SECURITIES AND FUTURES COMMISSION v. MANDARIN RESOURCES CORPORATION LTD. AND ANOTHER

Date of Handing Down Judgment : 19 November 1999

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J U D G M E N T

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The Securities and Futures Commission's ("SFC") case in skeleton form

1. The evidence in this case primarily concerns the affairs of two companies, namely Mandarin Resources Limited (hereafter referred to as either "the Company" or "Mandarin") and Lucky Man Properties Limited ("Lucky Man"). It is fundamental to the SFC's case that it proves that the 2nd Respondent, Mr Chim, was at all material times in control of both companies. Where his control was not legal control, it is said he was in de facto control. Similarly it is said he was a shadow director at times prior to his formal appointments as a director.

2. The Company was incorporated in Hong Kong in 1972 and was first listed in 1973. Lucky Man started at the same time. The two companies became engaged in what turned out to be lengthy litigation in 1986. As a result, the Company's shares were suspended in November 1986 and Lucky Man's in January 1987. The Company's shares remain suspended to date. Trading in Lucky Man shares resumed in October 1992.

3. The 1986 litigation concerned residential blocks of flats known as Fairmount Terrace. Fairmount Terrace comprised two blocks of flats on a site in Repulse Bay Road on the south side of Hong Kong island. Half of Fairmount Terrace was owned by Markle Land, a wholly owned subsidiary of the Company. In 1985 there was a purported sale of Markle Land by the Company to Lucky Man. It was this purported sale which prompted the litigation. The litigation remained unresolved in the early 1990's when Mr Chim came onto the scene. The other half of Fairmount Terrace was always owned by "Broadworld", a wholly owned subsidiary of Lucky Man.

4. The litigation was settled on 17th October 1991. As part of the settlement, the Company retained ownership of Markle Land. On 8th November 1991, Mr Chim became the majority shareholder of the Company. It is however the SFC's case that he had been in de facto control since at least May 1991. On 19th December 1991 Mr Chim became the majority shareholder of Lucky Man through a corporate nominee, Day & Day Investments Limited ("Day & Day").

5. Approximately one year later, in November 1992, the Company sold Markle Land to Lucky Man. It is this sale (and other transactions which the SFC contend are directly related), which is the centre piece of the SFC's petition.

6. The Petition refers to four "main transactions". They are :-

(1) The sale of Markle Land by the Company to Lucky Man. It is the SFC's case that it was sold at considerable under value at a time when Mr Chim controlled both companies. It is said that when the minority shareholders of the Company were asked to, and did, approve of the disposal of Markle Land, they should have been informed, but were not, of a number of matters, including Mr Chim's true role, which were material and relevant to their decision whether to approve it or not. The SFC also contend that the evidence shows that during the same period Mr Chim was heavily involved in negotiations for the sale of the whole of Fairmount Terrace. Such a sale was announced on 24th February 1993. In November 1992 the Company sold half of Fairmount Terrace for $120 million. In early 1993 Lucky Man sold the whole of it for $350 million. (Section D hereafter)

(2) Mr Chim's use of the proceeds of the sale Markle Land to acquire a substantial portion of rights issue shares offered by Lucky Man. The purported purpose of the Lucky Man rights issue was to raise funds to buy Markle Land. This is referred to in the Petition as the "Circular Flow of Funds". The complaint being that Mr Chim's shareholding and control of Lucky Man increased as a result. Thus, it is contended, as Markle Land was purchased very cheaply so Mr Chim's benefit by that transaction was correspondingly the greater. (Section E)

(3) "Idmiston"

7. Silver Mountain Investments Limited ("Silver Mountain") was a company wholly owned by Mr Chim. He has never disputed this. In effect, it was his personal bank. In October 1991, at a time before Mr Chim had become the majority shareholder of the Company but after he was in de facto control of the Company, the Company sold a wholly owned subsidiary, named Idmiston Limited ("Idmiston") to a company called Great Prospect Limited for $20 million. It is the SFC's case that not only was Mr Chim in de facto control of the Company at the time but also the shareholders and directors of Great Prospect were his close associates who did whatever was asked of them by Mr Chim. Soon after the sale to Great Prospect, $18 million was returned to Silver Mountain. (Section I)

(4) The fourth main complaint concerns a sale of 4.5 million Lucky Man shares by a Mr Sun Ying Chung to the Company. It is said that Mr Sun was a mere nominee of Mr Chim's and that the true outcome of this transaction was a secret profit to Mr Chim of slightly under $19 million. (Section F)

8. The SFC has investigated a number of other related matters which also form part of the complaints set out in the Petition. Those to which this judgment will refer, evidence having been given on each, are listed here by heading only :-

(5) The roles of Thai Yuen Investments Limited ("Thai Yuen") and Janyee Investments Limited ("Janyee"). It is alleged that Mr Chim concealed his true control of Lucky Man by, inter alia, transferring 15.1 million Lucky Man shares to these companies in June 1992 through Day & Day and by these companies transferring 12 million Lucky Man shares to 199 fictitious shareholders in March 1993. (Sections D and J)

(6) The proposed acquisition of Silver Mountain by Lucky Man in February 1993. (Section K)

(7) The payment of a $4 million "fee" to a company called Time Deco 1991 S.A. in December 1993. It is alleged that the reality of this payment was that it was a payment to Mr Chim. (Section L)

(8) An investment by the Company of $17 million in Golden Harvest Enterprise Limited in November 1992. (Section H)

(9) An acquisition by the Company of a 50% interest in Maxview Enterprises Limited in November 1992. (Section G)

(10) The abortive EGM in July 1996. (Section M)

(11) The "Traskey offer" in July 1996, which was an offer to the minority shareholders of the Company for their shares. (Section N)

9. It is the SFC's contention that the evidence relating to the four main transactions is sufficient to establish a proven case against Mr Chim justifying the relief they seek. Items 5 to 11 and others provide, they say, additional relevant and admissible evidence of Mr Chim's clear disregard of the interests of the Company's minority shareholders. The overall picture is one of a clear pattern of unfairly prejudicial conduct including repeated breaches of the Take Over and Merger Code, the Listing Rules of the Stock Exchange of Hong Kong and the relevant Securities Ordinances. They say there is a lengthy and continuing pattern of unacceptable conduct by Mr Chim who has repeatedly ignored principles of corporate behaviour, fairness to minority shareholders and openness to the regulators which continued both after the presentation of the Petition in June 1996 and also after the subsequent appointment of the Provisional Liquidators.

The Law

10. This Petition has been brought under sections 37A and 45 of the Securities and Futures Commission Ordinance, Cap 24 (" the Ordinance"). In this section, I will firstly deal briefly with the ingredients of those sections and matters arising therefrom, and secondly, with the representations made by the 2nd Respondent ("Mr Chim") on numerous occasions both at pre-trial hearings and during the trial in relation to matters of law. Finally, I will refer to the issue of shadow directors.

(1) Sections 37A and 45 of the Ordinance

(a) Section 37A

11. If the court is satisfied on the evidence that a company's affairs are being or have been conducted in a manner unfairly prejudicial to the interest of its members generally, whether by virtue of an isolated act or a series of acts, it is given, by s.37A(2) wide powers as follows :-

"It may :

(a) make an order restraining the commission of the act or conduct;

(b) order that such proceedings as it may think fit shall be brought in the name of the company against the persons, and on the terms, that it orders;

(c) appoint a receiver or manager of the whole or a part of the company's property or business and may specify the powers and duties of the receiver or manager and fix his remuneration;

(d) make any other order it thinks fit, whether for regulating the conduct of the company's affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of a purchase by the company, for the reduction accordingly of the company's capital, or otherwise."

12. Almost identical provisions appear in section 168A of the Companies Ordinance, Cap 32 (which in turn is taken almost verbatim from the U.K. legislation at section 459 of the 1985 Companies Act). The only difference is that the Companies Ordinance enables members of the company to present the petition, the Ordinance enables the SFC to present the petition.

13. Section 37A(1) simply sets out the circumstances in which the SFC may present a petition and section 37A(2) states what the court must be satisfied about before it considers what relief, if any, to grant. Four ingredients must be proved. Firstly, it must concern the conduct of the company's affairs, regardless of whether the conduct is one act, past, present or proposed, or a series of acts, past, present or proposed. Secondly, the conduct must be prejudicial to the company's members or part of them. Thirdly, the prejudice must be unfair prejudice and fourthly, the unfair prejudicial conduct must affect the members' interests. I will enlarge briefly on each ingredient.

(i) "The affairs of the company have been or are being conducted in a manner ..."

14. The expression "the affairs of the company" is to be given a wide interpretation. It would include, for example, its contracts with outside parties, the whole of its internal arrangement and its dealings with its shareholders. This very wide range of conduct could be conduct which had already taken place, regardless of whether it had been remedied, conduct which was continuing at the time of the petition and/or the hearing of the petition and conduct which was proposed in the future. The complaint or complaints in the petition can look both backwards and forwards. In Re Kenyon Swansea Ltd [1987] BCLC 514 per Vinelott J :-

"... It is in my judgment sufficient to found a petition that an act has been proposed which if carried out or completed would be prejudicial to the interests of the petitioner. Similarly, to found a petition it is sufficient that the affairs of the company have in the past been conducted in a way which was unfairly prejudicial to the petitioner even though at the date of the petition the unfairness has been remedied."

(ii) "Unfairness"

15. The concept of unfairness is fundamental to the wide interpretation that is given to s.37(A). The test of what is unfair is an objective test but that does not mean that the court should have no regard for any improper motives held by those in control of the company. Peter Gibson J so stated in Re D.R. Chemicals Ltd (1989) 5 BCC 39 :-

"... I do not doubt that if the objective bystander observes unfairly prejudicial conduct by a respondent the fact that the respondent had a proper purpose and a proper motive will not prevent that conduct from falling within the section. But if the objective bystander observes that the conduct of the respondent was for an improper purpose or with an improper motive, that may well be a relevant consideration in determining whether the conduct is unfairly prejudicial."

16. In the same case the learned judge summarized the test by stating that it was an objective test of unfairness, not of unlawfulness and that it was not necessary to prove bad faith or to prove a conscious intention to act in an unfairly prejudicial way. Hoffman LJ added a useful rider to the notion of the objective bystander in Re Saul D. Harrison and Sons plc [1995] 1 BCLC 17 :-

"... In explaining how the court sets about deciding what is fair in the context of company management, I do not think that it helps a great deal to add the reasonable company watcher to the already substantial cast of imaginary characters which the law uses to personify its standards of justice in different situations. An appeal to the views of an imaginary third party makes the concept seem more vague than it really is. It is more useful to examine the factors which the law actually takes into account in setting the standard."

(iii) Prejudice

17. The conduct complained of must be both prejudicial and unfairly prejudicial. The concept of prejudice is proved if the value of a minority shareholder's shareholding has been seriously diminished or at least seriously jeopardized. These words are taken from the judgment of Slade J in Re Bovey Hotel Ventures Limited as quoted by Nourse J in Re R.A. Noble Clothing Limited [1983] BCLC 290.

(iv) The interests of the member

18. A member may have many interests in the company of which he is a shareholder. Usually that interest will be financial. If he cannot get a fair price for his shares, then clearly his interests have been adversely affected.

19. In reality, the ingredients of "unfairness", "prejudice" and the member's "interests" should be considered together. At the end of the day the court must carry out a balancing act between ordinary incompetence which would not warrant intervention and serious mismanagement which would. Section 37A does not provide a remedy against poor commercial judgment by the company but is appropriate where there has been a "visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely" (from the Jenkins Committee Report 1962).

20. In conclusion, on the subject of section 37(A) Mr Heslop described the case of Re Saul D. Harrison and Sons plc (supra) as "the most authoritative case in the U.K.". Neill LJ sets down guidelines as to the correct approach to the concept of unfair prejudice. Those of particular application to the Petition before this court can be summarized as follows :-

" (1) The words 'unfairly prejudicial' are general words and they should be applied flexibly to meet the circumstances of the particular case.

...

(4) The conduct must be both prejudicial (in the sense of causing prejudice or harm to the relevant interest) and also unfairly so : conduct may be unfair without being prejudicial or prejudicial without being unfair, and it is not sufficient if the conduct satisfies only one of these tests ..."

(it is the Petitioner's case that Mr Chim's conduct is plainly both)

" (5) In construing the word 'unfairly' in this context it will be necessary to take account not only of the legal rights of the petitioner, but also consider whether there are any equitable considerations such as the petitioner's legitimate expectations to be weighed in the balance.

...

(8) Though it is open to the court to find that serious mismanagement of a company's business constitutes conduct that is unfairly prejudicial to the interests of the shareholders the court will normally be very reluctant to accept that managerial decisions can amount to unfairly prejudicial conduct ...

(9) A shareholder can legitimately complain, however, if the directors exceed the powers vested in them or exercise their powers for some illegitimate or ulterior purpose.

(10) Though in general members of a company have no legitimate expectations going beyond the legal rights conferred on them by the constitution of the company, additional legitimate expectations may be superimposed in certain circumstances."

21. Mr Heslop added a further principle which it is proper to apply, namely that the concept of unfair prejudice has an elastic quality which the court should utilize to mould it to the facts of the particular case.

22. Mr Heslop finally submitted that this case is not one where the matters complained of could be described as borderline issues in which the above guidelines have to be carefully applied before deciding whether unfair prejudice has been established or not. The Petitioner's case is that in each of the matters complained of, of which there are four primary ones and a number of lesser ones, three features consistently appear. Those three features, he contends, taken together, should leave the court in no doubt that the affairs of the Company have plainly been conducted in a manner unfairly prejudicial to the interests of the members. Those three features are firstly, persistent breaches of the fiduciary duties which the de jure directors of the Company owe to the Company; secondly, a consistent pattern of conduct which results in Mr Chim and his interests being benefited at the expense of the Company and its minority shareholders and thirdly, a failure to run the Company according to law, according to the regulatory requirements and according to acceptable standards of commercial behaviour.

(b) Section 45

23. Section 45 provides for the winding-up of a company by an order of the court. Section 45(1) enables the SFC to present a petition to the court that a company be wound up on the ground that it is just and equitable to do so if it is of the opinion that it is in the public interest.

24. Section 45(2) provides the court with the power to wind-up once a petition has been presented under section 45(1). The fact that the SFC came to the conclusion that it would be in the public interest to apply to wind-up a company on just and equitable grounds is not a material factor which the court will take into account when deciding to use its powers under section 45(2). The court will only make an order if it is satisfied by the evidence before it and not on the material which the SFC considered, that it is expedient in the public interest to make a winding-up order on just and equitable grounds.

25. Possibly, the most comprehensive judgment of the court's task in public interest petitions is that of Lord Nicholls of Birkenhead (as he now is) in Re Walter L. Jacob & Co. Ltd. (1989) 5 BCC, in particular where he says at p.251 :-

"The Court's task .... is to carry out the balancing exercise described above having regard to all the circumstances as disclosed by the totality of the evidence before the court .... Thus where the reasons put forward by the petitioner are founded on considerations of public interest, the court, if it is to discharge its obligation to carry out the balancing exercise, must itself evaluate those reasons to the extent necessary for it to form a view on whether they do afford sufficient reason for making a winding up order in a particular case."

26. The balancing act to which he refers is between the possibly conflicting interests and wishes of the petitioner and those of the independent minority and the investing public as a whole.

27. What matters are relevant to the public interest? Mr Heslop submits the court should consider the following :-

(i) Has Mr Chim been more concerned, or even exclusively concerned, with his own interests at the expense of the interests of independent minority shareholders of the Company? Have the affairs of the Company been mismanaged to this end?

(ii) How long have the independent minority shareholders been prevented from dealing in their shares because of the suspension of trading?

(iii) Have Mr Chim and his associates, and if so how often, breached the listing rules of the SEHK, the Hong Kong Code on Takeovers and Mergers, the Securities (Disclosures of Interests) Ordinance and the Companies Ordinance?

(iv) Have Mr Chim and his associates tried to mislead the SFC in the course of its investigation into the conduct of the Company's affairs?

(v) Has the conduct of Mr Chim's affairs under his control fallen short of the high standard of probity, integrity and competence, expected of him?

All these questions are indeed matters to which the court should have regard.

28. In this particular case, in almost all respects, the complaints made in the Petition are of equal relevance and materiality to the court's tasks under both section 37A and section 45(2). I say "in almost all respects" because the reports from the provisional liquidator do not assist the court in deciding whether the interests of minority shareholders have been unfairly prejudiced under section 37A but they clearly do assist the court and should be taken into account when deciding whether to make an order under section 45(2). Nicholls LJ in Re Walter L. Jacob & Co. Ltd. dealt with this point also (the judge at first instance having declined to consider the provisional liquidators' reports) :-

"In my view the judge fell into error in so ruling. I can see no basis on which, in the exercise of his discretion in this case, he could properly have refused to see the reports in question. No doubt the contents of a report made by an official receiver acting as provisional liquidator, or the contents of a report made by a special manager appointed by the court, may assist one or other of the parties to a winding-up petition. In my view, far from that being a reason for the court not receiving those reports, it is a reason why the court should admit them. Particularly is this so in a case where the foundation of the petition is that it is in the public interest that the company should be wounded up."

(2) Matters of law raised by Mr Chim

29. On several occasions prior to trial (which it is unnecessary to recite herein), Mr Chim has sought directions from the court. Where appropriate the court has given pre-trial directions. More often than not Mr Chim has appealed the court's directions and the Court of Appeal has given its rulings. With regard to three issues, the court's ruling has been that the matter was not an appropriate matter to give a pre-trial ruling upon but that it would be dealt with as an issue at trial. I now turn to each of those matters in turn.

(a) Mr Chim's contention that section 29A and section 37A of the Ordinance cannot have retrospective effect

30. These sections were introduced into the law of Hong Kong in 1994. The purpose of introducing section 37A into the law of Hong Kong was to enable the SFC to present a petition. It added the SFC to the list of those persons or bodies who could be the Petitioner. In this case the SFC is the Petitioner. Prior to 1994, any person or company was still at risk of having a petition presented against them. Precisely the same wording is to be found in section 168A of the Companies Ordinance which enables any member of the Company or the Financial Secretary to present a petition. Mr Chim's obligation not to unfairly prejudice the minority shareholders pre-existed section 37A and was not created by it. This is the first and only test to be applied here. At the time the Company was being conducted in the manner complained of by the SFC, Mr Chim was subject to the same legal restrictions as are contained in the 1994 legislation and thus the question of its retrospective effect does not arise. Lord Brightman made the point in Yew Bon Tew v. Kenderaan Bas Mara [1983] AC 563 where he stated :-

" Their Lordships consider that the proper approach to the construction of the Act of 1974 is not to decide what label to apply to it, procedural or otherwise, but to see whether the statute, if applied retrospectively to a particular type of case, would impair existing rights and obligations. ..."

He was here amplifying what he had said earlier at p.558 :-

"... There is at common law a prima facie rule of construction that a statute should not be interpreted retrospectively so as to impair an existing right or obligation unless that result is unavoidable on the language used. A statute is retrospective if it takes away or impairs a vested right acquired under existing laws, or creates a new obligation, or imposes a new duty, or attaches a new disability, in regard to events already past. ..."

31. For the sake of completeness, there is a second reason why Mr Chim's contention that section 37A cannot found any jurisdiction for pre-1994 matters must fail and that is because the wording of section 37A expressly provides for such a situation. The words "are being or have been conducted ..." are included in the section. It is the SFC's case that both at the date of the Petition in 1996 and thereafter, Mr Chim's conduct of the affairs of the Company fell within the section. The relief they seek is, in part, repayment of profits held by him, as constructive trustee for the Company, arising out of his wrongful conduct of the Company's affairs which "had been" committed prior to 1994 and "was being" still committed at the time of the Petition and are continuing thereafter.

32. Turning to section 29A, Mr Chim's argument must again fail. The simple reason being that the reference to section 29A appears in section 37A(1) but does not appear in section 37A(2).

