VELATEL GLOBAL COMMUNICATIONS INC AND ANOTHER v. CHINACOMM LTD AND OTHERS

HCA 1978/2011

[2018] HKCFI 2288

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1978 OF 2011

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JUDGMENT

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I. INTRODUCTION

1.  This action concerned dispute between foreign investors and domestic entities in Mainland China arising out of a joint venture (“JV”) project between Ps (see paragraph 2 below) and Ds (see paragraph 3(b) below) to develop/operate 3.5GHz spectrum wireless broadband access (“WBA”) services (“3.5GHz Services”) in 29 major/first-tier cities (“29 Cities”) in Mainland China (“Project”). Ps claimed the Project failed because of Ds’ repudiation/renunciation of the JV deal (including failure to have the Ministry of Industry and Information Technology (“MIIT”) renew/extend licences for operating 3.5GHz WBA network (“3.5GHz Licences”) in the 29 Cities), and sought to recover the monies they had invested in the Project. But Ds claimed that failure of the Project was due to Ps’ refusal to provide funding support, so Ps’ complaints were unfounded and their alleged loss self-induced.

2.  The 1^st plaintiff VelaTel Global Communications, Inc (“P1”)[1] was a US over-the-counter listed company (a) subject to SEC[2]-supervised corporate governance and (b) engaged in telecommunications business.[3] P1’s president was Colin Tay Yong Lee (“Tay”), and its chief executive officer was George Alvarez (“Alvarez”). For mega projects requiring significant capital (eg the Project), P1’s role was to secure investor funds from the US capital market (“Market”). But raising capital from hundreds of investors in the Market via SEC/lawyer-supervised escrow procedure was a lengthy/structured process that entailed locking investment funds from each investor in an escrow account subject to its own escrow closing requirements, and by releasing such funds only when all agreed conditions were met (“Escrow Procedure”). I find the Project’s domestic partners represented by Qiu Ping (“D6”) and Yuan Yi (“D7”) well knew P1’s fundraising role[4] even though P1 was not party to the formal transaction documents (see paragraph 18 below). The 2^nd plaintiff Trussnet Capital Partners (HK) Ltd (“P2”) was a Hong Kong company wholly owned by Tay.[5] P2 was a special purpose vehicle (“SPV”) set up for entering into the TCPSSA (see paragraph 18(f) below). For convenience, P1 and P2 are collectively referred to as “Ps” in the Judgment below.

3.  At all material times, Tay was the central figure and P1 was the central company in Ps’ camp (see paragraph 11 below):

(a)

Tay could read Chinese and was fairly fluent in putonghua. He read engineering in university, and managed projects after graduation. Tay/Alvarez (business partners of the Trussnet group of companies) were instrumental in setting up P1. Alvarez was in charge of inter alia raising investor funds, and Tay was in charge of coordinating with domestic partners, dealing with technical parties, and making technical decisions for Ps.

(b)

P1’s role was to secure investment financing for the Project whilst its wholly-owned direct/indirect subsidiaries Trussnet Nevada (see paragraph 10(b) below) and Gulfstream (see paragraph 10(c) below) entered into the TNFA (see paragraph 18(b) below) and GSSA (see paragraph 18(c) below). P2 eventually replaced Gulfstream as party to the TCPSSA (see paragraph 18(f) below) to accommodate D6’s/D7’s certain requests and to secure additional benefit which Trussnet Nevada, Gulfstream and P1 were not able to provide (see Part XVII below), but this would/did not diminish P1’s fundraising role for (and hence consequent interest in) the Project even though (as Mr Hui, counsel for the 1st to 10th defendants (“Ds”), noted) the formal transaction documents were entered into by P1’s “predecessors, associates, agents and/or nominees” (see paragraph 23(b) below).

4.  The 1^st defendant Chinacomm Ltd (“D1”) was a bare shell Cayman Islands company incorporated by D6, D7 and the 8^th defendant CECT Chinacomm Communications Co Ltd (“D8”) as SPV to implement the Project.[6] D1’s shareholders were the 2^nd defendant Thrive Century International Ltd (“D2”) (with D7 as its director) and the 3^rd defendant Newtop Holdings Ltd (“D3”) (with D6 as its director), and D1’s directors were D6/D7.

5.  D6/D7 set up a Hong Kong company, ie the 4^th defendant Smart Channel Development Ltd (“D4”). In May 2007, D6/D7 transferred all their shares in D4 to D1, so D4 became D1’s wholly-owned subsidiary. D6/D7 were also the directors of D4, which was used as SPV to implement the Project. D4 was sole shareholder of Yunji Communications Technology (China) Co Ltd (“Yunji”) incorporated in April 2008 in Beijing under PRC law as a wholly-owned foreign invested enterprise (“WOFIE”). Yunji was also engaged in telecommunications business.

6.  The 5^th defendant Mong Sin (“D5”), a Hong Kong resident, was the sole shareholder of D2 and D3, and a nominee of D6, D7 and D8. D6 was D8’s president and director, 1 of 2 directors of D1 (see paragraph 4 above), sole director of D3 (see paragraph 4 above), 1 of 2 directors of D4 (see paragraph 5 above), and authorised by the 9^th defendant CECT Chinacomm Shanghai Co Ltd (“D9”) to sign the GSSA. D7 was D8’s legal representative and director, 1 of 2 directors of D1 (see paragraph 4 above), sole director of D2 (see paragraph 4 above), and 1 of 2 directors of D4 (see paragraph 5 above). D6 and D7 were business partners.

7.  D8 was a PRC state company incorporated in 2003 with headquarters in Beijing and registered capital of RMB2,000,000,000. Beijing Xintong Data Network Co Ltd (“Xintong”) held 44.6% shares of D8, and Beijing Tianyi Holdings Co Ltd (“Tianyi”) held 94.12% shares of Xintong. D6 was the president of Tianyi, Xintong and D8. D7 was the chairman of both Tianyi and Xintong, and legal representative of Xintong and D8. D8 provided WBA, data centre, internet access and other telecommunications services. D9 was a subsidiary of D8. D8 and Xintong respectively held 60% and 40% shares in D9.

8.  The 10^th defendant Feng Xiao Ming (“D10”) was a resident of Mainland China. He received tertiary education and worked at managerial level at “上海中和服信公司” before he joined D9 in 2006. He was D9’s legal representative, chairman and general manager, and D8’s vice-president and director.

9.  From the above account, it was clear D6 was the central figure and D8 was the central company in Ds’ camp (see paragraph 11 below):

(a)	In 2007-2011, Tay and D6/D7 (who did not speak/read English) liaised in putonghua, and had meetings in relation to the Project. D6 relied on Tay to convey information to Ps and the US investors. They used to have an amiable relationship, but it gradually became more strained and less trusting.
(b)	D8 held 3.5GHz Licences for the 29 Cities, which licences were essential contribution by Ds’ camp for the Project. In my view, the continued vitality of such licences went to the “root” or very substance of the contract between the parties, and was the fundamental/essential commercial purpose of the JV Project.

10.  Several other companies also featured in the present action:

(a)	Trussnet USA Inc was incorporated in Delaware, USA (“Trussnet Delaware”) in respect of which Tay/Alvarez were business partners and Tay was the president;[7]
(b)	Trussnet USA Inc was incorporated in Nevada, USA (“Trussnet Nevada”) and was P1’s wholly-owned subsidiary with the TNFA (see paragraph 18(b) below)[8] as its principal asset;
(c)	Gulfstream Capital Partners Limited (“Gulfstream”), a Seychelles company, was Trussnet Nevada’s wholly-owned subsidiary and later became P1’s wholly-owned indirect subsidiary (see paragraph 57 below).

11.  For convenience, in the Judgment below, “Ps’ camp” refers to Tay, Alvarez, Ps, Trussnet Delaware, Trusset Nevada, Gulfstream, Trussnet group and/or combination of 2 or more such individuals/entities as may be relevant, and “Ds’ camp” refers to any of Ds or combination of 2 or more such individuals/entities as may be relevant.

12.  Ps commenced the present action against Ds on 18 November 2011. On the same day, DHCJ L Chan (as he then was) granted an ex parteMareva injunction order against D1, D2, D3, D6 and D7 (“1^st Injunction Order”) (continued by the Order of Yam J dated 24 November 2011). On 8 December 2011, DHCJ Lok (as he then was) granted another ex parte Mareva injunction against D10 (“2^nd Injunction Order”) (continued by the Order of DHCJ Au-Yeung (as she then was) dated 15 December 2011). For convenience, the 1^st and 2^nd Injunction Orders are collectively referred to as “Injunction Orders” below.

13.  The 1^st Injunction Order froze the assets of D1, D4, D6 and D7 up to US$4,749,599 including monies in 3 bank accounts with Standard Chartered Bank (HK) Limited (“SCB”), ie xxx-xxxx-xxx7 and xxx-xxxx-xxx9 held by D1 (“Chinacomm Accounts 1 and 2”) and xxx-xxx-xxx5 held by D4 (“Smart Channel Account”) (collectively, “Accounts”). Ps claimed Chinacomm Account 1 and Smart Channel Account were to be operated by Tay and D6 as joint co-signatories (“Double Signatures Arrangement”), but D1 and D6/D7 wrongfully changed such arrangement, removed the bulk of the total sum of US$4,749,599 deposited in Chinacomm Account 1 (“US$4.75M Sum”) and transferred inter alia US$4,500,000 thereof (“US$4.5M Sum”) to D10’s bank account xxxxxxxx7 (“D10 Account”) with DBS Bank (Hong Kong) Limited in Hong Kong (“DBS”) (“US$4.5M Transfer”), which led to Ps’ application for the 2^nd Injunction Order that froze D10’s assets up to US$4,500,000.

14.  The 1^st Injunction Order required D1, D6 and D7 to disclose inter alia information about the Accounts, and the 2^nd Injunction Order required D10 to disclose the following information:

(a)	if he had dealt with the US$4.5M Sum transferred to him, full details of each and every such dealing/transaction;
(b)	full details of all his bank accounts/statements, and a list of his assets;
(c)	the purpose of the US$4.5M Transfer.

D10 made disclosure by his 1^st affirmation filed on 5 January 2012 (“D10 1^st Aff”) and 2^nd affirmation filed on 27 February 2012 (“D10 2^nd Aff”), but such affirmations did not address (b) above.

15.  In the meantime, Ps applied for continuation of the Injunction Orders, and Ds applied for discharge of the same. Such applications came before DHCJ Au-Yeung (as she then was) on 19 July 2012. In her Decision handed down on 26 October 2012, the learned judge dismissed Ds’ application and continued the Injunction Orders (“Injunction Decision”). Mr Chan, counsel for Ps, drew my attention to the criticisms about Ds’ conduct in the Injunction Decision,[9] and further complained against Ds’ pre-trial conduct.[10] But these were interlocutory matters, so they would be referred to only if relevant to the evaluation of evidence adduced at trial.

II.  PARTIES’ RESPECTIVE CASE AND DISPUTED ISSUES

16.  In 2007 Tay/D6 began negotiations over the Project, which culminated in agreement in 2008 whereby Ps’ camp was to acquire the option to subscribe up to 49% shares in D8 for US$196,000,000 to carry on 3.5GHz Business in the 29 Cities with Ds’ camp on JV basis with planned exit by eventual flotation of shares of the JV SPV on a stock exchange. For the Project, Ps’ camp was to provide inter alia technical contribution and investment financing, and Ds’ camp was to supply inter alia 3.5GHz Licences for the 29 Cities. The investment funds would flow from the offshore JV SPV (eventually D1) to its wholly-owned Hong Kong JV SPV (eventually D4) and then to the Hong Kong SPV’s wholly-owned WOFIE in Mainland China (eventually Yunji), and the returns/profits from the 3.5GHz Business (see paragraph 19 below) by D8 as holder of the 3.5GHz Licences for the 29 Cities would be transferred indirectly to the WOFIE (eventually Yunji) by exclusive agreements with D8 for construction, operation and maintenance of 3.5GHz WBA networks to provide 3.5GHz Services in the 29 Cities, and absorbed by Ps’ camp (49%) and Ds’ camp (51%) through D4/D1.[11]

17.  In 2007, D8 held 2 3.5GHz Licences: (a) a 3.5GHz Licence for 5 cities in Mainland China (“5 Cities”) that would expire on 31 December 2008 (C/34-35, “5 Cities Licence”), and (b) a 3.5GHz Licence for 25 cities in Mainland China that would expire on 29 February 2008 (C/32-33, “25 Cities Licence”) (collectively, “29 Cities Licences”). Such licences overlapped by 1 city (Qingdao), so D8 held 2 3.5GHz Licences for the 29 Cities.

18.  The initial Build-to-Suit Agreement dated 1 November 2007 between Trussnet Delaware and D8 set out broad terms of the Project (“BSA”). Subsequently, Ps’/Ds’ camps entered into various agreements that governed the Project and subscription of D1’s shares:

(a)	an addendum to the BSA called the framework agreement dated 15 February 2008 between Trussnet Delaware and D8 (“TDFA”) whereby Trussnet Delaware had the option to subscribe 49% shares in D1 (“49% Shares”);
(b)	another framework agreement dated 7 April 2008 between Trussnet Nevada and D8 (“TNFA”) that substituted and replaced the TDFA;
(c)	a subscription and shareholders’ agreement dated 23 May 2008 between Gulfstream as Investor, D2/D3 as founders of D1, D1 as the company, D6/D7 as guarantors, and D8/D9 as warrantors (“GSSA”);
(d)	a supplementary agreement dated 23 May 2008 signed by Trussnet Nevada, D8, Xintong and Tianyi (“Supplementary Agreement”);
(e)	a supplementary agreement dated 17 November 2008 between Trussnet Nevada and D8 to amend the GSSA (“GSSA Supplementary Agreement”);
(f)	another subscription and shareholders’ agreement dated 16 February 2009 (“TCPSSA”) by P2 as Investor and the other parties being the same as for the GSSA;
(g)	an addendum to the TCPSSA dated 16 February 2009 between P2 and D8 to supplement the terms of the TCPSSA (“TCPSSA Addendum”);
(h)	an assignment dated 4 April 2011 (“Assignment”) whereby P2 (who executed the TCPSSA as Investor) assigned its right and interest in the TCPSSA and TCPSSA Addendum to P1, but Ds disputed the validity of the Assignment.

19.  Although the formal transaction documents were structured as subscription and shareholders’ agreements, the JV deal was not merely for Ps’ camp to acquire option to subscribe D1’s 49% Shares in exchange for US$196,000,000. Rather, the essential “root” or very substance of the JV deal was that in return for Ds’ camp agreeing to transfer to the WOFIE (ie D1’s indirect subsidiary Yunji) the right to 49% of the revenue from operating 3.5GHz WBA business (“3.5GHz Business”) in the 29 Cities under D8’s 29 Cities Licences, Ps’ camp would secure investment financing to pay for equipment/services in designing, engineering, building and operating the WBA networks under D8’s 29 Cities Licences to provide 3.5GHz Services in the 29 Cities. This was reflected in preconditions, provisions and warranties in the formal transaction documents, and explained why MIIT’s renewal/extension of D8’s 29 Cities Licences for 5 years (“Licence Extension”) was vitally important. Plainly, bare acquisition of the 49% Shares in D1 as a bare shell SPV without valid 3.5GHz Licences to carry on 3.5GHz Business in the 29 Cities would have no commercial purpose, would defeat the JV Project/deal, and would not have justified the substantial acquisition/subscription price of US$196,000,000.

20.  The TCPSSA was the relevant formal transaction document with the earlier agreements forming part of the factual background/matrix. Ps’ claim could be broadly categorised as follows:

(a)	breach of contract against D1, D6, D7, D8 and D9 being failure to:
	(i)	deliver to Ps adequate Licence Extension of D8’s 29 Cities Licences;[12]
	(ii)	use funds injected by Ps for the 1st/2nd Agreed Purposes via the 1st/2nd Agreed Routes (see paragraph 38 and 149 below);[13]
	(iii)	obtain Ps’ prior consent for certain matters specified in Schedule 5 of the TPCSSA;[14]
(b)	breach of Quistclose trust against D1, D6 and D7;
(c)	conspiracy to injure against D6, D7 and D10,
(d)	unjust enrichment against D10.

In raising the aforesaid claims, Ps also alleged breach of the Double Signatures Arrangement vis-à-vis Chinacomm Account 1, and D1’s failure to enter the name of P2 (as Investor) in its register of members/shareholders upon Closing, to register the 49% Shares with the relevant Cayman Islands’ registry/authority and/or to provide documentary evidence of inter alia such filing and/or allotment/issue of such shares within 7 business days from Closing.[15] But Ps would not claim for (1) infringement of copyright and/or loss of profits, (2) account of usage of the First Payment (see paragraph 35(c) below) of US$5,000,000 (“US$5M Sum”), and (3) had no claims against D2, D3, D4[16] and D5.

21.  Ps’ monetary claims against D1, D6, D7, D8 and D9 were for US$9,749,599 (ie the US$5M/US$4.75M Sums), and their claim against D10 was for US$4,500,000 (ie the US$4.5M Sum). Ps sought the following reliefs:

(a)	as against D1 – (i) declaration for breach of trust, (ii) restitution/refund of the sum of US$9,749,599 (ie US$5M/US$4.75M Sums) or damages for loss of monies injected into the Project in the sum of US$9,749,599, (iii) refund of the remaining balances in Chinacomm Accounts 1 and 2, and (iv) injunction restraining further dissipation of monies belonging to Ps;
(b)	as against D6/D7 – (i) declaration for breach of trust, (ii) damages for loss of monies injected into the Project in the sum of US$9,749,599, (iii) damages for conspiracy, and (iv) injunction restraining further dissipation of monies belonging to Ps;
(c)	as against D8/D9 – (i) damages for loss of US$9,749,599, and (ii) injunction restraining further dissipation of money belonging to Ps;
(d)	as against D10 – (i) declaration that the Surety Agreement (see paragraph 163 below) was void ab initio, (ii) declaration for breach of trust, (iii) damages for loss of the US$4.5M Sum, (iv) “[conversion] of the [US$4.5M Sum] in [D10 Account] to [Ps]”, (v) damages for conspiracy, (vi) declaration of unjust enrichment of the US$4.5M Sum, and (vii) injunction restraining further creation of encumbrances on the US$4.5M Sum to Ps’ detriment.

22.  Tay gave evidence for Ps, and D10 gave evidence for Ds. D6, who was supposedly Ds’ main witness, did not attend trial to give evidence. Ds denied liability, but was unable to deploy the full ambit of their pleaded defence in the absence of D6’s factual evidence. Further, on 28 May 2014 Master S Kwang (as he then was) granted leave for Ds to discontinue their counterclaim against Ps. Mr Hui put Ds’ defence case as follows:

(a)	for the alleged breach of contract,
	(i)		insofar as necessary, Ds would argue there was no precondition of Licence Extension for the 29 Cities Licences in respect of payment of the US$5M/ US$4.75M Sums;
	(ii)		there could not be any claim for alleged failure to obtain Ps’ prior consent as Ps did not plead particulars of alleged breach of Schedule 5 of the TCPSSA and alleged losses suffered as a result, and even if Ps were entitled to damages, such damages would not have amounted to US$5,000,000 (US$5M Sum) and US$4,750,000 (US$4.75M Sum);
	(iii)		since the TCPSSA was completed with deal closed and Ps received what they had bargained for, Ps were not entitled to recover the US$5.M/ US$4.75 Sums they had paid;
	(iv)		further and/or in the alternative, Ps unequivocally waived the aforesaid alleged precondition and relevant contractual provisions;
(b)	for alleged breach of the Quistclose trust,
	(i)	there was no sufficiently specific purpose attached to payment of the US$5M/US$4.75M Sums so no Quistclose trust could ever arise;
	(ii)	even if there was a sufficiently specific purpose, there could not be any breach of Quistclose trust since the specific purpose had not failed;
	(iii)	anyway, since there was no segregation of funds for the First Payment (US$5M Sum) and hence no certainty of subject matter, no Quistclose trust could arise;
(c)	D10 was not liable for unlawful means conspiracy since there was no effective combination and no unlawful means;
(d)	D10 was not unjustly enriched at Ps’ expense.

23.  But Ds would not dispute the following:

(a)	the parties entered into the BSA, TDFA/TNFA, GSSA (and GSSA Supplementary Agreement) and TCPSSA (and TCPSSA Addendum) voluntarily, so the issue was their legal effect;
(b)	some agreements in (a) above were entered into by P1’s/P2’s predecessors, associates, agents and/or nominees;
(c)	D8 was eventually unable to secure Licence Extension of the 29 Cities Licences, so the issue was whether Ps could then sue for the US$5M/US$4.75M Sums that they had paid so far or for damages.

24.  Neither Ps nor Ds adduced evidence of PRC and/or Cayman Islands law. Mr Chan and Mr Hui agreed that if issues herein touched upon such foreign law, this court should apply Hong Kong law.[17]

III.  WITNESSES

25.  In assessing witnesses’ credibility, I bear in mind not only their demeanour in court but also the intrinsic value of their evidence upon considering the totality of their evidence against the pleadings, chronology of events, documentary evidence and inferences based on inherent probabilities and/or undisputed facts.[18]

26.  In my view, Tay was an honest/credible witness. His evidence was clear and measured, and sat well with important contemporaneous documents. He was ready to make concessions on certain matters where appropriate, but stood his ground when intensely questioned over the core of Ps’ case. He struck me as a straightforward and reliable witness.

27.  The same could not be said of D10 whose evidence had to be approached with caution. His evidence was inherently evasive and closed. Cross-examination revealed prior serious inconsistency in his witness statement, affirmations and oral testimony, and my confidence in his evidence was undermined not just by alterations in his accounts but also by his unconvincing explanations. He was vague or confusing on certain things, and evasive and non-responsive on others. I find his evidence unsatisfactory, and except for matters I accept below, I reject his evidence on the core matters.

IV.  GENESIS OF THE PROJECT

28.  In 2007 China started to deregularise the telecommunications industry. Whilst foreign vendors, operators and firms were eager to enter the Chinese market, they were only allowed to do so as minority JV partner of state companies engaged in such business.[19] Ps’ camp and their investors were interested in D8, ie a state company that held the 29 Cities Licences but lacked expertise, know-how and/or experience to build, manage and/or operate WBA networks of such magnitude. Ps’ camp felt they could assemble business partners[20] and technical teams[21] to design, build, utilise and operate profitable WBA networks for the 29 Cities with a view to eventual public exit by flotation of shares of the JV SPV in a stock market. But the vitality of such JV Project would depend on the domestic partners being able (a) to have connections/contacts to secure necessary regulatory umbrella for the 3.5GHz Licences for the 29 Cities, and (b) to prepare, demobilise and improvise D8’s Existing System (see paragraph 36(a) below) to receive the new WBA network/system for the 29 Cities to be built for the Project (“New System” that would include design, engineering and operational works).

V.  29 CITIES LICENCES

29.  In 2007, Tay/Alvarez were introduced to D6/D7, who told them D8 was looking for investors to extend its 3.5GHz Business. Tay/Alvarez were excited about such investment opportunity. During negotiations, D6 showed Tay/Alvarez the following 3.5GHz Licences:

(a)	a 3.5GHz Licence issued on 12 June 2002 for experimental operation of 3.5GHz WBA network in the 5 Cities that would have expired on 31 December 2006 (C/6, “Old 5 Cities Licence”), but on 27 April 2007 the validity period of such licence was extended to 31 December 2008 (ie the 5 Cities Licence);
(b)	the 25 Cities Licence issued on 2 August 2006 with validity period of 5 years from 28 February 2003 to 29 February 2008.

The above showed MIIT permitted D8 to provide 3.5GHz Services in the 29 Cities from 28 February 2003 to 29 February 2008 (ie 5 years). As the 29 Cities Licences had validity period of 5 years, so both Ps’ camp and Ds’ camp understood/expected Licence Extension to be also for 5 years.

30.  Tay learned from due diligence findings that D8 was in bad financial shape, so although the Old 5Cities Licence was issued in 2002, D8 did not have financial resources and technical capability to implement what was required under the 29 Cities Licences to carry on 3.5GHz Business in the 29 Cities. Tay came to know this himself when he visited D8’s corporate offices/facilities, and spoke with D8’s key management team. But D6/D7 assured Tay/Alvarez they had good personal connections with MIIT and D8 was historically connected to MIIT (eg its chief scientist and director Xie Linzhen (“Xie”) was a retired MIIT section chief), so Ds’ camp would have no problem in obtaining Licence Extension for the 29 Cities Licences.[22]

31.  Negotiations proceeded on the basis Ps’ camp would provide network design capability and financial resources to build the New System whilst Ds’ camp would secure Licence Extension for the 29 Cities Licences without which the whole basis of the JV would be undermined. Tay/Alvarez took care to explore with D6/D7 possible business risks (eg likelihood of no Licence Extension for the 29 Cities Licences), but D6/D7 repeatedly assured them there should be no problem with Licence Extension (and referred to the renewed/extended 5 Cities Licence as illustration/support).

32.  Eventually, Tay/Alvarez for Ps’ camp and D6/D7 for Ds’ camp agreed in principle to set up a JV Project for carrying on 3.5GHz Business in the 29 Cities. The initial framework understanding for such deal was set out in the BSA that reflected the matters in paragraphs 19, 28 and 31 above.

VI.  BSA DATED 1 NOVEMBER 2007

33.  In my view, Ps’ camp relied on D6’s/D7’s representations in paragraph 30 above to cause Trussnet Delaware to enter into the BSA with D8 on 1 November 2007 whereby Trussnet Delaware would (a) design the New System and develop 3.5GHz Services for the 29 Cities, (b) provide technical services and arrange financing for the Project, and (c) be granted an option to acquire up to 49% “preferred shares” in D8.

VII.  TDFA DATED 15 FEBRUARY 2008

34.  The parties went on to negotiate a more specific transaction agreement. Since a foreign operator could not have more than 49% shares in any domestic operator (see paragraph 28 above), and it would be a lengthy, unclear and complicated process to secure government approval for direct foreign investment in and share acquisition of such domestic operator,[23] PRC lawyers retained by D6/D8[24] advised the parties to adopt a “Sina” structure[25] recognised/used in Chinese telecommunications industry for the Project as summarised below, which reflected observations in paragraphs 19, 28 and 31 above and paragraph 35(a)-(b) below, and which went to the “root” and very substance of the Project and JV deal:

(a)	D8 as licence-holder was to arrange Licence Extension for the 29 Cities Licences;
(b)	Trussnet Delaware was to subscribe 49% shares in the offshore JV company (eventually D1) set up by D6, D7 and D8;
(c)	a WOFIE was to be set up as D1’s indirect subsidiary with Trussnet Delaware and D8 indirectly owning 49% and 51% of its shares;
(d)	such WOFIE was to enter into a series of exclusive agreements with D8 in connection with the construction, operation and maintenance of 3.5GHz WBA networks for the 29 Cities;
(e)	the WOFIE was to deal with the commercial launch/operation/service of the New System and to have all rights assigned by D8 in respect thereof in exchange for the revenue thereby generated;
(f)	P’s camp was to form a wholly-owned WOFIE (ie Trussnet WOFIE) to contract with the WOFIE in (c) above for leasing to the WOFIE equipment required for development of the New System, and to provide technical/management services to the WOFIE for procurement, installation and optimisation of such equipment.

35.  Ps’ camp involved their in-house lawyer Li Aibin (“Li”) and external lawyers Global Law to prepare the draft agreement for review by Ds’ camp and their external lawyers. On 15 February 2008, Trussnet Delaware and D8 signed the TDFA as addendum to the BSA for development the New System for 3.5GHz Services under the Project for the 29 Cities upon inter alia the following terms:

(a)	Trussnet Delaware through Gulfstream would sign an investment agreement with D1 and its owner(s), and would invest US$196,000,000 being the Acquisition Price to acquire D1’s 49% Shares with the remaining 51% shares in D1 to be indirectly owned by D8’s shareholders (Recital 4 and Article 1a);
(b)	D1 would set up D4 in Hong Kong, and D4 would set up a WOFIE in Mainland China (with 49% equity interests owned indirectly by Trussnet Delaware and 51% equity interests owned indirectly by D8’s shareholders) that would enter into a series of exclusive agreements with D8 in connection with the construction, operation and maintenance of 3.5GHz Services in the 29 Cities, and D8 shall pay relevant service fees to the WOFIE according to such services agreements (Recital 4 and Articles 1b and 1d);
(c)	the composition of the board of directors of D1, D4 and the WOFIE shall be identical and shall be appointed by Trussnet Delaware and D8 in accordance with the percentage of shareholdings of each shareholder of D1, and each of Trussnet Delaware and D8 shall appoint one person as bank signatory for D1, D4 and the WOFIE after payment of the First Payment of the Acquisition Price (“First Payment”) of US$5,000,000 to D1 (Article 1b);
(d)	subject to PRC law, the annual rental and service fees payable by D8 to the WOFIE under the various service agreements shall be 100% of the turnover after deducting all tax payable and other necessary operation cost in accordance with the budget approved by both Trussnet Delaware and D8 (Article 1g);
(e)	D1 or another mutually agreed upon company was to have an exit plan strategy of an IPO (initial public offering) in an agreed upon stock exchange (Article 1i);
(f)	Trussnet Delaware shall pay the First Payment to D1 after execution of the TDFA and within 10 business days after Trussnet Delaware received originals of the signed shareholders and board resolutions of D1 approving Trussnet Delaware’s acquisition of D1’s 49% Shares through Gulfstream (Article 2a);
(g)	Trussnet Delaware shall pay the First Payment as part of the Acquisition Price by 2 separate cash payments to D1 through Gulfstream, then D4 shall pay the First Payment into the WOFIE as part of the capital injection required under PRC law (Article 2a);
(h)	within 20 business days upon receipt of inter alia the following documents acceptable to Trussnet Delaware (and such documents shall be provided by D8 within 30 business days after payment of the First Payment), Trussnet Delaware shall pay US$141,000,000 of the Acquisition Price in cash into D1 through Gulfstream, then D4 shall pay such payments into the WOFIE as part of the capital injection required under PRC law (Article 2b):
	(i)	the Investment Agreement for the acquisition of D1’s 49% Shares shall be signed by the relevant parties, and disbursement plan of all parts of the Acquisition Price shall be provided in the Investment Agreement (Article 2b(i));
	(ii)	D1’s revised articles of association reflecting D1’s certain equity interests were owned by Gulfstream proportionally in accordance with payment of the Acquisition Price (Article 2b(ii));
	(iii)	written documents showing Trussnet Delaware had validly appointed directors, bank signatory, general manager and corporate financial officer for D1 and D4 (Article 2b(iii));
	(iv)	governmental approval in relation to establishment of the WOFIE, certificate of approval and business licence of the WOFIE, and articles of association of the WOFIE as agreed by Trussnet Delaware (Article 2b(iv));
	(v)	certified true copies of all corporate documents of D4 (Article 2b(v));
	(vi)	lease agreements duly signed by the Trussnet WOFIE[26] and WOFIE, and sub-lease agreements[27] and services agreements duly signed by Trussnet Delaware and the WOFIE, and services agreements duly signed by the WOFIE and D8 (collectively, “Services Agreements”) (Article 2b(vi));
	(vii)	all documents/information materially necessary for conducting comprehensive legal and financial due diligence on D8 (Article 2b(viii));
(i)	the remaining US$50,000,000 of the Acquisition Price shall be deemed to have been fully paid by Trussnet Delaware if the Trussnet WOFIE transferred the equipment to the WOFIE in accordance with Article 1e (see footnote 27 below) (Article 2c);
(j)	if D8 failed to provide the documents listed in Article 2b above within the time required therein, the First Payment shall be refundable to Trussnet Delaware within 80 days after expiration of such required time limit (Article 2d);
(k)	within 7 business days after payment of the above US$141,000,000, D8 shall provide to Trussnet Delaware written evidence showing acquisition of D1’s 49% Shares, D1’s amended articles of association, and change of directors, managers and bank signatory of D1/D4 had been properly filed with the relevant agencies (if necessary) (Article 2e);
(l)	D8 shall provide to Trussnet Delaware legal evidence to show the 29 Cities Licences had been duly extended and were valid (Article 2f);
(m)	except as otherwise provided in the TDFA, the other provisions of the BSA shall remain valid (Article 4a).

36.  In 2008, after having signed the TDFA, Ps’ camp started to deploy staff to D8’s offices to work with D8 on preliminary preparation, demobilisation and improvisation works that were not revenue-generating (“Preparatory Works”), and to engage third party consultants (eg Nortel Networks (China) Limited (“Nortel”) – see footnote 27 above) to provide professional services for the Project. The Preparatory Works comprised 2 components:

(a)

Identification of (i) access points and (ii) utilisation / non-utlisation of the existing network/infrastructure of underground pipework and fibre optic lines for the 29 Cities previously laid by the military[28] and then owned by D8 (“Existing System”), which works were D8’s responsibility (“Ds’ Preparatory Works”) The team for the Project from Ps’ camp (“Ps’ team”) did not have access to D8’s proprietary knowledge and/or confidential information of the Existing System (which were kept at D8’s offices) or to security-related facilities open only to D8 as a state company, so D8 had to identify/locate all access points of the Existing System, to ascertain whether the existing fibre optic lines were let/utilised, and to work under advice by Ps’ team to prepare/ready the Existing System to facilitate Ps’ team to (1) work on components/design of the New System in order to tap into the Existing System, (2) advise the team for the Project from Ds’ camp (“Ds’ team”) on the requirements of the New System, and (3) work with Ds’ team on integration with the New System.

(b)

Design of the New System, which works were Trussnet Delaware’s responsibility (“Ps’ Preparatory Works”) Ps’ team could start to design the New System, review vendors’ proposals and come up with requirements for the new business model pending completion of Ds’ Preparatory Works, which works would enable Ps’ team to locate the access points of the Existing System for finalising the engineering design of the New System for integration with the Existing System.

Thus, whilst Ps’ team could start on their works, they could not finish until Ds’ team completed theirs. But D8 was quite passive over Ds’ Preparatory Works due to limited expertise/know-how, and they did not entirely allow Ps’ team to work with them or to understand how the First Payment (ie the US$5M Sum) was utilised.

VIII. TNFA DATED 7 APRIL 2008

37.  Due to internal business re-organisation, Trussnet Delaware’s shareholders decided to have Trussnet Nevada take over part of the business of Trussnet Delaware. On 7 April 2008, with agreement of all relevant parties, Trussnet Nevada and D8 signed the TNFA for Trussnet Nevada to substitute Trussnet Delaware with minor amendments to the agreement, so Trussnet Nevada had the option to acquire D1’s 49% Shares for US$196,000,000. 2 features of the TDFA/TNFA were of note:

(a)	the “Sina” structure provided for Ps’ camp to invest in D1 (which was an indirect mechanism to invest in D8) with a view to enter into a full-fledged subscription agreement governing the parties’ rights/obligations (ie the GSSA);
(b)	there was a “double signatures arrangement” as Article 1b provided each of Trussnet Delaware / Trussnet Nevada and D8 to appoint one person as bank signatory for D1, D4 and Yunji “after the First Payment has been paid to D1” (see paragraph 35(c) above).

IX.  FIRST PAYMENT AND D4

38.  The TDFA/TNFA (see paragraph 35(g) above) provided for Trussnet Delaware to pay D1 via Gulfstream the First Payment as part of the Acquisition Price by (a) an agreed route from Trussnet Delaware / Trussnet Nevada to D1, from D1 to D4, and then from D4 to the WOFIE (ie Yunji) (“1^st Agreed Route”) (ie D8 was not part of the Agreed Route) for (b) an agreed, specified and dedicated (hence exclusive) purpose as part of capital injection for the WOFIE (ie Yunji) required under PRC law (“1^st Agreed Purpose”).

39.  Ps’ camp did not ask for payment of the First Payment into a separate account because D6/D7 claimed monies were needed fairly urgently for Ds’ Preparatory Works and/or works under the Disbursement Plan (see paragraph below), and because of the following considerations: (a) D6/D8 disclosed D8’s bank statements and audited financial statements, (b) D8 was a state company with duty to disclose financial statements/ accounts, and (c) Ps’ team would vet transaction documents/receipts for ultimate utilisation of such monies. Moreover, the bulk of the US$5M Sum was actually deposited in Chinacomm Account 2, which was newly opened albeit not a designated account.

40.  In my view, Tay understood and D6/D7 agreed (and even assured Tay) Ps’/Ds’ teams would jointly work out items of needed works for ultimate use of the First Payment that was to be booked as part of the WOFIE’s capitalisation.[29] D8 provided a Disbursement Plan that outlined a list of works for ultimate utilisation of the First Payment (“Disbursement Plan”), including Beijing WBA network deployment and radio frequency occupation, which works D6/D8 claimed would facilitate Licence Extension, and D6/D8 further claimed Ds’ Preparatory Works would also require funds. Nevertheless, the First Payment still had to go via the 1^st Agreed Route to be booked as part of capital injection for Yunji (ie the 1^st Agreed Purpose) before Yunji could disburse monies for such works. On balance, I find D6 for D6/D8 gave verbal collateral warranty that the First Payment would go via the 1^st Agreed Route for the 1^st Agreed Purpose whereupon such monies could be used for Ds’ Preparatory Works and/or works specified in the Disbursement Plan (“Collateral Warranty”).

41.  Pursuant to the TDFA/TNFA and relying on the Collateral Warranty, Trussnet Delaware / Trussnet Nevada paid the US$5M Sum as the First Payment in the following manner:

(a)	between 7 March and 18 April 2008 Trussnet Delaware through Gulfstream wired a total sum of US$4,000,000 less bank charges (ie US$3,999,803.26) (“US$4M Sum”) to D1’s Chinacomm Account 2;
(b)	a sum of RMB7,000,000 (or US$1,000,000) (“US$1M Sum”) was wired from a PRC company affiliated with Trussnet Delaware to the bank account of D8’s Beijing subsidiary with the Yayuncun branch of Beijing Rural Commercial Bank by order/instructions of D1/D8.

42.  Ds’ camp was responsible for setting up the WOFIE, so Yunji was incorporated in Beijing on 8 April 2008 by D1, D6, D7 and D8 through D4. I disagree Ps’ camp was required to pay Yunji’s capitalisation first otherwise it business licence would not be issued. After all, the TFDA/TFNA required D8 to provide the WOFIE’s business licence before Trussnet Delaware was to pay the 2^nd tranche of the Acquisition Price of US$141,000,000:[30]

(a)	the First Payment was for part and not all of capital injection for the WOFIE under PRC law (see paragraph 35(g) above);
(b)	the First Payment was paid between 7 March and 18 April 2008 (see paragraph 41 above), but Yunji’s business licence was already issued on 8 April 2008 (C/37);
(c)	Yunji’s business licence stated its registered capital was US$99,000,000 so the First Payment could only have been part of capital injection for Yunji (see (a) above);
(d)	immediate payment of the entire registered capital of US$99,000,000 was not required as Yunji’s business licence specified “實收資本(注冊資本待收)” and “(下期出資時間2008年7月7日)”, and there were subsequent postponements of such deadline (see paragraph 144 below);
(e)	the US$5M Sum (fully paid by 18 April 2008) was for the 1st Agreed Purpose (ie part of capital injection for Yunji) via the 1st Agreed Route (see (a) above);
(f)	D8 had to provide documents specified in Article 2b(i)-(viii) of the TDFA/TNFA and acceptable to Trussnet Delaware within 30 business days after payment of the First Payment, and Trussnet Delaware had to pay US$141,000,000 (2nd tranche of the Acquisition Price) in cash via the 1st Agreed Route for the 1st Agreed Purpose within 20 business days upon receipt of such documents (see paragraph 35(h) above);
(g)	(e)-(f) above meant if D8 provided the requisite/acceptable documents within the prescribed time (but D8 did not as evident from, say, paragraph 43 below), the 2nd tranche of the Acquisition Price (US$141,000,000) would have been payable within 50 business days of payment of the First Payment as capital injection for Yunji to meet “下期出資時間2008年7月7日”.

X.  AFTERMATH OF TDFA/TNFA

(a)  Double Signatures Arrangement

43.  Despite Trussnet Delaware’s / Trussnet Nevada’s requests, D6, D7 and D8 failed to set up the Double Signatures Arrangement for the bank accounts of D1, D4 and/or Yunji.[31] The purpose of the Double Signatures Arrangement was to protect investments by P’s camp in the Project by having sufficient control over the Acquisition Price to be paid, ie to ensure such monies were booked for the 1^st Agreed Purpose via the 1^st Agreed Route, and ultimately used for works agreed by both parties. At first, Ps’ camp adopted a tolerant attitude when D6 claimed there were difficulties in implementing the Double Signatures Arrangement for the WOFIE (ie Yunji), and hoped things would work out. But as time went by and Ds’ camp still did not implement the Double Signatures Arrangement for D1, D4 and Yunji without justifiable reason, it became a point of conflict, which in my view reflected a permeating theme in the business relationship between Ps’ and Ds’ camps, ie Ds’ camp was passive in their contribution to the Project, but was anxious for Ps’ camp to pay monies and then to seize unilateral control/use of such monies.

(b)  1^st Agreed Route/Purpose and Disbursement Plan

44.  I find D8 did not cause D1 to transfer and D1 did not transfer the US$5M Sum via D4 to Yunji (ie 1^st Agreed Route) as part of capital injection for Yunji (ie 1^st Agreed Purpose), and D6/D8 failed to comply with the Collateral Warranty.

45.  The bank statements of the newly opened Chinacomm Account 2[32] showed that after the US$4M Sum was wired to such account, US$1,000,000, US$500,000 and US$2,000,000 were transferred to various third parties[33] (with no apparent connection with Yunji or the Project) on 3, 26 and 26 June 2008 respectively, leaving a balance of US$499,653.89 (“1^st Balance”). There was nil balance in Chinacomm Account 2 before deposit of the US$4M Sum,  and there were no further transactions before the aforesaid 3 withdrawals from the US$4M Sum, so there was no mixing of funds.

46.  On 30 June 2008 there was an anonymous deposit of US$1,999,948.17 (presumably US$2,000,000 less bank changes), and on 2 July 2008 there were anonymous transfer withdrawals of US$2,000,000 and US$100 (presumably bank charges), leaving a balance of US$499,502.06 (“2^nd Balance”). There were no other transactions before the 2^nd Balance was substantially disbursed on 23 December 2008 (US$450,000) and 17 September 2009 (US$36,000) to third parties[34] (with no apparent connection with Yunji or the Project).

47.  I have no doubt the withdrawal of US$2,000,000 on 2 July 2008 was from the deposit on 30 June 2008 and not from the US$4M Sum because (a) the amount of such withdrawal far exceeded the 1^st Balance, and (b) Ds in paragraph 42 of the D&C averred that on 23 December 2008 US$450,000 out of the US$5M Sum was debited from Chinacomm Account 2 allegedly to repay D8’s alleged RMB fund providers (see paragraph 60 below), thus acknowledging the 2^nd Balance (from which US$450,000 was debited) was derived from the US$4M Sum. Given such admission, there was no mixing of funds for withdrawal of US$450,000 from Chinacomm Account 2. Further, I infer/find the debit transactions from the US$4M Sum in Chinacomm Account 2 explained in paragraphs 45-46 above did not take the 1^st Agreed Route and/or did not concern the 1^st Agreed Purpose, works specified in the Disbursement Plan, Ds’ Preparatory Works and/or the Project.

48.  In paragraph 30(b)(iv) of the Defence and Counterclaim (“D&C”), Ds alleged that to minimise loss resulting from forfeiture of partially injected capital of the WOFIE (ie Yunji) in case it “failed to capitalise and verify the whole of the registered capital within the specified timeframe”, D1 only paid US$2,000,000 out of the First Payment as Yunji’s registered capital whilst the balance of the First Payment was paid to D8 for expenses of the Project according to the Disbursement Plan.

49.  There was no evidence to support such averments, which could only serve as admission that D8/D1 failed to cause the entire US$4M Sum to be used for the 1^st Agreed Purpose via the 1^st Agreed Route. Article 2b of the TDFA/TNFA (see paragraphs 35(h) above) provided the 2^nd tranche of Acquisition Price (US$141,000,000) was not yet payable pending D8’s provision of the requisite/acceptable documents in Article 2b(i)-(viii), so Trussnet Delaware / Trussnet Nevada could not be blamed for not making further capital injection for Yunji and/or for any feared failure to capitalise/verify Yunji’s entire registered capital within specified timeframe. Nevertheless, the deadline for full capitalisation was postponed without forfeiture of Yunji’s business licence (see paragraph 144 below), so there was no justification for D8/D1 not to apply the entire US$5M Sum for the 1^st Agreed Purpose, and I am not satisfied the US$4M Sum was disbursed for works specified in the Disbursement Plan and/or Ds’ Preparatory Works.

50.  As for the US$1M Sum, there was no or no credible evidence it had been paid to Yunji via D4 (ie the 1^st Agreed Route), booked as part of the capital injection for Yunji (ie the 1^st Agreed Purpose) and/or disbursed for works specified in the Disbursement Plan, Ds’ Preparatory Works and/or other works for the Project. Given (a) paragraph 30(b)(iv) of the D&C (see paragraph 48 above), (b) debits from Chinacomm Account 2 to third parties unconnected with D4, Yunji and/or aforesaid works, and (c) lack of evidence as to utilisation of the US$1M Sum, I infer/find the US$1M Sum was not (i) transferred via the 1^st Agreed Route for the 1^st Agreed Purpose, (ii) disbursed for works specified in the Disbursement Plan and/or for Ds’ Preparatory Works, or (iii) spent on the Project.

51.  Such non-compliance with the 1^st Agreed Route/Purpose in respect of the US$5M Sum was in breach of the TDFA/TNFA, which did not give liberty to D1/D8 to directly utilise such monies. In my view, the 1^st Agreed Route/Purpose made commercial sense. Since D4 and Yunji were D1’s direct/indirect subsidiaries, the investment funds from Ps’ camp should be properly routed from D1 via D4 to Yunji as the operational SPV for the Project, and properly booked as part of its capital injection (especially when its business licence imposed a deadline for such purpose, and part capitalisation was needed for postponing such deadline) before using the same for required/agreed works.

(c)  Information on works progress and use of US$5M Sum

52.  After a while Ps’ camp checked on progress of Ds’ Preparatory Works, but became concerned when there was no progress report as to when Ps’ team could integrate their works with Ds’ Preparatory Works. Ps’ camp asked Ds’ camp for details and bills of quantities of work done, and breakdown as to use of the US$5M Sum. D6-D8 were not responsive until September 2009 when D8 gave a 1-page excel worksheet (“D8 Worksheet”) of broad items totalling RMB33,944,800 (about US$5,000,000)[35] without detailed particulars and/or supporting documents. I accept Tay’s evidence that (a) professional review of the D8 Worksheet by Ps’ team showed the value of listed works did not amount to US$5,000,000, and (b) D8 only did minimal/cosmetic works without properly identifying/listing access points of the Existing System and carrying out Ds’ Preparatory Works to facilitate design/integration of the New System. Tay / Ps’ team continued to press for details of work done for and utilisation of the US$5M Sum to no avail. Ps’ camp was unhappy about this, which explained why Ps later insisted on the Double Signatures Arrangement for the US$4.75M Sum.

