EXCEL COURAGE HOLDINGS LTD AND ANOTHER v. WONG SIN LAI AND OTHERS

HCCL 34/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 34 OF 2013

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(By Original Action)

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(By Counterclaim by SUN XIAO XIANG)

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J U D G M E N T

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INTRODUCTION

1. This is an action by Excel Courage Holdings Ltd (“Excel”) and Hung Ka Leung (“Mr Hung”), the plaintiffs, for proprietary remedies and/or damages in respect of the disposal of certain shares on or about 25 September 2013.

2. The shares in question are 974,180,000 shares in Luxey International (Holdings) Limited (stock code: 8041) (“Luxey”) and 147 million shares in China Railsmedia Corporation Limited (stock code: 745) (“Railsmedia”) (collectively (“the Shares”)).

3. The claim is made against Wong Tam Yee, formerly Wong Sin Lai (“Mr Wong” and “D1”), Sun Xiao Xiang (“Mr Sun” and “D2”), Tsang Man Ho Alvin (“D3”), Wong Tsz Kin (“D4”), and Tsang Wing Ho Ringo (“D5”).

4. Excel (“P1”) has at all material times been the registered owner of the Shares.  Mr Hung (“P2”) claims to have been the beneficial owner of Excel at all material times until March 2015.

5. As against D1, it is claimed that, in breach of his fiduciary duties as director of Excel, he disposed of the Shares.

6. D1 counterclaims that Excel is and was at all material times holding the Shares and/or their proceeds on trust for D1 and Lau Chi Yuen Joseph (“Mr Lau”) in equal shares, and seeks an order for transfer of 50% of the Shares and/or proceeds to D1.

7. As against D2 to D5, it is claimed that they dishonestly assisted in the breach of fiduciary duty by D1 and/or that they conspired with D1 to misappropriate the Shares.

8. D2 counterclaims that he was a bona fide purchaser for value of the Shares without notice of the beneficial ownership of Excel or Mr Hung.

BACKGROUND

9. Excel is a company incorporated in the BVI.  At all material times, it has had one issued share.

10. The register of members and register of directors of Excel shows that from 3 February 2010 to 15 January 2011, Choi Chiu Fai Stanley (“Mr Choi”) was the shareholder and from 3 February 2010 to 1 March 2010 he was director.  Chen Xiao Tong (a mainland resident) (“Mr Chen”) was director from 1 March 2010.

11. Mr Choi was a friend of Mr Lau.  Mr Lau arranged (through Mr Sum Chun Ho) for the acquisition of Excel on behalf of an undisclosed person.  From 15 January 2011 to 21 February 2011, Mr Chen was shareholder, and he remained director until 21 February 2011. 

12. Between 21 February 2011 and 25 September 2013, Mr Wong was the registered shareholder of the share in Excel, and the sole director of Excel.  It is not disputed that Mr Wong at all material times held the share in Excel for the benefit of another person, although there is a dispute as to who was (at all material times up to and including 25 September 2013) the beneficial owner.  When Mr Wong became the shareholder and director of Excel on about 21 February 2011 he executed (by signing) an undated declaration of trust which left the identity of the beneficiary blank; a blank undated share transfer form; and an undated letter of resignation as director (“the Blank Excel Forms”).  The reason for executing the Blank Excel Forms is in dispute.

13. On 5 September 2011, Excel acquired a travel agency business called Achiever World Limited (“Achiever World”).  Mr Wong became director thereof but the day‑to‑day management of the company remained with the pre‑acquisition management.  Mr Lau’s companies had some business dealings with Achiever World thereafter.  Excel continues to own Achiever World.

14. On about 21 March 2012, Excel set up a brokerage account with Fulbright Securities Limited (“Fulbright”).  

15. On 22 March 2012, Fully Wealthy Limited (“Fully Wealthy”) agreed to lend $61.9 million to Excel.  The one‑page loan agreement provided for the loan to be repaid within two years, subject to agreed extensions; and for the payment of interest of 15% per annum, with principal and interest to be repaid upon maturity.

16. On 3 April 2012, Fully Wealthy deposited $61.9 million into Excel’s bank account with BSI.

17. On 21 May 2012, Excel entered an agreement with First Asia Limited (“First Asia”) whereby Excel agreed to lend $44 million to First Asia to enable it to provide loans to its clients.  The agreement was signed by Mr Wong on behalf of Excel and signed by Howard Tang on behalf of First Asia.

18. From May 2012, Excel began to acquire shares in Luxey and Railsmedia.  

19. On 3 July 2012, there was a rights issue by Luxey.  The subscription price was $0.05, whereas the market price that day ranged from $0.018 to $0.021.

20. Prior to the rights issue, Excel held 6.24% of the issued Luxey shares.  Excel did not directly subscribe for the rights issue.  There is an allegation made by Mr Wong that the subscription was for the purposes of Excel indirectly acquiring the Luxey shares (addressed further below).  By February 2013, Excel held 18.16% of Luxey shares.  By 24 September 2013, Excel held all the Shares in its securities account with Fulbright.

21. On 29 August 2012, Excel acquired Sea Rising Limited (“Sea Rising”), a company which owned a Bel‑Air property, from Mr Hung.  The consideration paid by Excel for the Sea Rising shareholding was about $20 million. 

22. Mr Wong (on an unknown date) executed, in respect of the Sea Rising shareholding, an incomplete undated share transfer form, an undated director resignation letter, and incomplete undated bought and sold notes (“the Blank Sea Rising Forms”).

23. On 8 October 2012, Excel sold the Bel‑Air property held by Sea Rising for $21.8 million.  (Excel retains ownership of Sea Rising, which apparently has no value after the sale of the property.)  

ACTIONS WHICH ARE THE SUBJECT OF COMPLAINT

24. On 5 September 2013, Mr Sun (D2) opened a brokerage account at CLC.

25. On 24 September 2013, Mr Wong (D1) caused Excel to open a brokerage account at CLC. 

26. Also on 24 September 2013, D3 to D5 each opened a brokerage account at CLC.

27. On 25 September 2013, Mr Wong caused Excel to transfer all of the Shares from its securities account with Fulbright to Excel’s securities account with CLC. 

28. On the same date Mr Wong caused Excel to transfer the Shares from its own CLC account to the CLC securities accounts in the names of D2 to D5.  There have been produced bought and sold notes in respect of the transfers to D2 to D5.  These bear the date 25 September 2013 and they state that Excel sold the Shares at $0.08.  The opening market price on 25 September 2013 was $0.08. 

29. The Shares were partly sold by D2 to D5 on 25 September 2013 to 27 September 2013:

a.  D2 sold 243 million Luxey shares for $11,552,376.39.

b.  D3 sold 243 million Luxey shares for $7,917,074.22.

c.  D4 transferred 243 million Luxey shares into an account in his name with KGI. 

i.  Between 26 to 27 September 2013, 43 million of those Luxey shares were sold.  Of the proceeds, $607,347.65 remains in the KGI account; what happened to the remaining $1,652,400 is unknown.

ii.  On 27 September 2013, 200 million Luxey shares were sold to Chartered Extend Limited.  The whereabouts of the proceeds of $8 million is unknown.

iii.  Between 27 September and 2 October 2013, Chartered Extend Ltd sold 200 million Luxey shares for $6,142,290.90. 

d.  D5 received 245,180,000 Luxey shares and 146,472,000 Railsmedia shares. 

i.  D5 sold 115.6 million Luxey shares for $3,156,096.50, and 78.538 million Railsmedia shares for $22,631,485.26.

ii.  The remaining 129,580,000 Luxey shares (25,9166,000 shares after consolidation) and 67,934,000 Railsmedia shares were not sold. 

30. Excel and/or Mr Hung have received no payment for the Shares. Indeed, D2 to D5 have made no payment for the Shares other than the provision to Mr Wong of a cheque payable to Excel by D2 in the amount of $4 million (said to be by way of deposit)  which has not been banked but remains in the possession of Mr Wong.

WHAT HAPPENED NEXT

31. On 25 September 2013, Mr Hung completed the Blank Excel Forms so that he became the sole registered shareholder of Excel, Mr Wong ceased to be director, and Mr Hung became director. 

32. On 26 September 2013, Mr Hung obtained an ex parteMareva injunction against D1.

33. On 3 October 2013, Mr Hung obtained ex parte injunctions against D2 to D5, restraining them from dealing with the proceeds of the Shares, and against D5, also restraining him from dealing with the Railsmedia shares held in his CLC account. 

34. On 18 October 2013, the injunction obtained by Mr Hung against D1 was discharged.

35. On 30 May 2014, the Court of Appeal ordered that Excel be granted a Mareva injunction against D1. 

36. There is no dispute that some but not all of the Shares and their proceeds have been secured by the Mareva injunctions. The proceeds of sale of the Shares by D2, D3 and D5, and the unsold Shares held in the name of D5, have been paid into court.

37. It appears from a sale agreement disclosed on Day  2 of the trial, that on 23 March 2015, Mr Hung and Huge Leader entered an agreement whereby Mr Hung sold his share in Excel to Huge Leader.  Accordingly, on any view, Mr Hung has had no beneficial interest in Excel since at least March 2015. 

APPLICATIONS MADE AT TRIAL

38. On Day 2 of the trial, 26 October 2015, the plaintiffs made two applications: (1) to amend the Amended Reply and Defence to Counterclaim; and (2) for leave to give late discovery of documents.  I decided the applications on the same day, allowing limited amendment and limited late discovery.  My reasons were addressed in a separate judgment dated 16 November 2015.

SUMMARY OF THE PARTIES’ PLEADED POSITIONS

39. The plaintiffs plead that:

a.  Through the agency of Mr Lau, Mr Wong agreed to be nominee shareholder and director of Excel on behalf of Mr Hung.

b.  On the instructions of Mr Hung, Mr Wong caused Excel to acquire the Shares which were placed in the custody of Fulbright.

c.  Mr Wong as director of Excel owed a duty to act bona fide and in the interests of Excel.

d.  Mr Wong as bare trustee of the Excel share and nominee director of Excel owed Mr Hung fiduciary duties to act in the best interests of Mr Hung, to act solely in accordance with Mr Hung’s instructions, and a duty not to act without Mr Hung’s instructions.

e.  The disposal of the Shares on 25 September 2013 was without Mr Hung’s consent or instructions or knowledge, and was in breach of Mr Wong’s duties to Excel and Mr Hung.

f.  D2 to D5 knew that the transfer of the Shares by D1 was without the authority of Excel and/or Mr Hung, and knew that the transfer was in breach of fiduciary duty.

g.  D2 to D5 dishonestly assisted in D1’s breach of fiduciary duties.

h.  The defendants conspired together to injure the economic interest of Mr Hung and/or Excel by unlawful means, namely the theft of the Shares.

40. Mr Wong, however, pleads that:

a.  He initially agreed to assist Mr Lau by acting as the front man of Excel in order to acquire and sell a travel agency business, in return for a share in the profit as remuneration.

b.  On 21 February 2011, he became shareholder and director of Excel to assist with the acquisition and sale of a travel agency business, and he held the Excel share behalf of Mr Lau.  He executed the Blank Excel Forms for that purpose and did not intend anyone other than Mr Lau to be the beneficiary of such documents.

c.  Excel acquired a travel agency business, Achiever World Limited (“Achiever World”), which it continues to own, and Mr Wong remains a director of Achiever World.

d.  After Mr Lau decided to retain Achiever World, Mr Wong queried the whereabouts of the Blank Excel Forms, and Mr Lau told him they had been destroyed. 

e.  Mr Wong never agreed to, nor was he informed, of Mr Hung or any other person being or becoming beneficial owner of the Excel share.

f.  Mr Wong owed duties to act, as director of Excel, in the best interests of Excel; and, as trustee of the Excel share for the benefit of Mr Lau, in the best interests of Mr Lau; but no duty to act in accordance with the instructions of Mr Lau.

g.  In about February 2012, he entered an oral investment agreement with Mr Lau whereby, inter alia, he and Mr Lau would each invest $30 million into an investment fund which would be used by Excel to acquire securities and hold the securities on their behalf in equal shares (“the Investment Agreement”).

h.  Pursuant to the Investment Agreement:

i.  He paid $30 million to Mr Lau in cash in three tranches, to be used by Excel to trade in securities.

ii.  Mr Lau arranged a loan of $61.9 million from Fully Wealthy, and on 3 April 2013, Fully Wealthy deposited around $61.9 million into Excel’s bank account with BSI.

iii.  From March 2012 to February 2013, Mr Wong caused Excel to purchase the Shares and hold them in a securities account with Fulbright, on behalf of Mr Lau and Mr Wong.

i.  From February 2013 to August 2013, Mr Wong had discussions with Mr Lau about selling the Shares which Mr Wong believed to be in their interests as the share price of the Luxey shares had not risen substantially since February 2013, and the Luxey and Railsmedia shares were thinly traded.  Mr Wong had contacted Mr Sun (D2), who was interested in acquiring the Shares on a block trade basis.  However, Mr Lau wanted to defer selling the Shares, stating that the Luxey share price would rise soon. 

j.  After seeing the annual results on 25 September 2013, Mr Wong caused Excel to sell the Shares on the basis that it was in the best interests of Mr Lau and himself (alternatively, in the best interests of Excel if that was the true beneficial owner).

k.  Mr Wong initially gave three reasons for saying that the sale was in the interests of Excel, Mr Lau and himself:

i.  The share price had not risen substantially since February 2013;

ii.  Luxey and Railsmedia shares were thinly traded; and

iii.  Luxey’s disappointing 2013 results.

l.  By amendment dated 16 December 2014, Mr Wong added a further reason: that he and Mr Lau had acted improperly in respect of the July 2012 rights issue, resulting in Excel increasing its holding in Luxey from 5.52% to 19.75%, and that it would be in the best interests of Mr Lau, himself, and Excel to dispose of the Luxey shares as soon as possible to prevent Mr Lau from committing any further wrongdoing.

41. D2 asserts he was a businessman who wished to purchase the Shares, that he did not know who owned Excel, nor that there was any issue as to the authority of Mr Wong to agree on behalf of Excel to sell the Shares; and that he was a bona fide purchaser of the Shares.

42. D2 to D5 claim that D3 to D5 were all nominees of D2.  They assert they each agreed to hold a portion of the Shares as directed, on the basis they would be paid $100,000.

THE ISSUES

43. The substantive issues which need to be decided are largely agreed:

a.  Did Excel acquire the Shares for its own benefit, or as trustee for Mr Lau and Mr Wong?

b.  What if any duties were owed by Mr Wong to Excel in respect of the Shares on 25 September 2013?

c.  Who at the material times was beneficial owner of the Excel share?

d.  What if any duties were owed by Mr Wong to Mr Hung in respect of the Shares on 25 September 2013?

e.  Did Mr Wong breach any duties owed to Excel?

f.  Did Mr Wong breach any duties owed to Mr Hung?

g.  If so, did any of D2‑D5 dishonestly assist such breaches and/or knowingly receive the Shares?

h.  Was there a conspiracy between Mr Wong and D2 to D5 to injure Excel and/or Mr Hung by the theft of the Shares?

i.  Is Excel beneficially entitled to the sale proceeds of the Shares sold, and the unsold Shares, under the accounts of D2 to D5?

