LIM YI SHENN v. WONG YUEN YEE AND OTHERS

HCA 1323/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1323 OF 2010

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J U D G M E N T

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A.  INTRODUCTION

1. This is the trial of the action brought by the plaintiff against the defendants.  There is no counterclaim by the defendants.

2. The main issues in this trial are set out in the plaintiff’s list of issues.  They are as follows:

(1) Whether there was a breach of the Investment Agreement (as defined in the Re‑Amended Statement of Claim) by the defendants?

(2) Whether there were negligent misrepresentations by the defendants?

(3) Whether there was a breach of trust, in respect of HK$10 million invested by the plaintiff held on trust for the specific purpose of investing in Luson Biotechnology Development Limited (“LBD”), by the defendants?

(4) What damages and/or relief are recoverable for: (i) Breach of the Investment Agreement; (ii) Misrepresentation; and (iii) Breach of trust by the defendants in failing or refusing to return the trust money of HK$10 million to the plaintiff.

A1.  Investment Agreement/Misrepresentation

3. In this action, the plaintiff seeks relief against the defendants for various breaches of an oral investment agreement allegedly reached on or about 10 April 2008 (“Investment Agreement”) and/or negligent misrepresentations.

4. Among others, the plaintiff relies on the following breaches of the Investment Agreement and/or misrepresentations:

(1) Instead of allotting 54 million shares in the 3^rd defendant to the plaintiff at HK$19,980,000, the 1^st defendant sold 54 million shares in the 3^rd defendant owned by her to the plaintiff.

(2) Contrary to the agreement/representation that there were various other independent investors committed to investing in the 3^rd defendant by way of issue of shares, such investors were not independent.

(3) Contrary to the agreement/representation that the defendants would not place or offer the shares of the 3^rd defendant at a price below HK$0.30, as the NAV of the 3^rd defendant was stated as HK$0.29 per share as per the Group Valuation Materials, the 3^rd defendant undertook various issues or placements of shares of the 3^rd defendant at prices far below such price level.

(4) The defendants failed to implement the Budget Hotels Business Plan and related fund raising activities.

5. In respect of the breach/misrepresentation set out in paragraph 4(4) above, the plaintiff relies on the Group Valuation Materials prepared in January 2008 (“GVM”) and/or the Information Memorandum prepared in June 2008 (“IM”).  The plaintiffs’ case is that:

(1) On several occasions from mid‑February 2008 to early April 2008, the defendants introduced to the plaintiff a plan referred to as the Budget Hotels Business Plan, as evidenced by the GVM which were subsequently incorporated, modified and expanded in the IM.  During the first meeting, a slideshow of the substantial contents of the GVM was shown to the plaintiff.

(2) The defendants agreed as part of the Investment Agreement and/or made representations to implement the investment plan on the Budget Hotels Business Plan as presented and introduced by the defendants and evidenced by the GVM, including the following:

(a) the investment acquisition, leasing and marketing of budget hotel business in numerous provinces in the PRC;

(b) to implement the hotel management contracts of hotels in the PRC entered into by the 3^rd defendant;

(c) to eventually raise funds either publicly or by private placement for sums as delineated in the GVM to expand the 3^rd defendant’s hospitality business operations (ie the Budget Hotels Business Plan) with a result that the share price of the 3^rd defendant would rise from at least HK$0.60 to HK$0.80 per share in 2008 and up to HK$3.39 per share in 2012;

(d) to achieve a gross operating profit of over RMB 255 million in 2008 and to achieve an annual gross revenue of over RMB 1.5 billion from the hospitality business by 2012; and

(e) to manage a portfolio of 65 hotels by the end of 2008 and to establish a nationwide budget hotel chain in the PRC with 225 budget hotels and 27,000 hotel rooms under management within five years.

(3) In conjunction with the above, the defendants also represented as follows:

(a) Since there was no major budget hotel operator in the PRC with a non‑local management, it would be easy for the 3^rd defendant to become one of the top 10 operators in the PRC within five years;

(b) when they implemented the plan, the 3^rd defendant’s listed company status in Hong Kong would be advantageous for the fund raising exercise;

(c) Cushman & Wakefield Capital Asia Ltd (“Cushman”) (which prepared the GVM and the IM with the 3^rd defendant) or its associated company was a reputable financial advisor in the finance market specialising in property financing and would be engaged by the 3^rd defendant for raising HK$200 million once they completed acquisition or leasing of 5 to 7 hotels by the end of 2008;

(d) the 3^rd defendant could raise funds because of Cushman’s contact and network, and the target timing for the fund raising exercise of the said HK$200 million would be within 12 months from June 2008.

