PINE ENTERPRISES LTD v. CYBER STRATEGY LTD AND ANOTHER

HCA 1221/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1221 OF 2006

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J U D G M E N T

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INTRODUCTION

1.  This is a trial of two actions, namely HCCW 593/2005 and HCA 1221/2006, ordered to be tried together pursuant to the order of Poon J.  The dispute arose out of four agreements in connection with the sale by Pine Enterprises Limited (“Pine”) of its shares in Union Resources (Educational Development) Limited (“UR Limited”) to Lecture Kit Company Limited (“Lecture Kit”).  The shares in UR Limited were duly transferred to Lecture Kit on 13 May 2003.  Pine complained of breach of the agreements.  On 1 August 2005, Pine petitioned for the winding up of UR Limited on just and equitable ground under HCCW 593/2005.  On 7 June 2006, Pine also commenced action HCA 1221/2006 against Lecture Kit and its parent company Cyber Strategy Limited (“Cyber Strategy”) for breach of agreement.  Cyber Strategy and Lecture Kit counterclaimed against the 1^st and 2^nd Third Parties for false representation.  I consider the main action is HCA 1221/2006.

2.  The Plaintiff and the 1^st Third Party are represented by Mr Poon SC and Ms Linda Chan.  The Defendants are represented by Miss Angela Gwilt and Mr C Y Li who joined in as leading counsel on the 12^th day of trial.  The 2^nd Third Party, who is a practising solicitor, appeared in person except for the last day of the trial when he is represented by Ms Elsie Yiu.

3.  By the seventh day of the trial, the parties were still entangled in pre-trial matters.  Rather than to have both actions adjourned and re-fixed, I considered it in the best interest of all parties to continue hearing the main action and to adjourn the winding up action.  Hence, on my own motion, I adjourned HCCW 593/2005 to a date to be fixed and continued hearing HCA 1221/2006.  I am glad to have taken that course, because as the evidence unfolds, it became obvious that the evidence in the winding up action would be highly prejudicial to the Defendants in the main action and the evidence in the main action would also be prejudicial to the Respondents in the winding up action.  In this judgment, I shall refer to some of the evidence in the winding up action for the purpose of setting out the background in which the material issues which I have to decide in the main action arose.  I do not rely on any of those evidence in my assessment of credibility of witnesses or finding of fact in the main action.  I make no finding of fact in respect of the winding up action either, not even a provisional view.

4.  On the 13^th day of trial, shortly after opening the defence case, the Defendants offered to discontinue the third party proceedings against the 2^nd Third Party, Andrew Law, with costs.  The offer was not accepted because of disagreement on the scale of costs.  Andrew Law continued as a third party.  But for all practical purposes, the Defendants have abandoned their claim against Andrew Law.  The issue as between the Defendants and Andrew Law is whether Andrew Law is entitled to have his costs on indemnity basis.

5.  The dispute is about two of the four agreements.  On 12 April 2003, Pine, Cyber Strategy and Lecture Kit entered into three agreements in connection with the sale and purchase of shares in UR Limited.  On the same day, they also entered into a fourth agreement with UR Limited to regulate their management of UR Limited. 

6.  Under the Sale and Purchase Agreement, Lecture Kit purchased from Pine 51% of its shares in UR Limited (i.e. 510,002 shares) and Pine purchased from Cyber Strategy 20% of its shares in Lecture Kit (i.e. 1,000 shares).  In essence, that was a share swap agreement.  The principal asset of UR Limited was, and still is, its wholly owned subsidiary, Union Resources Limited Educational Development (Yanjiao) Company Limited (“UREDY”) which owns a piece of land (“the Campus”) in the People’s Republic of China (“PRC”).

7.  Under the Lecture Kit Shareholders’ Agreement, Cyber Strategy agreed to repurchase Pine’s 1,000 shares in Lecture Kit at HK$12.5 million if Lecture Kit is not listed by 12 April 2005 and Cyber Strategy agreed to deposit its 510,002 shares in UR Limited with Messrs Andrew Law & Franki Ho as custodian.

8.  Under the Option Agreement, Lecture Kit granted an irrevocable option to Pine to call upon Lecture Kit to issue a convertible note for HK$20 million with interest, in consideration of Pine’s agreement to procure Edward Woo to waive his director’s loan to UR Limited.  Pursuant to this agreement, Edward Woo signed a letter of release confirming his agreement to release and discharge “all loans and liabilities hitherto due and owing by” UR Limited to him, whether listed or not listed in the books of UR Limited, and which was not less than HK$53,547,843. 

9.  The sale and purchase of the shares in UR Limited was completed on 13 May 2003.  Pursuant to the Option Agreement, a convertible note in the adjusted amount of HK$20.65 million was executed by Lecture Kit, which was subsequently dated 1 February 2004 with a maturity date on 1 February 2006.  The dispute between the parties is related to the Lecture Kit Shareholders’ Agreement and the convertible note issued pursuant to the Option Agreement.

10.  On 2 July 2003, Gary Ho, for and on behalf of UREDY, entered into the Cooperation Agreement (合作辦學合同書) with China Institute of Defence & Science Technology (“CIDST”) in providing educational services.  CIDST took possession of the Campus and operated a joint educational institute with UREDY there.  On 10 November 2003, UREDY demanded CIDST to vacate the Campus for having failed to obtain a bank loan which was a term of the Cooperation Agreement.  After some negotiations, on 4 February 2004, UREDY and China Defence Technology Centre (Beijing) (“CDTC”) reached an agreement for the sale of the Campus to CDTC for RMB 50 million (“Campus Sale Agreement”).  CDTC paid UREDY RMB 10 million on 12 February 2004.  On 5 March 2004, UREDY paid RMB 9 million to Beijing AIR Strategy and Information Technology Limited (“Beijing AIR”) purportedly to settle debts due from UR Limited and UREDY to various companies within the AIR group.  On 29 April 2004, UREDY entered into two consultancy agreements with AIR Logistics International Limited (“AIR Logistics”) under which UREDY would pay AIR Logistics RMB 9.744 million a year for professional realty management advice and RMB 35.01 million a year for real estate development advice.

11.  CDTC defaulted in paying the balance due under the Campus Sale Agreement.  That was followed by arbitration proceedings in the PRC and then an agreement to sell all the shares in UREDY to Jeavon Limited, a nominee of CDTC  (“Jeavon Agreement”) on 3 February 2005.  The Jeavon Agreement was terminated on 30 July 2005. 

12.  The listing of Lecture Kit did not materialise by 12 April 2005.  Cyber Strategy refused to repurchase the 1,000 shares in Lecture Kit held by Pine and refused to honour the convertible note.  On 1 August 2005, Pine petitioned for the winding up of UR Limited.  On 13 September 2005, Asian Information Resources (Holdings) Limited (“AIR Holdings”) entered into an agreement to sell Eleson Inc together with its chain of subsidiaries including Cyber Strategy and Lecture Kit to Beijing Olympics Limited for HK$50,000.  On 7 June 2006, Pine commenced the main action.

The issues 

13.    Pine claims against Cyber Strategy damages for breach of the Lecture Kit Shareholders’ Agreement in the sum of HK$12.5 million for its failure to repurchase the 1,000 shares in Lecture Kit and against Lecture Kit the sum of about HK$25.5 million under the convertible note.  In addition, Pine seeks a declaration that the 510,002 shares of and in UR Limited have been and are charged in favour of Pine as security for payment of all sums owed by Cyber Strategy and Lecture Kit under the Lecture Kit Shareholders’ Agreement and the convertible note.

14.  In essence, the defence of Cyber Strategy and Lecture Kit is that they entered into the four agreements as a result of certain false representations made by Pine, Edward Woo and Andrew Law and certain non-disclosures in the course of negotiation of the four agreements.  They also claim that they were discharged from their liability under the convertible note as Edward Woo had failed to comply with the condition precedent by waiving his director’s loan to UR Limited of the requisite amount.  They seek a declaration that the four agreements are rescinded and counterclaim for damages for false representation and non-disclosure.  In addition, they also make similar claims against Edward Woo and Andrew Law as third parties.

15.  There is no dispute that the Plaintiff had performed its obligations under the Sale and Purchase Agreement and has exercised its option under the Option Agreement.  The factual dispute is whether the Plaintiff had procured Edward Woo to waive the requisite amount of loan.  Subject to the Plaintiff discharging that burden, the burden would then be on the Defendants to prove the false representations and non-disclosures in order to have the four agreements rescinded and relieved of their liability under the four agreements.

The alleged false representations and non-disclosures

16.  The Defendants’ pleaded defence is excessive, confusing and overlapping.  In broad terms, the defences are false representation, non-disclosure and non-fulfilment of condition precedent.  Mr Poon SC and Mr Li adopt different approaches to the interpretation of the pleaded defence.  To consider their submissions, it is necessary for me to quote the pleaded defence in full.  The relevant pleadings are paragraphs 5(f), 5(g), 5(h), 6(c), 6(d), 6(e) and 7 of the Amended Defence and Counterclaim (“AD&CC”):

“5(f)    [Edward Woo] warranted and represented to Gary Ho that the [Campus] can be used to establish an institution there under the name “The East West Cultural Exchange Village” for the purpose of promoting education and cultural exchange.

5(g)  As a further and/or alternative proposal, [Edward Woo] warranted and represented to Gary Ho that the [Campus] can be used and/or developed as a hotel, spa, sports centre or residential buildings.

5(h)    In or about January 2003, Gary Ho … went to inspect the [Campus] upon the arrangement of the 1^st and 2^nd Third Parties.  At the time of the inspection, the [Campus] was not occupied and was vacant.  As a result, the Defendants were led to believe that [Edward Woo’s] intention and/or proposal were genuine and that the [Campus] was in a state of vacant possession.

6(c)   Prior to signing the Sale and Purchase Agreement and the [Lecture Kit] Shareholders’ Agreement, [Edward Woo] failed to disclose the following matters to the Defendants:-

(i)	There are building certificates numbered 013088 and 014809 for the buildings erected on the [Campus] which would have shown that the buildings were used as teaching premises, premises for the staff and premises for the students.  According to the laws of China, when that being the case, the [Campus] together with the buildings cannot be mortgaged to the bank to obtain finance.  In the premises, such building certificates constitute an encumbrance or restrictions on the [Campus], in breach of Clauses 3.31(C) and (E) of the Sale and Purchase Agreement and such defects have rendered the chance of [UR Limited] and 2nd Defendant being listed nugatory.
(ii)	Pursuant to [the December Agreement] on 2nd December 2002, CIDST had acquired certain rights including, inter alia, the right to occupy and to further develop the [Campus].  In breach of Clauses 3.17, 3.18, 3.31(B) and (F) of the Sales and Purchase Agreement, CIDST and its various divisions were still occupying the [Campus] at the date of signing of the Sale and Purchase Agreement and the [Lecture Kit] Shareholders’ Agreement.
(iii)	On 13 March 2003, UREDY had made an application to the Economic Planning Bureau in the Yanjiao Development Zone Authority in the PRC and submitted a Campus Expansion Plan.

6(d)    [Edward Woo] warranted and represented to the Defendants that the [Campus] can be used for various purposes including but not limited to establishing an institution and/or hotel, spas and other buildings.  As [Edward Woo] well knew that their representations were untrue and their proposals could never be materialised due to the occupation of the [Campus] by CIDST, their representations were false and were made fraudulently and/or recklessly (“False Representations”), with the view to induce the Defendants to enter into the Sale and Purchase Agreement and the [Lecture Kit] Shareholders’ Agreement.

6(e) The Defendants had relied on the False Representations and were induced by the False Representations to enter into the Sale and Purchase Agreement and the [Lecture Kit] Shareholders’ Agreement.

7. … By reason of the matters pleaded in paragraph 6(c) to (h) herein, the Defendants are discharged from its liability to the Sale and Purchase Agreement and the [Lecture Kit] Shareholders’ Agreement for reason of False Representations made by [Edward Woo] to the Defendants.”

(The words in [  ] are my substitutions in place of those in the original pleading for consistent reading and to reflect the abandonment of the third party proceedings against Andrew Law.)

17.  Mr Li submits that the Defendants have pleaded five false representations and non-disclosures made by Edward Woo on numerous occasions between late 2002 and January 2003.  Those representations are:

The first three representations are based on paragraphs 5(f), 5(g), 5(h) and 6(d) of the AD&CC.  The fourth representation had been pleaded as a non-disclosure in paragraph 6(c)(iv) of the Defence and Counterclaim, but was deleted from paragraph 6(c) of the AD&CC.  Whether this plea is one of false representation or non-disclosure, it is unnecessary because the Plaintiff bears the burden of proving that Pine had procured Edward Woo to waive the requisite amount of loan.  If Edward Woo had only waived a loan of a lesser amount, which is what Mr Li’s submission is premised on, the Plaintiff would fail in any event.  On the other hand, if the Plaintiff succeeds in discharging that burden, there could be no basis on which to raise that defence.  That defence is superfluous and has been rightly deleted from the pleading.  The fifth representation has been pleaded as a non-disclosure in paragraph 6(c)(i).  However, Mr Li submits that it is a representation which necessarily arises from or underpins the user representation and the vacant possession representation.

18.  On the other hand,Mr Poon SC draws a distinction between “non-disclosures” pleaded in paragraph 6(c) and “false representations” defined in paragraph 6(d).  He submits, firstly, that under paragraph 6(d), “false representations” was defined as “the Campus can be used for various purposes including but not limited to establishing an institution and/or hotel, spas and other buildings” which are repetitions of the false representations pleaded in paragraphs 5(f) and 5(g) but no more.  Secondly, he submits that the “non-disclosures” pleaded in paragraph 6(c) are by definition excluded from being “false representations” by virtue of paragraph 6(d).  He also refers to paragraph 6(e) as conclusively supporting his argument that “false representations” relied on by the Defendants do not include any of the “non-disclosures”. 

19.  Mr Poon SC then refers to the Defendants’ answer to the Plaintiff’s request for further and better particulars of the falsity pleaded in paragraph 5(f) and 5(g) of the AD&CC.  In their answer, the Defendants confirmed that both representations were false in that, contrary to the representations,

“in fact, CIDST had occupied and acquired certain rights to further develop the [Campus].  The building certificates for the buildings erected on the [Campus] further disclosed that the buildings were used as teaching premises, premises for the staff and premises for the students and as such cannot be mortgaged to the bank to obtain finance and constitute an encumbrance or restrictions on the [Campus].” 

(Words in [  ]  are my substitutions for consistent reading.)

The second part of the answer relates to the mortgage representation.  Mr Poon SC submits that insofar as the first part of the answer is concerned, the Defendants are alleging that it was CIDST’s occupation of the Campus which rendered the village representation and the user representation false.  Thus the falsity does not lie in whether the Campus could be used to establish the “East West Cultural Exchange Village” or could be used and/or developed as a hotel, spa, sports centre or residential buildings, but that the Campus could not be used for those purposes due to the occupation by CIDST.  Edward Woo did not deny that he had mentioned about establishing the East West Cultural Exchange Village and in that connection the use to which the Campus could be put.  The building certificate shows that the Campus was to be used as the “East West Cultural Exchange Village”.  The building plan shows the type of facilities, including hotel, spa and sports centre which were permitted to be built.  The real factual issues in relation to the false representations pleaded in paragraph 5(f) and 5(g) are the same, i.e. whether CIDST was in occupation of the Campus and that such occupation render it impossible for the Campus to be used for the purposes represented.  

20.  I can well understand Mr Poon SC’s ingenious argument.  It appears to be a little strained and semantic.  But I agree with him.  The pleadings draw a distinction between non-disclosures and false representations.  Mr Li also puts non-disclosures as an alternative basis for rescinding the four agreements.  That is how the two should have been pleaded and dealt with.  Thus, in view of the Defendants’ answer to the request for further and better particulars, there is only one false representation, i.e. the vacant possession representation which covers the first three of the five representations submitted by Mr Li.  The factual issue is whether CIDST was in possession of the Campus before 12 April 2003.  The above conclusion does not mean the non-disclosure issues are struck off from the AD&CC.  They will be dealt with as non-disclosures.

21.  Mr Poon SC takes yet a further pleading point on the non-disclosure issue.  He refers to Bullen & Leake & Jacob’s Precedents of Pleadings, 12^th ed, p 449.  He submits that a claim to recover damages or for other relief for misrepresentation inducing a contract or other conduct causing damage will lie where the misrepresentation is made dishonestly, i.e. fraudulently, in a common law action of deceit.  He then refers to Viscount Maugham’s dicta in Bradford Third Equitable Benefit Building Society v Borders [1941] 2 All ER 205 at 211 and submits that in order to sustain the common law action of deceit, the following facts must be pleaded and proved, namely:

Based on the above principles, Mr Poon SC argues that assuming for the present purposes that the “non-disclosures” were representations, nowhere in the AD&CC did the Defendants plead that the Plaintiff or Edward Woo knew the representations were false and intended the Defendants to act on them.

22.  Mr Li’s argument is that while the primary basis of the Defendants’ claim is misrepresentation, non-disclosure is nevertheless an alternative basis relied on by the Defendants.  This alternative basis is predicated on the basis that Pine or Edward Woo owed the Defendants fiduciary duties including a duty to act in good faith and to make all material disclosure.  He refers to Chitty on Contracts, Hong Kong Specific Contracts, paragraphs 19-20, 10-45 to 10-52; Cartwright, Misrepresentation Mistake And Non-Disclosure, 2^nd ed, paragraph 17.19 and Simms v Conlon [2006] EWCA Civ 1749 at paragraphs 87, 127 and 128.

