FIRST LASER LTD v. FUJIAN ENTERPRISES (HOLDINGS) CO LTD AND ANOTHER

CACV 97/2020

[2023] HKCA 465

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 97 OF 2020

(ON APPEAL FROM HCA NO 4414 OF 2001)

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J U D G M E N T

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Hon Kwan VP:

1.  Yuen JA will give the first judgment.

Hon Yuen JA:

2.  This is the defendants’ appeal from a Judgment of DHCJ To (“the judge”)  given on 8 April 2020 (“the Remitter Judgment”)  on the issue of restitution under Mainland law, which issue had been remitted to the Court of First Instance (“CFI”)  by the Court of Final Appeal (“CFA”)  in its Judgment dated 6 July 2012 (“the CFA Judgment”)[1].

Background

3.  The lengthy background of these proceedings has been set out in detail in the CFA Judgment.  For the purpose of understanding the present judgment, it is necessary to refer to the following facts.

4.1  The 1^st defendant (“FEHC” or “FEHL”)  and the 2^nd defendant (a company controlled by FEHC)  were incorporated in Hong Kong as the “window companies” of the Fujian Provincial People’s Government.

4.2.  In the early 1990's, FEHC had set up a joint venture on the mainland with a research institute for the production of nonlinear crystals.  In 1996 however, a dispute arose between them, which led to litigation.

4.3.  At about this time, FEHC needed capital, and also wished to relocate certain equipment and operations outside the Mainland.  It approached Mr Ngan In Leng (“Mr Ngan”), a resident of Macau originally from Fujian and the controller of the plaintiff (“First Laser”), a company incorporated in Macau.

4.4.  Three agreements[2] all dated 12 December 1996 were then executed between various companies associated with First Laser and FEHC respectively.  The judge held in a judgment given on 5 February 2008 (“the 1^st CFI Judgment”)  that an agreement made in Hong Kong about 2 weeks later on 28 December 1996 (“the First Laser Agreement”)  replaced the three agreements, but the CFA held that “in commercial terms [this] was only part of the transaction.  The reality of the matter was that the arrangement was a joint venture.  But the terms of the joint venture were never agreed ...”[3].

First Laser Agreement

5.1  Under this Agreement, it was agreed that First Laser would pay US$3,187,500 (agreed to be equivalent to HK$24.64 million)  for FEHC’s transfer of 51% of the nonlinear crystal project, to be effected by the transfer of that proportion of shares in two Mainland companies, Fujian Casix Laser Inc (“FCL”)  and Fuzhou Casix Optronics Inc (“FCO”). 

5.2.  The CFA held:

“the contract [the First Laser Agreement] was part of an overall plan for a joint venture, with manufacturing to take place mainly outside the Mainland ... but the subject matter was shares in Mainland companies ...” (§56).

“The First Laser Agreement was an agreement relating to the sale and purchase of the FCL and FCO shares, and in commercial terms was only part of the transaction. The reality of the matter was that the arrangement was a joint venture. But the terms of the joint venture were never agreed, and the relationship between the parties was fluid and decisions were taken on an ad hoc basis without reference to any underlying agreement. This caused no problem until the management of FEHC changed [in May 1998]” (§18). (Emphasis added).

Payments by First Laser and associate companies

6.1.  First Laser paid, or was taken to have paid, the sum of HK$24.64 million in full, as follows:

−  a sum of HK$10 million was paid on 31 November 1996;

−  another sum of HK$10 million was paid on 30 April 1997;

−  the balance of HK$4.64 million was set-off, as acknowledged in a memorandum dated 13 March 1998 (“the 1998 Memorandum”)[4].

6.2.  On top of that, companies controlled by Mr Ngan also paid:

−  two sums of RMB500,000 each in August and October 1997 to FCL;

−  a sum of US$500,000 in August 1997 and a sum of US$100,000 in April 1998 to a subsidiary of FCL for a project undertaken in the United States (“the Project”)  which enhanced FCL’s value (§25, CFA Judgment).

6.3.  It should be noted that all these payments occurred before the change of management of FEHC in May 1998.

No transfer of shares in accordance with First Laser Agreement

7.1.  In March 1997, FEHC transferred all the shares in FCO to Casix Optronic Manufacturing Ltd (“COM”)[5] instead of to First Laser pursuant to the First Laser Agreement[6].

7.2.  The transfer of FCL shares to First Laser did not occur.  As held by the CFA, apart from the absence of a directors meeting approving the transfer, it appeared from contemporaneous documents that the transfer was rendered impossible because approval for the transfer would not be granted as FCL’s share capital had not been fully paid up[7]. 

7.3.  In April 1997, FCL applied to the relevant authority for reduction of its authorized capital from US$15.15 million to US$7 million (§138, Remitter Judgment).  

The 1998 Memorandum

8.1  On 13 March 1998, when the reduction application was still being processed and when FEHC’s chairman and general manager Mr Kong Fan Li (“Mr Kong”)  was about to leave, the parties signed the 1998 Memorandum in the circumstances summarised by the CFA as follows (§26):

“On 13 March 1998, about a month before Mr Kong was due to vacate his office as chairman and general manager of FEHC, a Memorandum was signed on behalf of FEHC and First Laser setting out what was described as the rights of the parties and the capital arrangement of COM and FCL. The Memorandum explained why the shares in FCL were not transferred to COM. It acknowledged: (1)  that for some historical reasons, such as the fact that US$2.5 million of the registered capital of US$7 million had not yet been injected into FCL and that there were some outstanding legal disputes relating to FCO, the FEHC was still temporarily wholly holding FCL while COM was still temporarily wholly holding FCO; (2)  when those problems were resolved, the shareholding of First Laser and FEHC in COM and FCL would be regularised in the ratio of 51:49 (para.1); (3)  that prior to the regularisation, COM’s and FCL’s investments and rights in respect of FCL, COM and FCO would be governed by the agreements of 1996 (para.2); and (4)  that as First Laser injected a significant amount of capital in establishing COM, and as FEHC would hold 49% of the shares in COM upon the regularisation, the outstanding payment in the amount of HK$4.64 million due from First Laser to FEHC under the First Laser Agreement was treated as having been paid by First Laser and representing FEHC’s capital contribution to COM (para.3)”. (Emphasis added).

8.2.  The CFA held, significantly, that the 1998 Memorandum “made it clear that ownership in the FCL shares had not been transferred and that FEHC was still holding them (and in context this does not mean holding them for First Laser)” (§115(2), CFA Judgment).  

Events after the 1998 Memorandum

9.1.  In May 1998, Mr Kong and his management team were replaced by Mr Xu Meixing (“Mr Xu”)  and his management team.  The judge found in the 1^st CFI Judgment that “the relationship between the parties took a turn”[8] and “the conflict between Ngan and FEHC became overt since August 1998”[9]. 

9.2.  In August 1998, FEHC suggested a reversal of the share ratio under the First Laser Agreement, which suggestion was rejected by Mr Ngan (§15, Remitter Judgment). 

9.3.  After April 1999, Mr Ngan requested the return of the funds he had invested in the project, which request was ignored by FEHC (§17, Remitter Judgment).

Transfer of FCL shares to JDS

10.1.  In December 1999, FCL’s application for reduction in capital was approved (§168, Remitter Judgment).

10.2.  In February 2000, FEHC paid up the capital as reduced, and obtained approval from the approval authority to sell the entire shareholding in FCL to a company called JDS Uniphase China Holdings Company (“JDS”)  for US$60 million (“the JDS Agreement”).

Legal proceedings commenced

11.  Legal proceedings in Hong Kong and the Mainland were then commenced by First Laser and FEHC respectively.

- Hong Kong proceedings

12.1  In 2001, First Laser commenced proceedings against the defendants in Hong Kong in HCA 4414/2001.  In its original statement of claim, the relief sought included:

−  on the basis of the First Laser Agreement, a declaration that FEHC held 51% of the shares in FCL on “trust” for First Laser, and consequential relief;

−  alternatively to the above, on the basis of mistake, a declaration that FEHC held all the sums paid by First Laser on trust for First Laser (in what was called “Trust No.2”), and consequential relief;

−  (25)  Further or alternatively, restitution or return of the purchase price in the sum of $24,640,000 paid by First Laser for 51% of the shares in FCL and FCO;

  (27)  Further or alternatively, restitution or return of the sums of US$410,000 and RMB1,000,000 remitted by First Laser for investment in the Project;

(28)  Further or alternatively, restitution of the proceeds of sale under the JDS Agreement received by FEHC.

12.2.  The relief claimed in (25)  and (27)  were clearly on the basis of returning the parties to their “pre-contract” positions.  As for (28), as will be seen later, it was amended in 2016 and re-amended in 2018 in the circumstances discussed later in this Judgment.

- Mainland proceedings

13.1  At about the same time when First Laser commenced proceedings in Hong Kong, FEHC commenced proceedings in the Fujian Higher People’s Court against Hang Wo, COM and First Laser “concerning the dispute over share transfer agreement involving”[10] FEHC.  A photocopy of the 1998 Memorandum was referred to that court, but was rejected by the court as the original was not provided and there was no other evidence of the actual existence of the 1998 Memorandum.

13.2.  The three companies failed in the Fujian court, and appealed to the Supreme People’s Court (“the SPC”).

13.3.  It was held by the SPC in December 2004 that

−  those parts of the Hang Wo Agreement, the COM Agreement and the First Laser Agreement concerning the transfer of shares in FCO and FCL had never been approved by the approval authority, and were invalid and of no effect[11];

−  as for the 1998 Memorandum:

“The contents of the Memorandum mainly involve the equity held and capital contributed by respective shareholders before and after the share transfer of FCL and FCO under the three share transfer agreements. Although the Memorandum is not subject to the approval by relevant administrative authorities, it should also be regarded as invalid and of no effect because of the three share transfer agreements being invalid and of no effect”[12].

13.4.  In other words, the Memorandum was not regarded as having a “stand-alone” effect upon the rights and obligations of the parties. 

The 1^st CFI Judgment

14.1  The action in Hong Kong was tried before the judge in 2007.  One of the main issues was whether Hong Kong law or Mainland law applied.

14.2.  The trial culminated in the 1^st CFI Judgment in which the judge held that the proper law was Hong Kong law.  His orders were made on that basis, and he made no findings on Mainland law, or the parties’ position if Mainland law applied.

The CA Judgment

15.1  On FEHC’s appeal in CACV126/2008, this Court[13] (“CA”)  held in a Judgment given on 4 January 2011 (“the CA Judgment”)  that Mainland law applied.  However, because the judge had not made any findings under Mainland law, we found ourselves handicapped in addressing fully the consequence of the proper law being Mainland law (§59). 

