KWOK HIU KWAN v. JOHNNY CHEN AND OTHERS

HCMP 41/2018

[2020] HKCFI 324

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 41 OF 2018

________________

________________

________________

________________________________

REASONS FOR DECISION

________________________________

Introduction

1.  On 11 January 2018 Mr Kwok Hiu Kwan (“Mr Kwok”) issued an originating summons seeking declarations:

(1)     that a decision made by Johnny Chen, the 1^st Defendant     (“Mr Chen”), in his capacity as Chairman of an extraordinary general meeting held on 29 December 2017 (“EGM”) that 4,468,182,000 (“Shares”) representing 29.1% of the ordinary shares of the 5^th Defendant, Convoy Global Holdings Limited (“Company”) would not be counted (“Decision”) and was unlawful, void and of no legal effect;

(2)     that the Shares should be counted for the purposes of     six ordinary resolutions requisitioned by Mr Kwok put to the meeting for the reconstitution of the board of directors and that the resolutions were passed; and

(3)     that the Shares should be counted for the purposes of two ordinary resolutions appointing two non-executive directors and that the resolutions were not passed.

2.  The matter first came on for trial on 27 August 2018. In August 2018 the issue I was asked to determine concerned whether or not the Chairman’s decision to reject Mr Kwok’s Shares for voting purposes was final and conclusive.  I determined that issue and associated issues against Mr Kwok.  My reasons were delivered on 13 September 2018.  The reasons set out the background to the proceedings.  I ordered that the proceedings continue as begun by writ and that the second part of the trial should take place commencing on 19 March 2019 at which the remaining questions, namely, whether Mr Chen’s decision was made in bad faith, it being common ground that the decision could be set aside if it had been made in bad faith, or if there was some other qualification to the Chairman’s decision being, as I had found, final and conclusive: see [50] of my reasons.

3.  On 7 March 2019 I heard a preliminary application by the Company to strike out certain paragraphs of the witness statements and affirmations of Mr Kwok, Xu Hao and Tam Lai Ling, certain paragraphs of the Amended Statement of Claim and documents that had been disclosed by Mr Kwok.  On 11 March 2019 I made an order in the terms of the summons save that I did not make an order to strike out [50(1)] or [66(1)] of the Amended Statement of Claim.  In the case of [66(1)] I invited Mr Kwok’s legal team to consider whether in the light of my decision the averment remained viable.  I reserved my reasons, which I told the Parties would be included in the judgment after trial.  Before giving my reasons for my decision in March I will describe in detail the dispute that has led to this litigation.

Background

4.  The Company is listed on the Main Board of the Stock Exchange of Hong Kong.  It carries on business in the financial services sector including financial advice and planning, insurance,     asset management, managing providence funds and money lending in Hong Kong, Macau and the Mainland.  None of the parties have provided evidence about the activities of the Company or the circumstances leading up to controversy, which has given rise to this litigation.  It was perhaps assumed that as I am dealing with other litigation concerning the Company that I am familiar with the controversies concerning its ownership and its role in alleged attempts by Dr Roy Cho (“Roy Cho”) to acquire improperly stakes in other Hong Kong companies.  The principal other litigation is HCA 2922/2017, which was commenced on 18 December 2017, in which the Company is the 1^st Plaintiff and to          which there are at the time of the application 39 Defendants (“Principal Action”). Mr Kwok is the 27^th Defendant.

5.  The Company’s case in the Principal Action is summarised in [2] of the lengthy Amended Statement of Claim:

“2. It is the Plaintiffs’ case that:

(1) The 1^st Defendant, Cho Kwai Chee, Roy (‘Roy Cho’) gradually acquired ownership and control over Convoy since 2013 by appointing his associates, nominees and/or agents to occupy various key positions in Convoy. Despite having no formal role in Convoy during a substantial part of the material time, Roy Cho was able to negotiate on behalf of and make managerial and/or executive decisions for the Convoy Group, in particular Convoy, CCL and/or CSL. Roy Cho was able to be contacted and consulted through, amongst others, a secret email address financial9101@gmail.com (which, read backwards, would consist of the stock code of Convoy i.e. ‘1019’) as well as a Convoy email address roy.cho@convoy.com.hk (See Section C of this Amended Statement of Claim);

(2) In or around 2014, Roy Cho and/or Roy Cho’s Associates (as defined below) induced potential investors to invest in the Town Health Group (as defined below) and/or Convoy, including in particular as a major investor the family of Tsai Ming Hsing (‘Tsai Family’) of Fubon Financial Holdings Limited (‘Fubon’) through their corporate vehicles. Following a series of negotiations between Roy Cho and Roy Cho’s Associates and the Tsai Family, a capital-raising exercise for Convoy took place in around October 2015 in which, inter alia, the alleged independent placees (as particularised in the table at paragraph 42 below) (‘Alleged Independent Placees’) would participate (the ‘29 October 2015 Placing’);

(3) The Alleged Independent Placees are each (i) persons or companies held by, associated with, and/or connected to listed companies in the Enigma Network, a network of 50 listed companies with overlapping ownership as exposed by the renowned stock market activist David Webb in his report ‘The Enigma Network — 50 Stocks Not to Own’ dated 15 May 2017 (as set out in Appendix A) (‘Enigma Network’) which were subject to the control, influence and/or interest of Roy Cho; and/or (ii) persons or companies closely associated with Roy Cho, subject to the control, influence and/or interest of Roy Cho personally;

(4) Unbeknownst to all public investors at the time, this 29 October 2015 Placing would prove to be the key step of a sophisticated scheme devised by Roy Cho and implemented by Roy Cho and/or Roy Cho’s Associates, whereby:

(a) The Tsai Family was induced to pay proper consideration to invest in Convoy and acquire the single largest shareholding in Convoy on paper.

(b) Meanwhile, Roy Cho would secretly retain full control over Convoy, through a hidden controlling shareholding in Convoy nominally held by a network of Alleged Independent Placees, evading all shareholder and regulatory supervision and oversight and in blatant contravention of inter alia the Securities and Futures Ordinance (Cap 571) (‘SFO’). The Codes on Takeovers and Mergers and Share Repurchases (‘Takeovers Code’) of the Securities and Futures Commission (‘SFC’), and the Main Board Listing Rules of the Hong Kong Stock Exchange (the ‘Listing Rules’).

(c) Roy Cho’s continued hidden controlling shareholding in Convoy, concealed from regulatory and shareholder oversight, allowed him to (i) continue to secretly use and abuse the Convoy Group and its resources for any nefarious purposes he wished, whether by itself or in coordination with other Enigma Network entities; and (ii) continue to secretly retain for his own benefit the value of having control over a listed company (the listed status in itself being of substantial value) despite the Tsai Family’s investment.

(d) A particular illustration of Roy Cho’s abuse of his control over the Convoy Group is the ‘Circular Financing Arrangement’, whereby the acquisition of Convoy shares by a significant portion of the Alleged Independent Placees was enabled and/or assisted by substantial, unsecured, and uncommercial loans improperly made by CCL and CSL, arranged by Roy Cho and/or Roy Cho’s Associates – in other words, Roy Cho arranged for the improper release of Convoy monies to provide liquidity which enabled and/or assisted many of the Alleged Independent Placees to purchase Convoy shares.

(e) Pursuant to the Circular Financing Arrangement, a significant portion of the proceeds raised by Convoy in said capital-raising exercise was immediately channeled back to some of these same Alleged Independent Placees that subscribed for the shares of Convoy within a short period of time as loans and margin loans. Enabled and/or assisted by the liquidity provided by these loans and margin loans, the Alleged Independent Placees agreed to act in accordance with the direction of Roy Cho in respect of all matters relating to their shareholding acquired in Convoy. This was recently unearthed in around July 2017.