(4)  The defendants expressly or impliedly warranted the truth of the contents of the business plan and/or the GVM and all their statements and representations made to the plaintiff for the purpose of inducing him to purchase shares of the 3^rd defendant.

(5)  The defendants impliedly agreed that they would duly perform their obligations under the Investment Agreement and would not act or omit to act in any way so as to cause an end to the state of circumstances under which the execution of the Budget Hotels Business Plan and the scale of operations could be implemented.

(6) Contrary to the foregoing:

(a) Part of the contents of the GVM and the IM was untrue, which also rendered the factual status, the implementation of the Budget Hotels Business Plan, the valuation of the group of the 3^rd defendant and the pro‑forma valuation of the shares of the 3^rd defendant therein untrue;

(b) the 3^rd defendant failed to implement the Budget Hotels Business Plan and the related fund raising activities, notwithstanding repeated representations by the defendants that the project was still continuing and had substantial potential; and

(c) the 3^rd defendant effected the disposal of the two hotels (which had been acquired before the Investment Agreement) at the total consideration of RMB 4 million and ceased further action on the Budget Hotels Business Plan from June 2009.

A2.  LBD and Trust claim

6. In this action, the plaintiff also claims against the defendants for breach of trust in respect of HK$10 million allegedly agreed to be held on trust for the specific purpose of investing in LBD.  The plaintiff’s case is that, contrary to agreement (being one of the terms of the Investment Agreement) and/or representation made by the defendants, the defendants did not invest HK$10 million received from the plaintiff into LBD.

7. The factual circumstances leading to the trust are alleged by the plaintiff, in gist, to be as follows:

(1) From about mid‑February to early April 2008, the 1^st and 2^nd defendants acting on behalf of the 3^rd defendant represented to the plaintiff the advantage of investing in LBD introduced by Mr Michael Ong via investment in the 3^rd defendant because:

(a) LBD was a small new company without any track record and it would be safer for the plaintiff to secure his investment in the 3^rd defendant which in turn would invest in LBD;

(b) the 3^rd defendant at the material time had business dealings in the medical service sector and such connections would bring more business to LBD.

(2) The defendants represented that they would hold HK$10 million invested by the plaintiff on trust for the specific purpose of investing in LBD.

(3) As LBD only required HK$10 million at that stage which was less than 5% of the NAV of the 3^rd defendant, there is no requirement for disclosure to the public nor approval from the Stock Exchange of Hong Kong Ltd (“SEHK”) in relation to investment in LBD.

(4) The defendants never mentioned that the investment in LBD or the Investment Agreement could not take place without the compliance with the requirement of SEHK or the approval procedure of the 3^rd defendant.

B.  RELEVANT LEGAL ISSUES IN THIS CASE

B1.  Plaintiff’s claim under the Misrepresentation Ordinance

8. Apart from negligent misrepresentation under Common Law, the plaintiff also relies on section 3(1) of the Misrepresentation Ordinance, Cap 284. Pursuant to such statutory provision, the plaintiff may claim damages in the absence of fraud or negligence if the plaintiff can prove that the defendants would be liable for damages had the misrepresentation been made fraudulently, unless the defendants can prove that they had reasonable grounds to believe and did believe up to the time the agreements were made that the facts represented were true.

9. In general terms, the representee may recover damages under this provision if he can show that he entered into a contract with the defendant, that the defendant made a representation to him before the contract, that he suffered a loss as a result, and that the defendant would have been liable to pay damages if he had been fraudulent.

10. In the present case, the plaintiff is a contracting party in the placing letter with the 3^rd defendant, since the placing letter referred to a contract made on behalf of the 3^rd defendant with the plaintiff.  In addition, since the plaintiff purchased the 54 million shares from the 1^st defendant, there was also contractual relationship between the plaintiff and the 1^st defendant. However, there was no such contractual relationship between the plaintiff and the 2^nd defendant. In the circumstances, I agree with Mr Bernard Mak (and with him Mr Kelvin Tang), counsel for the defendants, that the plaintiff has no claim against the 2^nd defendant under the Misrepresentation Ordinance.

