CHEONG SHING LTD AND ANOTHER v. YU KWAN AND OTHERS

FACV No. 5 of 2008 & FACV 8 of 2008

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 5 & NO. 8 OF 2008 (CIVIL)

(ON APPEAL FROM CACV NO. 319 & 348 OF 2006)

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Court :    Mr Justice Bokhary PJ, Mr Justice Chan PJ, Mr Justice Ribeiro PJ, Mr Justice Litton NPJ and Lord Scott NPJ

Dates of Hearing :    10 and 13 October 2008

Date of Judgment :    29 October 2008

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J U D G M E N T

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Mr Justice Bokhary PJ :

1. I agree with the judgment of Mr Justice Litton NPJ and the orders proposed by him.

Mr Justice Chan PJ :

2. I agree with the judgment of Mr Justice Litton NPJ.

Mr Justice Ribeiro PJ :

3. I agree with the judgment of Mr Justice Litton NPJ.

Mr Justice Litton NPJ :

Introduction

4. This is a case where the primary facts are mired in obscurity.  Seven witnesses testified at the trial.  None of them told the whole truth, as the judge (Burrell J) found.  On the crucial issue before the court, the judge said : “sifting the truth from falsehoods has been particularly troublesome.  Moreover, neither do I think that the entire truth could be found within the entire pool of evidence even if it were possible to miraculously separate truth from lies.”

5. One fact is not in dispute.  On 24 July 1997 Mr Yu Kwan (“Mr Yu”) handed over to Mr Lo Kam Wing’s wife a cashier order for HK$38.76 million at the Kowloon Tong Club.  Present were Mr Lo, a wealthy businessman, and Mr Kong Kai Cheung, architect, a business associate of Mr Lo’s.  The cashier order was made out in favour of Cheong Shing Limited, a British Virgin Island Company owned and controlled by Mr Lo.  Mr Yu was the manager of a Hong Kong company called Minshen Group (H.K.) Limited, a subsidiary of a Mainland Chinese entity called Xian Minshen Group.  He had been a manager in Xian.  The money for the cashier order came from the Mainland entity.  Xian Minshen and Minshen Hong Kong have been referred to throughout the proceedings as “the plaintiffs”. 

6. At the heart of the case was this simple question :   Why did Mr Yu hand over the money?

7. In the cold clinical light of a courtroom, rights and obligations tend to be clearly defined.  But in real life, people’s motivation for their actions can be muddle-headed, ill-thought-out, obscure.  It can happen, of course, that where A hands over to B a sum of money - even a very large sum of money – the precise arrangement with regard to rights and obligations has not been worked out.  There might be an underlying feeling of trust; the parties expect that the money would be put to profitable use; they hope to be handsomely rewarded in the end.  This underlies the judge’s evaluation of the motivation of the various individuals in this case.  As the judge said, “the financial atmosphere in Hong Kong in July 1997 was one of supreme optimism”; it was “confidently expected” that the money, used by the parties in the purchase of shares in a Hong Kong listed company KPI Company Limited, would yield a large profit.  If everyone was going to be benefited, why be too precise in defining the arrangements?

Background Facts

8. In 1997 Mr Lo, through various entities, owned a substantial number of shares in KPI.  In June of that year Mr Kong, who had architectural projects in Xian and knew Mr Yu, introduced Mr Yu to Mr Lo.  This was at the Hyatt Regency Hotel.  Present was Dr Lee Wai Keung, a friend of both Mr Lo and Mr Kong, a medical doctor working in the public sector who, as the judge said, “had a deep interest in stocks and shares”.

9. The idea of “dyeing red” KPI was discussed : This was, as Burrell J said, “a popular profit-making scheme” to increase the market perception of value in Hong Kong listed shares by having Mainland Chinese entities buying into them.  Mr Yu was asked if Xian Minshen might be interested in such a scheme as partners.

10. Mr Yu was attracted to the idea and went to Xian to discuss it with senior management there.  The response was “no”.  Xian Minshen as a state-owned corporation was not permitted to participate in such a venture; moreover it had little experience in the business of Hong Kong stocks and shares, and the scheme was deemed too risking.  But, as the judge found, Mr Yu and his associates “being shrewd businessmen” did not want to let an opportunity to make a profit go by and did not “completely” turn their backs on the scheme.  Hence the idea of a “loan” from Xian Minshen was proposed : A sum of money from the Mainland which would be put by Mr Lo and his associates to the purchase of KPI shares in the Hong Kong market. 

