CAPITAL FORESIGHT LTD v. CHINA HEALTH GROUP LTD

HCA 2549/2017 and HCA 2569/2017
(CONSOLIDATED)

[2023] HKCFI 3290

HCA 2549/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2549 OF 2017

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HCA 2569/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2569 OF 2017

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(Consolidated by the Order of Master M Lam dated 19 January 2018)

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J U D G M E N T

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Introduction

1.  The Plaintiff in the present Action is China Health Group Limited (“China Health”), which is incorporated in Bermuda and listed on the Main Board of the Hong Kong Stock Exchange with stock code 673. Until 14 January 2016 it was called China Healthcare Holdings Limited. Its principal business activities have involved business-to-consumer services and healthcare management systems in Mainland China. Until 18 June 2016 the 1^st Defendant, Li Zhong Yuan (“Dr Li”), was an executive director of the China Health. He was the chairman of the Board of China Health until 26 March 2013 when the position was taken over by Jia Hong Sheng.

2.  The 2^nd Defendant (“Capital Foresight”) is incorporated in the British Virgin Islands and is an investment company. It has no active business operations. Chen Li Bo (“Mr Chen”) has at all material times been a director and shareholder of Capital Foresight. Mr Chen was by the time of the trial Capital Foresight’s sole shareholder. It has previously had two other shareholders: Yu Feng and Rupert Li.

3.  The 3^rd Defendant (“Li Hong”) is also incorporated in the British Virgin Islands. Ho Kin (“Mr Ho”) is its sole shareholder[1].

4.  The dispute has its origins in an attempt by Li Hong to enforce a promissory note (entitled loan note) for US$4,000,000 dated 1 August 2015 with a maturity date of 31 January 2016, on its face apparently issued in Li Hong’s favour by China Health (“Loan Note”)[2]. China Health refused to pay it and Li Hong issued a statutory demand in September 2016. China Health commenced proceedings to enjoin presentation of a winding up petition, which was successful. In brief, in the present proceedings China Health seeks to establish that the Loan Note was issued by Dr Li in breach of his fiduciary duties as a director of China Health, is unenforceable and Dr Li should pay damages to China Health caused by his breach. By a counterclaim Capital Foresight seeks to enforce the agreement pursuant to which its says the Loan Note was issued thus obtaining payment of US$4,000,000 originally, says Capital Foresight, intended to be payable to Li Hong pursuant to the Loan Note. Li Hong has been joined to be bound by the declaration sought by China Health to establish US$4,000,000 is not payable whether pursuant to the Loan Note or the agreement pursuant to which the Loan Note was allegedly issued. Li Hong does not seek to enforce the Loan Note, which it endorsed to Capital Foresight after it was enjoined from presenting a winding up petition against China Health.

5.  It is easiest to understand the claims by initially considering in chronological order the events leading up to the present proceedings which commenced in November 2017 and how, in particular, China Health’s case and evidence have evolved over time.

The History of the Matter

6.  Capital Foresight purchased 15,000 redeemable convertible cumulative preference shares (“PreferenceShares”) in China Health from the OZ Group pursuant to an agreement dated 19 April 2010 for US$15,000,000. The terms of the Preference Shares included:

(1)  A right to receive out of China Health’s funds available for distribution and resolved to be distributed, dividends pari passu with other pari passu shares.

(2)  A right that China Health do redeem the Preference Shares then outstanding at their Maturity Date (28 July 2011) at a redemption amount equal to the Early Redemption Amount.

7.  Li Hong had, prior to April 2010, held 8,595,000 shares in China Health (representing 3.28% of China Health’s issued capital). On 5 April 2010 another company owned by Mr Ho (ZhongXing Limited) subscribed for convertible notes.

8.  From 2010 to 2011 China Health was negotiating an acquisition with the Shanghai Fu Shou Yuan Group (“FSY Project”). Although a sale and purchase agreement was entered into on 19 August 2010 the acquisition was terminated by the counterparty, who commenced litigation against China Health seeking RMB45,000,000.

9.  On 31 March 2011 China Health and Capital Forsight agreed to extend the Maturity Date of the Preference Shares to 17 May 2013. In excess of HK$464,000,000 would be due upon redemption. On 23 November 2012 a further agreement was entered into between China Health and Capital Foresight dealing with China Health’s liabilities under the Preference Shares (“NovemberAgreement”). Rather than extend the Maturity Date further China Health agreed to redeem the Preference Shares for a total of US$19,000,000 of which US$15,000,000 was payable in cash representing a payment of principal and US$4,000,000 interest. The interest component was to be paid by a promissory note in the form contained in Schedule 1 to the November Agreement. The form of promissory note leaves the maturity date and the beneficiary blank.

10.  China Health questions the propriety of the November Agreement and the circumstances in which it came to be entered. Amongst its reasons for doing so are the way in which the negotiation of the November Agreement evolved, which China Health summarises as follows in [11] to [12] of its Written Opening.

“11. …

(1) On 25 October 2012, Dr Li sent a first draft of the agreement by email to Chen LB and Rupert Li, copying Ho. Such draft did not in any way refer to provision for the USD 4 million promissory note or any payment of ‘interest’ or ‘dividend’.

(2) On 29 October 2012, Rupert Li suggested a revision to Clause 1, to preserve CFL’s rights in the event CHGL’s proposed fundraising is not completed in time. Dr Li agreed and circulated an updated draft (still without any reference to the promissory note).

(3) On 31 October 2012, Chen LB’s assistant Ida sent a revised draft agreement to Dr Li for his handling. Presumably Ida would only have sent revisions as required/requested by Chen LB. Notably, this 3^rd draft still did not contain any reference to promissory notes, interest, or dividend.

(4) On 13 November 2012, Dr Li sent an email to ‘Amilia Tsang’ and ‘Louis Koo’, attaching a draft Assignment Deed to be executed by CFL to assign ‘the Promissory Note, of…US$4 million…to TACTUS LIMITED’ upon receiving cash of USD 15 million. This email was not sent or copied to either Chen LB or Rupert Li.

(5) The very next day on 14 November 2012, Dr Li sent a 4^th draft agreement to the original chain (with Chen LB, Rupert Li and Ho). This was the first time the proposed Clause 2 was revised to include a reference to CHGL issuing a promissory note of USD 4 million in the form set out in Schedule 1.

(6) Cryptically, in the afternoon of 19 November 2012, Rupert Li sent Dr Li a blank email with the subject ‘It is all done here’. Shortly thereafter, Rupert Li emailed Dr Li again, providing Ho’s information ‘further to [their] discussion’.

(7) In response, Dr Li circulated the 5^th draft agreement – this time with a revised draft letter to be issued by CFL to CHGL, instructing CHGL to issue the promissory note ‘to Mr. Kin HO…or an entity controlled by Mr. Kin HO upon your payment delivery of US$15 million to us’. Notably, this chain did not include Chen LB or Ho.

(8) Still on 19 November 2012 at around 6 p.m., Dr Li had a call with Rupert Li. [3] At 6:04 p.m., Rupert Li emailed Dr Li to suggest that the wording in the draft letter be changed to an entity ‘wholly owned’ by Ho (instead of ‘controlled’).

(9) This culminated in the final version presumably attached to Rupert Li’s email dated 20 November 2012, which included a draft letter dated 19 November 2012 to be signed by CFL instructing issuance of the promissory note to Ho ‘or an entity wholly owned’ by Ho.

(10) At around 12:11 p.m. on 20 November 2012, Ida then circulated a signed copy of such agreement, including a signed letter (with date removed) purportedly from CFL directing CHGL to issue the promissory note to Ho or an entity wholly owned by him.

12. On 23 November 2012, a Board meeting of CHGL was purportedly held during which, inter alia, the draft November 2012 Agreement was supposedly considered. The Board then purportedly resolved to approve such transaction: see minutes. At this juncture, the Court should note that CHGL has disputed authenticity of such minutes.[4] No such minutes have been found by CHGL in its possession, custody or control (hence no original or copy of these minutes have been discovered by CHGL, and which is why CHGL has raised such a dispute).”

11.  I would note at this juncture that in my view for reasons I explain later the Board meeting on 23 November 2012 did take place and the Board minutes are genuine and I so find.

12.  Subsequently, China Health and Capital Foresight entered into a series of supplemental agreements to modify the November Agreement, which China Health was unable to comply with.

13.  On 31 March 2013 the Parties executed the “1^st SupplementalAgreement”, which provided for the redemption of principal by 30 November 2013. China Health was to pay a non-refundable deposit of HK$10,000,000 which would be applied to the redemption amount if that was paid by 30 November 2013, but otherwise it would be forfeited. A dividend would accrue from 1 December 2012 onward at 5% per annum with the right for China Health to settle the dividend by issuing shares at HK$0.3201 per share.

14.  On 28 June 2013 the Parties executed the “AmendmentAgreement”, which extended the date for repayment of principal to 30 June 2014 and provided that China Health pay a non-refundable deposit of HK$10,000,000 by 29 June 2013. The non-refundable deposit was to be forfeited if redemption was not achieved by 30 November 2013. Dividends accrued from 1 December 2013 to 30 June 2014 at 6% per annum with China Health having the rights to settle the same by issuing shares at HK$0.3201 per share.

15.  On 30 June 2014 the Parties executed the “2^ndSupplementalAgreement” (referred to in some documents as the 630 Supplemental Agreement). This changed the date for the repayment of principal to five business days after completion of a proposed fundraising. China Health was given the right to settle Dividends II and III (which was a reference to the dividends payable under the 1^st Supplemental Agreement and the Amendment Agreement respectively) by issuing shares at HK$0.25 per share. If the fundraising could not be completed, the date of redemption was to be extended to 31 March 2015. Dividends accruing from 30 June 2014 to 31 March 2015 would be at 7% per annum. China Health had the right to settle the dividends by issuing shares at HK$0.15 per share.

16.  On 12 September 2014 the Parties executed the “3^rd Supplemental Agreement” (referred to in some documents as the 912 Supplemental Agreement). This provided for the redemption of principal by 10 November 2014 with settlement of dividends “within a reasonable time thereafter”. China Health was to pay US$1,500,000 to Capital Foresight as a security deposit by 26 September 2014. If China Health were to redeem the principal on or before 10 October 2014 and settled the dividends with a reasonable time thereafter the security deposit was to be deducted from the aggregate principal. If China Health failed to redeem by 10 October 2014, but before 9 November 2014 and settled the dividends within a reasonable period thereafter, US$500,000 of the security deposit would be assigned to China Foresight as a “special dividend”. In the event that China Health failed to redeem by 10 November 2014, the remaining US$1,000,000 of the security deposit would be assigned to Capital Foresight as a “special dividend”.

17.  The principal amount of US$15,000,000 was eventually paid by 2 December 2014. China Health says that the four supplemental agreements and Mr Chen’s frequent requests for repayment (which is not in dispute) demonstrate that Capital Foresight took obtaining repayment very seriously; not that there is anything surprising about that. China Health, however, points to the absence of evidence prior to July 2015 of Capital Foresight chasing for the promissory note, as being consistent with its claim that it was never intended to be a payment to Capital Foresight, but was an illicit payment channelled through Capital Foresight, whose intended recipient was Dr Li. China Health’s explanation for it being paid has developed during the case and I will explain it later.

18.  On 22 April 2015 China Health issued 46,296,000 shares to Capital Foresight at HK$0.28 per share. Capital Foresight says that the shares were to settle Dividends II, III and IV, which payable pursuant to the 1^st Supplemental Agreement, the Amendment Agreement and the 2^nd Supplemental Agreement. However, China Health’s public announcements at the time describe the share allotments as fundraising.

19.  A day before completion on 21 April 2015, Mr Chen apparently requested Dr Li to transfer an amount of HK$12,962,880 of “dividends” to Capital Foresight’s account. This amount of HK$12,962,880 corresponds to the subscription amount, namely, 46,296,000 shares at the subscription price of HK$0.28 per share.

20.  It appears that after completion of the subscription, China Health paid an amount equivalent to the subscription price to Capital Foresight purportedly in discharge of its liability to pay dividends under the previous supplement/amendment agreements. Dr Li appears to have confirmed as much by an email to Chung Ho (“Mr Chung”), director of China Health at the time, dated 13 April 2015.

21.  On 23 April 2015, Mr Ho wrote a cheque for HK$12,962,800 to Capital Foresight. Capital Foresight and Mr Ho claim this was consideration for the latter’s purchase of the promissory note. This amount is, of course, the same as the subscription amount and “dividend payment” to which I have referred.

