CTRISKS RATING LTD v. CHAN PIK KWAN

HCA 1413/2015

[2022] HKCFI 1100

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1413 of 2015

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BETWEEN

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AND

HCA 3108/2016  

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3108 OF 2016

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BETWEEN

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(Heard Together)

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J U D G M E N T

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1.  This is my judgment. The background facts to this case are partly stated in a statement of Agreed Facts dated 23 August 2021, and I shall not repeat the details. I will refer to the parties and persons as “CTRR, CTRS, Michael, Neville, Anita, Fai, CIS, CMC or CMCC, Philippe and Sonia”. It should be clear who they are.

2.  It should also be clear, and had been clear all along, the reality of context in which the communications and emails and matters and alleged matters in this case took place. On the one hand, it is Michael, a quantitative finance professor, who founded CTRisks, comprising CTRR and CTRS. Neville is his brother, Anita and Fai, his former students.

3.  On the other hand, it is Philippe, a finance practitioner who had industry experience and recognition in ratings. Indeed, it was because of this that Michael brought him into CTRR as a co-owner. CIS and CMC are Philippe’s companies. At the material time, they had a low level of operations. Sonia was Philippe’s staff in CIS.

4.  All of CTRR, CIS, CMC, even CTRS, were small companies and small businesses. CTRR was a start-up in every sense of the word. At all material times, CTRR had at most eight personnel. Some, if not most, were part-timers.

5.  CTRR had very little revenue. In only one year did it exceed $200,000, but then $440,000 out of the $450,000 was from related parties, indeed, in effect, Michael and Philippe, essentially to boost its revenue.

6.  CIS had very little operations. It, for a time, shared an office with CTRR. By the times material to this case, it had closed down its office. What happened was straight forward. Michael invited, and Philippe agreed to become a co-owner and promoter of CTRR. They pooled some resources, including staff. Both wanted to keep their own more established businesses, which would be in CTRS and CIS and CMC. In short, it was cooperation between two individuals who had their respective small businesses but thought they could come together to use what they had to build something new.

7.  This kind of arrangement must happen every day of the year. In this reality, to think there were, or could be some Chinese walls, let alone real walls between Michael, his people and CTRS or between Philippe, his people, CIS and CMC, would be fiction and contrary to common sense. Equally, to think such small businesses would have perfectly respected the notion of separate legal personality, or followed strict corporate governance or have done their accounting and taxes by the book, would be fanciful.

8.  Bureaucrats might have pretended to believe such assurances of perfection, or not thought very hard about it in the course of ticking some boxes. Maybe they did not know all the facts. A senior finance professor and a seasoned finance professional who were engaging in business could not have been so naïve. I emphatically reject any self-serving claim to that effect. Indeed, as I will discuss, the contemporaneous documents clearly show that all the people involved knew full well the reality.

The Evidence

9.  CTRR’s three witnesses, Michael, Neville and Anita, all said, indeed it was clear, they had no personal knowledge of the wrong-doings which CTRR and, at least Michael and Neville, allege against Philippe and Sonia. They say they only know what the emails show. It is thus surprising that they filed a total of 15 witness statements and supplemental witness statements. Indeed, having read them closely, I find them quite unhelpful.

10.  On the defence side, as I will discuss, the true defence case turns out to be very simple. Much of the defence’s six witness statements and supplemental witness statements is also quite unnecessary. As for cross-examination, I detected nothing of huge significance, perhaps other than finally, a simple and straight forward way of putting the defence case, to which I will return later.

11.  The main antagonists, Michael and Philippe, struck me as able professional men, and very much gave evidence in that character. Both were careful, at time defensive, or even argumentative, and spoke more to fit the evidence to the words or spins they preferred rather than plainly and calling a spade a spade, but both also mindful of stopping short of lying or misleading the court.

12.  Given that CTRR bases its case on the contemporaneous documents, and in particular emails, given that neither side raises any issue of authenticity and given that, as I specifically asked and was told several times, in the 6-year course of these proceedings up to trial, CTRR has never, not even by letter, complained of incomplete or insufficient discovery, one can safely go about understanding what happened by reference to the documentary evidence.

13.  I have read the documents in trial bundle C, paying special attention to all those documents which counsel have drawn to my attention or referred to in cross-examination. I cannot recite all of them but will note some which will suffice to give a flavour of what was happening at the time.

14.  I begin with an email at bundle page 343 where, on 18 April 2011, Philippe gave his thoughts as to the cooperation between him and Michael going forward, and noted at bundle page 343:

“While a friendly (and flexible) arrangement between two small firms like CTR and CIS can take care of all kinds of situations.”

15.  Indeed, as common sense and the rest of the documents show, much was left to friendly and flexible arrangement and indeed, CTR and CIS can be said to be small firms.

16.  At page 1316 in an email on 9 June 2011, Michael noted that:

“Currently Philippe would like to use the CIS team one day per week for CIS work. This may last for 3 months tentatively. CIS does not serve any clients relating to our related targets. Pls advise some possible arrangement on book.”

