CHEONG SHING LTD v. YU KWAN

HCA12021/1998
HCA2183/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12021 OF 1998

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AND

ACTION NO.2183 OF 2001

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(Consolidated by the Order of Deputy High Court Judge Muttrie dated 6 March 2002)

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J U D G M E N T

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1. Approximately nine years ago Mr Yu Kwan (“Mr Yu”) a representative of the plaintiffs, handed a cashier order for HK$38.76 million to the wife of the 1^st defendant (“Mr Lo”) in the presence of the 1^st and 3^rd defendants at the Kowloon Tong Club in Kowloon Tong.  The primary issue in this trial, which has lasted five weeks, has been, why?  The parties have produced, to assist the court, a total of approximately 260 pages of written submissions attempting to answer that single question.

2. The plaintiffs' case is that it was a loan which provided funds to the defendants, who were partners, to enable them to buy shares in a Hong Kong listed company named “KPI”.  The defendants disagree.  They say it was a payment made as part of an oral joint venture, to which Mr Yu was a party, the object of which was to invest in KPI shares.  The payment of $38.76 million was for the purchase of 22.8 million KPI shares which was 38% of a block of 60 million shares beneficially owned at the time by Mr Lo.  The defence case continues that it was agreed that the 22.8 million shares would not be handed over to Mr Yu but held by Mr Lo as security against Mr Yu's future liabilities for further purchases of KPI shares (his liability being 38% of the costs and expenses; Mr Lo and/or D5 (a BVI company owned and controlled by Mr Lo) being responsible for the other 62%).

3. The financial atmosphere in Hong Kong in July 1997 was one of supreme optimism.  It was confidently expected that the KPI shares would rise steadily and surely from their July value of about $1.70 up to $2.50 and more.  However, on 23 October 1997 the Hong Kong stock market crashed.  Much of the plaintiffs' $38 million had been spent.  None of the 22.8 million KPI shares had been transferred because (as is the defence case) Mr Yu had not paid his contribution for the post 24 July purchases of KPI shares.

4. In these proceedings the plaintiffs are suing for the repayment of the loan.  The defendants deny there was ever any loan and are counterclaiming for Mr Yu's unpaid 38% contribution to the joint venture.  The trial has taken five weeks because behind the single primary issue lurk a myriad of sub-issues all of which, to varying degrees, are said to be relevant (by one party or the other) to the fundamental issue, loan or joint venture?

5. All parties agree that, with one or two minor exceptions, the entire case turns on findings of fact.  The two main exceptions which are matters of law are firstly whether D3 (“Mr Kong”) has proved that a payment of $4 million made by him to the plaintiffs in August 1998 was made under duress (“the Xian incident”) and secondly whether the plaintiffs' alleged loan falls foul of the Moneylenders Ordinance, Cap.163.

6. Those issues apart it is entirely a case of what happened and why.  The factual issues upon which it is necessary to make findings of fact in order to resolve this dispute are fraught with difficulties.  The main reason for this stems from the way in which all the parties conducted their business at the time.  The defence case is based primarily on oral agreements.  The plaintiff relies on written loan agreements which the defence say are a sham.  The written agreements are far from formal contract documents.  They are brief but confusing.  There are at least three different versions of them.  Amendments and obliterations have been made.  There is starkly conflicting evidence about when they were made, by whom they were made, when they were photocopied, when they were amended and by whom and what their legal effect is, if any.

7. In a nutshell the evidence falls into three categories.  Firstly, evidence about meetings which took place in June and July 1997 culminating in the handing over of the $38.76 million cashier order on 24 July.  Secondly, what happened on 24 July.  What documents existed at that time and what was the true intention of the parties.  Thirdly, the events after the stock exchange crash in October 1997.  There were a number of post crash “events”.  “The November agreement”, “the December agreement”, the payment of $6.5 million by Mr Kong to Mr Yu and the “Xian incident” are four examples which will be referred to in a little more detail later in the judgment.  The question in relation to these “events” is were they directed towards helping Mr Yu get out of his predicament caused by the failed joint venture or were they directed towards schemes to resolve the defendants' liability under the loan.

8. Apart from the complexities and uncertainties surrounding the issues themselves a further difficulty has been the fact that I do not think any of the seven witnesses who gave evidence (two for the plaintiffs, D1, D1's wife, D3, D4 and a Mr Wong) told the whole truth.  Where the 24 July events and the post 24 July events are capable of being construed as being consistent with both a loan and a joint venture, sifting the truth from falsehoods has been particularly troublesome.  Moreover, neither do I think that the entire truth could be found within the entire pool of evidence even if it were possible to miraculously separate truth from lies.  In other words not even everything that has been said which is true reveals the whole picture.

THE PARTIES

9. The 1^st plaintiff (referred to hereafter as either “P1” or “Minshen Xian”) is a trading corporation based in Xian in Mainland China and formed under the laws of the PRC.  It is primarily a retail operation which runs department stores.

10. The 2^nd plaintiff (“P2” or “Minshen HK”) was incorporated as a private company in Hong Kong in 1994.  It is P1's Hong Kong window company.

11. Mr Yu was originally a 3^rd plaintiff.  He is the general manager and director of Minshen HK and has been since it was set up in 1994.  Before that he was a manager of the 1^st plaintiff in Xian.  Originally two writs had been filed in these proceedings.  They were consolidated in 2002.  In the other action Mr Yu was the defendant in a claim brought by D5.  He is therefore the defendant to the counterclaim in the consolidated proceedings.

12. The 1^st defendant (Mr Lo) is a wealthy businessman.  He made his money through property and shares in Hong Kong.  He stated in evidence that in about 1997 his assets exceeds HK$1 billion.  His wife, Mrs Lo, was originally the 2^nd defendant but the claim against her was discontinued in July 2001.

13. Mr Lo's style of business is an important factor in this case.  He owned and controlled many, many small private companies.  He rarely, if ever, did business in his own name.  His dealings were invariably conducted through one of the many small companies that he controlled.  D5 was one such company.  It was D5 to whom the cashier order of $38.76 million was made out and handed to Mrs Lo.  He had 30 years of experience in share investment and speculation.  Mrs Lo was often a shareholder or a director of companies owned by Mr Lo, but it was Mr Lo who was the dealer, the controller, the decision-maker, the money, the boss.

14. Mr Kong, the 3^rd defendant, is an architect by profession.  He was a friend of Mr Lo and both through his own business transactions and through his friendship with Mr Lo had become a wealthy and successful business professional.  He had been involved in a number of deals with Mr Lo.  I find that in this case, consistent with their general business relationship, Mr Lo treated him as a junior partner who was put on stage whilst Mr Lo pulled the strings from the wings.

15. The 4^th defendant “Dr Lee”, is a medical doctor working in the public sector.  He too was a friend of both Mr Lo and Mr Kong.  He too had a deep interest in stocks and shares.  He was present at all the meetings held in connection with this matter up to about the time of the stock market crash.  The sole issue concerning Dr Lee is whether or not the plaintiffs have proved that he was a member of the partnership to whom the alleged loan was made. 

ISSUES

16. I will attempt to answer these questions :

(1) Has the defence proved that there was an oral agreement between Mr Yu and D5, the joint venture, to invest in KPI shares so as to “dye red” the company?  It was a popular profit-making scheme at the time to increase the value of a Hong Kong listed company by making substantial share purchases by mainland interests. 

(2) Have the plaintiffs proved that the money was paid over as part of a loan agreement, the borrowers being the partnership of Lo, Kong and Lee?  This in fact is two questions, was there a loan agreement and was there a partnership?