(f) In short, under the guise of raising capital for Convoy, Roy Cho and/or Roy Cho’s Associates on the board of Convoy, CCL and/or CSL had improperly used their power to allot shares, and to grant loans on a non-commercial or commercially irrational basis to the detriment of the Convoy Group in order to entrench and conceal the secret control of Roy Cho over Convoy through the network of Alleged Independent Placees, whilst inducing substantial investment by the Tsai Family in Convoy.

(See Sections D and E of this Amended Statement of Claim)

(5) The network of Alleged Independent Placees consists entirely of members of the Enigma Network or persons/entities associated with the Enigma Network, subject to the control, influence, and/or interest of Roy Cho:

(a) As noted by David Webb, there is an ‘extraordinary coincidence’ of deep overlapping ownership within the Enigma Network. In some cases, there is ‘remarkable’ persistency of cross-ownership of shares, despite concentration warnings being issued by the SFC. In other cases, ‘there are multiple holdings below the normal 5% disclosure threshold which when aggregated, provide significant voting power when the companies seek approval from “independent” shareholders to do something that might not make sense to others’.

(b) These characteristics of the Enigma Network reflect that the members of the Enigma Network and their associated parties act in concert and in collusion, improperly manipulating and engineering Enigma Network companies and/or Enigma Network stocks for their own plans and own benefit, to the detriment of other shareholders and the investing public. The present case is a prime example of Enigma Network machinations.

(c) As an example of ‘extraordinary coincidence’, multiple Enigma Network companies connected with and/or associated with the Alleged Independent Placees happened to conduct mass fund raising exercises through open offers, rights issues, and share placements from February to August 2015. In fact, they were acting en masse under the directions and/or control of Roy Cho, in order to raise funds for the Alleged Independent Placees (further enabled and/or assisted by the liquidity from Convoy funds through the Circular Financing Arrangement) to participate in the 29 October 2015 Placing.

(d) Within about 6 months of the release of David Webb’s Enigma Network report, the SFC has already suspended trading on 5 Enigma Network companies (stock codes: 1225, 6108, 8215, 3886, 0648).

(5a) As a preparatory step leading up to the 29 October 2015 Placing and exploiting the last window in time before the Tsai Family’s investment in Convoy, in February 2015 Roy Cho and Roy Cho’s Associates on the Convoy Board caused Convoy to carry out an open offer of its own that was blatantly not in Convoy’s best interests, allowing them to achieve their purposes of benefitting themselves financially, whilst distancing Roy Cho from Convoy as a matter of paper records and raising funds for the Town Health Group to participate in the 29 October 2015 Placing as an Alleged Independent Placee (through the Town Health Group profitably disposing of its then interest in Convoy).

(6) Such actions by Roy Cho and Roy Cho’s Associates constitute serious breaches of fiduciary duties or other director’s duties, dishonest assistance, unlawful means conspiracy and/or lawful means conspiracy (See Sections G to J of this Amended Statement of Claim). Amidst still opening investigations by the SFC and the Independent Commission Against Corruption (‘ICAC’), in early December 2017, Quincy Wong (D2), Mark Mak (D3), Rosetta Fong (D5), Christie Chan (D11) were all arrested by the ICAC;

(7) In order to mask and white-wash the wrongful nature of the initial allotment and subscription, a large part of the shares allotted to the Alleged Independent Placees (‘Wrongfully Allotted Shares’) were subsequently transferred by the Alleged Independent Placees directly, or indirectly through Enigma Network intermediaries to Kwok Hiu Kwan (‘Kwok (D27)’) and Chen Pei Xiong (‘Chen (D28)’) from July to October 2017 under suspicious circumstances (respectively, ‘Kwok (D27)’s Acquisition’ and ‘Chen (D28)’s Acquisition’).

(8) Francis Choi Chee Ming (‘Francis Choi’) was in fact the true facilitator and beneficiary of Kwok (D27)’s Acquisition and Chen (D28)’s Acquisition:

(a) Francis Choi is the longtime business partner and funder of Roy Cho, Kwok (D27), Chen (D28), and Kwok (D27)’s father have significant business and personal connections with Roy Cho and Francis Choi.

(b) By Francis Choi’s own statements to the media, (i) he admitted previously providing funds to Roy Cho amounting to at least HK$500 million; (ii) he admitted knowing (without any explanation as to how) of Roy Cho’s interest and/or control over ‘tens of listed company shells’, a reference to the Enigma Network.

(c) By Kwok (27)’s admission, the purchase monies for Kwok (D27)’s Acquisition, totaling HK$889 million odd, were in fact fully funded by an ‘unsecured loan’ provided by Francis Choi, purportedly repayable only on demand with no fixed repayment date.

(d) At the same time, Francis Choi and Kwok (D27)’s father have made inconsistent public statements to the media, concealing the fact that Francis Choi fully funded Kwok (D27)’s Acquisition.

(e) In fact, Kwok (D27) and Chen (D28) posed as seemingly ‘bona fide purchasers’ whilst actually acquiring the Wrongfully Allotted Shares as nominees for and on behalf of Francis Choi from July to October 2017, through matching and coordinated online buy and sell orders, with the buy orders executed by securities firms closely associated with Kwok (D27)’s family.

(f) Consistent with his role as a mere nominee, the explanation provided by Kwok (D27) on oath as to why he carried out Kwok (D27)’s Acquisition is neither coherent nor credible:

(i) Kwok (27)’s explanation is that in July 2017, in the immediate aftermath of the release of the David Webb report and of a 28 June 2017 raid conducted by the SFC on the headquarters and several offices of Convoy (‘SFC Raid’), he somehow considered shares in Convoy to be a good investment opportunity. At the time of Kwok (D27)’s Acquisition, the SFC Raid had not been disclosed to the public.

(ii) Kwok (D27) also explained that he considered Convoy’s business would assist in the expansion of his existing business of financial services. However, prior to Kwok (D27)’s Acquisition, he did not meet the management of the Convoy Group to make basic inquiries, let alone conduct any proper due diligence of its financial services business.

(g) The purported ‘unsecured loan’ of HK$889 million odd provided by Francis Choi to Kwok (D27) was in fact a sham, and Kwok (D27) carried out Kwok (D27)’s Acquisition as nominee of Francis Choi. It is otherwise wholly inexplicable, in the immediate aftermath of the David Webb report and the SFC Raid, why Francis Choi would provide such a significant loan on such terms to Kwok (D27) to acquire a substantial stake in Convoy, and why Kwok (D27) would shoulder such a significant repayment liability to acquire shares in Convoy.

(h) With full knowledge of the circumstances of the 29 October 2015 Placing and the nature of the Wrongfully Allotted Shares. Francis Choi arranged to acquire a large part of the Wrongfully Allotted Shares through his nominees Kwok (D27) and Chen (D28) in order to (i) allow Roy Cho to cash out on a significant part of his wrongfully concealed interest in Convoy whilst continuing to conceal it; (ii) allow Francis Choi to obtain a secret controlling shareholding in Convoy in circumvention of regulatory and statutory requirements; and (iii) attempt to white-wash the tainted origins of the Wrongfully Allotted Shares by interposing Kwok (D27) and Chen (D28) as ostensibly ‘bona fide purchasers’.

(i) Pending further investigation, discovery and interrogatories, the Plaintiffs reserve the right to plead further to (i) the exact nature of Francis Choi’s relationship with Roy Cho (including whether Roy Cho’s control, influence, and/or interest in the Wrongfully Allotted Shares were held on behalf of Francis Choi), and Francis Choi’s interest in the Wrongfully Allotted Shares as a whole; and/or (ii) the legitimacy of the funds provided by Francis Choi to Roy Cho and Kwok (D27) (including whether anti-money laundering laws have been contravened).

