WONG KAM SAN AND OTHERS v. ZHAO KAI INVESTMENT LTD.

HCA1653/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

ACTION NO. 1653 OF 2004

J U D G M E N T

1.  In this action the 1st plaintiff claims against the 1st and 2nd defendants for the return of 75 shares of one Hawkins Development Limited (“Hawkins”).  The plaintiffs also seek an injunction against the 1st to 7th defendants to enjoin them from interfering with the business of Hawkins and of a Sino-foreign joint venture called Liaoyang Shunfeng Iron and Steel Company Limited (“the joint venture”).  Hawkins is named as the 8th defendant to make sure that any order made herein would bind it.

2.  The 1st plaintiff is the leading plaintiff, the 2nd plaintiff is his wife and the 3rd plaintiff his assistant.  The 1st plaintiff used to own and control Hawkins.  Prior to March 2000, Hawkins had issued and allotted 100 shares.  The 2nd plaintiff used to hold 80 of those shares and the 3rd plaintiff held the remaining 20.  They held the shares as the nominees of the 1st plaintiff.

3.  Hawkins, at all material times, is and was the owner of 80% of the interest in the joint venture.  The remaining 20% of the joint venture were held by two Mainland entities.  The joint venture is an iron ore mine in Denta Municipality, Liaoning Province.

4.  On about 27 March 2000, the 2nd plaintiff transferred her 80 shares away.  74 of those shares were transferred to the 1st defendant and one to the 2nd defendant.  The remaining five shares were transferred to the 4th plaintiff.  The 3rd plaintiff at the same time also transferred her 20 shares to the 4th plaintiff.  The 4th plaintiff is a BVI company owned and controlled by the 1st plaintiff.  After the transfers of shares, the 1st plaintiff, through the 4th plaintiff, was in control of 25% of Hawkins and the 2nd defendant, through himself and the 1st defendant, was in control of 75%. 

5.  The 1st plaintiff said that the 75% shares of Hawkins were transferred to the 1st and 2nd defendants for them to hold in trust for him.  He said the purpose was for the 2nd defendant to procure the listing of Hawkins in the GEM Board in the Hong Kong Stock Exchange.  If the 2nd defendant should succeed in this task, the 1st plaintiff would give him 1% of the shares of Hawkins as his remuneration.  The 1st plaintiff further said that since the 2nd defendant had breached this agreement, he therefore asked for the return of the 75% shares.

6.  The 2nd defendant said that the 75% shares were transferred to him and the 1st defendant for them to hold on trust for an investor called Zhao Ahping.  He further said that the 1st plaintiff procured the transfers of the 75% shares to him and the 1st defendant in return for Zhao’s assumption of the funding obligations for the mining operation of the joint venture and of the listing of Hawkins in the GEM Board and also for the advancement of a loan of HK$4.2 million to the plaintiff.  He also said that the plaintiff had promised him 1% of the shares of Hawkins as his remuneration if he could procure the listing of Hawkins.

7.  The main differences between the 1st plaintiff’s case and that of the 2nd defendant are the terms of the agreement for the transfers of the 75% of Hawkins shares to the 1st and 2nd defendants and the identity of the beneficiary of these shares.

8.  All the plaintiffs are represented at this trial.  They have only called the 1st plaintiff as their witness.  The 1st, 5th, 6th and 7th defendants are represented in this trial.  The 5th defendant is the wife of the 2nd defendant and the 7th defendant is his sister.  The 2nd defendant was adjudged bankrupt in October 2005.  The Official Receiver has chosen not to take part in this trial and the 2nd defendant is thus not represented at the trial.  He is, however, the only witness called by the 1st, 5th, 6th and 7th defendants.  The 3rd and 4th defendants have never taken any part in this action.  The 8th defendant, Hawkins, is also unrepresented at the trial.

The 1st plaintiff’s story. 

9.  According to his first affirmation filed on 7 October 2004, the 1st plaintiff had been an official in the Shunde Municipal Government, dealing with business and trading.  He had received junior secondary education in the Mainland and can read and write Chinese but not English.  In 1985 he came to Hong Kong to set up a window company for the Shunde Government.  The company traded in electronic products and machinery.  He was later put in charge of the trading department of another Hong Kong company owned by the Shunde Government.  His then superior was one Liao Rong Zhu who was then the Vice-Mayor of Shunde.

