CHINA METAL RECYCLING (HOLDINGS) LTD (IN COMPULSORY LIQUIDATION) AND ANOTHER v. CHUN CHI WAI AND OTHERS
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HCA 1412/2013
[2021] HKCFI 378
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 1412 OF 2013
________________________
| BETWEEN | ||
| CHINA METAL RECYCLING (HOLDINGS) LIMITED (IN COMPULSORY LIQUIDATION) | 1st Plaintiff | |
| CENTRAL STEEL (MACAO COMMERCIAL OFFSHORE) LIMITED (IN COMPULSORY LIQUIDATION) | 2nd Plaintiff | |
and | ||
| CHUN CHI WAI | 1st Defendant | |
| LAI WUN YIN | 2nd Defendant | |
| LANE TONE (H.K.) MATERIAL LIMITED | 3rd Defendant | |
| JASON METAL RECYCLE CORP | 4th Defendant | |
| CHEUNG FAT METAL RECYCLING COMPANY LIMITED | 5th Defendant | |
| ZHONG CHI GUANG (FORMERLY TRADING AS QI LE METAL RECYCLING CO.) | 6th Defendant | |
| METALLURGICAL INDUSTRY LIMITED | 7th Defendant | |
| HOI CHEUNG METAL RECYCLING LIMITED | 8th Defendant | |
| CHAK KWAN METAL RECYCLING LIMITED | 9th Defendant | |
| PACIFIC METAL RECYCLE LIMITED | 10th Defendant | |
| HEALTHY WORLD TRADING LTD. | 11th Defendant | |
| GOLD DRAGON INTERNATIONAL LOGISTICS LTD. | 12th Defendant | |
| WELLRUN LIMITED | 13th Defendant | |
____________
Before: Deputy High Court Judge MK Liu in Court
Dates of Hearing: 11 – 14 & 18 – 20 January & 4 February 2021
Date of Judgment: 25 February 2021
____________
JUDGMENT
____________
TABLE OF CONTENTS
1. In these proceedings, the Liquidators (“Liquidators”) of China Metal Recycling (Holdings) Ltd (in compulsory liquidation) (the 1st Plaintiff, “China Metal”) and Central Steel (Macao Commercial Offshore) Ltd (in compulsory liquidation) (the 2nd Plaintiff, “Central Steel”) (collectively, “Ps”) make a claim against Ps’ former Chairman, Chief Executive Officer and majority shareholder, Mr Chun Chi Wai (the 1st Defendant, “Chun”), his wife Ms Lai Wun Yin (the 2nd Defendant, “Lai”), and their connected entities and nominees. Ps’ case is that Ps have suffered loss and damage as a result of a large-scale and long-running fraud operated by Chun and Lai in breach of the fiduciary duties Chun and Lai owed to Ps.
2. This action was brought following investigations by the Securities and Futures Commission (“SFC”) into the listing and affairs of China Metal, the ultimate holding company of a group of companies (“the Group”), which purportedly carried on the business of scrap metal trading. As a result of the investigations, SFC presented a winding-up petition against China Metal on 26 July 2013 in HCCW 210/2013 (“the HCCW Proceedings”) on public interest ground (“the SFC Petition”).
3. The trial of the SFC Petition took place before Harris J from 24 to 26 February 2015. Harris J allowed the SFC Petition and wound up China Metal on 26 February 2015. Reasons for the Decision were handed down on 9 March 2015 (“the 2015 Judgment”). On 13 April 2015, the learned judge also made a winding up order against Central Steel.
4. In the 2015 Judgment, Harris J found that Chun and those in charge of China Metal had perpetrated a “fraud on a massive scale”, in that the vast majority of the transactions and hence revenue of Central Steel (the main driver of the Group’s revenue pre-and post-listing) in 2007-2009, 2012 and 2013 were in fact fictitious, financed by “round robin” fund flows and conducted with main “suppliers” and “customers” which were set up and/or controlled by Chun or persons associated with him (“the Round Robin Scheme”).
5. Ps’ case is that the fraud as found by Harris J resulted in, inter alia, the gross inflation of the revenue and profit of the Group between 2007 and 2013, and enabled China Metal to, inter alia, (1) raise HK$1.6 billion from the investing public in its initial public offering (“IPO”) in Hong Kong; (2) declare and pay out very substantial dividends totalling HK$672.9 million for the financial years ended on 31 December 2009 (“FY2009”), 31 December 2010 (“FY2010”) and 31 December 2011 (“FY2011”) (collectively “the Dividends”); and (3) wrongfully moved very substantial cash in excess of HK$1.9 billion out of Central Steel (“the June/July 2013 Payments”) and into Chun’s nominees, for Chun’s and Lai’s own benefit and the benefit of others.
6. In these proceedings, Ps are seeking relief with respect to (1) the Dividends and (2) the June/July 2013 Payments.
7. Both Chun and Lai faced criminal charges with respect to the aforesaid matters.
(1) In October 2015, Chun absconded and has since been a fugitive from justice.
(2) Lai was convicted after trial by a jury on 19 December 2019 (“the Conviction”) and was sentenced to imprisonment for 7 years on 23 January 2020[1]. Lai is now serving her sentence in custody.
8. Ps have obtained default judgments against the 3rd, the 4th, the 6th, the 7th, the 8th, the 9th and the 10th Defendants. Ps have discontinued their claims against the 11th and the 12th Defendants. Accordingly, the remaining defendants are Chun, Lai, Cheung Fat Metal Recycling Co Ltd (the 5th Defendant, “Cheung Fat”); and Wellrun Ltd (the 13th Defendant, “Wellrun”). Cheung Fat’s defence was struck out and Cheung Fat was de-barred from defending these proceedings[2]. Chun’s and Wellrun’s defences were struck out on 12 October 2015[3]. The only defendant who remains actively defending these proceedings is Lai. Lai was legally represented in these proceedings until 21 September 2017. From that time onwards, Lai has been acting in person in these proceedings.
9. I would first set out the facts which are either undisputed or indisputable as a background.
10. China Metal is and was at all material times a limited company incorporated in the Cayman Islands on 18 July 2007 and a non-Hong Kong company registered under s.333 (now repealed) of the Companies Ordinance. In particular, it is the ultimate holding company of the Group, which includes 38 subsidiaries in the BVI, Hong Kong, Macau, Mainland China, Singapore and Taiwan. The majority of the Group’s operations were carried out by the subsidiaries in Mainland China and the sub-subsidiaries of China Metal.
11. Central Steel was at all material times one of China Metal’s main operating subsidiaries. It was incorporated in Macau on 21 March 2005 with limited liability and is an indirect wholly-owned subsidiary of China Metal. Its sole shareholder is Huan Bao Steel Ltd (“Huan Bao”), which in turn is also an indirect wholly-owned subsidiary of China Metal.
12. The Group was founded by Chun and Lai. At all material times:
(1) Chun was the Chairman of China Metal’s Board of Directors (“the Board”) and Chief Executive Officer of China Metal until 26 July 2017, when he was removed from these positions by the provisional liquidators (“PLs”) appointed by the court.[4]
(2) Lai was a non-executive director of China Metal.
(3) Chun, through his personal corporate vehicle Wellrun, held 53% of the issued shares in China Metal (after listing).
13. On 10 June 2009, China Metal issued its Prospectus for Global Offering (“the Prospectus”), inviting applications to subscribe for its shares. As stated in the “Summary” section of the Prospectus:
(1) The Group was at all material times engaged in the principal business of recycling, processing and marketing of both ferrous and non-ferrous metals.
(2) China Metal and the Group had 2 primary business models:
(a) The purchase of scrap metal from suppliers and produce recycled scrap metal products which “meet customers’ requirements”; and
(b) The resale of scrap metal which China Metal has purchased without further processing.
(3) China Metal was the “largest scrap metal recycling company in China based on [its] revenue of HK$6.5 billion for the year ended 31December 2008”.
14. On 22 June 2009, the shares of China Metal (Stock Code: 773) were listed on the Main Board of the Stock Exchange of Hong Kong Limited (“the Stock Exchange”) and commenced trading. About HK$1.685 billion (net of listing expenses) were raised by the IPO.
15. From 2006 to 2012, the financial statements showed that Central Steel contributed a very substantial portion of the Group’s profit. In particular, between 2008 and 2012, save and except 2010, Central Steel’s purported external profit (excluding inter-company transactions) was 100% or more of the Group’s reported purported consolidated profit (which means that the other businesses of the Group were running at a loss but the Group’s overall financial results were propped up by Central Steel). The relevant figures are as follows:
(audited)
(audited)
(audited)
(audited)
(audited)
(audited)
(unaudited)
(34.8%)
(60.3%)
(47.6%)
(78.1%)
(48.9%)
(38.2%)
(36.6%)
(% of Group revenue)
(32.9%)
(53.3%)
(44.7%)
(71.5%)
(48.0%)
(35.5%)
(33.7%)
(% of Group profit)
(69.5%)
(78.6%)
(120.0%)
(142.6%)
(100.3%)
(105.7%)
(128.9%)
(% of Group profit)
(67.3%)
(68.9%)
(115.9%)
(144.1%)
(99.6%)
(107.4%)
(138.4%)
16. On 22 November 2009, the SFC began to investigate whether any persons might have engaged in disclosure of false or misleading information inducing transactions in the shares of China Metal.
17. On 28 January 2013, Glaucus Research, a US securities research firm that specialises in short selling stocks, published a report in relation to the fraudulent activities of the Group. On the same date, trading in the shares of China Metal was suspended.
18. On 26 July 2013, the SFC presented the SFC Petition in the HCCW Proceedings against China Metal seeking a winding-up order on the public interest ground pursuant to s.212(1) of the Securities and Futures Ordinance. The basis of the petition is as follows:
(1) China Metal had overstated its financial position in the Prospectus (covering FY2006-FY2008) and in its 2009 Annual Report as a result of the Round Robin Scheme and the fictitious transactions.
(2) The fictitious transactions continued after China Metal’s successful listing.
(3) Chun was the central figure in those fictitious transactions and the frauds.
19. The basis of the SFC Petition, insofar as it relates to the underlying fraud, is same as the basis of this action.
20. On the same date (ie 26 July 2013), Harris J appointed Mr Cosimo Borrelli (“Borrelli”) and Ms Jocelyn Chi (“Chi”) as the PLs over China Metal with powers to, inter alia, investigate and manage China Metal’s affairs and to take control of the Group, including all of China Metal’s subsidiaries in Hong Kong and overseas. On 8 August 2013, Borrelli and Chi were also appointed the PLs of Central Steel and Huan Bao.
21. On 26 February 2015, Harris J allowed the SFC Petition and wound up China Metal on public interest ground.
22. On 13 April 2015, Harris J also ordered that Central Steel and Huan Bao be wound-up.
23. The PLs were appointed as Liquidators of China Metal on 14 May 2015, and as Liquidators of Central Steel and Huan Bao on 10 July 2015.
24. On 8 March 2016, a criminal charge of conspiracy to defraud was laid against Lai and Ms Bobo Choy Ling Ling (“Choy”, former General Manager in charge of the administration of China Metal). It was alleged that between 2 June 2008 and 27 June 2009, Lai and Choy conspired together with Chun and others to defraud the Stock Exchange and/or its offices servants or agents, by dishonestly submitting or causing to be submitted false financial results and information of China Metal and thereby inducing the Stock Exchange to accept the same as true and accurate and approve the application of China Metal for listing on the Main Board of the Stock Exchange. This is the subject matter in HCCC 66/2018.
25. After a 60-day trial before Alex Lee J sitting together with a jury commencing on 16 September 2019, both Lai and Choy were found guilty as charged. Lai was convicted by the jury by a majority of 7:2. On 23 January 2020, Lai was sentenced by Alex Lee J to imprisonment for a period of 7 years.
26. In his Reasons for Sentence, Alex Lee J said:
“As regards the role of [Lai] in the offence there is evidence showing that:
(a) her company, [Aprima Logistics Ltd (“Aprima”)], her as involved in the circular funds flow concerning three parcels of money. Parcel A, US$5,000,020 withdrawn on 4 December 2007, parcel B, US$2,500,020 withdrawn on 7 December 2007, and parcel C, 26 million Hong Kong withdrawn on 11 December 2007;
(b) she had, between 2007 and 2009, signed 22 remittance applications of [Central Steel] involving multimillion dollars of money, which according to PW17, accounted for about 10 per cent of the total movement of funds from CSM to Cheung Fat and Lane Tone Hong Kong and those funds were involved in or formed part of the “Circular Funds Flow” as identified by PW17;
(c) she had signed a company cheque of Worldwide, another company of hers, in the amount of 47,900 Hong Kong, on 20 September 2007, to pay for Simon Chan & Co for the setting up of Cheung Fat;
(d) she was present at the long board meeting of [Central Steel] held at the office of Messrs Sidley Austin on 22 May 2009. There was also evidence that D1 had signed various documents, which directors of [China Metal] had to sign for the listing.
The above matters show that [Lai] was a party to the conspiracy at a relatively early stage and not as a latecomer. The above matters also show that [Lai’s] role in the conspiracy was a relatively limited one, mainly if not solely about signing of cheques or remittance applications in furtherance of the conspiracy. This is because of the evidence that although she had a room in the offices of [China Metal] she was not seem (sic) to have been involved in the daily management of [China Metal] or its subsidiaries. She had been granted an option to purchase about 2.18 million shares in [China Metal]’s IPO but she did not exercise any of those. She was paid 150,000 Hong Kong per annum for her role as a non-executive director. On the other hand, I do not lose sight of the fact that her husband, Mr Chun, did make a huge profit from the fraud.
There were immigration movement records showing that Mr Chun was out of Hong Kong from time to time. In all the circumstances, although D1 did not give evidence, I am prepared to accept the mitigation advanced by Mr Leung that it may be the case that she was acting under the influence of her husband. Nevertheless, [Lai’s] participation, I should say knowing participation in the conspiracy carried with it an element of breach of trust because of her position as a director of [China Metal], albeit a non-executive one.”
27. From what has been said by the trial judge in the criminal proceedings, it can be known that there is evidence in the criminal proceedings showing that:
(1) Lai was “a party to the conspiracy [to defraud the Stock Exchange] at a relatively early stage”, albeit that her role in the conspiracy was a “relatively limited one”.
(2) Although it might have been the case that Lai was acting under the influence of Chun, Lai had a “knowing participation in the conspiracy” which carried with it an element of breach of trust because of her position as a director of China Metal.
28. The evidence was accepted by the jury. As summarized by the trial judge in the Reasons for Sentence, by their verdict,
“… the jury was sure that there was a conspiracy to defraud the Stock Exchange to cause it to allow [China Metal] to become listed by means of false financial results and information which grossly overstated [China Metal]’s profit. Furthermore, the jury found as a fact that the defendants were knowing parties to that conspiracy. In the event, the object of the conspiracy was to cheat the Stock Exchange into permitting the listing of the company on the strength of the financial statements which contained material falsehood. Members of the public were tricked thereby into subscribing for shares in that company.”
29. Lai has lodged an appeal against the Conviction. The appeal has not yet been heard.
30. Ps are seeking, interalia, equitable compensation and proprietary relief for breaches of fiduciary duties, dishonest assistance and knowing receipt against the defendants. Ps’ claims are largely based upon the findings and investigations of the SFC, as well as further investigations by the PLs, who subsequently became the Liquidators.
31. As explained in the above, at the time of the trial, the remaining defendants are Chun, Lai, Cheung Fat and Wellrun.
32. Ps’ case is as follows:
(1) At all material times, (a) Chun (by himself and/or through his own personal corporate vehicle, Wellrun); and (b) Lai, through a network of individuals and entities, established, associated with or otherwise controlled a number of purported suppliers and purported customers of scrap metal of the Group.
(2) Between 2007 to 2009 and 2012 to 2013, Chun and Lai, through the aforesaid network of entities they controlled and individuals closely associated with them, caused or procured Central Steel (being one of China Metals’ main operating subsidiaries and which alone was responsible for 100% or more of the Group’s gross profits between 2008 and 2012) to enter into fictitious scrap metal trading transactions with purported suppliers and customers established and controlled by them. The fictitious transactions entered into in 2007 to 2009 and 2012 to 2013 are referred to as “2007-2009 Fictitious Transactions” and “2012-2013 Fictitious Transactions” respectively, and are collectively referred to hereinunder as “Fictitious Transactions”.
(3) To effect the Fictitious Transactions, Chun and/or Lai caused or procured Central Steel to:
(a) embark upon the Round Robin Scheme in 2007 to 2009 and 2012 to 2013 in which: (i) very substantial funds originating from Central Steel were paid out to the purported suppliers, (ii) who then transferred on to the purported customers and (iii) which were eventually circulated back to Central Steel to “pay” for the “goods’ allegedly purchased by purported customers from Central Steel; and
(b) create bogus bills of lading and other falsified documents to support the Fictitious Transactions.
(4) Accordingly, a very large percentage of the purported purchases by Central Steel from its purported suppliers, and an equally large percentage the purported sales of the goods from Central Steel to its purported customers, were fictitious. It is Ps’ case that Chun and/or Lai were the masterminds behind the fraudulent scheme.
(5) Further, given (a) the existence of the Fictitious Transactions and the Round Robin Scheme in 2009 and 2012; (b) the extent of the Fictitious Transactions leading up to 2009 and beyond; and (c) the continued growth and importance of Central Steel to the overall financial performance of the Group for FY2010 and FY2011, the only reasonable inference is that the Fictitious Transactions and Round Robin Scheme had continued throughout FY2010 and FY2011.
33. Ps submit that their case on the Fictitious Transactions is supported and corroborated by, inter alia, the following:
(1) Evidence from Ps’ expert on forensic accounting, Mr Kenneth Morrison (“Morrison”), who has conducted funds flow tracing analyses in respect of the transfer of funds amongst Central Steel and its purported suppliers and customers in 2007 to 2009 and 2012. Morrison concludes that for the period from 2007 to 2009 and 2012, between 83.26%-99.95% of the funds which Central Steel purportedly paid out to the purported suppliers were circulated back, over the span of between 11-21 days.
(2) Evidence from Ps’ expert on shipping matters, Mr Pottengal Mukundan (“Mukundan”), who has analyzed the bills of lading concerning the purported shipments of scrap metal from various world ports to China between 2007 to 2009 and 2012 to 2013 in relation to the transactions between Central Steel and its purported suppliers and customers. Mukundan concludes that of the 1,042 bills of lading he analyzed between the aforesaid period: (a) a vast majority of them (ie 71.50%) were found to be not representing a genuine shipping; (b) a further 9.60% were considered unlikely to represent a genuine shipping.
(3) Evidence from Ps’ factual witnesses.
(4) Expert evidence accepted by Harris J in the 2015 Judgment, which was evidence from Morrison and Mukundan. The said evidence is also evidence before the court in these proceedings.
34. As a result of the Fictitious Transactions, the Group’s overall revenue and profits were grossly inflated for the years from 2007 to 2013. Accordingly, the financial positions of China Metal and the Group for the financial years 2007 to 2013 have been substantially overstated and are completely unreliable.
35. Further, between 13 June 2013 and 29 July 2013 (ie immediately prior to the commencement of HCCW Proceedings by the SFC and the appointment of the PLs on 26 July 2013), Chun arranged the remittance of a total amount of HK$1,960,887,984.44 (ie, the June/July 2013 Payments) from Central Steel’s bank accounts to the bank accounts of Cheung Fat and Pacific Metal Recycle Ltd (the 10th defendant, “Pacific Metal HK”). To date, the Liquidators have been unable to identify any underlying transactions or other commercial justifications for the June/July 2013 Payments. It is Ps’ case that such transfers were made by Chun to dissipate Central Steel’s very substantial cash assets in order to place them outside the reach of the Liquidators and the Group’s creditors.
36. Ps are seeking seek relief (1) against Chun, Lai, Cheung Fat and Wellrun for equitable compensation and/or knowing receipt arising from the unlawful payment of the Dividends; and (2) against Chun and Cheung Fat for equitable compensation and/or knowing receipt arising from the June/July 2013 Payments.
37. Specifically, Ps are seeking the following:
(1) As against Chun:
(a) By virtue of his positions as a Chairman of the Board of Directors of China Metal and an administrator of Central Steel at the material times, Chun owed fiduciary duties to Ps, including:
(i) a fiduciary dutyto act bona fide and in the best interests of China Metal and/or Central Steel;
(ii) a fiduciary duty in the exercise of his powers and the discharge of his duties not to act for any collateral or improper purpose;
(iii) a fiduciary duty to use assets of China Metal and/or Central Steel in a manner which he honestly believed to be in the best interests of China Metal and/or Central Steel, and also to deal with those assets in a manner consistent with the duties of a trustee; and
(iv) a fiduciary duty not to act in the affairs of China Metal and/or Central Steel in circumstances where there existed an actual or potential conflict between his duties to China Metal and/or Central Steel as director and his other duties or interests.
(b) Given his involvement and participation in, and detailed knowledge of, the Fictitious Transactions, Chun was clearly in breach of the aforementioned fiduciary duties in that he: (i) well knew, or at least turned a blind eye to the fact that, his actions were in breach of his said duties and injurious to the interests of China Metal and Central Steel; and (ii) notwithstanding such knowledge, he proceeded to carry out such acts to the prejudice of China Metal and/or Central Steel and for his own benefit.
(c) As to loss and damage:
(i) By reason of the above, Chunwas well aware that the financial results as shown in China Metal’s 2009 Annual Report, 2010 Annual Report and 2011 Annual Report were false or at least unreliable; and he also well knew, or turned a blind eye, to the fact that China Metal was in fact not in a position to pay the Dividends to shareholders totalling HK$672.9 million for FY2009 to FY2011.
(ii) Accordingly, Chun is liable to pay equitable compensation for his breaches of fiduciary duties in the amount of Dividends.
(iii) Further or alternatively, at all material times Chun and Wellrun held 0.1% and between 51.16% and 64.21% of the issued share capital of China Metal, and accordingly received cash and/or scrip dividends equivalent to around HK$0.8 million and HK$357.4 million respectively out of the Dividends. Accordingly, Chun is liable to account for the sum of HK$0.8 million he received as Dividends which were wrongly paid out.