33. Section 29A gives the SFC power to seize documents. The SFC, under section 37A(1), has to form an opinion about the manner in which the Company's affairs have been conducted before it may present its petition. That opinion is formed on the basis of the information obtained under section 29A. The court however, under section 37A(2) is confined to considering all the evidence presented before it. If Mr Chim had any argument about the application of section 29A, it would have been by way of judicial review at the time the SFC was gathering information and forming its opinion on that information which resulted in the presentation of the Petition.

34. It seems to this court that even if Mr Chim had argued at the appropriate time that the SFC had exceeded its powers by invoking section 29A to allow it to gather information about matters prior to the enactment of 1994, his argument would have surely failed for the same reason referred to above in relation to section 37A, namely the wording of the provision. In section 29A(1) similar expressions are used :-

"(1) Where -

(a) it appears to the commission that there are circumstances suggesting that the business of a company which is or was at the relevant time a listed company has been or is being conducted ..."

35. It is plain that the SFC acted within its powers. Both these matters were considered by Rogers J (as he then was) in a pre-trial hearing in 1996. Although he decided that the issues should be determined by the trial judge (which they now have been), his provisional view was that Mr Chim's arguments were "likely to fail". He gave considered reasons for this observation with which I agree and have enlarged upon above.

36. More recently, in May 1999, Mr Chim sought a direction from the court that the SFC had failed to comply with s.29(7) of the Ordinance and that as a result documents produced by the SFC were inadmissible. I will deal with this point very briefly. Sections 29(6) and (7) concern the recording of explanations or the taking of statements from witnesses. No criticism is made that these sections were not properly adhered to when witnesses were interviewed. They have no relevance to the admissibility of documents.

(b) Mr Chim's contention that only matters prior to the date of the Petition (25th June 1996) can be considered by the court

37. The SFC in carrying out its continuing investigation into the affairs of the Company seeks to rely on two matters which have occurred since the presentation of the Petition. Its investigations have not been confined to these two matters, but for reasons of expediency and practicality it is only these two upon which they seek to rely. The two matters are referred to later in this judgment as the "Traskey offer" and the "abortive attempt to convene an EGM". There is nothing in the particular facts of these issues which is relevant to whether or not they can form part of the Petitioner's case.

38. As already stated, the SFC claim that the wrongful mismanagement of the Company by Mr Chim has been a continuing state of affairs. To disallow amendments which specifically deal with complaints that have emerged after June 1996 would in effect, deny them the opportunity of particularising part of their claim, namely that the unfair prejudice to the minority shareholders persists. Also, that new reasons that it would be just and equitable to wind up the Company have emerged, post June 1996.

39. I can see no reason why these claims should be excluded from the court's attention. In any event, the application to make the amendment was made to Rogers J in March 1997 and he, in the exercise of his discretion, allowed it. It would not be appropriate for this court to interfere with that discretion. The Ordinance governing these proceedings does not prevent such amendments and the rules and practice of the court make provisions for such amendments to be granted. In this particular instance, the amendments sought increase the particular heads of claim, they do not seek to plead new causes of action.

(c) Mr Chim's contention that the Petition should be confined to matters relating to the Company only (and thus excluding all matters relating to Lucky Man) and also confined to the so-called "4 main" transactions (thus excluding all other transactions)

40. This point has been argued at a number of previous hearings in this case. It was argued at length by the 1st Respondent in a "strike out" application heard by Rogers J in December 1996. It has since been raised on appeal against Rogers J's decision and at directions hearings and on appeal from directions made.

41. Now that all the evidence has been heard and final submissions on law have been made at trial, I make this ruling.

42. In the "strike out" judgment delivered by Rogers J on 7th January 1997 he described the point, when dealing with particular paragraphs in the Petition, at different times in the judgment, as myopic, blinkered and untenable. I agree.

43. Mr Chim's involvement in Lucky Man, as alleged by the Petitioner, is at the very heart of the complaints made. To examine the activities of the Company in isolation would be senseless and illogical. The complaints include a recurring pattern of Mr Chim being, in truth, on both sides of given transactions, albeit in a disguised form on one of the sides.

44. In this context, dealing briefly with each of the "4 main" transactions :-

(i) The Markle Land sale

45. The involvement of Lucky Man is plainly relevant and admissible in this issue because the Petitioner claims that Mr Chim owned and controlled Lucky Man at the time that the Company sold Markle Land to it. It is said that Mr Chim sold Markle Land at an undervalue and was also the beneficiary of that undervalue, as the purchaser. In the context of the complaint the two sides to the transaction cannot be separated.

(ii) The circular flow of funds

46. It is alleged that Mr Chim was behind a scheme whereby the money which funded the purchase of Markle Land by Lucky Man was passed by the Company to Silver Mountain, a company wholly owned by Mr Chim, which in turn used that money to fund the purchase of shares in the Lucky Man rights issue. Thus the Company lost the benefits of the proceeds of sale and Mr Chim increased his shareholding in the purchasing company, Lucky Man. To investigate a circle properly, the whole circle must be examined, not just part of it.

(iii) Idmiston

47. Idmiston, a wholly owned subsidiary of the Company, was sold to Great Prospect for $20 million. Again, it is alleged that Mr Chim features on both sides of this deal. It is alleged that, wrongly, $18 million was later refunded to Great Prospect. Being the true controller of Great Prospect, as alleged, Mr Chim therefore gained control of Idmiston which enabled him to further increase his shareholding in Lucky Man. Again, the roles played by these and other companies in the Idmiston issue are inextricably inter-related and their conduct simply cannot be considered in isolation.

(iv) Sale of 4.5 million Lucky Man shares to the Company

48. Again, because of Mr Chim's alleged disguised involvement in Lucky Man, the Petitioner claims that Mr Chim made a secret profit of over $18 million by this sale.

49. To continue the point by reference to other transactions properly pleaded in the Petition would be to labour it. Once it is established that Mr Chim's involvement in Lucky Man was the crucial starting point whereby he allegedly made profit for himself, the method by which he realized that profit in later transactions when Lucky Man shares were sold to other companies in 1993 and 1995 must, by the same token properly fall within the Petitioner's case.

(3) Shadow directors

50. Under this heading I not only outline the principles of law relating to the question of shadow directors but I also set the scene for the remainder of the judgment by setting out my finding based on all the evidence in relation to it.

51. In paragraph 37 of the Petition it is contended that Mr Chim was a shadow director of the Company prior to his appointment as a de jure director on 24th January 1994. It is sufficient simply to outline the principles of what a shadow director is. Whether or not the SFC has proved that Mr Chim was a shadow director is a question of fact. It is an important but not vital limb to their case.

52. In order to prove that he was, at the material time, a shadow director, the evidence must show firstly, that he was neither a de jure nor a de facto director; secondly, that he in fact directed the actual directors how to act in relation to the Company's affairs; and thirdly, that all the actual directors did in fact so act and were accustomed so to do, not just on one occasion but as a matter of course.

53. There is a sharp distinction to be drawn between a shadow director and a de facto director. It is impossible to be both and there is no grey area between the two. A de facto director holds himself out as a director, albeit not validly appointed, of the company. He claims to be and acts as a director. A shadow director claims not to be and holds himself out as not being a director when in truth he is pulling the strings behind the scene. In general terms these are the principles as set out by Millet J in Re Hydrodan (Corby) Ltd. [1994] BCC 163.

54. For reasons which emerge more fully later in this judgment, it is convenient to state at this stage that I am satisfied that the Petitioner has proved that at all material times Mr Chim was a shadow director of the Company and of Lucky Man. More specifically I find that Mr Chim was a shadow director of the Company from a date in May 1991 when James Lee Cheung Keung and Mr Tsui Yiu Wah were formally appointed to the board. His involvement in the Company became more transparent from 12th November 1991 when, through Rich World, he acquired 51% of the issued share capital of the Company. I also find Mr Chim a shadow director of Lucky Man from 26th October 1991 when Mr Nelson Chan Kai Fung was formally appointed to the Lucky Man board. As a shadow director, it was he who was behind Day & Day's acquisition of two-thirds of Lucky Man's issued share capital on 18th December 1991.

55. The facts speak for themselves. The evidence shows that none of the validly appointed directors brought any independent thought to the decision-making of the Company. Mr Chim was the puppet master. Mr Chim emphasized as part of his case that it was not unusual in Hong Kong to have family members or long standing associates or even junior member of staff on the board of directors. That may be so but it is not the point. The point is that where, as in this case, the Board of Directors were in fact family members, lowly staff and old associates and they acted on another person's instructions as described above in Re Hydrodan (Corby) Ltd., which, I am satisfied they did, then there can be no doubt that they were the puppets and Mr Chim was the puppet master. On the overall facts of this case, to find otherwise would fly in the face of common sense and the evidence. The Board was approving what Mr Chim wanted them to approve regardless of whether it involved breaches of fiduciary duty or the misleading of the minority shareholders or any other matters not in the interests of the Company.

The structure of the judgment

56. I will now move on to a review of the evidence. I will attempt to review the evidence and consider the submissions made thereon in all of the many issues and transactions about which the court has heard. On each issue, whenever the evidence permits it will make specific findings of fact. At the end of that task I will consider the cumulative effect of the totality of the findings I will have made and decide whether or not the Petitioner's case under both section 37A and section 45 has been made out.

57. It would be neither helpful nor appropriate to recite every piece of evidence or even major portions of it. Such an approach would result in an unwieldy and tedious judgment of inordinate length. The trial documents, experts reports, authorities, the transcript and so on amount to over 80 arch files, many of which contain over 600 pages of documents each (although it should be noted that there has been unnecessary repetition of photocopying. There are many instances of the same document or documents, sometimes very lengthy documents, appearing at two or more places in the trial bundles).

58. I shall refer to such parts of the evidence as is necessary to justify and explain either the making of a finding of fact or the failure to make a finding.

59. The Petitioner's evidence is contained primarily in the numerous documents and the lengthy experts reports from Mr Michael Grimsdick. There were other short witnesses as to fact who I shall refer to later in the judgment. Mr Grimsdick was the key witness. As part of his defence, Mr Chim did not mince his words in his criticism of Mr Grimsdick. He submitted he was only an accountant and not qualified to give expert evidence on many of the issues to which his reports and his evidence related. He submitted he was not an independent expert. He claimed also that his evidence was tailored to support the Petitioner's case because of the fee he was receiving. Even though much of Mr Chim's criticism was offensive and duly censured by the court at the time, I nonetheless considered it when coming to the conclusion that Mr Grimsdick was an independent expert witness of the highest calibre and integrity. His professional qualifications and his previous experience as an expert witness in cases involving highly complex financial issues made him a witness well equipped and qualified to give evidence on all those matters he addressed in his reports and upon whose evidence the court has attached considerable weight.

60. In many instances a finding results from the drawing of an inference or inferences. Proof by inference is common place. The SFC rely heavily on it in this litigation. They seek to prove that the true role played by Mr Chim and real control of the Companies in any particular transaction in issue is other than that contended by Mr Chim himself and other than might appear on the face of the documents. The drawing of an inference requires the application of common sense to a given set of proven or uncontested facts. If those facts lead the court to conclude that another fact must plainly and obviously also be the truth, then it would be wrong not to draw the inference and elevate it to the status of a proven fact. This approach is akin to the way in which inferences may be drawn in criminal proceedings. It is also the approach I have adopted in this case. I have only drawn inferences where the facts are such that no other inference could fairly be drawn.

61. Both parties' openings, the evidence and the closing submissions have followed a similar pattern in the sense that the same issues have been separately addressed, albeit sometimes in a different order. I will use the same headings but bear in mind that many of the issues, particularly the four "main transactions" are very much inter-related and have as their common theme the core issue, namely, Mr Chim's allegedly disguised role and concealed control.

62. I will review with varying degrees of brevity the following 15 issues :

A. Mr Chim's control of Mandarin

B. Mr Chim's control of Lucky Man

C. The transfer of 15.1 million Lucky Man shares to Janyee and Thai Yuen

D. The Markle Land sale

E. The circular flow of funds

F. The sale of 4.5 million Lucky Man shares

G. Maxview

H. Golden Harvest

I. Idmiston

J. Transfer of 12 million Lucky Man shares to 199 fictitious shareholders

K. The proposed acquisition of Silver Mountain by Lucky Man

L. Payment to Time Deco 1991 SA of $4 million for "consultancy services"

M. The abortive EGM in July 1996

N. The "Traskey Offer"

O. The Provisional Liquidators' Reports

63. For ease of reference I also list some of the more important individuals who will be referred to. Some of the "descriptions" include not only matters of fact but also findings which flow from the evaluation of the evidence which follows.

A. Mr Chim's control of Mandarin

64. In early 1991 Mandarin was, and had been for some time, in disarray. The reason for this was its involvement in the protracted litigation with Lucky Man concerning the acquisition by Lucky Man of Markle Land in 1985.

65. There can be no doubt that Mr Chim had taken an interest in this litigation, observed its progress and saw for himself an opportunity. His activities in relation to the Company's affairs prior to his acquisition through "Rich World" of a 51% share holding in November 1991 reveal compelling evidence that as early as 10th May 1991 he was controlling the Company and that he very probably had a secret long term agenda.

66. Mr Chim had both money and people at his fingertips and during this period he used both to his advantage :-

1. Control through money

(a) Loans

67. Prior to November 1991, Mr Chim made large loans to the Company. They were interest free and unsecured. In May and June 1991 he made five separate advances totalling $15.5 million. Between July and October there were eight cash deposits totalling $8.15 million. Mr Chim's apparent explanation for these loans was that he was helping out a company in financial difficulties which needed professional assistance does not bear scrutiny. The mere fact of the size of the loans and that they were interest free and unsecured marks them as part of a long term plan rather than short term charity.

(b) Legal fees

68. Mr Chim gave a personal guarantee for the payment of $30 million in legal fees due from the Company to their lawyers, Hampton, Winter & Glynn. This was payable on or before 6th June 1991 and mainly related to the continued funding of the ongoing High Court litigation between the Company and Lucky Man. The outcome to the litigation, which Mr Chim wanted, was achieved by settlement, in October 1991 with the return of Markle Land to the Company.

(c) Malcolm Stone

69. On 10th May 1991, two directors of the Company resigned. Mr Malcolm Stone was one of the two remaining directors (the other one, a Mr Shaw resigned in September 1991). On the same day the Company entered into an agreement with Mr Stone to pay him a "consultancy fee" of $12 million plus $10,000 a month. In spite of the Company's precarious finances, the fee was duly paid. Mr Stone then resigned as a director on the day before the completion of the Markle Land sale to Lucky Man at undervalue. It was a huge fee for six months as a director. Mr Chim seeks to explain the date of his resignation as a coincidence. The inference that it was not a coincidence is irresistible. I am satisfied on the evidence that Mr Chim was the effective paymaster of Mr Stone's fee and he thereby retained on the board a director who would carry out his instructions concerning his planned sale of Markle Land. Mr Grimsdick's evidence on this is as follows :

"This fee appears to be an extraordinarily large payment to a director, given the relatively limited scope of Mandarin's activities. Furthermore, its audited accounts reflected a loss for the year of approximately HK$23 million and a deficiency of assets of approximately HK$13 million. ... Malcolm Stone resigned the day before the Markle disposal was completed but following all the appropriate approvals having been obtained. ..."

2. Control through other people

70. Mr Chim's control through Mr Malcolm Stone as described above is only one such example, others include :

(a) The reconstitution of the Board on 10th May

71. In addition to the retention of Mr Stone as Managing Director, other new directors were appointed. They were Francis Chaine as Chairman and James Lee and Tsui Yiu Wah as directors. As will be seen later in this judgment, I make an unequivocal finding that James Lee was at all material times Mr Chim's nominee. This is in particular with reference to the purported sale of Day & Day to James Lee. Mr Tsui Yiu Wah was an employee of Mr Chim's and whose salary was paid from the Silver Mountain account. He was paid approximately $350,000 in 1991 and $700,000 in 1992 before emigrating to Canada where he has remained and been unavailable for interview. As to Mr Chaine's appointment, Mr Chim stated he could have had no control over him because he was a respected lawyer. There has been no challenge to his legal qualification. He was also Day & Day's solicitor. His offices were in the HMD Building and he was the uncle of Gordon Chan, an associate of Mr Chim. He did not give evidence as it has not been possible to evaluate his independence or otherwise.

72. Of these appointments, Mr Chim when being cross-examined agreed that he had recommended these people to Mr Stone as new directors but, he emphasized, he did not appoint them, it was Mr Stone who appointed them. It is obvious that these appointments were mere formalities, approved by Mr Stone as part of his $12 million fee. Mr Chim's attempt to distance himself from any involvement in them is simply unacceptable.

(b) The appointment of Kailun Lee

73. Mr Kailun Lee was an architect. In early May 1991 he was engaged by James Lee, the Company's new director, to make enquiries with the District Lands Office ("DLO") about the plot ratio at Fairmount Terrace. Fundamental to the court's findings in respect of this appointment and the work done by Kailun Lee is the finding, to which I have already referred and upon which in due course I shall elaborate, that James Lee was Mr Chim's nominee. Before dealing with what Kailun Lee did, there is ample evidence that his fee of $300,000 was paid by Mr Chim.

74. At the time of his appointment, the Company had no legal interest in Fairmount Terrace. However James Lee accepted Kailun Lee's fee "on behalf of our client - Mandarin and Lucky Man Properties Ltd.". This letter was copied to Mr Chim. After his appointment, Kailun Lee entered into correspondence with the DLO. The purpose was to see what prospects there were to increase the plot ratio of Fairmount Terrace and therefore increase its redevelopment potential. A review of the correspondence is not necessary in the context. Ultimately the plot ratio was increased to 3:1. The point is that the evidence clearly reveals that Mr Chim was instrumental in the appointment of Kailun Lee. At a time when he had no ostensible interest in Fairmount Terrace, he embarked on a course of action designed to increase its value. When the Company did regain ownership of half of Fairmount Terrace, Markle Land, and when the Company later sought the shareholders' approval to sell it to Lucky Man, Mr Chim was fully aware of the work done and progress made by Kailun Lee, but the shareholders were not. These matters are more fully considered under the heading of the sale of Markle Land. It is sufficient at this stage to find, which I do, that Kailun Lee to all intents and purposes was appointed by and instructed by Mr Chim.

(c) Before leaving the issue of Mr Chim's effective control of the Company prior to November 1991, two relatively minor matters are worthy of note. Firstly, on 1st August 1991 the Company moved its registered office to the 11th floor of HMD Building in Central. The property was owned by Silver Mountain. Secondly, there is evidence that on a number of occasions, Mr Chim was behind arrangements that were in fact in place before the documents might suggest. One early example is the fact that the Company's financial advisers, Somerley, were seeking payment of fees by letter addressed to Mr Tsui Yiu Wah even before he had been made a director of the Company, namely, at a time when he was solely in Mr Chim's employ.

B. Mr Chim's control of Lucky Man

75. The issue concerning Mr Chim's control of Lucky Man centres around his ownership and control of Day & Day. On 18th December 1991, Day & Day acquired a controlling stake (66%) in Lucky Man by purchasing 32,528,016 issued shares in Lucky Man at $1.00 each from the liquidators of Asiatic Fortune, Asian Master and Crownhall. It is not in dispute that Day & Day was wholly owned by Mr Chim and that he owned it when it acquired control of Lucky Man. In fact Mr Chim paid for the 32 million (plus) shares from his Silver Mountain account.

76. In the overall scheme of things, it was necessary for Mr Chim to appear to dispose of his interest in Lucky Man whilst, in reality, remaining in charge. The method he employed to achieve this was to enter into a sale of Day & Day to James Lee which was in fact a sham. James Lee had become a director of Mandarin on 10th May 1991. He resigned on 18th June 1992 when he became chairman of Lucky Man. He was Mr Chim's nominee in every position he held. There is an abundance of evidence which all points in the same direction, namely, that the sale of Day & Day to James Lee was on paper only. It was not a true disposal.