10.  In about 1986 and 1987 he was introduced to the 2nd defendant in Zhuhai.  The 2nd defendant told him that the 2nd defendant knew a lot of professionals, such as lawyers, accountants and bankers and would be able to assist him in property investment in Hong Kong.  In about June 1988, Mr Liao on behalf of the Shunde Government established a joint venture with the 2nd defendant in Hong Kong.  It was called Sun Lun Land Development Company Limited (“Sun Lun”).  The Shunde Government, through a company called Rich Firm Industries Limited, held 65% of Sun Lun while the 2nd defendant held 35%.  Mr Liao, the 1st plaintiff and the 2nd defendant were appointed as directors of Sun Lun.  The 1st plaintiff and the 2nd defendant then became friends.  They eventually became neighbours of two adjacent houses at Marina Cove, Sai Kung.  They also became familiar with each other’s family.  Later on, the 1st plaintiff sold his house to the 2nd defendant and moved out.

11.  The main business of Sun Lun was real property trading.  The 2nd defendant apparently had a good insight of the market.  He was able to recommend deals that resulted in significant profits to Sun Lun.  The 1st plaintiff thus had confidence in the 2nd defendant’s business judgment and trusted him.  In late 1999 the Shunde Government subcontracted a trading company to the 1st plaintiff.  It was called Rich Firm Trading Company Limited.  He then ceased to be a director of and left Sun Lun.  After that, he spent most of his time in the Mainland handling the business of Rich Firm Trading.  He later learned that the 2nd defendant had also left Sun Lun and became actively involved in the Hong Kong capital market.  The 2nd defendant had acquired several listed companies, including AWT Holdings Company Limited and Mandarin Resources Corporation Limited.  He had the impression that the 2nd defendant had been quite successful in the financial market.

12.  Regarding Hawkins, the plaintiff said it was one of the shell companies set up by the Shunde Government in 1989 for holding property investment.  It remained dormant until 1996.  In around March 1996, he decided to invest in the joint venture.  With the consent of the Shunde Government, he took over Hawkins for this purpose.  He appointed the 2nd and 3rd plaintiffs as trustees to hold for him the shares in Hawkins.  He also increased the shares from 2 to 100.  He also appointed the 2nd and 3rd plaintiffs as directors of Hawkins.  He himself also remained as a director.  There were altogether three directors.

13.  On about 30 March 1996, Hawkins acquired 80% of the joint venture from a Hong Kong company called Yield Gold Investment Limited at RMB¥13 million.  The 1st plaintiff was appointed the legal representative and chairman of the board of directors of the joint venture while the 3rd plaintiff was appointed the vice-chairman of the board.  After acquiring 80% of the joint venture, the 1st plaintiff had, through a company of his in Shunde called Rich Firm Industries Development Limited, injected more than RMB¥60 million into the joint venture.  He also produced a capital verification report issued by an accountant firm in Liaoyang showing that he had injected RMB¥28,800,000 as required by the joint venture agreement.

14.  The joint venture has six mines but only one has been extracted due to shortage of capital.  In order to find capital to extract the other five mines, the 1st plaintiff had tried to raise funds from other investors since 1988.  However, his attempts had not been successful.

15.  In February 2000 he met the 2nd defendant a few times and they discussed the listing of Hawkins.  The 2nd defendant suggested that listing Hawkins in Hong Kong could raise more than RMB¥10 billion.  He further suggested that in order to make the listing more feasible, he had to be seen as the major shareholder of Hawkins because he was well known in the financial market in Hong Kong.  He therefore suggested that 75% of the shares in Hawkins should be transferred to him while he would hold the same on the 1st plaintiff’s behalf.

16.  In one of the meetings, the 2nd defendant explained to the 1st plaintiff matters about listing in the GEM Board.  The 2nd defendant promised that he would be responsible for all the listing expenses.  In return, if listing should prove to be successful, he should be given 1% of the Hawkins shares.  He reiterated the importance of making him the registered major shareholder of Hawkins as his reputation in the financial market would facilitate the dealings with fund managers and underwriters.  He confirmed that the shares to be transferred to him would be held on the 1st plaintiff’s behalf.

17.  Initially the 1st plaintiff did not feel comfortable with the idea of transferring 75% of the shares to the 2nd defendant without any documentary proof of his beneficial ownership.  He asked the 2nd defendant whether the 2nd defendant could sign some documents to prove his beneficial interest.  The 2nd defendant replied that it was inadvisable to confirm the trust relationship in writing because of the listing rules.  The 2nd defendant comforted him by saying that they had known each other for many years and he should trust him. 