Meeting at the Kowloon Tong Club

11. At the meeting at the Kowloon Tong Club on 24 July 1997, the following undisputed events took place :

(i)  Mr Yu handed over to Mrs Lo the cashier order as mentioned in para. 5 above.

(ii)   Mr Yu got Mrs Lo to apply the chop of Cheong Shing Ltd (which she had brought along to the meeting) on a photocopy of the cashier order and to sign it on Cheong Shing’s behalf.  She dated it “23.7.97”.

(iii) Mrs Lo took out a receipt in Chinese.  This had been pre-prepared, with Cheong Shing’s chop and Mrs Lo’s signature on it.  She filled in the words “Swiss Bank Corporation” and the number of the cashier order.  She wrote the words “23.7.97” against the date.  She handed it to Mr Yu.

The receipt (in translation) said :

“Received from Mr Yu Kwan Hong Kong Dollars thirty eight million seven hundred and sixty thousand only (HK$38,760,000.00) being the price for purchasing from this company 22,800,000 shares in KPI Company Limited (Stock Exchange no. 605) at Hong Kong one dollar seventy cents (HK$1.70) per share.

(Swiss Bank Corporation bank draft cheque no. 205202)”

At that time Cheong Shing had a holding of 60 million KPI shares, so 22.8 million represented 38% of Cheong Shing’s holding.

12. Mrs Lo dated both the photocopy of the cashier order and the receipt “23.7.97” because of her superstitious dislike of the number “24”.

Disputed Facts

13. It was Mr Yu’s case at the trial that he had brought along to the meeting another photocopy of the cashier order.  He said in evidence that he was “very dissatisfied” with Mrs Lo’s receipt, since it recorded a purchase of shares rather than a loan.  So he wrote on the second photocopy in Chinese :

“This sum was paid pursuant to the instructions of Mr Kong Kai Cheung into Cheong Shing Ltd for the purpose of Loan Agreement No. KY001 (that is the sum borrowed by Mr Kong)”

14. Mr Yu said he then asked for it to be signed and, according to him, Mr Lo said : “Mr Kong is our representative and, since the loan agreement is signed by him, let him sign on this as well”; so Mr Kong allegedly signed; Mr Yu then signed and wrote the date “24/7”.  Mr Kong in evidence denied this.  He said that he was induced by Mr Yu to put his signature on the photocopy when it was blank; the chinese writing was put on the photocopy later by Mr Yu without his knowledge.

KY001

15. The reference to “Loan Agreement No. KY001” in para. 13 above is a reference to a Chinese document bearing that heading.  One version of KY001 showed the plaintiffs as Party A, Mr Kong as Party B, and Mr Yu as “Party C (Guarantor)”.  There were various versions of KY001 adduced at trial.  In one, the clause fixing Mr Yu with personal liability as guarantor for the loan was crossed out.  Mr Kong had a hand in drafting the document but his “true role in the entire saga” was, according to the judge, “difficult to pinpoint”.  He was treated by Mr Lo “as a junior partner”; Mr Lo was “the key player”, the “decision-maker, the money, the boss”.  But Mr Lo remained in the background, operating through nominees. 

16. One version of KY-001, in translation, reads :

          “          Reference No. KY-001

Loan Agreement

Party A :         Minshen Group (HK) Limited /Xian Minshen Group Company Import and Export Branch

Party B :         Kong Kai Cheung

Party C :        (Guarantor)

Party A agrees that the money paid by Xian Minshen to Minshen Hong Kong Company for the purpose of purchasing elevators in the sum of US Dollars five million two hundred and seventy one thousand five hundred and twenty only (USD5,271,520.00) be temporary lent to Party B for a period of 180 days (at the longest not exceeding 300 days) for the purpose of business activities.  Party B promises as follows :

(1)    Party B promises that it will on 10 January 1998 (at the latest not exceeding 10 May 1998) directly repay Minshen Group (HK) Limited US Dollars five million six hundred and seven thousand only

(USD5,607,000.00) (interest for exceeding the time will be borne by Party B).

(2)    If [Party B] is unable to pay on schedule, then Party B’s personal property will be realized for cash for payment, and [Party B] will bear all legal and economic responsibilities.

(3)    If [Party B] intends to sell his personal property to repay the debt, such property may not be sold for less than ninety percent of the market price.”

17. As the judge observed the sum in the cashier order (HK$38.76 million) was about US$4.98 million and was therefore not the Hong Kong dollar equivalent of the figure of US$5,271,520 mentioned in KY001.  And the judge found no satisfactory explanation at trial regarding the statement in KY001 that the US$5,271,520 was “for the purpose of purchasing elevators”.

