ELITE DRAGON LTD v. BEL GLOBAL RESOURCES HOLDINGS LTD

HCCL 8/2014
(formerly HCA 1903/2012)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 8 OF 2014

____________

(By Original Action)

____________

(By Counterclaim)

(By Counterclaim to Counterclaim)

____________

_______________

J U D G M E N T

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Introduction

1.  These proceedings were issued by the plaintiff (“Elite”) against the defendant (“BG”), for the principal amount of HK $89,651,000 (“Principal”) said to be due but unpaid under convertible bonds (“Bonds”) issued by BG to it between 2008 and 2011.  BG is a company which is listed in Hong Kong.  Elite claims that the Bonds were issued to it in partial satisfaction of the acquisition price payable to it for the entirety of the shareholding in a company known as Honour Max Trading Ltd (“Target Company”), sold by Elite and another company known as High Chance Investments Ltd (“High Chance”), to BG’s wholly owned subsidiary (“PE”) under an Acquisition Agreement dated 18 September 2007 (“Acquisition Agreement”).  Elite claims that the Principal became payable to it at the latest by September 2012 and October 2012, but that BG refused to make payment.

2.  Under the Acquisition Agreement which was made between Elite, High Chance and PE, the entire shareholding in the Target Company was sold by Elite and High Chance to PE, which was a wholly owned subsidiary of BG.  The price under the Acquisition Agreement is stated to be HK$2,340 million (“Acquisition Price”), partly payable by BG’s issue and allotment of 147,790,000 new shares, and partly payable by BG’s issue of Bonds of a specified amount (“Tranche 1 Bonds”).

3.  On the same day of the Acquisition Agreement, a separate agreement (“Supply Agreement”) was entered into by the Target Company’s wholly-owned subsidiary, Bel Nickel (“BN”), and an Indonesian company known as PT Aneka Nusantara Internasional (“PTA”).  Under the Supply Agreement, PTA agreed to supply to BN exclusively nickel ore from a mining site at Bunta in the Banggai Regency of Central Sulawesi, Indonesia (“Mine”), for a term of 15 years from the date of completion of the Acquisition Agreement.

4.  A further agreement (“Mining Services Agreement”) was made between PTA and another Indonesian company known as PT BT Mining Services (“MS”) on 3 January 2008, under which MS agreed to perform work and services required to operate and maintain the facilities at or concerning the Mine, for and on behalf of PTA.

5.  The main purpose of BG’s entering into the Acquisition Agreement was to secure BN’s right to the exclusive supply of nickel ore, upon BG’s expansion into the market of trading in mineral resources.  On BG’s case, the nickel ore to be supplied under the Acquisition Agreement was only to be supplied from the Mine, although this is disputed by Elite, which claims that the nickel ore can be supplied by, or on behalf of PTA, from mines other than the Mine, as agreed between the relevant parties at a meeting on 18 September 2007.

6.  Under the Acquisition Agreement, Elite and High Chance were entitled to further Bonds (referred to as the Tranche 2 to Tranche 5 Bonds) after completion, dependent on the volume of PTA’s supply of nickel ore to BN under the Supply Agreement.  The relevant parts of clause 3.5 of the Acquisition Agreement provide:

“3.5 The provisions shall be applicable to the Tranche 2 Bonds, Tranche 3 Bonds, Tranche 4 Bonds and Tranche 5 Bonds to be issued following completion:

(1) after completion, so long as any of the Tranche 2 Bonds, Tranche 3 Bonds, Tranche 4 Bonds and Tranche 5 Bonds (collectively, the “Post-Completion Tranches” and each a “Post-Completion Tranche”) have not been issued, the Purchaser shall procure HK Subsidiary:

(a) to prepare, for each of the Relevant Quarters, a statement (“Quarterly Supply Statement”) of the quantity of Mineral Resources supplied by (or on behalf of) the Indonesia Mining Company and delivered to and accepted by HK Subsidiary (or its designated recipient(s))(“Quarterly Actual Output”), and

(b) within 15 Business Days after the relevant Quarter-end Date, to supply the relevant Quarterly Supply Statement (“Draft Quarterly Supply Statement”) to the Vendors, the Purchaser and the Indonesia Mining Company;

(2) If there is no difference in the record kept by the Indonesia Mining Company as to the Quarterly Actual Output, the Quarterly Actual Output as recorded in the Draft Quarterly Supply Statement shall be conclusive evidence of the Quarterly Actual Output (“Final Quarterly Actual Output”).

