GAO HAIYAN AND ANOTHER v. KEENEYE HOLDINGS LTD AND OTHERS

HCA 1315/2009
& HCA 466/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1315 OF 2009

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AND

ACTION NO 466 OF 2012

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(Heard Together)

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J U D G M E N T

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INTRODUCTION

Introduction

1.  This is the trial of two actions heard together. The first one in time is HCA 1315/2009 in which the 1^st and 2^nd plaintiffs (“Gao” and “Xie” respectively) sue the seven defendants essentially for recovery of their shares in Bai Jun Tian Cheng Ltd (“Bai Jun”) transferred by them to Keeneye Holdings Ltd (“Keeneye”) and its three related companies (the “Keeneye Group”).  In the second action, the plaintiff (“Ma”) sues the 1^st and 2^nd defendants, i.e. Gao and Xie respectively, for specific performance of a share transfer agreement (the “STA”) as amended and supplemented by two supplemental agreements (the “1^st Supplemental STA” and “2^nd Supplemental STA”) (collectively, the “STAs”) and an oral agreement entered into in May 2011 (the “May Agreement”) relating to the transfer of the shares in Zhong Xin Ore-Material Holding Co Ltd (“Zhong Xin”) held by Bai Jun and Clarigain Enterprises Ltd (“Clarigain”).  The ultimate asset underlying these share transfers is a coal mine in Yulin City in Yu Yang District in Shaanxi Province of the People’s Republic of China (“PRC”).

2.  The background of this case dates back to 2004, but Ma was only involved since about October 2009.  He does not take issue with what was alleged to have occurred from 2004 to October 2009.

Dramatis personae

3.  Gao Haiyan (高海燕) (“Gao”) is the 1^st plaintiff in HCA 1315/2009 and the 1^st defendant in HCA 466/2012.  She is a permanent resident of Hong Kong.

4.  Xie Heping (謝和平) (“Xie”) is the 2^nd plaintiff in HCA 1315/2009 and the 2^nd defendant in HCA 466/2012.  He is a permanent resident of Hong Kong.  Xie and Gao are husband and wife.

5.  Ma Maogen（馬茂根）(“Ma”) is the plaintiff in HCA 466/2012.  He is the beneficial owner and person in control of the Keeneye Group.  He had conduct of the defence for all the defendants in HCA 1315/2009, except Bai Jun.  He was a resident of the PRC at the material time, but has become permanent resident of Hong Kong. 

6.  Liu Shengfeng（劉生峰）is a PRC resident.  He is Ma’s nominee.

7.  Lu Ying （呂瑩）is a resident of the PRC and a representative of the 1^st, 2^nd, 6^th and 7^th defendants in HCA 1315/2009, i.e. the Keeneye Group.  She is the 3^rd defendant in HCA 1315/2009.

8.  Wang Li （王李）is a resident of the PRC and a representative of the 1^st, 2^nd, 6^th and 7^th defendants in HCA 1315/2009, i.e. the Keeneye Group.   He is the 4^th defendant in HCA 1315/2009.  He was not legally represented and was absent at the trial of this action. 

9.  Chow Cheuk Lap (“Chow”) is a solicitor and partner of Messrs CL Chow & Macksion Chan (“CLCMC”), the then solicitors firm acting for Gao and Xie at the material time.

10.  Alice Fan (“Fan”) is a solicitor of CLCMC.

11.  Wang Bilin (“Wang”) is a PRC lawyer acting for Ma in relation to the STAs.

12.  Yulin Changlebao Mining Corporation Limited （榆林市常樂堡礦業有限公司）(“Changlebao”) is a Sino-foreign joint enterprise operating a coal mine in Yulin City in the PRC.  It is the investment vehicle of Gao’s and Xie’s joint venture with Yulin City Yu Yang District Changle Industrial and Trading Limited Liability Company (“Changle I&T”) (the “joint venture”).  It is beneficially owned by Zhong Xin Ore-Material Holdings Co Ltd (“Zhong Xin”), representing the interest of Gao and Xie, as to 70% and by Changle I&T as to the remaining 30%.

13.  Zhong Xin Ore-Material Holdings Co Ltd（中信礦業集團有限公司）(“Zhong Xin”) is a company incorporated in the British Virgin Islands (“BVI”) initially owned by Gao and Xie.  It is Gao’s and Xie’s investment vehicle and the foreign party in their joint venture with Changle I&T.  It holds 70% of the shares in Changlebao.  On 30 December 2004, Gao and Xie transferred 50% of its shareholding to Angola Group Holdings Limited (“Angola”) and the other 50% to Clarigain Enterprises Ltd (“Clarigain”) on trust for Bai Jun.  The transfer to Angola is the subject matter of litigation in HCA 1987/2005.  

14.  Bai Jun Tian Cheng Limited（百浚天成有限公司）(“Bai Jun”) is a company incorporated in Hong Kong.  It was initially owned and controlled by Gao and Xie.  It is the 5^th defendant in HCA 1315/2009.

15.  Clarigain Enterprises Ltd (“Clarigain”) is a company incorporated in the BVI.  It was initially owned and controlled by Gao and Xie.  It holds 50% of the interest in Zhong Xin on trust for Bai Jun.  It was transferred to Zi Rong under the 1^st Supplemental STA on 6 June 2010, but Gao and Xie remain as its directors.

16.  Yulin City Yu Yang District Changle Industrial and Trading Limited Liability Company（榆林市榆陽區常樂工貿有限責任公司）(“Changle I&T”) is a PRC company held by employees of Changlebao.  It holds 30% of the issued shares in Changlebao.  It is the PRC party in the joint venture.

17.  Angola Group Holdings Limited (“Angola”) is a BVI company, wholly owned by Achieve Goal.  It acquired 50% of the shares in Zhong Xin from Gao and Xie on 30 December 2004.  That transaction is the subject matter in dispute in HCA 1987/2005.

18.  Achieve Goal Holdings Limited (“Achieve Goal”) is the holding company of Angola. 

19.  Keeneye Holdings Limited（建毅控股有限公司） (“Keeneye”) was a company initially owned by Liu.  Liu sold it to Zhang on 16 May 2009, who then re-sold it to Ma on 17 May 2011.  It once held 62% of the shares in Bai Jun.  It is the 1^st defendant in HCA 1315/2009.

20.  New Purple Golden Resources Development Limited (“New Purple”) was a company initially owned by Liu.  Liu sold it to Zhang on 16 May 2009, who then re-sold it to Ma on 17 May 2011.  It once held 38% of the shares in Bai Jun.  It is the 2^nd defendant in HCA 1315/2009.

21.  Daynew Assets Management Limited (“Daynew”) is the company to which Keeneye transferred its 62% shareholding in Bai Jun. It was initially owned by Liu.  Liu sold it to Zhang on 16 May 2009.  Zhang re-sold it to Ma on 17 May 2011.  It is the 6^th defendant in HCA 1315/2009. 

22.  Far Orient Holdings Limited (“Far Orient”) is the company to which New Purple transferred its 38% shareholding in Bai Jun.  It was initially owned by Liu. Liu sold it to Zhang on 16 May 2009.  Zhang re-sold it to Ma on 17 May 2011.  It is the 7^th defendant in HCA 1315/2009.

23.  Zhang Xintian（張新田）(“Zhang”) is a PRC resident.  He is an employee of Changle I&T and the general manager of Changlebao.

24.  Liu Jian Shen（劉建申）(“Liu”) is a PRC resident and Shaanxi representative of the National People’s Congress.

25.  Liu Xiaoping（劉少平）is a PRC resident whom Ma alleged had agreed to purchase 50% of the shareholding in Zhong Xin from Gao and Xie in about March 2012.

26.  Zi Rong（訾榮) is a PRC residents who entered into a sale and purchase agreement with Ma on 7 June 2010 for the purchase of 100% of the interest in Zhong Xin (the “Ma/Zi Agreement”).

27.  Zi Fenggao（訾鳳高) is a PRC residents.  He is Zi Rong’s uncle.  He and Zi Rong is alter ego of one another.

Background before October 2009

28.  On 12 December 2004, Zhong Xin, as Gao’s and Xie’s investment vehicle, entered into a Sino-foreign joint venture agreement with Changle I&T to invest in a coal mine in Yulin City in Shaanxi Province of the PRC.  Changlebao is their joint venture vehicle.  It is owned by Zhong Xin as to 70% and Changle I&T as to the remaining 30%.  Under the joint venture agreement, Xie was appointed as its legal representative and managing director, while Zhang was employed as its general manager during the first three years of operation of the joint venture.  The operation of the coal mine was successful.  By 2010, the coal mine was assessed to be worth RMB ¥1,700 million.

29.  On 30 December 2004, by way of restructuring, Gao and Xie transferred 50% of their shareholding in Zhong Xin to Clarigain to hold on trust for Bai Jun under a declaration of trust (the “Clarigain declaration of trust”).  Bai Jun was then a company wholly owned by Gao and Xie.  On the same day, Gao and Xie entered into an agreement to sell the other 50% of their shareholding in Zhong Xin to Angola for RMB ¥50 million.  Under the agreement, Gao and Xie were to transfer their shares in Zhong Xin to Angola within two days after execution of the agreement and Angola was to remit the sum of RMB ¥50 million into Zhong Xin within 10 days.  According to Gao and Xie, they duly transferred the shares in Zhong Xin to Angola, but Angola did not remit the funds.  Gao and Xie commenced action against Angola in HCA 1987/2005 for breach of contract and sought recovery of the 50% of their shareholding in Zhong Xin.  A receiver was appointed to Zhong Xin.  Details of the background information relating to that dispute can be found in the judgment handed down by the Court of Appeal in CACV 324/2008 on 24 November 2008.

30.  On the other hand, the performance of the joint venture in Shaanxi was not smooth either.  Angola colluded with Zhang to replace Xie as legal representative of Changlebao by someone from Angola by forging Xie’s signature on certain documents.  The change was approved by the Shaanxi Administration for Industry and Commerce.  However, through the intervention of the State Administration for Industry and Commerce, the Shaanxi Administration for Industry and Commerce set aside the change and restored Xie as the legal representative in December 2006.  Then, Angola sought judicial review of that decision.  In December 2007, the Shaanxi Intermediate People’s Court dismissed Angola’s application.  But, during the course of these litigations, Zhang remained in control of Changlebao and Xie was excluded from its management.

31.  On 20 May 2008, as Gao and Xie were leaving the Yulin airport after attending a board of directors meeting of Changlebao, they were detained by the police for a suspected offence of assaulting Zhang.  They were thus detained for half a year.  There is another complicated story leading to their release[1] and which led to the action in HCA 1315/2009.

32.  During their detention in July 2008, Zhang, on behalf of Changle I&T, and Angola took out an action against Bai Jun alleging that certain capital injection by Zhong Xin was void and claimed entitlement to the second tranche of capital investment by Zhong Xin in the sum of RMB ¥30 million representing a right to purchase 42% of the shareholding in Changlebao (the “capital contribution claim”).  At the same time, Angola obstructed Gao’s and Xie’s representation of Zhong Xin in that action.  This led to Gao’s and Xie’s application for appointment of receiver for Zhong Xin in HCA 1987/2005 and CACV 324/2008 as mentioned above.  Eventually in December 2008, the Yulin City Intermediate People’s Court dismissed Changle I&T’s claim and upheld the validity of the second tranche of capital injection by Zhong Xin.  In January 2009, Changle I&T and Angola appealed to the Higher People’s Court of Shaanxi.  I shall come back to what happened in that appeal in paragraph 37 below.

33.  During their detention, for fear of her and Xie’s safety, Gao sought the assistance of Liu, a Shaanxi representative of the National People’s Congress, to procure their release.  Liu agreed to help them to restrain the unlawful acts of Angola and Zhang and to regain control over Changlebao.  The condition precedent for his assistance was that Gao and Xie shall transfer their shareholding in Bai Jun to Liu and his companies at a consideration to be agreed.  Thus, Gao and Xie entered into agreement to transfer 62% of the Bai Jun’s share to Daynew and the remaining 38% to New Purple respectively on 15 July and 27 August 2008 (collectively, the “Keeneye Agreements”).  No price was stated in the agreements because Liu asserted that as he was a Buddhist follower he could not discuss price with Gao and Xie while they were deprived of their freedom but would agree to a price after their release; and if no agreement could be reached the price would be based on their capital contribution.  Liu insisted to have the shares transferred before he would cause their release.  The transfer of the Bai Jun shares to Keeneye and New Purple was completed in August 2008 (“the first set of transfers”).  In October 2008, Liu caused Keeneye and New Purple to transfer the Bai Jun shares to Daynew and Far Orient respectively (“the second set of transfers”).  The four companies (collectively, the “Keeneye Group”) were all under the control of Liu.  In November 2008, Gao and Xie were released from detention.  But after their release, Liu refused to see them or to discuss the price for the transfer of the Bai Jun shares with them, claiming that he had already spent tens of millions of yuan to bring about their release.

34.  On 16 May 2009, Zhang reached agreement with Liu to acquire all his interest in the Keeneye Group for HK$150 million (the “Liu/Zhang Agreement”).  The sale and purchase under that agreement was completed on 29 March 2010.  According to Gao and Xie, they knew nothing about this agreement until shortly before commencement of HCA 466/2012.

35.  On 30 May 2009, Zhang also reached agreement to purchase all the shares in Achieve Goal for RMB ¥140 million from its shareholders.    As Achieve Goal is the holding company of Angola, Zhang was in control of the entire interest in Zhong Xin representing 70% of the interest in Changlebao.  Given his position in Changle I&T, he was also in total control of Changlebao and the coal mine at the time.  In mid 2010, the parties agreed to increase the purchase price to RMB ¥300 million.  However, those parties are now in dispute as to whether that agreement has been rescinded.  According to Gao and Xie, they also knew nothing about that agreement until during the course of these proceedings.

36.  In June 2009, Gao and Xie commenced HCA 1315/2009 against the seven defendants seeking to recover their shares in Bai Jun.  The action is essentially against the Keeneye Group owned by Liu.  Then, in July 2009, Liu and Zhang commenced arbitration proceedings with the Xian Arbitration Commission seeking a declaration that the Keeneye Agreements were lawful and valid.  This action, according to Gao and Xie, was a pre-emptive strike taken by Liu to take advantage of his influential position in Shaanxi.

37.  I now return to Changle I&T’s and Angola’s appeal relating to the capital contribution claim.  In June 2009, the Higher People’s Court of Shaanxi commenced court mediation process.  But it did so without giving notice to all the parties in the first instance trial.  The receiver of Zhong Xin and Xie as its legal representative were not informed.  The Higher People’s Court issued Mediation Agreement No 19 of 2009（《民事調解書2009年19號》）to the effect that the parties unanimously agreed that Bai Jun’s capital injection through Clarigain shall be returned and the investment be taken over by the shareholders of Zhong Xin.  By that time, Bai Jun, which had once been in the hands of Liu under the Keeneye Agreements, were transferred together with the Keeneye Group to Zhang.  As Zhang had acquired all the shares in Angola in May 2009, he effectively represented all the parties in the mediation process in his various capacities, despite the legality of the Keeneye Agreements is in dispute.

38.  Between June and July 2009, Zhang, Liu and Angola applied to set aside the receivership of Zhong Xin and to strike out Gao’s and Xie’s action in HCA 1987/2005.  Against that background, Ma emerged.

The background after October 2009

39.  Towards the end of September 2009, the PRC lawyer who acted for Gao and Xie in Zhang’s assault case in Xian, Yi, telephoned Gao and informed her that Ma wanted to discuss the sale of the coal mine with her.  Though Yi’s arrangement, Gao and her assistant had a meeting with Ma and Yi in Beijing (Ma’s case is that the meeting was in Yi’s office in Xian, but that dispute is immaterial).  Gao gave Ma copies of relevant documents, including documents relating to the various litigations in which Gao and Xie were involved.  Ma indicated that he wished to meet with Xie in Hong Kong to understand the position in respect of the litigations in Hong Kong and if there were no major problems, he would sign an agreement with Gao and Xie for the sale and purchase of the coal mine.

40.  Through Yi’s arrangement, Gao, Xie and their then solicitors, Chow and Fan, had a second meeting with Ma, his legal team and Yi in Island Shangri-La Hotel in Hong Kong.  That meeting was followed by three further meetings in the office of CLCMC.  At the fourth meeting on 15 October 2009, the parties entered into the STA. Under that agreement, Gao and Xie shall sell all their interests in Zhong Xin to Ma at the consideration of RMB ¥380 million.  Pursuant to the STA, Ma advanced a loan of RMB ¥5 million to Gao and Xie on 16 October 2009.

41.  Then three months lapsed without any progress. Gao went to Xian to see Ma.  Ma told Gao that he had collected evidence of Zhang’s embezzling funds of Changlebao and that action would be taken against Zhang once approval was obtained from his superiors. 

42.  On 8 February 2010, Ma came to Hong Kong and entered into the 1^st Supplemental STA with Gao and Xie. The essence of that agreement was to provide for pro-rata payment upon partial transfer of the interest in Zhong Xin through transfer of the shares in Zhong Xin, Bai Jun, Clarigain or Angola after having successfully obtained award from the Xian Arbitration Commission. 

43.  On a different front, on 29 March 2010, pursuant to the Liu/Zhang Agreement, Liu transferred all the shares of the Keeneye Group to Zhang’s nominee, Liu Shengfeng and Zi Rong.  According to Gao and Xie, they did not know anything about this transfer.

44.  In the course of the arbitration proceedings, Gao and Xie were required to pay into the Xian Arbitration Commission a sum of RMB ¥50 million as settlement offer to the Keeneye Group.  This sum, which was purportedly paid by Ma on behalf of Gao and Xie, was in fact paid by Zi Fenggao.  The offer was rejected by the Keeneye Group.

45.  On 3 June 2010, the Xian Arbitration Commission handed down award setting aside the Keeneye Agreements (the “award”) for the reason that they were manifestly unfair（顯失公平）and were entered into by exploiting a party’s precarious position（乘人之危）(“the vitiating factors”).  The Xian Arbitration Commission assessed the value of the coal mine to be worth more than RMB ¥1,700 million.

46.  On 6 June 2010, Ma entered into the Ma/Zi Agreement to sell to Zi Rong the entire shareholding in Zhong Xin, including its interest in 70% in Changlebao for RMB ¥900 million. The transfer shall be completed within one and half years, i.e. before 6 December 2011, failing which the agreement may be cancelled at the instance of Zi Rong.  This multi-million yuan agreement could not have been made within a day or two of the Xian arbitration award.  Zi Fenggao’s payment of the sum of RMB ¥50 million into the Xian Arbitration Commission suggests that probably he and Ma had commenced negotiation of the Ma/Zi Agreement during the course of the arbitration, if not before; and that he was the ultimate buyer.  On the other hand, it should also be noted that at that time Zhang had acquired all the interest in Zhong Xin from Liu and Angola.  An alternative way for Ma to deliver the 100% interest in Zhong Xin to Zi Rong under the Ma/Zi Agreement would be to negotiate a purchase of that interest from Zhang.

47.  On the following day, Ma, Gao and Xie entered into the 2^nd Supplemental STA.  Under clause 1(3) of the 2^nd Supplemental STA, Ma shall transfer RMB ¥80 million to a bank account specified by Gao and Xie within 15 days of execution of the agreement, i.e. by 22 June 2010.  That sum shall be treated as part of the consideration under Clause 4 of the STA.  Contemporaneous with the signing of that agreement, Gao and Xie transferred their shares in Clarigain to Zi Rong, and Zi Rong executed a declaration of trust to hold those shares in Clarigain on behalf of Gao and Xie (the “Zi Rong declaration of trust”).  That declaration was to be kept by Ma.  Ma agreed that Gao and Xie shall to continue their position as directors of Clarigain and that and a copy of the Zi Rong declaration of trust would be released to them upon their request to facilitate their litigation with Angola.  Clause 3 provides that upon Gao and Xie recovering all the shares in Bai Jun and executing a document discharging the Clarigain declaration of trust of the interest in Zhong Xin in favour of Bai Jun, Ma shall pay them RMB ¥110 million.  The total amount payable under the 2^nd Supplemental STA was RMB ¥190 million which was exactly 50% of the consideration payable under Clause 4 of the STA.  Looking at that agreement post facto, it is obvious that the 2^nd Supplemental STA was intended on the one hand as between Gao, Xie and Ma to fine tune the parties’ agreement under the STA as result of Gao and Xie having succeeded in the Xian arbitration; and on the other hand as between Ma and Zi Rong, part performance of the Ma/Zi Agreement.

48.  However, Ma did not pay the said sum of RMB ¥80 million in full.  It was only after repeated chasing that he caused RMB ¥62 million to be transferred to Gao and Xie towards the end of June or early July 2010, but that was still short of RMB ¥18 million.  Ma demanded a receipt from Gao who insisted to give a receipt only upon payment of the full sum.  Dispute over the non-payment arose.  Eventually on 3 August 2010, Gao issued a receipt for the sum of RMB ¥62 million expressly as part payment.  It is Ma’s case that Gao had agreed orally with him that a sum of RMB ¥13 million be withheld by him as payment for Gao’s and Xie’s tax and that the loan of RMB ¥5 million be treated as part of the payment under the 2^nd Supplemental STA (the “2010 Oral Agreement”).  The existence of this oral agreement is one of the two crucial issues in dispute in HCA 466/2012.