22.  On 28 April 2015, Capital Foresight transferred 46,296,000 shares to HKSCC Nominees Ltd.

23.  On 30 June 2015, Dr Li (through Ms Wendy Huang (“Wendy”)) proposed to add to the agenda of a China Health Board meeting approval of a promissory note to “Anchorage Associates Ltd” (“Anchorage”). The item was withdrawn from the agenda by Dr Li.

24.  Anchorage was a company owned by Mr Chen. In an email from Mr Ho to Dr Li dated 24 July 2015, Mr Ho forwarded a draft letter concerning the transfer of 75% of Anchorage’s shareholding to him by Mr Chen. In response to Mr Ho’s email, Dr Li replied on 25 July 2015 stating that the draft letter “looks fine”, and requested Mr Ho to let him know when everything was in order so China Health could “issue the promissory note to Anchorage”. China Health observes that this email correspondence was only between Dr Li and Mr Ho.

25.  Other than in draft documents circulated on 30 June 2015, there is no further mention of issuance of a promissory note to Anchorage in China Health’s internal documents or in communications with Capital Foresight. At a Board meeting of China Health on 20 September 2015 the directors were invited in the convening notice to consider an allotment of shares to settle a portion of the US$4,000,000 payable under the Loan Note. The matter was not resolved.

26.  On 23 May 2016, China Health received a letter from Li Hong enclosing an undated loan note purportedly executed by Dr Li on behalf of China Health (“Impugned Loan Note”) and an instruction letter dated 31 July 2015 from Capital Foresight to China Health directing that the promissory note be issued to Li Hong as its designee (“July 2015 Nomination Letter”). This was the first time China Health had received the July 2015 Nomination Letter.

27.  According to Capital Foresight and Li Hong, Capita Foresight and Li Hong had entered into an Agreement on 11 April 2015 (“CFL-LHHL Agreement”) whereby Capital Foresight agreed to transfer its interest in the US$4 million promissory note to be issued by China Health to Mr Ho, for US$1.67 million. It is further claimed that, pursuant to the CFL-LHHL Agreement, Mr Ho wrote a cheque to Capital Foresight on 23 April 2015.

28.  As I have already mentioned Li Hong issued a statutory demand for payment of the Loan Note leading to the application in HCMP 2593/2016 (“HCMP 2593”) and Chow J enjoining on 8 February 2017 presentation of a winding up petition on the grounds that there was a bona fide defence on substantial grounds to the alleged debt. Capital Foresight and Li Hong say that subsequently Li Hong endorsed the Loan Note back to Capital Foresight.

29.  As China Health explains in [34] of its Written Opening the crux of China Health’s case is that the November 2012 Agreement was a façade created to disguise what was really going on, namely, issue by China Health of a promissory note for US$4,000,000 to Capital Foresight or its nominee as a means of channelling a secret profit to Dr Li. China Health has referred to this as the “Backdoor Arrangement”. This is the shorthand term by which it was referred to at the trial and I will use it in this judgment.

30.  It is important in my view to understand the evolution of China Health’s case on the constituents of the Backdoor Arrangement as this is relevant to the assessment of China Health’s case and the strength of the evidence it relies on. It starts with the evidence filed for the hearing before Chow J. The application was supported by the affirmation of Chung Ho, who was appointed as a director of China Health on 28 December 2012. He remained on the Board after it was reconstituted on 18 June 2016 when control of China Health passed to a new shareholder, Speedy Brilliant Investments Limited. Mr Chung also gave evidence at the trial before me. Mr Chung explains what he understood to be the reason for the Backdoor Arrangement in [24]–[25] of his 1^st affirmation in HCMP 2593:

“24. I was told by CFL and Dr Li themselves that the US$4 Million was a backdoor arrangement to pay Dr Li US$4 Million.

(1) On or around 24 June 2014, in Hong Kong, Chen Li Bo of CFL informed me that the US$4 Million was not for the benefit of CFL, but in fact would be paid to Dr Li, and that I should ask Dr Li for the details.

(2) On or around 25 July 2014, in Beijing, Dr Li told Jia HS (Chairman of the Board) and me that the US$4 Million was compensation that CFL agreed to pay Dr Li for procuring the Fu Shou Yuan project (the ‘Fu Shou Yuan Project’, described in paragraph 25 below). Dr Li further told Jia HS that in order to reduce the financial pressure on CHGL, Dr Li was willing to accept shares in lieu of the US$4 Million, such as the shareholding in Shangdong Harvest Mobile Communication Technology Company Limited (山東德豐移通科技有限公司, ‘Shangdong Harvest’), a subsidiary of CHGL.

25. The Fu Shou Yuan Project was indeed led by Dr Li, as Chairman at the time. From 2010 to 2011, a subsidiary of CHC intended to acquire an interest in the Shanghai Fu Shou Yuan Group. The sale and purchase agreement was entered into on 19 August 2010, however in around May 2011, disagreements between CHC and the counterparties arose and ultimately the deal fell through. There was litigation between the parties until the matter was settled in 2013. It is apparent that Dr Li took a personal role in leading the Fu Shou Yuan Project, because according to CHGL’s Announcement dated 1 March 2012, he was personally identified as a defendant in proceedings brought by the counterparties in Shanghai. There are now produced and shown to me marked ‘CH-14’ copies of the relevant announcements (without enclosures).”

31.  Mr Chen made an affirmation dated 25 October 2016 in opposition to China Health’s application. In [30] he disputed Mr Chung’s suggestion that the FSY Project had been introduced by Dr Li, asserting in very clear terms that he had done so and accusing Mr Chung of lying:

“In paragraph 24(2) of the Affirmation of Chung Ho, he alleged that US$ 4 million represented the compensation/commission as requested by Li Zhong Yuan for the Fu Shou Yuan project, which I hereby deny such allegation, and inform the court that, as a director of a Hong Kong listed company, Chung Ho, on behalf of China Health, had lied and fabricated facts in his Affirmation in an attempt to mislead the court. The Fu Shou Yuan project was introduced by me at that time, and had ultimately fallen through since the project had seriously failed as the parties could not reach an agreement. Therefore, any fact and allegation that compensation/commission given to Li Zhong Yuan for the Fu Shou Yuan project is simply impossible. Li Zhong Yuan still needs to be rewarded even if the project turned into a mess in the end? Chung Ho’s fabricated accusation is simply devoid of logic and common sense.”

32.  As demonstrated by [17] of his reasons for judgment dated 29 March 2017, Chow J in HCMP 2593 clearly understood China Health’s case to be that the Backdoor Arrangement had been entered into because Dr Li had introduced the FSY Project, (that Li Hong disputed the suggestion that Dr Li had introduced the FSY Project) and that it was Dr Li’s introduction of the FSY Project that was the rationale for the Backdoor Arrangement.

33.  In [8] and [10] of the Statement of Claim the Backdoor Arrangement was pleaded in terms consistent with the case advanced in HCMP 2593:

“8. Unbeknownst to CHGL:

8.1. Capital Foresight had no intention of receiving payment of US$4,000,000 under the US$4M Promissory Note.

8.2. In around October and/or November 2012, Capital Foresight, Chen LB and Dr Li had an agreement and/or understanding that:

8.2.1. Dr Li would procure CHGL to enter into what became the November 2012 Agreement with Capital Foresight.

8.2.2. The effect of that agreement would, inter alia, result in the payment of US$4,000,000 by CHGL to Dr Li’s nominee, for Dr Li’s benefit.

8.2.3. Dr Li’s nominee would be Ho Kin and/or a company wholly owned by him.

This agreement and/or understanding is referred to herein as the ‘Backdoor Arrangement’.

…

10. Subsequently:

10.1. In or around June 2014, Chen LB said to Chung Ho (‘Mr Chung’), a director of CHGL, that the US$4,000,000 payable under the US$4M Promissory Note was not for the benefit of Capital Foresight but would in fact be paid to Dr Li.

10.2. In or around July 2014, Dr Li said to Jia HS and Mr Chung that the US$4M Promissory Note was compensation that Capital Foresight had previously agreed to pay Dr Li.”

Capital Foresight denied this plea in its Defence.

34.  China Health’s own solicitors clearly understood in April 2019 that their client’s case remained as pleaded as demonstrated by [12(1) & (2)] of the affirmation of Li Pik Yuk (a solicitor) filed in this Action on 2 April 2019, which states:

“12(1) It is the Plaintiff’s case that the rationale for the Backdoor Arrangement was to serve as compensation by the 2^nd Defendant to the 1^st Defendant for procuring an investment project whereby the Plaintiff would invest in the Shanghai Fu Shou Yuan Group (the ‘FSY Project’).

(2) The Defendants dispute this. They contend that it was Chen LB of the 2^nd Defendant who introduced the FSY Project to CHGL, and it fell through due to disagreements between the parties. Therefore there was no reason for the 2^nd Defendant to pay the 1^st Defendant any compensation.”

This would explain why [8] and [10] of the Statement of Claim remained the same when the pleading was amended on 1 April 2019, the day before Ms Li’s affirmation was made. It is also clear from [12(2)] of Ms Li’s affirmation that China Health and its solicitors understood that Capital Foresight disputed that Dr Li had introduced the FSY Project.

35.  In Mr Chung’s first witness statement he explains the principal reasons he suspected the Backdoor Arrangement had been made in [17]–[18].

“17. In or around June 2014, Chen Li Bo, a director and one of the beneficial shareholders of CFL, told me that the US$4 million payable under the US$4M Promissory Note was not for the benefit of CFL but would be in fact be paid to Dr. Li. He told me that I should approach Dr. Li for further details. After learning of this, I reported it to Jia Hong Sheng.

18. In or around July 2014, Dr Li told Jia Hong Sheng that the US$4M Promissory Note was compensation that CFL had previously agreed to pay Dr. Li for procuring the ‘Fu Shou Yuan Project’, which had ultimately fallen through during the course of 2011 and 2012. Dr. Li further told Jia Hong Sheng that in order to reduce the financial pressure on CHGL, Dr. Li was willing to accept shares in lieu of the US$4 million, such as the shareholding in Shandong Harvest Mobile Communication Technology Company Limited (‘Shandong Harvest’), a subsidiary of CHGL. Jia Hong Sheng accepted this explanation and shelved the matter. Jia Hong Sheng no longer has any relationship with CHGL so it is not practicable to locate him to give witness evidence.”

36.  Mr Chen makes it clear in [10] of his witness statement dated 24 January 2019 that he introduced the FSY Project to China Health not Dr Li.

37.  Precisely what Mr Chung was told, assuming he was told anything, by Mr Chen at a meeting about the purpose of the proposed promissory note for US$4,000,000 is of central importance to China Health’s case. It was the only direct evidence relied on by China Health of the Backdoor Arrangement. If the justification Mr Chung says he was given for the payment to Dr Li is improbable necessarily it calls into question whether he is telling the truth or made up an excuse for China Health not paying the Loan Note to avoid a winding up petition being issued against the company.

38.  It was clear in my view following Mr Chen’s evidence at trial that the FSY project was introduced by him to China Health. It was not introduced by Dr Li and, therefore, it is unlikely that it would have ever been thought by either Dr Li or Mr Chen to be a matter, which justified Dr Li receiving payment in respect of it. It would appear that Mr Chung realised this shortly before the trial.

39.  On 1 June 2023 China Health issued a summons seeking to introduce a supplemental witness statement of Mr Chung. He made an affirmation in support of the application. In it he explains in [5]–[6] why he wishes to supplement his evidence:

“5. I have been advised that the issues the Defendants (in HCA 2549) may raise at trial include the rationale of the US$4 million as compensation for Dr Li, as well as the purported acknowledgement and performance of the 23.11.2012 Agreement even after Jia Hong Sheng and I found out about the Backdoor Arrangement.

6. I would therefore like to supplement my First Witness Statements by giving more details about such discussions and my understanding of the nature of the US$4 million as compensation for Dr Lo. I would also like to clarify the reason why Jia Hong Sheng (and I) accepted Dr Li’s explanation and decided to shelve the matter. The reason for this application being made at this stage is that, during the course of preparing for trial with CHGL’s legal advisors, it was impressed upon me that these discussions and my personal understanding could be issues in significant dispute; therefore, to avoid any confusion, I wish to set out in writing more details about my recollection.”