77. The purported disposal was publicly announced on 27th February 1992. It included the following statements :-

- On 27th February 1992, James Lee acquired from Mr Chim, Day & Day for $32,528,016.

- Day & Day "is now beneficially owned" by Lee.

- Dao Heng is satisfied that financial resources are available to Day & Day to satisfy full acceptance of the offer.

That the transaction was a sham and that the above statements are either false or misleading is proved to the courts' satisfaction by the following :-

(a) James Lee never paid for Day & Day. James Lee was interviewed twice by the SFC in relation to this matter. In his first interview in December 1993 he asserted unequivocally that he was the owner of the shares in Lucky Man held by Day & Day. It is Mr Chim's case that Mr Lee told the truth at this interview and thereafter only changed his evidence as a result of threats by the SFC. Mr Chim's allegation of threats were unfounded. They were mere assertions unsupported by any evidence.

78. In September 1994, James Lee was interviewed again in which he gave a wholly different account. He substantially confirmed his second account when giving evidence to the court. On the issue of his ownership of Day & Day, there was the following evidence :-

" Q: In your statement in paragraph 23 you say that the contents of the three letters are inaccurate and that the purchase of Day & Day was in name only by you, and that Mr Chim remains the beneficial owner and you have never paid Mr Chim any consideration for the transfer of Day & Day to your name?

A: Yes.

Q: Do you specifically confirm that evidence?

A: Yes.

Q: You then add that the three letters were prepared by Robert Lee?

A: Yes.

Q: And that you signed them in the circumstances explained in paragraph 23?

A: Yes.

Q: In paragraph 24 you say: 'Mr Chim did not give me the scrip of the Day & Day and Lucky Man shares then or ever'; is that correct?

A: Right."

79. He went on to explain that his instructions with regard to Lucky Man's affairs in fact came from Nelson Chan but he also accepted that there was no doubt that Mr Chim was Nelson Chan's boss. The three letters referred to in evidence were letters signed by James Lee on 27th and 29th February and 4th March 1992 as a result of the SFC's enquiries, in which he stated that he had made the purchase, he would continue with the general offer to the Lucky Man shares on the same terms as announced, he was not acting on Mr Chim's behalf and Mr Chim did not finance the acquisition.

80. The court is in no doubt that the true account is contained in James Lee's second statement and his evidence. Mr Chim on the other hand points to a loan note for $33 million dated 2nd March 1992 as evidence of payment. The Petitioner makes the undoubtedly correct assertion that this loan note was fictitious and created later by Mr Chim (in November 1993 after the SFC probe had begun) to give the appearance of payment. Mr Grimsdick's research on the loan note reveals that :

- It promised (dated 2nd March 1992) James Lee would pay Mr Chim $33 million in 18 months time.

- It made no reference to interest or security and was dated two days before James Lee's purported acquisition of Day & Day.

- No evidence exists that the loan was ever repaid by James Lee when it fell due.

James Lee's evidence about the loan note was as follows :-

" Q: That is a $33 million loan note, signed by you and bearing the date 2nd March 1992?

A: Yes.

Q: Over the page on page 2321, that is a $70 million loan note to Mr Cheang, bearing the date 18th November 1992 and signed by you; is that right?

A: Yes.

Q: In paragraph 52 of your evidence, you say that you had not seen the two loan notes before the meeting with Mr Chim, and the meeting with Mr Chim you have said took place in November 1993 with a view to approving a draft letter to be sent to the SFC, and you explain how Mr Chim put a line through the notes?

A: Yes.

Q: You say that the two loan notes were backdated?

A: At that time they were undated.

Q: I see. At the meeting are you saying that they were undated?

A: I think so.

Q: Does that mean you think the dates were added after you signed the two notes?

A: I do not know."

In his statement he had said :-

"... The loan notes were backdated. As far as I can recall, when I signed, there was no other signatures on the notes and right after I had signed, Chim signed in the left bottom corner of the $33 million note."

(b) In the third letter referred to above (dated 4th March 1992) James Lee apparently confirmed to Dao Heng Securities Limited that "The financing for the acquisition of Day & Day and the captioned offer will not be from Mr Chim". The "captioned offer" was the general offer by Day & Day for the Lucky Man issued shares. The regulators required an assurance that Day & Day had the funds to back up the offer. That assurance was contained in a fax dated 28th February 1992 from solicitors, M/s Jennifer Cheung & Co., confirming a deposit of $17 million in the name of Day & Day. $17 million was sufficient to fund the purchase of the remaining 16.3 million shares. Mr Grimsdick's research revealed that the money was paid by Silver Mountain on 27th February and repaid to them on 12th March. It was parked there for two weeks to satisfy the regulators. In fact it was even repaid before the expiration of the general offer on 30th March 1992.

(c) On the "acquisition" of Day & Day by James Lee, one would have expected him to have paid his share of the transfer stamp duty. In fact it was paid by Silver Mountain. It is a small sum but nonetheless another clear indication of who was organizing the transfer and for whose benefit it was being done.

(d) After the transfer of Day & Day, there can be no doubt that the two directors were in Mr Chim's pocket. One was James Lee, the other was Mr Ng Fung Tai. Mr Ng was a very junior employee of Mr Chim's and, like James Lee, his nominee on the board of Day & Day. In addition to these two directors, two more of Mr Chim's employees were signatories of the Day & Day bank account (Mr Tsui Yiu Wah and Nelson Chan) but were not officers of the Company at the time.

(e) Silver Mountain's funding of Day & Day affairs did not stop after the transfer. There were many more, some small some large. The more significant ones, which will feature again later in this judgment when the particular issues are being dealt with, include payment of stamp duty in relation to transfer of 15.1 million Lucky Man shares to Janyee and Thai Yuen (June 1992), payment of stamp duty relating to the transfer of 16.8 million (approx.) Lucky Man shares to Mr Cheang Teng Hou (August 1993), the funding of the Lucky Man rights issue and excess rights issue shares (November 1992).

(f) It is also worthy of note that on 20th April 1995 James Lee transferred the Day & Day shares back to Mr Chim for $2. This was not because of the reason advanced by Mr Chim (see below) but because, in truth, nothing had been transferred in the first place.

81. Before dealing briefly with Mr Chim's evidence in relation to his control of Lucky Man, it should be stressed that the above evidence is by no means the totality of the evidence which points to Mr Chim's control. In particular, apart from the mere funding referred to in paragraph (e) above, clear evidence emerges from "the Procurement agreement" (in Section D) and his ability to arrange the "circular flow of funds" (Section E).

82. How does Mr Chim explain the transfer of Day & Day to James Lee? He said in evidence :-

" In fact, in 1991, I, representing Day & Day, bought from the liquidator of Asian Master, Asiatic Fortune and Crownhall 32.5 million Lucky Man shares at a price of $1 each. As I had promised to give the shell of Lucky Man to James Lee, so I transferred all the Day & Day shares to him. James Lee did not keep his promise, that is, was not able to fulfil his agreement; that is, he did not put any asset into Lucky Man.

As a result, in June 1992, after informing James Lee, I took away 7.5 million Lucky Man shares, plus another 7.6 million Lucky Man shares, and I put these shares into Janyee and Thai Yuen.

When Day & Day made the general offer to the minority shareholders of Lucky Man, my personal company, my private company, Silver Mountain, helped by providing the money and convenience."

The difficulty for Mr Chim is that this "promise" or agreement was not in writing and had no specific terms. To say it was vague would be to flatter it. Mr Chim's evidence as to when the promise was made, what were its terms and what was meant by "the shell of Lucky Man" was evasive. In cross-examination he had to accept that, on his version, it was a vague understanding or silent agreement. What it might cost James Lee in due course was uncertain and it was conditional on James Lee injecting unspecified assets of an unspecified amount within an unspecified period. In truth, it was because no such agreement existed that Mr Chim was able to transfer 15.1 million Lucky Man shares owned by Day & Day to Janyee and Thai Yuen in June 1992 and another 16.8 million to Mr Cheang in August 1993 without reference to or consent from their "apparent" owner, Mr James Lee.

83. This section concludes with the court's clear finding on the evidence that Mr Chim's contention that James Lee's acquisition of Day & Day was a genuine arm's length transaction does not bear any close examination and is unsustainable. Mr Chim's true control of Lucky Man was the same after the transaction as it had been before. I will now go on to state the court's findings in relation to the transfer of the Lucky Man shares to Janyee and Thai Yuen.

C. The transfer of 15.1 million Lucky Man shares to Janyee and Thai Yuen

84. By mid 1992 Mr Chim had acquired control of the Company, disposed of Idmiston (which as shall be seen later was an integral part of the settlement of the High Court litigation which led to Mr Chim's control of both companies), pretended to dispose of Lucky Man and appointed Kailun Lee who successfully negotiated an increase of the plot ratio of Fairmount Terrace to 3:1.

85. In June 1992 another piece in the jig-saw was orchestrated, namely a transfer of 7.6 million Lucky Man shares held by Day & Day to a company called Thai Yuen and 7.5 million such shares to a company called Janyee. It is the Petitioner's case that these transfers were by Mr Chim when ostensibly he did not own the shares and that Janyee and Thai Yuen were at all material times beneficially owned by him. Both these propositions have been proved to the court's complete satisfaction.

86. In fact, in evidence Mr Chim accepted that the two directors of each company were his nominees. However, when asked about them by the Hong Kong Stock Exchange ("SEHK") in February and March 1993 he, through correspondence between Lucky Man and the SEHK had stated that the companies were beneficially owned by Mr Chung Moon and Mr Sun Tak Sing. Both these gentlemen were friends of Mr Chim's who when asked about their involvement in the companies substantially said the same thing, namely that they had little or no knowledge of the companies' affairs and were simply doing Mr Chim a favour as a trusted friend.

87. There is an abundance of further evidence, primarily from Mr Grimsdick, that the companies were beneficially owned by Mr Chim. For example :

(i) The companies were incorporated in Hong Kong in March 1992 (Janyee) and April 1992 (Thai Yuen). The incorporation and business registration fees were paid for by Silver Mountain.

(ii) Neither company had a bank account.

(iii) When they received their 7.5 million and 7.6 million Lucky Man shares, Silver Mountain paid the stamp duty.

(iv) All similar fees were also paid by Silver Mountain when, in March 1993, 12 million of the Lucky Man shares were transferred into the name of 199 fictitious shareholders (see section J).

(v) In the Lucky Man rights issue in November 1992 (see section E) Janyee and Thai Yuen were allotted shares costing just over $30 million (Thai Yuen) and just under $30 million (Janyee). Silver Mountain paid for them on their behalves.

(vi) Neither Janyee nor Thai Yuen ever repaid Silver Mountain for the purchase of the rights issue shares nor paid Day & Day the monies due to it.

(vii) By March 1993 each company had considerable assets in the shape of many millions of Lucky Man shares. It is not surprising therefore that when the companies' nominee directors, Mr Sun Tak Shing and Mr Chung Moon allotted 8 of the 10 shares to Mr Chim on 16th April 1993, they did so for a consideration of $8. So, for $8 Mr Chim acquired 80% of the companies' share capital. The companies' total assets at that time being approximately $80 million. This was their value at cost, their market value at the time was a great deal more. In reality Mr Chim was acquiring on paper for $8 what he had always beneficially owned in these two companies.

(viii) In evidence when dealing with the issue of the transfer of 15.1 million shares, Mr Chim asked James Lee "... do you agree I took away 15.1 million shares from Day & Day but you remained the substantial shareholder?".

In his evidence-in-chief he said :

"On 8th June 1992, James Lee, through Day & Day, controlled Lucky Man shares. However, he did not inject any assets into Lucky Man. As he was the main substantial shareholder of the company, that day I transferred 7.6 million Lucky Man shares to Thai Yuen. On 19th June 1992, I transferred 7.5 million Lucky Man shares from Day & Day to Janyee."

The only inference to be drawn from this question and this evidence is that he owned Thai Yuen and Janyee.

88. The transfer of the 15.1 million is evidence that he and not James Lee owned Day & Day. In turn, it is evidence of his control of Lucky Man when he claimed not to be in control. The significance of the later rights issue in November 1992 (section E) is that Janyee's and Thai Yuen's shareholding in Lucky Man increased as a result from a combined holding of 30.9% to a combined holding of 35.7%. At the time Mr Chim concealed his control of these two companies and as a result avoided having to make a general offer under Rule 26.1 of the Hong Kong Codes on Takeovers and Mergers. That rule states that when "... any person acquires, by a series of transactions over a period of time or not, 35% or more of the voting rights of a company, a mandatory offer is required to acquire the shares of the remaining shareholders of the company, subject to the granting of a waiver by the executive."

D. The Markle Land Sale

89. This is at the heart of the Petition. In August 1992 the Company owned Markle Land. It represented half of Fairmount Terrace, Lucky Man owned the other half, Broadworld. Neither company had any other assets of any significance. On 10th November 1992 the Company sold Markle Land to Lucky Man for $120 million. It was worth considerably more. The Company's shareholders who approved the sale were kept in the dark about a number of matters. In particular they were unaware that the buyer was in the effective control of Mr Chim. In a nutshell Mr Chim organized the sale of a bargain to himself.

90. The SFC's investigation into the transaction which has emerged in evidence shows it to be riddled with irregularities. It is appropriate to consider the somewhat complex story under the following five headings :

1. The Company's Board Meeting on 18th August 1992.

2. The Company's circular to its shareholders.

3. The "King & Co." offer.

4. The "Procurement agreement".

5. Lucky Man's circulars.

1. Mardarin's Board Meeting

91. On 18th August 1992, according to the recorded minutes, the directors of the Company met and approved the sale of their major asset, Markle Land, to Lucky Man for $120 million. The agreement to sell had already been drafted by Jennifer Cheung & Co. and was announced by both parties in the press the next day. It is clear that the Board meeting was the mere rubber stamping of Mr Chim's instructions. The following observations lead to this conclusion :

(a) The minutes reveal that four people were present. (Curiously five names appear under the heading 'Present' but the word 'absent' appears after Mr Malcolm Stone's name.) The other four were Mr Chim's wife, his son, an asociate (Mr Vance Yim) and his Legco assistant (Mr Yau Hay Yiu).

(b) No declaration of interest was tabled concerning Mr Chim's interest in the disposal of Markle Land to Lucky Man, even though, as already found, he was in control of Lucky Man at the time. The meeting also tabled two acquisitions (of Flexiwell and Linfield) in which an interest of Mr Chim's was declared.

(c) The minutes suggest that a valuation of Markle Land was tabled. However the minutes are silent as to the author, date and content of the report. Curiously the press announcement the next day states "the property was revalued by Messrs. Chung Chan & Associates, an independent property valuer at $128 million as at 31st May 1992 on an open market basis subject to existing tenancies", however Chung Chan's report which states this is dated 8th September 1992, nearly three weeks afterwards. What is more, Chung Chan could hardly be said to be independent as they had valued the other half of Fairmount Terrace as well.

(d) The minutes record and the press announcement states that an independent board committee was to be constituted to consider the acquisition of Flexiwell and Linfield. No independent committee was appointed to consider the disposal of Markle Land because Mr Chim had not declared his interest. Had he declared his interest, it would have constituted a 'connected transaction' which would have required an independent committee to advise and protect the interests of the minority shareholders. Listing Rule 14.30(7) states :

"... that if a transaction is connected, 'an opinion, in the form of a separate letter, by an independent expert acceptable to the Exchange as to whether the transaction is fair and reasonable so far as the shareholders of the issuer are concerned' is required."

A connected transaction is defined as follows :

"14.23 (1) A connected transaction is :-

(a) any transaction between a listed issuer or any of its subsidiaries and a connected person, whether or not it also falls within any of the other categories in rule 14.02; and

(b) an acquisition or realisation by a listed issuer or any of its subsidiaries of an interest in a company, a substantial shareholder of which is, or is proposed to be, a director, chief executive or controlling shareholder of the listed acquiring or realising issuer or any of its subsidiaries or an associate of such director, chief executive or controlling shareholder of the listed issuer or any of its subsidiaries."

92. I agree with and accept and rely on the opinion of Mr Grimsdick who stated :-

"... there is a considerable body of material, all of which is consistent with Lucky Man being controlled by Mr Chim at this time, and on this basis it is clear that the disposal of Markle should have also been described in the Mandarin circular as a connected transaction."

93. Thus the state of play as at 19th August was that the Board had approved and announced the proposed sale but the fact that, in truth, it was a connected transaction because of Mr Chim's involvement was being concealed.

94. Both the Company and Lucky Man were now required to circulate their shareholders about the proposed sale. It will be seen that the true situation remained private and hidden.

2. The Company's Circular

95. A brief chronology of both Lucky Man and the Company's circulars and EGMs is as follows :

8th September 1992 -	Lucky Man's first circular relating to the proposed purchase of Markle Land and the proposed Rights Issue to raise the money.
28th September 1992 -	Lucky Man held an EGM and the proposed purchase and rights issue were approved.
28th September 1992 -	Lucky Man's second circular concerning the rights issue.
2nd October 1992 -	The Company issued its circular concerning its proposed acquisition and disposals.
19th October 1992 -	The Company held an EGM at which the sale was approved.
10th November 1992 -	the sale was completed. (The events of 10th November are considered in section E.)

96. It is appropriate to consider the Company's circular first.

97. Those who draft company circulars and the directors of the company who issue them are under a duty to ensure that all material and relevant information is disclosed. That is the very purpose of the circular. The shareholder must be fully equipped to make an informed decision as to how to vote on the proposal. If new material or information emerges after the circular has been sent, the shareholders should be informed either by a second circular or at the meeting. If new material emerges after the meeting, the directors should, if feasible, convene another EGM.

98. The first complaint about the 2nd October circular is the fact that in relation to the proposed Markle Land sale, the only advice the minority shareholders received was from the Chim controlled board. The Board was those five people already referred to in the minutes of the 18th August board meeting, namely, close family, employees and Mr Malcolm Stone. That Mr Stone's interest in the disposal of Markle Land was clearly vested has been dealt with hitherto. In short, the minority shareholders received not independent advice but deliberately misleading information as follows :-

(i) They were not told that the disposal was a connected transaction because of Mr Chim's control of Lucky Man. Of course, given the overall scheme, this was not surprising.

(ii) The circular expressly stated that the disposal agreement had been reached after "arm's length negotiations between the Company and Lucky Man". Given the fact, as I have found, that Mr Chim was the prime mover on both sides of the deal, it was the very antithesis of arm's length. No evidence at all has emerged of any meetings or correspondence about price and terms between the parties which would certainly have existed had there been arm's length negotiations.

(iii) The circular was silent about the high likelihood of the plot ratio at Fairmount Terrace being increased from 2.1:1 to 3:1. Such an increase is significant with obvious implications as to the true value of the plot. The District Lands Office had, on 19th May 1992, given a clear indication that they would approve such an increase subject to certain terms and conditions. There is a wealth of evidence, namely, in the form of correspondence and memos produced by Mr Grimsdick, commencing in May 1991 that both the Company and Lucky Man, were being kept informed about the progress of the negotiations, initiated by Kailun Lee, to increase the plot ratio. Much of the correspondence is copied to Mr Chim.

(iv) On 28th February 1992 solicitors named King & Co. had made an offer to buy Fairmount Terrace for $300 million (see below). The circular made no mention of this.

(v) The circular also made no mention, and so the minority shareholders were totally unaware of an offer to purchase Fairmount Terrace for $350 million made on 16th September 1992 from solicitors, Ho & Wong. The offer was on behalf of an unnamed client. In fact they were acting for Lai Sing Kai.

(vi) The minority shareholders should also have been made aware of negotiations which were under way with Lai Sing Kai which led to the "procurement agreement" of 26th October 1992. This is subject to more detailed consideration below. In short, the evidence reveals that it was highly probable that Lai Sing Kai's offer to buy for $350 million pre-dates not only the circular but also the press announcement of the Company's intention to sell on 19th August 1992. Thus, Mr Chim decided to dispose of Markle Land after he knew he had a buyer of the whole property from Lucky Man lined up.