49.  On 2 August 2010, Saunders J granted Gao and Xie leave under HCCT 41/2010 to enforce the award.

50.  On 19 October 2010, the Xian Intermediate People’s Court affirmed the validity of award, despite the challenge by the Keeneye Group.

51.  Since 24 March 2011, Ma stopped funding Gao’s and Xie’s litigation.

52.  On 12 April 2011, despite the decision of the Xian Intermediate People’s Court, Reyes J set aside the order of Saunders J.   On 6 May 2011, Gao and Xie lodged an appeal in CACV 79/2011. 

53.  It was at the middle of these appeal proceedings and on a day unknown in May 2011 that according to Ma he entered into the oral May Agreement with Gao and Xie to settle with Zhang by acquiring the shares of the Keeneye Group and to bear half of the purchase price.  The existence of this May Agreement is at the heart of the parties’ dispute in both HCA 466/2012 and HCA 1315/2009.

54.  On 17 May 2011, Ma and Zhang entered into a settlement agreement for Ma to purchase the shares of the Keeneye Group from Zhang for RMB ¥190 million (the “Zhang/Ma Agreement” or the “settlement”).  On 18 May 2011, Zhang and his nominees transferred the shares of the Keeneye Group to Ma’s nominees, Liu Shengfeng, and Zi Rong pursuant to the above agreement.  That was just twelve days after the filing of the appeal in CACV 79/2011 by Gao and Xie.  Gao and Xie claim that they had no knowledge of the Zhang/Ma Agreement until this litigation.

55.  On 2 December 2011, the Court of Appeal reversed the order of Reyes J[2]. On 22 March 2012, the Court of Appeal also refused Keeneye’s and New Purple’s application for leave to appeal to the Court of Final Appeal.  As Keeneye and New Purple did not proceed with further appeal, the decision of the Court of Appeal allowing enforcement is final.

56.  Between July and August 2011, while the above appeal was on-going, the parties entered into negotiation to vary the terms of the STA, but no agreement was reached.  Ma also refused Gao’s solicitors’ demand to pay costs on account for the appeal.  Then, alleging that Gao and Xie had agreed to sell their interest in Zhong Xin to Liu Xiaoping, Ma commenced proceedings in HCA 466/2012 and applied for an ex parte injunction to restrain the alleged sale.  The injunction was later discharged upon Gao’s and Xie’s undertaking not to dispose of their shares in Bai Jun.

The parties’ claims and issues

57.  Ma’s claim in HCA 466/2012 is that Gao and Xie breached the STAs as amended by the May Agreement by refusing to reduce the May Agreement into writing; pursuing the appeal proceedings; and selling the shares of Bai Jun to Liu Xiaoping.  He seeks specific performance.

58.  Gao and Xie deny the existence of the May Agreement or that they had agreed to sell their interest in Zhong Xin to Liu Xiaoping.  They counterclaim that they are entitled to terminate the STAs because of Ma’s repudiatory breaches and counterclaim for declarations and damages.

59.  Gao and Xie commenced HCA 1315/2009 as part of the enforcement proceedings pursuant to the STAs to annul the transfer of the Bai Jun shares to the Keeneye Group and to recover them to their ownership and possession and then deliver them to Ma.  Initially, the defendants in HCA 1315/2009 deny that the transfers of the Bai Jun shares were invalid.  Now that they are owned and controlled by Ma, they raise a further defence that Gao and Xie were no longer entitled to pursue HCA 1315/2009 as the shares in Bai Jun had been vested in Ma by virtue of the STAs as amended by the May Agreement. 

60.  The result of HCA 1315/2009 hinges very much on the outcome of HCA 466/2012, which in turn, hinges on the existence or otherwise of the May Agreement and whether Ma’s breaches of the STAs amounted to repudiation of the STAs.  

61.  The issues raised in HCA 1315/2009 are:

 (1)   whether the transfer of the shares in Bai Jun by Gao and Xie to Keeneye and New Purple were valid and effective;

(2)   whether the transfer of the shares in Bai Jun by Keeneye and New Purple to Daynew and New Orient were valid and effective; and

(3)   whether Gao and Xie are entitled to the declaration that they are the true owners of the shares in Bai Jun, the recovery of those shares; and the  related injunction.

The third issue depends very much on the outcome of the action in HCA 466/2012.

62.  The issues raised in HCA 466/2012 revolve around the existence or otherwise of the 2010 Oral Agreement and the May Agreement. These issues are:

(1) whether the parties have entered into the 2010 Oral Agreement;

(2) if not, whether Ma was in breach of Clause 5(4) of the STA and Clause 1(3) of the 2^nd Supplemental STA by paying RMB ¥62 million instead of RMB ¥80 million:

(a) whether tax was payable by Gao and Xie in respect of the consideration paid pursuant to Clause 1(3) of the 2^nd Supplemental STA; and whether Ma was entitled to withhold or did withhold RMB ¥13 million payable thereunder for payment of Gao’s and Xie’s tax;

(b) whether Gao and Xie had agreed that the loan of RMB ¥5 million paid pursuant to the STA be treated as partial payment under Clause 1(3) of the 2^nd Supplemental STA;

(c) whether the sum of RMB ¥62 million was paid late in breach of clause 2(3) of the 2^nd Supplemental STA; and

(d) whether Gao and Xie are entitled to be paid RMB ¥18 million as liquidated damages for Ma’s breach of the 2^nd Supplemental STA;

(3) whether the parties had entered into the May Agreement; and if yes, whether Gao and Xie were in breach of the STAs as amended by the May Agreement by continuing the appeal after Ma had purchased the shares of the Keeneye Group; and by refusing to reduce the May Agreement into writing;

(4) if not, whether

(a) Ma’s settlement with Zhang was without the knowledge and consent of Gao and Xie, and therefore in breach of Clause 3(2) of the STA;

(b) Ma had breached clause 3(2) of the STA by failing to provide funding for Gao and Xie to pursue the enforcement proceedings for recovering the interests in Zhong Xin; and whether Gao and Xie are entitled to the costs incurred in the appeal in CACV 324/2008 and application for leave to appeal the decision of the Court of Appeal;

(c) Ma was in breach of clause 3(5) of the STA by permitting and/or causing the Keeneye Group to resist the appeal and to apply for leave to appeal; and

(d) Ma was in breach by instituting HCA 466/2012;

(5) whether any of the above breaches on the part of Ma, if proved, entitled Gao and Xie to terminate the STAs;

(6) whether there was any waiver by Gao and Xie of the breaches;

(7) whether Gao and Xie had sold or agreed to sell 50% of the interest in Zhong Xin held by Clarigain to Liu Xiaoping; and

(8) whether Gao and Xie are entitled to damages for late payment of any sums at the rate of 0.05% per day as stated in the STA.

Credibility of witnesses

63.  Gao gave evidence for herself and Xie and called Chow of CLCMC to testify as factual witness.  Ma called himself as the only factual witness.  Professor Cao gave expert evidence on PRC law for Gao and Xie.  Mr Yin gave expert evidence for Ma. 

64.  The immediately relevant facts of this case occurred six years ago, with background facts dating back to about twelve years.  The focal point in dispute is the 2010 Oral Agreement and the May Agreement.  Oral testimony and demeanour may not be the most reliable guides to credibility.  Inherent probability and contemporaneous documents remain as the most reliable indicators of credibility. Having tested the parties’ evidence against contemporaneous documents and inherent probability, I am satisfied that Gao’s and Chow’s evidence is credible but not Ma’s.

65.  Given what she had gone through in the pre-2009 background and the actions she took in recovering her shares in Zhong Xin and Bai Jun, Gao is a person with remarkable strength and determination. She was longwinded at times and wandered off the questions asked of her by airing her own grievances.  That is understandable and I would not hold that against her.  Mr Wong criticises Gao for refusing to admit even the obvious and that her evidence was difficult to reconcile with her witness statement.  I consider otherwise.  Gao did frankly admit her mistakes in the witness statement, for example, in attributing what happened on the third day of her meeting with Ma in Hong Kong as having happened on the second day.  She also acknowledged her negligence when signing the 2^nd Supplemental STA in not having made provisions to the effect that the documents for cancelling the Zi Rong declaration of trust should be first kept by the solicitors before payment was transferred to the solicitors’ account and only to be handed over to Ma after such transfer in the spirit of Clause 3(3) of the STA.  I am satisfied that Gao had a genuine grievance, which she tried to put right without exaggeration.  Except for some small blemishes, her evidence is consistent with contemporaneous documents and is inherently credible.  I accept her evidence. 

66.  Ma has been extensively and searchingly cross-examined, including his personal background.  He was a PRC resident.  He came from a humble background without much education.  His answers under cross-examination revealed that he is a mysterious figure.  Originally, he was known as Ma Shehai （馬社海）.  He had been imprisoned for three years between 2000 and 2003 in relation to a murder case for which he was eventually acquitted.  He was then accused of fraud in Shenzhen, which he explained was because the fraudster had committed fraud using his name.  He obtained a new identity card under his present name, but with a different date and place of birth. If that had anything to do with government providing him a new identity with new particulars for any reason, he could have easily said so.  But that is not his case.  He could not explain why the new identity card shows particulars of a different person.  He just put the blame on the officers who processed his new identity card and did not explain why he did not insist to have those particulars corrected.  These are peripheral matters of no relevance.  However, throughout the course of that part of his cross-examination, he demonstrated secretiveness and evasiveness not only about his identity, but also about his business, his business partners and the other more critical issues in this case.

67.  Despite his humble background with little education and three years’ imprisonment, he emerged as a person of many means and with tremendous amount of funds and powers at his disposal.  According to Gao, Yi introduced him to her as someone with a strong political background, being associated with the former PRC President Jiang Zhemin.  He also represented to Gao that Zhang and Angola would back off if they came to know about his background or that of the people behind him.  He boasted to Gao that he could settle the case within three months.  As the facts revealed, he was able to get in touch with Liu, a member of the National People’s Congress and, through him, to bring about his purchase of the Keeneye Group from Zhang.  He was able to obtain evidence of Zhang’s embezzling funds of Changlebao, which led to Zhang’s detention.  He was secretive about his business and who his business partners were.  He was secretive and evasive about his dealings with Chen Xiaoping (“Chen”) who personally delivered a letter to Gao on 16 March 2012 offering to pay back RMB ¥13 million.  He said that Chen had nothing to do with the matters in dispute and refused to tell the nature of the business he had with Chen.  On the other hand, he had introduced Chen to Chow as a shareholder and partner of his company and had brought him to see Chow in his office from time to time.  He was also secretive and evasive about his dealings with Zi Fenggao who had other projects with him.  There is no doubt that Ma is a front man of some powerful people or organisation in the PRC, financially and/or politically, which he refused to disclose.  This is not anything relevant to the material issues.  But his evasiveness and propensity to be secretive cast doubt on his credibility. 

68.  Ma often avoided answering questions by proffering irrelevant matters or repeating what he had said in his witness statement.  For example, when asked about the sum of RMB ¥50 million paid into the Xian Arbitration Commission as settlement sum offered to the Keeneye Group, he suddenly volunteered that Gao had given him two blank pieces of papers with signatures and fingerprints of herself and Xie.  Those papers were not mentioned in his witness statement.  They were raised after Gao had testified and had no opportunity to refute his assertion.  However, they are absolutely irrelevant to the present proceedings.

69.  Ma tried to add credence to his evidence by asserting that Chow should have known about and would be able to confirm certain matters which he testified.  Those assertions had not been put to Chow when Chow was being cross-examined.  Had he considered those assertions true and relevant, he would have told his solicitors about them and his counsel would have put proper questions to Chow during cross-examination.  The assertions carry the hallmark of impromptu concoctions.

70.  Ma was very eager to portrait himself as a law abiding person and repeatedly claimed that he would not do anything illegal.  He then made serious attacks on Gao’s character.  He accused her of having killed for money, exerting personal threats on him, retaining some 20 assassins, arranging for triad members to be present at the birthday party of an arbitrator of the Xian Arbitration Commission.  Such over-enthusiasm would not be found in an honest witness who has no issue with the law.

71.  Ma was evasive in the witness box.  His demeanour was unsatisfactory.  Putting these aside, most importantly, his evidence of the key events especially about the making of the 2010 Oral Agreement, the May Agreement and what happened between April and October 2011 were, as my analysis of the evidence shows, illogical, inherently improbable, self-contradictory and inconsistent with contemporaneous documents.  His raising of PRC individual income tax law to justify his withholding payment under the 2^nd Supplemental STA is clear evidence of dishonesty and lack of good faith in his conduct of this litigation and in his dealing with Gao and Xie under the STA.  As my analysis of the evidence shows, much of Ma’s case is concocted by juggling with figures; asserting an oral agreement where evidence is lacking, and falsely relying on the law as an excuse to withhold payment.  He was an incredible and unreliable witness.

72.  Chow is a partner of a solicitors firm and an officer of the court.  His firm is no longer acting for Gao and Xie.  He may be regarded as an independent and non-interested witness.  He was a neutral witness in the sense that although he used to be familiar with and work with Gao, Xie and Ma, it was Ma who paid for the services of CLCMC.  There is no reason to doubt his impartiality.

73.  Mr Wong criticises Chow’s memory as shaky and his attitude as argumentative.  He suggests Chow had a pre-conceived notion that Ma was responsible for all that happened and was obviously watching out for Gao’s interests in any way he could both inside and outside the witness box.  He suggests Chow had a tendency to treat his speculation as fact.  I agree with some of Mr Wong’s observations.  Despite his over 30 years’ standing as a solicitor, Chow did not appear to be a good witness and did not have much regard to etiquette of a solicitor.  He was argumentative and arrogant.  He did not directly answer questions put to him by counsel, but answered questions with his rhetorical questions.  He seemed to have forgotten he was testifying in the witness box and behaved as if he were sitting in his office giving directions to his staff.

74.  The main part of his evidence is about his lack of knowledge of the May Agreement and the agreement to withhold payment of the sum of RMB ¥13 million to Gao and Xie for discharging their tax liability.  He was the handling solicitor for the parties involved in their performance of the STAs.  Those agreements, if they existed, would have been reflected in contemporaneous documents, but there was none.  CLCMC was charged with the duty to release the original transfer documents in respect of the shares in Clarigain to Ma upon full payment of the sum of RMB ¥80 million under the 2^nd Supplemental STA.  Ma’s right to withhold payment for tax was central to the issue of whether the full amount of RMB ¥80 million was paid.  There was every reason for Chow to be made aware by Ma or his legal team (if not by Gao or Xie) of the 2010 Oral Agreement to withhold payment for tax.  Furthermore, his firm had the conduct of the appeal against Reyes J’s decision, which was financed by Ma.  If he had been informed of the May Agreement, he would not have demanded Ma for payment of costs on account and kept on pursuing the appeal.  If there was the 2010 Oral Agreement, the then surrounding atmosphere would have told and Chow would have felt.  He would have so told the court unless he was being decidedly dishonest.  There was nothing to suggest he was acting without instruction or maliciously and I do not think he was.  Despite his unsatisfactory demeanour, I accept his evidence.

75.  As for the expert witnesses, Professor Cao is a respected professor of law and a practising lawyer in the PRC.  He gave evidence in a direct and professional manner.  Mr Yin is an accountant with no formal legal training.  In practical accounting and tax matters, he always stressed the necessity to consult the tax authority rather than to give his opinion of the relevant tax law.  For reasons as given in my analysis of the PRC law, I prefer Professor Cao’s opinion to Mr Yin’s.

THE 2010 ORAL AGREEMENT

Introduction

76.  Ma’s case is founded on the May Agreement and the 2010 Oral Agreement.  It is common ground that after May 2011, the parties negotiated for a further supplemental agreement, but failed to reach agreement.  I shall consider these events chronologically.

77.  Ma’s case of the 2010 Oral Agreement is that between 7 June and 3 August 2010 Gao, Xie and he orally agreed that of the sum of RMB ¥80 million payable under the 2^nd Supplemental STA only RMB ¥62 million was payable.  The upfront loan of RMB ¥5 million was to be treated as part of the payment under the 2^nd Supplemental STA and the balance of RMB ¥13 million would be payable only upon production by Gao and Xie of evidence of their payment of applicable tax.  His case is rested on the basis that Gao and Xie were liable to pay tax on the proceeds of sale of the shares in Clarigain under PRC law. 

The PRC tax law provisions 

78.  It is common ground between the parties’ experts that if Gao and Xie were liable to pay tax, they would be liable for individual income tax under Article 1 of PRC Individual Income Tax Law (《中華人民共和國個人所得稅》) (the “Income Tax Law”). 

79.  In essence, Mr Yin’s argument is that as the shares in Clarigain are shares or rights, their proceeds of sale fall within article 2(9) of the Income Tax Law and regulation 8(9) of PRC Individual Income Tax Law Implementation Regulations （《中華人民共和國個人所得稅法實施條例》） (the “Implementation Regulations”).  Hence Gao and Xie are liable to pay individual income tax.  Professor Cao argues otherwise.  Articles 1 and 2 of the Income Tax Law provide as follows:

「第一條

在中國境內有住所，或者無住所而在境內居住滿一年的個人，從中國境內和境外取得的所得，依照本法規定繳納個人所得稅。

在中國境內無住所又不居住或者無住所而在境內居住不滿一年的個人，從中國境內取得的所得，依照本法規定繳納個人所得稅。

第二條

下列各項個人所得，應納個人所得稅：

一、工資、薪金所得；

二、個體工商戶的生產、經營所得；

三、對企事業單位的承包經營、承租經營所得；

四、勞務報酬所得；

五、稿酬所得；

六、特許權使用費所得；

七、利息、股息、紅利所得；

八、財產租賃所得；

九、財產轉讓所得；

十、偶然所得；

十一、經國務院財政部門確定徵稅的其他所得。」

(My emphasis underlined)

Regulations 5 and 8 of the Implementation Regulations provide as follows:

「第五條

下列所得，不論支付地點是否在中國境內，均為來源於中國境內的所得：

（一）因任職、受僱、履約等而在中國境內提供勞務取得的所得；

（二）將財產出租給承租人在中國境內使用而取得的所得；

（三）轉讓中國境內的建築物、土地使用權等財產或者在中國境內轉讓其他財產取得的所得；

（四）許可各種特許權在中國境內使用而取得的所得；

（五）從中國境內的公司、企業以及其他經濟組織或者個人取得的利息、股息、紅利所得。

第八條

稅法第二條所說的各項個人所得的範圍：

（一）工資、薪金所得，是指個人因任職或者受僱而取得的工資、薪金、獎金、年終加薪、勞動分紅、津貼、補貼以及與任職或者受僱有關的其他所得。

（二）個體工商戶的生產、經營所得，是指：

1. 個體工商戶從事工業、手工業、建築業、交通運輸業、商業、飲食業、服務業、修理業以及其他行業生產、經營取得的所得；

2. 個人經政府有關部門批准，取得執照，從事辦學、醫療、諮詢以及其他有償服務活動取得的所得；

3. 其他個人從事個體工商業生產、經營取得的所得；

4. 上述個體工商戶和個人取得的與生產、經營有關的各項應納稅所得。

（三）對企事業單位的承包經營、承租經營所得，是指個人承包經營、承租經營以及轉包、轉租取得的所得，包括個人按月或者按次取得的工資、薪金性質的所得。

（四）勞務報酬所得，是指個人從事設計、裝潢、安裝、製圖、化驗、測試、醫療、法律、會計、諮詢、講學、新聞、廣播、翻譯、審稿、書畫、雕刻、影視、錄音、錄像、演出、表演、廣告、展覽、技術服務、介紹服務、經紀服務、代辦服務以及其他勞務取得的所得。

（五）稿酬所得，是指個人因其作品以圖書、報刊形式出版、發表而取得的所得。

（六）特許權使用費所得，是指個人提供專利權、商標權、著作權、非專利技術以及其他特許權的使用權取得的所得；提供著作權的使用權取得的所得，不包括稿酬所得。

（七）利息、股息、紅利所得，是指個人擁有債權、股權而取得的利息、股息、紅利所得。

（八）財產租賃所得，是指個人出租建築物、土地使用權、機器設備、車船以及其他財產取得的所得。

（九）財產轉讓所得，是指個人轉讓有價證券、股權、建築物、土地使用權、機器設備、車船以及其他財產取得的所得。

（十）偶然所得，是指個人得獎、中獎、中彩以及其他偶然性質的所得。

個人取得的所得，難以界定應納稅所得項目的，由主管稅務機關確定。」

80.  With respect to Mr Yin, I think his reading of the Income Tax Law is rather inchoate.  To ascertain an individual’s liability to tax, any practitioner in any jurisdiction must begin with the charging provision, rather than pick and choose provisions of the statute and read them in isolation from the charging provision.  Article 1 of the Income Tax Law is the charging section.  It distinguishes between residents and non-residents.  Residents are liable to tax on their income within or outside the PRC; but non-residents are only liable to tax on their income within the PRC.  The other provisions of the Income Tax Law and Implementation Regulations must be read subject to this distinction.  Thus, Regulation 8(9) of the Implementation Regulations applies in relation to a resident to his income within or outside the PRC; but in relation to a non-resident, it applies only to his income within the PRC.  There is no dispute that Gao and Xie have no residence in or are non-residents of the PRC and have resided in the PRC for less than one year.  They are non-residents.  Thus, Article 1 of the Income Tax Law would only catch their income gained within the PRC.