40.  The supplemental witness statement contained two significant changes to China Health’s case on what Mr Chung said he had been told about the rationale for the Backdoor Arrangement. First, was the explanation Mr Chung says he was given by Mr Chen for the payment to Dr Li of US$4,000,000. In [6(a) & (b)] of the supplemental witness statement he says this:

“(a) Dr Li had substantial influence over CHGL: he had been Chairman of CHGL’s board (‘Board’) since 2001 (until 26 March 2013, thereafter he remained an executive director until 18 June 2016); as far as I could see (from my time being on the Board), a number of other directors had close relationships with Dr Li and were prone to following his lead, presumably given how the same group of directors (Dr Li, Mr Zhou Bao Yi, Mr Mu Xiang Ming, Mr Jiang Bo and Dr Yan Shi Yun) had been on the Board together since at least 2007 (until 18 June 2016). Dr Li also had a substantial shareholding in CHGL and was the largest substantial shareholder until at least 2010.

(b) Dr Li stood to lose such substantial influence with the introduction of new investors and/or projects. Any issuance of convertible notes or shares as consideration for new projects to be acquired (which would be necessary given the limited liquidity of CHGL) would inevitably dilute Dr Li’s shareholding; bringing in new business was also likely to change things up in terms of CHGL’s management and therefore affect his influence. For the Fu Shou Yuan Project, for instance, the consideration for the acquisition was to be satisfied primarily by the issuance of convertible notes to the third party procurer, who could hold 29.99% of the shares of CHGL upon conversion of the convertible notes subject to conversion restrictions and full conversion of the existing convertible securities.”

41.  Mr Chung was now saying that he understood that the payment was not made to reward Dr Li for introducing the FSY Project, but to compensate him for the loss resulting from the dilution in his shareholding and influence in China Health if a significant new investor were to be introduced.

42.  Secondly, the justification said by Mr Chung to have been advanced by Dr Li for the payment to him of US$4,000,000 changes and becomes consistent with what Mr Chung says he was told by Mr Chen:

“8. …

(a) Dr Li admitted the US$4M Promissory Note was compensation that CFL had agreed to pay him for losing substantial influence over CHGL.

(b) Dr Li also told us that since the matter had already been decided upon and the 23.11.2012 Agreement had been entered into before Jia Hong Sheng and I joined CHGL, the arrangement should not be disturbed. In any case, Dr Li said he was entitled to compensation for his expected loss of substantial influence after investors and projects were brought into CHGL.

(c) Since CHGL was facing significant financial difficulties at the time, Dr Li indicated that in order to avoid imposing further financial pressure on CHGL, he was willing to accept assets of equivalent value instead of US$4 million in cash. Dr Li proposed being compensated by way of CHGL’s shares in Shandong Harvest, which was a project he had worked on during his tenure as Chairman, and that CHGL was unlikely to carry on since the CHGL had shifted its focus towards healthcare management services.”

Mr Jia did not give evidence at the trial. He was removed from the Board at the time it was reconstituted in 2016. Mr Chung explained in cross-examination that he had not approached Mr Jia to give evidence because they were not on good terms.

43.  Mr Chung was cross-examined about the reason China Health had left it so late to seek leave to file further evidence on Day 2 of the trial. He explained that “Upon reading Chen Libo’s statement, I could see that he intentionally manoeuvred the fact to say that he was the one who introduced the Shanghai Fu Shou Yung project, why would the compensation be directed to Li Zhong Yuan?” Later he said “On this occasion, when I had my discussion with my legal team, I realised that this manoeuvre of him was leading towards a wrong direction or it’s a misleading statement. I felt that Chen LiBo was intentionally trying to change the compensation into a commission. So I felt that I had a need to have a supplementary explanation of it and my lawyers also felt that it's important to let the court know this explanation, the explanation of the original meaning of the word ‘compensation’ in my mind.”

44.  Mr Chung said that the statement he refers to in the first of the quoted passages was a reference to Mr Chen’s affirmation in HCMP 2593 that he read in preparation for the trial. It is quite possible that Mr Chung in the run-up to the commencement of the trial had read Mr Chen’s evidence, discussed it with his legal team and this caused him to reconsider precisely what Mr Chung had told him in their meeting, however, that does not account for his failure to mention at anytime in the previous six years the meeting with Mr Jia, which was obviously very important. It also seems to me that his suggestion that he thought Mr Chen was trying to manoeuvre the characterisation of the payment is unconvincing. China Health did not dispute at the trial that Mr Chen was correct that he, not Dr Li, introduced the FSY Project. This being the case Mr Chung had no reason to think Mr Chen was doing anything other than correcting Mr Chung’s mistake. The Defendants suggest that Mr Chung realised in the run-up to trial that his explanation for the Backdoor Arrangement was flawed and he then altered his evidence to circumvent the flaw, namely, his suggestion that Dr Li introduced the FSY Project to China Health.

45.  The Defendants unsurprisingly opposed China Health’s application for leave to introduce Mr Chung’s supplemental witness statement. I dismissed the application but allowed Mr Man to examine Mr Chung in chief on its subject matter and he was then cross-examined extensively on the reason why the new evidence has been introduced late. Mr Chung did not accept that there was any inconsistency between his original evidence and China Health’s case and his new evidence. His position was that he had described the payment at the outset as compensation to Dr Li and this continued to be how he understood it was characterised. This seems to me to be unconvincing. There is a material difference between characterising the payment as made in recognition of the value of the introduction by Dr Li of a new project and characterising the payment as compensation for dilution in Dr Li’s shareholding and influence in the management of China Health as a consequence of the introduction of a major new investor. The former was clearly China Health’s case until 1 June 2023.

46.  China Health’s case advances serious allegations against Dr Li, Mr Chen, Mr Ho and Rupert Li. It is not in dispute that cogent evidence commensurate with the gravity of the allegations are required to prove them. Mr Man acknowledged at the outset of the trial that China Health is alleging that Dr Li, Mr Chen, Mr Ho and Rupert Li conspired together to procure the improper payment of US$4,000,000 to Dr Li and that their explanation of the genesis of the Loan Note is a lie. Although, such allegations made against anybody would be serious, in my view it is relevant when considering the likelihood of such allegations being true that all four men are successful businessmen and professionals. Dr Li is a mathematician by education and taught for a period at MIT. Rupert Li is an American qualified lawyer with a degree from Columbia and is currently a senior partner of King, Wood Mallesons. Mr Chen was originally a banker and has been a director of significant listed companies. Mr Ho is said by the Defendants to be a very successful investor and businessman. Although Mr Man suggested in closing that no evidence had been adduced to prove this neither was it suggested to Mr Ho in cross-examination that it was untrue.

47.  China Health’s case was based until 1 June 2023 (the trial commenced on 5 June) on the allegations I have previously explained and various matters from which it suggested inferences could be drawn supporting the existence of the Backdoor Arrangement. As I explain in [22]–[23] of Re Chinaculture.Com Limited[5] a disciplined approach is necessary to drawing inferences said to support a finding of a serious breach of duty or wrongdoing:

“22. …There is no direct evidence that the Defendants were so motivated and CC asks me to draw the inference that they were. I am mindful of the observations of Ribeiro PJJ in Nina Kung v Wong Din Shin[6] on the need for a disciplined approach to the drawing of inferences, in particular inferences of serious misconduct.

‘187. In HKSAR v Lee Ming Tee & Securities and Futures Commission (2003) 6 HKCFAR 336, Sir Anthony Mason NPJ acknowledged the need for such a disciplined approach to the drawing of inferences and in particular for inferences of fraud or serious misconduct to be drawn only where such inferences are compelling. Dealing with an allegation that senior SFC officers had deliberately and improperly terminated an investigation in order to avoid compromising the standing of the subject of the investigation who was acting as an expert witness in a criminal trial in which the SFC was interested, his Lordship stated:

“… that conclusion was not to be reached by conjecture nor, as the respondent submitted, on a mere balance of probabilities. It was to be plainly established as a matter of inference from proved facts”. (at §72)

Reflecting the Re H & Others (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 principle he added:

“In the particular circumstances, it was for the respondent to establish as a compelling inference that very senior officers of the SFC had deliberately and improperly terminated the investigation into Meocre Li’s conduct for the ulterior purpose alleged, sufficient to overcome the inherent improbability that they would have done so.” (Ibid.)

It will be convenient to refer to the principle adopted in these cases as “the HKSAR v Lee Ming Tee & Securities and Futures Commission principle”.’

23. An allegation of wilful misconduct by a director of a power for an improper purpose is a serious one. As these passages make clear the necessary inference can only be drawn from proven facts, which make the inference compelling. It is not sufficient to identify a series of wrongs and mistakes committed over time and invite the court to conclude that by virtue of their number it is probable that something more than negligence or indifference was their cause. This is to invite speculation and conjecture. It is necessary for the court to find facts, which assessed in context are indicative, in the present case, of the Defendants’ attitude and motives. Context includes how a person or a company normally conducts its affairs. If it is normally casual and unsophisticated, it is difficult to infer anything about the motives for dealing with a particular transaction in a casual and unsophisticated manner. Similarly, if the facts can credibly be explained as mistakes or errors of judgment an inference of, in the present case, conscious non-compliance by the Directors with their duties, or recklessness indifference to doing so, cannot properly be made.”

48.  Mr Man argued that if I am satisfied that China Health has demonstrated a prima facie case it is necessary for the Defendants to demonstrate a defence to that case. I accept that generally this proposition is correct. However, a prima facie case can be weak or strong. Where its sits on that spectrum is relevant to an assessment of the evidence necessary to call it sufficiently into question that the court concludes that the Plaintiff’s case has not been proved on the balance of probabilities. I have explained the necessity for a disciplined approach to the drawing of inferences of serious wrong-doing in [47]. Although the standard of proof is the civil standard regardless of whether or not the allegation is of conduct which may be criminal, the court proceeds on the basis that serious misconduct is less likely than lesser forms of misconduct and as a consequence requires the evidence of serious misconduct to be of commensurate cogency. This is explained in [182] and [184] of Nina Kung v Wong Din Shin[7]:

“the civil standard requiring proof on a balance of probabilities continues to apply where, in civil proceedings, an allegation is made of criminal (or similarly serious) misconduct, but explained that such standard is to be applied flexibly, factoring in the inherently greater improbability of serious misconduct as compared with lesser forms of misconduct, and therefore requiring the person bearing the burden of proving the allegation to prove it with evidence of a commensurate cogency…

Nevertheless, in a case like the present, the Re H & Others (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 principle is applicable by analogy, operating not as defining a standard of proof, but imposing a standard of cogency which must be satisfied before evidence is considered sufficient to raise a case (here of forgery and of an associated conspiracy) for consideration by the court. When weighing up and assessing the probabilities in relation to the evidence adduced by the respondent as evidence of forgery, the court must bear in mind the seriousness of the misconduct alleged, recognizing that it carries an inherent degree of improbability.”

49.  In the present case the only direct evidence supporting China Health’s case is Mr Chung’s evidence of what he says he was told at the meetings in June and July 2014. There are no contemporaneous documents corroborating this evidence. In addition to the evidence of Mr Chung about what he was told China Health rely on a number of other matters, which they say support the inference that the Loan Note was issued pursuant to the Backdoor Arrangement. The Amended Statement of Claim does not plead that this inference is to be drawn from facts and matters identified in the Amended Statement of Claim. China Health’s Written Opening Submissions do not identify precisely what facts and matters, it will seek to prove at trial from which it contends the inference can be drawn. Four “features” are, however, said to be relevant:

(1)  There is transactional documentation, which record the agreements the Defendants collectively say were concluded: November Agreement, 1^st Supplemental Agreement, Amendment Agreement, 2^nd Supplemental Agreement, 3^rd Supplemental Agreement and the Loan Note. However, there is no documentary evidence recording the evolution of the transactions such as emails, WhatsApp messages or similar communications common in contemporary commercial transactions. China Health’s case is that at least to the extent that the agreements record an obligation for China Health to pay Li Hong, they are bogus and the absence of contemporaneous communications of the sort China Health suggests one would expect to see is consistent with, and evidences, this. I note in passing that conversely the Defendants point to the fact that Mr Chung has not produced any contemporaneous documents recording his alleged concerns about what Dr Li was attempting to do or his discussions with Mr Jia. On the contrary, point out the Defendants, Mr Chung was a party to several public announcements by China Health after he says he had been told of the Backdoor Arrangement, which Mr Chung acknowledged in cross-examination were positive representations that the Loan Note was valid and binding.

(2)  Dr Li’s initiative to procure the issuance of the promissory note by China Health without any demand by Capital Foresight.