(d) Chun has also dissipated very substantial amounts of cash of Central Steel in excess of HK$1.9 billion (ie the June/July 2013 Payments) in breach of his fiduciary duty in favour of Cheung Fat and Pacific Metal HK, which were then further dissipated to other entities associated with Chun and/or Lai. Chun is therefore liable to pay equitable compensation for his breaches of fiduciary duty in respect of the said amount of HK$1.9 billion.
(2) As against Lai:
(a) By virtue of her positions as a director of China Metal and an administrator of Central Steel at the material times, Lai also owed the fiduciary duties to China Metal and Central Steel.
(b) Lai must also have been aware (alternatively, she turned a blind eye to the fact) of the existence of the Round Robin Scheme and the Fictitious Transactions, and the fact that these were injurious to the interests of China Metal and Central Steel, given: (i) her involvement in the management and operation of China Metal and the Group at least until 2012; (ii) her role as bank signatory or authorised person of Central Steel’s bank and brokerage accounts and her involvement in authorising payments in and out of Central Steel’s bank accounts; (iii) her actual participation in the Round Robin Scheme through Aprima, her personal corporate vehicle of which she was the sole shareholder and director; and (iv) the sheer scale and the schemes and the significant amount of purported revenue generated by the same.
(c) Notwithstanding such knowledge, Lai, in breach of the fiduciary duties, proceeded to: (i) participate in and carry out the Round Robin Scheme to the prejudice of China Metal and Central Steel; (ii) approve the 2009, 2010 and 2011 Annual Report; and (iii) approve the relevant declarations and payment of the Dividends. Accordingly, Lai is liable to pay equitable compensation for her breaches of fiduciary duty in the amount of the Dividends.
(3) As against Cheung Fat:
(a) Cheung Fat, as a purported supplier of Central Steel, was centrally involved in the Fictitious Transactions and the Round Robin Scheme, and without its involvement Chun could not have effected and continued with the same. Cheung Fat was described in China Metal’s internal records as a company of Chun, and Chun controlled the same, such that his knowledge should be attributed to Cheung Fat.
(b) Further, Chun caused Central Steel to make the June/July 2013 Payments in excess of HK$1.9 billion in breach of his fiduciary duties owed to Cheung Fat and Pacific Metal HK. Of that amount, Cheung Fat received the total sum of HK$1,215,099.463.37.
(c) In the premises, Cheung Fat is liable (i) in dishonest assistance for assisting Chun’s breaches of fiduciary duty with respect to the Fictitious Transactions and the Round Robin Scheme, and (ii) as knowing recipient of the HK$1.2 billion it received, and has also been unjustly enriched at Central Steel’s expense in circumstances where Chun had caused the transfer of the HK$1.2 billion from Central Steel to Cheung Fat in breach of fiduciary duty and/or without authority.
(4) As against Wellrun:
(a) As the holders of issued share capital of China Metal, Chun and Wellrun received Dividends of HK$0.8 million and HK$357.4 million respectively out of the HK$672.9 million Dividends paid.
(b) As Chun is the sole director and shareholder of Wellrun, and Wellrun is the corporate vehicle of Chun, Chun’s knowledge is imputed to Wellrun. In the circumstances, Wellrun had knowledge or turned a blind eye to the matters set out in [37(1)(c)(i)] above.
(c) In the circumstances, Wellrun is liable in dishonest assistance to the full extent of the Dividends, and for knowing receipt as constructive trustee for the sum of HK$357.4 million Dividends it received.
38. Ps no longer pursue any loss and damage arising from:
(1) the false and misleading information contained in the Prospectus leading to China Metal’s listing on the Hong Kong Stock Exchange;
(2) bank liabilities, interest and charges incurred by Central Steel for payments and transactions which served no genuine or commercial purpose and provided no legitimate benefit for China Metal and/or Central Steel; and
(3) loss and damage arising from the winding-up of China Metal and Central Steel.
39. On 31 December 2020, Ps took out a summons (“Ps’ Summons”) for leave to file and serve a Supplemental Expert Report on Cayman Islands law prepared by Mr Jonathan Guy Manning dated 29 December 2020 (“Manning’s Supplemental Report”). At the beginning of the trial, after hearing submissions from Ps and Lai, I allowed the application and awarded costs of the application to Lai in any event. My reasons for this decision are as follows:
(1) The purpose of Manning’s Supplemental Report is to clarify the articles in China Metal’s Articles of Association with respect to the declaration of dividends – the applicable articles should be the 2009 version, whereas the Manning Report dated 13 February 2018 (“the 1st Report”) referred to the 2007 version. Chinese translation of Manning’s Supplemental Report has been provided to Lai before the commencement of the trial.
(2) In Manning’s Supplemental Report, the expert observes that:
(a) At [77] – [90] of the 1st Report, his views in relation to China Metal’s power to lawfully declare dividends were expressed in the context of Article 16 of China Metal’s Articles of Association adopted on 28 August 2007 (“the 2007 Articles”).
(b) However, given that the Dividends which form the subject matter of the claims herein were declared and paid by China Metal between FY2009 to FY2011, the applicable articles should be Articles 133-134 of China Metal’s Articles of Association adopted on 22 May 2009 (“the 2009 Articles”).
(c) The wording of Article 16 (2007) and the wording of Article 134 (2009) are substantially the same.
(d) The expert is of the view that applying Articles 133-134 (2009), the opinion he expressed in the 1st Report remains unchanged.
(e) The expert opines that:
(i) under the 2009 Articles, the Board continues to have a power to declare dividends;
(ii) under Article 134 of the 2009 Articles, dividends may be paid out of China Metal’s profits or share premium;
(iii) although Article 134 of the 2009 Articles (unlike Article 16 of the 2007 Articles) imposes an additional condition that an ordinary resolution be passed where it is proposed that payment of a dividend is to be made out of share premium or any other fund/account which can be authorised for this purpose, this does not arise on the facts of the present case since there is no evidence that the Dividends were paid out of share premium.
(3) Manning’s Supplemental Report only seeks to clarify the applicable Articles of Association prevailing at the material times (being the 2009 Articles). It is clearly helpful and of assistance to the court that the correct legal basis for the payment of the Dividends be identified.
(4) Ps do not shy away from that fact that this is a late application. However, notwithstanding the lateness of the application, I am of the view that Manning’s Supplemental Report is relevant evidence, and admission of the same would not prejudice Lai. As said in the above, the analysis and conclusion of the expert remain the same after the admission of the supplemental report. The fact that different Articles of Association apply to the payment of the Dividends has no impact on the expert’s conclusions at all. Further, Lai has chosen not to adduce any expert evidence on Cayman law. There is therefore no question of her having to prepare responsive expert evidence to the Manning’s Supplemental Report.
(5) The primary aim in exercising the case management powers of the court is to secure the just resolution of the disputes in accordance with the substantive rights of the parties[5]. With all the aforesaid in mind, in my judgment, Ps’ application as per the summons ought to be allowed. However, since Ps are seeking an indulgence from the court, the costs of Ps’ Summons should be paid by Ps to Lai in any event.
40. Ps have called 5 factual witnesses and 3 expert witnesses to give viva voce evidence at the trial in support of Ps’ case.
(1) Ps’ factual Witnesses:
(a) Borrelli
(b) Mr Qiu Guo Ming (“Qiu”)
(c) Mr Cheng Hiu Fan (“Cheng”)
(d) Mr Chan Po Kau Simon (“Simon Chan”)
(e) Ms Chan Yok Ha Jenny (“Jenny Chan”)
(2) Ps’ expert witnesses:
(a) Morrison (on forensic accounting and fund flow analysis)
(b) Manning (on Cayman law)
(c) Mr Jorge Neto Valente (on Macanese law) (“Valente”)
41. Originally, Ps were prepared to call Mukundan to give expert evidence in the trial on shipping. However, in response to the enquiry made by the court, Lai said that she had no question for Mukundan. With no objection from Lai, I directed that the reports made by Mukundan be deemed as evidence before the court without requiring Mukundan to attend the trial to give viva voce evidence.
42. Lai filed an Amended Defence dated 22 June 2015. The Fictitious Transactions and the Round Robin Scheme as alleged by Ps are not admitted by Lai. Further, Lai avers that even if the fraud as alleged by Ps is true, she has no knowledge and no participation in the fraud.
43. Shortly before the trial, by a summons dated 5 December 2020 (“Lai’s Summons”), Lai made an application for leave to file and serve: (1) a Re-Amended Defence; (2) a Supplemental Witness Statement dated 5 December 2020; and (3) a Supplemental List of Documents. At the beginning of the trial, after hearing submissions on this summons from the parties, I dismissed the summons with costs to Ps in any event. These are my reasons for the decision.
(1) By making the applications as set out in Lai’s Summons, Lai intends to put forward a contention in the trial that an application for telegraphic remittance dated 5 December 2007 concerning USD 5 million from Aprima’s account in DBS (“Aprima Remittance Form”) to Qi Le Metal Recycling Co (“Qi Le”) was not signed by her and the signature thereon was not her signature.
(2) As to whether Lai should be allowed to introduce this contention at the trial, in fact I have heard the parties on 18 November 2020. In the hearing on 18 November 2020, after hearing the parties, I ruled that Lai should not be allowed to introduce the contention in these proceedings, for Lai had admitted in [20A] of Amended Defence dated 22 June 2015[6] that the Aprima Remittance Form was signed by her upon the invitation by Chun (“the November Ruling”). By seeking to introduce the contention, Lai was attempting to withdraw the admission made by her in her pleading. However, no satisfactory reason was provided by Lai as to why she attempted to withdraw the admission. I therefore held that Lai should not be allowed to withdraw the admission and Lai was not allowed to introduce the contention in these proceedings.
(3) By Lai’s Summons, Lai is trying to reargue what has already been determined by the court in the November Ruling. Lai said that at the time of preparing the Amended Defence, she and her solicitors did not have the Aprima Remittance Form. She mistakenly made an admission in [20A] of the Amended Defence that the Aprima Remittance Form was signed by her. However, when she saw the document at a later time, she realized that the Aprima Remittance Form in fact was not signed by her.
(4) I do not accept the explanation offered by Lai.
(a) The Amended Defence was prepared by Lai’s solicitors when she was legally represented. The Amended Defence was verified by a Statement of Truth signed by Lai on 22 June 2015. Under the Statement of Truth, there is a declaration signed by a partner of the law firm, in which the solicitor declared that the Amended Defence had been interpreted to Lai. In view of the Statement of Truth made by Lai, the explanation offered by Lai is unconvincing.
(b) There is nothing from Lai’s former solicitors providing support to the explanation sought to be relied upon by Lai.
(c) In the light of all these, I refused to accept Lai’s explanation.
(5) There has not been any change of circumstances since the November Ruling. That being the case, Lai is not entitled to ask the court to revisit the November Ruling.
(6) Issues to be resolved in the trial are defined by the pleadings. If Lai is allowed to withdraw the admission made by her in [20A] of the Amended Defence and put forward the new contention at the very late stage of these proceedings, the trial simply cannot proceed, for it cannot be right to deprive Ps the opportunity to adduce evidence to meet the new case put forward by Lai. However, the trial has been adjourned once due to the unreasonable conduct of Lai[7]. It would not be just and fair to adjourn the trial again, just because Lai intends to put forward a new case without a satisfactory and convincing explanation.
44. Apart from a witness statement made by her dated 27 July 2017, there is no other witness statement and there is no expert report filed by Lai in support of her case.
45. I would set out the applicable principles in this section. With all these principles in mind, I analyze the evidence and the issues in this case.
E1. Issues defined by the pleadings
46. Issues in a trial are defined by pleadings, not by evidence. One cannot slip in an unpleaded issue by saying that there is evidence on the issue[8]. My task therefore is to consider and determine whether the cases pleaded by Ps against Chun, Lai, Cheung Fat and Wellrun are established. As to Lai, I would also consider and determine whether the matters pleaded by Lai in her Amended Defence are proved.
E2. Breach of Directors’ Duties
47. It is Ps’ case that Chun and Lai have breached the directors’ duties owed by them to China Metal and Central Steel:
(1) the duty of a director to act bona fide in the interests of the company;
(2) the duty of a director to exercise his power solely for a proper purpose;
(3) the duty of a director not to misapply or misappropriate corporate assets or funds; and
(4) the duty of a director not to place himself in a position where there would or may be a conflict between his own personal and separate interests/duties and the interests of the company.
48. The duties owed by a director, which arise only from the director’s relationship with the company and relate to the internal management of the company, are governed by the law of the place of the company’s incorporation[9].
49. Ps have adduced expert evidence to show that the aforesaid duties exist under Cayman law (ie China Metal’s place of incorporation) and Macanese law (ie Central Steel’s place of incorporation). This is not challenged by Lai. I find that these duties in fact exist under Cayman law and Macanese law.
50. Ps have also adduced expert evidence to show that for Central Steel, although Chun and Lai are referred to as “administrators” of Central Steel (instead of directors), the distinction is in fact not relevant and administrators are treated as directors under Macanese law. This is also not challenged by Lai. I accept the point made by Ps.
51. Unless otherwise specified below, for the purposes of the said duties, Cayman law and Macanese law are same as Hong Kong law.
E2.1 Duty to act for proper purposes
52. A director owes a fiduciary duty to exercise his power solely for the purposes for which they are conferred. The rule is not concerned with excess of power by doing an act which is beyond the scope of the instrument creating it as a matter of construction or implication. It is concerned with abuse of power, by doing acts which are within its scope but done for an improper reason[10].
53. The law is summarised in Extrasure Travel Insurances Ltd v Scattergood[11], in which DHCJ Crow said:
(1) The test is an objective one.
(2) A four-stage test should be applied in the following manner:
(a) identify the power whose exercise is in question;
(b) identify the proper purpose for which that power was delegated to the directors;
(c) identify the substantial purpose for which the power was in fact exercised – this is a question of fact and turns on the actual motives of the directors at the time; and
(d) decide whether that purpose was proper.
54. Since the test is an objective one, “it matters not whether the director honestly believed that in exercise the power as he did he was acting in the interests of the company; the power having been used for an improper purpose, its exercise will be liable to be set aside”[12].
E2.2 Duty not to misapply corporate assets
55. According to Valente’s opinion, although an administrator has a duty to manage the assets of a company in a manner which he honestly believed to be in the best interests of the company and with diligence that may reasonably be expected from a careful and organised business administrator, Macanese law does not have the common law concept of a trust. That being the case, Ps fairly point out that the principles set out in [56] to [58] below only apply to China Metal and not Central Steel.
56. Directors owe a duty not to misapply or misappropriate company funds. This duty arises because directors, as human agents of the company, are vested with powers to control its property. In this respect, they are akin to trustees, although they are not properly speaking as such[13].
57. Once a prima facie case is shown that the director has acted in breach of fiduciary duty in misapplying company assets:
(1) The evidential burden shifts to the director to demonstrate the proprietary of the transaction[14].
(2) It is no excuse that a director blindly followed the act of other directors[15].
(3) Although the court is entitled to take into account the totality of evidence before it in ascertaining whether the disposal of corporate asset was for proper purpose and in good faith, the absence of a satisfactory explanation from the director is highly material, and may in an appropriate case drive the court to conclude that there was no proper justification for the disposal[16].
58. With respect to payment of dividends (which is a disposal of corporate assets):
(1) There is a common law rule against distribution of capital to a shareholder, known as the “capital preservation rule”. It is devised for the protection of the creditors of a company, such that unless a distribution of a company’s assets to a shareholder – which is a return of capital – is in accordance with specific statutory procedures, it is unlawful and ultravires the company[17].
(2) Where the director has caused the company to declare and pay dividends in circumstances which are not permissible under the company’s articles of association or statute, the director acts in breach of fiduciary duty and he needs to account for the dividends unlawfully paid out[18].
(3) The burden of proving that dividends were paid out of capital lies on the company, or its liquidator[19].
(4) No limitation period applies to such claims against the director[20].
(5) There are authorities suggesting that such liability is strict; it is up to the director to establish a defence under s.727 of the 1985 Companies Act or s.358 of the Companies Ordinance (Cap.32) (now s.903 of Companies Ordinance (Cap.622))[21]. However, there is no provision in the Cayman Companies Law (2016 rev.) equivalent to s.727 of the 1985 Companies Act or s.903 of the Companies Ordinance.
(6) Ps have fairly drawn my attention to a recent decision, ie ReBurnden Holdings (UK) Ltd (in liquidation)[22], in which Zacaroli J expressed the view that liability for payment of unlawful dividends was fault-based, ie a director would not be liable “if they were unaware of facts which rendered the dividend unlawful … provided they had taken reasonable care to secure the preparation of accounts so as to establish the availability of sufficient profits to render the dividend lawful”[23].
(7) Ps submit that Re Burnden Holdings (UK) Ltd (in liquidation) does not represent the law in Hong Kong. The true position should be the one reflected in Moulin Global Eyecare v OliviaLee.
(8) Ps have also fairly drawn my attention to Manning’s opinion on this issue. According to Manning, whether or not liability is strict or fault-based is an open question under Cayman law.
(9) After considering all the evidence, I am of the view that it would not be necessary for me to make a ruling on the question. As explained in this judgment, in my judgment, even if such liability is fault-based, such threshold has been surmounted in this case.
59. Directors owe a fiduciary duty[24]:
(1) not to place themselves in a position where there would or may be a conflict between their personal or separate interests / duties and the interests of the company; and
(2) not to make a profit from their position:
60. The no conflict and no profit rules are proscriptive duties (ie they forbid or restrict a director from acting in certain manner), which duties are strictly enforced, even in the absence of conscious wrongdoing [25]. They are “inflexible rule[s] [which] must be applied inexorably by [the] Court which is not entitled … to receive evidence, or suggestion, or argument as to whether the principal did or did not suffer any injury in fact by reason of the dealing of the agent”[26].
61. The test for determining whether there has been a breach of that duty is an objective one. Hence, the no conflict rule operates where the reasonable man looking at the relevant facts and circumstances of the particular case think that there is a “real sensible possibility of conflict” or “a real or substantial possibility of conflict”[27].
E2.4 Duty to act bona fide in best interests of company
62. The question of whether a director has breached the duty to act bona fide in the best interests of the company is ordinarily a subjective one, i.e. whether the director genuinely believed the transaction to be in the interests of creditors. In Regentcrest, DHCJ Jonathan Parker J said at [120]:
“The duty imposed on directors to act bona fide in the interests of the company is a subjective one … The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of the director at the relevant time, might have acted differently. Rather, the question is whether the director honestly believed that his act or omission was in the interests of the company. The issue is as to the director’s state of mind. No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the court that he honestly believed it to be in the company’s interest; but that does not detract from the subjective nature of the test.”
63. Once such knowledge is established, it then becomes necessary to consider whether the director has acted appropriately in the circumstances. In this regard, where there is no evidence that the director gave actual consideration to the interests of the company, the proper test to be applied is an objective one, ie whether an intelligent and honest man in the position of a director of the company concerned could, in the whole of the existing circumstances, have reasonably believed that the transaction was for the benefit of the company[28].
E2.5 Relief as a result of breach of director’s duties
64. Where a fiduciary such as a director has committed a breach of some fiduciary duty, the breach was complete when the money was paid out of the company wrongfully, and the loss was incurred at that point[29].
65. Where the breach of fiduciary duty involves unlawful payment of dividend out of capital, the director is strictly liable to account to the company for the same[30].
66. In respect of China Metal, it is China Metal’s case that the breaches committed by Chun and Lai leading directly to damage to or loss of trust properties, ie the Dividends. The propositions advanced by Ps are as follows:
(1) The director holds the misapplied corporate property (if he receives it himself) as constructive trustee for the company[31].
(2) Where such property cannot be returned in specie, or restoration in specie is not considered an adequate or just remedy, the director comes under a personal liability to pay equitable compensation restoring the value of what has been misapplied[32].
(3) Causation is established on a “but for” basis without the constraints of common law causation rules on remoteness and foreseeability, and the duty of mitigation only has very limited application. The court is entitled to assess compensation with the full benefit of hindsight[33].
67. In respect of Central Steel, Central Steel’s case is that the breaches committed by Chun leading directly to the loss suffered by Central Steel, ie the June/July 2013 Payments. According to Valente’s opinion, when a director breaches his duties owed to the company, he would be liable to the company for the loss and damage suffered by the company as a result of the breaches committed by that director.
E3. Third-Parties Involved in Directors’ Breach of Fiduciary Duty
68. As against third parties who are involved in directors’ breach of their fiduciary duties, through assistance or receipt of misapplied corporate assets, recovery can be made by the company on the basis of: (i) dishonest assistance (for equitable compensation, where the third party did not receive or no longer holds the misapplied corporate asset); (ii) knowing receipt (where the third party has received and continues to hold the misapplied asset); and (iii) restitution for unjust enrichment (where the third party has received corporate asset).
69. Ps are claiming:
(1) dishonest assistance against Cheung Fat and Wellrun, for assisting in Chun’s breaches of fiduciary duty;
(2) knowing receipt against Cheung Fat (the June/July 2013 Payments) and Wellrun (Dividends); and
(3) restitution for unjust enrichment against Cheung Fat (the June/July 2013 Payments).
70. Cheung Fat is a Hong Kong company and Wellrun is a BVI company.
71. Where there is no evidence of foreign law, the court will ordinarily apply Hong Kong law on the basis that the foreign law is presumed to be the same as the lex fori[34]. The presumption is generally applied, although there have been situations where it is not, typically where the court considers that “the default application of a rule of English law is simply too problematic to be appropriate”[35].
72. The concepts of dishonest assistance, knowing receipt and unjust enrichment are based upon common law and not upon statute law, which would be more relevant to consideration of whether the presumption should be disapplied. As explained in Dicey, Morris & Collins (15th edn), [9-027]:
“The recent practice of the English courts also suggests that the default application of English law where foreign law is not proved, is not unqualified, and is more likely to be challenged where the rule of English law is statutory rather than being a rule of the common law. In principle, an English statute may not be applied to a matter governed by a foreign law, in circumstances where that foreign law has not been proved, if the English statutory rule appears to state a rule of purely domestic law, or where the wording of the statute would need to be adapted or changed in order to be made applicable to facts which do not otherwise fall within it. The proposition that the gist of a statute may be extracted from its precise wording, and then applied to a case which is not governed by English law but for which the content of the applicable law has not been proved, on the basis that states a rule of “general application”, is dubious and probably wrong…”
73. Further, Ps’ claims are accessory to the breaches of fiduciary duty by Chun, with respect to a company listed in Hong Kong (ie China Metal) and/or acts predominately took place in Hong Kong.