(3) ...

(4) Where the Final Quarterly Actual Output for the Relevant Quarter (as set out in the first column below) is not less than the respective Quarterly Target Output, the respective Post-Completion Tranche of Bonds applicable to that Relevant Quarter as set out in the second column below shall be issued to the Vendors (or their respective nominees) in accordance with Sub-clause(8):

Relevant Quarter	Post-Completion Tranche
Quarter 1	Tranche 2 Bonds
Quarter 2	Tranche 3 Bonds
Quarter 3	Tranche 4 Bonds
Quarter 4	Tranche 5 Bonds”

7.  The claim made by Elite in these proceedings relates to the Tranche 2 Bonds issued under clause 3.5 of the Acquisition Agreement, and pursuant to a resolution of the board of BG passed at a meeting of the directors on 6 May 2008 (“Board Resolution”).  In defence to Elite’s claim for the Principal alleged to be due under the relevant Tranche 2 Bonds, BG claims that the issue of the Tranche 2 Bonds was made in reliance on a quarterly supply statement prepared by BN (“BN Statement”) with respect to PTA’s purported supply and delivery to BN of nickel ore from the Mine, pursuant to the Supply Agreement, for the quarter ending 31 March 2008 (“Relevant Quarter”), which proved to be inaccurate.  BG claims that the issue of the relevant Tranche 2 Bonds was induced by the fraudulent misrepresentations made to the BG board by the 2^nd named defendant, Sy Chin Mong Stephen (“Stephen”). At the material time, Stephen was said to be a shadow director of BG, and was BG’s executive director, Chairman and Chief Executive Officer since 30 April 2008, until May 2014 when he was adjudged bankrupt.  At all material times, Stephen was also the sole director and the controlling shareholder, beneficially owning not less than 80% of Elite, the plaintiff in these proceedings.

8.  According to the Amended Defence and Counterclaim (“Defence”) filed in these proceedings, the BN Statement was prepared and signed by Sze Shan (“Pat”), another director of BG, on the instructions of Stephen, and on the basis of a quarterly supply statement of PTA supplied by Stephen to Pat, with respect to PTA’s purported supply and delivery of nickel ore from the Mine for the Relevant Quarter, pursuant to the Supply Agreement (“PTA Statement”).  Pat is said to be a relative of Stephen.

9.  Both the PTA Statement and the BN Statement set out the following deliveries of nickel ore for the Relevant Quarter:

	Date of delivery	Quantity (wet metric tonnes)
1.	5 February 2008	29,675.40
2.	20 February 2008	50,000.00
3.	20 March 2008	16,207.35
4.	13 March 2008	39,319.00
5.	18 March 2008	40,000.00
6.	20 March 2008	30,000.00
7.	28 March 2008	51,965.00
	Total:	257,166.75

10.  BG claims that by instructing Pat to prepare the BN Statement based solely upon the PTA Statement, Stephen had represented to BG and those who intended to rely on the BN Statement that (“Representations”):

(1) the 7 deliveries set out in the BN Statement were of mineral resources supplied by or on behalf of PTA and sourced from the Mine, and which had been delivered to and accepted by BN or a designated recipient, pursuant to the Supply Agreement; and

(2) that the total quantity of mineral resources so supplied by or on behalf of PTA from the Mine, and so delivered and accepted by BN or a designated recipient, met or exceeded the Quarterly Target Output of 250,000 wet metric tons for the Relevant Quarter (as defined in, and required under clause 3.5 of the Acquisition Agreement, so as to entitle Elite to the issue of the Tranche 2 Bonds).