(d)  29 Cities Licences

53.  D8 failed to obtain Licence Extension for the 25 Cities Licence when it expired on 29 February 2008. In paragraph 33 of the D&C, Ds averred D6 had on a number of occasions informed Tay D8 (i) needed funds to start/continue construction works in the licensed cities, and (ii) would lose the 3.5GHz Licences for those cities where construction works were not commenced. I disagree with such averment:

(a)	there was no evidence adduced at trial to support such averments;
(b)	as explained in paragraphs 42 and 49 above, Trussnet Delaware / Trussnet Nevada was not required to pay the 2nd tranche of the Acquisition Price (US$141,000,000) until after receipt of the requisite/acceptable documents in Article 2b(i)-(viii) of the TFDA/TFNA, but there was no evidence all such documents were available;
(c)	the TDFA/TNFA did not provide for Trussnet Delaware / Trussnet Nevada to pay further sum(s) apart from the 2nd tranche of the Acquisition Price (US$141,000,000);
(d)	as explained in paragraphs 36 and 52 above, Ds’ team had been passive about Ds’ Preparatory Works and did not entirely allow Ps’ team to work with them, and the work done by Ds’ team under the Disbursement Plan as per the D8 Worksheet was cosmetic and insubstantial.

54.  Ds admitted Tay/Alvarez did raise query about the status of the 29 Cities Licences (see paragraph 56(b) of the D&C), and in my view, they would not have queried Ds’ camp about Licence Extension if it was dependent on further injection of funds which Ps’ camp did not pay. Rather, D6/D7 for themselves and D8 told Ps’ camp that delay in Licence Extension was due to MIIT’s internal administrative procedures, but renewed/extended licences would be issued soon. At that time Tay/Alvarez believed such explanation given D8’s past success in securing Licence Extension for the Old 5 Cities Licence, and D6’s assurance of good relationship with MIIT (with a retired MIIT official as D8’s board member – see paragraph 30 above), so Ps’ camp caused Gulfstream to enter into the GSSA with Ds.

XI.  GSSA DATED 23 MAY 2008

55.  On 23 May 2008, pursuant to Article 1a of the TNFA, Gulfstream (as Investor) and D2 and D3 (as founders/shareholders of D1), D1 (as the company), D6 and D7 (as guarantors), and D8 and D9 (as warrantors) signed the GSSA that supplemented the TDFA/TNFA and provided Gulfstream with the right to subscribe D1’s 49% Shares at the Subscription Price of US$196,000,000. The essential terms of the GSSA were as follows:

(a)	Investor was defined to mean Gulfstream and any other person to whom Gulfstream would transfer its Shares (defined to mean ordinary shares in D1) and who would become a party as an “Investor” by signing a Deed of Adherence (in the form set out in Schedule 7) in accordance with the GSSA and was named therein as an “Investor”;
(b)	Gulfstream shall apply for the allotment/issue to it at Completion 2,450,000,000 ordinary shares of D1 (ie 49% Shares) at the Subscription Price of US$196,000,000 subject to the Completion Conditions in Schedule 3 being satisfied or waived in writing by the Investor (at its sole discretion) (Articles 3.1 and 4.1);
(c)	as for the Subscription Price payable by the Investor,
	(i)	the First Payment of US$5,000,000 shall be paid to D1 as part payment and part satisfaction of the Subscription Price “in accordance with relevant articles of [TNFA]” (Article 3.2(a));
	(ii)	US$141,000,000 shall be paid as part payment and part satisfaction of the Subscription Price within 60 Business Days from the Completion Date in accordance with the following schedule: (1) at least US$50,000,000 shall be paid within 20 Business Days from the Completion Date, (2) at least US$100,000,000 shall be paid accumulatively within 40 Business Days from the Completion Date, and (3) the difference shall be paid within 60 Business Days from the Completion Date (Article 3.2(b));
	(iii)	US$50,000,000 shall be paid as part payment and part satisfaction of the Subscription Price to the Investor WOFIE[36] as registered capital within 45 Business Days from the Completion Date (Article 3.2(c));
(d)	Completion Date was defined to mean the 5th Business Day after all Completion Conditions set out in Schedule 3 had been fulfilled and/or waived, and one of the Completion Conditions set out in Schedule 3 was “the Investor representatives has met with the relevant officials of the Ministry of Information Industry [predecessor of MIIT] who are in charge of the issuance and extension of 3.5G licenses, and such officials have orally approved the extension of [D8’s] 3.5G licences [ie the 29 Cities Licences]” (Schedule 3(j));
(e)	subject to the Completion Conditions being satisfied or waived in writing by the Investor (at its sole discretion) on or prior to Completion, Completion of the subscription by the Investor of the 49% Shares shall take place on the Completion Date when the events set out in Article 4.4 shall take place in such order as the Investor might require (Article 4.1);
(f)	if the Completion Conditions shall not have been fulfilled or waived by the Investor (at its sole discretion) on or before 60 Business Days after the First Payment Date[37] (or such other date as might be agreed by the parties in writing), the GSSA (other than certain specified provisions) shall terminate and be null and void and of no effect except for the liability of any party to the other parties in respect of any antecedent breaches of the terms of the GSSA (Article 4.2);
(g)	in the event the GSSA was terminated pursuant to Article 4.2, D1 shall refund, D1 (as the company), D2 and D3 (as founders) and D6 and D7 (as guarantors) shall jointly and severally be liable to refund, the full amount of the First Payment to Investor (Article 4.3);
(h)	a series of events shall occur on the Completion Date, including inter alia the following (Article 4.4):
	(i)	a meeting of the board of D1 shall be held at which D1 shall approve (1) the appointment of 4 persons nominated by the Investor as Investor Directors and the appointment of 5 persons nominated by D2 and D3 (as founders) as Founder Directors, and (2) the appointment each one of the Investor Director and the Founder Director to jointly operate all bank accounts of D1 (as the company) (Article 4.4(a)(i) and (xi));
	(ii)	subject to completion of the matters in, say, (i) above, the parties shall procure and D1 shall inter alia deliver the share certificate for the 49% Shares to the Investor (Article 4.4(b)(i));
	(iii)	meetings of shareholders (where necessary) and/or board of directors of D4 and the WOFIE shall be held respectively at which inter alia the persons as listed in Article 4.4(a) shall be appointed for the same position in D4 and the WOFIE (Article 4.4(c)(i));
(i)	within 7 Business Days from the Completion Date, D1 shall file with the relevant companies registry(ies) or other authorities, and provide to the Investor documentary evidence relating to such filing of, the allotment and issue of the 49% Shares, the appointment of the Investor Directors, the adoption of the new articles of association and any other matters of Completion and Completion Conditions the filing of which was required by the applicable law or by the Investor in its sole discretion (Article 4.5);
(j)	within 7 Business Days from the Completion Date, D1 shall procure that D4 and the WOFIE shall file with the relevant companies registry(ies) or other authorities, and D1 shall provide to the Investor the documentary evidence relating to such filing of the appointment of company officers pursuant to Article 4.4(c)(i) and the adoption of their new articles of association and any other matters of Completion Conditions relating to D4 and the WOFIE the filing of which would be required by the applicable law or by the Investor at its sole discretion (Article 4.6);
(k)	within 90 Business Days from the Completion Date, D1 (as the company) shall provide to the Investor documentary evidence in relation to the valid extension of the 29 Cities Licences which had expired by the time of the GSSA (Article 4.7);
(l)	“[the] Warrantors[38] acknowledge that the Investor has been induced to enter into [the GSSA] and to subscribe for the 49% Shares on the basis of and in reliance upon the Warranties[39] amongst other things” (Article 6.1);
(m)	such Warranties in Part 2, Schedule 4 concerned inter alia the 29 Cities Licences:
	(i)	“[D8, D9, Chinacomm Guangdong Internet Co Ltd and Chinacomm Shanghai Internet Management Co Ltd and their respective subsidiaries from time to time, collectively “Chinacomm”] has obtained all approvals, permits, consents and/or licences which are necessary under the PRC law and regulations for its execution and performance of [the GSSA] and the Other Agreements and such approvals, permits, consents and/or licences are in full force and valid” (Clause 1.3);
	(ii)	“[all] necessary licences, consents, registrations, permits and authorities (public and private) have been obtained by [D8] to enable [D8] to carry on its business effectively in the PRC and in the manner in which such business is now carried on and all such licences, consents, permits and authorities are valid and subsisting and the Warrantors know of no reason why any of them should be suspended, cancelled or revoked or should not be renewed or reissued upon or prior to their expiry” (Clause 6.2);
	(iii)	“Chinacomm lawfully and validly holds valid licences (or, if any of the licenses are expired at the time of [the GSSA], Chinacomm will obtain extension of such licenses in accordance of [the GSSA]) issued by the PRC competent authority(ies), including but not limited to the Ministry of Information Industry, for the construction and operation of 3.5G Hz wireless broadband operation in the Territory [defined to mean the 29 Cities as set out in Schedule 8 of the GSSA], …… and there had not arisen any circumstances that may result in the temporary or permanent cancellation or termination of such licences” (Clause 4.2);
(n)	the Investor was vested with veto power over major decisions in relation to the business operation of D1 (as the company), D4, WOFIE and Chinacomm as listed in Schedule 5 of the GSSA:[40]
	(i)	the Shareholders (ie each of D2 and D3 (as founders) and the Investor and the other members of D1 from time to time who are a party to the GSSA) shall exercise all voting rights and other powers of control available to them in relation to the Group (ie D1 and each/any subsidiary of D1) to procure that D1 (as the company) shall not, and no Group Company shall, without the prior written approval of the Investor and D2 and D3 (as founders) or by representatives of the Investor and D2 and D3 (as founders) at a general meeting of Shareholders of D1 (as the company), effect any of the matters referred to in Schedule 5 (Article 10.7);
	(ii)	as a separate obligation to (i) above, D1 (as the company) agreed that save with the prior written approval of the Investor, it shall not effect any of the matters referred to in Schedule 5 (Article 10.8);
	(iii)	the provisions of Articles 10.8 to 10.10 shall apply mutatis mutandis in respect of each other Group Company and Chinacomm (Article 10.12);
(o)	the GSSA and documents referred to or incorporated in it[41] constituted the entire agreement between the parties relating to the subject matter of the GSSA and superseded/extinguished any prior drafts, agreements, undertakings, representations, warranties and arrangements of any nature whatsoever, whether or not in writing, between the parties in relation to the subject matter of the GSSA (Article 26.1);
(p)	subject to Article 30.3, the GSSA was personal to the parties and no party shall (i) assign any of its rights under the GSSA, (ii) transfer any of its obligations under the GSSA, (iii) sub-contract or delegate any of its obligations under the GSSA, or (iv) charge or deal in any other manner with the GSSA or any of its rights or obligations (Article 30.1);
(q)	any purported assignment, transfer, sub-contracting, delegation, charging or dealing in contravention of Article 30.1 shall be ineffective (Article 30.2);
(r)	an Investor might assign the whole or any part of its rights in the GSSA to any person who had received a transfer of shares in the capital of D1 from such Investor in accordance with the new articles and had executed a Deed of Adherence (Article 30.3);

56.  On the same date as the GSSA and pursuant thereto, the parties entered into a set of exclusive service agreements and equipment leasing agreements whereby D8 contracted all services in relation to deployment/operation of its 3.5 GHz Business to the WOFIE (ie Yunji).

XII.  AFTERMATH OF GSSA

57.  To raise sufficient funds for inter alia the Project and through a series of reverse mergers in May 2008, Trussnet Nevada’s shareholders took over P1 (then known as Mortlock Ventures Inc with name change to China Tel Group Inc in April 2008) whose stock was traded in the US over-the-counter market, and Trussnet Nevada became a wholly-owned subsidiary of P1 (see footnote 8 above). I find Tay told D6, and Ds’ camp knew,[42] investment funds for the Project had to be raised from the Market (see paragraph 2 above), and the reverse mergers enabled Ps’ camp to acquire P1 as listed corporate vehicle for canvassing/securing investment funds for inter alia the Project from investors via the Escrow Procedure.

58.  P1 promoted the Project in the Market, and arranged for D6, D7 and D8’s other representatives to meet potential investors. I find P1 (by collaborating with D8 and working with financial/legal advisors) secured committed investment funds for the Project conditional upon assurance of Licence Extension for the 29 Cities Licences, which underlined the importance of Licence Extension to the whole JV/Project, and without which the balance of the Subscription Price was not payable:

(a)	the first US$50,000,000 was payable within 20 Business Days of the Completion Date (see paragraph 55(c)(ii)(1) above);
(b)	the Completion Date was the 5th Business Day after all Completion Conditions in Schedule 3 of the GSSA had been fulfilled (see paragraph 55(d) above);
(c)	there was no waiver by the Investor of any Completion Condition in writing (see paragraph 55(e) above) or otherwise;
(d)	1 of the Completion Conditions was for (i) the Investor representatives to meet with the relevant MIIT officials in charge of the issuance/extension of 3.5GHz Licenses, and (ii) such MIIT officials orally approved Licence Extension for the 29 Cities Licences (see Schedule 3(j) of the GSSA and paragraph 55(d) above);
(e)	I find Ds’ camp failed to arrange the meeting in (d)(i) above and there was no oral approval in (d)(ii) above, at least for the 25 Cities Licence that had expired, so the precondition in Schedule 3(j) of the GSSA for payment of the balance of the Subscription Price had not been fulfilled.

59.  Meanwhile, P1 through Trussnet Nevada / Gulfstream put more efforts into Ps’ Preparatory Works, including vendor selection,[43] equipment testing/purchase, site lease, network design, project management and engineering works.

60.  Despite the matters in paragraph 58 above, D6-D8 pressed P1 to inject more funds/capital by claiming Yunji/D8 were running out of money and unable to pay overdue bills. In paragraph 42 of the D&C, Ds averred that after signing the GSSA D6 (for D8) from time to time asked Tay to honour his alleged promise to pay part of the Subscription Price to enable D8 to commence/continue construction works for the 3.5GHz WBA networks in the 29 Cities in order to keep/renew the 29 Cities Licences, and further averred that D8 obtained RMB funds/facilities in Mainland China to meet payments for equipment, overheads and operational costs for such construction works, and made repayments to such fund providers’ nominated agents in Hong Kong.[44]

61.  But there was no evidence to support such alleged promise by Tay and/or such alleged RMB loans to D8 in 2008. In any event, I reject such contention. First, such contentions flied against the findings in paragraph 58 above which showed the 2^nd tranche of the Subscription Price was not yet payable under the GSSA. Secondly, the alleged Loan (see paragraph 162(a) below) to D8 from 江蘇吳江中色紡織有限公司 (“Wu Jiang”) and/or Wu Jiang’s major shareholder Sun Xiaohua (“Sun”) (which allegation I reject in Part XXVIII below) was in mid-2011. Thirdly, given the experience of lack of enlightenment as to utilisation of the US$5M Sum, Ps’ camp would not have paid further funds to Ds’ camp (whether inside/outside the GSSA regime) without the Double Signatures Arrangement and/or without agreed written Business/Disbursement Plans[45] for utilisation of such monies. Fourthly, Ds’ camp apparently let the 2^nd Balance from the US$4M Sum idle in Chinacomm Account 2 up to late December 2008, which did not sit well with Ds’ alleged critical need for monies to pay for alleged construction works.

62.  I prefer Ps’ case that further funds under the GSSA were to be provided upon assurance of the existence, renewal and/or extension of the 29 Cities Licences, but there was no such assurance as yet (see paragraph 58 above). Ds’ camp also had to provide the Investor with evidence of Licence Extension of the 29 Cities Licences, which Warranty[46] should be true, accurate and not misleading at inter alia the Completion Date subject only to any exceptions expressly provided for under the GSSA (see Article 6.2 of the GSSA), but again such evidence was not forthcoming. Since the Completion Conditions had not been fulfilled, Ds’ camp could not look towards the 2^nd tranche of the Subscription Price to pay for the alleged construction works.

XIII.  SUPPLEMENTARY AGREEMENT DATED 23 MAY 2008

63.  On the same day of execution of the GSSA, a Supplementary Agreement was signed by Trussnet Nevada, D8, Xintong and Tianyi to set forth some issues/principles relating to indirect acquisition of interest in D8 by Trussnet Nevada not covered by the BSA, TDFA/TNFA and GSSA. Some key terms of the Supplementary Agreement were as follows:

(a)	Trussnet Nevada was to purchase 40% shares in Xintong from Tianyi at the acquisition price of US$70,000,000 (Article 1a);
(b)	Trussnet Nevada and Tianyi should enter into a Share Transfer Agreement and any other documents as necessary for transfer of 40% shares in Xintong from Tianyi to Trussnet Nevada (Article 1b);
(c)	the first US$10,000,000 of the acquisition price should be paid within 60 business days as from the date of Completion (defined under the GSSA), and the full amount of the acquisition price should be paid within 270 days as from the date of Completion (Article 1e-f);
(d)	Tianyi and Xintong shall provide all documents/information necessary for conducting comprehensive legal/financial due diligence on Xintong by Trussnet Nevada before Completion (Article 1h);
(e)	the equity interest enjoyed by Trussnet Nevada as a shareholder of Xintong shall not exceed the equity interest it might enjoy from D8 as 49% shareholder (Article 1k);
(f)	the WOFIE and D8 shall assign all the services in relation to the deployment of the WBA network to the Investor WOFIE for all the 29 Cities (Article 4a);
(g)	D8 agreed all obligations of D8 under the GSSA and other agreements specified under Schedule 3(b)(iv) of the GSSA as well as the Supplementary Agreement shall also apply to its subsidiaries (Article 5a);
(h)	if there was any information known by D8 but not disclosed in the due diligence and caused adverse effect to D8’s business, assets or financial liabilities, the shareholders of D8, including Xintong, should be liable for compensation (Article 6c);
(i)	D8 agreed the corporate governance structure and management of D1 and the WOFIE should also apply to D8 except that the directors appointed by Trussnet Nevada to D8 shall be 2 and must be Chinese nationals, and subject to the approval of the shareholders meeting of D8 (Article 8a).

64.  Such transaction between Tianyi and Trussnet Nevada fell through due to (a) certain legal restrictions under PRC law, (b) lack of clarity as to the meaning of Article 1k, and (c) non-fulfilment of the Completion Conditions for Completion under the GSSA (for triggering payment of the acquisition price under the Supplementary Agreement) (see Part XII herein). Tianyi/Xintong also had not provided relevant documents/ information for Trussnet Nevada to carry out comprehensive legal/ financial due diligence on Xintong pursuant to Article 1h of the GSSA (see paragraph 63(d) above).

XIV.  REQUESTS BY PS’ AND DS’ CAMPS

65.  The 25 Cities Licences expired by 1 March 2008 (ie before the GSSA) without Licence Extension and/or oral approval thereof by relevant MIIT officials, and the 5 Cities Licence was about to expire by end of 2008. Ps’ camp made clear to D6-D8 that valid 3.5GHz Licences for the 29 Cities was the whole basis of the deal. Even though (as I have found) Ds’ camp also knew (a) Ps’ camp had to raise investment funds from the Market to pay the Subscription Price, and (b) P1 had to be accountable to investors under the Escrow Procedure for release/use of such investment funds sourced from the Market, D6 kept pressing Tay to let Ds’ camp have some monies pending Licence Extension. In the meantime, Ps’ camp followed up with D6-D8 about the status of Licence Extension.

66.  This was borne out by Tay’s email to D6 on 16 July 2008 (C/283-286) stating he arranged payment of the US$5M Sum “without security and guarantee but just on a word of trust with [D6]”, and going on to say as follows:

“…… I wish to help you but I have my difficulties which I need you to understand:

1. We are a public body and both [Alvarez] and I are responsible to the SEC (Stock Exchange Commission) for all public funds that we raised in Wall Street. For me to use the investors funds, there are many procedures and legislation by the SEC lawyers before we can legally forward the funds. …… every investors Agreement with us comes with a contingent clause that dictate: A. Their lawyer and our attorney must supervise the release of such funds. B. Only upon renewal and receipt of all WiMax licenses [ie the 29 Cities Licences]. For me to go against this legal requirement, will put George and myself in jail immediately. …… I know it is very important to our company for the Yi Zhuang contract and also the Beijing City Government network. The timing is just very bad and I cannot betray my trust to the company and our investors. ……

……

I told our shareholders (Trussnet) that apart from this 5M cash, we will only pay out equipment for works that are done by us before the funds are approved for release ……

I can tell you, to raise money is not easy. We have done it before and because Trussnet has a strong financial team …… behind us, and also Trussnet track record, financial reports and credibility record, that’s why investors and banks only trust us and we have to guarantee them.

…… We had commitment of over USD1.3B I told you while you in America before. Meaning that people will sign LOI [ie letter of intent] with Trussnet for commitment to invest in our company and that’s because investors can check Trussnet financials and track records but not Chinacomm.

As a public company, we have to disclose any Agreement we signed even for LOI. …… If you look carefully at every agreement, there is always a condition that the investors’ attorney will state that they will only give money based on the condition that the licenses are extended. To raise such a huge amount there must be a reason and that’s why we have to declare it is for Chinacomm WiMax build out project.

……

But if things get out of control from my hands, then it may not be good for both of us. I am very serious and worried about this. One of the very important issue that told you and cannot be compromised by our investors is that all bank accounts must have my signature in every transaction from HKG to Chinacomm WOFE in China and I have to personally guarantees it. If this is not done or shown to our investors, I am almost certain none of our investors will put in money and the deal is dead.

……” (my emphasis)

67.  Such email highlighted the importance of Licence Extension for the 29 Cities Licences that went to the “root” of the JV deal, explained the substantial Subscription Price, and supported Tay’s explanations about the Escrow Procedure, P1’s involvement in raising capital from the Market[47] and need for the Double Signatures Arrangement.[48] In my view, the following made commercial sense and sat well with the GSSA: (a) third party investors imposed escrow closing condition of assurance of Licence Extension for the 29 Cities Licence under the Escrow Procedure for release of their investment funds to ensure vitality of the 3.5GHz Business in the 29 Cities, and (b) the Double Signatures Arrangement was to put in place for D1’s, D4’s and Yunji’s bank accounts for joint control over use of further payment of the Subscription Price. But since Ds’ camp failed to obtain MIIT’s oral approval of Licence Extension (particularly for the 25 Cities Licence that had expired), some previously committed investors withdrew their commitments or terminated signed investment agreements with P1.[49] Gulfstream therefore declined to make further payment of the Subscription Price to D1 before Completion,[50] and D1 and D6-D8 declined to appoint Gulfstream’s nominees as board directors and bank signatories of D1, D4 and the WOFIE (ie Yunji) (see Articles 4.4(a)(i) and (c)(i) of the GSSA and paragraph 55(h)(i)(1) and (h)(iii) above).

68.  In paragraph 56(c) of the D&C, Ds admitted at one point D6/ D7 explained the Beijing Olympic Games (“Games”) affected the timing of Licence Extension for the 29 Cities Licences as MIIT’s key officials were deployed for the Games and other staff were less focused on licensing matters, but D6/D7 assured Ps’ camp Licence Extension was just a matter of time. At that time it sounded reasonable to Ps’ camp (who relayed such explanation to the investors) because almost everything had to give way to the Games. Ps’ camp chased D6-D8 after the Games concluded in September 2008, and was informed Licence Extension was postponed due to reorganisation of MIIT and promotion of Chinese 3G TD-SCDMA standard.

69.  On 2 September 2008, Li (for Tay) emailed D6 (C/282) noting discrepancies in understanding over certain issues regarding financing/operation of the Project, agreeing to a meeting between D6/D7 and Tay/Alvarez in mid-September 2008, and proposing to outline topics for discussion beforehand. But up to September 2008 Ds’ camp had not arranged for Gulfstream’s representatives to meet with relevant MIIT officials in charge of issuance/extension of 3.5GHz Licences.

70.  From September 2008 onwards, to facilitate due diligence and at P1’s request, D6-D8 had meetings with investors and representatives of Ps’ camp. During such meeting, D6 reiterated explanations in paragraph 68 above, and gave assurance that D8 would soon receive Licence Extension for the 29 Cities Licences. There was also a meeting with Xie who assured Ps’ camp D8 was capable of securing such Licence Extension. In view of Xie’s personal credit Ps’ camp believed D6-D8,[51] but in the end there was no Licence Extension for all the 29 Cities.

XV. GSSA SUPPLEMENTARY AGREEMENT DATED 17 NOVEMBER 2008

71.  On 17 November 2008, as agreed by the parties to the GSSA, Trussnet Nevada (Gulfstream’s holding company) signed a Supplementary Agreement with D8 to amend certain terms of the GSSA. Trussnet Nevada signed on behalf of Gulfstream whilst D8 signed on behalf of itself and other parties to the GSSA.

72.  The Recitals to the GSSA Supplementary Agreement provided inter alia as follows:

(a)	according to the GSSA, Trussnet Nevada agreed to subscribe D1’s 49% Shares through its subsidiary Gulfstream at the price of US$196,000,000;
(b)	pursuant to the GSSA, Gulfstream had paid the US$5M Sum to D1 on 17 April 2008 as part of the Subscription Price (defined in the GSSA);
(c)	Trussnet Nevada and D8 wished to amend the GSSA based on the principle of mutual benefit.

73.  The GSSA Supplementary Agreement adjusted the payment schedule of the Subscription Price specified in Article 3.2 of the GSSA. Article 3.2(b)-(c) of the GSSA was changed and new Article 3.2(d)-(e) was added to the GSSA as follows:

(a)	Article 3.2(b) of the GSSA was changed to “[subject] to Article 2 below, US$50,000,000 shall be paid as part payment of the Subscription Price …… to a bank account jointly controlled by the Parties within ten (10) Business Days after the [29 Cities Licences] have been renewed and all open issues between the Parties have been mutually agreed” (my emphasis) (Article 1(b) of the GSSA Supplementary Agreement); “Article 2” of the GSSA Supplementary Agreement provided that D8 shall deliver to Trussnet Nevada (a) evidence for renewal of the 29 Cities Licences, and (b) the share certificate for D1’s 49% Shares immediately after renewal of the 29 Cities Licences (Article 2 of the GSSA Supplementary Agreement);
(b)	Article 3.2(c) of the GSSA was changed to “US$50,000,000 shall be paid as part payment of the Subscription Price …… to a bank account jointly controlled by the Parties within ninety (90) Business Days after the payment of the US$50,000,000 prescribed in Article 3.2(b) hereinabove” (Article 1(c) of the GSSA Supplementary Agreement);
(c)	Article 3.2(d) was added to the GSSA to the effect that “US$41,000,000 shall be paid as part payment of the Subscription Price …… to a bank account jointly controlled by the Parties within one hundred and eighty (180) Business Days after the payment of the US$50,000,000 prescribed in Article 3.2(b) hereinabove” (Article 1(d) of the GSSA Supplementary Agreement);
(d)	Article 3.2(e) was added to the GSSA to the effect that “US$50,000,000 shall be paid as part payment of the Subscription Price …… to the Investor WOFIE as registered capital within one hundred and eighty (180) Business Days after the payment of the US$50,000,000 prescribed in Article 3.2(b) hereinabove” (Article 1(e) of the GSSA Supplementary Agreement).

These provisions clearly showed the following were preconditions for further payment of the Subscription Price: (i) the Double Signatures Arrangement to be put in place for the bank account that would receive such monies (see (a)-(d) above), (ii) due renewal of the 29 Cities Licences (see (a) above) latest by end of December 2008 (see paragraph 75(b)(iii) below), (iii) delivery to Trussnet Nevada evidence of such Licence Extension and share certificate for the 49% Shares (see (a) above), and (iv) “all open issues between the Parties have been mutually agreed” (see (a) above) latest by the end of December 2008 (see paragraph 75(b)(iv) below).

74.  For “open issues between the Parties” (see Article 1(b) of the GSSA Supplementary Agreement and paragraph 73(a) above), on 28 November 2008 Li (for Tay) emailed D6 and D6’s assistant Li Hongji (C/269) setting out a list of outstanding issues “as per the [GSSA]” (ie some non-fulfilled Completion Conditions) inter alia as follows:

(a)	the directors’/shareholders’ resolutions of D1 to approve the issuance of the 49% Shares to “Trussnet”[52] and the whole deal (Schedule 3(a) of the GSSA);
(b)	the directors’/shareholders’ resolutions of D8 to approve all related agreements and the whole deal (Schedule 3(f) of the GSSA);
(c)	new articles of association of D1 and D4 (Schedule 3(d)-(e) of the GSSA);
(d)	new articles of association of Yunji (Schedule 3(e) of the GSSA);
(e)	Yunji’s valid business licence (Schedule 3(h) of the GSSA);
(f)	a meeting with MIIT officials in charge of the issuance/extension of 3.5 GHz Licences, and oral approval by such officials of Licence Extension for the 29 Cities Licences (Schedule 3(j) of the GSSA and paragraph 55(d) above);
(g)	legal due diligence;[53]
(h)	financial due diligence;[54]
(i)	business/disbursement plans for investment as agreed by D8 and “Trussnet”[55] (Article 11.2 and Schedule 3(m)-(n) of the GSSA and paragraph 61 and footnote 45 above).

75.  Clauses 3-4 of the GSSA Supplementary Agreement provided as follows:

(a)

upon payment of the US$50,000,000 specified in the amended Article 3.2(b) by the Investor, the Investor shall be entitled to ownership of D1’s 49% Shares, and Trussnet Nevada shall pledge to D8 the percentage of shares that corresponded to the balance of the Subscription Price to guarantee payment in accordance with the schedule specified in Article 1 of the GSSA Supplementary Agreement, which pledged shares shall be released in proportion to payment of the balance amount of the Subscription Price by the Investor, but if Trussnet Nevada failed to pay the funds according to the schedule in the GSSA Supplementary Agreement, D8 would withdraw the corresponding proportion of equity equal to the unpaid amount of funds within 180 Business Days after payment of the US$5M Sum (Article 3 of the GSSA Supplementary Agreement);

(b)

the GSSA Supplementary Agreement shall be void immediately as if it was never executed if (i) the Investor failed to provide evidence US$50,000,000 was received by the end of November 2008, (ii) the Investor failed to transfer US$50,000,000 to a bank account that was jointly controlled by the parties in accordance with Article 3.2(b) of the GSSA as amended by Article 1 of the GSSA Supplementary Agreement, (iii) D8 failed to obtain renewal of the 29 Cities Licences by the end of December 2008, or (iv) the Parties failed to reach consensus on all the open issues by the end of December 2008 (Article 4 of the GSSA Supplementary Agreement).

I note with interest (a) above envisaged Gulfstream’s parent company Trussnet Nevada would pay the balance of the Subscription Price under the GSSA as adjusted by the GSSA Supplementary Agreement, which reinforced my finding that all along Ds’ camp knew investment financing for the balance of the Subscription Price would have to be raised by P1 from investors in the Market.

76.  In light of paragraphs 73 and 74(f) above, I disagree the effect of Article 4 of the GSSA Supplementary Agreement was for evidence of further payment of the Subscription Price to precede Licence Extension for the 29 Cities Licence on the alleged basis that the former was essential to the latter (see paragraph 53(a) of the D&C). Instead, the effect of Article 3.2(b) of the GSSA as adjusted by Article 1 of the GSSA Supplementary Agreement was that the preconditions in paragraph 73(i)-(iv) above should be fulfilled before further payment of the Subscription Price. Such further payment was not yet payable since (a) Ds admitted there was no Licence Extension for all the 29 Cities Licences, and (b) there was no evidence all the open issues had been resolved, and instead some open issues were still outstanding as at 23 March 2010 (see paragraph 133 below).

77.  The email dated 28 November 2008 from Li (for Tay) to D6 and Li Hongji (see paragraph 74 above) stated “an escrow account has been opened under supervision of our investment bank and attorneys to which [a funder called Runcom Technologies Ltd (“Runcom”)] has transferred 50 million US dollars as part of share purchase price in exchange for ChinaTel stock”, which funds were designated for the Project and conditional upon (a) assurance of Licence Extension for the 29 Cities Licences and (b) exclusive purchase of Runcom’s equipment for deployment of 3.5GHz Services in the 29 Cities. Such email referred to a letter dated 26 November 2008 from Knight Capital Markets LLC (“Knight”)[56] to P1 (then known as China Tel Group Inc) confirming that a Funding Escrow Account had been opened and Runcom was prepared to complete wire transfer of US$50,000,000 to P1 upon (a)-(b) above.

78.  On 28 November 2008, Li Hongji replied by email to Li, D6 and D6’s/D8’s PRC lawyer Li Chaoying Charles (see footnote 24 above) (C/268) seeking clarification as to whether Runcom merely opened the Funding Escrow Account or actually wired US$50,000,000 into such escrow account. In paragraph 53(b)-(c) of the D&C, Ds complained Knight’s letter was not addressed to any party of the GSSA or GSSA Supplementary Agreement[57] and was conditional upon matters in paragraph 77(a)-(b) above. But Tay contended Ps’ camp did provide sufficient proof of commitment/availability of investor funds of US$50,000,000 as per Article 4(a) of the GSSA Supplementary Agreement (see paragraph 75(b)(i) above), and it was unnecessary to show actual payment of such monies. Tay claimed (and I accept) in the end the funds were unable to come in because the conditions in paragraph 77(a)-(b) above did not come true. In any event, I cannot see how Ds’ aforesaid contentions would assist. Even if Trussnet Nevada / Gulfstream failed to satisfy Article 4(a) of the GSSA Supplementary Agreement (see paragraph 75(b)(i) above), D8 also failed to obtain Licence Extension of the 29 Cities Licences and the parties failed to reach consensus on all open issues by end of December 2008 (see Article 4(c)-(d) of the GSSA Supplementary Agreement and paragraph 75(b)(iii)-(iv) above).

79.  In any event, it was common ground the GSSA Supplementary Agreement was null, void and of no legal effect. But the GSSA still had effect, so Gulfstream was not required to pay the 1^st US$50,000,000 of the 2^nd tranche of the Subscription Price until after Completion upon fulfilment of the Completion Conditions, 1 of which was a meeting with MIIT officials in charge of the issuance/extension of 3.5GHz Licences with oral approval by such officials of Licence Extension for the 29 Cities Licences (Schedule 3(j) of the GSSA and paragraph 55(d) above). But there was no such meeting and/or oral approval, which also remained as an outstanding “open” issue (see paragraph 74(f) above), so the Investor/Gulfstream need not make further payment of the Subscription Price as yet. I accept D6 nevertheless kept asking for funds, but Tay made clear to D1 and D6-D8 there would be no further funds without assurance of Licence Extension for the 29 Cities Licences.

XVI.  NEW 29 CITIES LICENCES

80.  After the 5 Cities Licence expired on 1 January 2009, D8 did not have any valid 3.5GHz Licence for any of the 29 Cities. Ps’ camp correctly warned Ds’ camp the Project could not continue if D8 could not obtain valid 3.5GHz Licences for the 29 Cities. After all, the “root” of the JV deal between the parties was to carry on 3.5GHz Business in the 29 Cities to generate service fees that would be channelled indirectly to the JV parties.[58] In my view, Ps’ camp would not have agreed to make such substantial investment of US$196,000,000 if there were no Licence Extension for the 29 Cities Licences. I also accept at that time Ds’ camp gave Tay lots of assurance, brought Tay to see various officials (albeit not MIIT officials in charge of issuance/extension of 3.5GHz Licences), and convinced/assured Tay 3.5GHz Licences were only issued to state companies like D8.

81.  I find that sometime in February 2009 D6/D7 presented to Tay an apparently new 3.5GHz Licence dated 12 February 2009 for the 29 Cities that appeared to have been granted to D8 for a term of 5 years (“New 29 Cities Licence”). Such purported licence appeared to have been signed/chopped by MIIT, and D6 (a) told Tay it was ready for but still pending official release so it was still MIIT’s internal document at that time, (b) borrowed it with help from his contact at MIIT to show Tay, and (c) asked Tay to keep it confidential pending official release to D8. But Tay insisted on having a copy, so Li Hongji gave him a photocopy (which Ps disclosed in the present action). Tay (who at that time did not yet harbour suspicion over D6’s/D7’s assertions about the New 29 Cities Licence) immediately told Ps’ camp such “good news”, and both Tay and P1’s board of directors were excited and encouraged.

82.  I find on balance that it eventually transpired the New 29 Cities Licence was a false document not issued by MIIT. Even though Ps did not adduce any technical expert evidence, the falsity of the New 29 Cities Licence was evident from the following: (a) in December 2011 (ie after Ps commenced the present action) Ps’ camp sent a representative to MIIT to verify the authenticity of the New 29 Cities Licence and was told MIIT had never issued such purported licence, (b) the file reference number was erroneous, and (c) there were discrepancies/inconsistencies as to the font/style of the printed Chinese characters and letterhead/chop on the New 29 Cities Licence when compared with those on genuine 3.5GHz Licences. Tay suspected (and I accept) the purpose of the purported New 29 Cities Licence was to deceive Ps’ camp and investors.

XVII.  NEGOTIATIONS PRECEDING TCPSSA

83.  As seen in Part XVIII below, Tay signed the TCPSSA for and on behalf of P2 on 16 February 2009 even though Ps were still unhappy over (a) Ds not having accounted for utilisation of the US$5M Sum and (b) the 29 Cities Licences had not been renewed/extended. Tay explained (and I accept) Ps’ camp committed to the TCPSSA because (i) Tay sighted the New 29 Cities Licence (without suspicion of its falsity at that time) and relied on / believed D6’s/D7’s representations that MIIT would soon issue such licence, (ii) during negotiations for the TCPSSA Ds gave Ps a comprehensive layout of the Existing System which suggested to Ps’ camp D8 was more serious in sharing confidential information, (iii) Ds appeared to be more upfront in seeking Ps’ help on outstanding Ds’ Preparatory Works,[59] and (iv) the matters discussed in paragraphs 84-85 below.

84.  In the period before signing the TCPSSA, D6/D7 in various meetings asked Tay to include a sum of US$10,000,000 for each of them as their personal fees in the JV deal for their contribution to D8/Project. Tay told them P1 (and hence its subsidiaries) could not pay such fees due to disclosure/audit issue,[60] but Tay also knew Ps’ camp could not avoid meeting such request when D6/D7 told him such monies were needed to smooth the way for Licence Extension and future operations/works,[61] so Tay had to find a way to provision for D6’s/D7’s request.

85.  Tay reviewed the whole Project and discussed with parts/ equipment vendors and labour contractors, and felt if the budget for the Project was controlled, tightened and revised, then D6’s/D7’s request could be provisioned in the course of implementing the Project so that (a) the overall Subscription Price would remain unchanged, and (b) D6’s/D7’s personal fees of US$20,000,000 would be defrayed out of the budget for the Project and channelled to them via the Project’s vendors/contractors rather than via P1 and/or its subsidiaries.

86.  Thus, the TCPSSA was to the knowledge of Ds’ camp a package deal for (a) reviving/boosting investors’ confidence that the JV Project would go ahead,[62] and (b) enabling arrangements for acceding to D6’s/D7’s personal request for US$20,000,000. In my view, (a) above led to Article 3 of the GSSA Supplementary Agreement (see paragraph 75(a) above) which later became Article 4 of the TCPSSA Addendum and the 1^st Note (see paragraphs 99(d) and 105 below), and (b) above caused the parties to abandon the GSSA and to enter into the TCPSSA and to change the Investor from Gulfstream being P1’s indirect subsidiary (see paragraph 10(c) above) to P2 being a Hong Kong company (i) owned by Tay with no apparent connection with D1 in terms of corporate structure, (ii) not subject to corporate governance and audit/disclosure requirements applicable to US listed company and subsidiaries, and (iii) established for the purpose of entering into the TCPSSA. I find this was why Ds readily agreed to have the TCPSSA replace the GSSA.

87.  P2 was also able to offer other additional benefits that P1/ Gulfstream could not provide,[63] which included negotiating extended payment terms with subcontractors who were performing services under contract with Trussnet Delaware to allow those services to continue, and the ability to arrange a US$3,000,000 – US$5,000,000 operating loan for D8,[64] which ultimately became a US$29,000,000 operating loan that D8 obtained from Hana Bank (see paragraphs 101-102 below).

88.  Separately, given the matters in paragraph 83(ii)-(iii) above, Ps’ camp thought if they had more control over Ds’ Preparatory Works, they could assist Ds with the outstanding works and make up progress.[65] Tay was also comforted by assurances given to him about Licence Extension for the 29 Cities Licences (see paragraph 83(i) above), and by the fact D6’s/D7’s own interest was at stake.[66]

89.  For all the above reasons, Ps’ camp made a commercial decision to enter into the TCPSSA and to continue putting resources in the Project,[67] but that did not mean they would abandon the need for assurance of Licence Extension for the 29 Cities Licence. On the contrary, Ps’ camp was anxious to proceed with the JV deal the “root” of which was to carry on 3.5GHz Business by the New System at the 29 Cities pursuant to renewed/extended 29 Cities Licences.

XVIII.  TCPSSA DATED 16 FEBRUARY 2009

90.  So in February 2009, Ps proposed to D6-D8 a substitute subscription and shareholders’ agreement upon terms similar to the GSSA. On 16 February 2009, by agreement of the parties to the GSSA, P2 signed such substituted agreement (ie the TCPSSA) with D1, D2, D3, D6, D7, D8 and D9. P2 assumed Gulfstream’s rights, title, interests and obligations as Investor under the GSSA.

91.  P1 was not expressly named and did not sign the TCPSSA. There was some debate as to whether P2 signed the TCPSSA as agent and/or for the benefit of P1. In my view, this could be easily explained in the relevant factual matrix that I have outlined. The initial transaction structure was for the Investor (ie Gulfstream) to become the indirect subsidiary of P1 which was acquired as US listed fundraising vehicle for the Project to solicit investment funds in the Market (see paragraph 57 above). Hence, P1 would pay the balance of the Subscription Price from investment funds it sourced from the Market, and in return it would have control over Ps’ camp’s interests in the Project via Trussnet Nevada and Gulfstream being its wholly-owned direct/indirect subsidiaries. But Gulfstream and the GSSA were substituted by P2 and the TCPSSA. This came about because of inter alia the need to accommodate D6’s/D7’s request for personal fees (see paragraphs 84-88 above) and to avoid the long arm of SEC corporate governance and audit/disclosure requirements, which therefore required apparent disconnection in terms of corporate structure between P1 and P2. Nevertheless, P1’s fundraising role was unchanged, and to the knowledge of Ds’ camp it remained as fundraising vehicle for the JV deal/Project (with obligations to the investors under the Escrow Procedure) and ultimate payer of the Subscription Price. This was acknowledged in the TCPSSA which provided the Subscription Price shall be paid by the Investor “or its Associate Company”.[68] In such circumstances, P1 necessarily had interest in the JV deal/Project,[69] which explained why P1 and P2 entered the APA Set (see Part XXI and paragraph 111 below) to overcome the apparent corporate disconnection between P1 and P2, and to assure investors of P1’s interest in the JV deal/Project.