18.  Before he had made any agreement with the 2nd defendant to list Hawkins, he went to the United States in February 2000 to raise funds for the joint venture.  But this trip again turned out to be a failure.  When he was about to come back to Hong Kong, the 3rd plaintiff called him and told him that the 2nd defendant wanted to talk to him urgently about the listing and that the 2nd defendant even wanted to go to the United States to see him.  He then received a fax from the 2nd defendant on 27 March 2000 which contained a restructuring plan for Hawkins.  He read the fax and wrote his comments on it.  He then discussed his opinion with the 3rd plaintiff and stressed that the 2nd defendant could only deal with the listing of Hawkins and could not interfere with the joint venture.  He understood from the 3rd plaintiff that this message had been passed to the 2nd defendant.

19.  The restructuring plan in the fax said that the new board of directors would comprise the 1st and 3rd plaintiffs and the 2nd, 5th and 7th defendants.  Regarding the shares, 75% would be held by an overseas company or by the 2nd defendant or by an overseas company of the 2nd defendant (the 1st plaintiff thought that it meant to be by an overseas company or the 2nd defendant).  The remaining 25% would be held by another overseas company or by the 1st plaintiff or by an overseas company of the 1st plaintiff. 

20.  The comments he wrote on the fax were that the 2nd plaintiff could be cancelled but not the 3rd plaintiff (he confirmed in cross-examination that he referred to the cancellation as a shareholder and director).  The next comment was that the 3rd plaintiff’s shareholding should be increased from 20% to 25%.  Further, he was appointed by the shareholders (he explained in oral evidence that this referred to his appointment as the legal representative of the joint venture).  He also queried the use of overseas companies and asked whether it involved fictitious companies.  His final comment was that his gain was of 25% which was equivalent to 300 million and he had to give up 75% shareholding which was equivalent to 900 million. 

21.  He explained in oral evidence that he was referring to the US currency and he was relying on a valuation of the joint venture made by a firm of accountants in the Mainland.  He also explained in cross-examination that the 75% shares were supposed to be sold to the investment public upon listing so as to raise the US$900 million for development of the joint venture.  Since the 2nd defendant said the matter was urgent, he therefore asked the 3rd plaintiff to assist the 2nd defendant and sign the documents on his behalf and on behalf of the 2nd plaintiff to effect the transfer of shares.  At that time he was in the United States, his wife was in Shunde and only the 3rd plaintiff was in Hong Kong. 

22.  He returned to Hong Kong on 6 April 2000.  The 3rd plaintiff then told him that the 2nd defendant had explained to her the documents that she had signed and they were normal documents used for the transfer of shares.  Accordingly, the 3rd plaintiff signed these documents on behalf of herself, the 2nd plaintiff and the 1st plaintiff. 

23.  The 1st plaintiff said that it was until shortly before October 2004 and also because of this action that he found out that those documents included bought and sold notes, instruments of transfer, board minutes and notices of resignation as directors.  Hawkins’ board of directors was indeed restructured in the way as mentioned in the said fax.  His 25% shares were transferred to the 4th plaintiff.  He also found that all the transfer documents were either undated or had been backdated by the defendants to 1997 and 1998. 

24.  The 2nd defendant had initially told him that the listing could be done as soon as September 2000 or at the end of 2001 at the latest.  The 2nd defendant had also confirmed to him that the share transfer was done for listing purposes only and the 2nd defendant had no interest in the shares other than the 1% share as remuneration for the listing.  They also agreed that the 2nd defendant would not be involved in the joint venture and that all listing expenses would be borne by the 2nd defendant.  Furthermore, if the listing should fail for whatever reason, all the shares should be transferred back to the 1st plaintiff.

25.  From 2000 to 20003 the 2nd defendant had brought lawyers and auditors to inspect the joint venture for four to five times.  There was also an auditor from Hong Kong who had stayed there for several days to study the books of the joint venture.

26.  The 1st plaintiff kept asking the 2nd defendant on the progress of the listing but was told that the mine was graded at “D” grade and was not up to the standard of “C” grade as required for listing in Hong Kong.  The 2nd defendant said that the depth of the mine had to be increased by another 30,000 metres before it could reach “C” grade and that required investment of RMB¥12 million.  Thereafter the 2nd defendant just told him that the listing would be done very soon. 

27.  In April 2004, the 2nd defendant asked him to come to a meeting in a restaurant and showed him a proposal to build a theme park at the joint venture.  He was very angry at this idea as he took that as the 2nd defendant’s attempt to involve himself in the joint venture.  He rejected the proposal.   He then instructed solicitors to issue a demand letter on 13 May 2004 to the 1st and 2nd defendants demanding the return of the 75 shares.