23.  The pleadings have drawn a clear distinction between non-disclosure and false representation.  It is manifestly clear that non-disclosure is relied on as an alternative basis for rescinding the four agreements.  Fraud is not a necessary element for non-disclosure.  In the circumstances, it is not necessary to plead the matters referred to by Mr Poon SC.  The way in which the defence is pleaded cannot be said to be commendable.  However, the non-disclosures have been fairly pleaded.  In paragraph 7 of the AD&CC, the Defendants pleaded that “by reason of the matters pleaded in paragraph 6(c) to (h) herein, the Defendants are discharged from liability under the Sale and Purchase Agreement and the Lecture Kit Shareholders’ Agreement for reason of false representations.”  The phrase “for reason of false representations” is inconsistent with the phrase “by reason of the matters pleaded in paragraph 6(c) to (h)” and on a fair reading should be treated as redundant.  The non-disclosures have been validly pleaded as an alternative basis of the defence.  The Plaintiff has not been misled or prejudiced.  Mr Li is responsible for the misunderstanding when he calls the “non-disclosures” as “false representations” as a convenient shorthand.  For avoidance of doubt, I would be prepared to allow an amendment to have the pleadings put right if the defence of non-disclosure is meritorious.

24.  The following two non-disclosures are pleaded:

It is immediately obvious that the factual issue raised by the occupation non-disclosure is the same as that raised by the vacant possession representation.  The only new issue raised by the non-disclosure is whether the Campus could be mortgaged to obtain finance under PRC law.  That is an issue of foreign law and is a factual issue. 

Non-fulfilment of condition precedent

25.  The only other defence is that pleaded in paragraph 11 of the AD&CC.  That defence alleges that Edward Woo had not waived a loan of the requisite amount and as a result Lecture Kit is relieved of its liability under the convertible note.  The factual issue raised by that defence is whether the loan waived by Edward Woo was in excess of the requisite amount.

The issues

26.  Thus the factual issues raised in the pleadings are:

Dramatis Personae

27.  Hereunder are the main entities and characters involved in the main action.

28.  Pine Enterprises Limited (松茂企業有限公司)(“Pine”)-This is the plaintiff in HCA 1221/2006 and the petitioner in HCCW 593/2005.  It is a company incorporated in Hong Kong.  Its shareholders are Mr Woo Pak Hay Edward (“Edward Woo”) and his wife Ms Huen Pui Lan.  Edward Woo is the director who is actively involved in the management of Pine.

29.  Union Resources (Educational Development) Limited (聯合資源 (教育發展) 有限公司) (“UR Limited”) - This company was incorporated in Hong Kong on 23 December 1986 with Edward Woo holding 1,000,002 shares and the remaining share held by his wife.  In November 1994, the company changed to its present name.  Since then, it has been used by Edward Woo as the vehicle to pursue educational services and business.  The only substantial asset of the company was, and still is, its wholly owned subsidiary established in the PRC, UREDY.  It is the 2^nd Respondent in HCCW 593/2005.

30.  Union Resources Educational Development (Yanjiao) Company Limited (聯合資源教育發展 (燕郊) 有限公司) (“UREDY”)- This is a wholly foreign-owned enterprise established in the PRC on 30 September 1998 with a registered capital of US$4,819,000.  It is a subsidiary of UR Limited.  Its only asset is the land-use right (which is the usual form of land holding in the PRC) over the Campus, which is a piece land at Yanjiao Development Zone in Sanhe City of Hebei Province of about 100,000 square metres with built up areas of 40,000 square metres.  Edward Woo was the legal representative of UREDY until 13 June 2003 when he was replaced by Gary Ho.

31.  Asian Information Resources (Holdings) Limited (亞洲訊息  (控股) 有限公司) (“AIR Holdings”)- This is a company listed in the GEM board of the Stock Exchange of Hong Kong Ltd (“Stock Exchange”).  It has a web of subsidiaries, including AIR Logistics, Beijing AIR and Eleson Inc, which is the parent company of Cyber Strategy, Lecture Kit, and subsequently of UR Limited and UREDY.

32.  Eleson Inc- This was a wholly owned subsidiary of AIR Holdings.  It is the parent company of Cyber Strategy, which in turn, holds Lecture Kit.  On 13 September 2005, AIR Holdings sold Eleson Inc together with its entire line of subsidiaries to Beijing Olympics Limited for HK$50,000. 

33.  Cyber Strategy Company Limited (數碼策略有限公司) (“Cyber Strategy”)- This is a wholly owned subsidiary of Eleson Inc, which in turn was a wholly owned subsidiary of AIR Holdings.  It is the parent company of Lecture Kit.  It is the 1^st Defendant in HCA 1221/2006.

34.  Lecture Kit Company Limited (靈卓傑有限公司) (“Lecture Kit”)- This is a company incorporated in Hong Kong.  It is a subsidiary of Cyber Strategy, which in turn was a subsidiary of AIR Holdings.  It is the 1^st Respondent in HCCW 593/2005 and the 2^nd Defendant in HCA 1221/2006. 

35.  China Institute of Defence & Science Technology (中國防衛科技學院) (“CIDST”)- This is a PRC entity originally established under the Ministry of Security.  After restructuring within the PRC Government, CIDST became vested under a commercial entity called China Far East International Trading Company Limited (中國遠東國際貿易有限公司), which is accountable for its own profits and loss.

36.  China Institute of Defence & Science Technology - School of Foreign Commerce (中國防衛科技學院涉外商務分院)(“Foreign School”)- This is a second tier school of CIDST.  It is a separate legal entity from CIDST.

37.  China Defence Technology Centre (Beijing) (中防國衛 (北京) 防衛技術服務中心) (“CDTC”)-This is one of the subsidiaries of China Far East International Trading Company Limited.  It is therefore associated to CIDST.  Jeavon Limited (BVI) is its nominee. 

38.  Mr Woo Pak Hay Edward (“Edward Woo”)- Edward Woo is the director of Pine, the Plaintiff in HCA 1221/2006.  He is personally the 1^st Third Party in the same action.  He is a retired solicitor and a very respected member of the profession.  Prior to his retirement from the legal profession, he involved himself in the field of education.  He set up the University of East Asia in Macau in 1981, which is now renamed as University of Macau.  He remains as one of its councillors.  He is a member of Asia International Open University (Macau) (“AIOU”).  He established UR Limited, UREDY and Bada School in Beijing.  The operation of these companies and Bada School were financed by loans from Edward Woo.

39.  Mr Ho Wing Yiu Glory (also known as Gary Ho) (“Gary Ho”)-He joined AIR Holdings in 2001 as its managing director, chief executive officer (“CEO”) and compliance officer.  He was also a director of Lecture Kit, Cyber Strategy, UR Limited and UREDY at the material time.  He became the legal representative of UREDY since 13 June 2003.  He does not hold any of the shares in AIR Holdings or any of its group of companies.  He left the employment of AIR Holdings on 7 December 2006 when he resigned from his directorship in all but one of the companies of the group.  He is a person with remarkable academic achievement, including a first class honours degree from Warrick University and a master degree in economics from the University of Oxford.  He has vast experience in senior management capacity in international corporations.  He had worked in the PRC, the United Kingdom, Belgium, Australia, France, United States and Singapore.  Needless to say, he is an extremely intelligent CEO.

40.  Mr Patrick Lee (“Patrick Lee”) - He is a certified public accountant.  He joined AIR Holdings as its chief financial controller.  He resigned on 4 December 2004.  He was a director of Lecture Kit from 11 February 2002 to 4 December 2004, director of Cyber Strategy from 18 March 2002 to 4 December 2004, director of UR Limited from 12 May 2003 to 4 December 2004 and director of UREDY since 13 June 2003.

41.  Mr Law Shiu Kai Andrew (“Andrew Law”) - He is the 2^nd Third Party in HCA 1221/2006.  He is a practising solicitor and a partner of Messrs Andrew Law & Franki Ho.  Until 5 September 2005, he was a member of the audit committee of AIR Holdings.  On 26 January 2006, he ceased to be a non-executive director of AIR Holdings upon completion of his term.  During the early years of his practice, he worked as an assistant solicitor in Edward Woo’s firm of solicitors.  He is very familiar with Edward Woo.

42.  Ms Ye Xinping (“Ye”)- Ye was the deputy principal of CIDST at the material time.  She is now the general manager of Beijing Oriental Yinjiao Education Technology Company.  In that capacity, she continued to have dealings with CIDST and China Far East International Trading Company Limited.  She is the founder of Jeavon Limited (BVI).

Credibility of witnesses

43.  In all, five factual witnesses gave evidence.  They were all searchingly cross-examined.  Hereunder is a summary of my assessment of their credibility.  Further reasons in support of my assessment are to be found in my analysis of the evidence.

44.  Edward Woo - Mr Li comments critically on Edward Woo’s credibility.  He criticises Edward Woo as a man capable of going to the extremes to exert pressure on Gary Ho.  He says that Edward Woo is a sophisticated and calculated man.  The basis for those comments are that Edward Woo wants to get paid for his shares in UR Limited and wants to get a charge on the shares and see to it that the Campus will be recovered by the provisional liquidator.  I think such comments are utterly unfair.  What Edward Woo did was just what a prudent vendor would have done.  Upon the eventual analysis, he has not done enough.  Given what UR Limited under the control of Gary Ho did by entering into two consultancy agreements in siphoning UR Limited’s resources, ensuring the provisional liquidator to recover the Campus is Edward Woo’s best hope of protecting his interest.  I do not think those comments tarnish Edward Woo’s credibility.

45.  Mr Li comments on the assistance rendered by counsel for Pine to Andrew Law.  Mutual assistance by counsel on the same side of the line is not unusual, especially if there are issues in which they have common interest.  Pine’s counsel might have been over-enthusiastic, but that does not in any way affect the credibility of Andrew Law or Edward Woo. 

46.  Edward Woo gave evidence in a calm, straight forward and sincere manner.  Much of his evidence is not seriously challenged.  His evidence is supported by contemporaneous documents and two tape recordings.  The tape recordings had been challenged by Miss Gwilt in a half hearted manner.  Anyway, my assessment of Edward Woo’s credibility was reached without reliance on the tape recordings.  I have warned myself that Edward Woo had the advantage of being a solicitor and knows how to cast his evidence in the best light.  I am satisfied that he is a truthful witness.  I accept Edward Woo’s evidence.

47.  Patrick Lee - Patrick Lee left the AIR group on his own accord on 4 December 2004.  He is still a director of UREDY.  Mr Li queries why being a former officer of the AIR group, Patrick Lee would give evidence against Cyber Strategy and Lecture Kit.  I find that comment surprising.  Mr Li further suggests that Patrick Lee resigned under unhappy circumstances.  I do not think that is true.  The reason of Patrick Lee’s resignation is that he smelt something irregular in AIR Holdings’ acquisition of Ever-ok International Forwarding Co Limited.  Indeed he resigned for his own protection.  There is nothing to suggest he had any grudge with AIR group or with Gary Ho.  Indeed, Gary Ho had requested him to stay.  There is also no suggestion that AIR group was dissatisfied with his performance in any way, save Gary Ho’s complaint that he thought Patrick Lee has disclosed confidential financial and operational information of the AIR group.  He has no personal interest whatever in the outcome of this action.  He is an independent witness.  He gave evidence in a straight forward and responsible manner.  He was not shaken in cross-examination.  I accept Patrick Lee’s evidence.   

48.  Gary Ho - Gary Ho is a highly educated and an extremely intelligent CEO.  He was exceedingly cautious in the witness box.  He had his university and postgraduate education in the United Kingdom, had worked extensively in English speaking countries and is very proficient in English.  Despite that, he refused to give his evidence in English.  Not only that, he even insisted to have the questions put to him interpreted into Cantonese.  That is his right and I am not drawing any adverse inference on his credibility.  Obviously, his answers under cross-examination had been carefully considered.  He would not have missed anything which would be to his interest.  Yet, I find him evasive, crafty and vindictive.  He was always ready to shift responsibility to his subordinates and professional advisers.  His allegation about Andrew Law’s demand for a six-digit compensation, even if it were true, was a clear ambush on Andrew Law, which adversely reflected on his character.  He armed himself with supporting documents which had never been disclosed and deprived Andrew Law of a fair opportunity to verify their authenticity or to meet the allegations.  He put the blame for the late disclosure on his solicitors.  That demonstrates the readiness with which he shifted responsibility to others to avoid cross-examination.  He has shown lack of good faith in the conduct of the litigation.  His evidence about Edward Woo signing the audit confirmation of UR Limited amply demonstrates how he wisely twisted the Plaintiff’s evidence to support the defence.  He has demonstrated a total lack of honesty in his evidence.  When his evidence is considered in the totality of the circumstances, it is amply clear that his evidence was concocted, incredible, bizarre and an insult to common sense.  His amputation of the whole chain of subsidiaries under Eleson Inc, which included the Defendants, shortly after the commencement of the winding up proceedings shows how wisely he acted in insulating AIR Holdings from this litigation.  He was a very intelligent but sly CEO sitting in the witness box, putting up an honest and innocent appearance, taking his time to consider his answers under cross-examination in order to protect the interest of the Defendants for which he was formerly responsible.  I do not believe in his honesty.  He is a witness of no credibility at all.  I do not believe in Gary Ho’s evidence.

49.  Ye - Ye was the deputy principal of CIDST at the material time and is now a very senior officer of a state-owned corporation entrusted with great responsibility and with state-owned assets.  I would be very careful before rejecting her evidence.  But I have to.  Her evidence was very guarded.  She seemed to be regurgitating evidence.  She was confused in her evidence whether she was to attend the meeting with AIR Holdings in December 2002 to resolve the financial problem of UR Holdings or UR Limited.  When tested against other incontrovertible evidence, her evidence does not make sense.  Despite that she was the deputy principal of CIDST, she was ignorant about a number of matters which she said happened in the Campus while under the control of CIDST.  Whenever, she had difficulties under cross-examination, she asked counsel to ask Wei Ren, the principal of CIDST.  She was clearly evasive and incredible. 

50.  Andrew Law - Andrew Law’s evidence is practically of no relevance as the third party proceedings against him have been abandoned.  I place no weight on his evidence in my finding of fact in relation to the main action.  His evidence in the third party proceedings is also of marginal utility.  Gary Ho ambushed him with his evidence about the demand for compensation in the sauna parlour.  That is the biggest issue as between the two of them.  For reasons which I shall explain in my analysis of the evidence, I reject Gary Ho’s evidence and accept Andrew Law’s.  On the whole, I find Andrew Law a reliable and credible witness. 

the factual background

51.  An understanding of the factual background prior to the negotiation between the parties on the four agreements is essential in resolving the factual dispute as to whether the false representations were made and whether certain facts were not disclosed.

The factual background prior to the negotiation of the four agreements

52.  By a contract on the Transfer of the Land-use Right of State-owned Land (國有土地使用出讓合同) (“Land Contract”) dated 22 June 1998, Sanhe Land Bureau granted to UREDY a 50-year right to use the Campus, which is a plot of land of about 100,000 square metres at Yanjiao Development Zone in Sanhe City of Hebei Province.  Under Clause 5 of the Land Contract, the land would be used for the purpose of constructing “New Century International Cultural City (新世紀國際文化城)”.  On 25 December 1998, UREDY obtained from Sanhe Land Bureau a land-use licence for the land to be used as “New Century International Cultural City”.  Later, Edward Woo felt it more appropriate and modest to describe the project as “East West Cultural Exchange Village”.  Accordingly, on 20 March 2000, UREDY obtained construction planning permission from Yanjiao Construction Planning Bureau to construct on the land, describing the developer as “East West Cultural Exchange Village” and the building project as “Teaching Complex (教學樓)”.  By the end of 2002, five blocks of buildings with a total built up area of 40,000 square metres were constructed on the Campus.  The buildings comprise of a teaching block comprising of four inter-connected buildings, a staff amenity block and three student blocks.  The Campus was acquired and built solely with the funds provided by Edward Woo.  As at 31 December 2001, the total assets of UREDY amounted to RMB 57,465,203.28, of which RMB 27,382,309.26 was construction in progress.  By the end of 2002, the total asset of UREDY was increased to RMB 58,195,746.87.  The market value of the Campus as assessed by an independent valuer in the PRC was RMB 68.6 million in September 2001 and RMB 65 million in June 2003.  That was the state of the Campus before the four agreements were entered into.

53.  In August 2002, UREDY’s then general manager, Mr Guan Yanfeng (“Guan”) introduced Edward Woo to Mr Yang Shiqi (“Yang”) of Foreign School.  Negotiation on joint venture with Foreign School ensued.  On 13 September 2002, Edward Woo and Foreign School entered into a share transfer agreement (“September Agreement”).  Under this agreement, Edward Woo would sell and Foreign School would purchase 60% of the issued shares of UR Limited for HK$36 million.  Foreign School would pay Edward Woo HK$20 million on or before 30 October 2002 and would enter into a lease with UREDY for leasing the Campus at RMB 6 million per annum.  The September Agreement also provided for a compensation of 0.05% of the amount payable per day if Foreign School defaulted in making payment.  Pursuant to the September Agreement, Foreign School entered into a five-year lease of the Campus with UREDY (建築物及場地租賃合同)(“September Lease”) on the same day.