17. Before I address these questions, which it will be necessary to do at some length, I will make an important factual finding which underlies everything that follows it.

18. There is no dispute that on or about 10 June 1997 a preliminary meeting took place, at the Hyatt Regency Hotel, in which Mr Yu was introduced by Mr Kong to Mr Lo and Dr Lee.  The idea of “dyeing red” KPI was discussed.  Mr Yu was asked if the plaintiffs might be interested in such a scheme as partners in an enterprise which would initially reap a handsome profit and ultimately may lead to the plaintiffs taking over KPI.  I have no doubt that in the boom times of mid 1997 Mr Yu was attracted to the idea and he went to Xian to discuss it with senior management in Minshen Xian, including Mr Shi who gave evidence in the trial.  I am also satisfied that P1's answer was “no”.  I accept the evidence from both Mr Yu and Mr Shi that they declined to get involved with the venture, as mooted, firstly because P1 was a state owned corporation and they were not permitted to participate in such a venture, secondly because their experience in the business of Hong Kong stocks and shares was very limited and thirdly because it was too risky.  However, being shrewd businessmen who did not want to let an opportunity to make a profit go by they did not completely turn their backs on the idea.  They therefore proposed the alternative idea of the loan which (a) they were permitted to do, (b) did not involve them directly in the business of Hong Kong share transactions, and (c) eliminated the risk. 

19. It was against this background that Mr Yu and Mr Kong produced the only two written documents (of which there are a number of different versions) which evidence the loan agreement, namely KY001 and KY002.  As already mentioned there are numerous disputes about these documents.  However, I accept they came into existence because Minshen Xian said “no” to the original joint venture idea to “dye red” KPI.  The issue remains however, are KY001 and KY002 a sham?  Are they, as contended for by the defence, meaningless documents behind which Mr Yu was, in truth, orally agreeing on his own account and using his company's money, to take part in the very joint venture which had been proposed to him but to which the plaintiffs had declined to get involved. 

20. Before embarking on the two key questions cited above, it is necessary to do two things.  Firstly, to set out the contents of KY001 and KY002 and highlight the differences in the various versions.  Secondly, to set out a brief outline of the entire saga as neutrally as possible. 

KY001 AND KY002

21. Firstly, let it be plainly stated that it is an irresistible inference from the evidence that the initials “KY” stood for Kong and Yu.  It was between Mr Kong and Mr Yu that the documents came into existence.  When Mr Kong suggested by his evidence that he neither appreciated nor agreed that “KY” stood for Kong and Yu, I did not believe him.

22. A blank version of KY001 states as follows :

“Reference: No. KY-001

Loan Agreement

Party A:  Minshen Group (HK) Limited/

 Xian Minshen Group Company Import and Export Branch

Party B: 

Party C:  (Guarantor)

Party A agrees that the money paid by Xian Minshen to Minshen Hong Kong Company for the purpose of purchasing elevators in the sum of US Dollars five million two hundred and seventy one thousand five hundred and twenty only (USD5,271,520.00) be temporary lent to Party B for a period of 180 days (at the longest not exceeding 300 days) for the purpose of business activities.  Party B promises as follows:

(1) Party B promises that it will on 10 January 1998 (at the latest not exceeding 10 May 1998) directly repay Minshen Group (HK) Limited US Dollars five million six hundred and seven thousand only (USD5,607,000.00)(interest for exceeding the time will be borne by Party B).

(2) If [Party B] is unable to pay on schedule, then Party B's personal property will be realised for cash for payment, and [Party B] will bear all legal and economic responsibilities.

(3) If [Party B] intends to sell his personal property to repay the debt, such property may not be sold for less than ninety percent of the market price.

(4) If Party B cannot repay on time pursuant to clause 1, Party C agrees to be responsible for repaying Party A and agrees to be responsible for all legal and economic liabilities.”

23. In another version of KY001 Mr Kong's name appears in manuscript as Party B and Mr Yu's name as Party C.  On the same version Clause 4 has been obliterated with black ink.  The obliteration has not been initialled.  Two versions of this “obliterated” version were produced.  One is signed by Party B and Party C but not Party A.  On another version all 3 signatures appear.  

24. Of the blank (unobliterated) version there are also two versions.  One displays a fax header showing that it was faxed from one of Mr Kong's offices.  None of them are dated.

25. Of the many issues which emerged concerning KY001 the key one was when and in what circumstances was Clause 4 obliterated.  Mr Yu says it was done at the time i.e. on or before 24 July 1997, with Mr Kong's knowledge.  Mr Kong says it must have been done later without his knowledge because, he says, when he first saw the obliterated version (and there is some confusion even on his own evidence as to when that was) he thought that Mr Yu was “cheating” him. 

26. At this stage I will make no further analysis or findings on KY001 (or KY002) save to note that the entire document (on all versions) is based on a fiction namely that the original purpose of the money was for P2 to “purchase elevators…”.

27. KY002 is similarly shrouded in mystery. 

28. The blank version is as follows :

“Reference Number: KY-002

Yield Undertaking Agreement

Party A:  Minshen Group (H.K.) Limited

Party B: 

Party C:  (Guarantor)

Party A is responsible for arranging the loan of US Dollars Five Million Two Hundred and Seventy One Thousand Five Hundred and Twenty only (USD5,271,520.00) to Party B, Party B undertakes the following:-

Should the loan be repaid within 4 months, pay Party A a consultation fee of USD1,318,000.00.

Should the loan be repaid within 10 months, pay Party A a consultation fee of USD1,581,000.00.

If Party B cannot pay the relevant consultation fee promptly, Party C agrees to be responsible for paying Party A the relevant consultation fee.”

29. Similarly there are two versions of this blank version (one containing Mr Kong's office fax header).  One is called an “Agreement for Guaranteed Return”, the other is called “Yield Undertaking Agreement”.  However, these are merely different translations of the same characters.  Similarly also, another version has the final paragraph which makes Mr Yu the guarantor deleted, but has Mr Kong's and Mr Yu's names written in as Party B and Party C.  Similarly, there is one version signed by B and C and another version signed by A, B and C.  None are dated.

30. The same issues arise as between Mr Kong and Mr Yu.

BRIEF OUTLINE OF THE ENTIRE SAGA

31. This will be a bare outline.  It is intended to give a general picture, no more.

(a) Pre-24 July 1997 meetings

32. At the first meeting in early June 1997 at the Hyatt Regency an idea was presented to Mr Yu to “dye red” KPI, a company in which Mr Lo had a share holding in excess of 60 million shares, which could and should result in an increase in value of the KPI shares from $1.70 to $2.60 or more, an increase of at least 50%, within three to six months.  As already stated, this idea was rejected by the Minshen management in Xian.

33. A second meeting then took place at the Hyatt Regency.  The possibility of a loan, instead of an investment, from Minshen was discussed.  The sum of $40 million was discussed with a fixed return plus interest over a three or six-month period.  Thereafter Mr Yu for the plaintiffs and Mr Kong for the defendants would meet and discuss further details.  It could not be said that after the second meeting any clearly definable consensus had been reached.

34. Mr Kong was very bullish about the idea.  Easy profits were being made for very little effort at the time.  For example, at about the same time Mr Lo had made a substantial profit out of buying and selling part of a property known as Eastland Towers.  He had bought for $188 million and sold for $260 million the next day.  He had “given” Mr Kong 5% of this property deal.  Mr Kong in turn had “given” to Mr Yu a share of his share.