74. Chun was either the de jure director, or the person in control, of the company in question. He never raised or took issue on foreign law, prior to his being debarred from defending this action.
75. With all the aforesaid in mind, I am of the view that there is no unfairness arising from the application of the presumption in this case. I would proceed on the basis that Hong Kong law applies to both the claims against Cheung Fat and the claims against Wellrun.
76. There are 4 requirements for the imposition of liability for dishonest assistance[36]:
(1) a breach of trust or fiduciary duty by someone other than the defendant;
(2) in which the defendant assisted;
(3) dishonestly; and
(4) resulting in loss.
77. On assistance:
(1) The defendant must have lent assistance to the commission of a primary breach of trust. This essentially means that the defendant’s actions or omissions[37] must have had some causative impact (ie that the acts or omissions must have “made a difference”)on the breach of trust[38].
(2) There is no need for the plaintiff to show that the defendant’s action or omission “inevitably [had] the consequence that a loss [was suffered]”[39], nor can a defendant resist such a claim by contending that the breach would “probably have occurred without his assistance”[40].
(3) In other words, “but for” causation is not required in the context of dishonest assistance, and a defendant may be fixed with liability for loss flowing from the primary breach even where there is no direct causal link between his actions and the loss[41]. However, the plaintiff must at least show that the defendant’s actions “have made the fiduciary’s breach of duty easier than it would otherwise have been”[42].
78. As to dishonesty:
(1) Dishonestydoes not require any subjective/self-conscious dishonesty of the kind described by Lord Lane CJ in R v Ghosh [1982] QB 1053 (ie the criminal standard). Instead, it is entirely an objective test: the conduct complained of must be conduct which is dishonest by the standards of ordinary and reasonable people[43].
(2) In Barlow Clowes International Ltd v Eurotrust International Ltd, Lord Hoffmann said[44]:
“… liability for dishonest assistance requires a dishonest state of mind on the part of the person who assists in a breach of trust. Such a state of mind may consist in knowledge that the transaction is one in which he cannot honestly participate (for example, a misappropriation of other people's money), or it may consist in suspicion combined with a conscious decision not to make inquiries which might result in knowledge … Although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. If by ordinary standards a defendant's mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards. The Court of Appeal held this to be a correct state of the law and their Lordships agree.”
(3) Hence, a defendant will be liable for dishonest assistance whenever his conduct transgresses the ordinary standard of honest behaviour (to be assessed by reference to right-thinking members of society), whether or not he is aware of this fact and whatever his motives may have been.
79. Since dishonest assistance relates not to any loss or damage which may be suffered but to the breach of fiduciary duty, once liability for dishonest assistance is established, the defendant is liable for all loss or damage resulted from the breach of fiduciary duty which has been dishonestly assisted[45].
80. A claim in dishonest assistance is properly characterised as a “tort” for the purposes of choice of law rules. In OJSC Oil Co Yugraneft v Abramovich, Christopher Clarke J said[46]:
“If it was necessary, I would strongly incline to holding that a claim in dishonest assistance was, for the purposes of the [Private International Law (Miscellaneous Provisions) Act 1995] a “tort” … Dishonest assistance, a form of equitable wrongdoing, is so closely analogous to a claim in tort (as characterised for purely domestic purposes) that it should, I would have thought, be so characterised for private international law purposes.”
81. Accordingly, the proper law to apply is the law of the country in which the events constituting the dishonest assistance occurred, or, if they occurred in more than one, the law of the country in which the most significant element or elements of those events occurred[47].
82. It is Ps’ case that the events constituting the dishonest assistance against Cheung Fat and Wellrun both substantially occurred in Hong Kong, as this was the location where:
(1) Chun and/or Lai hatched the fraudulent scheme and caused the Fictitious Transactions and the Round Robin Scheme to be implemented;
(2) Cheung Fat assisted them in doing so; and
(3) Wellrun assisted in Chun and/or Lai’s concealment and continued perpetration of the Fictitious Transactions and Round Robin Scheme by (a) causing them to be re-elected as directors of China Metal in 2010 and 2012; (b) and causing the 2010, 2011 and 2012 Annual Reports to be approved and auditors to be re-elected at China Metal’s annual general meetings[48].
83. Ps submit that for the reasons above, Hong Kong law applies to Ps’ cause of action in dishonest assistance. I agree and accept the submissions made by Ps.
84. There are 6 requirements for liability for knowing receipt[49]:
(1) there is property subject to a trust;
(2) the property is transferred;
(3) the transfer is in breach of trust;
(4) the property (or its traceable proceeds) is received by the defendant;
(5) the receipt is for the defendant’s own benefit; and
(6) the defendant receives the property with the requisite knowledge.
85. The defendant must “know enough of the facts surrounding the misapplication of trust property to make it unconscionable for him to retain the benefit of his receipt.”[50] In other words, the recipient’s state of knowledge must be such as to make it “unconscionable” for the recipient to retain the benefit of the receipt[51].
86. As to relief, the third party knowing recipient is treated as holding the property upon constructive trust for the company and should restore the same[52]. Where it cannot restore the property in specie, or restoration in specie is not considered an adequate or just remedy, it would be liable to pay equitable compensation.
87. With respect to the claim for knowing receipt against Wellrun for the Dividends, the Dividends were declared in Hong Kong (by China Metal as a listed company in Hong Kong) and paid to Wellrun in Hong Kong. Accordingly, the proper law (being the place of receipt) should be Hong Kong in any event.
E3.3 Restitution for unjust enrichment
88. Ps are relying upon this cause of action against Cheung Fat only.
89. Transfers made in circumstances where there is no authority to do so – and therefore no consent from the transferor – provide a basis for imposing restitutionary liability on the recipient[53].
90. The ground of want of authority relied upon by P arises in circumstances where a director of a company (ie an agent) has acted contrary to the best interests of the company (ie the principal). Where an agent acts in furtherance of his own interests to the detriment of his principal, that will negative any actual authority given to the agent to bind the principal to a transaction[54]. In Lysaght v Falk Bros & Co Ltd[55], Griffiths CJ put the principle simply as follows:
“It has never been doubted that an agent who is not acting for his principal but for his own benefit is acting beyond the scope of his authority.”
91. With respect to the restitution claim against Cheung Fat in respect of the June/July 2013 Payments, Ps’ pleaded case is that Chun had breached his fiduciary duties in that the payments were not for any genuine or legitimate commercial purpose or for the benefit of Central Steel or China Metal. Accordingly, Ps have pleaded a proper basis for its restitutionary claim based on want of authority.
E4. Conspiracy to Injure by Unlawful Means
92. A conspiracy to injure by unlawful means is actionable where the plaintiff proves that it has suffered loss or damage as a result of unlawful action taken pursuant to a combination or agreement between the defendant and another person(s) to injure it by unlawful means, whether or not it is the predominant purpose of the defendant to do so[56].
93. The elements of this cause of action are as follows:
(1) a combination, arrangement or understanding between 2 or more people. It is not necessary for the conspirators to all 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;
(2) an intention to injure another, albeit with no need for that to be the sole or predominant intention. The necessary intent can only be inferred if it can be shown that the act is done deliberately and with knowledge of the consequences;
(3) concerted action (in the sense of active participation) consequent upon the combination or understanding;
(4) use of unlawful means as part of the concerted action; and
(5) loss being caused to the target of the conspiracy.
94. In Ps’ case, the creation of the Fictitious Transactions and the Round Robin Scheme are the unlawful means forming parts of the concerted action.
95. The approach on assessing the credibility of witnesses is well-established[57].
(1) Contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility.
(2) In deciding whether to accept a witness’ account, importance should also be attached to the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events.
(3) In determining a witness’ credibility, it is also important to have regard to the consistency of the witness’ evidence with undisputed or indisputable evidence, and the internal consistency of the witness’ evidence, which is to be tested by a comparison between the witness’ oral testimony and his witness statement.
96. In assessing the evidence, the rule in Browne v Dunn is also relevant.
(1) The rule in Browne v Dunn is a rule of practice or procedures designated to achieve fairness to witness and a fair trial between the parties[58].
(2) The applicability of the rule has been explained by DHCJ Reyes (as he then was) in Kaifull Investments Ltd v. The Commissioner of Inland Revenue,[59]:
“(1) The general principle is that, where an attack on a witness’ evidence is to be made, notice should normally be given to the witness in cross-examination of the nature of the attack if such is not otherwise obvious.
(2) There is no breach of the principle if the witness knew or ought to have known that his version of events was being challenged or that adverse inferences might be drawn against him.
(3) Even if the procedural rule is transgressed, it does not inexorably follow that matters which have not been put to a witness in cross-examination cannot be relied on. It may be a question of the weight to be given to a witness’ testimony taking into account all the available evidence. Thus, for example, a witness’ evidence may be so incredible as to be incapable of belief or his evidence may be unsupported or contradicted by known facts and contemporaneous documents.
(4) The principle does not inflexibly require every point which might be used against the witness to be put to him. There can no hard-and-fast rule. The paramount consideration is fairness to the witness. In essence, the principle is breached if in all the circumstances an omission to cross-examine on a specific point is unfair to a witness.”
97. Where serious allegations (e.g. for breach of trust) are made, a high level of probability is required, although not as high as the criminal standard[60].
E7. Criminal conviction as evidence in civil proceedings
98. Ps are relying upon the Conviction as a matter in support of Ps’ case against Lai.
99. S.62 of the Evidence Ordinance (“the EO”) provides:
“(1) In any civil proceedings the fact that a person has been convicted of an offence by or beforeany court inHongKong shall, subject to subsection (3), be admissible in evidence for thepurpose of proving, where to do so is relevant to any issue in those proceedings, that he committed that offence, whether he was so convicted upon a plea of guilty or otherwise and whether or not he is a party to the civil proceedings; but no conviction other than a subsisting one shall be admissible in evidence by virtue of this section.
(2) In any civil proceedings in which by virtue of this section a person is proved to have been convicted of an offence by or before any court in Hong Kong-
(a) he shall be taken to have committed that offence, unless the contrary is proved; and
(b) without prejudice to the reception of any other admissible evidence for the purpose of identifying the facts on which the conviction was based, the contents of any documentwhich is admissible as evidence of the conviction, and the contents of the information, complaint, indictment or charge on which the person in question was convicted, shall be admissible in evidence for that purpose. ” (Emphasis added)
100. The burden of proving the relevance of the conviction remains with the party seeking to rely on it[61]. The effect of pleading and proving a criminal conviction under s.62 of the EO is to shift the legal burden of proof upon the party against whom a criminal conviction is made of disproving the offence or alleging that such conviction or finding was erroneous[62].
101. Once the criminal conviction (and the facts supporting the conviction) are adduced in evidence, the Court is bound to give some weight to the conviction. However, the weight to be ultimately given depends on the particular facts of the case and the issues involved. A person may plead guilty in error or simply to save time and expenses. In contrast, great weight is likely to be attached to a conviction where there was a full hearing[63].
102. Where there is on foot an appeal against the criminal conviction, the court would not finally dispose of civil proceedings in reliance on a criminal conviction alone while the conviction is subject to appeal or liable to be quashed[64].
103. Save and except the evidence given by Jenny Chan, the evidence given by Ps’ factual witnesses has not been challenged by Lai. Having seen and heard their evidence, I am of the view that all Ps’ factual witnesses (including Jenny Chan) are forthcoming and have directly answered the questions put to them by Lai. Their evidence is in line with the contemporaneous documents. In my view, all Ps’ factual witnesses are honest and reliable, and I accept their evidence in full.
104. The evidence given by Ps’ factual witnesses are summarized below.
105. Borrelli
(1) Borrelli is one of the Liquidators and has no personal knowledge of the events leading to the collapse of the Group. His knowledge is reconstructed on the basis of the documents and the information available to him. He was cross-examined by Lai on some matters, which he provided answers in a forthcoming, and readily acknowledged that he did not know the answer when such was the case.
(2) His evidence sets out the overall factual context and basis for Ps’ claims. The key aspects of Borrelli are summarized as follows:
(a) Facts showing the role and extent of involvement of Chun in the business of the Group;
(b) Facts showing the role and extent of involvement of Lai in the business of the Group, in particular Central Steel, as well as some of the related entities (including the defendants in this action);
(c) Facts showing the close connection between Chun and Lai and the corporate defendants and other related entities;
(d) Role and significance of Central Steel and its Southern China suppliers and customers to the financial performance of the Group;
(e) Facts in support of the 2007-2009 Fictitious Transactions and Round Robin Scheme, including:
(i) summary of forensic evidence from Morrison and Mukundan;
(ii) factual evidence gathered by the Liquidators;
(f) Facts in support of the 2012-2013 Fictitious Transactions and Further Round Robin Scheme, including:
(i) summary of forensic evidence from Morrison and Mukundan;
(ii) factual evidence gathered by the Liquidators;
(g) The June/July 2013 Payments and the fact that the Liquidators were unable to identify any underlying transactions, commercial justification or document to support these were genuine transactions, and how funds received by the defendants were then further dissipated to other corporate the defendants or related entities;
(h) The Liquidators’ analysis of what the Group’s financial position should have been once the Fictitious Transactions are excluded; and
(i) The Liquidators’ analysis of the Group’s cash flow and bank borrowings that the Group did not have cash flow to pay the Dividends which were wholly financed by loans.
(3) For (2)(g) above, Borrelli clarified in his oral evidence:
(a) Although the 3 payments made by Central Steel to (i) Cheung Fat dated 13 June 2013 of RMB130,218,382.28; (ii) Cheung Fat dated 9 July 2013 of US$1,827,068.98; and (iii) Pacific Metal HK dated 4 July 2013 of RMB83,988,209.74 are not borne out by the supporting documents (in the sense that they are less in amount than the sum stipulated in the documents), this is because at the time of those respective payments, the books and records of Central Steel showed a liability to Cheung Fat and/or Pacific Metal HK (as the case may be). Although the Liquidators do not accept that these payments have any commercial justification (as they have not been able to locate any evidence or underlying transaction documents supporting those payments), they have, out of an abundance of caution, treated those payments as settling the alleged liabilities and recorded the outstanding balance of those remittances as being unsupported and without commercial justification.
(b) Of the 3 transfers for which no remittance application forms have been produced (because the Liquidators could not find them), the basis for his evidence that Chun had authorized them is that the sole signatory for the relevant bank account at the time of payments was Chun.
106. Simon Chan was (1) the sole proprietor of Simon Chan & Co (“SCC”), an accounting firm; (2) the person operating CPK Secretarial Company Ltd (“CPK”), a Hong Kong secretarial services company, the directors and registered shareholders of which are Simon Chan’s family members; and (3) SCC and CPK were situated at Room D, 11/F, 8-10 Hart Avenue, Tsim Sha Tsui, Hong Kong (“Hart Avenue Address”). The main aspects of his evidence are as follows:
(1) In 2007, he was asked to set up a number of Hong Kong and BVI companies through SCC and CPK on the instructions of: (1) Bobo Choy; (2) 陸寶玉 (阿玉) (“Ar Yuk”) and/or (3) 伍小姐 (“Ms Ng”, also known as “Jing Jeh” (晶姐) or “Ar Jing” (阿晶)), all of whom appeared to be business associates connected to each other. Those companies included:
(a) Cheung Fat;
(b) Lane Tone HK (the 3rd defendant herein);
(c) Jason Metal (the 4th defendant herein);
(d) Hoi Cheung (the 8th defendant herein);
(e) Chak Kwan (“the 9th defendant herein”);
(f) Qing Yuan Xin Xin Metal Recycling Ltd (“Qing Yuan Xin Xin”); and
(g) Aprima
(2) The Hong Kong-incorporated companies, namely Cheung Fat, Lane Tone HK, Hoi Cheung and Chak Kwan, all used the Hart Avenue Address or SCC’s storage address as their registered addresses, and at the outset all correspondence addressed to these companies would be delivered to Chun’s office, or collected by a messenger of China Metal or by Mr Xie Baixing. Later, Simon Chan was instructed by Bobo Choy to redirect the post to Ar Yuk or Ms Ng at the Asia Steel Building in the Mainland.
(3) He also provided nominee services for a number of companies associated with Chun.
(4) He would arrange for delivery of bank documents of various corporate defendants on instructions of Mr Xie Baixing, Ar Yuk or Ms Ng.
(5) He would be asked by Ar Yuk to settle sundry payments for Cheung Fat and Metallurgical Industry Limited (“Metallurgical”, the 7th defendant herein).
(6) In 2013, when Simon Chan received a request for documents from the SFC, he was instructed by Chun personally on who the “contact persons” for each of Cheung Fat, Lane Tone HK, Hoi Cheung and Chak Kwan should be.
107. Jenny Chan was employed as the Administrative and Accounting Manager of Central Steel from 2012 to 2015. The main aspects of her evidence are as follows:
(1) She provided a factual description of how Central Steel handled the documentation concerning its sales and purchases, confirming that Central Steel mainly dealt with the Southern China (70%) and East China (30%) operations.
(2) For the Southern China operations, the documents would not go through the Group “OA System”, but were delivered by hand, and she dealt with firstly Yuki Ip and later 陸寶玉 (阿玉) (ie Ar Yuk).
(3) During her time as an employee of Central Steel, the only suppliers that she was aware of were Cheung Fat, Smith Steel and Pacific Metal HK, and the only customers that she was aware of were Chak Kwan, Metallurgical, Hoi Cheung and Qing Yuan Xin Xin (and in June or July 2013, Guangzhou Asia Steel Co Ltd).
(4) After Central Steel went into provisional liquidation, in October 2013, Ar Yuk contacted her to try to obtain the last contract and invoice numbers Central Steel had used up to May 2013, so that she could “provide” the information of suppliers and customers in June and July 2013 to Central Steel.
108. Under cross-examination, an answer given by Jenny Chan was challenged by Lai. Lai put to Jenny Chan that she was lying in that answer. This was denied by Jenny Chan.
(1) Under cross-examination, Jenny Chan was asked by Lai whether anyone had ever told Jenny Chan to get instructions from Lai while Jenny Chan was working in Central Steel. Jenny Chan answered that she was told by a person called Lai Chi (黎枝) at one time that Lai Chi would need to consult Chun or Lai if Lai Chi himself/herself was unable to answer the enquiries made by Jenny Chan. This answer was challenged by Lai. Lai accused that Jenny Chan lied in giving that answer.
(2) Facing the challenge, Jenny Chan maintained her answer. However, Jenny Chan clarified that she merely reported what Lai Chi had told her. Jenny Chan herself did not know why Lai Chi would need to consult Lai. Jenny Chan fairly said that Lai Chi’s answer could mean if Chun could not be found, Lai Chi might need to ask Lai as to the whereabouts of Chun for the purpose of finding Chun.
(3) In my view, since Jenny Chan and Lai Chi were colleagues and they had a working relationship, it is inherently probable that Lai Chi did tell Jenny Chan what Jenny Chan has now said in her evidence. There is nothing contradicting Jenny Chan’s evidence. Notwithstanding Lai’s challenge, I accept Jenny Chan’s evidence in full.
109. Cheng was employed by Huan Bao (parent company of Central Steel) as a clerical assistant from around 2006 to March 2015, who assisted with submitting documents to banks. The main aspects of his evidence are as follows:
(1) The bank books of various companies including inter alia Metallurgical and Cheung Fat were in fact held by the Group.
(2) He was asked to take various documents (including bank documents relating to Metallurgical) to Mr Xie Baixing, an employee of the Group, for signing. Mr Xie was named the sole signatory of Metallurgical’s and Cheung Fat’s bank accounts.
(3) He would be instructed by Lai Yuk Wa or Bobo Choy to deliver Qi Le’s, Lane Tone (HK)’s and Cheung Fat’s bank documents to banks.
110. I accept Cheng’s evidence in full. Cheng’s evidence shows that individuals such as Cheng (who were employees of the Group or otherwise closely connected with Chun) were repeatedly arranging physical deliveries such as transfer slips, withdrawal slips, fund remittance application forms on behalf of entities which were involved in the Round Robin Scheme, such as Cheung Fat, Lane Tone HK, Qi Le and Metallurgical, notwithstanding that such individuals had no connection with those companies.
111. Qiu is a former officer of Jason Metal. The main aspects of his evidence are as follows:
(1) From 2004 to 2007, Jason Metal only sourced 30,000 to 40,000 tonnes of steel priced at approximately US$250 to US$300 per ton (worth around US$7.5 million to US$12 million in total).
(2) In 2008, Jason Metal only sourced 20,000 to 30,000 tonnes of metals (worth around US$5 million to US$9 million in total).
(3) From 2009 to 2011, Jason Metal did not source any scrap metal at all.
(4) The transaction records between Jason Metal and Central Steel for the years 2007 to 2009 disclosed by China Metal to the SFC (which have since been disclosed to the Liquidators) are not the true business records.
(5) Qiu was instructed by Chun to sign documents purportedly to confirm, on behalf of Jason Metal and Lane Tone USA respectively, under different names (neither of which was his real name), purchase orders allegedly placed by Central Steel with those entities to address questions raised by China Metal’s auditors and the SFC.
(6) Jason Metal was closed down in 2011 by Chun because it was being investigated by the SFC.
112. As to Ps’ expert witnesses, as said in the above, Lai has no question for Mukundan. In respect of Morrison, Manning and Valente, although Lai has asked them some questions, Lai in fact has no challenge against their respective expertise, the analyses in their respective expert reports, and the answers given by them in their oral evidence. I find that each of them has the relevant expertise to give expert evidence in this case. Having considered the expert evidence given by Ps’ experts, I am of the view that the evidence given by each expert is well founded and I accept the expert evidence. The evidence given by Ps’ expert witnesses is set out in various parts in this judgment.
113. Lai was, inter alia,
(1) from 28 May 2008 to 21 May 2009, a director of China Metal, and thereafter a non-executive director of China Metal; and
(2) from 17 July 2007 to 14 April 2010, an administrator of Central Steel.
114. The essence of Lai’s evidence is as follows:
(1) She was a mere housewife responsible only for home duties.
(2) The directorship or bank signatories that she held was at the request of Chun for the sole purpose of complying with the statutory requirement of maintaining a sufficient number of directors in those companies or as a reserve signatory.