92.  I start with the key terms of the TCPSSA which were by and large similar to those of the GSSA with a few exceptions:

(a)	throughout the TCPSSA, the term “Completion” under the GSSA was replaced as “Closing”, and the term “Completion Conditions” under the GSSA was replaced as “Subsequent Payment Conditions”;
(b)	Investor was defined as P2 and any other person to whom P2 would transfer its Shares (ie ordinary shares in the capital of D1) and who would become a party as an “Investor” by signing a Deed of Adherence in accordance with the TCPSSA and was named in the TCPSSA as an “Investor”;
(c)	subject to the provision of Article 4 of the TCPSSA, the Investor would apply for the allotment and issue to it at Closing[70] of 2,450,000,000 ordinary shares of D1 (ie the 49% Shares) for a total subscription price of US$196,000,000 (Article 3.1);
(d)	Closing of the subscription by the Investor of the 49% Shares shall take place on the date when the First Payment was made or any other date as agreed by D1 (as the company) and the Investor (Article 4.1);
(e)	upon the Closing, the Investor shall become the legal owner of D1’s 49% Shares, and D1 and the parties shall procure D1 (as the company) to deliver a share certificate for the 49% Shares to the Investor and enter the name of the Investor into D1’s register of members/shareholders as the holder of the 49% Shares (Article 4.2);
(f)	the total Subscription Price shall be paid by the Investor or its Associate Company in stages, ie US$5,000,000 (ie the US$5M Sum) shall be paid as part payment and part satisfaction of the Subscription Price “in accordance with relevant articles of the [TNFA]” (Article 3.2(a)), and the balance sum of US$191,000,000 shall be paid in the following manner:
	(i)	US$141,000,000 shall be paid as part payment and part satisfaction of the Subscription Price and shall be paid in instalments, “[the] first instalment shall be no less than US$20,000,000 and be paid within 35 business days after the licenses of Chinacomm have been extended in accordance with item (j) of Schedule 3 of [the TCPSSA]”, and the balance shall be paid “within 180 business days after the licences of Chinacomm have been extended in accordance with item (j) of schedule 3 of [the TCPSSA]” (Article 3.2(b));
	(ii)	US$50,000,000 shall be paid as part payment and part satisfaction of the Subscription Price “to the Investor WOFIE as registered capital within 180 days after the licences of Chinacomm have been extended in accordance with item (j) of Schedule 3 of [the TCPSSA]” (Article 3.2 (c));
(g)	Schedule 3 of the TCPSSA set out a series of conditions precedent for the payment of the Subscription Price by the Investor after the First Payment (collectively, “Subsequent Payment Conditions”), one of which was “the delivery to [P2] of the adequate evidence in relation to the valid extension of Chinacomm’s 3.5 G licenses which are expired at the time of [the TCPSSA]” (Schedule 3(j));
(h)	other conditions precedent in Schedule 3 included (i) completion of the due diligence review (whether legal or financial or otherwise) of Chinacomm and its business with results to the satisfaction of the Investor, (ii) delivery to the Investor of the Business Plan in the agreed form, and (iii) delivery to the Investor of the disbursement plan of the Subscription Price in the agreed form (Schedule 3(k), (m) and (n));
(i)	the Investor shall be entitled to direct that the 49% Shares be issued and registered in the name of any nominee and the provisions of Articles 3.1 and 4 shall be interpreted accordingly (Article 3.3);
(j)	the US$50,000,000 to be paid to the Investor WOFIE as part of the Subscription Price shall be used by the Investor WOFIE to procure equipment and services to perform it obligations under the lease agreement and service agreement described under paragraph (b)(ii) and (v) of Schedule 3 thereto, and “upon the IPO of [D1], except for otherwise agreed by the Shareholders, the Investor [WOFIE] shall transfer the ownership of the equipments procured under this US$50,000,000 expenditure to the [WOFIE] at the consideration of US$1.00” (Article 3.5);
(k)	if the Subsequent Payment Conditions shall not have been fulfilled or waived by the Investor (at its sole discretion) on/before 60 business days after the Closing (or such other date as may be agreed between the parties in writing), the TCPSSA (other than certain specified provisions) shall terminate and be null and void and of no effect, except for liability of any party to the other parties in respect of any antecedent breaches of the terms of the TCPSSA (Article 4.3);
(l)	in the event the TCPSSA was terminated pursuant to Article 4.3, D1 (as the company) shall refund, and D1 as the company, D2 and D3 as founders, and D6 and D7 as guarantors shall jointly and severally be liable to refund, the full amount of the First Payment and any following payment made in relation to the TCPSSA to the Investor within 180 days from the date on which the TCPSSA was so terminated (Article 4.4);
(m)	upon fulfilment of the Subsequent Payment Conditions, the parties shall procure a meeting of the board of D1 to be held at which D1 shall approve inter alia the appointment of 4 persons nominated by the Investor as Investor Directors and 5 persons nominated by D2 and D3 (as founders) as Founder Directors, and the appointment of each one of the Investor Director and Founder Director to jointly operate all bank accounts of D1 (Article 4.5(a)(i) and (xi));
(n)	within 7 business days from the Closing, D1 (as the company) shall file with the relevant companies registry(ies) or other authorities, and provide to the Investor the documentary evidence relating to such filing of the allotment and issue of the 49% Shares (Article 4.6);
(o)	D1 (as the company) shall promptly provide to the Investor documentary evidence in relation to the valid transfer of 49% shares in Chinacomm, pro-rata to the amount of the Subscription Price actually paid by the Investor under Article 3.2 to a Mainland Chinese citizen/company through trust arrangement or other method agreed by the Investor and D2 and D3 (as founders) (Article 4.9);
(p)	the Warrantors[71] acknowledged that the Investor had been induced to enter into the TCPSSA and to subscribe for the 49% Shares on the basis of and in reliance upon the Warranties amongst other things (Article 6.1);
(q)	the Warrantors jointly and severally warranted to the Investor that each and every Warranty set out in Schedule 4 of the TCPSSA was true, accurate and not misleading at the date of the TCPSSA and at the Closing and Fulfilment Date[72] subject only to any exceptions expressly provided for under the TCPSSA (Article 6.2), and the Warranties included inter alia that “Chinacomm lawfully and validly holds valid licences (or, if any of the licences are expired at the time of [the TCPSSA], Chinacomm will obtain extension of such licenses in accordance with [the TCPSSA]) issued by the PRC competent authorit(ies), including but not limited to the Ministry of Information Industry, for the construction and operation of 3.5G Hz wireless broadband operation in the Territory,[73] ….. and there has not arisen any circumstances that may result in the temporary or permanent cancellation or termination of such licences” (Clause 4.2 of Part 2, Schedule 4);
(r)	the Shareholders[74] shall exercise all voting rights and other powers of control available to them in relation to the Group[75] to procure that D1 (as the company) shall not, and no Group Company shall, without the prior written approval of the Investor and D2 and D3 (as founders) or by representatives of the Investor and D2 and D3 (as founders) at a general meeting of Shareholders of D1 (as the company), effect any of the matters referred to in Schedule 5 titled “Matters requiring consent of the Investor” (Article 10.7);
(s)	as a separate obligation, severable from the obligations in Article 10.7, D1 (as the company) agreed that save with the prior written approval of the Investor, it shall not effect any of the matters referred to in Schedule 5 (Article 10.8);
(t)	the provisions of Article 10 shall apply mutatis mutandis in respect of each other Group Company and Chinacomm (Article 10.12);
(u)	Schedule 5 of the TCPSSA set out the matters relating to D1 and all other Group Companies and Chinacomm, including inter alia “…… (r) incur any capital expenditure (including obligations under hire-purchase and leasing arrangements) which exceeds the amount for capital expenditure exceeding US$10,000 ……” (Schedule 5(r));
(v)	in short, P2 was vested with veto power over major decisions in relation to the business operation of D1, D4, WOFIE and Chinacomm as listed in Schedule 5 of the TCPSSA (Articles 10.7, 10.8 and 10.12);
(w)	it was the parties’ intention to effect an IPO when the conditions are ready and upon such time as agreed by all the Shareholders, and the parties agreed to keep one another informed of all and any developments which may lead to an IPO (Article 13.1);
(x)	“[in] the event that any Shareholder wishes to sell any of its Shares in [D1] to third party(ies) (“Third Party Purchaser”), the selling Shareholder (“Seller”) shall promptly give the other Shareholders (the “Continuing Shareholders”) a written notice (“Transfer Notice”) offering to sell the shares (“Sale Shares”) to the Continuing Shareholders in proportion to their respective shareholdings in [D1] on the same terms (including price per Share which must be cash) as apply to the purchase of the Sale Shares by the Third Party Purchaser, and the offer shall (i) be irrevocable and unconditional (except for any conditions which applied to the proposed transfer of the Sale Shares); (ii) fully describe all material terms and conditions (including terms relating to price, time of completion and conditions precedent) agreed between the Seller and the Third Party Purchaser; and (c) be open for acceptance by the Continuing Shareholders within 21 days of the receipt of such offer” (Article 14.1);
(y)	“[in] consideration of the Investor entering into [the TCPSSA], [D6 and D7 as guarantors] hereby (on a joint and several basis) unconditionally and irrevocably guarantee to [P2] the due and punctual performance and observance by each of [D2 and D3 as founders], [D1 as the company] and the Warrantors of their respective obligations, commitments, warranties, undertakings, indemnities or covenants contained in [the TCPSSA] and agree to indemnify [P2] against losses, damages, costs and expenses (including legal costs and expenses actually incurred) which [P2] may suffer through or arising from any breach by each of [D2 and D3 as founders], [D1 as the company] and the Warrantors of such obligations, commitment, warranties, undertakings, identities and covenants. The liability of [D6 and D7 as guarantors] as aforesaid shall not be released or diminished by any arrangements or alteration of terms (whether of [the TCPSSA] or otherwise) or any forbearance, neglect or delay in seeking performance of the obligations hereby imposed or any granting of time for such performance” (Article 18.1);
(z)	the TCPSSA and documents referred to or incorporated in it[76] constituted the entire agreement between the parties relating to the subject matter of the TCPSSA and superseded/extinguished any prior drafts, agreements, undertakings, representations, warranties and arrangements between the parties in relation to the subject matter of the TCPSSA (Article 26.1);
(aa)	subject to Article 30.3, the TCPSSA was personal to the parties and no party shall (i) assign any of its rights under the TCPSSA, (ii) transfer to any of its obligations under the TCPSSA, (iii) sub-contract or delegate any of its obligations under the TCPSSA, and (d) charge or deal in any other manner with the TCPSSA or any of its rights or obligations (Article 30.1);
(ab)	any proposed assignment, transfer, sub-contracting, delegation, charging or dealing in contravention of Article 30.1 shall be ineffective (Article 30.2);
(ac)	an Investor may assign the whole or part of any of its rights in the TCPSSA to any person who had received a transfer of shares in the capital of D1 (as the company) from such Investor in accordance with the New Articles and had executed a Deed of Adherence (Article 30.3).

93.  Article 4.1 of the TCPSSA (see paragraph 92(d) above) was different from the equivalent provision in the GSSA in terms of Closing. Under the TCPSSA, if there was no agreement by the parties, Closing should take place upon the First Payment. But Ps’/Ds’ camps knew the US$5M Sum was paid in March/April 2008, so Closing would take place on a date to be agreed. The parties chose to close subscription of the 49% Shares upon execution of the TCPSSA, so they entered into the TCPSSA Addendum at the same time as the TCPSSA, and Article 1 thereof provided Closing shall take place on 16 February 2009 as mutually agreed by the parties (see paragraph 99(a) below).

94.  For Article 4.2 of the TCPSSA (see paragraph 92(e) above), Tay agreed that even though the bulk of the Subscription Price had yet to be paid, the parties intended P2 would nonetheless become legal owner of the 49% Shares upon fulfilment of relevant conditions (see paragraph 104 below). But this must be understood in the context explained in paragraph 91 above. Ps’/Ds’ camps both knew P1’s function was to raise capital from the Market for payment of the balance of the Subscription Price,[77] and to invite/lock investment funds under the Escrow Procedure for such purpose. But delay in securing Licence Extension for the 29 Cities Licences made it difficult to maintain investor enthusiasm in the Project (see footnote 49 above), so P1 had to boost investor interest and accelerate the fundraising process. It was thought that by presenting P2 as becoming legal owner of the 49% Shares and P1 as being able to acquire such interest from P2 would be useful for convincing investors that the Project would go forward and for encouraging fund commitments. This, in my view, explained why Ps’/Ds’ camps entered into the TCPSSA Set and the P1/P2 entered into the APA Set (see paragraph 91 above and paragraph 111 below), which I shall deal with in greater detail below.

95.  As regards the Subscription Price, Tay agreed Article 3.2(a) of the TCPSSA (in contrast to Article 3.2(b) of the TCPSSA) did not expressly mention “delivery to the Investor of the adequate evidence in relation to the valid extension of [the 29 Cities Licences] which are expired at the time of [the TCPSSA]” for the First Payment (Schedule 3(j) of the TCPSSA and paragraph 92(g) above). In my view, there was no such express reference because Article 3.2(a) specified the First Payment “shall be paid …… in accordance with relevant articles of the [TNFA] ……” The First Payment being the US$5M Sum was paid under the TDFA/TNFA for the 1^st Agreed Purpose via the 1^st Agreed Route, and D6/D8 gave the Collateral Warranty that such sum would eventually be used for works in the Disbursement Plan and/or for Ds’ Preparatory Works. So, by virtue of the terms of Article 3.2(a) of the TCPSSA which incorporated “relevant articles of the [TNFA]”, the 1^st Agreed Purpose/Route was still applicable for the US$5M Sum.

96.  Mr Hui reminded that by virtue of the entire agreement clause in Article 26 of the TCPSSA there could not be any other agreement, orally or in writing, stipulating any specific purpose for use of the US$5M Sum. But the above analysis showed Article 3.2(a) of the TCPSSA embraced the 1^st Agreed Purpose/Route vis-à-vis the First Payment. In any event, Article 26 of the TCPSSA expressly provided the “entire agreement” was constituted by the TCPSSA and documents referred to and incorporated in it, and the relevant articles of the TNFA (eg Article 2a – see paragraph 35(g) above) was plainly incorporated by virtue of Article 3.2(a) of the TCPSSA.

97.  As for the balance of the Subscription Price, the payment schedule was changed in the TCPSSA inter alia as follows:

(a)

“after the licences of Chinacomm [ie the 29 Cities Licences] have been extended in accordance with item (j) of Schedule 3 of [the TCPSSA]” (see Articles 3.2(b)-(c) of the TCPSSA and paragraphs 92(f)(i)-(ii) above), and Schedule 3(j) of the TCPSSA provided for “[the] delivery to the Investor of the adequate evidence in relation to the valid extension of Chinacomm’s 3.5 G licences which are expired at the time of [the TCPSSA]”, ie the 29 Cities Licences;

(b)

after delivery to the Investor of Business/Disbursement Plans in respect of the Subscription Price in agreed form in accordance with Schedule 3(m)-(n) (see paragraph 92(h) above).

98.  In my view, the provision in Article 3.2(b)-(c) of the TCPSSA for payment “after the [29 Cities Licences] have been extended” showed such Licence Extension was a precondition to payment of the balance of the Subscription Price, but there was no such Licence Extension (particularly for the 17 Cities referred to in paragraph 122(d) below). But even if I am wrong and the reference in Articles 3.2(b)-(c) of the TCPSSA to Schedule 3(j) only required “adequate evidence” of such Licence Extension for the 29 Cities Licences, I am still not satisfied there was such “adequate evidence”. Despite D6’s bare assertions (which I reject) in his email dated 11 August 2009 (see paragraph 122(a) below) which (in my view) could not amount to such “adequate evidence”, the 12 Cities Licence (see paragraph 122 below) itself was not “adequate evidence” of Licence Extension for the 29 Cities Licences for there was nothing on its face to suggest Licence Extension for the 17 Cities was under consideration, likely, forthcoming or due to be issued. Indeed, the 12 Cities Licence did not mention the 17 Cities at all, and MIIT did not issue any Licence Extension for the 17 Cities.

XIX.  TCPSSA ADDENDUM DATED 16 FEBRUARY 2009

99.  On the same day of the TCPSSA (ie 16 February 2009), P2 and D8 (on behalf of itself and other parties to the TCPSSA) signed the TCPSSA Addendum and agreed inter alia that:

(a)	the Closing (as defined in the TCPSSA) should take place on 16 February 2009 (Article 1);
(b)	according to Article 3.2 of the TCPSSA, P2 shall pay US$191,000,000 in accordance with the schedule set forth in the TCPSSA (Article 2);
(c)	where P2 cannot comply with the schedule set forth in Article 3.2 of the TCPSSA, the parties shall reach a new schedule through amicable negotiation (Article 3);
(d)	P2 shall pledge the shares corresponding to the outstanding balance of the TCPSSA to D1 (as the company) and D2 and D3 (as the founders) by the issuance of a legal note to that effect, and in case P2 failed to meet the Schedule in Article 3.2 or the new Schedule to be agreed by the parties, D1 (as the company) and D2 and D3 (as founders) shall be entitled to withdraw the shares corresponding to the outstanding balance of the Subscription Price at its discretion (Article 4);
(e)	the rights enjoyed by P2 shall be in accordance with law or the Articles of Association of D1 (as the company) as shareholder (Article 5);
(f)	P2 agreed to arrange US$3,000,000 to US$5,000,000 for the deployment of Beijing WBA network by 15 March 2009 in the way of loan of other manner permitted under PRC law (Article 6);
(g)	all other provisions in the TCPSSA and/or any agreement contemplated under the TCPSSA shall remain unchanged and continue to be binding, but if there was any conflict between the TCPSSA Addendum and TCPSSA and/or the supplementary agreement and/or any agreement contemplated under the TCPSSA, the TCPSSA Addendum shall prevail (Article 8).

100.  Reading the TCPSSA and TCPSSA Addendum together, the Subscription Price for acquiring the 49% Shares was the same as provided in the GSSA, but the payment terms were improved in that (a) payments were conditioned upon assurance of Licence Extension of the 29 Cities Licences for the New System (Article 3.2(b)-(c) of the TCPSSA and paragraph 92(f)(i)-(ii) and also paragraph 99(b) above), and (b) if P2 was not able to meet the schedule set forth in the TCPSSA, the parties were required to reach a new payment schedule through amicable negotiations (Article 3 of the TCPSSA Addendum and paragraph 99(c) above).[78]

101.  In my view, the “deployment of Beijing wireless broadband network” in Article 6 of the TCPSSA Addendum referred to works under the Disbursement Plan and D8 Worksheet (see paragraphs 40 and 52 and footnote 35 above) and the “Beijing City Government network” Tay referred to in his email to D6 dated 16 July 2008 (see paragraph 66 above), which works were improvisation works to the Existing System (not the construction of the New System) that Ds’ camp thought might be helpful in persuading MIIT to grant Licence Extension. In the same email, Tay explained why P1/Investor could not pay for the same from investor funds. Further, I have found the balance of the Subscription Price was not yet payable under the GSSA, which explained why the parties reached agreement on Article 6 of the TCPSSA Addendum (see paragraph 99(f) above) to arrange loans to fund such works outside the TCPSSA regime.

102.  Consequently, Ps introduced interested lenders/investors to assist D8 in obtaining the desired loan, but such efforts came to nought as D8 did not accept their loan conditions.[79] Nevertheless, at D8’s request, P2 issued a certifying letter in/about May 2009 to support D8’s application for a credit line from Chinese banks. In April 2010, D8 informed Ps it received a RMB200,000,000 credit line from Hana Bank (see paragraph 87 above), but D8 did not provide details on utilisation of such credit line (eg whether it was deployed for the Beijing WBA network). There was some debate as to whether or not Ps played any role for the Hana Bank credit line that was secured via recommendation by Samsung Corporation (“Samsung”) upon understanding D8 would purchase equipment from Samsung.[80] On balance, I find it was through efforts by Ps’ camp in arranging meetings between D8 and Samsung and in helping D8 test Samsung’s equipment and review Samsung’s proposal that led Samsung to introduce D8 to Hana Bank.[81] This was reflected in the 10K Announcement of P1 for 31 December 2011 filed with the SEC on 16 April 2012 (C/501), and in the discussion in paragraphs 213-214 below.

XX.  SHARE CERTIFICATE AND SHARE PLEDGE

103.  In paragraph 87 of the D&C, Ds averred that D1’s 49% Shares were allotted/issued in favour of P2, and claimed that since Ps paid the US$5M Sum and US$4.75 Sum (see Part XXVI below) totalling US$9,749,599 towards the Subscription Price (US$196,000,000), P2 became (a) the legal and beneficial owner of those shares out of the 49% Shares that corresponded to US$9,749,599 (121,875,000 D1’s shares), and (b) the pledgor of the remaining 2,328,125,000 shares out of the 49% Shares that were pledged to D8 pursuant to the 1^st Note (see paragraph 105 below). So even on Ds’ case, by reason of the pledge of shares, P2 would not have beneficial interest in respect of the shares in (b) above.

104.  In my view, the starting point was 16 February 2009 when the TCPSSA was signed and Closing took place. As envisaged under the TCPSSA, upon Closing, P2 shall become legal owner of the 49% Shares whereupon D1 shall (a) deliver share certificate for the 49% Shares to P2 and (b) enter the name of P2 into D1’s register of members/shareholders as holder of the 49% shares (see Article 4.2 of the TCPSSA and paragraph 92(e) above), and then (c) within 7 business days from Closing D1 was to file with the relevant companies registry(ies) or other authorities and provide to P2 documentary evidence relating to such filing in respect of allotment/issue of the 49% Shares (see Article 4.6 of the TCPSSA and paragraph 92(n) above). In my view, the TCPSSA envisaged transfer of legal ownership in the 49% Shares to P2 would require compliance with (a)-(b) above, and (c) above was to ensure completion of the registration record.[82] But to guarantee full payment of the balance of the Subscription Price which had not been paid and in line with Article 4 of the TCPSSA Addendum (see paragraph 99(d) above), the portion of the 49% Shares corresponding to the unpaid balance of the Subscription Price (“Portion Shares”) would be pledged back to D1, so the Portion Shares and share certificate would remain in D1’s physical possession. This explained why Article 4.2 of the TCPSSA (see paragraph 92(e) above) focused on legal ownership of the 49% Shares.

105.  But what actually happened was that upon Closing on 16 February 2009, neither condition in paragraph 104(a)-(b) above was fulfilled. It was only on 23 February 2009 (ie 7 days after the scheduled date for Closing) that (a) D1 issued a share certificate naming P2 as holder of all the 49% Shares (“Share Certificate”) with no split between the Portion Shares and other shares, and (b) Tay (for P2) issued a legal note dated 23 February 2009 to D1, D2, D3 and D8[83] to pledge the Portion Shares to D1[84] (“1^st Note”):[85]

“[P2] has received the share certificate for the 49% shares of [D1] on February 23, 2009. To guarantee its full payment of the subscription price for the 49% shares of [D1], [P2] agrees to pledge the shares that corresponding to the balance of the subscription price to [D1]. [P2] may transfer the 49% shares to a third party upon written notice to [D1] and the execution of an agreement among [D8], [P2] and the transferee. The transferee of the shares shall resume the rights and obligations of [P2] under the [TCPSSA], the Addendum and this note. The commitments and undertakings made by [P2] or its affiliate to [D8] and its shareholders shall remain effective after the share transfer.

[P2] shall not make other disposal of the pledged shares until the release of such shares (or any part of such shares), which shall take place proportionately to the payment of the subscription price. [D1] may withdrawn the shares that corresponding to the outstanding subscription price in case [P2] failed to comply with the payment schedule set forth in the [TCPSSA] and any revised schedule agreed by [D1] thereafter.” (my emphasis)

106.  Mr Hui submitted the TCPSSA was completed/closed on 23 February 2009 (although the TCPSSA expressly provided for Closing on 16 February 2009), and P2 was meant to have full benefit of the part of the 49% Shares which P2 had paid and/or would pay the relevant Subscription Price. It was also said that at all times Ps were satisfied with this (which Tay confirmed under cross-examination), and made no complaint at the time as to whether changes had been made in the Cayman Islands registry or D1’s register of members/shareholders. This contradicted Ds’ stance at the injunction proceedings when Ds asserted P2 was not a shareholder of D1 and hence did not have the right to claim proprietary interest in the money sitting in the frozen Accounts (see paragraph 76 of the Injunction Decision).

107.  My short answer to this would be that transfer of legal title must be a matter of satisfying necessary legal requirements and would not turn on subjective views by Tay or others. There was no evidence D1 had complied with paragraph 104(b) above in respect of the 49% Shares. Further, although D1’s register of members/shareholders was necessarily in D1’s possession, Ds chose not to disclose such register despite Ps’ complaint of failure to enter P2’s name therein.[86] In the absence of evidence of Cayman Islands law, I note section 112(3) of the Companies Ordinance Cap 622 and the repealed section 28(2) of Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap 32 provide for a person to become a member of a company when he so agrees and his name is entered in the company’s register of members, which was in line with Article 4.2 of the TCPSSA and Tay’s evidence (see paragraph 92(e) and  footnote 82 above). Thus, mere delivery of the Share Certificate would not make P2 legal owner of the 49% Shares, and I find there was no legal transfer irrespective of the subjective views of Tay and/or others. Tay’s unconcern about such legal niceties at the time was easily understood, but it is necessary to first set out the APA Set (see paragraph 111 below) and 2^nd Note (see paragraph 112 below) to put the matter in context. I pause to note the above contentions had not been raised with DHCJ Au-Yeung (as she then was) at the injunction proceedings, and she took the view there was arguable basis P2 became shareholder of D1 and owner of the 49% Shares (see paragraph 78 of the Injunction Decision). But this view was taken at an interlocutory stage without the benefit of full arguments at trial, and was not binding on this court.

XXI.  ASSET PURCHASE AGREEMENT, PROMISSORY NOTE AND PLEDGE AGREEMENT ALL DATED 9 MARCH 2009

108.  On 9 March 2009, P2 sold its “Equity Interest” in D1’s shares under the TCPSSA to P1 for US$191,000,000 pursuant to an Asset Purchase Agreement (“APA”), a Promissory Note for P1’s payment of US$191,000,000 and interest (“PN”), and a Pledge Agreement for pledge of such “Equity Interest” to P2 as security for P1’s performance of obligations under the PN (“PA”). This was made the subject of an announcement in a Form 8-K dated 9 March 2009 filed with the SEC.

109.  The Recitals of the APA were “deemed to be additional representations and warranties by [P2 as] the Seller” and provided inter alia as follows:

(a)	D8 was and on the Closing Date shall be the holder of a 3.5GHz Licence issued by MIIT authorising D8 to provide and deploy 3.5GHz Services in the 29 Cities (Recital A);
(b)	pursuant to the terms of certain agreements with D8, Yunji (WOFIE) was entitled to receive 100% of the revenues realised by D8 from the 3.5GHz Services in the 29 Cities (Recital B);
(c)	D1 through its wholly-owned subsidiary D4 owned 100% of the equity interests of Yunji (Recital C);
(d)	“[pursuant] to the terms of [TCPSSA] dated February 15, 2009 …… among: (i) [P2], (ii) [D1], (iii) [D8], (iv) [D6] and [D7], (v) [D3], (vi) [D2] ……, and (vii) [D9] ……, [P2] acquired 2,450,000,000 ordinary shares of [D1], constituting the legal and beneficial ownership of 49% of the equity of [D1] on a Fully-Diluted Basis (the “Equity Interest”). Attached as Exhibit A is share certificate No. 3 of [D1] representing the Equity Interest” (Recital D).

110.  The following were inter alia essential terms of the APA:

(a)	subject to the terms and conditions of the APA, at the Closing, Ps as seller shall sell all of its right, title and interest in the Equity Interests to P1 as purchaser (Article 2.1);
(b)	on the Closing Date, P1 as purchaser shall deliver to P2 as seller a promissory note in the original principal amount of US$191,000,000 and other terms as specified in Article 2.3 and in substantially the form as exhibited to the APA (Article 2.3);
(c)	“Closing” and “Closing Date” were defined in Article 3.1;
(d)	the closing of the transactions contemplated by the APA (“Closing”) shall take place on 9 March 2009 (“Closing Date”) or, if the conditions of the Closing have not been satisfied (or waived) by that date in accordance with the APA, at such other time and place as the parties may agree, but in no event shall the Closing take place later than 30 days after execution of the APA provided, however, that if all of the conditions of the Closing identified thereby were satisfied prior to the Closing Date, the Closing shall take place within 5 business days of such conditions having been satisfied (Article 3.1);
(e)	Closing shall be accomplished on the Closing Date and in accordance with the procedures set forth in Article 3.2, including “[on] the date which is two (2) business days prior to the Closing Date, the Seller and Purchaser shall have satisfied all Closing conditions ……” (Article 3.2.1);
(f)	P2 (as Seller) thereby represented and warranted to P1 (as Purchaser) that P2 (as Seller) shall be at the Closing the lawful record and beneficial owner of the Equity Interest free and clear of any and all Encumbrances whatsoever (except restrictions on transfer imposed by the Securities Act and applicable state securities laws) and P2 (as Seller) had good and marketable title thereto, and the delivery of the Equity Interest by P2 (as Seller) to P1 (as Purchaser) pursuant to the APA would convey to P2 (as Purchaser) lawful, valid and indefeasible title thereto, free and clear of all Encumbrances whatsoever (except restrictions on transfer imposed by the Securities Act and applicable state securities laws) (Article 4.1);
(g)	P1’s (as Purchaser’s) obligation to proceed to the Closing under the APA shall be subject to the satisfaction, on or prior to the Closing Date, of the conditions in Article 8.1, any of which might be waived in writing by P1 (as Purchaser) (Article 8.1), and such closing conditions included “[the] representations and warranties of [P2 as] the Seller contained in [the APA] shall be true and correct as of the date hereof and of the Closing, and [P1 as] the Purchaser shall have received a duly executed certificate from each of the Seller, dated as of the Closing Date, to the effect that the foregoing is correct” (Article 8.1.1);
(h)	notwithstanding anything to the contrary in Article 11.1, the APA shall terminate in all respects if the Closing did not occur on or before the latest date set forth in Article 3.1 thereof, as such date might be changed pursuant to such Article (Article 11.1).

111.  Mr Hui placed strong emphasis on Recital D of the APA which, he submitted, demonstrated that P2 had acquired legal/beneficial ownership of the 49% Shares sold to P1, which was said to match Tay’s testimony. But one could not take a blinkered view of Recital D of the APA, which must be considered against all the Recitals in the context of (a) the TCPSSA, TCPSSA Addendum and 1^st/2^nd Notes (“TCPSSA Set”), (b) the APA, PN and PA (“APA Set”) and (c) the JV deal/Project as a whole. I will return to this below, but suffice to note here this was not D6’s earlier stance. In paragraph 81 of the Injunction Decision, DHCJ Au-Yeung (as she then was) noted that D6 alleged P2 had wrongly represented it was “the lawful record and beneficial owner of the 49% share in D1, free and clear of any and encumbrances whatsoever, and the sale would convey to P1 lawful, valid and indefeasible title”, which change of stance on the part of Ds’ camp raised concern.

XXII.  BORROWING SHARE CERTIFICATE

112.  Tay on behalf of P2 issued a legal note dated 23 March 2009 to D8 and D1 (“2^nd Note”) which stated as follows:

“This note is issued by [P2] to certify that it has received the share certificate for the 49% shares of [D1] from [D8].

This said share certificate is borrowed from [D8] in accordance with the legal note dated February 23, 2009 for the pledge of 49% shares of [D1] issued by [P2].”

Tay explained P2 notionally received the Share Certificate (which did not split between the Portion Shares and balance of the 49% Shares), but all along such Share Certificate remained in the physical possession of Ds’ camp since (a) P2 had not paid the balance of the Subscription Price and (b) the Portion Shares were pledged back to D1 as security, so if P2 did not pay the balance of the Subscription Price as per the agreed schedule, D1 would be at liberty to sequest the Portion Shares and convert them back to D1 (see the 1^st Note, and also paragraph 105 and footnote 85 above).

XXIII.  TCPSSA AND APA SETS

113.  I have explained why the parties had to substitute Gulfstream and the GSSA with P2 and the TCPSSA (see Part XVII above). In my view, since (a) P1 was the investor-facing fundraising vehicle within Ps’ camp that wished to boost investor confidence by demonstrating (i) its interest in the Project (despite corporate disconnection with P2), (ii) its commitment to the Project that was seen as alive/ongoing, and (iii) its faith in D8 to secure Licence Extension for the 29 Cities Licences, but (b) there was corporate disconnection between P2 and P1 as P2 (unlike Gulfstream) was Tay’s company and not P1’s direct/indirect subsidiary, these matters had to be addressed in formulation of any marketing strategy to accelerate capital-raising from the Market.

114.  But it was no easy task. Potential investors looked only to P1 and the track record of the Trussnet group to consider whether to invest in the Project, but there was corporate disconnection between P1 and P2 who was the Investor under the TCPSSA. Further, potential investors regarded valid 3.5GHz Licences for the 29 Cities as vitally important to the Project, but in reality the 29 Cities Licences expired with no Licence Extension. As explained above, delay in securing such Licence Extension made investors more cautious/conservative, which translated to a need to strategise the fundraising exercise. The marketing ploy adopted (and hence the scheme envisaged in the TCPSSA and APA Sets) was to present P2 (and then P1) as acquiring legal ownership of the 49% Shares (which would show (a) P1’s interest in the Project despite corporate disconnection with P2, and (b) P1’s commitment to the Project and faith in D8 securing Licence Extension). In my view, Ds’ camp was aware of such marketing strategy to encourage investment by investors and willingly entered into the TCPSSA Set, and shortly thereafter on back-to-back basis P1 and P2 entered into the APA Set that mirrored the TCPSSA Set.

115.  Thus, provisions in the TCPSSA and APA dealing with ownership of the 49% Shares[87] were marketing strategy that had to be understood in the above context and that was brought about by D8’s delay in securing Licence Extension for the 29 Cities Licences and the need to accommodate D6’s/D7’s request for personal fees. In such context, there could not have been and there was no abandonment of the need for assurance of Licence Extension for the 29 Cities Licences and other contractual preconditions/provisions in the TCPSSA (as adjusted by the TCPSSA Addendum) for payment of the Subscription Price as Ds suggested.

116.  Thus, despite Mr Hui’s reliance on Recital D of the APA (see paragraph 109(d) above), I find such provision did not reflect any alleged abandonment referred to in the above paragraph. Recitals A-C of the APA made clear Licence Extension for the 29 Cities Licences and the entitlement of the Project’s SPVs to revenue from 3.5GHz Services in the 29 Cities (which necessarily depended on such Licence Extension) remained vitally important. So the bargain under the JV deal pursuant to the TCPSSA was not bare acquisition of legal ownership of the 49% Shares, and instead the Project required 3.5GHz Business to be carried on at the 29 Cities on JV basis pursuant to renewed/extended 29 Cities Licence to earn revenue/fees from such business. Moreover, the fact the TCPSSA and APA Sets were marketing strategy adopted for accelerating fundraising was also borne out by the following:

(a)	Recital A of the APA, which was said to be an additional representation/warranty by P2, provided D8 was and upon Closing the holder of 3.5GHz Licences for providing/deploying 3.5GHz Services in the 29 Cities, but Ps’/Ds’ camps well knew there was no Licence Extension for the 17 Cities, so Recital A (and hence the APA) in giving impression of Licence Extension for the 29 Cities Licences was plainly a marketing strategy to boost investor confidence;
(b)	even though the TCPSSA and 1st Note provided the Portion Shares were pledged to D1, Ps’/Ds’ camps were content to have only 1 Share Certificate for all the 49% Shares (inclusive of those shares that were not pledged) and Ps’ camp were content to let Ds’ camp retain possession of such Share Certificate without requests for splitting into 2 share certificates to cover the Portion Shares and other shares and for taking possession of the split share certificate for the other shares;
(c)	by the 2nd Note P2 borrowed the Share Certificate (which D1 retained) to show investors the 49% Shares were under its name;
(d)	actually, Tay admitted as much in his testimony when he said investors had to be comfortable that Ps had interest/control over the Project, but how Ps showed the Share Certificate to investors and/or how they explained progress of the Project in the Form 8-K announcement to facilitate capital-raising in the Market did not concern and would not affect Ds’ camp.

117.  But marketing strategy aside, the TCPSSA fairly contained countervailing provisions as a matter of precaution for Ds’ camp since P2 had not paid the balance of the Subscription Price. Such protection came in the form of letting D1 retain possession of the Share Certificate for all 49% Shares and having P2 pledge the Portion Shares back to P1 by the 1^st Note (which was mirrored by PN/PA under the APA Set between P1 and P2). In such circumstances, I disagree with Ps’ averment in paragraph 48 of the R&DC that the APA merely dealt with equitable interests in respect of the “Equity Interest” referred therein. In my view, the share pledge under the 1^st Note envisaged beneficial interest of the Portion Shares remained with D1 and not with P2.

118.  On the face of the terms of the TCPSSA and APA Sets, the envisaged marketing strategy was to give legal ownership of the 49% Shares to P2/P1 and to retain beneficial ownership of the Portion Shares with D1/P2, which in practical terms would only give option to purchase the Portion Shares by paying the corresponding Subscription Price as per the payment schedule in the TCPSSA/APA as explained in the 10K Announcement of P1 for 31 December 2011 filed on 16 April 2012:

“Pursuant to the [TCPSSA] and [TCPSSA Addendum], [D8] delivered [the Share Certificate] in [P2’s] name for 2,450,000,000 shares of [D1] stock (representing 49% of a total of 5,000,000,000 shares authorized). However, notwithstanding physical custody of the [Share Certificate] by [P2],[88] the [TCPSSA Addendum] provides that the number of [D1] shares corresponding to the unpaid outstanding balance of the subscription price are ‘pledged’ to [D1] and other parties to the [TCPSSA]. It also provides that the parties are entitled to withdraw the pledged shares at their discretion of [P2] fails to meet the payment schedule set for [P2] in the [TCPSSA] or any new schedule to which the parties agree.” (C/502)

“On March 9, 2009, [P2] sold the equity interest it purchased through the [TCPSSA] and [TCPSSA Addendum] to [P1] pursuant to an [APA] for a $191 million non-recourse promissory note in favour of [P2] [‘PN’] and a Pledge Agreement [PA] of the equity interest in [D1] back to [P2] as security for repayment of the [PN]. This effectively provided [P1] with non-recourse bridge financing for [P1’s] acquisition which, for accounting purposes, is characterized as an option to purchase up to 49% of the authorized shares of [D1]. As [P1] reduce the principal balance of the [PN], [P2] will deliver an equal amount towards the subscription price pursuant to the [TCPSSA] and [TCPSSA Addendum]. As [P1] reduce the principal balance of the [PN], [P2] will also release to [P1] shares of [D1] stock, free and clear of the [PA], in the same proportion that the reduction in principal balance bears to the total principal balance of the [PN].” (my emphasis) (C/503)

119.  But Ds’ camp put the spanner in the arrangements envisaged in the TCPSSA and APA when they went beyond the protection afforded under the TCPSSA Set (see paragraph 117 above) by not entering P2’s name in D1’s register of members/shareholders. As a result and as explained in paragraph 107 above, P2 was not the legal owner of the 49% Shares nor beneficial owner of the Portion Shares because (a) the Portion Shares were pledged back to D1 under the 1^st Note and (b) the balance of the Subscription Price was yet unpaid. But Tay / Ps’ camp appeared unconcerned because they were quite satisfied the arrangements envisaged in the TCPSSA/APA Sets and publicly announced in Form 8-K dated 9 March 2009 filed with the SEC[89] would boost investor confidence and enhance fundraising. Also, there were no practical worries (i) for Ps’ camp as the bulk of the Subscription Price was still unpaid and the Portion Shares had been pledged back to D1 and/or (ii) for Ds’ camp as they had the 1^st/2^nd Notes to hand and P2’s name had not been entered in D1’s register of members/shareholders.

120.  In any event, Mr Hui’s reference to the APA Set would not take Ds’ case any further because with further delay in Licence Extension for the 29 Cities Licences, the maturity date of the PN was extended several times,[90] and eventually the APA was terminated by adopting a different structure, but even that was not effective (see Part XXIX below).

121.  In paragraph 72 of the D&C, Ds complained that since P2 by the APA sold all legal/beneficial interest in D1’s 49% Shares acquired under the TCPSSA for good consideration of US$191,000,000 to P1, and Ds had not received any Deed of Adherence from P2, P2 was in breach of Article 30 of the TCPSSA (see paragraph 92(aa)-(ac) above). First, as explained above, P2 did not acquire legal/beneficial interest in all the 49% Shares. Secondly, Article 30 of the TCPSSA concerned rights/obligations under the TCPSSA but not transfer of shares in D1, so P2 was not in breach of such provision (see paragraph 49 of the R&DC).

XXIV.  3.5GHZ LICENCE FOR 12 CITIES

122.  In July 2009, D8 secured MIIT’s approval letter for a 3.5GHz Licence dated 17 July 2009 covering 12 out of the 29 Cities (“12 Cities”) for a term of 2 years (not 5 years) with expiry on 17 July 2011 (“12 Cities Licence”). On 11 August 2009, D6 emailed to notify Tay about the 12 Cities Licence and to claim as follows:

(a)	MIIT had approved Licence Extension for the 29 Cities;
(b)	D8’s communications with MIIT’s management revealed the main reason for the 12 Cities Licence was because D8’s first stage development/operation of the 3.5GHz Services “不盡完善”;
(c)	granting of Licence Extension was to be in stages to facilitate construction of 3.5GHz WBA network in accordance with MIIT’s requirements and to accelerate D8’s business development, so the 12 Cities Licence was the 1st batch;
(d)	MIIT would progressively grant 3.5GHz Licences for the other 17 cities out of the 29 Cities (“17 Cities”) based on D8’s network construction and business development;
(e)	D8 could apply for Licence Extension of the 12 Cities Licence 90 days before expiry of its validity period, so a validity period of 2 years for such licence would not affect normal development of D8’s relevant business;
(f)	D8 was the first 3.5GHz Services operator to secure Licence Extension, and the only basic telecommunications operator to lawfully obtain 3.5GHz Licence to operate 3.5GHz Business in Mainland China, which established D8 as a leader in the field, and which enabled D8 gain special advantage over other companies;
(g)	if investment funds could be secured quickly, D8 could start construction and development which would help D8 gain advantage over other companies and to seize the market.

123.  D8’s above assertions were not supported by MIIT’s oral/ written confirmation, and Ps were understandably disappointed with the 12 Cities Licence covering just the 12 Cities for a validity period of just 2 years. Tay complained to D6 it was commercially risky to make significant investment in construction of the New System for 3.5GHz Business at just 12 Cities for just 2 years, which changed the underlying premise for the Project that concerned 3.5GHz Business in the 29 Cities for 5 years. But D6-D8 reassured Ps’ camp and reiterated the explanation given in D6’s email dated 11 August 2009 (see paragraph 122 above).[91] With (a) D6’s/D7’s such assurances, (b) D6’s arrangement for Tay to visit MIIT (see paragraph 136(c) below) and (c) Tay’s personal effort to verify that no company (other than D8) had secured 3.5GHz Licence for the 12 Cities, Tay felt there was no competitor as yet, and was persuaded by representations from Ds’ camp that if certain improvisation/infrastructure works as requested by MIIT were done, then MIIT would gradually see its way to approve 3.5GHz Licences for D8 in respect of all 29 Cities.[92]

124.  So Ps’ team continued with Ps’ Preparatory Works, and (given D6’s assertions set out in paragraph 122(b)-(d) above) developed a comprehensive business plan for deployment/operation of the 3.5GHz WBA network for the 12 Cities (but these works were on the Existing System rather than the New System). Despite such efforts, it later transpired no 3.5GHz Licence was issued to D8 for the 17 Cities, which showed D6’s assertions in his email dated 11 August 2009 were unreliable.

XXV.  FURTHER DEVELOPMENTS

125.  In the meantime, Ps’ camp continued with fundraising pending Licence Extension for the 29 Cities Licence. On 24 August 2009, Li (for Tay) emailed D6 (C/280-281) by way of due diligence a summary of requests/matters raised by an investor Olotoa: (a) financial information of D1, (b) control on disbursement of funds, (c) TCPSSA Addendum and associated payments, (d) ownership certificates and receipts for the fibre optics network, and (e) ownership of D1’s subsidiaries. Ds’ camp did not resolve these matters, and D8 did not accept Olotoa’s request for fund control, so Olotoa decided to withdraw their investment commitment. This was borne out by Li’s email dated 9 January 2010 to D6 discussed in paragraph 127 below.

126.  On 4 January 2010, D6 emailed Tay (C/279) to press for further injection of funds, alleging (a) Ps’ failure to make promised payment of US$3,000,000 by 31 March 2009, (b) Ps’ failure to make instalment payments of the Subscription Price under the TCPSSA upon Licence Extension for D8’s 3.5GHz Licences, (c) Ps’ failure to make capital injection for the WOFIE (ie Yunji) despite expiry of the deadline on 31 December 2009, and (d) Ps had not paid capital injection or fund payment at all.

127.  On 9 January 2010, Li (for Tay) replied by email (C/278-279) to say since February 2008 Ps’ camp had made efforts to raise investment funds for the Project, but Ps’ camp lost many capital-raising opportunities and some committed investors cancelled their investment contracts due to delay in Licence Extension for the 29 Cities Licences. Li also complained that even though the transaction documents were premised on successful Licence Extension for the 29 Cities Licences,

“自2008年2月底[D8]24個城市WiMax執照到期後, 遲遲無法得到延展。對此, 本公司董事會與投資人均對貴公司運營的合法性提出了質疑。我們先後與ASSAC 、PLDT等投資人達成投資合約, 均因[D8]的執照失效等問題導致對方盡職調查無法通過, 最後不得不取消合約。[D8]曾反覆承諾執照將於新的MIIT重組後立即獲頒, 我們也據此向投資人作出承諾, 然而實際情況卻並非如此。這不僅使我們失去了投資人, 也使我們喪失了公信力。”

In my view, Ps’ stance in such email was consistent with and supported my findings in Part XXIII above.

128.  As for the alleged promise to pay US$3,000,000 by 31 March 2009 (see paragraph 126(a) above), Li’s email dated 9 January 2010 (a) noted in February 2009 D8 claimed the renewed/extended 29 Cities Licences would be issued soon as they were just waiting for the relevant MIIT official to affix the official chop, and (b) stated it was upon D8’s such assurance that Ps’ camp agreed to arrange payment of US$3,000,000 to D8 for “項目建設”, but as there was no Licence Extension for all the 29 Cities even up till July 2009, locked investment funds for such purpose had to be cancelled, which increased fundraising difficulties for Ps’ camp. I reiterate Article 6 of the TCPSSA Addendum (see paragraph 99(f) above) and paragraphs 87 and 101-102 above. As for alleged failure to pay the balance of the Subscription Price and capital injection for the WOFIE (ie Yunji) (see paragraph 126(b)-(d) above), I have found the balance of the Subscription Price was not yet payable (see paragraph 97-98 above), which was also reflected in Li’s email reply dated 9 January 2010 (see paragraph 127 above and paragraph 129 below).

129.  Li’s email dated 9 January 2010 went on to say as follows:

“ 雖然2009年7月中電華通終於取得了新的WiMax執照，然而新執照與原執照存在很大差異。原執照覆蓋29個城市，新執照卻只有12個城市，而且新執照的有效期僅有兩年而已。對於剩餘的17個城市的執照問題，中電華通解釋說MIIT同意在12個城市網絡建成後授予中電華通，然而卻未能提出任何形式的證明。在此情況下，為能繼續將項目進行下去，我們盡力說服已經與本公司達成投資合約的Olotoa接受現有條件，並安排Olotoa的代表於9月來北京與中電華通就投資的細節問題進行協商。然而，由於貴公司無法接受Olotoa對於資金控制方面提出的要求，Olotoa最終還是決定撤回投資承諾。

目前資本市場上的募資難度相信您也有充分的瞭解。在如此困難的情況下，我們已經又尋找到了新的投資人，並預計在今年一月中旬為中電華通撥付一筆資金。我本人將於本周到香港安排資金相關事宜。

對於中電華通提出的關於我方違反認股協議的指責，我們無法接受。中電華通WiMax執照的適當展延是我方在5百萬美元首期付款後進一步出資的前提條件。然而，中電華通的新執照卻與原執照有實質性的改變，未能滿足認股協議中設定的前提條件。因此，如果說有任何違約的話，中電華通實際上已經違反了認股協議。”

130.  As explained in paragraph 114 above and supported by Li’s email dated 9 January 2010 (see paragraphs 127 and 129 above), I have found the main fundraising difficulty for Ps’ camp was delay in Licence Extension for the 29 Cities Licences[93] rather than inability on their part to raise capital, and the longer Licence Extension was delayed the more nervous investors would become, so the more due diligence requirements they would impose to make sure what was presented to them was credible. So as time went by, even though Ps’ camp could bring in more investors, the committed/new investors would require more control over their investment funds and more due diligence on utilisation of such funds.

131.  But despite being unhappy over absence (as yet) of Licence Extension for all the 29 Cities, in January 2010 Ps’ camp (in view of the allegations by Ds’ camp in paragraph 122(b)-(d) above) was nonetheless prepared to give D’s camp some funds subject to investor requirements. But the balance of the Subscription Price under the TCPSSA was not yet payable, so Tay made clear to D6/D7 such proposal was outside the TCPSSA regime and was made on the following conditions: (a) Ps’/Ds’ camps were to have joint control by placing such monies in bank accounts to be jointly operated by both parties (ie Double Signatures Arrangement), and (b) such monies would have to be returned to Ps’ camp if the agreed conditions for their use were not met. Given the history of the Project and the absence of Licence Extension for all the 29 Cities so far, I do not believe Ps’ camp would have allowed Ds’ camp free rein over any funds they brought in.

132.  Thus, Li’s email dated 9 January 2010 advised D6 that notwithstanding increased difficulties in raising capital in the Market, Ps’ camp found a new investor (which Tay said was a small American investor who was willing to put up bridging funds of about US$2,000,000 – US$3,000,000), so Tay (who went to Hong Kong to make relevant arrangements) hoped to make some payment to Ds in mid-January 2010. I accept such investor initially requested for a separate account to place his investment funds, so he could (a) operate/control such account pursuant to the Double Signatures Arrangement (with 1 co-signatory nominated by each of Ps’ and Ds’ camps) so his funds would only be released for use by Ds’ camp upon Tay’s advice and/or (b) withdraw his funds from such account if Ds’ camp did not deliver on promised conditions. But D6 insisted on unilateral control over such funds[94] and did not make firm commitment on the investor’s conditions for release of investment funds (which raised concern for the investor). With tension between the investor’s wish for control and D6’s refusal to give up control, the funding deal eventually fell through, so no new funds were paid to Ds’ camp in mid-January 2010. But I cannot see how these negotiations outside the TCPSSA regime could amount to any breach/default by Ps’ camp, and they certainly would not suggest waiver of the precondition of assurance as to Licence Extension for the 29 Cities Licences. Indeed, it was insistence by Ds’ camp on such Licence Extension (such that the balance of the Subscription Price not yet payable) that took such negotiations outside the TCPSSA regime.

133.  On 23 March 2010, Li sent email to Li Hongji (C/277-278) to follow up on the outstanding “open issues” (see paragraph 74 above), which concerned (a) verification of the legality of the 12 Cities Licence, (b) shareholding issues in relation to D9 and D8’s subsidiary in Guangzhou, (c) change of Yunji’s bank account to one requiring joint signatures before receipt of fund injection, (d) ownership of D8’s fibre optic lines network, (e) disclosure of tax invoices in relation to deployment of fibre optic lines, and (f) resolution of the issue of D8’s state ownership status. There was no evidence these “open issues” were resolved.

134.  On 31 March 2010, D6 sent email to Tay (C/270) saying inter alia that:

“今接亦庄[“Yi Zhuang” or Beijing Development Area (“BDA”)]通知, 如我們能証明在香港有資金, 且4月份內能有1500萬美元資金到賬, 則可將運基WFO [ie the WOFIE/Yunji]的資金到位日期延至4月30日, 否則[WOFIE]將被注銷。因此, 請務必於4回[月]30日前到位1500萬美元資金” (my emphasis)

Such email referred to 2 matters required for postponement of the deadline for Yunji’s full capitalisation to 30 April 2010, ie (a) “如我們能證明在香港有資金”, and (b) “4月份內能有1500萬美元資金到賬”.

135.  Tay explained at that time Yi Zhuang / BDA (a high-tech industrial park in Beijing) authority was helping Yunji with business licence matters, and BDA would submit a package proposal to the relevant authorities on Yunji’s behalf if Yunji would set up its offices at the industrial park. The BDA authority worked on local requirements for setting up a WOFIE as a means to attract foreign investor/investment to the industrial park. Indeed, as early as in 2008, Tay’s email dated 16 July 2008 already referred to the “Yi Zhuang contract” (see paragraph 66 above).

