STANDARD CHARTERED SECURITIES LTD. v. ARTHUR LAI and Others

1993, No.A2757

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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Introductory

1. In early 1990, Bond Holdings Ltd, ("Bond Holdings") was experiencing financial difficulties. Amongst its assets were 881,515,404 (65.9%) of the 1,337,869,304 issued shares of Bond International Ltd, ("Bond International"), a company listed on the Hong Kong Stock Exchange. Bond Holdings had pledged them to Hong Kong and Shanghai Bank, ("H.K.S.B."), to secure advances to itself.

2. Tomson Pacific Ltd, ("Tomson Pacific"), another company traded on the Hong Kong Stock Exchange, wished to gain control of Bond International which was not itself experiencing financial difficulties and owned valuable assets including land near Rome.

3. Tomson Pacific was not a large company by Hong Kong standards, its total assets at the time it planned to gain control of Bond International being in the region of HK$870 million.

4. The stockbroker advising Tomson Pacific during its negotiations with Bond Holdings was ChinTung Ltd, ("ChinTung Securities"), the Plaintiff, and the advising merchant bank was Standard Chartered Asia Ltd ("SCA"). SCA was a wholly-owned subsidiary of Standard Chartered Bank Ltd. ("SCB").

5. ChinTung Securities was a wholly owned subsidiary of ChinTung Holdings Ltd ("ChinTung Holdings"), whilst ChinTung Holdings was owned as to 90% by SCA and the remaining 10% by Mr Arthur Lai, the 1st Defendant in the present proceedings.

6. Mr Arthur Lai was the Chairman of the board of directors of both ChinTung Holdings and ChinTung Securities.

7. Prior to any question arising on the part of Tomson Pacific that it might possibly consider seeking control of Bond International, Tomson Pacific was already an established customer of both ChinTung Securities and S.C.A. Likewise, associated companies of Tomson Pacific such as Tomson Securities Ltd ("Tomson Securities"), and Rivera Holdings Ltd ("Rivera") were already customers of ChinTung Securities.

8. Pursuant to Heads of Agreement reached on 4th May 1990, Tomson Pacific and Bond Holdings, together with other interested parties to whom, insofar as necessary, reference will in due course be made, entered into a series of interrelated agreements, all dated 16th May 1990, to the effect that Tomson Pacific would acquire 461,564,910 of Bond Holdings' 881,515,404 shares in Bond International at the price of HK$2.25 each, making a total consideration of HK$1,038,521,047, and that the remaining 419,950,494 million Bond International shares owned by Bond Holdings should be placed by ChinTung Securities with persons independent of both Tomson Pacific and Bond Holdings at the price of $2.25 each.

9. 461,564,910 shares in Bond International represented 34.5% of its issued capital of 1,337,869,304 shares.

10. By virtue of Rule 33 of Hong Kong's Takeovers and Mergers Code, any party acquiring, by itself or through related parties, 35% or more of the issued capital of a listed company has to make a general offer to all other holders of the company's stock to buy at the highest price paid by that acquiring party in the preceding six months. The practical implications of that for Tomson Pacific were that if its purchases of Bond International shares by itself or related parties equalled or exceeded that 35%, it would become liable to purchase at the price of at least $2.25 per share the 34% or thereabouts of Bond International shares not owned by Bond Holdings, the arithmetical result from that being a potential liability of approximately $1,023 million.

11. Were Tomson Pacific to become the owner of a mere 6,665,881 Bond International shares additional to the 461,564,910 it had agreed to purchase from Bond Holdings, the general offer mechanism of Rule 33 would be triggered.

12. To finance its purchase of the 461,564,910 Bond International shares owned by Bond Holdings, Tomson Pacific made a rights issue, managed by SCA, which raised HK$1,000 million. The prospectus for that rights issue was made public on 29th May 1990.

13. ChinTung Securities under one of the agreements made on 16th May 1990 accepted the role of agent to place the remaining 419,950,494 Bond International shares with placees independent of both Bond Holdings and Tomson Pacific.

14. If 6,665,881 or more of those 419,950,494 Bond International shares remained unplaced by a specified date, (25th July 1990), there would be significant financial implications arising by virtue of the various agreements made on 16th May 1990 for (i) Tomson which had agreed to underwrite the placing and any general offer under Rule 33, and (ii) Mr David Tong and Dr Stanley Ho, the principal shareholders of Tomson Pacific, who personally had agreed to sub-underwrite Tomson Pacific's obligation. The potential obligation of the underwriter and sub-underwriters was of the order of HK$1,000 million upwards.

15. An active participant in the negotiations which culminated in the agreements of 16th May 1990 was the Stock and Futures Commission ("SFC") Amongst its duties are seeing that the Takeovers and Mergers Code, as well as the Listing Rules, are observed.

16. For a deal between Tomson Pacific and Bond Holdings to take place in the form it did, of Tomson Pacific acquiring 34.5% of the shares in Bond International while at the same time there was to be the placing of a further 31% of that same company's shares, there had to be the blessing in advance of the SFC, which is ever-vigilant for "concert parties". Unless involved in advance and its natural suspicions of a deal of the type proposed between Tomson Pacific and Bond Holdings allayed, the SFC could in practice have been an insuperable obstacle to the contemplated transaction going ahead in the form it took.

17. What Tomson Pacific and Bond Holdings together with the other interested parties and their advisers were able to achieve with the SFC was the waiver, as embodied in an SFC letter dated 16th May 1990 (Bundle 2, pages 283 to 286), of any general offer obligation under Rule 33, provided that the proposed placement to be carried out by ChinTung Securities as placing agent was with persons independent from and not acting in concert with Tomson Pacific or Bond Holdings or any related person of either of them.

18. "Related person" was defined in a Placement Acknowledgement Form approved by the Chairman of the SFC's Takeovers and Mergers Committee. A condition attached by the SFC to the waiver was that all placees had to execute such a form which also had to be endorsed by Mr David Tong on behalf of Tomson Pacific. The form then had to be filed with the Chairman of that Committee. The relevant part of the form reads as follows:-

"We confirm that we are an independent party from and are not acting in concern with Bond Corporation International Holdings Limited ('BCIHL') and Tomson Pacific Limited ('Tomson') or any related party of either of them or any of their respective directors (or their close relatives, related trust or personal holding companies). For the purposes of this paragraph, 'related party' shall mean, in relation to BCIHL or Tomson, its parent company, subsidiaries and fellow subsidiaries, and their associated companies, and companies of which such companies are associated companies, all with each other (where 'associated company' denotes ownership or control of 20 per cent. Or more of the equity share capital of a Company, combined with the ability to exercise a significant influence over that Company)."

19. The Chairman of that Committee was also entitled to require further information to satisfy his Committee of the independence of the placees.

20. As events turned out, the Tomson Pacific Rights issue was a success, and the Placement Shares were all sold to placees within the time contemplated by the various agreements of 16th May 1990. Mr Raymond Lai, (the 2nd Defendant), Managing Director of ChinTung Securities, and brother of Mr Arthur Lai, its Chairman, confirmed to the SFC in writing on 23rd July 1990 to the effect that all of the Placement Shares had been sold to independent placees, and, in an internal memorandum, confirmed to the same effect on 25th July 1990.

21. Now a question has arisen about the independence of one of the placees - Mandarin Development Ltd, ("Mandarin"), the 5th Defendant, which, on a date between 20th and 25th July 1990 bought 8,050,494, being the final balance of the 419,950,494 Placement Shares.

22. So long as Mandarin really was independent of, and not acting in concert with Tomson Pacific, Bond Holdings or related parties, Tomson Pacific as underwriters and its two principal shareholders as sub-underwriters, cannot be called upon to make the general offer, involving HK$1,000 million or more already referred to.

23. The SFC now contends that, at the time Mandarin made its purchase, it was not independent of but, instead, acted in concert with, Tomson Pacific or Bond Holdings, since Mandarin was no more than a nominee of Mr Arthur Lai who was very much a related party because of the pivotal role he played in first of all bringing Tomson Pacific and Bond Holdings together, and then structuring the deal which led to Tomson Pacific gaining control of Bond International.

24. Because of disquiet over whether the Takeovers and Mergers Code might have been breached in the way Tomson Pacific got control of Bond International, the Financial Secretary, acting pursuant to s.143(1)(c) of the Companies Ordinance, appointed an Inspector on 28th August 1992 to investigate the transaction.

25. During the course of that investigation it came to light that by a letter dated 20th April 1990, Bond Holdings agreed to pay Mr Arthur Lai two million Australian dollars through his nominee company, Wealthcorp Investments Limited, ("Wealthcorp"), the 6th Defendant, for what was described as a "negotiation and success fee", (meaning "commission"), on completion of the sale and placement of the Bond International shares under the proposed arrangement between Bond Holdings and Tomson Pacific. Bond Holdings duly paid that $A2 million commission to Mr Arthur Lai on or about 28th June 1990, through Mandarin, with the concurrence of Wealthcorp.

26. It also came to light during the course of the Inspector's Investigation that, by a letter dated 31st May 1990, Tomson Pacific agreed to pay Mandarin, which Mr Arthur Lai admits was his nominee for this purpose, HK$26.4 million commission on completion of Tomson Pacific's acquisition of 34.5% of Bond International's issued capital, for having introduced Bond Holdings to Tomson Pacific and for acting as Tomson Pacific's agent for that acquisition.

27. The Plaintiff disputes that Mr Arthur Lai, Mandarin or Wealthcorp ever had the Plaintiff's authority to receive those payments of HK$26.4 million and $A2 million, and seeks by the present proceeding to recover both amounts from them on the basis of breach of fiduciary duty and conspiracy.

28. A further claim the Plaintiff makes against Mr Arthur Lai and Mandarin by the present proceedings is for the sum of $1,264,443, being the profit Mandarin, made on the sale between the 24th July and 1st August 1990, in various lots, of the 8,050,494 Bond International shares placed with Mandarin. The basis of that claim, too, is breach of fiduciary duty, in that Mr Arthur Lai took advantage, for his own benefit, of confidential information that came his way as Chairman and Director of ChinTung Securities that those 8,050,494. Bond International shares were available for placing, and, without the Plaintiff's consent, caused those shares to be placed with Mandarin, allegedly still acting as Mr Arthur Lai's nominee.

Mr Arthur Lai's Background

29. Mr Arthur Lai is a Chartered Accountant by training. Since qualifying, his career, for the most part, has been in stockbroking and other forms of finance.

30. Having worked for such internationally known investments institutions as Cazenove and Merrill Lynch, Mr Arthur Lai, in 1982, started his own unincorporated stockbroking firm, ChinTung, in Hong Kong.

31. One of the first people, he employed in those early days was Mr Peter Mou, the 3rd Defendant, who became the firm's financial director. In or about early 1987, Mr Arthur Lai brought in Mr Raymond Lai, his elder brother, to be managing director.

32. Under Mr Arthur Lai's leadership, ChinTung blossomed to the point where, by 1987, it was the largest local stockbroker in Hong Kong, it had branches in something like seven major international financial centres, and, world-wide, employed over four hundred people.

33. ChinTung branched out into other areas of financial dealing such as real estate business, (ChinTung Land Ltd), futures trading, (ChinTung Futures Ltd), and lending money for margin trading on securities (ChinTung Finance Ltd).

34. ChinTung Futures Ltd, by 1987, was the futures' trader doing the largest volume in Hong Kong of trading in the then relatively novel Hang Seng Index Futures Contract.

35. To help finance his rapidly expanding business, Mr Arthur Lai brought in a partner, Arral Associates, which provided capital but left Mr Arthur Lai to get on with running the business his way.