44. D1 raised two pleading issues which I address below:

a.  First, that the thrust of the plaintiffs’ case was premised on Mr Hung being beneficial owner, and that the pleaded duties owed by Mr Wong to Excel (as director and/or fiduciary) was to act with the consent of or on the instructions of or in the interests of Mr Hung.

b.  After the start of the trial, D1 raised a second pleading issue, submitting that in the opening of Mr Wong SC on behalf of the plaintiffs, Mr Wong SC had put the breach of duty case on the basis that D1 had misappropriated or stolen the Shares, whereas Mr Lam SC for D1 submitted that was not the pleaded case (“the Pleading Issues”).

45. Two other issues have also arisen, the relevance of which to this Action is disputed, with which I deal later in this judgment:

a.  Whether in about June to November 2012, Mr Lau orchestrated a scheme whereby Mr Wong arranged for nominees (in return for a fee) to subscribe to the July 2012 rights issue by Luxey, with finance for such subscriptions to be indirectly provided by Excel, and the subscribed shares to be sold to enable Excel to acquire such shares to raise its shareholding in Luxey from about 5% to about 20% — all for the purpose of Mr Lau avoiding disclosure that in addition to his disclosed holding in Luxey, he also had a holding through Excel and that he truly owned over 40% of the shareholding in Luxey (“the Rights Issue Allegation”).

b.  Whether there has been an attempt to intimidate the witnesses in this Action (”the Intimidation Allegations”).

THE PLEADING ISSUES

46. The plaintiffs have clearly pleaded their case primarily on the basis that Mr Hung is beneficial owner of the Excel share.  However, there seems to me to be a stand‑alone plea that D1 was in breach of his directors’ duties to Excel.  I did not understand Mr Lam SC to strongly persist in his submission to the contrary.  In particular:

a.  Para 6: “By reason of his position as director of Excel, Wong owed a duty at all times to act bona fide and in the interests of Excel.”

b.  Para 11: “In breach of the duties pleaded in Paragraphs 6 …” and there is then pleaded the particulars of the transfers of the Shares on 25 September 2013 by D1 from Fulbright to Excel’s CLC account, and then from that account to the accounts of D2 to D5, with the only reference to consideration being the unbanked $4 million cheque issued by D2.

c.  Para 12 pleads the sales and/or transfer of Shares made by D2 to D5 on 25 September 2013, the location of the proceeds of sale in D2, D3 and D5’s CLC accounts, and the onward transfer of shares from D3’s CLC account.

d.  Para 13 pleads that D1 had given evidence (in the context of the injunctions) that the Shares were sold at 40% of the closing price of the day prior to receipt.

e.  Para 14 pleads the absence of receipt of any consideration for the Shares by Excel.

f.  Para 16 pleads the knowledge of D2 to D5 that in transferring the Shares, D1 was acting without authority of Excel and/or in breach of his fiduciary duties, providing particulars of the matters from which such knowledge could be inferred.

g.  Para 18 pleads: “By reason of the matters pleaded in Paragraphs 11, 12 and 16 above, all the defendants conspired together to injure the economic interests of … Excel by the unlawful means, namely the theft of the Shares.  Excel … rely on the overt acts pleaded in Paragraph 16 above.”

47. Reading the Statement of Claim as a whole, it seems to me that the plaintiffs have pleaded that in breach of duty to Excel, Wong caused Excel to transfer the Shares out of its control to other persons, without consideration to Excel, and that such other persons knew of the transfer being without authority and that they had conspired to hurt Excel by unlawful means, namely theft of the Shares.  Whilst Paragraph 6, when pleading breach of duty, does not expressly refer to dishonesty, it seems to me to be clear from reading the pleading as a whole that dishonesty of Mr Wong is alleged, in particular, his theft of the Shares.

48. As litigants are reminded by Kwok Chin Wing v 21 Holdings Ltd(2013) 16 HKCFAR 663 at paragraphs 21 – 23, the basic objective of pleadings is to fairly and precisely inform the other parties of the stance of the pleading party so that proper preparation is made possible.

49. In ThreeRivers DC v Bank of England (No 3)[2003] 2 AC 1 at paragraphs 183 – 189, Lord Millett discussed the two principles in play with a pleading of fraud or dishonesty.  The first pleading matter is the giving of sufficient notice to the opposite party of the case made against him.  The second is that an allegation of fraud or dishonesty must be adequately particularised, and that particulars of facts which are consistent with honesty are not sufficient.  As stated by Lord Millett:

“… the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference … It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty.”

50. I did not understand D1 to complain that there were any material facts relied upon at trial by the plaintiffs that had not been pleaded.  I understood D1’s complaint to be that the plaintiffs had not spelled out that they advanced a case of dishonesty, and that the facts pleaded were consistent with a case of honest negligence.  This initially troubled me because the Statement of Claim, when it pleads breach of duty at paragraph 6, does not also expressly plead in the same paragraph that the breach of duty was dishonest and/or that the breach relied on was a misappropriation of the Shares. However, on reflection, I do not think that the pleading was consistent with negligence or other innocent breach of duty.  The plaintiffs had expressly pleaded against D1 a transfer of the Shares without any receipt of consideration, and expressly pleaded that D2 to D5 conspired with D1 in the theft of the Shares.

51. Nor do I think D1 understood the pleading of breach of duty against him to be consistent with negligence or innocent breach of duty.  D1’s Defence at paragraph 46, in denying the claim of conspiracy to injure by unlawful means, refers to the matters already in the defence in response to the claim of breach of duty.

52. Although a reply pleading cannot add new causes of action, it is clear from the Amended Reply (in particular paragraph 6 thereof) that the plaintiffs refer to their case against D1 as pleaded in the Statement of Claim as being one of misappropriation.  The Reply (insofar as D1 is concerned) does not seek to adduce any new material facts in support of Excel’s cause of action, although it does (properly) respond to the facts upon which D1 has relied in support of its defence, including D1’s allegation of a bona fide sale agreement with D2 on 25 September 2013.

53. I do not believe that D1 could have believed that the plaintiffs’ case against him was for innocent rather than dishonest breach of duty in respect of the transfer of the Shares.  I consider the allegation of breach of director’s duty by misappropriation of the Shares against D1 to be adequately pleaded.

54. D1 makes a related submission that the conspiracy plea is defective as it does not adequately plead an unlawful act by Mr Wong.  It follows from my finding that there is an adequate plea of breach of duty by misappropriation of the Shares, that the submission in respect of the pleading of the conspiracy claim also fails.

INTIMIDATION ISSUE

55. On Day 5 of the trial, whilst Mr Lau was still in the course of giving his evidence, I was informed by D1’s counsel, Mr Lam SC, that there had been episodes of intimidation on Day 4.  I was briefly told that these consisted of: (1) a bald man who D1 believed to be a bodyguard of Mr Lau approaching a staff member of D1 and asking him to tell D1 that D1 should be careful travelling about, and should be careful what he said in evidence; and (2) a man also believed to be associated with Mr Lau taking photographs of D1’s junior counsel whilst she was speaking to D1 in the conference room outside court.  Mr Lam SC informed me that the matter had been reported to the police and provided the court with a copy of the police statement with a partial translation.

56. Mr Wong SC informed the court that: (1) it was true that Mr Lau had bodyguards with him outside court; (2) the reason for that is because he was first intimidated by D1; and (3) this has not been raised before because it was not deemed relevant.  After conferring with Mr Lau on D1’s complaint, Mr Wong SC informed the court that he was told: (1) Mr Lau had no knowledge about the subject‑matter of the police report mentioned by Mr Lam SC or the police report itself; (2) Mr Lau said the reason he employed bodyguards was because he had received threatening messages on his telephone, which he would provide to the court; and (3) he had no bodyguard who was bald (although Mr Wong SC had no instructions as to whether Mr Lau had an associate who was bald).

57. I allowed limited cross‑examination on the intimidation issue in case it was relevant to credibility of the witnesses.

58. In cross‑examination, Mr Lau stated that he did not know any of the men outside court who he had been seen sitting or talking with, and that they (including the bald man) had approached him to ask whether they could help him, and he had declined (on each occasion).  Mr Lau said he had bodyguards but not these men, and he did not know if these men were related to his bodyguards, and he was not clear who the men outside court were.  When asked why he sat with the men if he did not know them, Mr Lau replied there was not much seating, and that they had spoken to him rather than vice‑versa.

59. Frankly, I found Mr Lau’s evidence on this implausible and I did not believe him.

60. Mr Lau then gave evidence about two recent intimidating text messages, before producing copies of the relevant texts.  He described one of the text messages as requiring $1 million to be deposited into a mainland account otherwise something big would be revealed, and he stated his opinion the message was from D1.

61. Mr Lau later produced the text messages that he claimed were intimidation by Mr Wong (D1).  They were:

a.  Text 1: A text message dated 30 September 2015: “F*** you!  You aren’t going to stop it are you?  I have revealing stuff about you to disclose!  Let’s crash and burn together.”

b.  Text 2: A text message dated 19 October 2015: “Are the photos sensational?  Do you want to know who the bastard is who betrayed you?  I will tell you as soon as you put one million into my mainland account.  If “No way!” the second batch will be disclosed.”

62. The text messages indicate that Mr Lau’s description or recollection of their content was inaccurate. 

63. As to Text 1, Mr Lau stated that he was not aware of any information which might expose him, so he did not think it was a big threat and did not report it to the police (but he was considering a report after Text 2). He agreed that Text 1 was not tied to the Action.

64. As to Text 2, when asked whether Mr Lau knew which or whose mainland account money should be paid into, Mr Lau stated he did not know.

65. When asked about the fact that Text 2 made no reference to this Action, Mr Lau responded that he did not know if it was related at all. 

66. When asked about the photographs mentioned in Text 2, Mr Lau said that there had been a photograph sent to his wife which showed him sleeping alone in a bed, he was not sure where.  He said although the message referred to photographs in plural, he did not know about any more.

67. However, when the photograph was later produced, it was clear that there was a message with the photograph: “Your husband is sleeping with another woman”.

68. The reference by Mr Lau and the plaintiffs’ counsel (albeit on instructions) to allegedly intimidating messages to Mr Lau from Mr Wong was misleading.  Text 2 was a message to Mr Lau’s wife suggesting that Mr Lau was having an affair.  There is no link established with either Mr Wong (D1) or these proceedings.  I find Mr Lau’s evidence in respect of the Intimidation Issues implausible and/or misleading.  However, I do not believe the Intimidation Issue is directly relevant to the subject‑matter of this action.

THE WITNESSES

69. The plaintiffs called Mr Sin Kwok Wai Ronald (“Mr Sin”), Mr Sum Chun Ho (“Mr Sum”), and Mr Lau. 

70. The plaintiffs had originally served three witness statements of Mr Hung between March 2014 and January 2015; but in their written opening submissions, the plaintiffs stated that they would not call Mr Hung because, after the sale to Huge Leader, he had no further interest in the Action.  There is accordingly no evidence from Mr Hung.

71. Each of the defendants gave evidence except for D5, Mr Tsang Wing Ho Ringo, who is deceased.  Counsel for D5 did not seek to rely on D5’s statements served before his death, accordingly they were not admitted.

72. Mr Sin has been the director of Excel since 23 March 2015.  He stated that he was responsible for supervising this Action since that time.  He gave evidence on the basis that his first knowledge of the subject‑matter of the Action was only from October 2014, ie after the material events of February 2011 (the time of the execution of the Blank Excel Forms) until 25 September 2013 (the time of the alleged unauthorised sale of the Shares by D1).  His witness statement evidence was that on October 2014 he was told by Mr Hung that almost all of the Shares held by Excel had been sold by D1 without Mr Hung’s consent.  Mr Sin confirmed in cross‑examination that his information as to the events in question in this Action is derived from Mr Hung, a Ms Cherry Chan (who he describes as the “boss” of Huge Leader — Excel’s largest creditor), and the documents of Excel. 

73. Nevertheless Mr Sin sought to give evidence in respect of the issues in this action.  I found Mr Sin’s evidence to be unreliable.  This is not surprising given that he clearly was not party to any of the material events from February 2011 to September 2013.  The two people who have allegedly provided him with information did not themselves give evidence, ie Mr Hung and Ms Chan (who at least is a Hong Kong resident). Mr Sin provided me with a little, albeit incomplete, information as to Huge Leader which I address below.  Otherwise, I do not consider that Mr Sin provided any material evidence which assisted me in reaching findings on the material issues.

74. Mr Sum is the accountant who assisted Mr Lau with the acquisition of Excel and who prepared the Blank Excel Forms.  I found him to be a straightforward witness.  He stated his belief that he was asked to prepare the Blank Excel Forms, just as he had been asked to prepare similar blank forms for other clients, so that the clients could maintain confidentiality (from his firm as well as other people) as to the true beneficial ownership of the relevant company.  He stated fairly what he was and was not told, in particular that he was not told who the beneficial owner of the Excel share was before 25 September 2013, and that he is not in a position to judge who in fact was the beneficial owner of Excel.

75. Mr Lau is the only witness for the plaintiffs with knowledge of the material events.  He supports the plaintiffs’ position.  Mr Lau was at all material times the chairman and CEO of Luxey.  Mr Lau was clearly the common thread between all the characters in this Action: he knew Mr Choi who originally owned Excel; he knew Mr Hung and introduced him to his friends and acquaintances; he arranged the acquisition of Excel; he arranged the appointment of, first, Mr Chen, then Mr Wong as nominee shareholders and director of Excel; he knew Ms Cherry Chan of Huge Leader which injected the Railsmedia convertible preference shares into Excel (allegedly against Mr Hung’s guarantee) and then apparently purchased Excel in March 2015; he knew Howard Jiang of Fully Wealth who made a loan to Excel (allegedly on the basis of Mr Hung being the owner of Excel); he arranged the acquisition of Achiever World by Excel; he assisted Mr Hung to go to lawyers to obtain the injunction on 26 September 2013.  Mr Lau disavows any personal interest in Excel or the Shares.  He states that his involvement in matters relating to Excel were solely as a favour to Mr Hung.  I will address the assistance given by and credibility of Mr Lau in respect of the issues below.

76. Mr Wong is D1.  He is an accountant by training.  He is not apparently a wealthy man as compared to Mr Lau, and appears to have been initially impressed by Mr Lau and keen to be on good terms with him, do business with him, and make money.  He was willing to act as a “front man” for Mr Lau, on the basis that he would receive some financial benefit for doing so.  He and Mr Lau are self‑evidently no longer on good terms.  In attempting to explain his reasons for disposing of the Shares held by Excel, Mr Wong (a) claims that he has a 50% beneficial interest in the Shares; and (b) brings Mr Lau into the fray, claiming that Mr Lau has the other 50% interest in the Shares, contrary to the public disclosure given.  In giving such evidence, Mr Wong clearly inculpates himself as well in respect (at least) of giving false public disclosure of ownership of listed shares in Luxey.  I will deal with the extent to which I am assisted by Mr Wong’s evidence when I address the issues below.

77. Mr Sun is D2.  His witness statement indicated he was a businessman who had chosen to purchase the Shares from Mr Wong on an arms’ length basis, and had used nominees to do so.  I have to note that Mr Sun does not speak English but his witness statement was provided in English on the basis that it had been translated to him before he approved it.  There was no Chinese version of his statement.  He was unable to refresh his memory from the statement, or to deal with questions by reference to his statement.  That was entirely unsatisfactory from both Mr Sun’s point of view and that of the court. In the event, Mr Sun came across as a man who was unsophisticated, vague, without a grasp on the details of the transactions in which he was involved. Although he blamed this on the lapse of time, I am not convinced this was the reason.  Mr Sun stated that he had bought the Shares on behalf of himself and partners, the identity of whom he did not wish to disclose.  I was left with the impression that Mr Sun was not the decision‑maker in respect of the transfer of the Shares to him and D3 to D5, that he was not sure what he was supposed to say on some occasions, and was easily swayed in his evidence by suggestions from counsel. 