15.2.  On the basis of the materials before us, Cheung JA said this:

“60. If Mainland law was the proper law of the contract, then the expert evidence clearly showed that the contract was invalid. The contract was invalid by reason of FCL not having obtained approval to dispose of its shares. Under Mainland law, the innocent party is entitled to two remedies:

(1)  Restitution: the parties will be restored 返還 to their pre-contract position.

(2)  Compensation: the party at fault 過錯 is liable to pay compensation to the other party”. (Emphasis added).

15.3.  At the time of the appeal to the CA, the restitution relief sought by First Laser remained that as set out in §12.1 above.  The CA held:

“Restitution

61. In respect of restitution the defendants have indicated both in the Court below and in this Court that they are prepared to make restitution. In this Court, the defendants openly stated that it will return HK$20 million[14] being the amount paid by the plaintiff to the 1^st defendant with interest and will forego the return of FCO shares, and dividends declared or paid by FCO. The plaintiff has not responded to the open offer. If this offer is accepted, then there will be a judgment on such terms for the plaintiff. If not, the issue of restitution must be remitted to the Court of First Instance for determination under Mainland Law”.

The CFA Judgment

16.1  First Laser’s appeal to the CFA from the CA Judgment was dismissed on 6 July 2012.  The CFA held:

−  Mainland law applied, whether by reason of issue estoppel by the SPC Judgment (§§36-50), or under the common law (§§52-56);

−   First Laser’s contention of estoppel by convention was rejected (§§75-106), even if Hong Kong law applied (§§107-116); 

−  as far as remedies were concerned, the CFA noted that:

(a)  FEHC’s offer of restitution (namely, return of HK$20 million with interest and foregoing the return of FCO shares, and dividends declared or paid by FCO)  has been rejected by First Laser (§59);

(b)  as for compensation under Mainland law, First Laser did not seek any relief for compensation for fault under Mainland law (§§62-63); and there was no expert evidence of Mainland law that the nature of that duty was such as to give rise to a constructive trust.  Accordingly, there was no basis for remitting the claim for compensation for fault (§70).

16.2.  The CFA therefore remitted only the issue of restitution to the CFI for determination under Mainland law (“the Remitter Order”)  (§74).

SPC Judicial Interpretation in Provisions I

17.1  Whilst the case was going through the Hong Kong courts, there were the following developments under Mainland law.

17.2.  On 17 May 2010, the SPC passed a judicial interpretation entitled “Provisions of the Supreme People’s Court on Several Issues concerning the trial of disputes involving Foreign-Funded Enterprises (I)” 《最高人民法院關於審理外商投資企業糾紛案件若干問題的規定(一)》(“Provisions I”).

17.3.  On 5 August 2010 (during the hearing of the appeal before the CA), Provisions I was promulgated, and it took effect on 16 August 2010.  

18.  It is well-established law that Mainland law is foreign law, and foreign law is factual[15].  However, First Laser did not apply to adduce Provisions I as new evidence before the CA or the CFA, and the proceedings before those courts were determined only on the pleadings and evidence before the CFI.

New expert evidence on Mainland law for the Remitter trial

19.1  At the Remitter trial, which eventually took place in 2019, First Laser sought to rely on Article 18(1)  in Provisions I (“Article 18”)[16] in support of its contention that it was entitled to more than what had been offered by FEHC in respect of the claim for restitution.  

19.2.  Before the Remitter trial took place however, the following events occurred which are relevant to some of the grounds of appeal before us.

Directions for leave to file expert evidence on Mainland law

20.1  First, in September 2015, there was a hearing before the judge for directions preparatory to the Remitter trial.  First Laser applied, among other things, for leave to file an expert opinion of Professor Yin Fei 尹飛 on Provisions I.  The defendants opposed this application as they received the opinion only a week before the directions hearing, and they had not obtained their own expert’s opinion on it yet.  The judge nevertheless heard the application for leave to adduce Professor Yin’s opinion.  

The judge’s Directions Decision

20.2.  In a Decision given on 28 January 2016 (“the Directions Decision”), the judge summarised his understanding of the relevant parts of Professor Yin’s opinion.  In §§16-17 of this Decision, the summarised analysis of Article 92 of the General Principles of the Civil Law (“GPCL”)  民法通則 and the Opinion of the Supreme People’s Court on Several Issues in Implementing the General Principles of the Civil Law of the People’s Republic of China (Trial Implementation)  最高人民法院關於貫徹執行《中華人民共和國民法通則》若干問題的意見（試行）(“GPCL Opinion”)  is difficult to understand. 

20.3.  However, the following is the judge’s understanding of that part of Professor Yin’s opinion on the effect of Provisions I on the case:

“17. According to ... Professor Yin, the Judicial Interpretation [Provisions I] applies specifically to disputes between a PRC party and a foreign investment enterprise; and articles 18 and 19 of [Provisions I], in very brief terms, permit a foreign investment enterprise to recover the profits generated from the investment with a PRC party under an agreement which was rendered no effect and which but for the interpretation of article 92 of the [GPCL] given by the [GPCL Opinion] would be forfeited to government. As FCO and FCL are joint venture companies between a PRC party and a foreign investment enterprise, [Provisions I] is applicable to the First Laser Agreement. The opinion of ... Professor Yin is, in gist, that by reason of [Provisions I], the Plaintiff would be put in more or less the same position as it would have been in had the First Laser Agreement been valid under Mainland law. The Plaintiff would thereby be entitled not just to interest but also substantial compensation representing the profits it would have made from the investment in FCO and FCL, in particular the proceeds of sale of FCL to JDS Uniphase”. (Emphasis added).

20.4.  The judge held:

“19. ... on a fair reading, [Provisions I] is prima facie applicable to this case and is likely to have a significant impact on the determination which this court has to make in due course on the issue of restitution. It is directly relevant to the remitted issue. ...” (Emphasis added).

“29. In my view, in hearing a remitted issue, a trial judge has discretion to admit further or new evidence, to permit amendment of pleadings and even to re-open a party’s case. In a case where the appellate court has not expressly directed that no new evidence may be adduced at the hearing of a remitted issue, it is entirely a matter of case management for the judge hearing the remitted issue to decide, particularly in view of the long lapse of time of almost eight years and the new [Provisions I], how best to proceed. The most important consideration is to secure the just resolution of dispute in accordance with the substantive rights of the parties. These two considerations point strongly in favour of admitting the new evidence relating to [Provisions I]. ...”. (Emphasis added).

20.5  For those reasons, the judge allowed Professor Yin’s opinion relating to Provisions I to be adduced. 

21.1  It would appear from the Directions Decision that whilst Mr Shieh SC, the then leading counsel for the defendants, had submitted that First Laser should not be allowed a “second bite of the cherry” by adducing new evidence[17], the defendants did not directly argue that the scope of the Remitter Order did not permit First Laser to rely on Article 18.

21.2.  Nor, in the light of the new evidence on Mainland law, did the defendants apply to stay the issue to the Mainland court on the basis that it would be the more appropriate forum.  

The CA Directions Judgment

22.1  The defendants’ appeal was dismissed by this court in July 2016 (“the CA Directions Judgment”)[18] after consideration of written submissions only. 

22.2.  In §3(1)  of the CA Directions Judgment, it was said that in relation to First Laser’s application for directions, including leave to file the expert opinion, the judge “made no order except that the costs of the application be First Laser’s costs in the cause of the remitted issue” and in §18, that that was “recognized by Mr Shieh in his oral submissions [before the judge] to be ‘perfectly open’ to the judge”.  Further in §5, it was said that “it has been acknowledged by all that these orders involved the exercise of discretion of the judge and most, if not all, are in the nature of case management decisions”. 

22.3.  It would therefore appear from these passages that the defendants did not advance any argument based on the scope of the Remitter Order. 

Amendment of SOC

23.1  Following the judge’s Directions Decision and the CA Directions Judgment, on 19 July 2016 the statement of claim was amended to incorporate a new §38A, which may be summarised as follows.

§38A(a)

−  Provisions I was adopted by the SPC on 17 May 2010, and came into force on 16 August 2010 [i];

−  Provisions I has legal force [ii - v];

−  Provisions I has retroactive effect [vi - vii];

−  Provisions I is applicable to the present case because FCO and FCL were both foreign investment enterprises and the remitter issue is pending [viii - ix];

−  Article 18(1)[19] was pleaded as follows[20] [x]:

“Where a contract between the actual investor and the nominal[21] investor [shareholder] of a foreign-funded enterprise is determined as void, if the value of the equity held by the nominal shareholder is higher than the actual investment amount, and the actual investor requests the nominal shareholder to refund the investment money and [the word “pleads” is deleted] for reasonable distribution of the equity proceeds between both parties on the basis of the actual investment it has made as well as the nominal shareholder’s participation in the business management of the foreign-funded enterprise, it shall be upheld by the people’s court”.

“實際投資者與外商投資企業名義股東之間的合同被認定無效，名義股東持有的股權價值高於實際投資額，實際投資者請求名義股東向其返還投資款並根據其實際投資情況以及名義股東參與外商投資企業經營管理的情況對股權收益在雙方之間進行合理分配的，人民法院應予支持。”

−  as First Laser was the actual investor in 51% of FCL and FEHC was the nominee shareholder, First Laser claimed, “on the basis of actual investment” as particularized, “reasonable distribution” of the proceeds of sale of FCL to JDS of US$60,000,000 [xi - xiv];

−  First Laser claimed to be entitled under Mainland law to:

− “restitution on the basis of a proportion greater than 51%” (at the court’s discretion)  of the value of the equity (US$60,000,000)  or proceeds of sale, and interest, etc [xv]; and also

−  a “reasonable distribution of any dividend and bonus arising from the FCL shares” from the date of the First Laser Agreement to the sale of FCL to JDS [xvi].

§38A(b)

−  Further or in the alternative, First Laser relied on Article 131, GPCL Opinion[22], which provides:

“The returned illegal [improper][23] profits shall include the original thing and the fruits arising therefrom”.

§38A(c)

−  Insofar as necessary, First Laser relied on Mainland laws on restitution pleaded in §§25A(4)  - (5)  and (8)  - (10)  of the Re-amended Reply, which pleaded (among other things)

−  Article 61 of the GPCL[24] [§25A(5)], and

−  Article 58 of the Contract Law[25] [§25A(8)]. 

23.2.  The claim for relief was amended as follows (amendment underlined):

“(28)  Further or alternatively, restitution under Mainland PRC law of the value of the equity or proceeds of sale under the JDS Agreement received by the 1^st Defendant”.

23.3.  It would be noted that the defendants did not object to the amendment on the basis that it went beyond the scope of the Remitter Order and/or the judge’s Directions Decision and/or the CA’s Directions Judgment.

Expert opinions

24.1  Subsequently, First Laser filed an expert opinion of Professor Yin, and the defendants filed an expert opinion of Mr Bai Tao 白濤, a Mainland lawyer.  There was also a joint experts’ opinion which was filed on 27 March 2018. 