36. By early 1987, Mr Arthur Lai had decided to seek a public listing for ChinTung. At or about that time, he found himself being wooed by SCB which, lacking a retail stockbroking arm, viewed his business as a convenient means of moving into that sphere. A stockbroking business would complement SCA's merchant banking activities. SCB's overtures to take over his business were on the basis of his business having a value of approximately four hundred to four hundred and fifty million Hong Kong dollars, but Mr Arthur Lai was not interested, since he expected his business to develop to a point where its value would exceed one thousand million Hong Kong dollars.

37. To enable him to buy out Arral Associates' interest in the business, SCB were happy to lend him, on the strength of his personal guarantee, somewhere between thirty-five and forty million Hong Kong dollars, which, at the time, relative to the estimated value of his business, must have seemed a modest sum.

38. If Mr Arthur Lai had had his way, he would have gone to the market in about March to May 1987, but the earliest date he could get from the Stock Exchange's Listing Committee was November that same year.

39. Disaster struck for Mr Arthur Lai on "Black Monday" in October 1987 when stock markets around the world crashed, the loss in Hong Kong being far steeper than elsewhere due to the unique approach of those responsible for running the Hong Kong Stock Exchange in suspending all trading for four business days. ChinTung Futures Ltd had a net long position on Hang Seng Index Futures. On re-opening, the Hang Seng Index was down well over thirty per cent. That translated into a debt exceeding six hundred million Hong Kong dollars owed ChinTung Futures Limited by its customers who had been buying on margin.

40. "Black Monday" and his firm's position in the futures' market brought about the result for Mr Arthur Lai that the thirty five to forty million Hong Kong dollars borrowed on his personal guarantee suddenly loomed as a huge sum in the light of a seriously weakened stock market, and probable massive defaults by the customers of ChinTung Futures Ltd who had been trading on margin.

41. The scale of the disaster was immediately apparent to both SCB and Mr Arthur Lai who was in no position to re-pay the thirty-five or more million Hong Kong dollars SCB demanded from him forthwith under his personal guarantee.

42. Within days of Black Monday, Mr Arthur Lai agreed with SCB that its subsidiary, SCA, should take over ChinTung which became incorporated for the purpose of the exercise. SCA also took over the other parts of the ChinTung empire such as ChinTung Land and ChinTung Finance which still looked viable, whilst the less promising parts, such as ChinTung Futures remained with Mr Arthur Lai.

43. Leading the SCA team in its negotiations with Mr Arthur Lai on taking over his companies was Mr Christopher Wigan, SCA's Chief Executive, and one of its directors.

44. The general arrangement agreed between Mr Wigan and Mr Arthur Lai was that Mr Arthur Lai and those working for him such as Mr Raymond Lai and Mr Peter Mou should continue to conduct the stockbroking operations of ChinTung Securities, since stockbroking was an area in which SCA lacked expertise, but that SCA financial controllers would be drafted as directors to ChinTung Securities' board to monitor the company's financial management, a particular area of concern for SCA being the granting of margin credit.

45. The great attraction for SCA in retaining Mr Arthur Lai was his vast range of business contacts which SCA hoped profitably to tap. Mr Arthur Lai himself, in his evidence before me recognized that when he stated that the advantage to the Standard Chartered group in having his services was that he was the one who brought in most clients.

46. There can be no dispute that the over-all agreement Mr Arthur Lai reached with SCA contained a substantial financial incentive for him (beyond an agreed salary of $130,000 per month), in that there was an explicit provision for sharing annual profits of ChinTung Securities in excess of five million Hong Kong dollars to enable him to pay off his debt to SCB.

47. An area where there is dispute, at least of fact, though, is whether there was an understanding between the SCB side and Mr Arthur Lai that, as a further incentive to him, he would be permitted to broker private deals with customers or potential customers of ChinTung Securities to earn commission for which he need not account to ChinTung Securities.

48. A formal written contract, dated 26th April 1988, setting forth the terms of his employment ("the Service Agreement") was entered into between ChinTung Holdings and Mr Arthur Lai. Much hard-bargaining from "Black Monday" onwards between Mr Wigan representing SCA's interests, and Mr Arthur Lai for himself, preceded the execution of that agreement.

49. In unmistakably clear terms, the essence of that agreement is to the effect that in consideration of a salary of $130,000 per month, Mr Arthur Lai is to devote all his time and energies to the business of the ChinTung Group (defined as ChinTung Holdings and its subsidiaries, which, of course, included ChinTung Securities), and, without the consent in writing of ChinTung Holdings' Board of Directors, he was not to be engaged in any other business.

50. I now set out the relevant passages of the Service Agreement. The references to "the Executive" are to Mr Arthur Lai and "the Company" is ChinTung Holdings.

"2. The Executive shall serve the Company as chairman and shall act as a dealing director of the Company's broking subsidiary in Hong Kong and shall undertake such journeys overseas as are required by the Company for the proper performance of his duties. As part of his duties, the Executive shall also provide such services to other members of the ChinTung Group as are required by the Board from time to time.

3. During the continuance of this Agreement, the Executive

(a) shall perform such duties and exercise such powers as are from time to time delegated to him by the Board and shall obey the reasonable lawful directions which the Board may from time to time assign to, vest in, or impose upon him and all rules and regulations from time to time laid down by the Company concerning its employees;

(b) unless and to the extent otherwise agreed by the Board or prevented by ill-health, shall carry out his duties in a proper, loyal and efficient manner and shall devote the whole of his time and attention to the business of the Company and the ChinTung Group both during normal business hours and also at other times when requested by the Company to do so or when it may be necessary for the proper and efficient conduct of such business and shall use his best endeavours to promote the interests and reputation of the Company and the ChinTung Group.

4.

(a) The Company shall pay to the Executive by way of remuneration for his services hereunder a salary of HK$130,000 per month payable in arrears on the last day of each month. The Executive shall also be entitled to two extra months' salary each calendar year if he is still employed by the Company on December 31 in such year.

7. The Executive shall not, except with the consent in writing of the Board, or directly or indirectly engaged or interested during the continuance of this Agreement in any other business or in any occupation whether of profit or otherwise or have any financial interest in any other business which may, in the opinion of the Board, preclude him from carrying out his duties efficiently or which may be detrimental to the interests of the Company."

51. Mr Arthur Lai claimed before me that there was an oral understanding reached between himself and Mr Wigan during the course of the negotiations for the Service Agreement that ChinTung Holdings was agreeable to his doing his own business on the side outside of ordinary working hours, and that was reflected in Clause 7 which meant he was permitted to do outside work, (in which category he placed the commissions he had negotiated with Bond Holdings and Tomson Pacific), unless in the opinion of the Board of ChinTung Holdings the work were detrimental to the interests of the ChinTung Group. If his outside work were detrimental to the ChinTung Group, he had to get written permission from the Board of ChinTung Holdings to do it.

52. Why the ChinTung Group were willing to countenance such an arrangement, according to Mr Lai, was that they realized a salary of only $130,000 per month was too low for him, and they knew he would have to supplement it in order to make the money necessary to clear up the problems of the companies in the ChinTung Group not taken over by SCA.

53. In Mr Arthur Lai's view, his taking the commissions of A$2 million from Bond Holdings and $26.4 million from Tomson Pacific was not detrimental, but beneficial to ChinTung Holdings and the ChinTung Group, since, through his instrumentality, ChinTung Securities got placing commission and ChinTung Holdings' parent, SCA, got commission as financial adviser to Tomson Pacific, which, so he claims, would not otherwise have gone their way.

54. I do not think for one moment that Mr Wigan or anyone else for SCA or the ChinTung Group would have agreed to the highly improbable arrangement Mr Arthur Lai claims existed. For Mr Arthur Lai to claim that such an implausible understanding had been arrived at, when the Service Agreement, on any reading, plainly said the opposite, was one of many indicators of Mr Arthur Lai's not being a credible witness.

Tomson Pacific and Mr David Tong

55. Tomson Pacific, controlled by Mr David Tong, was part of a group of Hong Kong listed companies which included Rivera, and Peace River.Mr David Tong normally resided in Taiwan.

56. For a good many months prior to Tomson Pacific's seeking to take over Bond International, SCA, together with ChinTung Securities, had been targeting Taiwan as a prospective source of wealthy investors in Hong Kong.

57. ChinTung Securities had even gone to the length of entering into a joint venture agreement with a Taiwan-based commodity-broking firm, Rosenthal Ltd., ("Rosenthal"), to share commissions on trades made on the Hong Kong Stock Exchange through ChinTung Securities by Rosenthal on behalf of clients in Taiwan.

58. Amongst the earliest, if not the earliest, of ChinTung Securities' Taiwan-based clients was Mr David Tong. Mr David Tong built up a stable of Hong Kong-listed companies in which he held substantial interests, including Tomson Pacific and its related companies to which I have already made reference.

59. Companies in Mr David Tong's Tomson Pacific group had been clients of ChinTung Securities well before Mr Arthur Lai actually met Mr David Tong, in early 1990, for the first time.

60. By the time Mr Arthur Lai got to meet Mr David Tong, Tomson Pacific and its associated companies were on the way to developing close commercial ties in Hong Kong with SCA. Besides acting for Tomson Pacific and companies within that group on various one-off transactions such as right issues and setting up a joint venture, SCA, by a letter dated 22nd November 1989, was retained by Tomson Pacific, and the companies in its group, as a financial adviser, for a monthly fee which included:

"...general advice on financial matters relating to your group, any correspondence, liaison with the Stock Exchange and the Securities & Futures Commission, presentation of annual statutory accounts and initial assessment on merger and acquisition opportunities identified from time to time. (my underlining)"

61. Unsurprisingly, SCA acted in tandem with its subsidiary, ChinTung Securities, whenever it could in relation to the affairs of Tomson Pacific and its group so that, for example in March 1990, one finds SCA acting as financial adviser and ChinTung Securities as a placing agent on the issue of new shares for Rivera (Holdings) Ltd, a company belonging to the Tomson Pacific group.

62. It was either in January or February 1990 that Mr Arthur Lai, on a business trip to Taiwan, paid for by the Plaintiff, met Mr David Tong.Rosenthal was run by a pair of brothers, John and Rustom Ho.

63. The Ho brothers had a Taiwan-based business associate, Mr Patrick Poon, who also happened to be a business associate of Mr Arthur Lai.

64. During the January or February 1990 Taiwan visit, Mr Patrick Poon confided to Mr Arthur Lai information that Mr David Tong might be interested in making further business acquisitions in Hong Kong, and that he could get an introduction to Mr David Tong for Mr Arthur Lai through the Ho brothers. Mr Arthur Lai there and then promised Mr Patrick Poon that if any commission came Mr Arthur Lai's way from Mr David Tong or his companies in relation to business arising from the introduction, he would give Mr Patrick Poon 40% of it.

65. Mr Patrick Poon duly arranged a dinner at which Mr Arthur Lai and Mr David Tong were both guests.

66. Mr Lai seems to think it was significant that he paid his own way at that dinner, rather than billing the Plaintiff for it, by way of entertainment expenses, and, for what it is worth, I am prepared to accept that was the case.

67. Although Mr Arthur Lai had not previously met Mr David Tong, he knew already that companies in which Mr Tong was interested had bought and sold shares through ChinTung Securities. That emerges from the answer Mr Arthur Lai gave to the Inspector at page 192 of the record.

"Q. ...had you ever dealt with David Tong before on a business level, personally?

A. No I think David, they have the interest, they came, well not directly with me but you know, David they have, I think some of their friends have meetings, have actually come with us. I think they also have a security account with us and they buy shares and sell shares, they have acquired shares, so we have already -- I think when we first started they start doing business with us. I mean otherwise I won't have the incentive of showing them the deal as well. I think that is really how it all works."