35. Ultimately, Minshen who were fully aware that the ends to which the funds would be put was the purchase of KPI shares, agreed to release a sum of approximately US$5.2 million to Minshen HK.  Apart from the written guarantees in KY001 and KY002 Minshen Xian were reassured by the fact that they knew Mr Kong well because he was involved, in his capacity as an architect, in lucrative projects in Xian for Minshen.  Mr Kong had also, in the course of discussions, offered to pledge his own property as security and Mr Kong had informed them, through Mr Yu, that Mr Lo was considerably wealthier than he was.

(b)     23 and 24 July 1997

36. KY001 and KY002 probably first came to light on 23 July 1997.  Mr Kong drafted them and produced them to Mr Yu when they met at the Regal Airport Hotel on that day.  Mr Yu could not possibly have agreed to Clause 4.  When he failed to initial the obliteration, Mr Kong decided not to initial either.  Minshen Xian would not have sanctioned a document which made their HK manager of their HK window company a guarantor of a $38.76 million advance that they were making.

37. On 24 July at a meeting at the Kowloon Tong Club a cashier order for $38.76 million made in favour of Mr Lo's BVI Company (D5) “Cheong Shing Limited” was handed over to Mrs Lo by Mr Yu.  Mr Lo and Mr Kong were also present.  Dr Lee had been present for the lunch but had returned to his hospital at the time of the handing over of the cashier order.  Mr Yu returned to Xian.  Copies of KY001, KY002 and the cashier order were kept in Xian.  What appeared in those documents reflected Minshen's understanding of the transaction at that time.

38. Another issue of fact concerns the cashier order.  On the photocopy produced by the plaintiffs appear the words “This sum was paid pursuant to the instructions of (Mr Kong) into Cheong Shing Ltd for the purpose of loan agreement No. KY001 (that is the sum borrowed by Mr Kong)”.  These words are followed by the signatures of Mr Kong and Mr Yu.  Mr Kong's explanation for his signature appearing is that he was asked to sign a blank photocopy and the words must have been written in on a later occasion, above his signature, without his knowledge.

(c)     Events after 24 July

39. Most of the events after 24 July consist of discussions and proposals.  The proposals were not put into effect.  The issue is always the same.  Were the discussions and proposals aimed at salvaging something out of the failed joint venture or were they aimed at raising funds partly to repay the loan from the plaintiffs and partly to help Mr Yu save face?  Are the “salvage operations” consistent with there having been a joint venture to invest in KPI or are they consistent with there having been a loan to fund the purchase of KPI shares?  There are valid points on both sides of the argument.

40. Of the many ongoing discussions, five “events” emerge which will require separate consideration.  Before the “crash” on 23 October 1997 all parties attended two meetings with a firm of accountants named Fan & Mitchell (in September 1997).  The purpose of the meetings was to discuss the pros and cons of launching a take-over bid of KPI.  By September the price of KPI had not gone up in spite of substantial buying through Mr Lo's many companies and many brokerage accounts.  The price had dropped by about 20 cents.  The fee invoice for the meetings was sent to Mr Kong but paid for by D5.  This was the first “event”.

41. After the crash a proposal, referred to in evidence as the “November” agreement, was discussed but not implemented.  It involved a scheme whereby Mr Kong would be given a $40 million credit line (the issue at trial being, was it to repay the loan or to fund more purchases under the joint venture).  This was the second “event”.

42. The third “event” was referred to at trial as “The December” agreement.  Again it was not implemented.  It involved the possible transfer of one of Mr Lo's companies, called “American Trade” (which held a substantial number of KPI shares) to a company called “Lucky Man”, a company controlled by Yu.  According to Mr Lo this plan was never completed because Mr Yu had not paid his share (38%) of the costs and expenses arising from the purchase of further KPI shares after 24 July.  He was not therefore prepared to dispose of his KPI shares held by American Trade.

43. The fourth “event” was a payment by Mr Kong of $6.5 million to Minshen HK in January 1998.  Mr Yu's evidence was that this was a partial repayment of the loan by Mr Kong on behalf of the partnership.  Mr Kong said it was a separate loan to Mr Yu to help him out of his predicament with Minshen Xian.

44. The fifth “event” concerned a trip made by Mr Kong and Mr Yu to Xian in August 1998.  By this time the plaintiffs, according to their own case, were getting impatient about the failure of the defendants to honour the terms of the loan.  Mr Kong said he went to Xian on business for a one-day trip.  In fact he said he was detained in the Sheraton Hotel in Xian for four days.  Under duress he managed to raise $4 million which he paid over.  He also signed a repayment guarantee and a security pledge against future payments.  Only after signing these documents and handing over the $4 million was he allowed to return to Hong Kong.

45. Mr Kong's counterclaim consists of a claim for a declaration that the two documents he signed in Xian are void and a return to him of $9 million.  The $9 million is made up by adding together the $4 million he paid over in Xian in August 1998 and $5 million of the $6.5 million he lent to Mr Yu in January 1998 (Mr Yu having already repaid, according to Mr Kong, the sum of $1.5 million).

46. I now turn to the two fundamental questions; have the defendants proved that a joint venture to invest in KPI was orally agreed or, alternatively have the plaintiffs proved that a loan agreement was made?

(A)     WAS THERE A JOINT VENTURE TO INVEST IN KPI?

47. I have come to the conclusion that the defendants, on the whole of the evidence, have not proved, on a balance of probability that Mr Yu was a partner in a joint venture to invest in and/or take over KPI.  For the reasons which follow the counterclaims are dismissed.

48. The plaintiffs have, understandably, spent as much time resisting the counterclaim (which if successful would have resulted in them not only losing the $38.76 million they paid over but being additionally liable for approximately $75 million for the costs, expenses and interest for the further purchases of KPI shares) as they did in prosecuting their claim for the return of the money handed over.

49. The reasons, which follow, are those parts of the plaintiffs' submissions with which I agree.

A1 : Credibility

50. As I have already remarked, no witness in this trial has emerged unscathed.  Some criticism, in my judgment, is rightly directed at each of the witnesses who gave evidence for the defence.  I will give examples, briefly, in each case.

Mr Lo

51. It is generally accepted that Mr Lo had become an immensely successful businessman having started from relatively humble origins.  As already stated, his style was to remain in the background, in the shadows, but to retain overall control.

52. When confronted with matters of details, such as signing documents or dealing with monthly accounts, he often said, “my wife dealt with such matters not me”.  He also claimed to have a relatively limited knowledge of share dealings.  The impression he sought to put over was of a man who was rather unsophisticated who relied on others when in truth, I found him to be a man who consistently endeavored to make himself invisible as the key player who he clearly was.

53. He used numerous different brokers and numerous different (often BVI) companies for his shares dealings.  The director and/or shareholder was usually his wife, or other family members or friends.  There is nothing wrong with this, it is only relevant because almost invariably the named directors and shareholders were not the same as the beneficial owner and controller.

54. It is also a fact that there were important conflicts between his oral testimony and his pleaded case and witness statements as to the terms of the alleged joint venture.  I found it would have been unsafe to place reliance on his testimony in this key area.

55. Furthermore, on two occasions it transpired that he had scant regard for the stringent rules and regulations governing share holdings in Hong Kong.  He knew there was a requirement to declare a share holding of over 10% in a listed company.  He had not done so and I am sure he had not done so because he believed that the spreading of his shareholding over various BVI companies was sufficient to conceal the true position.  It was his deliberate strategy.  By the same token he ignored the rule requiring a general offer to be made if the holding exceeded 33%. He simply carried on buying and selling in KPI after 33% had been acquired.

Mr Kong

56. Mr Kong was an evasive and unimpressive witness.  I consider the seeds of his predicament lay in the fact that in the bullish and optimistic atmosphere of summer 1997 be believed that it did not matter what he signed as an inevitable profit was around the corner.