11.  BG claims that the Board Resolution was passed, resolving to issue the Tranche 2 Bonds to Elite, at a board meeting which was chaired by Stephen and attended by his son Sunny Sy (“Sunny”), the 3^rd defendant, an executive director and the Deputy Chairman of BG, in reliance on and as induced by the BN Statement, which was tabled at the meeting, and the Representations.  BG claims in the Defence that the BN Statement and the Representations were in fact false.  First, and according to BG, the 4^th and 7^th purported deliveries referred to in the BN Statement and paragraph 9 above were deliveries of nickel ore supplied not from the Mine, but by another Indonesian company known as PT Antam TBK (“Antam”) and sourced from a mine in Gee Island.  Such nickel ore did not fall within the definition of, and were not, “Mineral Resources” under the Acquisition Agreement (“Source Claim”).

12.  Further, BG claims that the 2^nd, 5^th and 6^th purported deliveries referred to in the BN Statement and paragraph 9 above had not in fact occurred (“Falsification Claim”).

13.  Accordingly, it is BG’s case that the total quantity of mineral resources supplied by or on behalf of PTA from the Mine, and delivered to and accepted by BN or a designated recipient, for the Relevant Quarter, did not meet the quarterly target output of 250,000 wet metric tons (“Target”), as required by and defined in the Acquisition Agreement, and Elite was not entitled to the issue of the Tranche 2 Bonds.

14.  BG claims that Stephen’s instruction (to Pat) to prepare the BN Statement based solely on the PTA Statement constituted a fraud on BG, and that the Representations were made by him fraudulently, in that he knew that the Representations were false, or was reckless as to their truth.  BG further claims that Sunny also knew that the Representations were false, and knew or ought to have known that the 2 deliveries of nickel ore shipped from Gee Island were not from the Mine, and that the 3 purported deliveries had not in fact occurred. 

15.  According to the Defence, Stephen and Sunny owed fiduciary duties to BG as directors or shadow directors of the company: not to place themselves in a position where there might be a conflict between their interests and those of BG, to act bona fide and in the best interests of BG, and not to act for an improper or collateral purpose.  It is alleged that Stephen and Sunny had acted in breach of their fiduciary duties, by failing to abstain from voting for the Board Resolution, failing to inform the fellow directors that no Tranche 2 Bonds were in fact issuable, and by voting for the Board Resolution.

16.  In summary, BG claims that by reason of the fraud and/or fraudulent misrepresentations of Stephen, the Tranche 2 Bonds and shares of BG into which any of the Tranche 2 Bonds were converted (“Conversion Shares”) were void, or alternatively voidable and have been rescinded by BG on 20 June 2012, when their solicitors gave notice of rescission.

17.  By way of Counterclaim, BG claims (inter alia) rescission of all Tranche 2 Bonds and Conversion Shares registered in the name of Elite; indemnity from Elite and Stephen for any sum which BG may become liable to pay under any of the Tranche 2 Bonds or Conversion Shares which may be registered in the name of a party other than Elite; an account from Stephen and Sunny in respect of their breach of fiduciary duties and by reason of Elite’s knowing receipt of the Tranche 2 Bonds as a result of Stephen’s and Sunny’s breach of fiduciary duties; consequential and corresponding declarations; and alternatively, damages.

18.  It is not disputed that prior to the Acquisition Agreement, BG was in the business of manufacturing garments and apparel, and had not traded in mineral resources.  At the time of the Acquisition Agreement, BG was seeking to diversify into trading mineral resources and to take advantage of the booming nickel prices.  In its Reply and Defence to Counterclaim, and Counterclaim to Counterclaim (“Reply”), Elite claims that BG’s reasons for entering into the Acquisition Agreement were to enable BN (the wholly-owned subsidiary of the Target Company BG acquired under the Acquisition Agreement) to enjoy the commercial benefit of the Supply Agreement for the long term, and to have a constant and exclusive supply of nickel ore of a specified quality at a fixed price.