24.2.  Regrettably, this court has not been able to derive much assistance from the experts.  The written opinions were incomplete in scope[26], contained internal inconsistencies[27], and the transcripts showed that when challenged in cross-examination, the oral evidence of the experts was not impressive.

Re-amendment of SOC

25.1  On 25 January 2018, First Laser filed a further summons for leave to re-amend the statement of claim by pleading that it was also entitled to “a refund of the investment money” 返還投資款 at §38A(a)  xv and to re-amend the claim for relief as follows (amendment underlined and re-amendment double-underlined):

“(28)  Further or alternatively, restitution under Mainland PRC law of the investment money and a reasonable distribution of the value of the equity or proceeds of sale under the JDS Agreement received by the 1^st Defendant together with any dividend and bonus arising from FCL’s shares”.

25.2.  The judge granted leave to re-amend on 31 January 2018, and the re-amendment was filed on 2 February 2018. 

Remitter Trial

26.  The Remitter trial took place between September and December 2019.

The Remitter Judgment

27.  The Remitter Judgment was 189 pages long.  In summary, the judge’s conclusions are set out below.

Finding of a collateral nominee investment contract  

28.  As a result of his findings in §§179 - 204, the judge found:

“205. ... For reasons as I have already explained, I find that a new relationship was born out of the special circumstances of the case by the time of the 1998 Memorandum. The relationship is one which exists between an actual investor and nominee shareholder under a collateral nominee investment contract. This relationship and contract co-exists with the relationship of a vendor and purchaser of shares in a contract for sale and purchase of shares, such as the First Laser Agreement. It stands or falls with the First Laser Agreement. As the First Laser Agreement was held to be void, so too must the collateral nominee investment contract. (Emphasis added).

206. On the true construction of article 18 of Provisions (I), the Article may be invoked without the nominee investment contract being first held by a court to be void. There is no dispute that the value of the 51% shares in FCL is higher than the equity value of FCL at the time of its sale to JDS. The nominee investment contract having now been found by this court to be void, First Laser is entitled to restitution under article 18(1)  of Provisions (I)”.

The judge’s discussion of First Laser’s “primary claim in restitution”

29.1  In §§207 - 271, the judge discussed First Laser’s “primary claim in restitution” which he said (§207):

“is founded on articles 58 and 59 of Contract Law, articles 61 and 92 of GPCL, article 131 of GPCL Opinion and article 18 of Provisions (I)  which construes these articles” (emphasis added).

29.2.  He held (§208):

“This right to restitution of property transferred under a contract which is found to be void is founded on articles 58 and 59 of Contract Law and article 61 of GPCL”.

29.3.  Those articles are discussed in detail in Kwan VP’s Judgment below, but may be summarised as follows: 

−  Article 58 of the Contract Law[28] provides that property acquired as a result of a contract shall be returned after the contract is confirmed to be null and void or has been rescinded; where the property cannot be returned or the return is unnecessary, it shall be “reimbursed at its estimated price”.  The party at fault shall compensate the other party for loss incurred as a result therefrom;

−  Article 59 of the Contract Law[29] provides that if parties “maliciously colluded” to harm the interests of the state, the collective or a third party, property obtained should be returned to the state, the collective or the third party[30];

−  Article 61 of GPCL[31] provides for the return of property after a civil act has been determined to be null and void or has been rescinded;

−  Article 92 of the GPCL[32] provides that “if profits are acquired improperly and without a lawful basis, resulting in another person’s loss, the improper profits shall be returned to the person who suffered the loss”;

−  Article 131 of the GPCL Opinion[33] provides that “the improper profits to be returned shall include the original subject matter and the fruits arising therefrom.  Other benefits obtained by using the improper profits, net of labour service overheads, shall be forfeited”. 

29.4.  In fact, Article 92 of the GPCL had not been pleaded, although Article 131 of the GPCL Opinion which construed Article 92 was pleaded in §38A(b), Re-Amd SOC[34].

“Improper profits”

30.1  The judge held that as the banknotes paid could not be specifically returned, a claim for reimbursement of the property in this case could only be a claim for “improper profits” (§215).

30.2.  On his own understanding of the term 孳息 (which has been translated as “fruits”), the judge held that it includes interest, dividends and capital growth or enhancement in value arising from the original subject matter (§§224-5). 

The judge’s discussion of First Laser’s “primary claim under Article 18”

31.1  Although in §207, the judge had said First Laser’s primary claim in restitution is founded on Articles 58 and 59 of Contract Law, Articles 61 and 92 of GPCL, Article 131 of the GPCL Opinion and “Article 18 of Provisions I which construes these Articles” (emphasis added), he held at §226 that:

“First Laser’s primary claim is founded on article 18(1)  of Provisions I. That article sets out the principle on how improper profits are to be distributed between the actual investor and nominee shareholder ...” (emphasis added).

31.2.  He said (§228):

“Accordingly, I find that in a claim under article 18(1), the actual investor is entitled to be returned the value of the actual investment sum, interests, dividends, and a reasonable distribution of the benefits arising from the investment represented by the enhancement in value of the equity based on the actual value of the enterprise invested at the material valuation date”.

31.3.  After referring to “Understanding and Application of Provisions I” 《最高人民法院關於審理外商投資企業糾紛案件若干問題的規定（一）條文理解與適用》 (“U&A”)[35], and taking into account certain facts he found at the 1^st trial, he held that the value of the “original subject matter and the fruits arising therefrom” were HK$19,083,837.07 and HK$246,912,577 respectively, and assessed the sum “to be returned” to First Laser to be the total sum of $265,996,414. 

Counter-restitution

32.1  In the defendants’ Re-Re-Re Amended Defence and Counterclaim, they pleaded that if First Laser was entitled to restitution under Mainland law, then it was liable for counter-restitution:

(1)  for the value of 100% of FCO shares transferred to it, and

(2)  the dividends declared by FCO,

totalling RMB54,381,332.19.

32.2.  The judge upheld this plea and at the end of this section of the Remitter Judgment (§§279 -302), held that FEHC was entitled to the return of dividends in the sum of RMB8,411,153.60 and 49% of the equity value in FCO of RMB5,572,812.48 totalling RMB13,983,966.08 which he converted to HK$15,828,366.

Alternative claim

33.1  The judge also discussed First Laser’s alternative claim based on:

−  Article 58 of the Contract Law;

−  Article 61 of the GPCL;

−  the “improper profits regime” under Article 92, GPCL; and

−  the “principle of fairness” 公平原則 under Mainland law (which had not been pleaded).

33.2.  He held that on this alternative claim, “there is no need to prove that the contract is a nominee investment contract” (§304). 

33.3.  Basing his analysis on the “principle of fairness”, he found that FEHC “deliberately defaulted” in its obligation to seek approval for the transfer of the FCL shares to First Laser and “craftily engineered a situation to make the three agreements and the 1998 Memorandum void” (§315).  The judge went on to say that the defendants decided to “steal” the project and “took advantage of its own default”, saying that “these facts cry out loudly for the principle of fairness to intervene to right the wrong engineered by FEHC” (§316).

33.4.  He held that the principle of fairness required the same principle of distribution to be adopted as per Article 18 and the same sum should be paid under the alternative claim (§§317-320).

34.  These were the judge’s orders:

(1)  the defendants are to pay First Laser the sum of HK$250,168,048[36] with interest;

(2)  interest be calculated on

−  the principal sum of HK$265,996,414 (the total of what the judge found were “the value of the original subject matter and the fruits arising therefrom” of HK$19,083,837.07 and HK$246,912,577[37])  from 1 May 2000 (i.e. being the date of completion of the sale of the shares in FCL to JDS)  until 31 December 2008 (i.e. when FCO ceased business), and

−  the principal sum of HK$250,168,048 from 1 January 2009 until 8 April 2020 at the rate of 1% above prime, and thereafter at judgment rate until payment;

(3)  a costs order nisi that FEHC pay First Laser’s costs of the remitter proceedings with certificate for two counsel;

(4)  a costs order nisi that there be no order as to costs against the 2^nd defendant.

Notice of Appeal

35.1  The defendants appealed.  The Amended Notice of Appeal, filed on 3 September 2021, ran to 57 pages and 80 paragraphs.  A number of matters were repeated in support of different grounds. 

35.2.  The grounds may be summarised as follows:

A.  The judge erred in allowing First Laser to advance a new case in the remitter proceedings [Amended Notice of Appeal, §§1-5].  

B.  It was not open to First Laser to advance a case of nominee investment contract/joint venture agreement as these had not been pleaded [§§6-13].

C.  The judge erred in holding that there was a nominee investment contract between First Laser and FEHC in respect of the shareholding in FCL when there was no evidence in support of such a contract [§14].

D.  The judge erred in holding that Provisions I applied to this case [§15].

E.  The judge erred in holding that it was not necessary to identify a prior ruling that the nominee investment contract was void [§§16-18].

F.  First Laser had not pleaded Article 92 of the GPCL (improper profits)  [§§19-20].

G.  The judge erred in making findings that were inconsistent with the findings/rulings made in previous decisions, and in any event, those findings were not permitted under the Remitter Order:

G1.  The judge’s findings were inconsistent with previous rulings and were made on unpleaded issues [§§21-35].

The judge’s findings were inconsistent with the CFA Judgment which held that:

G2.  the terms of the joint venture were never agreed and what the parties did bore little relationship to the First Laser Agreement [§§36-40];

G3.  the First Laser Agreement was not treated as binding [§41];

G4.  First Laser did not participate in FCL’s capital contribution [§42]; and

G5.  FEHC did not hold shares in FCL for First Laser [§§43-44].

H.  First Laser was estopped (by issue estoppel)  from asserting that it was treated as the owner of FCL shares by §§107-116 of the CFA Judgment [§§45-46].

I.  The judge erred in finding there was a collateral nominee investment contract, as

−  the issue was outside the purview of the Remitter Order and had never been pleaded, and

−  the finding was unsupported by the factual evidence, inconsistent with the CFA Judgment, and unsupported by the expert evidence at the Remitter trial [§§47-52].

J.  The judge erred in:

−  accepting Professor Yin’s evidence, and in conducting his own research on the meaning of the term “fruits” 孳息 in Article 131 of the GPCL Opinion which was not put to the experts [§§53-56]; and

−  taking into account various payments as First Laser’s contributions for the purpose of distribution under Article 18 [§§57-60].

K.  The judge erred in:

−  dealing with the alternative claim, the nature of which were fault based

−  as that was outside the scope of the Remitter Order, and

−  his findings were unsupported by the evidence; and

−  applying the “principle of fairness” [§§60A-72A].

L.  The amount ordered to be paid to First Laser was wrong in principle, as it did not return First Laser to its pre-contract position, and treated the Agreement as valid [§73].