68. Precisely what transpired at that dinner is not all that important, but, as a matter of common sense, it is difficult to imagine that Mr Arthur Lai was not introduced to Mr David Tong as the chairman of the ChinTung group, and Mr David Tong to Mr Arthur Lai as controlling shareholder of the Tomson Pacific group. It is equally difficult to imagine that, even before they were formally introduced, Mr David Tong, an obviously successful businessman who no doubt has his wits very much about him, did not know that Mr Arthur Lai was the chairman of a Hong Kong stockbroking company, owned by SCA, which is backed up by the wealth of SCB.

69. It is clear that, from the outset, Mr Arthur Lai knew full well that why Mr David Tong might be interested in meeting him was because of Mr Arthur Lai's position in ChinTung Securities which would facilitate Mr David Tong's acquisition of shares in public companies in Hong Kong. That can be discerned from Mr Arthur Lai's following exchange with the Inspector at page 207/8.

"Q. What is your interest in Mandarin?

A. Well Mandarin is a company, really set up when I do the deal here, and it is because when Patrick Poon introduced me to a deal and of course you know how it is done, initially I said, well you know it is a ChinTung deal, and he said, why don't you do it yourself, because you know... doesn't really involve in matching deals, doing corporate finance work and such. And I said, well I could be interested. Of course in the market practices if you do a deal like this you always have to split commission, so to speak, whatever you can get with whoever introduced you to the deal. And Patrick introduced me to the Ho's (Hungs?), the Ho's (Hungs?) introduced Tomson, so that was the deal with Patrick, and at that moment I reckoned if there is any commission I will have 60/40, I think that was really the arrangement."

70. Obviously, Mr Arthur Lai knew all along it was "a ChinTung deal", which, in context, meant a deal to be conducted by ChinTung Securities. Common sense defies any other realistic possibility.

71. Even supposing that all the time at the dinner was spent on exchanging pleasantries, there is no doubt that when Mr Arthur Lai and Mr David Tong next got together, which was a few weeks later in Hong Kong, the conversation was about business, one topic in particular being Mr David Tong's interest in making further acquisitions of publicly-listed companies in Hong Kong, either for himself, or for companies in which he was interested. Mr David Tong asked Mr Arthur Lai to look for such opportunities for him.

Bond Holding's and Mr Peter Lucas

72. It so happened that shortly before then, Mr Peter Lucas, a director of Bond Holdings, had mentioned to Mr Arthur Lai that Bond Holdings, which, at the time, suffered from a liquidity crisis, was anxious to sell the 881 million shares it held, representing 65.9% of the issued capital of Bond International, a viable company.

73. As a matter of common sense, the only reason Mr Lucas, a businessman, imparted that information to Mr Arthur Lai was because he knew that Mr Arthur Lai was a director of the stockbrokers, ChinTung Securities, which had the merchant bank, SCA standing behind it.

74. Mr Lucas was not actually letting Mr Arthur Lai into any great secret since it was fairly common knowledge then that Bond Holdings, strapped for cash, was anxious to make asset sales.

The Mechanics of the Takeover

75. A practical impediment to Bond Holdings' disposal of its Bond International shares was the charge Bond Holding's had granted H.S.B.C. over them to secure huge advances to Bond Holdings.

76. Pursuant to his understanding with Mr David Tong, Mr Arthur Lai suggested to the former that Tomson Pacific should try to gain control of Bond International. Mr David Tong was in favour.

77. The mechanics of such a takeover were quite complicated. The price per Bond International share had to suit each of Bond Holdings, HSBC and Tomson Pacific. They were able to agree on HK$2.25 per share.

78. Tomson Pacific favoured the route of acquiring just under 35% of Bond International's issued capital, since that would give Tomson Pacific effective control without triggering the general offer provision of the Takeovers and Mergers Code, and having the other 31.4% placed with parties independent of Bond Holdings and Tomson Pacific.

79. Just to purchase 31.4% at $2.25 per share would cost approximately HK$945 million. If the general offer mechanism were triggered, Tomson Pacific would become liable to purchase not only the 31.4% it hoped to see placed, but also the remaining balance of the issued shares to make up 100%, all at a price of not less than HK$2.25 per share. Instead of having to fund only $1,038 million for 34.5% of the issued capital, Tomson Pacific would need close to $3,000 million to acquire 100%.

80. Mr Arthur Lai emphasised time and time again in his evidence how, the whole way through, he tried to bring ChinTung Securities and SCA into the deal so they could earning placing commission and financial adviser's fees, respectively, but not to the exclusion of the commissions he had in mind for himself personally from Tomson Pacific and Bond Corporation for having brought them together. Mr Arthur Lai was hoping for what he described as a "perfect marriage", where ChinTung Securities and SCA received the fees and commission he had in mind for them at full commercial rates, while he pocketed from Tomson Pacific and Bond Holdings whatever they were prepared to pay as "introduction fees" or "success fees", for having brought them together.

81. At first, HSBC wanted to do the deal "in-house", using its own merchant banking arm, Wardley's Ltd ("Wardley's"), and stockbrokers of its own choosing. If the deal had gone ahead that way, Mr Arthur Lai would still, presumably, have wanted to pocket commission for himself from Bond Holdings and Tomson Pacific, but there obviously would have been no placing commission for ChinTung Securities and no advisory fee for SCA.

82. Wardley's, for some reason being unable or unwilling to stitch the whole deal together, HSBC then adopted a stance of no longer standing in the way of ChinTung Securities and SCA participating, so that Mr Arthur Lai was able to fulfil his wish, as expressed in his evidence, of bringing them in as placing agent and financial adviser, respectively.

83. I accept that it was due largely to Mr Arthur Lai's flair and energy that the deal was cast in such a form as to make it practicable to go ahead.

84. Tomson Pacific, with SCA as their financial advisers, were to make a rights issue to raise the necessary $1,000 million to purchase 34.5% of Bond International at $2.25 per share.

85. ChinTung Securities was to be placing agent on a "best endeavour" basis to place the remaining 31.4% of Bond International owned by Bond Holdings with placees independent of and not acting in concert with either Bond Holdings or Tomson Pacific.

86. Tomson Pacific underwrote, and Mr David Tong together with Dr Stanley Ho, the principal shareholders of Tomson Pacific, sub-underwrote the placement and ensuing general offer if the placement to independent placees did not eventuate.

87. The fact that SCA and ChinTung Securities, standing as they did in the relationship of parent and subsidiary, were not seen to be independent of each other was obviously a cause of great concern to the SFC which would obviously have preferred the financial adviser and the placing agent to have stood in an unmistakably adversarial relationship to each other, with a view to the Takeovers and Mergers Code being observed with maximum rigour.

88. ChinTung Securities' own solicitors, in a letter dated 24th May 1990 to their client, for the attention of Mr Arthur Lai, pointed out the potential for conflict of duty and interest which existed for ChinTung Securities by virtue of its involvement, on the one hand, with both Bond Holdings and Tomson Pacific in helping along the bargaining process which led to their agreement, and, on the other hand, the need for it, in its capacity as placing agent, to remain scrupulously detached so as to avoid any suggestion of concert parties.

89. After obvious misgivings, reflected in its letter of 16th May 1990 to SCA in relation to the potential for breaches of the Takeovers and Mergers Code, the SFC allowed the deal to go ahead with the structure Mr Arthur Lai had played so major a part in devising.

90. It is unnecessary for present purposes to go into all the technicalities of the interlocking series of agreements, all dated 16th May 1990 which brought about the practical results that Bond Holdings sold all its 881 million shares in Bond International at $2.25 each, H.S.B.C. got repaid with the proceeds, Tomson Pacific gained control of Bond International by acquiring the 34.5% of its issued capital on or before the 28th June 1990, ChinTung Securities found placees for the remaining 31.4% before 25th July 1990, Tomson Pacific as underwriters, together with Mr David Tong and Dr Stanley Ho as sub-underwriters, were all treated as spared any contingent liability to make a general offer, SCA got its adviser's fee, and ChinTung Securities got placing commission.

Commission for Mr Arthur Lai

91. Mr Arthur Lai, too, received commission. On or about 22nd June 1990, he received HK$26.4 million from Tomson Pacific, and, on or about 29th June 1990, A$2 million from Bond Holdings. The cheques for those two amounts were both made payable to Mandarin. Those are two of the amounts the Plaintiff seeks to recover by the present proceedings.

92. The agreement between Bond Holdings and Mr Arthur Lai leading to the payment of the A$2 million is embodied in a letter dated 20th April 1990, from Bond Corporation to Mr Arthur Lai, and Wealthcorp, which Mr Arthur Lai admits was his nominee for that purpose. The letter was as follows :-

"This letter confirms that upon and subject to the due completion of the purchase by Tomson Pacific Limited ('TPL') or interests associated with TPL of 34.5% out of our holding of 65.89% of the issued capital of Bond Corporation International Limited and the completion of the placement of the balance of 31.35% we will pay you a negotiation and success fee equaling the Hong Kong dollar equivalent of AUD2.0 million which will include all of your out of pocket expenses and costs."

93. The agreement giving rise to the $26.4 million Mr Arthur Lai received from Tomson Pacific is evidenced by its letter dated 31st May 1990 to him and his nominee, Mandarin :-

"Dear Sirs,

In connection with your company introducing to us and acting as, agent for our acquisition, of 34.5% of the issued share capital of Bond Corporation International Ltd., Tomson Pacific Limited agrees to pay Mandarin Development Limited a cash commission of HK$26,400,000 seven days before the completion date of the said acquisition.Kindly acknowledge acceptance by signing below."

94. The agreement between Mr Arthur Lai and Mr David Tong on behalf of Tomson Pacific in relation to the $26.4 million commission for Mr Arthur Lai had in fact been reached several weeks earlier, and, in all probability at or about the same time as Mr Lucas, on behalf of Bond Holdings, offered to pay Mr Arthur Lai $A2 million, namely, on or about 20th April 1990.

95. The somewhat odd sum of $26.4 million stems from Mr Arthur Lai's having earlier agreed orally with Mr David Tong that he would use the cash Tomson Pacific paid him for commission to purchase thirty-three million of the new shares under Tomson Pacific's rights' issue to finance its purchase of the 34.5% of Bond International. As the issue price announced on 29th May 1990 was 80 cents per share, 33 million of them cost the $26.4 million to which the letter refers.

Fiduciary Duty and its Breach

96. It is common ground that Mr Arthur Lai, as a director of ChinTung Securities, owed it fiduciary duties to act bona fide in the best interests of ChinTung Securities.

97. The law is clear that, as a fiduciary, Mr Arthur Lai was not permitted to make use of opportunities coming his way, by reason of his being its director, to enrich himself personally without the informed consent of ChinTung Securities, his principal.

98. That is trite law, established by a long line of cases including Cook v. Deeks [1916] A.C.554; Phipps v. Boardman [1967] 2 A.C.46; Industrial Development Consultants Ltd. v. Cooley [1972] 1 WLR 443; and Guinness Plc v. Saunders [1990] 2 A.C.663.

99. It is also well-established law that it is no answer to a claim by the company to recover such profits from its director that the company itself could never have obtained them, or that no loss is caused to the company by the gain of the director: see Furs v. Tomkies (1936) 54 CLR 583 and Regal (Hastings) Ltd. v. Gulliver [1967] 2 A.C.34.

Whether ChinTung Securities knew of And/Or Consented to the $A2 Million Bond Holdings and $26.4 Million Tomson Pacific Commissions

100. At the time Mr Arthur Lai negotiated with Mr David Tong of Tomson Pacific for the payment of $26.4 million commission to Mr Arthur Lai's nominee, Mandarin, and with Mr Lucas of Bond Holdings for the payment of $A2 million to his other nominee, Wealthcorp, Mr Arthur Lai's co-directors in ChinTung Securities were his brother, Mr Raymond Lai as Managing Director, Mr Peter Mou, who had worked with Mr Arthur Lai since 1983, as Sales Director, Mr Wigan, representing SCA's interest, Mr Patrick Yeung, Finance Director, representing SCA's interests, Mr Gary Wong, who was in charge of the Settlement Department, representing SCA's interests, and there were also a Mr Michael Tong, a Mr Dickson Ho and a Mr Eugene Yang. At all material times, that is to say, from about the beginning of 1990 up until about August 1990 the directors remained the same.