81.  The income from the sale of the shares in Clarigain, a company situated in the BVI, is clearly income outside the PRC unless it is caught within the deeming provisions under Regulation 5 of the Implementation Regulations.  Under that regulation, the following income are deemed to have originated from within the PRC, regardless whether such income is paid within or outside the PRC:

(1)   income from office, employment or reward for services rendered in the PRC;

(2)   rental income for use of property within the PRC;

(3)   income derived from transfer of building or land use rights or other property in the PRC;

(4)   income derived from permission to exercise certain rights exercisable in the PRC; and

(5)   interest, dividend and bonus obtained from companies or enterprises and other economic entities or individuals within the PRC.

The nearest head of income which the proceeds of sale of the Clarigain shares may be caught is item (3). While the coal mine under Changlebao may be regarded as land use rights or other property in the PRC, there is no transfer of Changlebao or the coal mine by reason of the transfer of the shares in Clarigain.  The coal mine or the relevant 35% interest in the coal mine remains under the ownership and control of Changlebao, which in turn remains under the ownership and control of Zhong Xin.  For the above reasons, I agree with Professor Cao that the proceeds of sale of the shares in Clarigain were not caught within Article 1 of the Income Tax Law. 

82.  Mr Yin advances three other bases to found tax liability for Gao and Xie.  First, he submits that according to Article 13(4) of Mainland and Hong Kong Special Administrative Region Arrangements on Avoidance of Double Taxation and Prevention of Fiscal Evasion （《內地和香港特別行政區關於對所得避免雙重征稅和防止偷漏稅的安排》）(the “Arrangements”), the PRC tax authority has jurisdiction to levy tax.  That article provides as follows:

「四、轉讓一個公司股份取得的收益，而該公司的財產主要直接或者間接由位於一方的不動產所組成，可以在該一方征稅。」

83.  However, Professor Cao’s submits that the purpose of the Arrangements is to give effect to the bilateral agreement between Hong Kong and the PRC in providing relief against double taxation.  Thus, the operative words of “may levy tax in that jurisdiction” （「可以在該一方征稅」）in article 13(4) only has the effect of specifying which jurisdiction may levy tax under the Arrangements.  Mr Yin does not argue otherwise.  I am in agreement with Professor Cao.  Article 13(4) only specifies which jurisdiction may levy tax.  It is not a charging section.  Whether tax is chargeable depends on Article 1 of Income Tax Law, i.e. whether the proceeds of sale of the shares in Clarigain in the hands of a non-resident were income within the PRC.  The answer must be “no”. 

84.  Second, Mr Yin relies on a notice issued by the State Administration of Taxation on Strengthening of the Non-resident Enterprises’ Equity Transfer Income Corporate Income Tax Management（《國家稅務總局關於加強非居民企業股權轉讓所得企業所得稅管理的通知》）(“Notice 698”).  This notice provides anti-avoidance measures to prevent tax avoidance in transactions between non-PRC corporate entities involving indirect transfer of shares in PRC enterprises: see Article 1.  Its scope of operation is set out in Article 6.  These two articles provide as follows:

「第一條

本通知所稱股權轉讓所得是指非居民企業轉讓中國居民企業的股權（不包括在公開的證券市場上買入並賣出中國居民企業的股票）所取得的所得。

第六條

境外投資方（實際控制方）通過濫用組織形式等安排間接轉讓中國居民企業股權，且不具有合理的商業目的，規避企業所得稅納稅義務的，主管稅務機關層報稅務總局審核後可以按照經濟實質對該股權轉讓交易重新定性，否定被用作稅收安排的境外控股公司的存在。」

In essence, these articles catch transactions involving abuse of corporate structures for no reasonable commercial purpose and which have the effect of avoiding tax. 

85.  Plainly, the provisions of Notice 698 apply to transactions between non-PRC enterprises and are inapplicable to transactions between individuals.  According to Professor Cao, Notice 698 was the first regulations to provide anti-avoidance measures against share transfers between non-PRC enterprises but there are no similar provisions regulating share transfers between individuals.  As Notice 698 is aimed at tax avoidance involving abuse of corporate structure, one can readily see why it is not applicable to individual income tax.  Given the clear wording of Notice 698, Mr Yin could not argue otherwise, though he is reluctant to admit that the notice is not applicable to transactions between individuals. He then relies on a Shenzhen decision to argue that Notice 698 nevertheless applies to share transfer between individuals. 

86.  Third, the Shenzhen case relied on by Mr Yin concerned the actual transfer by an enterprise of the beneficial ownership of a PRC enterprise held by a Hong Kong company, which involved a change of actual controller.  That is also a case of transfer between enterprises and is therefore distinguishable from the present case of transfer between individuals. Indeed, even in the commentary in that case report, it was stated that if the transferring entity was a non-PRC enterprise, the tax authority may pierce its corporate structure and determine if the transfer was in effect a transfer of a PRC enterprise and chargeable to tax, but if the transferring entity was a natural person, then questions as to applicability of Notice 698 may arise.  On the facts of the present case, the transfer of the shares in Clarigain is between Gao, Xie and Ma as individuals.  Clearly Notice 698 is inapplicable.

87.  Further, Mr Chan submits, even if Notice 698 somehow applies, the anti-avoidance measures contained in Article 6 would not be triggered for the following reasons.  First, the article operates when there is an indirect transfer of a PRC enterprise.  Both experts admit their lack of expertise in trust law in the PRC. In the circumstances, it must be presumed that PRC law is the same as Hong Kong law.  It is common ground that the transfer of Clarigain does not affect the beneficial ownership of the shares in Changlebao at all.  Changlebao continues to be owned by Zhong Xin after the transfer.  By reason of the Clarigain declaration of trust, Clarigain is only a trustee of 50% of the Zhong Xin shares for Bai Jun.  Bai Jun remains as the 50% beneficial owner holding 35% interest in Changlebao before and after the transfer of the Clarigain shares from Gao and Xie to Zi Rong.  Both the legal and beneficial ownership of Changlebao and the coal mine under its control remain the same after the transfer of Clarigain.  Having been explained of the above position, Professor Cao confirms that transfer of the shares in Clarigain does not involve any transfer of interest in a PRC enterprise and would not trigger the operation of Notice 698.

88.  Second, there is no evidence that the setting up of Clarigain was an abuse of corporate structure or for the purpose of evading tax.  This is particularly so as Clarigain has been in existence for over ten years, long before any such anti-avoidance measures in Notice 698 were announced.

89.  Third, as stated in Article 6 of Notice 698, the liability to pay tax would only arise when there has been a report by the tax authority in charge to the State Administration of Taxation and approval given by the latter for re-assessment of the nature of the relevant share transfer.  In this respect, Mr Yin also agrees that tax was only payable after such re-assessment procedure.  In the present case, there was no reporting or re-assessment.  Hence, there is no liability to pay tax in any event.

90.  I accept the opinion of Professor Cao.  The proceeds of sale of the shares in Clarigain in the hands of a non-PRC resident are not caught by Article 1 of the Income Tax Law and are therefore not taxable.  There is no dispute that Gao and Xie are non-PRC residents.  Hence, the proceeds are not taxable.  The above discussions conclusively dispose of this issue both on the law and on the fact. 

91.  In the course of his evidence, Mr Yin described how the PRC tax laws work in practice. He referred to a notice entitled “Personal Income Tax Withholding Interim Measures” （《國家稅務總局關於印發《個人所得稅代扣代繳暫行辦法》的通知》） (“Notice 65”), issued by the State Administration of Taxation.  The notice sets out the procedures for withholding and payment of individual income tax.  According to Notice 65, the person obliged to withhold payment for the purpose of discharging the tax liability （扣繳義務人） of the person liable to pay tax（納稅義務人）has the following three statutory obligations.  First, he shall withhold sufficient amount from money payable to the person liable to pay tax.  Second, he shall pay the sum withheld to the treasury within 7 days of the month following the withholding.  Third, he shall report the payment to the relevant tax authority.  The report shall contain particulars such as, the amount withheld and paid with supporting documents, the name and particulars of the person liable to pay tax, his income, the amount of tax, and all other particulars required by the tax authority.  Upon payment of the sum withheld, the person obliged to withhold payment will be given a receipt containing the relevant particulars which he shall give to the person liable to pay tax.  It is Ma’s case that he withheld RMB ¥13 million for paying Gao’s and Xie’s tax.  As will be discussed in the latter part of this judgment, Ma admitted he had not paid the sum deducted to the treasury, or reported the matter to the tax authority.  Thus, his expert’s opinion destroys his case on this issue and severely damages his credibility and honesty.  This opinion shows that there was absolutely no legal or factual basis for Ma to raise this defence.  

92.  Summing up the experts’ evidence, the proceeds of sale of the shares in Clarigain are not taxable in the hands of non-PRC residents.  As Gao and Xie are non-PRC residents, those proceeds were not taxable.  Since Ma has not paid the sum withheld to the treasury or reported for tax, this defence was not raised bona fide.

The circumstances surrounding the making of the 2010 Oral Agreement

93.  At the time of the making of the alleged 2010 Oral Agreement, the parties had entered into the STAs and the Xian Arbitration Commission had handed down award setting aside the Keeneye Agreements.

94.  Under the STA, Gao’s and Xie’s obligation was to recover all the shares in Zhong Xin and transfer them to Ma at the consideration of RMB ¥380 million.  The duty to transfer and pay for the shares in Zhong Xin would only arise upon Gao and Xie having recovered all the shares in Zhong Xin but not before: Clause 2(2).  Ma was to make an upfront loan of RMB ¥5 million to Gao and Xie: Clause 2(1) which will be deducted from the purchase price at the time of transfer of the Zhong Xin shares to Ma: clause 4(2).  Ma shall be responsible for all legal and arbitration costs: Clause 3(2).  Any settlement sum to be paid to the Keeneye Group shall be agreed between the parties and be paid by Ma: Clause 3(2).  Very importantly, Clause 11(1) specifically provides that upon execution of the STA and the payment of the loan pursuant to Clause 2(1), amendments to the STA shall be effective only if agreed by both parties and upon their executing a written consent.  It is immediately apparent that even if the parties had entered into the 2010 Oral Agreement or the May Agreement, those oral agreements would be ineffective for want of written consent.

95.  The effect of 1^st Supplemental STA was that upon Gao and Xie succeeding in the Xian arbitration they may transfer such amount of shares in Zhong Xin recovered by them or the shares in Bai Jun or Clarigain or Angola holding those shares separately and be paid on a pro-rata basis: Clause 2.

96.  The effect of 2^nd Supplemental STA was that Gao and Xie shall transfer all the shares in Clarigain to Zi Rong as Ma’s nominee upon signing of the agreement and Ma shall pay them RMB ¥80 million before 22 June 2010.  However, it was only until the end of June or early July 2010 that Ma paid RMB ¥62 million and defaulted in paying the balance of RMB ¥18 million.

The non-payment of the sum of RMB ¥13 million

97.  In the earlier subsection, I have reached the conclusion that there was absolutely no legal or factual basis to support Ma’s withholding of payment due to Gao and Xie for the alleged purpose of paying their tax.  This part of Ma’s case of the 2010 Oral Agreement could be dismissed simply on that basis or for want of written consent.  I shall nevertheless examine the factual basis of this part of Ma’s case for what his evidence is worth and for completing my finding on credibility.  As submitted by Mr Chan, Ma’s version as to the timing when the 2010 Oral agreement was reached was self-contradictory.  His pleaded case in paragraph 9(a) of his Statement of Claim dated 21 March 2012 is as follows:

“After the making of the [2^nd Supplemental STA] as evidenced by a receipt dated 3^rd August 2010 signed by [Gao] on behalf of the Defendants, it was agreed between [Ma] and [Gao and Xie] that Ma only had to pay RMB 62 million to [Gao and Xie instead of RMB 80 million under the [2^nd Supplemental STA] with the sum of RMB 62 million arrived at by giving credit to the Loan already made by [Ma] to [Gao and Xie] and with the balance of RMB 13 million (i.e. RMB 80 million – RMB 5 million and RMB 62 million) payable by [Ma] upon production of evidence by [Gao and Xie] that [Gao and Xie] had already paid tax on the transaction concerning the transfer of 50% share and interest in Zhong Xin insofar as the partial payment of RMB 80 million was concerned.”

(My emphasis underlined)

This plea is equivocal as to precisely when the 2010 Oral Agreement was made, but it is clear that it was made sometime after the exection of the 2^nd Supplemental STA and before 3 August 2010.

98.  In his Amended Reply and Defence to Counterclaim in HCA 466/2012, Ma pleaded that the 2010 Oral Agreement was made when signing the 2^nd Supplemental STA.  It is neither before nor after the making of the 2^nd Supplemental STA but contemporaneously.

99.  In paragraph 22 of his second affirmation dated 17 August 2012, Ma said:

“22. On Gao’s allegation that I had failed to pay the Defendants RMB¥80 million as provided for in clause 1(3) of the Shares Transfer 2^nd Supplemental Agreement, I say as follows:-

(a) I came to Hong Kong to sign the Shares Transfer 2^nd Supplemental Agreement. Before I signed it, my staff in PRC reminded me about the tax implication of the transaction as tax was payable for transferring of interest in a joint venture company in PRC holding assets there.

(b) I raised the matter with the Defendants and told them tax would be payable for the transaction and if the Defendants would not pay then I would be liable to pay.

(c) After some negotiation, the Defendants and I agreed that I could withhold RMB¥13 million from the advanced payment which could be payable to them upon their proof that the relevant tax had been paid. The sum of RMB¥13 million was a rough and ready figure as the tax would be on the net sum obtained by the Defendants after deducting the costs. As there was no information on the costs, 20% could be on RMB¥80 million which gave rise to a figure of RMB¥16 million. Gao said costs should be taken into account and eventually the figure agreed at was RMB¥13 million.

(d) In relation to the implication of the PRC tax law leading to the withholding of RMB¥13 million, there is now produced and shown to me marked “MMG-23” a copy of the PRC tax opinion on the matter.

(e)   Further, both Defendants and I also agreed that the RMB¥5 million loan which was supposed to become part of the consideration for Zhong Xin shares should be deducted from the advance payment.  The [2^nd Supplemental STA] was then executed.”

(My emphasis underlined)

The tenor of his affirmation is that Ma was made aware of the tax issue before he came to Hong Kong to sign the 2^nd Supplemental STA, or at least before he actually put his pen to paper.  Then he raised the issue with Gao and Xie, negotiated, reached the 2010 Oral Agreement, and then executed the 2^nd Supplemental STA.  Thus, according to this affirmation, the 2010 Oral Agreement was reached at or immediately before the signing of the 2^nd Supplemental STA, i.e. comtemporaneously. This is consistent with his Amended Reply and Defence to Counterclaim.

100.  However, in paragraphs 22 and 24 of his later witness statement dated 13 May 2014, Ma said:

「22. 在簽署第二份補充協議後，高謝的代表律師向在香港的Clarigain公司管理人發函，並將所有簽署的文件遞交給該管理人，以便轉交給英屬維京群島公司註冊代理作備案登記。

23. 根據第一(3)條規定，本人應向高謝支付8000萬元人民幣。由於高謝根據法律規定需要繳納稅款，所以本人要求高謝應先提供納稅憑證或稅款收據，以證明他們已支付了稅款，而他們同意本人可先暫扣1300萬元人民幣，待高謝提供已支付稅款的證明後再予以支付，這樣他們可先取用余款。

24.   另外，高謝與本人亦同意付款應包含本人已支付的500萬元人民幣借款，加上1300萬元人民幣的暫扣款，故本人應支付的款額為6200萬元人民幣。本人之後根據約定向高謝支付了6200萬元人民幣。高亦在周卓立律師的見證下簽發收據以作確認。」

(My emphasis underlined)

The tenor of paragraphs 22 and 23 of his witness statement suggests that it was when CLCMC proceeded with the documentation well after signing the 2^nd Supplemental STA that Ma demanded Gao and Xie to produce proof of payment of tax.  It was then that Gao and Xie agreed that he may withhold RMB ¥13 million for tax.  Thus, according to his witness statement, the 2010 Oral Agreement was made well after the execution of the 2^nd Supplemental STA, not contemporaneously.

101.  Ma has been switching to and fro between his statement of claim, reply to defence and counterclaim, affirmation and witness statement.  One would expect his memory to be more accurate closer to the event, i.e. the filing of the statement of claim and the affirmation in support of his application for injunction.  But those two documents are self-contradictory.  If, as stated in his affirmation, the 2010 Oral Agreement was made before signing the 2^nd Supplemental STA, one wonders why it was not recorded in the 2^nd Supplemental STA.  This oral agreement does not stand well with the 2^nd Supplemental STA which stated in unequivocal terms that RMB ¥80 million shall be paid within 15 days and mentioned nothing about the two deductions which would significantly reduce the payment obligation.  This is particularly so as it was Ma’s own evidence that in the mainland, if there was such an arrangement for withholding payment for tax, there had to be express provision.  Given the technologies these days, it would take no time to print an amended copy of the agreement.  Ma has no answer to this anomaly.  Then, in his witness statement written more than two years later, he gave a vague account and avoided mentioning when the 2010 Oral Agreement was made.  These are hallmarks of an imperfectly cooked up concoction.  Whether the 2010 Oral Agreement was made before or after execution of the 2^nd Supplemental STA might not appear to have much significance.  However, the details given in his statement of claim, reply to defence and counterclaim, affirmation and witness statement are so detailed but are so markedly different that the irresistible inference is that Ma was making things up rather than making a mistake in recounting the events.

102.  There are other indications that Ma’s case is inherently improbable and is nothing but concoction.  The most obvious ones are that the proceeds of sale of the shares in Clarigain are not liable to tax under the Income Tax Law; and the fact that Ma had not made any report to the tax authority or paid the money allegedly withheld to the treasury.  These suggest that the allegation of withholding part of the payment for tax is not genuine but a concoction and an excuse not to pay.

103.  The damage to Ma’s credibility and honesty does not end there.  During cross-examination, he claimed that he is a law abiding citizen and is fully aware that “for every citizen in mainland China after a transaction, there is an obligation to pay tax, this is a rigid requirement” and “if people try to avoid paying tax, they would be taken to prison”.  When challenged with the fact that he had not paid over the money withheld to the treasury, he changed his evidence and said that he had made inquiries with the tax authority and was informed that no tax was payable at that stage.  This quick manoeuvre brought him more problems.  The enquiries he mentioned were raised for the first time during cross-examination and without any documentary proof.  This is by itself incredible.  What is worse is that when asked about specifics, he turned evasive and kept on talking about irrelevant matters.  Eventually, when he was cornered, he replied that he did not actually know what the situation was as the inquiries were made by someone else.  That leads him to other greater problems.  If indeed he had made enquiries, he would be misleading the court in not having disclosed them in his ex parte application for injunction.  When asked why this was not disclosed, his excuse was that in the affirmation he only disclosed the gist but not all the details.  But the reality was that he exhibited Mr Yin’s expert opinion asserting that tax was indeed payable and purporting to prove exactly the opposite of the result of those enquiries.  If indeed, there were those enquiries, why did he still produce Mr Yin’s expert opinion to mislead the court; and why did he not pay back Gao and Xie.  His answers amply demonstrate he was not telling the truth, but was making up his evidence in the witness box based on what struck his mind.

104.  Regarding the calculation of the amount to be deducted, Ma gave three versions.  In his second affirmation, he affirmed that the figure was roughly RMB ¥16 million being 20% of the consideration for the Clarigain shares less some unspecified costs.  Then, while giving evidence, he calculated the tax to be RMB ¥14 million by reference to the consideration and the agreed capital injection of RMB ¥49.7 million by Zhong Xin to Changlebao.  But, that was not quite the sum withheld.   In re-examination, he gave a third version that the amount of RMB ¥13 million was arrived at simply because Gao and Xie needed RMB ¥2 million for a Xinjiang project and RMB ¥60 million for repayment of her own debt.  Ma was changing his evidence.  It demonstrates that he was capable of juggling with figures and ready to make up anything in the witness box.  His evidence is plainly incredible.

105.  Another conflicting piece of evidence from Ma is Chen Xiaoping’s a letter to CLCMC dated 16 March 2012 asking for the particulars of CLCMC’s bank account in the PRC into which Ma could pay the balance of RMB ¥13 million.  On Ma’s own admission, that letter was sent with his authority.  Ma explained that the purpose of the letter was to test if Gao had sold her interest in Zhong Xin to someone else.