54.  On 10 October 2002, the Campus was handed over to Foreign School.  No deposit or rent was ever paid to Edward Woo or to UREDY.  Foreign School failed to pay the HK$20 million by 30 October 2002 pursuant to the September Agreement.  No formal agreement was signed for the termination of the September Agreement or the September Lease.  The dispute between the parties is whether Foreign School vacated the Campus after the September Agreement and September Lease fell through.

55.  After Foreign School defaulted in payment, Mr Wei Ren (“Wei Ren”), the principal of CIDST began to discuss with Edward Woo about the sale of the shares of UR Limited.  Wei Ren instructed Acumen Consulting Services Ltd to incorporate a company to be called UR Holdings Limited (“UR Holdings”) as the vehicle for acquiring the shares in UR Limited.

56.  On 2 December 2002, CIDST and Edward Woo entered into an agreement for the sale and purchase of all the shares in UR Limited (“December Agreement”).  At the time, UR Holdings had not been incorporated.  Wei Ren and CIDST would be parties to and be liable under that agreement.  Under the December Agreement, Edward Woo would sell and UR Holdings would purchase all the shares in UR Limited for RMB 50 million, based on a tentative valuation that the Campus was worth RMB 50 million.  The parties would cooperate in the development of education and defence technology and would collaborate in listing the shares in UR Limited.  Edward Woo would also have certain rights if the value of the Campus exceeded RMB 50 million at the time of listing.  Under clause III (1) - (2) of the December Agreement, UR Holdings would pay Edward Woo RMB 10 million by 17 December 2002 as deposit and the balance on or before 30 November 2003.  Under clause V(1), UR Holdings or CIDST or Wei Ren assumed responsibility to do whatever was necessary to cancel the September Agreement and the September Lease with Foreign School.  But unlike in the case of the September Agreement, no lease was entered into between UREDY and CIDST or UR Holdings for the lease of the Campus due to reluctance on the part of Wei Ren.  The dispute between the parties is whether CIDST had taken possession of and carried out construction works on the Campus pursuant to the December Agreement prior to signing the four agreements.

57.  Edward Woo was not paid the deposit of RMB 10 million by 17 December 2002 because CIDST was unable to obtain government approval to invest in UR Limited.  Pursuant to UREDY’s request made on 27 December 2002, CIDST advanced RMB 2 million to UREDY for the purpose of paying construction costs for the Campus.  According to Edward Woo the loan was only a pretext to enable him to have some security for the compensation payable by CIDST or Foreign School for their breach of agreement.

58.  Those were the factual background at the time of the negotiation of the four agreements among Pine, Cyber Strategy, Lecture Kit and UR Limited.

The negotiation with AIR Holdings

59.  In early December 2002, Andrew Law, who was an independent non-executive director of AIR Holdings and a friend of Edward Woo, introduced Gary Ho to Edward Woo.  Andrew Law and Gary Ho represented to Edward Woo that Henry Fok’s family was in control of the AIR group, albeit the Fok family did not play an active role therein.  There is no dispute that companies controlled by the Fok’s family had substantial shareholdings in AIR Holdings.  There was much debate at trial whether that representation was false.  But that is not a relevant issue in the present case.  On the evidence of Andrew Law and Edward Woo, I have no doubt that Gary Ho did so represent.  Even at a meeting in July 2003 with Mr Liu Wei of Yanjiao Economic & Technical Development Zone Management Commission, Gary Ho claimed that the Fok family was in control of AIR Holdings.  The late Henry Fok was a well-known public figure in Hong Kong andthe PRC and had an educational fund.  Perhaps because of that belief, Edward Woo was so anxious to strike a deal with AIR Holdings that he neglected to have a proper check of the financial position of the parties he was contracting with.  He gave away half of his Campus worth about HK$30 million for 20% of the shares in an insolvent company.

60.  The introduction was followed by Edward Woo’s taking prompt steps to set up meetings between AIR Holdings and CIDST.  On 6 December 2002, Edward Woo wrote to Gary Ho about meeting with Wei Ren of CIDST during his visit to Hong Kong from 16 to 19 December 2002.  At that time, Edward Woo had agreed to sell all the shares in UR Limited to CIDST or UR Holdings.  The contemporaneous e-mails issued by Andrew Law suggest that Edward Woo was representing AIOU in the meetings.  Since at that time Edward Woo was looking forward to the completion of the December Agreement with CIDST, I have no doubt that the original purpose of the meeting was to discuss a tripartite joint venture between AIOU, AIR Holdings and CIDST in providing educational services and in listing of UR Holdings or UR Limited so that Edward Woo would thereby benefit from the listing.  However, as things turned out about ten days later, the December Agreement fell through.  Even as late as March 2003, Edward Woo’s intention as expressed in his memorandum to Gary Ho, titled “Point of Discussion”, was to have a joint venture with AIR Holdings rather than sale of shares in UR Limited. 

61.  The meetings arranged were subsequently held on 17 and 24 December 2002 among Edward Woo representing AIOU, Andrew Law, Gary Ho representing AIR Holdings and Ye representing CIDST.  Nothing was achieved at those meetings.  The parties are in dispute as to whether there was an “unholy alliance” among Edward Woo, Andrew Law and Ye not to disclose to AIR Holdings the fact that Edward Woo had entered into the December Agreement to sell all the shares in UR Limited to UR Holdings and that CIDST had taken possession of and built on the Campus.

62.  On 6 January 2003, Andrew Law set up a meeting on 7 January 2003 among himself, Gary Ho, Edward Woo representing AIOU and CIDST with a view to signing a letter of intent on a tripartite joint venture.  CIDST refused to sign.  It is not clear if that meeting materialised.  But the final draft of the letter of intent indicated that the parties were discussing about a joint venture in providing educational services with a view that CIDST was about to be admitted as a major shareholder of UR Limited.

63.  In January or February 2003, Edward Woo, Gary Ho and Raymond Lo, another non-executive director of AIR Holdings, visited the Campus.  They met with Edward Woo’s staff in UREDY.  But they did not notice the presence of CIDST, students, teachers or security guards on the Campus. 

64.  Just before the end of January 2003, Edward Woo introduced Wei Ren to Gary Ho and they had further discussion about the joint venture.  Thereafter, Edward Woo, Wei Ren and Gary Ho continued their discussion about the joint venture.  The discussions were three way discussions on the possibility of a joint venture of UR Limited with CIDST, or with AIR Holdings or with both of them.

65.  On 19 March 2003, Edward Woo sent Gary Ho a joint venture proposal suggesting a share swap whereby AIR Holdings would acquire all the shares in UR Limited in exchange for a convertible debenture of AIR Holdings and that AIR Holdings would provide cash to CIDST to finance its operation in the joint venture. 

66.  Towards the end of March and beginning of April 2003, Edward Woo and Gary Ho entered into serious discussions on the terms of a joint venture with AIR Holdings.  According to Edward Woo, the joint venture was founded on the basis that the value of the Campus was RMB 65 million.  Under the joint venture, Edward Woo would give up control of UR Limited and UREDY by transferring 51% of the shareholding in UR Limited to Lecture Kit in return for 20% of the shareholding in Lecture Kit valued at HK$12.5 million with a convertible note of HK$20 million, making up a total of HK$32.5 million.  Gary Ho expressed that the AIR group intended to have Lecture Kit listed with a combined asset of HK$130 million.  The convertible note could be converted to shares to be traded on the Stock Exchange.  If listing of Lecture Kit would not materialise, Edward Woo would be repaid the HK$12.5 million for the 20% shares in Lecture Kit.  Gary Ho also assured him that AIR group would not take advantage of him by reason of their majority shareholding in UR Limited because many matters would require his approval before a decision could be taken.  Those discussions and understanding were reflected in the four agreements. 

67.  Eventually, on or about 9 April 2003, whilst in Malaysia, Edward Woo signed the execution pages of the four agreements which were subsequently dated 12 April 2003 at the instruction of Gary Ho.  Edward Woo also confirmed the parties’ understanding that the calculation for the value for 51% of the shares in UR Limited had been understated by $65,000.  On 12 April 2003, Edward Woo transferred his 1,000,002 shares in UR Limited to Pine and Pine executed a trust deed confirming that it was holding the shares on trust for Edward Woo.  On the same day, Edward Woo signed a letter releasing UR Limited of all loans and liabilities owed to him of not less than HK$53,547,843.

68.  Save otherwise mentioned, the above facts are not in dispute.  In broad terms, the dispute between the parties is whether, in the course of the negotiation of the four agreements, Edward Woo made certain false representations to or withheld certain material facts from Gary Ho.

Due diligence and completion

69.  Under clause 6 of the Sale and Purchase Agreement, the parties had four weeks to carry out their due diligence exercise in relation to UR Limited and Lecture Kit and consider whether to proceed to completion.

70.  During the due diligence period, Gary Ho on behalf of Lecture Kit requested UREDY to provide detailed information.  These included details on the inventory, fixed assets, construction-in-progress, deferred assets and shareholders’ equity as stated in UREDY’s balance sheet made up to 31 December 2002.  Gary Ho also requested UREDY to provide all documents relating to the Campus including the Land Contract and the application for construction of those parts of the building for which construction was still under way.  His requests were all answered.  Prior to completion, there was no outstanding request or query which had not been complied with or answered by Pine.

71.  Patrick Lee had some problems with the accounts of UREDY as some documentations were missing and the books of UREDY could not be removed from its office in China for checking.  Hence, he had difficulties in preparing a consolidated financial statement of UR Limited including the accounts of UREDY.  He consulted Gary Ho and Gary Ho replied that it did not matter.  He went to UREDY’s office in Yinjiao after the due diligence period to collect information for the purpose of preparing the consolidated financial statement.

72.  In the meantime, Edward Woo continued his participation in the on-going negotiation with CIDST on the tripartite joint venture.  That is not surprising, because success in that would-be joint venture could enhance the listing prospect of Lecture Kit and therefore the value of Edward Woo’s 20% shares in Lecture Kit and his remaining 49% shares in UR Limited.

73.  On 12 May 2003, the Sale and Purchase Agreement became unconditional and completion took place.  Pine transferred 510,002 shares in UR Limited to Lecture Kit and Cyber Strategy transferred 1,000 shares in Lecture Kit to Pine.  Apart from the usual formalities, Pine and Lecture Kit signed a memorandum supplemental to the Sale and Purchase Agreement (“Supplemental Memorandum”) confirming the correct amount to be paid under the convertible note annexed to the Option Agreement was HK$20.65 million and appointing Messrs Andrew Law & Franki Ho (“Custodian”) as custodian of Lecture Kit’s 51% of the shares of and in UR Limited.  On the same day, Pine and Lecture Kit also signed a memorandum pursuant to the Option Agreement appointing Messrs Andrew Law & Franki Ho as custodian of the convertible note to be executed in escrow by Lecture Kit.

74.  Pursuant to the irrevocable option granted by Lecture Kit under clause 3 of the Option Agreement, Pine called upon Lecture Kit and Lecture Kit executed the convertible note in undated form in favour of Pine.  On 6 June 2003, Edward Woo’s solicitors sent to the Custodian (a) the undated convertible note executed in escrow, (b) the stamped instrument of transfer and bought and sold notes for the transfer of 510,002 shares to Lecture Kit and (c) the original share certificate issued to Lecture Kit pursuant to the Lecture Kit Shareholders’ Agreement.  Copies of the relevant documents were also sent to Lecture Kit on the same day.

75.  On 13 June 2003, Gary Ho replaced Edward Woo as the legal representative and chairman of UREDY.

Andrew Law’s demand for compensation

76.  In the third party proceedings, Gary Ho made the allegation that Andrew Law demanded a six-digit compensation from him or AIR Holdings for being removed from the audit committee of AIR Holdings and as a reward for not giving evidence for Pine.  That issue is irrelevant in the main action or the issue of indemnity costs in the third party proceedings.  The issue was vigorously disputed between Andrew Law and Gary Ho for its impact on their credibility and Andrew Law’s honesty.  

77.  The surrounding circumstances in which the alleged demand was made were as follows.  The trading of the shares in AIR Holdings was suspended on 31 March 2005.  By about that time, the relation between Edward Woo and Gary Ho had turned sour.  The two consultancy agreements entered into on 29 April 2004 were obviously the immediate cause of the breakdown of their relationship.  Under the two consultancy agreements, consultancy fees in the tune of RMB 45 millions a year, which represented almost the entire asset of UREDY, were to be siphoned out to other members of the AIR group.  On 1 August 2005, Edward Woo launched the winding up action against UR Limited.  On the same day, Andrew Law offered his service as a mediator to Gary Ho.  The mediation was unsuccessful.  Andrew Law also entertained some doubts about the conduct of Gary Ho and AIR Holdings as a whole.  At about the same time, in the discharge of his duty as an independent non-executive director, he was enquiring about the two consultancy agreements.  He was removed from his office as a member of the audit committee by the board of directors of AIR Holdings with effect from 5 September 2005, while he was on a trip to California.  The reason for Andrew Law’s removal as given by AIR Holdings in its public announcement was Andrew Law’s involvement in the mediation.  Andrew Law’s access to the company documents was also obstructed.  He was not provided with copies of the company documents as it used to be but was required to inspect them at the company’s office.  Since 22 September 2005, the Stock Exchange was enquiring into the affairs of AIR Holdings including the two consultancy agreements.  Eventually on 16 December 2005, the Stock Exchange requested AIR Holdings to submit a resumption proposal.  It also referred to AIR Holdings’ announcement of Andrew Law’s removal from the audit committee and requested, through AIR Holdings, a confirmation from Andrew Law whether there were any disagreements between him and AIR Holdings.  Then on 11 January 2006, Gary Ho gave a copy of that letter to Andrew Law and sought his confirmation.  Andrew Law took great exception to the delay and sent an e-mail to Gary Ho on the following day complaining of the late delivery of the letter to him, his removal from the audit committee, his concern about the affairs of AIR Holdings and concluded the e-mail saying that he had grave difficulty to provide the confirmation unless his concerns were proved to be misconceived.  On 14 January 2006, Andrew Law also wrote to the Stock Exchange repeating the above concerns and said that upon receipt of clarifications of those concerns he would effect his confirmation.

78.  It was under the above circumstances that a meeting at the sauna parlour took place around Chinese New Year.  Gary Ho’s account of what happened at the sauna parlour is as follows.  He proposed to have discussion with Andrew Law and Andrew Law suggested to discuss at the sauna parlour.  While they were at the pool, Andrew Law made the naked demand saying: 

“To be frank, brother.  I am not capable of offending Woo Pak Hay.  For you people, I can still offend.”

After they moved to the massage room, Andrew Law said to him:

“In order that you people could resume trading, the price you have to pay me would be high, six digit figure.  Otherwise you could not think about it.” 

Then after the meeting, Gary Ho reported the incident to the board of directors and to the Stock Exchange.  He produced a copy of the minutes of a paper meeting of the board and a letter to the Stock Exchange in support of his evidence. 

79.  Andrew Law remembered that he had a meeting with Gary Ho in the sauna parlour at around that time.  He said that the pool is an open pool with people around.  After spending some time in the pool, they went to the massage room where they were alone for one to two minutes before the masseuse came in.  He said the meeting was uneventful.  He discussed about the disputes generally and suggested to Gary Ho it was very ugly to remove him from the audit committee so as to conceal information from him.  He bluntly put to Gary Ho that AIR Holdings had been running out of money and the executive directors were basically deceiving money from Edward Woo.  He advised Gary Ho not to get involved in crime and protracted litigation and suggested Gary Ho to take advantage of the new year atmosphere and resume mediation with Edward Woo.

80.  Gary Ho’s allegation was not pleaded in the AD&CC nor was it mentioned in his affirmations or witness statement.  It was volunteered by him during cross-examination by Andrew Law on matters which would not have provoked such evidence even if indeed the demand had been made, namely, the consultancy agreements and the cause of Andrew Law’s removal from the audit committee.  Gary Ho was well prepared to proffer the evidence.  He was armed with a copy of the letter to the Stock Exchange.  That letter and the minutes of meeting of the board of directors in which he allegedly reported the demand were never disclosed to Andrew Law.  Gary Ho said that he had informed his solicitors about the demand some time ago, but he could not even be specific as to when.  He was clearly evasive.  He said he had given a copy of the letter to the Stock Exchange to his solicitors a few months ago.  He explained the reason for the non-disclosure of the demand in his witness statements was that he wanted to give Andrew Law some “leeway” and he did not want to go to the extreme.  The way he proffered the evidence uninvited or unprovoked is inconsistent with his explanation of not going to the extreme and leaving the matter with his legal adviser.  He was asked if the board of directors had considered reporting Andrew Law’s demand to the police or the ICAC.  He replied that the board had taken advice from the legal adviser and decided to inform the Stock Exchange as the commercial decision then was to resume trading of the shares of AIR Holdings.  That was also an evasive answer.  To resume share trading and reporting a crime are two different matters.  Besides, the total lack of action from the board is inconsistent with the truth of Gary Ho’s allegation. 

81.  On the other hand, Andrew Law submits that AIR Holdings was short of funds.  This is supported by the annual report of the company.  It could not afford to pay him such a huge sum of compensation.  It is inconceivable that any board would have given in to such a demand.  Besides, Andrew Law’s attitude as shown in his subsequent letters to the Stock Exchange was not aggressive and inconsistent with an intention to extort money from AIR Holdings.  Mr Li criticises Andrew Law for not having put his case about what happened in the sauna parlour to Gary Ho during cross-examination.  I do not consider that fatal to Andrew Law’s credibility.  Gary Ho’s allegation was such an ambush, which might have unsaddled Andrew Law. 