(3) She had not participated in the operations or management of China Metal, Central Steel and/or Huan Bao at all, and had no knowledge and no involvement in the management of those companies.
(4) She relied upon Chun, staff of the Group and professionals (including auditors).
(5) She had no knowledge of the Fictitious Transactions or Round Robin Scheme.
(6) She claims to have no knowledge of any of the 3 payments made into Aprima (ie of which she is sole director and shareholder) and out to Qi Le (which were then used as part of the Round Robin Scheme), including the US$5 million payment made by Aprima to Qi Le on 5 December 2007 by the Aprima Remittance Form signed by her.
(7) Although she admits to her signature on the cheque issued by Worldwide Int’l Inspection Ltd (of which she is sole director and shareholder) paying for the incorporation expenses of Cheung Fat, she claims to have no recollection about the payee or the purpose of the payment.
115. Lai’s evidence is contradicted by contemporaneous documents on various material aspects.
116. There is clear and cogent documentary evidence showing that Lai was actively involved in the business of the Group, being a co-founder with Chun, had assisted Chun with its operations and development, and with special focus on overseeing the financial and administrative functions. Her active involvement was both before and after the listing of China Metal in 2009.
(1) As shown in the Prospectus signed and confirmed by Lai, Lai “co-founded [the Group] with Mr Chun” and that she had “over 8 years of experience in financial and administrative management”.
(2) As per the due diligence questionnaire signed and confirmed by Lai on 27 February 2008 for the purposes of listing, Lai herself described her job responsibilities within the Group as “assisting the Group Chairman to expand the Group’s PRC business” (協助集團董事長開拓中國業務).
(3) Further, in the confirmation document signed by Lai relating to the listing exercise, Lai annexed a personal CV thereto which was “true, accurate, not misleading and complete”. In that CV, Lai was described as having not only co-founded the Group, but having been “responsible for overseeing the financial and administrative functions of the Group’s business”.
(4) Lai was responsible for overseeing the financial and administrative functions is borne out by the fact that:
(a) she approved and signed the payment forms of various payments Central Steel made which were part of the 2007-2009 Fictitious Transactions and Round Robin Scheme; and
(b) she was the one who made decisions on salary increases and employment-related payments of various companies managed as part of the Group (廣州亞鋼置業有限公司 and 廣州誠摯物業管理有限公司).
(5) After China Metal’s listing in 2009, Lai (despite her re-designation as a non-executive director) continued to be actively involved in the general business and operations of China Metal and the Group companies.
(a) In the email from Mr Yan Qiping (“Yan”) dated 28 December 2012, Yan expressly addressed Lai as “黎總” alongside Chun. That is the usual greeting made by a subordinate in Mainland China to a superior. Yan himself was a senior staff of the Group at the time. The fact that he found it necessary to send the email to only Chun and Lai (as opposed to other directors, executive and non-executive, of China Metal) and to address Lai as “黎總” (instead of “Mrs Chun”) bears significance. This shows that Lai continued to remain involved in the operations of the company and was of a vital role in the Group[65].
(b) As shown in the Group’s employee directory dated 6 March 2013, Lai still had a listed telephone number with a dedicated line (showing that she had an office in the Shanghai office), fax number (which only Chun, Lai, Yan and the deputy CEO had) and 2 company email addresses with the Group in 2013, well after she had already been re-designated as non-executive director.
(c) Lai would also sign documents on behalf of Central Steel, for example, the provisional invoice and packing list, both dated 23 April 2010.
(d) Further, the events as set out in [116(4)(b)] above occurred in 2011 and 2012.
117. It is indisputable that Lai was entrusted with important positions within the Group.
(1) She was the director / shareholder / legal representative of no less than 13 companies affiliated with Chun.
(2) She was one of 2 bank account signatories of Central Steel from July 2007. This is a significant matter: Central Steel was the subsidiary of the Group contributing to a very substantial portion of the Group’s profit (ie contributing to 100% or more of the Group’s reported consolidated profit between 2008 and 2012). Lai was in a position with the authority of controlling the Group’s cash.
(3) It would have been wholly unnecessary for Lai to have been put in so many important positions within the Group if the intention was not for her to be involved in the Group’s management and operations. No satisfactory explanation has been suggested by Lai for her taking up all of these roles.
118. There is also indisputable evidence showing that Chun and Lai had placed family members and friends in critical positions in the Southern China office of the Group (which managed all of the purported suppliers and customers involved in the Fictitious Transactions), through whom Chun and Lai maintained control and oversight of the operations of the Southern China office:
(1) The list of relatives can be seen from Chun’s Singapore immigration investment application – all siblings of Chun (save one) worked in Guangzhou and 3 of them (ie Chun Chi Sun, Chun Yim Fong and Chun Mei Yung) worked for Guangzhou subsidiaries of the Group.
(2) Further, Lai confirmed under cross-examination that the staff as shown in the China Metal staff record for Guangzhou included a number of Chun’s siblings and Lai’s own sister.
(3) As to Ar Yuk, as per the Group’s internal records, she was an employee of one of the Guangzhou subsidiaries of the Group and a “friend” of Lai. Lai confirmed under cross-examination that Ar Yuk was the wife of her neighbour (although Lai denied that Ar Yuk was her friend), and Lai had known that neighbour for many years (ie since Lai was in the secondary school). On Lai’s own admission, Ar Yuk was someone whom Lai has known for a very long time. Based upon the evidence before the court, I am of the view that Ar Yuk was a person trusted and relied upon by Lai.
119. There is direct evidence showing Lai was actually and directly involved in the 2007-2009 Round Robin Scheme and Fictitious Transactions.
(1) Lai had authorized and signed remittances on behalf of Central Steel for no less than 24 transactions in the 2007-2009 Fictitious Transactions and Round Robin Scheme.
(2) Lai:
(a) accepted that she had signed the payment voucher dated 15 October 2009 and other similar payment vouchers;
(b) accepted that she would not merely sign without looking but would indeed “check” through the documents to make sure they were “okay” before signing the relevant payment vouchers; and
(c) gave evidence to the effect that not only did she sign the relevant remittance application dated 15 October 2009, she was contacted by the bank directly thereafter to confirm the details of the remittance, including payee and amount.
(3) Such evidence (that she would check the details of the transaction before approving and signing the same) is consistent with her background and experience in business and finance, and is clear evidence showing that she must have been fully aware of the transactions and their nature.
(4) Lai had also deployed her corporate vehicle, Aprima, and its bank accounts, to facilitate the Round Robin Scheme.
(a) In December 2007, approximately US$12.2 million was transferred into Aprima’s DBS account, which were then paid out to Qi Le in 3 transactions on 4 December 2007, 7 December 2007 and 11 December 2007 and were then transferred to Central Steel as part of the Round Robin Scheme. Of the 3 remittances made from the Aprima DBS account to Qi Le’s bank accounts, the one dated 5 December 2007 (ie the Aprima Transfer Document) bore Lai’s signature.
(b) Notwithstanding the admission made by Lai in [20A] of the Amended Defence, Lai insisted and denied that the signature of the Aprima Remittance Form was not her signature. This denial is plainly untrue.
(c) The relevant chronology is as follows:
(i) On 21 May 2015, Ps re-amended the Amended Statement of Claim to plead interalia that payments were made out of the Aprima DBS Account on the instructions of Chun or Lai to Qi Le.
(ii) On 22 May 2015, Ps filed and served the 2nd Supplemental List of Documents, which included item 1467. Item 1467 included the Aprima Remittance Form.
(iii) On 3 June 2015, Lai’s solicitors (Lai was legally represented at that time) requested for copies of items 1454 to 1482 (which included item 1467) on Ps’ 2nd Supplemental List of Documents.
(iv) On 4 June 2015, Ps’ solicitors provided the requested items to Lai’s solicitors.
(v) On 22 June 2015, Lai signed a Statement of Truth verifying her Amended Defence, which containing the new [20A].
(vi) On 25 June 2015, Lai filed the Amended Defence.
(d) Looking at the chronology, the truth is that when Lai signed the Statement of Truth to verify the Amended Defence on 22 June 2015, she had already obtained a copy of the Aprima Remittance Form.
(e) At the final submissions stage, I drew Lai’s attention to the chronology above and sought an explanation from her. Lai said that her solicitors had never shown the Aprima Remittance Form to her. This new allegation is obviously in contradiction with what Lai has told the court at an earlier time, ie both she and her solicitors did not have the Aprima Remittance Form at the time of the preparation of the Amended Defence.
(f) Lai’s evidence is that she has never herself deposited any substantial funds into Aprima’s DBS account (indeed the bank statement of Aprima reveals that there was insubstantial funds in Aprima’s DBS account prior to the US$5 million deposited into the same), and she accepted that she must have known, prior to her signing the remittance dated 5 December 2007, that someone else must have placed US$5 million into Aprima’s bank account, which she was then asked to transfer out on the following day to an entity in which Aprima had no apparent dealings with. In the premises, Lai must have been aware that the transfer of funds could not be for any genuine commercial reasons of Aprima but Aprima was being used to facilitate fund flow.
(5) Lai’s involvement in the Round Robin Scheme is also evidenced by her payment of Cheung Fat’s incorporation expenses through Worldwide Int’l Inspection Ltd. She must have known about the setting up and use of Cheung Fat, given also the registered address of Cheung Fat was the same as that of Aprima (Hart Avenue Address).
120. Lai says that she ceased to be an administrator of Central Streel in April 2010, and hence she should not be taken of having any knowledge and participation in the 2012-2013 Fictitious Transactions as claimed in Ps’ case. For the reasons set out in [116] above, at all times after the listing of China Metal in 2009 until the appointment of PLs (including the time after April 2010), Lai continued to be in a key position in the Group, being involved in the general business and operations of the Group. That being the case, and in view of the magnitude of the Fictitious Transactions and the fact that she is Chun’s wife, I refuse to accept that Lai has no knowledge of the 2012-2013 Fictitious Transactions.
121. Lai claims that she has placed trust in China Metal’s management and relied upon professionals (including auditors) in the company’s business and operations, and that she therefore had no knowledge of the Fictitious Transactions and Round Robin Scheme. However, under cross-examination, it was pointed out to her, by reference to the annual reports of the Group, that auditors were not tasked with preparing the company’s accounts – rather, it was the directors’ duty to prepare the company’s financial statements truly and fairly. Lai was unable to offer any explanation in response to this challenge.
122. Lai alleged that she never owned any interest in the Group and the only benefit received by her was a non-executive directors’ remuneration of HK$200,000 per annum after its listing. This is not true. In saying so, what Lai has not mentioned is the substantial benefit that she and her family derived from the fraud perpetrated on China Metal and Central Steel.
(1) As she accepted, her family fortunes were wholly tied to Chun, with whom she shared a family, including three daughters.
(2) The fact of China Metal becoming a listed company on the Hong Kong Stock Exchange, and the declaration of the Dividends in FY2009 to FY2011, on the basis of patently false financial information, was a matter which enabled Chun (through himself and his personal corporate vehicle, Wellrun), to obtain very substantial dividends in the amount of HK$358.20 million.
(3) As a result, Chun and Lai were able to live a luxurious lifestyle, including having lavish residences, and having the ability to afford the significant expenses incurred by Lai and by the 3 daughters during the relevant period.
123. In her final submissions, Lai mentioned some new factual matters[66] which had not been mentioned by her during the evidence stage. As to the new factual matters raised by Lai in her final submissions, these are not matters in her evidence and Lai is not entitled to introduce these matters in her final submissions. Ps have no opportunity to test these new matters by cross-examination. If these new matters are regarded as admissible evidence or any weight is given to these matters, that would be grossly unfair to Ps.
124. In my judgment,
(1) It is clear that Lai’s involvement in the Group was real and substantial. She was actively involved in assisting Chun to expand the business of the Group, with a particular focus on overseeing the financial and administrative functions. This included being one of the 2 bank account signatories of Central Steel from July 2007 and authorizing no less than 24 transactions in the 2007-2009 Fictitious Transactions and the Round Robin Scheme on behalf of Central Steel.
(2) Contrary to Lai’s allegation, her position as a director and authorized signatory was not simply to fill a vacancy or be a “reserve signatory”.
(3) I reject Lai’s allegation that she was a mere housewife with no involvement at all in the business and affairs of the Group, and that she had no knowledge of the Fictitious Transactions and Round Robin Scheme (from 2007 to 2013). Given her role and ongoing involvement in the business and affairs of the Group, and the magnitude of the fraud with respect to the overall financial position and well-being of the Group, Lai must be aware of the scheme of Fictitious Transactions and Round Robin Scheme.
(4) I find that Lai had knowledge of the Round Robin Scheme and Fictitious Transactions as a whole, and was directly involved in some of them.
(5) I also reject her allegation that she relied on others in looking after the business or in preparing the financial statements, which she had approved as a director and on the basis of which the Dividends were declared. I find that she approved the financial statements for FY2009 to FY2011 and recommended the declaration of Dividends with knowledge of the fraud and that the stated financial performance was wholly false and unreliable.
125. Save and except the admissions made by Lai which are against her interest, I reject Lai’s evidence in its entirety.
H. FICTITIOUS TRANSACTIONS & ROUND ROBIN SCHEME
126. Based upon the evidence accepted by this court, for the reasons set out below, I find that the Fictitious Transactions and the Round Robin Scheme as pleaded in Ps’ case are proved.
H1. Corporate entities controlled by and associated with Chun and Lai
127. With respect to the 3rd to the 10th defendants (D3 to D10), on the face of the Group’s records, they were said to be:
128. It is Ps’ case that the evidence clearly shows that these corporate defendants (as well as other corporate entities identified in Annex 2 to Ps’ Written Opening dated 28 December 2020 (“Annex 2”), which had involvement in the Fictitious Transactions) were controlled by Chun and Lai for the purpose of carrying out the same. Having examined the evidence adduced by Ps, I am satisfied that the matters set out in Annex 2 are proved. For ease of reference, Annex 2 is annexed hereto and should form part of this judgment[67].
H2. Fictitious Transactions – Overview
129. As said in the above, Central Steel had a vital role in the financial performance of the Group, in that its revenue and profits accounted for a very significant proportion of that of the Group. Between 2008 and 2012, Central Steel’s purported external profit (excluding inter-company transactions) was 100% or more of the Group’s reported purported consolidated profit.
130. The evidence shows that Central Steel was at the centre of the fraudulent scheme, in that the overwhelming majority of its reported sales and purchases between 2007 and 2009 and 2012 and 2013 were fictitious, conducted with purported suppliers and customers who were controlled by or associated with Chun and/or Lai, and financed by the Round Robin Scheme.
131. The evidence in support of the existence of the Round Robin Scheme and the Fictitious Transactions are as follows:
(1) evidence gathered by the SFC and presented in the SFC Petition, which the Liquidators have adopted and on top of which the Liquidators have conducted further investigations and analyses;
(2) expert evidence of Morrison, setting out his analysis on the funds flow tracing in respect of the transfer of funds amongst Central Steel, its purported suppliers and its purported customers in 2007-2009 and 2012;
(3) expert evidence of Mukundan, setting out his analysis on the bills of lading concerning the purported shipments of scrap metal from various world ports to China between 2007-2009 and 2012-2013 in relation to the transactions between Central Steel and its purported suppliers and purported customers; and
(4) evidence from Ps’ factual witnesses on other suspicious circumstances on the operations of China Metal and the Group.
H3. 2007-2009 Fictitious Transactions
H3.1 Central Steel’s financial position as recorded
132. Based on the records of Central Steel available to the Liquidators, in particular Central Steel’s Sales and Purchase Day Books (being electronic files showing details of the sale and purchase transactions conducted by Central Steel each year) (“Day Books”), the top 5 suppliers and customers of Central Steel between 2006 and 2012 were as follows:
Top 5 Suppliers of Central Steel (in HK$)
No 1
($236m)
($330m)
($1,013m)
($1,748m)
($2,856m)
($4,983m)2
($244m)
($649m)
($1,542m)
($2,261m)
($4,534m)
($7,191m)3
($10m)
($150m)
($498m)
($1,074m)
($1,449m)
($2,738m)4
($9m)
($153m)
($552m)
($1,362m)
($2,246m)
($1,551m)5
($4m)
($57m)
($145m)
($548m)
($748m)
($525m)
($432m)Legend:
Words in italicsidentifies a Defendant in this action;
Words in italics and with underlineidentifies parties who were closely associated with a Defendant in this action as set out in Annex 2;
Words in italics and with double underlineidentifies parties who had close connections with Mr Chun/ Ms Lai as detailed in Annex 2
Top 5 Customers of Central Steel (in HK$)
No
1
($267m)
($762m)
($1,589m)
($3,161m)
($5,330m)
2
($82m)
($262m)
($628m)
($1,572m)
($2,606m)
($5,081m)
($7,098m)
3
($579m)
($1,541m)
($2,557m)
($5,056m)
($6,680m)
4
($9m)
($311m)
($620m)
($768m)
($2,073m)
5
($0.2m)
($443m)
($606m)Legend:
Words in italicsidentifies a Defendant in this action;
Words in italics and with underlineidentifies parties who were closely associated with a Defendant in this action as set out in Annex 2;
Words in italics and with double underlineidentifies parties who had close connections with Mr Chun/ Ms Lai as detailed in Annex 2
133. Most of the “top” suppliers and customers of Central Steel between 2007 and 2012 are in italics. In particular:
(1) D3 to D8 (in italics) and their related entities (in italics with underline) were recorded to have consistently been the largest suppliers and customers of Central Steel between 2007 and 2012.
(2) The other top suppliers and customers (in italics with double underline) were also entities associated with Chun and/ Lai, even though they were not named as defendants in this action.
(3) Over 78% of the sales transactions (totalling HK$58.1 billion in value) and over 76% of the purchase transactions (totalling HK$51.1 billion in value) of Central Steel over this period were undertaken with entities identified in italics in the above tables, all of which were associated with Chun and/or Lai in some way.
134. As shown in the tables above, Central Steel’s top 3 suppliers between 2007 to 2009 were: (1) Lane Tone Int’l Material Inc (“Lane Tone USA”); (2) Jason Metal Recycle Corp (D4) (“Jason Metal”); and (3) Cheung Fat.
135. As to Lane Tone USA:
(1) According to the Prospectus, and the 2009 Annual Report of the Group, the annual total sums paid by the Group to Lane Tone USA in relation to the direct purchase of scrap metals for 2007, 2008 and 2009 purportedly approximated HK$241.8 million, HK$1,012.9 million and HK$1,073.6 million respectively.
(2) This corresponds to the records in the Day Books, which state the value of direct purchases of scrap metal from Lane Tone USA in 2007, 2008 and 2009 as US$31.3 million (HK$244.1 million), US$129.9 million (HK$1,013.2 million), and US$137.7 million (HK$1,074.1 million) respectively.
136. As to Jason Metal, according to the Day Books, the value of the total purchases from Jason Metal was US$42,292,955 in 2007, US$83,269,144 in 2008 and US$224,170,247 in 2009.
137. As to Cheung Fat, according to the Day Books, the value of the total purchases from Cheung Fat by Central Steel was allegedly US$19,196,060 in 2007, US$63,846,420 in 2008 and US$197,790,428 in 2009.
H3.2 Funds flow analysis by Morrison
138. The forensic accounting analysis of the fund flows between Central Steel and its purported suppliers and purported customers between 2007 and 2009 performed by Morrison indicates that:
(1) funds sourced from the bank accounts of Central Steel were first transferred to the bank accounts of some of its “top” purported suppliers, namely: (a) Lane Tone HK (purportedly for goods purchased from Lane Tone USA even though the 2 entities were not connected in any way); (b) Jason Metal; and (c) Cheung Fat (supposedly for payment of purchase of scrap metal from these purported suppliers);
(2) a substantial amount of those funds was then transferred to the bank accounts of some of the purported customers, namely: (d) Qi Le (ie D6) and (e) Metallurgical Industry Ltd (ie D7) (“Metallurgical”), despite there being no apparent commercial dealings between these purported suppliers (a), (b) and (c) and the purported customers (d) and (e); and
(3) a substantial amount of those funds received by Qi Le and Metallurgical was then circulated from their bank accounts back to the bank accounts of Central Steel (supposedly for sale of scrap metal to these purported customers).
139. Taking 2008 as an example:
(1) According to its internal accounting records, Central Steel made 85 payments totaling US$272,484,590.66 and HK$35,359,630.22 to Lane Tone USA, Jason Metal and Cheung Fat.
(2) The majority of those payments recorded in the internal accounting records of Central Steel to be for settlement of purchases from Lane Tone USA (ie 34 out of 38 payments) were in fact paid into bank accounts of Cheung Fat and Lane Tone HK. Lane Tone (HK) has a similar name as Lane Tone but there is no apparent commercial relationship between the two entities, or between Lane Tone (HK) and Cheung Fat, as to provide an explanation for the receipt by these companies of funds supposedly payable to Lane Tone USA.
(3) Transfers totaling US$273,810,257.61 and HK$35,312,768.07 sourced from Central Steel were then paid by Lane Tone HK/Jason Metal/Cheung Fat to the purported customers, namely Qi Le and Metallurgical.
(4) Each transfer of funds from Central Steel to the purported suppliers and then from the purported suppliers to the purported customers occurred within 8 days.
(5) Thereafter, a substantial portion of the funds transferred to the purported customers’ bank accounts, totaling US$276,702,855.11 and HK$4,679,830 (after deducting bank charges), were circulated back to Central Steel within 8 days.
(6) Combining the above findings with Morrison’s findings onthe payments from Central Steel made in early 2008, theamount of funds which were circulated back to Central Steel in 2008 totaled US$320,001,881.46, which made up of 99.95% of fundswhich were originally paid out of Central Steel to thesuppliers (ie US$320,174,953.14).
140. Morrison concludes that in the absence of satisfactory evidence or information to the contrary, the circular funds flow transactions were likely fictitious, lacking bona fide commercial substance, and hence fraudulent.