106.  Mr Chan submits that this explanation is illogical, because it was Ma’s own case that the time had not come for him to pay the RMB ¥13 million because Gao had never produced any receipt for payment of tax.  In reply, Ma referred to the enforcement action in respect of the award.  When reminded that HCA 1315/2009, to which that enforcement relates, had been pending since 2009 up to now and could not explain why the sum of RMB ¥13 million suddenly became payable on 16 March 2012, Ma changed and relied on the May Agreement. When reminded that the May Agreement had nothing to do with his liability to pay the sum of RMB ¥80 million under the 2^nd Supplemental STA, Ma changed and said he would be entitled to Clarigain’s company documents after all the RMB ¥80 million was paid.  While this may be true, Ma could not explain why the said sum of RMB ¥13 million suddenly became payable on 16 March 2012, if it was his case that there was the 2010 Oral Agreement.  Ma was obviously not telling the truth, but was making up his evidence as he was giving evidence.  That letter was issued just five days before he commenced the present action.  He has to be very stupid to test Gao at the price of making such a damaging admission against his interest.  In the absence of a satisfactory explanation from Ma, I have to accept what was stated in that letter as true.

107.  Mr Wong argues that Gao’s failure to produce any letter of demand for the two sums of RMB ¥13 million and RMB ¥5 million withheld is consistent with Ma’s case of the 2010 Oral Agreement.  This is a very flimsy argument in light of Ma’s admission that he had never paid the sum over to the treasury or reported the payment to the tax authority. 

The set off of the sum of RMB ¥5 million

108.  As for the set off of the loan of RMB ¥5 million, this allegation had always been pleaded by Ma as part of the same 2010 Oral Agreement under which the sum of RMB ¥13 million was agreed to be withheld.  Now that that part of the alleged agreement has been established to be a total fabrication, this part of the alleged agreement must fall as well.

109.  Mr Wong submits, in the alternative, that on a proper construction of all the STAs, Ma was entitled to take into account the loan of RMB ¥5 million as part of the payment under clause 1(3) of the 2^nd Supplemental STA.  He has not advanced any argument how the STAs could be construed to have such effect.  With respect, in the light of Clause 4(2) of the STA, which expressly provides that the loan shall be set off against the consideration at the time of the transfer of the interest in Zhong Xin to Ma, I am unable to read into the STAs such an intention.  This is particularly so as clause 11(1) of the STA required that all amendments of the STA had to be in writing.

Conclusion

110.  Summing up this part of my analysis, I find Gao is a credible witness but not Ma.  The proceeds of sale of the shares in Clarigain in the hands of Gao and Xie as non-PRC residents are not taxable under PRC laws.  On his admission, Ma has not paid any sum withheld to the treasury.  The alleged 2010 Oral Agreement was a concoction and the tax issue was only raised as an excuse not to pay.  The non-payment was a deliberate breach of the 2^nd Supplemental STA.   Even if the parties had entered into the 2010 Oral Agreement, it has no effect due to want of written consent.

111.  This finding has serious repercussions on Ma’s credibility.  He pleaded a positive case, presented expert evidence and gave evidence which demonstrated beyond any shadow of doubt that his case was a concoction.  It is not a case of mistaken belief of the law or of the fact.  He ought to know, with the advice of his expert, that to invoke that excuse he must have paid over the money withheld to treasury, reported the tax to the tax authority and given a copy of receipt to Gao and Xie.  He has not performed any of those acts.  He was only raising the tax issue to create an excuse not to pay and was actively attempting to deceive the court.  His defence was a calculated attempt with the help of people who had knowledge about PRC tax law to deceive the court by engaging expert evidence on PRC law.  It demonstrates his propensity in making concoction; his ability and readiness in juggling with figures to make up his case; and his dishonesty.  He is an extremely unreliable and dishonest witness. 

THE MAY AGREEMENT

The circumstances surrounding the making of the May Agreement

112.  The background set out in paragraphs 39 to 56 above, the circumstances surrounding the making of the 2010 Oral Agreement and my finding of fact in relation to that agreement also form part of the circumstances surrounding the making of the May Agreement.   Hereunder, I highlight some of those circumstances and some additional facts which are not in dispute or are incontrovertible. 

113.  On 29 March 2010, which was about two months before the Xian Arbitration Commission delivered its award, Liu transferred his shareholdings in the Keeneye Group to Zhang.  Gao and Xie claimed that they had no knowledge of that transfer.  

114.  Between 29 March and 19 October 2010, the following events occurred.  Zi Fenggao paid a sum of RMB ¥50 million into the Xian Arbitration Commission on Ma’s behalf.  On 3 June 2010, the Xian Arbitration Commission delivered its award in favour of Gao and Xie.  Three days after that, Ma and Zi Rong entering into the Ma/Zi Agreement.  On the following day, Ma entered into the 2^nd Supplemental STA with Gao and Xie; and Gao and Xie transferred their shares in Clarigain to Zi Rong, which effectively amounted to Ma’s part performance of the Ma/Zi Agreement.  Then, Ma paid Gao and Xie RMB ¥62 million, but withheld payment of RMB ¥18 million. On 2 August 2010, Saunders J granted leave to enforce the award.On 19 October 2010, the Xian Intermediate People’s Court affirmed the award of the Xian Arbitration Commission.  At that point in time, despite the Keeneye Group had applied to set aside the ex parte leave granted by Saunders J, the prospect of Gao and Xie recovering their shares in Bai Jun was promising.

115.  However, since about March 2011, Ma acted contrary to his obligations under the STA.  He refused to pay the legal costs of the various legal proceedings including the fees of the receiver of Zhong Xin.  Things took a turn on 12 April 2011 with Reyes J setting aside leave to enforce the award.  Gao and Xie appealed.  That was just seven months before Ma had to deliver the 100% interest in Zhong Xin under the Ma/Zi Agreement.  It was at this stage in the middle of the appeal proceedings that Ma asserted he had reached the May Agreement with Gao and Xie.  It was also at this stage that Ma initiated a re-negotiation of the STA.  He wanted a one-third reduction of the consideration and instalment terms.  Gao instructed Chow and Fan to discuss legal issues relating to the further supplemental STA with Ma.  Chow and Fan had a meeting with Ma and his lawyer Wang in Xian. After their return to Hong Kong, they exchanged proposals with Wang between July and September 2011.  But no agreement was reached.  As the appeal drew near in October 2011, Ma refused to pay costs on account for the appeal.  Gao and Xie had to pursue the appeal on their own funds.  Then on 2 December 2011, the Court of Appeal allowed the appeal and restored the leave to enforce the arbitration award. 

116.  In February 2012, Gao received an affirmation from Angola in the HCA 1987/2005 proceedings revealing sale of the Keeneye Group by Zhang to Liu Shengfeng and Zi Fenggao and another affirmation from Zhang confirming that the sale was to Liu Shengfeng and Zi Rong, not Zi Fenggao.  It is Gao’s and Xie’s case that it was only at this stage they learned about Ma’s secret acquisition of the Keeneye Group from Zhang.

117.  On the other hand, Ma alleged that on 5 March 2012 Zhang informed him that Liu Xiaoping told him that Gao and Xie had agreed to sell their interest in Changlebao to Liu Xiaoping. Ma confronted Gao on the telephoned and then commenced HCA 466/2012.

118.  In mid-December 2015, shortly before this trial Zi Fenggao confirmed to Gao that his relationship with Ma was one of buyer and seller.  As result, Gao and Xie sought specific discovery of the Ma/Zi Agreement and amendment of their defence and counterclaim.  It was at this late stage that they realized Ma had resold his interest under the STA to Zi Rong.

Ma’s case of the May Agreement

119.  Ma said that after Reyes J set aside leave to enforce the award, Gao telephoned him and wept.  Gao suggested to negotiate settlement with Zhang who was in control of the Keeneye Group.  At that time, Zhang was being detained by the police for embezzling funds of Changlebao.  Gao said it was Ma who caused Zhang’s detention, but Ma said it was Gao and Xie.  I tend to believe Gao’s evidence, but who brought about Zhang’s detention is not material to the present dispute.

120.  Ma negotiated with Zhang’s sister who demanded RMB ¥260 million for the sale of the Keeneye Group.  He reported the negotiation to Gao.  Gao said that the price should be below RMB ¥200 million and agreed to bear half of the price which shall be paid upfront by Ma and to be deducted from the consideration under the STA.  Ma negotiated further with Zhang and reached agreement to settle for RMB ¥190 million. He reported back to Gao.  After consulting Xie, Gao reverted to him and expressed agreement. Those were the terms of the May Agreement.  Gao agreed to reduce the agreement into writing afterwards and told him to settle quickly with Zhang.  

121.  Pursuant to the May Agreement, Ma instructed Zi Rong and Liu Shengfeng to enter into a sale and purchase agreement with Zhang in respect of the shares in the Keeneye Group for RMB ¥190 million on 17 May 2011.  The sale and purchase was completed on 1 June 2011. 

122.  Despite repeated request to reduce the May Agreement into writing, Gao stalled saying that she had to work out the details with her legal team and to concentrate on the action against Angola.  There is no dispute that between July and September 2011, their legal teams negotiated on the terms of a further supplemental STA, but no agreement was reached.  Then in March 2012, Ma learned from Zhang that Gao and Xie had agreed to sell their shareholding in Changlebao to Liu Xiaoping. 

Gao’s and Xie’s case

123.  According to Gao, subsequent to the decision of Reyes J, Ma proposed re-negotiating the STA, particularly to reduce the consideration and to provide for instalment terms.  The reasons Ma gave were that Zhang’s resistance proved to be much stronger and was costing more than he had anticipated.  The negotiation for a further supplemental STA and exchange of proposals between Fan and Wang are common ground.  But, Gao’s case is that the focal point of their negotiation was about reduction in the consideration depending on which party was to be responsible for continuing the litigations with the Keeneye Group and Angola and not about reducing into writing any agreement as to settlement with Zhang.

124.  Despite the failure before Reyes J, Gao was still very hopeful.  She insisted on performance according to the terms of the STAs. But, for comity reasons, she was willing to concede to a minor reduction in price to about RMB ¥350 million; or to RMB ¥300 million for a lump sum payment.  If Ma should insist on deferring part of the payment, she would require Ma to charge the Clarigain shares to her and Xie as security until full payment. Alternatively, if the Bai Jun shares were recovered by settlement and not by litigation, she would agree to have the Bai Jun shares charged to her and Xie as security.  But Ma refused.

125.  It seems to be Ma’s case that the alleged agreement of sale of the interest in Zhong Xin to Liu Xiaoping was the motive or one of the motives for Gao’s and Xie’s breach of the May Agreement and that the failed negotiations of the further supplemental STA is evidence of the May Agreement.  I shall examine the parties’ evidence of these two issues first. 

The alleged agreement of sale of the shares in Bai Jun to Liu Xiaoping 

126.  Ma’s case of the alleged agreement of sale of the shares in Bai Jun to Liu Xiaoping is based on the oral allegation said to have been made to him by Zhang, and Gao’s and Xie’s reaction when confronted by him over the telephone.  According to Ma, as a result of what Zhang told him, he confronted Gao on the telephoned.  In reply, Gao said that as she and Xie had won the appeal, they were shareholders of Bai Jun and could sell the shares to whoever they liked.  Based on that evidence, Ma applied for an ex parte injunction to restrain Gao and Xie from disposing of their interest in Zhong Xin in 2012. 

127.  The entirety of his case stemmed from Zhang’s oral assertion.  What Zhang was alleged to have said was hearsay and Ma’s evidence is second degree hearsay.  Now that three years have lapsed, Ma was still unable to improve his case with credible evidence.  The only evidence he has obtained during these three years was a purported witness statement from Zhang which was expunged because Zhang was not called to testify.  The explanation given by Ma is that Zhang was prevented from leaving the mainland because of certain measures imposed in the mainland arising out of Gao’s and Xie’s complaint.  He provided no details of that complaint or the alleged measures.  Zhang is such a crucial witness in his case that there is no reason why Ma did not arrange or could not have arranged for him to give evidence via video-link.  Given the time lapse and the resources Ma and those behind him have, this technology is not beyond his reach.  But he did not even make any application for Zhang to testify by video-link.

128.  The most important witness in this part of Ma’s case was Liu Xiaoping.  But Ma did not even attempt to contact him for confirmation of the alleged sale, not to mention to arrange for him to testify.  When cross-examined about Liu Xiaoping, Ma said that he had never met Liu Xiaoping or attempted to look for him.  Given Liu Xiaoping’s prominence in Yulin City and Ma’s resources, it would be very surprising that Ma could not get in touch with him.  Ma’s inaction can only be explained in one of two ways: either he knew the alleged sale did not exist or that he had enquired from Liu Xiaoping and received a negative confirmation.  Either way, Ma’s case against Gao and Xie is not supported by any evidence.

129.  As for Gao’s and Xie’s reaction upon confrontation, Ma’s pleaded case in the statement of claim and in his affirmation in support of his application for ex parte injunction is that Gao refused to confirm whether she and Xie had sold their 50% interest in Zhong Xin obtained by them through their successful appeal and that Xie had told him that he and Gao could do whatever they liked and to sell it to whoever offered the best price.  When cross-examined on the lack of evidence and his inexplicable conduct in not contacting Liu Xiaoping, Ma volunteered for the first time that during the telephone confrontation on 5 March 2012 Xie snatched the telephone away from Gao and said “I sold [the shares] already, why didn’t you give us the Bai Jun shares.  I’ve sold it, what can you do.”  Ma also said “Xie told me with his own mouth that he has already sold it.” This is in sharp contrast with his pleaded case, his affirmation and his witness statement.  Ma’s explanation for the inconsistency is his usual saying that what was said in the pleading, affirmation and witness statement was the gist and not comprehensive.  He put the blame on his lack of familiarity with punti or English.  But his witness statement was written in Chinese.  He then gave inconsistent explanations alleging on the one hand that what Xie said could not be taken seriously and on the other that he took it seriously and that was why he came to Hong Kong to commence HCA 466/2012 and apply for an ex parte injunction.  His evidence bears the hallmark of recent concoction.  His answers are typical of a witness who has no respect for the truth and who would make up anything in the witness box that suits him.

130.  On the other hand, Gao was not shaken on cross-examination.  She gave clear and consistent evidence denying such alleged agreement.  At the time, the parties were in dispute.  Ma refused to pay the balance of RMB ¥18 million under the 2^nd Supplemental STA and refused to fund the litigation.  Gao and Xie discovered that Ma had settled with Zhang behind their back.  What was most offending was that Ma kept the secret from them and caused them to incur expenses in the appeal.  At the highest, their reaction was a burst of the spleen, which cannot amount to an admission or is sufficient to raise any inference of an admission. I accept Gao’s evidence that she and Xie had not entered into any agreement to sell their interest in Zhong Xin to Liu Xiaoping and reject Ma’s evidence.  Ma bears the burden of proof but has utterly failed to prove the alleged agreement of sale of the Bai Jun shares to Liu Xiaoping and has failed to prove motive on the part of Gao and Xie to repudiate the May Agreement, if that agreement existed.

The negotiation for a further supplemental STA

131.  It is common ground that the parties negotiated for a further supplemental STA between May and August 2011.  The question is whether those negotiations evidence the parties’ attempt to reduce into writing the May Agreement reached earlier or whether those negotiations were just attempts to reach a further supplemental STA which failed.  The negotiations for the further supplemental STA took place shortly after the alleged making of the May Agreement.  The content of the negotiations as reflected in the contemporaneous communications between the parties’ lawyers best reflect where the truth lies.  The presence or absence of reference to the May Agreement, its terms and the nature of such reference is most significant. 

132.  After meeting with Ma and Wang in Xian, Fan drafted two proposals for discussion with Wang after their return to Hong Kong. She presented the draft proposals to Gao for approval.   In her email response of 26 July 2011, Gao made five points.  Points 2 and 3 are particularly telling as to Gao’s lack of knowledge of Ma’s settlement with Zhang.  In point 2, she was referring to the shares obtained or to be obtained from Liu, not Zhang.  She said:

「從一支劉處拿回的百浚公司股份須首先落在謝、高名下」

In point 3, she said that it was under that pre-condition that she and Xie would abandon the litigation with Liu.  If, as Ma alleged, Gao knew Zhang was in control of the Keeneye Group and therefore suggested Ma to negotiate with Zhang or had actually consented to the settlement with Zhang, she would have used words to the effect that “the shares obtained or to be obtained from Zhang” and about abandoning the litigation with Zhang.  This statement clearly reflected Gao’s belief at the time that Liu was the person in control of the Keeneye Group to which she and Xie had transferred their shares in Bai Jun in August 2008 and with whom they were litigating.  Her lack of knowledge about the transfer to Zhang is corroborated by Chow who said that to his knowledge the Bai Jun shares were held by the Keeneye Group under Liu’s control.  Looking at the situation the other way, if Gao had reached the May Agreement with Ma, Ma must have informed her that he had acquired the Bai Jun shares from Zhang and not from Liu; and she would not have, two months after the alleged May Agreement, given instruction to Fan still referring to the shares recovered or to be recovered from Liu.  Gao’s email supports her case that she had no knowledge of the settlement with Zhang and had not entered into the May Agreement with Ma.  It is a contemporaneous document between a party and her solicitor.  Unless Gao had set out to plant some false evidence for the purpose of deceiving the court in an anticipated litigation in future, she must have told her solicitor the truth and her true state of mind.  It deserves great weight.

133.  Mr Wong submits that by referring to the shares obtained from Liu in the past tense, Point 2 reflected Gao’s knowledge of the settlement with Zhang.  The beauty, or sometimes the defect, of the Chinese language is that it has no tense.  The above sentence could be interpreted in the past tense to mean “the shares obtained from Liu shall be first restored under Gao’s and Xie’s name” or in the future tense to mean “the shares to be obtained from Liu ...” Gao said in evidence that she meant it in the future tense.  From the conclusions drawn in the above paragraph, it is clear that Gao was talking in the future tense.

134.  Mr Wong argues that this email indicated that Gao knew that the Bai Jun shares had been acquired by Zhang because there was no discussion about settlement or litigation to obtain the Bai Jun shares, but only a request that those shares acquired from Liu be transferred to Gao and Xie.  With respect, this is a very misleading way to construe that email.  That email was a response to Fan’s request for comment on her two draft proposals.  Those two draft proposals and the finalised version which are analysed below did mention the Keeneye litigation.  Besides, Mr Wong cannot explain or overcome the fundamental difficulty why Gao referred to the shares obtained or to be obtained from Liu, not Zhang.

135.  Mr Wong argues that Gao’s indication in that email that she would abandon the litigation against Liu if the Bai Jun shares were transferred back to them is evidence that she knew the shares had already been acquired by Ma.  With respect, Mr Wong is construing the email out of context and without regard to the fact that it was a response to the two draft proposals prepared by Gao’s solicitor.  That argument fails for the same reason as given above.

136.  Next, Mr Wong refers to the following part of Gao’s email to Fan dated 1 August 2011 commenting on Ma’s draft agreement:

「王律師發來的東西，很可笑，即不願多付錢，又不肯抵押股份，天下哪裡有這樣的和解？純粹把你和周律師當[猴]耍，把我們當傻子。他們始終迴避一個根本的問題，即要回來的股份須先回歸謝／高，如果不能回歸，至少也須抵押至付全款為止。這是完全不能接受的。」

He argues that Gao was least troubled by the marked reduction in the consideration from RMB ¥380 million to RMB ¥260 million, but was most concerned about the Bai Jun shares not being transferred back to them before full payment.  Again, with respect, this is a very distorted way of reading that email.  Gao was saying that Ma’s proposal was laughable in his not being willing to pay more on the one hand and not willing to provide her with security on the other.  She then went on to comment on Ma’s evasion in answering her question about transferring the Bai Jun shares to them before full payment.  One cannot fairly say that Gao was not concerned about the price reduction.  She was concerned about both the price reduction and the security issue.  This email was issued in August 2011, which was almost three months after the alleged conclusion of the May Agreement.  It is still reflecting disagreement over the price reduction.  If so, how could the parties have reached the May Agreement which, according to Ma, required Gao and Xie to bear RMB ¥95 million of the price of settlement with Zhang?

137.  I now turn to examine the two proposals advanced by Fan to Wang.  The relevant parts of the first proposal read as follows:

「方案一：

1. 乙方支付甲方總價格共___元人民幣，甲方則把所有涉及中信及常樂堡礦業的訴訟權及與其相關的責任及權益轉讓給乙方，不管乙方與Angola的訴訟結果如何（如和解不成功的話），乙方的付款責任不受影響。

2. 支付方式：

第一期...

第二期...

不管乙方與Angola的訴訟或和解談判結果如何，餘額須於相關的一審判決之日或Angola的和解協議簽署日或乙方獲Angola名下之中信股份之日或補充協議簽署後的___年內（以最早之日為準）付清，在付清餘額之前，乙方及其關聯方須將百浚及Clarigain的股權抵押給甲方。

3.   關於與Angola的訴訟中及與張新田及劉健新的和解談判，在不影響甲方的權利的情況下，甲方須與乙方配合，但百浚的股份必須先轉到甲方的名下。...」

138.  The overall scheme under the first proposal was apparently for Gao and Xie to transfer all their litigation rights and the risk of litigation to Ma (clause 1) and that they be paid and leave the arena (clause 2).  They would have no obligation other than to co-operate with Ma in the Angola litigation and in the negotiation with Zhang and Liu (clause 3).