82.  Mr Li seeks to rely on the letter to the Stock Exchange to boost the veracity of Gary Ho’s account.  It could not have been a recent creation.  I have no doubt that Gary Ho had written to the Stock Exchange about Andrew Law’s demand, but that letter had not been copied to Andrew Law.  It was a self-serving letter obviously for the purpose of smearing Andrew Law so as to put the Stock Exchange off its demand for a confirmation letter from Andrew Law.  Gary Ho never gave the clarification sought by Andrew Law as a condition for issuing the confirmation letter.  Gary Ho knew he could not give the clarification.  The sudden change of AIR Holdings’ practice of providing documents to its directors speaks for itself.  I do not think the allegation about Andrew Law’s demand in that letter was true.  The letter is not a recent creation, but a valiant contemporaneous concoction created to get AIR Holdings out of the impasse.  It was sanctioned by the board of directors, probably with knowledge of the falsity.  I find Gary Ho’s evidence exaggerated and untrue.  This episode precisely demonstrates what this brilliant CEO is capable of.  Gary Ho is a man of no credibility. 

The three factual issues

(1)  Whether CIDST had occupied the Campus prior to 12 April 2003

83.  The Defendants’ pleaded case is that CIDST acquired certain rights, including the right to occupy the Campus, under the December Agreement.  At trial, the evidence was even advanced that Foreign School had never vacated from the Campus since they entered into possession on 10 October 2002 pursuant to the September Agreement and that their possession was continued by CIDST which was essentially the same entity.  Whatever is their case on CIDST’s occupation, the Defendants bear the burden of proof.  They rely primarily on the evidence of Gary Ho and Ye, Patrick Lee’s statement in a declaration made to the provisional liquidator of UR Limited and a letter signed by Patrick Lee to Gary Ho.  In addition, they also rely on the fact that the September Agreement and the September Lease had never been formally cancelled.  Edward Woo did not dispute that the Campus had been formally handed over to Foreign School on 10 October 2002.  But he said that there was hardly anyone from Foreign School who occupied the Campus.  He further said that when Foreign School could not come up with the money to pay, Yang personally went to see him to apologise and then Foreign School left the Campus.   

84.  Gary Ho’s evidence is that in June 2003, he was told by Wei Ren that their students had entered the Campus and that CIDST would be responsible for the utility charges.  He enquired from Mr Miao Liangtien (“Miao”) who was a supervisor of UREDY.  Miao told him that CIDST had been in occupation since October 2002 and that there were a hundred odd or a few hundred students in the Campus.  Gary Ho confronted Edward Woo.  Edward Woo told him not to worry and that he would be responsible for any damages.  Edward Woo suggested him to cooperate with CIDST in the tripartite joint venture which was being negotiated at the time.  Then Gary Ho attempted to negotiate with CIDST for their vacating the Campus.  He said that his counterparts in CIDST carried guns, filled him and his colleagues with alcohol and assaulted them.  His advisers advised him to regularise the illegal occupation by entering into the joint venture with CIDST.  As a result, he entered into the Cooperation Agreement with CIDST on 2 July 2003.  A joint institute was operated on the Campus.  But, subsequently the Cooperation Agreement broke down.  Then towards the end of 2004, when UREDY was trying to enforce an arbitration award to repossess the Campus from CIDST, he was told by Ye that there was once an “unholy alliance” among Edward Woo, Andrew Law and herself not to disclose to him during their December 2002 meetings that Edward Woo and CIDST had entered into the December Agreement and that CIDST had already occupied the Campus.  Ye also told him that CIDST had advanced RMB 2 million to UREDY back in December 2002.

85.  Gary Ho’s evidence of what Miao and Wei Ren told him are hearsay as neither of them was called to give evidence.  In addition, it is also contradicted by Wei Ren’s own written statement that CIDST had never occupied the Campus except for providing some security guards there at the request of Edward Woo.  All those evidence are hearsay.  I give no weight to them.  The rest of his evidence on this issue is based on what he was told by Ye.  Thus, it stands or falls with Ye’s evidence.

86.  Ye was the deputy principal of CIDST.  Her evidence is that in about October 2002 Wei Ren negotiated with Edward Woo for a joint venture and CIDST immediately occupied the Campus upon signing the December Agreement on 2 December 2002.  Pausing here, it is immediately apparent that Ye was not very serious in her evidence.  It was not until some time after 30 October 2002 when Foreign School was unable to come up with the first payment of RMB 20 million under the September Agreement that Wei Ren entered the scene.  It is remarkable that as the deputy principal of CIDST she could have got this wrong and she did not even verify what she said in her witness statement before coming to court to give evidence.  Ye went on with her evidence that CIDST was also unable to make the first payment of RMB 10 million by 17 December 2002.  Then she said that UR Limited was in financial difficulties and requested a loan of RMB 2 million from CIDST on 27 December 2002.  She went on with her evidence that she was sent by Wei Ren to come to Hong Kong to meet with AIR Holdings in December 2002 to introduce CIDST to AIR Holdings and to discuss about the financial difficulties of UR Limited.  Upon cross-examination, she admitted that she had no personal knowledge about the financial difficulties of UR Limited and that she was only told about that by Wei Ren in the context of the request for loan made by Edward Woo.  While there is no dispute that some excuse, including possibly cash flow problem of UR Limited, might have been offered by Edward Woo when he requested the loan, the readiness she accepted that as true and, more importantly, the very adamant attitude with which she insisted that the financial difficulties of UR Limited was the subject matter of her discussion at the meeting with AIR Holdings is very worrying.  Obviously, the financial problem was that of UR Holdings, or of CIDST behind it, for not being able to come up with the RMB 10 million which necessitated discussion about a joint venture with AIR Holdings and not financial problem of UR Limited.  Her evidence is confusing.  As a former very senior member of CIDST, the manner in which she gave evidence in matters relating to CIDST, which she was reasonably expected to have knowledge of, was hopelessly irresponsible.

87.  Then Ye talked about the “unholy alliance”.  She said that on 17 December 2002, she first met Edward Woo and Andrew Law before she was introduced to AIR Holdings.  She said that Edward Woo told her not to tell AIR Holdings about the December Agreement and about CIDST’s occupation of the Campus and Andrew Law gave support to that request.  On the objective fact, that meeting and the series of subsequent meetings were about a tripartite joint venture among Edward Woo, AIR Holdings and CIDST and not sale of the Campus or of the shares in UR Limited or UREDY to AIR Holdings.  Whether CIDST had entered into and defaulted on the December Agreement was of no interest to the parties at the meeting.  Whether the Campus was occupied was also immaterial.  If CIDST had indeed occupied the Campus and started some kind of a school, it would have been an asset for the intended joint venture which was being discussed.  Such evidence is inherently incredible, to say the least.

88.  Ye also said that there were on-going construction works in the Campus when she visited it in March 2003.  She saw holes and piling work.  Then in June 2003, she saw a new building erected on the Campus.  She did not know if the construction works were illegal or not but she was told by Wei Ren that the construction works were carried out by CIDST.  I find her evidence inherently incredible.  The application for the Campus expansion plan was only made on 13 March 2003.  While it was possible for CIDST to commence construction works without authority, it is highly unlikely that it would have incurred the construction costs without having first acquired the right to occupy the Campus, whether by way of purchase of the shares of UR Limited or UREDY or some form of a joint venture agreement with Edward Woo or a lease.  Ye’s evidence carried no conviction at all.  She was not an ordinary witness, but was herself the deputy principal of CIDST, the second person in command.  Yet she appeared to be wholly unconcerned seeing buildings being erected on the Campus which she said was occupied by CIDST as early as October 2002.  She appeared to have no knowledge about CIDST’s plan to build on the Campus.  She did not know if approval had been obtained from the relevant authority for the construction works.  I give no weight to this part of her evidence.

89.  Overall, Ye did not impress me as a truthful or sincere witness.  Her evidence was superficial.  She was evasive.  Whenever she had difficulties under cross-examination, she answered by asking counsel to ask Wei Ren as she was only instructed by Wei Ren to discuss about limited and specific matters.  Eventually, she even annoyingly remarked that she was not supposed to be asked of those questions.  I give no weight to her evidence. Insofar as Gary Ho’s evidence about occupation of the Campus and about construction works in the Campus being carried out by CIDST prior to June 2003 was based on Ye’s evidence, I reject them as groundless.

90.  I now return to Gary Ho’s evidence.  He said as a result of what Ye had told him, he confronted Edward Woo and Edward Woo promised to pay damages.  That allegation was denied by Edward Woo.  Having rejected Ye’s evidence, I can also reject Gary Ho’s evidence about the confrontation with Edward Woo.  Besides, Gary Ho’s evidence is also not credible in another respect.  He said that on the same occasion Ye told him about CIDST’s loan of RMB 2 million to UREDY.  He confronted Edward Woo and then Edward Woo gave him a detailed explanation.  However, the incontrovertible fact is that this loan had been fully described in the two Supplemental Agreements dated 17 and 18 July 2003 and the draft balance sheets appended thereto.  Though the loan was recorded as receivable from CIDST in the amount of HK$1,887,000, there could be no mistake that it was a loan repayable to CIDST as it was put under the heading of account payable.  The amount was RMB 2 million at the then prevailing rate of exchange.  Both Supplemental Agreements were signed by Gary Ho on behalf of Lecture Kit.  This shows how ready Gary Ho was in smearing Edward Woo to build the Defendants’ case.  I rejectGary Ho’s evidence.

91.  Mr Li refers to Patrick Lee’s statutory declaration dated 24 June 2006 to the provisional liquidator of UR Limited in which Patrick Lee said:

“During the negotiation of the April 2003 contract, CIDST was already using the site and had placed security guards on the site … CIDST could not be vacated from the school at that time.”

On the face, this statement supports Gary Ho’s evidence of occupation by CIDST.  However, Patrick Lee gave an affirmation about a month later to the Plaintiff’s solicitors to the effect that the above statement was based on what he was told by Gary Ho and he had no personal knowledge of the fact stated therein.  Mr Li suggests that it was strange that the affirmation was produced by the Plaintiff’s solicitors instead of being filed in the form of a supplemental statutory declaration to the provisional liquidator.  He submits that Patrick Lee’s change of evidence must be looked at sceptically and should not be accepted absent of any clear and cogent explanation in support of the alleged mistake made in the statutory declaration.  Patrick Lee was called by the Plaintiff.  He adhered to his affirmation.  His evidence is that he never participated in the negotiation of the four agreements and the Cooperation Agreement.  There is nothing to suggest otherwise, not even from Gary Ho’s evidence.  Thus, Patrick Lee could not have first hand information about occupation of the Campus by CIDST.  Occupation of the Campus was not a material issue at the time of preparation of the statutory declaration.  It is not surprising that Patrick Lee would have taken what he was told by Gary Ho for granted.  Furthermore, his evidence is that he first visited the Campus as part of the due diligence sometime after the due diligence period, i.e. after 5 May 2003.  On that occasion, except for a few security guards, he saw no students or staff of CIDST on the Campus.  This evidence was not contradicted by the Defendants.  In the circumstances, I find Patrick Lee’s explanation cogent and acceptable.

92.  Mr Li tries to explain Patrick Lee’s evidence on the basis that because of the SARS outbreak all schools were closed and hence Patrick Lee could find no students or teachers in the Campus on his first visit.  Unfortunately, there is no evidence of how China and in particular Yanjiao handled the SARS outbreak.  There is no dispute that all those events occurred during the SARS period.  There is some evidence that during the due diligence period Edward Woo requested more time to provide certain documents to Cyber Strategy and Lecture Kit because of the SARS outbreak.  There is also some evidence from Gary Ho that people going in or out of Yanjiao had to undergo some sterilisation process.  But in my view, that is not enough to explain Patrick Lee’s finding of no students or teachers in the Campus.  Again, Patrick Lee has not been cross-examined on whether the SARS outbreak was the reason for his finding no students in the Campus.  This is such an important question for cross-examination in order to adduce the much needed evidence to negative Patrick Lee’s evidence that it could not have been missed during the two half-days’ very thorough cross-examination by Miss Gwilt.  On the contrary, it appears from the tenor of his evidence that the SARS outbreak was not a problem in the Campus.  His spontaneous reaction under cross-examination was that he visited the Campus during May or June and he should expect seeing students there if the Campus was occupied but he saw none.  I am bound to reject Mr Li’s explanation. 

93.  Mr Li refers me to a letter dated 25 June 2003 which, he submits, points to the other direction.  That letter was typed in simplified Chinese characters and was found among documents in UREDY.  It was not signed by Patrick Lee though his name appeared as the writer of the letter.  In that letter Patrick Lee wrote to Gary Ho suggesting to retrieve all the keys of those premises not occupied by CIDST.  It appears from that letter about half of the keys to the premises in the Campus were still in the custody of CIDST.  Mr Li submits that it is implicit from the letter that CIDST had been in occupation of the Campus before the Cooperation Agreement.  Indeed it is.  Unfortunately, no question had been asked of Patrick Lee by either parties in respect of the letter.  But on a careful consideration of the totality of the evidence, that letter is damaging to the Defendants’ case but supportive of the Plaintiff’s case.  Patrick Lee had been to the Campus on two to three occasions.  That letter could not have been issued immediately or shortly after his first visit.  There could be no doubt that at his first visit, which was already some time after 5 May 2003, the Campus was not occupied by CIDST.  If in fact the Campus became occupied after 5 May 2003, it could have nothing to do with Edward Woo or Pine.  Since completion of the four agreements on 12 May 2003, Gary Ho took over the negotiations with CIDST about a new proposal to operate a joint institute on the Campus.  The only inference is that Gary Ho had in the course of his many negotiations between then and 25 June 2003 allowed CIDST occupation of the Campus prior to the entry of the Cooperation Agreement.

94.  Mr Li refers to UREDY’s application to the Investment Promotion Bureau of Yanjiao Development Zone Authority (燕郊經濟技術開發區招商局) for phase two of its Campus extension work on 13 March 2003 pursuant to Wei Ren’s request.  He submits that that is evidence that CIDST had been in occupation of the Campus before that date.  That is some circumstantial evidence.  According to Edward Woo, prior to signing the December Agreement Wei Ren suggested building some structures on the Campus.  Edward Woo saw no real objection as UREDY would not be bound to carry out the extension work even if approved.  Such application would take a long time to process.  Indeed according to Gary Ho, it was not until the end of April 2004 that the application was approved.  The joint venture was being actively negotiated at the time.  If there was a real likelihood of the joint venture materialising, it was not an unreasonable course for Edward Woo to adopt.  I accept Edward Woo’s explanation.

95.  The only outstanding evidence against the Plaintiff is CIDST’s loan of RMB 2 million to Edward Woo or UREDY and provision of security guards to the Campus.  It is perhaps a little difficult to explain why CIDST would have done so if it had not taken possession of the Campus or had no interest in it whatever.  Both parties take the view that though Foreign School and CIDST are different entities, they are closely related.  Foreign School is a second tier school of CIDST.  Foreign School, CIDST and their parent bodies have all shown interest in the Campus and at various stages made offers to purchase the Campus or the shares in UR Limited.  In the totality of the evidence, I have to accept Edward Woo’s evidence that in the circumstances Wei Ren was willing to assume in part Foreign School’s liability for breach of agreement by providing free security guards and was persuaded into providing the loan in mitigation for CIDST’s own breach of the December Agreement.

96.  Quite apart from the Defendants’ failure in proving CIDST’s occupation of and carrying out construction works in the Campus, there is evidence from the Plaintiff suggesting the contrary.  In April 2003, Guan was negotiating with the Beijing Humanity University (北京人文大學) for the lease of the Campus.  Edward Woo faxed a copy of the draft tenancy agreement to Gary Ho on 15 April 2003.  Gary Ho, Patrick Lee and another staff member of AIR group visited Beijing to have lunch and then a meeting with the president of Beijing Humanity University, presumably to discuss the lease of the Campus.  Guan or Edward Woo would not have engaged in the negotiation with Beijing Humanity University, if CIDST was in possession of the Campus and was carrying out construction works therein.

97.  Furthermore, on 8 July 2003, UREDY wrote to Patrick Lee reporting the preparation work carried out by CIDST in taking over the Campus.  The preparation work included establishing water supply system from the waterworks company of Yanjiao, taking over two student dormitory blocks, purchasing students’ necessities for use in the dormitories, testing the water boiler system for three dormitory blocks.  The letter also reported that the renovation works of the canteen were completed.  Those works clearly showed that the Campus could not have been ready for accommodation before July 2003.  Gary Ho’s evidence of occupation by CIDST as early as October or December 2002 is clearly a concoction.  It is interesting to note that this report was made on 8 July 2003, shortly after execution of the Cooperation Agreement and two weeks before the first meeting of the management committee of the joint institute described below.  Obviously, well before the signing of the Cooperation Agreement, UREDY under the control of Gary Ho had permitted CIDST to enter and carry out certain preparation works in anticipation of signing of the Cooperation Agreement.