(3)  Li Hong’s and Mr Ho’s role in events.

(4)  Mr Ho’s involvement from the outset as evidenced by him being a party to chains of emails.

50.  In practice China Health’s case has involved cross-examining Dr Li, Mr Chen, Mr Ho and Rupert Li with a view to demonstrating that its critique is justified, and that they cannot explain why the transactions were dealt with in the unconventional way China Health suggests that they were. In assessing the facts and matters China Health have attempted to prove, and whether or not they support the inferences that I am invited to draw, it is important for me not to lose sight of the principles I have explained early, namely, that the evidence must be sufficiently cogent to justify concluding that the Backdoor Arrangement has been proved. This requires China Health to prove facts and matters which are sufficiently compelling to support the drawing of the requisite inferences. Assessing the evidence and making findings of fact involves a consideration of whether, as well facts and matters that are capable of supporting China Health’s case, there are facts and matters, which point either to the opposite conclusion or suggest that there is sufficient uncertainty about what was motivating the parties that I cannot safely conclude that the Backdoor Arrangement was agreed and implemented. The assessment is not an accounting exercise in which I find some facts, which are capable of supporting China Health’s case and some that do not and then determine whether the balance is in China Health’s favour. Neither is it a matter of impression; both are clear from the passage from Sir Anthony Mason’s judgment in HKSAR v Lee Ming Tee referred to by Ribeiro PJ in the paragraphs of Nina Kung v Wong Din Shan, which I have quoted in [47]. A cogent case had to emerge from the assessment of the evidence that points compelling to the conclusion that the Loan Note was issued pursuant to the Backdoor Arrangement. In practice this means that the focus should be on significant facts capable of supporting the existence of the Backdoor Arrangement, alternatively, which impugn it.

51.  I have already addressed one significant matter, which is relevant to this assessment, namely, what in my view is clearly a late change of evidence by Mr Chung about what he says he was told by Mr Chen and Dr Li about the justification for the payment of US$4 million. This calls into question at least the accuracy of his memory or, as the Defendants argue, the veracity of his evidence generally.

The Evidence

52.  China Health argue that the facts (A) that the Loan Note was not included in the early stage of the negotiation and (B) it was to be issued to a company controlled by Mr Ho, suggests that it was not part of Capital Foresight’s negotiation of the payment of the sums due to it, but an addition included at the end of the negotiation as part of the Backdoor Arrangement. It seems to me that this is a weak argument even without regard to the Defendant’s evidence. If Dr Li had intended, as China Health allege, to use the agreement with Capital Foresight as a conduit for payment to himself it is inherently more likely that he would have included reference to payment of US$4,000,000 and how it was to be made, at the beginning of the negotiation not at the end.

53.  China Health also point to the absence of there being any evidence of Capital Foresight ever requesting issue of the Loan Note and not agreeing a maturity date as indicating it had no interest in it. It is correct that the text messages and emails during the period that Capital Foresight were chasing for payment of the US$15 million do not also request issue of the Loan Note. Mr Chen was cross-examined about this. Mr Chen said, Mr Man having established that in addition to sending messages they met and talked, that he had raised the subject of the Loan Note during these conversations. So far as the maturity date is concerned he said he was not concerned about it as he was willing to accept a 12-month period, which was generally the maximum maturity of a promissory note.

54.  Rupert Li was also cross-examined about the apparent failure to agree a maturity date until shortly before it was issued. Mr Li accepted that it was necessary for the Loan Note to have a maturity date.

55.  Mr Li disagreed that the absence of any reference to a Loan Note in the early drafts of the agreements was explained by the fact that the amount to be paid on top of US$15 million, which Capital Foresight characterise as effectively interest on the amount owed to it but unpaid, had not been agreed. Mr Li’s evidence was that the amount of interest was under negotiation and that there was no need for what Mr Man described as “place holder” in the draft—a reference to interest with the details left blank. The reference to the payment of US$4 million by way of Loan Note first appears in clause 2 of the draft attached to an email dated 14 November 2014 from Dr Li. The form of the Loan Note is in schedule 1 to the draft agreement. It contains a number of blanks—both the amount and the maturity date. Mr Li said in an answer to a question as to whether or not he thought at the time that “there is something a little bit short here because we don’t have an agreement on when the maturity date should be” that he was not surprised because the Loan Note was going to be issued in the future and the maturity date would be determined when China Health was confident it could pay. Mr Li said Mr Chen was negotiating the agreement and that he understood he had decided not to insist on a date.

56.  A further draft was circulated by Dr Li on 19 November 2012. The draft Loan Note has against the heading maturity date—12 months. Mr Li could not recall who introduced this provision. A further version was circulated by Dr Li on 20 November 2012. In the email chain is an email from Mr Li to Ida of Capital Foresight commenting that the agreement could be signed with the dates open, which reflected the fact that he understood at that time that a maturity date had not been agreed.

57.  Mr Li was also taken to an undated letter from Capital Foresight to China Health instructing the Loan Note to be issued to Mr Ho, which was sent to Dr Li about 20 November 2012. Mr Li said that at this time he understood Mr Chen and Mr Ho had agreed to the sale and purchase of the Loan Note. He was not, however, aware of any preceding documents evidencing this. A few days after the letter was sent he found out that in fact Mr Ho had not agreed to purchase the Loan Note. Mr Li was aware that the letter had been sent to China Health and China Health had not been told it had been revoked. He was asked why he did not suggest that it should be revoked. Mr Li said that although he was not now able to recall his thinking at the time there was no need to revoke the nomination letter, which is why it had not been; it was not an oversight. There was no necessity to revoke it, he suggested, as (1) the nomination letter was not intended to form part of the agreement, which allowed Capital Foresight to nominate the beneficiary of the Loan Note; (2) the November Agreement had not been signed; (3) the November Agreement allowed Capital Foresight to change the beneficiary; and (4) it was still hoped that Mr Ho would agree to buy the Loan Note.

58.  Mr Li rejected the suggestion that the reason the subsequent amendment agreements provided only for interest for late payment on the US$15 million not the US$4 million component was because Capital Foresight was not interested in the latter sum as it was always intended to be for Dr Li.

59.  It is China Health’s case that Mr Li knew that the provision for issue of a promissory note in the November Agreement was intended to channel money to Dr Li. The US$4 million was not intended for Capital Foresight. This would seem a necessary component of China Health’s case as Mr Li was one of the shareholders in Capital Foresight at the time and presumably if he had not been told he would have expected this sum when paid to become available to its shareholders including himself. The consequence of this is that in order to find in China Health’s favour I have to find not only that Mr Li was party to a conspiracy effectively to misappropriate US$4 million from China Health, but was also willing to come to court to lie about the transaction. Predictably the Defendants ask rhetorically why would somebody in Mr Li’s position be willing to do either of these things? The consequence of the court finding that he had lied would presumably be professionally catastrophic.

60.  Mr Li gave prompt and clear answers to the questions put to him. There was nothing evasive in his responses or his demeanour, which was confident and professional. It does not seem to me that one can read anything into the absence of disclosure of much in the way of internal communications about the terms of what became the November Agreement. China Health’s submission is that it is consistent with its case that the US$4 million was only introduced at the end of the transaction, because if this is the case the internal documents would make no reference to it and the documents may have been suppressed for this reason. However, as I have already explained it seems to me that if, as China Health allege, by this time Capital Foresight agreed to China Health paying Dr Li US$4 million and that what became the November Agreement was to be the conduit for the payment, it is more likely that it would have been mentioned at the outset not introduced at the end of the negotiations. For the same reasons I do not think that much can be read into the absence of internal communications. It was clear from Mr Li’s evidence that Capital Foresight dealt with the matter in a fairly informal way; deciding not to instruct external counsel. Neither in my view can anything of significance can be read into the issue of the nomination letter and the failure to revoke it. This is consistent with Capital Foresight dealing with the negotiation and documenting of the agreement in a fairly informal way with Mr Li not feeling it necessary to worry about matters that were never likely to be of practical significance. The chances of Mr Ho trying to obtain a promissory note and China Health issuing one to him if he had not agreed to buy it was obviously minimal.

61.  Mr Man recognised in closing that Mr Li’s evidence presented a problem for China Health. If I believe him necessarily it follows that I should reject China Health’s claim. Mr Man emphasised that I should not assess Mr Li’s evidence on a stand-alone basis. In other words I should not assess his evidence in isolation from the evidence of other witnesses and if I find it believable conclude that he was truthful and thus reject China Health’s claim. Mr Man argued that I need to assess Mr Li’s evidence in the light of the evidence of other witnesses. I understood this to mean that if I find that the other Defence witnesses were so unreliable as to call into question the veracity of the Defendants’ case this would justify me rejecting Mr Li’s evidence and find that he was an adept liar.

62.  I agree that I need to assess the evidence as a whole and not be unduly swayed by one particular witness’s convincing performance in the witness box. Conversely, I should not be unduly swayed by another witness’s poor performance in the witness box. What is required is an assessment of China Health’s forensic argument for me finding particular facts and matters and drawing inferences. However, that process has to give proper weight to the considerations I have explained in [48], recognition that the conduct of business transactions is commonly riven with minor errors, changes of mind and administrative infelicities and that part of the purpose of having oral evidence is for the court to assess the credibility of the witnesses.

63.  This is an appropriate point at which to address the credibility of the witnesses generally. Mr Chung was cross-examined extensively. There were in my view a significant number of unsatisfactory parts to his evidence:

(1)  I did not find his explanation for the late introduction of the new evidence to which I refer in [43]–[45] persuasive.

(2)  He had no explanation for the absence of any written record in 2014 in which he or Mr Jia make reference to what he says they had been told by Mr Chan and Dr Li about the true purpose of the US$4 million payment.

(3)  He was party to China Health issuing public announcements about the amendments to the November Agreement, which on his own evidence were false and misleading. His explanation for this I think can be summarised as him being willing to keep quiet and allow an untruth to be told to protect China Health.

(4)  Mr Chung clearly failed to tell other directors what he says that he knew.

(5)  One particular part of his evidence in my view sits uncomfortably with his evidence as to what he says he had been told. In [31] of his affirmation on 13 October 2016 in HMCP 2593/2016 he states the following:

“31. On around 20 September 2015, at a Board meeting discussing another transaction concerning a hospital in Tianjin, Mainland China (the ‘Tianjin Project’), Dr Li proposed a motion for CHGL to issue ordinary shares to partially pay HK$10 million of the US$4 Million. Dr Li explained that the shareholding of Shandong Harvest was no longer sufficient to pay for the US$4 Million (as Dr Li had previously proposed), since it was now only worth approximately HK$20 million. Therefore, to cover the remaining HK$10 million, CHGL should issue ordinary shares. I disagreed with this proposition, and the matter was not resolved on. There are now produced and shown to me marked ‘CH-20’ a true copy of an email from Wendy Huang, Dr Li’s secretary, dated 20 September 2015 raising Dr Li’s resolution.”

It is clear from the email of 20 September 2015 convening the board meeting that, as Mr Chung says, the proposal was that shares were to be allotted to settle (it says in the email part, Mr Chung says all) of the US$4 million. Mr Chung opposed this proposal. He was cross-examined about his evidence in [18] of his witness statement that Dr Li had told Mr Jia in July 2014 he would accept shares in lieu in a subsidiary of China Health. If this is correct Mr Chung was already alive to Dr Li willingness, at least in principle, to accept shares in lieu of payment. There is no explanation for why when this possibility was raised again in September 2015, he would simply have rejected it without any comment on what he understood to be the purpose of the US$ 4 million.

(6)  Questioning the authenticity of the Board minutes of 23 November 2012 without contacting the company secretary to see if he had a copy or contacting at least some of the directors to see if they recalled discussing the resolution.

64.  I have already mentioned that Dr Li is a highly educated man. Although no longer a fulltime academic he sits on the internal advisory board of the University of California at San Diego. He responded directly to questions. He was not evasive. On occasions he showed disdain for the questions put to him, but if his case is correct, namely, that Mr Chung has fabricated a defence to the claim on the Loan Note that is understandable. He disagreement with the case being put to him was clear and firm. He was not “caught out” in cross-examination and I did not understand Mr Man in his closing to suggest that he was. Mr Man’s attack on the evidence given by the Defendants’ witnesses focused on Mr Ho and Mr Chen.