B2.  Assessment of damages for Misrepresentation

11. It is the plaintiff’s case that he is entitled to claim damages for HK$19,980,000, which is reduced to HK$15,862,861.31 after taking into account the plaintiff’s effort to mitigate his loss by disposing of the shares.

12. Mr Mak, on the other hand, submitted that whilst section 3 of the Misrepresentation Ordinance was pleaded in the Re‑Amended Statement of Claim, no rescission was claimed.  In the circumstances, the court only has jurisdiction to consider making an award of damages under section 3(1) of the Misrepresentation Ordinance but not otherwise.

13. Mr Mak further submitted that the premise upon which a claim for damages under section 3(1) of the Misrepresentation Ordinance is based is that the innocent party opted to retain the benefits of the contract he entered into as a result of misrepresentation.  In cases of purchase of properties (including shares), the starting point for the calculation of damages would be to assess the difference in value between what he paid and what he received.  If there was a change in the market value of the property after the purchase, the loss would be assessed on the date he could have made a disposal, and the representor would be responsible even for the loss occasioned by the drop in market during such a period.

14. Mr Mak went on to submit that the plaintiff’s approach set out above is not applicable because it is the basis for assessment of damages in lieu of rescission which is only awardable under section 3(2) of the Misrepresentation Ordinance.  In the present case, the court has no power to award damages on such basis.  The plaintiff adduced no relevant evidence for assessment of damages on the right basis.  Thus, only an award of nominal damages can be made.

15. Mr Jenkin Suen, counsel for the plaintiff, submitted that the plaintiff’s position has been clearly set out in paragraph 15 and the Schedule of the Re‑Amended Statement of Claim, wherein it was pleaded that “the Plaintiff had no alternative but to mitigate his loss by selling his shares” at a loss.  I agree with Mr Suen. The material fact pleaded is that the plaintiff has disposed of all his shares.  The disposal of the shares is clear indication that the plaintiff wanted his money back, rather than to retain the benefits of the contract he entered into as a result of the alleged misrepresentation.

B3.  Plaintiff’s Contractual Claim

16. It is the plaintiff’s case that the 1^st and 2^nd defendants made representations, in reliance on which he agreed to invest in the 3^rd defendant.  In such case, the starting point must be that the plaintiff did not intend both the 1^st and 2^nd defendants to be contracting parties with him, because that was plainly unnecessary.

17. As pointed out by Mr Mak, it is trite that unless a director has done or said something clear to the representee that he assumes personal responsibility, in addition to the company, so as to create a special relationship with him and the plaintiff, he should not have personal liability [see: Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830].

18. I agree that, a fortiori, in the absence of the fact that a director has made it clear that he is assuming personal contractual responsibility for the performance of an intended contract by the company, a director involved in the negotiation only is not intended to and cannot be a contracting party.  On this basis, the plaintiff’s contractual claims against the 1^st and 2^nd defendants must fail.

19. Furthermore, I agree with Mr Mak that the basis for assessment of damages applicable for the alleged breach of the Investment Agreement would be for an award of damages which would restore the plaintiff to the position as if the Investment Agreement had been performed.

20. Damages assessed on the basis as if the Investment Agreement had not been entered into is not appropriate here, because such a “no transaction” basis of assessment is only applicable when a breach of contract involved a breach of duty of care.

21. The plaintiff has adduced no relevant evidence for assessment of damages on the right basis.  Accordingly, I agree with Mr Mak that only an award of nominal damages can be made, even if the plaintiff makes good his contractual claim against the 3^rd defendant.

B4.  Plaintiff’s Trust Claim

22. Mr Mak submitted that the plaintiff’s trust claim is of no substance.  In order for such “specific purpose trust” to be found, there should be some special arrangements which indicate that the money advanced by one party to another party is not intended to be at free disposal of the latter party.

23. In this case, Mr Mak submitted that once the plaintiff paid the consideration in exchange for shares, the money indeed became the 3^r defendant’s working capital that was at its free disposal.  It is not the plaintiff’s case that the 3^rd defendant must use his HK$10 million, but not other sums of HK$10 million, to invest into LBD.  There was no requirement for the HK$10 million to be kept at a separate account for the designated purpose.  There was also no agreement as to when and how the HK$10 million was to be returned to the plaintiff if the 3^rd defendant did not make the investment.  In such circumstances, so submits Mr Mak, the plaintiff’s alleged trust claim is plainly untenable.