141. Morrison’s findings in respect of each of the years under his review are summarized in the following table:
Review Period Purported Suppliers Involved Purported Customers Involved Initial Payment out of Central Steel Amount Circulated back to Central Steel % Funds Circulated Back Timeframe of Circulation 2007 Cheung Fat;
Jason MetalQi Le US$48,794,577.66 US$40,625,757.99 83.26% 11 days 2008 Lane Tone USA;
Lane Tone (HK);
Cheung Fat;
Jason MetalMetallurgical; Qi Le US$320,174,953.14 US$320,001,881.46 99.95% 8-16 days 2009 Lane Tone USA;
Lane Tone (HK);
Cheung Fat;
Jason MetalMetallurgical; Qi Le US$458,710,360 US$457,257,015.26 99.68% 21 days 2012[68] Cheung Fat[69];
Smith;
PacificHoi Cheung; Metallurgical;
Chak Kwan; Qing Yuan
Xin XinUS$2,397,822,505.70 US$2,338,130,866.43 97.51% 12 days
142. As shown in the table above:
(1) The amounts involved in the round robin funds flows had continuously and significantly increased over the years.
(2) The amounts of funds circulated back to Central Steel consistently formed a high percentage of the funds which were originally paid out of Central Steel.
(3) The number of entities involved in the Round Robin Schemes grew over the years.
143. Morrison’s findings are consistent with the Liquidators’ investigations:
(1) Morrison’s conclusions are consistent with the information recorded in a spreadsheet with the title “2006股息” dated as at 9 January 2008setting out the circulation of funds amongst various purported suppliers and purported customers and Central Steel between November 2007 and December 2007 located in the computer of Bobo Choy, the former General Manager in charge of administration in China Metal.
(2) The Liquidators have not identified any evidence which suggests that there could be any legitimate transactions or dealings between Lane Tone HK, Jason Metal and Cheung Fat on one hand and Qi Le and Metallurgical on the other hand that could justify the transfer of substantial funds between them.
144. Based upon all these, I find that the purchases from Lane Tone USA, Jason Metal and Cheung Fat during 2007 and 2009 (and the corresponding sales to Qi Le and Metallurgical) are not genuine transactions.
H3.3 Mukundan Expert Report: Analysis of bills of lading
145. The aforesaid conclusion is further supported by the analysis done by Mukundan of the bills of lading found by the Liquidators.
(1) The expert has investigated and analysed the bills of lading relating to the alleged transactions between Central Steel and its suppliers or customers to ascertain whether the relevant shipment of scrap metal had actually taken place. The scope of investigation covered the years 2007 to 2009, 2012 and 2013.
(2) A vast majority of the bills of lading which formed the subject of investigation were issued by Non Vessel Owning Common Carriers (“NVOCC”), ie companies which do not own or operate the vessel but assume the responsibility of the carriage of the cargo through the issuance of a NVOCC bill of lading.
(3) The expert checked, verified and commented on a total of 1,042 bills of lading, broken down into 4 categories:
(a) Category 1: Bills of lading for the period between December 2012 and May 2013 (“the 2013 Bills of Lading”), comprising 30 NOCC bills of lading;
(b) Category 2: Bills of lading for the 6 months ended on 31 December 2012 (“the 2012 Bills of Lading”), comprising 343 NOCC bills of lading;
(c) Category 3: Bills of lading in relation to Lane Tone USA (“the Lane Tone Bills of Lading”), comprising 22 NOCC bills of lading; and
(d) Category 4: Bills of lading for the period between 2007 to 2009 (“the 2007-2009 Bills of Lading”), comprising 647 NOCC bills of lading.
146. After examining the 1,042 bills of lading, the expert is of the view that the vast majority of them (71.50%) do not represent a genuine shipment, and a further 9.60% are considered unlikely to represent a genuine shipment.
147. The expert has detailed his methodology and analyses in his report. The following are the major reasons as to why a bill of lading purportedly representing a transaction of Central Steel would be regarded as not representing or unlikely to represent a genuine shipment:
(1) Non-compliance with the ISO 6346 container numbering system: it is not common practice for containers on ocean-going international voyages to be numbered differently from ISO 6346.
(2) No corresponding master bill of lading issued by the shipping company: every NVOCC bill of lading is supposed to have a corresponding master bill of lading with identical details of the name of the vessel, voyage number, container number(s), port of loading and discharge evidencing the physical movement of the goods. Such master bill of lading would have been required if the physical carrier had actually transported the containers.
(3) Significant discrepancies between the master bill of lading (obtained by the SFC from the shipping company) and the NVOCC bill of lading: eg the ports of loading or discharge are geographically in a different area (which made it impossible for the container to be loaded at a particular port in time as described on the NVOCC bill of lading), or different descriptions of cargoes.
(4) NVOCC’s contact details missing from the bill of lading: this is unusual because the consignee or notify party of the shipment would not know how to contact the carrier or whom to contact so as to have the cargo delivered to them at the port of discharge or if they have a claim for loss or partial loss of the cargo.
(5) Goods received by consignees under the master bill of lading or further processed by them at the end of the sea passage: this would mean the bill of lading operation had come to an end and the different shippers and consignees mentioned on the NVOCC bill of lading could have no role in the shipment.
(6) Confirmation from the physical carrier, shipper and/or consignee on the master bill of lading regarding the actual commercial transaction and shipment (which are different from those contemplated on the NVOCC bill of lading), or confirmation from the physical carrier that it had no relationship with the NVOCC enabling it to issue the NVOCC bill of lading or no knowledge of the NVOCC.
(7) The master bill of lading being “Non Negotiable Unless Consigned to Order”: where the shipment is not consigned to order and the master bill of lading has a named non-NVOCC shipper and consignee, the physical carrier would deliver the container to the named consignee, and there would be no role for the NVOCC in the shipment.
(8) No record of the vessel (named under the NVOCC bill of lading) existing or operating at the relevant time.
(9) At least one container on each master of billing was loaded with cargoes other than metal/scrap.
148. Mukundan’s evidence is not challenged by Lai at all. I accept and agree with the analysis done by the expert. In my judgment, the expert has cogently demonstrated that a large proportion of the trading activities supposedly carried out by the Group are fictitious.
149. The expert finds that all the Lane Tone Bills of Lading (ie 100%) are fictitious. Ps submit that this finding, coupled with the findings by Morrison as set out in the above, provides a strong basis to infer that all of the bills of lading relevant to the other purported suppliers and purported customers are also fictitious. I agree and accept the submissions made by Ps.
H3.4 Other matters specific to Lane Tone USA / Jason Metal / Cheung Fat
150. Ps refer to the the following additional matters which support that the transactions which Central Steel purported entered into with its top 3 suppliers (ie Lane Tone USA, Jason Metal and Cheung Fat) between 2007 to 2009 are fictitious.
151. In relation to Lane Tone USA, there is affirmation evidence from the former VP-Officer of that company, Ms Zhao Yuping (also known as Happy Zhao), that[70]:
(1) For the 3 years from 2007 to 2009, Lane Tone USA only had 17 direct sale transactions with Central Steel. Lane Tone USA had no other direct sale transactions with China Metal, including all of its subsidiaries and associate companies, during that period.
(2) During that period, the aggregate value of all the direct sale transactions between Lane Tone USA and Central Steel amounted to approximately US$2.7 million only.
(3) In other words, over 99% of the purported purchases recorded in the Day Books (and which alleged values were also consistent with those recorded in the Prospectus and the 2009 Annual Report) are not verified by Lane Tone USA. It is clear that those purported transactions are not genuine.
152. In relation to Jason Metal, according to the evidence given by Qiu[71], a former officer of Jason Metal, that:
(1) From 2004 to 2007, Jason Metal only sourced 30,000 to 40,000 tonnes of steel priced at approximately US$250 to US$300 per ton (worth around US$7.5 million to US$12 million in total).
(2) In 2008, Jason Metal only sourced 20,000 to 30,000 tonnes of metals (worth around US$5 million to US$9 million in total).
(3) From 2009 to 2011, Jason Metal did not source any scrap metal at all.
(4) The transaction records between Jason Metal and Central Steel for the years 2007 to 2009 disclosed by China Metal to the SFC (which have since been disclosed to the Liquidators) are not the true business records.
(5) Qiu was instructed by Chun to sign documents purportedly to confirm, on behalf of Jason Metal and Lane Tone USA respectively, under different names (neither of which was his real name), purchase orders allegedly placed by Central Steel with those entities to address questions raised by China Metal’s auditors and the SFC.
(6) Jason Metal was closed down in 2011 by Chun because it was being investigated by the SFC.
153. In view of the evidence given by Qiu, Jason Metal could not have sold any material amount of scrap metals to Central Steel as recorded in the Day Books. It is clear that significant purported purchases made by Central Steel from Jason Metal are not genuine business transactions.
154. In relation to Cheung Fat, it has to be borne in mind the close connection between Cheung Fat on the one hand and Chun, Lai and the Group on the other. The close connection is shown by the following:
(1) the incorporation expenses of Cheung Fat were funded by a company called Worldwide Int’l Inspection Ltd, of which Lai was the sole shareholder and director;
(2) Cheung Fat's office telephone number, as shown in the account opening documents of its Bank of East Asia accounts, was a number subscribed by Asia Steel (HK) Ltd, a subsidiary of China Metal; and
(3) Mr Xie Baixing, who was an employee of the Group during the material time, was the sole signatory or at least one of the two signatories of Cheung Fat’s bank accounts at the material times.
155. In my judgment, all the aforesaid further reinforce the conclusion that the overwhelming majority of the transactions entered into by Central Steel with its purported top suppliers are fictitious, such that the figures recorded in the Day Books during this period have been substantially inflated and cannot be reliable.
H4. 2012-2013 Fictitious Transactions
H4.1 Central Steel’s financial position as recorded
156. In the draft reports and consolidated financial statements of the Group for the financial year ended on 31 December 2012, the Group claimed to have, on a consolidated basis:
(1) a gross profit of HK$2.34 billion and an overall net profit of HK$1.768 billion;
(2) cash and bank balances of HK$1.65 billion; and
(3) current liabilities of HK$21.2 billion and current assets of HK$27.9 billion.
157. According to the Day Books:
(1) The top 3 suppliers of Central Steel for 2012 were Cheung Fat, Pacific Metal Corp Recycle Corp (D10) (“Pacific Metal Corp”) and Smith Steel Corp (“Smith Steel”), while the top 3 customers were Hoi Cheung Metal Recycling Limited (D8) (“Hoi Cheung”), Chak Kwan Metal Recycling Ltd (D9) (“Chak Kwan”), and Metallurgical. Details are shown in the table below:
(HK$4,274 million)
(HK$2,240million)
(HK$3,063 million)
(HK$2,140 million)
(HK$772 million)
(HK$2,168 million)
(HK$1,274 million)
(2) The transactions between Central Steel and these 6 purported top customers and top suppliers were mostly in a “single-to-single” or “paired-up” pattern, in that all the goods sourced from a particular top supplier were recorded to have been sold to a designated top customer, as set out in the following table:
US$
(3) For the reasons set out below, all or nearly all of the transactions identified above table are fictitious transactions.
H4.2 Morrison Expert Report: Funds flow analysis
158. Morrison has conducted forensic accounting analysis of the fund flows between Central Steel and its purported suppliers and purported customers in 2012. The expert discovered the following in his analysis:
(1) funds sourced from the bank accounts of Central Steel were first transferred to the bank accounts of its 3 purported top suppliers for 2012, namely: (a) Cheung Fat; (b) Pacific Metal Corp; and (c) Smith Steel (supposedly for payment of purchase of scrap metal from these purported suppliers);
(2) a substantial amount of these funds was then, through a further entity called New Metal Recycle Corp (“New Metal”), transferred to the bank accounts of (a) Hoi Cheung; (b) Chak Kwan; (c) Metallurgical; and (d) Qing Yuan Xinxin Metal Recycling Ltd (“Qing Yuan Xinxin”), despite there being no apparent commercial dealings between these purported suppliers and purported customers; and
(3) a substantial amount of those funds was then circulated from the above purported customers’ bank accounts back to the bank accounts of Central Steel (supposedly for sale of scrap metal to these purported customers).
159. The expert says that:
(1) According to its payment vouchers and the underlying supporting documents, Central Steel made 431 payments totaling US$2,397,822,505.70 to Cheung Fat, Pacific Metal Corp and Smith Steel during the 6-month period ended 31.12.2012.
(2) 419 payments totaling US$2,380,779,438.57 were then transferred by Cheung Fat, Pacific Metal Corp and Smith Steel to New Metal. Of this amount, US$2,373,474,101.45 was found to be sourced from Central Steel.
(3) Thereafter, 374 payments totaling US$2,352,965,392.76 were then transferred by New Metal to Metallurgical, Hoi Cheung, Chak Kwan and Qing Yuan Xinxin.
(4) In the end, funds totaling US$2,338,130,866.43 were circulated back to Central Steel, constituting 97.51% of the funds originally paid out of Central Steel (ie US$2,397,822,505.70). The entire round robin circulation was complete within a timeframe of 12 days.
(5) The aforesaid funds flow circulation transaction for the 6 months ended on 31 December 2012 is illustrated in the diagram below[72]:
160. The expert concludes that circular funds flow transactions among the bank accounts of Central Steel, the purported suppliers, New Metal and the purported customers for 2012 are unusual and appear to lack commercial substance. He further opines that in the absence of satisfactory evidence or information to the contrary, the circular funds flow transactions were likely fictitious, lacking bona fide commercial substance, and hence fraudulent.
161. I agree and accept the opinion evidence given by Morrison. In my judgment, Morrison’s evidence supports the conclusion that the purchases and sales by Central Steel with its top purported suppliers and top purported customers in 2012 are not genuine but fictitious transactions.
H4.3 Mukundan Expert Report: Analysis of bills of lading
162. Mukundan’s analysis in relation to the 2013 bills of lading and my finding concerning the bills of lading have been set out in section H3.3 above.
163. In respect of January 2013 up to May 2013, there is further evidence showing that the bills of lading of Central Steel are false and the underlying transactions could not be genuine:
(1) For the period from 31 December 2012 to May 2013, no financial results of China Metal or Central Steel are available. However, the SFC located 30 NVOCC bills of lading of Central Steel during that period, which related to about 172 containers, all of which were said to involve Cheung Fat or Pacific Metal Corp.
(2) According to Orient Overseas (International) Ltd (“OOCL”), which owns or charters many of the containers specified in those 30 bills of lading, those containers were in fact carried under different master bills of lading at the material times. That means many of the alleged containers recorded in the 30 bills of lading were in fact shipped under different shipments during the times and could not possibly have been in use under the 30 bills of lading associated with the alleged transactions of Central Steel.
(3) Further, the shippers and consignees identified in the master bills of lading issued by OOCL confirmed that the relevant containers were in fact shipped under different NVOCC bills of lading (ie not the ones found in the records of Central Steel).
(4) Consignees of the goods set out in those NVOCC bills of lading also confirmed that those goods were delivered to their local customers after the containers arrived at the port of discharge, and the vast majority of them were further processed before selling to local buyers. Thus, it would not have been possible for any on-sale of the entire containers of goods to the purported shippers as suggested in the relevant NVOCC bills of lading.
164. In the course of the Liquidators’ enquiries on the bills of lading as described above, OneSteel Recycling Hong Kong Limited (“OneSteel”), the shipper of a number of master bills of lading, confirmed that it did not have any business relationship with Central Steel in 2011 or 2012. This is inconsistent with the breakdown of the purchase transactions between Central Steel and its purported suppliers for each of the financial years between 2006 and the 9 months ended 30 September 2012 prepared by Deloitte, in which OneSteel was said to be a supplier of Central Steel for 2011 and 2012, with total purchases of MOP 9,259,151.
165. The above further shows that the transactions recorded in Central Steel’s records of its business transactions and turnover for 2012-2013 could not possibly be genuine or reliable.
H5. Close Connections Between Related Parties and Chun/Lai
166. As shown in Annex 2, that each of D3 to D10 were controlled by Chun and/or Lai, and used for the purpose of the Fictitious Transactions and the Round Robin Scheme. Further, of the “top” 5 suppliers and customers of Central Steel between 2007 and 2012, all of them were connected in some way to Chun and/or Lai, and accounted for over 78% of the sales transactions (totalling HK$58.1 billion in value) and over 76% of the purchase transactions (totalling HK$51.1 billion in value) of Central Steel during this period.
167. In respect of Lane Tone HK, Cheung Fat, Qi Le and Metallurgical, there is evidence showing that various individuals (who were not their account signatories, directors, shareholders or owners or employees but were closely associated with China Metal or Central Steel or Chun/Lai) assisted them in repeatedly arranging physical deliveries of banking and other documents on behalf of these entities to their banks. Those individuals are as follows:
Bank Account No. Delivery by Wing Hang Bank 418369-168
(022795-130)Chan Kin Kau Johnny Simon Chan Cheng Hiu Fan Cheng Hoi Bun Lu Baoyu Wing Hang Bank 626810-160 Cheng Hiu Fan Xie Baixing Wing Hang Bank 196722-130 Cheng Hiu Fan Wing Hang Bank 311082-168
(196722-130)Cheng Hiu Fan Ho Mei Fong Joyce Lu Baoyu Xie Baixing Zhou Renshan Wing Hang Bank 313398-101 Cheng Hiu Fan Bank of East Asia 015-51620016892 Cheng Hiu Fan Bank of East Asia 015-51610262326 Cheng Hiu Fan Bank of East Asia 015-51640056115 Cheng Hiu Fan
168. Of the individuals identified in above:
(1) Mr Cheng Hiu Fan had been employed by the Group as an office assistant/messenger since 2006, whose scope of work duties included delivery of documents and making payments at banks.
(2) Ms Lu Baoyu, also known as “Ar Yuk” (阿玉):
(a) was a staff member of the Group stationed in Guangzhou; and
(b) as confirmed by Simon Chan, gave instructions to him in relation to the incorporation of Hoi Cheung, Chak Kwan and other companies and their related matters.
(3) Mr Xie Baixing:
(a) has worked at the operating site of Huan Bao at least during the period between August 2008 and July 2011;
(b) was an employee of Guangzhou Jitong at least in 2011 and until February 2012; and
(c) sole signatory of Cheung Fat and Metallurgical.
(4) Mr Zhou Rezhan:
(a) has been an employee of the Group since 2001;
(b) was the Vice General Manager of Wuhan Yagang Metal Co Ltd, one of the PRC Subsidiaries; and
(c) sole signatory of Lane Tone HK.
H6. Financial Position of Central Steel in FY2010 and FY2011
169. For the financial position of Central Steel in FY2010 and FY2011, Ps submit that:
(1) the forensic evidence and findings of Morrison and Mukundan have clearly shown the existence and prevalence of fraud with respect to the transactions and revenue of Central Steel between 2007 and 2009 and 2012 and 2013;
(2) the evidence also shows how the purported suppliers and customers of Central Steel (in particular D3 to D10) were not genuine suppliers and customers but were controlled or closely associated with Chun and/or Lai and used for the purpose of the Fictitious Transactions;
(3) in FY2010 and FY2011, (a) the reported revenue and profits of the Group continued to increase; and (b) the reported profits were solely attributable to Central Steel’s profits (since the contribution by Central Steel’s profits were near or over 100%); and
(4) for FY2010 and FY2011, the purported suppliers and customers constituted the bulk of the revenue reportedly earned by Central Steel from its top 5 suppliers (in FY2010 it was HK$7,928 million ie 91%; and in FY2011 it was HK$15,026 million ie 96.5%).
170. Ps submits that by reason of the aforesaid, there is a strong case to infer that the fictitious transactions financed by the round robin circulation of funds were being operated in the same manner as the Fictitious Transactions and the Round Robin Scheme for FY2010 and FY2011.
171. Lai, in her cross-examination of Morrison and in her oral evidence, raised for the first time that given no fund flow analysis had been performed for 2010 and 2011, it should be inferred that the transactions in those years could be genuine. This is also a point made by Lai in her final submissions.
172. In my judgment, this point is not open to Lai. In the trial, Borrelli is the first witness giving evidence. As to why no investigation as to the fund flow in 2010 and 2011 was done, this is a factual question which ought to have been addressed to Borrelli so that Ps would have a proper opportunity to explain. Lai has failed to do so. Bearing the rule in Browne v Dunn in mind, I am of the view that Lai could not be allowed to rely on the absence of fund flow analysis for 2010 and 2011 as a point against Ps. That would be unfair to Ps if Lai is allowed to do so.
173. In my judgment, given the matters as set out in [169] above, there is evidence before the court in support of Ps’ contention that the fictitious transactions financed by the Round Robin Scheme continued in FY 2010 and FY 2011. If Lai is trying to put forward a positive case and argue that the transactions in 2010 and 2011 are genuine, Lai has to raise the same in her pleading and adduce evidence to prove her case. However, none of these has been done by Lai.
174. I accept Ps’ case and hold that the fictitious transactions financed by the round robin circulation of funds were being operated in the same manner as the Fictitious Transactions and the Round Robin Scheme for FY2010 and FY2011.
H7. True Financial Position of the Group 2009-2012
175. As a result of the Fictitious Transactions, the true financial position of the Group (on consolidated basis) between 2009 and 2012 was such that it did not have any or any sufficient distributable profits as to allow China Metal to have declared and paid the Dividends in FY2009, FY 2010 and FY2011.