78. D3 is Alvin Tsang.  In his witness statement, he claims to have been asked by Ringo Tsang (D5) to act as a nominee for D5 in holding 243 million Luxey shares and dealing with them on D5’s instructions, in return for a fee of $100,000. 

79. D4 is Wong Tsz Kin.  Similarly to D3, he claims that he was asked by D5 to assist with holding shares in return for a fee.  His witness statement is almost identical to that of D4. 

THE DOCUMENTS

80. There are limited documents available in this case, and I need to be wary of such documents as do exist as it is common ground that:

a.  some documents had been created to conceal information, eg the Blank Excel Forms; and

b.  perhaps more importantly, some documents had been created in order to present a position which differed from reality, eg  the “loan” agreement of $200,000 from Mr Ma, another of Mr Lau’s friends/associates, to Mr Wong which was actually a non‑returnable payment (although there was a dispute as to whether (per D1) the payment was an advance payment of dividends under the Investment Agreement or for assistance with the rights issue for services or whether (per the plaintiffs, as put to D1 in cross‑examination) it was remuneration from Mr Hung for assistance with Sea‑Rising and Achiever World). 

ISSUE 1: THE BENEFICIAL OWNERSHIP OF THE SHARES

81. There is no question that the Shares were purchased by Excel and registered in the name of Excel.  Unless Mr Wong (D1) can establish the Investment Agreement and his joint ownership of the Shares with Mr Lau, then the Shares (at least prior to 25 September 2013) belonged to Excel.

82. The issues which seem to me to arise are as follows:

a.  Was there, as D1 claims, an oral Investment Agreement?

b.  Who paid for the Shares?

A.  Was there an oral Investment Agreement?

83. Whether or not the alleged Investment Agreement was made is to be considered in the light of:

a.  any documentation evidencing the Investment Agreement;

b.  any conduct evidencing the Investment Agreement; and

c.  the conflicting oral evidence of Mr Wong and Mr Lau.

84. Before addressing these points, I wish to note the oddity of the conflicting evidence of Mr Wong and Mr Lau.  In the context of a claim for a valuable asset, Mr Wong says that it belongs to him and Mr Lau, but Mr Lau denies it.  However, Mr Wong has suggested that Mr Lau has reason to lie about ownership of the valuable asset because he has concealed ownership of the same in contravention of the disclosure requirements in respect of listed companies, and if ownership was established, that would also establish incorrect public disclosure in respect of a listed company, and expose Mr Lau to potential criminal prosecution.

(a)  Documents evidencing the Investment Agreement

85. I have seen no communications between Mr Lau and Mr Wong which indicate in any way that Excel would acquire, or had acquired, the Shares on their joint behalves.  I cannot put too much reliance on that as the allegation of the oral Investment Agreement is premised on Mr Lau wishing to ensure there was no evidence of his ownership of any Luxey shares which he had not disclosed.

86. Prior to this Action, both Mr Lau and Mr Wong asserted a state of affairs inconsistent with the positions they take in this Action:

a.  In the Action, Mr Lau states Mr Hung to be 100% beneficial owner of Excel, which owns the Shares; and Mr Wong asserts that by the Investment Agreement, he and Mr Lau jointly own the Shares. 

b.  Prior to the Action, Mr Lau and Mr Wong both presented the position that Mr Wong was 100% owner of Excel and therefore indirectly a 100% owner of the Shares.  That position was presented in the public disclosure in respect of the shareholdings of Luxey from August 2012 to September 2013, in particular:

i.  The Interim Report 2012 of Luxey dated 14 August 2012 and signed by Mr Lau as chairman, disclosing the shareholders to include: Mr Lau through his company JL Investments Capital Limited (“JL Investments”) as to 18.62%, and Mr Wong as to 6.36%, of which 6.24% was held through Excel, wholly‑owned by Mr Wong, and the balance held by Mr Wong as beneficial owner.

ii.  The Luxey Second Interim Results announcement dated 6 February 2013 signed by Mr Lau as chairman stated the shareholders to include: Mr Lau through JL Investments as to 22.64%, and Excel as to 18.16%, and stated Excel was wholly‑owned by Mr Wong.

iii.  In a public information sheet for Luxey dated 7 February 2013 submitted by Luxey to the HKSE, it was stated that Mr Lau through JL Investments owned 22.64%, and Mr Wong through Excel owned 19.75%.

iv.  The Luxey 5^th Quarterly report dated 10 May 2013 signed by Mr Lau as chairman stated Mr Lau through JL Investments owned 22.64%, and Excel owned 19.75% and Excel was wholly‑owned by Mr Wong.

v.  The Luxey annual report 2013, of which the directors’ report was dated 24 September 2013 and signed by Mr Lau as chairman, stated that, as at 30 June 2013, Mr Lau through JL Investments owned 22.64%, and Excel owned 19.75% and Excel was wholly‑owned by Mr Wong.

c.  I note that by letter dated 30 September 2013, Mr Wong’s solicitors were still asserting that the Shares were held by Excel for the 100% benefit of Mr Wong. 

87. Mr Wong’s explanation so far as I understood it was that he was the real owner of Excel from February 2011 to September 2013, so that he and the Luxey board represented the true position to the public. The Investment Agreement was confidential and so that was, Mr Wong said, not reported to the public.  I do not accept that explanation.  The representation to the public was that Mr Wong owned all of the Luxey shares held by Excel, and his story about the Investment Agreement is inconsistent with that.

88. On 25 September 2013, Mr Lau assisted Mr Hung to take control of Excel by completing the Blank Excel Forms and seeking legal assistance in getting an injunction on the basis that Mr Hung was the 100% beneficial owner.  This is notwithstanding that one day earlier he had signed Luxey’s annual report to the effect that Mr Wong was the beneficial owner. Mr Lau sought to explain this by saying that each time before the publication of results, he had checked the accuracy of the intended public disclosure of shareholdings with Mr Hung and Mr Wong who confirmed it was correct and he believed them.  Given Mr Lau’s involvement in setting up Excel with Mr Wong as a nominee shareholder, and his knowledge that Mr Wong was not a wealthy man, I do not find this explanation credible.

89. Accordingly, I consider Mr Lau knew at all material times that Mr Wong was not the 100% beneficial owner of Excel, but was prepared to publish Luxey statements to that effect.  In my view, he did not tell the court the truth about this.  This significantly affects my view of Mr Lau’s credibility and leads me to be wary about what he says about the true owner of Excel, amongst other things.  Clearly, if the true owner is him, this causes problems with the SFC, and he would have motivation to lie about that.  However, I note that I do not have to decide anything other than whether Mr Hung is the true beneficial owner of Excel.

90. There are no writtencommunications in evidence between Mr Hung, Mr Lau, Mr Wong, Ms Cherry Chan, Mr Jiang, or Mr Ma which tend to support the existence of the Investment Agreement.

(b)  Conduct evidencing the Investment Agreement

91. Mr Wong asserts that he paid $30 million to Mr Lau pursuant to the Investment Agreement.  If there were evidence of such payment, that would be evidence supporting the existence of the Investment Agreement.

92. I have seen no documentary evidence that Mr Wong paid $30 million to Mr Lau in about April 2012, whether for the purposes of Excel making securities investments for the benefit of Mr Wong and Mr Lau, or otherwise.  If such a payment was made, then I would expect some documentation to evidence it.

93. Mr Wong’s 1^st witness statement asserted that the $30 million funds he had paid had come mainly from his sale of Unique Smart, with the balance from his personal savings.  I have seen an agreement indicating that Mr Wong sold his interest in a company Unique Smart in consideration of two cheques totalling $33 million in April 2011. What happened to the cheques?  Were they successfully banked by Mr Wong?  What did he do with the proceeds of the cheques: did they remain on deposit or were they spent?  Clearly, there should be bank records which show what happened to the cheques and to the sale proceeds of Unique Smart between April 2011 and April 2012.  If Mr Wong had paid $30 million in cash to Mr Lau, I would expect there to be a paper trail at least until withdrawal of the cash.  No such paper trail has been provided.  Mr Wong, when cross‑examined about whether there would be bank statements showing the proceeds of the Unique Smart sale, apparently paid by two cheques dated 4 and 18 April 2011 respectively, being banked and what happened to them, Mr Wong said he had the statements but had not disclosed them. 

94. In cross‑examination Mr Wong asserted for the first time a detailed story as to how and why he paid $30 million cash to Mr Lau. He claimed:

a.  he had used the proceeds from the Unique Smart sale to go into partnership with a Cheng Koon Cheung in a microfinance business in Shenzhen, but due to ill health and Mr Wong’s investment in Excel, Mr Cheng had given Mr Wong his return on that business;

b.  that although Mr Cheng could have transferred the money to Mr Wong’s bank account, Mr Wong had asked for it in cash because Mr Lau had requested cash in order to avoid any public record;

c.  Mr Wong accepted $30 million was a huge sum for him, and that although he was an accountant, he was making a payment in cash without having any record; he stated that he did not think about money‑laundering issues; and he was very concerned at that time to earn a fortune;

d.  Mr Wong asserted that he had on three occasions met Mr Cheng at the New World Renaissance Hotel in Wanchai, and Mr Cheng had on each of three occasions between 11 April 2012 and end of April 2012 provided Mr Wong with a hand‑carry bag containing 10 blocks of $1000 notes, each block being $1 million, which Mr Wong had counted in the men’s bathroom;

e.  Mr Wong asserted that each time he then took the hand‑carry bag to Mr Lau’s office, and Mr Lau would count the money, there would be a short conversation, and Mr Wong would leave. When challenged as to why Mr Wong had not obtained a receipt from Mr Lau, Mr Wong stated (for the first time) that he had asked for a receipt but Mr Lau had refused, and that he had not previously mentioned this because he had forgotten.  He said Mr Lau had told him that if the money went into Mr Lau’s bank account then there may be a link between him and Excel, and that as Excel intended to invest substantially in Luxey shares where he was chairman and substantial shareholder, this would create a conflict of interests and may get him into trouble with the SFC.  So (according to Mr Wong) Mr Lau said that once Mr Wong paid all his share of the investment, Mr Wong would be allowed autonomy to operate the DBS bank account as well as the securities account with Fulbright.  

f.  Mr Wong said he tried to find Mr Cheng after the plaintiffs obtained their injunction but was unable to contact him on his mobile, and then in early 2014, he learned from Mr Cheng’s old boss, a Mr Lam, that Mr Cheng had died of cancer in late 2013.

95. I note the submission on behalf of the plaintiffs that it seems highly improbable that Mr Wong would pay $30 million in cash to Mr Lau, and not even ask for a receipt.  However, I have heard Mr Lau’s own evidence that: (1) he paid $800,000 in cash for the purchase of Achiever World, a company operating a travel agency business, on behalf of Excel/Mr Hung; and (2) that Mr Hung repaid him in cash on various occasions at nightclubs.  Whether or not all of that is true, it seems to me that in the context of business dealings involving Mr Lau, large cash transactions without a paper trail are not improbable.

96. However, Mr Wong’s assertion of having paid $30 million to Mr Lau in April 2012 is entirely unsupported by any documentation save for the April 2011 Unique Smart sale agreement and the related cheques.  Those documents at best show that Mr Wong had $30 million one year earlier, and no more.  If Mr Wong’s story was true, I would expect to see some documentation of the money trail, and there is none. 

97. The very late detailed oral evidence given to flesh out Mr Wong’s story does not assist me. 

98. I am unable to tell whether his witness statement was inadequately prepared or whether the oral evidence was an entire fabrication in the witness box.  I can attach very little weight to it because it is so late, when there was no opportunity for the plaintiffs to investigate it, and Mr Wong’s counsel had not put any of the new story to the plaintiff’s witnesses, particularly Mr Lau, in cross‑examination.

99. Initially, I thought Mr Wong’s story to be so fantastic that possibly it, or some of it, might be true.  This is on the basis that it seems so improbable that a professional man would make up such a story. However, in light of the documents Mr Wong has (or has chosen to) put before the court, and the absence of any documents which one might expect to see to support his story, I am not persuaded that Mr Wong paid $30 million to Mr Lau.

(c)  Conflicting oral evidence of Mr Wong and Mr Lau

100. I consider that Mr Lau was prepared to mislead the public as to the ownership of the Luxey shares by Mr Wong, and to mislead the court in respect of the Intimidation Issues (discussed above), and frankly I would be wary about relying on Mr Lau’s version of events.  However, Mr Wong was also prepared to mislead the public about his ownership of Luxey shares.  It seems to me that each of Mr Wong and Mr Lau have their own agenda in this Action and I doubt that either of them has told the whole truth as to what happened.  I have explained why I cannot accept Mr Wong’s story, by reference to the documents.  It is therefore not really necessary to rely on Mr Lau’s evidence on this matter save to note that he denies the Investment Agreement was ever made.

B.  Who paid for the Shares

101. I consider the source of the funds used to acquire the Shares to be an important indicator both as to whether the Investment Agreement was made (and acted upon), and the beneficial ownership of Excel.

102. The documentary evidence indicates that when Excel acquired the Shares, it did so from three sources of funds, and this was not contested. None of the sources were established as having been from Mr Wong, Mr Hung or Mr Lau. 

103. The three sources of funds for the Shares were as follows:

a.  Approximately $13.5 million was transferred to the Fulbright Account from Excel’s bank account with BSI on 23 November 2012 and 3 December 2012.  The funds in the BSI account were the proceeds of the loan by Fully Wealthy to Excel.  It was not disputed that that loan remains outstanding.  

b.  $3.5 million was paid into the Fulbright Account from Excel’s bank account with DBS on 14 or 15 January 2013. There is no information as to the source of the funds in Excel’s DBS account.

c.  The third source appears to be a total of 230 million Railsmedia convertible preference shares (“CPS”) deposited in two tranches into Excel’s Fulbright accounton 9 May 2012 and 18 July 2012. 

(a)  The Fully Wealthy Loan

104. What is the full story behind the Fully Wealthy loan?

105. It is undisputed that Fully Wealthy loaned $61.9 million to Excel and those monies were one of the sources of funds for the Shares. 

106. It is undisputed that Fully Wealthy is owned by a Howard Jiang, a friend of Mr Lau. 

107. Mr Lau states that the Fully Wealthy loan was made after he introduced Mr Hung to Mr Jiang, who wanted to do business with Mr Hung, and have access to his connections.

108. Mr Wong states that Mr Lau arranged the Fully Wealthy loan initially, and thereafter Mr Wong negotiated the terms and caused Excel to enter the loan agreement. 

109. I find that there is no reliable evidence that the Fully Wealthy loan was anything other than a genuine loan, and I find that it has not been repaid by Excel, or Mr Hung, or at all. 

110. Prior to Mr Wong’s oral evidence, there had been no suggestion that the Fully Wealthy loan was anything other than a genuine loan to Excel, for which Excel is liable to make repayment.  Mr Wong’s witness statement expressly stated that when he met Mr Jiang in September 2013, they were very concerned about the settlement of the loan, and Mr Jiang had suggested that Mr Wong pledge the share of Excel as security for the Fully Wealthy loan.  Mr Wong’s statement said that did not happen, and as far as he was aware Excel had not repaid the Fully Wealthy loan.