KY002

18. At trial, another Chinese document was relied upon by the plaintiffs.  This was KY002 headed “Agreement for Guaranteed Return”.  Here Party A was simply Minshen Hong Kong.  It said that Party A was “responsible for arranging a loan of US$5,271,520 to Party B” who promised to pay Party A a “consultant fee” of US$1,318,000 if the loan was repaid within four months, and a “consultant fee” of US$1,581,000 if it was repaid within ten months.  The Mainland entity was not mentioned as a party to this “agreement”.

19. None of the versions of KY001 and KY002 produced at the trial bore the chop of Cheong Shing Ltd or Mrs Lo’s signature as seen on the copy of the cashier order and the receipt as referred to in para. 11 above.  They were not on the table at the Kowloon Tong Club meeting and Mr and Mrs Lo were unaware of their existence.

20. Mr Kong said in evidence that these documents were “sham”, “meaningless”, “procedural only”, “of no legal effect” and created merely to “placate the management in Xian”. 

21. The judge commented that KY001 and KY002 were “shrouded in mystery”. 

The market turned

22. Whilst hopes of gain in the stock market were riding high in July 1997, these turned to dust when the “crash” occurred in October 1997.  The value of KPI shares plunged.  Xian Minshen pressed for repayment, putting enormous pressure on Mr Yu who in turn took steps to recover the money.

Mr Yu’s demand

23. In June 1998 a letter was sent by solicitors Messrs Fred Kan & Co on Mr Yu’s behalf to Mr and Mrs Lo.  There was much dispute at the trial as to how this letter had come about.  Mr Yu said that it was Mr Kong who took him to the solicitor Mr Wu Wing-kit at that firm and proposed “the method of attack” against Mr and Mrs Lo.  Where relevant the letter (dated 22 June 1998) says :

“1.        In July, 1997, our client was approached by you in relation to the purchase of shares in KPI.

2.    You represented to our client that you had acquired through various nominees a substantial number of shares in KPI and would be in a position to influence the price movement of the shares.

3.    You then invited our client to purchase from and/or through you 22,800,000 shares in KPI at the price of HK$1.7 per share and you represented and warranted to our client that the share price of KPI would rise to the range of HK$2.50 to HK$3.00 per share in three months’ time.

4.    In reliance on your said representations and warranties, our client agreed to purchase 22,800,000 shares in KPI from and/or through you at the price of HK$1.7 per share and paid at or about 24 July, 1997 in accordance with your direction the sum of HK$38,760,000.00, being the total consideration for the purchase of the said shares, to a company called Cheong Shing Limited (which is in fact a company incorporated in British Virgin Islands), a company alleged to be controlled by both of you.

5.    Notwithstanding repeated requests, you have failed, within a reasonable time, to show to the satisfaction of our client that you have ever purchased or held on the benefit of our client the full amount of the 22,800,000 shares in KPI.

6.         It is our client’s case that you have defaulted in acquiring or procuring transfer of the benefit of the said 22,800,000 shares for the benefit of our client in breach of the terms on which the said sum of HK$38,760,000.00 was paid to your nominee, namely, Cheong Shing Limited and our client is entitled to the return of the said sum HK$38,760,000.00 and other remedies.”

24. As can be seen, Mr Yu’s case as put in that letter was that the $38.76 million was paid for the purchase of 22.8 million KPI shares at $1.70 per share.  There was no suggestion that the money was a loan. 

Mr Lo’s response

25. By letters dated 8 July 1998 solicitors acting for Cheong Shing and for Mr and Mrs Lo in reply said, in essence :

(i)  There was a joint venture agreement between Mr Yu and Cheong Shing to “invest” in KPI shares, in the proportion of 38% for Mr Yu and 62% for Cheong Shing.

(ii)   A term of joint venture agreement was that Cheong Shing would sell to Mr Yu 22.8 million KPI shares, 38% of Cheong Shing’s existing holding, at $1.70 per share (making a total consideration of $38.76 million) in the first place and would thereafter buy in the market, on behalf of the joint venture, KPI shares until 50% of the issued capital was reached whereupon a general offer would be made to acquire all the KPI shares.

(iii)   All the cost and expense of acquisition would be defrayed by Cheong Shing in the first place, the money owed by Mr Yu for his share of such cost and expense to carry interest at 3% above prime lending rate from the date of purchase until repayment.

(iv)   The 22.8 million shares would be held by Cheong Shing as security for Mr Yu’s indebtedness under the joint venture. 