And indeed, as one would expect, and the rest of the documents show, sharing of staff and allowing the CIS team, that is the people who used to work for CIS, to continue some sort of work of CIS, was very much on the minds of both sides. It was not only reasonable and realistic, and indeed one sees in the emails, not really a point of controversy.

17.  There may be talks of more work being needed, or more sharing being needed in the initial months, but again as common sense would say, any sort of transition cannot end abruptly and there are always things that dwindle for a time and one would, if one is being realistic, accept that follow up can crop up years later. It is, as always, a matter of degree.

18.  It is also noted in this email that CIS does not serve clients which CTRR would aim at, and while it may be said that they are somewhat in the same industry, as the documents show, neither side ever expected real or direct conflict. This email also records Michael asking Fai for advice on how the arrangement can be put on the books, reflecting a theme that one will also see in subsequent emails. And again, as is entirely natural and common-sensical for small businesses, a theme of needing to do things nimbly and realistically, even though regulatory, accounting or tax requirements require more clear-cut recording.

19.  On the next day, Fai wrote to Michael and Philippe, in bundle page 1315, and Fai wrote:

“Peter, Sonia and Patrick may continue to work on the CIS projects, as long as it is not put on record.”

Reflecting very much what I have already noted.

20.  Then at page 1321, on 13 June 2011, Fai wrote to Philippe about the application to the SFC and suggested to Philippe whether he could assist the application by resigning as a director from Philippe’s companies. Philippe then replied, on page 1319:

“Yes, I can resign from my directorship of the two Hong Kong companies (CMC and CIS).”

But importantly he noted:

“It is not very convenient to manage companies if I am not a Director, so if at all possible I would prefer to avoid such situation.”

This exchange very much reflects what is natural and common sensical for small businesses needing to comply or needing to satisfy regulators who prefer clear-cut, if unrealistic, assurances. Thus Philippe, in an unguarded moment, mentioned to Fai that yes, he can resign as director, it would not change the substance of what he would do for the companies, but the form might be inconvenient.

21.  Returning to the subject of staff helping with the original companies, at page 1388, in an email on 25 June 2011, Michael wrote:

“Currently Philippe and me agree to pay CTRRL if the members help CIS or CTRS. Philippe wishes to follow time sheet. I prefer to make it simple. One fifth of the employees’ time is for outside work.”

One might say at this time, Michael was being entirely realistic and reasonable. In small businesses, such as the ones we are looking at, the idea of timesheets might indeed be squeaky clean and always preferred if there were no costs or inefficiency involved. But in the reality of things, Michael was, at the time, making what may well be regarded as a more reasonable way forward, which is to estimate a lump sum figure.

22.  Then, on 7 July 2011 at page 1386, Michael wrote:

“Simpler solutions:

(a) No payment for 3 months at all. Simply assume that 10% to 20% of the workload of CTRRL staff are for external parties.

(b) Some simple formula for payment.

Do you think we can let Sonia and Anita to come up with some details? Then we both endorse it.”

The repeated presence of emails discussing this topic well reflects the reality, the needs and what would be reasonable ways to deal with it. I note also that nowhere is it suggested that there would be any sort of serious conflict or any controversy as to the principle that both sides’ establish businesses may need to recall some time or help from the staff that go to CTRR, the new business.

23.  At page 1385, an email on 8 July 2011, the discussion as to how outside work, meaning staff working for their original companies, may be dealt with, Philippe wrote:

“I am myself in awkward position because I have a conflict of interest with one foot on each side.”

I should note that the conflict of interest here refers to is how the parties in this context are negotiating a kind of transfer pricing between their respective businesses and their mutually owned businesses and is not a reference to conflict of interest between CIS/CMC and CTRR. Philippe wrote next:

“This is why I personally think that CIS and CTRR should just take a simple formula based on simple facts that are verifiable.”

And thereafter, he made some suggestions which he says to be “In practice, I would suggest.”

24.  In paragraph 2 thereunder, he note:

“After some time (could be any time, even right now), when both sides are comfortable with a fixed number of hours (meaning we just instruct them to work on that basis without actually counting the hours), we simply fix the number of hours at 20 % (one day per week) for each of them, and CIS will pay on that basis.”

It is worth noting that again, the discussion was contemplating a period where there might be more work, or that the amount of work might be uncertain. And then after some time, an arrangement can be put in place for the long term. To this, Michael replied on 13 July, “Dear Philippe, just follow your new formula.” Again, showing how reasonable Michael was at the time and how little controversy there were at the time.

25.  A few days later on 17 July 2011, I see in bundle page 1412, an email from Michael to Fai summarising the shareholders’ agreement between Philippe and Michael. Under (d) Michael wrote:

“The shareholder agreement does not cover Carbon Credit Rating, Project Finance Rating, Investor Risk Profiling and Product Risk Rating. The former two are owned by CIS and the latter two are owned by CTRS.”

This reflected what the parties always understood to be the businesses that will remain with Philippe and Michael as their more established businesses.

26.  Under (e) Michael wrote:

“According to the shareholders’ agreements, if new products are injected into CTRR from an external party (CIS or CTRS) CTRR will pay the party a royalty fee in addition to the 15 % overall royalty fee paid to CTRS.”