M.  The judge erred in his calculation of FEHC’s plea for counter-restitution [§§74-77].

N.  The judge erred in his award of interest [§§78-80].

35.3.  Mr Benjamin Yu SC[38] for the defendants, indicated at the hearing of the appeal that he would rely only on the following summarised grounds:

(1)  the Remitter Judgment went beyond the scope of the CFA’s Remitter Order;

(2)  the nominee investment contract found by the judge was not pleaded and was not supported by the factual evidence;

(3)  the judge’s findings were inconsistent with those made in previous decisions, in particular, the CFA Judgment;

(4)  even assuming there was a nominee investment contract, it has not been determined that this was void, and so Article 18 was not engaged;

(5)  the judge failed to address (or erred when he addressed)  questions of Mainland law and the expert evidence;

(6)  the judge was wrong to find in favour of First Laser’s alternative claim.

Respondent’s Notice

36.1  On 27 May 2020, First Laser filed a respondent’s notice to affirm the Remitter Judgment.

36.2.  As mentioned above, at §186 and §205 of the Remitter Judgment, the judge had held that there was a “new relationship and contract” ie the collateral nominee investment contract. However, in the Respondent’s Notice, First Laser contended: 

“3.2(3)  The Plaintiff does not rely on a new or separate ‘nominee investment contract’ which was separately found to be void, but rather contends that the First Laser Agreement and/or the 1998 Memorandum (construed in the context of the factual background together with the Hang Wo and COM Agreements and the parties’ conduct), all of which were already held by the SPC and CFA to be of no effect, collectively or individually constitute a contract between the actual investor and the nominal shareholder within the meaning of article 18 of Provisions I” (emphasis added).

“6.1. Whilst the judge has labeled the nominee investment contract as a ‘collateral contract’ for convenience, it is conceptually not a ‘collateral contract’ in the common law sense that it was a separate and distinct contract from the First Laser Agreement and/or the 1998 Memorandum ...” (emphasis added).

“6.4. In respect of the judge’s finding (which was rightly made)  that a nominee investment contract existed by the time of the 1998 Memorandum (§205, Remitter Judgment), the First Laser Agreement on its own (construed together with the factual background and the parties conduct)  was also sufficient to constitute a nominee investment contract under Article 18, and the 1998 Memorandum merely reinforced such conclusion. Ths is particularly so when it is plain that the 1998 Memorandum purported to record the understanding or the spirit of the consensus previously reached between the parties” (emphasis added).

36.3.  Mr Jat SC[39] confirmed before us that he was not relying on a separate nominee investment contract.  He referred to the oral closing submissions of Mr Edward Chan SC, leading counsel for First Laser at the Remitter trial, who submitted at one point that First Laser was “not really saying that there is another agreement”[40].  

Discussion

37.1  I shall discuss grounds (1)  to (4)  of the defendants’ submissions, including relevant parts of the expert evidence on Mainland law, taking ground (5)  into consideration where relevant.  These grounds challenge the judge’s findings that there was a “nominee investment contract” which he described as “collateral”, and found was void, triggering the application of Article 18.  First Laser’s position in the Respondent’s Notice will also be considered.

37.2.  Kwan VP will discuss ground (6)  i.e. the submissions relating to the judge’s findings on the alternative claim, and the counter-restitution, also taking ground (5)  into consideration where relevant.

Ground (2)  - Pleading point part

38.  I shall consider the pleading point part of ground (2)  before ground (1), and deal with the rest of ground (2)  together with ground (4).

39.1  Although it is correct that the words “nominee investment contract” never appeared in First Laser’s pleadings, it is clear that in the Directions Decision in January 2016, the judge allowed the filing of expert evidence on the type of contract covered in Article 18[41], and the appeal from that decision was dismissed in the CA Directions Judgment.

39.2.  That type of contract was given the nomenclature “nominee investment contract” by the judge in §24 of the Remitter Judgment, as follows:

“a contract to invest in a foreign-owned enterprise between ... an actual investor 實際投資者 and a nominee shareholder of that enterprise 外商投資企業名義股東 (“nominee investment contract”)  ... ”.

39.3.  In my view, it matters not whether it is called a nominee investment contract or “a contract within the meaning of Article 18” (as per §3.2(3)  of the Respondent’s Notice).  For ease of reference to the Remitter Judgment, I will use the term “nominee investment contract”.

40.1  As mentioned above, in the Directions Decision in January 2016 and on appeal therefrom, the court had allowed First Laser to assert a case based on a nominee investment contract.

40.2.  This was followed by the Amd SOC in July 2016, in which First Laser pleaded Article 18, followed (in §38A(a)  xiii)  by its assertion that it relied on “all the facts pleaded herein, in particular paragraphs 17 to 18 and paragraphs 20 to 24 of the Statement of Claim, and paragraph 6, 17 and 19 of the Re-Amended Reply”. 

40.3.  Implicit in the pleading of Article 18, together with those facts, was First Laser’s case that there existed a nominee investment contract, a case which the judge permitted it to run in the Directions Decision, and which was not overturned on appeal in the CA Directions Judgment.

40.4.  If the defendants had any doubts about First Laser’s case, they could have asked for further and better particulars of the contract to which First Laser was applying Article 18, but they did not do so.  Instead, the defendants pleaded extensively in response to §38A Re-Amd SOC in §§38.1 - 38.20 of the Re-Re-Re Amd Defence and Counterclaim filed on 17 July 2019.  

40.5.  For the above reasons, the defendants must have been aware, well before the commencement of the Remitter trial in September 2019, that First Laser was advancing a case that there existed a nominee investment contract to which Article 18 was applicable. Consequently, that part of ground (2)  based on the pleading point should be rejected.

Ground (1)  - Scope of Remitter Order

41.1  As for ground (1), i.e. that the case of nominee investment contract was outside the scope of the Remitter Order, it has been noted above that Provisions I came into effect when the case was pending in the CA on appeal from the 1^st CFI Judgment.  There is no explanation from First Laser as to why it did not adduce it as fresh evidence before the CA or the CFA.

41.2.  Be that as it may, as mentioned above[42], in September 2015, First Laser made an application to file Professor Yin’s expert opinion on the application of Article 18. 

41.3.  If the defendants considered that this was outside the scope of the Remitter Order, they should have argued that before the judge’s Directions Decision, or on appeal therefrom, on the basis of abuse of process.  However, it appears from the CA Directions Judgment that the judge’s order was not challenged on that, or any similar, ground. Instead, the defendants accepted the position that the judge’s leave to file Professor Yin’s report was in the nature of a “case management decision” (§5, CA Directions Judgment). 

42.1  It is well-established that the court would normally not permit a party to put forward an argument which it might have brought forward earlier for adjudication (Henderson v Henderson[43]). 

42.2.  It was too late for the argument on the scope of the Remitter Order to be raised only at the trial, and consequently too late for the defendants to raise ground (1)  on appeal.  This ground should also be rejected. 

Ground (3)  - Inconsistency with CFA findings

43.  The defendants’ argument in ground (3)  is that the judge’s finding of a “new relationship and contract” between First Laser and FEHC is inconsistent with the CFA’s findings.

44.1  At §§179 - 182 of the Remitter Judgment, the judge found there was a “new relationship” between First Laser and FEHC.  This finding seems to have developed as follows:

“179. The true nature of the agreement was a joint venture and the true relationship between the parties was one of partnership which co-exists with the relationship of vendor and purchaser [of] shares”.

“181. By March 1998, the parties had carried on this de facto partnership for fifteen months.

...

Though what the parties did had little relationship with the First Laser Agreement, they were in fact carrying out the joint venture in accordance with the spirit of the First Laser Agreement. Kong executed the 1998 Memorandum acknowledging that the COM and FEHC were temporarily holding the shares in FCO and FCL respectively. While in the context this did not mean COM was holding any of the shares in FCO for FEHC nor was FEHC holding any of the shares in FCL for First Laser as there is no concept of beneficial interest under Mainland law, there was an understanding that when the two problems were resolved, the shareholdings in FCO, FCL and COM would be regularised and the First Laser Agreement would be performed to the letter. ... First Laser legitimately expected to acquire its 51% shareholding in each of FCO and FCL under the First Laser Agreement and the 1998 Memorandum. First Laser’s expectation to acquire the interest in FCL must increase with time and with its contribution to the joint venture by way of operation and management of FCO and FCL. Under the circumstances, a closer and tighter relationship must have arisen from the special circumstances of the case since the 1998 Memorandum as the parties were working towards their ultimate goal of acquiring 51:49 interest in each of FCO and FCL in the years to come”.

“182. This new relationship co-exists with the existing vendor and purchaser relationship as well as partnership relationship. ... Though the three agreements and the 1998 Memorandum were held to be invalid, the above relationship and the parties’ conduct pursuant to that relationship did not disappear. FEHC cannot brush off this new relationship, the de facto partnership relationship in the joint venture, the de facto relationship in FCO and FCL, and First Laser’s expectation by obstinately arguing that the relationship between the parties was just one of vendor and purchaser of shares”. (Emphasis added).

44.2.  It would appear from the above passages that the judge found that, apart from the relationship of vendor and purchaser:

−  there was a “partnership relationship” which co-existed with the vendor-purchaser relationship;

−  subsequently, there was a “new relationship” which also co-existed with the vendor-purchaser relationship and the partnership relationship.

45.1  In my view, first, it was not open to the judge at the Remitter trial to find that a partnership had been formed between First Laser and FEHC.  There was no expert evidence as to what would constitute a partnership under Mainland law.  This relationship had never been asserted by First Laser up to and including at the CFA. 

45.2.  Second, as the “partnership relationship” was one of the matters which caused the judge to find a “new relationship”, the finding of the “new relationship” would also be vitiated. 

45.3.  Third, as the terms of the joint venture were never agreed (§18, CFA Judgment), it was not open to the judge in the Remitter Judgment to find that the parties were “carrying out the joint venture”. 

45.4.  Fourth, the conduct relied upon by the judge in his finding that the parties were “carrying out the joint venture” in §181 of the Remitter Judgment was similar to the conduct considered by the CFA at §§110 - 115 of its Judgment.  The CFA found that “there was … no common assumption that notwithstanding the absence of approval for the transfer of FCL shares, … First Laser had a 51% shareholding notwithstanding the lack of approval” (§ 110)  and “what the parties did bore little relationship to the First Laser Agreement” (§112), noting eg. that there was no reorganization of the board as envisaged by the Agreement (§112), and no formation of a working group (§113).  Significantly, the CFA found (§113):

“(3)  The fact that Mr Ngan or COM was consulted on management decisions says nothing about any assumption that ...First Laser owned shares in FCL despite the absence of approval”.