99. As indicated, two of the above non-disclosures merit a more detailed consideration :-

3. The King & Co. offer

100. On 28th February 1992 Kailun Lee received a seven page letter from King & Co. which amounted to a clear and detailed offer to buy Fairmount Terrace for $300 million. This is evidence that in February 1991 Markle Land was worth $150 million. In October 1991 the Board was recommending its sale at $120 million. The letter was faxed directly to Mr Chim. Mr Chim, both in his evidence and submissions, sought to belittle this offer as being unworthy of serious consideration and therefore unnecessary to reveal to the shareholders in the circular.

101. He claimed firstly that the letter was no more than market research or "mere bluff". In response to this, the author of the letter, Ms Joanna Li, a solicitor with King & Co. at the material time, was called to give evidence. It was clear from her evidence that the offer was a proper and serious offer. The proposed terms were set out in considerable detail. Her client had had a site visit, preliminary talks had taken place, the title deeds had been obtained and perused and so on. She went on to say that it was a standard conveyancing offer. It was never suggested to her at the time that it was too imprecise. Her recollection was that the negotiations were terminated not because it was uncertain or not serious, but because the premium was too high.

102. Mr Chim suggested, secondly, that the offer was dependant on the plot ratio being 3:1 and he had considered that would probably not be achieved and thus attached no importance to it. This suggestion directly conflicts with his own evidence that there was no need to disclose the likely plot ratio of 3:1 because it was not a secret. In support of this, he produced a 1987 letter from the DLO in which the DLO had then, in relation to another situation, approved the increase to 3:1. The simple fact of the matter, however, was that in 1991 it was 2.1:1. Thus Mr Chim was saying that in February 1992 it was unachievable but in October 1992 it was a formality and always had been.

103. Thirdly, he gave as a reason for disregarding this offer, that he considered the situation regarding the tenants as unsatisfactory. In fact the King & Co. offer did not require vacant possession. It merely required a list of tenants and possession with existing tenants only. It is worthy of note at this point to refer to meeting held in May 1992 when Mr Chim's men (including James Lee, Kailun Lee and Tsui Yiu Wah) approved a wholly unattractive scheme to get rid of the Fairmount Terrace tenants. The relevant minutes read :-

"After thorough discussion, the following steps would be taken concerning the Repulse Bay property :-

A back-dated letter drafted by Mr Tsui Yiu Wah would be sent to Kailun Lee Chartered Architect enquired the condition of 127 Repulse Bay.

An unfavourable reply would be given by Kailun Lee Chartered Architect. The letter would describe the deteriorated (sic.) condition of the building which included water leakage, the necessity of lift reinstatement, the building service etc. Suggestions would be made on Plan alteration and addition ...

The letters as mentioned in point (sic.) 1 and 2 would be copied by us to Jones Lang Wootton.

The message would then be conveyed to tenants/occupants that major alteration and major building work would be required in the opinion of the architect. Such building work would involve remedial and structural work and would endanger the life of occupants if they do not leave the building."

Mr Chim was hardly likely to worry about the arrangements for the tenants when those who carried out his instructions would embark on such a scheme.

4. The Procurement Agreement

104. There are two aspects to the procurement agreement which require consideration, firstly what was agreed and secondly when was it agreed.

(a) What was agreed?

105. The agreement itself was signed on 26th October 1992. (Mr Chim's defence is that the signing post dated the Company's EGM and therefore he could not tell the shareholders about it but as will be seen in section (b) below that was mere manoeuvering on his part.) By the agreement Mr Chim agreed to procure the sale of Fairmount Terrace to Topnation for $350 million. Topnation were acting as consultants on behalf of Mr Lai Sing Kai. It stated that Topnation appointed Mr Chim to procure the sale to Topnation's client within five months.

106. The agreement further provided that Topnation would pay $35 million to Mr Chim "to show sincerity of Topnation's client". This would be repaid without interest upon a sale and purchase agreement being signed within time. If the purchaser did not complete within time, he would lose his $35 million. If Mr Chim failed to procure the sale within time, he would refund the $35 million and also pay a further $35 million as damages to Topnation. The first draft of this procurement agreement was sent by Mr Chim's solicitors to Mr Lai's solicitors on 17th September 1992. On the face of it therefore Mr Chim had nothing to gain and a lot to lose. However, in reality, it was a risk free situation for him. His task was to procure the Company to sell Markle Land to Lucky Man and then to procure Lucky Man to sell Fairmount Terrace to Topnation's client. These things did happen but would not have happened had the circulars been full and frank. They were not, they were misleading and inaccurate. Had the shareholders of the Company known of the agreement and of the King & Co. offer and of the discussions with the DLO on the plot ratio and of Mr Chim's control of both companies, they would not have approved the sale of Markle Land.

(b) When was it agreed?

107. In the course of the evidence, a number of different versions and different drafts of the procurement agreement were produced and testified to. They were all slightly different. In two of the early ones, Mr Chim was referred to as "the agent". This description disappears in the later drafts. Similarly the later drafts omitted the requirement that a proforma agreement should be annexed at the time of completion whereas there was such a requirement in the early drafts. Also the duration of the validity period and the deadline for completion changed in most of the drafts. Obviously all the drafts pre-dated 26th October. It is not possible, on the evidence, to say exactly when the agreement was first mooted, or when the final draft was actually agreed prior to 26th October. However, placing considerable weight, as the court does, on the evidence of Ms Elaine Ho, it can be confidently concluded that Mr Chim was confident he had a buyer for Fairmount Terrace as early as August 1992. At the material time Elaine Ho was a solicitor employed by Ho & Wong, Mr Lai's solicitors. She produced her handwritten notes taken during a meeting at Mr Chim's office on 30th September 1992. Mr Chim and Mr Lai and their respective legal advisers were present. She also produced a telephone note dated 2nd October recording a conversation between herself and Mr Gordon Chan, Mr Chim's solicitor. It was clear from this evidence that it was at this time (end of September) that Mr Chim did not want to be called the "Agent" in the agreement but the "contracting party" and that Mr Chim did not want a proforma agreement to be annexed and that it was Mr Chim who required an extension of time from four months to five months within which the sale and purchase agreement was to be signed. It was also clear that this meeting was convened because Mr Chim's solicitors had sent Mr Lai's solicitors the first draft on 17th September. This first draft, it is noted, was ready and delivered just one day after the first formal offer to buy Fairmount Terrace for $350 million made on 16th September. Mr Chim attempted to suggest that the solicitor Mr Gordon Chan was not acting on his behalf at this time and only acted for him after the Company's EGM on 19th October. Looking at the events as a whole, the court unhesitatingly rejects this suggestion.

108. What is clear is that Mr Chim knew he had a $350 million buyer early on in the play. The figure of $350 million never changed, it was never bargained. He would never have entered into the procurement agreement unless he knew the sale would go through. I find that he believed he had a firm buyer when the Company made its press announcement on 19th August that it was intending to sell Markle Land for $120 million to Lucky Man. He had this information but the shareholders never did.

109. To complete this issue and in support of the court's finding in relation to Mr Chim's knowledge of matters which were not disclosed to the Company's shareholders, it is illuminating to consider briefly the statements of other witnesses who were interviewed by the SFC about this matter.

110. Firstly, as early as 1st August 1992, a firm of property consultants called Centreline was approached to market Fairmount Terrace at a price range of $300-$400 million. The approach was made by one of James Lee's employees, Steven Lam. As a result, Centreline approached Mr Lai Sing Kai soon after 1st August to check out his interest. This evidence came from Ms Monita Leung, a director of Centreline. She added that Mr Lai offered $350 million soon after which was verbally accepted by the vendor but that it also involved a procurement agreement between Mr Lai and Mr Chim. This evidence brings the timing of Mr Chim's knowledge comfortably back into August 1992. It was confirmed by Monita Leung's junior, Mr David Ho. He was approached by James Lee's employee in July 1992 who told him that Fairmount Terrace was available for sale and they wanted a buyer. The employee himself stated that his boss, James Lee, told him to refer certain matters relating to this transaction to Mr Chim. On paper, of course, it could not have been available for sale because it had two separate owners at that time. The overwhelming inference is that Mr Chim knew better.

111. Mr Lai himself confirmed that he made his first offer soon after Centreline first approached him. He further told the SFC that his dealings with regard to the agency agreement were with Mr Chim personally and he was unaware that Lucky Man was the vendor.

112. The denouement of the procurement agreement can be stated simply by a recital of Mr Grimsdick's evidence tracing the movement of money.

113. Mr Chim received $15 million on 26th October and $20 million on 11th November (the $35 million) from Mr Lai. The $20 million was paid into Silver Mountain the next day. By correspondence dated 15th February 1993 Mr Chim is authorized by Markle Land and Broadworld (companies he claims falsely to have no control over) to complete the sale. Broadworld and Markle Land by separate EGM's approve the sale on the same day and sale and purchase agreements were signed on 23rd February 1993. This amounted to a major transaction by Lucky Man and therefore required another circular seeking approval from the independent shareholders. This was duly issued on 8th March 1993. It did not reveal the fact that negotiations for the disposal had started as much as six months earlier.

114. In the same context Mr Grimsdick has provided cogent evidence concerning a payment of $5 million to James Lee. This fee is later referred to as one of the non-disclosures in the Lucky Man circulars of 8th and 28th September. In short it is clear that James Lee was paid this substantial sum by Mr Chim for his services in relation to the sale of Fairmount Terrace. It was paid in two parts in a roundabout way. The first million was sourced from the first deposit of $15 million paid by Mr Lai to Mr Chim. It found its way to a company called Octogon of which James Lee was the only signatory on 28th October via a company called Grandson Nominees Limited. Mr Chim endeavoured to conceal the recipient of this money and called them simply "fees". In the same way the balance of $4 million was paid to Octogon, this time by Markle Land and Broadworld, $2 million each, on 29th March 1993.

5. The Lucky Man circulars

115. Even though Lucky Man was the beneficiary of the sale of Markle Land to it at undervalue, it was also necessary for Mr Chim to ensure that consistently misleading and false circulars were issued to Lucky Man's shareholders prior to its EGM. The Lucky Man circulars and EGM were on 8th and 28th September, both before the Company's first circular on 2nd October. It was equally important that the Lucky Man shareholders were unaware of what was happening and of the fact that the person in real control of their company was Mr Chim. The 8th September circular was defective in the following respects :-

(i) It said that Day & Day was beneficially owned by James Lee. This was not true and concealed the fact that Mr Chim was in control.

(ii) It did not say that the acquisition of Markle Land was a connected transaction which because of Mr Chim's involvement it was.

(iii) It did not inform the shareholders of the offer to buy Fairmount Terrace for $350 million by Lai Sing Kai or the negotiations concerning the procurement agreement.

(iv) It did not disclose the fact that a $5 million fee was to be paid to the director of Lucky Man, James Lee, as "consultancy services for the disposal of Fairmount Terrace". Had this been disclosed one would have expected, in normal circumstances, a barrage of questions at the EGM.

(v) The circular correctly stated that the company did not intend to redevelop Fairmount Terrace after the acquisition of Markle Land but falsely gave as the reason that it was not viable when in fact the true reason was that plans to sell to Mr Lai were under way.

(vi) It falsely stated that it had plans to upgrade the existing property at a time when Centreline was actively marketing it.

(vii) It stated that the income from the rights issue would be allocated as to $120 million for the purchase of Markle Land, $21 million for repayment of loans and approximately $17 million as working capital. Mr Grimsdick's evidence shows that $120 million was duly paid to the Company but $39 million of the balance was paid to Silver Mountain and none was used to repay bank loans or was used as working capital. (This issue is considered in more detail in section E.)

116. The next circular on 28th September was solely concerned with the Rights issue. It failed to remedy any of the mis-statements or non-disclosures in the 8th September circular. In addition it stated that the excess rights issue shares would be allotted at the sole discretion of the directors on a fair and reasonable basis. In one important respect the directors were not fair and reasonable. They accepted an application for a large quantity of excess shares from Day & Day on 17th November when the final date for application had been 10th November. (This is also referred to again in the next section.)

117. It is convenient to conclude this section on the Markle Land sale with a reference to the helpful and reliable evidence given to the court by Mr Lawrence Fok, the current senior executive director of the Regulatory Affairs Group of the Stock Exchange and previously the executive director of the Listing Division. His evidence is important and I consider it appropriate to recite the important parts verbatim :-

" Listing Rule 14.31 provides that the 'primary objective' of circulars prepared in relation to connected transactions is to 'demonstrate the reasonableness and fairness of the proposed transaction'. The Rule further provides that 'the balance of advantage or disadvantage to the issuer must therefore be readily apparent to enable a shareholder to reach his own conclusions on the proposal'. Finally, Listing Rule 14.31 provides : 'notwithstanding the inclusion of an independent valuation, the circular must contain sufficient information, comment and explanation to satisfy [the primary objective]'.

If the SEHK had been aware of the negotiations between Topnation and Mr Chim in relation to the potential sale of Fairmount Terrace for HK$350 million, the SEHK would, in my opinion, have required that the proposed transaction be taken into account when the required valuation report was produced for inclusion in the Mandarin Resources and Lucky Man circulars and, to the extent it was considered by the valuers to materially affect their valuation of the property, be referred to specifically in the valuation report.

If the SEHK had been aware of the letter from the DLO dated 19th May 1992, the SEHK would, in my opinion, have required that the potential change in plot ratio be taken into account when the required valuation report was produced for inclusion in the Mandarin Resources and Lucky Man circulars and, to the extent it was considered by the valuers to materially affect their valuation of the property, be referred to specifically in the valuation report.

If the negotiations between Topnation and Lucky Man for the proposed sale of Fairmount Terrace by Lucky Man; or the potential change in plot ratio of Fairmount Terrace; would have materially affected the valuation of the property then the absence of any mention of these matters in the valuation reports contained in the Mandarin Resources circular dated 2nd October 1992 and the Lucky Man circular dated 8th September 1992 renders them deficient under Listing Rule 5.06(1).

In my opinion, the negotiations between Lucky Man and Topnation for the sale of the whole of Fairmount Terrace for HK$350 million constituted information which was required by shareholders in Mandarin Resources to evaluate the advantages and disadvantages of selling Markle Land to Lucky Man for HK$120 million. If SEHK had been aware of these negotiations, it would have required the Mandarin Resources circular to refer to them.

In my opinion, SEHK would also have regarded information regarding the negotiations between Lucky Man and Topnation as 'necessary to enable an investor to make an informed assessment of the activities, assets and liabilities, financial position, management and prospects of Lucky Man and of its profits and losses and of the rights attaching to such securities'. The negotiations should therefore have been referred to in either or both Lucky Man circulars dated 8th and 28th September 1992.

Notwithstanding the opinion expressed above, the negotiations between Lucky Man and Topnation for the sale of Fairmount Terrace were matters which, to the extent the directors of Mandarin Resources and Lucky Man were aware of them, should have been included in the Mandarin Resources and Lucky Man circulars to ensure compliance with Listing Rules 14.31 and 11.07 respectively."

118. In each of the issues so far dealt with, the court's rejection of Mr Chim's explanations is implicit. For example, the Petitioner on the whole of the evidence has proved that :

· Mr Chim was in effective control of the Company from about mid-May 1991.

· Mr Chim's payment of $12 million to Malcolm Stone was not a proper and commercially litigimate payment.

· Mr Chim did not relinquish his interest in Lucky Man by the purported sale of Day & Day to James Lee.

· Mr Chim paid James Lee $5 million for his co-operation in the Markle Land sale.

· Mr Chim knew Markle Land was sold at undervalue.

· Mr Chim had a buyer lined up for the whole of Fairmount Terrace before both Companies were asked to approve the transfer of ownership of Markle Land.

· Mr Chim was the cause of the misleading statements and non-disclosures in both the companies circulars to shareholders concerning the proposed sale.

119. It is not necessary to deal with each and every point raised in his statements to the SFC, his opening submission, his evidence and his closing submission. Viewed as a whole and for reasons already stated, they are without substance.

120. I find that the Petitioner's complaints contained in paragraphs 47 to 87 inclusive proved in so far as I have specifically dealt with them in this part of the judgment.

E. The circular flow of funds

121. On 10th November1992 the Markle Land sale was completed. It was also the deadline for the Lucky Man shareholders to accept the provisional allotment of shares under the rights issue. It was also the deadline for applications for excess rights shares. It was a very significant day.

122. A circular flow of funds took place on that day. The Petitioner's case in relation to the fund flow concerns the use to which the money received by the Company for the sale of Markle Land was put. It was paid to Silver Mountain (Mr Chim) and Mr Chim used the proceeds to subscribe to the Lucky Man rights issue and thereby increased his control of Lucky Man. The minority shareholders were not told that the proceeds would be put to this use. In fact they were given a wholly different story in the circular. The minority shareholders suffered not only because their only asset was disposed of at undervalue but also because the proceeds that were received were used for Mr Chim's benefit, not for theirs. As will be seen, there is ample evidence providing proof of the Petitioner's case as outlined above.

123. On 10th November 1992 the following flow of funds took place :-

(i) Lucky Man issued a cheque for $120 million to Mandarin for Markle Land.

(ii) Mandarin issued six cheques to a total value of $115,878,500 to Silver Mountain.

(iii) Silver Mountain received the above $115 million plus from Mandarin and $39 million (four cheques) from Lucky Man.

(iv) Silver Mountain paid out $164,683,200 to Lucky Man (12 cheques on behalf of a number of different parties) to subscribe for the Lucky Man rights issue and excess rights issue.

(v) The money raised by the rights issue was used by Lucky Man to pay for Markle Land. ((i) above)

124. Mr Chim's repeated claim in relation to the circular flow is that such a flow is perfectly legal, it happens everyday in Hong Kong and the SFC did not understand. Such a close loop transaction may well happen regularly. What does not happen and is wholly irregular is that, firstly, the same person or entity is effectively positioned at every station on the loop, and secondly that the shareholders of the companies involved are told that their money which is travelling around the loop is being put or will be put to a different use.

125. Mr Grimsdick's evidence is a meticulous and painstaking analysis of what actually happened. Every movement of money which is outlined below is supported by documentary evidence.

126. The funds flow was approved by the International Bank of Asia by their memo dated 4th November 1992. The Bank's arrangement fee of $100,000 was paid by Silver Mountain. The memo, in its attachments, summarizes all the different transactions. The only conclusion that can be properly drawn from the evidence is that Mr Chim organized every movement in the circular flow and that it was pre-ordained in order to achieve the completion of the Markle Land sale and the funding of the proposed rights issue. The simple result was that Lucky Man got Markle Land cheaply and Mr Chim increased his control in Lucky Man through the rights issue. There is no doubt that had he truly disposed of Day & Day to James Lee earlier in the year, he would not have been able to arrange the transactions which he plainly did. When cross-examined on the matter, he purported to say that when he made the arrangements he was only acting on behalf of Silver Mountain. He was unable to say who from Mandarin or Lucky Man took or gave instructions to the Bank. Mr Chim's account was wholly unsatisfactory :-

" Q: I follow what you are saying Mr Chim, but you are unable to suggest the name of anybody who would have been involved from Mandarin or Lucky Man's point of view with the bank; is that right?

A: I only talked on behalf of Silver Mountain to the bank that $160 million was required for the rights issues and how much the building could be valuated, and also the cheque facility, and also how much the fee would be. I was not talking on behalf of Mandarin or Lucky Man. Whether it was the bank who took these two companies into consideration, I do not know. ...

Q: In that case, Mr Chim, how did the bank know that, for example, Lucky Man would be told about the requirements to give transfer instructions, and how did the bank know that Lucky Man and Mandarin would provide all the cheques and do everything that was required?...

... in the last paragraph of page 277: [the IBA internal memo] 'Required on or before 9th November all the cheques from the various parties- '

And that included the cheques from Mandarin and Lucky Man referred to over the page(e):

'To be delivered to the bank, plus transfer instructions from Lucky Man.'