The 2nd Defendant’s story

28.  He was introduced to the 1st plaintiff by a mutual friend in about 1987.  He was then very active in investing in the real property market in Hong Kong.  The 1st plaintiff asked him to form a joint venture with the Shunde Government.  With a joint venture, the parties could make use of the money from the government as well as the 2nd defendant’s expertise to invest in the property market in Hong Kong.  They then formed Sun Lun, in which the Shunde Government held 65% and the 2nd defendant held 35%.  The 1st plaintiff, Mr Liao and the 2nd defendant were Sun Lun’s directors.  Between 1988 to 1991 the 2nd defendant and the 1st plaintiff met very frequently and they became good friends.  The Shunde Government and the 2nd defendant had made a lot of money through Sun Lun.  In about 1991 the 1st plaintiff left Sun Lun and they still met regularly thereafter.

29.  In about 1996 the 1st plaintiff told the 2nd defendant that he had acquired an 80% interest in the joint venture in Denta Municipality of Liaoning Province.  He held the 80% shareholding of the joint venture through Hawkins.  At the material time the 2nd defendant was very busy in property development projects and did not pay much attention to the 1st plaintiff’s investment in this venture.

30.  In or about 1999 after the Asian financial crisis, the 2nd defendant was told by a friend that the 1st plaintiff had financial problems in his joint venture.  In early 2000 when the 2nd defendant was in the course of acquiring the shareholding of the listed company Mandarin Resources Limited, the 1st plaintiff approached him and asked if he would like to invest in the joint venture.  He declined the suggestion as he was not familiar with the operation of mining and he was then engaged in acquiring the shareholdings of Mandarin Resources.  He however said that he could find someone who might be interested.  After discussing with some of his contacts, he told the 1st plaintiff that he might get Hawkins listed on the GEM Board of the Hong Kong Stock Exchange so as to raise capital for the joint venture.  The 1st plaintiff then gave him some documents on the joint venture and asked him to help in the intended listing of Hawkins.

31.  He told the 1st plaintiff that the 1st plaintiff had to pay no less than HK$5 million as listing expenses to the accountants, auditors and lawyers before he could apply to list Hawkins on the GEM Board.  The listing expenses might exceed HK$10 million if there should be complications.  If the 1st plaintiff was not able to raise these expenses, there might be investors who would be interested in entering into a joint venture with him.  In that event, he had to transfer a substantial part of his shareholdings in Hawkins to the investor in exchange for the provision of funding for the intended listing.  The 1st plaintiff then asked him to find investors for the intended listing and further agreed to give him 1% of the shareholdings of Hawkins in return for his help in the intended listing. 

32.  He then negotiated with one Zhao Ahping of the Mainland and Zhao agreed to provide the expenses for the intended listing.  But Zhao required the 1st plaintiff to transfer to Zhao or Zhao’s nominee 75% shareholdings of Hawkins so that Zhao or Zhao’s nominee would be holding 60% interest of the joint venture after the listing.  Zhao asked the 2nd defendant not to disclose his identity to the 1st plaintiff and merely told the 1st plaintiff that there was an investor who had made the offer.

33.  The 2nd defendant then relayed Zhao’s offer to the 1st plaintiff.  The 1st plaintiff said that he needed some time to consider it.  In mid-March 2000 the 2nd defendant met the 1st plaintiff again and the 1st plaintiff told him that the 1st plaintiff would accept the offer provided that the investor would be responsible for paying (i) the arrears of the wages of the employees of the joint venture which were at about HK$4.2 million, and (ii) the daily operation costs after the transfer of the shares which included the wages of the employees.

34.  The 1st plaintiff further said that as he had failed to remit money to the joint venture, the wages of the employees were in arrears and there would be a strike.  The Mainland party had also threatened to hold Hawkins in breach of the joint venture agreement and would terminate the same accordingly.  In such an event, all the 1st plaintiff’s investments in the joint venture would be gone forever.  The 2nd defendant relayed the counter offer to Zhao.  On the arrears of wages, Zhao only agreed to advance the 1st plaintiff a loan in the sum of HK$4.2 to enable him to discharge the same.  However, Zhao agreed to be responsible for paying the daily operation costs of the joint venture after the transfer of the shares which costs included the wages of the employees.  The 2nd defendant then relayed this revised offer to the 1st plaintiff.  He further explained to the 1st plaintiff that it was a hostile takeover of Hawkins and asked the 1st plaintiff to consider it very carefully.  The 1st plaintiff said that he would be going to the United States for a fund-raising trip and would reply him later.

35.  At or about the end of March, the 2nd defendant received a phone call from the 1st plaintiff who informed the 2nd defendant that he would accept the revised offer from Zhao and asked the 2nd defendant to prepare all the documents for the transfer of the shares.  The 2nd defendant then asked his then legal adviser to prepare all the documents for the intended share transfer.  He also informed the 1st plaintiff about the proposed change in the board of directors of Hawkins after the transfer of shares.  He also told the 1st plaintiff that he would be acting as a nominee of the investor.  In order to gain control of Hawkins, its board of directors would have to be changed by dropping the 2nd plaintiff and appointing the 2nd, 5th and 7th defendants.  Regarding the shares, 75 shares had to be transferred to an overseas company under the control of the investor or the 2nd defendant as his nominee and 25 shares to be transferred to an overseas company under the control of the 1st plaintiff.