19.  In relation to clause 3.5 of the Acquisition Agreement, which provides for Tranche 2 Bonds to be issued to Elite when the quantity of nickel ore supplied “by or on behalf of” PTA and delivered to and accepted by BN was not less than the Target of 250,000 wet metric tons for the Relevant Quarter ended 31 March 2008, Elite claims that there was an understanding reached between the parties on 18 September 2007, at a meeting in the offices of the solicitors acting for the purchasers, ie BG and PE (“18 September Meeting”). 

20.  According to Elite, the 18 September Meeting was attended by Andrew Liu (“Liu”) the solicitor for BG and PE (the purchasers), some directors of BG including Francis Li (“Francis”), representatives of the financial advisers of BG, Stephen himself, David Supardi (“Supardi”), Ahmed Syed (“Syed”), and Stuart Lewis (“Lewis”) who was the representative of the mining consultants ITA (and had been engaged to prepare a technical report on the Mine).  Francis was an executive director and the Company Secretary of BG.  Supardi was the general manager of PTA, whose wife was one of the owners of PTA.  Syed was the Vice President of Bel Trade Investment Holdings Limited (“BT”), a company owned by Stephen, which is the parent company of Elite, and within a group of companies operating under the umbrella of Stephen.  Syed was the person assigned by the BT group to assist Elite in the negotiation of the Acquisition Agreement.

21.  According to the Reply, Lewis had pointed out to Syed at the 18 September Meeting that it would be impossible for the Mine to have a production capacity of 1 million wet metric tonnes in the first year of production, because of the lack of the necessary mining equipment and hauling trucks, the lack of infrastructure, and the necessity to widen the road from the Mine and to improve the jetty, all of which would take at least one year to implement.  Elite claims that in the presence of all those attending the 18 September Meeting, Syed conveyed to Liu and to Supardi what Lewis had told him, and Supardi had said that he could procure some other mines to supply nickel ores for and on behalf of PTA in order to meet the Target under the Acquisition Agreement.  According to the Reply, Supardi’s said proposal was agreed at the 18 September Meeting (“18 September Understanding”), with Liu assuring Supardi and Syed that he would prepare the amendments to the Acquisition Agreement which would reflect the 18 September Understanding.  It is claimed by Elite that at the time of the execution of the Acquisition Agreement, the common understanding of all the parties was that mineral resources could be obtained from mines other than the Mine to meet the Target under clause 3.5, and that amendments were indeed made to the Acquisition Agreement in a draft which was circulated on 21 September 2007 (“21 September Draft”).  In the 21 September Draft, the definition of the “Quarterly Supply Statement” was amended to include the phrase “or on behalf of” in respect of Quarters 1, 2, 3 and 4, so that “Mineral Resources supplied by (or on behalf of) the Indonesian Mining Company” (ie PTA) would constitute a proper “supply” under the Acquisition Agreement. 

22.  Elite and Sunny accordingly claim that BG is estopped from arguing that only mineral resources from the Mine can be taken into account in satisfying the Target for the Relevant Quarter under the Acquisition Agreement, and to the extent that the Acquisition Agreement does not reflect the common intention of the parties under the 18 September Understanding, they claim rectification of the Acquisition Agreement.

23.  In answer to the claims of fraudulent misrepresentations concerning the PTA Statement, the Reply pleads that the BN Statement was prepared by the sales department of BN, based upon invoices of PTA which Pat had obtained from PTA.  It is claimed that the 13 March shipment (the 4^th delivery) and the 28 March shipment (the 7^th delivery) the subject matter of the Source Claim were not handled by Stephen, but by the sales department and the shipping department of BN, which reported to Francis.  It is claimed that BG were at all material times fully aware that the 2 shipments in question were sourced from mines on Gee Island and not from the Mine.  The Reply denies the Falsification Claim, alleging that the 2^nd, 5^th and 6^th deliveries in question had been supplied by or on behalf of PTA and were delivered to and accepted by the recipients designated by BN (“Recipients”), namely Changzhou Retuo Mining Co Ltd (“CZ”) in respect of the 2^nd and 5^th deliveries, and Jiangsu Huaigang Import & Export Co Ltd (“JS”) in respect of the 6^th delivery.