98.  Finally, there is incontrovertible evidence that after entry into the Cooperation Agreement, UREDY and CIDST conducted a number of meetings of the management committee of the joint institute.  The minutes of the first meeting of the management committee attended by Gary Ho, Edward Woo’s proxy and Wei Ren on 22 July 2003 showed that the parties were discussing about admission of students for the first year.  There was nothing to suggest a hundred odd or a few hundred students were already in the Campus as alleged by Gary Ho.  Then at the second meeting attended by Gary Ho, Edward Woo and Wei Ren on 21 August 2003, it was agreed that details of the handing over of the Campus would be left to be arranged between Zhang Tianlin on behalf of CIDST and Gary Ho, Patrick Lee and Yiu Kwong Yick on behalf of UREDY.  There is nothing in the minutes of that meeting or the earlier meeting on 22 July 2003 suggesting that CIDST had already been in occupation of the Campus.

99.  Even on his own evidence, Gary Ho’s reaction was wholly inconsistent his having been informed about the “unholy alliance”.  Andrew Law’s participation in that “unholy alliance” would have been a very serious breach of fiduciary as a director.  Yet, Gary Ho did not inform the board of directors of AIR Holdings to take any action against Andrew Law.  He did not even confront Andrew Law himself.  As against Pine and Edward Woo, one would expect Gary Ho to take prompt steps to protect the interest of Cyber Strategy and Lecture Kit by making formal complaint to them and demanding immediate rescission of the four agreements.  Internally, one would expect Gary Ho to inform the board of directors of AIR Holdings, as well as Patrick Lee as director of Cyber Strategy, Lecture Kit and UR Limited, about the illegal occupation by CIDST, the breach committed by Pine and the right of Cyber Strategy and Lecture Kit to rescind the four agreements.  One would also expect Gary Ho to have caused AIR Holdings to make a public announcement about CIDST’s occupation and the serious ramifications on UREDY, the joint venture with Pine and AIR Holdings.  None of those steps had been taken.

100.  Even when the RMB 2 million loan, the application for Campus extension plan and Patrick Lee’s letter of 25 June 2003 are considered together, I am unable to find in the totality of the evidence that CIDST had been in occupation before the signing of the four agreements on 12 April 2003.  Gary Ho’s evidence that he first learned about the occupation of the Campus from Wei Ren in June 2003 and that he was forced to enter into the Cooperation Agreement to regularise the illegal occupation is clearly a pack of lie.  His evidence that he and his colleagues were intoxicated by Wei Ren, assaulted and threatened is inconsistent with his evidence that he did not take action against CIDST because Wei Ren behaved reasonably.  His evidence that officers of CIDST carried guns and were difficult to negotiate is also inconsistent with his own evidence that Wei Ren was a reasonable man and the non-controversial evidence that CIDST is a commercial entity under the China Far East International Trading Company Limited.  Alcohol and firearm diplomacy is not unheard of in China.  But on 10 November 2003, UREDY exercised its right to terminate the Cooperation Agreement with CIDST and commenced arbitration proceedings against CIDST as soon as it failed to obtain a bank loan within four months of the execution of the agreement.  UREDY also promptly rejected CIDST’s offer to purchase the Campus.  Then CDTC struck a deal with UREDY.  All these suggest CIDST was not as intimidating as Gary Ho wished me to believe.  I think Gary Ho was taking advantage of the military reminiscence of CIDST to exaggerate a concocted case.  I find him a thoroughly incredible, insincere and unreliable witness.  I reject Gary Ho’s evidence. 

101.  I accept Edward Woo’s evidence.  I find that CIDST had not occupied the Campus prior to 12 April 2003 except to the extent of providing gratuitous security guard service to the Campus.  CIDST guarding the Campus was not occupation on behalf of CIDST, but on behalf of UREDY.  CIDST only occupied the Campus after Lecture Kit or Gary Ho had control of UREDY.  Whether CIDST took possession of the Campus on 2 July 2003 pursuant to the Cooperation Agreement or earlier in anticipation of that agreement is immaterial and had nothing to do with the Plaintiff.  I also find that CIDST had not carried out construction works in the Campus before 12 April 2003.

(2)       Whether UR Limited owed Edward Woo director’s loan in excess of the requisite amount

102.  There is no dispute that a week before the execution of the four agreements, Edward Woo came up with the idea that Pine should deliver UR Limited as a company with “no assets and no liabilities”.  By that the parties understood to mean no assets except the Campus and no liabilities.  Pursuant to that understanding, Pine and Lecture Kit entered into a Supplemental Agreement dated 17 July 2003 agreeing that adjustments would be made to the accounts of UR Limited to reflect the fact that as at 12 April 2003 UR Limited had no assets and no liabilities.  Some adjustments in the accounts of UR Limited were made.  

103.  According to Patrick Lee, after Lecture Kit took over UR Limited on 12 April 2003, he was still preparing the consolidated financial statement of UR Limited with UREDY.  He had difficulties in finding or locating certain fixed assets in UREDY.  In order to balance the accounts, he wrote off the unlocated fixed assets against the loan due to Edward Woo.  Another purpose of the exercise was to enable UR Limited to be delivered as a company with “no assets and no liabilities”.  The amount thus written off was about HK$13 million.  He gave a copy of the consolidated financial statement to Edward Woo.  Within minutes, Edward Woo called him back and complained that the amount of loan due to him as recorded in the consolidated financial statement was incorrect.  Patrick Lee explained the situation to Edward Woo and assured him that the consolidated financial statement was only expressing the balance in the current account with UR Limited and did not affect the actual amount of outstanding loan due to him.  Subsequently, a meeting was held among Edward Woo, Gary Ho, Patrick Lee, Raymond Lo (a non-executive director), Frank Ng (the in-house counsel of AIR group), Gabriel Chan (the financial manager of AIR group) and his assistant.  At the meeting, Patrick Lee explained how the consolidated financial statement was prepared and that part of the loan due to Edward Woo had been written off.  Gary Ho assured Edward Woo that the write off had no effect on the total amount of loan actually lent to UR Limited which was in excess of HK$53.5 million.  Everybody at the meeting agreed that the accounting procedures did not result in any breach of Edward Woo’s obligation to write off his director’s loan of not less than HK53.5 million. 

104.  Edward Woo did not mention anything about that meeting, but he did mention there was an agreement that the write off did not affect the actual amount of his loan to UR Limited he waived.  I do not consider Edward Woo’s failure to mention that meeting affect my assessment of the credibility of Patrick Lee’s evidence because to Edward Woo that meeting was only a small incident in the whole series of events relating to the present action and it is not surprising for Edward Woo to have forgotten about it.  On the other hand, Patrick Lee was the chief financial controller of AIR Holdings.  He personally prepared the consolidated financial statement of UR Limited with UREDY.  He must have a deeper impression of his preparation of the consolidated financial statement and that meeting.  I accept his evidence.  The meeting was held between Edward Woo and the top management of AIR Holdings and Lecture Kit, including the chief financial controller and the in-house counsel.  I find that there was consensus that the reduction of the amount of Edward Woo’s loan to UR Limited as recorded on the consolidated financial statement of UR Limited did not affect the amount of the actual loan.

105.  Then PricewaterhouseCoopers entered into the scene about a year later.  They were appointed auditors of UR Limited.  As part of their auditing procedures, they requested confirmations from the creditors of UR Limited of their respective loans.  In this connection, Patrick Lee wrote to Edward Woo on 22 March 2004 requesting confirmation of the reduced amount of his loan to UR Limited.  He wrote as follows:

“Requested by our Auditors, PricewaterhouseCoopers, which is part of their normal audit procedures, enclosed is the Audit Confirmation for your current account due by Union Resources (Educational Development) Limited as at 31 December 2003.

  Please note that the amount of this current account should include the total lumpsum of your loans to the Company (which should be more than the minimum agreed in the Convertible Note Agreement) and a number of accounting adjustments concerning certain pre-acquisition expenses.  Therefore, this amount would not in any way affect the Convertible Note issued by Lecture Kit on February 2004.”

This memorandum was copied to Gary Ho.

106.  Edward Woo signed on the pro-forma confirming the amount of loan due from UR Limited to him as at 31 December 2003 was HK$43,368,000.  He forwarded the audit confirmation to Patrick Lee with the following covering note dated 23 March 2004:

“With reference to your Memo of Mar 22, I enclose herewith the confirmation as asked.  I would place on record that as agreed, the figure of HK$43,368,000 is not relevant to our transaction. As we all know, the amount of loan far exceeded this amount and even today, I am in the process of settling some expenditure expended for the purpose of the company but which in view of our understanding I have no intention of claiming.”

Edward Woo’s confirmation is now being used by the Defendants as evidence that he failed to waive the requisite amount of loan agreed to be waived under the Option Agreement.

107.  Gary Ho denied having agreed with Edward Woo that a lesser amount of loan be waived for the purpose of the Option Agreement.  That is true.  The gist of Edward Woo’s and Patrick Lee’s evidence is not that the parties agreed to a waiver of a lesser amount, but that the parties agreed that the agreed amount of loan of more than HK$53.5 million had been waived but for accounting purposes Edward Woo’s loan was to be recorded as HK$43,368,000 instead.  Gary Ho went on to say that upon seeing the audit confirmation signed by Edward Woo, he raised the matter with Edward Woo over the phone and told him that the amount of loan he waived was not enough.  He said that Edward Woo gave him a confusing explanation about the current account which he did not understand and then he passed the matter to the in-house counsel to follow up.  As for Patrick Lee’s memorandum attached to the pro-forma sent to Edward Woo, Gary Ho said that he had never seen it until two months before this trial.  He insisted that the memorandum was an internal correspondence which should have been sent by e-mail instead of a hard copy.  He doubted the authenticity of the e-mail.  He also insisted that Patrick Lee had no authority to issue that memorandum.

108.  Gary Ho’s evidence is a demonstration of his ingenuity and dishonesty.  Though Patrick Lee’s memorandum bore the words “Internal Memorandum”, it was a memorandum to UR Limited’s creditor, inviting him to respond to UR Limited’s auditor’s request for audit confirmation.  It was definitely not an internal memorandum.  The request was for a confirmation in a hard copy.  It could not have been sent by e-mail.  Gary Ho’s allegation of Patrick Lee’s lack of authority to send the memorandum is bizarre.  Patrick Lee was the chief financial controller of the AIR group, including UR Limited.  He was requesting for audit confirmation of the amount of loan due from creditors of UR Limited.  He clearly had actual and ostensible authority to do so.  If by lack of authority, Gary Ho meant Patrick Lee’s lack of authority to reduce the amount of loan to be waived under the Option Agreement, Gary Ho was trying to mislead the Court.  A man of his intelligence would not have so misunderstood or misinterpreted the memorandum.  By that memorandum, Patrick Lee was not re-writing the Option Agreement, but confirming the effect of the audit confirmation which Edward Woo was asked to sign.  Edward Woo’s obligation under the Option Agreement was not reduced by a single cent.

109.  Gary Ho’s evidence about his telephone conversation with Edward Woo is manifestly incredible.  The convertible note had been issued by Lecture Kit and released to Pine on 1 February 2004, less than two months ago.  Lecture Kit took no steps to recall the convertible note or to complain to Pine that Edward Woo had not fulfilled his obligation.  Instead, a year later, Gary Ho wrote to Pine requesting for extension of time to pay under the convertible note.  If there is any truth Gary Ho’s evidence, there is no reason why the in-house counsel would not have taken any steps to have the convertible note set aside and Gary Ho himself would not have asked for extension of time to pay.  This evidence of his is another example of how ready he was to shovel responsibility to his in-house counsel to avoid further cross-examination.

110.  Not until this litigation started, there was no complaint by Lecture Kit about the amount of loan waived or the release of the convertible note by the Custodian to Edward Woo.  On the contrary, in the 2003 Annual Report of AIR Holdings, there were full descriptions of the issue of the convertible note by Lecture Kit, Pine’s right to require repayment of $20.65 million upon the maturity of the convertible note on 1 February 2006 and Lecture Kit’s obligation to pay interest, amounting to $1,049,000, to Pine.  There was not a single word complaining about inadequacy of the amount of director’s loan waived by Edward Woo on 12 April 2003.  This is highly material as, by then, Gary Ho already knew and accepted that the amount of loan which had been waived by Edward Woo was stated to be $43,368,000 in the 2003 Annual Report.   

111.  All these evidence suggest that Gary Ho knew full well that some of Edward Woo’s loan to UR Limited was written off in order to balance the accounts of UR Limited so that it could be delivered as a company with no assets and no liabilities.  He knew full well that the audit confirmation was for audit purpose only.  Yet he denied all these facts and to raise a defence based on the audit confirmation.  He even advanced the incredible argument that Patrick Lee had no authority to issue the memorandum and was re-writing the Option Agreement.  I reject his evidence and accept Edward Woo’s and Patrick Lee’s.  Gary Ho’s evidence is an insult to common sense.  It shows what an intelligent but utterly dishonest and sly person he is.

112.  According to the unqualified audited accounts of UR Limited for the year ending 31 December 2002, it owed Edward Woo HK$55,521,881.  I give full weight to this statement as it is a statement from the unqualified audited accounts.  According to the auditors’ analysis on the audited accounts, all money remitted by Edward Woo to UREDY were recorded in the books of UR Limited and they matched with those of UREDY.  According to the computation of loan from director as at 12 April 2003 signed by Gary Ho, the amount of loan due to Edward Woo was HK$55,521,881.54 as at 31 May 2003.  Edward Woo also claimed to have discharged other debts on behalf of UR Limited.  On the above evidence, I am satisfied that the loan due to Edward Woo as at 12 April 2003 was in excess of HK$53,547,843 as required under the Option Agreement.  On 12 April 2003, Edward Woo signed a letter of release confirming his agreement to release and discharge all loans and liabilities due and owing by UR Limited to him which was not less than HK$53,547,843.  On 1 February 2004, Lecture Kit confirmed that the loan had been waived.  In the circumstances, I am satisfied that Edward Woo had waived his director’s loan in excess of HK$53,547,843 as required under the Option Agreement.  I dismiss Gary Ho’s evidence based on the audit confirmation that a lesser loan was waived as wholly unmeritorious.

(3)  Whether the Campus was mortgageable under PRC law

113.  Mr Li argues that the Campus was not mortgageable under PRC law.  His submission is on two fronts.  Firstly, he takes the evidential point that there is no evidence of any valid and effective mortgage of the Campus having ever been made and that to the contrary there is evidence from the bank that the Campus could not be mortgaged.  Secondly, he submits as a matter of PRC law, as there were educational facilities built on the Campus, the Campus could not be mortgaged under PRC law.

114.  Mr Li’s evidential point is built on the dispute between UREDY and CIDST over the Cooperation Agreement.  Under clause 4 of this agreement, CIDST would invest RMB 30 million and UREDY would invest RMB 32.5 million.  CIDST and UREDY would respectively hold 52% and 48% interest in the joint venture.  CIDST’s investment would be by way of cash of RMB 13 million and intangible asset of RMB 17 million, which essentially were the programme, the human resources, the know-how in operating the joint institute and the students.  As UREDY had contributed the Campus which was valued at RMB 65 million, UREDY would be entitled to be paid RMB 32.5 million from the joint venture.  Under clause 6, CIDST and UREDY would try their best endeavour to cooperate in applying for a bank loan of not less than RMB 48 million by mortgaging the Campus.  The proceeds from the mortgage would be used to pay UREDY RMB 32.5 million and the balance would be used in the operation of the joint institute.  If the mortgage could not be obtained within four months of the execution of the Cooperation Agreement, UREDY had the right to cancel the agreement.  CIDST entered and built on the Campus and operated the joint institute.  But it did not contribute the cash investment of RMB 13 million.  CIDST’s application for mortgage of the Campus was rejected by the banks.  As a result, UREDY was not paid the RMB 32.5 million.  After four months, UREDY sought to cancel the Cooperation Agreement and repossess the Campus.  The parties sought to resolve their dispute by arbitration.

115.  Gary Ho relied on this incident as evidence that the Campus was not mortgageable.  He referred to a certificate of the Sanhe branch of the Agricultural Bank of China dated 1 March 2004 in which the bank certified that “as the procedures taken by CIDST were incomplete (such as that the mortgaged property did not comply with the bank’s requirement) the mortgage application could not be processed”.  The certificate reads:

「 … 2003年9月份，[CIDST] 向我行申請數額為4000萬元人民幣三年期貸款，由於貸款方 [CIDST] 所提供手續不齊全 (如：抵押擔保物不符合農行規定等)，致使該項貸款業務無法辦理。」

(Words in [  ] are my substitutions for consistent reading.)

Gary Ho argued that the certificate by the bank that the mortgaged property did not comply with the bank’s requirement was evidence that the Campus was not mortgageable.

116.  Mr Poon SC refers to the minutes of the second meeting of the management committee of the joint institute on 21 August 2003.  The meeting was attended by Gary Ho, Edward Woo, Wei Ren and others.  The minutes of the meeting recorded that despite UREDY’s general manager Guan had a number of negotiations with the banks, the mortgage was not approved due to CIDST’s failure to provide financial documents.  It also recorded that Wei Ren’s response was that CIDST found it difficult to provide financial statements for the past three years.  If non-mortgageability of the Campus was the reason for refusal of the mortgage application, Wei Ren would have raised that at the meeting.  Instead the focus of the discussion at the meeting was CIDST’s inability to provide financial statements for the past three years required by the banks.  On this ground alone, Gary Ho’s argument could readily be dismissed.  Mr Li submits that those minutes of the meeting failed to take into account intervening events between then and the certificate of the Agricultural Bank of China of 1 March 2004 and that there was no suggestion that CIDST could not subsequently provide the financial documents.  I do not think that certificate contained any unequivocal allegation that the Campus could not be mortgaged.

