the legal advisers when filing the evidence a duty of making full and frank disclosure of all material facts relevant to the consideration of the court.  Facts which are material to the consideration of an application for service out include all material facts relevant to the consideration as to whether to assume jurisdiction over the defendant and the dispute in question (Pacific Aerosupplies Ltd v Dakota Air Parts International Inc, unreported, HCA 1233/2010 (24 June 2011) per Deputy High Court Judge Coleman SC, at §13).

41.  In the ex-parte application for service out, the plaintiff altogether filed three affidavits of Chan Heung Wing (respectively referred to as “Chan’s 1^st, 2^nd and 3^rd Affidavits”), the solicitor for the plaintiff.  In Chan’s 1st affidavit, the solicitor referred to the SPAs, and identified the various wrongdoings and breaches of the terms of the SPAs allegedly committed by the defendants.  The plaintiff also relied on O 11 r 1(d)(i) and (iii) of the RHC, that is the SPAs were made in Hong Kong and that the SPAs provide them to be governed by Hong Kong law.  It is further deposed, as required by O 11 r 4 of the RHC, that the plaintiff has a good cause of action.  The claim document “民事起訴狀” of the PRC Action No 2 was also exhibited. However, the defendants’ PRC addresses as shown in the documents were only referred to in the context of complying with O 11 r 4 in informing the court where the defendants would likely be found.  The solicitor also further submitted in Chan’s 1^st Affidavit that Hong Kong is the appropriate jurisdiction to hear the action.

42.  Apart from the claim document民事起訴狀of the PRC Action No 2 having been exhibited to Chan’s 1^st Affidavit, the Plaintiff has further exhibited the claim document民事起訴狀of the PRC Action No 1 to Chan’s 2^nd Affidavit.  In spite of the production of these documents, I tend to agree with Mr Lam that it was clearly for the purpose for confirming the defendants’ addresses in the PRC, rather than disclosing the facts of the Actions material to the court’s consideration.

43.  What I find materially lacking in the Chan’s Affidavits is lack of disclosure regarding the material aspects of the PRC Actions in matters such as the fact relating to the identity of parties, to the fact that the claims involve matters consequent on the sale and purchase and the transfer of the Shares. Relevantly, I also believe that the plaintiff ought to have also informed the court of the progress of the Actions especially the fact that the trial of the PRC Action No 1 was concluded and the parties were waiting for the PRC court to deliver judgment.

44.  Given the fact that relevant pleadings relating to the PRC Actions had been exhibited, I am inclined to find, as the plaintiff explained, that it had no intention to conceal the PRC Actions from the court.  The mere production of the documents for evidently showing the court where the defendants could likely to be found, however, is not sufficient to discharge the plaintiff’s duty of material disclosure.

45.  I am unable to accept the plaintiff’s contention that had these facts been disclosed, the court would in all likelihood still have granted the leave to serve out.  This argument is based on the plaintiff’s taking the view there was no overlap of issues with this action and the PRC Actions.  The view as taken by the plaintiff is a matter of judgment (or more correctly, the view taken by its legal advisers).  If there is serious non-disclosure, poor judgment is not enough to exonerate a plaintiff (see Pacific Aerosupplies Ltd v Dakota Air Parts International Inc, unreported, HCA 1233/2010 (24 June 2011) per Deputy High Court Judge Coleman, SC, at para 72).

46.  Hence, the question for determining materiality is not whether the court would have granted the leave to serve out, but whether the plaintiff has fully disclosed facts relevant to the consideration of the court. In this context, the court should have been informed of the identity of the parties, the nature of the claims, the reliefs sought and most important of all, the progress of the PRC Actions and how and to what extent they would likely impact on this action.

47.  In the circumstances, having regard to the nature of the claim, I cannot be satisfied that the material facts in relation to the PRC Actions have been disclosed in their proper context, though the disclosure is not deliberate or serious.

48.  The finding of material non-disclosure does not however automatically mean that the ex-parte order should be set aside.  I should further consider the issue of forum conveniens before deciding the appropriate order to be made.

D.2  Forum conveniens: whether to set aside

49.  In this case, there is little dispute that the plaintiff is required to demonstrate that Hong Kong is clearly an appropriate forum for the plaintiff’s claim to be litigated in Hong Kong.  By virtue of the conferment of the non-exclusive jurisdiction on the Hong Kong Court, the defendants  will need to show strong or overwhelming reasons or exceptional circumstances before  the parties can be allowed to be freed from their contractual bargain (See Nobel Power Investments Ltd per Ma CJHC (as he then was) at 645, §36).