24.  On the evidence produced in this case, it cannot seriously be disputed that at the material time of the relevant shipments and transactions which are the focus of these proceedings, BG (despite its being a listed company) was under the management control of Stephen, acting through himself and his wife Anita Hung (“Anita”), his son Sunny, and his close cohorts who included at that time his relative Pat.  This was until sometime in around May 2011, when Stephen lost control of BG to a camp comprising Tsoi Man Chi, Cai Dubing and their associates, who had acquired shares in BG.  In June 2011, Stephen resigned as Chairman, CEO and executive director of BG, and not long thereafter, in July 2011, trading in the shares of BG was suspended.  Sunny also resigned as executive director of BG in March 2012, and in mid-2012, the dispute between BG and Elite (which was still under Stephen’s ownership and control) concerning the issue of the Tranche 2 Bonds reared its head. 

25.  Stephen, Anita, Sunny, and Syed were called by Elite to give evidence at trial.  BG called Supardi, Francis, Nancy Jiang, Paul Ho, Liu and Sun Can Ping of CZ as witnesses.  Whereas I have considered and done my best to assess the demeanour of the witnesses in my determination of the issues in dispute, I have to bear in mind the apt reminders from many prominent judges that demeanour can be deceptive and should be approached with care, since “demaneanour” (as Lord Pearce put it in Onassis v Vergottis [1968] 2 Lloyd’s Rep 403 at 431) is “mostly concerned with whether the witness appears to be telling the truth as he now believes it to be”.  Each protagonist in the case may also have his/her own interest to serve.  In this case, each side has made accusations as to the other side’s attempts to distance themselves after the event from the transactions which have been labelled fraudulent and fictitious, and were financial losses to say the least.  Further bearing in mind the fact that the witnesses were testifying and being cross-examined as to events which took place over 10 years ago, it would in my view be more reliable to place emphasis on the contemporaneous documentation, and to use such documentation as an aid to test the reliability of the witnesses’ oral testimony.

26.  To summarize, in determining the key issues in dispute in this case, I would draw assistance from the oft-cited passage in The Judge (Oxford University Press, 1979) at p 63:

“This is how I go about the business of finding facts. I start from the undisputed facts which both sides accept. I add to them such other facts as seem very likely to be true, as for example, those recorded in contemporary documents or spoken to by an independent witness like the policeman giving evidence in a running down case about the marks on the road. I judge a witness to be unreliable if his evidence is, in any serious respect, inconsistent with these undisputed or indisputable facts, or of course if he contradicts himself on important points. I rely as little as possible on such deceptive matters as his demeanour. When I have done my best to separate the truth from the false by these more or less objective tests, I say which story seems to be the more probable, the Plaintiff’s or the Defendant’s.”

27.  In view of the disputes as to facts, I have placed no reliance on the declarations and statements of persons who have not been called as witnesses for cross-examination at trial.

28.  Counsel urged me in this case to draw adverse inferences in respect of a party’s failure to call witnesses at trial.  However, the drawing of an adverse inference is only appropriate when the opponent’s assertion and claim is credible. As the court observed in Gleneagle Holdings Ltd v Tse Yue Fong & others HCA 2807/2006, 12 May 2009, it would be unreasonable to draw an adverse inference against a party to get support to an assertion which cannot even stand on its own, or is not established.  If the primary assertion is not established, no adverse inference against the opponent can assist.

Issues

29.  The disputed issues for determination at trial are:

(1) Were there misrepresentations in the BN Statement?

(2) Is the BN Statement final and conclusive?

(3) Were the misrepresentations in the BN Statement known by Elite to be false?

(4) Can the Tranche 2 Bonds be rescinded?

(5) Were Stephen and Sunny in breach of their fiduciary duties?

(6) The relief to which BN is entitled.

30.  Determination of issue (1) involves construction of clause 3.5 of the Acquisition Agreement, as to whether the nickel ore to be supplied to BN can only be from the Mine, or can be sourced from another mine.  Determination of issue (1) also calls for a finding as to whether shipments 2, 5 and 6 referred to in the BN Statement in fact took place, or were fictitious.  It is not disputed that the nickel ore comprising shipments 4 and 7 referred to in the BN Statement did not in fact originate from the Mine, but from a mine in Gee Island, and from a company known as PT Antam.