This reflects that both parties did contemplate that their respective more established businesses would continue, and indeed, may have dealings with the new business, CTRR.

27.  Under paragraph (g) Michael noted,

“Both Philippe and me will not have any salary for a period of 3 years”.

This of course, reflected the fact that CTRR was a start up and the founders, for as long as their contribution, their on-going contribution were roughly equal, they would recoup such contribution from their status as shareholders.

28.  Jumping to page 1951 of the bundle, on 18 February 2012, Michael wrote to Philippe:

“Dear Philippe,

Do you think whether CIS and CTRS can subscribe some CTRR ratings in 2012? CTRS may refund CIS the royalty fee it directly collects from CTRR. I guess CTRR ratings info would be helpful to the two firms.”

This reflects several things. First, Michael well understood that Philippe was, in whatever capacity or hats he preferred to put on himself, the real person behind CIS. Second, Michael was reaching out to his co-shareholder to suggest that they jointly support their new venture by both contributing to its revenue. Third, this was so much so that Michael, very reasonably, suggested that since CTRS, his company, would stand to receive a royalty fee from that jointly contributed revenue, he offered to refund to CIS.

29.  Philippe well understood Michael and replied:

“Dear Michael,

Of course, at one point, CIS would need to buy some ratings on CTRR, but this is too early.

The only thing I can think of, however, since CTRR needs some encouragement, is that CIS and CTRS can jointly buy a set of ratings from CTRR on some China names in the power sector in advance of what would most likely be needed.”

Michael further replied, even calculating that, to be completely fair, every dollar CIS contributes, CTRS would contribute $1.35295.

30.  Then Philippe replied, also on 19 February 2012:

“If what you are saying is that they also cannot be used as an ingredient to create another product … then the transactions you are contemplating are just a way to help out CTRR in a roundabout way, just to satisfy regulatory requirements.

I must stress very strongly that I personally shall never agree to allow CTRR to go into a transaction entered into just to satisfy regulatory requirements. I also wish to state that CIS will never agree to do a transaction of that nature.

CIS, however, could soon be in need of the type of ratings CTRR produces. As such, what CIS would be prepared to do would be to help CTRR by buying products from CTRR just now rather than at some point in the future…”

And then he went on to say that if CIS does that, then CTRS should also bear a similar risk.

31.  It is interesting that Philippe seems always mindful of leaving a document trail that protects, or that allows him to justify various regulatory, accounting or tax position he takes, even though he, in fact, well saw the reality of things, and that is, CIS had no need yet, but in order to help CTRR, they would come up with a way to justify what he calls, “Purchase now in advance of the future”.

32.  Jumping ahead to 2014. On 4 June 2014 at bundle page 2833, Philippe wrote to Michael in relation to the $90,000 that he had started to receive through CIS for an increased role in CTRR. Philippe wrote to Michael:

“Dear Michael,

The services rendered by CIS to CTRR reflect the difference in input between you and I as owners of CTRR.”

Pausing here, the reality was, of course, as Philippe noted here, that he was contributing to CTRR, but it is perhaps unremarkable to anyone with any commercial experience to see that a professional rendering his services would arrange for that to be paid to his company. Philippe went on in his email:

“It came to my attention that this might potentially be interpreted as being a remuneration. We know that this is not the case since nothing in my input and the way I produce it really assimilates me as an employee.”

At the end of that paragraph:

“My contribution is in fact, CIS’s contribution since I am distilling essentially through training and advice, CIS’s long-standing rating skills and practice.”

Towards the end of that email he said:

“We need to visit those matters again. Nothing urgent however, just to be on the safe side, I think that we should now discontinue the payments made to CIS.”

Again, an email that reflects what the parties were doing which is, to fit a reality into certain regulatory, accounting and tax positions. And Michael replied, or forwarded to Sonia, to say, “Please stop payment to CIS”.

33.  On page 2854 on 30 July in that year, 2014, Michael wrote to Philippe saying:

“Anita needs more power to support her work. [That is, CTRS needs more manpower.] Sonia team [that is the team in CIS] seems to have many idle resources. Therefore I facilitated their discussion to find out some possible cooperation. Anita will outsource data analysis work on financial markets to Sonia team.

You may see whether this is okay. I guess it helps CTRR to generate reasonable income to sustain its operation for several years.

All the regulation focus on rating committee. As long as it is sufficiently independent, it meets with the regulation.”

Several things to note. First of all is that neither side regarded sharing of resources to be controversial. Second, in Michael’s own words, Sonia and her team had many idle resources. It therefore could hardly be said that Sonia was buried in work and every minute she spent on something else would be to the detriment to CIS. That simply is not the fact as recorded here.

34.  The email also shows that again, respecting reality, the parties at all times wanted to find a way so that they would be in technical compliance with the regulation and hence the note that as long as the rating committee is independent, in Michael’s view, sharing would be okay. I should also note that counsel for the Plaintiff put to Philippe that this email shows there were no existing agreement for sharing, otherwise Michael would not have to ask about arrangement for CTRR to receive reasonable income from CTRS. But Philippe pointed out that this work, which was data analysis, would involve conflict of interest.