 …”

6.  In short, it is the Company’s case, of which Mr Chen is a director and chairman, that Mr Kwok’s acquisition of Shares was part of an unlawful scheme initially to vest and retain control of the Company in Roy Cho and subsequently to facilitate Roy Cho cashing out part of his interest and passing control to Francis Choi.  Mr Kwok did not acquire the Shares as beneficial owner and was not the ultimate controller of the voting rights that attached to them.

7.  Mr Kwok disputes the Company’s case.  I am not required in the present Action to determine whether or not Mr Kwok acquisition of the Shares was, as he contends, a genuine investment or bogus and undertaken at the direction of others, probably Francis Choi.  The issue    I now have to determine is whether or not Mr Chen’s decision to disallow the voting of the Shares was made in bad faith.  It is Mr Kwok’s case that it was and that Mr Chen took the decision in order to ensure that another significant shareholding was able to determine the constitution of the board, namely, the 29.98% shareholding of the Tsai Brothers.

8.  The Tsai brothers acquired their shareholding in August 2015.  The Tsai Brothers control a large financial conglomerate trading under the name “Fubon”.  It is Mr Kwok’s case that the relevant facts are as follows:

(1)     On 15 September 2015, Ng Wing Fai (“Ng”) was appointed an executive director of the Company. Mr Ng was the managing director of Fubon Financial in charge of its overall strategy, capital markets, merger and acquisition activities and major change programs.  Mr Ng is the Group President of     the Convoy Group.

(2)     Mr Chen also comes from Taiwan. Since March 2016, Mr Chen was appointed a senior advisor of the Company, working under the leadership of and taking instructions from Mr Ng, providing strategic advice to the Company’s senior management team on the Convoy Group’s overall strategic business direction.

(3)     In June 2017, the share price of the Company dropped significantly at times.

(4)     From July to August 2017, Mr Kwok acquired 29.91% of     the Company’s shares in the open market through CCASS.  Prior to acquiring the shares, Mr Kwok was already a substantial shareholder of companies licenced by the SFC to conduct Types 1, 4, 9 regulated activities.

(5)     On 25 October 2017, the Company issued a shareholder certificate to Mr Kwok.

(6)     On 30 October 2017, Mr Kwok requisitioned the EGM, seeking to reconstitute the Board.

(7)     On 20 November 2017, the Company issued a circular giving notice to its shareholders that the EGM was to be held on 29 December 2017.

(8)     On 21 November 2017, Oceana Glory, a corporate vehicle of the Tsai Brothers, deposited a nomination notice seeking     to appoint two non-executive directors (“NED”) to the Company’s Board.  One of the candidates nominated by     the Tsai Brothers was Mr John Wang, an existing NED affiliated with the Tsai Brothers.  Oceana Glory proposed Mr John Wang to be re-appointed upon his removal pursuant to Mr Kwok’s requisition.

(9)     On 7 December 2017, trading of the Company’s shares      was voluntarily suspended at the request of the Company.      Shortly thereafter, three executive directors (Quincy Wong, Rosetta Fong, Christie Chan) were arrested.

(10)   On 8 December 2017, Mr Ng on behalf of the Company’s Board announced that the duties of the arrested directors were suspended until further notice, and Mr Ng was appointed interim chairman.

(11)   Whilst Mr Ng was at the helm of the Company, on 9 December 2017, numerous appointments were made to the Board—including Mr Chen who was made an executive director and interim chairman.  On 12 December 2017 the Board committees were also reconstituted.

(12)   On 12 December 2017, Mr Ng on behalf of the Company issued a supplemental circular setting out the resolutions proposed by the Tsai Brothers through Oceana Glory in November.

(13)   On 17 December 2017, Mr Ng and Mr Chen attended a     press conference for the Company.  They were the only two directors present.  Mr Ng took all the questions raised by     the press, and when asked about the EGM, Mr Ng replied “wait and see”.

(14)   On 18 December 2017, Mr Kwok received an undated letter from Mr Ng (allegedly copied to the ICAC, SFC and the police) stating that it was not the right time to change the directors of the company as Mr Kwok proposed.  Mr Ng requested Mr Kwok to withdraw the requisition.  Mr Kwok refused the request, and issued a public announcement explaining why he proposed to reconstitute the Board.

(15)   On that day, Mr Ng signed the statement of truth of the Writ in the Principal Action (which was authorized by Mr Chen), naming Mr Kwok as the 27^th Defendant, claiming that part of the Shares that Mr Kwok acquired were wrongfully allotted by Roy Cho (the so-called “Wrongfully Allotted Shares”), that those Shares should be rescinded and Mr Kwok should be restrained from exercising the voting rights over the “Wrongfully Allotted Shares”.

(16)   On 19 December 2017, Mr Kwok’s then solicitors specifically wrote to enquire whether the Company would apply for an injunction against Mr Kwok.  The answer was no.

(17)   On 20 December 2017, the Writ was served on Mr Kwok.

(18)   On 22 December 2017, Mr Ng announced that Mr Chen was appointed Chairman of the Company.

(19)   On 29 December 2017, the EGM commenced shortly after 11 am.  Mr Kwok appointed Mr Stephen Wong to attend as proxy for his 1,500,000,000 shares held under his name.  HKSCC Nominees Limited was Mr Kwok’s nominee to attend as proxy for his 2,968,182,000 shares held through CCASS.  The proceedings were recorded in a Transcript     (in which Mr Chen spoke in English).

(20)   Mr Chen stated that he, Chairman of the Company, presided as the chairman of the meeting in accordance with Article 63 of the Articles.

(21)   Mr Chen introduced those present and gave the audience      an account of the latest developments in relation to the Company (including the arrest of three executive directors and the issue of the Principal Action).  Mr Chen then      referred to “another writ”, a reference to HCMP 2773/2017         issued by Madam Zhu Xiao Yan on 27 December 2017 (“Zhu Petition”), but still not served on Mr Kwok at the time of the meeting.  Madam Zhu shared the same residentialaddress as Mr Ng.  Mr Chen claimed to have just received    the Zhu Petition that morning but had not read it through,    and  then asked Mr Ian Mann of Harneys to read out part of the Zhu Petition to the EGM, without specifying which parts.

(22)   Mr Chen went on to explain that the EGM was requisitioned by Mr Kwok, referred to the Oceana Glory nomination notice, then ascertained from the Company secretary whether there was a sufficient quorum.  In ascertaining the quorum, the company secretary included the voting rights attached to Mr Kwok’s shares.  Mr Chen declared that there was a quorum for the EGM.

(23)   Mr Chen explained the voting procedures to the audience, which included an inaccurate citation of Article 74, then turned to the audience and invited questions on the voting procedures.

(24)   One Mr Lam (whose identity and standing were not verified by Mr Chen) allegedly raised an objection about the voting rights of Mr Kwok, citing the legal actions against Mr Kwok to argue that Mr Kwok’s shares were “problematic”.  Mr Chen allegedly sought immediate advice from Mr Ian Mann, then stated the contents of the advice he received, and that it was his responsibility to decide on the objection under Article 74, which decision was final and conclusive.

(25)   Mr Stephen Wong objected, noting particularly that no court determination or injunction had been made against Mr Kwok, though the Company could have applied for an injunction.

(26)   Mr Chen did not make enquiry about the validity of Mr Kwok’s voting rights.  He stated that “another writ against [Mr Kwok] was filed this morning” and declared that “based on everything I have read, especially what I received this morning, I have to exercise my article 74 right.  If any of      the shares are deemed questionable, I have to void these shares for allowing to vote for the rest of the resolutions.  And with this decision, I deem that to be final and conclusive”.