101. Even on Mr Arthur Lai's best case, he does not claim that, before the payment of the commission to his nominees, Mandarin and Wealthcorp at the end of June 1990, all the directors of ChinTung Securities knew of, let alone consented to such payments.

102. From the totality of the evidence in this case I have, in fact, no doubt at all that, apart from Mr Arthur Lai, Mr Raymond Lai, and Mr Peter Mou, it was not until at least January 1993 that any of the other directors of the Plaintiff or companies in the ChinTung group got to learn anything about the $26.4 million from Tomson Pacific and A$2 million from Bond Holdings that Mr Arthur Lai had received by way of commission in late June 1990 through his nominee, Mandarin.

103. In February 1993, Mr Arthur Lai first gave evidence to the Inspector. He was obviously in an expansive mood on that occasion. He was, I think, quite proud of the deal he had engineered for Tomson Pacific to get control of Bond International and slightly boastful. Some two and a half years had passed since he had received the commission. He had long since left the ChinTung Group, and the money had in effect, all gone. The probabilities are that, at the time he gave his evidence to the Inspector, he was blissfully unaware of the law on secret commissions, and that he regarded the circumstances in which Mandarin came to accept the placement of the residual 8 million Bond International shares as so much water under the bridge by then, posing no threat to him.

104. From Mr Arthur Lai's answers to the Inspector then, and the rest of the evidence in this case, there is no room for doubt that he deliberately arranged for the Bond Holdings/Tomson Pacific deal to be carried out in such a way that, apart from Mr Raymond Lai and Mr Peter Mou, none of the other people running the Plaintiff, the ChinTung Group and SCA would even be so much as aware, let alone approve of, his being paid the A$2 million by Bond Holdings, and $26.4 million by Tomson Pacific.

105. Nothing could show more clearly than the following questions and answers from the Inspector's record at pages 235/6 that he let neither the Plaintiff, nor the other companies in the group, nor SCA know about the commissions he received from Bond Holdings and Tomson Pacific:

"Q. ---was ChinTung Securities Limited aware that you were going to get that commission?

A. No, I mean I must say all along in my whole life in ChinTung I never get commission for myself. I mean I was Chairman and I never do, but after the Standard Chartered Bank have taken over a lot of people say, 'Arthur, I don't want to give them 10 per cent commission, I want to give it to you, because why do you want to work so hard and get nothing?' Because you know my whole life's earning was taking away by Standard Chartered, anyway, because they got hold of everything that I had, I mean I basically was down to absolutely not a penny. So people always encourage me, and in a way I guess I have to look after myself. And my relationship with Standard Chartered is also quite clear that it will not be a very long term relationship, I help to rebuild the company, that is why I don't step in the day-to-day operation, I help them continue to build the infrastructure and I was maintained as the Chairman but I had already given up the Managing Director role in the company. And as a matter of fact, Christopher Wiggins was very involved in a lot of the Standard Chartered related business and I was involved in actually doing something on my own, and at that moment I didn't feel that I had to talk to Standard Chartered or ChinTung, provided I have looked after their interests. My job is to make sure that Standard Chartered bank is involved, and ChinTung is involved, and that is my own sort of moral thinking, OK? So right or wrong, I don't know."

106. It is clear in context that by "ChinTung" in that answer Mr Arthur Lai must have meant the Plaintiff.

Continuing from the Inspector's record:

"Q. So is it the situation that the Board of Standard Chartered would not have known you were getting the commission?

A. No, I mean I don't think they would, but I mean I guess, you know, I already told them from day-one that I have my own personal business. I at that moment, I still have a big stake in a company in the Philippines and I have told them, disclosed that, I said I have said that I would earn money for myself. That is perfect because my staff is being paid 40,000 and I was only paid 8,000 because I don't want a big salary, so I don't collect a full salary as Chairman, so that is really the situation.

107. I do not accept the self-serving part of that last answer to the effect that SCB (or SCA) knew he would earn commission for himself.

Then, at page 237 from the Inspector's record:-

"Q. Well, did you not think that the Board should be advised, that the Bank interest should realise that you were personally standing to gain out of the deal?

A. No, that's why, you know, I think Raymond is aware of it, and I think Peter is aware of it, maybe a fair Chinese way I didn't think I should inform the other side.

Q. Well Raymond and Peter may be aware of it but what about the bank representatives on the Board?

A. I think they know a bit, they don't know a bit, you know. But you see my relationship with Standard Chartered was a bit odd, I very much worked like an adviser to them, I bring Christopher Wiggins - Christopher Wiggins is really the effective Chairman, you see I am really the Chairman by name and I help him, so I bring him to Thailand and I bring him to Taiwan and I make him understand the deals, the distribution deals that we have.

Q. And did he know you were getting a commission through Mandarin?

A. I would think they might know but I don't know if they really do, because I mean I am quite open about it.

Q. Well, did you take any steps to inform them?

A. No, I didn't. I mean if that is your question, the answer is no."

108. In due course I will have more to say on credibility, but, for the moment, suffice it to say that I am fully confident that Mr Wigan, together with Mr Patrick Yeung and Mr Gary Wong, the other two directors of the Plaintiff appointed to protect SCA's interests, told me the truth when they denied having any inkling about the commission Mr Arthur Lai was receiving until they got to hear what had transpired during the Inspector's examination of Mr Arthur Lai, and I have no doubt at all that Mr Arthur Lai, aided and abetted by "the Old Guard", comprising Mr Raymond Lai and Mr Peter Mou, did everything in his power to conceal from Mr Wigan, Mr Patrick Yeung, Mr Gary Wong and anyone else representing SCB/SCA's interest in ChinTung Securities that commission was being paid to Mr Arthur Lai by Bond Holdings and Tomson Pacific.

109. The impression I get from reading Mr Arthur Lai's evidence to the Inspector in February 1993, in the context of all the evidence in this case, is that he did not feel that the SCA interests had too much to complain about in relation to the commission he had taken from Tomson Pacific and Bond Holdings, since SCA had got an adviser's fee and ChinTung Securities placing commission, and without his initiative and flair in putting the whole deal together, they would have got nothing.

110. Although I do not doubt that, judged by his own personal standards of commercial morality, Mr Arthur Lai did not feel he had really done anything too wrong at the time he first gave evidence to the Inspector, and for that reason was so forthcoming about his actions, the law simply does not permit a company director in Mr Arthur Lai's position to retain for himself commissions arising by virtue of his position in the company, as so clearly happened in the circumstances of the present case.

111. Mr Arthur Lai attempted to change some of the fundamental features of his earlier story after the no-doubt rude awakening he received on being served on 1st April 1993 with the writ in the present proceedings together with a Mareva injunction.

112. Since 1st April 1993, whether in his affidavit in reply to the Mareva, his further evidence to the Inspector in July 1993, his witness statement prepared for this trial, and in his evidence in court, Mr Arthur Lai has been at pains to stress how, generally, he had been open in his dealings with his co-directors, but, I was satisfied, at the end of the day, that Mr Raymond Lai and Mr Peter Mou were the only directors of ChinTung Securities in the know about the commissions Mr Arthur Lai garnered for himself from Bond Holdings and Tomson Pacific.

113. Mr Arthur Lai, Mr Raymond Lai and Mr Peter Mou were, I am satisfied, at all material times, in the nature of a "firm within a firm", prepared, for their own private advantage to assist one another hoodwink the other directors on the Plaintiff's board in relation to the Plaintiff's business.

114. From the time Mr Arthur Lai negotiated his own private commissions with Bond Holdings and Tomson Pacific up until the time the money found its way into Mandarin's account and even beyond, it is only the members of that trio who are ever involved.

115. When Mr Peter Lucas of Bond Holdings sent his letter of 20th April 1990, agreeing to pay the $A2 million "success fee" to Mr Arthur Lai and/or his nominee Wealthcorp, that letter went to Mr Arthur Lai alone. When a letter dated 16th May 1990 was sent (at the request of Mr Peter Lucas, I am sure,) on ChinTung Securities' letterhead to Bond Holdings, purporting to confirm that ChinTung Securities was aware of the $A2 million commission to be paid Mr Arthur Lai, and/or Wealthcorp, it was Mr Raymond Lai and Mr Peter Mou who purported to sign on behalf of ChinTung Securities. When an acknowledgement was made, on behalf of Mandarin to Tomson Pacific's letter of 31st May 1990, offering to pay the introduction fee of $26.4 million to Mandarin, Mr Peter Mou was the signatory for Mandarin. When a new Luxembourg bank account each was opened for Mandarin and Wealthcorp through a Hong Kong branch of the Union Bank of Switzerland on 11th June 1990, the signatories were Mr Arthur Lai, Mr Raymond Lai and Mr Peter Mou. When ChinTung Securities was stuck with 8,050,494 Bond International shares still unplaced from about the 19th or 20th July 1990 onwards, thus threatening to make the whole placement exercise fail, it was Mr Arthur Lai who found a placee - Mandarin - and Mr Peter Mou who opened a margin account with ChinTung Securities for Mandarin on 24th July 1990 without any payment of deposit or proper documentation. When, by 4th August 1990 at the latest, it came to the attention of Mr Raymond Lai that information he had furnished for the SFC in writing on 23rd and 25th July 1990 as Managing Director of ChinTung Securities, was wrong, in that he had then said that Hauxton Ltd ("Hauxton") was the placee of the final 8,050,494 placement shares, he failed to inform the SFC that Mandarin had later substituted for Hauxton, with the result that the SFC did not get to know that Mandarin was a placee until the Inspector's Investigation.

116. Mr Arthur Lai would like this court to believe that the letter of 16th May 1990 sent to Mr Lucas of Bond Holdings purportedly on behalf of ChinTung Securities confirming knowledge of the $A2 million "success fee" is an example of Mr Arthur Lai's openness. He tried to make out that he had it sent on his own initiative, because he was so open, whereas the content of the letter is in fact strongly suggestive of its being sent at the request of Mr Lucas who must have harboured some doubts on whether ChinTung Securities was aware of what Mr Arthur Lai was up to. I quote the letter :

"This letter is to confirm that ChinTung is aware of a fee of HK$12 Million or an equivalent of A$2 Million to be paid by bond Corporation International Holdings Limited (BCIH) to Wealthcorp Investment Limited for services rendered in connection with the introduction of Tomson to BCIH leading to the sales of 34.5% and 31.5% of BCIH's holding in Bond Corporation International Limited."

117. If Mr Arthur Lai were so open, it is surprising he did not send a similar letter to Tomson Pacific, unprompted.

118. A copy of that letter of 16th May 1990 was also sent to Mr McIntyre who handled Bond Holdings' account at HSBC. The probabilities, in my view, point towards Mr Arthur Lai's causing Mr McIntyre to be sent that copy because Mr Lucas insisted on it, rather than because of any inclination towards transparency on Mr Arthur Lai's part.

119. Mr Arthur Lai contended that his sending a copy of that letter to Mr McIntyre was consistent with his not trying to hide anything from the SCA - appointed directors of ChinTung Securities who might well have learnt from Mr McIntyre of the $A2 million commission being paid by Bond Holdings to Mr Arthur Lai.

120. I can see no reason why Mr McIntyre might want to pass on that information to either SCA or ChinTung Securities, which were subsidiaries of a rival bank.

121. There was no reason for me to doubt the evidence of Mr Wigan, Mr Patrick Yeung and Mr Gary Wong that no information had come their way from Mr McIntyre.