35.  It was not then discussed in detail or delved into why data analysis for CTRS would involve conflict of interest. One would have thought, in fact, a more common sensical and natural retort, calling a spade a spade, would simply be that the amount of work contemplated in this email was much larger than the kind of occasional follow up. That, I will return to later in my judgment.

36.  The next document I would mention is at page 3412. It is a written note signed by Michael, dated 24 August 2012, where Michael stated that the board decided Mr Philippe Delhaise be appointed as the compliance officer and chief operating officer, and that his service fee of $90,000 per month would be paid to Capital Information Services, ie, CIS. There is no dispute that this document was made to satisfy the auditors. I do not understand why parties become so sensitive to acknowledging the truth that documents, particularly in small businesses, are often generated when auditors require documentation and records.

37.  Again, as I have said time and time again, that is surely the reality of things. Perhaps it is professional men who are taught steep in perfect accounting and strict corporate governance, that is drilled into their heads, and that reality is somehow wrong or blameworthy. I would only add that when giving evidence, that really should not be the attitude.

38.  One sees at bundle page 3413 that Philippe, on 16 December 2014, placed on record to Sonia that the document I have just referred to at page 3412 is, in the words of Philippe, “only a Board of Directors’ decision, not a binding contract. I assume, however, that this was enough for the auditors’ purpose.” Again, showing that even Philippe understood and had no qualms about generating a document which he himself does not want to regard as valid, but had no qualms at producing it to the auditors.

39.  I am not saying that any of this was somehow illegal or contrary to rules. As I have said time and again, surely that is how small businesses operate. If small businesses were to operate under strict corporate governance and perfect accounting, how are they ever going to make a profit and grow? Surely, their strength lies in nimbleness and making decisions informally and somehow, one might even say, making it up as you go along as long as it does not hurt anyone. Surely business people are first guided by commercial ethics, rather than corporate governance or strict accounting.

40.  With all those things in mind, I turn to the claims in this case. As counsel agree at the end of evidence, there are essentially two claims; the misappropriation claim and the outside work claim. The misappropriation claim is by far the larger claim. I refer to bundle A2, page 25 where the loss and damage are pleaded. The misappropriation claim would, in that plaintiff’s table, amount to five and a half million, perhaps plus some investigation cost. Whereas the outside work claim in monetary amount was only half a million.

The Misappropriate Claim

41.  The misappropriation claim is pleaded centrally at paragraph 24 at bundle A2, page 14. In or around the end of 2013, or the beginning of 2014, the Plaintiff developed rating methodologies for high yield bond funds with code numbers HK-HYBF-1ND-V1 Part 1 and HK-HYBF-1ND-V1 Part 2.

42.  As I have observed and pointed out to counsel, the Plaintiff did not develop rating methodologies with those code numbers, and this was known early on in the proceedings. Thus the subject matter of the misappropriation is wrongly identified. For that reason alone, and but for the very fair position of the defence that they did understand what the Plaintiff was referring to, but for that reason I would have dismissed the misappropriation claim simply on this basis.

43.  Ms Seto, in her written submissions, pointed out that in the Plaintiff’s case, those code numbers nonetheless refer to files that contained intellectual property within the methodologies, and therefore, was a sufficient way of identifying the methodology. An ingenious argument that it is, it does not actually address the problem which is: it is pleaded that the Plaintiff developed the methodologies with such code numbers. It does not say, “The Plaintiff developed methodologies which can be identified by such code numbers”.

44.  In any event, I do not find there to be misappropriation. I do not find Philippe to have transmitted the HYBFRM or confidential information about the HYBFRM or to share such information with CIS or CMCC (except in the sense that his mind, his personal mind, is simultaneously holding information for multiple entities).

45.  I deal with the point which Ms Seto say support an inference of misappropriation. First, two emails which, in fact, when discovered, was the genesis of the Plaintiff making the misappropriation allegation. The two emails are at bundle page 3350 dated 27 December 2013 and at 3354 dated 20 January 2014. The emails by themselves and reading only the contents within the four corners of the emails, suggest CMC somehow had gotten or produced a report in two parts that related to the high yield bond fund rating methodology and was invoicing CIS for transmitting that report in two parts to CIS.

46.  I agree with Ms Seto that the emails, read without context, without explanation from the other side, reasonably prompted the Plaintiff to suspect there might have been misappropriation, or else why would CMC have report about the HYBFRM to send to, and invoice, CIS for? However, one would have thought, on that suspicion, the most natural thing to do was to confront Philippe, whether within the Civil Procedural Rules or by correspondence or by discussion, confronting Philippe as to what that report was and to demand a copy of the report and the invoices. Entirely surprisingly, that was not done.

47.  It is, of course, also natural, would have been natural, for the defence to explain these two emails clearly and straight forwardly. Again, entirely surprisingly, that was not done. I will return to this topic later. For now, suffice to note that although the defence may say the claims were not perfectly clear, they cannot really complain that they did not know it was these two emails which prompted the suspicion and allegation because the defence, of course, immediately identified that the two quoted code names related to these two emails and the two invoices.