136.  I accept D6/D7 told Tay unless the deadline for capital injection in Yunji (ie the WOFIE) was postponed, its business licence could be revoked with negative consequences. The deadline for Yunji’s full capitalisation had been previously postponed,[95] but the postponed deadline was due to expire, so in early 2010 D6/D7 told Ps’ camp there was urgent need of funds otherwise Yunji’s business licence might be revoked. Although D8 had not secured Licence Extension for the 29 Cities Licences and despite the problems in relation to the Project thus far, Tay negotiated with D6 in good faith to find a way to provide some funds to again postpone such deadline so as to save the WOFIE (ie Yunji) and protect the Project because Ps’ camp:

(a)	had committed much time/effort for the Project and did not want the Project and WOFIE (ie Yunji) to fail with loss of their investments so far (including technical works done by Ps’ team);
(b)	considered it important to preserve the WOFIE (ie Yunji) as the operational SPV for the Project;
(c)	was induced by D6’s/D7’s assurances as to likelihood of obtaining 3.5GHz Licences for the 29 Cities (following visit by Tay (together with D6/D7) to MIIT although there was no evidence to suggest such meeting was with officials in charge of issuance/extension of 3.5GHz Licences).

137.  For paragraph 134(a) above, Tay understood during negotiations with D6 that full capitalisation for Yunji could be postponed and Yunji’s business licence preserved if inter alia it could be shown there were funds in Hong Kong to a tune of US$4,750,000 dedicated for Yunji’s capital. So Tay agreed (albeit reluctantly) for Ps to pay the US$4.75 Sum to Chinacomm Account 1 even though (a) there was as yet no Licence Extension for the 29 Cities Licence, and (b) Ps were unhappy about lack of information as to Ds’ utilisation of the US$5M Sum. I will deal with the US$4.75M Sum in Part XXVI below.

138.  For paragraph 134(b) above, although the balance of the Subscription Price was not yet payable, Tay confirmed Ps was prepared to inject US$15,000,000 to support the WOFIE subject to (a) Ps’/Ds’ camps reaching agreement on equipment vendor selection (since ultimately such monies would be used for equipment purchase after booking as part of Yunji’s capital injection), and (b) implementation of the Double Signatures Arrangement for Yunji’s bank account, which explained references to promised payment of US$15,000,000 in D6’s emails dated 31 March and 24 August 2010 (see paragraph below). But as neither precondition in (a)-(b) above was fulfilled, Ps were not obliged to pay such sum.

139.  On 24 August 2010, D6 sent email to Tay (C/275) as follows:

“近日，我司注意到，有關報導稱chinatel將與中電華通合作建設中國29城市基於802.1 6e的wimax網絡。並稱TRUSSNET在2008年北京奧運期間在北京建設了wifi網絡，在北京、上海、深圳的wifi網絡共發展了40-50萬用戶。

貴方的上述宣傳與事實嚴重不符，已給我司帶來極大不良影響。中國政府主管部門有關領導已約我司負責人談話，表示對上述事件的關注。

上述類似事件已發生多次，我司亦多次致函貴方，要求貴方停止類似對外公告及宣傳，貴方亦做出停止類似宣傳的承諾。但貴司卻屢次違背承諾。

貴方與我方簽署股份認購協議後，始終未能按時履行注資義務。我司秉承相互理解、長期合作的宗旨，多次給予貴方注資延緩期，但貴方始終未能按雙方約定期限注入資金。貴方多次承諾的2010年6月30日前注入1500萬美元的最後注資期限，貴方亦未能按期注資，我方對此深表失望。

貴司不按雙方約定履行注資義務，卻大肆宣傳與中電華通的合作，以及擁有中電華通的權益。貴方的行為已嚴重違背了雙方的約定，並已損害了我司的利益。

鑒於上述事實，現我司嚴正要求貴方，立即停止嚴重違背事實的與我司相關的一切公告及新聞宣傳。在貴司完全履行注資義務前，貴司的任何公告、宣傳不得再使用中電華通的名號，或宣稱與中電華通進行合作。否則，我司為維護自身利益將不得不採取公開聲明等方式進行澄清，並保留追究貴方責任的權利。” (my emphasis)

140.  Tay explained (and I accept) this email must be understood in the following context: (a) he had told D6 (who actually knew) assurance of Licence Extension for the 29 Cities Licence was essential to the JV deal/ Project, and (b) even though D6, Li Hongji and others from Ds’ camp routinely telephoned to ask him for monies he told D6 the balance of the Subscription Price would not be paid without assurance of Licence Extension for the 29 Cities Licence (see Article 3.2(b) and Schedule 3(j) of the TCPSSA and paragraphs 92(f)(i) and (g) above).

141.  As I have explained, Ds’ camp could not complain about P1’s involvement since they knew it was the fundraising vehicle for the Project, and the TCPSSA provided for the balance of the Subscription Price to be paid by P2 or its “Associate Company”. In light of my findings, D6’s complaints in paragraph 139 above were unreasonable. I see no justifiable reason for D6’s allegation that publicity over the JV Project in respect of 3.5GHz Business in the 29 Cities “與事實嚴重不符” when this was the very essence of the TCPSSA (adjusted by the TCPSSA Addendum), and Ds’ camp knew the TCPSSA replaced the GSSA in order to inter alia boost investor confidence, facilitate fundraising and accommodate D6’s/D7’s request for personal fees.

142.  As regards reference to “[P2]在2008年北京奧運期間在北京建設了wifi網絡，在北京、上海、深圳的wifi網絡共發展了40-50萬用戶”, Tay explained (and I accept) (a) this related to D8’s Existing System and not the New System, (b) D8 was supposed to improvise the Existing System (but lacked relevant know-how) to maximise its utilisation, (c) Ps’ camp brought in an American wifi vendor to work with Ps’ team to improvise the Existing System for D8, and (d) it was P’s camp’s initiative, experience, resourcefulness and contribution that enabled D8 offer 500,000 user capacity on its Existing System during the Games season to earn additional revenue that went to D8 and not Ps’ camp. I accept Ps’ camp understandably regarded such beneficial outcome to be the result of their efforts and therefore publicised their efforts/capabilities to investors, but D6 was miffed because Ps’ camp did not give due recognition to him and Ds’ camp by failing to issue the publicity statement jointly with them. More importantly, as Tay said, D6’s complaints (which I find unmeritorious) concerned the Existing System which was a separate issue from D6’s demand for monies for the Project, and the attempt to bring these 2 matters together created unnecessary confusion.

143.  On 30 August 2010, Li (for Tay) emailed D6 to point out Ds’ camp failed to (a) set up joint signatory bank accounts for safe/effective use of funds that might be injected by Ps’ camp, (b) agree upon choice of equipment and (c) decide on strategy for 3.5GHz WBA network construction, which led to delay for fund injection as investors became concerned over such recalcitrance.

144.  Further, D6’s email of 31 March 2010 requested injection of US$15,000,000 by 30 April 2010 and warned otherwise the WOFIE “將被注銷”, but I reiterate my findings in paragraph 138 above. I note the original deadline for capital injection into the WOFIE (ie Yunji) on 7 July 2008 (see paragraph 42(d) above) had been postponed several times, which was also borne out by D6’s email dated 4 January 2010 that referred to deadline for capital injection into the WOFIE (ie Yunji) by 31 December 2009 (see paragraph 126 (c) above). As seen in Part XXVI below, Ps’ camp paid the US$4.75M Sum in April 2010 to aid postponement of Yunji’s required capitalisation, and the aforesaid deadline was again postponed (see D6’s email dated 24 August 2010 in paragraph 139 above that referred to the then “最後注資期限” of 30 June 2010). In the circumstances, the WOFIE (ie Yunji) was preserved by various extensions of the deadline for capital injection (at least beyond 30 April 2010).

XXVI.  US$4.75 SUM

145.  Ds’ pleadings alleged P2 waived all terms, conditions and warranties relating to Licence Extension of the 29 Cities Licences in the TCPSSA, including but not limited to Schedule 3(j) thereof:

(a)	the Project needed funds in early 2009 and Tay promised to pay at least US$50,000,000 as further payment of the Subscription Price whereupon (but not otherwise) Tay would be accepted as joint signatory to the account for holding such payment, but Ps’ camp failed to make such payment;
(b)	in/about early January 2010 D6 pressed Tay who agreed to pay US$30,000,000 by March 2010 as part of the Subscription Price, but Ps’ camp failed to make such payment even by April 2010;
(c)	Tay told D6 Ps’ camp would pay US$30,000,000 into a jointly-operated account, which led to the opening of Chinacomm Account 1 and Smart Channel Account with Tay as a co-signatory.

Ds averred Ps’ camp only paid the US$4.75M Sum on divers dates between April and June 2010 as part payment of the Subscription Price and not as part of the promised sum of US$30,000,000, so Tay was not entitled to be joint signatory to Chinacomm Account 1 and Smart Channel Account, and Ds’ camp was entitled to cancel the Double Signatures Arrangement which D1 did in May 2011 by resolution of its board of directors.

146.  But D6 did not attend court to give evidence, so there was no evidence to support the above allegations, including Tay’s alleged promises firstly to pay US$50,000,000 and later to pay US$30,000,000, and the alleged conditions for such purported promises to pay. I reiterate my findings in Part XXV above as to what happened in January to August 2010, and no email emanating from Li (for Tay) or D6 referred to any alleged promise made in early January 2010 to pay of US$30,000,000 or any earlier promise to pay US$50,000,000.

147.  As I have explained, payment of the balance of the Subscription Price under the TCPSSA did not turn on issuance of the Share Certificate or payment of the US$4.75 Sum. In any event, I find it highly improbable Tay would have promised to pay US$30,000,000 given the terms of the TCPSSA, history of the Project so far, concerns by Ps’ camp / investors over assurance as to Licence Extension for the 29 Cities Licences and over control of funds to be paid, and D6’s email dated 31 March 2010 that addressed the matter of postponement of deadline for Yunji’s full capitalisation (see paragraph 134 above), which would defeat any suggestion that Tay’s alleged promise in April 2010 to pay US$30,000,000 amounted to waiver of all terms, conditions and warranties relating to Licence Extension for the 29 Cities Licences, including Article 3.2(b)-(c) and Schedule 3(j) in the TCPSSA. Such alleged waiver also did not sit well with the parties’ usual practice of altering terms of their signed transaction agreement by supplementary agreement or addendum.

148.  I prefer Ps’ case that the US$4.75 Sum was not part of the Subscription Price, but a sum requested of Ps’ camp by D1 and D6-D8 to rescue the WOFIE (ie Yunji) (see paragraphs 134-137 above) subject to strict scrutiny by Ps’ camp pursuant to the Double Signatures Arrangement for the newly opened Chinacomm Account 1 and Smart Channel Account (see paragraphs 66-71 of the R&DC). Tay confirmed the US$4.75M Sum was not paid pursuant to any written agreement (see paragraphs 133-134 of his witness statement). I further find D6/D7 knew there was still need for assurance of Licence Extension for the 29 Cities Licence before payment of the balance of the Subscription Price, which precondition had not been abandoned.

149.  I reiterate my findings in paragraph 136 above, and note Tay negotiated with D6 to find a way to save the WOFIE (ie Yunji) and to protect the Project by providing some funds with a view to postpone the deadline for Yunji’s full capital injection. Tay understood from D6 during such negotiations this could be achieved if it could be shown inter alia there were funds in Hong Kong to a tune of US$4,750,000 dedicated for Yunji’s capital. So Tay for Ps and D6/D7 for themselves and D1/D8 agreed (albeit reluctantly) for Ps to pay the US$4.75 Sum for such purpose even though (a) there was still no Licence Extension for the 29 Cities Licence as yet, and (b) Ps were unhappy about lack of information as to Ds’ utilisation of the US$5M Sum. But in view of the Samsung/Huawei incident discussed in paragraphs 213-214 below, Tay was concerned D6 - D8 might unilaterally select design/equipment supplier and unilaterally disburse the US$4.75 Sum, so Tay requested and it was agreed to have the Double Signatures Arrangement for the bank accounts that would receive such monies (which meant no withdrawals were to be made without consent by Tay for Ps’ camp), which monies would be routed via D1 to D4 and then to the WOFIE (ie Yunji) (“2^nd Agreed Route”) to be booked as part of its capital injection (“2^nd Agreed Purpose”) before utilisation for D8’s acquisition of additional equipment for works under the 12 Cities Licence (which ultimate use Ds’ camp thought would facilitate Licence Extension) the selection of which was to be jointly approved by Ps’/Ds’ camps.[96]

150.  I find on balance D6/D7 (see paragraph 152 below for D7’s participation) for themselves and D1/D8 committed/agreed to the Double Signatures Arrangement (which would assure use of the US$4.75M Sum for the 2^nd Agreed Purpose, failing which the monies would be returned to Ps) and the 2^nd Agreed Route/Purpose, and it was pursuant to such agreed conditions that Tay (for Ps) agreed to pay the US$4.75M Sum. Tay/Li was assured by the Double Signatures Arrangement for the bank accounts that would receive such monies, which would allow Ps to retain tight control over use of such monies, and by the fact D1’s new bank account for such purpose was with a bank in Hong Kong.[97]

151.  In this way, Ps made a commercial decision to fund D1 “ahead of deadline”, ie before the balance of the Subscription Price under the TCPSSA (as adjusted by the TCPSSA Addendum) was payable (see paragraph 45 of the Injunction Decision). After all, there was still no Licence Extension for the 29 Cities Licences and/or no adequate evidence thereof. In my view (and as Tay said), Ps’ payment of the US$4.75 Sum (subject to the Double Signatures Arrangement and dedicated for the 2^nd Agreed Purpose via the 2^nd Agreed Route) was outside the TCPSSA or written contractual regime, but if everything eventuated (eg Articles 3.2(b)-(c) of the TCPSSA and Subsequent Payment Conditions in Schedule 3 thereof were fulfilled), it would be taken into account as part of the Subscription Price.[98] This probably explained why there was no written agreement (even though Ps’/Ds’ camps were all along careful in reducing their agreements concerning subscription/shareholders matters and amendments thereof in writing). But this did not mean Ps no longer insisted on Licence Extension for the 29 Cities Licences. On the contrary, I find it was because Ps’ camp still insisted on such preconditions in Article 3.2(b)-(c) and the Subsequent Payment Conditions (including Schedule 3(j)) of the TCPSSA that they paid the US$4.75M Sum outside the contractual regime.

152.  On 31 March 2010, D6 sent email to Tay (C/270-271) asking him to bring necessary documents for opening bank account for receipt of the US$4.75M Sum, and giving SCB’s contact details and name of the handling relationship manager, ie Jodie Lin (“Lin”). Tay took the precaution of carrying out personal due diligence by meeting Lin with D6/D7 and Li before opening the new bank accounts for D1 and D4, and asked Lin to explain the operation of the Double Signatures Arrangement. Tay/Li were assured these bank accounts would be operated as joint accounts, which Lin said should be quite safe. Tay/Li therefore believed Ps’/Ds’ camps would have joint control over such bank accounts, monies would not be released from such bank accounts without Tay’s express agreement/approval, and Tay would not be removed as co-signatory.

153.  On 9 April 2010, D6 sent email to Tay (C/272) asking him to contact Lin for opening bank account. Tay recalled he signed specimen signature forms for SCB. On 21 April 2010, Lin sent email to Tay and D6 (C/249) to confirm Chinacomm Account 1 and Smart Channel Account were opened, “這兩個戶口都是按閣下要求新開的, 要兩個人同時簽字才可以付款 ……” SCB confirmed that since early April 2010 Tay was a co-signatory of Chinacomm Account 1,[99] so the original mandate was that both Tay and D6 were joint signatories.[100] On 21 April 2010, D6 sent email to Tay (C/273) saying the relevant bank accounts had been opened, and requesting Tay to make remittance.

154.  The bank statements of Chinacomm Account 1 showed that on 26-27 and 30 April and 3, 6-7 and 11 May 2010 P2 remitted a total sum of US$1,999,951 into such bank account, and on 11, 18, 24 May and 10-11 and 21 June 2010 P1 remitted US$2,749,648 into such bank account, so the balance as at 21 June 2010 was US$4,749,599 (ie the US$4.75 Sum).

155.  The monthly bank statements of Chinacomm Account 1 were sent to D1, but Lin also sent such statements to Tay who received them up until January 2011. They showed the US$4.75 Sum remained intact in such bank account even though it was intended to be for the 2^nd Agreed Purpose via the 2^nd Agreed Route. Tay explained this was because Ps’/Ds’ camp failed to agree on (a) the joint signatory arrangement for Yunji’s bank account that was supposed to receive the US$4.75M Sum for booking as part of capital injection for Yunji under the 2^nd Agreed Purpose, and (b) equipment vendor selection (see paragraph 149 above). This also explained why despite P2’s earlier indication of provision of US$15,000,000, no more funds were injected after the US$4.75 Sum (see paragraph 138 above). Nevertheless, the WOFIE (ie Yunji) was “rescued” in the sense that the deadline of 30 April 2010 for capital injection was postponed (see paragraph 144 above).

156.  On 12 January 2011, Lin sent email to Tay (C/255) to advise she would leave SCB on 18 January 2011. Tay was told the new relationship manager was Timmy Lam (“Lam”). Since January 2011 SCB no longer sent monthly bank statements to Tay, but given Lin’s previous assurances Tay believed the US$4.75M Sum would not be removed without his consent, so he was not bothered by non-receipt of the bank statements for a few months. In the meantime, Tay tried but failed to contact Lam, who either could not be reached or was not responsive. Then from June to August 2011 Tay travelled extensively in Latin America and other parts of the world on business, so he did not manage to chase up Lam.

157.  The 12 Cities Licence expired in July 2011. By August 2011, Tay found out from D8 that such licence was not extended. Although Tay was prepared to give D8 2 months to sort this out, he felt uncomfortable and asked PRC lawyers to consider taking legal action. Tay also asked Ps’ chief financial officer to write to SCB for the monthly bank statements of Chinacomm Account 1. Tay finally reached Lam and asked about D1’s monthly bank statements, but Lam told him it was not convenient to reveal matters to him and he should ask lawyers to write to SCB. Tay consulted Li, and asked Ps’ solicitors to write to SCB. Correspondence between SCB and Ps’ solicitors in November 2011 revealed the Double Signatures Arrangement for Chinacomm Account 1 had been revoked and Tay was no longer an authorised co-signatory.[101] Tay was shocked because he never consented/authorised removal of his co-signatory mandate. It eventually transpired that by a purported resolution of D1’s board of directors (ie D6 and D7) dated 24 May 2011, it was resolved Chinacomm Account 1 would be operated by D6 solely.[102] Ds claimed (but I disagree) they cancelled the Double Signatures Arrangement because they decided to terminate business relationship with Ps’ camp. I discern no justifiable basis for Ds’ camp to terminate the TCPSSA (as adjusted by the TCPSSA Addendum), and in any event such alleged secret termination was not communicated to Ps’ camp, and Ds’ camp also kept silent on cancellation of the Double Signatures Arrangement until things unravelled after commencement of the present action. Indeed, Tay said Ps’ team continued to work at D8’s offices until some 6 months later in October 2011 (which was close to the time when Tay discovered the secret revocation of his co-signatory right for Chinacomm Account 1) D8 asked them to leave.

158.  In my view, D1, D6 and D7 by unilaterally removing Tay as authorised co-signatory of Chinacomm Account 1 were in breach of the agreement/understanding set out in paragraph 149 above. D6/D7 were in control of D1’s board of directors, and plainly they cancelled the Double Signatures Arrangement behind Tay’s back to avoid joint control by Tay / Ps’ camp and to enable D6 to solely operate Chinacomm Account 1 to make transfer withdrawals for Ds’ own purpose rather than for the 2^nd Agreed Purpose via the 2^nd Agreed Route.[103]

159.  As a result, Ps successfully applied for the 1^st Injunction Order in November 2011, and learned from consequent disclosure of bank statements for the Accounts that there was no activity in Chinacomm Account 1 up to May 2011, but on 20 June 2011 there was transfer withdrawal of US$50,000 (“US$50,000 Withdrawal”) and on 21 June 2011 US$4,500,000 (ie the US$4.5M Sum) was transferred to the D10 Account (ie the US$4.5M Transfer) leaving a balance of US$199,577 in such account. Tay said (and I accept) such debit transactions effected without his knowledge/signature were treacherous misappropriation/dissipation by D1, D6 and D7 that was made in bad faith. Ps claimed the US$4.75M Sum that Ps deposited in Chinacomm Account 1 was subject to Quistclose trust, so the monies still belonged to Ps on failure of the agreed specific purpose of the trust (ie 2^nd Agreed Purpose), and I will turn to such contention in Part XXXI below. But suffice to say here that even on Ds’ case that Ds’ camp decided to terminate business relationship with Ps’ camp without telling them (which I reject), D1, D6 and D7 had no right to thereafter effect the US$4.5M Transfer for alleged expenditure for the Project.

XXVII.  US$50,000 WITHDRAWAL

160.  Ds initially claimed the US$50,000 Withdrawal was transferred to the nominee account of the PRC lawyers of Ds’ camp to settle outstanding fees, but the confirmation letter dated 30 March 2012 by Hankun Law Offices[104] claimed such payment was paid to them rather than any nominee account. Ps’ camp had no idea about the nature of the legal expenses allegedly incurred or the alleged work done by such PRC lawyers, and Tay had not approved such payment. In my view, D1, D6 and D7 obviously made the US$50,000 Withdrawal unilaterally after secret  cancellation of the Double Signatures Arrangement for Chinacomm Account 1 in clear and material breach of agreement in relation to the Double Signatures Arrangement and 2^nd Agreed Purpose/Route in paragraph 149 above.

XXVIII.  US$4.5M SUM

161.  The bank statements in respect of the D10 Account showed deposit of the US$4.5M Sum on 21 June 2011, and on the following day (ie 22 June 2011) US$200,000, US$1,080,020.58, US$1,200,000 and US$2,000,020.57 were transferred out of such bank account, and a further sum of US$200,020.57 was transferred to become a 1-month fixed deposit of US$200,000 to mature on 22 July 2011. Upon maturity of such fixed deposit, it was credited back to the D10 Account and left to idle until 10 August 2011 when US$20,000 was withdrawn in cash and 22 November 2011 when US$190,032.08 was withdrawn as “Outward TT”, leaving a balance of US$10,015.08 in such bank account. Ps claimed the US$4.5M Transfer and these transfer withdrawals out of the D10 Account (collectively, “D10 Transfers”) were unauthorised/unjustified, and D10 was liable for dissipation of the US$4.5M Sum.

162.  D10 explained the US$4.5M and D10 Transfers by claiming he acted as guarantor, surety and/or escrow agent for the lender(s) of a RMB loan to D8. In his witness statement filed on 17 February 2017 (“D10 Statement”), D10 claimed inter alia that:

(a)	on 18 June 2011, he and D8 signed a Chinese deed of guarantee by which he agreed to act as guarantor to Wu Jiang and Sun who lent RMB30,000,000 (“Loan”) to D8 in Mainland China;
(b)	D8 needed the Loan because it had to “支付一項無線寬頻系統的運作費用” and to buy equipment for “提供3.5GHz無線寬頻服務” to the 29 Cities (“D8 Purpose”).

163.  Ds did not produce the Chinese deed of guarantee, but instead disclosed a Chinese “抵押協定” (“Surety Agreement”) dated 18 June 2011 between D1 as Party A and D10 as Party B. The Surety Agreement provided “乙方之委托人[whom D10 said was Wu Jiang and Sun]向[D8]提供借款, [Party A being D1]願為[D8]提供抵押擔保事宜達成協議如下”:

(a)	“[D8]向乙方之委托人借款人民幣3000萬元, 借款期限自2011年6月21日起至2011年7月20日止。這筆借款將用於無線網絡建設項目, 乙方之委托人同意提供該筆借款”;
(b)	“乙方之委托人, 將把這筆借款支付至[D9], 由該公司轉賬給 D8”;
(c)	“[Party A, ie D1]同意為該筆借款提供美元抵押擔保, 擔保金額為450萬美元”;
(d)	“乙方之委托人委托[Party B, ie D10]於[DBS]開立賬戶, 用於存放該筆抵押資金”;
(e)	“[D8]歸還該筆借款後, [Party B, ie D10]將把抵押資金歸還[Party A]”;
(f)	“如果[D8]未能按期歸還借款 …… 委托人有權向[Party B, ie D10]發出指令, 將該筆借款轉至委托人指定賬戶, [Party B ie D10]須無條件按照委托人指令進行轉款”.

Interestingly, the lender was not named in the Surety Agreement, and there was no explanation in the Surety Agreement or otherwise why the Loan was needed for 1 month.

164.  The D10 Statement went on to explain that on 21 June 2011 the US$4.5M Sum was remitted to D10’s personal D10 Account with DBS in Hong Kong, and then transferred to recipients nominated by Wu Jiang and Sun as repayment.[105] D10 elaborated as follows in the D10 Statement:

“4. ……孫[Sun]在國內借了3千萬中國人民幣(‘該借款’)給[D8]。

……

6. 吳江[Wu Jiang]和孫[Sun]先將該借款匯給[D9]於中國的銀行戶口, 其後這些錢就轉賬到了[D8]的戶口。……

……

9. 根據契約[ie Surety Agreement],我[D10]作為吳江[Wu Jiang]和孫[Sun]兩個借款人的擔保人的身份而收取該美元[US$4.5M Sum], 該美元首先被匯到[D10 Account], 然後轉帳給吳江[Wu Jiang]和孫[Sun]指定收款人作為該借款的還款。

10. 根據國內的借款的結構,還錢的方法乃需要經過我[D10]而不是直接還給借錢人。在國內, 只容許沒有利息的借款(於同一集團的除外)。為了方便有利息的貸款, 公司會通常把這些貸款以借錢人的‘往來帳戶’來描述[see ‘資金匯劃來賬憑證’ (‘Remittance Slips’)]。[D8]從吳江[Wu Jiang]和孫[Sun]所收到的貸款是人民幣, 以及因為國內的外匯管制, 吳江[Wu Jiang]和孫[Sun]就因此想在香港收該借款的還款。” (my emphasis)

165.  D10 knew the US$4.5M Sum deposited into the D10 Account on 21 July 2011 came from D1’s bank account, but claimed to be unaware Tay had been removed as co-signatory of such bank account. But on balance I reject D10’s such assertion, and find he lied to the court about his alleged lack of knowledge. D10 was quite prepared to tell untruths about the state of his knowledge. After all, D10 also claimed to be unaware of the 2^nd Injunction Order, and further claimed to have no impression of being required to disclose information as to recipients of the D10 Transfers. He even suggested (a) “I recall we might not have already engaged lawyer on this” and (b) documents might have been sent to D6. D10 also alleged he was unaware of Ds’ application to discharge the Injunction Orders in 2012. But despite such efforts to distance himself from the injunction proceedings, D10 was constrained to accept he was legally represented for such proceedings, and was so represented when he signed the D10 1^st/2^nd Affs in early 2012. In fact, Notice to Act was filed by D10’s solicitors on his behalf on 15 December 2011. This severely undermined D10’s claim that “[all] along [he] was not aware of the [D10 Account] being frozen”. I also do not believe D10’s assertion that he knew he was a defendant, but left all other matters to be dealt with by D6 on his behalf. His solicitors did not such resort to such irresponsible attitude because (a) the D10 1^st Aff expressly stated it was filed for making disclosure under the 2^nd Injunction Order and the D10 2^nd Aff expressly stated it was filed for opposing Ps’ application for further disclosure, and (b) the contents of both such affirmations had been interpreted to D10. I am unable to place any weight on D10’s alleged ignorance, which I find to be nothing more than a poor attempt to shy from his collusion with D6/D7 to dissipate the US$4.5M Sum.

166.  Like Ps, I find the so-called Loan and surety arrangement suspicious/unbelievable, and further find D10 lied to the court about such transactions notwithstanding the Surety Agreement which I find to be sham to cover up misappropriation/dissipation of the US$4.5M Sum (see paragraphs 125-126 of the Amended Statement of Claim (“ASoC”)), which came from the US$4.75M Sum that ought not to have been removed from Chinacomm Account 1 without Tay’s co-signature/consent. On balance, I wholly reject Ds’ case in respect of the US$4.5M and D10 Transfers, and find D6, D7 and D10 were collusive cohorts in misappropriating/ dissipating the US$4.5 Sum by putting it out of Ps’ reach. It must not be forgotten that D6/D7 secretly cancelled the Double Signatures Arrangement for Chinacomm Account 1 so as to unilaterally effect the US$50,000 Withdrawal and US$4.5M Transfer, and (as seen below) D10 worked closely with D6 to open the D10 Account to receive the US$4.5M Sum, and to make the D10 Transfers as alleged “repayment” of the Loan, which contention I reject.

167.  First, there was serious doubt about the alleged Loan as there was unreliable shift in D10’s evidence as to the identity of the lender. In the D10 1st Aff, D10 claimed he held the US$4.5M Sum as surety/ guarantor for the lender Wu Jiang who advanced to D8 the Loan of RMB30,000,000 by payment to the bank account of D9 (whose legal representative was D10) in Mainland China, which loan monies were later transferred to D8. D10 went on to say in the event D8 failed to repay the Loan to the lender, he undertook/guaranteed to repay US$4,500,000 to the lender (ie by the surety sum being the US$4.5M Sum). But in the D10 2^nd Aff, D10 claimed it was at his request in June 2011 that Sun (who was Wu Jiang’s major shareholder) agreed to lend D8 the Loan of RMB30,000,000, and D10 was asked to be surety for the US$4.5 Sum received from D1’s bank account as security for repayment of the Loan, which surety sum was eventually paid to Sun’s nominees in Hong Kong. D10 also went on to say in the D10 2^nd Aff that D8 had fully settled the Loan.

168.  In short, the D10 Statement referred to Sun as lender and later to Wu Jiang and Sun as lenders of the Loan (see paragraph 164 above), the D10 1^st Aff referred to Wu Jiang as the lender, and the D10 2^nd Aff referred to Sun as the lender. D10 testified under cross-examination that both Wu Jiang and Sun were lenders, but even though (according to the D10 2^nd Aff) the Loan was made at his request, he was unclear and/or could not recall the breakdown of the Loan by Sun and by Wu Jiang. D10 admitted he would have known had he checked the vouchers/receipts kept by D9, but he did not so check and Ds did not disclose those vouchers/receipts in the course of discovery in the present action.

169.  When pressed as to why he did not mention Sun as co-lender in the D10 1^st Aff, D10 sidestepped the question by saying he did not pay attention to the breakdown of the loan between Wu Jiang and Sun. When pressed further, D10 claimed Wu Jiang was the main lender and “they had used the name “孫小華” [ie Sun] once for paying out the amount, and that’s the arrangement of Wu Jiang”, so he thought he only needed to refer to Wu Jiang as the main/major lender. But not having looked at D9’s ledgers (which were not discovered/disclosed in the present action), D10 refused to say whether or not Wu Jiang (as main/major lender of just 2 lenders) paid more than half of the Loan, which begged the question why he described Wu Jiang as the main/major lender. When queried about this, D10 again sidestepped the question by saying the Loan took place a long time ago and even disagreed with common logic that a main/major lender of just 2 lenders would have lent more monies than the other lender.

170.  Be that as it may, D10 having thus explained why he referred to Wu Jiang as lender in the D10 1^st Aff (ie Wu Jiang was the main/major lender), he could not give any credible/reliable explanation why he referred to Sun as the lender in the D10 2^nd Aff. At first, he tried to say he did not understand English used in the D10 2^nd Aff, but was eventually constrained to agree the D10 1^st/2^nd Affs had been interpreted to him. When pressed again, D10 explained Sun as shareholder of Wu Jiang represented both himself and Wu Jiang. But if that were so, it begged the question why he referred to Wu Jiang and not Sun as lender in the D10 1^st Aff.

171.  Secondly, there was also serious doubt as to the amount of the alleged Loan. D10 agreed he paid more attention to the D10 Statement as it was in simplified Chinese being his native language. Such statement gave the amount of the Loan as RMB30,000,000, but D10 claimed under cross-examination that the Loan should be RMB32,000,000 odd although he could not remember the exact sum. D10 did not explain why he did not say so in the D10 Statement and/or in the D10 1^st / 2^nd Affs, or why he did not check the amount in D9’s bank statements since the Loan (according to the D10 Statement and Surety Agreement) was first remitted to D9’s bank account. More importantly, D10 had no explanation as to why he signed the Surety Agreement on 18 June 2011when it stated the Loan amount was RMB30,000,000 (see paragraph 163(a) above).

172.  Thirdly, there were discrepancies as to routing of the Loan funds which seriously undermined D10’s veracity. According to paragraph 6 of the D10 Statement and the Surety Agreement, the Loan funds should be and were paid into D9’s bank account before transfer to D8 (see paragraphs 163(b) and 164 above). But D10 testified only part and not entirety of the Loan was allegedly remitted to D9’s bank account in Mainland China, and he even tried to suggest the D10 Statement “don’t mean all the money, all the 30 [ie the Loan] have to go through [D9]”. But this did not sit well with plain/objective reading of paragraph 6 of the D10 Statement, ie the Loan (defined in paragraph 4 therein to mean a loan of RMB30,000,000 by Sun) went to D9’s account first before transfer to D8, which was consistent with the Surety Agreement that provided “乙方之委託人” (who on D10’s case were Sun and Wu Jiang being lenders of the Loan) paid the Loan to D9 who would then transfer the Loan to D8. D10’s purported explanations otherwise were confusing/incredible, and flied against the 2 Remittance Slips that showed Sun and Wu Jiang directly remitted RMB5,000,000 and RMB10,000,000 respectively to D8 on 16 June 2011 (C/313).

173.  In my view, D10 made such desperate attempt to shy away from his statement evidence that the Loan monies were first deposited in D9’s bank account because he knew such assertion was not borne out by the Remittance Slips. Although the D10 Statement claimed “公司會通常把這些貸款以借錢人的“往來帳戶”來描述[see “資金匯劃來賬憑證”]” to facilitate grant of interest-bearing Loan, 2 Remittance Slips showed Sun and Wu Jiang respectively remitted RMB5,000,000 and RMB10,000,000 to D8 on 16 June 2011 (C/313), and 2 other Remittance Slips showed D9 remitted RMB10,000,000 and RMB5,000,000 to D8 on 16 and 23 June 2011 (C/314). But there was no document[106] to show Sun and/or Wu Jiang remitted any part of the alleged Loan of RMB30,000,000 to D9 even though D10 testified that D9 had the relevant vouchers/receipts. In any event, 3 of the Remittance Slips were before the Surety Agreement dated 18 June 2011 and, more importantly, before commencement of the Loan period on 21 June 2011 (see paragraph 163(a) above). In the end, D10 confessed at trial he recently realised the contents of such Remittance Slips, so he testified not all Loan monies were remitted to D9’s bank account first. In my view, this was just poor attempt by Ds to use the inter-company Remittance Slips to make up their case of a Loan with deposit of loan monies in D9 first, but when the Remittance Slips failed to provide corroborative support, D10 tailored his evidence as he went along to shore up Ds’ crumbling case.

174.  Fourthly, Ds claimed the alleged surety arrangement was to support D10’s guarantee that D8 would repay the Loan upon expiry of the 1-month Loan period, so if D8 repaid such Loan by 20 July 2011, the purpose for the US4.5M Transfer into the D10 Account (opened purposely for “存放該筆抵押資金”) would have been spent and the US$4.5M Sum would have to be returned to D1. At first, D10 agreed in such circumstances “4.5 million US would be sort of cancelled” which was consistent with the Surety Agreement (see paragraph 163(e) above). But since the D10 2^nd Aff admitted the Loan was fully settled (see paragraph 167 above), D10 could not credibly/reliably explain why even on Ds’ case the US$4.5M Sum was not returned to D1, but instead was paid out to the order of Sun and Wu Jiang. This was of particular concern when D10 claimed “根據國內的借款的結構, 還錢的方法乃需要經過我[D10]而不是直接還給借錢人” (see paragraph 164 above). If settlement of the Loan was routed through D10, he must have known he had to return the US$4.5M Sum to D1.

175.  When pressed, D10 claimed even if D8 repaid the Loan to the lenders, the US$4.5M Sum would still have to be paid over to D8 and not returned to D1 because (a) D8 borrowed the Loan in RMB and repaid in RMB so “there’s no need for this guarantee sum of 4.5 million US”, and (b) D10 only knew D6 and not D1 and it was D6 who was “the party who enter into the agreement with [him]”. I am unable to accept these contentions which I find to be poor/unreliable attempts to shy away from the obvious. For (a) above, even on Ds’ case, the very fact “抵押資金” was no longer needed upon repayment of the Loan would have required D10 to repay the same back to D1 as provided for in the Surety Agreement. Anyway, the assertion in (a) above did not sit well with the D10 Statement which claimed “[D8]從吳江[Wu Jiang]和孫[Sun]所收到的貸款是人民幣, 以及因為國內的外匯管制, 吳江[Wu Jiang]和孫[Sun]就因此想在香港收該借款的還款”, and no explanation was given as to why D10 at one point said the Loan was repaid in RMB and at another point said the lenders would receive repayment in US$. When pressed, D10 was constrained to concede that upon repayment of the Loan, the US$4.5M Sum should be returned to D1. For (b) above, D1 was Party A to the Surety Agreement, and D6 signed on behalf of D1, so D6 presumably represented D1. But interestingly D10’s evidence in (a)-(b) above gave clear insight into D10’s knowledge and role. He was plainly working with D6 and under his direction in dealing with the US$4.5M Sum and in effecting the D10 Transfers, which went a long way to show they were co-conspirators in misappropriating/dissipating the US$4.5M Sum, especially when I have rejected the Loan and surety arrangement.

176.  The Surety Agreement provided that if D8 could not repay the Loan, then the US$4.5M Sum would be used to repay the lenders by making payment to their order (see paragraph 163(f) above). But since the D10 2^nd Aff confirmed the Loan had been fully settled, this provision was irrelevant. Anyway, such provision was only applicable if D8 “未能按期歸還借款”. Here, the 1-month Loan period only expired on 20 July 2011, so repayment of the Loan was not due until then. D10 offered no credible/ reliable explanation as to why (a) US$200,000, US$1,080,020.58, US$1,2000,000 and US$2,000,020.57 were transferred from the D10 Account allegedly to recipients nominated by Wu Jiang and Sun on 22 June 2011 (ie the 2^nd day of the Loan period and long before the due date for repayment), and (b) why US$200,020.57 was transferred for a 1-month fixed deposit until 22 July 2011 when the entire US$4.5M Sum ought to have been available for transfer to the order of the lender(s) should D8 fail to repay on 20 July 2011.

177.  It was stranger still that D10 asserted in paragraph 9 of the D10 Statement that the D10 Transfers on 22 June 2011 were for repayment of the Loan. As explained above, the Loan was not due for repayment until expiry of 20 July 2011. Also, the Surety Agreement provided the Loan period was to commence on 21 June 2011 (see paragraph 163(a) above), but the alleged repayments were made on the following day (see paragraph 161 and 176 above). What was the point of having a loan for just a day? In my view, this clearly showed the alleged Loan and/or surety arrangement (including the Surety Agreement) were a sham to cover up dissipation of the US$4.5M Sum (which sum ought to have been locked in Chinacomm Account 1 by the Double Signatures Arrangement) outside Ps’ reach. Further, if the US$4.5M Sum was intended for repayment of the Loan, D10 also offered no credible/reliable reason why (a) US$200,000 out of the US$4.5M Sum was placed on a 1-month fixed deposit to mature on 22 July 2011 (ie after expiry of the Loan period) (see paragraph 176(b) above), and (b) later left to idle in the D10 Account until 10 August and 22 November 2011 (apart from the bare assertion in paragraph 179(c) below which I reject).

178.  In desperation, D10 alleged for the 1^st time under cross-examination that on the very day the US$4.5M Sum was deposited in the D10 Account (ie 21 June 2011), D6 told him D8 could not repay the Loan and had to use the US$4.5M Sum for repayment. But it still did not credibly explain the matters in paragraphs 176(a)-(b) and 177(a)-(b) above. As I have said, it would have been pointless to ask for the Loan only to make repayment on the following day that was long before expiry of the Loan period, and if such alleged repayment from the US$4.5M Sum was due to D8’s inability to repay, it begged the question why RMB5,000,000 of the alleged Loan monies was remitted to D8 on 23 June 2011 (see paragraph 173 above).

179.  So again for the 1^st time under cross-examination D10 claimed (a) the Loan period did not start on 21 June 2011 as the lenders had paid some (not all) of the Loan monies to D9 even before early June 2011, (b) D9’s finance department had records to show D9 paid out such Loan monies “bit by bit” to D8 from early June 2011 onwards although D10 only made the deed of guarantee and Surety Agreement on 18 June 2011, and (c) in June 2011 Wu Jiang only asked for certain D10 Transfers so about US$200,000 was placed in fixed deposit “at the request of the bank” and it was in November 2011 that Wu Jiang asked for transfer withdrawal of US$190,032.08 out of the D10 Account. I am unconvinced that the fixed deposit was “at the request of the bank”. After all, when the fixed deposit matured, it was left to idle at the D10 Account until August/Nocember 2011 with no objection by DBS.

180.  In my view, these assertions were nothing more than bare assertions and poor attempts by D10 to tailor Ds’ case as he went along in face of contradictions between his statement/affirmation evidence and indisputable timing/amount of the D10 Transfers. Mr Chan asked me to note the Injunction Decision was critical of the alleged surety arrangement, and D10 not only did not clarify his position in the D10 Statement to set the record straight, he added to the confusion by giving contradictory accounts. There was no Remittance Slip to show transfer of any part of the Loan monies from Sun and/or Wu Jiang to D9, and Ds also did not disclose documents admittedly kept by D9’s finance department for alleged transfer of Loan monies from D9’s account to D8 in early June 2011. Further, the assertions in paragraph 179(a)-(b) above did not sit well with the D10 2^nd Aff which claimed that Sun at D10’s request agreed to lend the Loan to D8 “in June 2011” (see paragraph 167 above). But irrespective of the commencement date of the Loan period, D10 did not question the expiry of the Loan period on 20 July 2011, so there was no reason/right to use the US$4.5M Sum to repay the Loan on 22 June 2011 as such right was only exercisable on 20 July 2011 when D8 “未能按期歸還借款” (my emphasis). In any event, D10 offered no credible/reliable account why his new explanation given in his oral testimony was not mentioned in the D10 Statement and D10 1^st/2^nd Affs. D10’s casual suggestion that there was “[no] reason behind it, but just because you [Mr Chan] ask me today so I work it out” was, in my view, quite unconvincing. This lent weight to my view that D10 was in fact acting in concert with D6 to put the US$4.5M Sum outside Ps’ reach.

181.  Fifthly, D10 at first agreed D6 was aware of the Loan by the 2 lenders Sun and Wu Jiang (or “it’s not necessarily that he knew full well of Wu Jiang”) and also the Surety Agreement (which D6 signed on behalf of D1), but he later claimed D6 was unaware the Loan of RMB30,000,000 to D8 was granted by Sun and Wu Jiang because he (ie D10) was the one who arranged for the Loan. I find such assertions wholly unbelievable, and amounted to no more than a poor effort to excuse D6 from being involved with D10 in dealings concerning the alleged Loan and the US$4.5M Sum. Even on Ds’ case, D6 signed the Surety Agreement for D1 and he was “總裁” (president) of D8, so I do not believe D6 would have no idea who were the lender(s) of a substantial loan to D8. When pressed again, D10 agreed D6 must have been aware there were 2 lenders Wu Jiang and Sun, but it was D7 who might not have been aware of the loan and surety arrangements. On balance, I reject D10’s assertions which I find he made up as Ds’ case began to unravel, and I further find D6/D7 were knowing parties who acted in concert to effect the US$4.5M Transfer to put the US$4.5M Sum beyond Ps’ reach, and at the very least D6 (and very probably D7 too) acted in concert with D10 to receive the misappropriated US$4.5M Sum in a new bank account opened for such purpose (ie the D10 Account), and to effect the D10 Transfers to further dissipate such monies. Indeed, paragraph 112 of the Injunction Decision noted the sum of US$190,032.08 was withdrawn by D10 from the D10 Account “a day after the 1^st Injunction Order was served on [D6]”.

182.  Mr Hui submitted D10 adduced the documentary evidence (ie the Surety Agreement and Remittance Slips) to show the US$4.5M Transfer was pursuant to the RMB Loan taken out by D8 for the Project, and the D10 Transfers were made to recipients directed/designated by Wu Jiang and Sun for repaying the Loan. But in light of the above analysis, I find D10’s evidence inherently implausible and wholly unreliable, and he lied to the court about the alleged Loan/repayment and surety arrangement (including the Surety Agreement). I also note with interest Ds’ pleaded case on the US$4.5M Transfer was one of denial of conspiracy without any positive plea as to the Loan/repayment and surety arrangement (even though in paragraphs 125-127 of the ASoC Ps already pleaded the US$4.5M Transfer was misappropriation/dissipation of the US$4.5M Sum, the Surety Agreement was a sham, and there was a conspiracy the object of which was to misappropriate/dissipate the US$4.5M Sum). When considered in the wider context of D6’s/D7’s deliberate/wrongful act in secretly revoking the Double Signatures Arrangement for Chinacomm Account 1 to avoid joint control and then to unilaterally effect the US$4.5M Transfer for Ds’ camp’s own purpose despite the 2^nd Agreed Purpose/Route, I have no hesitation in concluding even on Ds’ evidence alone that the Loan and surety arrangement (including the Surety Agreement) were concocted to cover up such wrongful conduct.

183.  Mr Hui submitted Ps did not challenge and had no evidence to challenge the fact D8 did in fact receive the Loan of RMB30,000,000 in exchange for the US$4.5M Transfer to the D10 Account. In my view, it lied ill in the mouth of Ds’ camp to make such complaint when they failed to make discovery of relevant loan agreement, guarantee agreement and documents about the money trail when these matters were within their knowledge/possession despite Ps’ pleaded criticisms in the ASoC (see paragraph 182 above). In my view, Ds deliberately created an evidential black hole, but the evidence Ds did adduce sufficiently demonstrated its inherent contradiction/implausibility such that I disagree the alleged Loan was in exchange for the US$4.5M Transfer.

184.  Taking into account Ds’ explanations and the circumstantial evidence, bearing in mind my finding that D6, D7 and D10 gave false impression of loan, guarantee and surety arrangements to cover up misappropriation/dissipation of the US$4/5M Sum, I have no hesitation in concluding the alleged Loan/repayment and surety arrangement (including the Surety Agreement) were typical sham transactions.[107]

185.  Mr Hui submitted Ps did not adduce PRC expert evidence to support the argument that the Surety Agreement was a sham the object of which was to circumvent foreign exchange laws, and applying the default Hong Kong law position, the Surety Agreement was perfectly lawful since there was no foreign exchange control, so the transaction was neither illegal nor unlawful. This could be dealt with shortly. First, Ds could not be heard to say there was no foreign exchange control when D10’s own evidence was that “[D8]從吳江[Wu Jiang]和孫[Sun]所收到的貸款是人民幣, 以及因為國內的外匯管制, 吳江[Wu Jiang]和孫[Sun]就因此想在香港收該借款的還款” (see paragraph 164 above). Secondly, I have found D10 lied to the court and further found the Surety Agreement to be a sham transaction, so there was no need to go on to consider whether or not the surety arrangement infringed Chinese exchange control.