122. Ms Violet Ma, who was Mr Raymond Lai's secretary at all material times, was called as a witness by Mr Arthur Lai with a view to showing there was nothing clandestine in the way he and Mr Raymond Lai dealt with the letter of 16th May 1990 on ChinTung Securities letterhead to Mr Lucas of Bond Holdings about the $A2 million commission for Wealthcorp and the letter of 31st May 1990 from Tomson Pacific to Mandarin about the $26.4 million for Mandarin.

123. According to Ms Ma, she put copies of those two letters, at or around the time they were made, on a Bond Holdings/Tomson Pacific Takeover correspondence file kept in a place outside Mr Raymond Lai's office where it was accessible to any ChinTung Securities director wanting to consult it.

124. Any director of ChinTung Securities happening to consult that file could indirectly glean the knowledge that Bond Holdings and Tomson Pacific were paying commission to Mr Arthur Lai, according to Ms Ma. I fail to see how the letter from Tomson Pacific linked Mr Arthur Lai to Mandarin which was a Liberian company with no directors, and its one and only share held by a Mr David Tang, Mr Arthur Lai's nominee, but the name "Wealthcorp" might have rung a bell with Mr Wigan, Mr Patrick Yeung and Mr Gary Wong since the house where Mr Arthur Lai resided was owned by Wealthcorp, and there had been discussions from time to time between Mr Arthur Lai and SCA - officials in relation to that house. The fact that the house in which Mr Arthur Lai lived was owned by Wealthcorp was, I am satisfied, something which Mr Arthur Lai had openly communicated to SCA whenever the topic of his residence arose.

125. She also claimed she would have circulated copies of those two letters to Mr Gary Wong and Mr Patrick Yeung, as a matter of office routine.

126. I did not accept Ms Ma's evidence. Her independence as a witness is open to doubt, since she is closely allied to the defence camp, having moved from job to job with Mr Raymond Lai. Moreover, the evidence as a whole in the case satisfied me that Mr Arthur Lai, Mr Raymond Lai and Mr Peter Mou did all

in their power to conceal from the directors of the Plaintiff representing SCA's interests that Mr Arthur Lai was receiving the commission referred to in the two letters.

127. In any event, even if every word Ms Ma spoke were the Gospel truth, it might go some way towards showing openness on Mr Arthur Lai's part about his personal commission, but would fall far short of showing Mr Arthur Lai's co-directors were all fully informed of all the facts before he took the private commission.

128. Another reason advanced by Mr Arthur Lai to show he hid no secrets in his dealings with the SCA-appointed directors on ChinTung Securities was the information SCA, as financial adviser to Tomson Pacific was bound to glean from the "Verification Note", which, according to Mr Arthur Lai, invariably features in a rights issue.

129. Verification Notes are related to the provision in the Listing Rules requiring a company making a rights issue to disclose all material contracts made during the two years preceding the issue of the prospectus for that rights issue.

130. Sometimes a merchant bank representing the company making the rights issue will retain the services of an independent accountant to prepare a "Verification Note", certifying, publicly, inter alia, whether the company has entered into "material contracts" during the preceding two years. "Material contracts" are those which are likely to be significant for the company's financial position, and not part of the company's day to day business. Paying $26.4 million to Mr Arthur Lai via Mandarin by way of an introduction fee was not part of Tomson Pacific's everyday business and was of sufficient magnitude to be significant to Tomson Pacific's financial position.

131. According to Mr Arthur Lai, the Verification Note which was bound to have come into existence for the Tomson Pacific rights issue was sure to announce to the world at large, including to SCA and the Plaintiff, the agreement by Tomson Pacific to pay the $26.4 million commission.

132. Mr Arthur Lai was, I am satisfied, wrong in his contention that a Verification Note invariably accompanies a rights issue. A valid alternative route to make the public aware of material contracts is a statement about them in the prospectus. That is made clear in a letter from Richards Butler, solicitors for Tomson Pacific, on the topic of "material contracts".

133. In any event, the rights issue prospectus in the present case, issued on 29th May 1990, did not make any reference to Mr Arthur Lai's commission which was evidenced by Tomson Pacific's letter of 31st May 1990. If that letter were taken as the date of the contract between Tomson Pacific and Mandarin to pay the $26.4 million commission, it was not "material" for the purposes of the Listing Rules since it was not made within the two years preceding the issue of the prospectus on 29th May 1990.

134. There is no reason to suppose that a Verification Note made on 31st May 1990 would have been any more forthcoming about the commission Tomson Pacific was paying Mandarin. How SCA or ChinTung Securities were supposed to guess that Mandarin equated with Mr Arthur Lai was never explained by Mr Arthur Lai.

135. There is the point, too, that, because knowledge might have been imparted to SCA and its directors, it by no means follows that same knowledge has been imparted to ChinTung Securities and its directors.

136. Far from having been open, as he contends, Mr Arthur Lai was, I think, as secretive as he could be with his co-directors, other than Mr Raymond Lai and Mr Peter Mou. Nowhere is this more apparent than in his use of nominees the whole time where a more open and honest man would simply use his own name.

137. Even if, in relation to commission, Mr Arthur Lai had been as generally open with his co-directors in ChinTung Securities as he claims, that, by itself, would not mean he had discharged the duty of disclosure imposed by the law on a fiduciary who seeks to retain commission which has come his way by virtue of his office. In the case of a company director seeking to retain such a commission, the law requires nothing less from him than prior disclosure to all his co-directors of full and particularised knowledge of the nature and extent of the commission he hopes to be able to keep for himself : See Imperial Mercantile Credit Associations v. Coleman (1873) L.R.6HL, 189 and Gray v. New Augarita Porcupine Mines Ltd. [1952]3 D.L.R.1.

138. It was obvious from the evidence that the directors of ChinTung Securities had not all been informed beforehand about the commission Bond Holdings and Tomson Pacific were going to pay Mandarin and Wealthcorp.

139. At one point under cross-examination Mr Arthur Lai went so far as to baldly assert that all his co-directors knew but scrutiny of the evidence does not support that assertion.

140. At most, the sum total of all the evidence of Mr Arthur Lai, Mr Raymond Lai and Mr Peter Mou, whether to the Inspector pre- or post- Mareva, whether in affidavits or witness statements, or, in the case of Mr Arthur Lai or Mr Raymond Lai, on oath to me, is that, apart from themselves, the only other director specifically asserted to have known about and approved the Bond Holdings and Tomson Pacific commissions before Mr Arthur Lai gave evidence to the Inspector was Mr Patrick Yeung. It was Mr Arthur Lai who specifically asserted that at one point, but, elsewhere, he indicates that Mr Patrick Yeung did not know, or he was not sure whether Mr Patrick Yeung knew.

141. Mr Arthur Lai did not claim to have told the other directors himself about the commissions: he told Mr Raymond Lai to tell them. Mr Raymond Lai nowhere claimed to have told them. Mr Peter Mou said Mr Arthur Lai told him he had told the other directors.

142. In relation to telling Mr Wigan in particular, Mr Raymond Lai in his witness statement and under cross-examination reported having been told by Mr Arthur Lai that the latter had spoken to Mr Wigan about the Bond Holdings/Tomson Pacific commissions, but Mr Arthur Lai himself was unable to recall any such discussion with Mr Wigan. Mr Arthur Lai claimed, however, to recall an occasion in his own office when Mr Raymond Lai carried on a conversation with Mr Wigan on the topic of commission in general for Mr Arthur Lai. While Mr Raymond Lai and Mr Wigan conversed, Mr Arthur Lai was doing something else.

143. Even on Mr Arthur Lai's best case, Mr Patrick Yeung was the only director, apart from Mr Raymond Lai and Mr Patrick Mou, allegedly spoken to about the commissions, but I am, in fact, satisfied he was never told a thing.

144. Whilst full prior knowledge by all of ChinTung Securities directors of the nature of the private commission received by Mr Arthur Lai is a necessary condition for Mr Arthur Lai to be excused from accounting for it to ChinTung Securities, it is not, however, a sufficient condition, since he must also show that he was duly authorised in accordance with the Articles of ChinTung Securities to receive it. He has to show what is known in this branch of the law as "informed consent".

145. Firstly, I will set out the definition of "the Board and the Directors", and then the Articles with which Mr Arthur Lai's compliance was necessary.

"the Board and the Directors

The directors for the time being of the Company or such of the Directors as are present at a duly convened meeting of the directors of the Company at which a quorum is present;"

" DIRECTORS REMUNERATION

Reimbursement of expenses	81. (a)	The Directors shall be paid out of the funds of the Company remuneration for their services as Directors such sum (if any) as the Company may by ordinary resolution from time to time determine.
	(b)	The Directors shall also be entitled to be paid their reasonable expenses incurred in consequence of their attendance at meetings of Directors, committee meetings and general meetings and otherwise in or about the business of the Company.
Extra remuneration	82.	The Company may award extra remuneration out of the funds of the Company (by way of salary, commission or otherwise as the Company may determine) to any Director who performs services which in the opinion of the Company are outside the scope of the ordinary duties of a Director.

POWERS OF DIRECTORS

Management of business	83.	The business of the Company shall be managed by the Directors, who shall pay all expenses incurred in the formation and registration of the Company, and may exercise all such powers of the Company as are not by the Ordinance or by these Articles required to be exercised by the Company in general meeting, subject to any provision in these Articles or the Ordinance and to such regulations, not being inconsistent with any such provision, as may be prescribed by the Company in general meeting; but no such regulation shall invalidate any prior act of the Directors which would have been valid if such regulation had not been made. The general powers given by this Article shall not be limited or restricted by any special authority or power given to the Directors by any other Article.
Managers and agents	84.	The Directors may establish any agencies or appoint any individuals to manage any of the affairs of the Company, either in Hong Kong or elsewhere, and may fix their remuneration and may delegate to any such manager or agent any of the powers, authorities or discretion's vested in the Directors, with power to sub-delegate, and any such appointment or delegation may be made upon such terms and subject to such conditions as the Directors may think fit, and the Directors may remove any person so appointed, and may annul or vary and such delegation, but no person dealing in good faith and without notice or vary any such delegation, but no person dealing in good faith and without notice of any such annulment or variation shall be affected thereby.
Committees of Directors	86.	The Directors may, from time to time, appoint committees consisting of such member or members of their body as they think fit, and may delegate any of their powers to any such committee and, from time to time, revoke any such delegation and discharge any such committee wholly or in part.

Resolution in writing

106.

A resolution in writing signed by all the Directors shall be as effective for all purposes as a resolution of the Directors passed at a meeting duly convened, held and constituted. A written notification of confirmation of such resolution in writing sent by a Director shall be deemed to be his signature to such resolution in writing for the purposes of this Article. Such resolution in writing may consist of several documents, each signed or (in the case of a cable or telex message or facsimile transmission) purporting to have been sent by one or more Directors."

146. The "extra remuneration ... by way of ... commission", which is what Mr Arthur Lai received from Bond Holdings and Tomson Pacific, needed the sanction of ChinTung Securities' shareholders in general meeting to comply with Article 82. There was never any prospect of such a general meeting being called because the directors, apart from Mr Arthur Lai, Mr Raymond Lai and Mr Peter Mou, simply did not know what was going on in the company.

147. If power lay with the Directors under Article 83 to sanction payment of private commission to one of their number, that power had to be exercised at a duly convened directors' meeting to which all directors were invited and, at which, all the directors present were fully informed of all the facts. Consent, if it were forthcoming, would have to take the form of a properly passed resolution. Nothing like that happened here.

148. Mr Arthur Lai was simply wrong, as a matter of fact, in saying the Plaintiff never held board meetings, and even if he were right, full compliance with Article 83 was essential in the circumstances of the present case where a director was seeking these huge commissions for himself.