176. The consolidated income statements and consolidated balance sheet of the Group for FY2009 to FY2012, as per the audited and unaudited financial statements of China Metal and the Group, are set out below:
Consolidated Statements of Comprehensive Income
HK$'000 | 31 December 2009 | 31 December 2010 | 31 December 2011 | 31 December 2012 |
(audited) | (audited) | (audited) | (unaudited) | |
Revenue | 9,063,175 | 22,508,182 | 52,140,520 | 85,829,413 |
Costs of sales | (8,273,221) | (21,272,828) | (50,057,188) | (83,494,179) |
Gross profit | 789,954 | 1,235,354 | 2,083,332 | 2,335,234 |
Other income | 7,973 | 65,655 | 109,584 | 57,743 |
Distribution and selling expenses | (6,559) | (8,597) | (49,406) | (58,215) |
Administrative expenses | (83,548) | (182,832) | (257,382) | (252,731) |
Other expenses | (13,365) | - | - | - |
Net (loss) gain on derivative financial instruments | (72,336) | (77,534) | 338,123 | 265,340 |
Finance costs | (120,425) | (95,289) | (294,652) | (460,773) |
Share of results of an associate | 1,941 | (1,534) | (5,765) | (167) |
Gain on disposal of a subsidiary | - | 9,278 | 198 | - |
Profit before taxation | 503,635 | 944,501 | 1,924,032 | 1,886,431 |
Income tax expenses | (24,950) | (52,598) | (92,189) | (117,559) |
Profit for the year | 478,685 | 891,903 | 1,831,843 | 1,768,872 |
Consolidated Statements of Financial Position
HK$'000 | 31 December 2009 | 31 December 2010 | 31 December 2011 | 31 December 2012 |
audited | audited | audited | unaudited | |
Non-current assets | ||||
Property, plant and equipment | 88,989 | 426,817 | 454,205 | 595,383 |
Investment properties | 1,731 | 1,638 | - | - |
Prepaid lease payments – non current portion | 94,529 | 194,631 | 199,938 | 330,359 |
Interest in an associate | 97,113 | 96,625 | 304,586 | 304,757 |
Deposits paid for acquisition of property, plant and equipment | 55,130 | 18,281 | 108,266 | 2,878 |
Deposits paid for land use rights | 45,653 | 129,072 | 137,026 | 123,142 |
Fixed deposits | - | - | 60,976 | 61,350 |
383,145 | 867,064 | 1,264,997 | 1,417,869 | |
Current assets | ||||
Inventories | 727,538 | 1,747,136 | 2,640,496 | 4,629,917 |
Trade and other receivables and deposits | 2,524,325 | 7,347,811 | 8,042,864 | 16,067,432 |
Bill receivable | 248,067 | 717,160 | 2,303,746 | 2,077,360 |
Prepaid lease payments - current portion | 3,460 | 9,733 | 10,243 | 13,444 |
Deposit paid to a related party | 115 | 120 | 264 | 293 |
Amount due from a related party | - | - | - | 31 |
Amount due from an associate | - | - | 36,585 | 21,806 |
Derivative financial instruments | 36,940 | 66,745 | 94,480 | 86,659 |
Taxation recoverable | - | 3,888 | 3,342 | 4,580 |
Pledged bank deposits | 210,376 | 1,630,541 | 1,334,043 | 2,403,787 |
Restricted bank deposits | 62,284 | 251,972 | 220,635 | 948,028 |
Fixed deposits | 109,817 | - | ||
Bank balances and cash | 554,417 | 1,088,536 | 1,518,945 | 1,651,417 |
4,367,522 | 12,863,642 | 16,315,460 | 27,904,754 | |
Current liabilities | ||||
Trade and other payables | 981,796 | 4,171,503 | 2,841,311 | 8,504,010 |
Discounted bills | 139,810 | 1,109,965 | 2,418,230 | 3,672,008 |
Amount due to a non-controlling shareholder of a subsidiary | - | 1,960 | 23,911 | 1,960 |
Amount due to the Holding Company | 444 | |||
Amount due to associates | - | - | 28,080 | 118,264 |
Derivative financial instruments | 62,144 | 320,588 | 986,593 | 1,234,895 |
Bank borrowings - due with one year | 451,576 | 134,837 | 86,663 | 124,660 |
Secured guaranteed senior notes | - | 2,960,962 | 4,300,320 | 7,407,684 |
Taxation payable | 25,072 | 49,578 | 68,222 | 158,811 |
1,660,398 | 8,749,393 | 10,753,330 | 21,222,736 | |
Non-current liabilities | ||||
Bank borrowings - due after one year | - | 352,941 | 365,854 | - |
Other long term payable | 454 | 235 | - | - |
454 | 353,176 | 365,854 | - | |
Net Current Assets | 2,707,124 | 4,114,249 | 5,562,130 | 6,682,018 |
Net Assets | 3,089,815 | 4,628,137 | 6,461,273 | 8,099,887 |
177. As can be seen from the above, between 2009 and 2012, the “Trade and other receivables and deposits” represented 46% to 55% of the total assets of the Group. The Liquidators’ analyses show that 71% to 82% of the “Trade and other receivables and deposits” were purported accounts receivable from Central Steel’s purported customers in the Southern China operations payable to Central Steel.
178. As can be seen from [15] above, Central Steel’s profit generated from the sales with external parties in 2008, 2009, 2011 and 2012 was greater than the Group’s consolidated profit, indicating that the rest of the Group (in aggregate) was loss-making and that the financial position of the Group was heavily reliant on the (fictitious) performance of Central Steel.
179. The Liquidators have conducted an analysis of deducting the revenue and costs of sales generated by the 2007-2009 Fictitious Transactions and 2012-2013 Fictitious Transactions from the consolidated financial statements of China Metal. The summary tables of China Metal’s consolidated financial position and consolidated profit and loss accounts for the period from FY2009 to FY2012 after excluding the Fictitious Transactions are as follows:
Adjusted Consolidated Financial Position of China Metal
After Deducting Fictitious Transactions
Consolidated Assets and Liabilities | 31 December 2009 | 31 December 2009 | 31 December 2010 | 31 December 2010 | 31 December 2011 | 31 December 2011 | 31 December 2012 | 31 December 2012 |
(HK$'000) | Audited | Audited and Excluding Fictitious Transactions | Audited | Audited and Excluding Fictitious Transactions | Audited | Audited and Excluding Fictitious Transactions | Unaudited | Unaudited and Excluding Fictitious Transactions |
| Total non-current assets | 383,145 | 383,145 | 867,064 | 867,064 | 1,264,997 | 1,264,996 | 1,417,869 | 1,417,869 |
| Current assets | ||||||||
| Trade receivables | 2,301,571 | 448,348 | 6,303,704 | 269,450 | 6,909,521 | 480,834 | 14,440,403 | 2,965,633 |
| Other receivables, deposits and prepayment | 222,752 | 222,752 | 1,044,107 | 1,035,836 | 1,133,340 | 1,133,136 | 1,627,029 | 1,626,825 |
| Bank balances and cash | 554,417 | 550,070 | 1,088,536 | 1,088,536 | 1,518,945 | 1,518,945 | 1,563,012 | 1,563,012 |
| Other current assets | 1,288,782 | 1,276,385 | 4,427,295 | 4,427,295 | 6,753,654 | 6,753,654 | 10,252,179 | 10,252,179 |
| Total current assets | 4,367,522 | 2,497,554 | 12,863,642 | 6,821,117 | 16,315,460 | 9,886,569 | 27,882,623 | 16,407,649 |
| Total assets | 4,750,667 | 2,880,699 | 13,730,706 | 7,688,181 | 17,580,457 | 11,151,565 | 29,300,492 | 17,825,518 |
| Current liabilities | ||||||||
| Trade payable | (889,939) | (103,404) | (3,761,774) | (70,975) | (2,441,457) | (572,783) | (7,429,721) | (3,029,858) |
| Other payables and accrued charges | (91,860) | (91,860) | (409,729) | (409,729) | (399,854) | (399,854) | (1,074,289) | (1,074,114) |
| Bank borrowings – within 1 year | (451,576) | (450,257) | (2,960,962) | (2,960,962) | (4,300,320) | (4,140,735) | (7,407,684) | (7,368,703) |
| Other current liabilities | (227,023) | (227,023) | (1,616,928) | (1,616,928) | (3,611,699) | (3,611,699) | (5,288,914) | (5,288,914) |
| Total current liabilities | (1,660,398) | (872,544) | (8,749,393) | (5,058,594) | (10,753,330) | (8,725,071) | (21,200,608) | (16,761,589) |
| Net current assets (liabilities) | 2,707,124 | 1,625,010 | 4,114,249 | 1,762,523 | 5,562,130 | 1,161,499 | 6,682,015 | (353,941) |
| Net assets | 3,090,269 | 2,008,155 | 4,981,313 | 2,629,587 | 6,827,127 | 2,426,495 | 8,099,884 | 1,063,928 |
Adjusted Consolidated Profit and Loss Position of China Metal
After Deducting Fictitious Transactions
Consolidated Profit and Loss | 31 December 2009 | 31 December 2009 | 31 December 2010 | 31 December 2010 | 31 December 2011 | 31 December 2011 | 31 December 2012 | 31 December 2012 |
(HK$'000) | Audited | Audited and Excluding Fictitious Transactions | Audited | Audited and Excluding Fictitious Transactions | Audited | Audited and Excluding Fictitious Transactions | Unaudited | Unaudited and Excluding Fictitious Transactions |
| Turnover | 9,063,175 | 4,361,176 | 22,508,182 | 12,925,601 | 52,140,520 | 35,883,492 | 85,829,413 | 61,909,167 |
| Cost of sales | (8,273,221) | (3,909,952) | (21,272,828) | (12,742,338) | (50,057,188) | (35,470,531) | (83,494,179) | (62,122,988) |
| Gross profit/(loss) | 789,954 | 451,225 | 1,235,354 | 183,264 | 2,083,332 | 412,961 | 2,335,234 | (213,821) |
| Other income | 7,972 | 7,972 | 74,933 | 74,933 | 109,782 | 109,782 | 57,743 | 57,743 |
| Distribution cost | (6,559) | (6,559) | (8,597) | (8,597) | (49,406) | (49,406) | (58,215) | (58,215) |
| Administrative expenses | (96,913) | (96,913) | (182,831) | (182,831) | (257,382) | (257,382) | (252,731) | (252,731) |
| Gain on disposal of derivatives financial instrument | (47,131) | (47,131) | (34,909) | (34,909) | 310,453 | 310,453 | 303,341 | 303,341 |
| Loss on changes in fair value of derivatives | (25,204) | (25,204) | (42,625) | (42,625) | 27,670 | 27,670 | (38,001) | (38,001) |
| Share of results of associates | 1,941 | 1,941 | (1,534) | (1,534) | (5,765) | (5,765) | (167) | (167) |
| Finance cost | (120,425) | (120,425) | (95,289) | (95,289) | (253,901) | (253,901) | (460,773) | (460,773) |
| Profit/(loss) before tax | 503,635 | 164,906 | 944,502 | (107,588) | 1,964,783 | 294,412 | 1,886,431 | (662,624) |
| Taxation | (24,950) | (24,950) | (52,598) | (52,598) | (92,189) | (92,189) | (117,559) | (117,559) |
| Profit/(loss) after tax | 478,685 | 139,956 | 891,904 | (160,186) | 1,872,594 | 202,223 | 1,768,872 | (780,183) |
180. After excluding the Fictitious Transactions:
(1) the Group’s gross profit for FY2009 to FY2011 decrease substantially between 43% to 80% and has become gross loss of HK$213.8 million for FY2012;
(2) the Group’s profit before tax for FY2009 and FY2011 decrease substantially by 67% and 85% respectively and has become loss before tax of HK$107.6 million and HK$662.6 million for FY2010 and FY2012 respectively; and
(3) The Group’s profit after tax for FY2009 and FY2011 decreased substantially by 71% and 89% respectively and has become loss after tax of HK$160.2 million and HK$780.2 million for FY2010 and FY2012 respectively.
181. The Liquidators have explained that the adjusted financial statements set out above has not taken into account the other fraudulent schemes involving the subsidiaries of the Group in Mainland China due to the limited books and records available to the Liquidators and the uncooperative stance of the management and officers of the Mainland Chinese subsidiaries.
182. Based upon their investigations, the Liquidators concluded that, given the true financial position of the Group, China Metal would never have been in any position to declare dividends as it purported to do for FY2009 to FY2011. In particular,
(1) the declaration of Dividends was possible only because the financial position of the Group was artificially inflated by the Fictitious Transactions; and
(2) in order to pay for the operating expenses and dividends of China Metal which it did not have the cashflow or assets to support given the true financial position, very substantial bank loans had been taken out by China Metal.
183. Morrison has separately undertaken an analysis to determine the extent of the overstatement of revenue and gross profit of China Metal for the FY2007 to FY2009 and FY2012. Morrison estimates that:
(1) For FY 2007, there was an overstatement of revenue in the range of 34%-45% and an overstatement of gross profit in the range of 35%-45%.
(2) For FY 2008, there was an overstatement of revenue in the range of 36%-38% and an overstatement of gross profit in the range of 61%-64%.
(3) For FY 2009, there was an overstatement of revenue in the range of 33%-56% and an overstatement of gross profit in the range of 58%-90%.
(4) For FY 2012, there was an overstatement of revenue of approximately 12% and an overstatement of gross profit of approximately 49%.
184. In calculating the figures for FY2009, Morrison did not have information for those transactions which more accurately should be regarded as 2009 sales but which were settled by China Metal funds in 2010. Hence, he considers that the amount of alleged overstatement of fictitious sales revenue (and hence gross profit) for FY2009 is likely to be understated. Similarly, as he did not have information regarding transactions which more accurately should be regarded as 2012 sales but which were settled by China Metal funds in 2013, Morrison considers that the amount of alleged fictitious sales revenue (and hence gross profit) for FY2012 is also likely to be understated.
185. Morrison has separately reviewed the Liquidators’ adjusted consolidated financial results of China Metal for FY2009-FY2012, as set out above. Although the Liquidators and Morrison adopted different methodologies, Morrison is of the view that the amount of fictitious transactions identified by the Liquidators and the amount of fictitious transactions estimated by him are reasonably similar. The expert therefore considers that the methodology adopted by the Liquidators is reasonable and acceptable in the circumstances.
186. Morrison has further analysed whether, on the basis of the Liquidators’ adjusted financial statements, China Metal had sufficient retained profits for FY2009 to FY2011 for the Dividends to be declared. Morrison concludes that:
(1) For FY2009, the adjusted profit attributable to owners of China Metal was HK$139,692,000, which was sufficient for the FY2009 Dividend of HK$125,400,000. However, the accumulated loss as at 31 December 2009 is estimated to be HK$290.2 million. In practice, it would be unlikely for a company with substantial accumulated losses to declare dividends. Moreover, in the event that it became known that there had been significant fictitious transactions and fraud, as a result of which the financial results of China Metal and the Group had been materially overstated, there would be immediate demands for repayment of bank loans, particularly if the banks considered a company to be financially unsound or to have liquidity problems.
(2) For FY2010, the accumulated loss carried forward from 2009 is estimated to be HK$229,228,000 and the adjusted results for 2010 attributable to shareholders of China Metal was a net loss after tax of HK$165,529,000. Therefore, China Metal did not have sufficient profits or reserves to declare the FY2010 Dividend of HK$182,303,000.
(3) For FY2011, the accumulated loss carried forward from 2010 is estimated to be HK$581,157,000 and the adjusted results for 2011 attributable to shareholders of China Metal was a profit after tax of HK$191,568,000. Therefore, China Metal did not have sufficient profits or reserves to declare the FY2011 Dividend of HK$365,771,000.
187. In my judgment, Ps have proved that had the Fictitious Transactions not been carried out and the true financial position of the Group been properly reflected in the audited accounts for the relevant years, for FY2009 to FY2011, China Metal would either not have made a profit, or would not have made profits sufficient to justify declaring and paying the Dividends.
I. THE JUNE/JULY 2013 PAYMENTS
188. One of Ps’ claims is various substantial amounts paid from Central Steel’s bank accounts to Cheung Fat (D5) and Pacific Metal HK (D10) shortly before the appointment of the PLs in 2013.
190. First, 12 payments totalling approximately HK$1.215 billion were made from Central Steel’s bank accounts to Cheung Fat’s 2 bank accounts maintained with Bank of China, Guangzhou Branch (“BoC Guangzhou”):
Date Central Steel
Bank Account13 June 2013 中國銀行—廣州開發區分行
(HK$163,515,222.63)25 June 2013 中國銀行—廣州開發區分行
(HK$28,881,100.00)2 July 2013 中國銀行—廣州開發區分行
(HK$204,051,250.00)4 July 2013 Deutsche Bank
(HK$128,332,540.00)9 July 2013 Standard Chartered
(HK$14,173,158.74)15 July 2013 Deutsche Bank
(HK$20,944,764.00)15 July 2013 Deutsche Bank
(HK$168,891,650.00)15 July 2013 Standard Chartered
(HK$34,132,208.00)15 July 2013 Standard Chartered
(HK$128,206,970.00)23 July 2013 Standard Chartered
(HK$123,058,600.00)26 July 2013 Deutsche Bank
(HK$87,899,000.00)29 July 2013 Standard Chartered
(HK$113,013,000.00)
HK$1,215,099,463.37
191. Second, 11 payments totalling approximately HK$745.78 million were made from Central Steel’s bank accounts to Pacific Metal HK’s bank accounts maintained with ICBC Guangzhou Huangpu District Branch and with BoC Guangzhou:
Date Central Steel
Bank Account01.07.2013 中國銀行—廣州開發區分行
(NRA653560693533)
(HK$81,620,500.00)04.07.2013 Standard Chartered
(44717843516)
(HK$105,463,994.97)05.07.2013 Deutsche Bank
(0019596-05-0)
(HK$13,187,444.00)08.07.2013 Deutsche Bank
(0019596-05-0)
(HK$20,169,032.00)08.07.2013 Deutsche Bank
(0019596-04-8)
(HK$97,944,600.00)10.07.2013 Standard Chartered
(44717843516)
(HK$61,529,300.00)11.07.2013 中國銀行—廣州開發區分行
(NRA653560693533)
(HK$127,947,040.10)15.07.2013 Deutsche Bank
(0019596-05-0)
(HK$42,665,260.00)18.07.2013 Standard Chartered
(44717843516)
(HK$55,250,800.00)18.07.2013 Standard Chartered
(44717843516)
(HK$45,833,050.00)19.07.2013 Deutsche Bank
(0019596-04-8)
(HK$94,177,500.00)
HK$745,788,521.07
192. There is clear evidence showing that Chun authorised the remittance of these sums from Central Steel’s bank account to the respective bank accounts of Cheung Fat and Pacific Metal HK. Save in relation to the payments made from Central Steels account maintained with中國銀行—廣州開發區分行, Chun’s signature appeared on each one of the remittance application forms that the Liquidators were able to locate. As to the payments from Central Steels account maintained with中國銀行—廣州開發區分行, Chun was the sole authorised bank signatory of the account at the material times.
193. There is no document and no evidence of any underlying transaction in support of these transfers. No defendant in these proceedings has provided any plausible explanation, justification or documents in support of such transfers.
194. Shortly after receipt of the June/July 2013 Payments, Cheung Fat and Pacific Metal HK transferred some HK$1.82 billion to 5 entities (“Further Recipients”), including 3 of the defendants in these proceedings and a company closely connected to Chun.
Further Recipients Chak Kwan Hoi Cheung Metallurgical Qing Yuan Xinxin Hong Kong Dashine Investment Company Ltd (“HK Dashine”) Total
195. According to the Liquidators’ analysis of the bank statements of the Further Recipients, during June and July 2013:
(1) The majority, if not all, of the relevant bank accounts of Cheung Fat and Pacific Metal HK did not contain sufficient funds to make the onward transfers to the Further Recipients without the prior receipt of the June/July 2013 Payments from Central Steel.
(2) No material transaction is recorded in these bank accounts after 30 July 2013.
(3) The majority of the bank accounts of Cheung Fat and Pacific Metal HK only have minimal balances (not exceeding HK$200,000) after 30 July 2013.
196. In my judgment, in respect of Chak Kwan, Hoi Cheung HK, Metallurgical and Qing Yuan Xinxin, who were all closely connected with Chun, there is an irresistible inference that the transfers were a deliberate act on Chun’s part to dissipate very substantial amounts belonging to Central Steel to these entities which were at all material times controlled by Chun or his associates.
197. For the reasons given in this judgment, I make the following factual findings:
(1) the corporate entities identified in Annex 2, including in particular the corporate defendants in this action, were controlled by Chun and Lai for the purpose of carrying out the transactions which are the subject matter of these proceedings;
(2) the 2007-2009 Fictitious Transactions as pleaded in Ps’ case are not genuine and fictitious, and are financed by the Round Robin Scheme;
(3) the 2012-2013 Fictitious Transactions as pleaded in Ps’ case are not genuine and fictitious, and are financed by the Round Robin Scheme;
(4) given the prevalence of the Fictitious Transactions and the financial impact arising therefrom, the vast majority (if not all) of the transactions and hence revenue of Central Steel for FY 2010 and FY 2011 are also fictitious;
(5) the true financial position of the Group for FY 2009, FY 2010 and FY 2011, had the fact and extent of the fictitious transactions been properly reflected, was such that China Metal could not have been in a position to declare the Dividends;
(6) there was no transaction or commercial justification for any of the June/July 2013 Payments by Central Steel; and
(7) Both Chun and Lai knowingly participated in the fraud.
198. Based upon the evidence accepted by this court, it is clear that Chun has knowledge and has participated in the Round Robin Scheme and in causing the June/July 2013 Payments.
199. There is clear evidence showing that Chun was heavily involved in, and had detailed knowledge in and overall control over the business and affairs of the Group.
(1) Chun was not just the Chairman but the Chief Executive Officer of China Metal until the appointment of the PLs in 2013.
(2) Chun has been one of the 2 administrators of Central Steel since its incorporation until 31 December 2012.
(3) The Prospectus (the contents of which had been certified by Chun as correct) and 2011 Annual Report of China Metal stated that “since [the Group’s] establishment in 2000, [Chun] has been leading us through the growth and expansion of our business” and that the Group was “dependent on the continued service of [Chun]”.
(4) Chun was deeply involved in the Mainland China business operations of the Group. This is evidenced by
(a) China Metal’s announcement dated 28 March 2011, where Chun is quoted extensively speaking to the details of the Mainland China operations of the Group;
(b) board minutes of China Metal dated 17 September 2009 where it was Chun who reported to the board on the Group’s proposed investment into a port in the Mainland and the details and future development of the same. Chun was also the legal representative and/or director of 9 of the Mainland subsidiaries prior to the appointment of the PLs. The Fictitious Transactions and the Round Robin Scheme were centrally concerned with the Mainland subsidiaries in the Southern China region.
(c) According to China Metal’s own minutes dated 27 March 2012, Chun’s overall control and management of the Group increased in the 2 years prior to the presentation of the SFC Petition (such as to justify increasing Chun’s remuneration package).
(d) Chun was also closely connected to the management of the other Mainland subsidiaries, and many of the senior management of the Mainland subsidiaries also played substantial roles in the business and operational affairs of the private companies of Chun.
(e) Chun controlled the Group’s funds. He was the sole signatory of Central Steel’s bank accounts in Guangzhou. He was also one of the 2 signatories of Central Steel’s bank accounts with DBS (the other signatory was Ms Lai). He signed all the remittance application forms for the June/July 2013 Payments that the Liquidators were able to locate.