57. For example, he was willing to be “the borrower” (even though the money was going to be actually spent by Mr Lo) on KY001 and KY002.  He was willing to sign the photocopy of the cashier order for $38.76 million on 24 July as a “witness” even though Mrs Lo was the custodian of the money and Mr Lo was the receiver, through Cheong Shing.

58. Also, in the “November” agreement he put his name to a document which could only, on any sensible construction, imply that he had an interest in a company called the “Shanghai Pacific Club” worth approximately $40 million (which he was willing to pledge as security) whereas he insisted in evidence that his interest, in reality, was only worth about $4 million.  It is not necessary here to go into further detail about why the document said $40 million but the truth was $4 million.  I believe the true value of his interest was indeed a mere $4 million, yet he was prepared to let others think it was $40 million.

59. His lack of openness does not stop there.  Even though the “November” agreement was never implemented, in May 1998 he claimed he has pledged the very same interest when, in truth, he had not.  At this stage he had switched sides.  He was supporting Mr Yu in his attempt to recover money from Mr Lo.  It seems to me that it was not the only time he switched sides.  Originally he was a partner of Mr Lo, after the stock exchange crash he tended to be on Mr Yu's side in trying to recover money from Mr Lo and after his unpleasant experience in Xian in August 1998 he reverted to the Lo camp.

60. Mr Kong's credibility is further dented upon a brief examination of the circumstances surrounding the coming into being on KY001 and KY002.  His explanation for personally (according to the document) exposing himself to a liability for $38.76 million was that he believed that these documents were “of no legal effect” and “purely procedural”.  Such matters, he said, were conveyed to him by Mr Yu.  He said he believed that they were required merely to placate the management in Xian.  Thus, even if true, he was willing to sign documents which were a sham.  According to him they were meaningless fictions which could never return to haunt him.  In short he allowed himself to be carried along in the optimistic mood of the times and, as a result, let his business standards drop below an acceptable level.

61. As to the issue about when Clause 4 was deleted, his evidence is once again unsatisfactory.  The fact that it was Mr Yu who did the deletion is entirely logical.  It was Mr Yu who was affected by Clause 4.  If Mr Yu deleted it, it follows that Mr Kong had drafted it.  As already stated his case is that the deletion was not done with his knowledge in July 1997 but much later.  As to exactly when, his evidence went backwards and forwards.  Firstly, he said it was in the winter of 1997/1998, then he said it was when litigation commenced in the summer of 1998.  Later he thought it may have been the winter of 1998/1999.  Finally he returned to the first version, namely in the winter of 1997/1998.

62. His difficulty was that in early 1998 he was acting as if he was close to and a friend of Mr Yu.  At that time he either repaid or lent him $6.5 million.  He also arranged for him to see a solicitor to help him.  If he first saw the deletions in the winter of 1997/1998 and only then realized that Mr Yu was “trying to cheat him” it would be surprising that he would do him acts of kindness soon after.  His acts of kindness are more consistent with Mr Yu's evidence about when the deletions were made.  Further support for this conclusion comes from the fact that if Mr Kong truly thought that, in late 1997, Mr Yu was cheating him, one would reasonably expect some reference to the fact in his five witness statements.  There is none.

63. In many respects Mr Kong's evidence was unsafe to rely on.

Mrs Lo

64. Mrs Lo's evidence as to the true ownership of the BVI companies which bought the KPI shares after 24 July was confused and unconvincing.  One such company was called “Rich Freedom”.  She give three different versions as to the ownership of Rich Freedom.  In chief she said that she was the beneficial owner, in cross-examination she said it was owned “by the family” and in her witness statement she said it was owned and controlled by her husband.

65. She purported also to produce tables showing the purchase of KPI shares after 24 July in support of the counterclaim for Mr Yu's 38% contribution towards the costs thereof.  It became apparent in cross-examination that these tables (to which I shall refer in a little more detail later) were far from complete and also included transactions which could not have been “joint venture” transactions, even on her own case.

66. She was part of the smoke screen behind which Mr Lo stood.

Dr Lee

67. In view of my ultimate decision in respect of Dr Lee I shall refrain from making findings about his credibility at this stage.  His primarily role was in the earlier stages of the saga when a possible joint ventures was being discussed.  He took notes in the early meetings and drafted proposals.  The issue in respect of Dr Lee is whether the plaintiffs have proved he was one of the partners to the loan agreement.

Wong Wai Shan

68. The only witness called by the defence who was not an original party to the proceedings was Wong Wai Shan (“Mr Wong”).  He was subpoenaed by Mr Lo.  Why he had to be subpoenaed is difficult to understand.  He gave no reason for being reluctant to testify, he had had a number of meetings with Mr Lo's solicitors before the trial and he was plainly partial.  The disadvantage to the plaintiffs was that he had made no witness statement and they had only been given a brief summary of what it was expected he would say.

69. It became clear that Mr Wong's partiality was very probably connected to a falling out between himself and Mr Yu over another deal in more recent years.  I felt the safe course was to attach very little weight to his evidence.

A2 : Improbabilities

70. It is submitted by the plaintiffs, and I agree, that for a number of reasons it is highly improbable that a joint venture, as claimed, would ever be entered into between Mr Yu and D5.  The following matters lead to this conclusion.

(a) Mr Yu's knowledge about D5

71. Mr Yu knew nothing about Cheong Shing.  I cannot accept that he would have handed over a very large sum of money belonging to his employer to a BV1 company about which he knew nothing on the basis of an oral arrangement which involved him personally and without his employer's knowledge.

72. It should be remembered that in late June his employer had said “no” to any such idea.  Two of the reasons being that Minshen Xian was not permitted to do so and also that it was too risky bearing in mind their lack of knowledge and experience in the Hong Kong market.  All these reasons applied to Mr Yu as well.  I am sure that Minshen would only part with money if it was secure.  I am sure, having seen and heard Mr Yu, that the same applied to him.  

(b)     Uncertainty as to who were the real parties to the alleged joint venture

73. In his witness statements, in his evidence and in his solicitor's letter before action, Mr Lo's case was that D5 and Mr Yu were the two parties to the joint venture.  The above letter included the following : “all the dealings had nothing to do with (Mr and Mrs Lo) at all”.

74. By its very nature the alleged joint venture could not, in my judgment, have operated meaningfully on such a basis.  The original idea involved dyeing KPI red.  Mr Yu could not have done this.  P1 and P2 would have had to have been involved.  It was not Mr Yu's money.

75. Moreover, it defies common sense to suggest that Mr Lo's involvement was merely as agents of Cheong Shing.  All purchases were made by D5 and other companies controlled by Mr Lo, through brokers which were in truth Mr Lo's accounts with money that came from Mr Lo's funds.  It is also plain that the decisions about when to buy and sell and how many to buy and sell were Mr Lo's decisions.  I reject Mrs Lo's assertions to the contrary.  

(c) Uncertainty as to the purpose of the alleged joint venture

76. The evidence was somewhat confused as to the underlying purpose of the joint venture.  In early discussions the focus was on “dyeing red” KPI.  However Mr Lo's evidence was at the time of the alleged oral agreement he had no intention of taking over KPI.  The take-over discussions only commenced when the price went down instead of up and Fan Mitchell was consulted.  On the other hand Mr Lo said that he understood Mr Yu's intention was acquire KPI shares so as to mount a take-over.