117.  As mentioned earlier, UREDY wasted no time in evicting CIDST from the Campus and commenced arbitration proceedings.  In the answer filed by CIDST in the arbitration proceedings, it never complained that the Campus could not be mortgaged.  Indeed, according to the decision of the Beijing Arbitration Committee dated 29 July 2004, both CIDST and UREDY were responsible for failing to obtain the mortgage.  It held that CIDST failed to provide financial documents while UREDY withheld the title document (權屬證書)of the Campus.  The question of mortgageability of the Campus was not in issue.  The evidential issue does not assist the Defendants.  If any inference has to be drawn from the refusal of the mortgage application, the inference is that the Campus could be mortgaged because according to the finding of the Beijing Arbitration Committee three banks had reached an understanding to provide a five-year mortgage renewable for a further term of five years.

118.  I now turn to the legal issue.  Both Plaintiff and the Defendants adduced expert opinion on PRC law.   The Plaintiff’s expert is Professor Lin Feng.  He has a Bachelor of Laws degree from Fudan University of Shanghai, a Master of Laws degree from Victoria University of Wellington and a Doctorate degree from Peking University.  He is a practising barrister in Hong Kong and an associate professor of the School of Law of the City University of Hong Kong.  He had practised law for two years in the PRC.  His practice was mainly in commercial law.  The Defendants’ expert is Mr Jia Jingyang.  He was graduated from the Law School of Beijing University in economic law and from Peking University in common law stream.  He is a practising lawyer in the PRC and had experience in mortgages.  Counsel have no dispute on Professor Lin’s and Mr Jia’s status as experts in PRC law.

119.  Before turning to the experts’ opinion, I shall first turn to the Land Contract dated 22 June 1998 under which UREDY obtained the land-use right.  Clause 14 of the Land Contract provides:

「第十四條    乙方根據本合同投資開發利用土地，但投資必須達到總投資 (不包括出讓金) 的25% (或建成面積達到設計總面積的25%) 以上，有權將本合同項下的全部或部分地塊的餘期使用權轉讓、出租。

    本宗地的土地使用權可以抵押，但在未達到土地使用權轉讓條件前，該抵押貸款必須用於該宗地的開發建設，抵押人和抵押權人的利益受法律保護。」

Under this clause, the land-use right in respect of the Campus is mortgageable, provided that where the investment on the land undertaken is less than 25% the proceeds from the mortgage must be invested in the development of the land.

120.  Mr Li’s submission is not that the Campus could not be mortgaged but that the question of mortgageability was determined according to the facilities eventually erected on the Campus.  He relies on the expert evidence of Mr Jia.  Professor Lin argues otherwise.  Both experts rely on articles 34, 36 and 37 of the Guarantee Law of the People’ Republic of China 《中華人民共和國擔保法》(“Guarantee Law”) as the statutory authority giving the right to mortgage property.  These articles provide as follows:

“Article 34        The following property may be mortgaged:

(1)      houses and other things firmly fixed on the land which are owned by the mortgagor;

(2)      machines, means of transport and other property owned by the mortgagor;

(3)      the land-use right to the State-owned land, State-owned houses and other things firmly fixed on the land which the mortgagor is entitled to dispose of according to law;

(4)      State-owned machines, means of transport and other property which the mortgagor is entitled to dispose of according to law;

(5)      The land-use right to barren hills, barren gullies, barren hillocks, waste flood land and other unreclaimed land contracted by the mortgagor according to law and consent for the mortgage of such right is obtained from the party granting the contract; and

(6)      Other property that may be mortgaged according to law.

A mortgagor may at the same time mortgage all the property listed in the preceding paragraph.

Article 36       Where houses on State-owned land acquired in accordance with law are mortgaged, the land-use right to the State-owned land occupied by the houses shall be mortgaged at the same time.

Where the land-use right to State-owned land acquired by means of granting is mortgaged, the houses on the State-owned land shall be mortgaged at the same time.

The land-use right to land-used by a township (town) or village enterprise may not be mortgaged separately.  Where factories and other buildings of township (town) or village enterprises are mortgaged, the land-use right to the land occupied by such buildings shall be mortgaged at the same time.

Article 37       The following property may not be mortgaged:

(1)      ownership of the land;

(2)      the land-use right to the land owned by the collectives such as cultivated land, house sites, private plots and private hills, with the exception of those provided in sub-paragraph (5) of Article 34 and sub-paragraph (3) of Article 36 of this Law;

(3)      education facilities, medical and health facilities of schools kindergartens, hospitals and other institutions or public organizations established in the interest of the public and other facilities in the service of public welfare; 

(4)      property in relation to which the ownership or the right of use is unknown or disputed;

(5)      property sealed up, distrained or placed under surveillance in accordance with law; or

(6)      other property which may not be mortgaged as prescribed by law.”

121.  It is the common opinion of the two experts that the land-use right of the Campus is property within the meaning of article 37(3) of the Guarantee Law and is therefore mortgageable and that UREDY having lawfully obtained the land-use right has the right dispose of it by way of mortgage.  It is the further opinion of Professor Lin that the buildings on the Campus, being buildings on state-owned land acquired in accordance with law are also mortgageable under article 36.  That opinion is not disputed by Mr Jia.  

122.  The dispute between the two experts is on the proper interpretation of article 37(3).  Professor Lin’s opinion is that article 37(3) only prohibits mortgage of educational facilities of any institution (事業單位) or public organizations (社會團體) established in the interest of the public (以公益為目的).  Mr Jia’s opinion is that mortgages of educational facilities of all kinds of schools and kindergartens regardless of their set-up or whether for public purposes or for profit are prohibited by article 37(3).  Mr Jia’s opinion is, to say the least, astounding because on that opinion, the words “in the interest of the public” would be rendered meaningless.  I think those words are not there for no purpose.  They cannot be ignored.

123.  A reading of the Chinese text of article 37(3) is illuminating.  The article reads as follows:

「(3)   學校、幼兒園、醫院等以公益為目的的事業單位、社會  團體的教育設施、醫療衞生設施和其他社會公益設施。」

It is clear from the Chinese text that what are not mortgageable are educational facilities (教育設施), medical and health facilities (醫療衞生設施)and facilities in the service of public welfare (其他社會公益設施)of certain entities (事業單位、社會團體).  Those entities are schools, kindergartens and hospitals which are qualified by the words “in the interest of the public (以公益為目的)”. It then follows that only the facilities of those institutions and public organizations established in the interest of the public may not be mortgaged.  Facilities of similar but private institutions or organisations are mortgageable.  I think this interpretation makes better sense. 

124.  Under cross-examination, Mr Jia sought to justify his interpretation by referring to the historical background in the setting up of non-profit making educational organizations under the communist regime in 1949.  That hardly makes sense in interpreting a statute promulgated in 1995 after all the social and economic changes in China, especially in the last twenty years.  When cross-examined by counsel about the absurd result his interpretation may have on the right of private schools and private hospitals, to mortgage their facilities for expansion and development, Mr Jia then became evasive and notably irritable.  He simply answered the question by asserting his legal expertise.  Mr Jia then said that article 37(3) had been “rectified” or “amended” or “supplemented” by two other statutory provisions.

125.  Firstly, Mr Jia referred to regulation 8(2) of Measures on the Administration of Mortgage of Urban Real Estate (Amendments) 1997 《城市房地産抵押管理辦法（1997 修正）》(“Mortgage Administration Measures 1997”).  This regulation provides: 

「第八條  下列房地產不得設定抵押：

(一)        權屬有爭議的房地產；

(二)        用於教育、醫療、市政等公共福利事業的房地產；

(三)        列入文物保護的建築物和有重要紀念意義的其他建  築物；

(四)        已依法公告列入拆遷範圍的房地產；

(五)        被依法查封、扣押、監管或者以其他形式限制的房 地產；

(六)        依法不得抵押的其他房地產。」

  [English translation]

“Article 8     The following real estates shall not be mortgaged:

1)        A real estate whose ownership is in dispute;

2)        A real estate used for education, medical care, civil planning and other undertakings of public welfare;

3)        Buildings protected as culture relics and other buildings that have important memorial significance;

4)        A real estate that has been announced to be demolished according to law;

5)        A real estate that is legally confiscated, seized, controlled or restricted by other means;

6)        Other real estates that can’t be mortgaged according to law.”

Mr Jia asserted that regulation 8(2) prohibits mortgage of any educational facilities.

126.  Under cross-examination, Mr Poon SC suggested to Mr Jia that the Mortgage Administration Measures 1997 could not override the Guarantee Law.  That was refuted by Mr Jia.  Mr Li submits that Mr Poon SC’s suggestion was not supported by the expert evidence of Professor Lin.

127.  With respect, Mr Jia’s statement is a very over sweeping statement.  The Guarantee Law is of the nature of a superior law made by the National People’s Congress.  The Mortgage Administration Measures 1997 are administrative measures promulgated by the Ministry of Construction of the PRC (中華人民共和國建設部), which are of the nature of an inferior legislation.  According to my knowledge of the PRC legal system as I learned from other cases, such inferior legislation cannot have the effect of amending a superior legislation such as the Guarantee Law.  Mr Li is right that there is no evidence from Professor Lin to the above effect and Mr Jia has refuted the suggestion of Mr Poon SC.  However, Hong Kong Special Administration Region is part of the PRC.  Basic legal principles such as these must be such well known fact that I am entitled to take judicial notice of.  It would be absurd for the Hong Kong courts to say it does not recognise the National People’s Congress as the supreme law making body and that the laws made by the Ministries are of an inferior nature.

128.  An examination of the title note and the first article of the Mortgage Administration Measures 1997 will demonstrate the point.  The title note reads:

「[題注]    (1997年5月9日 建設部令第56號發布，根據2001年8月15日〈建設部關于修改《城市房地産抵押管理辦法》的决定〉修正)」

  [English translation]

  “(Promulgated by Order No 56 of the Ministry of Construction on 9 May, 1997.  Amended according to the Decision of the Ministry of Construction on Amending the Measures on the Administration of Mortgage of Urban Real Estate on August 15, 2001)”

In addition, article 1 is also relevant.  It reads:

「第一條        為了加强房地産抵押管理，維護房地産市場秩序，保障房地産抵押當事人的合法權益，根據《中華人民共和國城市房地産抵押管理辦法》、《中華人民共和國擔保法》，制定本辦法。」

    [English translation]

  “Article 1        In order to strengthen the administration of the mortgage of urban real estates, to maintain the order of real estate market and to guarantee the legal rights and interests of the parties to real estate mortgage, these Measures have been formulated according to the Law of the People’s Republic of China on Real Estate Administration, and the Guarantee Law of the People’s Republic of China.”

The title note states that the Mortgage Administration Measures 1997 are administrative measures promulgated by the Ministry of Construction, which was amended in 2001 by its own decision.  Article 1 states that the Mortgage Administration Measures 1997 were formulated according to the Law of the People’s Republic of China on Real Estate Administration and the Guarantee Law.  That article makes it clear that the Mortgage Administration Measures 1997 were formulated according to two superior legislation of the National People’s Congress, including the Guarantee Law.  By simple logic, Mortgage Administration Measures 1997 could not have the effect of overriding the very legislation to which they owe their existence.  The purpose of the Mortgage Administration Measures 1997 is to fortify the management of mortgages of property, protect the order of the property market and protect the interest of the mortgagee and mortgagor.  It does not purport to amend the Law of the People’s Republic of China on Real Estate Administration or Guarantee Law.  Indeed, the classes of prohibited properties recited in article 8 are virtually identical to those set out in article 37(3) of the Guarantee Law and must be interpreted likewise.

129.  Next, Mr Jia refers to rule 53 of the Judicial Interpretation of the Supreme People’s Court on Some Issues Regarding the Application of Security Law issued by the Supreme People’s Court in December 2000 《最高人民法院關於適用 《中華人民共和國擔保法》 若干問題的解釋》 (“Judicial Interpretation”).  The title note, opening words and rule 53 state as follows:

「[題注] 《最高人民法院關於適用 《中華人民共和國擔保法》 若干問題的解釋》已於(2000年9月29日由最高人民法院審判委員會第1133次會議通過，現予公佈自2000年12月13日起施行。)

  為了正確適用《中華人民共和國擔保法》(以下簡稱擔保法)，結合審判實踐經驗，對人民法院審理擔保糾紛案件適用法律問題作出如下解釋。

  …

  第五十三條  學校、幼稚園、醫院等以公益為目的的事業單位、社會團體， 以其教育設施、醫療衞生設施和其他社會公益設施以外的財產為自身債務設定抵押的， 人民法院可以認定抵押有效。」 

                      [English translation]

 “This Interpretation is adopted by the Judicial Committee of the Supreme People’s Court in its No.1133 Conference on September 29, 2000 and promulgated now. It will come into force as of December 13, 2000.

For the purpose of proper application of the Guarantee Law of the People’s Republic of China (hereinafter called Guarantee Law), after consolidating the practical judicial experience, the applicable legal problems facing the People’s Courts in adjudicating disputes arising out of guarantees are interpreted as follows. 

…

Article 53         Where institutions and social organizations for the public good such as schools, kindergartens, hospitals, etc., for their own debts, debt mortgage properties other than the educational, medical and other facilities for public good, such mortgage may be considered valid by the court.”

The title note and the opening words suggest that this law is of the nature of a resolution by the Judicial Committee of the Supreme People’s Court of the interpretation of the Guarantee Law.  The properties mentioned in rule 53 are virtually the same as those mentioned under article 37(3).  But instead of saying that such properties cannot be mortgaged as in article 37(3) of the Guarantee Law, rule 53 says that the Supreme People’s Court may validate all mortgaged properties apart from the properties specified in that rule.  Rule 53 is no more than a corollary of article 37(3).  It adds nothing to or subtracts nothing from article 37(3). 

130.  Mr Li criticises Professor Lin’s interpretation of article 37(3) as being too literal and his lack of knowledge of the Mortgage Administration Measures 1997 and the Judicial Interpretation.  He also criticises Professor Lin’s limited practice in the PRC and lack of practical experience in mortgage matters.  He submits that Mr Jia had rich experience in mortgage matters and his opinion should be preferred.  All these are matters which go to weight.  In considering the validity of any opinion based on foreign law, the court has a duty to consider the basis of the legal reasoning of the experts and the statutes, if any, referred by them and determine the weight to be attached to the opinion.  I have warned myself of my lack of expertise in PRC law and the ease with which I would fall into adopting an English approach in interpreting PRC law.  After having so warned myself and carefully considered the opinion of the two experts, I reject the opinion of Mr Jia.  For reasons as already explained, there is no logic in the legal basis of Mr Jia’s opinion.  Mr Jia’s interpretation of article 37(3) defies common sense and cannot stand up to the reality of the modern China I know.  It does not make sense.  On the other hand, Professor Lin’s interpretation makes good sense.  I accept the opinion of Professor Lin.  I therefore conclude that the Campus was mortgageable under PRC law.  This conclusion is supported by my finding in the evidential issue.

the defence

131.  The three material factual issues are all resolved against the Defendants.  In view of my finding on the factual issues, there is no need to consider if the Plaintiff was under a legal duty to make the non-disclosures complained of.  Subject to the Plaintiff showing that it has performed the condition precedent by waiving the requisite loan, it will be entitled to judgment unless the Defendants are able to prove that the four agreements are rescinded by reason of false representation or non-disclosure.  It would be convenient to deal with the defence at this stage rather than after dealing with the Plaintiff’s case while the evidence is still fresh.

False representations

132.  The Defendants effectively pleaded three false representations: village representation, user representation and vacant possession representation.  Mr Li has argued for two other false representations, namely, loan representation and mortgage representation.  The loan representation, as I have already indicated, is a non-point for the defence as it is an issue which the Plaintiff must prove in order to succeed.  The mortgage representation is in fact non-mortgageability non-disclosure which I shall deal with that when I come to consider the defence based on non-disclosure.  In respect of the remaining three representations, the pleaded defence is that through Edward Woo, Pine made the village representation, user representation and vacant possession representations, which were rendered false by reason of CIDST’s occupation of the Campus.  In its Reply and Defence to Counterclaim, Pine denied that Edward Woo made the said representations.  As analysed above, in view of the Defendants’ pleaded defence, the real issue here is whether the Campus was occupied by Foreign School or CIDST before the signing of the four agreements.  On that issue, I have found against the Defendants and it would be unnecessary to deal with the village representation and the user representation.  However, I shall nevertheless deal with them in all fairness to the Defendants and for completeness. 

133.  As regards the village representation and user representation, Edward Woo was shown a feasibility report on the use of the Campus for the purpose of the East West Cultural Exchange Village.  That report suggests the East West Cultural Exchange Village would be used to conduct entertainment and catering businesses.  Edward Woo explained that the report was probably prepared by one of his staff back in 1997 and was not shown to Gary Ho.  It was filed in one of the files of UREDY handed over to Gary Ho after completion of the Sale and Purchase Agreement.  I accept Edward Woo’s explanation.  That report could not be taken as a representation by Edward Woo.