111. However, Mr Wong asserted for the first time in oral evidence that:

a.  When he, Mr Lau and Mr Jiang initially discussed the loan arrangement, Mr Wong knew that Mr Lau would settle the $30 million of his investment with Mr Jiang, and that is why Mr Jiang arranged the Fully Wealthy loan. 

b.  When he spoke to Mr Jiang in September 2013, Mr Jiang suggested that Mr Wong pledge the share of Excel as collateral for the Fully Wealthy loan to make it look “more real”. 

112. This oral evidence was not in Mr Wong’s witness statement nor was such a scenario put to Mr Lau in cross‑examination.  I therefore place no weight on this evidence.

113. As to the Investment Agreement issue, the outstanding Fully Wealthy loan seems to be inconsistent with Mr Wong having provided funds of $30 million to Mr Lau for the purposes of the alleged Investment Agreement. 

114. As to the issue of who owns Excel, the fact of the loan is just as consistent with Mr Lau being the true owner of Excel as Mr Hung. 

(b)  The DBS account

115. The source of the monies in Excel’s DBS account has simply not been addressed at all.  I note that the January and February 2013 bank statements show two cheque deposits totaling approximately $12.5 million in January 2013 (but the cheques and the identity of the drawers of the cheques are not in evidence), and one deposit of just under $15.5 million in February 2013.  I have seen no bank statements for the period of or after April 2013.

(c)  The Railsmedia CPS

116. I agree with the plaintiffs that the source of the Railsmedia CPS should be inferred to be Huge Leader.  The basis for this inference is two undated promissory notes whereby Excel promised to pay Huge Leader $13 million and $16.9 million respectively in respect of the transfer of Railsmedia CPS. 

117. Those promissory notes were signed by D1 on behalf of Excel.  (D1 accepted this in cross‑examination notwithstanding his initial challenge to the authenticity of the documents as at the start of the trial.)  It is surprising that the notes are undated, incomplete as to the amount of the shares to be transferred (inter alia), and refer to instruments of transfer between Huge Leader and Excel where no such instruments were disclosed. 

118. However after the first day of trial, and cross‑examination of Mr Sin (the plaintiffs’ witness) who said he had never seen the instruments of transfer mentioned in the promissory notes, the plaintiffs sought leave to produce further documents including instruments of transfer between Huge Leader and Excel, and a board resolution of Huge Leader to transfer the CPS to Excel.  For the reasons given in my judgment dated 16 November 2015, that application was substantially refused.  For present purposes, I note that Mr Sin, an accountant (1) who had been consultant to Huge Leader in respect of the Excel loan and claimed to have reviewed all relevant documents, and (2) who had then become internal auditor of Excel with (inter alia) a monitoring role over these proceedings, stated clearly he had never seen the instruments of transfer mentioned in the promissory notes.  Yet the day after that evidence, someone in the plaintiffs’ camp sought to produce such instruments of transfer without any explanation at all being put forward as to who held or located such documents, why Mr Sin had not known about them, or otherwise.  This leaves the clear impression of there being someone other than Mr Sin controlling matters on behalf of Huge Leader or Excel who is not willing to make themselves or their capacity known to the court for the purpose of these proceedings.

119. However, the promissory notes do tend to support the suggestion that the source of the Railsmedia CPS was Huge Leader and I find that there is no alternative explanation as to the source of the Railsmedia CPS deposited in Excel’s Fulbright account other than that they came from Huge Leader. 

120. The evidence before me did not address the basis on which the Railsmedia CPS were deposited into the Excel account by Huge Leader, in 2012, apparently in return for  unsecured promissory notes and an unsecured limited personal guarantee of Mr Hung (“the Huge Leader documents”), none of which have ever been paid or honoured.  

121. The evidence as to Huge Leader is very thin.

122. Although Huge Leader is allegedly a substantial creditor of Excel and (since March 2015) the current owner of Excel, no‑one on behalf of Huge Leader has given evidence, or any reliable evidence, to verify the Huge Leader documents or explain the Railsmedia CPS deposit or, in particular, to say who owns Huge Leader. 

123. Mr Sin gave evidence on behalf of the plaintiffs.  I had initially understood that he had a senior role with Huge Leader because:

a.  His witness statement gave that impression although it did not state his position or occupation.

b.  Mr Wong SC said Mr Sin was “from Huge Leader” when he applied for leave to amplify Mr Sin’s evidence to address the Huge Leader documents after a late challenge to authenticity by D1 (which leave I granted).

c.  In giving that extra evidence in chief, Mr Sin identified himself with Huge Leader by saying “We sold two different lots of shares to Excel at different times”, and “For the purpose of protecting us… Mr Hung was willing to sign a personal guarantee”.

124. It was only in cross‑examination that it became apparent that Mr Sin was not “from Huge Leader”.  He stated:

a.  He had been head of finance at Railsmedia from October 2010 to April 2013. 

b.  In about October 2014, he was engaged by Ms Cherry Chan of Huge Leader to provide some part‑time management consultancy work to Huge Leader on the basis that she was concerned about the recovery of a debt from Excel.

c.  In about February 2015, he was appointed internal auditor to Excel.  Mr Sin’s witness statement stated that he was appointed director of Excel at his own request.  In oral evidence, Mr Sin stated at one point that Ms Chan of Huge Leader had appointed him to be internal auditor of Excel in February 2015, and at another point that such appointment came about by agreement of Mr Hung and Ms Chan, who Mr Sin said were good friends.  

125. Mr Sin stated that Huge Leader was a BVI company set up in 2011 as an investment company and had no substantial business, no office and no employees.

126. Mr Sin’s evidence (both in his witness statement and orally) was given on the basis that Mr Hung had been the beneficial owner of Excel at all material times.  However, he confirmed that was solely on the basis of the declaration of trust dated 21 February 2011 naming Mr Hung as beneficiary; and he confirmed that until his cross‑examination he had no idea that such declaration had been signed in blank and that Mr Hung’s name was not inserted until about 25 September 2013.  He was not aware this was common ground in the proceedings.  (This contrasts with Mr Sin’s stated belief that he was director of Excel with responsibility for supervising these proceedings).

127. Mr Sin confirmed that, given the dates of his involvement, he had no personal knowledge of any transactions between Excel and Huge Leader in the period 2011 to 2013.  

(D)  CONCLUSION AS TO INVESTMENT AGREEMENT AND OWNERSHIP OF THE SHARES

128. There is no evidence that the money used to purchase the Shares came from Mr Wong or indirectly through Mr Lau. 

129. For the reasons given above,I am not persuaded that the Investment Agreement was made.

130. Even if Mr Wong’s evidence of the Investment Agreement could be believed, there is no evidence that such $30 million given by Mr Wong to Mr Lau was used to purchase the Shares.  I am simply not able to draw inferences to make such connection in the face of the information I have as to the source of funding for the Shares. 

131. Mr Lam SC accepted that a trust over the Shares would not arise until the Shares had been acquired, and he was not suggesting that there was an express declaration of trust that Excel would hold the shares on trust for Mr Lau and Mr Wong on each acquisition of any of the Shares.  He submitted that there was a common understanding between Excel, Mr Lau and Mr Wong that Mr Wong and Mr Lau would beneficially own the Shares.  If there was evidence of funding being provided to Excel by Mr Wong and Mr Lau, then that would tend to support such a common intention, but I find no such evidence.

132. I reject D1’s claim of the existence of the Investment Agreement, and therefore his counterclaim necessarily fails.

WHO OWNS EXCEL?

133. The plaintiffs assert that I should find Mr Hung to be beneficial owner of Excel until the sale of his shareholding to Huge Leader in March 2015.

134. I agree with D1 that I do not need to decide for present purposes who, if not Mr Hung, was the beneficial owner of Excel at the material times; and my view is that it would be most unsatisfactory to try to do so in light of the clear gaps in information before the court — in particular the ownership of Huge Leader and the connection of Huge Leader with Excel.

135. I find that the plaintiffs have failed to establish that Mr Hung was beneficial owner of the Excel share at any material time up until and including 25 September 2013.

136. I have taken into account:

a.  the documents available relevant to ownership;

b.  the source of Excel’s funds to buy the Shares; and

c.  the witness evidence in light of the documents and factual background.

137. I note that there are some documents which might tend to suggest Mr Hung was beneficial owner of Excel as at September 2013.  The plaintiffs rely heavily on these.  The relevant documents are:

a.  a personal guarantee apparently given by Mr Hung to Huge Leader dated 11 May 2012 to pay any liability of Excel up to $20 million;

b.  the Blank Excel Forms as completed by Mr Hung on 25 September 2013;

c.  the sale agreement in respect of the Excel share to Huge Leader dated 23 March 2015 apparently signed by Mr Hung; and

d.  a text message on 25 September 2013 from Mr Hung to Mr Wong asking the latter to call him as soon as possible.  

138. The immediate action taken by or on behalf of Mr Hung to obtain an injunction on 25 September 2013 to 26 September 2013 is also consistent with Mr Hung being the beneficial owner of Excel. 

139. Further, by letter dated 7 April 2014, the solicitors of Fully Wealthy stated that the Fully Wealthy loan was advanced to Excel on the basis that Mr Hung was beneficial owner.  This is an “after‑the‑event” letter on behalf of Mr Jiang’s company where Mr Jiang is Mr Lau’s friend and Mr Jiang did not give evidence.  I place very little weight on it.

140. My view is that such documents and activity are equally consistent with Mr Lau causing Mr Hung (as his nominee or “front man”) to appear to be the beneficial owner.  In particular, the fact that the personal guarantee of Mr Hung to Huge Leader was never enforced leaves me in doubt as to whether it was a genuine liability of Mr Hung. 

141. The following matters have also influenced me:

a.  It is very significant that Mr Hung did not attend court to give evidence, although he had made and served a number of witness statements (which were then clearly not admissible). 

b.  Mr Lau, on the other hand, has throughout been intended to be a key witness for the plaintiffs (even before the “Rights Issue” allegations were made), and has indeed been the key witness for the plaintiffs.  Mr Lau’s position is that he has no interest in the Shares or Excel, and his involvement has been on behalf of Mr Hung.  At least in respect of the acquisition of Excel and Achiever World, Mr Lau stated his reason for helping Mr Hung was that Mr Hung is second generation of a wealthy mainland family, whose father is a man of influence in the mainland, and Mr Lau wants good relations with him for business purposes.  Be that as it may, Mr Lau’s involvement is also consistent with him having an undisclosed interest in Excel and/or the Shares.

142. The evidence as to the acquisition of Sea Rising by Excel does not influence me one way or the other:

a.  On the one hand, I can see that the purchase of Sea Rising holding a  property, and the sale of the property with the profit being taken by Excel, is consistent with Mr Hung injecting the profit into Excel. 

b.  However, there is no explanation as to why Sea Rising did not simply sell the property and provide the profit cash to Excel.

c.  Nor is it clear whether the transaction might have been a way of settling a debt to the true beneficial owner of Excel.

d.  Frankly, I am not convinced the full story has been given to the court, particularly without hearing Mr Hung’s explanation for the transaction.

143. I also have regard to the lack of any real evidence of where the money for the Shares really came from (behind the three direct sources identified above). 

144. Mr Sin gave oral evidence that Mr Hung had sold his shareholding in Excel to Huge Leader on terms (inter alia) for the release of Mr Hung’s personal guarantee to Huge Leader, in March 2015.  He then produced the sale agreement.  The fact that Mr Hung purported to sell Excel does not in my view conclusively establish that Mr Hung was the beneficial owner of Excel prior to the sale.

145. I note that Mr Sin believed Ms Chan was the owner of Huge Leader.  Mr Sin said Ms Chan had told him she was a close friend of Mr Hung, and that he did not know if Huge Leader was connected to Mr Lau, or if Ms Chan was connected to or friends with Mr Lau. 

146. My firm impression is that Mr Sin only “knew” what others have chosen to tell him.  He is not able to assist any determination of who in truth owns Huge Leader or Excel, or what in truth was the basis for Railsmedia CPS being deposited in the Excel securities account. 

147. It is undisputed that Cherry Chan was a co‑signatory of Excel’s BSI bank account with Mr Wong.  This might be relevant to the question as to who is the true beneficial owner of Excel, but I do not have any reliable evidence on this point which would assist in the identification of the owner of Excel:

a.  That Ms Chan was co‑signatory to Excel’s bank account seems significant to me as it might indicate that Huge Leader and Excel did not deal on a conventional arms’ length basis and that there was a connection between the real owners and/or controllers of Excel and Huge Leader (which would not include Mr Wong).  

b.  There was no explanation in any of the witness statement evidence as to why Ms Chan of Huge Leader was a signatory to Excel’s bank account.  

c.  Mr Lam SC put it to Mr Lau in cross‑examination that he had arranged for Ms Chan to be co‑signatory pursuant to the Investment Agreement, which Mr Lau denied. 

d.  Mr Wong stated in oral evidence that Mr Lau introduced Ms Chan, a pretty lady in her twenties who was Mr Lau’s girlfriend, to Mr Wong to say that she would be co‑signatory to the BSI account, and when Mr Wong asked why, Mr Lau answered that it was because Mr Wong had not yet paid his $30 million and he was looking for someone to monitor the account. 

e.  However, I feel unable to attach any weight to this further new development of Mr Wong’s evidence where there was no forewarning or opportunity for investigation.  

148. I note briefly that Mr Wong said in oral evidence for the first time that Ms Cherry Chan is a girlfriend of Mr Lau.  Whilst, if true, it might be relevant given the involvement of Huge Leader in Excel’s affairs, I place no reliance on that as it was not independently established and it was not put to Mr Lau.  Mr Wong had also said in his witness statement that Ms Vicky Yu was a girlfriend of Mr Lau; that was denied by Mr Lau.  I do not place any reliance on that either; indeed I do not see how this last allegation could be relevant to any of the issues.  

149. I do not accept that the only possible beneficial owner of the Excel share is Mr Wong (D1), Mr Hung or Mr Lau.  It is clear that if Mr Wong is not ultimately a beneficial owner of the Luxey shares (through Excel) then there has been misleading disclosure of the ownership of Luxey shares.  The true owner, if someone other than Mr Wong, may well not come forward because of the risk of investigation or prosecution.

DUTIES OWED BY MR WONG

150. It is trite law that:

a.  As an agent of a company, a director stands in a fiduciary relationship with the company, requiring the director to act honestly, in good faith and in the best interests of the company as a whole.

b.  Although not strictly a trustee of the company’s property, a director’s duties in respect of the company’s assets are analagous to those of a trustee.  See Gower & Davies Principles of Modern Company Law (9^th ed) at 16‑39 to 16‑41.

151. The plaintiffs do not rely on a director’s duty of reasonable care and diligence.

152. On the basis that I have found the Shares to be beneficially owned by Excel, Mr Wong was required to act bona fide in the interests of Excel. 

153. The financial position of Excel is (apart from the Shares), according to Mr Sin, that Excel has the Achiever World business (currently valued at $1.2 million), and liabilities to Fully Wealth (approx $61.9 million) and Huge Leader (of $29.9 million).  There is no suggestion that the financial position was materially different on 25 September 2013.

154. As at 25 September 2013, the market value of the Shares was $146,043,880 (according to the plaintiffs, on the basis of the closing price of the respective shares that day ie $0.08 for Luxey and $0.465 for Railsmedia). 

D1 and D2 claim that they agreed to the sale of the Shares by Excel on terms that D2 would pay a consideration fixed at 40% of the closing price of the respective shares on the day immediately before receipt of the Shares, with Mr Sun paying a deposit of $4 million forthwith as a deposit; and the balance of the consideration to be paid by Mr Sun within seven days of receipt of the Shares (“the Excel‑Sun Share SPA”).