65.  Mr Ho was giving evidence on behalf of the Li Hong, which had been joined in order that it is bound by a judgment in China Health’s favour. China Health does not advance a claim against Li Hong and Li Hong has not suggested that it is owed anything by China Health. China Health has advanced no motive for Mr Ho agreeing to involve himself in the backdoor arrangement or actively to defend the action. Mr Ho says, with the support of Dr Li and Mr Chen, that he is a successful and wealthy businessman. Mr Man suggested in closing that there was no evidence of this. This is incorrect. This was the evidence of Mr Ho, Dr Li and Mr Chen. It is correct that Mr Ho did not produce any documents that showed what his business interests are, but he was not cross-examined about this and there is nothing in the evidence before me, which is inconsistent with him being a successful and wealthy businessman. On the contrary it was his uncontested evidence that he became involved in the matter because he in late 2009 to 2010 had at Mr Chen’s suggestion purchased HK$20 million of convertible notes issued by China Health through his company ZhongXing Limited as shown in China Health’s Announcement dated 8 April 2010. China Health does not suggest that this is incorrect. He subsequently converted his shares at Mr Chen’s request in order that he could vote at an extraordinary general meeting in favour of the FSY Project I refer to in [8]. It was the resulting loss that led, says Mr Chen, to him inviting Mr Ho to purchase the Loan Note as a way of reducing the losses that Mr Chen felt some responsibility for. It is difficult to see what motive Mr Ho would have had for agreeing to facilitate the Backdoor Arrangement by appearing to purchase the Loan Note, but in fact with the intention of passing the proceeds when it was honoured to Dr Li, other than the fact that he was a friend of Mr Chen and an acquaintance of Dr Li and Mr Li. It seems to me inherently unlikely that this would have been sufficient to persuade him to involve himself in the Backdoor Arrangement and, when its implementation became problematic actively participate in this action. What is more likely is that he takes exception to the case advanced by China Health and the suggestion that he was dishonestly implicit in the Backdoor Arrangement and has the resources to contest their allegations.

66.  The attack on Mr Ho’s evidence focused on evidence that arose for the first time during Mr Ho’s cross-examination. During Mr Ho’s cross-examination [day 9] he referred to an agreement that Capital Foresight transfer to him their shares in China Health (about 46 million) as collateral for China Health honouring the Loan Note. Mr Chen asked him to gradually dispose of the shares and the purchase price of the Loan Note of HK$12,962,800 was the assumed value of the collateral. It is correct that this has not previously been referred, no documents have been produced that record the arrangement and the Debt Purchase Agreement records the consideration as US$1.67 million not HK$12,962,800[8]. It is also correct that although Mr Ho did sell the shares over time into the market he did not account as the sales proceeded to Capital Foresight for the proceeds. China Health argues that this new evidence was an attempt to explain why Mr Ho paid HK$12,962,800 to Capital Foresight and answer China Health’s case that the payment was not for the purchase of the Loan Note, but an outright purchase of Capital Foresight’s shares. China Health argues that if this is the case it supports its case that the purchase of the Loan Note was not genuine and the appearance of a sale of the Loan Note to Li Hong was a ploy to disguise the fact that the proceeds of the Loan Note was intended to go to Dr Li.

67.  Mr Ho was quite clear in his evidence that he wanted collateral for the amount he was to pay so that he got at least that amount back and that Mr Chen proposed that the purchase price would be the value of the collateral. Mr Ho’s explanation for the agreement recording the purchase price in US$ was that the Loan Note was denominated in US$ and that the cheque he wrote to pay for it was for the equivalent amount in HK$. Mr Ho’s answers were clear and confident. It does not seem to me that this explanation is inherently implausible.

68.  If the logic of China Health’s analysis is correct it would seem to follow that Mr Ho was able and willing to purchase Capital Foresight’s shares. It is difficult to understand (and China Health has offered no explanation) why Ho would have agreed to increase his shareholding in China Health and at the same time agreed to become involved in the Backdoor Arrangement. I note that it is not being suggested by China Health that the shares were being sold at an undervalue in fact when they were sold they realised approximately HK$3.3 million less than the alleged purchase price. It cannot, therefore, be suggested (and China Health do not do so) that the shares were sold at a low price in return for Mr Ho agreeing to facilitate the Backdoor Arrangement.

69.  It also seems a remarkable coincidence if China Health is correct, that the amount Mr Ho agreed to pay to purchase Capital Foresight’s shares in China Health is the same as the amount Mr Li and Mr Chen agreed to record as being the purchase price for the Loan Note.

70.  China Health make other forensic points about what it suggests are questionable features of Mr Ho’s explanation for the way in which the transaction developed and was implemented. It queries, for example, why it was necessary for Mr Ho’s bond to be converted in order that he could vote shares at the special general meeting. The suggestion put to Mr Chen, Mr Li as well as Mr Ho was that clearly the Board of China Health was aligned with its major shareholders and the necessary majority was always going to be obtained. Mr Ho’s evidence was that he simply converted because Mr Chen asked him to in order that he could vote for the FSY Project. He did not know whether this was necessary. I can see no reason not to accept Mr Ho’s evidence. And if, as China Health suggests, Mr Ho converted because he thought that the share price was about to rise (which it did) why would he lie about it? This example illustrates what in my view is a significant difficulty with China Health’s case. It involves trawling through the details of the various transactions and identifying inconsistencies in the way in which a transaction developed or things, which could have been dealt with more effectively. However, experience clearly demonstrates that few people conduct their affairs in a neat and tidy way, free of mistakes, inefficiencies, unexpressed assumptions that may or may not be correct and idiosyncrasies. This is not something that China Health can sensibly dispute as on its own case both Mr Chung and the Chair of the Board, Mr Jia, failed to keep any written record of what Mr Chung says they were told, they failed to communicate their concerns to other directors and they allowed public announcements to be published, which according to Mr Chung they knew contained material misstatements.

71.  Mr Chen’s explanation for asking Mr Ho to convert his shares was that this was consistent with what he understood to be the expectation of the prospective investor, namely, that none of the existing major shareholders would increase their shareholding and a desire to make sure there was no problem getting approval. Whether Mr Chen recorded this anywhere, or was correct in his assumption about what the investor expected, or the need to increase the number shares that would be voted in favour of FSY Project, does not advance an assessment of the veracity of Mr Chung’s evidence that he was told by Dr Li about the Backdoor Arrangement anywhere. What is required is proof of facts and matters that support China Health’s case that there was a Backdoor Arrangement. As I have already explained this must be done by advancing a version of events that can be proven, and which points strongly to this conclusion. Not undertaking a far-reaching inquiry into how the various participants conducted their affairs, which is what much of the cross-examination became.

72.  Mr Chen was, like Mr Chung, verbose and constantly argued with counsel rather than simply answer the questions. However, he like the other witnesses called, by the Defendants never deviated from substance of the Defendants’ explanation for issue of the Loan Note. His evidence lent itself to the most far reaching critique in closing particularly as he was the person negotiating on behalf of Capital Foresight with Mr Chung and Mr Ho, but for the most part like the example that I have just given in my view it amounted to little other than a series of illustrations of the casual way in which business is frequently conducted.

73.  In addition to the above matter in closing China Health emphasised the following matters:

(1)  The nomination letter signed by Mr Chen and sent to China Health, although Mr Ho had not definitely agreed to purchase the Loan Note and the failure to revoke it when it became clear that he was not going to do so. The implication I am apparently asked to draw (although this was not expressly stated in the Closing) is that this illustrates that the arrangement was not genuine. I disagree. If anything I would have thought the opposite was true. If Mr Ho was party to Backdoor Arrangement, why would he have not, as Mr Chen apparently assumed, confirm his agreement to purchase? I note in passing that I do not agree that it is “unbelievable” that Mr Li decided not to revoke the letter. Mr Li is an experienced commercial lawyer he would have fully understood that Capital Foresight could cancel the revocation whenever it wanted to and that the possibility of Mr Li relying on the nomination letter if he was not buying the Loan Note was for practical purposes zero. Leaving the nomination letter in place all the time Mr Li understood Mr Chen was still trying to negotiate with Mr Ho seems to me to fall comfortably within the range of reasonable ways of dealing with the matter.

(2)  Mr Chen’s failure to agree a maturity date. I do not agree that the compelling inference is that Mr Chung did not care about the Loan Note. I accept Mr Chen’s explanation that he was principally concerned with recovering the US$15 million and that he was willing to accept what in his experience was generally the maximum maturity date for a promissory note of 12 months. In layman’s terms he was more concerned with what would work than what appeared on a piece of paper.

(3)  The lack of evidence of serious demands prior to July 2015 for issue of the Loan Note or interest on it. Mr Chen’s explanation was that he had agreed to accept the Loan Note as settlement of interest and China Health did not have the money to pay additional interest, which would appear to have been the case at the time. I see no reason to disbelieve Mr Chen’s explanation.

(4)  The request by Dr Li to approve issue of the Loan Note to Anchorage after the sale of the Loan Note to Mr Ho in April 2015. Mr Chen’s explanation was that he had decided to introduce Anchorage, which he owned in order to claw back some of the interest in the Loan Note that he had agreed to sell to Mr Ho—what Mr Man described pithily as an example of seller’s remorse. An idea that Mr Ho rejected. What I am asked to find is that rather than a clumsy attempt to claw back interest in the Loan Note, Mr Chen was acquiring an interest in the US$4 million destined for Dr Li. Mr Man submitted that this was revealed by the July 2015 emails between the parties. He summarised the argument as follows:

“(a) Upon receiving the draft share transfer document from Chen LB, Ho forwarded it to Dr Li. Ho claimed that he wanted to run this by Dr Li to make sure the proposal would be fine – despite the fact that he was not considering accepting Chen LB’s proposal at all, and he was not planning on using Dr Li’s response as a helpful excuse to turn Chen LB down.

(b) But this is directly inconsistent with Dr Li’s evidence, which was that he did not even know why Ho forwarded the document to him.[9] Significantly, in Ho’s covering email, he actually makes no mention of asking for Dr Li’s advice or input about the propriety of things – he was actually telling Dr Li he could not deal with the transfer until after 29.7.2015 when he returned from Taiwan.

(c) After Dr Li’s sign-off, Ho replied saying he would ‘get on it immediately’. That contradicts with Ho allegedly not planning to accept Chen LB’s suggestion.

(d) The reasonable reading of these emails corroborates CHGL’s case that Ho was indeed helping Dr Li in respect of arrangements to issue the promissory note to Anchorage.[10] Why else would Ho have to forward the draft to Dr Li, and say he would ‘get on it immediately’ after Dr Li asked him to follow up on the relevant procedures?

(e) Further, the 25% share in Anchorage to be held by Chen LB personally is also in conflict with CFL’s case about the purported outright sale to Ho as of April 2015 – but sits well with Chung’s evidence that, in September 2016, Chen LB had said Dr Li and Ho had offered him money/benefits to help.”

This is not an entirely accurate summary of Mr Ho’s evidence. Mr Ho said that he received Mr Chen’s email proposing the use of Anchorage on 24 July 2015 when he was out of Hong Kong and initially he did not read it. Mr Chen had not previously mentioned this proposal. Somebody prompted him to look at it and then he forwarded it to Dr Li. He then discussed it with Mr Chen. He did not ask Mr Chen directly what he intended. He says he assumed “he probably thought he already put up the collateral to me and he received nothing but U.S. dollars 1.67 million. At the same time, he’s about to give me the whole thing of the 4 million promissory note. He just want—probably he want a little bit leverage on the whole thing rather than giving up all the control.”

As I understood Mr Ho’s evidence he had not made a final decision, but by 24 July 2015 he was considering rejecting Mr Chen’s proposal that he purchase the Loan Note and was thinking about how to back out without too much embarrassment. He had simply forwarded the email of 24 July 2015 to Dr Li when he became aware of it for Dr Li to look at for conformity with any relevant regulations before making a final decision. There is no suggestion that Mr Ho had rejected the purchase at this date. It does not seem to me that his explanation is inherently implausible. It is perfectly credible that Mr Ho was by 24 July 2015 inclined to walk away from the purchase, had not told Mr Chen this and forwarded the email to Dr Li without much thought while he continued to mull over what to do. It also seems to me that Mr Ho’s decision in 2015 not to purchase the Loan Note is inconsistent with him being a party to the Backdoor Arrangement.

(5)  The decision not to sue on the impugned Loan Note. I do not think anything can be read into Li Hong deciding after its initial attempt to enforce the Loan Note was not successful not to pursue it. China Health suggest that Capital Foresight’s failure to do so after it was endorsed back to it, makes little sense other than because of a recognition that it could not explain Mr Ho’s interest in the US$4 million. I disagree. I see no reason not to accept that at the time it was not Capital Foresight’s priority.