(27)   Mr Chen advised Mr Kwok to call another EGM. Yet he also stated that, until the Court makes a final determination, Mr Kwok’s Shares would remain disqualified from voting.

(28)   Immediately after the EGM, Mr Chen attended a press conference without taking any questions from the press.  He read from a written statement to the effect that he had exercised his powers under Article 74 and excluded the voting rights of all of Mr Kwok’s Shares.

9.  It is Mr Kwok’s case that the EGM was a well-planned ambush against him, designed to entrench the position of the incumbent board, which the Tsai Brothers could direct.  Mr Chen’s decision, so Mr Kwok alleges, was a deliberate attempt to prevent the Tsai Brothers losing control of the board rather than a decision motivated by a genuine concern that the Shares had been acquired in order to facilitate an improper and unlawful scheme to vest control in Roy Cho and Francis Choi.

The Issues

10.  There is no dispute that if Mr Chen’s Decision was made in bad faith then it should be set-aside.  There is an issue over whether, if this is the decision that I reach, the court should make a declaration effectively reversing the result of the EGM and, as a consequence, change the constitution of the board.

11.  There is also an issue to be considered concerning whether or not it is sufficient to show something less than bad faith in order to overturn the Decision.

12.  In the remainder of this Decision I deal with the following matters.

(1)     The strike-out application;

(2)     what constitutes bad faith;

(3)     whether it is sufficient to show something less than bad faith, and if so what, in order to overturn the Decision; and

(4)     has bad faith been proved.

Strike-out Application

13.  The controversial averments and the evidence adduced to support them concerned discussions at meetings that took place on      23 and 27 December 2017 and on 21 March 2018 (after the EGM)   between Mr Chen (in the case of the December meetings) and Mr Ng      and Daniel Hui Chuen Kin (in the case of the March meeting) concerning the dispute between Mr Kwok and the Company with a view to persuading Mr Kwok to sell his Shares. The Company’s objection was that the discussions were without prejudice and privileged.

14.  It is well understood by lawyers that discussions between parties with a view to finding a resolution to a dispute, which is the subject of litigation between them is privileged and cannot be relied on in the future as evidence in the litigation.  The reason for this is also well understood.  It is intended to encourage parties to try and settle their differences [1]. Consistent with this the extent of the privilege is generous.  Discussions are not to be forensically examined to see if one can extract from what may be informal discussions a few sentences, which it might be possible to characterise as going beyond the process of negotiation and evidencing a lack of sincerity or honesty in some part of the case being advanced [2]. The test is objective [3]. In my view it follows from this that a party cannot circumvent the privilege by allowing discussions to proceed for the purpose not, as the other party he knows intends, to see if there is room for compromise, but in an attempt to create an opportunity at which things are said that can be used against his opponent.  In other words if a litigant attends a meeting, which he knows the other party intends to be an opportunity to explore settlement anything said about the case at the meeting is highly likely to be privileged. 

15.  It seems to me fairly obvious that the paragraphs of the Amended Statement of Claim to which the Company objects and the evidence Mr Kwok wishes to adduce to support the averments fall foul of the privilege that I have described.  The discussions Mr Kwok wishes to rely on took place to explore means by which the dispute over Mr Kwok’s shareholding and his right to influence the reconstitution of the board could be resolved. Mr Kwok wishes to use part of what was said during these discussions to demonstrate that Mr Chen’s decision was made against a background, of which Mr Chen must have been aware, which supports Mr Kwok’s contention that the Decision was part of a plan to exclude the Shares from being voted for resolutions, which would result in the Tsai Brothers losing control of the Board.  It seems to me that this is exactly the kind of forensic use of things said during discussions forming part of a process aimed at resolving a dispute that the authorities to which I have referred make clear is not permissible.  For this reason I ordered that the following be struck out:

(1)     The following evidence and/or materials filed on behalf of Kwok Hiu Kwan, the Plaintiff herein be expunged from the Court’s records:

(a)    Paragraphs 51 and 52 of Kwok Hiu Kwan’s Witness Statement dated 2 January 2019 and the exhibits referred to therein;

(b)    Item 87 of Plaintiff’s List of Documents which is a letter dated 14 June 2018 marked with the Chinese equivalent of “without prejudice”;

(c)    Paragraphs 25 to 30 of Xu Hao’s Witness Statement dated 2 January 2019 and the exhibits referred to therein;

(d)    Paragraphs 27 to 38 of the Witness Statement of Tam Lai Ling dated 2 January 2019 and the exhibits referred to therein;

(e)    Items 93 and 94 of the Plaintiff’s Supplemental List of Documents which are the Chinese transcript of and the English translation of the transcript of a meeting of 21 March 2018;

(f)     Paragraph 44 of the 1^st Affirmation of Kwok Hiu Kwan filed herein on 24 January 2018 and the exhibits referred to therein; and

(g)    Paragraph 12 to 15 of the 4^th Affirmation of Kwok Hiu Kwan filed herein on 13 August 2018, and the exhibits referred to therein

(2)     Paragraphs 35, 36, 46 to 48, 50(2) of the Plaintiff’s Amended Statement of Claim dated 30 October 2018 be struck out;

(3)     There be a costs order nisi that the Plaintiff do pay the 5^th Defendant’s costs of the Summons forthwith with a certificate for two counsel.

Bad Faith

16.  By its nature bad faith is not capable of precise definition and what constitutes bad faith will very much depend on the subject matter. Certain criteria do emerge from the cases.  It involves personal fault that goes beyond an error in law or of fact.  It is a serious allegation and it must be clearly identified and proved [4]. It is bad faith knowingly to exercise a power for an improper purpose and it is “capable of embracing a failure to act in a commercially acceptable way and sharp practice of a kind that falls short of outright dishonesty as well as dishonesty itself” [5]. It is Mr Kwok’s case that Mr Chen made the decision not to count the Shares for voting purposes for an improper purpose, and he was motivated by a desire to ensure that the Tsai Brothers retained control over the board of the Company.  I accept that if this is demonstrated, Mr Chen will have acted in bad faith, the Decision was unlawful and should be set-aside.

The manifestly flawed argument

17.  In [50] of my September decision I left open the question of whether or not establishing something other than bad faith might be sufficient to justify the court intervening to remedy a decision that would otherwise be final and binding.  In his written opening Mr Mok advanced an argument that in substance involved practically wholesale importing of administrative law concepts dealing with the review of administrative decisions into company law and, so he argued, allowing the court to review the decision of the chairman of a general meeting.  I made it clear at the outset of the second stage of the trial that I thought that this approach is misconceived and that any suggested qualification to the finality of the chairman’s decision had to be founded on established contractual or company law principles.  The articles constitute a contract between a company and its shareholders or members inter se. What I had in mind in my comments in [50] was an argument founded on implication of terms.

18.  In his closing Mr Mok advanced on behalf of Mr Kwok     two grounds for the court finding that the decision could be challenged on that grounds that it was manifestly wrong, or as he prefers to formulate it, as Wednesbury unreasonable in the sense that the decision was one that no reasonable chairman could have reached if he properly directed himself as to his duties and had regard to all the facts he knew or should have known. These are two components to this argument. The first is that

Article 74 gave the chairman a contractual discretion and that such a discretion must not only be exercised honestly and in good faith, but also it must not be exercised unreasonably, arbitrarily, capriciously or irrationally [6].  The second is that Article 74 should be read as subject to an implied qualification that a decision is not final and binding if wrong in the way I have just described.