200. Prior to the listing of China Metal, the companies within the group were wholly owned by Chun. The evidence shows that in 2007 and 2008 (during which China Metal was solely owned by Chun), the Group had already engaged in the 2007-2009 Fictitious Transactions. As the sole shareholder of China Metal and sole owner of the Group, Chun must have been aware of, and must have directed and orchestrated, the 2007-2009 Fictitious Transactions, since no one else (certainly not any of the staff who were only employed and had no personal stake in these acts of falsification) would have the financial interest to do so.
201. The very substantial extent of falsification and resultant inflation of the financial performance of Central Steel and the Group was such that it is inconceivable that Chun would have been unaware of the same.
202. In the light of all the above, Chun was clearly aware of, and also directed and orchestrated the Fictitious Transactions and the Round Robin Scheme.
203. As to the June/July 2013 Payments, each of the said payments was personally authorized by Chun. There is no evidence justifying these payments. In the premises, in causing China Metal and Central Steel to carry out the Fictitious Transactions and to make the June/July 2013 Payments, Chun was plainly in breach of each of the fiduciary duties he owed to China Metal and Central Steel.
204. Based upon the evidence accepted by this court, I am of the view that Lai was aware of and has knowingly participated in the fraud complained by Ps.
205. Lai argues that according to Ps, the funds eventually went back to China Metal in the Round Robin Scheme, and hence China Steel should have suffered no loss. There is no merit in this submission. Ps case is that the Round Robin Scheme has created a false financial position of China Steel, and the Dividends were declared on the basis of the false financial position created by the Round Robin Scheme. In the circumstances, the Dividends were paid out unlawfully, and hence China Metal is entitled to claim back the Dividends.
206. That fact that Lai was a non-executive director of China Metal (instead of an executive director) from 22 May 2009 makes no difference to the director’s duties owed by her to the company. As confirmed by Ps’ expert on Cayman Islands law, the common law represents Cayman Islands law, and executive directors and non-executive directors owe the same duties as fiduciaries.
207. Under the common law, there is no distinction between executive and non-executive directors insofar as director’s duties are concerned. In Dorchester Finance Co Ltd v Stebbing[75], a company brought an action against 3 directors (2 of whom were non-executive directors) for breaches of their duty of skill and care and breaches of fiduciary duty. After trial, Foster J found all 3 directors to have acted in breach of duty, including the non-executive directors who were infrequently in the office and had signed blank cheques to be signed by the executive director at a later date. The learned judge expressly rejected the proposition that non-executive directors had no duties to perform and held that under the Companies Act 1948, and the judge held that “the duties of a director whether executive or not are the same”[76]. I agree.
208. Lai was at all times one of the 2 administrators of Central Steel (together with Chun). She was also one of the 2 signatories of Central Steel’s bank accounts with DBS (together with Chun, each with power to sign singly).
209. Contrary to her assertions that she was just a homemaker, her own statement to the IPO adviser in the questionnaire dated 27 February 2008 (which she had verified to be true) was that she had assisted Chun to develop and expand the business of the Group. This is consistent with the statements in the Prospectus that Chun and Lai “co-founded” the Group (which was verified by Lai and was submitted to the Stock Exchange).
210. Notwithstanding her re-designation from executive director to non-executive director of China Metal in 2009, the Liquidators’ investigations have revealed that Lai continued to be involved in the management and operation of China Metal and the Group companies until at least the end of 2012:
(1) There is evidence showing that internal operational problems of the Mainland subsidiaries would be reported to Lai. An example is the email from Yan dated 28 December 2012, in which Yan was reporting to both Chun and Lai concerning the recovery of account receivables by Tianjin China Metal.
(2) Lai authorized and signed payment instructions for and on behalf of Central Steel as well as payment authorizations for Central Steel’s bank and brokerage accounts. This is evidenced by payment vouchers, remittance application forms and other bank documents signed by Lai for payments from Central Steel’s various bank accounts from 2007-2009 maintained with:
(a) Sucden Financial Ltd;
(b) DBS Bank;
(c) Standard Chartered Bank; and
(d) Hang Seng Bank
(3) There is also a Central Steel’s resolution dated 1 January 2007 resolving to appoint Lai as an authorized signatory of all of the bank accounts of Central Steel.
(4) Lai signing contracts entered into by Central Steel: see the signed Provisional Invoice dated 23 April 2010 from Central Steel and issued to Yieh United Steel Corporation.
(5) Lai took part in meetings and discussions with senior management on business review, business development and the preparation of business plans for China Metal and the Group companies, as evidenced by the meeting minutes and other records.
(6) At all material times, Lai had an office in China Metal’s Hong Kong office at The Centrium in Central, Hong Kong.
211. Lai was also directly involved with some of the counterparties to the Round Robin Scheme:
(1) Lai, through a company Worldwide Int’l Inspection Ltd (of which she was the sole shareholder and director), funded the incorporation expenses of Cheung Fat, whose transactions with Central Steel were central to the Round Robin Scheme.
(2) Aprima, another company of which Lai was the sole shareholder and director, had been used to channel funds to Central Steel through its purported customers as part of the Round Robin Scheme. Lai (together with Chun) were authorized to make payments on behalf of Aprima from its bank accounts with DBS Bank, and she in fact did make such payments.
(3) The involvement of Aprima in the Round Robin Scheme is further confirmed by an Excel spreadsheet which the Liquidators located in the computer of Bobo Choy, former General Manager in charge of administration of China Metal, deliberately hidden under a surreptitious folder. The excel file depicts a fund flow diagram which shows that monies paid in Chun’s bank accounts were paid into Aprima’s DBS account, which were then paid out to Qi Le and eventually paid back to Central Steel.
212. Based upon the aforesaid, I find that:
(1) Lai had an active management role within China Metal and the Group.
(2) Due to Lai’s active involvement within the management and operations of China Metal and the Group, she must have knowingly participated in the Round Robin Scheme and must have procured or facilitated the procurement of the Fictitious Transactions.
(3) In causing China Metal and Central Steel to carry out the Fictitious Transactions and the Round Robin, Lai acted in breach of each of the fiduciary duties she owed to China Metal and Central Steel.
213. I shall deal with a complaint made by Lai in the trial. Lai criticized the Liquidators for not trying to find witnesses who would give evidence favourable to Lai, and failing to adduce evidence from those witnesses. Lai mentioned that the witnesses in her mind would include Wong Hok Leung 王學良 (“Wong”), Lai Yuk Wa 黎旭華 (“YW Lai”), Ip Un Kei 葉婉琪 (“Ip”), Fung Ka Lun 馮嘉倫(“Fung”) and Lam Po Kei Kenneth (林寶基) (“Lam”). In my judgment, there is no merit in this complaint at all.
(1) Lai has never put to Borrelli that the Liquidators have concealed evidence in favour of Lai in these proceedings. That being the case, Lai would not be entitled to make this criticism in her submissions.
(2) With Lai’s consent, on 1 February 2018, DHCJ Kent Yee ordered that some affidavits and affirmations filed in HCCW 210/2013 with witness statements attached thereto be deemed as evidence in the trial in these proceedings. Among those documents, there are witness statements made by Wong, YW Lai, and Ip. I have read those witness statements. In my view, nothing therein provides support to Lai’s case.
(3) This is a civil case. Our system is an adversarial system. It is Lai’s duty to adduce evidence in support of her own case. These proceedings were commenced by the Liquidators in 2013. Lai has many years to prepare evidence to meet the Liquidators’ case. However, apart from one witness statement made by herself, Lai did not file any other witness statement in these proceedings.
(4) As submitted by Ps, there is no property in a witness. The addresses of Wong, YW Lai and Ip are set out in their witness statements filed in HCCW 210/2013. Lai could try to contact them at those addresses and to obtain statements from them. However, Lai did not do so.
(5) As to Fung and Lam, Lai did not try to get in touch with them and to obtain statements from them.
(6) In my view, there is no basis for me to have a view that there would be evidence favourable to Lai from these witnesses. In any event, Lai can only blame herself for not adducing evidence favourable to her (if any) in support of her case.
214. In her final submissions, Lai alleged that what she did was, in her honest belief, in the interest of China Metal. In my judgment, Lai cannot rely upon the alleged honest belief as a defence.
(1) The alleged honest relief is unpleaded. Bearing in mind that issues are defined by the pleadings, Lai is not entitled to take this point at the trial.
(2) There is nothing in Lai’s evidence in support of the alleged honest belief.
(3) In any event, I have refused to accept Lai’s evidence. Hence, there is no evidence accepted by this court proving the alleged honest belief.
(4) Further, honest belief without any reasonable basis cannot be a defence to breach of director’s duties. As said in the above, it is no excuse that a director blindly followed the act of other directors[77].
215. Lai also raised a point that the Liquidators have not done any fund flow analysis in respect of FY2006. In my view, this point is irrelevant for the purpose of these proceedings. The Liquidators are not alleging that there was any fraudulent transaction or fraudulent act in the Group in FY2006. There is no claim in respect of the matters occurred in FY2006. Further, Lai has not raised any matter occurred in FY 2006 which would provide any support to her case. In any event, as to why no fund flow analysis was done in respect of FY2006, the point has not been put to Borrelli during cross-examination, and Borrelli has been deprived of an opportunity to give a reply on this point. Lai is therefore not entitled to ask this court to draw any adverse inference against the Liquidators by relying upon the absence of fund flow analysis for FY2006.
216. For the sake of completeness, I would briefly discuss the relevance of the Conviction in relation to Lai’s liability.
217. Lai was convicted of one count of conspiracy to defraud in HCCC 66/2018. The particulars of the offence are that between 2 June 2008 and 27 June 2009, Lai and Choy conspired together with Chun and others to defraud the Stock Exchange and/or its offices servants or agents, by dishonestly submitting or causing to be submitted false financial results and information of China Metal and thereby inducing the Stock Exchange to accept the same as true and accurate and approve the application of China Metal for listing on the Main Board of the Stock Exchange.
218. I have refused to accept the evidence given by Lai in this case. Accordingly, there is no evidence before this court rebutting the presumption in s.62(2)(a) of the EO. Lai shall be taken as having committed the offence in these proceedings.
219. Notwithstanding the appeal against the Conviction lodged by Lai, I shall give effect to the presumption prescribed in s.62(2)(a) of the EO. In doing so, I am aware of the fact that Lai pleaded not guilty to the charge in the criminal case. Having heard and considered the evidence in a 60-day trial, the jury convicted Lai by a majority of 7:2. In other words, the Conviction was the outcome of a contentious criminal trial. The Conviction is relevant to the fictitious transactions from 2007 to 2009 and the dividends paid in 2009, which are the subject matters in these proceedings. In light of all these, I would attach heavy weight to the Conviction.
220. In my judgment, the Conviction has provided further support to Ps’ case. However, I am of the view that even without the Conviction, there is already sufficient evidence before me supporting the finding that Lai has knowingly participated in the fraud. Accordingly, the existence of Lai’s appeal against the Conviction would not affect the outcome of these proceedings in any way. Even if Lai succeeds in her appeal against the Conviction at a later time, that would not have any impact on my ruling on Lai’s liability.
221. Lai submits that I should stay the proceedings herein and refrain from making a decision in this case pending the outcome of her appeal against the Conviction. For the reason set out in the paragraph above, there is no justification in support of this approach. I refuse to accede to Lai’s request.
M. ARTICLE 164 OF CHINA METAL’S ARTICLES OF ASSOCIATION
222. Lai raised the indemnity clause in Article 164 of China Metal’s Articles of Association (“Article 164”) in her Amended Defence. Article 164 is as follows:
“(1) The Directors, Secretary and other officers and every Auditor for the time being of the Company and the liquidator or trustees (if any) for the time being acting in relation to any of the affairs of the Company and everyone of them, and everyone of their heirs, executors and administrators, shall be indemnified and secured harmless out of the assets and profits of the Company from and against all actions, costs, charges, losses, damages and expenses which they or any of them, their or any of their heirs, executors or administrators, shall or may incur or sustain by or by reason of any act done, concurred in or omitted in or about the execution of their duty, or supposed duty, in their respective offices or trusts; and none of them shall be answerable for the acts, receipts, neglects or defaults of the other or others of them or for joining in any receipts for the sake of conformity, or for any bankers or other persons with whom any moneys or effects belonging to the Company shall be placed out on or invested, or for any other loss, misfortune or damage which may happen in the execution of their respective offices or trusts, or in relation thereto; PROVIDED THATthis indemnity shall not extend to any matter in respect of any fraud or dishonesty which may attach to any of said persons.
(2) Each Member agrees to waive any claim or right of action he might have, whether individually or by or in the right of the Company, against any Director on account of any action taken by such Director, or the failure of such Director to take any action in the performance of his duties with or for the Company; PROVIDED THAT such waiver shall not extend to any matter in respect of any fraud or dishonesty which may attach to such Director.” (Emphasis supplied)
223. I have found that Lai has knowingly participated in the fraud perpetrated against China Metal. As a result of this finding, Lai cannot rely upon Article 164 to claim any indemnity from China Metal.
N. LIABILITY OF CHEUNG FAT AND WELLRUN
224. In my judgment, Ps’ claim for dishonest assistance against Cheung Fat is established.
(1) Chun’s breaches in causing China Metal and Central Steel to enter into the Fictitious Transactions and the Round Robin Scheme are clearly established.
(2) Cheung Fat’s assistance in the Fictitious Transactions and the Round Robin Scheme is indisputable.
(3) Dishonesty is established, given (a) Cheung Fat was established by Chun and Lai; (b) it was described in Central Steel’s internal records as a “company of Mr Chun”; and (3) its business licence was kept by Chun. All these show that Cheung Fat was controlled by Mr Chun, such that Chun’s knowledge should be attributed to it. I have no doubt that Chun was acting dishonestly when he procured and implemented and Fictitious Transactions and the Round Robin Scheme.
(4) As to loss, the Fictitious Transactions and the Round Robin Scheme, which resulted in the overstatement of the financial performance and profits generated by the Group, led to the wrongful declaration and payment of the Dividends by China Metal.
225. I am also of the view that Ps’ claim for knowingly receipt against Cheung Fat with respect to the June/July 2013 Payments is established. Cheung Fat’s receipt of 12 of the June/July 2013 Payments is indisputable. Given that Chun’s breaches of fiduciary duty are proved and Chun’s knowledge should be attributed to Cheung Fat, Ps’ claim for knowingly receipt against Cheung Fat with respect to the June/July 2013 Payments is also proved.
226. With respect to P’s claim for restitution of the June/July 2013 Payments, the claim has also been substantiated. Chun’s want of authority is clearly established. Cheung Fat’s receipt cannot be disputed. There can be no relevant change of position, since the Further Recipients were all closely associated with Chun.
227. As to Wellrun:
(1) Wellrun is the alter ego of Chun, as Chun being the sole shareholder and the sole director of Wellrun. As such, Chun’s knowledge with respect to the Fictitious Transactions and the Round Robin Scheme would be attributed to it.
(2) Wellrun was in receipt of substantially all of the Dividends in Hong Kong.
(3) For reasons similar to those set out in the above, Wellrun is clearly liable to Ps in (a) dishonest assistance for Chun’s breaches of fiduciary duty, and (b) knowing receipt for the Dividends.
228. I am also of the view that Ps’ claim of unlawful act conspiracy against Chun, Lai, Cheung Fat and Wellrun is also established.
(1) Based upon the evidence accepted by this court, there was a combination, arrangement or understanding among Chun, Lai, Cheung Fat (with respect to which Chun’s knowledge should be attributed by reason of their control over the same) and Wellrun (Chun’s alter ego).
(2) The intention to injure others (being China Metal and Central Steel, as well as public investors in China Metal) is also established, given the procurement of the Fictitious Transactions, the Round Robin Scheme and the making of the June/July 2013 Payments were all done deliberately and with knowledge of the consequences.
(3) There was concerted action in that each party took steps to (a) carry on and continue with the Fictitious Transactions and the Round Robin Scheme; (b) make the June/July 2013 Payments; and (c) procure Chun and Lai to continue to remain in office as directors such that these breaches of fiduciary duties could continue to be perpetrated, consequent upon the combination or understanding.
(4) There was use of unlawful means, namely the breaches of fiduciary duties by Chun and Lai.
(5) Loss has been caused to Ps, in the form of the unlawful Dividends and the June/July 2013 Payments.
229. Based upon the findings made by this court, in my judgment, Ps are entitled to have the reliefs set out below.
230. China Metal is claiming against Chun and Lai for the Dividends paid out by China Metal for FY2009-FY2011 in the amount of HK$672.9 million on 2 bases.
231. First, as a matter of law, where dividends were declared and paid in circumstances where the company made no profit, they would have been paid out of capital and as such would be unlawful. It is clear that at least for FY2010 and FY2011, there was no or no sufficient net profits for the purpose of the Dividends declared and paid. As such, the Dividends for FY2010 and FY2011 were clearly paid out of capital and hence unlawful. Since I have found that both Chun and Lai had knowingly participated in the fraud, whether or not liability is strict or fault-based does not make really matter.
232. Second, even if a small net profit had been made such that the dividends declared and paid would not per se be unlawful (as in FY2009), Chun and Lai are still liable for the same as loss flowing from their breaches of fiduciary duty, specifically their involvement in and knowledge of the Fictitious Transactions and Round Robin Scheme.
(1) Ps’ pleaded case is that the Dividends (for FY2009 to FY2011) were loss from Chun and Lai breaches of fiduciary duty, in that they were aware, when resolving and approving the Dividends, that the reported financial results were false or at least unreliable.
(2) That the board of directors of China Metal (and the general meeting which acted on the board’s recommendation) proceeded on the premise that China Metal had returned much higher level of profits to justify the Dividends is clearly borne out by the respective board minutes for FY2009, FY2010 and FY2011 (all these minutes were signed by Chun and Lai), which recorded that China Metal would keep the remaining profits after distribution of the Dividends (保留餘下溢利).
(3) This premise was clearly erroneous by reason of the Fictitious Transactions and Round Robin Scheme, as Chun and Lai well knew.
(4) Accordingly, the premise upon which the board and the general meeting approved the Dividends was entirely false and occurred by reason of Chun’s and Lai’s breaches of fiduciary duty – despite their knowledge on the falsity, at no time did Chun or Lai voice out. The payment of Dividends (which is a corporate asset) is a loss of trust property flowing from Chun’s and Lai’s breaches of fiduciary duties.
(5) The “but for” causation is not broken by the fact that the net profits for FY2009 exceeded the 2009 Dividends declared. As shown in Morrison’s analysis, China Metal did not actually have funds to pay the 2009 Dividends, and was only able to do so by equity and debt financing, which had the fraud been known would have been highly unlikely for the banks to lend. Indeed the banks would have demanded repayment, further reducing the cashflow of China Metal). Further, had the fraud been known, it was also most unlikely that independent investors would have been prepared to accept placed shares of China Metal for the purpose of equity financing. As such, that China Metal might have had a “book entry” net profit for FY2009 is no answer to Ps’ claim for the 2009 Dividends as loss flowing from Chun’s and Lai’s breaches of fiduciary duty.
233. I agree and accept these submissions.
234. Accordingly, in respect of the Dividends:
(1) Chun and Lai: Chun and Lai are liable to pay equitable compensation to China Metal for breaches of fiduciary duties owed by them to China Metal in the amount of HK$672.9 million, being the full amount of Dividends for FY2009 to FY2011.
(2) Cheung Fat and Wellrun: Cheung Fat and Wellrun are liable to pay equitable compensation to China Metal for their dishonest assistance in Chun’s and Lai’s breaches of fiduciary duty in the amount of HK$672.9 million, being the full amount of Dividends for FY2009 to FY2011 in respect of which they had assisted. A dishonest assistor should be liable for all loss or damage resulting from the breach of fiduciary duty which has been dishonestly assisted[78].
(3) Chun and Wellrun: Further, as Chun and Wellrun received cash and/or scrip dividends equivalent to HK$0.8 million and HK$357.4 million respectively out of the Dividends paid out, they hold those sums, and are liable to account for the same, as constructive trustees.
P2. The June/July 2013 Payments
235. In relation to the June/July 2013 Payments:
(1) Chun: Chun is liable to pay equitable compensation to Central Steel for breach of fiduciary duty owed by him to Central Steel in the amount of HK$1,960,887,984.44, being the full amount of June/July 2013 Payments wrongfully transferred from Central Steel to (a) Cheung Fat and (b) Pacific Metal HK.
(2) Cheung Fat: Cheung Fat is liable to Central Steel for knowing receipt, alternatively for restitution for unjust enrichment, for HK$1,215,099,463.37, being the amounts actually received by Cheung Fat.
P3. Joint and several liabilities
236. The liabilities set out in the above should be joint and several. It is trite that third parties who are implicated in a breach of trust or breach of fiduciary duty are jointly and severally liable with the trustees or fiduciaries, and with one another, for the harm suffered by the beneficiaries. Hence any one of the fiduciaries or third parties may have to make good the loss in full[79].
237. As to pre-judgment interest, apart from the usual rate of pre-judgment interest, ie 1% over the prime rate[80], Ps also ask for pre-judgment interest being awarded on a compound basis. I am of the view that Ps’ application is justified and allow the application.
(1) Where a fiduciary has in breach of fiduciary duty misapplied the company’s money or obtained and retained the same, the court has a discretion, and the normal order is to award compound interest from the date of the breach[81]. In my view, there is no reason why I should not exercise my discretion to make this normal order.
(2) Compound interest should also be awarded against Cheung Fat and Wellrun with respect to equitable compensation payable for their dishonest assistance in Chun’s and Lai’s breaches of fiduciary duty, for in such a case the measure of loss is by reference to the loss arising from the breaches of fiduciary duty.
(3) There is a further basis for awarding compound interest on the FY2010 and FY2011 Dividends, which were unlawfully declared out of capital[82].
238. I have heard submissions on costs. There is no reason to depart from the general rule that costs should follow the event. Further, this is a complicated case, with numerous factual and legal issues involved. In my view, it is plain and obvious that a certificate for 2 counsel is justified in this case. I so order.