134.  Gary Ho referred to a brochure of the East West Cultural Exchange Village given to him by Edward Woo which described the various commercial facilities to be established in the village.  The brochure contained a reproduction of the plan annexed to the planning permit issued by the Yanjiao Planning Bureau dated 20 March 2000.  The plan shows that hostels, restaurants, bars, coffee shops, supermarket, spas, sports centre, etc were intended to be built on the Campus.  The brochure supports Gary Ho’s evidence of the representation made by Edward Woo as to what use and development the Campus would be capable of.  But Gary Ho’s case went further.  He said that Edward Woo represented that the Campus could be used for commercial and residential development independent of the educational purpose of the East West Cultural Exchange Village.

135.  Gary Ho also relied on clause 2 of the Lecture Kit Shareholders’ Agreement as corroborating evidence that Edward Woo had made the representations.  That clause provides for the business of Lecture Kit as follows:

 “2.       BUSISNESS OF THE COMPANY

The memorandum of association of the Company shall be amended where necessary to the intent that the Company will be involved in the following lines of business which shall be the primary objects of the Company:-

(a)  To carry on all or any businesses associated with the education industry, including the provision of the following courses: -

(b)     Provision of online education through the Internet for the    course mentioned above; and

(c)     Hotel and spa operation at the college campus of UREDY;

(d)    to carry on such other business and activities as the Parties may agree; and

(e)     to do everything reasonable incidental or conducive to the above.

Paragraph (e) of the preamble to that agreement states that both Cyber Strategy and Pine are desirous of building a corporation with the primary intention of promoting educational services in the PRC.  The opening sentence of clause 2(a) makes it clear that the businesses stated in that clause are associated with the education industry.  Read in that light, the hotel, spa and other business operations of Lecture Kit mentioned in clause 2(a) must be understood as businesses ancillary to the educational services provided by Lecture Kit and not as independent business operations as insisted by Gary Ho.  If that was what the parties agreed, it is unlikely that Edward Woo would have represented that the Campus could be used for commercial and residential development.  Even if the planning permit issued by Yanjiao Planning Bureau permits construction of buildings for independent business operations as restaurants or supermarkets, it has no bearing on the representations made by Edward Woo. 

136.  Edward Woo’s evidence, properly understood, is not that he denied making any of the representations.  He did not dispute he might have represented that the Campus could be used to establish an institution, by whatever name it was to be called, for promoting education and cultural exchange and that it could be used and/or developed as a hotel, spa, sports centre or residential buildings for and within the purposes of that institution.  I do not think he would have represented that the Campus could be used as a hotel, spa or any other entertainment or catering businesses independent of the operation of the institution, in particular for commercial and residential development.  The representations he made were true.  In the planning permit issued by Yanjiao Planning Bureau, the project developer was described as the East West Cultural Exchange Village.  The plan showed that hostels, restaurants, bars, coffee shops, supermarkets, spas, sports centres were intended to be built on the Campus.  In any event, the Defendants’ complaint is not that those representations as such were false but that they were rendered false by reason of occupation by CIDST.

137.  As for the vacant possession representation, there is no evidence that such representation had been made by Edward Woo.  Despite the fact that vacant possession of the Campus became a term of the Sale and Purchase Agreement, most probably, the question had not been raised at all. 

138.  On my finding of fact, CIDST had not taken possession of the Campus until after Gary Ho had on behalf of Lecture Kit assumed control over UREDY and the Campus on or after 12 May 2003.  The three representations in the terms Edward Woo made them were not false by themselves.  Nor were the representations rendered false by reason of occupation by CIDST prior to 12 April 2003 as alleged in the defence.  The defence of false representation must be dismissed.

Non-disclosures

139.  The Defendants pleaded two non-disclosures: occupation non-disclosure and non-mortgageability non-disclosure.  The occupation non-disclosure must fall away in view of my finding of fact.  As for the non-mortgageability non-disclosure, I have found as a matter of fact that the Campus could be mortgaged under PRC law.  That would be sufficient to dispose of this defence.  However, I shall, for completeness, deal with the surrounding circumstances under which this defence was raised.

140.  The burden of proving this defence is on the Defendants.  Gary Ho’s evidence is that he remembered distinctly Edward Woo told him in the course of negotiation of the four agreements that the Campus could be mortgaged to raise funds for the project.  Edward Woo denied that topic was ever discussed.  The Defendants’ pleaded case on non-mortgageability of the Campus is not based on false representation but non-disclosure: see paragraph 16.

141.  If such representation had been made and which Gary Ho remembered distinctly, it is difficult to see why, given the extensiveness of the pleadings, such false representation was not pleaded.  It is amply clear that Gary Ho’s allegation is gratuitous.  His emphasis using the words “remember distinctly” shows how ready he was to indulge in exaggeration.  Mr Li submits that in view of the proposed joint venture and absence of any provision for source of funds for the joint venture, it was natural that the parties have discussed about financing and the possibility of using the Campus to obtain mortgage.  According to Edward Woo, Gary Ho was talking in terms of listing Lecture Kit as a company with a combined asset of HK$130 million, implying that Lecture Kit would contribute asset worth HK$65 million and not raising loan with the use of the Campus.  In the light of the pleading and my finding of credibility of Gary Ho and of Edward Woo, I reject Mr Li submission and Gary Ho’s evidence.  I accept Edward Woo’s evidence.  I find that no representation on mortgageability of the Campus had been made.  Nevertheless, I shall consider the defence based on non-disclosure.

142.  This defence of non-disclosure is made up of five components:

(1) Edward Woo suppressed two building certificates numbered 013088 and 014809;

(2) the building certificates would have shown that the buildings on the Campus were being used for educational purposes;

(3) under the laws of the PRC, the Campus together with the buildings cannot be mortgaged to banks to obtain finance;

(4) accordingly, the two building certificates constitute an encumbrance or restrictions on the Campus; and

(5) such defects prevented the listing of UR Limited and Lecture Kit.

143.  It is incontrovertible that the two building certificates were not in existence before the four agreements were signed.  The two building certificates numbered 013088 and 014809 were respectively issued on 2 June and 4 September 2003, months after the date of execution of the four agreements.  When this became apparent under cross-examination, Gary Ho immediately sought to salvage the defence by saying that the applications, as opposed to the two building certificates, should have been disclosed before the date of the two agreements.  This has not been pleaded and no amendment to the AD&CC is being sought.  As in any event I have found as a matter of PRC law that the Campus is mortgageable, the building certificates could not constitute any encumbrance or restrictions on the Campus.  It would be pointless for me to invite any amendment to the defence to enable this defence to be advanced further.  This defence must be dismissed.

the plaintiff’s Claim

144.  I now turn to the Plaintiff’s claim.  The Plaintiff claims under the convertible note and the Lecture Kit Shareholders’ Agreement.  It is common ground that the four agreements were duly executed.  Except as to whether the Plaintiff had procured Edward Woo to waive a loan of the requisite amount due from UR Limited, there is no dispute that the Plaintiff had performed all its obligations under the four agreements.  That Edward Woo had waived a loan of the requisite amount is the only issue which the Plaintiff has to prove.  At one stage, the Defendants advanced the argument that the Option Agreement was not supported by consideration and applied for leave to amend the defence.  The application was refused by Mr Recorder Kwok.  The Defendants renewed that application before me at trial.  Out of extreme caution, I granted leave on condition that the Defendants shall pay the Plaintiff’s costs of and occasioned by the application thrown away forthwith.  The condition not having been fulfilled, the Defendants are precluded from raising that defence. 

The claim for repurchase of the 1,000 shares in Lecture Kit

145.  Under clause 5.1 of the Lecture Kit Shareholders’ Agreement, Cyber Strategy undertook to repurchase the 1,000 shares in Lecture Kit transferred to Pine under the Sale and Purchase Agreement for HK$12.5 million if called upon to do so.  The request having been made on 29 April 2005, Cyber Strategy refused to perform its undertaking on the ground that the four agreements have been rescinded.  That defence has failed.  The Plaintiff is therefore entitled to judgment against Cyber Strategy in the amount of HK$12.5 million in damages for breach of clause 5.1 of the Lecture Kit Shareholders’ Agreement.  

The claim under the convertible note

146.  Pine’s claim under the convertible note is based on clause 2 of the convertible note which provides:

“2(a)  This Convertible Note shall commence and be binding on the Parties only upon the fulfilment of the following event namely that [Pine] having successfully procured the release of a Director’s Loan to the sum of at least $53,547,843 owed by [UR Limited].

  (b)   In consideration of the premises and both parties having confirmed that the said Director’s Loan having been waived, [Lecture Kit] hereby promises to pay to the order of [Pine] the principal sum of HONG KONG DOLLARS TWENTY MILLION SIX HUNDRED AND FIFTY THOUSAND (HK$20,650,000.00) and interest thereon as set forth herein.”

(Words in [  ] are my substitutions for consistent reading.)

147.  There is no dispute that on 12 April 2003, Pine procured Edward Woo to release and discharge a director’s loan owed by UR Limited to Edward Woo.  The dispute as between the parties is as to the amount of loan waived.  On my finding of fact, the loan waived was in excess of the requisite amount.  It is also common ground that on 6 June 2003, the undated convertible note was executed in escrow and delivered to and retained by the Custodian.  By a letter dated 1 February 2004 to Lecture Kit, Pine referred to the Supplemental Memorandum and the fact that UR Limited had been released of liability from the director’s loan and called upon Lecture Kit to issue the convertible note as stipulated in the Option Agreement.  In the same letter, Pine instructed the Custodian to insert that day as the date of the convertible note.  On 16 February 2004, the Custodian released the convertible note dated 1 February 2004 to Pine and Lecture Kit.  In the circumstances, as at 1 February 2006 Lecture Kit was indebted to Pine in the sum of $25,519,915.07, comprising the outstanding principal of $20,650,000 and accrued interest of $4,869,915.07.  On 10 April 2006, Pine demanded payment of the amount due under the convertible note.  The demand not having been met, Pine is entitled to judgment for $25,519,915.07.

Claim for a charge on Lecture Kit’s shares

148.  The Plaintiff seeks a declaration that Lecture Kit’s 510,002 shares of and in UR Limited held by the Custodian have been and are charged in favour of the Plaintiff as security for Cyber Strategy’s payment of the repurchase price for the Plaintiff’s 1,000 shares in Lecture Kit and amount due from Lecture Kit under the convertible note.  The Plaintiff’s case is based on an equitable charge created over the 510,002 shares by virtue of clause 5.2 of the Lecture Kit Shareholders’ Agreement.  Clause 5.2 provides as follows:

“[Lecture Kit] agrees and undertakes that it will not charge or otherwise deal with its 51% shareholding in [UR Limited] until after satisfactory guarantor shall have been furnished to [Pine] that the covenants herein contained as well as contained in a Convertible Note shall be fulfilled. Pending the repurchase, and pending the due payment of all moneys under the said Convertible Note, [Lecture Kit] agrees that its 51% shareholding in [UR Limited] shall be held by a custodian nominated by Lecture Kit and [Pine].”

(Emphasis added.  Words in [ ] are my substitutions.)

149.  Pursuant to clause 5 of the Supplemental Memorandum, Messrs Andrew Law & Franki Ho was appointed as the Custodian.  Pursuant to the above Supplemental Memorandum, the original share certificate for Lecture Kit’s 510,002 shares in UR Limited was delivered to the Custodian on 6 June 2003 and is still being held by the Custodian.  There is also no dispute that Lecture Kit never provided any guarantor to Pine.

150.  Other than the general assertion in the AD&CC that the four agreements are null and void, no positive case has been advanced by the Defendants.  The Defendants just put the Plaintiff to strict proof.   Having found that the Lecture Kit Shareholders’ Agreement is a valid and binding agreement, the only issue is whether by clause 5.2 of the Lecture Kit Agreement an equitable charge has been created over the 510,002 shares in UR Limited in favour of Pine.

151.  Whether a document has the effect of creating a charge is essentially a matter of construction of the relevant terms of the document.   The question is one of intention of the parties.  As explained by Atkin LJ in National Provincial and Union Bank of England v. Charnley [1924] KB 431 at 449: -

“The first question that arises is whether or not this document does create a mortgage or charge, and to determine that it is necessary to form an idea of what is meant by a ‘charge’.  It is not necessary to give a formal definition of a charge, but I think there can be no doubt that where in a transaction for value both parties evince an intention that property, existing or future, shall be made available as security for the payment of a debt, and that the creditor shall have a present right to have it made available, there is a charge, even though the present legal right which is contemplated can only be enforced at some future date, and though the creditor gets no legal right of property, either absolute or special, or any legal right to possession, but only gets a right to have the security made available by an order of the Court.  If those conditions exist I think there is a charge.  If, on the other hand, the parties do not intend that there should be a present right to have the security made available, but only that there should be a right in the future by agreement, such as a licence, to seize the goods, there will be no charge.”  (Emphasis added.)

To similar effect was the approach set out by Buckley LJ in Swiss Bank Corporation And Lloyds Bank Ltd and Others [1982] AC 584 at 595: -

“... whether a particular transaction gives rise to an equitable charge of this nature must depend upon the intention of the parties ascertained from what they have done in the then existing circumstances.  The intention may be expressed or it may be inferred.  If the debtor undertakes to segregate a particular fund or asset and to pay the debt out of that fund or asset, the inference may be drawn, in the absence of any contra indication, that the parties’ intention is that the creditor should have such a proprietary interest in the segregated fund or asset as will enable him to realise out of it the amount owed to him by the debtor: compare In re Nanwa Gold Mines Ltd [1955] 1 WLR 1080 and contrast Moseley v Cressey’s Co (1865) LR 1 Eq 405 where there was no obligation to segregate the deposits.  But notwithstanding that the matter depends upon the intention of the parties, if upon the true construction of the relevant documents in the light of any admissible evidence as to the surrounding circumstances the parties have entered into ... an equitable charge ... the fact that they may not have realised this consequence will not mean that there is no charge.  They must be presumed to intend the consequences of their acts.” (Emphasis added)

152.  Counsel have no dispute about the above principles.  Their dispute is whether the parties intended to create a charge over Lecture Kit’s 510,002 shares in UR Limited.  However, Mr Li draws attention to the underlined part of Buckley LJ’s dicta and submits that the inference that a charge has been created will be drawn if three conditions are satisfied, namely: (a) the debtor undertakes to segregate a particular asset; (b) the debtor undertakes to pay the debt out of that segregated asset; and (c) there is no contra indication of the creation of the charge.  I would not go that far as to say that Buckley LJ was laying down criteria which must be fulfilled in order to create a charge.  His Lordship was only giving an example, and a very strong one, of when the intention to create a charge would be inferred.  Obviously, segregation of asset is a very strong indication of such intention.  Whether the debtor has undertaken to pay the debt out of the segregated asset is another piece of evidence on which the intention of creating a charge over the segregated asset could be inferred.  But I do not think anything short of that would preclude the intention from being inferred.  Whether there is contra indication is also one of the factors to be considered in ascertaining the intention.  The real test is whether reading the Lecture Kit Shareholders’ Agreement as a whole and in the light of the admissible surrounding circumstances the Court is satisfied that it is the intention of both parties that by virtue of clause 5.2 Lecture Kit has given the right to Pine over its 510,002 shares in UR Limited held by the Custodian for the purpose of securing Lecture Kit’s and Cyber Strategy’s payment obligation.

153.  On the facts, by depositing the shares with the Custodian, Lecture Kit has not only undertaken to segregate a particular asset, but has actually segregated its 510,002 shares in UR Limited from its other assets for a purpose.  Mr Li argues that Lecture Kit has not undertaken to pay the debt out of that segregated asset and that there are contra indications that the shares are not to be charged.  Certainly, by the terms of clause 5.2, Lecture Kit has not expressly undertaken to pay any debt out of the shares.   But before considering Mr Li’s submission on these two issues, I shall first set out the factual background leading to the creation of clause 5.2.

154.  It is common ground that the clause was to provide comfort to Pine.  Even Gary Ho himself accepted under cross-examination that clause 5.2 was prepared under circumstances when Edward Woo was seeking protection of Pine’s right in case Lecture Kit and Cyber Strategy were in breach of the agreements and the purpose of depositing the shares with the Custodian was to give comfort to Pine and Edward Woo by putting it beyond Lecture Kit’s means to charge or otherwise dispose of the shares.  He said that was all that the parties intended.  But Edward Woo went further.  He said the parties intended that the shares were to be used to secure the payment obligations of Lecture Kit and Cyber Strategy.

155.  The genesis of clause 5.2 began with the following e-mail dated 29 March 2003 from Edward Woo to Gary Ho.  It reads:

“You may have some reason to avoid having to publicize the fact that [Lecture Kit] has created a charge.  Be that as it may, it only stands to reason that a company like Lecture Kit must give some security to back up its [convertible] Notes. Otherwise, it does not make commercial sense for one to accept it.  Please consider my proposition as contained in the following sentence to be added to the end of paragraph 2:

  To secure repayment of the Loan and interest, the Payer shall at the request of the Payee furnish such guarantor or replacement thereof as the Payee shall from time to time require.  If the Payer fails to comply a request of the Payee so to do, the Payee may require the said shares to stand charged for the repayment of the amount of principal and interest covered by the [convertible] Note.

  [Cyber Strategy] can be the guarantor.” 

  (Words in [  ] are my substitutions for consistent reading.)