139.  Mr Wong argues that because clause 1 expressly provides that Ma shall pay regardless of the outcome of the litigation with Angola and nothing was mentioned about the outcome of the litigation with the Keeneye Group, it must be the understanding of both parties that the litigation with the Keeneye Group had been settled.  Similarly, paragraph 3 of clause 2 only mentioned that the payment responsibility was irrespective of the outcome of the Angola litigation, without any reference to the result of the litigation with the Keeneye Group.  That is one possible inference.

140.  But more telling is Clause 3, which provides that Gao and Xie shall co-operate with Ma in the Angola litigation and the settlement negotiation with Zhang and Liu.  Very plainly, this clause reflects that to Gao’s knowledge, there was no concluded settlement agreement with Zhang or with Liu.  It is Ma’s case that the Zhang/Ma Agreement was concluded on 17 May 2011 and completed on 1 June 2011 with payment made to Zhang.  The existence of the May Agreement must be tested against this proposition.  If the parties had entered into the May Agreement and settled with Zhang in May 2011, there would be no need to make express provision two months later for cooperation in the settlement negotiation with Zhang and Liu.  What was there left for Gao and Xie to cooperate in the settlement negotiation with Zhang and Liu?  This is proof beyond any doubt that Gao and Xie knew nothing about the May Agreement, let alone agreed to it.  The settlement with Zhang was clearly something done at the back of Gao and Xie for Ma’s personal purpose.

141.  Another argument of Mr Wong is that by providing in paragraph 3 of clause 2 that Ma must provide the shares in Bai Jun and Clarigain as securities for Gao and Xie, it was clear that Gao and Xie knew Ma had obtained the shares in the Keeneye Group from Zhang.  This is a possible inference if looked at in isolation.  But it should be recalled that it was Gao’s instruction to Fan that the shares in Bai Jun to be obtained from Liu shall be first put under her and Xie’s name.  This clause was drafted by Fan on the basis that the shares in Bai Jun were still being held by the Keeneye Group under the control of Liu. It cannot reflect Gao’s knowledge of their transfer to Ma.

142.  Any document has to be construed as a whole.  In the light of my analysis of Clause 3 above, it is obvious that Gao could not have known that the Bai Jun shares had been transferred to Ma.  Against the background that Gao and Xie had succeeded in the Xian arbitration and were confident about their success in the appeal against Reyes J’s decision, putting it at the highest, one could only infer that when drafting this paragraph, the draftsman or Gao was particularly confident that the Bai Jun shares would have been recovered well before the recovery of the Zhong Xin shares transferred to Angola and not that they had knowledge of the settlement with Zhang.  This is supported by the evidence of Gao and Chow who both confirmed that they were confident of their chance of success.  Gao even went as far as to say that even if she lost the appeal, she could still recover the Bai Jun shares from the Keeneye Group under HCA 1315/2009 which had been stayed by reason of the Xian arbitration.  Indeed their optimism proved to be correct.

143.  The second proposal casts an even more favourable light on Gao’s and Xie’s case.  It provides for an alternative scenario to that under the first proposal.  The relevant parts of this proposal read as follows:

「方案二：

1. 乙方支付甲方總價格共___元人民幣。甲方對百浚及對Angola的訴訟負責，直至與Angola和解或訴Angola的訴訟完結，以及乙方完成支付責任為止。

2. 支付方式：

第一期...

第二期...

關於與張新田及劉健新的和解談判中，在不影響甲方的權利的情況下，甲方須與乙方配合，但百浚的股份必須先轉到甲方的名下。...」

144.  Mr Wong refers to Clause 1, which provides for the litigation between Bai Jun and Angola only.  With respect to the draftsman, that clause was badly drafted.  On a strictly literal reading, it means Party A shall be responsible for the litigation against Bai Jun and the litigation against Angola.  There was no litigation against Bai Jun.  On the factual matrix that construction does not make sense.  Mr Wong accepts that reference to Bai Jun means reference to the shares in Bai Jun held by the Keeneye Group.  He then argues that Gao and Xie were not required to shoulder any responsibility for the Keeneye litigation which must have, to their knowledge, been settled.  With greatest respect, such argument is absurd because of the presence of the words “and verses”（「及對」）between “Bai Jun” and “Angola”.  On a plain reading, that clause simply referred to the litigation between Party A (i.e. Gao and Xie) verses（「對」）Bai Jun (meaning the Keeneye Group); and（「及」）the litigation between Party A verses（「對」）Angola.  The overall scheme under this proposal is that Gao and Xie shall be responsible for the litigation with the Keeneye Group relating to the recovery of the Bai Jun shares and against Angola relating to the recovery of the Zhong Xin shares until their conclusion.  It referred to two sets of litigations: one with the Keeneye Group and one with Angola.  In the light of that provision, it cannot be argued that Gao and Xie had knowledge of the settlement with Zhang.  Plainly, if there was the May Agreement and, to the knowledge of Gao and Xie, the dispute with the Keeneye Group had been settled with the Bai Jun shares placed in the hands of Ma, it did not make sense to speak of Gao and Xie being responsible for the Keeneye litigation until its conclusionn.

145.  Mr Wong then refers to Clause 1 of Fan’s draft second proposal to Gao which used a different set of wordings.  It reads:

「甲方仍保留百浚及對Angola的訴訟權，直至與Angola和解或訴Angola的訴訟完結。及乙方完成支付責任為止。」

Again, with respect to the draftsman, like its finalized version discussed above, that clause was also badly drafted.  On a strictly literal reading, it means Party A shall continue to retain Bai Jun and the litigation rights against Angola.  On the incontrovertible factual matrix, Gao and Xie had lost control and ownership of Bai Jun at that time.  That construction does not make sense.  Mr Wong argues that a fair reading the first phrase suggests that only the litigation rights against Angola was intended to be retained.  Hence, Gao had knowledge of the settlement.  I disagree.  To read it the way Mr Wong does, it would be necessary to take out the word “and”（「及」）.  Even assuming that there was the May Agreement, the shares in Bai Jun were retained by Ma and not Gao.  That clause could only mean Party A shall continue to retain the litigation rights against the Keeneye Group relating to the Bai Jun shares and against Angola relating to the Zhong Xin shares.  I think the draftsman and Gao clearly had in mind two sets of on-going litigations.  As Mr Chan submits, even if that clause were given the meaning Mr Wong contends, the true intention is what is reflected in the final version of the second proposal discussed above, otherwise, it would not have been amended.

146.  I now turn to Ma’s counter-proposal. Unlike Fan’s two proposals, this counter-proposal was not drafted in the form of a discussion paper, but in the form of a comprehensive draft agreement containing a recital and detailed provisions.  It was also presented by Wang as a settlement agreement.  This draft agreement must be viewed on that basis.

147.  The recital recited all the relevant agreements, except the May Agreement.  It mentioned the Keeneye Agreements, the agreement with Angola, the transfer of 100% of the interest in Zhong Xin and hence 70% of the interest in Changlebao.  It mentioned the STA, the 1^st Supplemental STA, and the 2^nd Supplemental STA, but singularly left out the May Agreement.  In the recital of the 1^st Supplemental STA and the 2^nd Supplemental STA, all previous agreements were mentioned.  Had the parties entered into the May Agreement, there could hardly be any reason why, contrary to their usual practice, the May Agreement was not mentioned in the recital.

148.  The recital also recited material changes.  In the recital of the 2^nd Supplemental STA, the issuance of the award was mentioned as a material change.  One would expect this very important and material change in circumstances as the successful recovery of the Bai Jun shares through settlement with Zhang which was the basis for the reduction in the consideration under the STA would appear in this draft agreement.

149.  I now turn to the substance of the terms of Wang’s draft agreement.  Mr Wong submits that under this proposal, Ma was asking for a reduction of RMB ¥120 million, based on the agreed reduction of RMB ¥95 million under the May Agreement for settlement with Zhang and a further reduction of RMB ¥25 million in relation to escalated costs.  He submits that as Ma was still in good terms with Gao, the reduction is not commercially offensive in the light of those legitimate reasons.  Thus, RMB ¥33 million would be payable under clause 1(2)(A) upon transfer of the Bai Jun shares to Ma; RMB ¥30 million would be payable half a year after execution of the agreement under clause 1(2)(B); RMB ¥100 million would be payable under clause 1(2)(C) upon recovery of the Zhong Xin shares from Angola; and the balance, i.e. RMB ¥95 million would be payable upon completion of all other formalities under clause 1(2)(D).

150.  Mr Wong specifically refers to clause 1(2)(A) which reads:

「2 、 付款步驟：

A、  乙方將中信礦業公司股東百浚天成公司100% 股份通過與註冊股東談判和解轉讓到乙方名下，乙方最終獲得百浚天成公司100% 股權、中信礦業公司50% 股權，以及中信礦業公司在榆林常樂堡公司35% 股權，乙方向甲方支付轉讓款3300萬元。」

(Emphasis underlined)

Mr Wong reads the word「將」as meaning 「把」, i.e. “put” without any temporal connotation.  I have no dispute with that.  He submits that reading the clause as it stands, no litigation was envisaged for the recovery of the Bai Jun shares and it implies that the settlement with Zhang had already occurred, had been known and had been consented to by Gao.  I have problem with that construction.  While the word 「將」 has no temporal connotation, on a plain reading the clause simply means that Party B is obliged to pay Party A various sums upon acquiring the specified interest in Bai Jun, Zhong Xin and Changlebao. It is neutral as to whether litigation would be necessary or whether there had been a settlement between Ma and Zhang.  It cannot give rise solely to the inference suggested by Mr Wong.  

151.  More curious is the obscure manner in which the recovery of the Bai Jun shares was mentioned in Clause 1(2)(A) of the draft agreement.  This clause says in a round about and convoluted way that Party B, i.e. Ma, shall cause 100% of the shareholding of Bai Jun to be transferred to Party B through negotiation and settlement by way of sale with its registered shareholder.  It is Ma’s case that the Zhang/Ma Agreement had been completed and the settlement known to Gao and Xie.  If that was a fact known to them, why should the identity of Zhang or the Keeneye Group be concealed and described as the “registered shareholder”?

152.  Besides, this clause contains a lot of illusion. It mentioned securing the transfer of the Bai Jun shares to Ma through “negotiation, settlement by way of sale”（「談判和解轉讓」）.  But as at the date of presentation of the draft agreement for discussion, on Ma’s own case, the Keeneye Group had already been transferred to his nominees for three months. If indeed a transfer to Ma was intended, Ma could simply direct his nominees to execute the necessary transfer documents.  There was no need for any negotiation, settlement or sale.  Obviously, this clause was drafted in such a way as to give to Gao and Xie the impression that the Keeneye Group and the shares in Bai Jun were still in the hands of their opponents.

153.  This clause referred to Ma’s negotiation for acquisition of the Bai Jun shares and not the shares in the Keeneye Group.  It must necessarily envisage the transfer of the Bai Jun shares by the Keeneye Group as a future event, otherwise the payment date for the sum of RMB ¥33 million mentioned in that clause would have long passed before this intended further supplemental STA would be signed. On Ma’s case, Gao had entered into the May Agreement with him and had knowledge of his acquisition of the Keeneye Group.  This transfer of the shares in Bai Jun from the Keeneye Group owned and controlled by Ma to himself would be quite unnecessary.  If the parties had entered into the May Agreement, Wang would not have put this provision in the draft agreement.  But, if there was no May Agreement, the draft made business sense for Ma.  It has the effect of presenting to Gao and Xie a picture that settlement had yet to take place and hence payment obligation had not arisen.  It also has the effect of delaying payment of the sum of RMB ¥33 million by imposing a condition precedent which was solely subject to Ma’s control.

154.  Similarly, Clause 2(1) which provides for Gao’s and Xie’s obligation to cooperate with Ma for the transfer of 100% interest in Zhong Xin to Ma is also redundant.  By reason of the May Agreeent, Ma had already obtained 50% of the interest in Zhong Xin through his acquisition of the Keeneye Group.  What was left to be dealt with was the remaining 50% interest in Zhong Xin held by Angola.  There would be no role to be played by Gao and Xie.  This clause is redundant. If the draftsman had in mind the May Agreement, he would not have included this provision in the draft agreement.  But if there was no May Agreement, the draft agreement made business sense.

155.  More importantly is recently discovered Ma/Zi Agreement and Zi Fenggao’s confirmation that his relationship with Ma was one of buyer and seller.  In the light of Zi Fenggao’s confirmation, the shares in the Keeneye Group transferred by Zhang to Zi Rong was most probably not transferred to him as Ma’s nominee in furtherance of the May Agreement with Gao and Xie but as Ma’s sub-purchaser or assignee pursuant to the Ma/Zi Agreement.  Just as with the transfer of the shares in Clarigain to Zi Rong, the transfer was most probably Ma’s part performance of the Ma/Zi Agreement.  The basis that the Zhang/Ma Agreement was a settlement under the May Agreement disappeared.  This supports Gao’s and Xie’s case that they had no knowledge of the settlement with Zhang and had not entered into the May Agreement.

156.  Under the above scenario, a disturbing concern arose.  It should be recalled that under Clause 1(2)(A) of Wang’s draft agreement, RMB ¥33 would be payable upon transfer of the Bai Jun shares to Ma.  If the Keeneye Group was transferred to Zi Rong as Ma’s sub-purchaser, there would be no reason why Zi Rong or Zi Fenggao would transfer the Bai Jun shares held by the Keeneye Group to Ma, without undoing the Ma/Zi Agreement.  Without the Bai Jun shares, it would be impossible for Gao and Xie to recover the 50% interest in Zhong Xin held by Angola. Thus, except for the sum of RMB ¥30 million payable under Clause 1(2)(B) of the draft agreement, none of the other payments under the STA as would be amended by this draft agreement would ever become due.  This draft agreement was probably intended by Ma to be illusory.

157.  The key features of Ma’s draft agreement are: the departure from the usual practice of reciting all previous agreements and changes in circumstances; the convoluted way in which the recovery of the Bai Jun shares was described; the secretive way in which Zhang’s or Keeneye Group’s or Ma’s nominees’ identity as the registered shareholder of the Bai Jun shares was concealed; the redundancy of some of the provisions; and the total absence of mention of the May Agreement or any of its terms.  Had the May Agreement existed, the draftsman would have included terms, such as:

(1)   that Ma was to acquire the Keeneye Group as opposed to Bai Jun itself;

(2)   that Gao and Xie would bear half of the settlement sum to be paid to Zhang subject to a ceiling of RMB ¥100 million;

(3)   that half of that payment was to be deducted from the consideration under the STA; and

(4)   provisions for the disposal of the appeal against Reyes J’s decision and HCA 1315/2009 which were still on-going and which were rendered no longer necessary by reason of the settlement with Zhang.

One would also expect mention in the recital of matters such as:

(1)   the fact that Ma had acquired the shares in the Keeneye Group from Zhang on 1 June 2011 for RMB ¥190 million; and

(2)   the fact that it had been agreed that the shares of Bai Jun would stay with Ma.

The draft agreement is more consistent with the draftsman’s design to conceal the settlement between Ma and Zhang than with the parties’ common knowledge of its existence. It is also more consistent with the non-existence of the May Agreement than its existence.

158.  Summing up this part of my finding, the contemporaneous documents supports Gao’s case but are inconsistent with Ma’s case of the May Agreement.  Gao’s two emails and Fan’s two proposals reflect that Gao had no knowledge of Ma’s settlement with Zhang and that she had not entered into the May Agreement.  On the other hand, not only does Wang’s draft agreement not give rise to any inference that the parties had knowledge of the May Agreement, on the contrary, it gives rise to an irresistible inference that this draft agreement was deliberately dressed up in such a manner as to conceal Ma’s secret settlement with Zhang and the fact that he had already obtained from Zhang the shareholding in the Keeneye Group; and to present to Gao and Xie a picture that settlement had yet to take place.  The draft agreement reflects that it was drafted without the May Agreement in mind.  It is even destructive of Ma’s case.

The parties’ contemporaneous conduct

159.  The parties’ case can also be tested against their reactions to contemporaneous events.  First, on 7 October 2011, CLCMC wrote to Ma and Wang requesting payment of costs on account for the appeal in the sum of HK$5 million.  Instead of informing CLCMC that there was no need to pursue the appeal any longer because of the May Agreement and that settlement had been reached with Zhang, Wang asked Fan for evidence of the user of the previous funds and the breakdown of the newly requested funds.  Wang’s response made on behalf of Ma is not consistent with the existence of the May Agreement. 

160.  More importantly, the settlement agreement between Ma and Zhang was made on 17 May 2011.  If May Agreement had been reached, Ma would have informed CLCMC to stop the further progress of the appeal. According to Chow, Ma never instructed him to stop the appeal and he was never informed of anything about the settlement with Zhang, whether from Ma, Gao or Xie.  As result, the appeal was set down for hearing in the Court of Appeal on 2 and 3 November 2011.  Chow’s evidence was not disputed by Ma and I have no reason to doubt its veracity. 

161.  Ma offered an explanation that it was Gao who insisted to proceed with the appeal to prove that she was right.  Gao denied.  By June 2011, Ma was in control of the Keeneye Group.  What could have been easier and more cost effective in proving Gao’s point or in satisfying her pride than to enter into a consent judgment conceding the appeal?  Why would Ma allow the Keeneye Group to resist the appeal?  Why would he allow CLCMC to incur more costs which he would have to pay whoever was to win?   Ma was to foot the bill of everybody in millions of dollars by fighting and contesting the appeal with his own funds just to please Gao so that she could prove she was right.  That explanation does not make sense.  I consider Ma’s evidence extremely incredible and reject his evidence.

162.  By way of contrast, Gao reacted strongly upon learning about Ma’s settlement with Zhang.  On 9 February 2012, Gao received an affirmation from Zeng Wei filed in HCA 1987/2005 in which Zeng Wei said he heard Zhang had onward sold his shareholding in Bai Jun to Zi Fenggao for double protection.  Zi Fenggao is the uncle of Zi Rong to whom Gao and Xie transferred their shares in Clarigain under the 1^st Supplemental STA.  He was present at the time of signing that agreement. Gao was led to the belief that he was one of Ma’s partners.  Even upon sight of some hearsay about Ma’s partner having acquired the shares in Bai Jun, impliedly the Keeneye Group, Gao immediately confronted Ma’s lawyer and demanded an explanation.  Her reaction is consistent with lack of knowledge of Ma’s settlement with Zhang.

163.  On 27 February 2012, Gao received another affirmation from Zhang in HCA 1987/2005 in which he confirmed that he had sold his shares in Bai Jun to Liu Shengfeng and Zi Rong (not to Zi Fenggao).  Gao forwarded a copy of the affirmation to Wang and sought an explanation.  On the following day, Ma telephoned her and denied the allegation saying that it was all hearsay.  He assured her that he would not enter into any settlement with Zhang without her consent.  Gao demanded an explanation.  Later that day, Ma called back.  He said he had seen Zhang’s affirmation, but knew nothing about what Zhang said.  He said that transaction was made by his partner Zi Fenggao and Wang behind his back.  In the light of the Zhang/Ma Agreement, that is untrue.  Then Gao confronted Wang by text message, but Wang replied that he had no obligation to explain.  

164.  Gao’s evidence is incontrovertible and supported by Zeng Wei’s affirmation, Zhang’s affirmation and the text messages.  Ma did not dispute that evidence.  Instead, he attempted to divert the court’s attention to the alleged sale of Zhong Xin by Gao to Liu Xiaoping based on what he alleged was said by Zhang.  He said he felt outraged at Gao’s sale of the interest in Zhong Xin.  But in the end, Ma did not call Zhang and I discarded that evidence.  What is left of Ma’s response to Gao’s evidence is Wang’s hearsay denial of having received the email from Gao.  I give no weight to that evidence.  Gao’s evidence of this event was nine months after the alleged May Agreement.  It has no contemporaneity with the May Agreement, but is evidence of her contemporaneous reaction upon learning of the settlement between Ma and Zhang.  It supports her evidence that she had no knowledge of the settlement and had not entered into the May Agreement.  It deserves much weight.

Inherent probability

165.  Mr Wong submits that at the time of the making of the May Agreement, Reyes J had just set aside leave to enforce the award. The position of Gao and Xie was precarious.  They had to overcome the hurdle of the appeal.  Even if they succeed in the appeal, the appeal would not be binding on Daynew and Far Orient to which the Bai Jun shares had been transferred because they were not parties to the Xian arbitration.  Gao and Xie would still have to run the full course of the proceedings in HCA 1315/2009 and to run the risk that Daynew and Far Orient would transfer the Bai Jun shares to other third parties and further complicate the recovery process. Furthermore, the failure to recover the Bai Jun shares would jeopardise the recovery of the 50% shareholding in Zhong Xin from Angola.  Hence, Mr Wong submits, faced with the choice of a reduction in the consideration under the STA by settling with Zhang or risking everything on appeal, it was inherently probable that Gao and Xie would have entered into the May Agreement.  With respect, I think Mr Wong is posing the wrong question.  His proposition rested on the presupposition that the May Agreement existed.  The question is not, as between the May Agreement and proceeding with the appeal, what would Gao and Xie have probably chosen.  The question is whether there was the May Agreement.  