Whilst on a remitter, a judge may take into account conduct which took place after the original trial[44], it does not give free rein to contradict or undermine facts upon which the CFA had adjudicated.  At §115(2)  of the CFA Judgment, the CFA held: “the memorandum of March 1998 made it clear that ownership in the FCL shares had not been transferred and that FEHC was still holding them (and in context this does not mean holding them for First Laser)” (emphasis added).  This puts the situation clearly outside the ambit of a nominee investment contract because, as the judge said (at §183), “the relationship under such a contract is one … when the nominee shareholder holds the shares for the actual investor …” (emphasis added).

45.5.  For the reasons above, it is clear that ground (3)  has been established. 

Ground (2)  - Finding of nominee investment contract not supported by the evidence, and Ground (4)  - Article 18 not engaged

46.  This part of the discussion deals with:

−  that part of ground (2)  in which the defendants argue that the finding of a nominee investment contract was not supported by the evidence, and

−  ground (4)  in which the defendants argue that, even assuming there was a nominee investment contract, it has not been determined that it was void, and so Article 18 would not apply in any event.

47.1  First, the judge found that the “new relationship”, which followed from his finding of a “partnership relationship”, gave rise to a nominee investment contract. 

47.2.  The crux of the point is set out at §186 of the Remitter Judgment:

“This nominee investment contract arose from the factual background including the Agreement, the three agreements[45], the 1998 Memorandum[46] and the parties’ conduct. The parties conducted themselves in accordance with the spirit of the First Laser Agreement as if they were partners in the joint venture and shareholders of FCO and FCO [presumably referring to FCL]. The fact that the FEHC permitted First Laser to participate as de facto partner in the joint venture and de facto shareholder in FCL and FCO is its recognition that its rights as shareholder of FCL and FCO is somehow and in some way subject to the rights of First Laser. These legal facts enable this court to draw as the only irresistible inference that FEHC and First Laser were engaged in a relationship of nominee shareholder and actual investor under a nominee investment contract. This contract is collateral to the Agreement, the three agreements, individually or collectively, which have been held to be void. Under this nominee investment contract, which I conveniently call ‘collateral contract’ using the common law term, FEHC was to hold 51% of the shares in FCL as nominee shareholder for First Laser and the balance of 49% in its own right as shareholder and actual investor until the shareholdings in FCO and FCL were regularized”. (Emphasis added).

48.1  First, in view of the judge’s line of reasoning, once his findings of a “partnership relationship” and a “new relationship” are rejected as discussed in §45 above, it must follow that the finding of a nominee investment contract should also be rejected.  But there is more.

48.2.  In the Mainland proceedings, First Laser had not advanced a case of partnership or nominee investment contract.  Incidentally, the concept of “concealed name investment” had been referred to in another case in the SPC (E3/2491)  before the SPC judgment in this case.  First Laser’s response to this is simply “that the concept of ‘nominee investment contract’ was known in Mainland law in other contexts before the promulgation of Provisions (I)  … is neither here nor there, and does not alter the fact that the SPC was not asked to determine this question”. There is no evidence which explains why (if there was in fact a nominee investment contract between the parties)  why First Laser did not assert it in the Mainland proceedings.

48.3.  Nor has it been suggested that there was any evidence from Mr Ngan at the first trial before the judge to the effect that the parties had formed a partnership or entered into a nominee investment contract. 

Provisions I

49.  Before considering the defendants’ further arguments that the evidence did not support the judge’s finding of a nominee investment contract, it would be helpful to first analyse Provisions I. 

50.  It was common ground at the Remitter trial that although entitled “provisions”, this is a judicial interpretation under the Mainland legal system.  As such, it is not a statutory enactment (and hence not a new law), but is the SPC’s interpretation of existing statutory provisions, having effect alongside the statute interpreted, although it takes effect only from the date of promulgation (§§28-29, Remitter Judgment). 

51.  The preamble to Provisions I states:

“These provisions are formulated, in conjunction with trial practice, to enable proper adjudication of disputes arising from the establishment of and changes relating to foreign investment enterprises, and to protect the lawful rights and interests of the parties, according to provisions under the laws and regulations in the GPCL, the PRC Contract Law, the PRC Property Law, the PRC Company Law, the PRC Law on Sino-foreign Joint Ventures, the PRC Law on Sino-foreign Co-operative Enterprises, the PRC Law on Foreign Investment Enterprises”.

52.1  The layout of Provisions I[47] is clear on even a cursory reading.

52.2.  First, there are four Articles (Articles 1-4)  which “set the scene”.  Article 1 confirms that approval from the authority is required for contracts for the establishment of, and changes relating to, foreign investment enterprises to be valid.  Articles 2-4 then refer to variation of approved contracts, post-approval matters and management rights, matters which do not concern us in this appeal.

52.3.  At the end of Provisions I, Articles 21-24 deal with matters of general application, such as use of false materials, etc., which also do not concern us in this appeal.  

52.4.  Significantly, the rest of Provisions I (ie Articles 5-20)  clearly govern two different types of agreements.  It is notable that this was agreed by First Laser’s expert in cross-examination[48]. 

(1)  Articles 5-12 deal with agreements for transfer of shares in foreign investment enterprises 外商投資企業股權轉讓合同 (“transfer contracts”)as the parties are identified as “transferor” 轉讓方 and “transferee” 受讓方, and the amount paid is referred to as “transfer funds” 轉讓款; significantly, the rights and obligations of the parties where the contract did not receive approval from the authority are provided for in Article 7[49];

(2)  Articles 14-20 deal with agreements relating to foreign investment enterprises, where one party is the “actual investor” 實際投資者, and the other party is the “nominee shareholder” 名義股東, and the amount paid is referred to as “actual investment amount” 實際投資額 or “investment amount” 投資款.

52.5.  Articles 14-20 illustrate the features of a nominee investment contract:

−  Articles 14 and 15 refer to it having been “agreed” 約定 that one party is to actually invest, and the other is to be the nominee shareholder;

−  Article 14 stipulates three conditions which have to be fulfilled before the actual investor may request confirmation of its identity as shareholder;

−  Article 15 deals with the actual investor’s request to the nominee shareholder for distribution of profits and remuneration for the nominee shareholder;

−  Article 16 refers to the nominee shareholder failing to perform the contract with the actual investor, entitling the latter to discharge the nomineeship contract;

−  Article 17 states that the people’s court should not uphold an actual investor’s direct request to the foreign investment enterprise for distribution of profits or the exercise of shareholder’s rights;

−  Articles 18 and 19 then deal with situations where the nominee investment “contract” 合同 is invalid; Article 18 deals with the situation where the shares held by the nominee shareholder are more valuable than the amount invested by the actual investor, and Article 19, where the shares are less valuable;

−  Article 20 deals with a contract between an actual investor and a nominee shareholder which has been determined invalid by reason of their having colluded maliciously to damage the interests of the state, or any organizations or third parties.

53.1  In the above contextual setting, it is clear that Articles 14-20 cater for a situation where it has been agreed that one party would invest in a foreign investment enterprise, and the other party would hold the shares in that enterprise only as a nominee for the first party.  The Articles in this part of Provisions I (eg confirmation of identity, remuneration of the nominee, discharge of the nomineeship contract, no direct distribution from the enterprise, and invalidity of such a nominee investment contract)  pertain to this type of agreement.

53.2.  Irrespective of whether it is called an agreement or contract, under this arrangement the parties have agreed that the shares belong to the actual investor, but his identity is concealed by the device of a nominee shareholder.  Thus, this is given the name “concealed name investment” 隱名投資 in the U&A, which states explicitly that Articles 14-20 are provisions for disputes relating to concealed name investments[50].  Mr Bai, the defendants’ expert, had in his opinion dated 28 March 2017, §3.4, drawn attention to this.

53.3.  In contrast, in the present case, there was no attempt by First Laser to conceal its intended purchase of the shares in FCL.  First, in the First Laser Agreement, the parties’ intention is clearly for the sale and purchase of shares, not to establish a nominee shareholding.  Was there a subsequent contract to do so?

54.1  The judge said he found “that a new relationship was born out of the special circumstances of the case by the time of the 1998 Memorandum” (§205, Remitter Judgment). The judge however also said at §181 that at an unidentified time “since the 1998 Memorandum ... a closer and tighter relationship must have arisen” which “new relationship co-exists with the existing vendor and purchaser relationship”[51], and this new relationship was a “share-holding relationship” 代持 under a nominee investment contract[52] which was collateral to the parties’ previous agreement(s).

54.2.  Contrary to the Respondent’s Notice, it is clear from the above that the judge found that it was only by virtue of the new relationship that a collateral nominee investment contract (a new and separate agreement between the parties)  arose, which he then found to be void.

55.  In my view, the finding of a nominee investment contract cannot be upheld.  First, the finding of such a nominee relationship “co-existing” with the existing vendor and purchaser relationship is, with respect, illogical.  As the judge recognized, “a nominee investment contract is not the same as a contract for sale and purchase of shares”[53]. As there was no approval for the sale and purchase of the shares as required, the shares could not be owned by First Laser, whereas on the judge’s finding of the nominee holding, the shares were already owned by First Laser as the actual investor.  This is conceptually self-contradictory.

56.  Second, the finding of a subsequent creation of a nominee investment contract is not supported by the evidence.  The inconsistency between §205 and §181 of the Remitter Judgment as to whether the new relationship was created “by the time of the 1998 Memorandum” or “since the 1998 Memorandum” shows a lack of clarity and consistency in the fact finding exercise. 

57.1  Dealing first with up to March 1998, ie “by the time of the 1998 Memorandum” (§205), the judge accepted that the terms of the Memorandum (when FEHC was still under Mr Kong’s management)  showed that despite the agreement between the parties and First Laser’s payments, FEHC was not holding the FCL shares for First Laser[54].  

57.2.  Further, the CFA described the relations between the parties (before the management of FEHC changed)[55] as “fluid” and “constantly shifting”[56]. Clearly therefore, there could not have been a nominee investment contract between them “by the time of the 1998 Memorandum” as the judge held in §205. 

58.1  As for after March 1998, ie “since the 1998 Memorandum” (§181), it should be noted that the relations between the parties changed drastically after May 1998 when Mr Xu took over control of FEHC[57]. The judge found the following facts[58]:

“All went very well until May 1998 when Xu and a new management replaced Kong and his team. After an incubation period of about three months, Xu had second thoughts and started to wriggle out of the First Laser Agreement. FEHC dragged its feet in resolving FCL’s under-capitalization problem. Despite the previous agreement to apply the dividends from FCO and FCL as the parties’ joint contribution to the capital of FCL ... FEHC ignored Ngan’s request to acknowledge his intended contribution as the parties’ joint contribution”. (Emphasis added).

58.2.  Further, at §313, the judge found that the parties “in truth, ... fell out because of a change of mind on the part of FEHC following a change in its management team”.