239. Ps are also seeking indemnity costs.
240. The principles concerning indemnity costs are well established. The court may award indemnity costs where the proceedings are scandalous or vexatious, or have been initiated or prosecuted maliciously, or for an ulterior motive, or in an oppressive manner, or are prosecuted in such circumstances as to constitute an affront to the court, though the court’s discretion is a broad one and is not limited to the above circumstances[83]. These principles apply equally to defendants[84]. The parties’ conduct is a relevant consideration to the court’s exercise of discretion[85].
241. Ps submit that an award of indemnity costs is justified by reason of the following:
(1) Chun and Lai engaged in deliberate, serious and fraudulent breaches of fiduciary duty against a Hong Kong listed company, thereby seriously prejudicing the interests of the investing public. The sums of money which Chun and Lai obtained as a result of their breaches for their own personal benefit were vast. Indeed, one can hardly think of a more serious case of breach of fiduciary duty owed to a company.
(2) The manners in which Chun, Lai, Cheung Fat and Wellrun defended each of their respective cases in these proceedings are highly objectionable and constitute an affront to the court. In particular:
(a) Chun and Wellrun: Chun has throughout these proceedings repeatedly gone out of his way to obstruct the Liquidators from identifying and securing his assets for the purposes of the Mareva injunctions obtained against him (in the amount of up to HK$1.6 billion). In particular: Chun has: (i) failed to give proper disclosure of his assets as required under the disclosure obligation in the Mareva injunctions; and (ii) committed contumelious breaches of the Mareva injunctions in dissipating assets covered by the same. Due to his persistent and deliberate failure to give proper disclosure of his assets as required under the Mareva injunctions that his and Wellrun’s Defences herein were struck out[86].
(b) Lai: Lai has also conducted herself unreasonably throughout these proceedings, in that she: (i) unhelpfully provided very limited discovery; (ii) deliberately derailed the initial trial dates of this action (originally fixed to commence on 14 October 2019 with 30 days reserved) by not disclosing such trial dates to the criminal court in her criminal proceedings, such as to engineer a situation where the dates of the criminal trial overlapped with the initial trial dates and causing the latter to be vacated and re-fixed (with a delay of 15 months)[87]; (iii) taking out unnecessary and vexatious applications, including repeatedly making unmeritorious applications to introduce handwriting expert evidence concerning the Aprima Remittance Form at the eleventh hour of these proceedings (notwithstanding such handwriting expert evidence had been available to her for over a year, ie since her criminal trial).
(c) Cheung Fat: Cheung Fat has likewise been unreasonable throughout these proceedings. Its repeated refusal to provide discovery ordered by the court eventually resulted in its Defence and Counterclaim being struck out and it be debarred from defending these proceedings[88].
242. I agree and allow Ps’ application for indemnity costs.
243. For the reasons set out in the above, in my judgment, Ps have proved their case against Chun, Lai, Cheung Fat and Wellrun. I am also of the view that Ps are entitled to have costs of these proceedings (including all costs reserved) on an indemnity basis, with a certificate for 2 counsel. I make an order in terms of the draft judgment submitted by Ps[89]. The terms of the order made by me are as follows:
In relation to the “said Dividends” as defined in the Re-re-amended Statement of Claim
(1) The 1st and 2nd Defendants and each of them do pay the 1st Plaintiff equitable compensation for breach of fiduciary duty in the amount of HK$672.9 million.
(2) The 5th and 13th Defendants and each of them do pay the 1st Plaintiff equitable compensation for dishonest assistance in the amount of HK$672.9 million.
(3) The 1st Defendant holds the sum of HK$800,000 (being the cash and/or scrip dividends received by the 1st Defendant out of the dividend payments by the 1st Plaintiff in respect of the financial years ended 2009, 2010 and 2011 (as pleaded in paragraph 66 of the Re-Re-Amended Statement of Claim)) as constructive trustee for the benefit of the 1st Plaintiff, that the 1st Plaintiff is the beneficial owner of the said sum of HK$800,000 and the 1st Defendant is liable to return this sum to the 1st Plaintiff together with all profits generated therefrom.
(4) The 1st Defendant do pay the said sum of HK$800,000 (as particularised in paragraph 3 above) to the 1st Plaintiff.
(5) There be an inquiry as to damages / equitable compensation or, alternatively (at the 1st Plaintiff’s option) an account of profits from the 1st Defendant in relation to the said sum of HK$800,000 particularised in paragraph 3 above.
(6) There be payment by the 1st Defendant to the 1st Plaintiff of all sums found due upon such inquiry as to damages or equitable compensation or account of profits under paragraph 5 above together with interest on the damages compensation and/or profits accountable to the 1st Plaintiff or interest pursuant to s48 of the High Court Ordinance at such rates or for such periods as the Court thinks fit.
(7) The 13th Defendant holds the sum of HK$357.4 million (being the cash and/or scrip dividends received by the 13th Defendant out of the dividend payments by the 1st Plaintiff in respect of the financial years ended 2009, 2010 and 2011 (as pleaded in paragraph 66 of the Re-Re-Amended Statement of Claim)) as constructive trustee for the benefit of the 1st Plaintiff, that the 1st Plaintiff is the beneficial owner of the said sum of HK$357.4 million and the 13th Defendant is liable to return this sum to the 1st Plaintiff together with all profits generated therefrom.
(8) The 13th Defendant do pay the said sum of HK$357.4 million (as particularised in [(7)] above) to the 1st Plaintiff.
(9) There be an inquiry as to damages / equitable compensation or, alternatively (at the 1st Plaintiff’s option) an account of profits from the 13th Defendant in relation to the said sum of HK$357.4 million particularised in paragraph 7 above.
(10) There be payment by the 13th Defendant to the 1st Plaintiff of all sums found due upon such inquiry as to damages or equitable compensation or account of profits under paragraph 9 above together with interest on the damages compensation and/or profits accountable to the 1st Plaintiff or interest pursuant to s48 of the High Court Ordinance at such rates or for such periods as the Court thinks fit.
In relation to “the June / July 2013 Payments” as defined in Re-re-amended Statement of Claim
(11) The 1st Defendant do pay the 2nd Plaintiff equitable compensation for breach of fiduciary duty in the amount of HK$1,960,887,984.44.
(12) That the 5th Defendant holds the sum of HK$1,215,099,463.37 (as pleaded in paragraph 95(1) of the Re-Re-Amended Statement of Claim) as constructive trustee for the benefit of the 2nd Plaintiff, that the 2nd Plaintiff is the beneficial owner of the said sum of HK$1,215,099,463.37 and the 5th Defendant is liable to return this sum to the 2nd Plaintiff together with all profits generated therefrom.
(13) The 5th Defendant do pay the 2nd Plaintiff the said sum of HK$1,215,099,463.37 (as particularized in [(12)] above).
(14) There be an inquiry as to damages / equitable compensation or, alternatively (at the 2nd Plaintiff’s option) an account of profits from the 5th Defendant in relation to the said sum of HK$1,215,099,463.37 particularised in paragraph 12 above.
(15) There be payment by the 5th Defendant to the 2nd Plaintiff of all sums found due upon such inquiry as to damages or equitable compensation or account of profits under paragraph 14 above together with interest on the damages compensation and/or profits accountable to the 2nd Plaintiff or interest pursuant to s48 of the High Court Ordinance at such rates or for such periods as the Court thinks fit.
(16) Further to [(13)] above, the 5th Defendant do pay the 2nd Plaintiff equitable compensation for knowing receipt and/or in restitution for monies had and received in the amount of the said sum of HK$1,215,099,463.37.
And it is further adjudged that
(17) The 1st, 2nd, 5th and 13th Defendants and each of them do pay: (i) pre-judgment interest on the amounts ordered against each of them in paragraphs 1, 2 and 11 above at the rate of prime plus 1% at compound interest from the date of breach to the date of judgment; (ii) pre-judgment interest on the amounts ordered against each of them in paragraphs 4, 8, 13, and 16 above at the rate of prime plus 1% at simple interest from the date of breach to the date of judgment; and (iii) post-judgment interest at judgment rate on the amounts ordered against each of them of 8%.
(18) The 1st, 2nd, 5th and 13th Defendants and each of them do pay to the 1st and 2nd Plaintiffs the costs of and occasioned by this action (including all costs reserved), to be taxed if not agreed on an indemnity basis, with certificate for two counsel.
244. I direct that this judgment be orally interpreted to Lai at the time of handing down of the same by a court interpreter in the High Court Building.
245. Lastly, I must register my gratitude to Ms Eva Sit SC and Mr Justin Ho. The documents in this case are voluminous and various factual and legal issues with complexity are involved in these proceedings. Senior Counsel and Counsel for Ps have provided the court the most helpful assistance by presenting evidence and submissions to the court systemically, succinctly and fairly. The able and helpful assistance rendered by them to the court is highly appreciated.
| ( MK Liu ) Deputy High Court Judge |
Ms Eva Sit SC, leading Mr Justin Ho, instructed by Hogan Lovells, for the plaintiffs
The 2nd defendant appeared in person
[1] HCCC 66/2018
[2] Order of DHCJ Saunders dated 25 June 2014
[3] Order of DHCJ Anita Yip SC dated 12 October 2015
[4] As per the 2015 Judgment, [4]
[5] Order 1A rule 2(2)
[6] [20A] is a new paragraph added in the Amended Defence dated 22 June 2015.
[7] See [2019] HKCFI 1068
[8] Kwok Chin Wing v 21 Holdings Ltd (2013) 16 HKCFAR 663, per Ma CJ at [21] and [22].
[9] Base Metal Trading Ltd v Shamurin [2005] 1 WLR 1157, per Tuckey LJ at [56]-[58], per Arden LJ at [69]; applied in Hong Kong in East Asia Satellite (Holdings) Ltd v New Cotai LLC [2011] 3 HKLRD 734, per Tang ACJHC at [35], [45] and [47]
[10] Mortimore, Company Directors (3rd edn, 2017), [11.35]
[11] [2003] 1 BCLC 598, [92]-[93]
[12] Regentcrest plc (in liq) v Cohen [2001] 2 BCLC 80, per Jonathan Parker J at [123]
[13]Re Lands Allotments Co [1894] 1 Ch 616, per Lindley LJ at 631; Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2012] Ch 453, per Lord Neuberger at [34]
[14] Bishopsgate Investment Management Ltd v Maxwell (No 2) [1994] 1 All ER 261, supra, per Hoffmann LJ at 265, per Ralph Gibson LJ at 269; Waddington Ltd v Chan Chun Hoo Thomas (CACV 10/2014, 20 May 2016) at [38]; GHLM Trading Ltd v Maroo [2012] 2 BCLC 369, per Newey J at [149]
[15] Maxwell (No 2), supra, per Hoffmann LJ at 265
[16] Re Idessa (UK) Ltd [2012] 1 BCLC 80, per DHCJ Lesley Anderson QC at [28]
[17]RMF Market Neutral Strategies (Master) Ltd v DD Growth Premium 2X Fund [2014] (2) CILK 316, [24]
[18]Re Oxford Benefit Building and Investment Society (1886) 35 Ch D 502, 509, 516; Re Exchange Banking, Flitcroft’s Case (1882) 21 Ch D 519, 533-534
[19] Re City Equitable Fire Insurance Co Ltd [1925] 1 Ch 407, 477
[20] Re Oxford Benefit Building and Investment Society, supra, 509; Flitcroft’s Case, supra, 535
[21]Revenue and Customs Commissioners v Holland, in re Paycheck Services 3 Ltd [2010] 1 WLR 2793, per Lord Hope at [45]-[47], per Lord Walker at [124], per Lord Clarke at [146]; applied in Moulin Global Eyecare Holdings Ltd v Lee Sin Mei Olivia [2019] 3 HKLRD 833 (CFI), per Peter Ng J at [81]
[22] [2019] Bus LR 2878, at [103]-[159]
[23] At [139], see also [157]
[24] Kao Lee & Yip v Koo Hoi Yan Donald [2003] 3 HKLRD 296, per Ma J (as he then was) at [46]
[25] Moulin Global Eyecare Holdings Ltd v Lee Sin Mei Olivia (2014) 17 HKCFAR 466, [36]
[26]Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, per Lord Wright at 155, citing Parker v McKenna (1874) LR 10 Ch App 96
[27]Boardman v Phipps [1967] 2 AC 46, per Lord Upjohn at 123C-124C; applied in Kao Lee & Yip, supra, at [50]
[28] Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62, per Pennycuick J at 74E-F
[29] The Liquidator of Wing Fai Construction Company Limited (in liquidation) v Yip Kwong Robert [2018] 1 HKC 472, per G Lam J at [280], [283]
[30] Re Oxford Benefit Building and Investment Society, supra, at 516; Flitcroft’s Case, supra, at 534
[31] JJ Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162, [25], [27]-[29]
[32] Underhill & Hayton: Law of Trusts and Trustees (19th edn, 2016), supra, [98.33]; Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, [78], [87]-[88]
[33] Libertarian, supra, [79]-[81]; [90]-[91]
[34] Johnston, The Conflict of Laws in Hong Kong (3rd edn, 2017), [2.075]; Dicey, Morris & Collins: TheConflict of Laws (15th edn, 2012), [9-002] – [9-011]
[35] Dicey, Morris & Collins: The Conflict of Laws (15th edn, 2012), [9-029]
[36] Grupo Torras SA v Al-Sabah (No 5) [1999] CLC 1469, per Mance J at 1664A-B
[37] A defendant’s failure to act may be capable of constituting “assistance”; however, “mere passive acquiescence” is unlikely to suffice: See Re-Engine Pty Ltd (in liq) v Fergusson [2007] VSC 57, at [120].
[38] Underhill & Hayton, supra, [98.53]
[39] Baden v Société Générale SA [1993] 1 WLR 509, per Peter Gibson J at 575
[40] Balfron Trustees Ltd v Peterson [2001] IRLR 758, per Laddie J at 761
[41] Grupo Torras, supra, per Mance J at 1667
[42] Underhill & Hayton, supra, [98.56]
[43] Royal Brunei Airlines v Tan [1995] 2 AC 378, 389
[44] [2006] 1 WLR 1476, at [10]
[45] Grupo Torras SA v Al Sabah (No 5) [2001] CLC 221, at [119]
[46] [2008] EWHC 2613, at [223]
[47] OJSC Oil v Abramovich, at [221]
[48] The Liquidators have commenced proceedings against the auditors in respect of the fraud which is the subject matter of these proceedings.
[49]Lewin on Trusts (20th edn, 2020), [42-023], expanding on the 3 established criteria in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, per Hoffmann LJ at 700g
[50] Snell’s Equity (34th edn, 2020), [30-072]
[51]Bank of Credit and Commerce International (Overseas) v Akindele [2001] Ch 437, per Nourse LJ at 455E-F, applied in Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479, per Lord Neuberger NPJ at [127]-[128], [134]
[52]JJ Harrison, supra, [26]; Belmont Finance Corp v Williams Furniture Ltd (No 2) [1980] 1 All ER 393, per Buckley LJ at 405
[53] Goff & Jones, The Law of Unjust Enrichment (9th edn, 2016), [8-104] - [8-118]
[54] Bowstead & Reynolds on Agency (21st edn, 2018), [3-010] – [3-011]; Hopkins v TL Dallas Group Ltd [2005] 1 BCLC 543, per Lightman J at [99]; Sweeney v Howard (2007) 13 BPR 24381, per Windeyer J at [55] – [58]
[55] (1905) 2 CLR 421, at 430
[56] Kuwait Oil Tanker SAK v Al Bader [2000] 2 All ER (Comm) 271, at [108]
[57] Esquire (Electronics) Ltd v Hong Kong and Shanghai Banking Corporation Ltd [2007] 3 HKLRD 439, [135]; Hui Cheung Fai v Daiwa Development Ltd (HCA 1734/2009, 8 April 2014), [77] – [83]
[58] HKSAR v Chan Hing Kai [2020] 1 HKLRD 1082, [38]
[59] [2002] 1 HKLRD 858, [31]
[60] Re H [1996] AC 563
[61] The Kang Oh v Wong Yik Fai (HCPI 791/1995, 10 July 1996), per Woo J (as he then was) at p.5
[62] Hong Kong Civil Procedure 2021, Volume 1, [18/7A/3]
[63] China Everbright-IHD Pacific Ltd v Ch’ng Poh (CACV 513/2001, 19 February 2002), [37] - [40]
[64] Re Raphael [1973] 1 WLR 998; Hong Kong Civil Procedure 2021, Volume 1, [18/7A/5]
[65] In this email, Yan provided a comprehensive report to Chun and Lai regarding the “clearing of debts” (which suggests difficulty in recovering account receivables) by Tianjin China Metal. Lai has tried to argue that this email shows that she has duly discharged the director’s duties owed by her to China Metal. I refuse to accept this argument for (1) there is no evidence showing that Lai has taken any action as a result of this email (in fact, Lai claimed that she had never seen this email); and (2) further, the matter mentioned in this email is not one of the matters being complained by the Liquidators in these proceedings. The Liquidators’ case is that in respect of the matters being complained by the Liquidators in these proceedings, Lai has breached her duties. Lai cannot rely upon this email as an answer to the Liquidators’ claim.
[66] For example, in her final submissions, Lai alleged that she was asked by Chun to monitor the matters relating to the employees’ salaries in 廣州集通倉碼公司, 廣州誠摯物業管理公司, 廣州亞鋼置業公司from about late 2011 to February 2012. She only did the said monitoring work for a short period of time.
[67] The references to the trial bundles in Annex 2 are in the form [Bundle#/Item#/Page#].
[68] For 2012, funds were first transferred from the Purported Suppliers to New Metal before they were transferred further to the Purported Customers.
[69] One of the bank accounts used for receiving payments from Central Steel and making payments to New Metal in 2012 was an account held at Bank of America in the name of “Cheung Fat Metal Recycling Co., Limited”, which was a company incorporated in the State of California in the United States.
[70] The evidence is not challenged by Lai.
[71] Qiu’s evidence is not challenged by Lai and is accepted by this court.
[72] Abbreviations used in the diagram:
CMR – Central Steel;
CF-HSBC-1 – Business integrated account in HSBC held by Cheung Fat;
CF-BOA-1 – Account in Bank of America held by Cheung Fat;
SS-Citi-1 – USD checking account in Citibank N.A. held by Smith Steel;
SS-EWB-1 – Business checking account in East West Bank held by Smith Steel;
PM-EWB-1 - Business checking account in East West Bank held by Pacific Metal;
NM-JPM-1 – Account in JPMorgan Chase Bank held by New Metal;
NM-EWB-1 – Business checking account in East West Bank held by New Metal;
NM-Citi-1 – USD checking account in Citibank N.A. held by New Metal;
CK-HSBC-1 – Business integrated account in HSBC held by Chak Kwan;
HC-HSBC-1 – Business integrated account in HSBC held by Hoi Cheung;
ML-WHB-1 – Account in Wing Lung Bank Limited held by Metallurgical;
QX-HSBC-1 – Business integrated account in HSBC held by Qing Yuan Xinxin
[73] HKD equivalents are based upon the exchange rates of US$1 = HK$7.75732 and RMB1 = HK$1.2557 as at 26 July 2013
[74] HKD equivalents are based upon the exchange rates of US$1 = HK$7.75732 and RMB1 = HK$1.2557 as at 26 July 2013
[75] [1989] BCLC 498
[76] At 505g; See also Mortimore, Company Directors (3rd edn), [3.53], and The Company Director: Powers, Duties and Liabilities (12th edn), [6.39]
[77] Maxwell (No 2), supra, per Hoffmann LJ at 265
[78] Grupo Torras, supra, [119]
[79] Underhill and Hayton, supra, [97.25; Bank of Ireland v Pexxnet Ltd [2010] EWHC 1872 (Comm), per DHCJ Jonathan Hirst QC at [54]
[80] This is the appropriate measure to compensate a party for being kept out of its damages, as it reflects the theoretical cost to the plaintiff of borrowing the sums withheld. See Waddington, supra, [171]-[185]
[81] Wallersteiner v Moir (No 2) [1975] QC 373, per Lord Denning MR at 388B-H, per Buckley LJ at 397C-398G; Wing Fai, supra, at [345], [351]; Tam Po Kei v Tam Bo Kin (No 2) [2011] 2 HKLRD 272, per Harris J at [3], [7]; Kao Lee & Yip, supra, per Ma J (as hen then was) at [131]
[82] Re Oxford Benefit Building, supra, per Kay J at 516
[83] Choy Yee Chun v Bond Star Development Ltd [1997] HKLRD 1327, at 1334 and 1338
[84] Hong Kong Civil Procedure 2021, Volume 1, [62/App/12], 1st para
[85] Order 62, rule 5(1)(e) and 5(2)
[86] Order of DHCJ Anita Yip SC dated 12 October 2015
[88] Order of DHCJ Saunders dated 25 June 2014
[89] Annex 13 to Ps’ Closing Note dated 29 January 2021
[90] The facts and matters set out in this Annex are based upon and an expansion of Appendix 1 [B1/1-1/89-1 – 89-19] to the Witness Statement of Cosimo Borrelli dated 13.07.2017 [B1/1/1-89].
[91] See Item 11.
[92] See Item 18.
[93] See Item 10.
[94] See Item 14.
[95] See Item 15.
[96] See Item 16.
[97] See Item 6.
[98] See Item 6.
[99] See Item 3.
[100] See Item 1.
[101] See Item 4.
[102] See Item 1.
[103] See Item 1.
[104] See Item 3.
[105] See Item 2.
[106] See Item 2.
[107] See Item 3.
[108] See Item 1.
[109] See Item 6.
[110] See Item 1.
[111] See Item 1.
[112] See Item 5.
[113] See Item 5.
[114] See Item 1.
[115] See Item 1.
[116] See Item 5.
[117] See Item 12.
[118] See Item 1.
[119] See Item 1.
[120] See Item 1.
[121] See Item 13.
[122] See Item 8.
[123] See Item 12.
[124] See Item 14.
[125] See Item 16.
[126] See Item 1.
[127] See Item 16.
[128] See Item 1.
[129] See Item 13.
[130] See Item 16.
[131] See Item 1.
[132] See Item 14.
[133] See Item 15.
[134] See Item 1.
[135] See Item 5.
[136] See Item 1.
[137] See Item 5.
[138] See Item 5.
[139] See Item 3.
[140] See Item 4.
[141] See Item 1.
[142] See Item 5.
[143] See Item 5.