155. Mr Wong initially claimed to have entered the Excel‑Sun Share SPA for three reasons (set out at para 40k above), and later added a fourth reason ie to end the wrongdoing arising from the improper activities related to the July 2012 rights issue. 

156. In my view, none of these reasons is convincing.

157. As to the assertion that the Luxey share price had not risen substantially since February 2013:

a.  The closing market price in February 2013 fluctuated between 0.055 and 0.09, whereas the closing price as at 24 September 2013 was 0.08.

b.  However, the average acquisition cost to Excel of the Luxey Shares was $0.0428, meaning that as at 24 September 2013, the value of Excel’s Luxey Shares had increased by 87%.

c.  Mr Wong has not established that the lack of substantial increase in share price between February and September 2013 led to a belief that it was in Excel’s interests to sell at all, or on the terms of the alleged Excel‑Sun Share SPA.

158. Nor has D1 established that Luxey and Railsmedia shares were thinly traded: the share trading evidence shows the shares being traded almost every day, and there is no evidence or submission as to whether such trading should be regarded as thin.

159. The assertion that the poor annual results published by Luxey on 25 September 2013 were an impetus for agreeing to sell the Shares could not be pursued after Mr Wong altered his evidence, in cross‑examination, to say that Excel‑Sun Share SPA was made earlier on 22‑23 September 2013.

160. I did not understand Mr Wong to pursue the complaint  made at one time that Mr Lau refused to provide information as to Luxey (which might have been insider information).

161. Mr Wong also advanced the Rights Issue Allegation as a further reason for selling the Shares on 25 September 2013.  That is that he lent himself to a scheme by Mr Lau in April 2012 to November 2012 to arrange for “independent” nominees to subscribe for a rights issue by Luxey, whereby the nominees would then sell their shares to Excel, and the value of Luxey shares would be increased.  Mr Wong asserts that Mr Lau intended (by the said scheme) to avoid disclosure requirements under sections 341 to 344 of the Securities and Futures Ordinance.  Mr Wong asserts that he was remunerated for participating in the scheme.  Mr Wong asserts that on 25 September 2013, he considered the scheme to be improper and that it would be in the best interests of Excel, Mr Lau and himself to dispose of the Luxey shares as soon as possible “to prevent Mr Lau from committing any further wrongdoings”.

162. I am informed that Mr Wong (D1) has made these allegations to the SFC who are investigating.  The plaintiffs state these allegations to be irrelevant, but that in any event, they cannot comment on such allegations during the investigation and seek to rely on the privilege against self‑incrimination.

163. I am certainly not in a position to determine such allegations, particularly given the absence of full information and evidence from any of the implicated persons such as the nominees and the other intermediaries.  In any event, I do not think it is necessary to do so.  However, I recognize that if Mr Lau was indeed the beneficial owner of the share in Excel and/or had masterminded a scheme as alleged, or had otherwise used Excel as a front to control a substantial number of Luxey shares without disclosing the same to the market, then that would give him a powerful motive to dispute Mr Wong’s assertion of the Investment Agreement.

164. In any event, I am completely unconvinced that Mr Wong’s alleged concern about prolonging the wrongdoing commenced at the time of the Rights Issue (assuming the Rights Allegation to be true) was a factor leading to the disposal of the Shares.  If Mr Wong genuinely had such a concern:

a.  he could have removed himself from the affairs of Mr Lau, Excel and Luxey;

b.  he could have reported the matter to the SFC in any event; and

c.  he presumably would not have lent himself to the alleged Excel‑Sun SPA involving a disposal of the Shares to nominees in order to avoid disclosure requirements.

165. I should also note that on Mr Wong’s case, he was beneficial owner of only 50% of the Shares yet he disposed of 100% of the Shares on 25 September 2013, without any prior consent from the other alleged beneficial owner, Mr Lau.  Mr Wong’s explanation was that he thought that the Fulbright account manager, Mr Richard Tong, who was a friend of Mr Lau would have informed Mr Lau.  That evidence was quite implausible.  Even more so, when the Shares were evidently sold in a rush on 25 September 2013 and the evidence shows Mr Wong as having been anxious to get the sales done quickly and early that day, in the context of Mr Wong’s own evidence that Mr Lau does not generally start his day until midday.

166. I am not persuaded that there was any Excel‑Sun Share SPA made as alleged on or prior to 25 September 2013, or any other time.

a.  Mr Wong orally departed from his witness statement (which asserted the agreement was made on 25 September 2013), when he stated the agreement was made on 22‑23 September 2013. 

b.  D2, Mr Sun, by contrast continued to say the agreement was made on 25 September 2013, and that Mr Wong said he would not decide until 25 September 2013 (which is consistent with Mr Wong’s witness statement and what Mr Wong was expected to say). 

c.  Mr Sun’s evidence was so vague and variable that I was not persuaded that he was acting in his own right. 

i.  His witness statement indicated he was driving the decisions as purchaser.  However, in his oral evidence, whilst maintaining that he was purchaser, he stated he had undisclosed partners in the purchase, and he further gave the impression that D5 (now deceased) was directing the decisions with respect to using brokerage accounts, and execution of onward sales.

ii.  D3 and D4 also gave evidence, which I believed, that they got involved at D5’s request and simply followed D5’s instructions.

iii.  Mr Sun also said for the first time in oral evidence that on 5 September 2013, he left a signed blank cheque with D5 to be used as a deposit for the proposed transaction.  It was unclear whether Mr Sun had completed the date of 25 September 2013 on the cheque, but he clearly stated the amount and payee were left blank.

iv.  When asked for his understanding as to when the $4 million had to be paid, he said 7 days after he sold the Shares.  When asked to clarify his understanding that he would not be required to have any funds ready on 25 or 26 September to honour the cheque, Mr Sun said he did not know, he was told by Mr Wong the transaction could go ahead, and he told D5 to do the transaction.

v.  Mr Sun did not appear to be able to answer questions on points addressed in his own witness statement, such as his case on the agreed timing for payment of consideration for the Shares under the alleged Excel‑Sun SPA.  Instead Mr Sun said he was confused by the questions and that the transactions happened a long time ago.

vi.  When asked about the sales of shares from his CLC account, Mr Sun said that he had given D5 total discretion to sell them, and had not given guidance as to the minimum sale price D5 should achieve, other than the bottom line was that he should not suffer any loss.  This is quite inconsistent with Mr Sun being a bona fide purchaser, looking to make a profit on the Shares.

vii.  When asked about the likelihood of not getting a good price if hundreds of millions of shares were dumped in the market in two hours, Mr Sun said the operation was done by D5 and he would not interfere.  He said D5 was a good friend who knew more about stocks, whereas Mr Sun did not know much about buying and selling shares in the Hong Kong market, so he trusted D5 and gave him discretion.

viii. Mr Sun’s witness statement stated clearly that he had told Mr Wong that he and 3 other nominees, namely D3 to D5, would take up the Shares, and he had told Mr Wong how the Shares should be divided between the 4 CLC accounts.  However, Mr Sun stated orally that the use of nominees was arranged by D5; and that until asked about it in cross‑examination he did not know that his purchase of the Shares was split into four lots.  This contrasts with the evidence of D4 that Mr Sun was paying his legal fees in defending this action.  Either Mr Sun is lying or he is very confused and is dancing to someone else’s tune (which I do not rule out).

ix.  I simply did not believe that Mr Sun was a decision‑maker in the transactions relating to disposal of the Shares, or that his involvement in the acquisition and on‑sale of the Shares was in the capacity of a bona fide purchaser.

d.  The bought and sold notes are completely inconsistent with the alleged terms of the Excel‑Sun Share SPA.  The notes represent the share transfers as having been for full market value.  (However, it is clear that Excel did not receive any value let alone the full value).

e.  A very significant factor in my decision is the simple fact that there appears to be no good commercial reason for “selling” the Shares on the terms of the alleged Excel‑Sun Share SPA.

167. Even if there were such an Excel‑Sun Share SPA, Mr Wong did not, in my view, act in the interests of Excel in disposing of the Shares.

a.  I do not believe that Mr Wong could have considered it to be in Excel’s interests to sell the Shares at a 60% discount to the market price, without first attempting to sell the Shares in the market; and no good reason was advanced for this. 

b.  I do not believe that Mr Wong could have considered it to be in Excel’s interests to sell the Shares to Mr Sun, a non‑Hong Kong resident previously unknown to Mr Wong or Excel, apparently introduced through a bank manager in the Mainland, on terms that payment would not be made immediately but seven days later, without taking any security for payment. 

c.  Insofar as it was suggested that Mr Sun could pay Excel consideration after selling the Shares in the market, as at 25 September 2013, either:

i.  Mr Wong believed he was selling the Shares for the maximum achievable price and therefore he would consider that Mr Sun could not sell them within seven days in the market for a higher price in order to pay Excel (in which case there was a risk of substantial loss to Excel); or

ii.  It was known to Mr Wong that the sale was at such a low price that there would be no problem in quickly re‑selling Luxey shares in order to make a profit (in which case there would be a profit‑making exercise for D2 to the detriment of Excel). 

d.  Mr Wong signed the “sold notes” in respect of the Shares on the false basis that the sales were for full market value and that the consideration had been received, in the knowledge that this was untrue and these notes would be provided to the Inland Revenue Department for stamp duty purposes.  Mr Wong caused Excel to mislead the Revenue, and although this may not have caused loss to Excel, it indicates Mr Wong had another agenda inconsistent with acting in Excel’s interests. 

DID ANY OF D2 TO D5 DISHONESTLY ASSIST THE BREACHES OF DUTY BY MR WONG?

168. The general requirements for liability for dishonest assistance, as set out in Lewin on Trusts (19^th ed) para 40‑014, are agreed:

a.  there is a trust (there is no need for a formal trust; it suffices if there is a fiduciary relationship in relation to property);

b.  there is a breach of trust by the trustee of that trust;

c.  the defendant induces or assists that breach of trust; and

d.  the defendant does so dishonestly.

169. Where these requirements are satisfied, the defendant is personally liable to account in equity in respect of the breach of trust as though he were a trustee.  However, there is no creation of a constructive trust in a proprietary sense.  (Lewin on Trusts para 40‑015).

170. The liability of the assistant will be for such loss as the trustee would be liable for, but only in respect of the breaches which he has assisted: Lewin para 40‑053.

171. As to the dishonesty element: counsel are agreed that the relevant principles are set out in Royal Brunei Airlines v Tan [1995] 2 AC 378 at 389. 

a.  A person’s conduct must be assessed in light of what he actually knew at the time, and to that extent there is a subjective element in the assessment.  But when assessing whether the conduct in light of that person’s knowledge was honest or dishonest, the standard is objective ie whether the person acted as an honest person would have done, not whether the person acted in a manner which he thought was honest. 

b.  In particular, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries.  Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless.

c.  However, carelessness is not dishonesty.

172. It is for the plaintiff to plead (and of course establish) the facts upon which the allegation of the subjective element of dishonesty is founded; and also the facts upon which reliance is placed as demonstrating that the objective element is satisfied (unless it is manifest that the objective element is satisfied if the facts supporting the subjective element are proved): Lewin at 40‑048.

173. Leaving aside the parts of the pleadings which rely on Mr Hung (P2) being the beneficial owner of Excel, it has been pleaded that:

a.  Wong (D1) as a director of Excel owed a duty to act in the interests of Excel (para 6 of the ASOC);

b.  in breach of that duty, the Shares were transferred away from Excel to D2‑D5 on 25 September 2013 (para 11 of the ASOC);

c.  on 25 September 2013, D2‑D5 sold or transferred the Shares (para 12 of the ASOC);

d.  D2‑D5 were at all material times fully aware that in transferring to them the Shares, D1 was acting without actual authority from Excel and/or had actual or constructive knowledge that the transfer of the Shares was in breach of D1’s fiduciary duties; the court is asked to infer such knowledge from five pleaded particulars in respect of the opening of the accounts, transfers of shares, and sales of shares (para 16 of the ASOC).

174. D2.  I have addressed Mr Sun’s evidence at paras 77 and 165 above. 

a.  He received 243 million Luxey shares from Excel (acting by Mr Wong) without paying any consideration, then immediately sold them for over $11.5 million.  He accordingly clearly assisted in Mr Wong’s breach of trust in disposing of the part of the Shares which passed into his account.

b.  I find that Mr Sun in fact assisted Mr Wong with the disposal of all of the Shares. 

i.  He alleged that he had agreed to purchase all of the Shares under the Excel‑Sun SPA, then arranged for or allowed the split of the shares into 4 different securities accounts of D2 –D5.

ii.  I have found that the alleged Excel‑Sun SPA did not exist.  Accordingly, it follows that Mr Sun has lent himself to the concoction of the Excel‑Sun SPA for the purposes of these proceedings in order to present the position that all the Shares were bona fide sold by Excel to Mr Sun. 

c.  On the basis that Mr Sun did not pay, and did not intend to pay, for the Luxey shares he received from Excel; that he knew that Mr Wong did not require him to pay to Excel full market value for the shares, which was an action which could not be commercially justified; that Mr Sun was happy to receive whatever could be obtained upon the quick sale of those shares in the market; and that Mr Sun was willing to lend himself to the fabricated story of the Excel‑Sun SPA, I consider that Mr Sun knew (or at least turned a blind eye to whether) Mr Wong was disposing of the Shares without the authority of Excel when he acted so as to facilitate the disposal of the shares.  I consider Mr Sun acted dishonestly.

175. D3.  Alvin Tsang is very young: he was 19 in September 2013.

a.  As is understandable given his age, he was not an experienced or sophisticated person.  Even when being cross‑examined, he did not know what a nominee was.  He did not know what stamp duty was. 

b.  I believed him when he said he agreed to open a securities account to help D5 so that he could make money; that he signed the forms provided to him; that he did not know how to operate the CLC securities account but he thought D5 could; that he did not complete the bought and sold notes although he signed them; that he did not give instructions to the broker to sell the portion of Shares which went into his account, and that he did not know that there was about $7.9 million in that account. 

c.  He did not receive the $100,000 fee he had been promised.

d.  It was not in my view established that D3 knew anything other than D5 wanted to use a securities account in D3’s name, and that D3 would be paid a substantial amount of money for helping with this.  At most it could be inferred that D3 deliberately did not ask questions about D5’s activities which might not have been legitimate.

e.  It was not established that D3 knew that the shares to be deposited into his securities account were being transferred into his account without the authority of Excel.

f.  The necessary element of dishonesty is not made out against D3.

176. D4 (Wong TK).  According to Mr Wong (D1), it was D4 who he met on 25 September 2013 for the execution of forms, and bought and sold notes, and who took care of the payment of stamp duty.  Also D4 did not just sell the shares he received but transferred them to yet another securities account with KGI and made further sales.  It is the shares transferred to D4 which appear to have “got away” as these shares (or proceeds) were not secured by injunction or paid into court.  D4 is of Form 2 educational level and speaks no English.  He gave me the impression of being unsophisticated and genuine. 