48.  The simplest of explanations might, in fact, had been anticipated if one bears in mind the reality that Philippe wholly owned CMC and CIS, and this invoicing was internal transfer pricing/transfer of funds. That the request for a confirmation reflect a need for internal documentation for a position to be taken and that the monetary sums stated here bear no resemblance to the value thought to be attributable to the methodology. I am referring to the sum of US$3,000 in the first invoice and the sum of US$9,000 for the second invoice.

49.  The defence did give discovery of a stand-alone document without context or explanation, I am referring to a French email, an email in the French language at page 2564 which, when translated, I can see it is Philippe telling Sebastian of CMC in terms as follows:

“You can invoice CIS for US$12,000 for ‘Research and preparation of a rating methodology for High Yield Bond Funds’. I was the one who did this work and the documents sold to CIS is called, ‘HK-HYBF-1ND-V1’.”

50.  Philippe then went on to say:

“Is it necessary that you have the document before invoicing?”

This email well shows it was Philippe telling Sebastian how to generate an invoice or invoices, what to say the invoice was for down to the point of giving it the code, “HK-HYBF-1ND-V1”, and recording that he was the one to have done this work and that, in fact, no document was being transmitted to CIS by CMC, nor indeed as one would have guessed, ever existed since if one were to take so much care about documentation and such a document actually existed, it would have been easy for Sebastian to attach the document or to have received the document probably from Philippe, and then to have attached it an email to Sonia and then for Sonia to return the confirmation, thus completing the documentation exercise for whatever position they were to take, vis-à-vis whatever authorities that they want to take about the transfer pricing or transfer of funds.

51.  As it turned out, in cross-examination Philippe finally explained in the simplest of terms, which is simply that in the course of his working on the methodology for CTRR, he recalled that he had encountered a similar issue and had devised a solution and he was going to share that solution he had earlier devised for work done in the context of CMC. He was going to share or reapply that solution for CTRR as between him and CTRR.

52.  That would, of course, have been covered by the contribution he had agreed to make, whether as a co-owner or as part of the $90,000 that he would receive through CIS. And as Philippe finally explained under cross-examination, there was simultaneously, at around the same time, a need on the part of CMC to be funded $12,000, and so he thought it justifiable, and indeed it may well be, that he thought justifiable for him to then use that as a reason for CMC to receive $12,000 from CIS. That really is a matter of Chilean exchange control, corporate law and/or accounting or other regulatory matters.

53.  I would note that even under cross-examination, Philippe at first tried to portray a picture of everything being squeaky clean and books being kept somehow perfectly by saying that there was a list of outstanding invoices or outstanding items from which these two invoices would have been derived. But when pointed out that this was, in fact, inconsistent with another matter which I will turn to shortly, he had to acknowledge that these two invoices were not from such a list of outstanding invoices or outstanding items. They were, as in fact shown in this email at page 2564, specifically generated to justify the sum of $12,000.

54.  And the matter that I said I would turn to can be seen in bundle pages 2358 and 2359 where exchanges between Philippe, the Chilean staff of CMCC and Sonia, well document that invoices from CMCC to CIS was to fund CMCC and that the amount sent to CMCC should follow CMCC’s needs at the time rather than whatever work may be said to have been done by CMCC for CIS. It was all driven by the reality of needs, the documentation followed that, rather than following the work done. As I said, I do not know whether this is legal or proper under Chilean law or regulation or even under Hong Kong tax and regulation or any kind of accounting. All the more reason why parties should not pretend reality to follow the paper, but should again, as I said earlier, call a spade a spade and explain the truth in plain terms.

55.  For completeness, I note that on page 2360, Philippe wrote and specifically instructed:

“Normally you should select among those tasks the one with a total approximately equal to your financial need (as per the cash flow).”

This reflected what I have said so far and, in fact, is consistent with why the two invoices had to be specifically generated to get to an amount of $12,000 which was what CMCC needed at the time. This simple defence is further supported by the documents in item 519 of the bundle, beginning at page 3337 and some of the documents at item 527 of the bundle, in particular other invoices that I can see in those two items. While I will have a lot to say about the cost consequences, I accept the defence case and evidence finally given.

56.  Ms Seto’s second point about the emails is timing, and she said that the two emails coincided with when the methodology was already quite advanced. A logically valid point that it is, it does not really assist in drawing of inference because even in earlier days the main ideas and tenants within the methodology were already devised, and equally it can be said that even in later days, the methodology was still subject to refinement and additional work. It is thus not possible to draw an inference from the timing. Certainly not such an inference in the context of the documentary evidence that I have referred to and which makes, as I have said time and again, natural and common sense.

57.  Ms Seto’s third point about the emails is context, and I refer to paragraph 54 of her written closing where, among similar points, she pointed out that CMC had no reason to be in any way involved in the methodology and had no reason to provide a report to CIS. One must commend Ms Seto for the attention to details. Indeed, these are logically, makeable points. However, applying common sense, those points rather more supported the defence case that the report does not actually exist and that CMC was not actually involved in the methodology and all this was just a way to justify the internal transfer of funds.