(d) Uncertainty as to the terms of the alleged joint venture

77. Mr Lo's stated intention (at (c) above) does not sit well with his pleaded case.  In evidence he was specific that the idea was to push the price up and then make a profit by selling at about $2.50 or more.  However the pleaded case is that the agreement was to acquire KPI shares and make a general offer when they got to a 50% holding.  D1 and D5's letter before action makes the same claim.  Mr Lo's witness statements follow a similar theme.  The idea of selling at an increased price to make a profit is absent until Mr Lo gave evidence.

78. Another “term” of the agreement which only came to light when Mr Lo gave evidence was the suggestion that there was a limit on the amount of money which would be advanced to Mr Yu to fund his share of the venture after the post-24 July purchases.  The limit was said to be $19 million, unless further funds materialized.  Such an advance, it was said, would attract interest of 3% over prime.  Again, the pleadings and witness statements are silent on this alleged term.

79. The alleged agreement was also vague.  It is true that oral agreements often lack detail and the courts should strive to extract the true intentions of the parties and, if necessary and if possible, fill in some details.  However, where the fundamental purpose, the true identity of the parties and the basic terms are all uncertain, the absence of further details only serves to compound the obvious lack of any consensus.  For example there was no agreement as to the duration of agreement.  Thus, for example, when and if to stop buying was a decision taken unilaterally by Mr Lo.

(e) Dr Lee's notes add to the uncertainties

80. Dr Lee's evidence consisted largely of explaining the various notes and draft agreements and proposals (all unsigned) that he had made at the various meeting before 24 July.  There were at least four draft agreements.

81. It is curious that if Dr Lee was drafting and re-drafting written proposals for a joint venture that the actual joint venture agreement upon which D5 (and D1) are counterclaiming is an oral one.  Moreover, none of Dr Lee's drafts sufficiently accord with the case as advanced by Mr Lo.

82. I accept that the fact that Dr Lee produced various written proposals, all of which were unsigned, none of which were adopted and none of which mirror the defendants' present case, merely enforces the submission made by the plaintiffs that there never was a completed agreement.

83. Dr Lee's evidence as to the timing of the meetings and of the draft proposals was unclear.  His lack of clarity on the timing probably stems from the fact that at some stage, Mr Yu returned from Xian and reported that his senior's response to the original idea was “no”.  From then on no consensus on the idea was going to be achieved.  Dr Lee's perspective may have been influenced by hope rather than reality.

(f)      Mr Kong's self inflicted exposure to KY001 and KY002

84. If Mr Kong truly believed that there was no loan from the plaintiffs, I find it unbelievable that he would have signed documents which were largely created by himself (“K” comes before “Y” in “KY”) knowing them to be a “sham”, “meaningless”, “procedural only” and “of no legal effect”, simply because he trusted Mr Yu and wanted to keep his business contacts in Xian sweet.  I believe he realized that the only way that money from Xian would be forthcoming is if it was structured as a loan.  The question is rightly posed — if he believed the documents to be procedural only why did he include Clause 4 making Mr Yu a guarantor?  Why would such a clause be necessary if Mr Yu was telling him the truth when he persuaded Mr Kong to sign on the basis that it merely documented internal borrowing and lending between P1 and P2?

85. Mr Kong's evidence as to where and when KY001 and KY002 were exchanged and signed is also confused.  He suggested it was on an uncertain date in early July at his home.  Mr Yu said it was at the Regal Airport Hotel on 23 July.  I prefer the latter's recollection.  The date is more logical and I do not think he simply invented a venue out of his imagination.  

A3 : Share transactions after 24 July 1997

86. It was Mr Lo's evidence that a record of the buying and selling of KPI shares after 24 July was kept by his wife.  He said he played no part in the record keeping of the transactions made by his various companies for the purpose of the joint venture.  Mrs Lo said she kept a daily record which she sent to Mr Kong on a daily basis.  She said it was Mr Kong's responsibility to send it to Mr Yu to keep him informed of his increasing liability under the joint venture.  None of the daily records have emerged into evidence.  The only document which records the transactions is a composite table, dated December 1997, which was clearly created after its date.

87. The document, in so far as it purported to be a record of joint venture purchases was not satisfactory in several respects.  Firstly, it did not record all the purchases made; secondly, it contained at least one significant error and thirdly, and most importantly, it did not differentiate between the purchases and sales of the shares which were intended to form part of the 60 million joint venture shares on the one hand and other purchases and sales of the remainder of Mr Lo's holding in KPI which amounted to an extra 30 millions shares on the other hand.  In other words the transactions concerning the “joint venture” shares and the transactions concerning the non joint venture shares were mixed up in the same table.

88. Even if Mrs Lo did send a daily report to Mr Kong, it raises two questions.  Firstly, where have they all gone?  Secondly, why send it to Mr Kong?  If it was a joint venture the more logical person to whom it would be sent directly would be the person liable to pay, Mr Yu.  If on the other hand, borrowed money was being spent it would be logical to send it to the person in whose name the loan was, Mr Kong.  I accept the plaintiffs' case that Mr Yu did not receive any daily reports of the dealings in KPI shares.  Neither do I find that they were regularly sent to Mr Kong.

89. In short, the more probable explanation for the documentation and tables which purport to set out the joint venture expenses is that they record Mr Lo's own speculation in KPI shares.  In truth, there was no distinction drawn between a designated batch of 60 million shares under the alleged joint venture umbrella and the remaining 30 million shares.

90. Like many successful businessmen, Mr Lo was not shy to use (legitimately) other people's money, even though he had plenty of his own, whether through, for example, banks, other loans or joint venture partners to carry out his deals.  His style was also to use other people's identities (again, perfectly legitimately) such as BVI companies, family members and front men to do his bidding.  Thus when the crash hit in October 1997 it was second nature to him to use his best endeavours to arrange other entities to pick up his losses.

(B)     HAVE THE PLAINTIFFS PROVED, ON THE BALANCE OF PROBABILITIES, THE LOAN AGREEMENT AS EVIDENCED BY KY001 AND KY002, TO WHICH THE PARTNERSHIP OF MR LO, MR KONG OR DR LEE WAS A PARTY?

91. My answers to these questions are that the plaintiffs did hand the $38.76 million over by way of a loan but that the terms of the loan have not been proved.  Neither has it been proved that Dr Lee was a member of a partnership which received money from the plaintiffs for the purpose of share speculation.

92. Some, but not all, counsel in final submissions suggested that the court had the unenviable task of choosing one version of the facts or the other.  Thus, if the defendants fail in their counterclaim the plaintiffs must win on their claim and vice versa.  I do not agree.

93. The defendants' case seeks to show that the money received from the plaintiffs was not repayable because it was joint venture money.  The burden was on them to so prove.  They have failed to discharge that burden.  The burden on the plaintiffs to prove its case remains.  Rhesa Shipping Co. SA v. Edmunds [1985] 2 AER 712 observes that a judge is not always bound to make a finding one way or the other with regard to the disputed facts, there being open to him the third alternative of saying that the party who had the burden of proof in relation to any averment had failed to discharge that burden (per Le Pichon JA in Mak Ka Hing v. Pang Ming Chung, CACV 215/2002 at p.10)

94. Thus, I find that the plaintiffs have succeeded in proving a $38.76 million advance of money was made to and received by D5 on behalf of Mr Lo and Mr Kong as partners but they have failed to prove that it was on the terms as claimed.

B1 : Defence case against it being a loan

95. It has to be acknowledged that there are arguments worthy of consideration against it being a loan.  It is because some of the arguments against it being a loan are, superficially at least, plausible that makes this such a difficult and curious case.  The defendants' (for this purpose I group them together as in many instances they adopted each others submissions) arguments include the following.