19.  Article 74 provides:

“ If:

(a) any objection shall be raised to the qualification of any voter; or

(b) any votes have been counted which ought not to have been counted or which might have been rejected; or

(c) any votes are not counted which ought to have been counted;

     the objection or error shall not vitiate the decision of the meeting or adjourned meeting on any resolution unless the same is raised or pointed out at the meeting or, as the case may be, the adjourned meeting at which the note objected to is given or tendered or at which the error occurs.  Any objection or error shall be referred to the chairman of the meeting and shall only vitiate the decision of the meeting on any resolution if the chairman decides that the same may have affected the decision of the meeting. The decision of the chairman on such matters shall be final and conclusive.”

20.  Article 74 does not give the Chairman a discretion whether or not to allow or disallow votes.  It requires him to decide at the meeting whether votes should be allowed or disallowed on the basis of the information he has at the time.  I do not think that there is any justification for reviewing the decision on the basis of the first component to the argument advanced by Mr Mok.

21.  The principles that determine the implication of terms were considered by the Court of Appeal in Lo Yuk Sui v Fubon Bank [7] in   [31]–[33] of the judgment of the Court.  In [32] the Court quotes with approval [7] of the judgment of Lord Hughes sitting in the Privy Council in Nazir Ali v Petroleum Company of Trinidad and Tobago [8].

“It is enough to reiterate that the process of implying a term into the contract must not become the re-writing of the contract in a way which the court believes to be reasonable, or which the court prefers to the agreement which the parties have negotiated. A term is to be implied only if it is necessary to make the contract work, and this it may be if (i) it is so obvious that it goes without saying (and the parties, although they did not, ex hypothesi, apply their minds to the point, would have rounded on the notional officious bystander to say, and with one voice, ‘Oh, of course’) and/or (ii) it is necessary to give the contract business efficacy. Usually the outcome of either approach will be the same. The concept of necessity must not be watered down. Necessity is not established by showing that the contract would be improved by the addition. The fairness or equity of a suggested implied term is an essential but not a sufficient pre-condition for inclusion. And if there is an express term in the contract which is inconsistent with the proposed implied term, the latter cannot, by definition, meet these tests, since the parties have demonstrated that it is not their agreement.”

22.  With these principles in mind I turn to consider whether or not Article 74 should be read as subject to an implied qualification that it is not final and conclusive if the decision was one that no reasonable chairman could have reached if he properly directed himself as to his duties and had regard to all the facts he knew or should have known.

23.  There is something immediately attractive in the argument that the shareholders and the Company must have envisaged when agreeing the articles that a manifest mistake by the Chairman exercising his right under Article 74 to determine an issue arising during the course of a general meeting would be rectifiable.  It seems unlikely, it might reasonably be suggested, that in the event of a chairman inadvertently making an obvious error, which he acknowledges when after a meeting has been concluded it is pointed out to him, a shareholder cannot ask the court to rectify the mistake.  I agree that it seems unlikely that such an error could not be rectified.  The starting point in exploring this issue is to consider whether there are existing mechanisms for remedying indisputable mistakes.  It seems to me that there are.  First, that in the case of a manifest and undisputed factual error such, for example, as a chairman announcing that a resolution has been passed, when it had not, because of an arithmetical mistake in counting votes, there is nothing to stop a chairman revising his decision.  In other cases, which may be less straightforward and the subject of some controversy, another meeting convened for the resolution to be considered afresh, subject to any provision in the articles that requires a period to elapse before the same resolution can be put to shareholders   from fresh consideration.  This is a more practical and quicker ways of remedying a manifest error than going to court.

24.  In obvious cases it does not seem to me that the implication of a term is either necessary or obvious because a chairman’s decision is not binding save for the purposes of a particular resolution put to shareholders at a particular meeting and any error is always open to correction.  In any event even if one takes the view that Article 74 is subject to qualification in the case of a manifest error this is not such a case in my view and it is of no assistance to Mr Kwok.  What is required is a right to seek rectification by the court of a decision that is made in good faith and not indisputably wrong, but can be demonstrated to be sufficiently bad to justify the court intervening. Is it necessary to imply such a right or obvious that if when the articles were being prepared shareholders, who understood the issue and argument, had been asked if there was such a right of review they would have said “obviously”.

25.  It is uncontroversial that Mr Chen’s decision can be challenged if made in bad faith and, further, does not determine whether or not Mr Kwok is entitled to vote the Shares registered in his name at future general meetings.  Whether or not Mr Kwok is the beneficial owner of the Shares, bought them as a genuine investment and is entitled to vote them is a question ultimately to be determined by the court and will be determined in the Principal Action.  In considering whether or not a term should be implied that permits Mr Kwok to challenge Mr Chen’s decision it is necessary to consider whether, against this background, a right to ask the court to consider whether or not Mr Chen’s decision was manifestly bad has any utility.

26.  It seems to me that it does not.  In most cases in which there is a dispute as to whether or not a registered shareholder is entitled to vote I doubt if there would be much difference in terms of bringing the dispute on to trial, between (1) a case in which the court is being asked to determine if the registered shareholder was entitled to vote the shares and (2) a case in which the court is asked to consider whether or not a decision by the chairman of a meeting not to admit the shares for voting purposes was manifestly bad.  The present case, although more complex than most, is an example.  The Company filed extensive submissions before trial arguing that in the event that I took the view that Mr Chen’s decision should be overturned it should be allowed to be heard on the question of relief and, in particular, address Mr Kwok’s claim that the resolutions should be reversed thus changing the constitution of the board.  As I understand the Company’s case, it wishes to argue that the Court should not change the present constitution of the board until after the trial of the Principal Action.  It is these kinds of complexities that are likely in many cases to mean that reading Article 74 as subject to an implied qualification that the Chairman’s decision is not final and conclusive if it can be demonstrated that it is manifestly bad, is not going to achieve its intended effect, namely, allowing a dissatisfied shareholder to quickly overturn an erroneous decision.

27.  A further complication is that given the circumstances in which such decisions have to be made, it may be difficult to assess whether the decision, which it must be assumed for these purposes was made in good faith, fell within or outside the range of decisions a chairman might reasonably have been expected to be make.  Once again the present case demonstrates the complexities.  It seems to me that it is arguable that amongst the range of reasonable decisions that might have been made was not to put to the vote any resolution, which the Chairman, Mr Chen, understood to be controversial and adjourn the meeting until either the parties had obtained a court order, which provided the Chairman with a direction as to how to determine the issue or allowed Mr Kwok to provide an answer to the objection to the Shares being voted.  This is not, it will be appreciated, what Mr Kwok wants.  He says that the hypothetical chairman should have allowed him to vote the Shares, which in my view it cannot sensible be said was the only reasonable decision open to the Chairman in the circumstances.

28.  In conclusion, in my view Article 74 is not subject to the qualifications submitted by Mr Mok and Mr Chen’s decision can only be overturned if Mr Kwok demonstrates that the decision was made in bad faith, which I now turn to consider.

Was there bad faith?

29.  I do not have to decide whether or not Mr Kwok is the beneficial owner of the Shares, which he acquired for his own investment reasons and not as part of some improper conspiracy of the type alleged by the Company in the Principal Action.  What Mr Kwok has to demonstrate is that Mr Chen’s decision was improper in the sense discussed in [16].  I may have doubts about the correctness of the decision or the manner in which Mr Chen came to reach it, but that is not sufficient to justify me interfering with the Decision.