186.  As Tay noted, consent from the Investor under the TCPSSA (ie P2) was required under Schedule 5(l), (s) and (z) before D1 could provide the US$4.5M Sum as “抵押資金” for a private loan to D8, and D10 was a connected party to D8/D9 so the Surety Agreement was not an arms’ length transaction in breach of Schedule 5(gg)-(hh) of the TCPSSA. So D1, D6 and D7, who well knew the US$4.5M Sum was subject to the Double Signatures Arrangement, must also have known such sum could not be unilaterally used as “抵押資金” for a private loan to D8 unconnected with the 2^nd Agreed Purpose via the 2^nd Agreed Route. In secretly revoking the Double Signatures Arrangement and unilaterally effecting the US$4.5M Transfer, D6/D7 must have acted in concert to misappropriate/dissipate the US$50,000 Withdrawal and US$4.5M Sum, and D6/D10 must have acted in concert to have the D10 Account opened to receive the US$4.5M Sum knowing it was monies that came from D1 but which D6, D7, D8 and D10 were not entitled, and further knowing dealings with the US$4.5M Sum were to put such monies further away from the rightful owner.

187.  Mr Hui next complained Ps did not adduce evidence to prove the Loan monies received by D8 were not used in accordance with the alleged intention to purchase equipment and/or other alleged purposes, so Ps’ only complaint was just the US$4.5M Transfer to the D10 Account. In my view, there was no merit to such argument. Since I do not accept the alleged Loan of RMB30,000,000 and/or it was paid in exchange of the US$4.5M Transfer, there was no credible/reliable evidence that D8 received the Loan monies of RMB30,000,000.

188.  Mr Hui also argued that as a matter of commercial/economic reality, there was no loss to Ds’ camp or to Ps’ investment occasioned by advancing the Loan of RMB30,000,000 to D8 and making “repayment” from the US$4.5M Sum that came from D1 since (a) D1 and D8 belonged to the same group of companies working together for the Project on the domestic side, and (b) should D8 be able to repay the Loan the Surety Agreement provided that US$4.5M Sum would have to be duly returned to D1. Again, I am unable to accept such contentions. First, I have rejected the alleged Loan/repayment as untruths, so there was no reliable/credible evidence D8 received Loan monies of US$30,000,000 even though some Remittance Slips showed some monies were transferred to D8. Secondly, the US$4.75M Sum was constrained by the Double Signatures Arrangement and dedicated for the 2^nd Agreed Purpose via the 2^nd Agreed Route before it could be utilised for D8’s acquisition of additional equipment the selection of which should be jointly approved by Ps’/Ds’ camps (see paragraph 149 above). But the wrongful cancellation of the Double Signatures Arrangement and the US$4.5M and D10 Transfers effected by D6, D7 and D10 caused the 2^nd Agreed Purpose/Route and joint control of equipment acquisition to fail. It could not be said unilateral transfer of the US$4.5M Sum in Chinacomm Account 1 to the D10 Account and then to unknown recipients made no difference. Thirdly, I have dealt with the matter raised in (b) above in paragraphs 174-180 above, and find D10’s evidence in relation thereto unreliable. Fourthly, it was suggested the arrangement for RMB Loan to D8 in exchange for US$4.5M Transfer to D10 was commercially legitimate/sensible because, as a matter of commercial reality, US$ paid to D1 could not be used directly to pay for equipment purchase in the PRC. But I have found the US$4.75M Sum (inclusive of the US$4.5M Sum) was meant to be booked as capital injection (in US$) for the WOFIE (ie Yunji) in Mainland China, so there would not have been any problem for D6/Tay to jointly authorise transfer of such monies to Yunji for the 2^nd Agreed Purpose via the 2^nd Agreed Route had there been joint signatories arrangement for Yunji’s account that would receive such monies, and had there been agreement on selection of equipment vendors, Yunji could have defrayed the cost for agreed equipment purchase from such monies.

189.  Mr Hui also submitted that even if the Surety Agreement contravened the TCPSSA, it would not make such agreement a sham and there was no loss “since D8 has indeed received the sum of RMB30m in the form of the loan which was later repaid”. But in view, such argument fell away as it was premised on the fallacy of there being genuine Loan/ repayment, which I have rejected.

XXIX.  ASSIGNMENT DATED 4 APRIL 2011

190.  On 4 April 2011, P1 (formerly known as China Tel Group Inc) and P2 entered into an Assignment of Subscription Agreement and Cancellation of Promissory Note (“Assignment”). By the Assignment, the APA Set between P1 and P2 was cancelled, and P2 assigned to P1 all its rights under the TCPSSA and TCPSSA Addendum. The Assignment also provided that, to the extent consent for such assignment was required from D8 or any other party, P2 agreed to continue to act as agent for P1 as P1 would direct.

191.  But as Tay admitted, even the Assignment was not affective. It fell foul of Article 30 of the TCPSSA (see paragraph 92(aa)-(cc) above), which required the assignee of rights/obligations under the TCPSSA to receive transfer of D1’s shares from the Investor (ie P2) and to execute a Deed of Adherence, failing which such assignment shall be ineffective. There was no evidence that any Deed of Adherence was signed (see also paragraphs 85-87 of the Injunction Decision). Consequently, after the Assignment was executed, P2 continued to act as the Investor under the TCPSSA, but at the directions of P1 in implementation of the TCPSSA. Tay said Ps’ team continued to work at D8’s offices until Ds’ camp asked them to leave in October 2011, which was around the time when Tay discovered he was removed as co-signatory for Chinacomm Account 1 (ie some 6 months after the fact in May 2011).

XXX.  BREACH OF CONTRACT

192.  Mr Hui complained there was no separate doctrine of “fundamental breach” as pleaded in paragraph 102 of the ASoC. But it is trite such term is just a restatement of the principle that particular breach(es) may be such as to go to the root of the contract and entitle the other party to treat such breach(es) as a repudiation of the whole contract.[108] Mr Chan also referred to the principle of renunciation of contract when one party by words or conduct evinces an intention not to perform,[109] or expressly declare he is or unable to perform, his obligations under the contract in some essential respect.[110]

193.  There must be an absolute refusal to perform. If one party evinces an intention not to perform or declares his inability to perform some, but not all, of his obligations, then the right of the other party to treat himself as discharged depends on whether the non-performance of those obligations will amount to a breach of a condition of contract or deprive him substantially the whole benefit which it was the intention of the parties that he should obtain from the obligations of the parties under the contract then remaining unperformed.[111] DHCJ To in Leung Yuk Lin trading as King’s Glory Education Centre & ors v Karson Oten Fan, Karno explained that the test is an objective one, and the court infers intention from the conduct of the party in default.[112] In drawing the necessary inference, the court must consider the conduct of the party in breach as a whole[113] and the actual circumstances of the case. Since repudiation or renunciation of a contract is a serious matter, conduct short of repudiatory breach, which is necessary to evince intention not to perform, must be an absolute refusal to perform, which intention is not to be inferred lightly.[114]

194.  By reason of the aforesaid findings, I reject Ds’ contention that Ps unreasonably and unjustifiably refused to cooperate and provide funding support to Ds’ camp (see paragraph 1 above). After all, I have found Ps’ camp did pay the US$5M Sum as the First Payment and also paid the US$4.75M Sum outside the TCPSSA regime “ahead of deadline”, ie before the balance of the Subscription Price was payable. I have further found Ps’ camp assisted Ds’ camp with Ds’ Preparatory Works and works under the Disbursement Plan, and also helped D8 to improvise the Existing System to let them earn additional revenue during the Games. Ps’ camp also introduced potential lenders when Ds’ camp required a loan, and facilitated the Hana Bank credit line by introducing Samsung and helping Ds’ camp work with Samsung.

(a) 29 Cities Licences

195.  Ps claimed that in breach of Schedule 3(j) and Clauses 1.3, 4.2 and 6.2 of Part 2, Schedule 4 of the TCPSSA, D1 (as the company), D6 and D7 (as guarantors) and D8 and D9 (as warrantors) failed to obtain Licence Extension for the 29 Cities Licences and/or even adequate evidence thereof. The 25 Cities and 5 Cities Licences expired on 28 February and 31 December 2008 respectively, and were not extended/ renewed. Notwithstanding the grant of the 12 Cities Licence since 17 July 2009 (which I have found did not amount to adequate evidence of valid Licence Extension for the 29 Cities Licences and which eventually expired in July 2011) and Ds’ assurances that 3.5GHz Licence for the 17 Cities would be awarded by stages (which in the end did not materialise), Ds eventually failed to obtain Licence Extension for the 29 Cities Licences in respect of the 29 Cities. As at the commencement of the present action, D8 did not hold any valid 3.5GHz Licence for any of the 29 Cities.

196.  As explained above, as between Ps’ and Ds’ camps, Ps’ camp would provide network design capability and financial resources to build the New System whilst Ds’ camp would provide 3.5GHz Licences for the 29 Cities without which the whole basis of the JV would be entirely gone. Thus, Licence Extension for the 29 Cities Licences went to the very “root” of the JV Project and the TCPSSA (as adjusted by the TCPSSA Addendum). So, irrespective whether or not the 12 Cities Licence could be or was eventually extended/renewed, there was still material and repudiatory breach of the TCPSSA (as adjusted by the TCPSSA Addendum) due to failure to secure 3.5GHz Licences for all the 29 Cities (see paragraphs 102-103 of the ASoC), which was the essential basis for the Project and the reason for the significant value of the Subscription Price. This was borne out by the fact that each of TDFA/TNFA, GSSA and TCPSSA provided for Licence Extension for the 29 Cities Licences and/or adequate evidence thereof as precondition for further payment of Subscription Price.

197.  Mr Hui argued Ps’ claim for breach of contract in relation to Licence Extension for the 29 Cities Licences was nothing more than alleging Schedule 3(j) and Clauses 1.3, 4.2 and 6.2 of Part 2, Schedule 4 of the TCPSSA were breached, and since these provisions related to the Subsequent Payment Conditions or warranties they were insufficient to support any alleged repudiation or renunciation of contract. It was also said that (a) breach of warranties would only ground a claim in damages and not termination of contract, (b) there was no precondition of adequate evidence of Licence Extension for the 29 Cities Licences (ie Schedule 3(j) of the TCPSSA) for payment of the US$5M Sum, and (c) even if such precondition applied to payment of the US$4.75M Sum it had been waived.

198.  I accept there was no precondition of Licence Extension of the 29 Cities Licences for the First Payment under the TDFA/TNFA (see paragraph 35(g) and 38 above) even though the 25 Cities Licence had expired on 29 February 2008 (see paragraph 53 above). As for the US$4.75M Sum, although Mr Hui conceded it was subject to the precondition in Schedule 3(j) in the TCPSSA,[115] I have found there was no such precondition for payment of such sum for the 2^nd Agreed Purpose outside the TPSSA regime (see paragraph 148 above).

199.  There was therefore no need for me to go further to consider Mr Hui’s interesting argument that Article 3.2(b) of the TCPSSA (see paragraph 92(f)(i) above) only set deadlines for payment of the 2^nd tranche of the Subscription Price and “did not say that, prior to such deadlines, Ps had no obligation to provide funding support to D8 to back up its renewal of the 29 Cities Licence” (or in other words, Article 3.2(b) “has not created a condition precedent as a matter of contractual interpretation”).

200.  But for the sake of completeness, I also reject such argument. Apart from the obligation to pay the Subscription Price, there was no provision in the TCPSSA (as adjusted by the TCPSSA Addendum) that imposed a contractual obligation to provide funding support to D8 to back up Licence Extension for the 29 Cities Licences, and Mr Hui did not refer to any such provision. Schedule 3(j) of the TCPSSA was one of the Subsequent Payment Conditions which were described in Schedule 3 as a series of conditions precedent for the payment of the Subscription Price by the Investor after the First Payment. The significance of the Subsequent Payment Obligations was highlighted in Articles 4.3-4.4 which provided for refund of monies paid if such preconditions not fulfilled. It was also clear from Article 3.2(b) of the TCPSSA that if “the licenses of Chinacomm have [not] been extended in accordance with item (j) of Schedule 3 of [the TCPSSA]” the balance of the Subscription Price was not even payable. These provisions all suggested Licence Extension went to the very “root” of the TCPSSA.

201.  Mr Hui submitted that the contention in paragraph 197 above was reinforced by the attempt by Ps’ camp to procure the agreement (in principle) of a new investor to pay in funds for D8 in mid-January 2010 before Licence Extension of the 29 Cities Licence. It was said that if Article 3.2(b) of the TCPSSA imposed the precondition of Licence Extension, this planned injection of funds in mid-January 2010 would not have been necessary as such precondition had not been satisfied. I disagree and I reiterate my findings in paragraphs 125-132 above.

202.  Importantly, in focusing on payments already made by Ps (ie the US$5M and US$4.75M Sums) and the schedule of payments to be made for the balance of the Subscription Price without considering the TCPSSA (as adjusted by the TCPSSA Addendum) as a whole, Ds lost sight of the fundamental “root” of the JV deal, ie that Ps’ camp was to provide technical capability and financial contribution for building/deploying the New System for the 29 Cities whilst Ds’ camp was to procure/provide 3.5GHz Licences for the 29 Cities, so both JV parties would earn revenue from service fees of the 3.5GHz Business to be carried on in the 29 Cities with possible future listing of the JV SPV company. I have no doubt Ds’ camp’s admitted failure to secure Licence Extension for all of the 29 Cities Licence was clear/unequivocal conduct amounting to repudiation and/or renunciation of the TCPSSA (as adjusted by the TCPSSA Addendum).

203.  Mr Hui next argued it was difficult to see how Ps could claim back the US$5M and US$4.75 Sums already paid by them after Closing pursuant to Articles 4.1-4.2 of the TCPSSA (see paragraph 92(d)-(e) above), and after P2 became full owner of D1’s 49% Shares that they had bargained for (or least part of such shares that corresponded to the US$5M and US$4.75 Sums out of the Subscription Price). It was said in the absence of express contractual remedies, it was difficult to see how Ps could claim the amount paid to Ds in respect of which shares had already been allotted to them. Mr Hui reminded that P1’s locus standi to sue vitally hinged on P2 having the legal/beneficial ownership of the 49% Shares to sell to P1 in the first place.

204.  I have rejected the above contentions, and reiterate my findings in Parts XVII-XXIII above. Although it was envisaged in the TCPSSA P2 would become the legal owner of D1’s 49% Shares upon Closing by issuance of the Share Certificate and entry of P2’s name in D1’s register of members/shareholders (and Ps did not dispute the Share Certificate for the 49% Shares were issued), I have found there was no entry of P2’s name on D1’s register of members/shareholders, and hence P2 was not legal owner of those shares. Tay’s subjective views and lack of complaint prior to the present action would not alter the status of legal ownership of such shares, which must be a matter of law. I have also found at that time Ps’ camp (including Tay) and Ds’ camp were unconcerned with such legal niceties because as a result of D6’s/D7’s demand for their personal fees (such that P2 had to replace Gulfstream as Investor) and delay in Licence Extension for the 29 Cities Licence (which necessitated efforts to boost investor confidence and to demonstrate P2’s/P1’s stake in the Project to overcome the corporate disconnection between them), the TCPSSA and APA Sets were (to the knowledge of Ds’ camp) structured as marketing strategy to encourage investment financing by presenting to investors in the Market P1’s faith in the Project going forward. In such context, I am also unable to lay much store in Recitals D-E of the APA (see paragraph 109(d) above). In any event, the APA Set was subsequently cancelled by the Assignment (see paragraph 190 above).

205.  I pause to note P1’s locus standi did not turn on the APA and/or legal/beneficial ownership of the 49% Shares in D1. Rather, P1’s locus standi turned on it being a party to the agreement in relation to the US$4.75M Sum outside the TCPSSA regime (see paragraph 149 above) and its payment of US$2,749,648 of the US4.75M Sum thereunder (see paragraphs 154 above and paragraphs 207-210 below), and the vitality or otherwise of the Assignment (but I have found the Assignment was not effective in view of Article 30 of the TCPSSA (see paragraph 191 above), so P2 rather than P1 was still the relevant party to the TCPSSA (as adjusted by the TCPSSA Addendum)).

206.  Anyway, I am unable to see how it could be said Ps got what they bargained for. I have found P2 did not even secure legal ownership of the 49% Shares. More importantly, the bargain for P2 under the TCPSSA (as adjusted by the TCPSSA Addendum) was not mere acquisition of the 49% Shares of D1 as a bare shell SPV with no business/asset. What was envisaged for the Project under the TCPSSSA was for D1 as the off-shore JV SPV that would carry on 3.5GHz Business via D4 and Yunji by deploying the New System and providing 3.5GHz Services in the 29 Cities under the renewed/extended 29 Cities Licences to earn service fees for the benefit of the JV partners. In the absence of Licence Extension for the 29 Cities Licences, the whole “root” and/or underlying foundation of the bargain between the parties was undermined, and it would be wrong to say Ps got what they bargained for when they could not enjoy the benefits of such bargain in relation to the 29 Cities, and did not have legal ownership for the 49% Shares and/or beneficial interest in the Portion Shares. There was added concern when (as Tay said) D6/D7 also deliberately dissolved all entities under D1, ie they allowed D4 to be dissolved in Hong Kong and Yunji to be penalised/dissolved in Mainland China. In my view, there is no merit to such argument (see paragraph 228 below).

(b)  1^st and 2^nd Agreed Purposes via 1^st and 2^nd Agreed Routes

207.  Ps claimed it was a material/repudiatory breach of the TCPSSA (as adjusted by the TCPSSA Addendum) that D1, D6, D7, D8 and D9 failed to use the US$5M Sum for the 1^st Agreed Purpose via the 1^st Agreed Route (see paragraph 104 of the ASoC):

(a)	US$3,999,803.264 out of the US$5M Sum deposited into Chinacomm Account 2 was not injected into Yunji via D4;
(b)	such sum of US$3,999,803.264 was not used for the Project as evident from the bank statements disclosed by D1, D6, D7, D8 and D9 and their solicitors;
(c)	no details were provided on the utilisation of the US$5M Sum;
(d)	no evidence was provided to show how the US$1M Sum deposited into the account of D8’s Beijing subsidiary had been spent on the Project.

208.  Mr Hui submitted Article 3.2(a) of the TCPSSA did not specify any agreed purpose or agreed route for the First Payment, so it could not be said there was breach of any provision in the TCPSSA, especially when the TCPSSA contained an entire agreement clause in Article 26. It was said Ps could not have claimed for breach of term, condition and/or warranty at all since the US$5M Sum was already paid before the TCPSSA and/or even the GSSA. I reject such argument and repeat my findings in Part IX and paragraphs 95-96 above.

209.  In my view, the US$5M Sum was subject to the 1^st Agreed Purpose/Route. So long as the US$5M Sum went to Yunji via the 1^st Agreed Route to be booked for the 1^st Agreed Purpose, Tay had no objection for such monies to be disbursed by Yunji for works under the Disbursement Plan and/or for Ds’ Preparatory Works under the Collateral Warranty, but this did not mean Ds’ camp could use the US$5M Sum in any way they wished so long it was for the Project.

210.  Ps also alleged Ds’ camp failed to use the US$4.75M Sum for the 2^nd Agreed Purpose via the 2^nd Agreed Route, and I refer to my findings in Parts XXV-XXVIII above, which plainly showed there was material and repudiatory breach of the 2^nd Agreed Purpose/Route and Double Signatures Arrangement as agreed between Tay for Ps and D6/D7 for themselves and D1/D8. By silent and unilateral removal of Tay as co-signatory of Chinacomm Account 1, it was clear D1/D8, D6 and D7 evinced an intention to resile from the agreement in paragraph 149 above. Such appropriation of monies intended for the Project for private use by Ds’ camp whether paid under the TCPSSA regime or otherwise, which Ds knew would go to the Subscription Price if everything (eg fulfilment of the Subsequent Payment Conditions including Schedule 3(j) of the TCPSSA) eventuated, must be clear indication of refusal to perform the TCPSSA. These findings also went a long way to demonstrate there was no waiver on the part of Ps as discussed below.

(c)  failure to obtain P’s consent for certain matters specified in Schedule 5 of the TCPSSA

211.  Ps claimed that in breach of Articles 10.7, 10.8 and 10.12 of the TCPSSA (as adjusted by the TCPSSA Addendum), Ds failed to obtain P2’s prior approval when making major decisions in relation to the business operation of D1, D4, the WOFIE (ie Yunji) and D8 (see provisions in Schedule 5 of the TCPSSA – see paragraph 28 of the RD&C).

212.  Ps averred and Tay claimed (a) since 2010 Ps were excluded from involvement in the Project by D8 and its subsidiaries and not treated as business partner of the JV on the principle of cooperation, (b) Ds did not seek P2’s prior approval on major decisions concerning the Project as specified in Schedule 5 of the TCPSSA (eg Ps were not consulted before making any decision for the business of D1, D4, D8, D9 and their subsidiaries),[116] and (c) D8 formed business partnership for 3.5GHz Business with other parties without Ps’ prior consent. But Mr Hui submitted that the particulars for such alleged breaches as in paragraph 105 of the ASoC were sparse except for the averment that D8 having awarded equipment supply contracts to Samsung and Huawei without Ps’ consent, but he argued this would not take Ps’ case substantially further as Ps’ loss for such alleged breach could not amount to the whole of the US$5M and US$4.75M Sums.

213.  In relation to Ps’ complaint about D8’s unilateral selection of equipment supplier, Tay gave evidence that Ps’ team put in substantial manpower and intellectual property in designing the New System, and by 2010 D8 was in possession of all intellectual property Ps had developed for the Project including design diagrams and specifications. Ps’ camp introduced Samsung (a major player in respect of WBA networks) to D8. In March 2010, D8 started discussions with Samsung about technical equipment supply for 3.5GHz Services in Beijing. Tay expected to be involved in the discussion (see paragraph 138 above), but soon discovered Ps’ team was excluded. Since May 2010 D8 negotiated directly with Samsung on technical matters without involving Tay or Ps’ team, which Tay considered to be an act of bad faith. In my view, it was through efforts by Ps’ camp in introducing and working with Samsung that led to Hana credit line (see paragraphs 101-102 above). By June 2011, Tay was advised by an industry specialist Mr Luo[117] that D8 awarded technical equipment supply contracts to Samsung and Huawei without Tay’s knowledge/consent, which I find to be in breach of Articles 10.7, 10.8 and 10.12 and Schedule 5(r) of the TCPSSA (see paragraph 92(r), (s) and (u) above) since such capital expenditure would be way above US$10,000, hence D8 infringed P2’s rights to be consulted and to give consent as a party to the TCPSSA.

214.  In my view, this was significant because the basis of the JV cooperation in respect of the Project was to build the New System to provide 3.5GHz Services for the 29 Cities. By unilaterally negotiating with equipment suppliers, D8 took unfair advantage of the intellectual property developed by Ps for D1 in relation to the Project, so D1, D6, D7, D8 and D9 in failing to obtain Ps’ prior consent for certain matters specified in Schedule 5 of the TCPSSA destroyed the basis of JV cooperation (especially when Articles 10.7-10.8 of the TCPSSA emphasised such JV cooperation by giving veto power to P2). Ps claimed (and I accept) this was material/repudiatory breach of the JV and TCPSSA as adjusted by the TCPSSA.

(d) Waiver

215.  In the circumstances, although there was no precondition of Licence Extension in request of the 29 Cities Licences for payment of the US$5M and US$4.75M Sums, such Licence Extension for all the 29 Cities was a core requirement that went to the very “root” of the bargain under the TCPSSA (as adjusted by the TCPSSA Addendum), and by failing to procure and/or provide such Licence Extension, by taking steps to defeat the 1^st/2^nd Agreed Purposes/Routes and by failing to cooperate over matters in Schedule 5 of the TCPSSA, D1, D6, D7, D8 and D9 were in repudiation/renunciation of the JV Project, the TCPSSA (as adjusted by the TCPSSA Addendum) and the agreement in paragraph 149 above, and D1, D6, D7, D8 and D9 were liable to pay the US$5M Sum to P2, and D1, D6, D7 and D8 were liable to pay the US$4.75M Sum to P1 and P2.

216.  But Mr Hui argued Ds would rely on the doctrine of waiver to overcome failure by Ds’ camp to (a) obtain Licence Extension of the 29 Cities Licences, and (b) use the US$5M and US$4.75M Sums for the 1^st/2^nd Agreed Purposes via the 1^st/2^nd Agreed Routes, so Ps were not entitled to insist upon fulfilment of relevant contractual provisions in relation to the US$5M and US$4.75M Sums. Ds’ waiver argument rested on the contention that Ps agreed to pay and did pay the US$4.75M Sum to D1 well knowing the relevant contractual provisions had not been fulfilled.

217.  There was little dispute as to the legal principles on waiver by conduct. If one party, by his conduct, leads another to believe that the strict rights under the contract will not be insisted upon, intending that the other should act on that belief, and he does act on it, then the first party will not afterwards be allowed to insist on that strict legal rights when it would be inequitable for him to do so.[118] Detriment is a sufficient but not necessary element.[119] Mr Hui accepted the burden was on Ds to establish waiver.

218.  I start with a pleading point. Mr Hui submitted the waiver defence had been sufficiently pleaded in paragraph 87(e)-(g) of the D&C which averred inter alia that (a) in/about early January 2010 Tay agreed to (but did not) pay US$30,000,000 by March 2010 as part payment of the Subscription Price for the 49% Shares, (b) in breach of this promise to pay US$30,000,000 in full Tay paid the US$4.75M Sum into Chinacomm Account 1 on divers dates in/about April to June 2010, and (c) Ds “further aver that by agreeing to pay US$30 million to [D1], [P2] has expressly waived all terms, conditions and warranties relating to the extension/ renewal of the 3.5GHz Licences in the TCPSSA, including but not limited to Schedule 3, Clause 3(j) thereof” (see paragraph 145 above).

219.  I refer to my findings in paragraphs 146-147 above. I have found there was no evidence to support Ds’ averment that Tay allegedly promised to pay US$30,000,000 as part of the Subscription Price, and in any event I reject such contention. That being the case, the whole basis of the waiver argument as pleaded was undermined. Mr Hui tried to salvage the situation by saying there was no need for any evidence that the US$4.75M Sum was part of the US$30,000,000 promised by Tay “since in substance both are monies for the subscription price for the 49% shares in D1”. But this argument could not made out when I have rejected the alleged promise by Tay to pay US$30,000,000, and there was no or no credible evidence that I accept to show the US$4.75M Sum had anything to do with such alleged promise to pay US$30,000,000. Indeed, Ds averred otherwise in the D&C by asserting the US$4.75 Sum was part payment of the Subscription Price and not part of the promised sum of US$30,000,000 (see paragraph 145 above). The alleged waiver by “agreeing to pay US$30 million to [D1]” fell away, and the payment of US$4.75M Sum on its own fell outwith the ambit of the pleaded waiver.

220.  But even if Ds were able to cross the pleadings hurdle (which I disagree), Mr Hui relied on the following to support the waiver contention: (a) Ps paid the US$4.75M Sum pursuant to the Double Signatures Arrangement when they well knew the matters in paragraph 216(a)-(b) above had not been fulfilled and despite rejection of previous funding requests by D6 and his assistant, and (b) Tay expected such payment would eventually be treated as part payment of the Subscription Price. It was also suggested P2’s commercial decision to proceed with the Project based on various comfort factors (eg Ds brought Tay to see MIIT officials) had no relevance to the waiver defence which was based on objective conduct rather than subjective belief/intention.

221.  In my view, Ds’ contentions placed blinkered focus on payments of the US$5M and US$4.75M Sums rather than proper consideration of the very “root” of the bargain under the TCPSSA (as adjusted by the TCPSSA Addendum) explained above. I refer my findings in Part XXVI above which explained the US$4.75M Sum was to Ds’ knowledge intended for the 2^nd Agreed Purpose via the 2^nd Agreed Route (ie to rescue the WOFIE and to support some works under the 12 Cities Licence allegedly for the purpose of facilitating Licence Extension of the 29 Cities Licence), and whereby I concluded Ds knew there was never any abandonment of the requirement of Licence Extension for the 29 Cities Licence for the JV Project (and/or adequate evidence thereof before payment of the balance of the Subscription Price). The Double Signatures Arrangement agreed to by Ds was to ensure compliance with the 2^nd Agreed Purpose via the 2^nd Agreed Route.

222.  Mr Hui argued P2’s payment of the US$4.75M Sum led Ds to believe the matters in paragraph 216(a)-(b) above would not be insisted upon, and “Ds relied upon that by causing D1 to allot the part of 49% shares in D1 to P2 that corresponds to such a payment, pursuant to the terms of the [1^st Note]”, which was said to be clear evidence to show Ps had conducted their affairs on the basis of waiver otherwise Ps would have no obligation to pay and “Ds would have no obligation to allot and release part of the Pledge”. Mr Hui also reiterated that Ps were satisfied with D1’s allotment of shares to it and the closing of the TCPSSA, and had no complaint as to whether or not changes have been made in the Cayman Islands Registry or D1’s register of members.

223.  However, the TCPSSA, TCPSSA Addendum and 1^st/2^nd Notes were made in February 2009, which was more than a year before payment of the US$4.75M Sum in April to June 2010. I am unable to see how payment of the US$4.75M Sum in 2010 could cause D1 to issue the Share Certificate and/or enter into the 1^st Note in 2009. I reiterate my findings in Parts XVII-XXIII above in relation to the TCPSSA and APA Sets and the discussion in paragraph 221 above. Anyway, I have found the payment of US$4.75M Sum was outside the TCPSSA regime subject to the Double Signatures Arrangement and 2^nd Agreed Purpose/Route, and would only be treated as Subscription Price if everything eventuated (see paragraph 151 above). Moreover, I am unable to see how payment of the US$4.75M Sum in 2010 could “by logical extension” amount to retrospective waiver of the requirement in paragraph 216(b) above for the US$5M Sum that was paid in 2008 and subject to the 1^st Agreed Purpose/Route.

224.  There was some suggestion in Ds’ pleadings that alternatively P2 waived Schedule 3(j) of the TCPSSA by its acceptance of the 12 Cities Licence in continuing with the Project. But I find Ps never accepted the 12 Cities Licence as substantial contractual performance of the TCPSSA or as abandonment of Licence Extension for the 29 Cities Licences (see paragraph 98 above).

225.  In my view, Ds’ contentions placed blinkered focus on payments of the US$5M and US$4.75M Sums rather than proper consideration of the very “root” of the bargain under the TCPSSA (as adjusted by the TCPSSA Addendum) explained in paragraphs 19 and 28 above. I reject the defence of waiver.

(e)  Summary

226.  With failure to secure 3.5GHz Licences for the 29 Cities, failure to seek consent from Ps on major capital expenditure of the Project, and unilateral change of the Double Signatures Arrangement, I accept there were material and repudiatory breaches by D1, D6, D7, D8 and D9 such that the whole bargain and basis of cooperation between the Ps’ and Ds’ camps for the Project had been undermined.

227.  D1 was a JV SPV used by Ps and D6-D8 for the Project with no business operation or asset except for shares in D4, which was also a SPV to incorporate the WOFIE. Ps’ investments were not in the bare 49% Shares, but in the JV between Ps’ camp and Ds’ camp as explained in paragraphs 19 and 28 above, and business planning, financial forecast and project evaluation for the Project were all done on the basis of the 3.5GHz Business for the 29 Cities as a whole, which was why the 1^st Agreed Purpose/Route was specified for the First Payment. But D1, D6, D7, D8 and D9 failed to obtain Licence Extension for the 29 Cities Licences within reasonable time or at all.

228.  Ps’ solicitors later discovered Ds’ camp suffered D4 to be de-registered/dissolved on 22 October 2010, and Beijing Administration of Industry and Commerce imposed penalty on Yunji on 27 December 2010 for failure to participate in annual inspection and dissolved Yunji in October 2011 (see paragraph 206 above).

229.  For all the above reasons, I find D1, D6, D7, D8 and D9 were in repudiatory breach of and evinced an intention not to be bound by the TCPSSA (as adjusted by the TCPSSA Addendum) and the agreement in paragraph 149 above. They were therefore liable to pay P1 and P2 reliance loss in relation to the US$5M Sum and US$4.75M Sum paid under the TCPSSA and the agreement in paragraph 149 above as explained in paragraph 136 above.

XXXI.  BREACH OF TRUST

230.  The US$5M Sum was deposited into Chinacomm Account 2 and the account of Chinacomm’s/D8’s Beijing subsidiary pursuant to Article 2a of the TDFA/TNFA (see paragraph 35(g) above) exclusively for the 1^st Agreed Purpose via the 1^st Agreed Route with no discretion to deviate from such purpose/route. As for the US$4.75M Sum deposited into Chiancomm Account 1, there was the Double Signatures Arrangement coupled with the 2^nd Agreed Purpose/Route as agreed between Ps and D6 for D1/D8. Ps therefore claimed the US$5M and US$4.75M Sums were in nature trust monies, and D1, D6 and D7 dissipated such monies in breach of trust by transferring the US$5M Sum to unknown recipients and not for the 1^st Agreed Purpose/Route, and by secretly/unilaterally removing Tay’s co-signatory right for Chinacomm Account 1 and effecting the US$50,000 Withdrawal and US$4.75M Transfer from such bank account without Ps’ authorisation. Ps claimed D1, D6 and D7 were therefore liable for restitution and damages. Ds denied this and alleged there was no basis to support Ps’ case of breach of a Quistclose trust.

231.  There was little dispute over the legal principles on Quistclose trust. A Quistclose trust may arise where one person A advances monies to another B on the understanding that B is not to have free disposal of the money and that it may only be applied for the purpose stated by A.[120] Thus A’s beneficial interest in the money will remain unless and until the money is applied in accordance with the purpose stated by A.[121] The key question is whether the parties intended the money to be at the free disposal of the recipient. A’s freedom to dispose of the money is necessarily excluded by an arrangement that the money should be used exclusively for the stated purpose.[122] A’s subjective intentions are irrelevant. If he enters into arrangements which have the effect of creating such trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them.[123]

232.  The rationale for equity’s intervention in such circumstances is that it is unconscionable for a man to obtain money on terms as to its application and then disregard the terms on which he received it. Such conduct goes beyond mere breach of contract for the duty is fiduciary in character, so Quistclose trust may exist despite the absence of any contract at all between the parties.[124] The concept of Quistclose trust has been applied to a non-loan situation in Typhoon 8 Research Ltd v Seapower Resources International Ltd & anor.[125] There will be breach of the Quistclose trust where the money is applied for purposes other than the stated specific/exclusive purpose.

(a) US$5M Sum

233.  Mr Hui submitted there was no Quistclose trust and hence no breach of trust in relation to the US$5M Sum. It was said there was no provision for any specific purpose restricting the usage of the US$5M Sum in the TCPSSA (which was a comprehensive agreement prepared by internal and external lawyers) except that it shall be paid as “part payment and part satisfaction of the Subscription Price” in Article 3.2(a), and there could not be any other agreement, orally or in writing, stipulating any specific purpose of the use of the US$5M Sum given the entire agreement clause in Article 26 of the TCPSSA.[126] It was said that at best the purpose of the US$5M Sum was for subscription of the 49% Shares, which purpose had been fulfilled (and not failed) by allotment of such shares to P2 (see paragraphs 89-91 of the D&C).

234.  I disagree and refer to my findings in paragraphs 95-96 above. Article 3.2(a) of the TCPSSA expressly referred to the TNFA by providing that the First Payment “shall be paid as part payment or part satisfaction of the Subscription Price in accordance with the relevant articles of the [TNFA]”, and Article 2a of the TNFA provided that the First Payment was to be paid as part of the Acquisition Price by 2 cash payments to D1 and then to D4 into the WOFIE as part of the capital injection required under PRC law (ie the 1^st Agreed Purpose via the 1^st Agreed Route). Clearly, although the US$5M Sum was paid as part of the Acquisition Price / Subscription Price for acquisition of the 49% Shares, there was an exclusive, specific and dedicated purpose that restricted usage of the US$5M Sum. There was therefore no need for Ps to go outside the contractual regime under TCPSSA.

235.  In my view, Mr Hui’s suggestion that Ps made different, inconsistent and/or contradictory references to the purpose of the US$5M Sum reflected misunderstanding of Ps’ case. The 1^st Agreed Purpose (ie the US$5M Sum was to be paid to the WOFIE as part of its capital injection required under the PRC law) was the specific and dedicated purpose of such monies. This was understandable since Yunji’s business licence specified a deadline of 7 July 2008 for capital injection (although such deadline was subsequently postponed several times). But once having booked such monies as part of the WOFIE’s (ie Yunji’s) capital injection in fulfilment of the 1^st Agreed Purpose, such monies would be available for use by the WOFIE (ie Yunji), ie for works pursuant to the Disbursement Plan and for Ds’ Preparatory Works subject of the Collateral Warranty. Mr Hui’s suggestion that disbursing the US$5M Sum for works in relation to the Project outside the TCPSSA was merely unilateral understanding that was too uncertain and non-specific to make out a Quistclose trust flied against the very specific 1^st Agreed Purpose. I am satisfied there was a sufficiently specific purpose as agreed between the parties to support a Quistclose trust over the US$5M Sum.

236.  Mr Hui then argued there could not be any Quistclose trust since there was no certainty of subject matter. He submitted it must be shown the monies are paid on such terms or in such circumstances that it is made objectively clear the money transferred should not be part of the general assets of the recipient, but should be used exclusively for the specified purpose. To put it in another way, it must be shown the money is not at the free disposal of the recipient.[127] But even though keeping the money in a separate account pending application in accordance with the purpose will demonstrate such money is not at the free disposal of the recipient,[128] it does not appear to be an absolute requirement for Lewin on Trusts states that:[129]

“It has been said that the effect of the authorities is that a requirement to keep moneys separate is normally an indicator that they are impressed with a trust and the absence of such a requirement, if there are no other indicators, normally negatives it. ……” (my emphasis)

237.  Mr Hui submitted that since Tay did not ask for the US$5M Sum to be placed in a separate account for the reasons set out in paragraph 39 above and money was a fungible asset, it would have been mixed with existing and/or subsequent funds after deposit in the recipient bank account leaving no certainty of subject matter to ground or support a Quistclose trust.

238.  In respect of the US$4M Sum, there was no mixing of funds as explained in paragraphs 45-47 above. It was clear (a) the entire sum of US$3,999,803.26 deposited in newly opened Chinacomm Account 2 (ie the US$4M Sum) which had nil opening balance and (b) the 1^st Balance after some transfer withdrawals in June 2008 were subject to a Quistclose trust with no mixing of funds. Even though there was further deposit of US$1,999,948.17 into such bank account on 30 June 2008, I have explained in paragraphs 46-47 above why there was no mixing of funds in respect of the 2^nd Balance, the transfer withdrawal of US$450,000, and the ultimate remaining balance in such bank account. As for the US$1M Sum paid into the bank account of D8’s Beijing subsidiary, there was no evidence of any mixing of funds since Ds did not disclose the relevant bank statements to show such account was in use for other transactions and/or there were other funds in such bank account. Thus, on failure of the 1^st Agreed Purpose, P2 had beneficial/proprietary interest in the remaining balance in Chinacomm Account 2, which monies belonged to P2.

239.  More importantly, there were other indicators that the US$5M Sum was to be kept separate and applied for the 1^st Agreed Purpose and not to be treated as D1’s general assets for deployment as it wished for the Project or otherwise. At the time of payment, there was time pressure for capital injection for the WOFIE (ie Yunji) known to both Ps’/Ds’ camps. In fact, Ds’ camp well knew the US$5M Sum was intended to be for such specific purpose and not as Ds’ general assets. I refer to paragraph 48 above and note Ds’ plea that in order to minimise loss resulting from forfeiture of partially injected capital of Yunji (ie the WOFIE) in case Yunji “failed to capitalise and verify the whole of the registered capital within the specified timeframe” D1 only paid US$2,000,000 out of the First Payment to Yunji as its registered capital whilst the balance of the First Payment was paid to D8 to meet expenses of the Project according to the Disbursement Plan. This showed clearly that even on Ds’ case they knew the US$5M Sum was for the specific purpose of partial capital injection into the WOFIE, but it was just alleged fear of forfeiture that held them back from putting the whole US$5M Sum into the WOFIE (which at best would amount to misapplication of funds in breach of the specific and exclusive purpose). In my view, there is no merit to the argument that there was no certainty of subject matter.

240.  Ds put Ps to proof of failure of the 1^st Agreed Purpose. Mr Hui in his written opening submissions suggested no sufficient/ adequate evidence was adduced by Ps to support their bare assertion that the 1^st Agreed Purpose had failed. It was said since Yunji had a registered capital of US$99,000,000, Ps failed to adduce documentary evidence to prove the US$5M Sum had not been injected into Yunji as capital. But in my view, even taking on board Mr Hui’s reminder that cogent evidence was required to satisfy a civil tribunal that a person had been fraudulent or behaved in some other reprehensible manner,[130] this could be dealt with quite shortly. The fact Yunji’s registered capital was US$99,000,000 was neither here nor there since (a) Yunji’s business licence itself made clear it had not been paid up (see paragraph 42(d) above) and (b) there were various postponements of the deadline for full capital injection (see paragraph 144 above). It lied ill in Ds’ mouth to complain there was no documentary evidence to prove the US$5M Sum had not been injected into Yunji as part of its capital when D1, D4 and Yunji were part of Ds’ camp and only Ds’ camp had access to their bank accounts, bank statements, ledgers and financial documents, but Ds had chosen not to make discovery of these documents despite their pertinence in light of Mr Hui’s submissions.

241.  More importantly, on Ds’ own pleaded case (even though I have found there was no factual evidence to support the same), Ds admitted that at least US$3,000,000 of the US$5M Sum was not injected into Yunji for the 1^st Agreed Purpose (see paragraph 48 above). In my view, the whole tenor of the evidence before this court was that all along Ds’ camp tried to get monies from Ps but failed to perform their part of the bargain, and they were not above “reprehensible conduct” in order to get their hands on such monies.[131] I infer/find the US$5M Sum had not been applied for the 1^st Agreed Purpose, which led to subsequent pressure to organise funds to rescue Yunji from cancellation of its business licence and to postpone the deadline for capital injection. In my view, D1 and its directors D6 and D7 were in breach of the Quistclose trust in relation to US$5M Sum.

(b) US$4.75M Sum

242.  Ds also denied there was any Quistclose trust (as there was no agreed specific purpose) and hence no breach thereof in respect of the US$4.75M Sum, and suggested the Double Signatures Arrangement for Chinacomm Account 2 was therefore irrelevant.

243.  Mr Hui argued that under the TCPSSA, if there was a specific purpose (which was denied), it could only be for the Subscription Price for the 49% Shares as set out in Article 3.2(b) of the TCPSSA. In that case, Mr Hui contended his arguments in relation to the US$5M Sum would apply mutatis mutandis. But as I have found the US$4.75M Sum was paid outside the TCPSSA regime although if everything eventuated (as explained in paragraph 151 above) it would have been treated as part of the Subscription Price.

244.  But Mr Hui argued that even outside the TCPSSA regime Tay’s evidence failed to pinpoint whether or not the stated specific purpose was for “equipment purchase”, “capital injection into Yunji” or “maintaining the licences”. Mr Hui submitted these uncertain concepts could not support any Quistclose trust, and the fact Tay mentioned all 3 matters reinforced Ds’ view that there was no agreed purpose specific enough to give rise to a Quistclose trust. It was said properly analysed Tay’s evidence was no more than saying the US$4.75M Sum was for general purpose of pursuing the Project or, to put it in another way, for D1’s general cash flow.

245.  However, I reject such contention and refer to my findings in paragraphs 148-151 above. The fact the US$4.75M Sum was to be deposited in Chinacomm Account 1 that was newly opened with agreed Double Signatures Arrangement for receiving such sum lent weight to Ps’ contention that such monies would be locked for the 2^nd Agreed Purpose with Tay having the right to veto any other use by refusing to co-sign transfer withdrawal from such account. This arrangement was put in place given Ps’ camp’s experience of opaque non-response by Ds’ camp over queries as to utilisation of the US$5M Sum. In my view, such special arrangements spoke of an agreed specific and exclusive purpose for the US$4.75M Sum. It must also be remembered that the US$4.75M Sum was paid at pressure/request by Ds’ camp inter alia to postpone the deadline for full capital injection to rescue the WOFIE when Ps’ camp was unwilling to make payment under the TCPSSA regime since the 2^nd tranche of the Subscription Price was not yet payable pending fulfilment of the Subsequent Payment Conditions of the TCPSSA including Schedule 3(j). The Double Signatures Arrangement was also in place for D4’s bank account (ie Smart Channel Account), and it was expected such arrangement would be put in place for Yunji’s bank account that would eventually receive the US$4.75M Sum via the 2^nd Agreed Route for the 2^nd Agreed Purpose (see paragraph 155 above). In my view, it was Ds’ recalcitrance over inter alia the Double Signatures Arrangement for Yunji’s bank account that held up application of the US$4.75M Sum for such specific/dedicated purpose. I have also found it was understood/agreed that the US$4.75M Sum would be refunded if the 2^nd Agreed Purpose failed and the parties were unable to reach agreement on its disbursement (see paragraph 150 above). I have no hesitation in concluding there was sufficiently specific and exclusive purpose for the US$4.75M Sum to give rise to a Quistclose trust, and Ps had proprietary/beneficial interest in such trust monies. The fact that after satisfying the 2^nd Agreed Purpose the US$4.75M Sum could be disbursed for acquisition of additional equipment for works for the 12 Cities as explained in paragraph 149 above did not detract from sufficiency and exclusivity of the 2^nd Agreed Purpose.

246.  Mr Hui next argued the US$4.5M Transfer did not defeat any or any alleged specific purpose for there was no sufficient and adequate evidence such transfer amounted to any asset dissipation that was contrary to any specific purpose. I refer to my findings in Parts XXVI-XXVIII above and reject such contentions. I have also rejected D10’s account of the alleged Loan for D8 and the surety arrangement for such alleged Loan.

247.  Further, in light of my rejection of D10’s evidence as to the alleged Loan and Surety Agreement, and my further finding that they were mere sham in Part XXVIII above, it was plain the 2^nd Agreed Purpose failed because the US$4.75M Sum was not applied for the 2^nd Agreed Purpose but was misappropriated by D1, D6, D7 and D10 for their own purposes unconnected with Yunji’s capitalisation and/or the Project.

(c)  Summary

248.  I therefore find the US$5M and US$4.75 Sums were subject to Quistclose trust, and the remaining monies in Chinacomm Account 1 and 2 were in nature trust monies and liable to be returned to Ps. Further, D1, D6 and D7 as trustees were liable to P2 for breach of trust for the US$5M Sum and US$4.75M Sum, and liable to P1 for breach of trust for the US$4.75 Sum.

XXXII.  CONSPIRACY TO INJURE

249.  Ps’ case was that D6, D7 and D10 conspired together by unlawful means to injure Ps by the US$4.5M Transfer to the D10 Account. The D10 Transfers added insult to injury by putting the US$4.5M Sum even further beyond Ps’ reach.

250.  The essence of the tort of conspiracy to injure by unlawful means is injury to the claimant as a result of unlawful act or acts where 2 or more people have combined to cause the injury to a third party.[132] It was said that for such conspiracy, it is incumbent on the plaintiff to prove (a) the nature of the agreement, (b) the unlawful means alleged, (c) each of the unlawful acts relied on, (d) the fact that each act was carried out pursuant to the conspiracy, and (e) the relevant state of mind of the alleged conspirator.[133]

251.  Insofar as the element of combination was concerned, a party to a conspiracy need not understand the legal effect of it, but he must know the facts on the basis of which it is unlawful. The absence of overt acts or an uncommunicated intention to join a conspiracy may show that there has not been an effective combination. Clerk & Lindsell on Torts went on to say:[134]

“The conspirators need not all join the conspiracy at the same time, nor need they have exactly the same aim in mind; but the possession of a separate aim may be evidence that the party concerned has not participated in the combination at all, at any rate if he acted throughout in ignorance of the true facts. The question is how far the defendant was aware of the plan and then ‘joined in the execution of it’. A person may be a party to a combination to use unlawful means, even though he himself cannot commit the unlawful acts in question, …… On the other hand, persons who participated in meetings which formed part of the combination but who played no active role will not be parties to the conspiracy. The question is whether a particular defendant, having regard to his knowledge, utterance and actions, was sufficiently a party to the combination and common design. It would appear that the question whether a person who is a party to a combination constituting a conspiracy is essentially the same as whether he is liable as a joint tortfeasor in procuring a wrong, by reason of a common design.”