74.  Third, the negotiation of the 1^st Supplemental Agreement, the Amendment Agreement and the 2^nd Supplemental Agreement. China Health point to Capital Foresight’s vigorous pursuit of payment of the principal, but the lack of reference to the US$4,000,000 and suggest that this is consistent with Capital Foresight having no interest in it. It seems to me that little can be read into this.

75.  In my view China Health has come no where near proving facts and matters, which justify the court drawing inferences that the November Agreement, the Loan Note and the subsequent negotiation of agreements between China Health and Capital Foresight and Capital Foresight and Mr Ho evidence the Backdoor Arrangement and I reject the claims against all three Defendants in HCA 2549/2017.

76.  If I had reached the alternative view, China Health sought a declaration that the November Agreement and the Loan Note are void or voidable and unenforceable. Paradoxically this would put China Health in the position of having to honour its obligations in respect of the Preference Shares. In China Health’s closing it says that if I find the Backdoor Arrangement proved China Health “is content with order [sic] in terms of prayer 1 of the ASOC”, which seeks only a declaration in respect of the November Agreement. For the reason referred in the second sentence of this paragraph I find it difficult to see how this would give China Health any commercial benefit. A point taken against China Health is that it cannot be entitled to recission because it clearly cannot make restitution in integrum[11] and that China Health’s latest interim report (for 2022) suggests that it is not in a position to do so. China Health has not explained why it has pursued a claim that even if successful does not appear to confer any commercial benefit.

Capital Foresight’s Claim in HCA 2569/2017

77.  In this Action Capital Foresight seeks an order directing forthwith issue by China Health of a promissory note for US$4 million in its favour. In Closing China Health argued that as Capital Foresight has not pleaded a maturity date and the November Agreement does not specify one the Court cannot properly make an order as it would be futile. China Health also argues that this problem cannot be solved by the court inserting a reasonable date. It advances two reasons. First, that if Capital Foresight wished to rely on an implied term, it was necessary for this to be pleaded and this included pleading what a reasonable period would be. The importance of pleading the relevant components of a claim is explained by the Chief Justice Ma (as he then was) in [21] of his judgment in Kwok Chin Wing v 21 Holdings Ltd[12].

“21. It should by now really be quite unnecessary to issue yet another reminder on the rationale behind pleadings. The basic objective is fairly and precisely to inform the other party or parties in the litigation of the stance of the pleading party (in other words, that party’s case) so that proper preparation is made possible, and to ensure that time and effort are not expended unnecessarily on other issues:- Wing Hang Bank Limited v Crystal Jet International Limited[13]. It is the pleadings that will define the issues in a trial and dictate the course of proceedings both before and at trial. Where witnesses are involved, it will be the pleaded issues that define the scope of the evidence, and not the other way round. In other words, it will not be acceptable for unpleaded issues to be raised out of the evidence which is to be or has been adduced. As the Court of Appeal remarked in Wing Hang Bank Limited v Crystal Jet International Limited[14]:-

‘(2) In a trial, particularly where evidence is given by witnesses, it becomes extremely important that each side knows exactly what are the live issues. Where issues are sought to be introduced that have not been adequately or properly pleaded, amendments must be sought unless the consent of the other party or parties has been obtained. It will simply not do for unpleaded issues to be ‘slipped in’ when evidence is being given in the hope that the other side is not sufficiently alert to object.’”

78.  China Health argue that it was necessary for Capital Foresight to prove that a term should be implied that a particular maturity date (or period) be included in the promissory note that it sought to have ordered and, that as it was not pleaded, this was not an issue for determination and without its determination an enforceable promissory note cannot be ordered and, therefore, the Court should decline to make an order. Secondly, the evidence does not provide the Court with a reliable basis for ordering what is a reasonable period. It seems clear, I accept, that a maturity date was not agreed. Dr Li and Mr Chen gave evidence that maturity dates could range from three months to a year; although Mr Chen said that he would have accepted a year.

79.  In Closing Capital Foresight sought damages in lieu of an order for issue of the promissory note on the basis that the Court had the power to order damages rather than specific performance and this was appropriate in the circumstances. The availability of this alternative claim presupposes that Capital Foresight is entitled to an order for specific performance. If it is not for the reasons advanced by China Health it follows that damages are not an available alternative; in other words the claim for damages cannot cure the problem posed by the absence of a maturity date, if it is fatal to the claim for specific performance.

80.  I agree with China Health. The absence of any agreement as to the maturity date of the promissory note to be issued is a flaw. The only way it can be cured is by implying an agreement that payment would be within a reasonable period of issue of the promissory note. This should have been pleaded and evidence adduced directed specifically to this point. Plainly it was not. The fact that during their evidence Rupert Li and Mr Chen expressed their views on what Capital Foresight might have been willing to accept by way of maturity date does not cure this flaw. In my view it is not appropriate for the court to determine what the parties would probably have been willing to agree particularly when there is no evidence from China Health directed to this point because it was not pleaded. And I note it was not referred to in Capital Foresight’s opening submissions[15].

Disposition

81.  I dismiss both China Health’s claim and also Capital Foresight’s claim. Dr Wong sought a costs order on an indemnity basis against China Health on the grounds that its case was entirely fabricated. That I am not inclined to do, I will order that the costs of HCA 2549/2017 be paid by the Plaintiff to the Defendants with, in the case of the 2^nd and 3^rd Defendants, a certificate for three counsel, such costs to be taxed if not agreed. In the case of HCA 2569/2017, I order no order as to costs as given the limited time spent on this Action and the fact that it was responsive to China Health’s misconceived this claim seems to me just.

Mr Bernard Man SC, Ms Natalie So and Mr Louis Cheng, instructed by Jones Day, for the plaintiff (in HCA 2549/2017) and the defendant (in HCA 2569/2017)

Mr Martin Ho and Mr Adrian Kwan, instructed by Fairbairn Catley Low & Kong, for the 1^st defendant (in HCA 2549/2017)

Mr William Wong SC, Mr Patrick Chong and Mr Adrian Lee, instructed by Howse Williams, for the 2^nd and 3^rd defendants (in HCA 2549/2017) and the plaintiff (in HCA 2569/2017)

HCA 2469/2016 & HCA 2549/2017 & HCA 2569/2017 & HCA 1270/2019

[2021] HKCFI 3806

HCA 2469/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2469 OF 2016

_________________

_________________

AND

HCA 2549/2017 & HCA 2569/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2549 OF 2017

_________________

_________________

ACTION NO 2569 OF 2017

_________________

AND

_________________

Consolidated by Order of Master M. Lam dated the 19th day of January 2018

_________________

AND

HCA 1270/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1270 OF 2019

_________________

_________________

(Heard Together)

____________________

DECISION

____________________

1.  By an amended summons dated 13 July 2021 in HCA 2549/2017 & 2569/2017 (“the Note Action”), an amended summons dated 19 July 2017 in HCA 1270/2019 (“the Derivative Action”), an amended summons dated 18 August 2017 in HCA 2469/2016 (“the Fund Transfer Action”), the plaintiffs in all these proceedings (“Ps”) seek an order consolidating these actions, or alternatively, a direction that these actions be heard before the same judge at the same time or one after the other (“the Consolidation Application”).

2.  The Consolidation Application is opposed by Dr Li Zhong Yuan (“Dr Li”, the 1^st defendant in all the actions), and by Capital Foresight Limited (“CFL”, the 2^nd defendant in HCA 2549/2017 and the plaintiff in HCA 2569/2017) and Li Hong Holdings Limited (“LHHL”, the 3^rd defendant in HCA 2549/2017).

3.  Many affirmations filed in these actions contain exhibits which are copies of court documents.  This is not allowed under PD10.1, §4(c).[1] To do so would not only be contravening the PD, but would also unreasonably and unnecessarily increase the volume of the court files.  At the beginning of the hearing, I have drawn the parties’ attention to this problem.  The problem must be rectified.  There is no reason to allow unnecessary papers to stay in the court files.  I directed the parties to have discussion and to try to agree on a solution resolving the problem.  Ps’ solicitors are required to give a written report to the court within 35 days, informing the court the outcome of the discussion, including whether there is an agreed proposed solution to resolve the problem, and if yes, the details of the proposal.  If there is no agreement, the written report should contain the parties’ respective proposed solutions to the problem.

Background

4.  In relation to Ps:

(1)  China Health Group Limited (“CHGL”) is a company whose shares are listed on the Hong Kong Stock Exchange.  CHGL is the plaintiff in HCA 2549/2017, and the 1^st plaintiff in the Fund Transfer Action.

(2)  CHGL owns a number of subsidiaries, including (a) China Healthcare Holdings (Hong Kong) Limited (“CHHHK”); (b) Wisdom Profit Investment Limited (“Wisdom Profit”), which are respectively the 3^rd and the 2^nd plaintiffs in the Fund Transfer Action; (c) CHC Investment Holdings Limited (“CHCI”), which is the plaintiff in the Derivative Action; (d) Harvest Network Limited (“Harvest Network”), which is one of the defendants and companies on whose behalf CHCI seeks to sue in the Derivative Action; (e) World Success Investments Limited (“World Success”), which is another one of the defendants and companies on whose behalf CHCI seeks to sue in the Derivative Action, as well as the 3^rd defendant in the Fund Transfer Action; and (f) Shanghai De Yi Er Investment Management Consulting Co Ltd (“Shanghai De Yi”), which is another defendant on whose behalf CHCI seeks to sue, in the Derivative Action.

(3)  Prior to events complained about in the Derivative Action, Shanghai De Yi and Harvest Network together held another subsidiary known as Shanghai Harvest Network Technology Co Ltd (“Shanghai Harvest”).

5.  The main defendants in these actions are as follows:

(1)	Dr Li	1st defendant in all the actions; Executive Director of CHGL from June 2001 until 18 June 2016; Director of various CHGL group companies
(2)	Zhou Baoyi (“Zhou BY”)	2nd defendant in the Fund Transfer Action and the Derivative Action; Director of CHGL until 18 June 2016; Director of various CHGL group companies
(3)	Zhang Yi Juan (“Zhang YJ”)	3rd defendant in the Derivative Action; Director of various CHGL group companies
(4)	CFL	2nd defendant in HCA 2549/2017 and the plaintiff in HCA 2569/2017
(5)	LHHL	3rd defendant in HCA 2549/2017
(6)	Shanghai Huiqu E-Commerce Company Limited (“Shanghai Huiqu”)	4th defendant in the Derivative Action; alleged by P as a company whose registered shareholders are individuals associated with Dr Li

6.  The issues in these actions can be briefly summarized as follows:

(1)  Fund Transfer Action:

(a)  Ps’ pleaded case is that on or about 8 March 2016, Dr Li and Zhou BY wrongfully effected various unauthorized transfers from CHGL, CHHHK and Wisdom Profit’s bank accounts to Dr Li and World Success’ accounts, and that World Success at all material times held the amounts received on trust for Dr Li or Zhou BY.  Based on such facts Ps then plead (i) breach of fiduciary duty; (ii) knowing receipt; (iii) dishonest assistance; (iv) negligence; and (v) restitution for unjust enrichment, with the consequence that the misappropriated amounts remain held on trust for Ps and/or that Ps are entitled to equitable compensation or damages.

(b)  Dr Li’s defence is that that the alleged unauthorized transfers were in fact effected for lawful purposes to (i) repay to him outstanding remuneration; and (ii) repay outstanding debts owed to Harvest Network and its subsidiaries.

(2)  Note Action:

(a)  The crux of this action revolves around certain convertible preference shares in CHGL which CFL had purchased in April 2010, with maturity date on 28 July 2011.

(b)  CHGL’s case is that on a date before November 2012, it is claimed that inter alias Dr Li purportedly on behalf of CHGL entered into an arrangement, which would result in, inter alia, payment of USD 4 million by CHGL to Dr Li’s nominee for his benefit, through a purported agreement dated 23 November 2012 (“the November 2012 Agreement”) which provided for the redemption of CFL’s shares partly by USD 15 million in cash, and partly in the form of a promissory note in the amount of USD 4 million (“the Promissory Note”).

(c)  Dr Li then procured the issuance of the Promissory Note by CHGL.  Later, LHHL claimed to be the beneficial owner of a loan note for the amount of (also) USD 4 million issued by CHGL (“the Loan Note”), and requested CHGL to settle the same.  The Loan Note was included in a letter from LHHL dated 23 May 2016 which referred, inter alia, to a purported letter from CFL dated 31 July 2015 in which CHGL was requested to issue the Promissory Note in favour of LHHL.