30.  In [5] I quote the summary of the Company’s pleaded     case in the Principal Action.  As this indicates by the time of the EGM on 29 December 2017, the Company’s board had been provided with information from various sources that suggested that a significant part of the Company’s shares had been acquired as part of a scheme, central to which was Roy Cho, clandestinely to control the Company.  Mr Chen knew this and it seems to me that if the Company had credible reasons to think that this was likely to be the case it would be difficult to conclude that Mr Chen decision was made in bad faith.  Assessing whether or not this is the case requires a detailed consideration of the circumstances in which Mr Chen came to find himself at the EGM.  So far as the evidence is concerned there were only two witnesses.  A witness statement was filed from Mr Tam Lai Ling, who is a senior adviser to the Kaisa Group, which is controlled by Mr Kwok’s Father. Mr Tam’s evidence was limited to dealing with information concerning share transfers, which was not controversial and he was not cross-examined.  Mr Kwok did not give evidence.  There was no evidence adduced on Mr Kwok’s behalf about his motives for purchasing the Shares or addressing any of the substantive complaints raised in the Principal Action. The only other witness was Mr Chen himself.

31.  Mr Chen is from Taiwan.  He left with his Family for the United States when he was 13.  He was educated in the United States and qualified as an accountant.  He worked for KPMG in the United States from 1983 to 1988.  He then moved to Beijing with KPMG and was made a partner in 1993.  He then joined PwC becoming the managing partner of its Beijing office. He left Beijing to Zurich Insurance Group AG (“Zurich”) occupying various positions until he became Chairman of its China operations.  He has also served as an independent non-executive director of six listed companies and is an adjunct associate professor of the Department of Finance at the Hong Kong University of Science and Technology.

32.  Mr Chen left Zurich in March 2015.  Towards the end of the year he was approached by Mr Ng in relation to the Company’s interest in acquiring Zurich’s Hong Kong insurance business and the possibility of Mr Chen joining the Company as an advisor on account of his experience of insurance and Zurich in particular.  In March 2016 he was engaged by the Company as a senior adviser on a part time basis.  He was engaged as an independent contractor for remuneration of HK$2,000,000 per annum.  It is Mr Chen’s evidence, which I accept, that prior to joining the Company he had no existing relationship with the Tsai Brothers or their business interests or Mr Ng other than for the fact that when he joined Zurich it had a business collaboration with a private equity fund in which Mr Ng and the Tsai Brothers had an interest and that he had not encountered either Mr Ng or the Tsai Brothers in the 10 years prior to 2015.  The only other connection is Mr Chen’s appointment as a director of a joint venture between the Convoy Group and Fubon, which has not proceeded since the Securities and Futures Commission (“SFC”) investigation into the Company’s affairs.

33.  In May 2017, David Webb published an article describing what he called the “Enigma Network”: a group of 50 Hong Kong listed companies.  He alleged that the companies in the Enigma Network had significant cross-shareholdings.  Mr Webb appeared to suggest that this indicated that many of these companies had shareholders, who were disguising the fact that they were acting in concert.  On 28 June 2017 the Company’s headquarters and various other offices were raided by the SFC.  On 7 December 2017 the Independent Commission against Corruption (“ICAC”) arrested Rosetta Fong, the Vice-Chairman and an executive director of the Company, as well as Ms Chan Lai Yee, the Chief Financial Officer, and also an executive director.  The next day the Chairman of the Company, Quincy Wong, was also arrested.  The ICAC also attempted to contact Roy Cho, but he had left Hong Kong.  I take judicial notice that he subsequently returned to Hong Kong and was also arrested.

34.  Mr Ng invited Mr Chen to join the Board and become Chairman on an interim basis.  At about the same time other individuals were approached to join what would be a re-constituted board.  Mr Chen says that he understood that he was invited to join the Board because      of his familiarity with the Company and his experience both as accountant and at Zurich in dealing with accounting fraud.  I accept that this was the reason Mr Chen understood he was asked to become interim chairman having been appointed a director, in an executive capacity,      on 9 December 2017 along with Mr Ng, John Wang, Francine Fu, Pak Wai Keung, Yan Tat Wah, Peter Ma and Byron Tan.  Mr Chen was formally appointed Chairman on 21 December 2017.

35.  Unsurprisingly, following his appointment he began to receive reports from the Company’s management on the result of      their investigations, which led to issue of the Principal Action on 18 December 2017.  He was also briefed by the Company’s lawyers.     It will be appreciated that this resulted in Mr Chen becoming familiar   with the allegations in respect of Mr Kwok.

36.  On the morning of 29 December 2017 the Company was served with a copy of the Zhu Petition.  Mr Chen says that he knew from reading the petition that Madam Zhu asserted that she was a member of  the Company.  Her complaints substantially overlapped with those in the Principal Action. She alleged that the allotment referred to in [2] of the Amended Statement of Claim quoted in [5] was wrongful.  Mr Kwok is the 27^th Defendant to Madam Zhu’s petition.  Madam Zhu sought as against Mr Kwok an order that he (along with Chen Pei Xiong) be restrained from exercising their voting rights and dealing in the Shares.

37.  It is Mr Chen’s case that prior to 29 December 2017 he had not heard of Madam Zhu and had no knowledge of her petition.

38.  It is Mr Chen’s evidence that at the time he came to make his decision his understanding of the Company’s claims against the various defendants to the Principal Action were as follows.

39.  Since 2013 Roy Cho has gradually been acquiring control of the Company through nominees, who he caused to be put in key positions in the Company.  Roy Cho was closely associated with Choi Chee Ming (“Francis Choi”). Together the two of them owned Broad Idea International Limited (“Broad Idea”) through which they held positions in various companies, the most significant of which was Town Health International Medical Group Limited (“Town Health”). Mr Chen says  that he understood that Francis Choi provided a significant amount of Roy Cho’s funding and that Francis Choi’s daughter, Crystal, had been a business partner of Roy Cho and his brother and an executive director and chairman of Town Health.

40.  Mr Chen was familiar with the Company’s claims that the placement of 7,508,3000,000 new shares in the Company in August 2015 was not a genuine scheme to raise new capital, but to entrench Roy Cho’s control of the Company.  It is Mr Chen’s evidence that at the time the Principal Action was commenced he believed on the basis of what he had been told that the source of all the Shares was the Wrongfully Allotted Shares, which had been transferred to Mr Kwok and Chen Pei Xiong (“CPX”) to inhibit the Company’s investigation into the allotment.     He says in his witness statement that he reached this conclusion on the basis of the following matters.

41.  Various things led him to believe that Mr Kwok and CPX had acted in concert in acquiring the Shares.  CPX was a senior member of the management of Kaisa, which Mr Kwok’s Father controls.  Mr Kwok ceased to acquire shares in the Company on 16 August as he approached the 30% threshold for a mandatory general offer under the Takeover Code.  On 21 August CPX began to buy shares in the Company.  He explains in [41(c)] of his witness statement the specific characteristics of the acquisitions that he believes points to the conclusion that Mr Kwok and CPX were acting in concert:

(1)     From 7 July 2017 to 16 August 2017, the securities firms that housed, among other things, the Company’s shares held by the Alleged Independent Placees, steadily and systematically disposed of 21.46% of the Company’s shares.  The decrease of 21.46% was closely matched by the corresponding increase of 28.31% in the Company’s shares held by Fulbright Securities Ltd and South Ocean Securities Ltd, both of which held the Company’s shares on behalf of the Plaintiff.

(2)     Apart from Mr Kwok’s and CPX’s acquisitions, the daily trading volume of the Company’s shares from around 1 June 2017 to 1 December 2017 was consistently below 200 million.  In contrast, during Mr Kwok’s and CPX’s acquisitions, the daily trading volume of the Company’s shares was usually above 200 million, and sometimes even above 500 million and peaked at around 700 million.