58.  Ms Seto’s second main point to support the misappropriation claim is that the Defendant’s pleaded defences put forward a different positive case such that, compared with the current version of defence case, there are inconsistencies. And in any event, at the very least, it may be said that if the defence were so simple, why the elaborate and convoluted, if also possibly, at times in some respects, possibly inconsistent defence pleadings were made. I have a lot of sympathy for this point.

59.  As I have indicated to the parties several times in these proceedings during trial, I have read the defence cases carefully including bundle A1, pages 25 to 26, paragraph 15 and bundle A2, page 84(3), page 87(5) and (6) and the replaced defence at page 107, paragraph 24 and page 109, paragraph 27. I must confess it also took me some mental gymnastics to come to the conclusion that the defence pleas or previous defence pleas are, strictly speaking, with perhaps one exception, strictly speaking not inconsistent. But they are far from the simple, straight forward way that was eventually put. But for the undisputed documentary evidence which support the eventual defence story I would have fretted a lot more over the poor pleadings and may or may not have drawn the inference which Ms Seto urged on that basis.

60.  The one exception which I think may be said to be an inconsistency is at bundle A1, page 25, paragraph 15 where Sonia, in her defence said, in respect of subparagraph 13(h) of the re-amended Statement of Claim:

“It is specifically denied that the said report was or is part of the Final HYBF Rating Methodology: and it is averred in any event that the said report was at most research and preparation of the final HYBF Rating Methodology and does not represent the Methodology itself.”

This gives the impression, if not also tacitly affirmed that a report, in fact, existed which we now know is not the case. I even went further with Ms Seto’s submission and noted that this plea was added to Sonia’s defence after commencement of another action against Philippe, and that by then, the two had common representation. As I pointed out to Ms Seto, that would have allowed her a submission that even though Sonia has always said she had never seen the report, her job in response to the emails were simply to reply to confirm, it would have allowed Ms Seto a submission that surely her lawyers would not have allowed her a misleading plea, having known from her co-defendant that such a document did not, in fact, exist.

61.  I note, however, that a few lines down on the same page, page 26 at paragraph 16(b), it is said that:

“It is averred that the Invoices issued to CIS in CMC (Chile)’s name, are the Invoices for the services rendered in divulging of its intellectual property by CMC (Chile) in assisting CIS to develop the Final HYBF Rating Methodology.”

Even in an earlier form, it would have said, “In assisting by way of research and preparatory work”. Thus it was just a few lines down said that the invoices were for services and divulging of intellectual property and not suggesting in that place, paragraph 16, that the report existed.

62.  Reading the pleas together, I have concluded that it was just bad pleading, I do not know whether fault will lie with those giving instructions, those taking instructions or those holding the pen and, respecting legal professional’s privilege, I may never know. But this is a matter for costs. Considering all the evidence, I think it far from enough for this bad pleading and other poor pleadings, to support an inference against the evidence that there was misappropriation.

63.  The third point in support of the misappropriation claim, or allegation, is that not only are the pleadings, the pleaded defences to be faulted, the witness statements and supplemental statements can also be faulted in similar ways. I have some sympathy for this argument too, and just like the pleadings I also read the witness statements and supplemental witness statements carefully. As I have noted earlier, I find them to be quite unhelpful. But even less than the problems with the pleadings, I do not think the words, whether chosen by the parties themselves or by their lawyers, the words in the witness statements and supplemental statements, justified an inference against the documentary evidence that there was misappropriation.

64.  I also note that in Philippe’s witness statement in bundle B3, page 215, at paragraphs 73 and 74, he said:

“73. The reason these Invoices exist is because, during the development of the HYBFRM, I required the use of intellectual properties associated with work on concentration and diversification previously performed by CMCC. As I was aware of the separate legal entities between CIS and CMCC, I regarded it fair for CMCC to charge CIS for such use. This had long been the modus operandi between CIS/CMC and their overseas subsidiaries and it was in fact well-known by Neville to whom I once explained it. Had he queried me about the CMCC invoices of December 2013 instead of launching frivolous proceedings, we would not be here.

74. I can confirm that the HYBFRM, or its work in progress, was never transacted. Nor were such works sent to CMCC. Rather it boils down to a one-way charge by CMCC for the use by CIS of intellectual properties such as country and sector analysis.”

These two paragraphs appeared to be the closest the defence had come to telling their story simply and straight forwardly until trial, and even then, one is left wondering what these two paragraphs really mean. Again, as I said, these are matters for costs to which I will later deal with.

65.  The fourth point in support of the misappropriation claim is the lack of discovery, but equally, it must be borne in mind, as I have noted earlier and as I asked several times and was told several times, the Plaintiff never made, not even by letter, complaints about inadequate or incomplete discovery. In the circumstances, the discovery point really cannot get Ms Seto home.