24. I do not agree with Mr Mak’s submissions.  As put by Le Pichon JA in Typhoon 8 Research Ltd v Seapower Resources International Ltd [2002] 2 HKLRD 660 at paragraph 19:

“ … It would appear that the duty to keep the money separate is an incident of a Quistclose trust, should one arise from the circumstances, rather than a pre-condition for the existence of such a trust. It is implicit from Lord Millett’s observations that he rejected the submission (at [70]) that “there must be something more, for example, a requirement that the money be paid into a segregated account” before it is appropriate to infer that a trust had been created”. (emphasis supplied)

25. Accordingly, the only issue to be determined is a factual one, namely, whether the 3^rd defendant’s freedom to dispose of the money is necessarily excluded by an arrangement that the money should be used exclusively for the stated purpose of investment into LBD.

C.  ANALYSIS OF THE EVIDENCE

C1.  Investment Background of the Parties

26. It is noteworthy that in the present case, at all material times, both the plaintiff and the defendants were not amateur investors or businessmen.  Instead, they were reasonably experienced investors who were actively engaged in doing deals and trading in the corporate market.

27. Under cross-examination, the plaintiff was referred to an Announcement of a company known as China Photar Electronics Group Ltd (“China Photar”) pursuant to which Emcom Ltd and Smart Step Holdings Ltd (a limited company incorporated in the BVI which is wholly and beneficially owned by the plaintiff), being parties acting in concert, entered into a subscription agreement with China Photar dated 4 June 2007 and agreed to subscribe for 1,800 million shares in China Photar.  At page 12 of the Announcement, it describes the plaintiff as a person who had “more than 10 years of banking and corporate experience”; who founded his own corporate advisory firm; who was both an investor and a corporate adviser; andwho was at that time a business adviser to Emcom Limited.

28. Given the above background, I agree that the plaintiff was at all material times and is a sophisticated investor and had experience in investing in listed companies and businesses in Hong Kong.  This is consistent with the impression that the plaintiff gave to the defendants during their discussions and negotiations.  In determining other issues, for instance, whether the plaintiff should have regarded the GVM as “representation”, whether the plaintiff should have “relied on” the GVM, where the plaintiff should have agreed to the alleged terms, etc, the investment background of the plaintiff is of considerable relevance.

C2.  Alleged Representation & Term – Implementation of the Budget Hotels Business Plan as shown in the GVM

29. Regarding the presentation of the GVM, the plaintiff agreed the following under cross-examination:

(1) That there was some brief introduction on Cushman;

(2) that the GVM presented something on the drawing board and consisted of projections and plans;

(3) that page 20 thereof presented a bird’s eye view of what the 3^rd defendant had done;

(4) that from page 29 onwards, it clearly states that those were “future plans”;

(5) that it was “not difficult” for the 3^rd defendant to become one of the top 10 budget hotel players in the PRC within five years and his understanding about being one of the top 10 is to have 10 hotels and 100 rooms;

(6) that he was told the basis upon which the defendants established the “Inno‑Swiss” brand and was told the brief background of Swiss Belhotel International;

(7) that when he asked the defendants whether those target figures stated in the GVM were “feasible”, they said yes;

(8) that when he asked whether the defendants were confident in achieving those figures, they only said they would try but that was not guaranteed;

(9) that he had doubts about how the figures were derived when he first read the GVM;

(10) that he was not concerned about the reasonableness of the PE of 22 times as stated in page 34 thereof, but was only concerned about whether those figures were “achievable” based on those numbers;

(11) that based on his understanding, if one person says he will buy, then he will buy, and the defendants should do it “come what may”;

(12) that he knew “pro‑forma” at page 35 means “estimated”;

(13) that when the defendants said “they would acquire”, he understood it as “they would acquire whatever happened”; and

(14) that the defendants were telling him “we have this plan, this projection, these estimates, and we believe that these figures are ‘achievable’”.

30. Under re‑examination, when being asked whether the defendants went through the SWOT analysis as shown at page 33 of the GVM, the plaintiff answered that all of them had been gone through, despite that more emphasis was placed on strengths and opportunities.