(a) The Eastland Tower project

96. On the day of the handing over of the cashier order for $38.76 million, a cheque for $2 million drawn on D5's account in favour of a company called “Victory Grand” Ltd was handed to Mr Yu.  The defence case is that this was a refund of Mr Yu's deposit for the purchase of 22.8 million shares KPI shares under the joint venture.  Mr Yu said it had nothing to do with any joint venture, he said it was part of his profit from the Eastland Tower project.

97. There was considerable evidence on this issue.  Rather too much, usefully, to recite herein.  Ultimately, the defence argument was that (i) the documents did not support Mr Yu's contention and (ii) if the $2 million was for the Eastland Tower's profit why did Mrs Lo on behalf of D5 give the cheque to Mr Yu and not to Mr Kong.  It was accepted that the Lo's were unaware of Mr Yu's participation in the project.

98. The plaintiffs' answer was that it was all on Mr Kong's instructions.  In any event, they argue, the evidence concerning Mr Yu's payment of a “deposit” for the joint venture in the first place is very unsatisfactory.  It was argued, by the defence, that Mr Yu's $2 million “deposit” was made up by a cheque for $1.8 million and a loan of $200,000 from Mr Kong.  This is curious.  Why would Mr Yu only be able to raise $1.8 million?  Why would Mr Kong lend him $200,000?  Why bother with a refund at all, why not merely reduce the cashier order by $2 million?

(b) Pre-24 July meetings

99. The defence submits that Dr Lee's notes of the various meetings disclose the “plan” to dye red KPI with Mr Yu injecting 40%, later reduced to 38% for auspicious reasons, of the finances.  Mr Yu denied this.  The plaintiffs' case is that whatever the initial discussions about “dyeing red” may have been, Minshen Xian said “No”.

(c) A loan does not “dye red”

100. The defence submits that if the object was to dye red KPI it could only be done if a mainland party was seen to be acquiring an equity interest in a Hong Kong listed company.  A loan would fail this objective.

101. On the other hand, the plaintiffs submit that once Minshen Xian had rejected the idea, the best alternative, for both sides, was to use a substantial sum of money from the mainland, albeit borrowed, with the full knowledge of both sides, and the public, that it was to be invested in KPI. The plaintiffs had no control over the purchases and sales but why should they worry if they had a guaranteed return.

(d) Why should the partnership borrow at all?

102. It is argued that Mr Lo was a very wealthy man who did not need to borrow, especially at such a high rate of return.  Also, the defence say, why is it that $38.76 million was the amount of loan?  $38.76 million is 22.8 million x $1.70.  This is the exact price of the shares alleged to form part of the joint venture.

103. Curiously however $38.76 million is about US$4.98 million which is neither of the 2 figures in KY001 and KY002.  It seems likely to me that $38.76 million was the figure selected by the defendants, or Mr Lo in particular, as it represented the amount that they had been discussing but which never came to fruition.

(e) KY001 & KY002

104. Counsel for D1 and D5 points out that there is no evidence that Mr and Mrs Lo ever even knew the existence of these documents.  Whatever the true nature of the transaction it was between the plaintiffs and/or Mr Yu on one side and Mr Kong on the other.  The plaintiffs' answer is that it merely another example of Mr Lo conducting business from the shadows.

105. In any event, all defendants argue that KY001 and KY002 are sham documents designed to cover up Mr Yu's participation in the joint venture.

(f) The meeting on 24 July

106. The key conflict of evidence in relation to the “completion” meeting on 24 July was that Mrs Lo said she gave Mr Yu a receipt for the purchase of 22.8 million shares in return for the $38.76 million.  She said she dated it 23 July, even though it was in fact on 24 July for, again, “auspicious reasons”.

107. Mr Yu on the other hand said he found Mrs Lo's receipt unsatisfactory so he prepared his own which referred to KY001 and got Mr Kong to sign it.  In other words, did Mr Yu write on the receipt at the time to re-emphasize that it was a loan or did he write on it later (having got Mr Kong to sign a blank photocopy) to suit his own purposes?  The defendants rely on the latter version, I prefer the former.

(g) Two meetings with Fan Mitchell & Co.

108. These meetings were in September 1997.  The purpose was to be advised about a theoretical take-over of KPI.  The defence ask — if it was a loan why did Mr Yu attend these meetings?  The plaintiffs ask — if it was a joint venture why were the invoices for the meetings sent to Mr Kong and not the Lo's (and indeed it was D5 who paid the invoices)?

(h) The “November agreement”

109. I have already referred to this and will refer to it again under the heading of “the plaintiffs' responses”.  The defence rely on it as being inconsistent with a loan agreement.  Additionally, the Lo's point out that there is no evidence that they knew anything about it.  The plaintiffs point out that it was never implemented.

(i) The “December agreement”

110. Similar issues arise with this “agreement”.  It is a complex proposal which was never implemented and is based on a fiction that KPI shares would change hands at $1.65 which was about double their true value.

(j) Solicitors' letters in mid-1998

111. The defence point to a demand letter from Fred Kan & Co. sent on Mr Yu's behalf, claiming the return of the $38.76 million.  It is submitted that the letter proceeds on the basis of there having been a joint venture not a loan.  Mr Yu's response was that it was Mr Kong who took him to a solicitor, it was Mr Kong who proposed the method of attack against the Lo's at that time (it was in a period when Mr Kong had switched sides), the action never proceeded on this basis and in any event Mr Yu was desperate to get his money back.

112. The above are the defendants' key submissions in support of the “joint venture” case.  I have made brief references therein to the plaintiffs' counter-arguments.  I now turn to their responses in a little more detail.    

B2 : The plaintiffs' responses

113. When I outline the plaintiffs' responses it should be borne in mind that, in general terms, they represent the submissions which I prefer and which have led me to my ultimate decision that the money was not handed over in the context of an agreed joint venture at the time.

(a) Eastland Tower

114. The most revealing feature of the Eastland Tower issue is that it shows how major transactions were often carried out at that time, particularly between these parties.  Much of it lacked formal documentation, much was oral, much was on trust.  As the Eastland Tower project demonstrates this works very well provided there is a profit.  If there is a profit there is a pay out, if there is a loss there is a dispute.

115. In addition to the observation already made concerning the unlikelihood that Mr Yu would have to borrow $200,000 from Mr Kong to “make up” the $2 million as a deposit for the KPI shares purchase money, the plaintiffs submit further that there is no evidence of any sort that Mr Yu repaid Mr Kong the $200,000.  Also, the cheque for $2 million is dated 23 July, the day before the meeting.  The defence explanation for this is unsatisfactory.  They say is because 24 has the unlucky “4” in it.  Why not post date it to 28 July if they were so superstitious?  Do the Lo's regard the whole month of April and the entire year of 2004 also taboo for cheque writing?  These questions were not put to Mr or Mrs Lo.

(b) Rescue operations

116. In September the KPI share price went down, in October it crashed.  The meetings with Fan Mitchell were in September.  The “November” and “December” proposals would not have been tabled but for the crash.  I agree that, in the prevailing circumstances, such events could have occurred regardless of whether it was a loan or whether it was a joint venture.  They are arguably consistent with both stances.  Common to both stances is the fact that a lot of money had been lost.  Unsuccessful attempts were made to retrieve the situation.  It is not surprising that Mr Yu would be anxiously interested in such events.  In short the proposals, as I find them to be, seem to have been :

(i) “November”.  This required Mr Kong to charge to Minshen Xian his shares in the Shanghai Pacific Club in return for a $40 million credit line lasting for one year.  This credit would be used to repay the loan.  However, no shares were ever charged and no credit line was ever provided.  Moreover, as already stated, Mr Kong confessed in evidence that he never owned such a valuable security.