(v)   Cheong Shing did, after 24 July 1997, buy KPI shares on behalf of the joint venture totaling 71,424,000 shares and, in consequence, incurred cost and expense amounting to $110,723,312.77.  Hence Mr Yu owed Cheong Shing $42,974,858.85 being 38% of the total acquisition cost.

(vi)   Cheong Shing claimed against Mr Yu $42,974,858.85 plus interest at 3% above prime.

26. In answer, Mr Yu’s solicitors asserted in a letter dated 15 July 1998 that his dealings were with Mr and Mrs Lo and not Cheong Shing.  They accepted that Mr Yu did get the receipt signed by Mrs Lo but “did not pay any particular attention to the content of the receipt”.  They reiterated the statement in their earlier letter that Mr and Mrs Lo had made representations that they were in a position to influence the price movement of the shares and Mr Yu had bought the 22.8 million shares at $1.70 per share, at a premium to the market, solely upon their representation that the price would rise to the range of $2.50 to $3.00 in three months’ time.  There were other matters in that letter not relevant to this case (such as the suggestion that Mr and Mrs Lo had acted in breach of the Takeover Code of the Stock Exchange).  Nowhere was there mention of the so-called loan documents KY001 and KY002.

Legal Proceedings

27. On 21 July 1998 a writ was issued on Mr Yu’s behalf against Mr and Mrs Lo.  This was HCA 12106 of 1998.  The claim was for $38.76 million :

“being money paid by the plaintiff to the Defendants’ agent or nominee company called Cheong Shing Limited for acquiring 22,800,000 shares in KPI Company Limited the consideration of which has wholly failed and the Defendants have had and received the said sum … to the use of the Plaintiff”.

28. On 20 July 1998 Mr Lo caused a writ to be issued (HCA No. 12021 of 1998) with Cheong Shing Ltd as plaintiff and Mr Yu as defendant.  The indorsement of claim states :

“The plaintiff’s claim is for the repayment of the total sum of HK$46,844,280 being the total of money lent by the plaintiff to the defendant on divers occasions between 23 July 1997 to 20 July 1998 …”

29. The statement of claim in HCA No. 12021/1998 pleaded an oral agreement whereby Mr Yu entered into a joint venture with Cheong Shing to buy “shares and warrants of KPI … with a view to ultimately acquiring the control of KPI for the defendant (Mr Yu)” and, in essence, set out the matters in the solicitors’ letter of 8 July 1998 as summarized in para. 25 above except this : Cheong Shing had allegedly spent on behalf of the joint venture $117,492,566.47 in acquiring 71,424,000 shares and 11,320,000 warrants.  Mr Yu was therefore indebted to the tune of $44,647,176.26.

30. The action referred to in para. 27 initiated by Mr Yu never went beyond the issue of the writ.  Much later, Mr Yu changed tack and launched HCA No.2183 of 2001.

HCA No. 2183 of 2001

31. The writ in this action was issued on 17 May 2001.  The plaintiffs and Mr Yu (as the 3rd plaintiff in HCA No. 2183/01) had apparently abandoned their claim that the $38.76 million was the purchase price of 22.8 million KPI shares and instead sued Mr and Mrs Lo, Mr Kong, Dr Lee Wai Keung and Cheong Shing Ltd for the repayment of a loan of $38.76 million, giving credit for two “repayments”, and, as against Mr Lo, Mr Kong and Dr Lee the “guaranteed return” as stipulated in KY002 as well : see para. 18 above.  The two “repayments” were :

(i)  A sum of $6.5 million paid in January 1998 and

(ii)   $4 million paid in Xian in August 1998. 

Hence the claim in HCA 2183 of 2001 was $28.26 million plus interest.

32. The action against Mrs Lo was discontinued at an early stage.  In March 2002 this action was consolidated with HCA No. 12021 of 1998[1].  Mr Yu dropped out as a plaintiff in HCA No. 2183/01 but remained as defendant to Cheong Shing’s claim against him, as referred to in para. 29 above.

The consolidated action

33. The consolidated action went for trial before Burrell J on 13 April 2005 and was part-heard when the time for the original hearing ran out at the end of that month.  The hearing resumed in June of the following year.  Judgment was given in August 2006.

34. Pausing here, and looking at the matter in the round, there were startling features in the cases on both sides.

(1)  There could have been no doubt as to how Mr and Mrs Lo saw the matter on 24 July 1997 : They had prepared a document before the meeting at the Kowloon Tong Club acknowledging receipt of $38.76 million as the purchase price of 22.8 million KPI shares and had brought it along to the meeting.  The parties were then on amicable terms.  They had high hopes of a profitable enterprise.  There was no reason whatever for them to have prepared a document which falsified their understanding of the position.  Mr Yu said in evidence that he was “very dissatisfied” with the receipt, and yet he never raised the matter with Mr and Mrs Lo.  He never said : “Wait a minute, there’s a misunderstanding here.  We are not buying shares from you; we are lending you money to enable you to buy shares in the market”, or words to that effect.