31. It is the 1^st defendant’s evidence that whenever Mr Paul Law of the 3^rd defendant made presentations, he would definitely tell the potential investors that the business proposal was not intended to be relied upon for acquisition of shares, but instead it was just a business plan.  It is also the 2^nd defendant’s evidence that Paul Law must have referred to the disclaimer when he presented the GVM, despite the plaintiff disagreed that it was shown to him during the meeting on 10 April 2008.

32. I agree that based on the plaintiff’s evidence at trial, the plaintiff clearly knew right from the beginning of the said meeting that the GVM only consisted of estimates, projections and figures which are only “achievable” and “feasible”. “Achievable” and “feasible” should, in any event, not be interpreted as a definite obligation or a promise.  He was also fully aware of the potential weaknesses and threats of the hospitality business of the 3^rd defendant. Being a corporate adviser for companies, it is more likely than not that the plaintiff has come across similar materials before and he should know that this kind of business proposals was prepared based on assumptions, although he disagreed that he had been told about them.  Also, the plaintiff agreed that he had read the GVM sent by Michael Ong to him which, although the appendices were allegedly missing, contained the disclaimer.  Given the context of the meeting where the presentation of the GVM was just for an introduction of the 3^rd defendant’s business plan and given the plaintiff’s background, I agree that the plaintiff was not entitled to rely on the GVM as representations made to him.

33. In Cassa di Risparmio v Barclays Bank [2011] 1 CLC 701 at paragraph 215, Hamblen J held that a representation is a statement by the representor to the representee on which the representee is intended and entitled to rely.  In order to determine whether any and if so what representation was made by a statement requires (i) construing the statement in the context in which it was made; and (ii) interpreting the statement objectively according to the impact it might be expected to have on a reasonable representee in the position and with the known characteristics of the actual representee.

34. Furthermore, by looking at the GVM itself, I agree that it should not be regarded as containing any actionable representations.

(1) First, notwithstanding that there are some figures or information in the GVM which may, on their own, amount to “statement of facts”, the entire document should be construed so as to decide whether it constitutes representation.  It is obvious that a substantial portion of the GVM is about projections in the near future.  The nature of this document is just for providing potential investors with a panoramic view of the 3^rd defendant’s hospitality business.

(2) Secondly, the alleged representations relied on by the plaintiff are clearly only “business objectives and plans”, “future plans” and “valuation of the Group” (which are based on the assumptions as shown in Appendix I thereto) and shall at most constitute “statements of intention”, “statements as to future” or “statements of opinion”.  It is for the plaintiff to prove that the defendants did not actually intend to expand the 3^rd defendant’s hotel business as at the time of presenting this proposal before these future plans may be regarded as misrepresentations.  This plainly fails as evidenced by the 3^rd defendant’s Announcements and Annual Reports made at around that time.  Even assuming the plaintiff can prove that the 3^rd defendant did not carry such intention of continuing its hotel business eventually, it does not prove the original non-existence of the intention.

(3) Thirdly, the GVM contained the disclaimer.  The disclaimer is, in no doubt, issued by Cushman and part of it is intended to protect Cushman from liability.  However, it is plainly clear from the wording of the disclaimer that whoever receives the information presented by the GVM should exercise his own judgement and decision, and the GVM is not intended to be relied on by potential investors in deciding whether to make the investment.

35. Further, I hold that the GVM was just the 3^rd defendant’s business plan for the future and the 3^rd defendant simply could not be regarded to have guaranteed or promised that it would invest in the hotel business no matter what the prevailing market conditions were.  The plaintiff well knew that the GVM was only a projection, not a prophecy.  Objectively speaking, the defendants had made it clear that they did not intend to be contractually bound by the matters set out in the GVM, and it is not in accordance with commercial sense that the defendants would agree to be contractually bound in such a manner.

C3.  Alleged Representation & Term – Holding HK$10 million invested by the plaintiff on trust for the specific purpose of investing into LBD

36. The 1^st and 2^nd defendants denied making such representation.  I agree that, for the following reasons, it is contrary to commercial sense for them to agree to hold HK$10 million on trust for the plaintiff for the specific purpose of investing into LBD.

(1) In a business proposal of LBD to which the plaintiff was referred, the date “2008/4/16” is clearly stated at page 27 thereof.  Therefore, this business proposal could not have been presented to the defendants at any time prior to 16 April 2008.