50.  It is submitted on behalf of the defendants that the defendants have provided compelling evidence showing that by virtue of the PRC Action No 1 (which is unforeseen) and the approval of the transfer of the Shares by the Plaintiff relying on the Forged Agreement, it is just that the court should stay this action.

51.  The main plank of the defendants’ argument on this ground is that the plaintiff has been acting inconsistently in that they have been, using the expression Mr Lam used, “blowing hot and cold”.  It is suggested that on one hand the plaintiff has relied on the terms of the Forged Agreement to obtain the PRC approval of the assignment of the Shares to it while on the other hand, the plaintiff in this action has completely disregarded the Forged Agreement. It is submitted that the SPAs and the Forged Agreement are mutually exclusive.

52.  Although references have been made by the experts to the likelihood of whether the PRC courts would likely exercise jurisdiction over this dispute, in view of what I have stated above, and further that there is no concluded evidence pointing to the likelihood of whether or not the PRC courts would exercise the jurisdiction, I think this aspect should only be regarded as a neutral factor.

53.  The factor that undoubtedly is to be weighed most favourably for the plaintiff will be the express non-exclusive jurisdiction clause making Hong Kong Court to be the governing jurisdiction and the law of Hong Kong to be the governing law.  The plaintiff undisputedly is contractually entitled to sue on the SPAs in Hong Kong.

54.  The PRC Action No 1 is concerned with an alleged improper transfer of shares to the plaintiff after the relevant PRC authority had acted upon the Forged Agreement.  Notwithstanding references having been made to the SPAs in the relevant pleadings of the PRC Action No 1, the cause of action of the latter is not based on the SPAs, but on the alleged forgery.  Neither is there any relief touching upon the SPAs.  Thus, it cannot be said, as Mr Lam has suggested, that the plaintiff has been acting inconsistently by commencing this action in Hong Kong, by relying on the SPAs as the cause of action, while bringing an action on the Forged Agreement in the PRC proceedings.

55.  Further, I am also unable to discern evidence that the Forged Agreement and the PRC Actions are unforeseen circumstances for the defendants have not provided any evidence to explain why the PRC Action No 1, impugning the Forged Agreement and the approval of the transfer of Shares was only commenced more than 3 years after the Shares were transferred to the plaintiff in November 2007.

56.  All in all, after having taken all the relevant factors discussed above, I come to the view that Hong Kong is the appropriate forum.

D.3   Conclusion on the application for setting aside

57.  Apart from finding Hong Kong being the appropriate forum, I further find that there is little prejudice to the defendants in refusing to set aside the ex-parte order as the defendants have acknowledged the service of the writ.  For the reasons given, I am not inclined to set aside the ex-parte order though I have found that there is material non-disclosure as I am satisfied that the plaintiff is entitled to bring proceedings in Hong Kong in respect of the claim based on the SPAs.

D.4  Interim Stay

58.  The defendants further apply for interim stay as their fallback position on the ground that the outcome of the PRC Action No 1 would materially change the way the parties conduct this action.

59.  Before analyzing the impact, if any, the PRC Action No 1  may have on this action, I should briefly set out the claims as contained in the Plaintiff’s Re-Amended Statement of Claim, which contains the following broad heads of claim :

(a) Breach of the term of the SPAs requiring the defendants to be refraining from engaging in competing business (paras 28-35);

(b) Breach of promises in obtaining land use certificates (paras 36-45);

(c) Breach of warranties concerning the true state of the Company’s management accounts and the inflation of assets (paras 46 to 54);

(d) Fraudulent misrepresentation concerning the construction costs  as set out in the relevant management accounts of the Company (paras 55-63);

(e) Indemnity under the Instruments (paras 64-66);

(f) Breach of the profit guarantee and the set off of the net profit shortfall under the 1^st Instrument (paras 67-82).

60.  Would the various heads of claim as set out above, when examined against the context of the claim, likely impact on this action?  If yes, how would it be affected?

61.  According to Mr Lam, the PRC Action No 1 would impact on this action in three aspects: First, the bulk of this claim would likely become irrelevant should the defendants succeed in the PRC Action No 1.  Secondly, the parties would need to conduct this action in accordance with the outcome as the parties will be bound by the findings of the PRC Court. Thirdly, costs would be saved if the parties are certain of their respective rights and liabilities once the outcome of the PRC Action No 1 is known.