(2)     The notion that he was “very dissatisfied” with the receipt was in flat contradiction with his solicitor’s letter of 15 July 1998 (para. 26 above) which said that “he did not pay any particular attention to the content of the receipt”.

(3)     KY001 and KY002 ultimately became the key documents in support of the plaintiff’s case that the $38.76 million was a loan.  And yet they made no appearance at the Kowloon Tong Club meeting; they do not bear Cheong Shing’s chop or Mrs Lo’s signature; the principal party to whom the money was allegedly lent (Mr Lo) knew nothing about the documents.

(4)  Mr Lo was said to be an extremely wealthy man. It seems absurd that he would borrow money at the extortionate rates set out in KY002 when he could have raised the money in the market on much better terms.

(5)  As against Mr Lo’s case there is this inexplicable feature : He (or Cheong Shing) began buying shares and warrants in the market from 24 July 1997 allegedly on behalf of the joint venture.  To have accumulated 71.4 million-odd shares and 11.3 million-odd warrants by July of the following year, he would have been buying almost on a daily basis, with Mr Yu accruing ever-increasing liability for his 38% share of the cost of acquisition.  Mr Lo’s statement of claim in para. 17(ii) says :

“In the course of the acquisition of KPI shares by the joint venture, there were from time to time discussions between Lo and Yu Kwan and Lo had in those discussions repeatedly requested Yu Kwan to pay Cheong Shing his share of the purchase price and costs associated therewith”.

But no written accounts were rendered to Mr Yu from time to time regarding what he allegedly owed as the purchasing exercise progressed.  No contemporaneous records of such purchases on behalf of the joint venture were produced at the trial.  The accumulating debt allegedly incurred interest at 3% above prime from the respective dates of purchase.  How was Mr Yu to know the sums he owed from day to day?  At trial, the defendants sought to fill this deficiency by producing a “composite table” dated December 1997 which the judge found was “clearly created after its date”.  But even as a purported record of joint venture purchases it was found unsatisfactory by the judge in several respects.  Its value as documentary evidence of the joint venture was nil.

35. The trial before the judge – interrupted by a gap of 14 months – lasted a total of 24 hearing days.  Beneath the surface of the evidence – not far beneath – were allegations of breaches of fiduciary duty, contravention of the provisions of s. 157H of the Companies Ordinance prohibiting loans to directors, manipulation of the stock market, infringement of the rules governing the take-over of listed companies, in which all the main participants in “the saga” (as the judge called it) to a greater or lesser extent took part : namely, Mr Yu, Mr Kong and Mr Lo.  No wonder that the judge found difficulty in separating truth from lies.

The Trial Judge’s Findings

36. As the judge found, when the idea of a scheme of “dyeing KPI red” was rejected by senior management of Xian Minshen (see paras 9 and 10 above) a second meeting involving Mr Yu, Mr Lo, Mr Kong and Dr Lee took place at the Hyatt Regency Hotel.  The possibility of a loan, instead of an investment, from Xian Minshen was discussed : The sum mentioned was HK$40 million with a fixed return plus interest over a three or six-month period.  Thereafter Mr Yu and Mr Kong met and discussed further details : This was said to be the genesis of KY001 and KY002, the letters “KY” representing Kong and Yu.  The judge said :

“Ultimately, Minshen who were fully aware that the ends to which the funds would be put was the purchase of KPI shares, agreed to release a sum of approximately US$5.2 million to Minshen HK.  Apart from the written guarantees in KY001 and KY002 Minshen Xian were reassured by the fact that they knew Mr Kong well because he was involved, in his capacity as an architect, in lucrative projects in Xian for Minshen.  Mr Kong had also, in the course of discussions, offered to pledge his own property as security and Mr Kong had informed them, through Mr Yu, that Mr Lo was considerably wealthier than he was.”

37. The “approximately US$5.2 million” referred to in Burrell J’s judgment was, according to Mr Shi Yong Li, deputy chairman of Xian Minshen who testified at the trial, in fact a sum available under a line of credit opened in favour of Minshen Hong Kong for the purchase of equipment.  How the funds came to be diverted for use in share speculation in the Hong Kong stock market has not been satisfactorily explained.  Two clear pieces of evidence emerged at the trial :

(i)  The HK$38.76 million was booked in Xian as a loan to Minshen Hong Kong, and

(ii)   the accounts of Minshen Hong Kong did not show an onward loan to anyone. 