252.  In short, it is not necessary for every overt act to be done by every conspirator, but the conspirators must be sufficiently aware of the relevant circumstances and share the same common purpose at the time when they acted in concert pursuant to the conspiracy, and the relevant overt act(s) must be done pursuant to the conspiracy, scheme or combination. Acting in concert requires combination or agreement, but not necessarily an express agreement. It is sufficient if 2 or more persons deliberately combine with a common intention whether expressly or tacitly to achieve a common end.

253.  It is also useful to refer to parts of the extracted passage from Kuwait Oil Tanker Co SAK v Al Bader[135] cited by DHCJ Au-Yeung (as she then was) in Pak Win Investment Ltd (in compulsory liquidation) v Chung Yuet Sheung, Lorraine & ors as follows:[136]

“…

‘… the origins of all conspiracies are concealed and it is usually quite impossible to establish when or where the initial agreement was made, or when or where other concentrators were recruited. The very existence of the agreement can only be inferred from overt acts. Participation in a conspiracy is infinitely variable: it can be active or passive ... Consent, that is agreement or adherence to the agreement, can be inferred if it is proved that he knew what was going on and the intention to participate in the furtherance of the criminal purpose is also established by his failure to stop the unlawful activity.’ (at page 312j-313b)

Thus it is not necessary for the conspirators to join the conspiracy at the same time, but ... the parties to it must be sufficiently aware of the surrounding circumstances and share the same object for it properly to be said that they were acting in concert at the time of the acts complained of. (at page 313c)

…

In most cases it will be necessary to scrutinise the acts relied upon in order to see what inferences can be drawn as to the existence or otherwise of the alleged conspiracy or combination. It will be the rare case in which there will be evidence of the agreement itself. (at page 313d)

……”

254.  As regards the element of “intention”, the mental element is merely an intention to injure.[137] In many contexts it will be necessary in order to prove intention to ask the court to infer the relevant intention from the primary facts, “and in the case of most conspiracies to injure by tortious means it will be clear from the acts of the conspirators that they must have intended to injure the claimant. In the case of a conspiracy to defraud by wholesale misappropriation it would be absurd to argue that the conspirators did not intend just that”.[138]

(a)  Unlawful means

255.  There was no dispute over the existence of the US$4.5M Transfer from Chinacomm Account 1 to the D10 Account. I have found this was done by D6’s/D7’s deliberate/secret revocation of Tay’s co-signatory mandate for Chinacomm Account 1 by purported board resolution in breach of the agreed Double Signatures Arrangement to misappropriate the sum of US$50,000 and the US$4.5M Sum in breach of the 2^nd Agreed Purpose/Route. I have also found there was breach of trust on the part of inter alia D1, D6 and D7, and further found the alleged Loan and surety arrangement (including the Surety Agreement) were a sham. Mr Hui submitted Ps made no complaint as to breach of the TCPSSA by D10 and other Ds, but I note it was not Ps’ case there was breach of the TCPSSA by D10 and other Ds by the US$4.5M Transfer out of the US$4.75M Sum (that Ps paid outside the TCPSSA regime). Indeed, I am unable to see how Ps could complain about the US$4.5M Transfer (when it was only discovered as a result of court-ordered disclosure by Ds in the course of the present litigation) except to plead in paragraphs 125-127 of the ASoC that the surety arrangement for the Loan was a sham, and that D6, D7 and D10 conspired to misappropriate the US$4.5 Sum. In light of my findings, the US$4.5M Transfer was plainly an unlawful means, and there was no merit to such argument.

(b) Combination

256.  D10 was D9’s legal representative, and D8 was 60% shareholder in D9. D1, D6 and D7 were in breach of Quistclose trust in respect of the US$5M and US$4.75M Sums, and in breach of the Double Signatures Arrangement for Chinacomm Account 1. Ps claimed it could be inferred D6, D7 and D10 conspired to effect the $50,000 Withdrawal and US$4.5M Transfer with deposit of the US$4.5M Sum into the D10 Account being D10’s personal account which (to the knowledge of Ds’ camp) was for their own benefit but Ps did not authorise:

(a)	D1, D6 and D7 unilaterally and without Tay’s consent changed the mandate to SCB with a board resolution of D1 signed by D6 and D7 to remove Tay as authorised co-signatory of Chinacomm Account 1;
(b)	the US$50,000 Withdrawal on 20 June 2011 was without Tay’s consent and signature;
(c)	the US$4.5M Transfer on the 21 June 2011 without Tay’s consent and signature to the D10 Account was not for the purpose of the Project or the 2nd Agreed Purpose;
(d)	there was only US$199,577 left in Chinacomm Account 1 by October 2011.

257.  In light of the above, and the fact D6/D7 asked (a) Tay (for Ps) for the US$4.75M Sum to rescue the WOFIE by postponing the deadline for full capital injection, (b) knew and agreed to the Double Signatures Arrangement for Chinacomm Account 1 and Smart Channel Account as well as the 2^nd Agreed Purpose/Route, and (c) signed the purported board resolution of D1 to facilitate secret revocation of the Double Signatures Arrangement and unilateral US$4.5M Transfer behind Tay’s back, I have no hesitation in concluding D6/D7 conspired to injure Ps by misappropriating and dissipating the US$4.5 Sum from Chinacomm Account 1 to the D10 Account outside Ps’ reach.

258.  But Mr Hui submitted there was no effective combination to support any claim in conspiracy against D10. First, it was said there was no documentary evidence suggesting D6, D7 and D10 had conspired together to dissipate the US4.5M Sum. But as explained in paragraphs 251-254 above, the essence of conspiracy is concealment, so direct documentary evidence of the combination is unlikely and in any event not necessary. Secondly, it was said D10’s receipt of the US$4.5M Sum did not justify any adverse inference that D10 was party to any conspiracy. But taking into account (a) the overt acts by D10 to present a positive case of the Loan and surety arrangement (including the Surety Agreement), which arrangements I have found to be a sham to cover up the dissipation of monies which D10 well knew came from D1 but neither he, D6, D7, D8, Wu Jiang nor Sun were entitled, and (b) D10 working closely with D6 and at D6’s directions (see paragraphs 166, 175 and 181-182 above) to receive US$4.5M Sum in the D10 Account newly opened for such purpose, to effect the D10 Transfers, and to participate in sham arrangements involving of D8 and D9 (of which D6, D7 and D10 were part of the senior management), there was ample evidence for coming to the irresistible inference that D10 combined/agreed with D6 (and probably D7 too) in a common design to dissipate the US$4.5M Sum. This was bolstered by the fact D10 knew or could have found out about the recipients of the D10 Transfers and should have disclosed them under the 2^nd Injunction Order, but he chose to shy away by asserting he was not aware of the injunction proceedings, which allegations I have rejected as lies. All of these matters added weight to the inference that D10 knew the US$4.5M Sum was misappropriated funds and he combined/agreed with D6 (and probably D7 too) to dissipate them with intent to injure the rightful owners of such monies, and cover up the same with story of sham arrangements.

259.  Mr Hui complained about sparsity of particulars as to knowledge in Ps’ pleadings, but I see nothing in such complaint for Ps did plead the overt acts including the sham transaction which they relied for inferring the combination/agreement, and there was no positive plea in response about the Loan and surety arrangement in the D&C. It is accepted in this kind of tort, it is usually quite impossible to establish when and where the initial agreement was made, and the existence of the agreement can only be inferred from overt acts. But what was clear here was that D10 knew what was going on (ie dissipation of funds away from D1 and the rightful owners) and he actively participated in such unlawful activity in concert with D6 (and probably D7 too).

260.  It was also suggested Ps failed to put to D10 that he knew (a) the articles in the TCPSSA for payment of the Subscription Price, (b) the Double Signatures Arrangement, (c) the US$4.75M Sum was trust money subject to the 1^st Agreed Purpose/Route, and (d) the US$4.5M Sum came from the US$4.75M Sum and hence was trust monies, so the pleaded particulars could not support the conspiracy claim against D10. But conspirators do not have to join the conspiracy at the same time. It was sufficient that D10 knew (as I have found) the US$4.5M Sum was misappropriated monies to which he, D6, D7, Wu Jiang, Sun and/or D8 were not entitled, and D10 and D6 combined/agreed to dissipate and/or further dissipate the same to bring it outside the reach of the rightful owners. There was no need for D10 to know in detail about the operation of the trust account (ie Chinacomm Account 1).

261.  I also bear in mind D6/D7 intentionally deregistered D4 and the WOFIE by failing to file annual return for D4 and letting Yunji’s business licence fail (see paragraphs 206 and 228 above). In my view, Ps had established all the elements of conspiracy to injure by unlawful means, and D6, D7 and D10 are liable for damages in the sum of US$4,500,000.

XXXIII.  UNJUST ENRICHMENT

262.  Ps claimed the US$4.75M Sum belonged to them and the secret US$4.5M Transfer amounted to misappropriation of such funds, and hence D10 in receiving the US$4.5M Sum from D1 was unjustly enriched.

263.  In Shanghai Tonji Science & Technology Industrial Co Ltd v Casil Clearing Oil,[139] the approach to a claim for unjust enrichment was to ask the following questions: (a) was the defendant enriched? (b) was the enrichment at the plaintiff’s expense? (c) was the enrichment unjust? (d) are any the defences available?

264.  Plainly, D10 was enriched by receipt of the US$4.5M Sum, and such enrichment was unjust as I have found the Loan and surety arrangement to be a sham, and both the US$4.5M and D10 Transfers were acts to dissipate such monies which D6, D7 and D10 knew they and D8 were not entitled. In view of the 2^nd Agreed Purpose/Route and the Double Signatures Arrangement, and breach of trust by D1, D6 and D7 in relation to the US$4.75M Sum as I have found, D10’s enrichment must have been at the expense of Ps.

XXXIV.  CONCLUSION

265.  In the circumstances, I grant the following orders:

(a)   subject to (f) below, judgment in favour of P2 against D1, D6, D7 and D8 jointly and severally for damages for breach of contract and against D1, D6 and D7 jointly and severally for damages for breach of trust in the sum of US$9,749,599,[140] and against D9 for damages for breach of contract in the sum of US$5,000,000;

(b)   subject to (f) below, judgment in favour of P1 against D1, D6, D7 and D8 jointly and severally for damages for breach of contract and against D1, D6 and D7 jointly and severally for breach of trust in the sum of US$4,749,599;[141]

(c)   judgment in favour of P1 and P2 against D6, D7 and D10 jointly and severally for damages for conspiracy to injure in the sum of US$4,500,000;

(d)   judgment in favour of P1 and P2 against D10 for unjust enrichment in the sum of US$4,500,000;

(e)   interest on the judgment sums in (a) – (d) above due to P1 and P2 from the date of the Writ of Summons in the present action to the date of judgment at 8%pa and thereafter at judgment rate until full payment;

(f)   declaration that all current remaining balances of Chinacomm Account 1, Chinacomm Account 2 and D10 Account were trust monies and property of P1 and P2, which remaining balances shall forthwith be released to Ps’ solicitors on behalf of P1 and P2;

(g)   the security Ps paid into court in the sum of HK$500,000 and all interest accrued thereon (if any) be paid out to Ps’ solicitors on behalf of P1 and P2;

(h)   subject to (f) above, the 1^st Injunction Order against D1, D6 and D7 do continue until satisfaction of the judgment against D1, D6 and/or D7 or further order of the court, whichever is earlier, and the 1^st Injunction Order against D2 and D3 be discharged;

(i)   subject to (f) above, the 2^nd Injunction Order against D10 do continue until satisfaction of the judgment against D10 or further order of the court, whichever is earlier;

(j)   Ps’ claim in this action against D2, D3, D4 and D5 be dismissed.

266.  Ps submitted a draft order for the court’s consideration under cover of the letter by Ps’ solicitors dated 4 May 2017. I am unable to grant the order in paragraph 8 of the draft order since it was not prayed for in the ASoC, and the utility of such order to be made quite a number of years after the event had not been explored at trial.

267.  I also grant a costs order nisi that subject to the 1^st and 2^nd Costs Issues in Parts XXXV and XXXVI below, D1, D6, D7, D8, D9 and D10 do joint and severally pay the costs of and occasioned by P1 and P2 in respect of their claim in this action (including all costs reserved, if any) to be taxed if not agreed. Mr Chan particularly raised the issue of costs of 2 bundles of documents prepared by Ds for the purpose of the trial, but in the end such bundles were not used. However, in light of my costs order nisi, there is no need to separately deal with Ps’ costs in respect of perusal/consideration of such documents as they would be part and parcel of the costs of Ps’ claim in this action.

268.  I also grant a costs order nisi that there be no order as to costs as between P1 and P2 on one hand and D2, D3, D4 and D5 on the other hand in respect of Ps’ claim against D2, D3, D4 and D5 in this action. Although I have dismissed Ps’ such claim in paragraph 265(j) above, that was for the purpose of finality. I note D2, D3, D4 and D5 were parties to the TCPSSA, and my findings above reflected that Ds’ camp acted reprehensibly vis-à-vis Ps. In any event, I do not consider there would be significant costs incurred by D2, D3, D4 and D5 in the overall defence against Ps’ claim which failed. I therefore consider a fair order for costs would be to make no order.

XXXV. 1^ST COST ISSUE

269.  By the order of Master S Kwang dated 28 May 2014, leave was granted for Ds to discontinue their counterclaim against Ps with costs reserved to be argued before the trial judge. Thus, the issue of reserved costs was in respect of costs of and occasioned the abandoned counterclaim (“1^st Costs Issue”). In light of my findings in favour of Ps in respect of their claim which must impact on the vitality of their mirrored allegations in the counterclaim, and given that Ds made a deliberate decision to abandon the counterclaim in the course of their security for costs application which failed, there is no reason why costs should not follow event. I therefore grant an order that Ds do pay Ps’ costs of and occasioned by (a) Ds’ application for leave to discontinue the counterclaim against Ps and (b) Ds’ counterclaim, including all costs reserved, if any, to be taxed if not agreed.

XXXVI.  2^ND COST ISSUE

270.  The present action was scheduled for trial on 10 May 2016 to be heard by Au-Yeung J. On the 1^st day of trial, Au-Yeung J adjourned the trial, and the present action came before this court for trial on 27 March 2017. At the pre-trial review on 26 February 2016, DHCJ Au-Yeung (as she then was) ordered that costs of such pre-trial review be reserved (“2^nd Costs Issue”). Mr Hui fairly accepted it would be difficult for Ds to resist such costs as the costs for that wasted hearing arose out of matters raised by Ds. I therefore order Ds to pay Ps costs of and occasioned by the pre-trial review on 26 February 2016 to be taxed if not agreed.

HCA 1978/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1978 OF 2011

____________

____________

________________________

R U L I N G

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1. There are two applications before me today: (1) the renewed application by the defendants to adjourn the trial; and (2) leave to adduce the witness statements of Li Hong Ji.

Renewed Application to adjourn the Trial

2. I have given reasons on 22 March 2016 as to why I rejected the application to adjourn.  The whole thing arose out of the delay of D6 to inform his lawyers about his arrest which occurred in October 2015 and then there was no action to try and obtain his evidence by letter of request or video-link. He informed his lawyers only in about February 2016.  At the hearing on 22 March 2016, this court took the view that the evidence then before the court in support of the adjournment was flimsy and not credible. 

3. Since that date, there had been some developments.  What was estimated to be a trial allegedly took place on 18 April 2016 but was adjourned for the prosecution in the Mainland to obtain further evidence.  No further trial dates had been fixed.  The anticipation in paragraph 10 of my decision dated 22 March 2016, if D6 were acquitted, or if the trial in the Mainland finished in good time before today, was not met. 

4. The defendants’ solicitors, Lam & Co, have in the meantime applied for the issue of a letter of request from Hong Kong to the Mainland court but, out of wrong steps taken, one was issued only by about 27 April 2016.  Given the lateness of that issue of the letter of request, one cannot expect the Mainland courts to entertain the request by today. 

5. Next, there was some effort shown by Lam & Co to try and contact the Wuhan court to get an opportunity to see D6.  This was a step which, to their credit, Lam & Co had taken in the interests of the defendants, knowing that the Wuhan court would not usually entertain that kind of letter.

6. Up till now, we could only have hearsay evidence as to the incarceration of D6 and the condition of his trial.  However, the acts of issuing a letter of request and the letter of Lam & Co to the Wuhan court was evidence to show some attempts to try and get information from D6 which may be of use to the Hong Kong court.

7. I have considered the submission of Mr Chan, counsel for the plaintiffs.  He draws to my attention that Lam & Co was at least able to obtain some kind of instructions, for example, to try and put in a further witness statement of Li Hong Ji.

8. However, in my view, what is important today is the fact of D6’s inability to give evidence in person in Hong Kong.  Lam & Co purportedly got information only through Xi of the PRC lawyers.  It was not very substantial evidence, I have to say.  For example, there was nothing to show that Xi had taken instructions from D6 to pass on to Lam & Co about how to deal with the present case. 

9. But taking into account all the circumstances, reluctant though I may be, in the interests of justice, I consider I should give the defendants an opportunity so that D6 may hopefully have a chance to give evidence on their behalf.  However, this is subject to the following conditions:  the defendants are to pay costs, to be summarily assessed in a moment, to the plaintiff forthwith.  I will fix a hearing on 23 June 2016 at 10 am.  But before that date, I require the defendants and the plaintiffs to jointly report to me as to whether or not the costs have been paid.  If the costs have not been paid, 23 June 2016 would be the date set down for a short trial for the plaintiffs to prove their case.  On the other hand, if the defendants do pay up the costs, 23 June 2016 will be used to update the court on D6’s position. 

10. I make clear that I will not be content with some general information that D6 was incarcerated, or that the trial date is unknown.  I need firm evidence as to when D6’s trial, if ever, will be held, how long it will last, written proof from the defendants that they will pursue the claim with D6 as witness to give evidence; the position on the letter of request or whether it is possible to take evidence by way of video-link.  I make clear that the court will not wait indefinitely for D6’s return.  The next trial date will still be fixed, if necessary, regardless of whether or not D6 is able to return to give evidence.  It may well be a trial where the intended witness is unable to turn up to give evidence and the defendants run that risk.

11. I come now to deal with the question of costs.  It will not be taxed costs but summary assessment. 

(Submissions on costs)

The Application to adduce Witness Statement

12. I reject the application on the following grounds: 

(1)  It is too late and the application can be dismissed on this ground alone. 

(2)  There had been a prior application at the first PTR to adduce Li’s witness statement which was rejected on the ground that there was no draft attached to the summons. 

(3)  The relevance of this witness statement is not known. It purports to evidence the flow of moneys in relation to this matter as stated in the letter of Lam & Co dated 12 April 2016.  This witness statement has exhibits which duplicated those already produced by D6 in his witness statement.  There is no explanation as to why Li has to produce the same exhibits by a new witness statement. 

(4)  The defendant’s purported explanation for this late witness statement was that the records in Li’s witness statement took some time to compile.  This could not be true as most of those records have been exhibited to D6’s witness statement. 

(5)  Li cannot attend the trial today as he is one of the defendants to stand trial with D6 in Wuhan.  Li is now on bail but, allegedly, his liberty to travel to Hong Kong is restricted.  If he cannot come to be cross-examined, his witness statement cannot be used.

For all these reasons, I dismiss the defendants’ application by summons.

13. As to costs, both applications are unmeritorious but, eventually, the court, in view of the recent developments, adjourned the trial.  It has to be recognised that there is some prejudice to the plaintiffs in view of this adjournment.  I consider that costs ought to be borne by the defendants and it ought to be on indemnity basis.  Looking at the costs statement, I am satisfied that the defendants ought to bear costs in the sum claimed, in the amount of $269,599.  Payment within 14 days.

14. The joint letter from the plaintiffs and defendants should reach me by 25 May 2016, at latest.

HCA 1978/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1978 OF 2011

____________

____________

________________________

REASONS FOR DECISION

________________________

1.  By his summons dated 18 February 2016, D6 (Qiu Ping) applied for an order vacating the trial dates of 10-13 May 2016. It was heard at the PTR on 26 February but was adjourned to enable D6 to file proper evidence to enable the court to come to a decision. At this 2^nd PTR, I dismissed the summons with costs to the plaintiffs. Here are my reasons.

The legal principles

2.  The factors to consider in such an application have been set out in Arko Ship Leasing Ltd v Winsmart International Shipping Ltd [2013] 2 HKLRD 121, G Lam J, §14:

(1) What is the nature of the proceedings? What is at stake to the parties, in particular to the plaintiffs who seek the adjournment?

(2) Would the relevant witnesses definitely not be available to give evidence in any manner — for example, if a witness is unable to come to Hong Kong, is it possible nevertheless to receive his evidence via videolink?

(3) What is the nature of the difficulty preventing the witnesses from attending, and is the applicant responsible for creating that difficulty and if so to what extent?

(4) What is the nature of the evidence each relevant witness is intended to be called to give? Is he the only possible source of such evidence?

(5) Has the party seeking the adjournment made efforts to locate other persons who may be able to stand in to give similar evidence?

(6) Will the adjournment be likely to address the problem faced by the applicant?

(7) What is the risk of prejudice or other disadvantage to other parties if the adjournment is granted?

(8) The application must also be viewed in terms of the wider implications on the administration of justice. In particular, I have in mind the public interest in the efficient despatch of the court’s business, and the effect on the interests of future litigants of vacating a hearing close to the date and possibly leaving the court empty. In this context, I should take into account the timing of the application for adjournment.

Application of the legal principles

3.  The claim involved a dispute between foreign investors (the plaintiffs) and Mainland domestic entities (the defendants) over a joint venture in the telecommunication business.  D6 was the central figure in the defendants’ camp.  The plaintiffs claimed for breach of contract.  It was also the plaintiffs’ case that the defendants’ camp had removed designated funds for the joint venture without their approval.

4.  The summons was supported by 2 affirmations of Ms Lam of Lam & Co, solicitors for D6.  In essence, D6 was charged with fraud and was detained.  He might not be able to attend the trial in Hong Kong. 

5.  The plaintiffs’ solicitors have very properly raised a number of questions by letter, including the circumstances of D6’s arrest, his place of detention, the charge, the date of bail application, dates for trial and the maximum penalty upon conviction. 

6.  At the last PTR, I have directed D6 or a solicitor of Hong Kong who had visited him face to face to file an affirmation to answer the plaintiffs’ queries.

7.  Without disrespect, the 2^nd affirmation of Ms Lam filed as a result was not helpful.  Neither she nor the only 2 persons in the Mainland allegedly allowed to see D6 had seen him during the adjournment. There was no first hand evidence or documentary evidence from the relevant Mainland authority about D6’s arrest, detention or charge.

8.  Further, it transpired that D6 had been detained since 26 October 2015. He was charged at Wuhan Intermediate People’s Court on 14 January 2016.  He only informed Lam & Co a month later.  There was no explanation for this delay.

9.  Ms Lam was allegedly told by the Mainland lawyer that it was estimated that trial would start in the latter half of April 2016.  The basis of that estimation was not stated.  How long that trial would last was also unclear. Ms Lam has been told that the sentence upon conviction of the charge would be 10 years or more. 

10.  I should not speculate on the outcome of the trial in the Mainland.  If D6 were convicted, he might not be able to attend the trial in Hong Kong for some time and it would be unfair to ask the plaintiffs to wait.  On the other hand, if D6 were acquitted or the trial finished in good time, there was no reason why he could not attend the trial in Hong Kong in May.

11.  The evidence before the court as to why the trial dates should be vacated was overall flimsy and not credible. 

12.  Applying Arko Ship, with regard to factor (1),the plaintiffs’ claim was substantial, for restitution of the sum of US$9.75 million and loss of profits.  The defendants’ counterclaim for US$186.25 million had been dropped.  Only an amount of US$213,000 had been frozen by the Mareva injunction.  There was little incentive for D6 to litigate.

13.  With regard to factors (2)-(5), accepting that D6 was a crucial witness, D6 has failed to provide credible proof of his unavailability for trial in Hong Kong.  He has not even attempted to apply for giving evidence by video link or letter of request.  It was not open to him to ask for vacating of trial dates now and then explore the possibility of a video link later.

14.  With regard to factor (6), there was no credible evidence that the adjournment would address the problem faced by him in view of paragraph 10 above.

15.  With regard to factor (7), the prejudice to the plaintiffs was substantial.  Mr Chan, counsel for the plaintiffs has reminded me of my views of D6 when the plaintiffs applied for Mareva injunction.  In my Decision dated 26 October 2012, it was stated that D6’s explanation as to why funds were withdrawn were incredible (§50).  The surety agreements put forth by the defendants’ camp were very suspicious (§§111 & 112).  I took the view that there had been shameless efforts by D6’s camp to remove US$4.7 million out of reach of the plaintiffs and to conceal the true picture.  Dissipation was not only a risk but a fact (§120).  D6 had not made full and frank disclosure (§124).  Mr Chan informs me that this was still the position today. D6 had sought leave to appeal against the Decision but abandoned the appeal. 

16.  The risk of prejudice to the plaintiffs would be their having to wait for another period of time before getting a judgment against a defendant who appeared to be evading it, with the minimum security.  See factor (1).

17.  With regard to factor (8), the vacating of trial dates may waste the court’s time but this is not the most important consideration in the circumstances of the present case. 

18.  Considering all the circumstances, I am not satisfied that the trial dates should be vacated.

19.  The summons also asked for leave to adduce a new witness statement of Li Hong Ji.  There was no draft attached to the summons despite the plaintiffs pointing this out to D6 at the last PTR.  There was simply nothing on which the court could exercise its discretion.

20.  For the above reasons, I have dismissed the application.

21.  Costs should follow the event and be to the plaintiffs.  It was not opposed.  I therefore summarily assessed costs at $35,000 in favour of the plaintiffs.

HCA 1978/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1978 OF 2011

_______________

_______________

________________________

J U D G M E N T

________________________

Nature of appeal

1.  On 4 November 2013, the defendants took out a summons seeking an order that the plaintiffs do provide security for costs in favour of the defendants in the sum of HK$7.2 million, or such sum as may be fixed by the court, pursuant to Order 23, rule 1 of the Rules of the High Court or the former section 357 of the Companies Ordinance, Cap 32 (now repealed and replaced by section 905 of the Companies Ordinance, Cap 622).

2.  On 28 May 2014, the defendants’ application came before Master S Kwang, who dismissed it with costs to the plaintiffs.

3.  On 11 June 2014, the defendants lodged an appeal against the aforesaid decision of Master S Kwang. This is the hearing of the defendants’ appeal.

Background facts

4.  This action has come before the court on a number of previous occasions.  The underlying facts are of some considerable complexity.  A summary of the background facts relevant to the Mareva injunction applications (more particularly described below) has been set out in the Decision of Au‑Yeung DHCJ (as Madam Justice Au‑Yeung then was) dated 26 October 2012 (“the Decision”) given in these proceedings.  I shall not attempt to summarise those facts in my own words, but am content to refer to and recite below paragraphs 3 to 22 of the Decision for the present purpose:

“3. This action is essentially a dispute between foreign investors (the Plaintiffs) and Mainland domestic entities (the Defendants) over a joint venture investment in D1 which is a Cayman Islands company. P1 is a United States listed company engaging in telecommunication business. It was formerly known as Mortlock Ventures Inc and ChinaTel Group Inc. P2 is a Hong Kong company. Colin Tay was and is president of P1 and authorized representative of the corporate director of P2. He was and is the person in control and ownership of P2. At all material times, he was the central figure in the Plaintiffs’ camp.

4. Qiu Ping [D6] was the central figure in the Defendants’ camp. D1 was used by D6 to D8 as a special purpose company for the implementation of the joint venture between Colin Tay and Qiu Ping’s camps. The relationship of the Defendants is tabulated as follows:

Defendant	Director/officer	Shareholders
D1 (Chinacomm)	D6, D7	D2 &D3 (51%)
D2 (company)	D7	D5 (nominee of D6-8)
D3(company)	Qiu Ping	D5 (nominee of D6-8)
D4 (Smart Channel)	D7	D1
D5 (person)
D6 (Qiu Ping)
D7 (Yuan Yi)
D8 (company) Licence holder	D6 as president; D7 as legal representative and director; D10 as director
D9 (company)	D10 as legal representative	D8 holds 60%
D10 (person)

5. The parties’ relationship originated from negotiations between Colin Tay and Qiu Ping to develop and operate 3.5 GHz spectrum wireless broadband services in 29 major cities in Mainland China (‘the Project’).  It culminated in an agreement, in broad terms, whereby Colin Tay’s camp was to purchase up to 49% equity interest in [D1] at a consideration of US$196 million and then have the shares of D1 floated.  The intention was for Colin Tay’s camp to provide, amongst others, financial resources, and D8 to provide the licences to operate wireless broadband network.

6. Anyway, the intention was for funds from D1 to flow to its wholly owned subsidiary, Smart Channel (D4), and then to Yunji, a Chinese wholly owned foreign invested enterprise (‘WOFIE’) engaging in telecommunication business.  The profits made by D8 (the licence holder) would be indirectly transferred to a WOFIE and further absorbed by Colin Tay’s camp (49%) and Qiu Ping’s camp (51%) through D1.  This indirect method of absorbing profits was used to get round the complicated legal restrictions against foreign investments in the telecommunications industry imposed by the Chinese government and to enable parties to achieve the listing of D1 on a stock exchange as agreed.

7. Initially there was a Build to Suit Agreement (‘BSA’) dated 1 November 2007 setting out the broad terms of the joint venture.  It was made between a company (‘Trussnet Delaware’) from Colin Tay’s camp and D8.  At that time, D8 held 2 licences issued by Ministry of Industry and Information Technology, namely,

(i)   a licence for 5 cities which would expire on 31 December 2008 (‘the 5 Cities Licence’); and

(ii)   a licence for 25 cities which would expire on 29 February 2008 (‘the 25 Cities Licence’). 

Of these, one city (Qingdao) overlapped with the 5 Cities.  Therefore, at the date of the BSA, D8 held licences covering a total of 29 cities in Mainland China.

8. The parties subsequently entered into various agreements to govern the joint venture and the subscription for the shares in D1:

(i)    TDFA: an addendum to the BSA called the framework agreement (‘TDFA’) dated 15 February 2008. It was made between Trussnet Delaware and D8.  The former was to subscribe for 49% equity of D1.

(ii)   TNFA: another framework agreement dated on 7 April 2008 between Trussnet Nevada and D8, to replace the TDFA.

(iii)  GSSA: a Subscription and Shareholders’ Agreement dated 23 May 2008 between Gulfstream Capital Partners Ltd (said to be 100% owned by P1) as investor, D2 and D3 as founders, D1 as the Company, D6 and D7 as guarantors and D8 and D9 as warrantors. 

(iv)  Supplementary Agreement: dated 17 November 2008 made between Trussnet Nevada and D8 to amend the GSSA.

(v)   TCPSSA: another Subscription and Shareholders’ Agreement dated 16 February 2009.  Save that P2 replaced Gulfstream, the other parties to this agreement were the same as those of the GSSA.

(vi)  Addendum to Subscription and Shareholders’ Agreement dated 16 February 2009 between P2 and D8 to supplement the terms of the TCPSSA.

For easy reference, the material terms of these agreements are set out in the Annexure to this Decision, and are in bold print whenever referred to in this Decision.

9. Some features of these agreements concerning the parties, payment structure, signatory rights and timing need to be highlighted.

10. Insofar as parties were concerned, Colin Tay’s camp used various entities (Trussnet Delaware, Trussnet Nevada, Gulfstream, and P2) to enter into those agreements, but P1 never appeared as a party.  P2 only appeared as a party to the TCPSSA and the Addendum. 

11. Insofar as payment structure was concerned, the terms governing the dates of payment and the amount of each tranche of the US$196 million had been changed from agreement to agreement.

12. Insofar as signatory rights were concerned, in Article 1(b) of both the TDFA and TNFA, each of Trussnet and D8 was required to appoint one person as bank signatory of the bank accounts of inter alia D1, Smart Channel (D4) and Yunji after the first US$5 million (‘the First Payment’) had been made to D1.  Article 1 of the Supplementary Agreement likewise contained a term for payment of part of the subscription price to a bank account jointly controlled by the parties.

13. Insofar as timing was concerned, when the TDFA was executed and as all the parties were aware, the 25 Cities Licence would expire in half a month’s time on 29 February 2008.  The TNFA was entered into after expiry of the 25 Cities Licence. 

14. Indisputably, pursuant to the TCPSSA, on 23 February 2009, D1 issued a share certificate to P2 (‘the Share Certificate’), representing 2,450,000,000 (49%) shares of D1, even though a very substantial part of US$191 million remained unpaid.  On the same day, P2 signed 2 notes (‘the 2 Notes’), one to acknowledge that the Share Certificate was borrowed, the other agreeing to pledge to D1 the shares representing the unpaid balance of the subscription price.

15. As background information, the First Payment had been made in tranches in March/April 2008 to Chinacomm Account 2 and by cash, before the GSSA was signed.

THE PLAINTIFFS’ CASE AT THE STAGE OF THE EX PARTE INJUNCTIONS

16. According to Colin Tay, he was allegedly told in early 2010 that D1 was in need of funds to meet government deadlines.  If those deadlines were not met, the licences could be revoked.  So Colin Tay negotiated with Qiu Ping in good faith to find a way to save the Project and the Plaintiffs’ investment. 

17. According to Colin Tay, Qiu Ping’s camp had never satisfactorily accounted for expenditure of the First Payment.  So he, on behalf of the Plaintiffs, and Qiu Ping on behalf of D8, orally agreed for the Plaintiffs to inject ‘another US$5 million in tranches as equity to Chinacomm Limited, with the condition that new bank accounts of Chinacomm Ltd and Smart Channel would be established with the double signature arrangement’.  The money was for the specific purpose of using in the joint venture.  The Plaintiffs were funding the investment ahead of deadline because D8 had not yet renewed the licences for 29 cities as required by Article 3.2(b) of the TCPSSA.

18. It is not in dispute that the Chinacomm Account 1 and Smart Channel Account were first set up in April 2010 and were subject to a double signature arrangement, with Colin Tay and Qiu Ping being the signatories.  Nor is it disputed that the US$4.7 million was paid in tranches in April to June 2010 by Colin Tay’s camp into the Chinacomm Account 1.  What was in dispute was the underlying agreement.  Colin Tay claimed that the 2 Accounts were opened pursuant to the oral agreement.

19. Apart from the US$4.7 million, no other party had put funds into Chinacomm Account 1.

20. In November 2011, Colin Tay learnt from the Bank that he was removed as an authorized signatory of Chinacomm Account 1.

.....

22. It transpired that without notification to the Plaintiffs, Qiu Ping and Yuan Yi (D7) convened a board meeting of D1 on 24 May 2011 and removed Colin Tay’s signatory rights from Chinacomm Account 1.  Less than a month later, on 21 June 2011, Qiu Ping as sole signatory transferred US$4.5 million to the account of Feng (D10) in DBS Bank.”

Procedural history

5.  Despite the fact that the proceedings herein were commenced as long ago as November 2011, they have not yet progressed beyond the pleadings stage.  A summary of the procedural history of these proceedings is as follows.

6.  On 18 November 2011, the plaintiffs issued the Writ herein and obtained a Mareva injunction against the 1^st, 2^nd, 3^rd, 6^th and 7^th defendants (“the 1^st Injunction Order”) to freeze the amount of US$4.7 million paid by the plaintiffs to the 1^st defendant.  A disclosure order was also made against the 1^st, 6^th and 7^th defendants.

7.  On 8 December 2011, the plaintiffs obtained a further Mareva injunction against the 10^th defendant (“the 2^nd Injunction Order”) to freeze his assets up to US$4.5 million. The 10^th defendant was also ordered to disclose by affidavit the purpose of movements of the US$4.5 million.

8.  On 27 February 2012, the plaintiffs filed and served a Statement of Claim.  It can be seen from the Statement of Claim that the plaintiffs have raised numerous causes of action against the defendants, including breach of contract, misrepresentation, infringement of copyright, breach of trust, conspiracy, misappropriation and unjust enrichment.  The complaint which the plaintiffs relied upon for the purpose of supporting the applications for Mareva injunction, ie the alleged breach of the “double signature arrangement” and the dissipation of the US$4.7 million paid into the “Chinacomm Account 1” is only one of the many complaints raised in the Statement of Claim.

9.  On 23 May 2012, the defendants filed and served their Defence and Counterclaim.  It is a substantial document setting out the defendants’ answers to the plaintiffs’ complaints as raised in the Statement of Claim.  For the purpose of the present appeal, I do not consider it necessary to summarise the contents of the Defence and Counterclaim here.

10.  On 30 May 2012, the defendants took out a summons seeking security for their costs of the action from the plaintiffs for the amount of HK$4 million (“the 1^st Application for Security for Costs”).

11.  On 1 August 2012, the plaintiffs filed and served a Reply and Defence to Counterclaim.

12.  In the meantime, on 19 July 2012, the plaintiffs’ application to continue the 1^st and 2^nd Injunction Orders and the defendants’ application to discharge them on the ground of material non disclosure were heard by Au‑Yeung DHCJ. The learned judge’s decision, ie the Decision, was handed down on 26 October 2012.  It was held that the plaintiffs were guilty of material non‑disclosure on one matter (namely, the 1^st plaintiff’s locus or capacity to sue), but the learned judge exercised her discretion to re‑grant the injunction orders.  The learned judge also made a costs order nisi in favour of the plaintiffs regarding the costs of the plaintiffs’ application to continue the 1^st and 2^nd Injunction Orders and the defendants’ application to discharge them.

13.  On 2 November 2012, the 1^st Application for Security for Costs came before Master S Kwang and was dismissed.  As I understand it, the main reason given by the master to dismiss the 1^st Application for Security for Costs was the existence of the defendants’ Counterclaim raising overlapping issues which would also have to be determined in the plaintiffs’ claims against the defendants in the main action.  The master considered that it would not, in those circumstances, be fair to order the plaintiffs to provide security for the costs of the defendants.  For the sake of completeness, I should add that the master also took into account a number of other subsidiary considerations in deciding to dismiss the 1^st Application for Security for Costs.

14.  On 9 November 2012, the defendants applied to vary the costs order nisi made by the learned judge and also sought leave to appeal to the Court of Appeal against the Decision.  Those applications came before the learned judge on 26 February 2013.

15.  On 8 March 2013, the learned judge varied the aforesaid costs order nisi such that: (i) the 1^st plaintiff was to bear the defendants’ costs to discharge the 1^st and 2^nd Injunction Orders and there be no order as to costs between the 2^nd plaintiff and the defendants on the discharge application, and (ii) the costs of the plaintiffs’ application to continue the 1^st and 2^nd Injunction Orders be the plaintiffs’ costs in the cause.  The learned judge also granted the defendants leave to appeal to the Court of Appeal against the Decision.

16.  On 18 April 2013, the defendants filed and served their Notice of Appeal against the Decision as varied on 8 March 2013.

17.  The defendants did not, however, proceed to set the appeal down for hearing.  Instead, on 4 November 2013, the defendants made a fresh application seeking security for their costs of the action from the plaintiffs for the amount of HK$7.2 million (“the 2^nd Application for Security for Costs”).

18.  The 2^nd Application for Security for Costs came before Master S Kwang for hearing on 28 May 2014.  Apparently, at that hearing, the master expressed the view that, in view of the subsisting Counterclaim raising issues which overlapped with those in the plaintiffs’ claims in the main action it would be unfair to order the plaintiffs to provide security for the defendants’ costs of the action.  In response, the defendants’ counsel, after a short adjournment of the hearing, produced a written undertaking from the defendants’ solicitors confirming that the defendants would withdraw the Counterclaim.  As observed by the master, it is clear that the withdrawal of the Counterclaim was a step taken by the defendants to salvage the application for security for costs.  Notwithstanding this manoeuvre, the master decided to dismiss the 2^nd Application for Security for Costs having regard to (i) the defendants’ conduct (which I shall consider further below), and (ii) the defendants’ pending appeal against the Decision which meant that there would unlikely be any progress in the action while the appeal was still outstanding.

19.  As earlier mentioned, the defendants lodged the present appeal to challenge the decision of the master made on 28 May 2014 dismissing the 2^nd Application for Security for Costs.

Applicable principles

20.  It is not in dispute that (i) both plaintiffs are ordinarily resident out of the jurisdiction, and (ii) there is reason to believe that neither plaintiff will be able to pay the defendants’ costs should the defendants succeed in their defence.  That being so, the court’s jurisdiction to make an order for security for costs against them under Order 23, rule 1 of the Rules of the High Court or section 905 of the Companies Ordinance, Cap 622 is triggered.  In either situation, the court has a broad discretion whether to order the plaintiffs to provide security depending on the facts and circumstances of the case.

21.  I accept that prima facie a plaintiff resident abroad should normally be required to provide security: see The Alpha [1991] 2 Lloyd’s Rep 52 at 54; Lauria v Le Salon Orient (Hong Kong) Ltd [1996] 3 HKC 157 at 160.  However, this is not an inflexible or rigid rule.  The court may order security for costs “if, having regard to all the circumstances of a case, the court thinks it just to do so” under Order 23, rule 1(1) of the Rules of the High Court.

22.  The court has a similar, broad, discretion whether to order an impecunious corporate plaintiff to provide security under the former section 357 of the Companies Ordinance, Cap 32, and, in my view, under the current section 905 of the Companies Ordinance, Cap 622 (see Hong Kong Civil Procedure 2014, paragraph 23/3/14).

23.  One of the factors which the court may take into account in deciding whether to order a plaintiff to give security is the plaintiff’s prospect of success in the action.  However, unless the prospect of success can be clearly demonstrated one way or another, it is not the function of the court to conduct a detailed examination of the merits of the case, or to conduct a mini‑trial on affidavit evidence: see Sunchase International Group (China) Ltd v Vincor Group of Companies (Investment) Ltd [2004] 1 HKLRD 731 at 733.

Discussion

24.  The fact that the defendants will have difficulties in enforcing any costs order which may be made in their favour should they succeed at the trial is a factor which obviously I do take into account in the exercise of my discretion whether to order the plaintiffs to give security in the present case.

25.  I do not take into account the merits of the plaintiffs’ claims against the defendants.  From the materials which I have seen, I do not consider that it is possible to reach a clear view on the merits one way or another.  I proceed on the basis that the plaintiffs’ claims have some prospect of success but I am unable to say that the prospect is so clearly established that it becomes a factor against the exercise of my discretion to order security for costs.

26.  On the other hand, Mr Chan (for the plaintiffs) submits that the court should take the defendants’ conduct, both in relation to the transactions complained of and in relation to these proceedings, into account in the overall exercise of my discretion.  The following matters are emphasised by Mr Chan:

(1)     The comment of Au‑Yeung DHCJ at paragraph 120 of the Decision that “there has been shameless efforts by Qiu Ping’s camp to remove the US$4.7 million out of the reach of the plaintiffs and to conceal the true picture”.  The learned judge further stated that “[d]issipation was not only a risk but a fact in the present case”.  This strong criticism of the defendants’ conduct was repeated at paragraph 27 of the learned judge’s decision dated 8 March 2013.

(2)     The defendant’s conduct in relation to the withdrawal of the Counterclaim.

(3)     The defendant’s conduct in relation to the abandonment of the appeal against the Decision.

27.  In respect of (1), the strong comment was expressed by Au‑Yeung DHCJ after a careful examination of the evidence before her.  I appreciate that this comment was made by the learned judge in the context of the application then before her, ie the plaintiffs’ application to continue the 1^st and 2^nd Injunction Orders where the risk of dissipation of assets is a material consideration, whereas for the purpose of the defendants’ application for security for costs the issue of dissipation of assets is not directly relevant.  The further evidence or material since adduced by the defendants which I have seen but was not before the learned judge does not, it seems to me, undermine the learned judge’s strong comment.  While, as Mr Hui has argued, the learned judge’s comment does not go to the issue of whether the defendants were in fact entitled to “dissipate” the money, it is a matter which I consider I am entitled to take into account in the exercise of my discretion whether to order the plaintiffs to give security for costs.

28.  In respect of (2), I have already set out the circumstances leading to the defendants’ withdrawal of the Counterclaim which clearly demonstrate that the withdrawal of the Counterclaim was a tactical step taken to salvage their application for security for costs.  For the sake of completeness, I should mention that in the 4^th Affidavit of Lam Ping Cheung filed by the defendants in support of the 2^nd Application for Security for Costs, the defendants undertook to stay or withdraw their Counterclaim in the event that the main action was stayed or dismissed due to the plaintiffs’ inability to provide security for costs.  I do not, however, give any weight to this undertaking because, it seems to me, the defendants have to make up their mind whether to withdraw the Counterclaim, and cannot expect the court to give weight to an undertaking which is conditional upon the court acceding to their application.

29.  In respect of (3), as earlier mentioned, the defendants sought and obtained leave from Au‑Yeung DHCJ to appeal against the Decision to the Court of Appeal and filed and served a Notice of Appeal on 18 April 2013.  Thereafter, the defendants took no further step in the appeal until after the hearing of the 2^nd Application for Security for Costs on 28 May 2014.

30.  As observed by the master when giving his ruling in the 2^nd Application for Security for Costs, the outcome of the appeal could affect the plaintiffs’ conduct of the action.  Depending on the Court of Appeal’s decision, the plaintiffs might have to reconsider how they might wish to pursue their claims against the defendants.

31.  It was only when the failure of the defendants to prosecute the appeal was raised by Colin Tay in his 11^th Affirmation filed in opposition to the 2^nd Application for Security for Costs (see paragraph 3(b) thereof) that it transpired, from Lam Ping Cheung’s 5^th Affidavit filed on behalf of the defendants on 29 January 2014, that the defendants did not in fact intend to “take the matter [regarding costs] further to the Court of Appeal” because the defendants were of the view that “the cost order absolute made by the learned judge was a correct decision” (see paragraph 20 thereof) and that the defendants “made a tactical decision not to pursue the appeal, in order not to waste further costs and time on dealing with the Injunctions” (see paragraph 21 thereof).

32.  It will be recalled that the learned judge made the costs order absolute and granted leave to appeal on 8 March 2013.  The defendants have not stated in their evidence as to when the tactical decision not to pursue the appeal was made.  Whatever might have been the position, it was a decision that could have been made soon after the learned judge gave her decision on 8 March 2013.  Once the defendants had made a decision not to pursue the appeal, the defendants ought to have informed the court and the plaintiffs of the decision.  When asked by the court in the course of the present hearing, Mr Hui (for the defendants) was unable to offer any explanation for the delay.  It may be that the plaintiffs could, as argued by Mr Hui, also have taken some steps to force the defendants to proceed with or abandon the appeal.  However, the defendants, being the appellants, must be primarily responsible for proceeding with the appeal diligently.

33.  In his ruling given in relation to the 2^nd Application for Security for Costs, the master took into account the existence of the pending appeal which had not yet been formally abandoned or withdrawn in deciding to dismiss the application.  As it was, it was only on 12 June 2014 that a consent summons for the withdrawal of the appeal was filed.

34.  The master considered that the defendants’ application for security for costs was a “tactical move” and not one which addressed “a genuine need in seeking protection” on their costs.  The matters mentioned in (2) and (3) above, in my view, amply support this comment of the master.