177. In cross‑examination, D4 stated:

a.  that he had met a Mr Wong on 25 September 2013 in respect of the sale of shares (but did not know if that Mr Wong was D1). 

b.  As to the bought and sold notes dated 25 September 2013 between him and Excel, he did not complete them but he did sign them, although he believes he signed them before 25 September 2013. 

c.  He did meet Mr Wong twice on 25 September 2013 (the only occasions he has met him) and he thinks he did tell Mr Wong he would take care of the stamp duty, but he did not do that, he believes D5 did.

d.  He stated that he did not meet D2 until after the start of legal proceedings. 

e.  He opened the CLC and KGI accounts on the instruction of D5, and he did not complete the KGI form (partly in English, which he does not speak) but signed them.  He stated that he was a driver as at 24 September 2013 not a professional investor as stated on the form, and he had not written that he was professional investor. 

f.  He signed the securities withdrawal form and CLC settlement instruction on D5’s instruction and he does not know who completed the forms. 

g.  He did not deal with the sale of shares in his accounts and did not give instructions to sell.  When taken to the transcripts of KGI’s recordings of conversations in respect of the operation of D4’s account, D4 stated it was not him who had made the calls. 

h.  He did deal with withdrawal of cash on D5’s instructions, in particular he withdrew $1 million on 30 September 2013 and gave it to D5. 

i.  He said he had not received the $100,000 fee.

178. I have no reason to disbelieve D4.  

179. D4’s position is somewhat different from that of D2.  D4 had contact with D1 and knew that D1 was acting for the seller, Excel.  However, it has not been established that D4 knew that D1 was acting without the authority of Excel.  Nor is it established that D4 knew what consideration was being paid for the Shares, or when/for what consideration they would be sold.  It seems that it was not D4 who operated his securities account.  In my view, the necessary element of dishonesty is not made out against D4.

180. D5.  There has been no evidence advanced on behalf of D5 (deceased).  The evidence of D2 to D4 is that it was D5 who orchestrated the opening of securities accounts into their names, and the sale/transfer of the Shares after transfer out of Excel’s securities account into D2‑D5’s accounts. I note that the evidence od D3 and D4 has always been that D5 organised all matters relating to the transfer of part of the Shares into securities accounts in their names.  However, it was only in oral evidence that D2 asserted a large role played by D5 on his behalf as well.  Notwithstanding the late oral evidence from D2 in this regard, I consider it likely to be true in light of the evidence of D3 and D4.  On the basis that D5 orchestrated the opening of the accounts shortly before transfer of the Shares from Excel, and immediate sale or transfer of the Shares, and on the basis of the lack of payment of consideration for the Shares, I infer from the evidence that D5 not only assisted in D1’s breach of fiduciary duty insofar as the Shares passed into or through the accounts of D2‑D5, but that D5 knew, or must have known, that D1 was arranging the disposal of the Shares without authority. Accordingly, dishonesty is established against D5.

UNCONSCIONABLE RECEIPT

181. The plaintiff’s submissions refer to unconscionable receipt. I do not find this to be a pleaded allegation in the statement of claim.

CONSTRUCTIVE TRUST

182. D2‑D5 were holding some of the Shares or their proceeds in their securities accounts, as legal owners, prior to them being paid into court. However, none of D2‑D5 are bona fide purchasers of the Shares, nor do they have any beneficial entitlement to any of the Shares or their proceeds.  Since (at least) becoming aware of Excel’s proprietary claim to the Shares, the consciences of D2‑D5 have been affected so as to create a constructive trust in favour of Excel.  (Westdeutsche Landesbank Girozentrale v Islington London BC [1996] AC 669 at 705).

183. Counsel for D2‑D5 raised the defence of bona fide purchaser for value.  I have found there was no bona fide purchase of the Shares by any of D2‑D5.

184. Although counsel for D2‑D5 also raised the issue of a change of position defence, this was not developed.

CONSPIRACY

185. The general requirements for establishing a conspiracy to injure by unlawful means were agreed.  As stated in Clerk & Lindsell on Torts (21^st ed 2014) at para 24‑98, it consists of an agreement of two or more to take action which is unlawful in itself with the intention of causing damage to a third party who does incur the intended damage.  It is not necessary that the causing of damage was the main or predominant purpose of the combination but that purpose must be part of the combiners’ intentions.

186. On a claim of conspiracy by unlawful means, the plaintiff must prove:

a.  the nature of the agreement;

b.  the unlawful means alleged;

c.  each of the unlawful acts relied on;

d.  the fact that each act was carried out pursuant to the conspiracy; and

e.  the relevant state of mind of the alleged conspirator.  (See De Krassel v Chu Vincent[2010] 2 HKLRD 937 at para 41).

187. In this case, the plaintiffs have pleaded at para 18 of the ASOC:

“By reason of the matters pleaded in Paragraphs 11, 12 and 16 above, all the defendants conspired together to injure the economic interest of Hung and/or Excel by the unlawful means, namely the theft of the Shares. Excel and Hung rely on the overt acts pleaded in Paragraph 16 above.”

(I have referred to Paragraphs 11, 12 and 16 of the ASOC at para. 171 above). 

188. The conspiracy is therefore pleaded as one which involves all of the defendants.  No claim has been made that the conspiracy involved only some of the defendants.  As is clear, I do not consider that D3 or D4 have been shown to have been aware of any plan for D1 and others to dispose of the Shares without Excel’s authority.  Accordingly, the conspiracy claim as pleaded does not get off the ground.  I do not address other potential pleading deficiencies.  In any event, I do not believe that a properly pleaded conspiracy claim would lead to any different or further remedy from the equitable compensation claims against D1, as accepted by the plaintiffs’ closing submissions which seeks an award of damages in the same amount as the equitable compensation sought.  

REMEDIES

189. Excel is entitled to the return of such of the Shares and their proceeds as are secured by the Mareva injunctions and/or paid into court.

190. Mr Wong was in breach of his fiduciary duty as director when he disposed of the Shares.  He no longer has the Shares.  Mr Wong has not apparently gained from his breach of duty, but Excel has suffered a loss. Accordingly, I consider there is an obligation to account for the loss by way of equitable compensation.  The loss is to be assessed at the time of judgment and the court is entitled to take into account any post‑breach changes affecting the value of the lost trust property.  See Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681 at 712‑713.

191. The plaintiffs have provided me with a document Table C (set out in full below) which sets out their calculation of equitable compensation, which excludes the Shares which have been preserved by injunctions.  The calculations were not disputed by the defendants. 

Ps’ Table C

Calculation of Equitable Compensation / Damages payable to P1

(having excluded Shares preserved under the Injunctions)

		# of Shares		Market Price		Loss
Luxey Shares
# of shares misappropriated on 25.9.2013		974,180,000
# of shares preserved by the Injunction – paid into COVA		(129,580,000)
Net Amount of Shares Lost on the date of breach		844,600,000		$0.0800		$67,568,000.00		(A)
		=========				===========
Subsequent changes to Luxey Shares [TB7/1686]
Less: Amount of shares reduced due to “5 to 1 consolidation” on 24.4.2014		(675,680,000)
No.  of Shares Equivalent to the Lost Shares		168,920,000
Add: Amount of shares increased due to “4 for each existing share” bonus issue on 24.9.2015		675,680,000
No.  of Shares Equivalent to the Lost Shares as of 4.11.2015		844,600,000		$0.3150		$266,049,000.00		(B)
		=========				===========

		# of Shares		Market Price		Loss
Railsmedia Shares
# of shares misappropriated on 25.9.2013		146,742,000
# of shares preserved by the Injunction		(67,934,000)
Net Amount of Shares Lost on the date of breach		78,808,000		$0.4650		$36,645,720.00		(C)
						===========
Subsequent changes to Railsmedia Shares [TB7/1684]
Add: Amount of Shares increased due to “1 to 5 split” on 17.4.2014		315,232,000
No. of Shares Equivalent to the Lost Shares		394,040,000
Less: Amount of shares reduced due to “2 to 1 consolidation” on 24.7.2915		(197,020,000)
No.  of Shares Equivalent to the Lost Shares as of 4.11.2015		197,020,000		$0.0900		$17,731,800.00		(D)
		=========				===========
Hence:
Value of the Lost Shares as of date of misappropriation (on 24.9.2013) (A) + (C)						$104,213,720.00
						============
Value of the Lost Shares as of date of trial (on 4.11.2015) (B) + (D)						$283,780,800.00
						============

192. I will proceed on the basis that the value of the lost shares as at 4 November 2015 is the same as now (the date of judgment), and assess the equitable compensation to be paid by D1 to P1 as $283,780,800.

193. D2 and D5 dishonestly assisted D1’s breach of fiduciary duty in respect of all the Shares.  D2 and D5 are therefore jointly and severally liable with D1 to pay equitable compensation of $283,780,800 to Excel.

194. The award of interest in respect of the period prior to judgment is discretionary.  The purpose of interest is to compensate the plaintiff for being kept out of the money he should have had.  Equitable compensation has been awarded on the basis of the value of the lost Shares as as at the date of judgment.  In these circumstances, without yet having the benefit of any argument on the point, I see no reason to award interest at all in respect of the period up until judgment.  I note this point was not discussed in Libertarian Investments Ltd v Hall paras 140‑142, cited in the plaintiffs’ Opening Submissions.  However, on the basis of Libertarian, I would certainly not award compound interest.  Accordingly, if Ps wish to pursue a claim for simple interest in respect of the pre‑judgment period, I will require written submissions on this issue.

195. Interest is in any event awarded to Excel at judgment rate from the date of judgment.

196. Ps’ Closing Submissions also sought, on behalf of Mr Hung (P2), an injunction restraining D1 from acting as a director or shareholder of Excel.  I see no need for such an order, and in any event, Mr Hung has not demonstrated his locus standi to seek any relief from this court.

ORDER

197. Accordingly I order:

a.  The Shares and/or proceeds thereof as are held in the names of any of D2 to D5, and/or paid into court, be transferred to P1 forthwith, with D2 to D5 being required to cooperate in order to effect the transfer to P1, with liberty to apply.

b.  D1, D2 and D5 are jointly and severally liable to pay P1 equitable compensation of $283,780,800 to Excel, such payment to be made within 21 days.

c.  Interest on the equitable compensation to be paid at the judgment rate from the date of this judgment.

d.  If P1 wishes to pursue simple interest in respect of the pre‑judgment period, P1 to lodge written submissions within 21 days; D1, D2 and D5 to lodge any written submissions in answer within 21 days thereafter; P1 to lodge their reply written submissions (if any) within 14 days thereafter.  The issue of pre‑judgment simple interest will be dealt with on paper unless any party requests an oral hearing within seven days after all written submissions on interest have been lodged, and/or otherwise directed by the court.

e.  Save in respect of any costs relating to submissions on pre‑judgment interest, P1’s costs of the Action be paid by D1, D2 and D5, with certificate for two counsel.

f.  P1 to pay D3 and D4 their costs of defending the Action.

g.  The counterclaims of D1 to D5 be dismissed with costs to P1 with certificate for two counsel. 

h.  P2’s claims be dismissed with costs to D1 to D5, with certificate for two counsel.

HCCL 34/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 34 OF 2013

____________________________

____________________________

(By Original Action)

____________________________

(By Counterclaim by WONG TAM YEE)

____________________________

(By Counterclaim by SUN XIAO XIANG)

________________________

REASONS FOR DECISION

________________________

1.  The plaintiffs made two interlocutory applications on Day 2 of an 11‑day trial, the hearing of which commenced on 22 October 2015. The applications were for amendment of the Amended Reply, and leave to give late discovery. I allowed limited amendment of the Reply, and gave leave for limited further discovery. I now set out my reasons.

2.  By way of background, I note that the matter has been set down for trial since 13 August 2014, pursuant to leave given on 10 June 2014.  I also note that the 1^st defendant amended his Defence and Counterclaim on 16 December 2014, and the plaintiffs amended their Reply and Defence to Counterclaim on 13 January 2015.

3.  The action concerns the true ownership of certain shares held in the name of the 1^st plaintiff, Excel Courage Holdings Limited (“Excel’) as at 25 September 2013.  The relevant shares are in two Hong Kong-listed companies, China Railsmedia Corporation Limited (“Railsmedia”) and Luxey International Holdings Limited (“Luxey”).  The shares were acquired from April 2012 onwards.

4.  On Day 1 of the trial on 22 October 2015, Mr William Wong SC opened his case for the plaintiffs.  By reference to a Table A handed up on Day 1, he submitted that the sources of funds for the acquisition of the relevant Railsmedia and Luxey shares were:

(1)  230 million Railsmedia convertible preference shares (“CPS”) acquired in May 2012 and July 2012;

(2)  a $61.9 million loan from Fully Wealth to Excel paid into its BSI bank account; and

(3)  deposits from Excel’s bank accounts including DBS.

5.  Mr Douglas Lam SC, acting for the 1^st defendant, pointed out that this was inconsistent with the plaintiffs’ case as pleaded in the Amended Reply and Defence to Counterclaim at para 4(1), in response to paras 16 and 17 of the 1^st defendant’s Defence.

6.  On the morning of Day 2 of the trial, on 26 October 2015, Mr Wong made two applications:

(1)  To amend para 4(1) of his Amended Reply and Defence to Counterclaim as follows:

“4. In reply to paragraphs 16 and 17:-

(1)  It is admitted that the Luxey Shares and Railsmedia Shares were acquired by Excel between March 2012 and February 2013 through (a) acquiring 230,000,000 shares of Railsmedia from Huge Leader Holdings Ltd in consideration of HK$29,900,000; (b) using 47.27% of the loan funds of HK$61.9 million provided to Excel by Fully Wealthy Inc, a company wholly owned by Mr Howard Jiang (‘Jiang’); and (c) using Excel’s own bank deposits.”

(2)  To have leave to put in late discovery, as listed in the plaintiffs’ 4^th Supplemental List of Documents.

7.  It should be noted immediately that the plaintiffs have not provided any evidence to support the applications and/or to explain why they are made so late.

The amendment application

8.  Mr Wong relies on two grounds:

(1)  He argues the plaintiffs were not in position to make the proposed amendment before seeing the instruments of transfer in respect of Railsmedia and related board resolutions which were obtained from Huge Leader on 23 October 2015.  However, he accepts he was effectively running his amended case in his oral opening before receiving the documents and states this was on the basis of inference from the existing evidence and documents before the court.  He says the documents received on 23 October 2015 from Huge Leader provide direct evidence in support of his proposed amended case.  He accepts that since Huge Leader has (on the plaintiffs’ case) been the owner of the 1^st plaintiff since March 2015, the documents have been in the plaintiffs’ power since at least that time.  I do not therefore accept this first argument for seeking the amendment now.  Clearly, the amendment should have been made much earlier to accord with the plaintiffs’ case even before sight of the Huge Leader documents received on 23 October 2015.  Mr Wong accepts the proposed amendment comes much too late, and this is entirely the fault of the plaintiffs.

(2)  Mr Wong then argues that in light of the documents indicating that the Railsmedia CPS and other Excel bank deposits were other sources of acquisition of the relevant Railsmedia and Luxey shares, he cannot properly pursue the plaintiffs’ claim as pleaded at para 4(1) of the Reply as being factually correct.  It seems to me that (were it not for the lateness of the application) the plaintiffs should be allowed to amend to reflect the case they are running and which they say is a proper interpretation of the facts as currently disclosed by the documents and witness evidence.  The question is whether and how this can be done fairly, having regard to the consequences of any amendment.

9.  Mr Lam argues against amendment on three grounds:

(1)  It would amount to a withdrawal of an admission of the 1^st defendant’s Defence paras 17(2) and (3) without explanation.  As to this I agree that the plaintiffs have by para 4(1) admitted that Excel obtained a $61.9 million loan from Fully Wealth and that was used to acquire the Luxey and Railsmedia Shares.  However, I do not believe the plaintiffs seek to withdraw that admission — rather they seek to complete the picture to assert where the other acquisition monies came from.