149. An alternative mode of sanctioning what Mr Arthur Lai wanted did exist under Article 106, but Mr Arthur Lai did not seek recourse to it, although the evidence discloses instances of such resolutions in writing signed by all the Plaintiff's directors. In passing, it can be noted that the letter dated 16th May 1990 to Bond Holdings signed by Mr Raymond Lai and Mr Peter Mou purportedly on behalf of ChinTung Securities is not such a resolution since it is not signed by all the directors and it is no substitute for such a resolution.

150. Articles 84 and 86 contemplate the Board of Directors delegating their powers, but there is no evidence to suggest any delegation of any power the Board might have had in relation to a director keeping for himself commission which would otherwise go to the company.

151. Nowhere in the minutes of any board or committee meeting of ChinTung Securities is there any reference to the commission in issue.

152. It is virtually inconceivable that Mr Arthur Lai's co-directors, additional to Mr Raymond Lai and Mr Peter Mou, could in fact have consented to his receiving the two huge sums by way of commission without its being minuted somewhere by the Plaintiff.

153. Informed consent from the directors and shareholders of ChinTung Securities for Mr Arthur Lai to receive the two disputed lots of commission was, in my judgment, wholly lacking. It was neither sought, nor granted.

The Reason Why Mr Arthur Lai Was Paid the Commission

154. A line of defence relied on by Mr Arthur Lai was that neither Bond Holdings, nor Tomson Pacific should be treated as a client of the Plaintiff for the purpose of the payments of the disputed sums of $A2 million and HK$26.4 million, respectively, because they were paid to him not by virtue of his position in the Plaintiff, but because he brought his two personal friends, Mr Peter Lucas and Mr David Tong together, enabling them to do the deal which resulted in Tomson Pacific taking over Bond International.

155. What Mr Arthur Lai thus puts forward by way of defence is basically a causation argument.

156. Whilst perhaps Mr Arthur Lai's personal relationship with Mr Peter Lucas and/or Mr David Tong might have played some minor contributory role in inclining either or both of Mr Peter Lucas and Mr David Tong to settle upon Mr Arthur Lai as the conduit which brought Bond Holdings and Tomson Pacific together to do business, the overwhelming cause for their so doing, in my judgment, was the position they knew he held as a director in the Plaintiff, a major stockbroking firm, which they also knew to have the backing of SCA, behind which, they would have been aware, stood SCB.

157. Considering that Mr Arthur Lai did not get to meet Mr David Tong until either January or February 1990, the contention about personal friendship being the reason for the payment from Tomson Pacific does not stand up to examination.

158. Neither does there seem to have been much in the way of friendship felt by Mr Lucas for Mr Arthur Lai, judging from the way Mr Lucas obviously insisted on getting the letter of 16th May 1990 purportedly from the Plaintiff to Bond Holdings, confirming that the Plaintiff was aware of the commission Bond Holdings was paying Mr Arthur Lai/Wealthcorp. It is clear that Mr Lucas did not trust Mr Arthur Lai, an attitude hardly compatible with friendship.

159. Even on Mr Arthur Lai's own evidence, it is clear that neither Mr Lucas, nor Mr David Tong was more than a business acquaintance.

160. Mr Arthur Lai was clutching at straws in asserting that friendship rather than his position in the Plaintiff was the cause of his being paid commission.

The Scope of the Plaintiff's Business

161. At no point has it been suggested, nor could it reasonably have been argued by any of the Defendants, that it would have been outside the scope of the Plaintiff's Memorandum of Association for it to engage in the business of brokering the take-over of a controlling interest in a publicly listed Hong Kong company, in consideration of the payment of such fee as it could negotiate from each of the seller and buyer of that controlling interest for bringing the transaction to a successful conclusion.

162. The line of argument instead put forward by the defence was that, in practice, the Plaintiff's business had been limited to the simple matching of buyers with sellers on trades of shares put through the stock-exchange, but had never extended to any sort of deal-making. "Cutting deals", to use Mr Raymond Lai's racey phrase, was the province of merchant banks, not stockbrokers, so the defence argument went.

163. Whether Mr Arthur Lai, with a view to earning commission for himself, had ever previously, while Chairman of the Plaintiff, participated in negotiations over the sale and purchase (including the price) of substantial chunks of a listed stocks where the buyer was seeking acquisition or control was something within the peculiar knowledge of Mr Arthur Lai, Mr Raymond Lai, too, no doubt, and probably also Mr Peter Mou.

164. At some points in his evidence Mr Raymond Lai, who, as a witness, did everything in his power to aid Mr Arthur Lai's case, seemed to be saying Mr Arthur Lai had a reputation for brokering such deals and receiving personal commission, but after making reference to a deal where Mr Arthur Lai had engineered the sale of 20% of publicly traded Continental Jewellery Ltd. to Mr Dickson Poon, and another where he was involved in selling 10% of the publicly listed shares of Great Eagle, Mr Raymond Lai backed away from the topic by saying he knew nothing specific about Mr Arthur Lai receiving any commission.

165. Mr Arthur Lai himself, in somewhat ambiguous terms, put it to Mr Raymond Lai in re-examination, as I understood it, that Mr Arthur Lai had received introduction fees on behalf of a middleman in a transaction involving the Reali family, and publicly-traded Lippo. Whether Mr Arthur Lai was himself one of those middleman, and whether he was chairman of the Plaintiff at the time was not made clear.

166. Mr Arthur Lai and Mr Raymond Lai were obviously aware they were skating on very thin ice in broaching the topic of whether Mr Arthur Lai had received other personal commissions while chairman of the Plaintiff or, for that matter, any other company. On the one hand, they wanted to raise the notion there was nothing uncommon in a company chairman receiving personal commission as some sort of middleman, but, on the other hand, they steered away from being frank to the point where they might attract yet more writs and Marevas heading in their direction.

167. The message I gathered that Mr Arthur Lai and Mr Raymond Lai were trying to get across to me, without, at the same time, stirring up further hornets' nests, was that it was not uncommon for company directors to rake off personal commission in connection with company business without the company knowing.

168. Whether such conduct on the part of company directors is common or uncommon in Hong Kong matters not one jot or tittle, since in the eyes of the law it is unqualifiedly wrong and any such commission plainly belongs to the company.

169. While it can be said with certainty that the Plaintiff under Mr Arthur Lai's chairmanship has so far itself never received the benefit of anything in the nature of introduction fees in relation to a take-over, I am satisfied that the scope of a stockbroker's business has for many years past embraced the arranging of takeovers. I did not accept the opinions of Mr Arthur and Mr Raymond Lai that merchant banks in Hong Kong enjoy a monopoly over arranging take-overs, to the exclusion of stockbrokers. I preferred the opinion of Mr Wigan, and his successor, Mr Mallows, who has considerable experience in international stockbroking, that there is an area of overlap between merchant banks and stockbroking houses when it comes to organizing take-overs of publicly listed companies.

170. The spheres within which stockbroking firms and merchant banks, respectively, operate are helpfully and, in my view, accurately, described by Mr Wigan in the paragraphs of his Witness Statement from which I now quote:

"48. The description 'stockbroker' reflects the strictly agency role which traditionally was undertaken in the stock markets by the broker who arranged transactions between buyers and sellers and it is true that the main business of a stockbroker is to act in share transactions and to earn a commission for doing so. A stockbroker's clients include individual investors and institutional investors such as corporations, unit trusts, mutual funds, pension funds and other trust funds. Corporate clients whose shares are listed will often have contacts with perhaps several brokers as they will each provide the company with information about the state of the market in the company's shares. As a result of that, stockbrokers often develop a close relationship with directors of corporate clients and they may be frequently asked to give advice. A stockbroker is able to give advice to clients on a variety of matters. For example, if a client wished to acquire a stake in a company a stockbroker will advise on the nature of the market in that stock. This information might include how much of the stock is publicly listed, whether there are any sizable stakes in the company, the liquidity of the market etc. Stockbrokers also have analysts who review companies' performance and recommend stocks to buy and to sell. Stockbrokers, therefore, have a lot of information about listed companies and how they are likely to perform in the future and whether their shares are overpriced or undervalued.

49. The description 'merchant bank' is not capable of clear definition. It has its origins in the development by merchants of the provision of finance facilities to facilitate trade with the merchant. The description originated in London, where it is till commonly used, and spread to other centres where London merchant banks opened offices, for example Hong Kong or Singapore. As a general rule, a merchant banker covers a broader spectrum in the financial market than a stockbroker as it is involved with both publicly listed and private companies. However, in Hong Kong transactions involving listed shares form the bulk of their work. A Hong Kong merchant bank would advise its clients on the raising of capital on the stock market and would arrange access to local and international debt markets. The merchant bank would expect to have a close relationship with its corporate clients and to advise them on a whole range of matters for which it would receive a fee. In the United States similar organisations are described as 'investment banks'. Their activities would encompass most of those provided by 'merchant bank' though, in addition, they may expose more of their own capital to investment risk.

50. In recent years stockbrokers have become known as 'securities houses' recognising that they frequently now deal with their clients and the market as principals, as opposed to acting merely as agents, and are much involved in the issuance of securities both as sponsors and underwriters. It would not now be at all unusual for an 'investment bank' or 'merchant bank' to encompass a comprehensive 'stockbroking' capability or a 'securities house' to be able to provide a full range of 'merchant banking' or 'investment banking' services."

171. I also accepted Mr Mallow's evidence to the effect that, on account of the contacts they build up, the general intelligence information they accumulate from their day to day activities, and their research facilities, stockbroking firms can be well placed to take charge of a take-over operation in respect of a listed company's stock.

172. Moreover, I accepted what Mr Wigan and Mr Mallows said to the effect that, in the same way that, for the purposes of a takeover, a merchant bank can make use of stockbrokers, accountants, lawyers or other experts, either by employing them permanently or on an ad hoc basis, so can a stockbroker in the same way make use of merchant bankers plus the same array of other experts. That is what happens in other sophisticated markets, and there is no reason why Hong Kong should be any different, bearing in mind, in particular, the large number of major international brokers having operations world wide in many different markets, with seats on the Hong Kong Stock Exchange.

173. Mr Arthur Lai clearly took pride in having established branches of the Plaintiff in several different countries, so that it did not sit well with his internationalist outlook to argue that Hong Kong stockbrokers were too provincial to take charge of a take-over.

174. From what I learnt about the Plaintiff, I am satisfied it was ready, willing and able to conduct a take-over operation for clients, if given the opportunity.

175. Besides the merchant bank/stockbroker dichotomy for which Mr Arthur Lai argued in the takeover context, he also sought to impose a rigid classification of entrepreneurial, and non-entrepreneurial on businesses.

176. According to Mr Lai's way of thinking, he was an entrepreneur whereas the Plaintiff was not. From there, he went on to argue that it was beyond the scope of the Plaintiff's business to undertake an activity such as organizing a takeover which required considerable entrepreneurial skill.

177. Entrepreneurship is, I think, quite clearly a difference of degree, not kind. There was nothing about the Plaintiff's business which proscribed it from entrepreneurial activities. In fact all businesses are to some extent entrepreneurial : that is what business is all about.

178. With little doubt, Mr Arthur Lai was the company official with the highest aptitude for entrepreneurship, working for the Plaintiff, but that did not put his work requiring that quality outside the scope of the Plaintiff's business. As part of a general duty of good faith towards his company, every company official is expected to use his entrepreneurial skill, along with any other skill he possesses, in reasonable furtherance of the employer's business. Such furtherance includes taking steps to expand the business.

179. In my judgment, the nature and scope of the Plaintiff's business was such as to include the arranging of a takeover within its ambit. If the Plaintiff, through its officers, including directors, brings the parties to a take-over together, the Plaintiff will be entitled to all introduction fees success fees or any other sorts of fees the parties agree with such officers they are willing to pay.