166.  Next, Mr Wong argues that it is improbable and repugnant to business commonsense for Ma to have acquired the Bai Jun shares from Zhang behind Gao’s and Xie’s back.  He advanced a number of reasons.  The strongest of those reasons is this.  Under the Ma/Zi Agreement, the payment of the sum of RMB ¥720 million to Ma would be contingent upon his recovering 50% of the share in Zhong Xin held by Angola. It is therefore highly improbable that Ma would have settled with Zhang behind Gao’s and Xie’s back, thereby running the risk of losing their cooperation and jeopardizing the recovery of the 50% interest in Zhong Xin held by Angola and the payment of RMB ¥720 million under the Ma/Zi Agreement.

167.  These are very strong and powerful arguments, which would prevail under normal circumstances.  Whether such arguments prevail is a matter of inference to be drawn from ordinary circumstances involving ordinary people and ordinary behaviour.  However, I have made adverse finding of Ma’s honesty and credibility in the light of his case of the 2010 Oral Agreement, and the almost irrebuttable inference to be drawn from Gao’s email of 26 July 2011, Fan’s two proposals, Wang’s draft agreement and the parties’ contemporaneous conduct and reactions.  I only know when Ma was not telling the truth, but do not know when he was telling the truth and what he had hidden from me.  But I do not have to speculate what other things Ma could have possibly done.  Suffice it is to say that it is meaningless to talk about business common sense when there is no credible evidence of the basic facts on which to found that common sense.  Ma acted out of the ordinary.  In circumstances where Ma was involved, I cannot as readily draw the ordinary inference from ordinary circumstances involving the behaviour of ordinary people as I otherwise would. 

168.  On the fact, when Ma entered into the Ma/Zi Agreement in June 2010, the circumstances were hopeful.  The Xian Arbitration Commission had set aside the Keeneye Agreements.  Things progressed hopefully with Saunders J granting leave to enforce the award on 2 August 2010 and with the Xian Intermediate People’s Court affirming the decision of the Xian Arbitration Commission.  Thus, despite Zhang and Liu had applied to set aside leave to enforce the award, the prospect of Gao and Xie recovering the shares in Bai Jun was promising.

169.  Despite that rosy picture, Ma behaved in an extraordinary way since March 2011, shortly before the hearing before Reyes J on 12 April 2011.  He refused to perform his obligations under the STA.  He refused to fund the litigations against the Keeneye Group and Angola including that of resisting Angola’s attempt to discharge the receiver of Zhong Xin and paying the fees of the receiver of Zhong Xin.  By not funding the litigation, Ma was damaging Gao’s and Xie’s prospect of recovering the Bai Jun shares against the Keeneye Group; and was assisting, instead of resisting, Angola’s effort to discharge the receiver of Zhong Xin.  His conduct was detrimental to Gao’s and Xie’s recovery of the 50% interest in Zhong Xin held by Angola and to his prospect of delivering 100% interest in Zhong Xin before 6 December 2011.

170.  Ma’s actions were inexplicable, except on the basis that he had reached settlement with Zhang in respect of Zhang’s shareholding in the Keeneye Group and with Zhang[3] or Angola in respect of the other 50% interest in Zhong Xin.  Indeed it is Ma’s case that he reached settlement agreement with Zhang in May, though not in March 2011.  In view of the drastic change of course, even accepting Ma’s case, something was brewing in March 2011.  Ma might have changed or prepared to change his bet.  He might have commenced negotiation with Zhang for buying out his interest in the Keeneye Group and, possibly, Achieve Goal as well.

171.  Then, on 12 April 2011, Reyes J set aside leave to enforce the award.  Ma was left with seven months under the Ma/Zi Agreement to deliver 100% interest in Zhong Xin.  Even if Gao and Xie were to win the appeal, after that they would have to win the Angola litigation.  Even if everything were to go smoothly, Ma would not have enough time to deliver the 100% interest in Zhong Xin before 6 December 2011, which was only seven months away.  Ma was pressed with time.  A sure way to secure the ludicrous profit under the Ma/Zi Agreement was to buy out Zhang’s interest in the Keeneye Group.  As for the other 50% interest in Zhong Xin held by Angola, it should be recalled that Zhang had reached agreement with the shareholders of Achieve Goal on 30 May 2009 to purchase all their shareholding.  That agreement was still on foot in mid 2010 after agreeing to a price increase to RMB ¥300 million, though the parties are now in dispute as to whether that agreement has been rescinded. But back in May 2011, Zhang had acquired the Keeneye Group and had reached agreement to purchasae Achieve Goal.  If he had agreed to resell the Keeneye Group to Ma, it would not be unlikely that he would have agreed to sell Achieve Goal or Angola to him as well.  I am not speculating whether there were those negotiations.  I am only identify possible scenario in March 2011.

172.  While there is some force in Mr Wong’s argument that no seasoned businessman would have settled with Zhang behind Gao’s and Xie’s back because Ma would still have to pay them RMB ¥380 million under the STA, the basic premise of that argument is that Ma would honour the STA and pay Gao and Xie RMB ¥380 million after settling with Zhang.  But, if Ma intended not to honour the STA (which is a real possibility in view of his fabricating the 2010 Oral Agreement), there could be many dishonourable reasons to go behind Gao’s and Xie’s back.  Gao and Xie were not pressed with time under the STA, but Ma was under the Ma/Zi Agreement.  It was too obvious that Gao and Xie would not agree to share the costs of settlement with him because it was his obligation under the STA to pay all costs of any settlement.  At the time Ma was indeed negotiating a further supplemental STA, which was in effect a haircut for Gao and Xie and an attempt to plough back RMB ¥120 million from them.  From the draft settlement agreement prepared by Wang, it is obvious that Ma was concealing his secret settlement with Zhang from Gao and Xie.  Had Gao and Xie agreed to the draft agreement, he could still preserve their cooperation in pursuing against Angola, if he could not settle with Achieve Goal or Angola.  It was also possible that Wang’s draft agreement was intended by Ma to be illusory, if signed, as he could with his control of the Keeneye Group defer payment by making the transfer of the shares in Bai Jun never happen.  That could also explain why Ma permitted or caused the Keeneye Group to resist the appeal and to apply for leave to appeal the decision of the Court of Appeal.  All these made dishonest sense for Ma to go behind Gao’s and Xie’s back.  

173.  I am not drawing any inference that the above was in fact what happened.  I am just identifying the various possibilities which I may take into account in assessing the improbability of Ma settling with Zhang behind Gao’s and Xie’s back.  In conclusion, in view of my adverse finding of Ma’s honesty and credibility, I am unable to draw the ordinary inference which Mr Wong urged me to draw.  I find, on balance, the inference that the parties had not entered into the May Agreement to be drawn from the surrounding circumstances is much stronger than the improbability of Ma settling with Zhang behind Gao’s and Xie’s back.

Conclusion – the May Agreement

174.  Whether the parties had entered into the May Agreement is ultimately a question of fact, which has to be determined on the basis of credibility.  I find Gao and Chow honest and credible.  Gao’s evidence is supported by multiple inferences to be drawn from the negotiations for the further supplemental STA, Fan’s two proposals, Wang’s draft agreement, and Gao’s and Ma’s contemporaneous conduct and reactions.  On the other hand, I find Ma dishonest and incredible and reject his evidence.  His evidence, particularly that about the 2010 Oral Agreement proved his dishonesty and incredibility.  In conclusion, I accept Gao’s evidence that she had no knowledge about Ma’s settlement with Zhang.  I find that the May Agreement was an afterthought concocted by Ma to evade his liability under the STA.  Furthermore, even if there were the May Agreement, it has no effect due to want of written consent.

HCA 466/2012

Introduction

175.  Ma claims against Gao and Xie for specific performance of the STA as amended by the 1^st Supplemental STA, the 2^nd Supplemental STA and the May Agreement, the various declarations relating to the Bai Jun shares and an injunction restraining Gao and Xie from transferring the 50% interest in Zhong Xin held by Clarigain on trust for Bai Jun.

176.  Gao and Xie deny the existence of the 2010 Oral Agreement and the May Agreement.  They counterclaim a declaration that the STAs were terminated and ceased to have any further effect, damages and other ancillary relief by way of injunction.  Their case is that Ma had repudiated the STAs by reason of his breaches in not paying the sum of RMB ¥18 million under Clause 1(3) of the 2^nd Supplemental STA; not paying the legal costs incurred in recovering the Bai Jun shares under Clause 1(3) of the 2^ndSupplemental STA and clause 5(4) of the STA; entering into the Zhang/Ma Agreement in breach of Clause 3(2) of the STA; entering into the Ma/Zi Agreement in breach of Clause 13.1 of the STA; resisting enforcement action in breach of his duty to cooperate under Clauses 3(2), 5(5) of the STA and Clause 1 of the 1^st Supplemental STA and in taking out the present action.  Further or in the alternative, they counterclaim damages representing the sum of RMB ¥18 million payable under the 2^nd Supplemental STA, the legal costs in pursuing the appeal against Reyes J’s decision, the legal costs incurred in the PRC and in Hong Kong incurred in recovering the shares in Bai Jun in the sum of RMB ¥1.8 million and HK$10 million respectively, and damages for late payment. 

177.  In the light of my finding of fact above, these claims and counterclaims have to be adjudicated on the basis that the parties had not entered into the 2010 Oral Agreement and May Agreement.  On that basis, I make a further finding of fact that when Ma’s settlement with Zhang was exposed by the affirmations filed in HCA 1987/2005, he knew he could no longer conceal his secret settlement and breaches of the STA and hence took pre-emptive action by commencing HCA 466/2012 and seeking specific performance to force the fictitious May Agreement on Gao and Xie.  The above also explains why he suddenly stopped financing the appeal and refused to pay the outstanding balance of RMB ¥18 million to Gao and Xie.

Ma’s claims

178.  The essence of Ma’s claim under HCA 466/2012 is the alleged resale or agreement to resell by Gao and Xie of their interest in Zhong Xin to Liu Xiaoping in breach of clause 8(3) of the STA and their breach of the May Agreement.  For reasons as given above, Ma has failed to prove the alleged or intended resale and the May Agreement.  The entire basis of Ma’s claim in this action collapsed.  His claim must be dismissed with costs.  The focus of the rest of this section is on Gao’s and Xie’s counterclaim for Ma’s breach of the STAs.

Default in payment of the sum of RMB ¥18 million

179.  Under clause 1(3) of the 2^nd Supplemental STA, Ma was obliged to pay Gao and Xie RMB ¥80 million within 15 days of signing of the 2^nd Supplemental STA, i.e. on or before 22 June 2010.  Gao’s unchallenged evidence is that it was not until the end of June or early July 2010 that Ma paid them RMB ¥62 million, but the balance of RMB ¥18 million remains unpaid. Ma’s primary position is that Gao and Xie agreed under the 2010 Oral Agreement that he may withhold RMB ¥13 million for payment of their tax and that the loan of RMB ¥5 million shall be treated as payment under clause 1(3) of the 2^nd Supplemental STA. Alternatively, he argues that on a proper construction of all the STAs, he was entitled to take into account the loan of RMB ¥5 million as payment under the 2^nd Supplemental STA.  For reasons as explained above, I find that the 2010 Oral Agreement was Ma’s concoction and a mere excuse not to pay.  I also find on a proper construction of the STAs the loan may not be treated as part of the payment under clause 1(3) of the 2^nd Supplemental STA, particularly in view of Clause 4(2) of the STA.  Accordingly, I find that Ma was in breach of the STA and 2^nd Supplemental STA and is liable in damages in the sum of RMB ¥18 million.  The payment of the sum of RMB ¥62 million by end of June or early July 2010 was late.  Gao was unable to specify the actual date of payment, other than saying it was between the end of June and early June.  Therefore, I arbitrarily assume in Ma’s favour that the payment was made on 15 July 2010 for the purpose of calculating interest.

Default in payment of legal costs

180.  Mr Wong does not dispute that Ma has an obligation under clause 3(2) of the STA to pay legal costs incurred by Gao and Xie incurred in recovering the Bai Jun shares.  He argues that the obligation was premised upon actual costs incurred （以實際發生額為準） and that by implication the obligation to pay would only arise upon proof that costs had in fact been incurred and that Ma would only pay such costs which are reasonable.  He therefore argues that before the obligation to pay arises, it is necessary that Ma be given proof of the costs which had in fact been incurred so that Ma can assess what costs were “actually” incurred and whether they were reasonable or reasonably incurred.  He submits that the STA, being a commercial contract, must be viewed through the eyes of a reasonable businessman and no reasonable businessman would agree to pay legal costs without proof and breakdown having been shown.  Besides the dispute about the construction of the STA, the parties are in dispute as to whether Ma had been provided with breakdown of the costs prior to commencement of these proceedings.

181.  The legal issue raised by Mr Wong is what is the true construction of clause 3(2) of the STA, in particular, the meaning of the words “actual costs incurred”.   It is a basic principle of construction that a contract must be construed as a whole and against its factual matrix.  The STA was signed in the midst of hot disputes and multiple legal actions that Gao and Xie were involved in fighting for the shares in Bai Jun and Zhong Xin.  Gao and Xie were in need of funds to finance their litigations.  This is self evident from clause 2 which made it a condition precedent that Ma shall advance a loan of RMB ¥5 million to Gao and Xie.  Clauses 3(2) and 5(5) are relevant. These clauses provide:

「3(2) 轉讓方式：在[Gao and Xie]充分披露轉讓標的存在的所有糾紛問題的情況下，本協議所涉轉讓股權在中國大陸和香港方面的糾紛及法律障礙由甲乙雙方共同配合解決，所需訴訟及仲裁費用（包括自本協議生效之日起所產生的律師費用，以實際發生額為準）由[Ma]負擔，但在與Angola公司、建毅投資公司及New Purple公司的任何和解方案須獲得甲乙雙方同意，和解金額由[Ma]負擔。

5(5)   [Ma]承諾在本協議生效後應積極配合[Gao and Xie]處理與本協議所涉及股權轉讓相關的糾紛，力爭在本協議生效後三過月內處理完畢前述糾紛。」

In his written submission, Mr Wong accepts that Ma’s obligation under Clause 2 was to provide financial assistance to Gao and Xie in their litigations against the Keeneye Group and Angola for recovering the 100% shareholdings in Zhong Xin for the purpose of delivering them to Ma and to pay any settlement sum required.  In addition, Ma has an obligation under Clause 5 to actively cooperate （積極配合） with Gao and Xie in the above litigations.  That Ma’s position was a financier is beyond dispute. 

182.  Thus, Ma’s obligation to pay legal costs under Clause 3(2) has to be construed against this factual matrix and in the context of settling legal costs between solicitor and client in the course of litigation.  In usual litigation practice, solicitors would require costs on account to be paid in accordance with progress of the litigation.  These costs are paid before they are incurred and no bill or breakdown of these costs would be issued until conclusion of the litigation or until such time as the client may require.  Any disagreement about excessive costs would be ironed out at that stage by way of adjustment in the final bill.  If such costs on account are not paid, the solicitor may cease to act for the client.  Gao and Xie need financing.  Ma was their financier and under an obligation to actively cooperate with them in their litigation for the recovery of the Bai Jun shares.  The mechanism suggested by Mr Wong would require Gao and Xie to pay the costs upfront until conclusion of the litigation several years later and then obtain reimbursement from Ma.  That could not have been the parties’ intention as to how Ma would actively cooperate.  If Gao and Xie could pay those costs upfront, there would be no need for them to enter into the STA with Ma.  Under that factual matrix, “actual costs incurred” simply means actual costs on account paid to or demanded by Gao’s and Xie’s solicitors.  Ma may seek a review of the costs as litigation progressed every now and then, if he so desired.  A final bill with breakdown for such stage of the proceeding may be issued.  A financier’s liability to finance the costs of a party could not be equated with a litigant’s liability to pay costs under a costs order.  Reasonableness in the taxation context does not come into the equation.  If Gao and Xie, or Ma for that matter, consider the costs charged by CLCMC excessive and cannot reach agreement in the final bill, they may seek taxation.  It is only in that limited scope that reasonableness may be relevant.  Any reasonable reader with knowledge of the above factual matrix would construe Clause 3(2) as meaning that Ma’s payment obligation would arise upon receipt of proof of demand for payment of costs on account with Ma reserving the right to make adjustment in the final bill and with the right to be reimbursed any costs recovered from the opponent.  That is the combined effect of Clauses 3(2) and 5(5).

183.  On the evidence, there is no dispute that Ma had always been paying legal fees to CLCMC by way of costs on account with no bill and no breakdown.  That was how the reasonable man would have understood was the effect of Clause 3(2).  That was also what Ma understood to be his obligation.  He had paid a total sum of HK$ 7,215,989 as costs on account.  However, since March 2011, he refused to make payment on account. When the hearing of the appeal drew near, on the instruction of Gao, Fan wrote to Ma and Wang on 7 October 2011 demanding HK$5 million as costs on account. Wang responded by asking for breakdown of previous costs and evidence of payment of costs by Gao and Xie and the basis of costs on account charged on that occasion.  According to Chow, CLCMC sent a breakdown of the costs charged to Ma, although it was not sent under any cover letter.  Ma denied ever receiving any such breakdown.  Mr Wong submits that Chow’s evidence is not credible as it is contrary to reasonable practice and is inconsistent with CLCMC’s practice as evidence by their letter demanding payment of HK$5 million costs on account in October 2011. I do not think there is any established practice that a breakdown must be sent under a covering letter.  It depends on the circumstances. Here, Fan and Wang were communicating by iPhone and email.  Sending a hard copy of the breakdown as result of Wang’s request without any covering letter was an informal way of dealing with the matter, but not entirely unusual.  As for CLCMC’s written demand for payment of costs on account on 7 October 2011, it was a formal demand issued as result of Ma’s failure to pay.  It did not reflect any established practice, in the profession or in CLCMC, of sending breakdown under a covering letter.  The fact that that demand was made in writing is neither here nor there.  

184.  Gao also said in evidence that Xie had given a copy of the breakdown to Ma.  However, Xie was not called as a witness.  Mr Wong submits, quoting Wisniewski v Central Manchester Health Authority[4] and Li Sau Keung v Maxcredit Engineering Limited[5] that the court is entitled to draw adverse inference to the effect that even if Xie testified his evidence would not have advanced Gao’s and Xie’s case on this issue.  That presumption is not irrebuttable.  In the end, this is a matter of credibility.  Given my adverse finding on Ma’s credibility, I reject his evidence and accept Chow’s and Gao’s.  I am satisfied that a breakdown of costs had been given to Ma before the commencement of this litigation. 

185.  Ma does not dispute that he had not paid costs on account since 24 March 2011 or upon receipt of CLCMC’s demand on 7 October 2011.  His only defence or excuse was that he had not been given any breakdown for him to determine if the costs demanded were actually incurred and reasonable. On my construction of Clause 3(2), he was under a duty to pay costs on account upon demand in accordance with what the progress of litigation required so as to actively cooperate with Gao and Xie.  His allegation of not having been provided with a breakdown of costs incurred in the past had nothing to do with paying costs on account for the imminent appeal.  It was just a mere excuse. Accordingly, I find that he was in breach of a condition of the STA and is liable in damages.

The Ma/Zi Agreement: the discovery and consent

186.  Gao’s and Xie’s case is that they had no knowledge of the Ma/Zi Agreement until after commencement of these proceedings.  They had never suspected that Ma wanted to resell the interest in Zhong Xin before the STAs were fully performed.  Ma introduced Zi Rong to Gao and Xie as a member of his group and told Gao that Zi Fenggao was his partner. Gao was also led to the belief that Zi Fenggao was Zi Rong’s uncle. Zi Fenggao also attended the execution of the 2^nd Supplemental STA.  He and Zi Rong may be treated as one party.  Then Gao saw the two affirmations filed in HCA 1987/2005 in which Zhang confirmed that he had sold the Keeneye Group to Liu Shengfeng and Zi Rong in May 2011 shortly after the decision of Reyes J.  She sought confirmation from Zi Fenggao about his position in the transactions, but Zi Fenggao refused to confirm.  It was only until mid-December 2015, long after the commencement of this action, that Zi Fenggao confirmed to Gao that his relationship with Ma was one of buyer and seller.  This confirmation suggested that the transfer of the Clarigain shares to Zi Rong under the 2^nd Supplemental STA was not a transfer to Ma’s nominee, but an assignment under a resale to a third party.  That provoked Gao’s request for specific discovery.  It was only until the day before the start of trial that Ma produced the Ma/Zi Agreement dated 6 June 2010, under which Ma agreed to sell 100% interest in Zhong Xin to Zi Rong.  This late discovery triggered amendment of the pleadings by Gao and Xie to plead a further breach of Clause 13(1) of the STA by entering into the Ma/Zi Agreement without their knowledge and consent.  Ma’s pleaded defence is that his entering into that agreement was not in breach of Clause 13(1).  It is not his case that he had obtained Gao’s and Xie’s consent.  But in his evidence, Ma said that Gao knew about the resale to Zi Rong before entering into the 2^nd Supplemental STA.  But that is contrary to his own pleaded case, which was only amended three days before he testified in which he pleaded that he did not know when Gao and Xie discovered the agreement with Zi Fenggao.  This plea suggests that Ma’s evidence about Gao’s knowledge of the resale is recent fabrication.