38.  Minshen Hong Kong was the subsidiary of Xian Minshen, a state-owned Mainland company.  Minshen Hong Kong was not in the business of money-lending; far less was it in the business of share speculation in the Hong Kong market.  It is therefore not surprising that Mr Yu, a director of Minshen Hong Kong and its manager, was unable to explain clearly what his “deal” was with the other parties, using Xian Minshen’s money.

As he said in evidence at one point :

“… there was bound to be a profit so I introduced this to Minshen Hong Kong and Minshen Xian to do it.  In respect of this loan made by Minshen Xian and Minshen Hong Kong, it could be said that there was a connection in making this deal but it can also be said that the two matters were not connected at all.”

And, later on, he agreed with counsel’s suggestion that if somehow he managed to send back the money to Xian within the 180 days’ period of the letters of credit that would be alright : It would not “cause any trouble on the books … [of] Minshen Xian.”

39. From what is said above, the conclusion is inevitable that KY001 was created simply as some form of reassurance to head office in Xian by the parties in Hong Kong that the money, recorded in the books of Xian Minshen as a loan to Minshen Hong Kong, was secure.  It was, in Mr Kong’s words, “to placate the management in Xian”.  It did not require Mrs Lo’s signature or Cheong Shing’s chop.  Mr Kong’s name appeared as “Party B” because he was a person well known to senior management in Xian.  What benefit Mr Kong hoped to derive from the transaction has not been revealed.  Mr Kong turned out to have been an elusive witness at the trial.  As mentioned earlier (para. 15 above) the judge found his “true role in the entire saga … difficult to pinpoint.”

40. What then – using Mr Yu’s words quoted above – was “the deal” for him and Minshen Hong Kong?  The notion that they were simply lending money to Mr Lo in the hope that Mr Lo would share some of the profits gained from the stock market made little sense.  And that was not the plaintiffs’ case.  But was it a loan at all to Mr Lo?  The only evidential link between the so-called loan agreement KY001 and Mr Lo was what Mr Yu had written on the photocopy of the cashier order referred to in para. 13 above.  And it was tenuous as best, for it made no reference to Mr Lo or any entity owned by him.  It did not have Mrs Lo’s signature, nor Cheong Shing’s chop, nor indeed the date “23.7.97” which appeared on the two unquestioned documents referred to in para. 11 above.  As counsel accepts, it is unlikely this photocopy was made on the same occasion as that bearing Mrs Lo’s signature and Cheong Shing’s chop, judging from its physical appearance.

And when did Mr Kong put his signature on the photocopy?  As to this, the judge said that, as between Mr Yu’s account that Mr Kong had signed the photocopy cashier order at the Kowloon Tong Club meeting and Mr Kong’s version that he merely signed a blank version (not necessarily at the Kowloon Tong Club meeting) Mr Yu having added the words in Chinese later, he preferred the former.

41. Counsel submits that this was a totally deficient finding by the judge; a bare statement “I prefer the former” is not enough.  There was no analysis of the evidence which flatly contradicted Mr Yu’s version; the trial judge paid no more than lip service to the letters before action referred to in paras 23 and 26 above and the action launched by Mr Yu (HCA 12103 of 1998) which plainly belied the notion of a loan; the feeble attempt made by Mr Yu to distance himself from the solicitor’s letters by saying that it was Mr Kong who had proposed “the method of attack” was nullified by his own admission in cross-examination that he had met the barrister who had “issued the writ” and that the writ was based on instructions he gave.  Neither Mr Yu nor Mr Kong was found by the judge to have been reliable as a witness; there was no reason why the judge should have preferred Mr Yu’s version rather than Mr Kong’s.  There is much strength in these submissions.

42. The judge’s conclusion was as follows :

(1)     The “uncertainties” surrounding KY001 and KY002 were such that it was unsafe to rely on them “as evidence supporting the plaintiff’s case on the specific terms of the loan.  In short, I am not satisfied that any specific terms have been proved”.

(2)     KY001 and KY002 was “evidence of a loan and evidence against a joint venture but no more”.

43. Having reached the point that KY001 and KY002 did not constitute evidence of the “specific terms” of a loan to Mr Lo and his associates (whoever they might have been) it is difficult to see how those pieces of paper could nevertheless be evidence of a loan to them.