180. Even if Mr Arthur Lai had been right in his contention that the arranging of a take-over was outside the ambit of the Plaintiff's business it would have availed him nothing in his attempt to retain the personal commission paid by Bond Holdings and Tomson Pacific, since it came his way by virtue of his being a director of the Plaintiff : See Regal (Hastings) Ltd. v. Gulliver [1970]2 A.C.134.

Finding On Claims For Breach of Fiduciary Duty Against Mr Arthur Lai In Respect Of Commission of $A2 Million From Bond Holdings and $26.4 Million From Tomson Pacific

181. All the ingredients of this cause of action have been established to my satisfaction in respect of both amounts, so I find in the Plaintiff's favour against Mr Arthur Lai for those sums of $A2 million and HK$26.4 million.

Conspiracy Alleged Against Mr Arthur Lai

182. As something of a makeweight, it was pleaded that in diverting the commission of $A2 million and HK$26.4 million in his own direction, Mr Arthur Lai conspired with Mr Raymond Lai, Mr Peter Mou, Mandarin and Wealthcorp and persons unknown, to injure the Plaintiff by unlawful means.

183. There can be no doubt that, as mastermind, Mr Arthur Lai combined with the two individuals named and the two named companies, which I am satisfied were his mere nominees, with the intention of injuring the Plaintiff by depriving it of the two lots of commission which it might otherwise have earnt for itself.

184. Certainly, in respect of the $A2 million from Bond Holdings, I see no reason to doubt that Mr Lucas would have been equally happy paying that money to the Plaintiff as to Mr Arthur Lai/Wealthcorp. Mr Lucas was completely above-board on the evidence I have seen, and, as there is no suggestion he might be seeking any special favours from Mr Arthur Lai of a type which the Plaintiff itself might not have been willing to grant, I think he would in all probability have been willing to pay the Plaintiff the full $A2 million. Once Bond Holdings paid the $A2 million at the end of June 1990, it had nothing more to hope or fear.

185. Whether Mr David Tong for Tomson Pacific would have been willing to pay the Plaintiff the full $26.4 million he paid Mr Arthur Lai/Mandarin is not clear on the evidence, but I see no reason to doubt he would have been willing to pay the Plaintiff something for making the introduction to Bond Holdings. After paying Mr Arthur Lai/Mandarin the $26.4 million on 22nd June 1990, Tomson Pacific still did have hopes and fears since the failure of the placing exercise could be very expensive for it. Whether Mr Arthur Lai was expected to exert himself extraordinarily in relation to the placing on Tomson Pacific's behalf is not clear on the evidence, but, as a matter of fact, I am satisfied he did go to special lengths to ensure the placement was a success by taking the final 8,050,494 unplaced shares for himself, through his nominee, Mandarin. Whether Mr Arthur Lai did that for the sake of his own general reputation for achieving successful placements, or whether he did it because he felt Tomson Pacific expected it of him after paying him this huge sum of $26.4 million cannot be answered on the evidence before me.

186. As to the element of an unlawful act required to establish conspiracy, there is already my finding of Mr Arthur Lai's breach of fiduciary duty.

187. All the necessary ingredients to establish conspiracy against Mr Arthur Lai are present :-

(i) agreement between himself and others to commit an unlawful act;

(ii) commission of that unlawful act with intention to injure; and

(iii) loss to the Plaintiff.

The Placement of 8,050,494 Bond International Share with Mandarin

188. On the last date for placement, namely, 25th July 1990, 8,050,494 Bond International shares, being the balance of the placement shares, were placed with Mandarin.

189. By 1st August 1990 all those shares had been sold off by Mandarin to yield a profit of HK$1,264,443.

190. It was Mr Arthur Lai who took the initiative in getting those shares placed with Mandarin when, as a director of the Plaintiff, he learnt those shares remained unplaced.

191. If, as the Plaintiff contends, Mandarin was Mr Arthur Lai's nominee at the time those shares were placed with it, Mandarin and Mr Arthur Lai will be liable to account to the Plaintiff for the profit of HK$1,264,443 made on re-sale, since Mr Arthur Lai will, for his own personal benefit, have taken advantage of the confidential information that came his way as a director of the Plaintiff that the 8,050,494 shares were available for private placement.

192. In the case of this profit of $1,264,443, Mr Arthur Lai has not sought to raise a defence of informed consent from the Plaintiff to his taking the shares and making a profit.

193. This time, his line of defence took the form of disputing that Mandarin was still his nominee by the time - 25th July 1990 - the placement of those 8,050,494 shares occurred.

194. According to what Mr Arthur Lai told the court, the beneficial ownership of Mandarin had passed from Mr Arthur Lai by 25th July 1990, and the request to have those share placed with Mandarin came from that new owner - Mr Patrick Poon.

195. It has not always been Mr Arthur Lai's contention that Mr Patrick Poon was the beneficial owner of Mandarin at the time of that placement.

196. When Mr Arthur Lai first gave evidence before the Inspector on 8th February 1993, he stated unequivocally, "As a matter of fact I remember, I personally subscribed a few million shares, just to make up the final number, I remember." That answer comes from the Inspector's transcript at page 212:-

"Q. We understand that but how were the individual allocations decided, assuming that there was an over-subscription?

A. I don't think there was an over-subscription. Initially there was an overwhelming response but towards the end it was really quite close to the exact figure. As a matter of fact I remember, I personally subscribed a few million shares, just to make up the final number, I remember. I don't know if I am correct because I don't remember.

Q. Well it appears that Mandarin Development subscribed to just over eight million and then --

A. I don't think I have subscribed to so much. I think initially they said there was eight million and asked if I wanted to, but at the end of the day there were some more takers, you know, who take out private clients or whatever, smaller clients. I only said I would take it up if you are stuck with it and I think towards the end I took up much less than that, I don't know, you would remember more than I because I don't have anything to go back on any more. Anyway, go on with your names, I will try to see if I can help you."

Then at page 224:-

"A. ........... I only know about Mandarin because they asked me to put in the filler myself, and I said all right I'll put in the filler - that's why it's an odd number, maybe - but I said if you have anyone taking it up don't let me get stuck in this, you know. Well not stuck, anyway, I mean I had no reason to invest in that."

197. Then, from out of the blue, on 1st April 1993, Mr Arthur Lai was served with the writ, together with the Mareva injunction, in the present proceedings, based in important respects on what the Plaintiff knew Mr Arthur Lai had told the Inspector in February 1993.

198. Since the writ, Mr Arthur Lai has come up with a version in which, instead of Mr Arthur Lai personally subscribing, there is now, "This friend of mine, you know, who could be interested". The transcript of what Mr Arthur Lai told the Inspector on 21st July 1993 is as follows :

"A. Well I tell you, this is really the irony of the whole thing. The reason why Mandarin took it up is because at that moment, the last minute, they said they don't want the eight million for whatever reason. So he said, anyone can help? So I said, alright I'll help. I am only trying to work as a filler. This friend of mine, you know, who could be interested and now I'm suffering on this at this moment. Anyway ...."

199. "This friend of mine" turns out to be Mr Patrick Poon. Mr Arthur Lai asks the court to believe that he made an oral gift of Mandarin to Mr Patrick Poon in June 1990, and then got the Plaintiff to place the 8,050,494 Bond International shares with Mandarin by way of sale on 25th July 1990.

200. The belated revelation by Mr Arthur Lai, post-writ, that Mr Patrick Poon had become the beneficial owner of Mandarin by 25th July 1990 is nothing better than a cock and bull story. As a pathetic invention it is rivalled only by Mr Arthur Lai's explanation of why Mr Patrick Poon could not come over from Taiwan to give evidence : his wife had given birth recently and was too ill for him to leave her.

201. An affirmation from Mr Patrick Poon which Mr Arthur Lai sought to put into evidence did not in fact assist Mr Arthur Lai's case since in the affirmation Mr Patrick Poon refers to having become owner of Mandarin in September 1990.

202. Mr Raymond Lai, who, before the Inspector first time, in January 1993, claimed not to know who owned or controlled Mandarin purported to remember, next time before the Inspector, in July 1993, that Mandarin had always been Mr Patrick Poon's company.

203. I have no doubt that Mr Arthur Lai and Mr Raymond Lai collaborated to invent a role for Mr Patrick Poon as beneficial owner of Mandarin as at 25th July 1990 in a desperate endeavour to defeat the Plaintiff's claim in relation to the placement.

204. Besides carrying the stigma of recent invention, Mr Arthur Lai's and Mr Raymond Lai's account of Mr Patrick Poon's having become beneficial owner of Mandarin by July 1990 is inherently improbable for other reasons.

205. It made no sense for Mr Arthur Lai to give Mandarin to Mr Patrick Poon when, included in its assets, was the $A2 million commission from Bond Holdings, none of which was due to be shared with Mr Patrick Poon, and the HK$26.4 million commission from Tomson Pacific, of which Mr Patrick Poon had only been promised 40%. After Mandarin opened an account with the Plaintiff on 24th July 1990, Mr Arthur Lai admits buying some Rivera shares through that account - conduct hardly consistent with his having given Mandarin away.

206. Again on 10th September 1990, Mr Arthur Lai put 10 million Bond International (subsequently re-named World Trade Centre) shares into that account. Those he contends he held to the order of Cathay General Inc. ("Cathay"). Even if what he says about the beneficial ownership of those 10 million World Trade Centre shares belonging to Cathay is correct - And I am still completely open-minded on that since Cathay which has got itself joined as a party to the present suit has yet to be heard - it is odd that he should park them in Mandarin's account if he was not the beneficial owner of Mandarin.

207. True, the one and only issued share in Mandarin was transferred from Mr Arthur Lai's nominee Mr David Tang to Mr Patrick Poon on 2nd September 1990. Mr David Tang has, nonetheless, continued as a director of Mandarin so that, even after 2nd September 1990, it might well be that Mr Arthur Lai continues to control Mandarin. That, however, is a collateral question the court need not pursue for present purposes.

208. It was argued by Mr Arthur Lai that, as ChinTung Securities conducted the placement on a "best endeavour" basis, involving no risk of financial loss to ChinTung Securities or himself, it was unlikely that he would want to place the residual 8,050,494 Bond International shares with Mandarin if it were his nominee, since any incentive to do so was lacking.

209. There was an incentive, though : the prospect of future private commissions in future placements. ChinTung Securities handled something like 80% of all placements coming to market. If the Bond International placement did not succeed, and the underwriters had to make a general offer, the prospects for future personal commissions for Mr Arthur Lai would be blighted.

210. A further reason advanced by Mr Arthur Lai against Mandarin having been his nominee as at 25th July 1990 was the circumstance it could create complications for Mr David Tong when called upon to certify the appropriate Form of Acknowledgement for the SFC to the effect that Mandarin was an independent placee. According to Mr Arthur Lai, Mr David Tong, who, on behalf of Tomson Pacific, had agreed to pay Mandarin $26.4 million commission when it was Mr Arthur Lai's nominee, would not be willing to sign a Form of Acknowledgement for Mandarin in respect of a placement unless Mandarin were under new ownership by the time of the placement. Otherwise, according to Mr Arthur Lai, Mr David Tong would run the risk of precipitating a general offer.

211. The fallacy in Mr Arthur Lai's argument is the assumption that Mr David Tong was called upon to sign a Form of Acknowledgement in respect of Mandarin. Moreover, I regard it as highly unlikely that Mr David Tong or anyone else in Tomson Pacific knew anything about Mandarin being a placee before the Inspector's Investigation.

212. The way things were arranged by Mr Arthur Lai, Mr Raymond Lai and Mr Peter Mou, in all probability, so I am satisfied, was that no Form of Acknowledgement in the name of Mandarin was ever submitted to Mr David Tong or the SFC.

213. The Form of Acknowledgement approved by the Chairman of the Takeovers and Mergers Committee does not specify the number of shares it covers.