36.  In order to facilitate the listing of Hawkins, the 2nd defendant agreed with Zhao to take up one share to show his involvement, notwithstanding that he was holding it as a trustee for Zhao.  The remaining 74 shares for Zhao were transferred to the 1st defendant, which was a BVI company owned by the 2nd defendant’s elder brother Yang Fuqiang.  After the transfer of the 75 shares of Hawkins to the 1st and 2nd defendants, Zhao had, through the 2nd defendant, advanced a loan in the sum of HK$4.2 million to the 1st plaintiff to pay the arrears of wages to the employees. 

37.  In order to comply with the listing requirement of the Hong Kong Stock Exchange, there could not be any substantial change in the management of the joint venture, including its board of directors and legal representative, within two financial years prior to the application for listing.  The 2nd defendant therefore told the 1st plaintiff that he could remain as the legal representative of the joint venture and there would not be any change in the composition of the joint venture’s board.  The 2nd defendant thought that it was the parties’ common goal to get Hawkins listed in the GEM Board and he thought the 1st plaintiff would not do anything to harm the joint venture.  He denied that he had agreed with the 1st plaintiff that he would not interfere with the affairs of the joint venture and would bear all listing expenses and would transfer back all the Hawkins shares to the 1st plaintiff if the listing should, for whatever reason, fail. 

38.  With the 1st plaintiff as the legal representative of the joint venture and without any change in the board of directors after the transfer of shares, the 1st plaintiff had absolute control over the joint venture.  The 2nd defendant was not able to interfere with it.  The 1st plaintiff was very unco-operative after the transfer of shares and had deliberately concealed his wrongful acts to the joint venture.

39.  He complained that the 1st plaintiff had failed to provide accounts of the joint venture for his inspection despite his repeated demands and requests.  He qualified this complaint in paragraph 12 of his third affirmation filed on 26 January 2005 that he was only denied access to the accounts after he had raised the theme park proposal in April 2004. 

40.  He also complained that the 1st plaintiff had failed to disclose to him before the transfer of the shares that the joint venture had, on about 18 November 1998, granted a licence to one 撫順罕王實業集團有限公司 to extract one of the mines of the joint venture for 20 years, commencing from 1 January 1999, at a licence fee of RMB¥500,000 per annum.  He said that this mine had contributed to two-thirds of the total income of the joint venture.  If the licence fee was adopted as two-thirds of the annual income of the joint venture in the next 20 years, the intended listing was bound to fail.  Moreover, granting of the said licence was not approved by the Mainland party.  However, none of the valuation reports produced at the trial had mentioned this licence to extract one of the mines as an obstacle for listing of Hawkins. 

41.  The 2nd defendant also alleged that the 1st plaintiff had offered to sell the 25% shares in Hawkins to him at a very high price and had threatened to block his listing attempt if he did not accept the offer.

42.  In oral evidence, the 2nd defendant said that he had in fact entered into an oral agreement with the 1st plaintiff on listing of Hawkins before 28 February 2000 (rather than at the end of March 2000 as he had said in his affirmation).  He said this when he was asked for the reason why he had, in the name of Hawkins, entered into a written agreement with one Robert Lee on 28 February 2000.  The agreement promised to pay Lee HK$5 million for Lee to engage a reputable valuer in the Mainland to complete the valid report of the revaluation of the joint venture.  The agreement said that the HK$5 million would be payable if Hawkins should find the valuation satisfactory.  The 2nd defendant said, when he made this agreement with Lee, the 1st plaintiff had an oral agreement with him on listing and had given him the company kit of Hawkins which contained the rubber chop that he had applied on the agreement with Lee.

43.  On the terms of the listing agreement, he further said that Zhao Ahping had agreed as a term of the agreement to pay and discharge all the debts of the joint venture including the arrears of wages to employees regardless of when the debts were incurred.  However, Zhao did not pay the HK$4.2 million but only lent it to the 1st plaintiff.  The reason being that Zhao at that time did not know the exact amount as due and was worried about how much it really was.  The 2nd defendant then suggested that Zhao could advance this HK$4.2 million to the 1st plaintiff as a loan in the meantime.  He agreed in cross-examination that Zhao, despite having entered into the agreement and assuming the obligation to pay the expenses for running the joint venture, had not paid any money to the joint venture for whatever purpose.  He tried to explain this by saying that after the making of the listing agreement, the joint venture had produced sufficient income to fund its operation, thus no money was required from Zhao.  He however could not explain why the accounts produced by the 1st plaintiff in December 2004 showed that the joint venture had been suffering losses since 2000.  The accounts showed that the joint venture had lost over RMB¥2 million in each of the years of 2000 and 2001, over RMB¥3.9 million in 2002 and over RMB¥4.6 million in 2003.  He had never queried the accuracy of these accounts despite they had been produced in December 2004.