187.  The course of Ma’s evidence also demonstrates the falsity of his new story.  First, he sought to argue that by reference to the word “nominee” in the STA the parties had always envisaged a resale.  Not only does that not support his theory as a matter of ordinary usage of the word, that word was only first used in the 2^nd Supplemental STA which was part of his design for part performing his obligation under the Ma/Zi Agreement.  When that was pointed out to him, he changed his evidence and said that the resale had always been the basis on which the discussions between the parties were conducted, but he failed to give particulars despite repeated questions.  He evaded the questions and alleged that in the mainland what the contract said did not really matter.  Eventually, when cross-examined on the issue of breach of the confidentiality clause under the STA which the negotiation of the Ma/Zi Agreement must necessary entail, he became extremely evasive and repeatedly changed his stance, first denying he had breached the clause, then alleging he had told Gao about the negotiation and then said he could not actually remember.  The amoeboid nature of his evidence proves that he was a hopelessly incredible witness who had no respect for his promise to tell the truth given under affirmation.

188.  In conclusion, there is no dispute that the Ma/Zi Agreement was a sale and re-assignment of the interest in Zhong Xin. I accept Gao’s evidence that Ma had never informed her about the Ma/Zi Agreement before the execution of the 2^nd Supplemental STA. There is also no dispute that Gao and Xie had not given their written consent to Ma’s assigning of his rights under the STA to Zi Rong.  Thus, whether there was a breach of Clause 13(1) of the STA is entirely a matter of construction of the STA.

The Ma/Zi Agreement: the true construction of Clause 13(1)

189.  Under Clause 13(1), neither party may assign or transfer his rights and obligations under the STA without the written consent of the other party.  That clause provides as follows:

「本協議未經另一方同意的書面同意，任何一方不得轉讓其依照本協議所享有的權利及應承擔的義務。」

(Mr Wong’s emphasis underlined)

The thrust of Mr Chan’s submission is that Clause 13 prohibits transfer or assignment of the rights under the STA and the major right Ma enjoyed under the STA was the right to receive the subject matter of the STA, which is the 100% shareholding or interest in Zhong Xin.  That subject matter was mentioned or described in a number of provisions in the STA, such as Clauses 1(1), 2(2), 3(1)(3) and 4(1).  Clause 1(1), for example, puts it in the clearest manner as follows:

「轉讓標的：指甲方所持有的中信礦業公司100% 股份，包含中信礦業公司所擁有的常樂堡礦業公司的全部投資權益。」

Hence, Mr Chan submits that the resale by Ma of the interest in Zhong Xin to Zi Rong was prohibited by Clause 13(1).

190.  The thrust of Mr Wong’s submission is that Clause 13 should not be construed in isolation, but should be construed in the light of the other relevant provisions of the STA, in particular Clause 8(3).  He relies on the presumption that where different words are used in different parts of a contract, the terms are intended to mean different things.  He also relies on the principle of construction that the court should generally be hostile to any construction which has the effect of rendering parts of a contract redundant and that each part of a contract should be construed in such a way as to be given effect whenever possible.  These are trite principles of construction of contract which are not disputed by Mr Chan. 

191.  Clause 8(3) of the STA provides: 

「本協議簽訂後，甲方不得與第三方簽訂任何與本協議所涉標的有關的，包括但不限於股權轉讓、糾紛和解，以及相關權益處分的文書(獲得乙方書面同意的除外)。」

(Mr Wong’s emphasis underlined)

Mr Wong’s argument is as follows.  There is a discernable difference between the words “rights” (“權利”) in Clause 13(1) denoting interim rights and the words “beneficial interest” (“權益”) in Clause 8(3) denoting an immediate beneficial interest. It is beyond dispute that Clause 8(3) prohibits Gao and Xie from assigning their beneficial interest in Zhong Xin, but does not prohibit Ma from doing the same.  Had the parties intended to restrain Ma from such activity, Clause 8(3) could have easily so provided but it does not.  This is because only Ma would be concerned with Gao and Xie transferring away the beneficial interest in Zhong Xin, but Gao and Xie would not be concerned as to whom the shares in Zhong Xin would ultimately go as long as Ma would fulfill his obligations.  By contrast, Clause 13(1) prohibits both parties from assigning their interim rights and obligations as the parties may not be prepared to deal with a third party in the performance of the STA. Thus, Mr Wong submits that Mr Chan’s contention would render Clause 8(3) redundant but there would be no redundancy if Clause 13 is construed in such a way as to only prohibit Ma from assigning his interim rights and obligations but does not prohibit sub-sale of the beneficial interest so that he remains liable to perform the obligations under the STA.  

192.  It was suggested to Gao during cross-examination that as long as Ma fulfils his obligation under the STA it would be unwise to restrict him from reselling his interest in Zhong Xin under the STA and that Ma’s resale would be of no concern to Gao and Xie.  As submitted by Mr Chan, whether a particular clause is wise or not is not relevant to the construction of the contract, though commercial sense may be of some limited assistance in ascertaining the parties’ intention.  But, as explained by Gao, she and Xie chose to enter into the STA with Ma because of his connections in Xian, his resourcefulness and professed ability to overcome Liu.  They did not want to deal with an intermediate who would resell their interest without performing their contract with Gao and Xie as they had learned bitter lessons from their previous experiences in dealing with Angola and Liu.  Prohibition makes commercial sense because if Ma had disposed of his rights, he would have less incentive to perform his obligations.

193.  In my view, the word “rights” is of much wider import than the word “interim beneficial interest”.  It includes the right to any interest, legal or equitable, which may or may not have actually matured into a beneficial interest.  It may, for example, include an option, which if exercised becomes a beneficial interest.  While the term “rights” and “beneficial interest” should be construed to mean different things, I think to confine the word “rights” as meaning interim rights as distinguished from beneficial interest as suggested by Mr Wong is too arbitrary and restrictive.  The word “rights” and “obligations” are often used together in the context of an agreement.  The word “right” represents the sum total of the subject matter of the agreement and the bundle of rights attached to that subject matter.  The word “obligations” is the quid pro quo of the agreement, which represents the sum total of the consideration in exchange for those rights.  In the context of an agreement for sale and purchase of property, for example, the subject matter of the agreement is the proprietary interest in land.  To the purchaser, the word “right” represents the right to that proprietary interest in land, the right to a proper conveyance, the right to a good title and all the rights attached to that land, including the right to all the benefits under the deed of mutual covenant.  His corresponding “obligation” is to pay the purchase price.  To the vendor, the word “right” means the right to the purchase price and his “obligation” is to deliver a good title etc.  It is arbitrary and unnecessarily restrictive to limit the word “right” as meaning interim right in the way Mr Wong suggests.   

194.  As the word “rights” has a wider import than the words “beneficial interest”, given the context in which these words are used and the nature of the subject matter covered by these words, it must be accepted that there may be some overlap.  It must also be accepted that in reality some contractual terms do overlap, particularly due to aggressive drafting and use of unnecessarily wide language.  But as submitted by Mr Chan, there is a distinction between the operation of Clause 8(3) and Clause 13(1).  Given the width of the language used, the two clauses may cover the same conduct, but not necessarily in relation to the same subject matter.  The acts prohibited under Clause 8(3) are much wider than those prohibited under Clause 13(1).  Clause 8(3) prohibits Gao and Xie from executing any document which is related to the beneficial interest in Zhong Xin, including but not limited to transfer of shares, settlement of disputes and disposal of interest in Zhong Xin, which may or may not be contractual.  But Clause 13(1) prohibits transfer of interest under the STA only.  On the other hand, the subject matter which Clause 8(3) is concerned with is much narrower than that of Clause 13(1).  It must be related to the beneficial interest in Zhong Xin, whereas Clause 13(1) only prohibits transfer of any right or obligation under the STA.  Thus, if Gao and Xie transfer their right to receive payment to a third party, such act would be caught by Clause 13(1) but not Clause 8(3).  Although these two clauses may both cover the same conduct, they have different contents, serve different purposes and trigger different consequences.  For example, there is an express penalty of 30% of the entire purchase price for breach of Clause 8(3), but no penalty is provided for breach of Clause 13(1).  Any assignment of the beneficial interest in the shares in Zhong Xin by Gao and Xie in the manner as prohibited by Clause 8(3) would also be caught by Clause 13(1).  Despite the overlap, Clause 8(3) has its exclusivity.  The construction as contended by Mr Chan does not have the effect of rendering Clause 8(3) redundant. 

195.  Reading the STA as a whole, there is no doubt that the subject matter of the STA is the 100% interest in Zhong Xin.  A reasonable reader with knowledge of the factual matrix reading the STA as a whole would construe the rights enjoyed by Ma under the STA to include, amongst other things, the right to 100% of the beneficial interest in Zhong Xin and that Clause 13(1) prohibits the transfer of that interest save with the written consent of Gao and Xie. 

196.  In addition, the prohibition against transfer of the interest in Zhong Xin under Clause 13(1) of the STA is extended by Clause 1 of the 1^st Supplemental STA to the shares in its holding companies, Bai Jun, Clarigain and Angola.  Clause 1 of the 1^st Supplemental STA provides:

「 第一條 本補充協議簽訂後，雙方共同配合將甲方在香港中信礦業公司的全部股權(含百浚天成、CLARIGAIN與ANGOLA公司及中信礦業在榆林常樂堡礦業70%股權)收回後轉給乙方。乙方按《原協議》的約定向甲方支付股權轉讓款，該轉讓款中留下貳千萬(20,000,000.00)元在甲方配合乙方將所有遺留問題解決後10個工作日內支付。」

Breach by the Ma/Zi Agreement

197.  It should be recalled that within three days after delivery of the award, Ma and Zi entered into the Ma/Zi Agreement.  The recital of that agreement sets out in essence the STA. It reads:

「甲方已與謝和平、高海燕簽訂股權轉讓協議，約定甲方受讓其二人在香港中信礦業公司的100%股權。Clarigain公司作為香港中信礦業公司股東持有該公司50%股權。」

Clause 1(1) then sets out the subject matter of the transfer under the Ma/Zi Agreement.  It provides that Ma shall transfer the 100% interest in Zhong Xin which he was legitimately entitled to receive to Zi Rong.  It reads:

「1(1) 轉讓標的：甲、乙雙方經協商確定，甲方將其依法受讓的香港中信礦業公司100%股權，以及中信礦業公司在榆林常樂堡礦業公司的70%股權，一併轉讓給乙方或乙方指定的人。」

Looking at the Ma/Zi Agreement as a whole, the interest which Ma was obliged to transfer to Zi Rong under Clause 1(1) must be the same interest that he was entitled to receive under the STA. As such, the purpose of the Ma/Zi Agreement was to sell and assign to Zi Rong the 100% interest in Zhong Xin which Ma was entitled to receive under the STA.

198.  Immediately on the next day, Ma entered into the 2^nd Supplemental STA with Gao and Xie and secured the immediate transfer of Clarigain to Zi Rong, representing 35% of the interest in Zhong Xin.  It is obvious that the 2^nd Supplemental STA was designed by Ma to bring about the partial performance of his obligation under the Ma/Zi Agreement.  That nexus is clearly shown in the recital and Clause 1 of the Ma/Zi Agreement quoted above.  Indeed, Ma admitted under cross-examination that he caused Gao and Xie to enter into the 2^nd Supplemental STA so as to transfer their shares in Clarigain to Zi Rong in part performance of his obligation under the Ma/Zi Agreement. 

199.  When entering into the 2^nd Supplemental STA and transferring the share in Clarigain to Zi Rong, Gao and Xie were lead to the belief that Zi Rong was a member of Ma’s company and that they were transferring Clarigain to Zi Rong as Ma’s nominee in their performance of the 2^nd Supplemental STA.  They did not realize that the 2^nd Supplemental STA was designed by Ma as his part performance of his obligation under the Ma/Zi Agreement.  This transfer is precisely the kind of transfer prohibited by Clause 13(1) of the STA.  Thus, by bringing about the transfer of Clarigain to Zi Rong under the 2^nd Supplemental STA, Ma completed his breach of Clause 13(1) of the STA.  The breach is incontrovertible.

200.  In addition, as the prohibition against transfer of the beneficial interest in Zhong Xin is extended by Clause 1 of the 1^st Supplemental STA to the shares in its holding companies, Bai Jun, Clarigain and Angola, Ma committed a repeated breach of Clause 13(1) of the STA and Clause 1 of the 1^st Supplemental STA when he caused Gao and Xie to transfer their shareholding in Clarigain to Zi Rong without Gao’s and Xie’s consent and knowledge that the true nature of the transfer was an assignment and transfer of Ma’s interest under the STAs to a third party purchaser.

201.  During cross-examination, Mr Wong suggested to Gao that it was not be a breach for Ma to resell his interest in Zhong Xin just as it would not be a breach for Gao to spend the RMB ¥62 million paid over to her under the 2^nd Supplemental STA.  That is a bad argument.  Gao’s and Xie’s disposal of the sum of RMB ¥62 million was after they had received the same and had performed their part under the 2^nd Supplemental STA in relation to that payment.  The fund became their personal property which they were free to dispose of at their will and they were not restrained by any contractual term to seek Ma’s consent before any such disposal.  But Ma’s assignment of the interest in Zhong Xin was before he had received that interest which remains a contractual right under the STAs.

202.  On the true construction of the STA, Clause 13(1) prohibits the transfer of the beneficial interest in Zhong Xin and the shareholding of its holding companies, Bai Jun and Clarigain without the written consent of the other party.  There is no dispute that Ma entered into the Ma/Zi Agreement to transfer by way of sale that very interest in Zhong Xin to Zi Rong without Gao’s and Xie’s written consent.  By entering into the 2^nd Supplemental STA to cause the transfer of Clarigain to Zi Rong, Ma brought about that transfer in part performance of his obligation under the Ma/Zi Agreement and completed the breach of Clause 13(1) of the STA and Clause 1 of the 1^st Supplemental STA.  Gao and Xie have not quantified the damage caused by the breach. 

Breach by settlement with Zhang and breach of the duty to cooperate

203.  Clause 3(2) of the STA provides that settlement arrangement with the Keeneye Group and Angola may only be made with the consent of the parties and that the settlement sum shall be paid by Ma.  Clause 5(5) provides that Ma shall actively cooperate with Gao and Xie in the recovery of the shares in Bai Jun and the interest in Zhong Xin.  On my finding, the settlement with Zhang was reached behind Gao’s and Xie’s back.  That was a clear breach of Clause 3(2).

204.  On 12 April 2011, Reyes J set aside leave to enforce the award and Gao and Xie lodged an appeal on 6 May 2011.  Then, on 17 May 2011, Ma entered into the settlement agreement with Zhang to acquire the Keeneye Group for RMB ¥190 million.  That would have rendered the appeal against Reyes J’s decision unnecessary.  But despite that settlement, not only did Ma not inform Gao and Xie not to proceed with the unnecessary appeal, he permitted or caused the Keeneye Group then under his control to resist the appeal and when the Keeneye Group lost the appeal to apply for leave to appeal.  Even without disclosing his settlement with Zhang, he could have easily caused the Keeneye Group to concede the appeal and save every party’s costs.  Instead, not only did he resist the appeal, he caused the Keeneye Group to institute application for leave to appeal the decision of the Court of Appeal and thereby further obstructed Gao’s and Xie’s effort in recovering the interest in Zhong Xin.  Thus, apart from breaching Clause 3(2) in not seeking Gao’s and Xie’s consent before entering into the settlement agreement with Zhang, Ma was in clear and aggravated breach of his duty to actively cooperate with Gao and Xie by actively obstructing and resisting the appeal. 

Anticipatory breach caused by these proceedings

205.  As pleaded in paragraph 26 of the Re-amended Defence and Counterclaim, by instituting the present proceedings seeking specific performance, Ma was attempting to avoid paying RMB ¥380 million under the STA by falsely alleging Gao’s and Xie’s agreement to bear half of the settlement sum payable to Zhang.  He was seeking specific performance of a different contract on his own terms.  That evinced a clear intention that he was not going to perform his obligations under the STAs.  He was in anticipatory breach of Clauses 3(2), 4(1) and 5(5) of the STA.

Nature of the breach

206.  Gao’s and Xie’s counterclaim is based on repudiation.  Repudiation occurs where a party intimates by words or conduct that he does not intend to honour his obligations when they fall due in the future.  Repudiation may be explicit or implicit.  Gao and Xie are not relying on explicit repudiation.  Repudiation is implicit where the reasonable inference from the defaulting party’s conduct is that he no longer intends to perform his side of the contract.  Repudiation is a serious matter, which is not to be lightly found or inferred: Ross Smyth & Co Ltd v Bailey, Son & Co[6]. What has to be established is that the defaulting party has made his intention clear beyond reasonable doubt that he will no longer perform his side of the bargain.  Proof of such intention requires an investigation of, inter alia, the nature of the contract, the attendant circumstances and motive which prompted the breach.  Such investigation entails, in the words of Lord Selborne in Mersey Steel and Iron Co v Naylor Benzon & Co[7], examination of the actual circumstances of the case:

“you must look at the actual circumstances of the case in order to see whether the one party to the contract is relieved from its future performance by the conduct of the other; you must examine what that conduct is, so as to see whether it amounts to a renunciation, to an absolute refusal to perform the contract ... and whether the other party may accept it as a reason for not performing his part; ...”

In ascertaining this intention, the breaches have to be viewed together, not in isolation, but against the factual circumstances.  The circumstances to look at in the present case are those prevailing at the time of the Xian arbitration.  

207.  Three days after obtaining the arbitration award, Ma assigned his interest under the STA to Zi Rong under the Ma/Zi Agreement without Gao’s and Xie’s consent.  On 2 August 2010, Gao and Xie obtained leave from Saunders J to enforce the award.  That leave was set aside by Reyes J on 12 April 2011. Gao and Xie lodged an appeal, which was set down for hearing on 2 November 2011.  Then Ma refused to pay the sum of RMB ¥18 million under the 2^nd Supplemental STA and refused to pay costs on account for the appeal.  He settled with Zhang behind Gao’s and Xie’s back.  Eventually, Gao and Xie successfully set aside the order of Reyes J and restored the leave to enforce the award.  When Gao discovered Ma’s secret settlement with Zhang and/or the secret assignment of the interest in Zhong Xin under the STA to Zi Rong, Ma took pre-emptive actions against Gao and Xie by commencing HCA 466/2012 by asserting the fictitious May Agreement.  They obtained an injunction restraining Gao and Xie from disposing of their interest in Zhong Xin.  In summary, Ma committed the following breaches:

(1)   default in paying the sum of RMB ¥18 million in breach of clause 1(3) of the 2^nd Supplemental STA by falsely fabricating the 2010 Oral Agreement;

(2)   refusal to pay legal costs in breach of clause 3(2) of the STA;

(3)   transferring the rights under the STA to Zi Rong without Gao’s and Xie’s written consent in breach of Clause 13(1) of the STA by entering into the Ma/Zi Agreement;

(4)   instituting HCA 466/2012 by seeking specific performance of the fictitious May Agreement in an attempt to avoid paying the full purchase price of RMB ¥380 million in anticipatory breach of Clause 4(1) of the STA;

(5)   entering into settlement with Zhang without consent of Gao and Xie in breach of Clause 3(2) of the STA; and

(6)   permitting the Keeneye Group to resist the appeal against the order of Reyes J and causing the Keeneye Group to apply for leave to appeal the decision of the Court of Appeal in breach of his duty to cooperate under Clause 5(5) of the STA.

Some of these breaches, such as the non-payment of the sum of RMB ¥18 million, the making of the Ma/Zi Agreement and the settlement with Zhang (items 1, 3 and 5 respectively) may be de minimis or non-repudiatory when viewed in isolation; but they are clearly repudiatory when viewed together against the background circumstances.  The other breaches are clearly repudiatory even if viewed in isolation.  The reasons are as follows. 

208.  While settling with Zhang, by itself may not be repudiatory, the fact that Ma kept it secret and with intention to past on liability for payment of part of the settlement sum to Gao and Xie is clear evidence of his intention not to perform the STAs in accordance with their terms.  Ma concocted the 2010 Oral Agreement and put up various lies and excuses to avoid performing his obligation to pay under the 2^nd Supplemental STA, most blatantly his dishonest assertion of withhold RMB ¥13 million for payment of tax, is clear demonstration of his intention not to perform what he had contracted to perform.  When he commenced HCA 466/2012 seeking specific performance of the fictitious May Agreement in order to avoid performing his obligation to pay the sum of RMB ¥380 million under the STA, he was making an open declaration denying his fundamental obligations under the STAs and seeking to invoke the court’s jurisdiction to enforce a different agreement on his own terms.  It is the clearest expression of intention not to perform his obligations under the STAs.  If this is not repudiation, what else can be?