(2) The plaintiff also admitted that in his presence, Michael Ong had not represented anything to the defendants on how LBD would acquire the patent, and no presentation in either written form or electronic form in relation to LBD had ever been made to the defendants.  Under cross-examination, both the 1^st and 2^nd defendants also said that Michael Ong had not provided any documents to them regarding his traditional Chinese medicine (“TCM”) business.

(3) It is always the defendants’ case that all along, they have only heard of the “TCM” business which Michael Ong was intending to set up in the PRC but had never heard of a concrete company name like “LBD”, until they read the public documents of LBD in this action.

(4) The defendants’ contention is indeed corroborated by the transcripts of conversation provided by the plaintiff:

(a) In the meeting dated 14 April 2009, when the plaintiff said the parties had said before that they would support Michael Ong’s TCM business, the 1^st defendant answered that Michael Ong’s business was far-fetched and since he could not find a factory that could earn revenue, he was not going to roll out the plan.  Thereafter, the 1^st defendant said that Michael Ong’s plan was far from workable and when she asked Michael Ong about the concerned medicine, it had not yet been certified.  The 1^st defendant also said Michael Ong’s business was still at a concept stage and was itself not viable.

(b) In the meeting dated 7 May 2009, when the plaintiff said: “… million meant to be invested in the company…”, the 1^st defendant immediately replied: “… that’s something doesn’t come out”.

(5) Based on the foregoing evidence, I agree with Mr Mak that it is plainly inconceivable for the defendants to have agreed that the 3^rd defendant, a publicly listed company, would invest into a bare business concept where no concrete business proposal had been presented or provided to them.

C4.  Alleged Representation & Term – Aiming to raise funds so that share price of the 3^rd defendant would rise

37. It is the plaintiff’s case that the 1^st and 2^nd defendants had represented to him that the 3^rd defendant was aiming to raise fund of at least HK$100 million by placement of shares at between HK$0.60 to HK$0.80 per share and it was confident of being able to raise funds at this price range.  He further alleges that the defendants agreed to do such fund raising so that the 3^rd defendant’s share price would rise from at least HK$0.60 to HK$0.80 per share in 2008 up to HK$3.39 per share in 2012.

38. Under cross‑examination, both the 1^st and 2^nd defendants denied making such representation to the plaintiff.  It is also the 1^st and 2^nd defendants’ evidence that the 3^rd defendant had no imminent concrete plans for a placement in April 2008.

39. As a matter of commercial reality, the placing price of a placement is usually determined with reference to the closing price of the shares on the last day of trading before signing of the placing agreement; or the average closing price of the shares over the five trading days before the signing of the placing agreement.  Mr Stanley Lai, the Responsible Officer of the Corporate Finance Department of President Securities (Hong Kong) Ltd (“President”) also gave evidence in this regard and he said the former approach is the best approach and the placing agent would usually liaise with the company before deciding which approach to adopt.

40. Furthermore, Rule 17.42B of the GEM Listing Rules provides that “in the case of a placing of securities for cash consideration, an issuer may not issue any securities pursuant to a general mandate … if the relevant price represents a discount of 20% or more to the benchmark price of the securities [which is referred to thereafter] …”. Therefore, there is certain restriction on the determination of the share price, and thus the 1^st and 2^nd defendants could not simply forecast the share price of the placement which was to be carried out only after a few months.

41. Given the above, I agree with Mr Mak that it would, objectively speaking, not be likely that the 1^st and 2^nd defendants would make any promise that the 3^rd defendant could raise funds at a certain price per share, let alone promising any rise of the 3^rd defendant’s share price in the near future.

C5.  Alleged Representation & Warranty – There were various other independent investors who would commit at the same terms as the plaintiff

42. It is the plaintiff’s case that the 1^st and 2^nd defendants represented to him that there were various independent investors who would commit to invest in the 3^rd defendant at the same terms as what the plaintiff was subject to.  This is also alleged to be one of the contractual warranties under the Investment Agreement.

43. The 1^st and 2^nd defendants denied making such representation and contractual warranty.  Mr Mak submitted that it is impossible for the 1^st and 2^nd defendants to say whether there would be other investors as early as in April 2008 since they did not have any concrete future plans of placement.

44. I agree. Objectively speaking, at such an early stage, it was not likely that the 1^st and 2^nd defendants would promise to the plaintiff that there were other independent investors, when nothing concrete about the upcoming placement plans had actually been confirmed.