44.  In cross-examination, he suddenly said that Zhao was merely representing a group of investors of which his elder brother Yang Fuqiang was a member.  He later said that Zhao had emigrated in 2003 and had given everything to his elder brother.

45.  In any case, there was not a single piece of paper showing the involvement of or payment by Zhao to him to reimburse the listing expenses or otherwise.  The absence of anything from Zhao indeed creates a doubt as to Zhao’s existence. 

Analysis and conclusion

46.  Each side has put forward one story to explain why the 75 Hawkins shares were transferred.  Despite this, I am reminded that the burden of proof lies on the plaintiffs’ shoulders.  If I should find that the plaintiffs have failed to prove their case on a balance of probability, I will dismiss the claim without the need to consider the defendants’ case.  This is indeed my approach.

47.  The 1st plaintiff had a modest education.  He, however, had ample experience in trade, commerce and dealings in real estate.  There is some evidence that he had been involved in the development of a building somewhere in the Happy Valley.  There are many people in Hong Kong who take an active part in the buying and selling of shares in the Stock Exchange, but many of them have no knowledge of how to list a company or how the Stock Exchange works.  Despite his commercial experience, the 1st plaintiff does not appear to have any knowledge or experience of the financial market or the listing of companies in the Stock Exchange.  

48.  Mr Chow, leading counsel for the 1st, 5th, 6th and 7th defendants, submitted that the 1st plaintiff was in a dire situation in March 2000 as the joint venture had been losing money ever since he had invested in it.  His attempts to raise capital had all failed.  There were arrears of wages at about RMB¥3.8 million and the workers were about to strike.  In these circumstances, the offer from Zhao was an opportunity for him to realise a losing investment at a substantial profit. 

49.  On this submission one has to look to the past.  It seems that the joint venture had been owing wages to the workers for years.  On the suggestion of a possible strike by the workers, the only evidence was an assertion by the 2nd defendant. 

50.  Even though the 1st plaintiff was not in a very enviable position, the question remains whether the position was so bad that he had to give away 75% of Hawkins in the hope that Hawkins could be listed in the GEM Board and he could then benefit from it.  Furthermore, the conduct of the parties after the transfer of shares has to be considered, not for the purpose of determining the meaning of a particular term of the contract, but to find out what sort of contract had been entered into. 

51.  If Zhao had indeed become a 75% owner of Hawkins or 60% owner of the joint venture, there was no reason why they were not concerned about the operation of the joint venture.  They might have to allow the 1st plaintiff to remain as the legal representative in order to comply with the listing requirements.  However, it does not mean that they should take no part in managing the daily operation.  However, the undisputed evidence is that Zhao, either directly or through the 2nd defendant, had never interfered with the management of the joint venture.  Furthermore, if Zhao had promised to bear all the funding and debts regardless of when they were incurred, I do not see why the 1st plaintiff would be prepared to accept a loan of $4.2 million and not to ask Zhao or the 2nd defendant to fund the joint venture’s operation.

52.  On this point I do not believe the 2nd defendant’s story that the joint venture had been producing sufficient income for its operation ever since the transfer of Hawkins shares.  This has never been put to the 1st plaintiff despite the 1st plaintiff has, since December 2004, pointed out that there was no such agreement as deposed to by the 2nd defendant because Zhao had not paid a cent to the joint venture.  Furthermore, there is also evidence produced by the 1st plaintiff, in October 2004, that he had injected into the joint venture RMB¥3.3 million between September and December 2003 and RMB¥4.14 million between January to May 2004.  Such evidence has not been challenged and the 1st plaintiff was not cross-examined on it.  If Zhao had assumed the funding obligation, I can see no reason why the 1st plaintiff should have injected his capital into the joint venture in 2003 and 2004.

53.  Mr Chow then submitted that there was no reason for the 1st plaintiff not to ask the 2nd defendant for a declaration of trust or some bought and sold notes and instrument of transfer executed in escrow.  However, that depended on how close the 1st plaintiff and the 2nd defendant were at the material time and how much trust the 1st plaintiff had in the 2nd defendant. 