(ii) “December”.  This proposal was much more complex.  It involved a transfer of 23 million KPI shares to Minshen HK to set off the loan (at the artificially high price of $1.65 per share).  The first stage was to transfer the shares to the BVI company called “American Trade” (of which Mr Lo's brother was the shareholder).  American Trade would then be transferred to “Lucky Man” (a company controlled by Mr Yu).  Lucky Man would then be transferred to Mr Zhan (of P1) and “Victory Grand” for the benefit of the plaintiff.  Although this proposal engaged various parties in a lot of work and activity, with hindsight, it fell at the first hurdle.  No shares were ever transferred to Minshen HK.

117. I find it unnecessary (and at times impossible) to make further findings about these events.  The bottom line is that it would be plainly unsafe to rely on them as support for a joint venture to the exclusion of a loan. 

118. Further reasons for attaching little weight to these events are the fact that, as stated, nothing solid ever emerged from them and that it was Mr Kong who seemed to be taking a leading role throughout.  As has been hitherto alluded to, Mr Kong's true role in the entire saga has been difficult to pinpoint, he has changed sides and his credibility has been the subject of justifiable criticism.

119. The next two “events” however are consistent with a loan and inconsistent with a joint venture.

(c) Mr Kong's $6.5 million cheque to Mr Yu

120. Mr Kong's explanation is that he loaned $6.5 million to Mr Yu.  I do not accept his explanation for a number of reasons.  Firstly, the “loan” seems to have been made at a time when, according to Mr Kong's evidence he was very angry with Mr Yu.  Secondly, he only remembered that Mr Yu had partially repaid him eight years later, in 2005.  I prefer the more logical explanation that the $6.5 million was a partial repayment by Mr Kong of the money due to Mr Yu.

(d) The “Xian incident”

121. This was a most unsavoury incident.  It supports the plaintiffs in one respect only.  It shows that it was Mr Kong's side which owed Mr Yu's side money and not the other way around.

122. Mr Kong and Mr Yu went to Xian in August 1998.  Mr Kong said he originally intended to go for one day.  In fact he was there for four days.  He eventually paid over $4 million and signed further repayment guarantees.

123. The plaintiffs submit his evidence has been exaggerated.  It may well have been, however I am satisfied that Mr Kong was subjected to a very uncomfortable time whilst in the Sheraton Hotel in Xian.  I am satisfied that it was his reluctant agreement to sign the repayment schedules and the handing-over of $4 million which triggered his return to Hong Kong three days later than originally intended.  I am satisfied that it was a further partial repayment of the loan.  I condemn the plaintiffs' methods but Mr Kong's discomfort was because of his inability to pay rather than because of his denial of any liability.

124. The incident reflects poorly on the Minshen Xian personnel.  Whether it amounts to duress in law is borderline, but in any event academic.  The money was due and owing.  Mr Kong's counterclaim for the return of the $4 million is dismissed.  It would be pointless to order the plaintiffs' to return it to Mr Kong, only for Mr Kong to then have to return it back to the plaintiffs in an orderly fashion.

125. Although the “Xian incident” was dealt with at some length in the evidence at trial I find it unnecessary to make any further findings as to the events themselves.  It is also unnecessary to make any declaration, as sought by Mr Kong, in relation to the “repayment guarantee” and to the “pledge an assets agreement” as the plaintiffs are taking no steps to enforce them.  The reality is that they would have found it extremely difficult if they had ever tried to do so.

126. In short, the money was due (it has been deducted from the plaintiffs' claims), the written agreements are worthless and the Minshen management brought unacceptable pressure to bear on Mr Kong.  I will however adjust my final order on costs so as to reflect the “Xian incident”.

LOAN TERMS

127. My findings of fact therefore establish that there was no joint venture and that the plaintiffs advanced money to D5 for the use of D5 and others.  I now turn to the separate issue of whether the plaintiffs have proved that the money was advanced on the specific terms as alleged by them, as evidenced by KY001 and KY002.

128. My conclusion is, for the reasons which follow, that the uncertainties which surround KY001 and KY002 are such that it would be unsafe to rely on them as evidence supporting the plaintiffs' case on the specific terms of the loan.  In short, I am not satisfied that any specific terms have been proved.  I am content to rely on KY001 and KY002 as evidence of a loan and evidence against a joint venture but no more.  This is primarily because of the unusual nature of the repayments, the unsatisfactory evidence of the documents' provenance, the uncertainties of the parties who were aware of the documents, the fact that they are based on non-existent business and the dubious and inconsistent terms which they contain.

129. An understandable response to the above observations might be — if KY001 and KY002 are so flawed how can they be relied on to prove anything?  The answer simply is that stripped of all their inadequacies what remains is a document which was intended at the time to evidence the plaintiffs' intended stance — to lend money, albeit knowing that the Hong Kong parties would use it to invest, as they saw fit, in KPI.

130. The plaintiffs are entitled to restitution.  The issues which remain are, on what terms and from whom?

131. Before addressing those final issues I shall dispose of the side issue of the Money Lenders Ordinance, Cap.163 (“the Ordinance”).

MONEY LENDERS ORDINANCE

132. I describe it as a “side issue” because that is what it has become as a result of my finding (in paragraphs 139 and 140 infra) that the plaintiffs should not reap the benefits of the terms, as written, relating to “interest”, “fees”, “yield” or “guaranteed return” etc.

133. The defence, nonetheless, argue that the entire documents offend the Ordinance and thus the entire documents are unenforceable.

134. The starting point of the defence argument is that KY001 and KY002 taken together provide for ‘interest' at a rate in excess of 60% per annum.  If so, they are, unenforceable, and the advance of $38.76 million cannot be recovered at all.  Section 24 of the Ordinance so provides.  It refers to the effective rate of interest.  The defence submit that any return of money under the agreement which is not capital should be regarded as “effective” interest (the Ordinance section 2).  They secondly rely on the argument that where the agreement provides for a payment of “fees” on a sliding scale depending on when the “fees” are paid, the court should take the highest possible payment when deciding whether or not the 60% limit has been breached.

135. In my judgment because of the contradictions and inconsistencies within the documents themselves, they are incapable of any accurate interpretation.

136. Among such contradictions and inconsistencies are :

(i) KY001 and KY002 refer to a principal sum of US$5,271,520 whereas in fact only HK$38.76 million was handed over (US$ equivalent of $4.98 million approximately).

(ii) The loan was said to be for either a minimum of 180 days or a maximum of 300 days whereas the repayment of $5.607 million was geared to repayments on 10 January (minimum) or 10 May (maximum), periods of 170 days and 290 days respectively.

(iii) KY001 provides for a repayment in excess of the principal of US$335,480 whereas KY002 refers to “repayments” in greater amounts.  It is not clear whether the KY002 repayments are inclusive of or additional to the KY001 repayments.

(iv) KY001 refers to repayment periods of 6 months and 10 months whereas KY002 refers to periods of 4 months and 10 months.

(v) KY001 refers to ‘repayments', KY002 refers to ‘consultation fees'.  The only reference to ‘interest' is in KY001 if the time limits are not met.

(vi) If the “consultation fees” in KY002 should be regarded as ‘interest' the ‘effective rate' actually decreases with time.  A payment after 4 months would have been an effective rate of about 74% p.a. whereas, if they waited for 10 months to repay the effective rate would have been about 35%.  Thus, it could be argued that KY002 was unenforceable for about one month but then became enforceable once the ‘sliding scale' effect of the repayment provisions dipped below 60%.