C6.  Alleged Terms – Implementation of moratorium by the plaintiff & promise that the 3^rd defendant would not issue or place shares below HK$0.30 per share

45. The 1^st and 2^nd defendants denied the existence of these two alleged terms.

46. Under cross‑examination, the plaintiff said that it was the 1^st and 2^nd defendants who initiated the moratorium since the number of shares acquired by him was quite large and the 3^rd defendant’s share price would be affected if the plaintiff was to dispose of his shares.  He further said that this moratorium also bound the other investors.

47. Again, the plaintiff’s allegation is inherently improbable.  Under Rule 17.30(15) of the GEM Listing Rules, “where the directors agree to issue any securities for cash…an issuer shall publish an announcement as soon as possible…containing, inter alia, any other material information with regard to the issue (including any restrictions on the ability of the issuer to issue further securities or any restrictions on the ability of the allottees to dispose of shares issued to them…)” (with emphasis added).  Assuming what the plaintiff alleged were true, it is plainly impossible for the 3^rd defendant to omit mentioning anything in the Announcement about the moratorium and restriction on the share price at which future shares will be issued.  There was no reason for the defendants to conduct themselves otherwise than in accordance with the GEM Listing Rules.

C7.  Alleged Contractual Warranty – Truth of the contents of the GVM

48. The 1^st and 2^nd defendants denied having given such alleged contractual warranty to the plaintiff.

49. As mentioned above, the GVM is just a business proposal or plan which shows projections and estimates of the 3^rd defendant’s hospitality business.  I agree that it defies commercial sense for the 1^st and 2^nd defendants to have agreed that all estimated figures in the GVM must be attained and achieved.

C8.  Alleged Implied Contractual Warranty – Defendants’ promise to duly perform their obligations under the Investment Agreement

50. The 1^st and 2^nd defendants denied the existence of such alleged implied contractual warranty.

51. I agree with Mr Mak that it is contrary to commercial sense that the 1^st and 2^nd defendants would agree to be bound by a contractual warranty that they cannot act or omit to act in any way which would cause an end to the implementation of the Budget Hotels Business Plan.  The 3^rd defendant, being a publicly listed company, is entitled to decide on which area of business to engage in, subject to market conditions.  Assuming what the plaintiff said were true, it means that the defendants would invest into the hotel business “come what may”, which does not accord with common sense or commercial reality.

C9.  Plaintiff entering into the Placing Agreement

52. Under cross‑examination, the plaintiff confirmed that he had signed the undated Form of Acknowledgement and faxed it to President thereafter.  When the plaintiff was referred to the Form of Acknowledgement, he confirmed that he knew the effect of signing the form, namely acknowledging receipt of President’s placing letter dated 11 June 2008 confirming the terms and conditions of the oral contract in connection with the placing concluded between him and President; and that he was fully aware of the nature of the document when he signed it.

53. Despite the plaintiff testifying that he did not in fact know what the “oral contract” was about, I agree that, unless there is any legal basis for the plaintiff to argue that his apparent consent to the document had been vitiated, the mere fact that he did not know the contents is not a valid reason for him to disavow the document [see: Ming Shiu Chung v Ming Shiu Sum (2006) 9 HKCFAR 334].

54. In the placing letter dated 11 June 2008, it is clearly stated that: “We refer to our recent telephone conversation during which an oral contract was concluded between us (acting on behalf of the Company) and you whereby you agreed, on the terms and conditions stated below, to subscribe for 54,000,000 Placing Shares at HK$0.37 each Placing Share …  Under a placing agreement dated 11 June 2008…made between ourselves, Ms Wong Yuen Yee as vendor…and the Company, we have agreed to place up to 70,000,000 Placing Shares on a best effort basis,…” (with emphasis added).

55. In view of the terms of the placing letter, it is clearly not open to the plaintiff to assert that he was not aware of getting existing shares from the 1^st defendant, rather than new shares allotted by the 3^rd defendant. Clearly, the plaintiff was bound by all terms and conditions stated in the placing letter.

56. Further, it can be noted that the placing letter makes no reference to other alleged terms and conditions, especially with regard to the moratorium.  In the circumstances, I find against the existence of the terms and conditions that were allegedly agreed by the plaintiff and the defendants on 10 April 2008.