Now, how did Lucky Man and Mandarin find out what they were required to do under this scheme?...

A: I do not know. Perhaps IBA was informed. For instance, Lucky Man or Mandarin, they say,

'Hey, while you received the cheques, you have to back them, and how much chance is this when naturally you have to give a chance to other people and other people would bank them; it is so simple'.

Q: Do you know? Please answer 'yes' or 'no' or you do not know how Lucky Man were informed of the arrangements with the bank.

A: I do not know. I do not know.

Q: Because I am going to suggest to you that, on the evidence, the only person who dealt with IBA was you, and what you negotiated with the bank was an overall scheme or plan as reflected in this document; do you understand?

A: There was no need to make any plan. You are again complicating the matter. You are only making deductions. In fact it is very simple. Let me tell you again. ...

Q: ... The plan set out in the letter of 4th November was carried out in its entirely on 10th November, so that also establishes, Mr Chim, if there be any doubt, that you controlled not only Mandarin, but Lucky Man because there is no suggestion that they did anything other than what you had agreed with the bank on 4th November; do you understand that, Mr Chim?

A: I regard that you are talking nonsense. Your mouth is on your head; I cannot stop you from saying what you like. I have already explained that to you."

127. Thus, the first irregularity about the circular flow is that Mr Chim was instrumental in setting up the whole scheme. A finger in every pie. The second criticism, to which I now turn is the fact that the Mandarin shareholders were misled as to the use to which the proceeds of sale were put. In this regard it is sufficient at this stage merely to identify to what end the money actually went as compared to what the shareholders were told in the 2nd October circular. In each case the improper use of the money merits separate consideration later in the judgment.

128. Taking each of the transactions as described above ((i)-(v)) in turn :-

(i) Lucky Man's cheque for $120 million to Mandarin. This issue has already been covered in Section D.

(ii) Mandarin's six cheques to Silver Mountain totalling $115,878,500. This was Mandarin's disposal of the proceeds of sale. The shareholders had been told it would be used as follows :

(a) Acquisition of Linfield for $45.5 million;

(b) Balance to be used to fund future expansion and provide working capital;

(c) Balance on short term deposit in the interim and later redeploy the cash into :-

(d) "the higher yielding manufacturing sector".

129. What in fact happened was wholly different and in all cases except the Linfield acquisition was not disclosed to the shareholders. None of the money was put on short term deposit. It was moved on at the same time that it was received. None of the undisclosed investment, listed below, were investments in the "higher yielding manufacturing sector". The $115 million plus was in fact used as follows :-

· $45.5 million investment in Linfield (about which no complaint is made).

· $13.5 million cheque to Silver Mountain, being the repayment of a loan purportedly due to Mr Chim/Silver Mountain. In Section A (page 26 ) reference is made to Mr Chim making substantial loans of the Company as part of his increasing control prior to his acquisition of 51% of the Company's shares. It was pointed out that their loans were interest free, unsecured and largely undocumented. On 10th November, Mr Chim repaid himself $13.5 million. This was done without any formal request by Silver Mountain for repayment, without the shareholders' knowledge and absent any document suggesting the loans were due for repayment on that day. The major portion of the repayment was in relation to legal fees which Mr Chim had paid to Hampton Winter and Glynn.

· Two separate cheques (one for $15 million and one for $10 million) were used to purchase 4.5 million Lucky Man shares. This issue is dealt with separately. It will be seen that the court finds that the 2nd Respondent's claim that these shares were owned by Mr Sun Ying Chung is false and that they were in fact beneficially owned by Mr Chim. Mr Sun was his nominee. (Section F below) The proceeds of the sale of the 4.5 million shares did not go to Mr Sun,, they went to Silver Mountain and accordingly to the direct benefit of Mr Chim.

· $14.9 million was used to acquire a 50% interest in a company called Maxview (Section G below). The reality of the 'investment' was that Mandarin was acquiring a 50% interest in Maxview (unknown to the Company's shareholders) from Mr Chim. Like the acquisition of the 4.5 million Lucky Man shares above, and the acquisition of an interest in Golden Harvest below, it was a connected transaction because of the undoubted connection to Mr Chim.

· Finally, $17 million of the proceeds was used to acquire a 55% interest in a company called Golden Harvest, a company which had yet to start business (Section H below).

(iii) Silver Mountain, in addition to the $115 million plus, paid to it by Mandarin, also received four cheques for $8 million, $10 million, $20 million and $1 million from Lucky Man.

(iv) The final stage of the loop was for Silver Mountain to issue 12 cheques to Lucky Man to subscribe for the Lucky Man rights issue and excess rights issue. On the face of it, the payments were made on behalf of three companies and four individuals. The three companies subscribing to the rights issue were Day & Day ($58 million approx.), Thai Yuen and Janyee (both $25 million approx.). The four individuals were Mr Sun Ying Chung, Mr Shek Kuan Hsin, Mr Simon Lee and Mr Wai Yu Kei (totalling approximately $24 million). Each individual, except Mr Wai, also applied for the excess rights issue ($22 million in total), so did Janyee and Thai Yuen ($11 million in total). Thus the overall subscription made on 10th November 1992 was approximately $165 million. Day & Day did not apply for the excess rights issue within the specified time, i.e. by 10th November. However, a week later Lucky Man did accept a late application on behalf of Day & Day in direct contravention of Lucky Man's circular of 28th September with which all the Lucky Man shareholders had to comply.

130. Before the rights issue, the three companies owned 66.9% of the Lucky Man shares. The four individuals owned 13%. 98.2% of the shares allotted in the rights issue went to these seven people or companies. The result was that after the rights issue, the three companies owned 77.3% of the Lucky Man shares and the four individuals 16.4%. We have already seen that Day & Day, Thai Yuen and Janyee were under Mr Chim's control. Mr Grimsdick's evidence clearly shows that Silver Mountain funded their rights issue shares. His evidence shows that the same applies to the four individuals. He further identified documentary evidence that Silver Mountain not only funded their rights and excess rights allotments but also funded the original acquisitions of their pre-rights issue Lucky Man shares. The pre-rights issue shares in the names of Sun, Shek and Lee were registered in their names on 15th August 1992. (Mr Wai did not 'own' any prior to 10th November 1992.) There is evidence of a loan to them from Silver Mountain on 15th August. The loans were not repaid.

131. To conclude this section and before dealing with the three specific complaints referred to herein (the sale of 4.5 million Lucky Man shares, Maxview and Golden Harvest) I make the following findings. In so far as I have specifically referred to them in this section, the complaints contained in paragraphs 88 to 109 of the Petition are made out.

132. Mr Chim's case is based on the false proposition that he did not own Day & Day and did not control Janyee and Thai Yuen at the material time. Therefore he did not control Lucky Man, therefore he was only a party to the movement of funds on a section of the circle, not the entire loop. He forlornly asks the court to accept that :-

"From the perspective of Lucky Man, CPC believed that in November 1992, Day & Day belonged to James Lee while Thai Yuen and Janyee belonged to his friends. It was only on 16 April 1993 that he owned 80% of the shareholding of Thai Yuen and Janyee respectively. CPC, therefore, only became the substantial shareholder and a connected person of Lucky Man on that day. As such, the deals he made with Lucky Man before that day did not constitute any connected transactions."

Every cogent piece of evidence points in the opposite direction.

F. The sale of 4.5 million Lucky Man shares

133. A document exists, dated 6th November, i.e. two days after Mr Chim had made the necessary arrangements for the circular flow of funds with the I.B.A. and four days before the transaction occurred, by which Mr Sun Ying Chung purportedly agreed to sell to the Company 3 million Lucky Man shares at $5 each with an option on a further 1.5 million at $6.66 each, the option to be exercised by the Company on or before 30th June 1993.

134. Mr Sun at the material time was the registered owner of only 2.5 million shares, yet he purportedly agreed to sell 3 million. "His" 2.5 million had been acquired in August 1992 and the purchase had been funded by Mr Chim through Silver Mountain.

135. The Company Board approved the purchase of the shares and the option on 6th November. It issued a cheque to Silver Mountain for $15 million for the 3 million shares and another for $10 million as a "deposit" for the option to buy the further 1.5 million. Paying the full amount for the option (representing $6.66 per share) to Mr Sun on 10th November created a risk to the Company, namely, if the Company decided not to proceed on or before 30th June 1993, Mr Sun might not be able to refund the $10 million. The Company was not in possession of the share certificates during the option period. Furthermore, Mr Sun was not required to pay interest on the $10 million if the option was ultimately not taken up and the "deposit" refunded. It was an unusual arrangement for the Company Board to agree to. The point is that the cheque for $10 million was paid to Silver Mountain (as was the $15 million).

136. The issue turns on where the true ownership of the shares lay prior to their transfer to the Company. Was Mr Sun the true vendor or was Mr Chim the true vendor? In order to explain the uncontested fact that the cheques for the payment of the 4.5 million shares were credited, not to the purported vendor Mr Sun, but to Silver Mountain, Mr Chim relies on what was referred at trial as the "running account" between himself and Mr Sun. The court's findings in relation to the evidence concerning the running account, in particular that it fails utterly to explain what Mr Chim suggests it explains, is elaborated upon below.

137. Before doing so, the question marks, irregularities and unusual features which gave rise to the Petitioner's complaints in relation to the transaction as set out in the Petition are highlighted as follows :-

(i) There are suspicious circumstances surrounding the Company's Board of Directors meeting on 4th November 1992. Apparently, in attendance were Mr Yau Hay Yiu, Mr Chim's wife and Mr Vance Yim. The minutes are strangely headed "Minutes of a meeting .... to be held at ....". This suggests that the minutes themselves and the agreements recorded therein were typed out before the meeting took place, if it did take place.

(ii) Mr Grimsdick's evidence notes that the 6th November I.B.A. memorandum authorizing the 10th November flow of funds, states that the sum of $10 million (the "deposit" for 1.5 million options) was due for payment to a company called Serrig and not to Mr Sun. Later, however, the $10 million loan to Serrig was adjusted and thereafter treated as payment for the 1.5 million shares from Mr Sun. Thus, Mr Sun's name only came into the picture after the event.

(iii) As already mentioned, at the material time Mr Sun's registered shareholding was only 2.5 million shares which had been funded by Mr Chim in August 1992. In evidence Mr Chim speculated that, as trading in Lucky Man shares had resumed on 23rd October, Mr Sun might have made up the shortfall by buying in the open market. When Mr Sun himself testified, he gave no evidence as to how he was able to sell 3 million when he only had 2.5 million. In his final submission, Mr Chim added to the speculation by saying that Mr Sun might have borrowed them from friends. There was no evidential foundation for this suggestion at all.

138. The above three features lead to the inference that there was, in fact, no meeting on 6th November and that documents intended to show that it was a legitimate transaction were created later.

139. However, the questions and unsatisfactory features do not end there :-

(iv) Why did Silver Mountain pay for Mr Sun's shares (the 2.5 million) in the first place?

(v) Why did Silver Mountain fund Mr Sun's application for the rights issue and excess rights issue shares which resulted in a further 9 million shares being registered in his name?

(vi) Why did Mr Sun never reimburse Silver Mountain? Mr Grimsdick's evidence on this is simply -

"While these payments appear on the computerized listing headed 'Amount due to Silver Mountain', I have seen no evidence of these amounts being repaid by the individuals to Mr. Chim or the company."

(vii) Why did Silver Mountain never pay to Mr Sun the proceeds of sale it had received from the Company? Mr Grimsdick again :-

"I have seen no evidence that Silver Mountain paid any of the HK$25 million to Sun Ying Chung at about this time. One possible explanation of why Mr. Chim received the money may be that Sun Ying Chung was holding these shares as Mr. Chim's nominee."

As will be gleaned from the findings made in this section, the court has concluded that it was not "one possible explanation" but the only possible explanation.

(viii) Neither the true owner of the shares nor the fact of the transaction was ever disclosed to the Company's shareholders.

(ix) Why was the "deposit" for the option to buy eight months hence equivalent to the full purchase price?

(x) Why was no interest payable on 30th June 1993 if the option was not taken up and the $10 million refunded?

(xi) On what basis were the 3 million shares valued at $5 each and the 1.5 million option valued at $6.66 each?

140. In an attempt to answer all the above matters, Mr Chim points to his alleged running account with Mr Sun.

The "running account" evidence

141. From an early stage in the investigation, Mr Chim, when giving statements to the SFC, relied on a running account. In essence he was saying that the proceeds went to Silver Mountain instead of Mr Sun to set off other liabilities which were due to Mr Chim. Not surprisingly the SFC were anxious to discover evidence about this running account and from as early as 1997, upon application by the SFC, the court made orders for specific discovery. An order of 12th July 1997 states :-

"... the 2nd Respondent do on or before 15th September 1997 make and serve on the Petitioner a list of documents which are or have been in the possession, custody or power of the 2nd Respondent and which relate to the "running accounts" between Mr. Sun and the 2nd Respondent which are referred to in paragraph 101 of the 2nd Respondent's affirmation made on 17th February 1997; and

the 2nd Respondent do on or before 15th September 1997, file and serve an affirmation verifying the said list of documents."

142. This order was not complied with. On 19th January 1999 the court ordered :-

"... the 2nd Respondent do give specific discovery of all documents relating to the alleged running accounts between himself and (i) Mr Sun Ying Chung or (ii) Mr James Lee Cheung Keung intended to be relied upon by the 2nd Respondent, such discovery to be made by the 2nd Respondent by filing and serving a list of documents, to be verified by affidavit within 28 days..."

143. Mr Chim's wholly unsatisfactory explanation for failing to comply with either order was that in 1997 he was very busy preparing for his criminal trial which led to his being imprisoned in August 1998. This submission fails to recognize that the subject matters and issues in the criminal trial and in this trial were in many respects substantially the same. He went on to say that he had neither the time nor the resources to comply with the order and that his accountant had emigrated. This unacceptable explanation does not alter the situation that Mr Chim has not produced any documentation in support of his alleged running account. The one document which appeared to be relevant to the issue which was contained in the SFC exhibits was headed "Sun Ying Chung - current account". In evidence he introduced the matter in the following way :-

" In our running account, a record was made, saying that for the 2.5 million Lucky Man shares Sun Ying Chung owed to us $5.5 million. Also, in his own accounting records in China, he would also write down that for the 2.5 million Hong Kong shares he owed to Hong Kong $5.5 million.

As to the other expenses, for example, the stamp duty, if he was told of the amount he would also make a record of it in his running account. In Hong Kong, sometimes Debbie Chui helped him to keep some of the records. As to how that was actually done, I paid no attention and I took no part."

(Debbie Chui was his employee, a bookkeeper.)

144. Mr Sun himself also gave evidence. In answer to Mr Chim, he confirmed that the document headed "Sun Ying Chung - current account" was a Silver Mountain document kept by Debbie Chui which recorded the buying and selling of shares. He said it was the running account between himself and Silver Mountain. As to his own records of the running account, he said, in cross-examination, that they did exist but that they were in China. Unfortunately he had not brought them with him to court, neither had he ever provided any in the course of the investigation and neither had Mr Chim ever asked him to produce any to the Petitioner or to the court.

145. He was questioned at some length about the entries in the "current account" document which concluded as follows :-

" Q: Here is Mr Chim, in Silver Mountain, recording the purchase of 2.5 million Lucky Man shares for $5.5 million which is said to be debited against you.

So you see that? Now, there is no entry for a credit against that amount?

A: I do not know anything about it. This is his company's document; nothing to do with me.

Q: Mr Sun, do not be so defensive; listen to the question. If you had paid Renmenbi to Mr Chim for the 2.5 million shares, one would expect to see a credit entry against the 2.5 million shares; do you understand?

A: I was checking the accounts with Mr Chim, however whether his employees made any records about it or not, nothing to do with me.

Q: You gave clear evidence of payment being made in Renmenbis for 2.5 million shares. One would expect to see a credit entry here and one does not. Now, can I move on.

A: This is something internal. If there was an error - here it was an error on their part. Nothing to do with me; we settled our accounts.

Q: If you look at the rights issue shares, passing over stamp duty when the same point can be made, one sees a debit entry for rights issue, and no corresponding credit entry that you would expect if in fact payment had been made in Renmenbi; do you understand? And the same point was the excess right shares?

A: This was something internal. If there was an error, it was an error on their part, and there was no error in the settling of accounts between the two of us.

Q: Well, there are a lot of errors appearing.

Now, the next entry is, 'Sold to Mandarin for 3 million shares of Lucky Man', and do you see a credit entry for the first time of $15 million?

Over the page, you see, 'Sold to Mandarin for 1.5 million shares of Lucky Man' - a credit entry of 10 million, and then you see a final entry relating to the sale to Leander said to give rise to a $31.7 million credit entry.

So you see, Mr Sun, when you put that together, what appears to happen is this, according to this document, no payment was ever made for the 2.5 million Lucky Man shares, or the rights issue, or the excess issue shares by you; instead, payment was effected by setting off against the profits arising on the sale to Mandarin of the 4.5 million shares; that is what this document appears to record, do you agree?

A: Let me tell you, including all the shares, including the rights issues, he paid $29 million or so on my behalf, and I gave him 20 million Renmenbi. And then I paid $25 million to Mr Chim for the 4.5 million shares.

Q: No, Mr Sun, you see, what happened is you never paid for the 2.5 million shares; you have never paid for the rights issue shares or the excess rights issue shares.

Mr Chim funded those and he was refunded, unknown to the shareholders, by Mandarin's money when they bought 4.5 million shares, ostensibly from you, creating a profit for Mr Chim to offset against the cost of funding the original shares; do you see?

A: What do you mean by 'unknown to shareholders'? What was unknown to shareholders.

Q: I said unknown to shareholders of Mandarin, their money was being used to benefit Mr Chim, and your name, Mr Sun, you would be used purely as a front.

A: It is wrong for you to say that; I disagree with you."

146. It was clear to the court from this passage and from the evasive and disingenuous nature of Mr Sun's evidence generally that his testimony was designed to help Mr Chim's untruthful defence.

147. On the other hand, the measured, objective and logical evidence of Mr Grimsdick came to the following conclusion on this issue :-

"It is clear from the documents described above that Sun Ying Chung did not at any time settle the amounts that were due to Silver Mountain/Mr Chim and that Mr Chim did not pay the 41 million to Sun Ying Chung in October 1993. Furthermore, no interest appears to have been charged on the amount outstanding from either party.

If in fact this had been a 'running account' I would have expected to see repayments and possibly offsets for amounts that Sun Ying Chung may have paid on behalf of Mr Chim. There was however no evidence of any such repayments to Mr Chim or of any payments on his behalf.

I have therefore concluded that it does not appear that Sun Ying Chung had a running account with Mr Chim. Furthermore, I described earlier that Mr Chim/Silver Mountain funded the acquisition of the 4.5 million Lucky Man shares that were sold by Sun Ying Chung to Mandarin.

On this basis it would appear that the purchases of Lucky Man shares had not been made on behalf of Sun Ying Chung and that they were made for the benefit of Mr Chim. As a result it was therefore Mr Chim and not Sun Ying Chung who made the profit of HK$18.835 million in relation to the sale to Mandarin of the 4.5 million Lucky Man shares."

148. This judgment deals with the issues of liability only. The reference above in Mr Grimsdick's evidence to a profit of $18.835 million is based on a weighed average cost for the shares of $1.37 per share ($6.165 million total) deducted from $25 million.

149. In conclusion, in so far as the complaints contained in paragraphs 153 to 160 inclusive have been specifically dealt with herein, I find them proved. In particular I find Mr Sun held his Lucky Man shares as a nominee for Mr Chim. The beneficiary of the sale was Mr Chim and not Mr Sun and the true nature of the transaction was not revealed to the Company's minority shareholders.

G. Maxview

150. The next investment made by the Company out of the proceeds of sale of Markle Land which was not disclosed to the shareholders in its 2nd October circular and which did not conform with the Company's published intention as to the use of that money was the acquisition of a 50% share in a company called Maxview Enterprises Ltd. ("Maxview") by means of a cheque for $14,878,500 on 10th November 1992 to Silver Mountain.