(2)  The proposed amendment would be contrary to Mr Sin’s agreement with para 4(1) of the Amended Reply in cross‑examination on 22 October 2015.  Mr Sin’s evidence may be criticised for the failure to qualify it as not being a complete picture, but it might be said that Mr Sin’s evidence was aimed at agreeing whether the $61.9 million loan was used as a source for acquisition of the relevant shares.

(3)  Finally, it is argued that there would be substantial prejudice to the 1^st defendant if the amendment is allowed.  Mr Lam refers to Hong Kong Changyi Real Estate Development Ltd v Neo‑China (Group) Infrastructure, HCA 1576/2011 (unrep, 25 February 2014), at paras 1‑3 in respect of late applications for amendment of pleadings, or discovery, or filing of witness statements, when trial is imminent, which has the effect of disrupting the preparation for trial.  I agree that the principles as stated here apply a fortiori where the trial has already started.  I find the plaintiffs’ conduct in respect of this aspect of trial preparation to be most unsatisfactory.  But the issue is whether the amendment, if made to reflect the factual evidence as it now appears, will prejudice the defence and/or jeopardize the fair trial of the matter. 

10.  It is the last point of prejudice to the 1^st defendant which most concerns me.  (Counsel for 2^nd to 5^th defendants did not seek to enter the fray.)

11.  Mr Wong argued that the plaintiffs were already in a position to submit, on the evidence and documents currently before the court, that an inference should be drawn that the relevant Luxey and Railsmedia shares were acquired from three sources, not just the Fully Wealth loan.  Mr Lam responds that whether the plaintiffs’ factual case is supported by direct evidence or inference, it should have been clearly pleaded.

12.  Mr Lam takes particular objection to the proposed amendments insofar as they (1) assert that the Railsmedia CPS came from Huge Leader and (2) assert a consideration provided by Excel to Huge Leader for such CPS.

13.  Before deciding the amendment application, I will first consider the related late discovery application.

Late discovery application

14.  The plaintiffs’ 4^th Supplemental List includes two categories of documents:

(1)  A sale agreement between Mr Hung and Huge Leader in respect of the sale of the shareholding in Excel, dated 23 March 2015 (“the Excel SPA”).

(2)  Documents relating to the transfer of Railsmedia convertible preference shares from Huge Leader to Excel, Zeng Min, and I‑Cloud Investments Ltd, including instruments of transfer (two of which are apparently signed by the 1^st defendant on behalf of Excel), and board resolutions of Huge Leader (signed by Ms Chan and a Mr Anthony Tang) (“the 2^nd category of documents”).

15.  Mr Lam on behalf of the 1^st defendant does not oppose the admission of the Excel SPA, as he himself asked for the terms of the sale when cross‑examining Mr Sin.

16.  As to the 2^nd category of documents, Mr Lam has referred me to Kinetics Medical Health Group v Dr Tse, HCA 1115/2010 (unrep, 8 May 2013) and its summary of relevant principles, in particular at paras 33 and 36, which sets out an extract from Liu Chen. As to the four factors to be considered by the court as listed in Hong Lok School, Mr Wong has submitted (without any evidence in support):

(1)  As to reasons for lack of earlier disclosure: there are no good reasons.

(2)  As to provenance and makers of documents:

(i) Ms Chan, as a maker — the 1^st defendant could subpoena her if he wishes;

(ii) Provenance — Mr Wong could undertake to get an affidavit from a director of Huge Leader to address the provenance of the documents (without giving me any indication as to what the evidence would say or what the provenance was); and

(iii) the 1^st defendant, as a signatory to some of the documents, could himself testify as to the documents.

(3)  Relevance — the documents provide direct evidence to support the plaintiffs’ case, and weaken the 1^st defendant’s case on the joint Investment Agreement alleged by the 1^st defendant.

(4)  As to availability of the makers to attend trial for cross‑examination, Ms Chan and Mr Tang could be subpoenaed for cross‑examination if the 1^st defendant wants.

17.  However, Mr Lam submits:

(1)  The instruments of transfer of the Railsmedia CPS purportedly signed by the 1^st defendant would clearly be challenged for authenticity by the 1^st defendant, as have been the related promissory notes already disclosed; and the 1^st defendant should have a proper opportunity to consider the documents and consider obtaining handwriting expert evidence (although no handwriting expert evidence was obtained in respect of the promissory notes, Mr Lam submits that prior to the proposed amendment of the Reply, the challenged promissory notes as to a debt between Huge Leader and Excel was not considered particularly material).

(2)  The documents relating to Zeng Min and I‑Cloud raise more questions as these people/entities are not known, the documents are undated and unwitnessed; and there is no evidence to explain the documents.

(3)  The Huge Leader board resolutions are allegedly signed by Ms Chan and a Mr Anthony Tang (of whom no prior mention has been made, and whose position is unexplained).

18.  I note in particular the complete absence of any evidence on behalf of the plaintiffs to explain the provenance of the 2^nd category of documents, eg whether the Huge Leader board resolutions were obtained from the company’s minute book held by a responsible person who can verify that they were prepared on the date they bear, or whether they were created last week.

19.  I accept that, on their face, the 2^nd category of documents would appear to be relevant, and if they had been disclosed at an appropriate time, well before trial, they would have been expected to feature in the trial and to have been put to witnesses in cross‑examination (at least). However, in light of the principles as to when late discovery will be permitted, the complete absence of evidence in support of the late production of the documents, the inability of the court to be satisfied as to the authenticity of the documents, the many ways in which the 1^st defendant would be prejudiced in addressing the documents in his defence without adjournment of the trial (getting instructions, seeking further information, considering obtaining handwriting expert evidence to name but a few), the lack of good reason to adjourn the trial when balanced with the need to maintain the trial date and ensure the fair use of court resources — all these factors lead me to consider that the plaintiffs should not have leave to give late discovery of the 2^nd category of documents.

20.  It seems to me that if the amendment to para 4(1) of the Reply were limited to plead three sources of funds for the acquisition of the relevant shares by Excel, without pleading the source or consideration for obtaining the Railsmedia CPS, nor the percentage of the Fully Wealth loan used, then this ought to reflect the plaintiffs’ factual inferential case so far as necessary without introducing new factual matters to which the 1^st defendant has not had a proper opportunity to respond.  I would allow such limited amendment on the basis that there would be no leave to allow late discovery of the 2^nd category of documents.

21.  I raised this possibility with Mr Wong, and he confirmed he would be content with such limited amendment to para 4(1) of the Reply. Mr Lam confirmed he would not object to such amendment, on the basis of my order refusing leave to give late discovery of the 2^nd category of documents.  The plaintiffs agreed to produce a Re‑Amended Reply and Defence to Counterclaim within the day, and I gave leave to the plaintiffs to amend para 4(1) of the Amended Reply and Defence to Counterclaim as follows:

“4. In reply to paragraphs 16 and 17:-

(1) It is admitted that the Luxey Shares and Railsmedia Shares were acquired by Excel between March 2012 and February 2013 through (a) acquiring 230,000,000 shares of Railsmedia; (b) using loan funds of HK$61.9 million provided to Excel by Fully Wealthy Inc, a company wholly owned by Mr Howard Jiang (‘Jiang’); and (c) using Excel’s own bank deposits.”

22.  Mr Wong did not contest an order that the plaintiffs do in any event bear the costs of the half day spent today, 26 October 2015, on dealing with his applications.

HCCL 34/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 34 OF 2013

(Transferred from High Court Action No 1827 of 2013)

____________

____________

(By Original Action)

AND BETWEEN

AND BETWEEN

_____________

DECISION
_____________

1. I have an application before me by summons filed on 3 July 2015 to vary a Mareva injunction.

2. In September 2013, the 2^nd plaintiff (then the only plaintiff in this action) obtained a Mareva injunction against the 1^st defendant (then the only defendant) restraining him from removing from Hong Kong any of his assets up to the value of some HK$146 million.

3. In October 2013, Deputy High Court Judge Mayo discharged the injunction for material non-disclosure of both fact and law and refused to re-grant the injunction afresh.  The plaintiffs succeeded on appeal to the Court of Appeal against the refusal to re-grant the injunction.  As a result, the Mareva injunction was reinstated.  Nevertheless, the Court of Appeal upheld the judge’s order that the costs of the hearings on 4 and 10 October 2013 be paid by the 2^nd plaintiff to the 1^st defendant forthwith.

4. These costs, together with the costs of another hearing on 21 October 2013, have since been taxed in the sum of $973,943.  A sum of $1,053,993.10 had been paid by the plaintiffs to the 1^st defendant’s solicitors pursuant to the allocatur together with interest accrued in November 2014.  In relation to the hearing on 21 October, the Court of Appeal had ordered that the plaintiffs’ costs be in the cause, the amount of which the parties had agreed in the sum of $116,182.  This has been returned to the plaintiffs.  As things stand, the net sum of $937,811.10 is now held by the 1^st defendant’s solicitors. 

5. On 9 February 2015, the 1^st defendant’s solicitors asked the plaintiffs’ solicitors, in order to avoid unnecessary argument as to whether the amount was subject to the Mareva injunction, to agree to a variation of the Mareva injunction.  The 1^st defendant undertook that the sum held by his solicitors would be paid to the solicitors themselves in satisfaction of costs already incurred.  The plaintiffs’ solicitors initially agreed to the variation, but subsequently retracted from that position.

6. The 1^st defendant has therefore taken out an application to vary the injunction by providing that it does not prevent the 1^st defendant from spending $937,811.10 currently stakeheld by his solicitors towards the settlement of his legal costs already incurred in this action.  The 1^st defendant has undertaken that the money will be used by his solicitors to settle their own outstanding costs.  The money would not therefore leave the solicitors’ firm at all if the application was granted.

7. Mr Lai opposed the application on behalf of the plaintiffs on the ground, inter alia, that the 1^st defendant had not adduced enough evidence about his unfrozen assets outside the jurisdiction.  But it has been said that this is not an inflexible requirement: Gee, Commercial Injunctions (5^th ed) paragraph 20-052; Kea Corporation v Parrot CorporationLtd (unreported, English CA, 24 September 1986).  Mr Lai also submitted the 1^st defendant has not sufficiently explained his ability or otherwise to pay legal costs.

8. In my view, what distinguishes this application from the usual situation seen in the authorities that have been drawn to my attention this morning, is that the money in the account was not originally the 1^st defendant’s to deal with.  It was money paid by the plaintiffs pursuant to the court’s order, on account of the liability of the 1^st defendant incurred, after proceedings had been brought against him, to his solicitors in respect of fees and disbursements. 

9. The purpose of the application to allow that money to be paid to the 1^st defendant’s solicitors in settlement of their unpaid bills would not prima facie be to dissipate the 1^st defendant’s assets so as to frustrate execution of any judgment the plaintiffs may obtain against the 1^st defendant. 

10. As Ms Ho pointed out, the relevant costs order was made by the judge and upheld by the Court of Appeal as a sanction on the 2^nd plaintiff for his non-disclosure.  The costs were ordered to be paid forthwith.  The courts were unimpressed by the 2^nd plaintiff’s material failure to make disclosure on the ex parte application.  They decided that the 1^st defendant should have his costs forthwith.  The plaintiffs’ solicitors, who were there at the hearing before Deputy Judge Mayo and the Court of Appeal, confirmed in correspondence earlier this year that the purpose of the order was “to allow the 1^st defendant (and practically, his legal advisers) to recover his costs forthwith”.

11. Accordingly, as of March 2015 the plaintiffs had no objection for the sum to be paid to the 1^stdefendant’s solicitors directly in settlement of costs already incurred.  Nothing has been said by the plaintiffs to gainsay the proper interpretation of the orders according to their own solicitors who were privy to the entire factual background leading to the making of the orders.

12. Looking at the overall justice of the matter, I do not think it would be just for the plaintiffs, effectively, to withhold the benefit of the sum they were required to pay, as a penalty, by relying on the Mareva injunction.

13. Finally, Ms Ho confirmed that the 1^stdefendant had no assets overseas and has undertaken to file a supplemental affirmation to that effect.

14. For these reasons I accede to the 1^stdefendant’s application.

HCCL 34/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 34 OF 2013

(Transferred from High Court Action No 1827 of 2013)

____________

____________

(By Original Action)

AND BETWEEN

____________

(By Counterclaim by Sun Xiao Xiang)

_____________

D E C I S I O N

_____________

1. I have before me two summonses of the 1^st defendant for leave to amend his defence and counterclaim and to file a supplemental witness statement of himself that first came before me on 2 December. It was considered then that there were problems with the terms of the amendments sought as a result of which the summonses were adjourned. I indicated on the last occasion that any new proposed amendments should be filed by 8 December. That has since been done. Without any opposition from the plaintiffs, I gave leave at the outset today for the 1^st defendant to amend his two summonses.

2. So the applications now before me are to make the amendments as shown in the draft amended defence and counterclaim attached to the summons as amended with leave given today, and to file and serve the supplemental witness statement attached to the other summons as amended today.

3. In this action, in broad terms, the plaintiffs allege there was an agreed arrangement implemented with the assistance of the 2^nd plaintiff’s friend, Mr Joseph Lau, whereby the 1^st defendant would be appointed a director of the 1^st plaintiff and hold one issued share in the 1^st plaintiff for the 2^nd plaintiff, and that the 1^st plaintiff would be used as the 2^nd plaintiff’s vehicle for investment in Hong Kong stocks.  For the purpose of that arrangement, the 1^st defendant executed: (1) a deed of trust dated 21 February 2011 in respect of one issued share in the 1^st plaintiff; (2) a blank undated share transfer form; and (3) an undated letter of resignation as director of the 1^st plaintiff.

4. The plaintiffs say that, on the instructions of the 2^nd plaintiff, the 1^st defendant caused the 1^st plaintiff to acquire shares in Luxey International Holdings Limited, stock code 8041.  By September 2013, the 1^st defendant had caused the 1^st plaintiff to acquire 974,180,000 shares in Luxey on that basis.  There is no complaint by the plaintiffs about the acquisition of the shares.  The plaintiffs’ case is that in breach of trust, the 1^st defendant subsequently wrongly caused the 1^st plaintiff to transfer all of those shares into four securities accounts held in the name of the 2^nd to 5^th defendants respectively, and caused the substantial portion of those shares to be sold

5. The plaintiffs claim that the 1^st to 5^th defendants are all trustees in respect of the unsold shares and the proceeds of sale of the sold shares, that there was a conspiracy, and that the 2^nd to 5^th defendants had dishonesty assisted the 1^st defendant’s breach of fiduciary duties.

6. The 1^st defendant does not dispute that he held the share in the 1^st plaintiff on trust, but says he held it on trust for Joseph Lau, not for the 2^nd plaintiff.  Lau was the chairman and a major shareholder of Luxey.  The 1^st defendant says Lau intended to use the 1^st plaintiff as a corporate vehicle to acquire and re-sell a travel agency business, and that the 1^st defendant agreed to act as Lau’s “front man” in the negotiation with potential purchasers of the business. 

7. The 1^st defendant admits having signed the deed of trust, share transfer form and letter of resignation, but says he signed them in blank.  The 1^st defendant says he was never informed that Lau had transferred his interests in the one share in the 1^st plaintiff to the 2^nd plaintiff or indeed anyone else.  In the event, Lau did use the 1^st plaintiff to acquire a travel agency called Achiever World Travel Services Limited, but did not resell it. 