C10.  Miscellaneous points on the evidence

57. Based on the plaintiff’s evidence at trial, I agree that the plaintiff’s case is unbelievable and inherently improbable.  Assuming what the plaintiff said was true regarding the occasions when he discovered the breaches of the Investment Agreement and the falsity of the representations, he should have taken action, for instance, confronting the defendants or disposing of his shares.  Instead, he chose to do nothing. Assuming there was a moratorium as alleged by the plaintiff, it only concerned 50% of the shares, and he could simply elect to sell half of the shares if the defendants were really in breach of their promises.  He chose to do nothing. Further, the alleged moratorium should have expired by 13 December 2008 (six months from the placing agreement), by which time the placing of shares by the 3^rd defendant at a price lower than HK$0.30 per share had already taken place.  Again, he chose not to do anything at that time.  I agree with Mr Mak that the probable explanation for the plaintiff’s inaction at the time was because the alleged Investment Agreement, the alleged representations and/or terms and/or contractual warranties simply did not exist.

58. At trial, the plaintiff relied on various transcripts of conversation between the parties in support of his allegations against the defendants.  In this regard, I agree with Mr Mak’s submissions that on closer analysis of their contents, the transcripts are not conclusive and they can be interpreted in different ways.  Moreover, the plaintiff has often attempted to take particular portions of the transcripts out of context in order to suit his case.  Overall (save for the portions thereof referred to in paragraph 36(4) above), I do not find the transcripts to be particularly helpful in resolving the issues in dispute in this case.

59. Finally, in assessing the credibility of the plaintiff, I have taken into account the glaring inconsistencies contained in the draft Statement of Claim attached to the letter dated 29 May 2009 issued by Messrs Michael Pang & Co (“MPC”), the former solicitors for the plaintiff.

60. Put simply, the factual bases mentioned in the draft Statement of Claim are significantly different from those contained in the Re‑Amended Statement of Claim filed in this action.

(1) In the draft Statement of Claim, no “Investment Agreement” had been referred to.

(2) According to the draft Statement of Claim, the agreement to invest a minimum of HK$10 million into LBD was made on 28 February 2008.

(3) Based on the entirety of the draft Statement of Claim, (i) the subscription of the 54 million shares was unrelated to the Budget Hotels Business Plan; (ii) the “1‑year” period during which the 3^rd defendant would not place or issue shares below HK$0.30 per share should run from 28 February 2008; and (iii) all the terms and conditions of the subscription of shares by the plaintiff were contained in the placing letter issued to the plaintiff on 11 June 2008.  Very significantly, nothing about the Budget Hotels Business Plan, the Investment Agreement, the moratorium, the independency of placees, other representations allegedly made by the defendants, etc, had ever been mentioned.

61. Under cross‑examination regarding the above inconsistencies between the draft Statement of Claim and the Re‑Amended Statement of Claim, the plaintiff simply answered he had not read through the draft Statement of Claim and he was not familiar with it since it was prepared by MPC and another counsel.  He alleged that he had told MPC that there was an Investment Agreement and there were other terms and representations, yet MPC made no reference to the agreement and only picked two of the representations to be incorporated into the draft Statement of Claim.

62. I agree with Mr Mak that the plaintiff’s explanation is wholly implausible.  If the plaintiff had truly given all instructions to MPC, there was no particular reason why MPC would omit mentioning most of the allegations in the draft Statement of Claim.  This is especially the case when most of the missing allegations, for instance, the failure to implement the Budget Hotels Business Plan, the moratorium, the “trust” arrangement, the failure to procure independent placees by the defendants, etc, form the bulk of the plaintiff’s case in this action.

63. With no reasonable explanation given by the plaintiff, I agree that these inconsistencies cast serious doubt on his credibility as to whether the events had happened as he alleged in the Re‑Amended Statement of Claim.

D.  CONCLUSION AND DISPOSITION

64. For the reasons set out above, I hold that the plaintiff’s case against the defendants is unmeritorious, especially having regard to all the inherent improbabilities and inconsistencies above mentioned.  On the other hand, I regard what the 1^st and 2^nd defendants have told the court to accord much more with commercial reality.

65. In the premises, the plaintiff’s claim against the defendants in this action is dismissed.

66. I further order that the plaintiff do pay the defendants their costs of this action, including all costs reserved (if any).  Such costs are to be taxed if not agreed.

67. The above order as to costs is nisi and shall become absolute in the absence of any application within 14 days to vary the same.

68. Lastly, I express my gratitude to counsel on both sides for their helpful assistance in this matter.