44. A loan by A to B is, by it’s nature, a contract.  The advance of money by A to B by way of loan is inseparable from the terms of the contract.  If all that can be said at the end of the day is that A paid to B a sum of money but nothing else could be proved, then the contract was ineffective.  To categorise the bare payment of money by A to B as a “loan” is plainly wrong.  Here, having regard to all the evidence, such as it was, the only possible conclusion was that the $38.76 million was not a loan to the defendants, whatever the dealings between the Mainland company and its Hong Kong subsidiary.  In so far as the judge found otherwise – a finding upheld by the Court of Appeal (Rogers VP, Le Pichon JA and A Cheung J) – this was an error of law.

Joint Venture

45. As regards the alleged oral agreement to form a joint venture to purchase shares in KPI and ultimately to take it over, the key witness for the defendants was Mr Lo.  The judge was unable to rely on his testimony, finding important conflicts between his evidence, his pleaded case and witness statements as to the terms of the alleged joint venture.  The counterclaim was dismissed. 

46. Counsel for the defendants Mr Vos QC does not seek in this Court to overturn the dismissal of the counterclaim.

47. This is not surprising.  The parties to the joint venture were said to be Cheong Shing and Mr Yu.  No evidence was led regarding Mr Yu’s personal wealth at that time except this : When, later on, Xian Minshen was pressing for the money, Mr Yu was apparently unable from his own resources to repay and had to borrow from a Mr Chow Chiu Hung.  The amount borrowed was $10 million.  The joint venture as pleaded by Mr Lo involved not only the purchase of KPI shares up to 50% of its issued capital, but a general offer thereafter for all the remaining shares.  It would seem remarkably generous on Mr Lo’s part if he was proposing in pursuance of the joint venture to finance from his own resources the entire expenditure of this undertaking, having as security from Mr Yu no more than the 22.8 million shares.

“Share Purchase”

48. Mr Vos QC puts forward, for the first time in this litigation, this argument : that the terms of the joint venture can be “severed”.  The receipt handed to Mr Yu on 24 July 1997 clearly states that the $38.76 million was for the purchase by Mr Yu of 22.8 million KPI shares (see para. 11 above); this was “the first step” of the joint venture; even though the rest of the terms of the joint venture were never proved, this, Mr Vos submits, was a free-standing sale of 22.8 million shares; Cheong Shing is prepared even now to transfer to Mr Yu the 22.8 million KPI shares he had purchased.  In the course of the hearing Mr Vos handed up (at the Court’s invitation) a form of the order he said  this Court should make.  His draft was to this effect : To allow the appeal, discharge Burrell J’s judgment for $28.26 million, “upon the appellant’s undertaking by their leading counsel to transfer within 14 days to Mr Yu or to his order 22.8 million shares in KPI Company Limited”, together with dividends and bonus shares distributed since 24 July 1997, and interest on such dividends at 1% above prime.

49. With respect to counsel, this is untenable.  As observed in the course of the hearing, the court does not bargain with parties.  Appeals are allowed or dismissed on the basis of the rights and liabilities established.  If the “undertaking” was one which the opposite party was prepared to accept, then the appeal could be stayed upon terms, to give effect to the parties’ bargain.  Otherwise the appeal goes on.  The draft order as proposed by Mr Vos simply exposes the fundamental flaw in his case.

50. The sale of 22.8 million KPI shares in July 1997 was not an outright sale.  The transaction was inextricably linked with the other terms of the so-called joint venture. On the defendants’ pleadings, the shares were not to be transferred to Mr Yu but held by Cheong Shing as security for his indebtedness incurred during the process of share purchase by Cheong Shing.

51. The receipt (see para.11 above) was no more than what it says : A receipt.  It was not a written contract for the sale of 22.8 million shares.  It evidenced one of the terms of a larger commercial transaction.  What, then, was that transaction?  The trial court, after 24 hearing days and entertaining the testimony of seven witnesses, was left in the dark.  The payment of $38.76 million on 24 July 1997 was made in the course of some commercial transaction which failed.  Neither party was able to give a good explanation why it was paid.

Restitution

52. The judge made his award of $28.26 million in the plaintiffs’ favour in terms of restitution, but it is clear from the rest of the judgment that, in truth, he was ordering the repayment of a loan.  The matter must now be looked at afresh.

53. The position as I see it is as follows :

(1)  The money was paid in pursuance of some commercial enterprise which was never proved.  Why it was never proved could be because the parties themselves, in the heady days of July 1997, were muddle-headed and had not agreed the precise terms of the enterprise, or because they were not prepared to reveal the whole truth; or because they were both muddle-headed and untruthful.  It matters not how this unusual result came about.