62.  Disputing the relevancy of the PRC Action No 1, Mr Ho contended that the determination of the PRC Action No 1 would not help completely dispose of the Hong Kong action because plaintiff’s claims in respect of those heads in para (c) to (f) that I have summarized will remain to be resolved in the Hong Kong court.

63.  As to the other two heads of claim in para 59(a) and (b) above, Mr Ho’s position appears to be a little ambiguous, and he does not seem to be seriously contending that they would have likely been rendered irrelevant in case of a successful outcome for the defendants in the PRC Action No 1.

64.  Thus analyzed, I think it is beyond argument that if the defendants were to succeed in the PRC Action No 1, the plaintiff may likely abandon a significant portion of the claim.  Parties have in the submissions invariably used the term “overlap of issues” when discussing the impact of the PRC Proceedings on this action. I somehow think that the use of this expression may be a misnomer.  In weighing up the likely effect the PRC Action No 1 has on this action, I do not think it matters much as to whether there is or not an overlap of issues. It is rather, in my judgment, whether the outcome of the PRC Action No 1 would change the texture and the factual and legal matrix of this action. 

65.  A brief examination of the claim tends to show that there is such impact, that is, the texture of this claim in terms of the heads of claim and nature of the defence will likely be affected by the outcome of the PRC Action No 1. Hence, irrespective of the conclusion that I have reached in finding Hong Kong being the appropriate forum for the plaintiff to sue on the SPAs, I respectfully disagree with Mr Ho that the PRC Action No 1 can be disregarded in considering its likely impact on the present action.

66.  Having so found, I should next, before deciding how my discretion is to be exercised for the attainment of overall justice, weigh up the advantages and disadvantages of an interim stay.

67.  The advantages of a stay are obvious.  The parties will have certainty of their rights and liabilities that would in turn likely result in significant saving of costs and time.  This will resonate with one of the underlying objectives of the Civil Justice Reforms.

68.  The disadvantages will be the prejudice that may be caused to the plaintiff as a result of the delay.  In addition, since it is still unknown as to when the judgment of the PRC Action No 1will be delivered though the trial was concluded about one year ago,   a further delay may deny the plaintiff the opportunity of the early resolution of its dispute in Hong Kong.

69.  On the other hand, if there is no stay, there is a likelihood that costs will be wasted if the court allows this action to continue without allowing reasonable time for the parties to wait for the judgment of the PRC Action No 1.

70.  Having weighed up the pros and cons of an interim stay and taking all the relevant matters into the balance, including the substantial amount (which is in excess of RMB200,000,000) being claimed in this action, the promise by the defendants to continue with the undertakings in respect of the Instruments,  the PRC Action No 1 is shown to be a genuine claim and  already in an advanced stage of proceeding pending for judgment, I am inclined to grant, under the inherent jurisdiction of the court,  an interim stay pending the judgment of the PRC Action No 1.

71.  In order to militate the prejudice against the uncertainty as to when the judgment will be delivered and the action concluded, I am not inclined to grant a period of stay at large.  A reasonable duration for the conclusion of the PRC Action No 1 must be imposed.  If no time limit is to be imposed, it may be open to abuse.

72.  Given that the PRC Action No 1 was already concluded some months ago, I consider that it is reasonable to give the defendants 6 months to wait for the outcome of the PRC Action No 1.  There should be a liberty to apply should there be any change of circumstances that justify an uplift or extension of the interim stay.

E.  Directions and Orders

73.  There is a material non-disclosure but the application for setting aside the ex-parte order of 21 December 2011for leave to issue and serve the Concurrent Amended Writ out of jurisdiction; and the service (including substituted service ordered by Master Ho dated 25 May 2012) of the Concurrent Amended Writ on the defendants is refused.

74.  There shall be an interim stay for 6 months or until the final outcome of the PRC Action No 1, whichever is the sooner.

75.  There shall be liberty to apply.

76.  There will be a costs order nisi that the plaintiff to pay the defendants’ cost of the summons, including costs reserved together with certificate for two counsel. Any application to vary the said costs order nisi should be made within 14 days from the date of the handing down of this judgment.

80. The costs are to be summarily assessed in lieu of taxation if they cannot be agreed within 14 days of the costs order nisi becoming absolute. The defendants are to lodge and serve a statement of costs within 21 days from the date of the costs order absolute and the plaintiff likewise is to lodge and serve its list of objections 3 days thereafter. The costs will be assessed on paper without an oral hearing within 7 days of the lodgment of the list of objections.

81.     Lastly, I wish to express my gratitude to counsel for their thorough research and helpful assistance in this application.