66.  In any event, I note that since the reports do not exist, there will be no discovery to give. However, that also is a point that will not go very far for Mr Yu to justify his side’s conduct in these proceedings. Since given that the true defence, as I have explained earlier, there would surely be other discovery to be considered, and indeed perhaps pursued, by the Plaintiff.

67.  The fifth point in support of the misappropriation claim is general credibility of the defence witnesses. Perhaps counsel can never resist the temptation or the practice to speak of witness credibility, but as counsel would also know, the rule of weighing evidence puts demeanour and general points that can be made about witness oral evidence rather at the back of the scale. And in any event, as I have said at the beginning part of my judgment, I do not detect any material lying or misleading by any of the witnesses.

68.  I therefore dismiss the misappropriation claim.

Noting Another Email

69.  I will make an addition to the part of my judgment earlier where I recited various emails which I note from the documentary evidence. And I will add that on page 1610 of the bundle, on 9 November 2012, Philippe wrote to Michael where, among other things, he said to Michael:

“Similarly, CTRR owes some little money to CIS for fixed assets (in fact CTRS might also have some claims of that nature). As for time spent by CTRR (ex-CIS) staff, for the benefit of CIS after 1 June 2011, and for time spent by CIS staff for the benefit of CTRS in the year or two prior to 1 June 2011, they are, according to my estimates, approximately equivalent and should not be subject to accrual for the benefit of either side. Naturally, if you have a different opinion, let me know.”

It is common ground that no objection was taken to this, although it may also be said that there was no written agreement or document recording written consensus.

70.  However, the point to draw is that again, it was always known to everyone involved the reality: what was natural and common sense, which was that the staff, having moved to the new business, would nonetheless do some work for the old business from time-to-time, and when the parties behave reasonably, they would not make a big deal of it, would make some rough estimate and either set off or pay some lump sum or find some ways, using the words in the very first email that I noted, of dealing with the situation on friendly and flexible ways.

The Outside Work Claim

71.  Now turning to the second claim, that is the outside work claim, I will first deal with the claim of Sonia’s outside work. Ms Seto has helpfully set out all the emails which CTRR says shows Sonia’s outside work. I have read and reread those emails. In a minute, I will turn to my estimate of what amount of time could be assessed to conceivably have been done during office hours of the Plaintiff.

72.  But even taking Ms Seto’s table and figures to the highest, as Ms Seto noted in paragraph 39 of her closing submissions, the Plaintiff’s estimate is Sonia spent 20.5 hours of her office time. That is 20.4 hours in the course of 3 years and 3 months. By my estimate, that is 0.3 per cent of her working time, not including overtime etc. Even if it were 10 times that at 3 per cent, considering modern office culture, especially in the financial industry, even if it were 10 times that at 3 per cent, I, and I think any reasonable business person would regard it to be de minimis.

73.  Turning to the table. Following Ms Seto’s number, and having read the emails cited by Ms Seto, I would regard item 1 to be 10 minutes, rather than 1 hour, because obviously much of the work would have been done over lunch hour. Item 2, I would have regarded as taking 15 minutes max. Item 3, 30 minutes. Item 5, I would have attributed zero time to it, since the email itself was on a Sunday, and it does not, in any way suggest that work must be done during office hours.

74.  Item 7, I would have attached zero minute to it, since the three emails are all after office hours. In particular, Sonia’s reply was at 6.03 pm. Item 8, zero minute, as likely done during lunchtime. Item 9, I would accept 10 minutes. Item 10, I would accept 30. Item 11, I would accept 30 minutes. Item 12, I would accept 10 minutes. Item 14, I would accept 15. Item 15, I would estimate 5 minutes maximum. Item 17, I would accept 5 minutes. Item 18, I would accept 5 minutes. Item 19, I would accept 15 minutes.

75.  Item 20, which was an email at 11 pm, I would have estimated zero minute during office hours, for similar reasons as I have noted earlier. Item 21, I would have estimated 15 minutes for, as Ms Seto herself noted, this was a round trip from Tsim Sha Tsui to General Post Office and I believe it likely to have happened during lunch. Item 22, 5 minutes. Item 23, 10 minutes. Item 24, 10 minutes. Item 25, I would have estimated 10 minutes for a call to ICBC. Item 26, I would have given zero minute, as after or close to after office hours.

76.  Item 27, 15 minutes, since banking of a cheque is exactly the kind of thing that administrative tasks are often performed over lunchtime. Item 28, zero minute. Item 29, 15 minutes max. Item 30, for argument I would accept 45 minutes. And item 31, for argument I would accept 30 minutes.

77.  By my calculation, that adds up to 335 minutes, which would be 0.09 per cent of Sonia’s working time over the course of 3 years and 3 months.

78.  One must also consider the unchallenged evidence that Sonia, from time-to-time, worked overtime, which of course is entirely natural in the financial services industry in a start up and in helping with devising and finalising a model. One notes also that the Plaintiff’s own evidence is that Fai and Neville sometimes, if not often, worked from home.

79.  One then further takes into account, as I have noted earlier in the judgment, that CTRR was not busy, at least not busy throughout the 3 years and 3 months. And finally, surely anyone who wants to make a name in finance would not deny the culture in this line of business, that it is results that matter and staff are not generally held to a timesheet. As I have said time and again during the trial, I am tempted to query how respected lawyers would formulate an outside work claim on the basis of such figures.