137. In short, it is because of the many inconsistencies relating to the terms of the repayment that I have (a) disregarded the terms entirely and (b) concluded that it is impossible to conclude with any certainty whether or not the entire documents breached Cap.163 or not.  In this regard it becomes unnecessary for me to decide the sub-sub-issue of whether or not the plaintiffs come within the jurisdiction of Cap.163 by virtue of coming within the definition of “moneylender” in section 2 of the Ordinance.

138. Moreover, and in conclusion of this side issue, the plaintiffs' claim, as pleaded, was confined to paragraph 3 of KY002 which plainly, taken on its own, did not breach Cap.163.

TERMS OF RESTITUTION

139. This matter can be dealt with shortly.  In my judgment the terms of the repayment, given the overall circumstances of this particular case which can only be described as falling well short of the standards expected of businessmen dealing with large sums of money, should be on the most conservative basis whilst remaining fair to both sides.

140. This approach leads me to awarding the return of the balance of the total sum, namely $28.26 million to the plaintiffs with interest at 5% from the date of the writ, namely 17 May 2001.  Naturally the KPI shares purchased with the money remain the property of the names in which they were purchased.

WHO IS LIABLE TO REPAY?

141. This raises the final issue namely have the plaintiffs proved on the balance of probabilities that Mr Lo, Mr Kong and Dr Lee were partners for the purpose of receiving the $38.76 million or, alternatively, did they hold themselves out as such.

142. It is abundantly clear that there was no formal documented legal partnership.  It is not the plaintiffs' case that there was.  The plaintiffs can nonetheless succeed to the extent that they prove parties were acting in concert as if they were partners and were holding themselves out as such.

143. My assessment is that it is fanciful for Mr Lo to contend that it “was nothing to do with him”.  His business methods, to which there have been many references hitherto, point clearly to him utilizing Mr Kong as his partner.  On the other side of the coin Mr Kong is clearly proved to be Mr Lo's partner also.  Mr Kong's role was to get the money.  Mr Lo's role was to spend it.

144. The evidence against Dr Lee is less compelling.  At the end of the day I judge him to be an enthusiastic supporter but not a member of the team.  I shall return to the Lo/Kong partnership later.  I now deal with Dr Lee's involvement. 

Dr Lee

145. The thrust of the argument that Dr Lee was one of the partners is to ask the question, why did he attend so many of the meetings and why did he make detailed notes at the meetings if he was not one of the partners?  In particular, the plaintiffs point out that, generally speaking, the meetings were held at lunchtime when Dr Lee could attend as he was then able to get away from his duties in a public hospital.  The timings of the meetings were therefore for Dr Lee's convenience.  The other partners, it is said, would not have been so accommodating to someone who was not involved to the same extent as they were.

146. On the other hand the following points are made in support of Dr Lee not being a partner.

147. Dr Lee's attendance at meetings appears to have ceased after the Fan Mitchell meetings (subject to two meetings with Mr Yu and Mr Kong, but not the Los, at his home in Shatin where the “November” and “December” proposals were briefly discussed).  

148. Dr Lee's own evidence that he was initially invited to attend the first meeting as a friend of Mr Lo to help him with language differences and offer such advice as he was able based on his own limited knowledge of shares and the Hong Kong market, was supported by the other defendants and Mrs Lo.

149. The only piece of evidence which pointed to any financial contribution by Dr Lee came from Mr Yu when he said he overheard Mr Lo ask Dr Lee when he was going to make his contribution to the venture.  One comment, overheard by chance and denied by everyone else is a poor foundation for alleging a partnership which included Dr Lee.

150. The facts for and against Dr Lee's involvement must also be tested against the principle that a person can be rendered liable to a third party if he knowingly represents himself as a partner by his words or deeds.  (Partnership Ordinance, Cap.38 section 16.)

151. The high water mark of the evidence purporting to show that Dr Lee represented himself as a partner comes from Mr Yu's oral testimony.  At its highest I do not consider that evidence to be sufficiently persuasive.  Mr Yu said Dr Lee was introduced as a medical doctor friend of Mr Lo who was interested in share investments.  Moreover, and most significantly, I do not think that Mr Yu was ever particularly concerned about Dr Lee's personal wealth whereas Mr Lo's and Mr Kong's personal wealth was specifically said by Mr Yu to be a factor which persuaded him to proceed with the loan with confidence.  Further, it was not only Mr Yu who regarded Mr Lo's and Mr Kong's wealth as significant.  Minshen Xian also made their own enquries about them; but not into Dr Lee's financial background.

152. It is a fair comment also to note that in the early exchanges of correspondence and in the initial threats to litigate Dr Lee's name is significant by its absence.  The first time the plaintiffs pleaded a partnership against Dr Lee was four years after the material events of 1997.  At that time Dr Lee was one of Mr Lo's witnesses.

153. As already stated I prefer the arguments against holding Dr Lee as a partner in these proceedings.

Mr Lo and Mr Kong

154. I find, on the whole of the evidence, that the inference that Mr Lo and Mr Kong were “in it together” (to borrow a phrase from criminal law) as a syndicate to obtain a loan from the plaintiffs to speculate in KPI shares is irresistible.  When Dr Lee wrote in one of his early notes of meeting the words “My side” against party A the “side” to which he referred must at the very least have meant Mr Kong and Mr Lo together with whichever of Mr Lo's companies were to be utilized for the venture.  The expression “my side” excludes Dr Lee himself on the reasoning that one can refer to a team as “my team” without being a player in that team.

155. Mr Lo trusted Mr Kong.  He was an old friend.  They had done business before.  Mr Lo's reluctance to reveal his identity was made easy by Mr Kong accepting the role as his trusted representative.  I find that Mr Kong signed both KY001 and KY002 on their joint behalves, even if Mr Lo never actually saw them, because it was well known to them both that when the money came it was Mr Lo who would be in charge of it.  I find also that when things went wrong, after the crash, Mr Lo continued to rely on Mr Kong to lead the rescue operations which could only have come to fruition had they had the blessing, co-operation and participation of Mr Lo.

CONCLUSION

156. As all counsel have said on more than one occasion this has been a case which can only be decided on the court's findings of fact.  There has been a refreshing paucity of legal issues.  The fact finding exercise has nonetheless been a difficult one.  Some issues remain unresolved because of the unsatisfactory state of the evidence on both sides.  The final judgment is based only on those limited findings which have emerged as having been satisfactorily proved.

157. Those factual issues which have not been referred to at all (for example Victory Grand's company brochure and the assignment of the loan between the plaintiffs) have not been overlooked.  I have regarded findings on such issues to be either unnecessary or not possible.

158. I make the judgment in favour of both plaintiffs.  I consider it unnecessary to make it in favour of one or the other.

159. The plaintiffs are entitled to recover from D1, D3 and D5 the sum of $28,260,000 plus interest as stated in paragraph 140 herein.  This sum represents the money advanced on 24 July 1997 less $10.5 million already repaid by Mr Kong.  It is not necessary for me to assess the respective degrees of participation by those involved.  Suffice it to say that Mr Lo's passive role was plainly more significant than Mr Kong's active role.

160. D5's counterclaim is dismissed with costs.  D3's counterclaim is dismissed.  There shall be no order as to costs arising out of D3's counterclaim.  The plaintiffs' costs of the claim shall be paid by D1, D3 and D5, save that the plaintiffs' claim against D4 is dismissed with costs.  There shall be an order in terms of paragraph 4 of the Summons dated 15 March 2005.  All costs orders are on a nisi basis.