(d)  In view of the foregoing, CHGL pleads that the November 2012 Agreement and the Loan Note are both void or voidable, and unenforceable, given Dr Li’s breaches of fiduciary duties in procuring CHGL to enter into the same and/or various breaches of CHGL’s Bye-laws.

(e)  Dr Li’s defence is that, inter alia, the whole arrangement alleged by CHGl does not exist at all.  Dr Li says that he does not has any personal gain from the November 2012 Agreement.

(f)  CFL avers that the November 2012 Agreement has been entered into with a view to settle CHGL’s liabilities in respect of the aforementioned preference shares.  It is also claimed that CHGL should issue the Promissory Note in favour of CFL pursuant to the November 2012 Agreement and other supplemental agreements.

(g)  LHHL’s case is that it has indorsed the Loan Note to CFL.

(3)  Derivative Action:

(a)  The main complaint in this action arises out of Shanghai Harvest[2] and its subsidiaries (“the Shanghai Harvest Group”), which was in the business of e-commerce and payment services (“the Payment Services Business”), which required a payment business licence (“the Payment Service Licence”) under Mainland Chinese regulations.  Details of the complaint are as follows.

(b)  On or around 15 January 2011, Harvest Network[3] and Shanghai De Yi[4] (both are Shanghai Harvest’s shareholders) purportedly entered into a share transfer agreement to transfer their shares in Shanghai Harvest to Shanghai Huiqu for RMB 40 million.

(c)  In March 2011, Shanghai De Yi transferred one of its subsidiaries 上海德颐网络技术有限公司 (“Shanghai DY Network”) to Shanghai Harvest, purportedly to enable Shanghai DY Network to apply for a Payment Service Licence.  The Shanghai Harvest Group (through Shanghai DY Network) was then able to acquire a Payment Business Licence in December 2011.

(d)  In essence, CHCI’s contention is that Dr Li, Zhou BY and/or Zhang YJ in causing and procuring the aforementioned actions breached various fiduciary duties, in that they diverted from Harvest Network and Shanghai De Yi valuable opportunities to develop, exploit and/or benefit from the Payment Service Business, by instead transferring Shanghai Harvest to Shanghai Huiqu (which was under their control).

(e)  On such premise, damages were claimed for loss and damage arising for such breach.  As against Shanghai Huiqu, CHCI claims for knowing receipt and knowing assistance.

(f)  The other part of the Derivative Action involved alleged unauthorised transfers on around 8 June 2016 by World Success[5] (through Dr Li’s procurement) to a Mu Xiangming (“Mu XM”), who was originally on CHGL’s Board together with Dr Li.

7.  As to the Fund Transfer Action,

(1)  The writ of summons for the Fund Transfer Action was issued on 23 September 2016. The parties exchanged witness statements on 6 November 2018.

(2)  After the exchange of witness statements, on 16 July 2019, CHGL took out an application to amend the pleadings of the Fund Transfer Action (“the 2019 Amendment Summons”).  By the proposed amendments, CHGL sought to introduce the facts of the Derivative Action into the Fund Transfer Action.  The only additional relief sought was a declaration that Dr Li was in breach of his fiduciary duties in relation to the announcements and circulars published on the sale of Shanghai Harvest.  No additional substantive relief was sought.

(3)  The 2019 Amendment Summons will be heard on a call-over basis on 21 December 2021.

8.  As to the Note Action,

(1)  The Note Action was commenced on 7 November 2017.  First round of witness statements exchange was on 24 January 2019.  Further witness statements for Dr Li were filed and served on 6 October 2020.  Dr Li also made a supplemental witness statement on 11 February 2021.

(2)  On 30 April 2021, CHGL sought to file a supplemental witness statement of Chung Ho (“the CH Supp WS”) on the ground that the CH Supp WS would give context to the Note Action.  On 28 May 2021, Dr Li took out a summons for striking out the CH Supp WS on the ground that its contents are inadmissible, irrelevant, scandalous, frivolous, oppressive and/or otherwise constitutes an abuse of the court’s process.  By Master Cruden’s Order dated 10 September 2021, the application is allowed with costs to Dr Li.

(3)  CHGL has lodged an appeal against Master Cruden’s order, but the appeal has not yet been heard.

(4)  Apart from the said appeal and the Consolidation Application, there is no other outstanding interlocutory application in the Note Action.

9.  As to the Derivative Action,

(1)  The writ of summons for the Derivative Action was issued on 15 July 2019.  So far CHCI has not been able to effect service on all of the defendants, including Shanghai De Yi.  Shanghai De Yi is the corporate entity on whose behalf of the triple derivative action was commenced by Ps.

(2)  The Derivative Action has not progressed beyond the statement of claim.

(3)  The BVI court granted leave to commence the Derivative Action on 16 November 2017.[6]  However, the Derivative Action was only commenced on 15 July 2019.

10.  There is a previous consolidation application (“the Previous Consolidation Application”) made by Ps.

(1)  On 16 July 2019, apart from issuing the 2019 Amendment Summons, Ps also made an application to consolidate the Fund Transfer Action and the Derivative Action.

(2)  On 26 July 2019, the Previous Consolidation Application was heard by Master Ho.  Master Ho remarked that until the 2019 Amendment Summons has been disposed with, one cannot fully assess the factual and legal questions that are going to arise in the Fund Transfer Action, which would inform whether there is a need for consolidation.

(3)  The Previous Consolidation Application was for this reason withdrawn.

The principles

11.  The principles are not in dispute.

12.  Order 4 rule 9(1) provides as follows:

“Where two or more causes or matters are pending, then, if it appears to the Court—

(a) that some common question of law or fact arises in both or all of them, or

(b) that the rights to relief claimed therein are in respect of or arise out of the same transaction or series of transactions, or

(c) that for some other reason it is desirable to make an order under this rule,

the Court may order those causes or matters to be consolidated on such terms as it thinks just or may order them to be tried at the same time, or one immediately after another, or may order any of them to be stayed until after the determination of any other of them.”

13.  As explained by Zervos J (as he then was) in Komal Patel v Chris Au :[7]

(1)  In deciding whether to order consolidation, the court has an unfettered discretion.  The power is to be exercised in a flexible way with regard to the particular circumstances of the situation.  The objective of such an order is to save time and costs.  There is no hard and fast rule that just because the parties are identical and some common question of fact or law is involved in both actions, it would be expedient and proper to order consolidation.

(2)  The court has an unfettered discretion in deciding whether to order consolidation of two or more causes or matters.  Even though the power is to be exercised with some degree of flexibility, a court must nevertheless be satisfied that it would be proper and expedient to make such an order, having regard to the particular circumstances of the situation, including, amongst other things, that the objective of such an order is to save time and costs, and that where there is a substantial overlapping of issues and parties, it is desirable to resolve the disputes in the different actions on one occasion by the same judge.

(3)  Where there was “substantial overlapping of issues and parties” it was desirable that the disputes in the different actions to be resolved on one occasion and by the same judge.

(4)  The question of whether actions should be tried together or one after another had to be approached from the perspective of case management rather than principles of law; the Court is primarily concerned with savings of time and costs, and also with the avoidance of unnecessary delay, undue complexity and overloading of issues.  In considering “the practical implications of trying the actions together”, relevant factors include, inter alia, the additional time needed to address further issues, the adoption or admission of the evidence of witnesses in subsequent trials, the risk of losing reserved trial dates and the different stages the actions had reached before going to trial.

(5)  The emphasis is on the efficient and just resolution of disputes before the courts.  The court should take a practical and common-sense approach to meet the justice of the situation.

14.  See also Chan Shing Lam v Winscore International Ltd[8], in which Recorder Dawes SC said:

“12. The principles under [Order 4 rule 9(1)] are trite:

(1) The Court has a wide and unfettered discretion under Order 4, rule 9. There is no hard and fast rule on how this discretion ought to be exercised, but the Court should take a practical and common sense approach to ensure justice is best served.

(2) Even though the Court’s discretion should be exercised flexibly, it must be satisfied that it would be proper and expedient to make such an order, having regard to the all the circumstances. It should consider, amongst other things, that the objective of the rule is to save time and costs, and where there is a substantial overlapping of issues and parties, it is desirable to resolve the disputes in different actions on one occasion before the same judge.

(3) Following the Civil Justice Reform, the emphasis is on ensuring the efficient and just resolution of disputes before the courts.

See Komal Patel and Ors v Chris Au and Ors, HCA 183/2014 and HCA 2063/2015 (14 January 2016) at §§11-17; Yong Li Investments Ltd v LeeSing Leung Robin[2018] HKCFI 1711 at §§16-17, 22, and 25-27.”

Analysis

15.  Having considered the papers and the submissions, I would exercise my discretion against Ps and disallow the Consolidation Application.

16.  Firstly, in my view, there is limited overlapping issues in these actions.

(1)  Each of the actions concerns different incidents which occurred at different times.  The incidents are commercially unrelated to each other in any way, shape or form.  The persons or entities allegedly having colluded with or are under the control of Dr Li are also different.  The reliefs sought in each of the actions are different and unconnected.

(2)  There would be no practical benefit for having all these issues to be heard and determined by a trial judge at the same time. Since there is essentially no overlap in the issues and the reliefs sought in these actions, it cannot be said that without consolidation, there would be a risk of having conflicting judgments on the same issues.

(3)  Ps submit that there are common questions of law amongst the 3 actions concerning:

(a)  the extent and scope of fiduciary duties owed by Dr Li to CHGL;

(b)  the cause of actions relating to knowing receipt and dishonest assistance; and

(c)  the validity of the Service Agreement (“the Service Agreement”) entered into between CHGL and Dr Li on 1 September 2011.

(4)  With respect, I am not persuaded by these submissions.

(5)  The mere fact that there are the same causes of action in the 3 actions does not justify consolidation.  It is plain and obvious that it would not be right to say that any actions featuring alleged breaches of fiduciary duties should be consolidated, regardless of the underlying issues and when the alleged acts took place.

(6)  Ps contend that there is a real risk of different formulations of the legal tests on dishonest assistance and knowing receipt and, hence, having a single judge to hear the cases will help prevent such risks.  There is no merit in this argument.  Obviously, it cannot be said that any cases involving alleged dishonest assistance and alleged knowing receipt should all be consolidated.  Further, the principles concerning dishonest assistance and knowing receipt are not controversial. 

(7)  In my view, there is no common controversial legal question in these actions justifying consolidation.

(8)  The disputes in these actions are factual disputes, which hinge on whether Dr Li participated in the impugned arrangements or transactions, and whether such participation involved a breach of duty on Dr Li’s part.  The analysis of each transaction would be independent and discrete.

(9)  Ps submits that the trial judge should look at the “big picture” in determining whether dishonesty is established for each of the individual actions.  Ps are inviting the court to take into account facts advanced in one action to determine whether Dr Li may be said to be dishonest in another action.  This is legally impermissible.

(a)  It is well established that (i) a plaintiff who alleges dishonesty must plead and establish facts to show that the defendant was dishonest and not merely negligent; (ii) the court will not infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with innocence; and (iii) both fraud and dishonesty must be distinctly alleged and dishonestly proved, and must be sufficiently particularised – in the sense that the particulars as pleaded cannot be consistent with mere negligence.[9]

(b)  Clearly, Ps can only invite the court to find dishonesty for each separate transaction based on the particulars specifically pleaded for that transaction, and not on particulars or matters pleaded for other matters.

(10)  As to the validity of the Service Agreement, one has to bear in mind that the Note Action is at a very advanced stage and would be ready for trial soon.  Both CHGL and Dr Li are parties in these 2 actions.  Once a ruling on the validity of the Service Agreement is made by the court in the Note Action, that would constitute an issue estoppel and both CHGL and Dr Li would not be allowed to reargue the same issue in the other 2 actions. In these circumstances, the validity of the Service Agreement itself would not be a sufficient factor justifying consolidation.

(11)  There is also no common question of facts in these actions.

(12)  Ps argue that there are common questions of facts as follows:

(a)  the credibility of Dr Li and his associates;

(b)  the relationship between Dr Li and his associates (including Mu XM) who executed the Service Agreement on behalf of CHGL;

(c)  The alleged unauthorized transfers by Dr Li;

(d)  the circumstances in which Service Agreement was signed; and

(e)  the background of alleged takeover of CHGL culminating in the 3 actions in retaliation against Dr Li.[10]

(13)  With respect, I am unable to accept Ps’ submissions.