80.  Perhaps it was a blind eye to the context, perhaps it was client’s instructions, perhaps it was over-eagerness. Again, as I have noted earlier, respecting legal professional privilege, I may never know, but we will have to deal with this in costs.

81.  I note further that, as Ms Seto fairly acknowledged, the Plaintiff’s case is that there may be a conflict between CIS and CTRR. In the absence of the Plaintiff establishing conflict, I am entirely at a loss as to how reasonable persons could suggest Sonia working just a little bit of time for CIS, in any way realistically, harm CTRR, or is anything but humanly natural and well-accepted by the parties from day one. I refer back to the various emails that I have noted earlier in the judgment.

82.  For completeness, I find that there was an understanding among all that staff could work on matters for their previous business and that it would only be if it impinges upon the ability of the staff to discharge his or her work to CTRR that it would become anything of an issue.

83.  I have no hesitation in dismissing the outside work claim against Sonia.

84.  I turn to Philippe’s alleged outside work. First, I note, and as Ms Seto very fairly has to accept, no loss is averred. I refer again to bundle A2, page 25, where the five amounts pleaded there, none is said to be loss suffered because of Philippe’s outside work.

85.  I have not lost sight of paragraph 38 of the alternative plea, but (1) it is alternative; (2) the first item which does refer to Philippe as 1st Defendant, is for human resources costs for development of the HYBFRM. I do not read this as referring to loss as a consequence of Philippe’s outside work.

86.  Without getting into the niceties of whether one can run a cause of action without pleading loss and damage suffered, common sense surely should have prevailed, and if no loss can be said to have suffered, even if technically one can mount an action, one should think long and hard and before one makes an argument, one should think equally long and hard.

87.  In any event, the legal basis on which it is said Philippe should not engage in outside work is that he had a fiduciary duty and/or fiduciary obligation. But such a duty and obligation is simply not engaged if the work he did, did not, in fact, conflict or disadvantage CTRR. The only conflict which Ms Seto referred to, when I asked in oral closing, was that Philippe had assured the SFC, indirectly through CTRR, that he would not be involved in the daily management and operations of CIS or CMC.

88.  As I pointed out to Ms Seto, that was not pleaded as a breach of fiduciary duty. That is, it is not pleaded that failure to fulfil an assurance to the SFC was a breach. In fact, as we know, as the evidence is both sides say they have complained to the SFC and both sides say the SFC have informed them they will not be taking further action.

89.  Further, as I noted at the outset of my judgment, the fact that someone might prefer an unrealistic assurance does not mean a finance professor and a finance professional, who live in reality, would think that. In any event, it is quite equivocal that what Philippe did might, or might not, amount to being involved in daily management or operations.

90.  I have in mind the case law that speak to whether someone can be involved in management of a company, and I have no doubt that counsel on both sides know, it can become a thorny issue, especially when it is a holding company where decision-making are by their nature, not something that requires daily attention, and also, in the context of personally wholly-owned companies where the owner can appoint others as directors. But given the ownership and the scale of operation and the kind of people appointed to be directors, I cannot imagine either Michael or Philippe labouring under any belief that the other were not the true decision-maker. And in fact, as I have noted in some of the emails that I have canvassed, it was obvious that the two of them regarded each other as the ultimate decision-makers.

91.  I therefore also reject the outside work claim as to Philippe.

(Discussion re costs)

92.  Here is my decision on costs. Sonia to have her costs on an indemnity basis and that would include 50 per cent of the costs of the trial on the basis of counsel Mr Yu’s statement, on instructions from those instructing him, that the trial costs as between lawyers and client, were agreed to be and will be borne 50/50 between Sonia and Philippe.

93.  I award indemnity costs for all the reasons I have already noted in my substantive judgment, in particular the de minimis nature of the claim for her outside work and that, although allegations are made against her to have participated in the alleged misappropriation on the documentary evidence and in the context that it is never said she had a commercial interest in CIS and CMC or in the alleged misappropriation, the allegation that she was somehow involved was even more fanciful than the substantive claims.

94.  Philippe, to have 30 per cent of his costs at the normal scale. I deny 70 per cent of his costs for all the reasons I have noted in my substantive judgment. Chiefly that the defence case against the misappropriation allegation did not come out clearly until the trial. I have considered the possibility that it was mere bad drafting.

95.  First, even if so, the party would still have to bear the consequences. Second, Philippe is someone well-experienced in finance and the evidence shows that he is a person careful with documentation. And so, even if it were bad drafting by his lawyers, he surely would have reviewed it. Three, the evidence and how the cases unfold rather suggests a possibility that Philippe chose to put his case, or he chose to explain to the lawyers his case, or his lawyers chose to advise him to put his case in legalistic technical and often vague terms because it was felt that he had to defend, or not attract attention to potential accounting, tax or corporate law issues. If so, then it is more than bad drafting, but a deliberate, if ill-informed choice.