151. Maxview first appears in the purported 6th November Mandarin Board Meeting minutes. At that meeting (which as has already been found, very probably never occurred), the minutes record approval by the Board to acquire 50% of Maxview for $14.9 million. When later asked for an explanation concerning this transaction, Mr Chim, in his letter to the SFC dated 1st August 1994 and as part of his case in this trial, stated that the payment was "a refund to Silver Mountain for the acquisition of Maxview Enterprises Ltd. incorporated in the USA".

152. As will be seen, the court finds this to have been a connected transaction which should have been, but was not, considered by an independent committee and should have been, but was not, disclosed to the minority shareholders. It was further not within the scope of the published intended use of the Markle Land sale proceeds. The court also finds that documentation has been created at a later date designed to mislead the regulators and investigators into thinking that it was not a connected transaction at the time. In other words, an attempt by Mr Chim to distance himself from a transaction with which he was in reality intimately connected.

153. The first difficulty, which has contributed to the above findings, in this transaction is the contradictions which appear on the face of certain key documents :-

(1) The Hong Kong company named Maxview was incorporated on 27th June 1991. The two named holders of one share each were Mr Chim and James Lee (through his company Transco).

(2) However, the purchase agreement (of 10th November 1992) is between the Company as the purchaser and James Lee and Gordon Chan as the vendors. Gordon Chan seems to have taken the place of Mr Chim as one of the owners as at the time of sale.

(3) A third document, dated 4th January 1993, referred to as an "amended partnership agreement" states that Mr Chim, Gordon Chan and James Lee "have been and now are Partners doing business as Maxview Enterprises Ltd., ...". Clause 1.02 of this agreement stated that :-

"The parties (referring to Chim, James Lee and Gordon Chan) entered into an Assumed Name Record General Partnership on September 30, 1991, and have continued in Partnership under the provisions of that record until this time."

(2) and (3) are inconsistent. The company's own financial documents are consistent with situation number (3). A balance sheet as at 31st December 1993 indicates a partnership between Chim, Lee and Chan in the ratio of 50%, 25% and 25% respectively. However, later balance sheets relating to Maxview, dated 30th June 1994, indicate that the Company was a 50% shareholder. There is one way in which some sense can be brought in to solve the apparent confusion and, that is that as at 10th November 1992, Mr Chim did indeed have a 50% interest in Maxview but that the Board minutes of 6th November and the acquisition agreement were created later and backdated in order to exclude the involvement of Mr Chim at the time and completely distance him from the acquisition on paper. Mr James Lee's response to questioning on this issue by the SFC in 1994 is illuminating. He said "several months ago (he was speaking in September 1994, two years after the circular flow of funds), Gordon Chan asked me to sign the Maxview agreement, which was backdated to 1992 and said my interest in Maxview was sold to Chim. However, as I have so far received no payment for the sale, I do not regard myself to have sold". At trial he agreed that he had said this but said that as at the date of trial in 1999, he "did not have much recollection about the matter". Mr Chim, in cross-examination of Mr Lee, made no reference to the issue.

154. By the amended agreement of 4th January 1993, Mr Chim transferred his 50% shares to James Lee and Gordon Chan equally. They then had 50% each. They then each transferred 25% to the Company resulting in a new ownership of Chan 25%, Lee 25% and the Company 50%. The end result therefore was that Mr Chim had disposed of his 50% interest in Maxview to the Company, which he always held, indirectly through his compliant associates, Gordon Chan and James Lee.

155. This explains why no monies were ever paid by Silver Mountain to James Lee or Gordon Chan for the 10th November transfer to the Company, even though they were the supposed vendors. The only inference being that the Company did acquire 50% interest in Maxview, not on 10th November as the documents suggest, but in the following year. Mr Chim was a partner in November 1992 and continued to be thereafter.

156. On any view, I am satisfied that the sale of 50% of Maxview to the Company was a connected transaction as defined by Listing Rule 14.23(1)(b) (as set out at page 42 supra). On the basis that it was Mr Chim who sold the 50%, albeit through the conduit of Mr Lee and Mr Chan, it was connected. It would also have been connected if it had been a sale by Mr Lee and Mr Chan on 10th November because at that time Mr Chim had a 50% interest.

157. In his defence, Mr Chim says it was not connected and little more. As to the allegation that documents had been backdated, he said in his final submission that "many procedures were handled not by me but by others". It was a familiar feature of his evidence that when confronted with compelling and damaging evidence, he either ignored it or claimed no knowledge of it.

158. In short, Silver Mountain received nearly $15 million, the purported vendors received nothing from Silver Mountain and the Company acquired a loss-making American property investment. The Company shareholders were not told about it and on any view, it could not be described as "use of working capital" or spending in "the higher yielding manufacturing sector" which is how the shareholders had been told their money would be invested. It was the very antithesis of an arm's length transaction.

159. Before finishing the Maxview saga, three additional complaints must be dealt with. The first two relate to the acquisition agreement itself, dated 10th November.

160. Regardless of when that document came into being, on the face of it, two further complaints are made out :-

(a) Firstly, the agreement stated that the purchaser shall at its own expense investigate and satisfy itself as to the following:

- the financial status of Maxview;

- the title of the vendors of and in the equity; and

- the title of Maxview of and in the properties.

In essence, the Company was expected to carry out due diligence procedures. Mr Grimsdick searched in vain for documentation to suggest that such procedures had been carried out. There was none. Had it been an arm's length transaction, there would have been some.

(b) Secondly, contained in the agreement was a profit guarantee clause which guaranteed that the Company would make a profit of at least $1 million per year for two years. Mr Grimsdick's evidence shows that up to 9th November 1994, Maxview made a loss of $961,296. There is evidence of a payment of $1 million paid on 31st March 1994 to the Company from the vendors of Maxview. The fact that it was from Silver Mountain lends further support for the contention that the true vendor was Mr Chim. What there is no evidence of, is any attempt by the Company to enforce the guarantee to recoup its losses.

161. The third matter concerns the post-petition issue of the ultimate disposal of Maxview.

(c) Thirdly, on 4th April 1999, the Provisional Liquidators received a cheque for just over $4 million, said to be the proceeds of sale of the Company's interest in Maxview from Mr Gordon Chan. It is apparent and I so find that the sale of Maxview was contrary to the Provisional Liquidators' consent and approval which had been expressly required and was very probably at undervalue.

H. Golden Harvest

162. The final complaint relating to the misuse of the Markle Land proceeds of sale and non-disclosure to shareholders concerns the payment by Mandarin to Silver Mountain of $17 million purportedly for the acquisition of 55% interest in a company called Golden Harvest Enterprise Limited ("Golden Harvest"). It was another investment approved at the purported Board meeting on 6th November 1992.

163. The documents show that the vendor of Golden Harvest was a Mr Cheung Chuen Chui. Golden Harvest was a mainland company involved in the manufacture of construction materials and glass mosaic tiles. As at November 1992 and even by June 1993, Golden Harvest had not commenced any business. When asked by the SFC for an explanation concerning this investment, Mr Chim stated, by three letters in August and September 1994, that the reason the purchase price was paid to Silver Mountain and not to the vendor was that the vendor, Mr Cheung, had instructed Mandarin so to do. The now familiar inference emerges once again, namely that the vendor was a nominee of Mr Chim's. There is simply no evidence that Silver Mountain ever paid any monies over to Mr Cheung. Mr Chim's letters also state that $6 million of the $17 million was provision of working capital for Golden Harvest.

164. As part of the transaction executed on 10th November 1992, Mr Cheung gave a written undertaking guaranteeing that Mandarin would make a minimum profit of $7 million after tax by 31st December 1994. On what basis Mr Cheung, who received no consideration for the sale of 55% of Golden Harvest, could guarantee a specific profit by a specific time from a company which had not yet started business and eight months later had still yet to start, is impossible to understand.

165. Mr Chim's justification for the propriety of this transaction, as contained in his final submission, was that "the investment of $17 million could be confirmed by Golden Harvest's capital examination report in PRC and the MRC (Mandarin) auditor". Unfortunately, the former report was never produced to the court and the Mandarin accounts make no such reference as suggested.

166. In short, Golden Harvest was an acquisition about which there were several irregularities and about which prudent shareholders would have had many questions to ask. However they had no such opportunity because they were not told about it. The irregularities were these :-

(a) No formal documentation evidencing the agreement by Mandarin to acquire Golden Harvest appears to exist.

(b) Mandarin acquired a company which was not in business on the strength of a letter of guarantee about which no enquiries or investigations were made.

(c) As Mr Grimsdick pointed out -

"I would have expected the Mandarin board to have been provided with profit and cash flow forecasts as part of a feasibility study to assist them in deciding whether they should invest such a large sum of money in a company that had not yet commenced business."

There were none that had been disclosed prior to trial. At trial and in the course of Mr Chim's cross-examination of Mr Grimsdick, Mr Chim produced a document purporting to be a report about the company prepared in the Mainland. Many criticisms and objections were made to the document by Mr Heslop. Ultimately Mr Chim said of it "Let us leave the court to decide what weight to attach to this document, let us not argue about it". The court attaches no weight to it. To use Mr Heslop's words, it was "pulled out of the hat". It was untranslated. It had never been seen by the Petitioner or the Provisional Liquidators. It was not clear what it was or who had written it or to whom it had been sent. It was a copy and there was no explanation for the absence of the original.

(d) The letter of guarantee has never been enforced. There is clear evidence that Golden Harvest made consistent losses in 1993, 1994 and 1995. Had there been any substance to the profit guarantee and had Mandarin enforced it, the loss to the company and therefore also to the shareholders, would have been significantly reduced.

167. As with Maxview, the same complaint is made and is proved, namely that the investment in Golden Harvest did not comply with the published intentions of the Company as to the use of the proceeds of sale. It was not used as "working capital of the Company". It was not money "placed on short term deposit" and it was not an investment in the "higher yielding manufacturing sector".

168. In so far as they have been specifically dealt with, the complaints relating to Maxview and Golden Harvest as set out in the Petition are made out.

I. Idmiston

169. The Idmiston transaction goes back to 1991. In many ways it is a self-contained issue. It will be seen that Mr Chim was heavily involved in it. It occurred before, and was relevant to, the settlement of the litigation between Mandarin and Lucky Man which had been going on for several years prior thereto.

170. In a nutshell the transaction involved the sale of Idmiston by Mandarin. Idmiston was a wholly owned subsidiary of Mandarin. Mandarin sold it, in October 1991, to a company called Great Prospect. At that time, as already demonstrated in section B, Mr Chim was already in control of Mandarin but had yet to declare his interest. In this section, the court finds that at all material times Mr Chim also beneficially owned and controlled the purchaser of Idmiston, namely Great Prospect. It is another example of him, in reality, being on both sides of the transaction. It was a piece in the jig-saw whereby he gained control of both Mandarin and Lucky Man and, as will be seen by the very unusual events which followed the sale to Great Prospect, it resulted in financial advantage to Mr Chim. The whole issue is somewhat involved. I shall state the court's findings by dealing with it chronologically.

1. 10th May 1991 :

171. It will be recalled that this is the time when Mr Chim's real control of Mandarin began. On 10th May 1991 the Mandarin Board met and, inter alia, it was resolved, under the chairmanship of Mr Malcolm Stone, to sell Idmiston to a suitable purchaser for $20 million. It was further recorded that the reason for the sale was "to further remove uncertainty and to settle the value of Idmiston Limited judgments in the company accounts."

172. Idmiston was a limited company incorporated in Hong Kong in 1986 and was a wholly owned subsidiary of Mandarin. Its only asset was three judgment debts against Asian Master Enterprises Limited, Crownhall Investments Limited and Asiatic Fortune Company Limited, the majority shareholders in Lucky Man. These three companies were under Provisional Liquidation. The full value of the three debts was $29,913,377.

2. 30th September 1991 :

173. Another Mandarin Board meeting was held. At the time of the meeting Idmiston owed Mandarin $26,250,000, being the amount of an unsecured loan previously advanced. At this meeting, for no apparent reason the debt was written down to $21,005,949. As will be seen, by accepting $20 million for Idmiston upon its sale to Great Prospect three days later, they effectively wrote off a further $1 million of the loan.

3. 3rd October 1991 :

174. This is the date of the written agreement of sale to Great Prospect.

175. Great Prospect was a Hong Kong company with two issued shares of $1 each registered in the names of Mr Sun Ying Chung and Mr Shen Kuan Hsui. They were Great Prospect's only directors. Mr Sun and Mr Shen (also known as Mr Shek) were the same two people who the court has found, earlier in this judgment, were Mr Chim's nominees in November 1992 at the time of the circular flow of funds in relation to their applications for rights issue and excess rights issue Lucky Man shares and the sale by Mr Sun of 4.5 million Lucky Man shares to Mandarin. The same finding, namely that they were Mr Chim's nominees, is made in respect of this transaction.

176. By the 3rd October agreement, Great Prospect purchased and Mandarin sold the two shares for a consideration of $20 million. On the payment of $20 million, the Company released and discharged the loan owned by Idmiston to the Company. It is important to note at this stage that the cheque for $20 million to the Company was not issued by Great Prospect but was issued by Mr Chim personally. The effect of the 3rd October agreement was succinctly described by Mr Grimsdick as follows :-

"A cheque for HK$20 million dated 3 October 1991, was drawn on Mr Chim's International Bank of Asia bank account. 3 October 1991 was the date that the acquisition agreement was signed.

This cheque was payable to Mandarin and appears to have been in settlement for the outstanding loan balance between Idmiston and Mandarin. With this payment Mr Chim was now owed HK$20 million by Idmiston and that the HK$21 million loan balance due to Mandarin under the agreement was now cleared/assigned. ...

It would appear from Mandarin's general ledger account activity detail report that Mandarin did not present the HK$20 million cheque to its bank for clearance but instead a HK$20 million deduction was made from the amount that Mandarin owed to Mr Chim."

In addition, two clauses in the agreement require particular mention. Clause 1.1(b) expressly provided as follows :-

"... the Vendor hereby agrees to assign all interest and benefits in the Judgement Debts to the Purchaser and stipulates that the assignment is made completely at the risk of the Purchaser without any representation, undertakings, or warranties of any kind whatsoever with regard to the subject matter of the assignment, its ownership, or the right to take the assignment and to the recovery of the Judgment Debts".

Clause 4 states :-

"4. ENTIRE AGREEMENT

This Agreement constitutes the entire agreement and understanding between the parties in connection with the subject-matter of this Agreement and supersedes all previous proposals, representations, warranties, agreements or undertakings relating thereto whether oral, written or otherwise and neither party has relied on any such proposals, representations, warranties, agreements or undertakings."

4. 5th October :

177. On this date the Mandarin Board approved the agreement. The written resolution of approval made no mention of Mr Chim's involvement even though he had written the cheque and ostensibly had no interest in Mandarin. Neither did it explain why Mandarin sold off its loan worth $26.25 million for only $20 million.

5. 17th October :

178. The litigation between Mandarin and Lucky Man was settled. Included in the settlement was a declaration that 23 million Lucky Man shares held by Asian Master and Asiatic Fortune had not been paid for.

6. 2nd December :

179. The unusual nature of the Idmiston transaction now enters a higher plane. On 2nd December Mandarin sent a letter, unsolicited, to Great Prospect offering to refund to them $18 million as a "financial adjustment" following the settlement of the litigation. Mr Sun, not surprisingly, accepted the offer on behalf of Great Prospect.

7. 18th December :

180. Great Prospect formally accepted the refund but did not receive the money itself. Instead it directed Mandarin to pay the money to Mr Chim, which it was, and was paid into Silver Mountain's account. Mandarin's letter enclosing the cheque describes it as :-

"... a refund to you to the purchase price in accordance with an Agreement dated 3 October 1991 between us as Vendor and yourself as Purchaser of 2 shares in Idmiston." (emphasis added)

181. 18th December 1991 was an important day in other respects concerning the Idmiston transaction. First of all, however, it is necessary to answer the question - on what basis can it be justified that the refund was "in accordance with" the agreement. On the face of the agreement there is nothing which could be construed as providing for such a refund. In fact it expressly provides for the opposite.

182. This question occupied some time at trial. Mr Grimsdick, Mr Chim and Mr Sun were all examined and cross-examined about it, in varying degrees. The Respondents' evidence boiled down to three different explanations being given. I will deal with each briefly. None of them stood up to close examination, none of them were acceptable, none of them begun to explain the refund to Mr Chim.

183. Firstly, consideration was given to the explanation contained in the only affirmation filed by the Company on 22nd February 1997 and signed by another Mr Sun, Mr Sun Tak Keung, a director of Mandarin. He said :-

"Although under the agreement with Great Prospect MRC did not warrant for the recoverability of the said judgment debts; it was clearly an implied term of the agreement that MRC would not itself act or cause any act to be done which would prejudice the recoverability of the said judgment debts."

184. The suggestion being that as Mandarin had been a party to the settlement of the litigation in which a declaration had been made that the 23 million Lucky Man shares which had been allotted to the three companies in liquidation had not been paid for, then Mandarin had effectively impoverished the three companies, the judgment debts of which Idmiston had acquired.

185. This explanation has no substance. No such term could be implied into the agreement of 3rd October in the light of its express and unequivocal terms to the opposite effect. Furthermore there is no evidence of Great Prospect being aggrieved or angry about the settlement which, on the face of it, seriously devalued its judgment debts against the three companies. Great Prospect never asked for a refund, neither did it ever suggest that the original agreement contained an implied term on which they could rely. What is more, Mandarin apparently did not consult its solicitors before deciding that the agreement contained an implied term and when it first offered the $18 million refund on 2nd December made no mention of an implied term. It merely suggests "we make a financial adjustment". The 1st Respondent's affirmation simply does not address the Petitioner's allegation that the true role of Great Prospect was as a front for Mr Chim.

186. The second explanation came from Mr Chim himself, both by affirmation and in evidence at trial.

187. In his affirmation of 17th February 1997, Mr Chim said as follows :-

" Regarding the price of $20,000,000.00, my agreement with Mr Shen and Mr Sun of Great Prospect was that if they were unable to recover at least $20,000,000.00 from the judgment debts owed to Idmiston by the 3 companies, any short fall would be returned to them.

As it turned out Idmiston was only able to recover $2,000,000.00 from the 3 companies. The 1st Respondent was faced with the prospect of litigation by Great Prospect for the recovery of $18 million. To avoid this from happening it was decided to return $18,000,000.00 to Great Prospect. It is totally incorrect for the Petitioner to say that the return of $18,000,000.00 was without any commercial reason or justification. However, I accept the fact that the agreement to dispose Idmiston to Great Prospect which was subject to the conditions I mentioned, were not stated in the 1st Respondent's announcement in connection with the proposed sale or in the circular to shareholders. I had no recollection whether I had informed those in the 1st Respondent responsible for these matter that the disposal of Idmiston was subject to these conditions or not. If I had, they had probably omitted to include this in the announcement or the circular to shareholders of the 1st Respondent and I failed to realise the importance of such an omission.

The Petitioner is using this omission to suggest that the assets of the 1st Respondent was depleted by $18,000,000.00 for no apparent reason and that the minority shareholders of the 1st Respondent had suffered prejudice. This suggestion can only be made by ignoring basic business sense and commercial realities. No one would agree to pay $20,000,000 as the price for something which was worth only $2,000,000."

188. This suggests Mr Chim had a collateral agreement with Mr Sun and Mr Shen. It starts "My agreement ... was ..." The difficulties which Mr Chim faces with this explanation are numerous. There is no documentary evidence in support of this alleged collateral agreement. Such an agreement would fly in the face of the "entire agreement" clause (clause 4) and would be the reverse of the terms contained in clause 1.1(b). There is no evidence that the company was aware of any collateral agreement and neither did Mr Stone refer to it when he wrote to Great Prospect on 2nd December. Had it existed, the minority shareholders should have been made aware of it. It makes no sense to inform the shareholders about one agreement but conceal a collateral one which has a direct bearing on the first one. The public announcement about the sale of Idmiston on 4th October 1991 and the circular to shareholders on 12th November 1991 both refer to the original agreement only. It is correctly contended by the Petitioner that both these documents were thoroughly misleading. The 4th October press announcement said :-

" The Board of Directors of Mandarin announces that the company on 3rd October entered into an agreement with an independent third party ...