(3)     Mr Kwok’s and CPX’s acquisitions were substantial in value, spread out over a relatively short period of time, but with relatively minimal fluctuations in the price of the Company’s shares.  Mr Chen says that in his experience, this is very unusual given the size of the acquisitions.

42.  Mr Chen concludes that the 37% of Convoy’s shares that he believes Roy Cho controlled, were as a result of Mr Kwok and CPX’s acquisitions, transferred to them.

43.  Mr Chen also says that he found it inherently unlikely that a genuine investor would have acquired the Shares shortly after the SFC raid on 28 June 2017 and the crash in the share price of 13 of the Enigma Network companies.  Mr Kwok has since he left University in 2014 been working in the securities industry, apparently having developed his own business with, what is described in the Amended Statement of Claim as a capital gift, which has come to use the “Kaisa” name used by his Father’s Group. Mr Chen believed that it was suspicious that given Mr Kwok’s age, he was only 26 when he began acquiring the Shares, and inexperience, he should acquire such a substantial shareholding with an unsecured loan of HK$800,000,000 from Francis Choi, a business associate of his Father, and without approaching the Company for the purposes of understanding the Company’s business and financial condition.

44.  As I have mentioned Mr Chen was appointed to the Board on 9 December 2017.  He did not have any personal knowledge of the circumstances in which the EGM came to be convened.  In brief this was as the result of a requisition of 30 October 2017 by Mr Kwok to convene an extraordinary general meeting to remove all the members of the board except Quincy Wong, Rosetta Fong and Peter Ma and add five of his nominees. On 21 November 2017, Oceana Glory Limited deposited a nomination notice seeking to appoint Chen Shih-pin as a NED, and if he was removed pursuant to one of Mr Kwok’s resolutions, John Wang     re-appointed. Mr Chen did, however, have two meetings with Mr Kwok and his representatives to discuss the resolutions.

45.  Mr Chen chaired the EGM on 29 December 2017, which took place at 11am at Hutchison House.  Although amongst the resolutions was one for his removal Mr Chen did not consider that he was conflicted from chairing the meeting.  He viewed his own appointment to the board as a short term one.  He saw his role as stabilising the Company during a period of uncertainty; a role for which his professional and business experience made him suitable.

46.  Mr Chen commenced the meeting by explaining the voting procedures including Article 74.  After he had done so a person, who he later found out to be a Mr Lam, objected to the entitlement of Mr Kwok and CPX to votes their shares, because he understood that they were the subject of a legal dispute.  Mr Chen proceeded as follows.  He took advice from the Company’s Cayman Island lawyers, Harneys, who were present at the EGM.  He was aware that, in addition to the Principal Action, the Zhu Petition had been issued.  He was also addressed by another attendee, Stephen Wong of Stephenson, Wong & Co, who explained that he was a representative of Mr Kwok.  Mr Wong observed that the Company must have taken legal advice on what could be done in relation to Mr Kwok’s shares and that it had not obtained an injunction.  He urged Mr Chen to count the Shares for voting purposes.

47.  Mr Chen says that having considered the matter he decided to disallow the Shares for voting purposes at the EGM.  He took into account the following matters in arriving at this decision:

(1)     The matters contained in the Statement of Claim in the Principal Action, which he believed justified the acquisition of the Shares by Mr Kwok being declared void.  In particular, what Mr Chen says was his belief that the timing of the acquisition of the Shares and their apparent origin in the Wrongfully Allotted Shares.  Mr Chen also says that he anticipated that more evidence would come to light supporting the conclusion that the Shares had been acquired as part of an improper scheme to obtain control of the Company.

(2)     Mr Kwok had not put forward any explanation for the matters complained of in the Statement of Claim.

(3)     He thought that given Mr Kwok’s and CXP’s questionable status it would be unfair to bona fide shareholders to allow them to vote their controversial shareholdings to obtain control of the Company.

(4)     He understood that his decision was whether or not to allow the Shares to be voted at the EGM on 29 December 2019 only. It did not determine the issue for the purposes of future meetings.

48.  It is Mr Kwok’s case that Mr Chen’s decision was     pre-determined and that it was made with an improper motive, namely, to side Mr Ng.  In Mr Kwok’s closing submissions it is suggested that issue of the Principal Action, the Zhu Petition and the objection by Mr Lam to Mr Kwok’s and CXP’s shares being voted were a “ploy” (a strategy might be a more apposite description of what was submitted) agreed between Mr Chen and Mr Ng to justify excluding Mr Kwok from voting and ensuring defeat of his resolutions thus leaving the incumbent Board in place.  The ultimate purpose was to advance the Tsai Brothers’ interests.

49.  Before turning to consider the forensic attack on Mr Chen’s version of what took place and his deliberations it is necessary to recall both what I have found Mr Kwok needs to establish in order to succeed in his challenge to the Decision and also, as Mr Kwok has adduced no direct evidence of Mr Chen agreeing the strategy I have referred to in the previous paragraph, what has to be established in order to justify the inference that Mr Chen’s version of what he knew, thought and was motivated by is a lie.

50.  I have explained what constitutes bad faith in [16].  As I note, an allegation of bad faith is a serious one and it must be clearly proved. In the absence of direct evidence it is necessary for a plaintiff to prove facts and matters from which bad faith can be inferred.  The Court of Final Appeal has warned trial judges in two decisions of the need to adopt a disciplined approach to the drawing of inferences.  I have previously explained this in [9]–[10] of my decision of 19 September 2018 in respect of Mr Kwok’s application to strike out the claim against him in the Principal Action.  In Nina Kung v Wong Din Shin [9] Ribeiro PJ explains the correct approach:

“In HKSAR v Lee Ming Tee & Securities and Futures Commission (2003) 6 HKCFAR 336, Sir Anthony Mason NPJ acknowledged the need for such a disciplined approach to the drawing of inferences and in particular for inferences of fraud or serious misconduct to be drawn only where such inferences are compelling. Dealing with an allegation that senior SFC officers had deliberately and improperly terminated an investigation in order to avoid compromising the standing of the subject of the investigation who was acting as an expert witness in a criminal trial in which the SFC was interested, his Lordship stated:

... that conclusion was not to be reached by conjecture nor, as the respondent submitted, on a mere balance of probabilities. It was to be plainly established as a matter of inference from proved facts. (at §72).”

As Sir Anthony Mason explains (quoting Lord Nicholls in Re H [10]) in  Lee Ming Tee at [71]:

“When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability.”

51.  In my view the allegations against Mr Chen are serious. What is being said is that he agreed with Mr Ng to engineer a situation in which he could, as Chairman of the EGM, disallow the Shares for voting purposes and that the explanation he gives in his witness statement, which has been admitted in the trial under oath, is simply a lie.  I am asked to infer this from the various matters I will shortly describe.  I need to be satisfied that facts and matters have been proven which make it a compelling inference that Mr Chen’s evidence is false.

52.  I am invited in Mr Mok’s closing submissions to find the following facts and matters.  First, Mr Chen has an existing relationship with Mr Ng, who was instrumental in having him join the Board.

53.  Secondly, Mr Tam’s evidence that Mr Kwok had not less   than 3,395,566,000 indisputable shares on 29 December 2017 was not challenged.  Mr Chen admitted that he and the Company had time to   verify those calculations before trial.  Mr Tam’s calculation was carried out from publicly available information.  It follows, so Mr Mok argues, that the Company, and necessarily Mr Chen, could or should have known this before the Principal Action was issued. Mr Chen could not give a convincing explanation for not having found this out.  Mr Mok submitted that Mr Chen was turning a blind eye to the difficulty of demonstrating that all the Shares had their origin in the Wrongfully Allotted Shares.