35.  In view of the foregoing matters, in the overall exercise of my discretion, I decline to order the plaintiffs to provide security for costs.  Accordingly, the defendants’ appeal by Notice of Appeal dated 11 June 2014 is dismissed.

Mr Edward TC Chan, instructed by Lawrence KY Lo & Co, for the plaintiffs

Mr John Hui, instructed by Lam & Co, for the defendants

HCA 1978/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1978 OF 2011

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BETWEEN

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D E C I S I O N

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1.  This is an application to vary a costs order nisi and for leave to appeal against my decision given on 26 October 2012 (“the Decision”). The plaintiffs support the order for costs in their favour. The defendants seek an order for costs of the discharge summons be in their favour whereas costs for the summons to continue the injunction be the defendants’ costs in the cause or be in the cause.

VARIATION OF COSTS ORDER NISI

2.  Under Order 62, rule 3(2A) of the Rules of the High Court, “if the Court in the exercise of its discretion sees fit to make any order as to the costs of or incidental to any interlocutory proceedings, it may, subject to this Order, order the costs to follow the event or make such other order as it sees fit.” Accordingly, for interlocutory matters, costs to follow the event is only one option.

3.  Mr Scott SC has referred me to a number of authorities such as Re Elgindata (No.2) [1992] 1 WLR 1207, AEI Redifussion Music Ltd v Phonographic Performance Ltd [1999] 1 WLR 1507, Hung Fung Enterprises Holdings Ltd v. Agricultural Bank of China [2012] 3 HKLRD 679, Ho Chun Yan Albert v Leung Chun Ying, HCAL85/2012, 15.1.2013, Lam JA, Re Wing Fai Construction Co Ltd (in Compulsory Liquidation), HCCW735/2002, 8.12.2009, Kwan JA.  With respect, those authorities concern final as oppose to interlocutory matters like the present.

4.  For interlocutory injunctions, normally an order of either costs in the cause or the successful party’s costs in the cause would be appropriate.  However, if there are special circumstances or where the unsuccessful party has acted improperly or is in some way to be penalized a different order may be made: King Fung Vacuum Ltd & others v Toto Toys Ltd & others [2006] 2 HKLRD 785 at 794; followed in Ng Chi Sum & anor v Full Art International Ltd & ors, HCA138/2009, 5.3.2009, Sakhrani J.

5.  Where an ex parte injunction is discharged on the ground of non-disclosure, the usual order will be for costs to the defendant.  Costs of the re-grant will be costs in the cause or one party’s costs in the cause.  See cases where this principle has been consistently applied: Ng Chi Sum, Muginoho Co Ltd v Vimiu HK Co Ltd, HCMP107/2012, 24.2.2012, M Chan DHCJ (as she then was), Sino Resources Group Limited v Hung Chen Richael & ors, HCA2477/2009, 30.3.2010, Chung J.

6.  There is, however, no general practice that where there has been non-disclosure, and costs are to be awarded against the claimant, they ought to be on an indemnity basis.  The fact that there has been material non-disclosure is plainly a relevant factor to be taken into account on the question of costs and is capable of justifying an award on this basis, and such an order will usually be made if the non-disclosure was deliberate or seriously culpable.  Gee on Commercial Injunctions, 5^th ed (2004),para 23.044.

7.  In making the costs order nisi, I described the plaintiffs as the overall winner in the sense of their having eventually obtained a continuation of the injunction.  The basis of my costs order nisi was not that although being ultimately successful in discharging the injunction orders as regards P1, the defendants should nevertheless pay the plaintiffs’ costs in relation to the issues in which I ruled against the defendants.

8.  Although the defendants’ discharge summons was dismissed and the injunctions re-granted, it is important not to lose sight of how the court reached that conclusion.  I have expressly found that there was a material non-disclosure of the Assignment to show the locus standi of P1 to sue. The defendants have successfully shown that the ex parte injunction should not have been granted to P1 in the first place.  P1 should thus bear the costs of the defendants in the discharge summons.

9.  As to P2’s costs, it appears at first sight that it should be borne by the defendants.  Having heard submissions, I am of the view that P2 should be deprived of its costs.  This is because in civil cases, plaintiffs jointly appoint one firm of solicitors and incur one set of costs.  Here, at the ex parte stage, the plaintiffs made no distinction of their individual rights and interests and the ex parte injunctions were sought for both of them.  They thus had a duty to ensure that each of them made full and frank disclosure to the court, especially since Colin Tay was the central figure common to both plaintiffs.  P2 failed in this duty.

10.  A proper order would be for P1 to bear the defendants’ costs and there be no order as regards the costs between P2 and the defendants on the discharge summons. 

11.  Should the defendant be deprived of part of its costs?  The answer is no, because if a plaintiff has no right to sue, it matters not that the defendant has dissipated somebody else’ assets.

12.  The same result is reached even if Re Elgindata (No.2) is to apply.  The rule of “costs follow the event” does not cease to apply simply because the successful party (the defendants in the present case) raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or costs of the proceedings he may be deprived of the whole or a part of his costs.  Where the successful party raises issues or makes allegations improperly or unreasonably, the court may not only deprive him of his costs but may order him to pay the whole or a part of the unsuccessful party’s costs.

13.  Applying Re Elgindata (No. 2), though I have rejected most of the non-disclosed matters as immaterial, I do not think it could be said that raising those matters was improper or unreasonable or had caused a significant increase in the length of the discharge summonses.  The plaintiffs have not shown me otherwise.  Accordingly, the defendants should not be deprived of all or part of their costs of the discharge.

14.  Mr Scott SC does not pursue indemnity basis for costs.  Nor do I think it is appropriate in this case where the material non-disclosure was limited to a distinct point of lack of locus standi of P1. 

15.  As for costs of continuation of the injunction, I have decided to continue the injunctions in circumstances where I found, inter alia, Qiu Ping’s camp to have engaged in shameless efforts to remove the bulk of the US$4.7m out of the reach of the plaintiffs and to conceal the true picture.  Dissipation was not only a risk but a fact.  As pointed out by Mr Chan, counsel for the plaintiffs, the circumstances of the plaintiffs putting the Chinacomm Account 1 into funds and the acts of dissipation were undisputed and did not depend on credibility of Colin Tay’s evidence.  Till this day the defendants have not explained the removal of the funds.  I am of the view that a proper order should be for the plaintiffs’ costs to be in the cause.

16.  In terms of apportionment, it is difficult to identify which aspect of the evidence is relevant to which summons.  I take a broad brush approach to apportion costs at 50:50 between the 2 summonses.

17.  Having regard to the costs order made, there is no advantage in going forth with summary assessment.  I order that there shall be taxation of costs at the end of this action. 

18.  Neither party is entirely successful in its argument on costs.  Costs of this variation application should follow the orders I have made above, subject to what I shall say in paragraph 35 below.

LEAVE TO APPEAL

19.  To obtain leave to appeal, an applicant has to show more than just an arguable case, with a reasonable and not fanciful prospect of success, although he does not have to demonstrate that the appeal will probably succeed: section 14AA of the High Court Ordinance; SMSE v KL [2009] 4 HKLRD 125, Le Pichon JA, para 17.

20.  Four grounds of appeal have been put forth:

A. That the court has applied the wrong threshold test for Mareva injunctions;

B. Material non-disclosure;

C. Fresh injunction orders should not be granted; and

D. Costs

A. That the court has applied the wrong threshold test for Mareva injunctions

21.  Mr Scott SC submits that this court should have applied the “good arguable” case test to the more stringent remedy of a Mareva injunction instead of the “serious issue to be tried” test applicable to ordinary interlocutory injunctions; and that this court has applied a markedly lower threshold in assessing the apparent strength of the plaintiffs’ causes of action.

22.  In Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft GmbH, [1983] 2 Lloyd’s Rep 600, it is said that the “good arguable case” is “one which is more than barely capable of serious argument, but not necessarily one which the judge considers would have a better than 50 percent chance of success.”

23.  The difference between “good arguable” case and “serious issue to be tried” is a very fine one.  In Fiona Trust Holding v Privalov [2007] EWHC 1217 (Comm), para 18,David Steel J said,

“… it must be accepted that the margin between a serious issue to be tried and a good arguable case is a narrow piece of territory and it may not always be easy to identify which side of the central reservation a particular claim which is legitimately pleaded falls.”

24.  Ultimately, it is a question of whether it is “just and convenient” to grant the injunction.

“In Mareva cases, the all-important question is whether, in the circumstances of the case, it is “just and convenient” to grant the injunction. A requirement that the court must form the provisional view that the claimant will probably succeed at trial would be plainly inconsistent with an approach which enables the court to achieve ‘its great object viz abstaining from expressing any opinion upon the merits of the case until the hearing’. Nevertheless, the court will take into account the apparent strength or weakness of the respective cases in order to decide whether the claimant’s case, on the merits, is sufficiently strong to reach the threshold, and this will include assessing the apparent plausibility of statements in affidavits.” Gee on Commercial Injunctions, 5^th ed (2004), para 12.024.

25.  This court certainly did not stop at considering whether there were serious issues to be tried.  Semantics aside, the merits and probabilities of the plaintiffs’ case have been assessed.  The need to consider the justice and convenience in re-continuing the injunctions have not been overlooked.

26.  Mr Chan has helpfully referred to Lord Neuberger MR’s decision in Finurba Corporate Finance v Imaved Investmentos [2011] EWCA Civ 465, para 31:

“In the light of the increasing sophistication of fraudsters, and their extensive use of companies and other entities to mask their activities and assets, the courts should adopt a robust and realistic approach to technical points of substantive law or evidence raised against the grant of a freezing order, in cases where there is good reason to believe that fraud has occurred. Having said that, a freezing order can have very serious adverse effect often over a long period, sometimes even financial ruin, for the individual or company against whom it is made. The court should be satisfied not only that there is a properly arguable case against the defendant and a risk of dissipation or hiding of assets, but also as to the proportionality of the order, and it should be especially concerned about making the order when there seems to be little real value in the cross-undertaking.”

27.  Whilst I am convinced that, taking the robust approach of Lord Neuberger MR, the justice of the case in the light of the defendants’ shameless efforts to dissipate assets and to conceal the true picture would have justified the continuation of the injunction, ground A as framed is more than arguable or fanciful.  Leave to appeal should be granted.

B. Material non-disclosure

C. Fresh injunction orders should not be granted

28.  These 2 grounds can be considered together because if ground B can be established on appeal, the exercise of discretion under ground C ought to be reviewed.

29.  The criticism of Mr Scott SC is that this court erroneously granted the injunctions solely on the basis of the double signature arrangement in isolation of the complex background, thereby deeming many non-disclosed facts (including potential defences and counterclaims) as immaterial.  It is also said that by virtue of the deliberate, serious and egregious nature and extent of the non-disclosure, a fresh injunction should not have been granted.

30.  In this application, but not at the substantive hearing, Mr Scott SC has referred me to authorities on the need for a plaintiff to disclose facts relevant to potential defences and counterclaims at the ex parte stage.  It suffices to refer to 2 passages in Gee on Commercial Injunctions, 5^th ed (2004):

“The applicant must identify any defences, which, although not yet taken, would have been available to be taken by the defendant had he been present at the application, provided that:

(1) The defence is one which can reasonably be expected to be raised in due course by the defendant;

(2) The defendant is not one which can be dismissed as without substance or importance (e.g. an argument based on a misconceived interpretation of a statutory provision).

(at para 9.004)

…

It is often a difficult exercise to settle a suitable affidavit which achieves the right balance between full and fair disclosure and a far too detailed description of the facts, with perhaps too much generosity towards the defendant. The duty of disclosure does not require the applicant to describe his case or the factual background in minute detail, nor does it require him to search for possible but unlikely defences. (at para 9.005)

The claimant must disclose all defences open to the claim which the defendant has already raised, or which are open to him, though he need not indulge in speculation.” (at para 12.025)

31.  Having regard to these authorities the defendants have shown an arguable and not fanciful point on appeal as regards the way this court assessed the extent of the plaintiff’s duty in disclosing potential defence and counterclaim.  Leave to appeal should be granted on grounds B and C.

D. Costs

32.  The application for leave to appeal under this ground was premature as it is argued at the same time as the variation of costs order.  I decline to grant leave. 

33.  Leave to appeal on grounds A to C is granted.  Costs should be in the cause of the appeal with certificates for 2 counsel.

COSTS FOR BUNDLES

34.  Mr Chan complains that solicitors for the defendants have prepared 4 new bundles with different pagination for the leave application, despite objection of the plaintiffs’ solicitors and despite this court being familiar with the old bundles.  The new bundles, printed on single sides of paper, were not referred to at all during submissions, except for the Decision and the summons for appeal.  There was no answer at all from the defendants.  I find these complaints of Mr Chan to be most justified.

35.  Accordingly, save for the photocopying costs for the Decision and the summons for appeal, costs in relation to preparation of these new bundles should not be granted to the defendants.  I would also ask the solicitors for the defendants to show cause as to why they should not personally bear such wasted costs incurred by their clients and the plaintiffs arising out of such unnecessary preparation.

36.  The new bundles shall be returned to the defendants for proper re-arrangement in the light of my observations in paragraph 129 of the Decision and re-use in the Court of Appeal.

CONCLUSION

37.  I order as follows:

Summons for variation of the costs order nisi

(1) P1 shall pay the defendants’ costs of the summons for discharge of the injunction orders, with certificates for 2 counsel.  There shall be no order as to costs as between P2 and the defendants.

(2) Costs of the summons for continuation of the injunction orders shall be the plaintiffs’ costs in the cause.

(3) Overall costs incurred for the 2 summonses for discharge and continuation (including the hearings on 26 October 2012 and 26 February 2013) are to be apportioned 50:50.

(4) Costs of the summons for variation will follow the terms of paragraphs (1) to (3).  Half of the hearing time on 26 February 2013 be apportioned to this summons.

(5) All costs are to be taxed at the conclusion of this action.

Summons for leave to appeal

(6) There be leave to the defendants to appeal to the Court of Appeal on grounds A to C.

(7) Costs of this application be in the cause of the appeal, with certificates for 2 counsel.

(8) Save for the photocopying costs for the Decision and the summons for appeal, costs in relation to preparation of the new bundles shall not be granted to the defendants.  Solicitors for the defendants do appear before me on 18 March 2013 at 3 pm to show cause as to why they should not personally bear such wasted costs incurred by their clients and the plaintiffs arising out of the unnecessary preparation.

38.  I thank counsel for their assistance.

HCA 1978/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1978 OF 2011

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D E C I S I O N

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1.  The Plaintiffs apply for continuation of 2 ex parte Mareva injunction orders, whereas the Defendants apply for their discharge on the ground of material non-disclosure.

SUBJECT MATTER OF THE INJUNCTIONS

2.  The Injunction Orders seek to freeze assets of D1 (Chinacomm), D4 (Smart Channel) and D10 (Feng Xiao Ming) up to US$4,749,599 (“the US$4.7 million”), including money in 3 bank accounts (collectively “the subject accounts”):

(i)  368-0080-9447 held by D1 (“the Chinacomm Account 1”);

(ii)  368-0042-3379 held by D1 (“the Chinacomm Account 2”); and

(iii)  368-0080-9455 held by D4 (“the Smart Channel Account”).

It is the Plaintiffs’ case that items (i) and (iii) had to be operated jointly by Mr Colin Tay of the Plaintiffs and Qiu Ping (D6) (“the double signature arrangement”).  However, D1/Qiu Ping wrongfully changed the signatory arrangement and removed the bulk of the US$4.7 million.  The 2^nd Injunction Order is against D10 to whom part of the funds were transferred.

BACKGROUND

3.  This action is essentially a dispute between foreign investors (the Plaintiffs) and Mainland domestic entities (the Defendants) over a joint venture investment in D1 which is a Cayman Islands company.  P1 is a United States listed company engaging in telecommunication business.  It was formerly known as Mortlock Ventures Inc and ChinaTel Group Inc.  P2 is a Hong Kong company.  Colin Tay was and is president of P1 and authorized representative of the corporate director of P2.  He was and is the person in control and ownership of P2.  At all material times, he was the central figure in the Plaintiffs’ camp.

4.  Qiu Ping was the central figure in the Defendants’ camp.  D1 was used by D6 to D8 as a special purpose company for the implementation of the joint venture between Colin Tay and Qiu Ping’s camps.  The relationship of the Defendants is tabulated as follows:

Defendant	Director/officer	Shareholders
D1 (Chinacomm)	D6, D7	D2 &D3 (51%)
D2 (company)	D7	D5 (nominee of D6-8)
D3(company)	Qiu Ping	D5 (nominee of D6-8)
D4 (Smart Channel)	D7	D1
D5 (person)
D6 (Qiu Ping)
D7 (Yuan Yi)
D8 (company) Licence holder	D6 as president; D7 as legal representative and director; D10 as director
D9 (company)	D10 as legal representative	D8 holds 60%
D10 (person)

(The highlighted Defendants will feature significantly in this Decision.)

5.  The parties’ relationship originated from negotiations between Colin Tay and Qiu Ping to develop and operate 3.5 GHz spectrum wireless broadband services in 29  major cities in Mainland China (“the Project”).  It culminated in an agreement, in broad terms, whereby Colin Tay’s camp was to purchase up to 49% equity interest in D8 at a consideration of US$196 million and then have the shares of D1 floated.  The intention was for Colin Tay’s camp to provide, amongst others, financial resources, and D8 to provide the licences to operate wireless broadband network.

6.  Anyway, the intention was for funds from D1 to flow to its wholly owned subsidiary, Smart Channel (D4), and then to Yunji, a Chinese wholly owned foreign invested enterprise (“WOFIE”) engaging in telecommunication business. The profits made by D8 (the licence holder) would be indirectly transferred to a WOFIE and further absorbed by Colin Tay’s camp (49%) and Qiu Ping’s camp (51%) through D1.  This indirect method of absorbing profits was used to get round the complicated legal restrictions against foreign investments in the telecommunications industry imposed by the Chinese government and to enable parties to achieve the listing of D1 on a stock exchange as agreed.

7.  Initially there was a Build to Suit Agreement (“BSA”) dated 1 November 2007 setting out the broad terms of the joint venture.  It was made between a company (“Trussnet Delaware”) from Colin Tay’s camp and D8.  At that time, D8 held 2 licences issued by Ministry of Industry and Information Technology, namely,

(i)  a licence for 5 cities which would expire on 31 December 2008 (“the 5 Cities Licence”); and

(ii)  a licence for 25 cities which would expire on 29 February 2008 (“the 25 Cities Licence”). 

Of these, one city (Qingdao) overlapped with the 5 Cities. Therefore, at the date of the BSA, D8 held licences covering a total of 29 cities in Mainland China.

8.  The parties subsequently entered into various agreements to govern the joint venture and the subscription for the shares in D1:

(i)  TDFA: an addendum to the BSA called the framework agreement (“TDFA”) dated 15 February 2008. It was made between Trussnet Delaware and D8.  The former was to subscribe for 49% equity of D1.

(ii)  TNFA: another framework agreement dated on 7 April 2008 between Trussnet Nevada and D8, to replace the TDFA.

(iii)  GSSA: a Subscription and Shareholders’ Agreement dated 23 May 2008 between Gulfstream Capital Partners Ltd (said to be 100% owned by P1) as investor, D2 and D3 as founders, D1 as the Company, D6 and D7 as guarantors and D8 and D9 as warrantors. 

(iv)  Supplementary Agreement: dated 17 November 2008 made between Trussnet Nevada and D8 to amend the GSSA.

(v)  TCPSSA: another Subscription and Shareholders’ Agreement dated 16 February 2009.  Save that P2 replaced Gulfstream, the other parties to this agreement were the same as those of the GSSA.

(vi)  Addendum to Subscription and Shareholders’ Agreement dated 16 February 2009 between P2 and D8 to supplement the terms of the TCPSSA.

For easy reference, the material terms of these agreements are set out in the Annexure to this Decision, and are in bold print whenever referred to in this Decision.

9.  Some features of these agreements concerning the parties, payment structure, signatory rights and timing need to be highlighted. 

10.  Insofar as parties were concerned, Colin Tay’s camp used various entities (Trussnet Delaware, Trussnet Nevada, Gulfstream, and P2) to enter into those agreements, but P1 never appeared as a party.  P2 only appeared as a party to the TCPSSA and the Addendum. 

11.  Insofar as payment structure was concerned, the terms governing the dates of payment and the amount of each tranche of the US$196 million had been changed from agreement to agreement.

12.  Insofar as signatory rights were concerned, in Article 1(b) of both the TDFA and TNFA, each of Trussnet and D8 was required to appoint one person as bank signatory of the bank accounts of inter alia D1, Smart Channel (D4) and Yunji after the first US$5 million (“the First Payment”) had been made to D1.  Article 1 of the Supplementary Agreement likewise contained a term for payment of part of the subscription price to a bank account jointly controlled by the parties.

13.  Insofar as timing was concerned, when the TDFA was executed and as all the parties were aware, the 25 Cities Licence would expire in half a month’s time on 29 February 2008.  The TNFA was entered into after expiry of the 25 Cities Licence. 

14.  Indisputably, pursuant to the TCPSSA, on 23 February 2009, D1 issued a share certificate to P2 (“the Share Certificate”), representing 2,450,000,000 (49%) shares of D1, even though a very substantial part of US$191 million remained unpaid.  On the same day, P2 signed 2 notes (“the 2 Notes”), one to acknowledge that the Share Certificate was borrowed, the other agreeing to pledge to D1 the shares representing the unpaid balance of the subscription price.

15.  As background information, the First Payment had been made in tranches in March/April 2008 to Chinacomm Account 2 and by cash, before the GSSA was signed.

THE PLAINTIFFS’ CASE AT THE STAGE OF THE EX PARTE INJUNCTIONS

16.  According to Colin Tay, he was allegedly told in early 2010 that D1 was in need of funds to meet government deadlines.  If those deadlines were not met, the licences could be revoked.  So Colin Tay negotiated with Qiu Ping in good faith to find a way to save the Project and the Plaintiffs’ investment. 

17.  According to Colin Tay, Qiu Ping’s camp had never satisfactorily accounted for expenditure of the First Payment.  So he, on behalf of the Plaintiffs, and Qiu Ping on behalf of D8, orally agreed for the Plaintiffs to inject “another US$5 million in tranches as equity to Chinacomm Limited, with the condition that new bank accounts of Chinacomm Ltd and Smart Channel would be established with the double signature arrangement”.  The money was for the specific purpose of using in the joint venture.  The Plaintiffs were funding the investment ahead of deadline because D8 had not yet renewed the licences for 29 cities as required by Article 3.2(b) of the TCPSSA[1].

18.  It is not in dispute that the Chinacomm Account 1 and Smart Channel Account were first set up in April 2010 and were subject to a double signature arrangement, with Colin Tay and Qiu Ping being the signatories.  Nor is it disputed that the US$4.7 million was paid in tranches in April to June 2010 by Colin Tay’s camp into the Chinacomm Account 1.  What was in dispute was the underlying agreement.  Colin Tay claimed that the 2 Accounts were opened pursuant to the oral agreement.

19.  Apart from the US$4.7 million, no other party had put funds into Chinacomm Account 1.

20.  In November 2011, Colin Tay learnt from the Bank that he was removed as an authorized signatory of Chinacomm Account 1.

21.  On 18 November 2011, the Plaintiffs obtained an ex parte Mareva injunction against D1, D2, D3, D6 and D7 (the 1^st Injunction Order) from Deputy Judge L Chan (as he then was).  D1, D6 and D7 were ordered to disclose by affidavits the details of the subject accounts, any other accounts under their names, details of fund movements and payees.

22.  It transpired that without notification to the Plaintiffs, Qiu Ping and Yuan Yi (D7) convened a board meeting of D1 on 24 May 2011 and removed Colin Tay’s signatory rights from Chinacomm Account 1.  Less than a month later, on 21 June 2011, Qiu Ping as sole signatory transferred US$4.5 million to the account of Feng (D10) in DBS Bank. 

23.  On 8 December 2011, the Plaintiffs obtained ex parte from Deputy Judge Lok the 2^nd Injunction Order against D10 to freeze his assets up to US$4.5 million.  D10 was ordered to disclose by affidavit, the purpose and movements of the US$4.5 million.

24.  This is the substantive hearing for the continuance of the 1^st and the 2^nd Injunction Orders.  The Defendants, however, apply to discharge them on 4 principal grounds:

A.  Material non-disclosure;

B.  Lack of serious issues to be tried or good arguable case;

C.  Lack of risk of dissipation of assets; and

D.  Balance of convenience.

SECTION A  MATERIAL NON-DISCLOSURE

The legal principles

25.  There is no dispute on principles.  An applicant must make full and frank disclosure in an ex parte application.

“On any ex parte application, the applicant must proceed with the highest good faith. The fact that the court is asked to grant relief without the person against whom the relief is sought having the opportunity to be heard makes it imperative that the applicant should make full and frank disclosure of all material facts …” Hong Kong Civil Procedure 2012, Vol 1, para 29/1/39.

26.  What is material is for the judge to decide.  Suppression of material facts will cause the court to discharge an ex parte order without going into the merits. 

“(1) The duty of the applicant is to make “a full and fair disclosure of all the material facts:” sec Rex v. Kensington Income Tax Commissioners, Exparte Princess Edmond de Polignac [1917] 1 K.B. 486, 514, per Scrutton L.J.

(2)  The material facts are those which it is material for the judge to know in dealing with the application as made: materiality is to be decided by the court and not by the assessment of the applicant or his legal advisers: see Rex v. Kensington Income Tax Commissioners, per Lord Cozens-Hardy M.R., at p. 504, citing Dalglish v. Jarvie (1850) 2 Mac. & G. 231, 238, and Browne-Wilkinson J. in Thermax Ltd. v. Schott Industrial Glass Ltd. [1981] F.S.R. 289, 295.

(3)  The applicant must make proper inquiries before making the application: see Bank Mellat v. Nikpour [1985] F.S.R. 87. The duty of disclosure therefore applies not only to material facts known to the applicant but also to any additional facts which he would have known if he had made such inquiries.

(4)  The extent of the inquiries which will be held to be proper, and therefore necessary, must depend on all the circumstances of the case including (a) the nature of the case which the applicant is making when he makes the application; and (b) the order for which application is made and the probable effect of the order on the defendant: see, for example, the examination by Scott J. of the possible effect of an Anton Piller order in Columbia Picture Industries Inc. v. Robinson [1987] Ch. 38; and (c) the degree of legitimate urgency and the time available for the making of inquiries: see per Slade L.J. in Bank Mellat v. Nikpour [1985] F.S.R. 87, 92-93.

(5)  If material non-disclosure is established the court will be “astute to ensure that a plaintiff who obtains [an ex parte injunction] without full disclosure ... is deprived of any advantage he may have derived by that breach of duty:” see per Donaldson L.J. in Bank Mellat v. Nikpour, at p. 91, citing Warrington L.J. in the Kensington Income Tax Commissioners’ case [1917] 1 K.B. 486, 509.

(6)  Whether the fact not disclosed is of sufficient materiality to justify or require immediate discharge of the order without examination of the merits depends on the importance of the fact to the issues which were to be decided by the judge on the application. The answer to the question whether the non-disclosure was innocent, in the sense that the fact was not known to the applicant or that its relevance was not perceived, is an important consideration but not decisive by reason of the duty on the applicant to make all proper inquiries and to give careful consideration to the case being presented.

(7)  Finally, it ‘is not for every omission that the injunction will be automatically discharged.  A locus poenitentiae may sometimes be afforded’: per Lord Denning M.R. in Bank Mellat v. Nikpour [1985] F.S.R. 87, 90.  The court has a discretion, notwithstanding proof of material non-disclosure which justifies or requires the immediate discharge of the ex parte order, nevertheless to continue the order, or to make a new order on terms

‘when the whole of the facts, including that of the original non-disclosure, are before [the court, it] may well grant … a second injunction if the original non-disclosure was innocent and if an injunction could properly be granted even had the facts been disclosed:’ per Glidewell L.J. in Lloyds Bowmaker Ltd. v. Britannia Arrow Holdings Plc.”

In Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350, at 1356F-1357F, per Gibson LJ.  See also Gee on Commercial Injunctions,5^th ed, at p 241.

27.  In considering what matters should be disclosed to the court, the test is whether the facts are relevant to the exercise of the discretion, regardless of whether they are relevant to the merits of the claim, and irrespective of whether the matters, if disclosed, would have caused the court to refuse to grant the ex parte application.  The court was not concerned with whether the matters not disclosed would, if they had been disclosed, have caused it to refuse to grant the ex parte order.  The test was whether the court should have these matters in the weighing scales: Standard Chartered Securities Ltd v Lai Arthur & ors [1993] 1 HKC 375,at 380-381.

28.  The test of materiality is objective.

“The duty extends to placing before the court all matters which are relevant to the court’s assessment of the application, and it is no answer to a complaint of non-disclosure that if the relevant matters had been placed before the court, the decision would have been the same. The test as to materiality is an objective one, and it is not for the applicant or his advisers to decide the question; hence it is no excuse of the applicant subsequently to say that he was genuinely unaware, or did not believe, that the facts were relevant or important. All matters which are relevant to the ‘weighing operation’ that the court has to make in deciding whether or not to grant the order must be disclosed.” (Gee on Commercial Injunctions,5^th ed at para 9.002)

29.  The materiality of matters undisclosed or misstated, if relevant, will depend on the importance of the facts to the issues which were to be decided by the judge on the ex parte application: Pacific Base Services Ltd & Anor v Silver Gain Development Ltd & ors [1996] 1 HKC 610at 617I-618A.

30.  The duty to disclose cannot be fulfilled by simply exhibiting voluminous documents mentioned in the supporting affidavit without making any distinct reference to the points in the body of the affidavit itself or when addressing the judge at the hearing: Standard Chartered Securities Ltd v Lai Arthur, page 388Gfollowed in Rever (AMA) Salon Ltd v Kung Wai For Danny & others [2001] 1 HKC 241, 246E-F.

31.  Where there has been material non-disclosure in an ex parte application, the practice of the court is to discharge the order without going into the merits: R v Kensington Income Tax Commissioners, ex parte de Poliganc [1917] 1 KB 486, 514-515;Manor Electronics Ltd & Anor v Dickson & ors [1988] RPC 618at 624.

The bases of the Plaintiffs’ application before Deputy Judge L Chan

32.  At the ex parte stage, the causes of action endorsed on the writ of summons were: (i) breach of the TCPSSA by unilaterally removing Colin Tay as an authorized signatory to Chinacomm Account 1; and (ii) breach of the “agreements under the joint venture” by failure to secure the licences.

33.  In the 1^st affirmation of Colin Tay (which constituted the supporting affirmation for the 1^st Injunction Order), the 4 incidents of breach could be summarized as:

(i) Refusal to implement the double signature agreement in the TNFA;

(ii) Failure to produce valid 3.5GHz wireless broadband licences;

(iii) Unilaterally selecting equipment supplier; and

(iv) Removing Colin Tay as an authorized signatory to Chinacomm Account 1.

34.  At the ex parte hearing, it was only item (iv) that the Plaintiffs relied on in their skeleton and oral submissions (page 8R-9E of the transcript). There was no exchange between the Court and the Plaintiffs’ counsel relating to the legal bases of the causes of action. 

35.  Deputy Judge L Chan confirmed that the Plaintiffs were not relying on “all these other things about misrepresentation, about breach of warranty to renew a license or forged license …” (page 9F of the transcript).  He granted the 1^st Injunction Order solely on the basis of breach of the double signature arrangement (page 12R-T of the transcript).

36.  The statement of claim filed subsequent to the ex parte hearing relied also on other causes of action.  For the purpose of this discharge application, those additional causes should be disregarded.

The alleged non-disclosure

37.  In substance, Mr Scott SC’s submission is that the Plaintiffs had failed to draw to the Court’s attention material contractual provisions which contradicted Colin Tay’s assertion of an oral agreement, his case of “no licence, no payment”, and showed the Plaintiffs’ breach of various contractual provisions.  Mr Scott SC submits that the non-disclosure was such as to undermine the Plaintiffs’ causes of action and demonstrate that it was inappropriate for the Court to grant the Injunction Orders.  These alleged non-disclosed facts will be analyzed in accordance with the following topics:

A1.  The double signature arrangement (paras 38-52 below);

A2.  No licence, no payment (paras 53-74 below);

A3.  Failure to exhibit the note of borrowing and pledge note (paras 75-78 below);

A4.  Failure to disclose P2’s sale of shares in D1 to P1 (paras 79-84 below);

A5.  Failure to disclose P2’s assignment to P1 (paras 85-91 below);

A6.  Failure to disclose the agency relationship between the Plaintiffs (paras 92-95 below);

A7.  Failure to disclose the Plaintiffs’ financial inability to pay the balance of the subscription price (paras 96-97 below);

A8.  Failure to disclose that the Defendants have various defences and a counterclaim for return of the 49% shares (paras 96-97 below).

A1.  Non-disclosure in respect of the double signature arrangement

38.  Colin Tay alleged in his 1^st affirmation that despite the express provision in Clause 1b of the TNFA which provided that each of Trussnet Nevada and D8 shall appoint one person as bank signatory of D1, D8 and WOFIE after the First Payment has been made, D8 had been refusing to implement the double signature arrangement.  Colin Tay asserted that this was an incident of breach of the TNFA and the TCPSSA[2].

39.  The following non-disclosure was not disputed:

(i)  The TNFA had been superseded by the GSSA[3]. However, in my view, it was apparent that Deputy Judge L Chan was not misled. He knew the Framework Agreement(s) were signed “very earlier on” and then the TCPSSA signed in February 2009 “was only a replacement of the previous one” (page 9H-K of the transcript).

(ii)  The TCPSSA did not contain a provision for double signature arrangement[4]. Its Article 26.1 stated that the TCPSSA contained the entire agreement between the parties and superseded any prior agreements and arrangements, whether or not in writing, between the parties in relation to subject matter of the TCPSSA.  Hence any earlier double signature arrangement would have been superseded.

(iii)   The Plaintiffs were not parties to the TDFA or TNFA. They had no right to sue for any breach of the double signature arrangement thereunder. Similarly, only P2 was a party to the TCPSSA and P1 has no cause of action thereunder.

40.  The undisclosed facts under (ii) and (iii), if made known, might cause the Court to query whether the double signature arrangement had been waived, or whether there could have been an oral double signature arrangement amidst the series of written agreements.  I am of the view that if the Injunction Orders were obtained solely to pursue a cause of action for refusing to implement the double signature arrangement under the TNFA and TCPSSA, they must be discharged. 

41.  However, the Plaintiffs did not just rely on one cause of action.  They also relied on the failure to renew licences, D8’s unilateral selection of equipment of supplier and secret removal of Colin Tay’s signature authority. As will be seen in Section B below, these causes of action did raise serious issues to be tried.

42.  Mr Scott SC queries how the oral double signature arrangement in respect of such a substantial sum as US$4.7 million could have arisen.  He submits that P2 had breached a prior obligation to pay the balance of the Subscription Price. Article 3.2 of the TCPSSA envisaged payment to be made for the 49% shares.  Once payment was made, D1 did not have to share control with the Plaintiffs since they were not on the board of D1.  Therefore, viewing the parties’ conduct objectively, Mr Scott SC submits that the US$4.7 million must have been part of the Subscription Price.  Mr Scott SC also submits that Deputy Judge L Chan had granted the 1^st Injunction on the basis of breach of the TNFA and TCPSSA.  The Plaintiffs’ current position is reprobation from that taken before Deputy Judge L Chan.

43.  With respect to Mr Scott SC, he has confused 2 parts to the Plaintiffs’ case summarized in paragraph 33(i) and (iv) above.  The 1^st part formed background to the Plaintiffs’ case.  It was the 2^nd part relating to the distinct oral double signature arrangement that Deputy Judge L Chan made the 1^st Injunction Order.  Leaving aside the question of whether the Plaintiffs were in breach of a prior obligation to pay (see Section A2 below), the pertinent question to ask was whether the double signature arrangement was capable of belief.

44.  Qiu Ping’s version of how the accounts under the double signature arrangement were opened was as follows.  He claimed that Colin Tay did not ask for joint signatory rights for the First Payment for he was well aware that all the money received was properly disbursed to meet the overheads and day-to-day operation of the Project.  He claimed that Colin Tay kept on giving empty promises as to payment of funds.  A promise was made on 11 May 2010 that US$15 million would go into the Chinacomm Account 1 by 30 June 2011[5]. According to his 4^th affirmation (para 11), after the Share Certificate was borrowed and pledged, in early January 2010, Colin Tay promised that he would pay US$30 million instead of the whole US$50 million to Qiu Ping before March 2010 as part payment of the outstanding Subscription Price. As the Project was in need of funding, Qiu Ping agreed and on that basis accepted him as one of the joint signatories to the Chinacomm Account 1 and Smart Channel Account.  Qiu Ping said that he made it clear to Colin Tay that his right of joint signatory to Smart Channel’s Account and that of Yunji’s account was conditional upon his paying in full the US$30 million but not any lesser amount.  However, Colin Tay breached his promise and paid only US$4.7 million.

45.  This explanation was incredible in the light of the objective circumstances.  Of the 3 subject accounts, Chinacomm Account 2 was mentioned in the agreements and was the account into which the First Payment was made.  If the Subscription Price was already due, Colin Tay could have been asked to pay into Chinacomm Account 2 solely under the control of D1.  There was no need to set up 2 new accounts, 2 years after the joint venture had started, to receive the US$4.7 million.  Colin Tay was not a director of Chinacomm.  That he was made a signatory to the Chinacomm Accounts and Smart Channel Accounts clearly reflected some separate agreement with Qiu Ping/D1/D8.

46.  The TCPSSA provided for how the First Payment already paid was to be treated as part of the Subscription Price, but no written agreement provided for why the US$4.7 million should be paid and how it should be dealt with.  For over a year, the US$4.7 million had sat in the Chinacomm Account 1 despite Qiu Ping’s alleged need to obtain funds to operate the Project. 

47.  In his 9^th affirmation, Colin Tay clarified what he meant by “the Plaintiffs shall inject another US$5 million in tranches as equity to [D1].”  He said he meant an injection of capital to keep the WOFIE going.  The injection of this US$5 million was not written down in any agreement between the parties.  It was not part and parcel of the Subscription Price because the Defendants had failed to renew the licences by then.  Payment was ahead of schedule. Moreover, there were outstanding issues (such as vendor selection) to deal with.  As can be seen under Section A2 below, his views were tenable.

48.  Mr Chan, counsel for the Plaintiffs pointed out that even Qiu Ping relied on oral promise of Colin Tay to pay US$15 million (Qiu Ping’s 1^st affirmation); and US$30 million (Qiu Ping’s 4^th affirmation).  It was thus not surprising that parties might have oral arrangements between them from time to time.

49.  Viewing these circumstances, the oral double signature arrangement as alleged by Colin Tay was capable of belief and at least raised a serious issue as to its existence for the Court to try. 

50.  Qiu Ping’s explanation as to why funds were withdrawn was equally incredible.  In May 2011, the expiration of the 12 Cities Licence drew nearer. Allegedly experiencing the same pain of unfulfilled promise of payment, and receiving market information that Colin Tay had exploited the Defendants’ trust and used the Share Certificate to borrow to enable him to take control of a US listed company, Qiu Ping decided to terminate the relationship with Colin Tay.  Qiu Ping said the first thing he did was to cancel his signing right to the Chinacomm Account 1.

51.  Mr Scott SC submits that the double signature arrangement was not irrevocable.  He may well be correct but there was no agreement to have it revoked either.  Nor was there evidence of notice of revocation to Colin Tay’s camp.  Colin Tay said he discovered the revocation of the signing rights some 6 months after the withdrawals rather than being informed about any termination. His people had worked at D8’s office until they were told to leave in October 2011.  In my view, even if there had been termination of relationship, should not Qiu Ping clarify how to dispose of the US$4.7 million before unilaterally removing the same?

52.  Having regard to the analyses in Section A1, it can be seen that the non-disclosure in paragraph 39(ii) and (iii) was not material.  Deputy Judge L Chan could not be faulted.  He decided what was material.  He was aware of the Plaintiffs’ bases for application, ie loss of double signature arrangement to operate the 2 accounts.  There is no reprobation from the position before Deputy Judge L Chan.

A2.  No licence, no payment

53.  The Plaintiffs’ case was that the pre-condition for payment was D8’s renewal of licences (“the pre-condition”).  The Defendants denied and claimed that it would be essential for the required funds to be available to prove the financial ability of D8 to continue with the Project, before the licences could be renewed.  Colin Tay was allegedly aware of this because at the time the TNFA was entered into, both camps knew that the 25 Cities Licence had already expired.  Mr Scott SC submitted that this was highly indicative of Qiu Ping’s case.  But the Plaintiffs had breached prior obligations to pay.  Mr Scott SC’s arguments under this head are that:

A2.1  The Plaintiffs’ case was contradicted by terms in the various agreements, to which the Court was not referred during the ex parte hearing;

A2.2 P2 was in prior breach of agreement in failing to arrange for a US$3-5 million loan, rendering it unnecessary for the Defendants to discharge their obligation in getting renewal of the licences.

A2.1  The Plaintiffs case was contradicted by terms in the various agreements, to which the Court was not referred during the ex parte hearing

54.  Mr Scott SC relies on the provisions in the BSA, TDFA, TNFA and GSSA to show that the pre-condition did not exist.

55.  With respect to Mr Scott SC, the governing agreements at the time of payment of the US$4.7 million were the TCPSSA and the Addendum. The provisions in the preceding agreements could not be material to the injunction application, but I will deal with them for completeness’ sake.

56.  In the BSA, it is true that Article 6.03 provided that D2 shall assume the responsibility of obtaining licences but it was not expressed to be the pre-condition.  Recital O provided that D1 should first be provided with a US$10 million line of credit before the addendum to agreement could be entered into.  However, the BSA only set out the parties’ agreement in broad terms.  Further negotiation of terms of cooperation was anticipated and there had been various specific agreements entered into subsequently.  Mr Scott SC’s reliance on Recital O was misplaced because clause 4(a) of the TDFA provided that Recital O and the relevant provisions of the BSA shall be void.

57.  The TDFA and TNFA did not contain the pre-condition.

58.  The GSSA contained the pre-condition.  Paragraph (j) of Schedule 3 to the GSSA permitted oral approval of the renewal of the licences.  According to Qiu Ping, paragraph (j) had been fulfilled when, in June 2008, one Mr Xie of the Science and Technology Committee of the Ministry responsible confirmed to Colin Tay, his legal advisers and Qiu Ping that renewal of the 12 Cities Licence would not be a problem because construction works had started.  It would be imperative to start construction works for the remaining 17 cities or else the licence might not be renewed.  It was in this context that the Supplementary Agreement was entered into[6].

59.  Mr Scott SC refers to clause 4.7 of the GSSA and submits that D1 only had to provide to Gulfstream the documentary evidence in relation to the valid renewal of Chinacomm’s 3.5G licences within 90 business days from the Completion Date, ie well after payment by GSSA.

60.  I accept that the GSSA contradicted Colin Tay’s assertion of no licence, no payment.  However, the GSSA had been overridden by the Supplementary Agreement which contained the pre-condition.

61.  Article 1(b) and2 of the Supplementary Agreement clearly stipulated for payment after the licences “have been duly renewed and all open issues between the parties have been mutually agreed”.  Faced with this clear provision, Mr Scott SC pointed to Article 4 and contended that the intention was for D1 to receive US$50 million first by the end of November 2008 before it was required to renew the licences by the end of December.  The joint signatory right would kick off only if Colin Tay paid the US$50 million but Colin Tay never did, despite being aware that funds were essential to have the licence renewed. 

62.  I set out Article 4of the SupplementaryAgreement in full:

“This Agreement shall be void immediately as if it was never executed if (a) the Investor failed to provide evidence that US$50,000,000 has been received by the end of November 2008, or (b) the Investor [Gulfstream] failed to transfer US$50,000,000 to a bank account that jointly controlled by the parties in accordance with Article 3.2(b) as amended in Article 1 hereinabove; (c) Chinacomm failed to obtain the renewal of the 3.5G licenses by the end of December 2008…” (emphasis added)

63.  With respect to Mr Scott SC, he had left out sub-Article 4(b). That sub-Article stipulated for payment to be made “in accordance with Article 3.2(b) as amended in Article 1”, ie when “the 3.5G licences of [D8] have been duly renewed and all open issues between the Parties have been mutually agreed.”  Article 4(b) should also be read with Article 2, which obliged D8 to deliver to P2 (a) evidence for the renewal of the 3.G licences; and (b) the Share Certificate after the renewal.

64.  The correct sequence of events under Article 4 would be for P2 to show it was in receipt of funds (not to pay D1/D8) by November 2008.  Then Chinacomm shall have licences renewed by December.  After that, payment shall be made. Since D8 had failed to renew the licences by December, the Supplementary Agreement would have been void under Article 4.  These Articles support “no licence, no payment”. 

65.  Next came the governing TCPSSA.  Clause 3.2 of the TCPSSA clearly stipulated for payment of the Subscription Price within 35 days after the licences of Chinacomm have been renewed in accordance with paragraph (j) of Schedule 3 of the TCPSSA.

66.  The Plaintiffs alleged that the Defendants were in breach of (i) clause 6.2; and (ii) clause 4.2 of Part 2 of Schedule 4 to the TCPSSA in that the Warrantors (D8 and D9) were not able to renew the licences of the 29 Cities. Colin Tay has set out in his 1^st affirmation (paras 24-31) the various licences with which he was provided.  There was a 5 Cities Licence valid up to 31 December 2008.  In early 2009, there was a copy licence dated 12 February 2009 for 29 cities for 5 years about to be awarded shown to Colin Tay.  (There was a dispute between the 2 camps as to who was responsible for forging this licence which need not be resolved here.)  The latest licence was dated 17 July 2009 for only 12 cities for 2 years, and nothing more thereafter. 

67.  The Plaintiffs’ case of “no licence, no payment” was consistent with contractual provisions since the GSSA.  There was no breach of prior obligation to pay as submitted by Mr Scott SC.

68.  Colin Tay further denied that he was ever told about the risk of not having the licences renewed if funds were not available to show to PRC authorities. He pointed out that without financial backing, D8 or its predecessor had obtained the licences for a number of cities from 2002 to 2009.  It was thus complete nonsense to say that in order to seek renewal of the 29 Cities Licence it was essential for D8 be put in funds from the Plaintiffs.

69.  In my view, the need for the Plaintiffs to come up with funds should be determined by the parties’ agreement and not Colin Tay’s awareness of a situation.  Having regard to the contractual provisions referred to in Section A2, I am satisfied that the pre-condition existed but was not fulfilled at the time the US$4.7 million was paid.  The non-disclosure was immaterial and, even if the relevant facts were disclosed, they would not have affected the Court’s decision.

A2.2  Plaintiffs were in prior breach of an agreement in failing to arrange for a US$3-5 million loan, rendering it unnecessary for the Defendants to discharge their obligation in getting renewal of the licences

70.  It is the Defendants’ case that the Plaintiffs had failed to disclose the breach of a prior obligation under Article 6 of the Addendum. Article 6 provided for P2 to arrange a loan of US$3 to 5 million for D8 before 15 March 2009.  Mr Scott SC submits that the tight deadline of 15 March 2009 could have expired even before the Completion Date and that meant the parties had agreed that P2 shall arrange funding for D8 even before D8 should perform its obligations concerning the licences.  What P2 had purportedly arranged could be seen in a letter dated 8 May 2009, well after the deadline, contents of which did not in any way assist the arrangement of the loan.  Colin Tay admittedly[7] failed to bring the breach of this prior obligation to the attention of Deputy Judge L Chan although he had exhibited this document.