54.  The 2nd defendant is an educated person who can read quite a lot of English.  He has an MBA from the University of California at Santa Barbara.  He had acquired two listed companies.  His name was in the newspapers and magazines.  The 1st plaintiff had known him for over 10 years and they had indeed been so close that they had bought and lived in neighbouring houses.  I do not think it surprising for the 1st plaintiff to have accepted the 2nd defendant’s words and not insisted on some written confirmation of the trust holding.  Furthermore, the 1st plaintiff had limited knowledge on the financial market and had to rely on the 2nd defendant totally in order to list Hawkins.  This is supported by the undisputed fact that the 1st plaintiff had been running the joint venture throughout but had not played any role in the listing.  Instead, all tasks gearing towards listing were done by the 2nd defendant.  If the 2nd defendant should have told him that any written confirmation of trust would get the 2nd defendant into trouble with the listing rules, I would not be surprised that the 1st plaintiff would have accepted such statement as true.

55.  Another point raised by Mr Chow is that the 1% Hawkins shares remuneration is not reasonable if the 2nd defendant were to bear all the listing expenses.  He said such expenses could be as much as HK$10 million.  He referred to an estimate by one SSS Mandarin Financial Services Limited.  Very little is known about this company except that it occupies a single office unit in Shun Tak Centre together with some firms of accountants and auditors.  In any case, the evidence available only shows the incurring of a few sums totalling slightly over HK$1 million by the 2nd defendant personally.  Regarding the HK$5 million paid to Robert Lee, not a sheet of paper has been produced to prove what Lee had done to earn this sum.  When questioned about this, the 2nd defendant suddenly said that the HK$5 million were paid to Lee not for any valuation, but for him to negotiate a discount of certain fees for some design work.  I just wonder why this had not come out in any of his eight affirmations made at different times for use in injunction applications.  If Robert Lee had indeed been paid the HK$5 million, I do not accept that such sum had anything to do with the listing of Hawkins.  On the basis of the expenses already incurred, I therefore have grave doubt as to the $10 million estimate by SSS Mandarin.

56.  The 2nd defendant at that time had just acquired two listed companies and he knew what the expenses would be like.  According to the 1st plaintiff, the 2nd defendant was very confident of the listing of Hawkins.  If he should have asked for 1% of Hawkins shares as remuneration, it was likely that he had his own estimate of the listing expenses and he thought he could profit from this exercise.  I do not think it very unreasonable for him to have agreed with the 1st plaintiff on the basis as the 1st plaintiff had deposed to.

57.  Mr Chow also submitted that the 1st plaintiff’s conduct showed that he did not regard Hawkins as his company after the share transfer as all secretarial duties were done by the 2nd defendant and the company kit had also been passed to the 2nd defendant.  However, that was for the 2nd defendant to arrange the listing of Hawkins.  I note that the 1st plaintiff continued to manage the joint venture and injected funds into it in the same way as before the transfer.  I do not think there is any merit on this point.

58.  Mr Chow criticised the plaintiffs for not calling the 3rd plaintiff.  However, I agree with Mr Chan, leading counsel for the plaintiffs, that the 3rd plaintiff was not the one who clinched the listing agreement.  The agreement was clinched between the 2nd defendant and the 1st plaintiff direct.  I do not think the 3rd plaintiff is an important witness.  However, the absence of Zhao Ahping or the 2nd defendant’s elder brother deserve a lot more adverse comment as they are said to be the true owner of the 75 shares of Hawkins and the principal or principals behind the 2nd defendant.

59.  Mr Chow also referred to the final comment written by the 1st plaintiff on the fax of 27 March 2000 and his explanation that the US$900 million was to be obtained for the joint venture by selling 75% of Hawkins to the public.  Mr Chow said that it would not be possible for a 75% shareholder to sell all his shares upon listing, but I do not think the 1st plaintiff would have realised this given his modest knowledge and understanding of the financial market and his reliance on the 2nd defendant.

60.  There are a number of other relatively minor criticisms on some inconsistencies between the 1st plaintiff’s affirmations and his oral evidence.  Given the lapse of time and the fact that the 1st plaintiff is in his late 60’s, I do not think these criticisms would sway me into disbelieving him.  He spent quite a number of hours in the witness box and I think he has tried hard to fully and truthfully answer the questions given to him.  I think he is an honest witness.  I find that he has discharged the burden of proof on a balance of probabilities.

61.  Regarding the 2nd defendant, I think his story is inherently improbable.  I have already referred to some of the incredible features above.  I now continue.  Zhao has not appeared at all, whether personally or by document.  I doubt his existence.  I do not think a genuine investor would plunge into this deal as deposed to by the 2nd defendant without doing a due diligence exercise.  If he had no idea as to the financial status of the joint venture, I do not know on what basis he would commit to all past and future debts; that is simply ridiculous.