54.  Thirdly, there are alleged flaws in [68(2)] of the Statement of Claim in the Principal Action, which also concerns the source of Mr Kwok’s Shares, in particular the securities firms from which Fulbright Securities acquired shares on behalf of Mr Kwok.  When asked whether the Company had assessed whether the disposal of shares held by brokers on behalf of the original places could be demonstrated to result from the acquisition of shares by Mr Kwok, Mr Chen could only answer that he relied on his internal and expert team and that the movement of the disposals and acquisitions were closely aligned.  Mr Mok submitted that this failure to ask and answer an obvious question was another example of consciously turning a blind eye to unhelpful evidence.

55.  Fourthly, given the Board’s apparent concern about the Shares Mr Mok submitted that one would have expected the Company to have applied for an injunction after issuing the writ in the Principal Action to restrain Mr Kwok from voting the Shares.  Mr Chen was unable to identify a particular reason other than the fact that the EGM would still have had to go ahead.  Mr Mok argued that the most likely reason was that Mr Chen knew the Company’s case had holes in it and that rather than apply for an injunction he and Mr Ng came up with an alternative, namely, engineering a situation at the EGM, which enabled Mr Chen to disallow them for voting purposes.

56.  Fifth, Mr Chen has a closed mind when the EGM commenced.  It seems to me that this is a non sequitur.  Clearly, Mr Chen as the Chairman of the Board had a view on the propriety of Mr Kwok’s acquisition of the Shares and he was not apparently told anything by Mr Kwok after the writ was served that was likely to change his mind.

57.  Sixth, concerns the Zhu Petition.  This point seems to me to be fundamental to Mr Kwok’s case.  Mr Chen says he knew nothing about Madam Zhu or the Zhu Petition until the morning of the EGM.  It is Mr Kwok’s case that this is a lie.  Mr Mok submitted that Mr Chen knew exactly what was going on and that the Zhu Petition was presented in order to assist in disallowing the Shares to be voted.

58.  It is Mr Kwok’s case that Mr Ng and Madam Zhu live together at a house in Deep Water Bay Road.  This is not disputed by Mr Chen or the Company.  Madam Zhu’s interest in the Company is modest: her shares were worth about HK$500,000 at the time of the EGM.     The action that she commenced was complex.  It names 33 respondents. Her statement of claim is 60 pages in length.  I agree with Mr Mok that it is surprising that a member with such a small interest would have gone to the trouble and expense of issuing a petition.  The Zhu Petition also repeats the complaints in the Principal Action, which suggests that Madam Zhu was provided with information by somebody at the Company.  The fact that Madam Zhu gave her address in the Mainland when it would appear she has a residence in Hong Kong also suggests that she was trying to avoid drawing attention to her relationship with Mr Ng.  She seems to have readily agreed to stay her Petition after the EGM.

59.  I agree with Mr Mok that it is inherently unlikely that Mr Ng did not know what Madam Zhu was going to do, provided her with information and that he had a hand in the decision to issue her petition.  The question is whether he told Mr Chen or chose to keep him in the dark?

60.  It is Mr Chen’s evidence that he did not know anything about the Zhu Petition until he received a copy at about 10am on the morning of the EGM while he was waiting in a room outside the room in which the EGM was to take place.  He was given it by somebody from the Company, whose identity he could not recall.  Mr Chen says he did not know at the time that Mr Ng and Madam Zhu lived together.  Mr Mok did not adduce any evidence to demonstrate that Mr Chen way lying.  I cannot on the basis of the evidence before me infer that Mr Chen was lying as opposed to Mr Ng implementing of his own accord a plan to create an opportunity for an objection to be raised to Mr Kwok voting the Shares.  Importantly I can see no benefit to Mr Chen that explain him coming to court and being prepared to lie about this with the risks inherent in so doing to his reputation.

61.  Seventh, it is suggested that Mr Chen and Mr Ng had the opportunity to discuss and orchestrate how to avoid allowing the Shares to be voted at the EGM.  As far as it goes this is no doubt correct, but without any evidence to suggest that they did have such a discussion the submission takes the matter nowhere.  The best Mr Mok could do was to point to evidence in Mr Chen’s cross-examination that suggests that Mr Chen discussed with Mr Ng what might take place at the EGM, the prospect of questions being asked and objections being raised and Article 74. This in itself is unremarkable given the background against which the EGM took place and it seems to me that it is a matter of little, if any, weight.

62.  There is one final matter that I will address, although it was not a matter relied on by Mr Mok in his closing.  In [52]–[57] of the Statement of Claim there is a complaint concerning the Company’s attempts to interfere with the tendering of Mr Kwok’s expert on Cayman Islands law, Alexander Gray Henderson, for cross-examination at the hearing of the originating summons in HCMP 41/2018 on 27 August 2018.  As I made clear at the time I considered that the Company and its solicitors’ conduct was improper.  Mr Chen was cross-examined about this matter.  His evidence was clear.  He did not know about the complaint made by the Company’s solicitors to the Immigration Department about Mr Henderson attending court in order that he could be cross-examined, because somebody at the Company had been told (the ICAC being the likely source) that he did not have a work visa.  Mr Chen says that he first came to know about this when he was sitting in court and the matter was raised by Mr Kwok’s counsel at the time, Charles Sussex SC.  Although I find Mr Chen’s evidence that he did not subsequently find out, who had instructed Charles Chu & Kenneth Sit to write the letter surprising, I accept it. As in the case of the Zhu Petition there is no apparent reason for Mr Chen to come to court and lie on oath, particularly as if he has done so this would be known to the Company’s solicitors, whose obligations to the court would, I anticipate, require them to withdraw from acting or risk being party to misleading the court.

63.  Amongst the possible explanations both for the ill-advised letter to the Immigration Department concerning Mr Henderson and issue of the Zhu Petition is that they were orchestrated by Mr Ng; quite possibly with a view to protecting the Tsai Brothers’ interests with whom he is probably aligned.  If this were correct it would invite concern about Mr Ng’s conduct and compliance with his fiduciary duties and also a willingness on the part of Charles Chu & Kenneth Sit to subordinate their obligations to their client, the Company, to the wishes and directions of Mr Ng.  These are matters, which Mr Chen and the Board might be well advised to investigate. 

64.  In my view Mr Kwok has not proved facts which point compellingly to the inference that Mr Chen was party to a stratagem to prevent the Shares being voted.  Indeed, even applying a less stringent test such as it being more likely than not he was party to the alleged stratagem, I do not think that it is an inference that can fairly be drawn.  The claims that are made against Mr Kwok arise out of complex and serious events that have led to the arrest and prosecution of Roy Cho and it cannot sensibly be said that given the circumstances in which Mr Kwok came to acquire the shares the Board’s concerns that he is a party to an elaborate conspiracy, which, so the underlying theory goes, started with Roy Cho trying to obtain clandestine control of the Company and continued with the Wrongly Allotted Shares being acquired by persons aligned with his interests, who would be able to take control of the Company and stifle investigations into what had transpired, is fanciful and without any foundation.  Against this background, Mr Chen, who had only recently been appointed to the Board and made its Chairman might reasonably be expected to have approached the issue of Mr Kwok’s right to vote the Shares with concern and some scepticism.  I also do not find it especially surprising that he could not personally answer many of Mr Mok’s questions concerning the details of the share transfers that led to Mr Kwok’s acquisitions of the Shares.

Conclusion

65.  Having found that Mr Kwok has failed to prove that Mr Chen made the Decision in bad faith or that Article 74 is subject to some form of qualification, which allows its review in the event of a patent flaw, I shall dismiss the originating summons and make a costs order nisi that Mr Kwok pays the Defendants costs including any costs reserved with a certificate for two counsel.