The consideration was arrived at after arm's length negotiation between the company and the purchaser. ... The proceeds on repayment of the loan from Idmiston will be applied for the reduction of borrowings of the company."

189. Naturally, it does not say that the consideration came from Mr Chim or that he was connected with the company. The notice to shareholders is much the same. It contains the following sentence :

"The purchaser is an independent third party not connected with the directors, chief executive or substantial shareholders ..."

190. The last line of the passage from Mr Chim's affirmation, quoted above, states "No one would agree to pay $20 million for something worth only $2 million". On the face of it, that is exactly what they did. It only makes sense on the basis that Great Prospect was in reality Mr Chim.

191. A third expression used by Mr Chim in an attempt to justify the refund was that it was "a commercial decision made by the Mandarin Board". This is his explanation in his letter to the SFC dated 30th September 1994. This is neither an implied term nor a collateral agreement. It is also difficult to see why the Company would consider it in the shareholders best interest to give back $18 million contrary to the express terms of the agreement.

192. Finally and somewhat confusingly, Mr Chim in his final submission to the court, seemed to abandon his "collateral agreement" argument and revert to the implied term. He said (of the Lucky Man/Mandarin settlement) "This amounted to a breach by MRC of the implied warranty contained in the agreement it entered into with Great Prospect on October 3rd 1991".

193. The simple reason for the confusion surrounding Mr Chim's justification for the refund is that there was no justification for it. The explanation for it is that he was on both sides of the transaction and Mr Sun and Mr Shen were his nominees. The cheque for $20 million signed by Mr Chim was not presented by the Company for payment. It was endorsed by Malcolm Stone in favour of Mr Chim and set off against loans made by Mr Chim to the Company. The refund of $18 million was issued to Mr Chim and paid into the Silver Mountain account. This leads on to the next question involved in the Idmiston transaction.

Why did Mr Chim need the $18 million refund and how did he use it?

194. To answer this question, it is necessary to return to the events which occurred on 18th December 1992. The day of the refund. A number of other transactions took place on the same day, which I list below. The fact of, the nature of and the timing of these transactions can only lead to the conclusion that they were all part of the same scheme. Each depended on the other.

195. Documents produced and considered by Mr Grimsdick reveal the following events on 18th December :-

- Silver Mountain received three deposits totalling $32,528,016. They were the $18 million refund from Mandarin, another cheque for $2.6 million from Mandarin and a transfer from Mr Chim for $11,928,016.

- Silver Mountain made four payments out, also totalling $32,528,016. These were $29,670,000 to Lucky Man and three payments totalling $2,858,016 to Asian Master, Crownhall and Asiatic Fortune.

- The $32,528,016 payments out were for the purchase of 32,528,016 Lucky Man shares which Day & Day had agreed to acquire from the three companies in liquidation. 23 million of them having been allotted to Asian Fortune pursuant to an agreement between the liquidators and Lucky Man. The cheque for $29,670,000 (above) to Lucky Man was the payment for this allotment.

196. The consequence was that Silver Mountain i.e. Mr Chim had paid for, on behalf of Day & Day 66.6% of the issued share capital of Lucky Man. About 55% of the cost was represented by the $18 million which Mandarin had improperly refunded to Great Prospect but had paid into Silver Mountain's account. Thus on 18th December 1991 Mandarin made a substantial financial contribution to Mr Chim's control of Lucky Man. The Mandarin shareholders were unaware that their assets were being disposed of to acquire an interest in Lucky Man. They reaped no benefit from this. They are entitled to be compensated.

197. Mr Chim suggests that the acquisition of the controlling stake in Lucky Man was a wholly separate transaction from the refund of $18 million from Mandarin. It is implicit in this suggestion that he says it was pure coincidence that all the financial manoeuverings occurred on the same day. The hallmarks of it being a part of the overall scheme and therefore, no coincidence are abundantly present. The final blow to Mr Chim's response to the Idmiston complaints is to be found in his explanation for the fact that even after the purported sale of Idmiston to Great Prospect, Mandarin continued to pay its disbursements throughout 1992, such as the auditors fees. Extracts from his affirmation on this matter ring very hollow indeed :-

" Neither I nor the staff of Mandarin are able to recall why this was so. It could have simply been clerical or administrative errors made by the accounting staff who handled many companies owned by me. They could have continued paying expenses without realising Idmiston had been sold but were under the belief that since we were friendly parties, and used to have running accounts kept for our business dealings, that irrespective of the correct position, expenses, whether rightly or wrongly, could be adjusted easily."

J. Transfer of 12 million Lucky Man shares to 199 fictitious shareholders

198. I have just quoted an example of Mr Chim blaming his staff for the existence of documents which support findings adverse to him. The following issue is another example. This issue comes at or near the top of an imaginary league table of Mr Chim's wrong doings and his attempt to explain it away as "a misunderstanding and a mistake by an employee" does him no credit and lacks even a trace of veracity.

199. In April 1993, when Mr Chim claimed to have no controlling interest in Lucky Man and Day & Day was wholly owned by James Lee, he arranged the transfer of 6 million Lucky Man shares owned by Janyee and 6 million Lucky Man shares owned by Thai Yuen into the names of 199 fictitious names. His motive was probably to increase the number of outside shareholders in support of his aim to have trading in Lucky Man shares resumed. However, it is the fact of what he did which is important. There is no requirement to prove his exact motive.

200. In Mr Chim's final submission he summarized his defence on this matter as follows :-

"In March 1993, Thai Yuen and Janyee each transferred 6,000,000 Lucky Man shares to 199 fictitious shareholders, purely due to mistakes made by staff. At that time CPC (Mr Chim) had reached an agreement with a washing machine factory in Hefei. That factory paid RMB60,000,000 for CPC to a municipal institution for investing in a property project in the city centre of Hefei. CPC repaid in the form of 12,000,000 Lucky Man shares. At the request of the factory, CPC divided those 12,000,000 shares into 200 portions to facilitate allotments by the factory. Hence CPC instructed his staff to do accordingly. But the staff misunderstood his words and allotted those 12,000,000 shares to 199 nominee accounts."

201. Thus, it seems the facts of what happened are not in dispute. He says it was an unfortunate mistake. That it was no mistake is the only inference that can be drawn from the unchallenged facts which briefly are as follows.

202. As already described, after the Lucky Man rights issue Janyee held approximately 34.7 million shares and Thai Yuen 35.1 million shares. However, on 25th February two notices pursuant to the Securities (Disclose of Interest) Ordinance, Cap.396 were submitted to the Stock Exchange of Hong Kong which stated that Janyee held 28.7 million and Thai Yuen 29.1 million i.e. 6 million each less than their actual holding. Then on 4th March 1993, fresh notices were submitted which stated that their original shareholding had been the higher figure but that as at 22nd February 1993 their new holding was the lower figure. By way of explanation in later correspondence to the SFC, Mr Chim stated that in February 1993, Janyee and Thai Yuen had transferred a total of 12 million shares to him for $13.2 million. That was not a correct statement.

203. In fact, Janyee transferred 6 million Lucky Man shares to 99 individuals and Thai Yuen transferred 6 million Lucky Man share to 99 individuals and one company. These transfers are recorded in the Lucky Man share register dated 17th April 1993. Mr Grimsdick's evidence reveals that the Janyee Lucky Man shares were transferred on 4th March 1993. The transfer was executed not by an authorized representative of Janyee but by an employee of Lucky Man, a Ms Finny Tong at a recorded price of $7.8 each. However, there is no evidence that Janyee actually received any money for them.

204. Similarly, the Thai Yuen Lucky Man shares transfers are dated 2nd and 3rd March. They were executed not by an authorized representative of Thai Yuen but by a Silver Mountain employee, Debbie Chiu. There is no record of Thai Yuen receiving the recorded price of $7.8 each.

205. All disbursements on both transfers were paid by Silver Mountain.

206. The truth plainly is that the 199 named shareholders did not know anything about the transactions or even that their names had been used. They certainly did not acquire any beneficial interest in Lucky Man. They were sham transactions based on forged documents.

207. Further investigations revealed that 133 of the 198 individuals' names were the registered shareholders of a company called First City Investments Company, a company of which Mr Chim and Mr Robert Lee had been directors.

208. Any fanciful doubts about the sham nature of the transfers are dispelled by the following factors :-

i) In August 1994, 46 of the 99 Janyee transferees were contacted by SFC investigators. They all denied signing the transfer forms and denied either buying or paying for them.

ii) In August 1994, 39 of the 100 Thai Yuen transferees were contacted by SFC investigators. They all denied signing the transfer forms and denied either buying or paying for them.

iii) All the transfers were made within three days of each other (2nd March to 4th March) and all for exactly the same consideration per share.

iv) By further investigation it is apparent that the 199 shareholders held their shares for about 18 months until 23rd August 1994. During that period none of them dealt with their shares in any way.

Then,

v) On 23rd August 1994, all the shareholders sold their shares to the same company, Power Master Development Ltd., for the same price, $5.00 each.

vi) Power Master was incorporated on 8th August 1994. Silver Mountain paid for an incorporation fee in September 1994. Correspondence for Power Master was sent to the 11/F of HMD Building, Mandarin's address. Silver Mountain also paid for the stamp duty payable by both the purchasers and the sellers in August 1994. Thus, once again we find Mr Chim on both sides of the same transaction.

209. I have already quoted from Mr Chim's written opening by way of explanation for these 199 transfers. In his opening to the court he elaborated as follows :-

" In March 1993, I went to a place in China called Hefei in Anhui Province in China. I and my representative agreed to buy a piece of land in the city area from the provincial government - from the town government, at a consideration of 60 million Renminbi. At that time we agreed the payment to be made in the equivalent sum of Hong Kong dollars, and that is equivalent to HK$60 million.

At that time, there was a factory which had money, and it was called Rongshida. It was a factory manufacturing washing machines. It represented me or my representative to pay $60 million to the Government of Hefei. I gave them a private placement of 12 million Lucky Man shares, and each share was worth $5. At that time, this Rongshida washing machines factory had a lot of retail outlets all over China. It wanted to have the 12 million Lucky Man shares to be divided up into 200 lots.

So I took 600 shares from Thai Yuen and then 600 shares from - so in Hong Kong I took 6 million shares from Thai Yuen and another 6 million shares from Janyee. I asked my staff to entrust these 200 lots to 200 trustees - to 200 nominees. I did not pay notice to how they did it and I did not make any follow-up."

210. Not surprisingly, Mr Heslop, on behalf of the Petitioner wanted to ask Mr Chim some questions in cross-examination. Mr Chim, to 12 consecutive questions said that he refused to answer. His given reason for refusing to answer was that this issue had nothing to do with Mandarin. I am satisfied that the real reason for his refusal was that he had no satisfactory answer to the complaint.

K. The proposed acquisition of Silver Mountain by Lucky Man

211. When asked about the above issue, to which I now turn, Mr Chim, in cross-examination adopted the same stance. He said, in answer to the first question about it :-

" In fact the question you are asking me has nothing to do at all with Mandarin. I challenged you on many, many occasions: why do you not apply to wind up Lucky Man as well? You should not be asking something outside Mandarin and it is a joke for the court to allow you to do that."

212. Of course, given that Silver Mountain was to all intents and purposes, Mr Chim himself and given that he was also in control of Lucky Man, through Day & Day, at the same time as being in control of Mandarin, it was far from a joke.

213. Once again therefore it seems that Mr Chim has no satisfactory answer to the complaints made. Once again the evidential foundation to the complaints comes from the documents produced by Mr Grimsdick and from the lack of documentation which one would have expected to exist had this been a proper commercial transaction.

214. The complaint is headed the "proposed" acquisition because it never actually materialized. However, an investigation into Mr Chim's involvement in the proposed sale is relevant to both the "unfair prejudice" and the "public interest" limbs of the Petition.

215. On 24th February 1993 Lucky Man announced that it had entered into a conditional agreement with Migara Investments Limited ("Migara"), a company owned by Mr Chim, to buy Silver Mountain for $220 million. There is no information available to explain how the price of $220 million was arrived at.

216. At the time Silver Mountain assets comprised three properties. According to Mr Grimsdick the net asset value of Silver Mountain was $106.3 million. It seems therefore that Lucky Man was paying significantly more for Silver Mountain than it should have been. The irregular nature of this proposed sale is compounded by the fact that prior to the announcement of the proposal Lucky Man had carried out no due diligence and there had been no independent professional valuations of Silver Mountain's three properties. Had there been due diligence, it would have been noted that Silver Mountain was not Migara's to sell in the first place. It belonged to Mr Chim. The announcement further stated that the proposed sale had been agreed after arm's length negotiations. Yet again, Mr Grimsdick pointed out that there is no written evidence of any sort to indicate that any arm's length negotiations had taken place.

217. The main complaint arising out of this issue is the fact that on 22nd June 1993 Lucky Man paid to Silver Mountain $50 million as a "refundable deposit" and "earnest money" for the acquisition. There was no justification for this payment for three reasons. Firstly, it was paid to Silver Mountain whereas the proposed vendor, according to the agreement, was Migara. Secondly, there was nothing in the agreement which provided for the payment of any deposit or earnest money. Thirdly, one of the conditions which had to be fulfilled before the acquisition could go ahead was that Silver Mountain's appeal against a judicial review decision concerning the three properties would succeed. Silver Mountain's appeal was unsuccessful. Nonetheless the "deposit" was still paid even after the appeal had failed.

218. There were simply no grounds upon which it could have or should have been paid. Furthermore, its amount was unreasonably large. It represented almost 50% of the actual value of Silver Mountain. When it was refunded in November 1993, it was refunded without payment of interest.

219. Had the proposed sale of Silver Mountain to Lucky Man gone through, Lucky Man might have paid over $100 million too much for it. Lucky Man, at exactly this time was "in funds" because of the highly profitable sale, procured by Mr Chim, of Fairmount Terrace to Mr Lai. Thus, part of the profits to Lucky Man procured by Mr Chim would have been moved on to Mr Chim himself by the purchase of Silver Mountain at its inflated price.

220. However, it did not go through. The complaint remains that Lucky Man never got any interest on the payment of a refundable deposit which should never have been made in the first place.

L. Payment to Time Deco 1991 S.A. of $4 million for "consultancy services"

221. In December 1993 Mandarin paid "Time Deco" $4 million for "securities investment consultant services charges". In the overall scheme of things, it is a discrete issue for a relatively small sum. I emphasis "relatively".

222. It is clear from the evidence that the only trading in securities carried out by Mandarin during the period to which this payment relates was in Lucky Man shares and in shares in a company called "Oriental Watch". The trading in Lucky Man shares by Mandarin can be safely ignored for the purpose of this issue because, given the relationship between Lucky Man and Mandarin and the history of their dealings up to December 1993, there would plainly have been no need for independent investment advice about Lucky Man shares.

223. It follows therefore, and it is the opinion of Mr Grimsdick with which I agree, that this payment of $4 million related solely to advice about trading in "Oriental Watch" or about trading in other shares which never occurred. There is simply no evidence of any advice relating to possible dealing in other shares which were not pursued.

224. Trading in Oriental Watch occurred only during the two months of November and December 1993 and resulted in a profit of $7.64 million.

225. These are the simple facts which give rise to the questions - who are Time Deco and what did they do for their $4 million?

226. The Mandarin Board (comprising Mr Chim's wife, son and three employees) which I have already found was under the control of Mr Chim, approved the payment on 31st December 1993. The agreement named Mandarin as one of the parties and Time Deco as the other. Mandarin's address is quoted but no address for Time Deco is given. In the letter of the same date from Mandarin to Time Deco, signed by Ricky Chim, Time Deco's address at the top of the letter is given as "Present". These factors merely serve to highlight the mystery which surrounds this payment.

227. In addition it is noted that this was a one-off annual payment which in itself is unusual. The amount of the payment represented over 50% of the profits made by trading in Oriental Watch. By the agreement, Mandarin was given "sole discretion" to pay Time Deco whatever it wanted. No documents have emerged to show that Time Deco ever prepared or submitted any investment reports about Oriental Watch or about any other shares.

228. No doubt because of its unsavoury features, Mr Heslop's cross-examination of Mr Chim started with the "Time Deco" issue. He selected it, to use his own words, "to test your commitment to the truth". In my judgment, Mr Chim failed the test.

229. In answer Mr Chim said, in effect, that he knew nothing about it. He would have been aware that the complaint was being made since the date of the Petition over two years earlier. However, he said that he had made no enquiries about who Time Deco was or what they had done for their $4 million. He had not even asked his son about who had signed the 31st December 1993 letter and recorded the address of the company as "Present".

230. Only one proper conclusion can be made from the evidence, namely that Mr Chim was behind the Board's approval of the payment which had no justification and was improper.

M. The abortive EGM in July 1996

231. This is a simple complaint which can be stated quite shortly. It is a criticism, wholly justified on the evidence, concerning Mr Chim's familiar habit and style of ignoring rules, directions and orders when they do not suit him. It is not an allegation from which any financial loss to the shareholders results, but is plainly relevant to the allegation that the affairs of Mandarin continue to be conducted in a manner unfairly prejudicial to the shareholders.

232. On 8th July 1996, 13 days after the presentation of the Petition, Mr Chim set about convening an EGM of the Mandarin shareholders. At the time Mr Chim was the beneficial owner of 73% of Mandarin issued share capital (through three nominee companies). The purpose of the EGM was said to be :-

"for the following purposes raised by the SFC :

1. To consider whether the Company should be wound up by the Court under the provisions of the Companies Ordinance applied by the SFC.

2. Further or alternatively, to consider whether an accountant should be appointed to determine the present value of the shares in the Company on the basis that none of the transactions complained of by the SFC in the Petition (the 'Transactions') had occurred and whether Mr Chim should make a general offer to purchase the shares of the Company not already beneficially owned by him at a price representing that present value.

3. Further or alternatively, to consider whether a Receiver should be appointed and empowered to take such steps to investigate matters and to bring such proceedings as he may be advised are available to it in respect of the transactions and matter referred to in the Petition.

4. Further or alternatively, to consider whether to declare any of Mr Chim and the other executive directors of the Company is unfit to hold any position of management in the Company and that they be disqualified from acting as directors thereof.

5. To consider whether the company should continue its application for resumption of trading of shares on The Stock Exchange of Hong Kong Limited.

6. To support the company to take legal action against the SFC and all legal fees involved in respect of the Petition.

7. To confirm the allegations by the SFC in the Petition is a commercial decision; and to confirm and approve all the transactions stated in the Petition.

8. To support the commercial decision made by the existing board of Directors.

9. To transact any other business. (sic)"

233. It is unnecessary to consider in any detail the propriety of these proposed resolutions. It is sufficient to highlight numbers 6, 7 and 8. By these resolutions, Mr Chim is attempting to whitewash all the complaints made in the Petition and to get the Company to pay whatever it costs to defend the Petition.

234. In any event, urgent correspondence ensued between the solicitors for the parties. The meeting was being convened with unseeming haste with improper motives to pass resolutions which would have no legal effect. The shareholders were being given the opportunity to vote for or against the proposals. They were not told that they could adjourn the meeting. On 12th July the Company sent out a circular to shareholders concerning the EGM. The circular purportedly came from an "independent committee". The obvious lack of independence of that committee caused the Petitioner's solicitors to write to them setting out their concerns which were as follows :-

"(i) that it would not be possible, by 29th July 1996, to provide the minority shareholders with sufficient, impartial information to allow them to consider the proposed resolutions sensibly;

(ii) that the minority shareholders had not received any real advice from the Committee, let alone a summary of the nature of the allegations made in the petition nor the amounts claimed in it by way of compensation;

(iii) that in view of the fact that many of the minority shareholders are based overseas, those minority shareholders were unlikely to have any or any adequate and realistic opportunity to consider the contents of the petition;

(iv) that the Committee had not waited until it was in possession of the Petitioner's evidence before formulating their advice to the shareholders and convening the EGM;

(v) that the Committee had not attempted to assess the potential financial and legal consequences of the various proposed resolutions;

(vi) that the Committee had not informed the shareholders that, as an alternative to voting for or against any of the proposed resolutions, they could resolve to adjourn the meeting until such time as sufficient information became available to them."