58.3.  The conduct above described by the judge display a more distant and hostile relationship between the parties after May 1998 when Mr Xu took over control of FEHC.  This does not support the finding at §114 Remitter Judgment, where the judge said:

“If FEHC wants to identify a nominee investment contract required under Article 18, the short answer is that it is a contract created by conduct under the above circumstances”. (Emphasis added).

The conduct, which in the judge’s words, showed that FEHC was intending to “wriggle out” of the agreement, is clearly incompatible with an intention to pass ownership of the shares to First Laser under a nominee investment contract. 

58.4.  At §186 of the Remitter Judgment, the judge said that “legal facts need not be the result of the parties’ intentional or conscious conduct.  They may arise from factual circumstances independent of the parties’ intention and may create legal consequences, including contractual consequence”.  

58.5.  The suggestion that two commercial parties somehow by conduct created a nominee contract for the shares when their intentions were clearly to hotly contest for them is surprising. Even before the change in FEHC’s management team, when the relationship between the parties was friendly, the situation was in a state of limbo, as the sale and purchase agreement had been signed but approval had not been obtained and was not certain, and the terms of the joint venture were not agreed.  As the CFA said, the relations were “fluid”, but as evidenced by the 1998 Memorandum, even then FEHC was still holding the FCL shares in their own right.  

58.6.  After the change in FEHC’s management team, the parties held adversarial positions with regard to the FCL shares.  FEHC was trying to “wriggle out” of having to transfer the shares in FCL to First Laser.  In light of this, the judge would need to examine the evidence closely before he could find that somehow, FEHC had done the exact opposite of its intention, and presented the contested shares to First Laser by holding them as its nominee. 

58.7.  There was no close examination of the evidence that led to a finding that such a contract or agreement was created (eg when, by whom, how and its terms).  The judge’s finding that a “closer and tighter relationship must have arisen from the special circumstances of the case since the 1998 Memorandum”, creating a nominee investment contract, is an inference that was not supported by the evidence.

59.  For the above reasons, this part of ground (2)  has also been established. The finding of a nominee investment contract must also be set aside, and consequently Article 18 is not engaged.

60.1  In ground (4), the defendants argued that even assuming there was a nominee investment contract, it has not been determined 認定 that it was void, and so Article 18 would not in any event apply.

60.2.  This contention arises from the construction of Article 18 which has been set out in §23.1 above.

61.1  At §105 of the Remitter Judgment, the judge held that there is no doubt that the actual investor has the burden of proving the existence of a nominee investment contract, and that it is void.  At §205 however, he said:

“ ... I find that a new relationship was born out of the special circumstances of the case by the time of the 1998 Memorandum. The relationship is one which exists between an actual investor and nominee shareholder under a collateral nominee investment contract. This relationship and contract co-exists with the relationship of a vendor and purchaser of shares in a contract for sale and purchase of shares, such as the First Laser Agreement. It stands or falls with the First Laser Agreement. As the First Laser Agreement was held to be void, so too must the collateral nominee investment contract”.

61.2.  As discussed earlier, there is a conceptual illogicality in finding that the nominee investment contract “co-exists” with the sale and purchase agreement which was not approved, as First Laser owns the shares under the nominee investment contract, and yet not own the shares under the unapproved sale and purchase agreement. 

61.3.  But more importantly, when the judge said “this relationship and contract [the nominee investment contract] co-exists with the relationship of a vendor and purchaser of shares in a contract for sale and purchase of shares”, it is clear that the judge considered the nominee investment contract to be separate and distinct from the First Laser Agreement.  Thus, the SPC’s finding that the First Laser Agreement was void cannot be regarded as a finding that the nominee investment contract was also void. 

61.4.  First Laser’s argument in the Respondent’s Notice, that it does not rely on a new or separate nominee investment contract separately found to be void, contradicts its own case as advanced by its expert Professor Yin, who had agreed in cross-examination[59] that under Article 18, there had to be a determination 認定 that the nominee investment contract was void.  There has been no such determination under Mainland law.  First Laser relied on the SPC’s finding that the three agreements were void, but that would not assist its case as the judge’s finding was that the nominee investment contract was a separate and distinct agreement. 

62.  For the reasons set out above, as there has been no determination under Mainland law of the invalidity of the nominee investment contract, ground (4)  has also been established.

Order

63.  For the reasons above, as well as those in Kwan VP’s Judgment, I would allow the appeal and set aside the order made by the judge.  I agree with the disposition of the appeal as proposed in §§110-111 of Kwan VP’s Judgment.

Hon Kwan VP:

64.  I agree with the judgment of Yuen JA on the primary claim of First Laser.  I adopt the terms and expressions in her judgment.  My judgment deals with the alternative claim and the issue of counter-restitution.

First Laser’s alternative claim in restitution

65.  As a fallback, in the event that First Laser is unable to rely on Article 18 of Provisions I for failing to establish a contract to invest in a foreign-owned enterprise between an actual investor and a nominee shareholder (“nominee investment contract” or “NIC”), First Laser has mounted an alternative claim in restitution in respect of the First Laser Agreement – a share transfer agreement – which was found to be null and void by the Supreme People’s Court.  This alternative claim was described by the judge in §25 of the Remitter Judgment as follows:

“First Laser’s alternative claim is founded on article 58 of 《The Contract Law of the People’s Republic of China》 (《中華人民共和國合同法》)  (‘《Contract Law》’)  and article 61 of《The General Principles of the Civil Law of the People’s Republic of China 》)  (《中華人民共和國民法通則》)  (‘《GPCL》’). This claim is premised on First Laser being entitled under these articles to the return of the actual investment sum of HK$24,640,000 as property acquired by FEHC by reason of the First Laser Agreement, which is found to be void and of no effect. Under article 131 of 《The Opinion of the Supreme People’s Court on Several Issues in Implementing the General Principles of the Civil Law of the People’s Republic of China (Trial Implementation)  》(《最高人民法院關於貫徹執行《中華人民共和國民法通則》若干問題的意見（試行）》)  (‘《GPCL Opinion》’), the property to be returned includes the original subject matter (「原物」)  and ‘the fruits arising from the original subject matter’ (「原物所生的孳息」). On a proper application of article 58 of 《Contract Law》 and/or articles 61 of 《GPCL》, article 92 of《GPCL》, the ‘improper profits regime’ (「不當得利制度」)  and the ‘principle of fairness’ (「公平原則」)  under Mainland law, the scope of restitution covers not only the original subject matter transferred under the First Laser Agreement and dividends but also other benefits generated from the original subject matter received by FEHC. This alternative claim will yield more or less the same result as the primary claim under article 18 of 《Provisions (I)》.” [60]

66.  The judge essentially upheld the alternative claim as framed above, holding in the Remitter Judgment at §317:

“If there was a nominee investment contract which was void, First Laser would be entitled to a reasonable distribution under article 18 of 《Provisions (I)》 as it sought in the primary case. If there is no, First Laser is entitled to restitution under article 58 of 《Contract Law》 and/or article 61of 《GPCL》, article 92 of《GPCL》as construed under article 131 of 《GPCL Opinion》considered in the light of the principle of fairness.”

67.  It would be convenient to set out first the terms of the various articles on which the alternative claim is said to be founded.

68.  Article 58 of the Contract Law provides:

“「合同無效或者被撤銷後，因該合同取得的財產，應當予以返還；不能返還或者沒有必要返還的，應當折價補償。有過錯的一方應當賠償對方因此所受到的損失，雙方都有過錯的，應當各自承擔相應的責任。」

(Translation:

Property acquired as a result of a contract shall be returned after the contract is confirmed to be null and void or has been rescinded; where the property cannot be returned or the return is unnecessary, it shall be reimbursed at its estimated price.  The party at fault shall compensate the other party for loss incurred as a result therefrom.  If both parties are at fault, each party shall respectively be liable.)”

69.  Article 61 of the GPCL provides:

“「民事行為被確認為無效或者被撤銷後，當事人因該行為取得的財產，應當返還給受損失的一方。有過錯的一方應當賠償對方因此所受的損失，雙方都有過錯的，應當各自承擔相應的責任。

雙方惡意串通，實施民事行為損害國家的、集體的或者第三人的利益的，應當追繳雙方取得的財產，收歸國家、集體所有或者返還第三人。」

(Translation:

After a civil act has been determined to be null and void or has been rescinded, the party who acquired property as a result of the act shall return it to the party who suffered loss.  The defaulting party shall compensate the other party for the losses it suffered as a result of the act; if both sides are at fault, they shall each bear their proper share of the responsibility.

If the two parties maliciously collude together to carry out a civil act that harms the interests of the state, the collective unit, or a third party, the property acquired by both parties shall be recovered and returned to the state or the collective unit or returned to the third party.)”

70.  Article 92 of the GPCL provides:

“「沒有合法根據，取得不當利益，造成他人損失的，應當將取得的不當得利返還受損失的人。」

(Translation:

If profits are acquired improperly and without a lawful basis, resulting in another person’s loss, the improper profits shall be returned to the person who suffered the loss.)”

71.  Article 131 of the GPCL Opinion provides:

“「返還的不當利益，應當包括原物和原物所生的孳息。利用不當得利所取得的其他利益，扣除勞務管理費用後，應當予以收繳。」

(Translation:

The improper profits to be returned shall include the original subject matter and the fruits arising therefrom.  Other benefits obtained by using the improper profits net of the labour service overheads shall be forfeited.)”

72.  As it was held by the Court of Appeal and the Court of Final Appeal that the remission to the Court of First Instance is for determination of the issue of restitution under Mainland law, by which the parties are to be restored (返還)  to their pre-contract position, any liability of the party at fault (過錯)  as mentioned in the 2^nd sentence of Article 58 and of Article 61 is not relevant as this falls outside the scope of the remitter.

The arguments

73.  The arguments of Mr Yu may be summarised as follows.

74.  The first broad aspect of his arguments relates to Article 92. Foreign law has to be specifically pleaded and, somewhat inexplicably, First Laser has failed to plead Article 92 of the GPCL in the RASOC albeit that Article 131 of the GPCL Opinion was pleaded[61].  The judge was wrong to allow First Laser to rely on Article 92.  Mr Bai, the Mainland law expert of FEHC, was not cross-examined at all on Article 92.  Nor was Professor Yin, the Mainland law expert of First Laser, cross-examined on this provision. Mr Yu further submitted that Article 92 plainly does not apply as there is no question of FEHC making a profit without legal basis, or causing loss to First Laser, and the remission is not on the basis that First Laser has suffered “loss” and is seeking to be compensated.