(2)  One thing is certain.  The $38.76 million was not intended as a gift.

(3)  The money was received by Mr Lo; the judge having found that Cheong Shing, a British Virgin Island Company with nominal capital, was his mere nominee.  To this extent, Mr Lo was enriched.

(4)  But Minshen Hong Kong is not out of pocket to the tune of $38.76 million.  Its claim has always been for $28.26 million, having received the two sums mentioned in para. 31 above.  Any claim on the basis of unjust enrichment must then be confined to the sum of $28.26 million, leaving it to the party who had partially relieved Mr Lo of his personal liability to seek repayment from him.

(5)  On the evidence, Xian Minshen has received full payment.  It is Minshen Hong Kong which is out of pocket.  Judgment should be given in favour of Minshen Hong Kong alone.

54. The plaintiffs’ statement of claim, in para. 3 of the prayer for relief, seeks “repayment of the sum of HK$28,260,000 as money had and received or otherwise by way of restitution”.  Neither Mr Tong SC nor Mr Vos QC has addressed us on this form of relief.  Mr Tong’s argument was that we should simply affirm the finding of the two courts below that the money was a loan, and para. 3 in his prayer for relief was very much his “fall-back” position.  Mr Vos, as mentioned earlier, submitted that we should allow the appeal and discharge the judge’s order for repayment upon the terms set out in para. 48 above.  Not having received submissions from counsel on restitution as a form of relief, I would simply say this : The term “money had and received” or “money had and received to the use of the plaintiff” expresses the old common law form of action; it is nowadays encompassed by the claim in restitution in common law : see observations to this effect by Lord Goff of Chieveley in Westdeutsche Bank v. Islington L.B.C. [1996] AC 669 at 683 B.

Mr Kong

55. The judge’s finding that Mr Lo and Mr Kong were “in it together” (para. 154 of his judgment) was on the basis of KY001 being documentary evidence of a loan, and Mr Kong (“Party B” in KY001) was acting in some representative capacity for Mr Lo.  For reasons set out earlier in this judgment those findings cannot stand.  Mr Kong’s role in the transaction was obscure.  There was no evidence that he had benefited in any way from the money paid.  Hence the judgment against him must be discharged.

56. Mr Chain, counsel for Mr Kong, submits that if this Court should conclude that the $38.76 million was not a loan, we should then give judgment on his counterclaim and order repayment of the two sums referred to in para. 31 above.  In his pleadings the $6.5 million was said to be a loan to Mr Yu made in early 1998, and the $4 million was said to be money extracted from him by duress in August 1998.  The judge had made no findings with regard to those two sums upon which this Court, in its appellate capacity, can act.  Whether Mr Kong has some claim by way of subrogation against Mr Lo in consequence of the judgment of this Court is not something which requires our consideration.

Interest

57. As to payment of interest on the $28.26 million, the difficulty here is to determine when the party unjustly enriched (Mr Lo) ought to have repaid the $28.26 million, having regard to the obscurity surrounding the transaction.  At some stage Mr Lo’s liability to repay became a debt in terms of s.48(1) of the High Court Ordinance, Cap. 4. The judge concluded that the $28.26 million should carry simple interest at 5% from the date of the writ.  Having regard to all the circumstances of this case, I would not be inclined to disturb the judge’s conclusion in this regard.

Costs

58. Each side to this litigation has put forward a case which has failed.  They led evidence over many days which was largely disbelieved by the trial judge.  Any award of costs in favour of such parties would seem wholly inappropriate.  I would discharge the orders for costs in the courts below, leaving all the parties to pay their own costs, including the costs incurred on appeal to this Court.

Conclusion

59. I would discharge the judgments in the courts below and order :

(1)  Judgment in favour of Minshen Hong Kong in the sum of HK$28.26 million, together with interest at 5% as from the date of the writ in HCA 2183/01, against Mr Lo and Cheong Shing.

(2)  Make an order nisi that there be no order as to costs.  Any party dissatisfied with this order should, within 14 days of the handing down of judgment, lodge in court and serve on the other side its written submissions; any reply thereto must be lodged and served within 14 days of the receipt of such written submissions.  If no written submissions are lodged within 14 days the order nisi becomes absolute.

Lord Scott of Foscote NPJ :

60. I agree with the judgment of Mr Justice Litton NPJ.

Mr Justice Bokhary PJ :

61. By the unanimous decision of the Court, the appeals are allowed so as to discharge the orders in the courts below and replace them with the orders set out in the concluding paragraph of Mr Justice Litton NPJ’s judgment.