71.  Qiu Ping also stated, in his 1^st affirmation, that “the subsequent payments starting from 26 April to 21 June 2010, if they were loan pursuant to this obligation, came too little and too late.”  He said the Defendants could and did treat the TCPSSA as repudiated, rendering it unnecessary for the Defendants to perform their part of the obligations.

72.  Colin Tay denied that there was a breach of obligation.  The parties also disputed as to whether the credit line eventually obtained by D8 was the result of the Plaintiffs’ arrangement. 

73.  It is not necessary to resolve these disputes here.  Article 6 of the Addendum obliged P2 to arrange a loan.  Qiu Ping never asserted that the US$4.7 million was in purported discharge of the obligation under Article 6. In fact, the Defendants’ case[8] was that the US$4.7 million must be part of the Subscription Price for the 49% shares.  Moreover, there was no evidence that Qiu Ping had purported to terminate the TCPSSA or Addendum at any stage on the ground of the Plaintiffs’ breach of the obligation under Article 6.  The parties’ relationship had continued until 2011.  Qiu Ping cannot say that the Defendants were discharged from the obligation to renew the licences.

74.  I find that non-disclosure of the breach, if at all, of the prior obligation to arrange a loan was plainly immaterial to the injunction application.  I find that the Plaintiffs had ample contractual backing to say “no licence, no money.”  These findings reinforce my view on the credibility of the oral double signature arrangement.

A3.  Failure to exhibit the note of borrowing and pledge note (“the 2 Notes”)

75.  It was not in dispute that although Colin Tay had disclosed to the Court the issuing of the Share Certificate and the pledge of shares, he had failed to disclose the fact that the Share Certificate was borrowed from D8.  He also failed to disclose:

(i)  The 2 Notes;

(ii)  The contractual terms giving rise to the pledge; and

(iii)  The fact that, if the balance of the Subscription Price was not paid, D1 was entitled to withdraw the shares corresponding to the unpaid proportion.

76.  Mr Scott SC submits that the non-disclosure would evidence that P2 was not a shareholder of D1 and hence did not have the right to claim proprietary interest in the money sitting in the frozen accounts.

77.  The terms in the pledge note were as follows:

“[P2] may transfer the 49% shares to a third party upon a written notice to [D1] and the execution of an agreement among [D8], [P2] and the transferee. The transferee of the shares shall resume (sic) the rights and obligations of [P2] under the [TCPSSA], the Addendum and this note. …

[P2] shall not make other disposal of the pledged shares until the release of such shares (or any part of such shares), which shall take place proportionately to the payment of subscription price. Chinacomm may withdrawn (sic) the shares that corresponding (sic) to the outstanding subscription price in case [P2] failed to comply with the payment schedule set forth in the [TCPSSA] and any revised schedule agreed by [D1] thereafter.” (emphasis added)

The contractual terms in Article 3 of the Supplementary Agreement to the GSSA and Article 4 of the Addendum were in the same vein.

78.  I am unable to see how the borrowing, the pledge and failure to exhibit the 2 Notes would affect the Plaintiffs’ ownership of the shares.  Under Articles 4.1 and 4.2 of the TCPSSA, P2 was to become the owner of the shares on closing.  Article 1 of the Addendum fixed the closing date as 16 February 2009.  Accordingly P2 had the status of a shareholder of D1 and was so recorded on the Share Certificate.  As P2 had not failed to comply with the payment schedule in the TCPSSA (because the licences were not renewed), D1 would not be entitled to withdraw the shares.  The pledge, which only created a security, would have no effect on P2’s ownership of the shares or proprietary interest in the US$4.7 million.  The non-disclosure was not material.

A4.  Failure to disclose P2’s sale of D1’s shares to P1 (“the Sale”)

79.  Qiu Ping alleged that there had been a series of transactions over the shares in the USA.  P1 was acquired by Colin Tay on 6 March 2008 by means of a reverse takeover.  By a reorganization plan between P1 and Trussnet Nevada, the latter’s shareholders (who was Colin Tay) acquired a controlling interest in P1.  Since then, P1 had attempted to dispose of a substantial part of its shareholding to third parties, including one ASSAC, Runcom and Olotoa, but none of the attempts bore fruit.

80.  On 9 March 2009, P2 purportedly sold the 49% shares to P1 for US$196 million. P1 paid P2 cash of US$5 million and the balance of US$191 million by a promissory note that bore interest of 8% per annum, to be secured by a pledge of the shares back to P2.  The Sale was without D1’s knowledge, and without P2 having paid for those shares in full.  It was in breach of the pledge by P2 and Article 4 of the Addendum.

81.  Qiu Ping alleged that P2 had wrongly represented that it was “the lawful record and beneficial owners of the 49% share in D1, free and clear of any and encumbrances whatsoever, and the sale would convey to P1 lawful, valid and indefeasible title”. Those representations ignored the fact of borrowing and the pledge. They were made in public documents to P1’s shareholders and the United States Securities and Exchange Commission (“USSEC”).  The last of such public documents was filed on 14 November 2011[9], just 4 days before the 1^st Injunction Order.

82.  How Colin Tay used the shares in D1 to raise funds, whether P1 was in breach of duties to shareholders or USSEC, and whether the Defendants might claim against P2 for breach of the non-disposal provisions were plainly not the concern of the Court in the injunction proceedings. 

83.  The importance of the undisclosed Sale as submitted by Mr Scott SC, was that:

(i)  At the time of the ex parte hearings, P2 was either in possession of the shares, or the sale proceeds thereof.  Any purported claim concerning the double signature arrangement was already “secured” to an extent beyond US$4.7 million sought to be frozen by way of the Injunction Orders.  There was doubt as to whether the Injunction Orders were necessary.

(ii)  By agreeing to sell at the same consideration offered to D8, ie US$196 million, the Plaintiffs must have taken the view that the value of the 49% equity had not been affected.  The alleged loss and damage suffered by the Plaintiffs flowing from the Defendants’ alleged breach was in doubt.

84.  The documents relied on by Mr Scott SC showed that the Sale had been cancelled and replaced by an assignment by P2 to P1 (see Section A5 below). The non-disclosure could not be material.  Moreover, as discussed in paragraph 78 above, the right of D1 to have the proportion of unpaid shares returned had not yet arisen.  Further, the Plaintiffs’ claim for damages was not limited to the US$9.7 million it had already paid.  At this stage of the action, it cannot be said that the shares formed security beyond the Plaintiffs’ loss to disentitle them to an injunction.

A5.  Failure to disclose the assignment by P2 to P1 (“the Assignment”)

85.  By the Assignment dated 4 April 2011, P2 agreed:

“to assign, without warranty, all of its right, title and interest in the [TCPSSA] and the addendum thereto to [P1]. [P1] assumed all performance obligations of [P2], if any, under the [TCPSSA] and addendum. To the extent consent to this assignment is required from any other party to the [TCPSSA] and Addendum, [P2] agreed to continue to act as the agent for [P1], as [P1] directs. In either event, [P1] is responsible to insure that the obligations of [P2], as set forth in the [TCPSSA] and Addendum, are met timely.” [10]

86.  The Assignment was in direct contravention of the non-assignment clause in Article 30.3 of the TCPSSA, which provided that:

“[P2] may assign the whole or part of any of its rights in [the TCPSSA] to any person who has received a transfer of shares in the capital of [D1] from [P2] in accordance with the New Articles and has executed a Deed of Adherence.”

87.  No Deed of Adherence[11] was ever executed.  The assignment was also in breach of the share pledge.

88.  Mr Scott SC submitted that it was very doubtful whether an unlawful transferee was effective and was in accordance with Article 30.3 of the TCPSSA.  The implication of the purported assignment was that only P1 or P2 could be the proper plaintiff to sue upon the TCPSSA.  During the ex parte hearings, when the purported assignment was concealed from the Court, there was simply no legal or factual basis for Colin Tay to maintain an action by P1.

89.  There is substance in Mr Scott SC’s submission.  P1 was not a party to any of the agreements and its capacity to sue was never made clear.  The endorsement on the writ vaguely described P1 and D8 as joint venture partners (para 1).  Agreements including Framework Agreements were entered into at various stages between the Plaintiffs of the one part and D8 and D9 on the other pursuant to the joint venture (para 2).  US$5 million (apparently referring to the First Payment) was injected by the side of P1 (para 4).  “By the [TCPSSA], Mr Colin Tay Yong Lee, the President of [P1] and the authorized representative of the corporate director of [P2]” and D6 were appointed as the joint signatories of the Chinacomm Account 1 and Smart Channel Account.  Apparently, these pleas were based, wrongly in my view, on P1 being a contracting party to the various agreements.

90.  In the 1^st affirmation, Colin Tay said nothing about P1’s right to sue, nothing about his acting on behalf of P1 as the authorized signatories to the Chinacomm Account 1 and Smart Channel Account, and nothing about the US$4.7 million being injected by P1.  It was not until paragraph 93 of his 7^th affirmation that he said that P1, as the ultimate holding company of most of the entities on the Plaintiffs’ side “having beneficial interest in all the Subscription Agreements, and having paid or caused to pay the subscription price, has a right to sue.  This is in addition to the intellectual property rights that Qiu Ping mentioned.”  Having regard to the care in which Colin Tay chose the contracting entities from his camp, there was little room for P1 to rely on beneficial interest to establish its locus to sue.  There was no proof of P1 paying or causing to be paid the Subscription Price.  Moreover, what intellectual property rights P1 owned and was infringed were never made clear.

91.  The transaction which purportedly gave rise to P1’s interest in the joint venture and hence the capacity to sue was the Assignment.  I find that the non-disclosure of the Assignment to be material in the circumstances of this case.

A6.  Failure to disclose the agency relationship between the Plaintiffs

92.  In paragraph 79 of the statement of claim filed subsequent to the grant of the Injunction Orders, it was pleaded that P2 signed the TCPSSA as agent for P1.  Mr Scott SC pointed out that such an undisclosed agency was diametrically inconsistent with the alleged sale by P2 to P1 on 9 March 2009, because no agent would have sold an asset back to the principal for full consideration. This means either the plea of agency in the statement of claim was false or the alleged sale was a sham.

93.  Mr Scott SC went on to comment that if the Sale was a sham, then the reports filed by P1 with the USSEC would have contained false information.  P1 would then have exhibited those reports in support of the continuation of the Injunction Orders knowing that they contained false information relating to the sham Sale.

94.  Colin Tay explained in the 9^th affirmation that he was authorized by P1 to use P2 to sign the TCPSSA.  He said that the Sale was merely a way of raising money by P1.  Colin Tay was just acting as agent of P1 and did not get any benefit out of the sale of the equitable interests in the shares.  He was holding on behalf of some nominees.  He was of the view that he did not need to disclose the transactions because they were not relevant to the wrongdoings of the Defendants. It was impossible to transfer ownership of the shares without the approval of the board and without proper registration with the Registered Agent of the Cayman Islands.  The legal title in the shares remained the same.

95.  It is difficult to understand Colin Tay’s explanations.  But again, what P1 did with the USSEC and whether it could be penalized for putting forth false information were irrelevant.  Even if there had been an agency, there could be valid reasons for an agent to assign rights under its name back to his principal.  In any case, it is not appropriate to have a mini-trial on affirmations to determine the effect of various relationship and transactions. The non-disclosure was not material to the Plaintiffs’ case based on the oral double signature arrangement.

A7.  Failure to disclose the Plaintiffs’ financial inability to pay the balance of the subscription price

A8.  Failure to disclose that the Defendants have various defences and a counterclaim for return of the 49% shares

96.  Mr Scott SC relies on Exhibit CTYL-35 wherein it was stated by P1 that it “attempted to raise capital to make the required payments, but was unable to do so within the time specified”.  Mr Scott SC took that to mean that P1 admitted that at all material times, it had no ability to pay the outstanding subscription price of US$191 million to D1 and was desperate to raise funds.  Mr Scott SC submitted that non-disclosure of such impecuniosity was relevant to cast the genuineness of the Sale and hence P1’s locus to sue for breach of the TCPSSA in doubt.  Further, in some agreements, the obligation of Colin Tay’s camp to pay came before D8’s obligation to renew the licences.  It was thus highly arguable that Colin Tay’s camp remained unable to perform its contractual obligations to pay, even if the licences were duly renewed.  Finally, given the impecuniosity, the Plaintiffs would be unable to pay for the balance of the subscription price, so P2 was obliged to give up part of the shares in D1 proportionate to the unpaid subscription price.  In other words, there is a strong counterclaim by the Defendants against P2, the damages of which could easily exceed the US$4.7 million now sought to be frozen by the Injunction Orders.

97.  I do not think the Plaintiffs’ duty of full and frank disclosure extended to reveal facts concerning potential defences and counterclaim of the Defendants.  I repeat my analyses under Section A2 on “no licence, no payment”.  There are serious issues to be tried as to which party was first in breach and hence whether the Plaintiffs were obliged to return the unpaid portion of the Shares.  The double signature arrangement was an agreement on its own.  I do not find any alleged non-disclosure under this head to be material.

Summary on non-disclosure

98.  On the evidence before me, I find the oral double signature arrangement to be capable of belief and Colin Tay’s version to be more probable than Qui Ping’s.  Having considered the full set of Mr Scott SC’s submission, I reject most of the allegations on non-disclosure and find that the only material non-disclosure was the failure to refer to the Assignment to show the locus of P1 to sue.

Should a fresh injunction be granted?

99.  It is not every omission that will cause an injunction to be automatically discharged.  The court has a discretion, notwithstanding proof of material non-disclosure which justifies or requires the immediate discharge of the ex parte order, nevertheless to continue the order, or to make a new order on terms.  When the whole of the facts, including that of the original non-disclosure, are before the court, it may well grant a second injunction if the original non-disclosure was innocent and if an injunction could properly be granted even had the facts been disclosed.  Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350, at 1357F.

100.  In Yau Chiu Wah v. Gold Chief Investment Ltd, HCA 807/2001, 15 May 2001, Recorder Ma (as he then was) set out the guidelines as follows:

“Of the relevant factors that a court would consider in the exercise of its discretion, they would include the following:-

1. Whether the non-disclosure was innocent or deliberate;

2. The excuse or reason for such material non-disclosure;

3. Whether the non-disclosure would in fact have resulted in the original order not having been made in the first place or whether conversely, even if the material fact or facts have been disclosed, this would have made no difference. Here, the court is required to look at the merits and justice of the grant of a Mareva injunction.

4.   Whether the party guilty of the non-disclosure is deserving of a locus poenitentiae.”

Those principles were approved by the Court of Appeal in Cheung Kam Wah v Cheung Hon Wah,CACV 53/2004, 11 January 2005,at paras 43-45.

101.  Where a plaintiff does not have capacity to sue, an injunction will not be granted to him.  In the present case, P2’s capacity to sue was not in doubt, it being a party to the TCPSSA, holder of the Share Certificate and party to the double signature arrangement.  However, P1’s capacity to sue was in doubt.

102.  However, I find that the failure to highlight P1’s capacity or the assignment before Deputy Judge L Chan was not deliberate.  The circumstances in which the Plaintiffs came for an ex parte injunction were urgent.  Within a few days, investigation was made with the bank as to why Colin Tay was not sent the bank statements, documents had to be amassed and the endorsement of claim prepared. The series of agreements between the Plaintiffs and Defendants’ camp and the transactions between P1 and P2 were not straightforward.  All the information that formed the subject of the Defendants’ complaints were disclosed in the Plaintiffs’ exhibits or filings with USSEC.  It was not one of those cases that the applicant withheld part of a series of interlinked facts that would render the disclosed facts misleading. 

103.  The Assignment did not meet the requirements for assignment under the TCPSSA for reasons given in section A5.  Nor did it constitute a legal assignment for lack of notice to the relevant Defendant.  However, both the assignor and assignee were joined as Plaintiffs to complete the locus to sue. The evidence before the Court was not such that the locus of P1 to sue was clearly and obviously non-existent. 

104.  Ultimately, in the circumstances of this case, it is a question of whether the merits and justice warrant the grant of a Mareva injunction.  Subject to proof of meeting the requirements of American Cyanamid v Ethicon Ltd [1975] AC 396,the Injunction Orders should be continued.

SECTION B  SERIOUS ISSUES TO BE TRIED

105.  There are serious issues to be tried in this case, including locus standi of the Plaintiffs, causes of action, interpretation of terms in the various agreements, which party was first in breach and damage caused.  The analyses under Section A already covered the issues of the double signature arrangement and “no licence, no payment”.  There was also another cause of action concerning whether D8 had engaged suppliers without consent of the Plaintiffs.

106.  The requirement for P2’s consent for capital expenditure exceeding US$10,000 was stipulated by contract: Article 10.8 and Schedule 5, item (r) of the TCPSSA.  Yet D8 awarded technical equipment supply contracts to Samsung and Huawei without involving P2 in the negotiation or obtaining its written approval. 

107.  Qiu Ping claimed that the contractual obligations under Article 10.8 had come to an endbecause the investor had not fulfilled its obligation to pay the Subscription Price.

108.  In my view, Article 10.8 did not appear to be conditional on any obligation to pay the Subscription Price.  In any case, since the licences were not renewed, P2 was not in breach of the obligation to pay.  There is a serious issue to be tried on breach of Article 10.8, to which Mr Scott SC made little comment.

SECTION C  DISSIPATION OF ASSETS

109.  Qiu Ping withdrew part of the US$4.7 million from Chinacomm Account 1 allegedly for the following purposes:

(i)  US$50,000 was paid to the nominee account of the PRC lawyers for their fees;

(ii)  US$4.5 million (about RMB 30 million) was transferred to D10 as surety and pledge for a loan obtained in PRC by D8 for operational expenses, acquisition of equipment for the joint venture project, and to pay creditors who had lent funds for construction works in respect of the 12 Cities Licence.

110.  Colin Tay disputed the nature of the legal expenses or the work done by the unidentified lawyers.  He also disputed D1’s authority to sign that surety agreement and to withdraw the money in the joint signatory account to guarantee the private loan of D8.

111.  There was no documentary proof of such payments or the loan.  The surety agreement was very suspicious for the following reasons:

(i)  The lender was not even named, so how could he benefit from the surety?

(ii)  Since D1 was in possession of the US$4.5 million, why didn’t D1 pledge the sum itself instead of enlisting the assistance of D10?  To this, Qiu Ping’s explanation was that it was because of the need to structure loans in the PRC to facilitate interest bearing loans to be made.

(iii)  There was no evidence relating to the loan.  Why would the loan be for only one month from 21 June to 20 July 2011?

(iv)  There were 4 remittances totalling RMB 30 million dated 16 and 23 June 2011.  Two remittances on 15 June were even earlier than the surety agreement dated 18 June 2011.  Were those remittances for drawdowns of the loan?  Of the 4 remittances, 2 were from D9 (a 60% subsidiary of D8); one was from a company known as Wujiang Zhongse Textile Co Ltd (吴江中色纺织有限公司), and one from a Sun Xiaohua (孫小華).  Colin Tay has been advised that Chinese law prohibited companies (other than financial institutions) from lending to one another and he had not heard of the other lenders.

(v)  The intention of Colin Tay and Qiu Ping had all along been for the funds to go through D1 and Yunji and not D8.  The query was whether the loan was really obtained for the joint venture or for some ulterior purpose.

(vi)  Under Article 6 of the surety agreement, the lender could instruct D10 to set off the loan as repayment if D8 could not repay on time. There was no evidence of such instruction being given by the repayment date.

(vii)   No repayment was recorded in the Chinacomm Accounts after the transfer out of the US$4.5 million in June 2011

112.  What was more suspicious was why D10 removed approximately US$4.28 million on the following day instead of holding it for one month as surety.  There were 2 other withdrawals of US$20,000 in August and about US$190,000 in November 2011, the latter of which was made a day after the 1^st Injunction Order was served on Qiu Ping.

113.  These queries point to dissipation of the US$4.7 million.

114.  Mr Scott SC submits that there was no evidence that the Defendants intended to dissipate the funds in the frozen bank accounts so as to render any future judgment obtained by the Plaintiffs empty.  There had been no movement of funds in the SCB accounts since June 2011, well before commencement of this action in November 2011. 

115.  With the greatest respect to Mr Scott SC, this line of submission blatantly ignored the history of fund movements.  There was not much movement of funds since June 2011 simply because the bulk of it had been secretly removed before then.

116.  In addition, there was evidence that D1, D6 and D7 had not complied fully with the disclosure orders made by Deputy Judge L Chan.  It was pointed out in the affirmation of Li Aibain, legal counsel for the Plaintiffs, that amongst others, the statements of the Smart Channel account were not produced.  No explanation of the movement of funds and contacting details of the payees of any funds were given.  In particular, the contact details and bank account numbers of D10 were not disclosed.

117.  As a side note, upon the disclosure (through Lam Ping Cheung’s affirmation) by D1, Qiu Ping and Yuan Yi (D7), it was discovered that D1 had, through Qiu Ping, withdrawn the First Payment to some payees without consent of the Plaintiffs, instead of transferring the funds to Smart Channel (D4) and then to Yunji as agreed.

118.  As for D10, his affirmation was far from being full and frank disclosure required under Deputy Judge Lok’s order.  Among the many complaints of the Plaintiffs, the so called personal account number held by D10 with the DBS Bank was not an account number but just a transfer code of the SCB.  Moreover, D10 did not exhibit a single bank statement until pressed upon in correspondence.

119.  It was only in his 2^nd affirmation that D10 disclosed for the first time that: (i) the money was transferred to unidentified nominees of the shareholder of the lender; and (ii) that the loan had been settled.

120.  In my view, there had been shameless efforts by Qiu Ping’s camp to remove the US$4.7 million out of reach of the Plaintiffs and to conceal the true picture.  Dissipation was not only a risk but a fact in the present case.

SECTION D  BALANCE OF CONVENIENCE

121.  D6-D10 are domiciled in the Mainland.  D8 is the most substantial entity and the others are not worth much.  There would be difficulty over enforcement of a judgment in the Mainland.

122.  Indisputably, Smart Channel (D4) was dissolved on 22 October 2010. Likewise, Yunji was dissolved on 21 October 2011 by the Beijing Administration of Industry and Commerce for failure to participate in annual inspection. 

123.  After all the dissipation, the bank balance in the Chinacomm Account 1 and 2 totalled US$213,000; and the Smart Channel Account had zero balance.  The freezing of the accounts would cause minimal disturbance to the Defendants as they should not have dealt with the subject accounts anyway.  In fact, Mr Scott SC had not said much about balance of convenience in his submission.

124.  So far Qiu Ping and D10 had not made full and frank disclosure of the money trails and the particulars of the transferees.  They still failed to disclose their assets and bank accounts outside Hong Kong which might throw light on the disposal of the US$4.7 million.

125.  There is no issue as to why the respective Defendants were made subject to the Injunction Orders.  The analyses under Sections B and C there suggest that there was a joint enterprise among those Defendants to transfer the US$4.5 million to D10’s account.

126.  The balance of convenience is clearly in favour of the Plaintiffs.

CONCLUSION

127.  The Plaintiffs have shown a credible case on the existence of the oral double signature arrangement.  There had been material non-disclosure of P1’s capacity to sue at the ex parte stage.  The original Injunction Orders should not have been made in favour of P1.  However, the non-disclosure was not deliberate.  By virtue of the Assignment, P1 did have capacity to sue.  Had it been disclosed, the Injunction Orders would have been granted.  The Plaintiffs have met the tests in American Cyanamid.  Having considered the merits and justice of the case, and in the light of the overwhelming evidence of dissipation of the bulk of the US$4.7 million, the Injunction Orders ought to continue.

128.  I therefore dismiss the Defendants’ application to discharge the Injunction Orders.  The Plaintiffs’ summons for continuation of the Injunction Orders is granted.  The time taken for argument on the Assignment was relatively short. The Plaintiffs are the overall winners.  I make an order nisi that costs of both summonses be to the Plaintiffs to be taxed and payable forthwith.

OTHER COMMENTS

129.  Nineteen affirmations have been included in the hearing bundle.  The way the affirmations were arranged (by grouping all affirmations of each affirmant together) did not facilitate the understanding of each party’s case, the cross allegations and the manner in which disclosure was made pursuant to the disclosure orders.  Moreover, classifying bundles by various titles (such as “pleadings bundles”, “Plaintiffs’ bundles”, “PA-1”, “PA-2”, “DA-1, “DA-2”) instead of the conventional alphabetical series made reference to documents confusing.  It is hoped that careful thought be made by the parties in future in the preparation of hearing bundles.

130.  I thank counsel for their assistance.

ANNEXURE

Relevant Articles under the Various Agreements

TDFA dated 15.2.2008 (Exhibit No. CTYL-3)

Article 1b

“Each of the parties shall appoint one person as bank signatory of [D1], [D4] and WOFIE after the First Payment has been paid to [D1].”

Article 2. The Payment of Acquisition Price

“a.  After the execution of this Framework Agreement by both Parties and within 10 business days after Trussnet [Delaware] has duly received the originals of the signed shareholders’ meeting resolution and board resolution of[D1]both approving the acquisition of the49%equity interests of[D1]by Trussnet [Delaware] through Gulfstream, Trussnet [Delaware] shall pay USD5,000,000.00 (“First Payment”) in cash in two separate payments as part of the above Acquisition Price into[D1]through Gulfstream, then Chinacomm HK shall pay such First Payment into WOFIE as part of the capital injection required by the laws of China.

b.  Trussnet [Delaware] will pay USD141,000,000.00 of the Acquisition Price in cash, within20business days upon the receipt of the following documents, into[D1]through Gulfstream, then Chinacomm HK shall pay such payments into WOFIE as part of the capital injection required by the laws of China, subject to the following documents being received and acceptable by Trussnet [Delaware] …

c.  The remaining USD50,000,000.00 of the Acquisition Price shall bedeemed being fully paid by Trussnet if Trussnet WOFIE has transferred the equipments to WOFIE in accordance with Article 1(e).

  …

f.   Chinacomm shall provide to Trussnet the legal evidences showing that all of the3.5G Licenses for 29 cities have been duly extended and valid.”

Article 3c

“Notwithstanding other provisions herein, if the FirstPayment is not paid by Trussnet in accordance with Article 2(a) above, this Framework Agreement shall be void.”

TNFA dated 7.4.2008 (Exhibit No. CTYL-4)

[The terms are largely similar to the TDFA.]

GSSA dated 23.5.2008 (Exhibit No. CTYL-6)

Article 3.2

“The Subscription Price shall be paid by the Investor [Gulfstream] in the following method:

(a) US$55,000,000 shall be paid as part payment and part satisfaction of the Subscription Price in accordance with relevant articles of the Framework Agreement, by electronic funds transfer to the bank account of the Company (“Bank Account”) as set out below

…

(b) US$141,000,000 shall be paid as part payment and part satisfaction of the Subscription Price by electronic fund transfer to the Bank account within sixty (60) Business Days from the Completion Date in accordance with the following schedule: (i) at least US$50,000,000 shall be paid within twenty (20) Business Days from the Completion Date; (ii) at least 100,000,000 shall be paid accumulatively within forty (40) Business Days from the Completion Date; (iii) the difference shall be paid within sixty (60) Business Days from the Completion Date.

(c)   US$50,000,000 shall be paid as part payment and part satisfaction of the Subscription Price to the Investor WOFE as registered capital within forty five (45) Business Days from the Completion Date.”

Article 4.7

“Within ninety (90) Business Days from the Completion Date the Company [D1] shall provide to the Investor [Gulfstream] the documentary evidence in relation to the valid extension of Chinacomm’s 3.5 G licenses which are expired at the time of this Agreement.”

“Completion Date” was defined in Article 1 “the fifth Business Day after all Completion Conditions have been fulfilled and/or waived”.

One of the “Completion Conditions” set out in Schedule 3, paragraph (j) of the GSSA was that “the Investor representatives has met with the relevant officials of the Ministry of Information Industry who are in charge of the issuance and extension of 3.5G licenses, and such officials has (sic) orally approved the extension of Chinacomm’s 3.5G licenses.” 

Supplementary Agreement dated 17.11.2008 (Exhibit No. CTYL-7)

Article 1

“The Parties agree to amend Article3.2 of the Share Subscription Agreement in the following manner:

(a) No change.

(b) It shall be changed as below:

Subject to Article2 below, US$50,000,000 shall be paid as part payment of the Subscription Price by electronic funds transfer to a bank account jointly controlled by the Parties within ten (l0) Business Days after the 3.5G licenses of Chinacomm have been duly renewed and all open issues between the Parties have been mutually agreed.

(c) It shall be changed as below:

US$50,000,000 shall be paid as part payment of the Subscription Price by electronic funds transfer to a bank account jointly controlled by the Parties within ninety (90) Business Days after the payment of the US$50,000,000 prescribed in Article3.2(b) hereinabove.

(d) One sub-article should be inserted here as below:

US% [sic] 41,000,000 shall be paid as part payment of the Subscription Price by electronic funds transfer to a bank account jointly controlled by the Parties within one hundred and eighty (180) Business Days after the payment of the US$50,000,000 prescribed in Article3.2(b) hereinabove.

(e) One sub-article should be inserted here as below:

US$50,000,000 shall be paid as part payment of the Subscription Price by electronic funds transfer to the Investor WFOE as registered capital within one hundred and eighty (180) Business Days after the payment of the US$50,000,000 prescribed in Article 3.2(b) hereinabove.”

Article 2

“Chinacomm [D8] shall deliver to [Trussnet USA, Inc] (a) the evidence for the renewal of the 3.5G licenses; and (b) the share certificate for the 49% shares of [D1] immediately after the renewal of the 3.5G licenses.”

Article 3

“Upon payment of the US$50,000,000 specified in the amended Article3.2(b) by the Investor, the Investor shall be entitled to the ownership of 49% shares of [D1]. Trussnet shall pledge the percentage of shares that correspond to the balance of Subscription Price to Chinacomm to guarantee its payment in accordance with the schedule specified in Article 1hereinabove. Such pledge of shares shall be released in proportion to the payment of the balance amount of the Subscription Price by the Investor. If Trussnet fails to pay the funds according to the schedule in this contract, Chinacomm will withdraw the corresponding proportion of equity equal to the unpaid amount of funds within 180 Business Days after the payment of the first US$50,000 000.”

Article 4

“This agreement shall be void immediately as if it was never executed if (a) the Investor failed to provide evidence that US$50,000,000 has been received by the end of November 2008, or (b) the Investor failed to transfer US$50,000,000 to a bank account that jointly controlled by the Parties in accordance with Article 3.2(b) as amended in Article 1 hereinabove; (c) Chinacomm failed to obtain the renewal of the 3.5G licenses by the end of December 2008; (d) the Parties failed to reach consensus on all the open issues by the end of December 2008.”

TCPSSA dated 16.2.2009 (Exhibit No. CTYL-8)

Article 3.2

“The Subscription Price shall be paid by the Investor [P2] or its Associated Company by the following method:

(a) US$5,000,000 shall be paid as part payment and part satisfaction of the Subscription Price in accordance with relevant articles of the Framework Agreement, by electronic lands transfer to the bank account of the Company [D1] (the Bank Account) … [The account no. was 36800423379, ie Chinacomm Account 2].

(b) US$141,000,000 shall be paid as part payment and part satisfaction of the Subscription Price by electronic funds transfer to the Bank Account. Such amount shall be paid in instalments. The first instalment shall be no less than USD 20,000,000 and be paid within 35 business days after the licenses of Chinacomm have been extended in accordance with item (j) of Schedule 3 of this Agreement. The balance shall be paid within 180 business days after the licenses of Chinacomm have been extended in accordance with item (j) of Schedule 3 of this Agreement.

(c)  US$50,000,000 shall be paid as part payment and part satisfaction of the Subscription Price to the Investor WFOE as registered capital within 180 business days after the licenses of Chinacomm have been extended in accordance with item (j) of Schedule 3 of this Agreement.”

Item (j) of Schedule 3 provided that one of the subsequent payment conditions was “the delivery to [P2] of the adequate evidence in relation to the valid extension of [D8’s] 3.5G licenses which are expired at the time of this Agreement”.

Article 4.1

“Closing of the subscription by the Investor of the New Shares shall take place on the date when the First Payment is made or any other date as agreed by the Company and the Investor.”

Article 4.2

“Upon the Closing, the Investor shall become the legal owner of the 49% shares of the Company. The Company shall and the Parties shall procure the Company to deliver a share certificate for the 49% New Shares to the Investor and enter the name of the Investor into the Company’s register of members/shareholders as the holder of 49% shares of the Company.”

Article 6.2

“The Warrantors [ie D8 and D9] jointly and severally warrant to the Investor that each and every Warranty set out in Schedule 4 is true, accurate and not misleading at the date of this Agreement and of the Closing and Fulfilment Date subject only to any exceptions expressly provided for under this Agreement.”

Clause 4.2, Part 2, Schedule 4: Warranties Relating to Chinacomm:

“Chinacomm lawfully and validly holds licenses (or, if any of the licenses are expired at the time of this Agreement, Chinacomm will obtain extension of such licenses in accordance with this Agreement) issued by the PRC competent authority(ies), including but not limited to the Ministry of Information Industry, for the construction and operation of 3.5G Hz wireless broadband operation in the Territory and the Ministry of Cultural Affairs, for the operation of Internet Cafe nationwide, and there has not arisen any circumstances that may result in the temporary or permanent cancellation or termination of such licenses.”

Article 10.8

“… [D1] agrees that save with the prior written approval of the Investor [P2], it shall not effect any of the matters referred to in Schedule 5.”

Schedule 5 set out a list of matters requiring consent of P2/the Investor, including:

“(r) incur any capital expenditure (including obligations under hire-purchase and leasing arrangements) which exceeds the amount for capital expenditure exceeding US$10,000.00.”

Article 30.1

“Subject to clause 30.3, this Agreement is personal to the parties and no party shall:

(a)assign any of its rights under this Agreement; or

(b)transfer any of its obligations under this Agreement; or

(c)sub-contract or delegate any of its obligations under this Agreement; or

(d) charge or deal in any other manner with this Agreement or any of its right or obligations.”

Article 30.3

“An Investor may assign the whole or part of any of its rights in this Agreement to any person who has received a transfer of shares in the capital of the Company from such Investor in accordance with the New Articles and has executed a Deed of Adherence.”

Addendum dated 16.2.2009 (Exhibit No. CTYL-10)

Article 1

“The Parties agree that the Closing (as defined in the Share Subscription Agreement [TCPSSA]) shall take place on February 16, 2009.”

Article 3

“Where Trussnet cannot comply with the schedule set forth in Article 3.2 of the Share Subscription Agreement, the Parties shall reach a new schedule through amicable negotiation.”

Article 4

“Trussnet shallpledge the shares corresponding to the outstanding balance of the Subscription Agreement to the Company and the Founders by the issuance of a legal note to that effect. In case that Trussnet failed to meet the Schedule in Article 3.2 or the new Schedule agreed by the Parties, the Company and the Founders (as defined in the Share Subscription Agreement) shall be entitled to withdrawn (sic) the shares that corresponding (sic) to the outstanding balance of the Subscription Price at its discretion.”

Article 6

“Trussnet agrees to arrange USD3,000,000 to USD5,000,000 for the deployment of Beijing wireless broadband network by the 15^th of March 2009 in the way of loan of other manner permitted under PRC law.”

 

 

HCA 1978/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1978 OF 2011

________________________

BETWEEN

________________________

________________________

REASONS FOR DECISION

________________________

1. There are three summonses taken out by the plaintiffs before me:

(i)  application for disclosure and unless order against the 1^st, 6^th and 7^th defendants;

(ii)  application for disclosure and unless order against the 10^th defendant; and

(iii)  application to vary the injunction order dated 18 November 2011 (“the 1^st Injunction Order”) by prohibiting the 1^st defendant to withdraw money from certain bank accounts to pay for its legal fees.

2. In the hearing on 11 April 2012, the plaintiffs withdrew the first two applications against the relevant defendants.  I allowed the plaintiffs’ application under the third summons and I now give my reasons.

Background

3. This action is essentially a dispute between foreign investors (the plaintiffs) on the one hand and Mainland domestic entities (the 8^th and 9^th defendants) and parties related to them on the other hand over an investment in the 1^st defendant which is a Cayman Islands company.  The 1^st defendant was set up to invest in specified telecom projects in the Mainland.  The funds from the 1^st defendant were supposed to flow to its wholly owned subsidiary, the 4^th defendant, which would then flow to Yunji, a Chinese Wholly Owned Foreign Invested Enterprise engaging in telecommunication business.

4. The main subject matters of the Mareva injunction under the 1^st Injunction Order are two bank accounts in the name of the 1^st defendant and one account in the name of the 4^th defendant at the Standard Chartered Bank (HK) Limited (“the Bank”) in Hong Kong, and it is the plaintiffs’ case that one of such 1^st defendant’s account (“Chinacomm Account 1”) and 4^th defendant’s account (“Smart Channel Account”) in the Bank were subject to a joint-signatories arrangement, ie the accounts had to be operated jointly by Mr Colin Tay of the plaintiffs (“Mr Tay”) and the 6^th defendant.

5. The 1^st plaintiff is a United States listed company engaging in telecommunication business, and the 2^nd plaintiff is a Hong Kong company and is the contracting party in the various agreements with the defendants.

6. The defendants are all interrelated.  The 1^st defendant is used by the 6^th to 8^th defendants as a special purpose company for the implementation of the joint venture project between the plaintiffs and the 8^th defendant.  The 1^st and 8^th defendants share the same business address in Beijing, and the 5^th defendant is the nominee of the 6^th to 8^th defendants.  For the purpose of this Reasons for Decision, I do not propose to go deeply into corporate structures and the interrelationship between the different defendants.

7. The parties agreed to enter into some form of joint venture in respect of telecommunication business in the Mainland.  After a series of negotiations, on 13 February 2009, the 2^nd plaintiff, the 1^st to 3^rd and the 6^th to 9^th defendants entered into a Subscription and Shareholders’ Agreement.  Under this agreement, the 2^nd plaintiff agreed to subscribe for new shares of the 1^st defendant with payment in tranches subject to certain milestones.  The first tranche of US$ 5 million was paid before this agreement with part of the fund went into one of the bank accounts of the 1^st defendant in the Bank (“Chinacomm Account 2”).

8. It is the plaintiffs’ case that, in early 2010, the parties agreed for the plaintiffs to inject another US$ 5 million into Chinacomm Account 1, a joint-signatories account of the 1^st defendant.  The fund was supposed to flow into another joint-signatories account, ie the Smart Channel Account.  According to the plaintiffs, this fund was intended to be used for the joint venture telecom project in the Mainland, and the signatures of both Mr Tay and the 6^th defendant were required to operate these two accounts.  The plaintiffs eventually paid US$ 4.75 million into Chinacomm Account 1 pursuant to such agreement.

9. In November 2011, Mr Tay learnt from the Bank that he was no longer an authorised signatory of Chinacomm Account 1.  It is the plaintiffs’ case that the 1^st to 9^th defendants had wrongfully removed Mr. Tay as an authorised signatory of Chiancomm Account 1 and converted the money therein to their own use.  On 18 November 2011, the plaintiffs obtained an ex parte Mareva injunction against the 1^st to 9^th defendants (the 1^st Injunction Order) from L Chan DHCJ.

10. Upon certain disclosure by the defendants, the plaintiff found that part of the fund was transferred to the bank account of the 10^th defendant.  On 8 December 2011, the plaintiffs obtained from myself an ex parte Mareva injunction order against the 10^th defendant (“the 2^nd Injunction Order”).

11. The substantive hearing for the continuance of the 1^st and the 2^nd Injunction Orders is now fixed on 3 May 2012.  In the meantime, the parties agreed for the injunctions to continue.

Summonses for the disclosure and unless order

12. Prior to the substantive hearing, the plaintiffs took out two summonses, one against the 1^st, 6^th and 7^th defendants and the other one against the 10^th defendant, compelling these defendants to comply with the orders for disclosure contained in the 1^st and the 2^nd Injunction Orders.  According to the said summonses, in the case that the relevant defendants do not comply with the orders for disclosure, leave should be granted to the plaintiffs to apply for orders for committal against them.

13. The sanctions sought in the summonses are quite unusual. It is the plaintiffs’ case that the relevant defendants have failed to comply with the orders for disclosure, and so the plaintiffs can now institute contempt proceedings against these defendants even without the unless order.  Further, if the court finds in favour of the plaintiffs in the present applications and the relevant defendants still refuse to comply with the orders, there is a possibility that the court will have to deal with the defendants’ arguments again in the later contempt proceedings.  Hence, in order to save time and costs, the plaintiffs agreed to withdraw the said summonses and would proceed directly to institute contempt proceedings against the relevant defendants.  I therefore granted leave in the hearing for the plaintiffs to withdraw these two summonses with costs reserved.

Summons for the variation of the 1^st Injunction Order

14. That leaves the plaintiffs’ application for variation of the 1^st Injunction order by prohibiting the 1^st defendant to withdraw money from Chinacomm Accounts 1 and 2 to pay for its legal fees.

15. It was provided in the 1^st Injunction order that the 1^st to 3^rd and the 6^th to 7^th defendants be allowed to spend $20,000 per week for ordinary and proper business expenses and $100,000 on legal advice and representation.  But when the solicitors for the 1^st defendant later asked for the plaintiffs’ consent to withdraw the sum of $100,000 for the payment of the 1^st defendant’s legal fees, the plaintiffs refused and lodged the present application for variation of the 1^st Injunction Order.

16. The plaintiffs’ arguments are simple.  According to their claim, the funds in Chinacomm Account 1 were all contributed by the plaintiffs with the agreement that there would be a joint-signatories arrangement and the funds would be used for the specified telecom projects in the Mainland.  As the defendants wrongfully revoked Mr. Tay’s authority to operate Chinacomm Account 1 and withdrew part of the funds from the account, the plaintiffs are lodging a “proprietary claim” against the defendants for the return of the money paid by the plaintiffs into such account.

17. The principles applicable to the release of funds to pay legal costs from an injunction involving proprietary claims are well settled.  It is an exercise of discretion which involves a two-stage process:

(i)  firstly, the defendant applying for the release of funds has to demonstrate with full and frank evidence that there are no alternative funds or assets available to him which can be used to pay his legal expenses other than the assets in respect of which the plaintiff brings the proprietary claim.  If the defendant fails in this first hurdle, the court need not consider the second stage and the application should be dismissed;

(ii)  secondly, once the first hurdle is cleared, the court in the exercise of its discretion will engage in a balancing exercise to weight the potential injustice to the plaintiff of releasing the funds against the possible injustice to the defendant of depriving him of the opportunity to have legal assistance in advancing what may eventually turn out to be a successful defence.  This process is a “careful and anxious judgment”, and the court is entitled to look at all relevant circumstances, and in particular, to weight the relative strengths of the plaintiff’s proprietary claim in the funds and the defendant’s defence to that claim.  In relation to this, it is not sufficient for a defendant to merely establish that he has no other funds, for even so, he must also show that there is an arguable case for his having recourse to the funds in question, failing which, he has no right to use the money.  As Millett LJ (as he then was) said in Ostrich Farming Corp Ltd v Ketchell [1997] EWCA Civ 2953 “[no] man has a right to use somebody else’s money, for the purpose of defending himself against legal proceedings”.

(see a summary of the principles in Wharf v Lau Yuen How [2010] 1 HKLRD 783, per Au J at §13)

18. Further, in considering whether a particular defendant has the financial resources to pay for his legal fees, the court is not limited to the funds to which the defendant has the legal right if there are reasonable grounds for believing that the defendant can obtain money elsewhere.  In appropriates cases, corporate veil can be lifted to take into account the resources of the defendant’s parent company (see: Atlas Maritime v Avalon Maritime (No 3) [1991] 1 WLR 917).

19. In considering whether the 1^st defendant should be allowed to use the money in the accounts to pay for its legal fees, the plaintiffs submit that the court should take into account the interrelationship between the different defendants and the financial resources of the other defendants.  According to the evidence at this stage, the 1^st defendant is merely a special purpose company set up to implement the telecom projects.  The 8^th defendant, which has registered share capital and paid up capital of RMB 2 million according to its business licence, is the ultimate holding company of the 1^st defendant.  Further, the 9^th defendant, which is a subsidiary of the 8^th defendant, has registered capital of RMB 100 million and paid up capital of RMB 42 million according to its business licence. The evidence also shows that the 6^th and 7^th defendants are the masterminds of the defendants and they should have the means to fund the defendants’ litigation.  Taking into account the financial resources of these other defendants, the 1^st defendant should not be allowed to withdraw the money from Chinacomm Accounts 1 and 2, which is subject to the proprietary claim of the plaintiffs, to pay for its legal fees.

20. I agree.  Based on the evidence available at this stage, there are strong reasons to believe that the other defendants have the financial resources to fund the litigation.  As the 1^st defendant has not even cleared the first hurdle according to the two-stage test summarised by Au J in the Wharf case, the 1^st defendant should not be allowed to use the money in the said bank accounts to pay for its legal fees.

21. Mr. Lam, solicitor for the defendants, argues that the variation is unfair as it would deprive the 1^st defendant of the means to defend the plaintiffs’ claim.  According to the defendants’ case, the sum of US$ 5 million paid by the plaintiffs into Chinacomm Account 2 in 2008 and the sum of US$ 4.75 million paid by the plaintiffs into Chinacomm Account 1 in 2010 were for the acquisition of the 1^st defendant’s shares.  As the 2^nd plaintiff had obtained the shares and the plaintiffs were in breach of the various joint venture agreements between the parties, the defendants have the right to dispose of the funds in the relevant bank accounts.

22. Despite such allegation, there is no dispute that Chinacomm Account 1 was originally subject to a joint-signatories arrangement between the parties.  To a certain extent, the existence of such arrangement does support the plaintiffs’ case that the money paid into such account should only be used for a specified purpose agreed by the parties.  If the money was simply paid for the acquisition of the shares, there was no need to make this sort of joint-signatories arrangement.  That also explains why when the plaintiffs paid the sum of US$ 5 million into Chinacomm Account 2 in 2008, which apparently was for the acquisition of the shares, that account was not subject to any joint-signatories arrangement.

23. There is certainly some evidence to support the plaintiffs’ proprietary claim.  In my judgment, unless the 1^st defendant can clearly demonstrate that it has no financial resources, whether from its own company, its parent or related companies or its shareholders, to pay for its legal fees, the 1^st defendant should not be allowed to use the money in Chinacomm Accounts 1 and 2 to defend the plaintiffs’ claim.

24. In his submission, Mr. Lam also tries to challenge the plaintiffs’ variation application by reason of the following grounds:

(i)  there was non-disclosure of certain material facts when the plaintiffs applied for the 1^st and the 2^nd Injunction Orders;

(ii)  the plaintiffs have failed to prove the sources of the funds paid into the defendants’ accounts and it is doubtful whether the plaintiffs do have the right to maintain the claim against the defendants; and

(iii)  the 2^nd plaintiff has no locus to make a claim against the defendants as it had already transferred all its shares in the 1^st defendant to the 1^st plaintiff.

25. As these arguments would be fully canvassed in the hearing on 3 May 2012, I do not propose to deal with them at this stage. In the case that the defendants succeed in these arguments in the substantive hearing, it is very likely that the Injunction Orders would be discharged and the defendants would then be free to make use of the funds in the relevant bank accounts.  I am very much conscious of the fact that the proposed variation would limit the fund available to the 1^st defendant in preparing the defence in the substantive hearing.  But since all the defendants are going to be represented by one single team of legal advisers, I am of the view that the effect on the 1^st defendant would be minimal.

26. Based on the aforesaid reasons, I allowed the variation application in the hearing on 11 April 2012.  As the costs of such application should follow the merits of the plaintiffs’ claim, I ordered that the costs of the variation application be costs in the cause.