75.  The second aspect of his arguments relates to the principle of fairness.  The judge held that even if the primary claim should fail, he would still arrive at the same conclusion on the alternative claim based on the principle of fairness[62].  He invoked a general principle of fairness to “fill in lacunae in the law”[63] (when it was never suggested in the pleadings or in evidence there was any lacuna in Mainland law), resulting in his award to First Laser 51% of the sale proceeds of the FCL shares, as if the contract was valid.  In doing so, he failed to apply Article 58 of the Contract Law and Article 61 of the GPCL, which are the directly relevant articles under Mainland law.  On the basis that restitution is claimed under an agreement for the sale and purchase of shares, as provided in Article 58, the only property that FEHC received by reason of the agreement (因該合同取得的財產; “Property acquired as a result of a contract”)  would be the purchase price.  This is very different from the situation of a nominee investment contract, in which the property acquired by the nominee shareholder by reason of the agreement would be the shares of the foreign-owned enterprise.  The judge had wrongly mixed up the two in adopting the principle of fairness suggested by the authors of 《Provisions (I)》 titled 《Understanding and Application of 《Provisions of the Supreme People’s Court on Several Issues concerning the trial of disputes involving Foreign-Funded Enterprises (I)  》》 (《最高人民法院關於審理外商投資企業糾紛案件若干問題的規定(一)條文理解與適用》)  (“Provisions I U&A”)  at pages 185 to 186[64].

76.  The third aspect of his arguments relates to Article 131 of the GPCL Opinion.  Under this article, the “fruits arising therefrom” (原物所生的孳息), ie from the original subject matter, could only be the interest from the purchase price, since the original subject matter acquired by FEHC under the agreement was the purchase price.  This is Mr Bai’s opinion, which was unjustifiably rejected by the judge, who conducted his own research on the meaning of the term “fruits” (孳息)  and gave the expression “fruits arising therefrom” the widest possible meaning, which should include “interests, dividends and capital growth or enhancement in value arising from the original subject matter”.[65] The judge was plainly wrong in including the “enhancement in value of the shares in FCL” as within the scope of the property to be returned in the alternative claim under Article 58 or Article 61 by invoking the principle of fairness, holding that this “requires that these fruits be distributed between First Laser and FEHC regardless whether there was any nominee investment contract or the nature of the agreement or arrangement between them” and “Even though article 18 of 《Provisions (I)》does not apply to distribution of fruits arising from a contract other than a nominee investment contract which is void or found to be void”[66].

77.  The fourth aspect of Mr Yu’s arguments relates to the scope of the remitter, namely, that the issue for determination under Mainland law is restitution, by which the parties are to be restored (返還)  to their pre-contract position.

78.  On a pre-contract position (the contract being the First Laser Agreement), First Laser would not enjoy the benefit of any appreciation in value of the shares in FCL.  It is wrong for the judge to find that the parties had “conducted themselves at least up to March 1998 or possibly the end of that year according to the spirit of the First Laser Agreement” (quite apart from this being inconsistent with the findings in the CFA Judgment at §§115 to 116)  and use this as a reason to apply the principle of fairness “to right the wrong engineered by FEHC”[67].

79.  His finding that there was “agreement to apply dividends from FCO and FCL as contributions to the capital of FCL”[68] is not First Laser’s pleaded case and is unsupported by evidence.  The findings that FEHC “deliberately defaulted” in not causing FCL to seek approval for the share transfer and that FEHC “dishonestly stole the Project”[69] are again not First Laser’s pleaded case and are improper in light of the holding of the Court of Appeal that it was wrong to hold (on the basis that the proper law of the contract was Hong Kong law)  FEHC was at fault in not causing FCL to obtain approval for the transfer of the FCL shares[70].  It is also inconsistent with the judge’s finding in his earlier judgment that the money was received by FCL and that the Project was held by FCL and he had dismissed First Laser’s claim against FEHC in respect of the Project[71].

80.  In response, Mr Jat emphasised that the alternative claim is not a “fault-based” claim excluded by the CFA Judgment. The concept in Mainland law of “不當利益” (translated as “improper profits regime”[72] in the Remitter Judgment)  in Article 92 of the GPCL and Article 131 of the GPCL Opinion is not fault-based but a concept distinct from compensation (賠償)  for fault (過錯)  in the 2^nd sentence of Article 58 of the Contract Law and of Article 61 of the GPCL.  As appears from Article 92 (沒有合法根據，取得不當利益，造成他人損失的，應當將取得的不當得利返還受損失的人; emphasis supplied)[73], the concept of “不當利益” arises from the absence of legal basis and the remedy is not compensation but restitution.  “Absence of legal basis” is a principle recognised in civil law systems[74].  The relevant part of Article 131 of the GPCL Opinion defines the scope of the improper profits to be returned – not compensated – as including the original subject matter and the fruits arising therefrom.

81.  Mr Jat submitted that the juridical basis in Mainland law of the right to return of money paid under an invalid contract under Article 58 of the Contract Law and Article 61 of the GPCL can only be under the “improper profits regime”, because under Mainland law money once paid is not considered “property” and therefore no “right to claim rights in property” (物權請求權)  arises and the right that may be invoked is the “right to claim improper profits” (不當得利請求權).  There is no challenge to the relevant part of the Remitter Judgment at §§215 to 220.

82.  As for the pleading objection that First Laser has failed to plead Article 92 of the GPCL, the judge dealt with this in §§117 to 119 of the Remitter Judgment.  The judge rejected the absence of express pleading of Article 92 as “highly technical”.  The RASOC expressly pleaded reliance on Article 131 of the GPCL Opinion, which is a judicial interpretation that explains the effect of Article 92, and made cross reference to the Reply which referred to FEHC’s liability under the accepted principles of PRC civil law in respect of “restitution, return, unjust enrichment, return of the purchase price and/or monies paid/transferred over, as well as improper/unjust gains and/or profits”.  It is impossible and illogical to analyse and apply Article 131 without considering its subject matter, ie Article 92. Furthermore, Article 92 was expressly identified as point (6)  of the experts’ agreed list of disputed Mainland law issues in their joint statement[75]. Mr Bai had addressed the applicability of the improper profits regime under Article 92[76].

83.  As for the principle of fairness, Mr Jat pointed out that the judge did not rely on the principle as a standalone cause of action. He submitted that the judge was entitled to reject the contention that “property acquired as a result of a contract” held to be void should mean only the purchase price and interest.  There is support for the judge’s approach that this expression in Article 58 (and a similar expression in Article 61)  should not be so narrowly construed.  In §308 of the Remitter Judgment, the judge quoted from page 120 of Provisions I U&A, in which the authors expressed the opinion that “if the value of the enterprise is significantly enhanced beyond the average income (of such an enterprise)  due to the contribution of the transferee’s special efforts and management, it may be appropriate in the exercise of discretion and in accordance with the principle of fairness allocate to the transferee part of the enhancement in value, in addition, if the transferee also invests its own funds while operating and managing the enterprise, so that the enterprise can enhance its value with the combined funds, the respective capital ratio can also be a factor to be taken into account in distributing the enhancement in value.”  Mr Jat submitted that where the purchaser’s investment in the company and actual participation in management produces an enhancement in value of the shares, and the contract is later declared void, the seller must be regarded as having obtained (取得)  the enhanced value of the shares (財產)  as a result of the contract (因該合同).

84.  Mr Jat contended that the judge’s findings of fault or blame in §§312 to 315 of the Remitter Judgment are not essential to the conclusion he reached that the same result would be arrived at in the alternative claim in restitution.  The judge’s conclusion is justified by First Laser’s contributions to the enhancement of value of FCL in its management, its capital investment in the Project and subsidy to Wang for the latter’s management of the Project, as mentioned in §317 of the Remitter Judgment. The “profits” (ie the enhancement in value of FCL shares)  retained by FEHC are “improper” because First Laser, rather than FEHC, provided the investment needed to generate those fruits, and the retention of such fruits by FEHC is without any legal basis as a result of the invalidity of the contract.

Discussion

85.  The alternative claim in restitution is fraught with difficulties, leaving aside the omission to plead Article 92 and whether the juridical basis of the improper profits claim is fault-based.  To facilitate discussion on the material issues, the pleadings point and the no fault-based claim will be addressed first.

86.  I am inclined to agree with the judge that the absence of express pleading of Article 92 of the GPCL should not be an obstacle to First Laser to rely on this provision, given that Article 131 of the GPCL Opinion was expressly pleaded, and, as rightly submitted by Mr Jat, it would be impossible and illogical to analyse and apply Article 131 which is the judicial interpretation of Article 92, without considering Article 92 itself.  Both experts addressed Article 92 in their reports.  This provision was expressly identified in the agreed list of disputed Mainland law issues in their joint statement.  That they were not cross-examined on this provision specifically is immaterial.  As pointed out by Mr Jat, Mr Bai was cross-examined extensively on “improper profits” (不當得利), an expression which appeared in Article 92 and Article 131, and its interaction with the principle of fairness[77].

87.  I am also inclined to agree with Mr Jat that the “right to claim improper profits” (不當得利請求權)  is not fault-based.  His difficulty is that the findings identified by the judge at §§313 to 315 of the Remitter Judgment to found the basis of the award in the alternative claim appeared to be fault-based.  Despite his contention that the award was based solely on the parties’ respective contributions and participation in the management of FCL, it does not appear on a fair and proper reading of the relevant parts of the Remitter Judgment that the findings of fault played no or no significant part in the judge’s decision in applying the same principle of distribution for the alternative claim.  In this respect, the judge has exceeded the scope of the issue remitted for his determination.  This is not the only difficulty about supporting the judge’s ruling on the alternative claim. 

88.  The greater and fundamental difficulty about the judge’s ruling is this.  The alternative claim is premised on First Laser being entitled under Article 58 of the Contract Law and Article 61 of GPCL to the return of the actual investment sum of HK$24,640,000 as property acquired by FEHC by reason of the First Laser Agreement, which is found to be void and of no effect.  This claim is on the basis that the contract found to be void is the First Laser Agreement, not the nominee investment contract.  In the former situation, what FEHC had acquired as a result of the void contract would be the purchase price.  In the latter situation, the FCL shares would be the property which FEHC had acquired as a result of the void contract.  This distinction should be borne in mind when one comes to apply the various articles invoked in the alternative claim.  As rightly submitted by Mr Yu, it is first necessary to identify what is the “property” that required restitution.  And the parties are to be restored to their pre-contract position.

89.  Thus, in applying Article 58 (“Property acquired as a result of a contract”; 因該合同取得的財產)  or Article 61 (property acquired as a result of a civil act determined to be null and void; 因該行為取得的財產)  in this instance, the property acquired would be the purchase price.  In applying Article 92 of the GPCL and Article 131 of the GPCL Opinion in this instance, the original subject matter (原物)  and the fruits arising therefrom (原物所生的孳息)  as part of the improper profits to be returned (返還的不當利益)  would be the purchase price and the fruits arising from the purchase price such as interest.  Mr Jat submitted that the above expressions should not be so narrowly construed and contended that the enhanced value of the FCL shares should be regarded as property acquired by FEHC as a result of the contract declared void.  But in this instance, enhancement in value of the shares cannot come within the meaning of the fruits arising from the original subject matter being the purchase price.