235. In a lengthy reply, the committee effectively rejected the SFC's concerns. It is an important letter because (and I here quote Mr Heslop's words in opening) :-

"... it demonstrates that even after the presentation of the petition, this company under the control of Mr Chim, and this board, continued to look at matters from a solely partisan point of view, which manifestly preferred the interests of Mr Chim to those of the company as a whole, and the minority shareholders in particular."

236. There were further urgent exchanges of correspondence which culminated, on 26th July, in the adjournment of the EGM by the Provisional Liquidators. In spite of this, a meeting chaired by Mr Chim and held in a Wanchai restaurant owned by him took place on 29th July. At the meeting Mr Chim conceded that "the meeting might not be a valid one". Nonetheless the resolutions were voted on and passed. The Provisional Liquidator, Mr J. Lees, correctly denounced the meeting as being improperly convened and having passed resolutions of no legal effect.

237. In short, in the context of the Petition, this matter constitutes a proposed act by the Company which would have been unfairly prejudicial to the minority shareholders. As soon as the Company received the requisition from Mr Chim, it proceeded with the calling of the EGM in a partisan way, merely, in truth, doing what Mr Chim wanted and ignoring the best interests of the Company as a whole.

N. The "Traskey Offer"

238. At the same time as the events outlined in the previous section the so-called "Traskey Offer" was made. On 1st July 1996 a company named "Traskey Ltd." made written offers to minority shareholders to buy their shares at $5 each. The only information given in the letter about the company was its mobile phone number. No address was given. The employee from Traskey who dealt with the subsequent enquiries was a Mr Ip. He was also named as one of two directors of Traskey.

239. The SFC only learnt of this offer on 22nd July 1996 as a result of a newspaper article. There is no doubt that Mr Ip was and is a close associate of Mr Chim's. He had on many occasions received travelling and other expenses from Silver Mountain, Lucky Man and Mandarin. He was also present in court on each day of this trial sitting next to and acting as Mr Chim's assistant.

240. The explanation offered by the Company for this offer was that Mr Ip had agreed to act as a middleman for Rich Profits Investment Limited, a company owned by mainland investors, and that :-

"Rich Profits has 'absolutely no connection' at all with the company. No member of the board, including Mr Chim, was aware of the acquisition by Rich Profits through Mr Ip/Traskey of shares in the company."

241. Further investigation revealed more evidence that Mr Ip was very closely associated to Mr Chim. He was closely involved in the management at Mandarin. On one Mandarin document he is quoted as being "responsible for the accounting and financial management functions of the group". He was involved in the preparation of the circular to shareholder on 12th July 1996 concerning the 29th July EGM. Since 1994 he was a co-signatory of Mandarin's bank account. Since 1994 he had been a director and chairman of a company called Chinatex in which Mr Chim had a 20% interest. Also since 1994 he was a director of one of Lucky Man's subsidiary companies, Fu Tai Vacationing Village Development Co. Ltd. The inference must be drawn and is drawn that the companies' claim of "absolutely no connection" is false.

242. The SFC set out its complaints in this matter in paragraphs 239CC to 239FF. No attempt has been made by Mr Chim to answer them. Mr Ip was neither called nor filed any affirmation. He had no right or authority to make a public offer for the shares by means of a letter and a mobile phone contact number. I am satisfied that the offer was made at the behest of Mr Chim and for his benefit. Again it is not necessary for the Petitioner to prove a motive for this. An obvious motive would be to have control of as many of the minority share holdings prior to proposed EGM on 29th July, or generally to gather in as many of the minority shares as possible.

243. Whatever the motive, it is the conduct which the court takes into account, namely improper conduct in offering to buy the shares in the way outlined by a person who claimed to be independent but was in fact a front man for Mr Chim.

O. The Provisional Liquidators' Reports

244. I have already dealt with the law on this issue. Put shortly, the court can have regard to the Provisional liquidators reports, particularly when deciding whether it is in the public interest to order that a company be wound up (supra, Nicholls LJ in Re Walter L. Jacob & Co Ltd (1989) 5 BCC 254). In all four reports have so far been submitted on 31st July 1996, 27th January 1997, 26th February 1999 and 19th March 1999. The contents of these reports are relevant and admissible on the issue of whether the company has continued to be run in a manner unfairly prejudicial to the interests of the minority shareholders since the presentation of the Petition.

245. Of those matters reported on by the Provisional Liquidator, the Petitioners relies on three matters as further evidence in their favour.

1. The cancellation of a Deed of Indemnity

246. In his report of 27th January 1997 Mr J. Lees reported as follows :-

"During my review of the minutes of directors meetings, I noted that, on 24 January 1994, Mr Chim executed a Deed of Indemnity (the 'Indemnity') to indemnify the Company for all costs incurred by the Company in respect of certain legal disputes with the Company. This Indemnity was resolved as null and void in a board meeting held on 6 May 1996. The Board members who were present and voted on this resolution comprised Mr Chim, his wife, his son and a Mr Sun Tak Keung. The total sum paid by the Company in respect of a legal dispute covered by the Indemnity was HK$1,529,329.93."

247. He wrote requiring an explanation and on 26th February 1999 reported the up-to-date position :-

"As we did not receive a response from the directors to our letter of 20 December 1996, we wrote to Mr Ricky Chim on 9 January 1997 requesting a response. Having received no response to that letter, we again wrote to the directors on 26 February 1997, requesting information in relation to this matter.

On 10 April 1997, having received no response from the directors, we then forwarded a copy of our letter of 20 December 1996 to Messrs Wilkinson & Grist ('W&G'), solicitors for the directors, requesting a response to the matters contained therein. A follow up letter was sent to W & G on 30 April 1997 again requesting this information.

To date, neither the directors nor W&G have provided a response in relation to this matter."

248. In short, the Company paid legal fees which Mr Chim should have paid under a Deed of Indemnity which the Board, under Mr Chim's control, simply tore up when the time for Mr Chim to pay was looming.

249. Mr Chim's submission as to why he did not pay was that the indemnity only applies if the Company could not afford to pay. The Company could afford to pay and so he did not have to. He added "if the Company wants, it can sue me".

250. Even if he was correct about this, which he is not, it gives rise to the question - if there was no liability to pay under the indemnity, why declare it null and void?

251. It is another example of the Mandarin Board and Mr Chim acting in concert to the unfair prejudice of the minority shareholders.

2. The Investment in South East Asia Wood Holdings industry Ltd (SEAW)

252. In a nutshell, in November 1998, Mandarin purchased 56 million shares in SEAW at $0.44 per shares. The 56 million is assumed to be the shareholding of one of the company's directors, Mr Hui Lap Chun. The market value of the shares at the time was $0.246 per share. In total, therefore, there was an overpayment to Mr Hui of almost $11 million. In addition the Company had made substantial loans to Mr Hui. The details are not important. What is important is that the consequence of the purchase amounted to a debt forgiveness to Mr Hui by Mandarin of $9.2 million.

253. The Provisional Liquidator has written letters to the Company requesting information about this acquisition but no replies have been received.

254. In evidence Mr Chim has said that he has taken no part in Mandarin's business affairs in "the later stages, particularly after the appointment of the Provisional Liquidator". It is implicit in the findings made thus far that this claim by Mr Chim is rejected.

255. The relevance of the unexplained SEAW transaction is twofold. Firstly, the requests for information, very properly made by the Provisional Liquidator have been ignored. On the face of it the purchase constituted a breach of fiduciary duty by the Mandarin Board. It is proper to infer that the fact that they have not given any answer means that they have not got any satisfactory answer to give. Secondly, if the court considers it is one of a number of transactions which require further investigations, it could be a ground for making a winding up order so that the court liquidator as opposed to the provisional liquidator can properly pursue the matter.

3. The investment in World Target International Limited ("World Target")

256. Similar difficulties arise with this transaction. It is not necessary to examine the details. The fact is that the Provisional Liquidator wanted information but his letters to both the Company and their solicitors resulted in no information being provided. As a result he applied for a court order which was granted.

257. In January 1997 he reported as follows :-

"On 27 November 1996, Mr Justice Rogers endorsed the view that I should be given access to certain information relating to the subsidiaries and activities of the subsidiaries. I have now commenced reviewing the subsidiaries' documents and will report to the Court on any significant findings in due course.

I have noted an unusual investment made by World Target International Limited and I have written to the directors for further information. I enclose a copy of my letter to the directors dated 25 January 1997 and marked 'Exhibit JRL-7'."

258. By February 1999 the position was :-

"We referred in the 27 January Report to the fact that we had identified an unusual investment made by World Target International Limited (a subsidiary of the Company) and that we had requested further information from the directors under cover of our letter dated 25 January 1997.

We advise that, to date, we have received no information from the directors pertaining to this transaction."

259. Once again, the deafening silence is a factor the court can and does take into account when deciding the proper relief to be granted on the Petition.

260. This concludes my evaluation of the evidence and my findings thereon under the aforesaid 15 headings.

261. I now turn to the question of the appropriate relief to be ordered.

Relief

262. The court must now consider the cumulative effect of the findings made in relation to all 15 of the issues dealt with. The court has found proved to the required standard the substance of the complaints on each and every issue. It has amounted to a systematic dismantling by the Petitioner of Mr Chim's improper business dealings. The puppet master has been revealed.

263. In summary form, the findings amount to :-

1) Mr Chim was in control of Mandarin secretly, before his public acquisition of 51%;

2) Mr Chim remained in control of Lucky Man after his purported disposal to James Lee. Thereafter, Lucky Man's involvement in the matters referred to in this judgment were under Mr Chim's control;

3) the interests of Mandarin's minority shareholders have been consistently disregarded to Mr Chim's financial advantage;

4) a long standing pattern of conduct which unquestionably falls within the definition of "unfair and prejudicial" conduct;

5) a consistent and continuing failure to be frank and open with the market regulators;

6) consistent and continuing attempts to conceal his activities from the Company's minority shareholders and from the investing public;

7) repeated breaches of takeover codes and listing rules. The Petition, at paragraphs 181-194 inclusive, sets out the relevant provisions which, it is claimed, have been breached. When dealing with each issue hitherto no specific reference has been made to what codes or regulations have been breached by wrongdoings which have been proved. It is an important aspect of the Petition and I therefore deal with it in some detail now. The following list is confined to the relevant codes and regulations. I have made no specific findings one way or the other on possible offences under the Companies Ordinance.

264. The relevant provisions of the Takeovers and Mergers Code ("the Old Code") which was in effect until 31st March 1992 are :-

General Principle 4 :-

"Shareholders must be given all the facts and opinions necessary for them to make a reasonable-informed judgment of an offer. Such facts must be accurately and fairly presented ..."

General Principle 8 :-

"A board which receives an offer or is approached with a view to an offer being made should, in the interests of its shareholders, seek competent independent advice.

The Committee would not normally regard as an appropriate person to give competent independent advice a person who has a substantial connection, financial or otherwise, with the offeror or offeree company of a kind likely to create a conflict of interest."

General Principle 9 :-

"Rights of control must be exercised in good faith and the abuse of shareholders' rights is wholly unacceptable."

Rule 16 :-

"Any document or advertisement addressed to shareholders must be prepared with the same standards of care with regard to the statements made therein as if it were a prospectus. This applies whether the document or advertisement is issued by the company direct or by an adviser on its behalf."

Rule 17 :-

"The offer document submitted by the offeror to the offeree shareholders should contain the information required by Schedule I [of the Old Code], together with any other relevant information. In addition, the offeror will normally be expected to cover the following points in the offer document :-

(i) its intentions regarding the continuation of the business of the offeree company;

(ii) its intentions regarding any major changes to be introduced in the offeree's business, including any redeployment of its fixed assets ..."

Rule 19 :-

"The highest standard of accuracy and fair presentation must be maintained in all communications to shareholders in a takeover or merger transaction. Attention is particularly drawn to profit forecasts and asset valuations."

Rule 22(2) :-

"The board of the offeree company should obtain competent independent advice on any offer or proposal to the holders of such securities and the substance of such advice must be made known to them together with the board's views on the offer or proposal."

The relevant provisions of the SEHK Listing Rules are :-

Rule 3.08 :-

(effective from 1st August 1993) which provides that the directors, both collectively and individually, have to fulfill fiduciary duties and duties of skill, care and diligence.

Rule 5.06 :-

which deals with the information to be contained in valuation reports. By Rule 5.06(1)(1), a valuation report should normally contain information relating to any matter which may materially affect the value of the property in question.

Rule 7.21(1)(a) :-

"In every rights issue the issuer may make arrangements to :-

(a) dispose of securities not subscribed by allottees under provisional letters of allotment or their renouncees by means of excess application forms, in which case such securities must be available for subscription by all shareholders and allocated on a fair basis."

Rule 11.07 :-

"... all listing documents ... must, as an overriding principle, contain such particulars and information which ... is necessary to enable an investor to make an informed assessment of the activities, assets and liabilities, financial position, management and prospects of the issuer and of its profits and losses and of the rights attaching to such securities."

Rule 11.12 :-

"Issuers are reminded that each of their directors ... is required to accept responsibility for the information which the listing document contains ..."

Rule 14.23 deals with connected transactions and has already been set out earlier in this judgment.

265. There are numerous examples of these codes and rules having been breached in the public announcements, circulars and transactions already dealt with in this judgment.

266. The following are examples of breaches of the listing rules :-

(1) Listing Rules 5.06, 11.07 and 11.12 were breached by Mr Chim and the Lucky Man directors when the Lucky Man circulars of 8th and 28th September 1992 were issued.

(2) Listing Rules 5.06, 11.07 and 11.12 were breached by Mr Chim and the Mandarin directors when Mandarin's circular dated 2nd October 1992 was issued.

(3) Listing Rules 7.12 was breached on 16th November 1992 when Day & Day's late application for excess rights issue shares was accepted.

(4) Listing Rules 14.10, 14.13(1)(b) and 14.14 were not complied with because of the court's findings in relation to the Idmiston transaction.

(5) The sale of Idmiston is also an example of Mr Chim and the Mandarin directors being in breach of Rule 19 and general principle 4 of the Old Code.

267. The circulars and transactions specifically dealt with in this judgment do not represent the total list of breaches. Although the following announcements have not been referred to in detail, the surrounding events have been and provide further illustrations of breaches :-

(6) Breaches of general principles 4 and 9 and Rules 16 and 19 of the Old Code arise in the general offer by Real World for the Mandarin shares on 4th December 1991 (Mr Chim's acquisition of 51%). The breaches arise because of Mr Chim's true control of Mandarin since May 1991, the fact that James Lee and Mr Tsui were his nominees, the payment of $12 million to Malcolm Stone, the true reason for the Markle Land sale and the reason and facts behind the appointment of Kai Lun Lee.

(7) General principles 4 and 9 and Rules 16, 17 and 19 of the Old Code were breached in a like manner, by the false and misleading statements and non-disclosure contained in the joint announcement and general offer documents dated 29th February and 5th March 1992 concerning Lucky Man shares.

268. Finally, I refer to a breach of the Securities (Disclosure of Interests) Ordinance, Cap.396 ("SIDO") :-

(8) Section 3 of SIDO was breached by Day & Day's, Janyee's and Thai Yuen's failure to disclose their acquisition of Lucky Man rights issue shares.

269. In conclusion the totality of the evidence entitles the Petitioner to relief under ss.37A and 45 of the SFC Ordinance.

270. Under s.37A the cumulative effect of the findings made prove that the affairs of Mandarin are being and have been conducted in a manner unfairly prejudicial to the interests of the minority shareholders. This decision is a decision on liability only. In due course, I will hear the parties on the question of quantum of compensation orders and other consequential matters.

271. As far as s.45 is concerned, the findings made on the totality of the evidence would justify an order that it is expedient in the public interest that Mandarin be wound up and that it is just and equitable to do so. However the time for such an order has not yet arisen and may never do so.

272. I therefore now invite the parties to fix a date for a resumed hearing. There should, first of all be a preliminary hearing at which the court will firstly consider, and hopefully approve, a draft order to be prepared by the Petitioner arising out of the findings made in this judgment. Secondly, give directions concerning the quantum hearing.

273. As to the appropriate order, I direct that it includes an order that Mr Chim purchases the shares of the independent minority shareholders at a fair value. Such an order falls within the very wide powers conferred on the court under s.37A(2)(a)-(d). I am satisfied that English authorities which state that such orders may be made against individuals who are not registered shareholders of the company apply. Hoffman J in Re A Company [1986] 1 WLR 281 held :

"... there is no reason why the words of section 461(1) should not be given their full effect and allow the court to give relief in respect of a complaint that the company's affairs have been conducted in a manner unfairly prejudicial to the interests of members, even when this would involve giving relief against a respondent who is no longer a member. ..."

274. In our case, Mr Chim is more than a person who is merely "no longer a member". Although not a registered shareholder, he was always the beneficial owner of the majority of the shares and was the person responsible for orchestrating the numerous complaints made in the Petition.

275. I also direct that it includes an order that Mr Chim be declared unfit to hold a position of management in the Company and that he be disqualified on acting as a director. Such an order is necessary for two reasons. Firstly, because of the totality of the adverse findings contained in this judgment. The second, slightly different reason is this. In most instances the 2nd Respondent's defence amounted to a continuation of the deception which permeated his business dealings. At times, however, it seemed to the court that Mr Chim believed that what he had been doing was acceptable business practice when it was not. In such instances it was alarming to note the yawning gap between Mr Chim's perceived standards of business ethics and those high standards which this community expects. As to whether the disqualification be permanent or for a specific period, I shall hear submissions in due course. It is arguable that a relevant factor in the determination of this issue will be Mr Chim's response to the court's order under s.37(A).

276. At the forthcoming directions hearing, I will consider what evidence should be adduced to resolve the question of :

i) a fair price for Mr Chim to pay for the minority shareholders' shares. This will involve a consideration of :

ii) the valuation of the Company; and

iii) the loss and damage suffered by the Company.

277. Of the 15 issues considered in this judgment, findings in favour of the Petitioner, in so far as the judgment specifically deals with complaints in the Petition, have been made in all 15. Of those 15 issues, it seems to me that those which will give rise to consideration of loss and damage will primarily be sections D, E, F, G, H, I and L.

278. I finally direct that pending the final outcome of these proceedings the appointment of the Provisional Liquidators shall continue so as to continue the protection of the Company's assets.

279. Whether an order for winding up pursuant to s.45 will ultimately be appropriate or necessary will depend on the outcome of the restored hearing on quantum and consequential matters and its subsequent execution.

280. The issue of whether Mandarin is wound-up will therefore be adjourned sine die with liberty to restore.

281. The role of the 1st Respondent in these proceedings was determined in a pre-trial directions hearing and was as follows :-

"the role of the 1st Respondent at the hearing of the Petition be limited to (i) the issue whether the Court should make an Order for the winding up of the 1st Respondent; (ii) the form of reliefs which the Court should make; and (iii) representation of Mr Sun Tak Keung at the time he gives evidence including re-examination of Mr Sun Tak Keung, if any;"

282. The 1st Respondent made no representations to the court in respect of the above three issues. It is open to the Petitioner to include in the draft order to be submitted for the court's approval at the resumed directions hearing such paragraphs as it considers fit arising out of the 1st Respondent's silence in these proceedings. The 1st Respondent may be heard on the form of the order.

283. I will make one order in relation to costs when all matters have been finally disposed.