209.  Worst of all, Ma secretly gained control over the Keeneye Group and permitted or caused the Keeneye Group to resist Gao’s and Xie’s appeal and then to apply for leave to appeal the decision of the Court of Appeal.  He stopped financing Gao’s and Xie’s litigations against the Keeneye Group.  He stopped paying the costs of the receiver of Zhong Xin which would jeopardise Gao’s and Xie’s recovery of the shares in Zhong Xin against Angola.  Not only was he neglecting to perform his obligations under the STA, he was positively obstructing Gao and Xie in the performance of their obligations under the STA.  Such conduct is destructive of the very root of the parties’ contract.

210.  Ma’s assignment of his interest under the STA to Zi Rong without Gao’s and Xie’s consent is by itself repudiation.  The assignment might not appear to be of significance if at the end Ma would be free to dispose of the interest in Zhong Xin after Gao and Xie have recovered all the 100% interest in Zhong Xin and delivered the same to him.  However, the assignment before that stage is reached would prejudice Gao’s and Xie’s chance of ever recovering the interest in Zhong Xin held by Angola.

211.  In conclusion, I find that these breaches go to the very root of the STAs.  The only inference that could be drawn from these breaches is that Ma was pursuing his own agenda and will no longer perform his obligations under the STAs.  Accordingly, I find that the breaches are repudiatory.

Acceptance and affirmation

212.  In their defence filed in HCA 466/2012, Gao and Xie pleaded that they accept Ma’s repudiation and consider themselves as being discharged from further performance of the STAs.  Mr Wong argues that even if the breaches have been proved, Gao and Xie are not entitled to terminate the STAs as they have affirmed them by making a claim for the sum of RMB ¥18 million and legal costs, entering into the May Agreement, continuing to conduct the litigation in HCA 1987/2005 via Clarigain, and accepting payment of legal costs.  I shall deal with the last three of these items first as these items can be disposed of quickly on the fact. 

213.  It is trite that when an innocent party is faced with a repudiatory breach, he is entitled to choose whether to treat the contract as continuing or to accept the repudiation and treat himself as discharged.  While affirmation may be express or implied, for an implied affirmation to be effective, there must be clear and unequivocal act on the part of the innocent party from which his intention to go on with the contract regardless of the breach or his intention that he will not exercise his right to treat the contract as repudiated may be inferred: see Chitty on Contracts[8], and Large Land Investments Ltd v Cheung Siu Kwai Pansy[9].

214.  The May Agreement was Ma’s concoction which does not in fact exist. The plea of affirmation based on that agreement simply collapses.

215.  Gao’s and Xie’s pursuance of the litigation in HCA 1987/2005 through Clarigain cannot be clear and unequivocal act of affirmation as they or Clarigain are entitled to chase for assets that belong to them anyway, whether they intended to continue to perform the STAs and sell the recovered assets to Ma later or to keep those asserts to themselves.  Mr Wong argues that Gao wanted to keep the sum of RMB ¥62 million and did not want to undo the contract, otherwise she would have asked for the Clarigain shares back, cancelled the Zi Rong declaration of trust and returned the sum of RMB ¥62 million to Ma.  He submits that it was under those circumstances that Gao and Xie continued to litigate through Clarigain and must be taken to have affirmed the continuation of the 2^nd Supplemental STA.  The actions suggested by Mr Wong are actions to be taken in restitution.  There is a distinction between restitution and repudiation.  The effect of restitution is to restore the parties to the position before contract, whereas the effect of repudiation is to discharge the parties from further performance.  Gao and Xie are not seeking restitution, but repudiation and damages for breaches which occurred before repudiation.  By not taking the steps suggested by Mr Wong, Gao and Xie cannot taken to have affirmed the STAs.

216.  As for accepting payment of legal costs, Mr Wong argues that there is no dispute that Ma had settled various legal costs in accordance with Clause 3(2) of the STA and a sum of HK$2.3 million was paid by Ma and accepted as late as 24 March 2011 without protest, well after the alleged breach of non-payment.  He therefore submits that Gao and Xie must be taken to have waived their right to rescind the STAs by accepting further performance from Ma.  In my view, acceptance of costs paid before 24 March 2011 was irrelevant to breaches committed or discovered by Gao and Xie after that date.  There is no dispute that Ma stopped paying legal costs after 24 March 2011 and refused to pay costs on account in October 2011.  There is no acceptance of the breach.

217.  As for Gao’s and Xie’s claim for the sum of RMB ¥18 million and legal costs, Gao and Xie expressly pleaded in the original paragraph 28 of their Defence that despite the repudiation pleaded therein, they “expressly reserve their rights in respect of such repudiation.”  As the effect of repudiation is to discharge the parties from future performance and does not affect the parties’ right to claim damages for breach prior to repudiation, including the breach which led to the repudiation, it is open to Gao and Xie to claim the sum of RMB ¥18 million for the Clarigain shares duly delivered to Zi Rong and the legal costs incurred in the recovery of the Bai Jun shares and Zhong Xin shares before their acceptance of the repudiation.

218.  Ma also raised affirmation on the basis of lapse of time.  It is settled law that the innocent party may first reserve his rights and take time to consider before making his election to affirm or to terminate. In Stocznia Gdanska SA v Latvian Shipping Co and others (No 3)[10], Rix LJ of the English Court of Appeal explained the innocent party’s position as follows:

“In my judgment, there is of course a middle ground between acceptance of repudiation and affirmation of the contract, and that is the period when the innocent party is making up his mind what to do. If he does nothing for too long, there may come a time when the law will treat him as having affirmed. If he maintains the contract in being for the moment, while reserving his right to treat it as repudiated if his contract partner persists in his repudiation, then he has not yet elected. As long as the contract remains alive, the innocent party runs the risk that a merely anticipatory repudiatory breach, a thing 'writ in water' until acceptance, can be overtaken by another event which prejudices the innocent party's rights under the contract — such as frustration or even his own breach. He also runs the risk, if that is the right word, that the party in repudiation will resume performance of the contract and thus end any continuing right in the innocent party to elect to accept the former repudiation as terminating the contract.”

219.  The above proposition of the law was adopted by the Hong Kong Court of Appeal in Cheung Ching Ping Stephen v Allcom Ltd[11].  In that case, Rogers VP rejected counsel’s argument that the period must be short in terms of minutes or hours, not in months. He held that the length of the period depends on whether there was prejudice caused to the defaulting party or a third party or whether the delay was of such a length as to evince that the innocent party had in truth forgone his right to repudiation.  He said:

“Further research by the Court has revealed a decision of the Court of Appeal in England, Allen v Robles [1969] 1 WLR 1193, which supports the proposition that an innocent party may delay accepting a repudiation because lapse of time did not operate against a party who was entitled to elect to repudiate liability under a contract unless there was prejudice to the defendant or rights of third parties had intervened or the delay was of such a length as to be evidence that they had in truth decided to accept liability.”[12]

220.  The repudiatory breaches occurred at various times from May 2011 throughout to 21 March 2012 when Ma commenced the present action.  But, it was only until 26 November 2013 that Gao and Xie amended their pleading to plead acceptance of the repudiation.  However, delay in acceptance as such is not fatal unless there was prejudice caused to the defaulting party or a third party or when the delay was of such a length as to evidence the fact that the innocent party had in truth forgone his right to repudiation.  No prejudice has been pleaded by Ma.  The only prejudice raised by Mr Wong way of submissions was that as the opposite party, Ma wanted to know Gao’s and Xie’s case.  Lack of prejudice in this regard can be shown from the simple fact that his response to Gao’s and Xie’s plea of acceptance was effectively the addition of one paragraph and the amendment of another in the reply with no extra evidence introduced.  In my view, the delay was not of such a length as to evince the fact that Gao and Xie had in truth forgone their right to repudiation. 

221.  Mr Wong quoted Force India Formula One Team Ltd v Etihad Airways PJSC[13].  In that case, the English Court of Appeal held:

“Although delay may always be capable of being compromising, this contract, especially during the winter break between two racing seasons, did not present the typical case where mere delay may demonstrate a decision to affirm. Such cases typically occur where time is of the essence, for instance, in an extreme case where markets are always on the move such as in a share transaction, or more generally in a sales of goods case where a seller has to know whether or not his buyer is accepting the goods which have been delivered. In the present case, however, we are not faced with either an urgent situation of that kind, nor are we faced with some minor and remediable breach where the injured party only has to speak up for the matter to be remedied; or where firm protest is immediately necessary to prevent the party in breach from being misled. The present case concerns a complex and medium term relationship, which a takeover has destabilised, and where it necessarily and legitimately takes time for the consequences to become clearer and for the innocent party to consider his position. That is the middle ground between acceptance of a repudiation and affirmation of a contract which I discussed in the earlier Stocznia case (cited at para 113 above). In my judgment, the sponsors were always in fact considering their position, and Force India knew or must have known that that was so.”

That case seems to suggest that election should be quick where there is urgency in the matter; where the breach is minor and remediable in that the injured party only has to speak up for the matter; or where firm protest is immediately necessary to prevent the defaulting party from being misled.  As submitted by Mr Chan, none of the three situations where quick election is needed is satisfied here.  On the contrary, the present situation resembles Force India where a complex and long term relationship was in issue and Gao and Xie obviously needed time to clearly consider their position.  The complexity of the matter can be seen from the various litigations in which the parties were involved and the several hundred pages of skeleton arguments submitted by counsel.

222.  In conclusion, I am not satisfied that Ma has proved affirmation on the part of Gao and Xie.

Conclusion

223.  Ma has failed to prove his claim and his action shall be dismissed.  Gao and Xie have successfully proved the various repudiatory breaches by Ma and their acceptance of Ma’s repudiation. Accordingly, they are entitled to judgment on their counterclaim.

224.  I therefore grant Gao and Xie the declaration sought in paragraph (0A) of their Amended Defence and Counterclaim that the Share Transfer Agreement as amended and supplemented by the 1^st Supplemental Share Transfer Agreement and the 2^nd Supplemental Share Transfer Agreement was terminated and ceased to have any further effect as of 26 November 2013, the date of filing of their Amended Defence and Counterclaim accepting Ma’s repudiatory breaches.

225.  Having rejected Ma’s case of the 2010 Oral Agreement, his liability to pay the balance of RMB ¥18 million under the 2^nd Supplemental Share Transfer Agreement is indisputable.  So, too, is his liability to pay damages for late payment on the said sum at the rate of 0.05% per day pursuant to Clause 8(4) of the Share Transfer Agreement.  Accordingly, I order that Ma shall pay Gao and Xie the sum of RMB ¥18 million and damages for late payment on the said sum of RMB ¥18 million at the contractual rate of 0.05% per day from 22 June 2010 until 28 May 2012 and on the sum of RMB ¥62 million at the contractual rate of 0.05% per day from 15 July 2010 until 28 May 2012.

226.  As for Gao’s and Xie’s claim for legal costs, Ma’s defence is one of non-admission and there was no challenge on quantum.  Having rejected his defence, I order that Ma shall pay Gao and Xie the sum of RMB ¥1.8 million and HK$10 million being legal costs incurred in the PRC and Hong Kong respectively, pursuant to the Share Transfer Agreement.  This order does not prejudice Ma’s right to be reimbursed any costs recovered against the opponent parties.  As these sums are not payment for transfer of shares, the contractual rate of interest under Clause 8(4) of the Share Transfer Agreement does not apply. 

227.  Gao and Xie claim the costs of the appeal against the decision of Reyes J and the costs of the Keeneye Group’s application for leave to appeal.  Regardless of how Ma acquired the shares of the Keeneye Group, he was in breach of the duty to actively cooperate by permitting and/or causing the Keeneye Group to resist the appeal and to apply for leave to appeal.  Those costs were incurred as a direct result of his breach of duty.  Gao and Xie have not proved any other loss or damage.  I therefore make an order that Ma shall pay those costs to Gao and Xie on indemnity basis to the extent that the costs are not recoverable from the Keeneye Group.

228.  In addition, Ma shall pay pre-judgment interest on the principal parts of all judgment sums at the rate of 1% over prime rate from 28 May 2012 to the date of judgment and thereafter at judgment rate until payment.

229.  I also make a costs order nisi that Ma shall pay the defendants’ costs of this action, including all costs reserved if any, with certificate for two counsel.

HCA 1315/2009

Introduction

230.  In HCA 1315/2009, Gao and Xie claim against the Keeneye Group (the 1^st, 2^nd, 6^th and 7^th defendants), their representatives (the 3^rd and 4^th defendants) and Bai Jun (the 5^th defendant, as a nominal defendant) various declarations, injunctions, restitution and account, and damages or equitable compensation.  Unless the context otherwise requires, reference to “defendants” hereunder does not include Bai Jun.   The remedies sought revolve around the validity of the Keeneye Agreements and the subsequent transfers of the shares in Bai Jun. 

231.  The defendants, except Bai Jun, are under Ma’s control and are represented by the same legal team as Ma’s in HCA 466/2012.  Their defences are accord, satisfaction and estoppel. These defences are premised on the existence of the May Agreement.  It is Mr Wong’s submission that if the court finds that there is a valid May Agreement, there must be valid accord and satisfaction or compromise of the dispute in HCA 1315/2009.  Alternatively, if the court finds that the May Agreement existed but was for some reason invalid or unenforceable, there was an implied representation that Ma, and along with him the defendants, would acquire the interest in Bai Jun from a settlement with Zhang, which was acted upon by Ma to the defendants’ detriment, thereby raising an estoppel.  Upon my finding that the May Agreement was a concotion which never existed, the defendants have no defence.  Mr Wong does not take any issue with the various legal propositions advanced by Mr Chan. I adopt most of Mr Chan’s submissions.

232.  The factual background set out in HCA 466/2012 above is also relevant for this action.  The following events are the major events in HCA 1315/2009.  On 15 July and 27 August 2008, at the suggestion of Liu, Gao and Xie executed the Keeneye Agreements as sellers of the shares in Bai Jun to Keeneye and New Purple as purchasers with no consideration stipulated therein.  Pursuant to those agreements, 62% of the shareholding in Bai Jun was transferred to Keeneye and 38% of the shareholding was transferred to New Purple (i.e. the first set of transfers).  On 20 October 2008, by the second set of transfers, those shares were respectively transferred to Daynew and Far Orient at a consideration of HK$ 1.00 each.  The Keeneye Group was beneficially owned and controlled by Liu until 16 May 2009, when he sold it en bloc to Zhang.  On 3 June 2010, the Xian Arbitration Commission issued the award setting aside the Keeneye Agreements for the vitiating factors that they were manifestly unfair（顯失公平）and were entered into by exploiting a party’s precarious position（乘人之危）.  Saunders J granted leave to Gao and Xie to enforce the award.  That leave was set aside by Reyes J but was restored by the Court of Appeal on 2 December 2011.  In the midst of those enforcement proceedings, Ma acquired the Keeneye Group from Zhang for RMB ¥190 million on 17 May 2011.  By virtue of the decision of the Court of Appeal, that award has the same effect as a judgment of this court and is now binding and final as against Keeneye and New Purple.

Gao’s and Xie’s entitlement to the Bai Jun shares

233.  The Keeneye Agreements have been revoked and everything that was conducted pursuant or subsequent to those agreements should be reversed to its staus quo ante by way of restitution in integrum. The first set of transfers of the Bai Jun shares from Gao and Xie to Keeneye and New Purple is therefore invalid.    

234.  The Bai Jun shares were transferred by Keeneye and New Purple to Daynew and Far Orient who are not parties to the Xian Arbitration.  Therefore they are not bound by the award.  But, as the shares were transferred to them at a nominal value of HK$ 1.00 each, they are not purchasers for value but remote recipients.  The relevant laws on the position of remote recipients are summarized in O’Sullivan, Elliott & Zakrzewski[14]as follows:  

(1)   The party rescinding a contract would be entitled to recover from such remote recipients who took a voidable title in situations, including as:

(a)   as volunteers;

(b)   as those who had notice of relevant vitiating factors; and

(c)   as those who did not purchase bona fide.

(2)   For volunteers, although consideration need not be adequate, nominal value is not sufficient to establish a purchaser for value: see Snell’s Equity[15]; Nurdin & Peacock plc v DB Ramsden & Co Ltd[16]; and Ng Luk Mui & Anor v Shiu Tsun Wai, Vincent and Anor[17].

(3)   For notice, this has been given a rather liberal interpretation. It is not necessary for the recipient to know all the details of the earlier transaction.  It is enough if the third party suspects that something was wrong.

(4)   A remote purchaser only acquires an indefeasible title if it acquired the questionable title as a bona fide purchaser for value without notice of the underlying vitiating factors: see Crown Master Intl Trading Co Ltd v China Solar Energy Holdings Ltd[18].

235.  Gao’s and Xie’s case against Daynew and New Purple is that they are not bona fide purchasers for value without notice of the nullity of the Keeneye Agreements, the defects in Keeneye’s and New Purple’s purported title to the Bai Jun shares, and Gao’s and Xie’s true interest therein.  Daynew and Far Orient pleaded bare denial with no particulars.  No evidence has been adduced by Ma to show that they are bona fide purchasers for value without notice.  On the documents, the consideration for the Bai Jun shares under the second set of transfers was stated to be a total of HK$100 only.  As against the actual value of the coal mine of RMB ¥1,700 million as assessed by the Xian Arbitration Commission, the actual value of those shares would be almost RMB ¥600 million, being 35% of the value of the interest in the coal mine. Under the STA, those shares were priced at RMB ¥190 million plus all the costs of financing the litigations against the Keeneye Group and Angola.  The stipulated value of HK$100 is by any standard nominal.

236.  It is admitted by the defendants that Liu was one of the controllers of the Keeneye Group at the material time, though it is expressly pleaded that he did not participate in their day-to-day management or in the two sets of transfers.  This is also admitted by the 4^th Defendant in the transcript of a conversation made around 22 September 2009.  Liu must be taken to have knowledge of the vitiating factors relating to the Keeneye Agreements as found by the Xian Arbitration Commission and his knowledge could therefore be attributed to all the four companies of the Keeneye Group.  The Keeneye Group was sold en bloc by Liu to Zhang on 16 May 2009 and then to Ma on 17 May 2011 and has since been under the common ownership of Ma.  The Keeneye Group is comprised of legal persons.  As such they have always had knowledge and notice of the vitiating factors and cannot argue to have lost that knowledge as result of change of shareholders.  Besides, the present proceedings have always been defended by all defendants including the Keeneye Group as one party and represented by the same legal team acting under the same common instructions.  They cannot claim to have no notice of the vitiating factors. 

237.  Furthermore, neither Zhang nor Ma was a new purchaser of the Bai Jun shares.  They were purchasers of shares in Daynew and Far Orient. The Liu/Zhang Agreement recorded that Zhang was fully aware of the Keeneye Agreements and the first set of transfers.  Ma must have also acquired thorough knowledge of the vitiating factors from his negotiations with Gao before entering into the STA.  Ma’s knowledge is also apparent from the fourth paragraph of the recital of the STA.  Thus, both of them were fully aware of the vitiating factors affecting the first set of transfers.

238.  In conclusion, I am satisfied that the 1^st, 2^nd, 6^th and 7^th defendants were remote recipients and not bona fide purchasers for value without notice of the vitiating factors.  Gao and Xie are thus entitled to recover the Bai Jun shares from them.    

Gao’s and Xie’s entitlement to the declarations and injunctions sought

239.  As can be seen from the amendments to the defence of HCA 1315/2009 introduced by Ma after the start of HCA 466/2012, the defendants are effectively repeating Ma’s statement of claim in HCA 466/2012 and using the claim therein as a defence to claim for declarations sought under HCA 1315/2009.  Thus in essence, their defence is based on the 2010 Oral Agreement and the May Agreement.  I have found that those agreements were Ma’s concoctions to prevent Gao and Xie from recovering the shares in Bai Jun when he realised that he could no longer conceal his breaches of the STAs in settling with Zhang and in sabotaging Gao’s and Xie’s effort in appealing the decision of Reyes J.  As the 2010 Oral Agreement and the May Agreement were fictitious and the STAs were repudiated, the defences premised on accord, satisfaction, implied term and estoppel fall away.  The injunctions sought are in aid of the declarations.  Thus, Gao and Xie are entitled to the declarations and injunctions sought.

Conclusion

240.  For the above reasons, I enter judgment in favour of Gao and Xie and grant them the remedies sought in their Amended Statement of Claim.  I also make a costs order nisi that the 1^st, 2^nd, 3^rd, 4^th, 6^th and 7^th defendants shall pay the plaintiffs’ costs of this action, including all costs reserved if any, with certificate for two counsel.

241.  Lastly, I thank counsel and the legal team of all the parties for their thorough research in the law and very comprehensive skeleton arguments.  And I apologize to the parties for the time taken in deliberation.