90.  The passage in Provisions I U&A at page 120 quoted in §308 of the Remitter Judgment does not appear to support Mr Jat’s contention. It relates to Article 10 of Provisions I and this article is premised on a situation where the vendor in an agreement for the sale and purchase of shares in a foreign-owned enterprise requested the purchaser who had been involved in the management to withdraw and seeks to claim the profits arising from the management less the expenses.  Article 10 has not been pleaded or relied on by First Laser, nor was it mentioned in the evidence of Professor Yin.  In the absence of expert evidence on the commentary at page 120 of Provisions I U&A, I am not persuaded by Mr Jat that the authors’ views as quoted were based on the general application of principles including the principle on improper profits (不當得利)  and the principle of fairness, and not the application of Article 10 specifically.

91.  The other passage in Provisions I U&A at pages 185 to 186 quoted in §227 of the Remitter Judgment and referred to in §318 does not explain or provide support for the judge’s conclusion that the expression “fruits arising from the original subject matter” should be given the widest possible meaning as suggested in §225 and that the same principle of distribution should be adopted for the alternative claim.  The interpretation in this passage of the subject matter of the “right to claim improper profits” (不當得利請求權)  that fruits derived from the original subject matter should include investment income and the benefit which exceeds the objective value of the original subject matter should be distributed according to the contribution of the parties creating that benefit was made in the context of a nominee investment contract.

92.  As Professor Yin had opined[78], Article 61 of the GPCL and Article 58 of the Contract Law only stipulated a right to claim the return of property acquired (返還財物請求權)  and did not make clear and specific provision on the scope of the return of the property acquired.  In the judge’s attempt to “fill in lacunae in the law” with the principle of fairness[79], he did so without proper support from the experts in Mainland law.  There was no proper explanation of the basis on which Article 92 and Article 131 may be invoked in a claim for restitution under Article 58 and/or Article 61, where the contract declared void is just a contract for the sale and purchase of shares and not a nominee investment contract where provisions have been made regarding specific situations in Provisions I Articles 14 to 21.  As pointed out by Mr Yu, the judge’s entire discussion on the alternative claim does not explain satisfactorily how any claim under Article 58 and/or Article 61 would arrive at the same result as the primary claim under Provisions I Article 18.

93.  When Professor Yin addressed the question of the scope of restitution in Appendix 3 to his first report, he first discussed the primary case of First Laser on the premise of there being a nominee investment contract and hence Article 18 of Provisions I would apply[80].  He then considered the situation if Article 18 of Provisions I does not apply, and opined that First Laser can make an alternative claim under Article 131 such that it would be entitled to the principal and interest of the sums invested[81]. The judge did not however accept this evidence. 

94.  Mr Jat pointed out that in the main body of the same report of Professor Yin, he had opined that by applying the general principle of improper profits (不當得利一般規則)  and the principle of fairness, the court should still arrive at the same or similar result as under Article 18 of Provisions I[82].  Professor Yin did not elaborate on this.  Mr Bai disagreed with Professor Yin[83]. The apparent discrepancy of the main body of Professor Yin’s report and Appendix 3 was not addressed.  This is most unsatisfactory.  Quite clearly, the focus of his expert evidence is the primary claim based on Article 18 of Provisions I.  Insufficient thought was given to the alternative claim.

95.  For the above reasons, the award made on the alternative claim in the sum of HK$265,996,414, which is the same as the amount made on the primary claim, cannot be upheld.

FEHC’s counter-restitution

96.  FEHC withdrew its counterclaim at the original trial and has not pursued a counterclaim during the remitted hearing.  It has however raised a plea of “counter-restitution” in response to the amendments in RASOC of the primary claim under Article 18 of Provisions I.  FEHC pleaded that in the event First Laser is “entitled to restitution under Mainland law, this is subject to [First Laser’s] liability to procure counter-restitution to be made (1)  for the value of 100% shareholding in FCO to be assessed (or credit to be given for such value)  and (2)  the dividends declared by FCO at least in the sum of RMB 13,138,492.27.”[84]

97.  The judge described the “counter-restitution” of FEHC in this way[85]:

“ ‘Counter-restitution’ just means restitution claim by the opponent under the same Mainland law as relied on by First Laser under its claim in restitution. It is the reverse of First Laser’s case in respect of the shares in FCO. The factual basis relied on by FEHC are the same nominee investment contract and First Laser being the nominee shareholder with FEHC being the actual investor in respect of 49% of the shares in FCO. … [First Laser’s] case is that FCO ceased business after 2008 and its current equity value is less than the original investment sum. Article 18 of 《Provisions (I)》is inapplicable. First Laser has no dispute that it is obliged to return part of the dividends distributed to COM and part of the current equity value of FCO to FEHC in accordance with article 19.”

98.  On the basis that the same nominee investment contract in the primary claim is established in respect of the shares in FCO, the judge held that FEHC is entitled to be returned dividends in the sum of RMB 8,411,153.60 and 49% of the equity value of FCO in the sum of RMB 5,572,812.48, making a total of RMB 13,983,966.08.  Applying the exchange rate in December 2008, the amount he awarded to FEHC on its counter-restitution is HK$15,828,366[86].

99.  The judge did not consider what should be returned to FEHC if First Laser should fail to establish a nominee investment contract in the primary claim when he came to deal with the alternative claim of First Laser.  In view of his conclusion that the approach in considering the alternative claim should be the same as the primary claim under Articles 18 and 19 of Provisions I, it is reasonable to assume that he would have made the same award in counter-restitution to FEHC if First Laser could only pursue its alternative claim.

100.  On appeal, FEHC contended that to restore the parties to their pre-contract position, by way of counter-restitution, it should be entitled to: all the dividends declared by FCO and distributed to its shareholder COM (RMB 23,803,718.60), all the accumulated profits (RMB 27,380,435.80), and the entire equity value of FCO.

101.  As noted by the judge, the factual basis relied on by FEHC to establish a nominee investment contract is the same as in First Laser’s primary claim.  As First Laser has failed to establish a nominee investment contract in respect of the shares in FCL, likewise there is failure to establish a nominee investment contract in respect of the shares in FCO. There can be no counter-restitution premised on the application of Articles 18 and 19 of Provisions I.  We are concerned with only the First Laser Agreement, an agreement for the sale and purchase of shares, that was found to be void.

102.  The earlier discussion on the scope of the property acquired that should be returned to restore the parties to their pre-contract position pursuant to Article 58 of the Contract Law and Article 61 of GPCL should apply equally to this situation.  Applying the same reasoning, FEHC is not entitled to be returned the dividends declared by FCO and distributed to COM and the accumulated profits of FCO as claimed.  This leaves the claim for the entire equity value of FCO.

103.  FEHC recognised that the shares in FCO cannot be returned to FEHC to restore the parties to their pre-contract position as the shares have been sold by COM, hence its claim for the entire equity value of FCO[87].

104.  Under the COM Agreement, the total value of FCL and FCO was agreed to be US$6.25 million, based on their net asset value as at 31 December 1996 of RMB 32,207,987.67 and RMB 21,519,788.21 respectively, totalling RMB 53,727,775.88, using an exchange rate of RMB 8.596444 per US dollar.  Under the First Laser Agreement, the purchase price for 51% of the shares in FCL and FCO was agreed to be US$3.1875 million, equivalent to HK$24,640,000, using an exchange rate of HK$7.730196 per US dollar.  Using the same exchange rate of HK dollar to US dollar, the net asset value of FCO at the time of the COM Agreement or the First Laser Agreement would be HK$19,351,283.39[88].

105.  FEHC has accepted all along that for First Laser to be restored to the pre-contract position, First Laser is entitled to be returned the purchase price and interest and the judge has found that the total price of HK$24,640,000 was paid by First Laser under the First Laser Agreement[89].

106.  To restore the parties to their respective pre-contract position, leaving aside the interest on the amount to be returned, the amount that should be returned to First Laser would be HK$24,640,000 and the amount that should be returned to FEHC would be HK$19,351,283.39.  After netting off, First Laser should receive an amount of HK$5,288,716.61.

107.  The exact figure can only be worked out after the calculation of interest.  The judge ordered interest on the principal sum to run from 1 May 2000[90] at the rate of 1% above prime rate until the date of judgment on 8 April 2020 and thereafter at judgment rate until payment[91].  Mr Yu complained there was substantial delay of First Laser in proceeding with its claim for the remitter proceedings.  The CFA Judgment was handed down in July 2012 and First Laser took no steps to resume the proceedings until 8 April 2015.  He submitted there is no reason why interest should be awarded for such substantial delay by First Laser.

108.  Mr Jat submitted that FEHC did not raise this argument before the judge that First Laser should be deprived of interest owing to inaction and delay and it was not given an opportunity to justify or explain by evidence the relevant circumstances at the material time.  The threshold which FEHC must meet is that the delay was truly “exceptional and inexcusable, having made allowance for the fact that delays and lulls do occur in litigation”[92].

109.  I am inclined to think it would not be appropriate to award interest for the whole of 20 years from 1 May 2000 to 8 April 2020.  At the very least, there should be deduction for the substantial period of inaction after the CFA Judgment.  First Laser complained it had no opportunity to explain before the judge why there was such delay, but chose not to put forward any explanation when the question of delay was raised before us.  Even after the proceedings were resumed in April 2015, it took another four years for the remitter proceedings to be brought to trial. Accepting that delays and lulls in litigation are not uncommon, it seems that the delays in this instance have exceeded what might be regarded as ordinary or common.  It would be appropriate to deprive First Laser of interest from the period of 1 January 2013 to 7 April 2015.

Disposition

110.  I would allow the appeal of the defendants and set aside the judgment that the defendants do pay the plaintiff the sum of HK$250,168,048 with interest.  I would substitute this with judgment to the plaintiff in the sum of HK$5,288,716.61 with interest at the rate of 1% above the prime rate fixed by The Hongkong and Shanghai Banking Corporation Ltd from 1 May 2000 to 8 April 2020, save for the period of 1 January 2013 to 7 April 2015, and thereafter at judgment rate until payment.

111.  In light of our judgment, we would invite submissions from the parties before we make an order regarding the costs of the appeal and of the trial of the remitter proceedings before the judge.  Both parties are to lodge written submissions of not more than 7 pages within 14 days of this judgment, with leave to both to serve a further round of submissions of not more than 3 pages within 14 days thereafter.

Hon Au JA:

112.  I agree with the judgment of Kwan VP and Yuen JA.

Hon Kwan VP:

113.  Accordingly, the defendant’s appeal is allowed and the judge’s judgment and order are set aside and replaced with the orders mentioned in §§110 to 111.