Mr Poon SC submits that the e-mail shows there was an agreement or implied agreement to charge the shares as a security, the only concern was not to publicize it.  On the other hand, Mr Li submits that Edward Woo’s suggestion to charge the shares if Lecture Kit failed to provide a guarantor was not written into clause 5.2 which is evidence of rejection of Edward Woo’s proposal and lack of agreement to charge the shares. 

156.  Edward Woo’s suggestion to have a guarantor was adopted in the first sentence of clause 5.2.  But his suggestion to charge the shares upon Lecture Kit failing to provide a guarantor was replaced in the second sentence of clause 5.2 by an agreement to have the shares deposited with the Custodian pending two events, namely repurchase by Cyber Strategy of Pine’s 1,000 shares in Lecture Kit and due payment by Lecture Kit of all moneys under the convertible note.  Whatever might have brought about the change is unknown and immaterial.  The comfort sought by Edward Woo was a guarantor or a charge over the shares in the absence of one.  The effect of clause 5.2 is that an undertaking by Lecture Kit not to deal with the shares until a satisfactory guarantor would have been furnished.  In addition, the shares are to be deposited with the Custodian pending two events.  The two protections are independent of one another.  The deposition of the shares with the Custodian is not conditional on Lecture Kit’s failure in furnishing a satisfactory guarantor.  Indeed, the shares were deposited with the Custodian on 6 June 2003 almost immediately after completion of the four agreements.  One asks what is the purpose of immediately depositing the shares with the Custodian?

157.  Whether Gary Ho and Edward Woo had a different view or understanding on the legal effect of clause 5.2 is wholly irrelevant.  The question is what is their intention as conveyed by the agreement in the light of the surrounding circumstances.  The Lecture Kit Shareholders’ Agreement is a commercial document.  It must be read in such a way as to give commercial sense.  Men of commerce would not do things which achieve no purpose or commercial sense.  When tested against commercial reality, Gary Ho’s understanding of the common intention of the parties does not make commercial sense.  One asks rhetorically, what is to be achieved by depositing the shares with the Custodian from the point of view of both parties, if neither party could do anything with the shares.  The Defendants may conveniently answer by saying that it is to ensure that they would not deal with the shares.  The question that follows must be “to what end?”  Are the shares to be segregated from the general pool of creditors for no purpose other than preventing Lecture Kit from dealing with them and to return them to the general pool of creditors in case Lecture Kit runs into debts or are they to be segregated for the benefit of Pine?  If the purpose is that of the former, the segregation would be nugatory.  On the other hand, there could be no reason why Pine would have taken the trouble to make it a term of the agreement and to arrange for the shares to be segregated for the benefit of the general pool of creditors and not for themselves.  In my view, segregation of asset, as opposed to undertaking to segregate, plus parting with possession of the asset to a custodian has gone a long way to show that there is an earnest intention to offer the asset as a security for some payment obligations.

158.  It is clear from the second sentence of clause 5.2 that both Edward Woo (on behalf of Pine) and Gary Ho (on behalf of Lecture Kit) intended that the 510,002 shares should be safeguarded for the two events.  The first event is the repurchase by Cyber Strategy of Pine’s 1,000 shares in Lecture Kit in the event that listing of UR Limited or Lecture Kit would not have materialised.  Cyber Strategy would then be under an obligation to repurchase and to pay for the purchase price of HK$12.5 million for Pine’s 1,000 shares in Lecture Kit.  The second event is the non-payment by Lecture Kit of moneys due under the convertible note.  Reading the clause as a whole, Lecture Kit undertakes not to charge or deal with the shares until after a satisfactory guarantor would have been furnished to Pine.  Not only did the parties had in mind providing a comfort to Pine, but the comfort is that of providing a guarantor who would perform the payment obligation of Lecture Kit and Cyber Strategy in the event of their default.  That must also be the purpose of depositing the shares with the Custodian.  The Custodian is not a guarantor and has no obligation to perform the payment obligation of Lecture Kit and Cyber Strategy.  Thus, the comfort to be provided by depositing the shares must be to provide a security albeit limited to the value of the shares for either or both of the two events for the benefit of Pine.  If, as Gary Ho said, the shares were only to be held by the Custodian and that was it, the second sentence of the clause would be nugatory.  It makes no commercial sense.  By agreeing to deliver the shares to the Custodian in addition to providing a guarantor, Lecture Kit must have agreed that the shares may be used in satisfying its and Cyber Strategy’s obligation under the two events. 

159.  Furthermore, not only must clause 5.2 be read in the context of the Lecture Kit Shareholders’ Agreement, the transactions under that agreement and the other three agreements must be treated as one composite transaction.  The transaction was to swap the 510,002 shares in UR Limited with 1,000 shares in Lecture Kit as part of a joint venture, the main object of which was to have the UR Limited and/or Lecture Kit listed on the Stock Exchange.  The agreement was that if the listing would not materialise in two years, the transaction would be partially reversed.  The 1,000 shares in Lecture Kit, which is a minority shareholding, would be repurchased by Cyber Strategy for HK$12.5 million.  A minority shareholding in a private company, particularly in the case of Lecture Kit, is of little worth.  The repurchase price of HK$12.5 million and the amount payable under the convertible note of HK$20.65 million were the real consideration for the 510,002 shares in UR Limited.  That is 51% of the value of the Campus assessed at HK$65 million.  Viewed in this light, it is not difficult to infer that the purpose of depositing the 510,002 shares in UR Limited with the Custodian was to enable the shares could be used as if they were Pine’s lien in case the transaction was to be reversed.  Despite the absence of express undertaking to pay the debt out of the shares, I have no difficulties to infer that the intention of the parties was that the 510,002 shares were to be used to secure Lecture Kit’s and Cyber Strategy’s payment obligations under the convertible note and the Lecture Kit Shareholders’ Agreement.  This inference is not difficult to draw as Pine, Lecture Kit and Cyber Strategy were the only parties to the transactions.

160.  Mr Li submits that there is contra indication in clause 5.2 which provides that Lecture Kit would not charge or deal with the shares.  He argues that it is absurd to say on the one hand that Lecture Kit expressly agreed not to charge the shares and on the other it is inferred that Lecture Kit agreed to charge the shares to Pine.  I think the absurdity is in that argument.  In construing an agreement, one cannot overlook the purpose to be achieved by the agreement.  The purpose of clause 5.2 is to give comfort to Pine.  Charging the shares to Pine would provide that comfort.  Thus, Lecture Kit’s undertaking not to charge or deal with the shares could not have intended to include an undertaking not to charge the shares in favour of Pine for the purpose of providing comfort to Pine, which is the very purpose of clause 5.2.

161.  Mr Li further argues that no charge could be created if the terms of the agreement is precarious.  He submits that in the case of Swiss Bank Corporation And Lloyds Bank Ltd and Others, notwithstanding there was an obligation of segregation of funds and repayment of loan thereout, it was held that it did not give rise to an equitable charge by reason of the terms of the contract being precarious.  I think no assistance could be drawn from that case.  That case involved complicated issues of construction of documents, including Bank of England conditions granted under the Exchange Control Act 1947.  It was the terms of the Bank of England conditions which Buckley LJ held were precarious.  That is a decision on the facts of that case.  In the present case, there is no uncertainty in clause 5.2 of the Lecture Kit Shareholders’ Agreement.

162.  I find that Pine has an immediate right to and had required Lecture Kit to make available the shares to the Custodian in order to protect its interest.  It must have been the intention of the parties that the shares so delivered to the Custodian are to be used as a security for the discharge of Cyber Strategy’s and Lecture Kit’s payment obligations under the two events.  In the circumstances, Pine is entitled to a declaration that Lecture Kit’s 510,002 shares in UR Limited held by the Custodian have been and are charged in favour of Pine as security for payment of $12.5 million and payment under the convertible note.

Conclusion

163.  I accept the evidence of Edward Woo and reject the evidence of Gary Ho in the main action.  I find for the Plaintiff in respect of its claim under the convertible note and the Lecture Kit Shareholders’ Agreement.  I reject the Defendants’ defence of false representation and non-disclosure and dismiss their counterclaim against the Plaintiff.  It must of necessity mean that the Defendants’ third party proceedings against Edward Woo and Andrew Law based on false representation and non-disclosure must also be dismissed.

The Plaintiff’s and the 1^st Third Party’s costs

164.  At trial, the Defendants revived interlocutory applications which had been refused.  They repeatedly applied for adjournment using different pretexts, including an adjournment pending appeal against my interlocutory orders.  Those repeated applications almost had the effect of de-railing the trial but for the Court making more time available.  Without deciding whether that was done with the intention of actually de-railing the trial, they are wasteful of the Plaintiff’s costs.  It was not until the 12^th day of trial when the conduct of the defence was taken over by leading counsel that the defence progressed more regularly.  Despite that, there is really no defence to the Plaintiff’s action.  The defences raised by the Defendants are concocted.  They are based on concocted evidence, which the Defendants’ then controlling mind and principal witness, Gary Ho, knew full well were false.  The defence was conducted in a most scandalous and vexatious manner with the principal witness lying all the way for nine days in the witness box.  One of the defences raised was non-disclosure arising out of fiduciary duty of partners to the joint venture.  That defence must now boomerang.  The parties were in a fiduciary relation.  I do feel a strong sense of indignation at the Defendants’ conduct.  This is a case which cries out for costs to be awarded on indemnity basis. 

The 2^nd Third Party’s costs

165.  As a result of the further and better particulars provided by the Defendants, it is clear that the Defendants’ allegations of false representation were only made solely against the 1^st Third Party.  Nevertheless the Defendants chose to continue the proceedings against the 2^nd Third Party.  On the 13^th day of trial, after Mr Li had taken over as leading counsel for the Defendants, he offered to discontinue the third party proceedings against Andrew Law with costs on party and party basis.  Andrew Law insisted that the proceedings be dismissed so that he could be exonerated and asked for costs to be taxed on indemnity basis with the Defendants’ solicitors undertaking to pay the taxed costs.  His position is understandable as any monetary judgment against the Defendants is likely to be empty and he had a grievance against the Defendants’ solicitors for taking out the proceedings against him when the pleadings do not even support the action against him.  I allowed the parties time to negotiate for an agreed costs order.  On the 16^th day of trial, Mr Li made his “ultimate” offer to have the third party proceedings against Andrew Law dismissed with costs.  That offer only met with Andrew Law’s request to have the proceedings dismissed instead of discontinued but not his demand that the costs be taxed on indemnity scale and be fortified with an undertaking from the Defendants’ solicitors.  It became necessary for me to adjudicate on the issue of costs.

166.  On the 17^th day of trial, in the default of agreement with Andrew Law, Mr Li made a formal application to have the Defendants’ third party proceedings against Andrew Law dismissed with party and party costs.  I explained to Andrew Law that his claim for costs against the Defendants’ solicitors should be pursued by way of separate action.  But he insisted to continue as a party to pursue his claim for costs on indemnity basis.  Mr Poon SC resisted the Defendants’ application on the ground of prejudice against the Plaintiff as the Plaintiff had anticipated an opportunity to adduce further evidence from cross-examination of Andrew Law during the third party proceedings.  I do not consider that a valid ground as the Plaintiff’s case has already been closed.  If the Plaintiff wished to adduce evidence from Andrew Law, it should have called him as a witness rather than to rely on the possibility that he would give evidence in the third party proceedings. 

167.  The application was not made under Order 21 rule 3 of the Rules of the High Court.  Had it been made under that provision, I would have wide discretion in imposing terms including order as to costs and a term that no other action may be brought against Andrew Law.  But despite the wide discretion, I do not consider dismissing the proceedings is one which is open to me.  If the proceedings have been discontinued, the jurisdiction to pronounce an adjudication is taken away from me.  If I wish to have the proceedings dismissed, I can only refuse the application for discontinuance and then dismiss the proceedings on their merits at the conclusion of the proceedings.

168.  There are provisions under the Rules of the High Court for striking out an opponent’s pleading or dismissing the opponent’s action, but not dismissing one’s own action.  But I think in the discharge of the Court’s  function of case management, I must have inherent jurisdiction to dismiss an action, whether at my own initiative or at the invitation of any party including the one who took out the proceedings, which has no chance of success and the continuation of which would achieve no purpose other than wasting costs.

169.  Taking out proceedings against a party without any cause is prima facie frivolous and vexatious and may justify indemnity costs.  This is particularly so in the third party proceedings against Andrew Law.  In essence and in effect, the Defendants are saying, “You owed me nothing.  You did me no wrong.  But I like to sue you.  I want you to pay for what I will be liable to Pine.”  This is vexatious and an abuse of the process of court and would in a normal case be sufficient for me to order indemnity costs.  However, Mr Li suggests that despite he was applying for dismissal of the proceedings there were good reasons for taking out the third party proceedings.  He submits that the proceeding against Andrew Law was dropped on legal advice and there were plainly legal consideration such as whether there is a better cause of action against Andrew Law.  The application was made on the 17^th day of trial.  Gary Ho was in the 5^th day of his cross-examination.  As things turned out, Gary Ho was the middle of his nine days in the witness box.  In view of that suggestion and Mr Li’s resistance to pay costs on indemnity basis, I feel the state of the evidence was such that it was premature for me to adjudicate on the scale of costs.  I had to allow the proceedings to proceed for the purpose of determining costs.

170.  Mr Li submits that Andrew Law’s reasons to continue as a party in the proceedings are to generate costs for himself and to assist Edward Woo in his claim against the Defendants.  He refers to the following of Andrew Law’s submission:

“I need my dollars and cents to be compensated before I walk out of this court room.  I am sure the judgment at the end of the day would serve redeeming my reputation one way or another but it does not help in the dollars and cents directions.

  … only when you fail to buy me out.  You pay me costs, I walk out of the court room.”

If Andrew Law is entitled to indemnity costs, he is entitled to be so compensated.  I do not think the above speech indicated malice or greed in his part in trying to generate costs for himself.

171.  As for Andrew Law’s motive to help Edward Woo by continuing as a party and to give evidence, I noted some assistance rendered by the Plaintiff’s legal team to Andrew Law.  I can find nothing wrong for members of the legal profession to render some assistance in a matter of common interest, at least not on the circumstances in which the assistance arose in the present case.  Mr Li commented on Andrew Law participating in the cross-examination of Ye for over one hour and in cross-examining Gary Ho for approximately one day.  He argues that the evidence eluded from the cross-examination were absolutely irrelevant as to his claim for costs.  With respect, I do not agree.  Ye gave evidence on the 15^th day of trial before any offer for dismissal of the third party proceedings against Andrew Law was made.  Even if that offer had been communicated in their out of court negotiation which I am not aware of, Ye gave evidence about the “unholy alliance”.  In view of Mr Li’s suggestion that the Defendants had a good cause for taking out the third party proceedings, Ye’s evidence certainly would have an impact on the scale of costs that I may award.  This consideration may weigh less heavily in his cross-examination of Gary Ho.  But Andrew Law’s cross-examination was mainly aimed at adduce evidence of Gary Ho’s malice in order to justify his claim for indemnity costs.  That cross-examination took a side track when Gary Ho suddenly mounted an ambush on Andrew Law by accusing him of demanding a six-digit compensation.  That took some time.  Any damage done by Andrew Law in cross-examination of Gary Ho which was not strictly relevant to the scale of costs is just collateral damage which the Defendants have to bear the consequence of.  In any event, I have averted such damage to the Defendants in my assessment of credibility of the witnesses.  I am unable to find any malice on the part of Andrew Law in continuing to be party for the purpose of having his costs on indemnity scale.  It was just a legitimate exercise of one’s rights in a litigation.

172.  The Defendants having abandoned the third party proceedings against the 2^nd Third Party, the proceeding must be dismissed with costs.  The insistence of the Defendants that they had a ground to issue the proceedings against Andrew Law is only a face saving allegation.  It has no merit.  Their refusal to pay Andrew Law’s costs on indemnity basis and their face saving allegation made it necessary for Andrew Law to insist on continuing the litigation.  Andrew Law is entitled to have his costs for the entire proceedings.

173.  In the light of the further and better particulars given by the Defendants, the Defendants have no case against Andrew Law.  In Gary Ho’s witness statement, there is no allegation of Andrew Law’s involvement in the negotiation of the four agreements or in their subsequent dealings.  In his evidence in Court, Gary Ho alleged that he felt Andrew Law had given him false representations but could not give particulars.  The Defendants’ principal witness and the controlling mind knew they had no evidence against Andrew Law.  Some reliance was placed on Ye’s evidence about the “unholy alliance” which according to Gary Ho was disclosed to him at the end of 2004.  I have dismissed that evidence as incredible.  Obviously, Gary Ho did not believe in that evidence or he was a party in concocting that evidence because he never confronted Andrew Law or reported his misconduct to the board of directors.  Worst still, he even engaged Andrew Law as mediator for the Defendants in May 2005, which suggests his allegation about the “unholy alliance” could not have been true.  Viewed in this light, Gary Ho had never believed and could hardly have any reason to believe Andrew Law was an associate of Edward Woo in making false representations to him, let alone his case against Edward Woo is also fabricated.  This shows that the third party proceedings against Andrew Law is vexatious and an abuse of the process of court.  It is only proper that the Defendants shall pay Andrew Law’s costs to be taxed on indemnity basis.  The issues having been fully argued, an order nisi is inappropriate. 

Conclusion

174.  Accordingly, I enter judgment in favour of the Plaintiff against the Defendants and in favour of the 1^st and 2^nd Third Parties against the Defendants.  I grant the following relief: -