8. The 1^st defendant’s case is that in February 2012, he and Lau decided to trade in listed securities through the 1^st plaintiff. There was an oral agreement whereby the 1^st defendant and Lau would each contribute HK$30 million to form a fund, which would be used by the 1^st plaintiff to acquire listed securities to be held on trust for the 1^st defendant and Lau in equal shares.  According to the 1^st defendant, pursuant to this investment agreement, he paid HK$30 million in cash to Lau in three tranches in April 2012.  Lau then injected, via a company called Fully Wealth Inc., the sum of approximately HK$61.9 million into the 1^st plaintiff’s bank account.  During the period from March 2012 to February 2013, the 1^st defendant caused the 1^st plaintiff to acquire a total of 974,180,000 shares in Luxey, and 147 million shares in another listed company called China Railsmedia.  These shares were held by the 1^st plaintiff on an express trust or a common intention constructive trust for the 1^st defendant and Lau in equal shares.

9. The 1^st defendant says that between February and August 2013 he and Lau discussed whether they should sell the Luxey shares and the Railsmedia shares.  The 1^st defendant says the 2^nd defendant was an investor from the Mainland who had expressed an interest in acquiring the Luxey shares and the Railsmedia shares at 40 per cent of the closing price on the day before receipt of the shares.  The 1^st defendant considered it would be in the best interests of himself and Mr Lau to sell the shares to the 2^nd defendant, and so, on 25 September 2013, he caused the 1^st plaintiff to sell the shares to the 2^nd defendant and transfer the shares to various accounts nominated by the 2^nd defendant.

10. As to why the 1^st defendant considered it to be in the best interests of himself and Lau to sell the shares then, in the existing defence, at paragraph 24,  the 1^st defendant pleads:

“In the light of (a) the fact that share price of the Luxey Shares had not risen substantially since February 2013; (b) the fact that the Luxey shares and the Railsmedia Shares were thinly traded; (c) Luxey’s disappointing 2013 annual result, Mr Wong considered that it would be in the best interests of himself and Mr Lau to sell the Luxey Shares and the Railsmedia Shares to Mr Sun pursuant to the Proposed Terms.”

11. By way of relief, the 1^st defendant seeks, inter alia, a declaration that the 1^st plaintiff is and was at all material times holding the Luxey shares, the Railsmedia shares and the proceeds of sale of the shares on express trust or common intention constructive trust for the 1^st defendant and Lau in equal shares.  Lau has been joined as the 3^rd defendant by counterclaim.  His defence to counterclaim takes the same line as the plaintiffs’ case. 

12. The amendments that the 1^st defendant seeks leave now to make assert the existence of a scheme devised by Lau to control a substantial amount of shares of Luxey via the 1^st plaintiff without disclosing his interest in those shares.  It is said that in mid April 2012, Lau asked the 1^st defendant and another person to help find six persons to act as nominees to subscribe for shares in a rights issue of Luxey.  The nominees were lent money to subscribe for shares and they were duly allotted shares.  Later in November 2012, they were told by Lau to sell their shares.  At the same time, the 1^st defendant, as instructed by Lau, caused the 1^st plaintiff to acquire a substantial amount of shares in Luxey.  This resulted in the 1^st plaintiff’s shareholding in Luxey to increase from 5.52 per cent to 19.75 per cent.

13. The 1^st defendant also wants to add a plea that when he caused the Luxey shares to be sold in September 2013, one of the reasons was that he considered Lau’s scheme to be improper and that it would be in the best interests of Lau, the 1^st defendant himself and the 1^st plaintiff, to dispose of the Luxey shares as soon as possible to prevent Lau from committing any further wrongdoing.

14. The 1^st defendant also seeks leave to adduce a supplemental witness statement of himself.  That witness statement largely covers the matters he seeks to add to the pleading. 

15. The crucial issues in the case are whether the 1^st defendant was a trustee holding the one share in the 1^st plaintiff for the 2^nd plaintiff as the plaintiffs allege, or for Lau as the 1^st defendant alleges, and whether the oral investment agreement alleged by the 1^st defendant existed. 

16. The plaintiff’s case is that the alleged oral investment agreement did not exist.  However, the plaintiff’s case is not that the 1^st plaintiff belonged 100 per cent to Lau, but that they belonged wholly to the 2^nd plaintiff from the outset. 

17. On the basis of the 1^st defendant’s new allegation, Lau wanted to have control over the shares in Luxey using the names of others including the nominees and ultimately the 1^st plaintiff.  The arrangement alleged by the 1^st defendant would enable Lau to retain control (together with the 1^st defendant if the oral investment agreement existed) over the shares acquired by the 1^st plaintiff in Luxey.

18. This seems to me to be relevant to the issue whether in fact Lau had no control at all, and that the 2^nd plaintiff was the full 100 per cent beneficial owner of the 1^st plaintiff. 

19. In the witness statement of Lau at paragraph 9, it is said:

“… the acquisition of any shares by Excel was completely out of the initiative and decision of the 2nd Plaintiff. I have never had any interest in Excel nor in the investment of Excel, including the shares discussed below.”

20. The evidence that the 1^st defendant wishes to adduce as set out in the supplemental witness statement plainly takes issue with Lau’s evidence and explains the circumstances in which Lau allegedly controlled the 1^st plaintiff via the 1^st defendant and the Luxey shares acquired in the name of the 1^st plaintiff.  It seems to me the materials that the 1^st defendant wishes to put forward would be relevant to that issue.  The main point seems to me to be that the allegations, if established, might arguably make one party’s case more credible or probable as compared to the other party’s case.

21. While the new matters do not seem to me directly to support the existence of the oral investment agreement in February 2012, if indeed it is established that there was the scheme alleged, it would to my mind throw doubt on the plaintiffs’ case that Lau had no interest in the 1^st plaintiff or in the Luxey shares acquired by the 1^st plaintiff, especially the substantial portion of shares acquired since November 2012 and that the 2^nd plaintiff is the only person with any real beneficial interest in the 1^st plaintiff and the Luxey shares.

22. Further, as Miss Ho points out, the allegation that Lau wished to hold shares in Luxey without that fact being known to the public is not completely new.  In the 1^st defendant’s first witness statement dated 27 March 2014, at paragraph 14, it is said:

“Mr Lau suggested that we should acquire shares in Luxey as part of our investment. He said that I should continue to act as the sole shareholder and director of Excel, so that the public would not know that he was a beneficial owner of the Luxey shares to be acquired by Excel. He said that the arrangement would be convenient to him, as he could avoid the requirements under the Codes on Takeovers and Mergers and Share Buy-backs.”

23. This is denied by Lau in his supplemental witness statement dated 14 August 2014 at paragraph 5, where he maintains the purchase of the Luxey shares was at the initiative and decision of the 2^nd plaintiff giving instructions to the 1^st defendant as his nominee. 

24. Miss Ho submits that the justification for the 1^st defendant to cause the shares to be sold as he did in September 2013 is also relevant, although the plaintiffs make no complaint of a breach of duty by the 1^st defendant on the basis of the 1^st defendant’s own case of the oral investment agreement.  Miss Ho submits that even if the 1^st defendant’s oral investment agreement is established, the court might find the 1^st defendant to have been in breach of it if he was unable to show it was in the best interests of himself and Lau to sell the shares. 

25. On the present shape of the case, I think it is a little far-fetched to suggest that the 1^st defendant would become liable on such a basis.  However, it is part of the 1^st defendant’s case on the facts as to why he decided to sell the shares.  Given the existing state of the pleading, it is not I think desirable to try to cut the 1^st defendant’s case up into different parts and to admit some and reject other parts of its case on the facts.  The matters he wishes to put forward seem to me to be an integral part of his version of the facts. 

26. Mr Lai submits that the new plea raises scandalous matters in the sense of making grave allegations against Mr Lau and should not be allowed unless properly substantiated.  I am of course not adjudicating on the trial at this stage, and I make no comment on the creditability of either party’s case.  It seems clear to me what is put forward has now been to a large extent particularised and, despite Mr Lai continues to pick holes in it, cannot be said to be a bare assertion made by the 1^st defendant without any details whatsoever.  Whether or not the allegations will be established as fact must remain a matter for trial.

27. As to delay, the 1^st defendant only sought to introduce the new matters in the original summons for leave to file a supplemental witness stated dated 31 July 2014.  By then, I had given leave for the trial to be set down, and a trial date had been allocated in October 2015.  The 1^st defendant has explained that he only raised the matters in July 2014 because he believed the matters involved misconduct and breach of the Securities and Futures Ordinance, and because he was involved in those matters and was concerned that he would incriminate himself by disclosing those matters.  However, after further consideration, he decided to disclose the matters as he considered them relevant to the existence of the investment agreement and his contention that Lau had used the 1^st plaintiff to hold shares in Luxey on his behalf.

28. Mr Lai does not suggest the explanation is incredible.  Rather, he says, it was a conscious decision on the part of the 1^st defendant not to raise the matters previously.  I think that, in the circumstances of this case, the new matters should not be shut out because of the lateness in raising them.  There are still over 10 months to the trial which, in my opinion, will provide sufficient time for the parties to deal with the new allegations.  I do not think the trial dates will necessarily be jeopardised.  If necessary, I am prepared to reserve a few more days after the current allotted days to accommodate the parties

29. The power to allow amendment of pleadings is exercised on the principle that all such amendments should be permitted as are necessary to enable the real questions in controversy between the parties to be decided, subject of course to the prejudice to the other parties, the underlying objectives as set out in Order 1A of the Rules of the High Court, and the importance of not disturbing a milestone date.  I consider that, in the circumstances of this case, I should allow the amendments. I do not think the plaintiffs will suffer significant prejudice that cannot be compensated by costs as a result of the matters not having been pleaded originally and are only being introduced by way of amendment now

30. On that basis, there is no reason why the supplemental witness statement should be excluded, and I also give leave for it to be filed and served. 

(Submissions on costs)

31. I am entitled to take into account the parties’ conduct, including in this case the fact that it was the 1^st defendant’s own decision not to raise the matters at the outset but only relatively late in the day.  I also take into account the lateness of the application in the sense that it was after the 1^st defendant indicated to the court that no further amendment will be required to the pleadings on the basis of which leave was given for the trial to be set down and trial dates were given.  It is therefore a matter of indulgence for the 1^st defendant. 

32. In all the circumstances, I would order that the plaintiffs’ costs of and relating to the 1^st defendant’s application be in the cause.

HCCL 34/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 34 OF 2013

(Transferred from High Court Action No 1827 of 2013)

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D E C I S I O N

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1.  I have a number of summonses before me at this CMC. The summonses relating to supplementalwitness statements, other than the summons of the 1^st defendant, are not contentious and I have already granted leave accordingly.

2.  What is contentious before me this morning is the plaintiffs’ application by summons for specific discovery against the 4^th defendant. 

3.  In broad terms, in this action the plaintiffs allege there was an agreed arrangement whereby the 1^st defendant would be appointed a director of the 1^st plaintiff, and hold the one issued shared in the 1^st plaintiff for the 2^nd plaintiff, and the 1st plaintiff would be used as the 2^nd plaintiff’s vehicle for investment in Hong Kong stocks. 

4.  The 1^st plaintiff acquired 974,180,000 shares in Luxey on that basis.  In breach of trust, it is said that the 1^st defendant wrongly caused the 1^st plaintiff to transfer all of those shares to four accounts held by the 2^nd to 5^th defendants respectively.  In particular, 243 million shares were transferred to the 4^th defendant’s account with CLC Securities on 25 September 2013, whereupon they were transferred to the 4^th defendant’s account with another broker called KGI Securities, from which, a little later, 200 million shares were transferred to an account of yet another broker called China Rise Securities. 

5.  The 1^st defendant does not dispute that he held the share in the 1^st plaintiff on trust, but says he held it on trust for one Mr Joseph Lau, not for the 2^nd plaintiff. 

6.  The 1^st defendant’s case is that in February 2012 there was an agreement whereby he and Mr Lau would each contribute HK$30 million to form a fund which would be used by the 1^st plaintiff to acquire listed securities to be held on trust for the 1^st defendant and Lau equally.  Pursuant to that agreement, the Luxey shares were acquired and held by the 1^st plaintiff on trust for the 1^st defendant and Lau.  The 1^st defendant considered it would be in their best interest to sell the shares, and so on 25 September 2013 caused the 1^st plaintiff to sell the shares to the 2^nd defendant.  The shares transferred to the 4^th defendant’s account were done in accordance with the 2^nd defendant’s direction.

7.  The 4^th defendant’s pleaded case is consistent with the 1^st defendant’s case in that the 4^th defendant says he was a nominee acting for the 2^nd defendant in receiving the shares, and in transferring them to his account at KGI Securities and thereafter 200 million shares to China Rise Securities.

8.  In his witness statement, the 4^th defendant says he agreed with the 5th defendant to act as a nominee to deal with the shares and to act in accordance with his instructions to transfer or deal with the 243 million Luxey shares.  The agreed fee for the 4^th defendant was HK$100,000.

9.  The plaintiffs have discovered since from documents obtained from the KGI group, that the 4^th defendant sold 43 millionLuxey shares on 26 and 27 September 2013 for over HK$1.6 million, and on 30 September 2013 transferred HK$1 million from his KGI account to his account with Hang Seng Bank. 

10.  Against this background, the plaintiffs now seek discovery of the bank statements of the 4^th defendant’s account at Hang Seng Bank showing the account balance from 30 September 2013 to the present. 

11.  There is a clear issue whether the 4^th defendant is a mere nominee.  Although the plaintiffs’ reply does not expressly traverse it, there is an express joinder of issue at the beginning of the pleading and an implied joinder under the rules. 

12.  In my view, what happened to the proceeds of sale of the 43 million shares is relevant to the issue whether the 4^th defendant is a nominee as alleged. If, for example, he spent it on entertainment or acquisition of assets for his own purposes, that might suggest he was a beneficial owner of the shares and thus the proceeds of sale, rather than a mere nominee entitled only to a fee of $100,000.  The bank statements sought can show how the sum of $1 million being a substantial part of those proceeds was dealt with by the 4^th defendant.  I therefore reject Ms Lam’s submission that there is no issue to which the documents can be relevant. 

13.  I am more sympathetic, however, to the argument that the description of the documents sought is too wide.  There is no point in ascertaining the account balance up to the present. What is relevant is to see how the sum of $1 million deposited into the account was disposed of. 

14.  I appreciate there may be other money deposited into the account either before or after 30 September 2013, and that the credit balance at any one time may represent a mixed fund.  On the 4^th defendant’s own case, however, he was a nominee and there should be no difficulty for him to identify transactions in the account showing how the relevant sum was disposed of and accounted for.  Nor has the 4^th defendant complained of any such difficulty. 

15.  I therefore make an order for specific discovery, confining the documents sought to the statements of the relevant account showing how the sum of HK$1 million transferred from KGI Securities on 30 September 2013 was disposed of.

Mr Christopher Chain, instructed by ONC Lawyers, for the 1^st and 2^nd plaintiffs (by original action) and the 1^st to 3^rd defendants (by counterclaim by Wong Tam Yee) and the 1^st and 3^rd defendant (by counterclaim by Sun Xiao Xiang)

Ms Sabrina Ho, instructed by Cheung & Liu, for the 1^st defendant (by original action) and the plaintiff (by counterclaim by Wong Tam Yee and the 2^nd defendant (by counterclaim by Sun Xiao Xiang))

Ms Rachel Lam, instructed by S.T. Poon and Wong for the 2^nd to 5^th defendants (by original action) and the plaintiff (by counterclaim by Sun Xiao Xiang)