214. In the present case, Mr David Tong signed a Form of Acknowledgement for Hauxton. That was sent by Mr Raymond Lai to the SFC on or about 23rd July 1990, with what purported to be a final Placee List, showing 68,050,494 shares placed with Hauxton.

215. The reality was only 60 million shares were ever placed with Hauxton, and the residual 8,050,494 shares were placed with Mandarin on 25th July 1990.

216. There was no need for Mr David Tong to know that, and I greatly doubt that he did know.

217. Common sense suggests that Mr Arthur Lai would not have wanted Mr David Tong to know the embarrassing situation Mr Arthur Lai had created by employing Mandarin to receive a placement.

218. I am satisfied that Mandarin continued to be Mr Arthur Lai's nominee at the time the 8,050,595 Bond International shares were placed with it, and he is liable to the Plaintiff on the basis of breach of fiduciary duty for the profit of $1,264,443 made by Mandarin on the sale of those shares.

Mardarin and Wealthcorp :

Knowing Receipt and Knowing Assistance

219. Causes of action of this type are variants of breach of fiduciary duty.

220. An action for knowing receipt will lie against an individual who has received the proceeds of a breach of fiduciary duty with knowledge of such breach. Fraud or dishonesty is not a necessary ingredient.

221. By contrast, an action for knowing assistance lies against a party who, without receiving the proceeds, has knowingly aided and abetted a fiduciary in committing a dishonest breach of his duties.

222. Because of the convoluted and dishonest way in which he chose to conduct his affairs, Mr Arthur Lai has managed to bring about a situation where Mandarin, and Wealthcorp, as his nominees, are each liable for the $A2 million commission paid by Bond Holdings as well as the $26.4 million paid by Tomson Pacific.

223. Mandarin, a Liberian registered company with just the one shareholder, Mr David Tong, who was Mr Arthur Lai's nominee, received the proceeds of the cheque for $26.4 million from Tomson Pacific as foreshadowed in the latter's letter of 31st May, 1990 to Mandarin, plus a cheque for $A2 million from Bond Holdings, although the original arrangement, set down in Bond Holdings' letter of 20th April, 1990, was to pay the $A2 million to Wealthcorp. Mandarin was as much Mr Arthur Lai's alter ego as it is possible for a company to be. His knowledge was Mandarin's knowledge. See Mandarin Resources v. David Cheng HCA No.A7375 of 1986. The Plaintiff has an open and shut case of knowing receipt against Mandarin for both the $A2 million and the $26.4 million.

224. On the receipt aspect, the $26.4 million was used to fund the 33 million Tomson Pacific shares which finished up in Tomson Pacific's account with Mandarin. The $A2 million went into Mandarin's account with UBS (See Bundle 1 at page 148 and Bundle 14 at page 13), and, according to Mr Arthur Lai who pretended not to know what happened to it when withdrawn on 16th August 1990, has since disappeared in nubibus. Likewise, for knowing assistance against Mandarin. Mr Arthur Lai's taking personal commission from Bond Holdings and Tomson Pacific was, by any standard, dishonest from start to finish. There is no need to catalogue the tricks he and his minions, Mr Raymond Lai and Mr Peter Mou got up to. It is sufficient to recall the fake letter of 16th May 1990 supposedly from the Plaintiff to Bond Holdings, and Mr Arthur Lai's deliberately doing the very thing the SFC had so earnestly tried to prevent when he, very much a "related party", rigged the result of the placement by taking the residual 8,050,494 Bond International shares through Mandarin.

225. How Wealthcorp came to receive and knowingly assist in the disposal of the $26.4 million from Mandarin was that on the strength of instructions on behalf of Mandarin from Mr Arthur Lai's nominees, Mr Raymond Lai and Mr Peter Mou, to UBS in a letter dated 28th June 1990, the proceeds of Tomson Pacific's cheque for $26.4 million were used to fund a cashier's order in the same amount in favour of Wealthcorp.

226. On or about 29th June 1990, the proceeds of that cashier's order were credited to Wealthcorp's account with Security Pacific Asian Bank. At what must have been the instigation of Mr Arthur Lai, or his nominees, Mr Raymond Lai and Mr Peter Mou, a cheque for $26.4 million was issued by Wealthcorp on or about 29th June 1990 in favour of Tomson Pacific to pay for the 33 million shares in Tomson Pacific which were deposited in Mandarin's account with the Plaintiff on or about 25th July 1990.

227. Although the one and only share issued by Wealthcorp, a Hong Kong company, was owned by Mr Arthur Lai's wife, Yvonne, she took a completely passive role while Mr Arthur Lai operated and controlled the company through his nominees. Because Wealthcorp was, in effect, Mr Arthur Lai's alter ego, it was fixed with his guilty knowledge that Wealthcorp was part of his dishonest scheme to keep for himself commission which he had arranged to be paid to himself through nominees in knowing breach of his duties as a fiduciary towards the Plaintiff.

228. The $A2 million destined for Wealthcorp under Bond Holdings' letter of 20th April 1990 in fact went to Mandarin. The only reasonable inference is that the money was paid to Mandarin on Wealthcorp's orders as Wealthcorp's nominee. The position in law is the same as if the money had been paid to Wealthcorp, which I am satisfied, in such circumstances, is liable for both knowing receipt and knowing assistance.

229. In respect of Mandarin's profit of $1,264,443 in respect of the placement of the 8,050,494 Bond International shares, Mandarin, as Mr Arthur Lai's nominee, is liable in respect of both knowing receipt and knowing assistance.

Conspiracy : Mandarin and Wealthcorp

230. As Mr Arthur Lai's alter ego, Mandarin and Wealthcorp are liable for the same conspiracy as Mr Arthur Lai in relation to the $26.4 million and $A2 million private commissions.

Miscellaneous

(a) Lost Placement File

231. One of the Plaintiff's two placement files in the custody of Mr Gary Wong went missing in or around May 1993.

232. In March 1993, that file, along with the Plaintiff's other relevant files was, I am satisfied, thoroughly scoured by the Plaintiff's solicitors for documents tending to advance or damage the Plaintiff's case on the issues embodied in the present proceedings launched on 1st April 1993. Copies of any such documents were kept by the Plaintiff's solicitors, and, in due course, made available to Mr Arthur Lai and the other Defendants on discovery.

233. As the opening salvo in this litigation was to be a Mareva injunction, I do not doubt that the Plaintiff's solicitors, who enjoy a high reputation in the field of commercial litigation, would have shown all due diligence in their review of the Plaintiff's documents so as to forestall any subsequent application from the Defendants to discharge the Mareva for want of full disclosure to the court at the ex parte stage.

234. The court is displeased that the file has been lost, but is satisfied that the possibility of the Defendants having suffered any disadvantage from this is remote in the extreme.

235. Because the Plaintiff's case is so overwhelming against Mr Arthur Lai, he has had to clutch at such straws as he can in trying to defend himself. Opportunistically, Mr Arthur Lai tried to make out that the unrevealed content of the lost file was of crucial importance to his showing how he hid nothing from his co-directors.

236. I do not think for one moment the missing file would have contained, as Mr Arthur Lai suggests, a Form of Acknowledgement in relation to Mandarin being an independent placee of the residual 8,050,494 Bond International shares, since the relevance of such a document would have been immediately apparent to the Plaintiff's solicitors and it is unthinkable it would not have been copied, to be available on discovery.

(b) Practice Manual

237. It is not without irony that Mr Arthur Lai, of all people, should try to take the point that there could not have been anything irregular in the way Mr Peter Mou opened a margin account for Mandarin with the Plaintiff on 24th July 1990 in respect of the placement of the 8,050,494 shares, since it would have been in breach of the Plaintiff's Practice Manual, which required proper documentation from a prospective customer.

238. Not following proper procedures is what first set Mr Arthur Lai's career on a downward spiral in 1987 when the aftermath of Black Monday brought to light that, through ChinTung Futures, he had been trading Hang Seng Index Futures on a margin of 8% when the figure required by the regulating authority was 10%. That resulted in a judgment, including interest and costs, in excess of $100 million against Mr Arthur Lai in favour of ChinTung Futures and its creditors for negligence.

239. Mr Arthur Lai got himself into trouble again when the Hong Kong Stock Market went steeply into reverse after word reached Hong Kong of the chilling events which took place in Tienanmen Square on 4th June 1989. The market's sudden collapse exposed Mr Arthur Lai's to be trading on the Plaintiff's account to the extent of $10 million when the limit imposed on him was $5 million.

240. It would have been perfectly in character for Mr Arthur Lai to get Mr Peter Mou to open a margin account for Mandarin on 24th July 1990 without any deposit or proper documentation, contrary to the provisions of the Practice Manual, and I am satisfied that is what in fact happened.

241. There is a witness statement from Mr Freddie Kwan, the Plaintiff's Manager of Client Services at the material time, relied on by Mr Arthur Lai. That statement is to the effect that all margin accounts had to be approved by the Plaintiff's Finance and Administration department, and any unauthorised dealing would be closed out immediately, unless approved by the Finance Director who was Mr Patrick Yeung at the material time. There was similar evidence from Thomas Mak and Philip Pang, who had both been employees of the Plaintiff.

242. What Mr Freddie Kwan and the others described was, so I am satisfied, the theoretical ideal which the Plaintiff's salesmen were supposed to follow, but I am satisfied, too, from the evidence of Mr Patrick Yeung and Mr Gary Wong that salesmen high enough in the Plaintiff's hierarchy, such as Mr Raymond Lai and Mr Peter Mou, could get away with disregarding the Practice Manual - at least for a while - and would present the Finance Director with a fait accompli in the form of a margin account opened without the approval of himself or members of the Plaintiff's Credit Committee authorised to grant the necessary approval. I accepted what Mr Patrick Yeung told the court about the dilemma he then faced, and how as a matter of practical business he would not automatically close out such an account, but exercise his discretion, basing himself on what the salesmen represented to him about the customer.

243. I accepted the evidence of Mr Patrick Yeung and Mr Gary Wong that, on account of limitations in the Plaintiff's computerised system at the material time, they were powerless to prevent margin accounts being opened without proper approval.

244. A point made against Mr Patrick Yeung and Mr Gary Wong by Mr Arthur Lai was that they both must have known of the placement to Mandarin at or about the time it happened on 25th July 1990. I accept that they probably did know at or about that time, but such knowledge on their part does nothing to assist the defence case, since, I am satisfied, they did not know or have any ground to suspect that Mandarin might be owned and controlled by Mr Arthur Lai.

(c) Section 358 of the Companies Ordinance

245. This cannot be prayed in aid by Mr Arthur Lai to excuse his breaches of duty to the Plaintiff, since, for reasons already expressed, the court does not consider he has acted honestly.

Credibility

246. I have made comments on the credibility of several of the witnesses in the course of this judgment.

247. In relation to Mr Arthur Lai and Mr Raymond Lai, the two main witnesses for the defence, I found neither of them worthy of belief on account of the inherent improbability of their version of what happened, and their manner of telling it.

248. On the other hand, I found the Plaintiff's main witnesses, Mr Wigan, Mr Patrick Yeung and Mr Gary Wong all wholly credible. Mr Arthur Lai complained that Mr Gary Wong had a purpose of his own to serve, since the Plaintiff has withheld his 1993 bonus, thus putting Mr Gary Wong under pressure to ingratiate himself with the Plaintiff by giving evidence only favourable to the Plaintiff. In fact, Mr Gary Wong's evidence before me was wholly consistent with the affirmation he made in support of the Plaintiff's application for its Mareva Injunction in late March 1993, at which time there was no suggestion of any particular inducement operating on his mind.

Conclusion

249. In view of the foregoing, I enter judgment for the Plaintiff on all of its claims.

250. This is a judgment handed down pursuant to Order 42, rule 5B.