(14)  As to the 1^st point, creditability of a witness is not an issue to be tried.  As the Court of Final Appeal pointed out in SunLegends Investments Ltd v. Ho Yuk Wah:[11]

“57. A civil case is a trial of the issues as put before the court. It is not a trial of the character of the parties. This is a matter beyond the scope of analysis in a court of law.”

It would be wrong on principle to seek consolidation of the actions by reference to the creditability of Dr Li and his associates.

(15)  As to the 2^nd point, the relationship between CHGL and Mu XM (and Dr Li’s other alleged associates) may be questions in the Derivative Action or the Fund Transfer Action, but it is not a question in the Note Action.  On the other hand, the alleged relationship and arrangement between Dr Li and CFL/LHHL is a question to be resolved in the Note Action, but not in the other 2 actions.  There is no suggestion that CFL/LHHL are connected with Dr Li’s associates or are somewhat involved in the issues in the other 2 actions.

(16)  As to the 3^rd point, the alleged unauthorized transfers occurred in different years (ie January 2011, November 2012 and March 2016).  Further, the alleged transfers are questions only in the Fund Transfer Action and the Derivative Action.  This cannot be a ground in support of consolidating these 2 actions with the Note Action.

(17)  As to the 4^th point, this cannot be a ground justifying consolidation.  See [16(10)] above.

(18)  As to the 5^th point, the alleged takeover and retaliation has no relevance to any disputed issues in the Note Action.  It is not even a matter pleaded or referred to in the witness statements in the Note Action.

17.  Secondly, ordering consolidation would cause substantial and undue delay in the Note Action and in the Fund Transfer Action, which would be unfair to the defendants in these proceedings.

(1)  It is indisputable that the Note Action is at a very advanced stage and the Fund Transfer Action is at an advanced stage, while the Derivative Action is very primitive.

(2)  The Note Action is ready to be set down for trial.  The outstanding appeal against Master Cruden’s Order dated 10 September 2021 would not materially affect the setting down of that case for trial.  If the appeal is successful, there would only be one further supplemental witness statement in that case.  As there is no application to amend the pleadings or to introduce any new pleading in the Note Action, the issues in the Note Action would remain unchanged.[12]

(3)  The Derivative Action is still very primitive. Although CHCI in the Derivative Action has obtained leave from the BVI court to commence the action on 16 November 2016, the writ of summons was not issued until 15 July 2019. No explanation is given as to why CHCI has waited for 2 years and 8 months after obtaining leave from the BVI court before commencing the Derivative Action.

(4)  In the Derivative Action, Dr Li, Harvest Network and World Success have been served.  Attempted service out on Zhou BY failed, and he was re-served as per the Order of Master Tse dated 30 October 2020.  Service out on Zhang YJ and Shanghai De Yi have also been unsuccessful.  As for Shanghai Huiqu and Shanghai Harvest, there has been no update after service out was effected in November 2020.  In Ps’ written submissions filed before the hearing, Ps suggest that they are prepared to abandon the claims against the unserved defendants, so that the Derivative Action would be able to catch up with the other 2 actions.  Ps suggest that all the 3 actions could be set down for trial first, leaving the interlocutory steps in the Derivative Action to take place in the meantime.

(5)  With respect, that proposal is not feasible. One of the unserved defendants in the Derivative Action is Shanghai De Yi, the claimant on whose behalf CHCI is bringing a derivative action.  It is trite that a company on whose behalf the common law derivative action is brought is an indispensable party to the derivative action.[13]  Ps’ suggestion that they could proceed in the Derivative Action without serving Shanghai De Yi is misconceived.

(6)  In the hearing, Ps have put forward a revised proposal.  Ps say that after Dr Li filing and serving his defence in the Derivative Action, the court would be able to appreciate what would be the issues in the Derivative Action.  The court then can fix a trial period for all the 3 actions, and Ps would attempt to serve the papers in the Derivative Action on Shanghai De Yi and Shanghai Harvest in the meantime.  Ps say that Shanghai De Yi and Shanghai Harvest are the two nominal defendants in the Derivative Action, and it can be expected that they would not take an active role in the action.  Ps would also abandon the claims against the 2^nd, the 3^rd and the 4^th defendants in the Derivative Action.

(7)  With respect, I am also of the view that the revised proposal is also not feasible.  One does not know how much time would be required to effect valid service on both Shanghai De Yi and Shanghai Harvest.  Bearing in mind that these two companies are incorporated in Mainland China, service may take considerable time.  Before serving the papers on these two defendants, the court simply cannot make any case management orders in the Derivative Action which would bind all the parties in that action.  With all these matters in mind, adopting Ps’ revised proposal would not have the effect of speeding up the Derivative Action.

(8)  Further, even if expedited directions are given, the parties in the Derivative Action would need to go through the pleadings stage, the discovery stage and also the exchange of witness statements.  These stages would take up a long period of time. Without finishing all these steps, no one can accurately estimate how much time would be required for resolving all the issues in the Derivative Action.  Naturally, it must follow that no one can tell how much time should be reserved for the combined trial of these 3 actions.  In these circumstances, it is simply unrealistic to say that leave to set down the 3 actions for trial can be given now or in the near future.

(9)  If the Consolidation Application is allowed, the Note Action and the Fund Transfer Action would have to wait, and the trials in these 2 actions would be delayed for a long time.  The long delay would be prejudicial and would not be fair to Dr Li, CFL and LHHL.

(10)  Ps submit that any delay should be balanced against the risk of conflicting judgments and the time saved as a result of having a single judge hearing all the disputes.  For the reasons set out in [16] above, I refuse to accept this submission.

18.  Thirdly, there is no other factor favouring consolidation.

(1)  Ps suggest that there are other factors favouring consolidation:

(a)  there are common witnesses amongst the actions; and

(b)  CFL/LHHL are allegedly the associates of Dr Li.  It would be beneficial to have all the disputes tried in a single action.

(2)  As to common witnesses, Ps contend that the common witnesses are Dr Li, Mu XM, and Chen Libo (“Chen”).[14] However, the mere fact that there are some common parties or witnesses per se does not justify consolidation.  Absent any substantial degree of overlapping issues amongst the actions, there is no basis for consolidation.  Dr Li, Mu XM, and Chen would give evidence on separate and distinct issues in these 3 actions.  Further, Chen is not involved in the Derivative Action at all.

(3)  As to the alleged relationship and arrangement between Dr Li and CFL/LHHL, this is an issue to be resolved in the Note Action, but not in other 2 actions.  There is no suggestion that CFL/LHHL are connected with Dr Li’s associates or are somewhat involved in the issues in the other 2 actions.

(4)  In my view, the other factors suggested by Ps cannot be sufficient reason in support of the proposed consolidation.

19.  Fourthly, CFL and LHHL are only parties in the Note Action, and they are not parties in the other two actions.  No reliefs against CFL and LHHL are sought in the other two actions.  In these circumstances, there is no reason to drag CFL and LHHL into the other two actions.

20.  Finally, the Consolidation Application is an abuse of the process of the court.

(1)  As between the Previous Consolidation Application and the present Consolidation Application, there is no material change of circumstances.  In my view, there is no reason why the current consolidation application could not have been made over two years ago.  If Ps’ position is that the Consolidation Application should be allowed irrespective of the outcome of the 2019 Amendment Summons, then there was no need on Ps’ part to withdraw the Previous Consolidation Summons.

(2)  In Laemthong International Lines Co Ltd v Artis, Colman J said:[15]

“If … [a party] issues a second application to a judge, the judge would have to take a threshold decision, namely whether the character of the second application made it appropriate that he should entertain it. That would be a discretionary exercise. Normally a factor of great, if not determinative, weight would be whether on that second application new evidence or other matters were to be brought to the court’s attention which had not been before the court on the first application and which were substantially material to the exercise of the court’s discretion in favour of the claimant.” (Emphasis added)

(3)  If a point was open to a party on an earlier interlocutory application and was not pursued, then it is not open to him to take the point at a later application when there has been no material change of circumstances and no new fact.  It would be an abuse of process to delay taking the point until a subsequent application.[16] The principle has been summarized by the Court of Appeal in Compania Sud Americana De Vapores SA v Hin-Pro International Logistics Ltd[17] as follows:

“16. The principle derived from Chanel Ltd v FW Woolworth & Co Ltd is that if a point was open to a party on an earlier interlocutory application and was not pursued, then it is not open to him to take the point at a later application when there has been no material change of circumstances and no new facts. This principle applies when the Mareva injunction is continued inter partes, or where an undertaking is given in equivalent terms, which is expressed to be until further trial or further order, and no specific reservation is made before the court. See Gee on Commercial Injunctions, (5^th ed., 2004), para 20.061 at pp.632-633.

17. The Chanel Ltd v FW Woolworth & Co Ltd principle is founded on the basis that the party has a responsibility to take the point when it is first reasonably available to him before the court and that it would be an abuse of process to delay taking it until a subsequent application: Gee, ibid. Where, as here, the interlocutory injunction is continued at the return date but there had been an express intimation that the defendant was contemplating an application to discharge once his evidence is in order, he is not guilty of any abuse of process as envisaged by the Chanel Ltd v FW Woolworth & Co Ltd principle. Cf. Gee, at para. 23-015 at 714 (which concerns undertakings but equally applies to injunctions). That principle does not apply to debar him from taking out the subsequent discharge application.” (Emphasis added)

(4) The same principle was recently applied by Linda Chan J in Re Shing Tai Ginseng Company Ltd[18], in relation to a strike out application that was previously mounted but withdrawn by consent. As the learned Judge noted at [32] of the judgment, this principle is engaged even if there was no substantive determination by the court on the first occasion.

(5) In Borealis AB v Stargas Ltd and another[19], in which Rix LJ said:

“Against the background of an increasingly imminent trial date, the importance in such circumstances of a proper and frank explanation of the reason for delay should not be under-estimated. The danger is that tactical decisions have been taken and retaken which, if considered in the cold light of day, would not justify disruption to the trial. However one wants to look at it, whether as a matter of fairness, proportionality or overall justice, the court is not able to found a safe decision on such questions without, as it seems to me, a proper and frank explanation. The later a decision is made, which could, and it might be said should, have been made earlier, the more the court is entitled to be concerned lest tactical considerations have entered into the matter.” (Emphasis added)

(6) Ps’ explanation for re-mounting the Consolidation Application at this late stage (ie when the Note Action is ready for trial) is unsatisfactory. Ps’ explanation is that the reason for making the present application is slightly different now, given that the Note Action is involved.

(7) The reason given by Ps cannot be right. If Ps did not consider the circumstances to be sufficiently strong to justify a consolidation of two actions (the Fund Transfer Action and the Derivative Action) at the time of the Previous Consolidation Summons, there can be no basis for suggesting that their position would be stronger because there are now three actions involved. Naturally, when more actions are involved, there would be a wider range of distinct factual and legal issues.

(8) Further, when the Previous Consolidation Application was taken out on 16 July 2019, the Note Action was already in place. In fact, CHGL filed its reply in the Note Action in July 2018. Before Ps taking out the Previous Consolidation Application, any potential overlapping issues between the 3 actions would already have been apparent by then.

(9) In the absence of a satisfactory explanation as to why Ps re-apply for consolidation at this late stage, I agree with Dr Li, CFL and LHHL that the Consolidation Application is a tactical move, with a view to delay, in particular, the setting down of the Note Action for trial. I hold that the Consolidation Application is an abuse of the process of the court.

21.  For all these reasons, I would dismiss the Consolidation Application.

Costs

22.  I have heard submissions on costs.  Since I have ruled that the Consolidation Application is an abuse of the process of the court as contended by Dr Li, CFL and LHHL, I would order that costs of the Consolidation Application be paid by Ps to Dr Li, CFL and LHHL forthwith on an indemnity basis, with a certificate for 2 counsel.  In my view, this is the appropriate costs order in the circumstances.

Deposition

23.  I dismiss all the 3 amended summonses mentioned in [1].

24.  I also make the costs order as set out in [22] above.  Those costs would be summarily assessed on the papers without an oral hearing.  In view of the coming Christmas and New Year holidays, I would grant leave to Dr Li, CFL and LHHL to file and serve their respective bills of costs for summary assessment within 14 days, and leave to Ps to file and serve a written reply to each bill within 14 days thereafter.

25.  Lastly, it remains for me to thank all counsel for the helpful assistance rendered to the court.