62.  It is also incredible that the joint venture, which, under the helmsmanship of the 1st plaintiff, had been suffering losses throughout the years, would suddenly turn into profit or no loss after the making of the listing agreement in March 2000.  There was no change in the management of the joint venture.  I find this allegation that the joint venture stopped making any loss a blatant lie.  It was a lie fabricated by the 2nd defendant in the witness box as he could not explain why Zhao had injected no money into the joint venture for years despite his allegation that Zhao had assumed the funding obligation.  But his lie could not change the picture painted by the joint venture accounts produced by the 1st defendant in December 2004, against which he had made no challenge.

63.  He also fabricated an early oral agreement with the 1st plaintiff made before 28 February 2000 as he could not otherwise explain the so-called Robert Lee Agreement made on that particular date.  If there was such an early oral agreement, I cannot see why he would not have mentioned it in his eight affirmations and why it was not put to the 1st plaintiff in his cross-examination.

64.  On the turning of the HK$4.2 million from a payment due from Zhao to a loan advanced by Zhao to the 1st plaintiff, it again only came out for the very first time in the 2nd defendant’s oral evidence and it was not put to the 1st plaintiff in his cross-examination. 

65.  The revelation of his elder brother’s involvement as one of the investors and Zhao’s departure by emigration in 2003 are again surprising matters.  I also hold that these are lies used by the 2nd defendant to explain why Zhao had not paid his legal fees if Zhao was indeed behind him.

66.  I accept that some money, totalling over 1 million, had been spent for listing purpose, but that is more consistent with the 1st plaintiff’s story than the 2nd defendant’s as there is no evidence that Zhao or the 2nd defendant’s elder brother had reimbursed the 2nd defendant any of such expenses.  The listing could not go ahead because substantial investments would have to be injected into the joint venture before it would be ready for listing.

67.  I also refer to the 1st plaintiff’s demand letter of 13 May 2004 seeking the return of the shares held on trust by the 1st and 2nd defendants.  There was no written reply.  The 2nd defendant said that he had talked to the 1st plaintiff personally about it.  But that is not a reason for not replying in writing to such a serious demand.  The obvious reason is that the 2nd defendant at that time did not contemplate this action or had not thought out what lie to tell; hence no reply.

68.  There are other less significant points raised by Mr Chan for the plaintiffs.  I do not think it necessary for me to go through them.  The points I have referred to above are more than enough for me to hold that the 2nd defendant’s story should not be believed. 

Orders

69.  I therefore make the following orders as now sought by the plaintiffs, which is at page 46 of the plaintiffs’ closing submissions:

1.                 I declare that the 1st defendant holds the 74 shares in Hawkins registered in its name on trust for the 1st plaintiff. 

2.                 I order the 1st defendant to forthwith transfer the 74 shares in Hawkins held in its name to the 1st plaintiff or his nominee.

3.       I further declare that the 2nd defendant holds the one share in Hawkins, registered in his name on trust for the 1st plaintiff. 

4.       I also order the 2nd defendant to forthwith transfer this share in Hawkins, held in his name, to the 1st plaintiff or his nominee. 

5.       I grant the 1st plaintiff liberty to apply in respect of the implementation of the above orders. 

6.       I order the 1st, 2nd, 5th and 8th defendants to bear the costs of this action up to the time when the 2nd defendant was declared bankrupt and after that the 1st and 5th to 8th defendants shall bear such costs.

Dismissal of the counterclaim

70.  On the counterclaim by the 1st defendant for repayment of the loan of HK$4.2 million, the evidence of the 1st plaintiff is that the loan was from the 2nd defendant.  The 2nd defendant’s evidence is that he advanced the loan on behalf of Zhao Ahping.  Though the 74 shares held by the 1st defendant allegedly belonged to Zhao, the defence pleaded that the 1st defendant was a company owned by the 2nd defendant’s elder brother and not by Zhao.  There is just no evidence to support the claim of the 1st defendant.  I therefore dismiss the counterclaim and order the 1st defendant to pay the 1st plaintiff costs of the counterclaim.

Further orders

(Discussion)

71.  I formally order that the security of $1.2 million be released to the 1st plaintiff, although I doubt whether such an order is necessary but it is only for the sake of prudence that I make this formal order.

(Discussion)

72.  I also grant an injunction to restrain each of the 2nd to 7th defendants, whether by themselves or their servant or agents or otherwise howsoever from interfering with the business of Hawkins or the business of the joint venture or the mining operation.