31.  On the issue of fraudulent misrepresentations and findings of falsities in the BN Statement or relating to the purported shipments referred to therein, Leading Counsel for BG drew attention to the decision of the Court of Final Appeal in Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387. In his judgment, Ribeiro PJ explained the drawing of inferences of forgery or fraud at para 185:

“A related principle should be applied in tandem. Where, as in the present case, the court is invited to reach a conclusion of forgery as an inference to be drawn on the basis of circumstantial evidence, any such inference must be properly grounded in the primary facts found. The court guards against indulging in conjecture under the guise of drawing an inference where the primary evidence does not logically and reasonably justify the particular inference in question. ... The difference between the criminal standard of proof in its application to circumstantial evidence and the civil is that in the former the facts must be such as to exclude reasonable hypotheses consistent with innocence, while in the latter you need only circumstances raising a more probable inference in favor of what is alleged. In questions of this sort, where direct proof is not available, it is enough if the circumstances appearing in evidence give rise to a reasonable and definite inference: they must do more than give rise to conflicting inferences of equal degrees of probability so that the choice between them is mere matter of conjecture: see per Lord Robson, Richard Evans and Co Ltd v Astley (1911) AC 674, at p 687. But if circumstances are proved in which it is reasonable to find a balance of probabilities in favor of the conclusion sought then, though the conclusion may fall short of certainty, it is not to be regarded as a mere conjecture or surmise ... (Luxton v Vines (1952) 85 CLR 352 at p 358, citing the unreported decision in Bradshaw v McEwans Pty Ltd (unrep, High Court of Australia, 27 April 1951).”

32.  These are observations I bear in mind when making findings on the issues which arise in this case.

Construction of clause 3.5

33.  Under clause 3.5 (1) of the Acquisition Agreement, PE (BG’s subsidiary) as purchaser is to procure BN “to prepare, for each of the Relevant Quarters, a statement (“Quarterly Supply Statement”) of the quantity of Mineral Resources supplied by (or on behalf of) the Indonesia Mining Company and delivered to and accepted by (BN) (or its designated recipient(s))”.  Under clause 3.5 (4), the Tranche 2 Bonds shall be issued to Elite if the Final Quarterly Actual Output for the Relevant Quarter is not less than the Target of 250,000 wet metric tonnes (“WMT”) of Mineral Resources.

34.  There can be no doubt that Mineral Resource is defined in clause 1.1 of the Acquisition Agreement to mean “mineral resources containing nickel in the Mine”, and “Mine” is defined in the Acquisition Agreement as the Mine in Bunta. “Indonesia Mining Company” is defined in the Acquisition Agreement as PTA, the holder of the nickel exploitation licence, and the party to the Supply Agreement.  Recital (C) of the Acquisition Agreement refers to the Supply Agreement being entered into between BN and PTA.

35.  The Acquisition Agreement is consistent with the Supply Agreement, made between BN and PTA on the same day and forming part of the same transaction under the Acquisition Agreement.  The Supply Agreement is solely concerned with PTA’s supply of nickel ore from the Mine, and not from any other source.  In clause 1.1 of the Supply Agreement, “Nickel Ore” is defined as “the nickel derived from the Mine”, the “Mine” being defined as “the mining sites located at Bunta ... locations of which are detailed in the KPs”.  The term “Mineral Resources” is defined to mean “mineral resources containing nickel in the Mine”, and “KPs” are defined to refer to “the Nickel Mining Licenses mining authorizations held by the Indonesia Mining Company”.  “Nickel Mining Licence(s)” are defined to mean “the mining licence(s) held or to be held by the Indonesia Mining Company and the right to conduct mining and exploitation work for the Mineral Resources over the Mine exclusively pursuant to the Mineral Laws”.

36.  Clause 2.1 of the Supply Agreement provides that PTA was to supply exclusively to BN the “Nickel Ore” in accordance with the terms of the agreement, and under clause 4.2, PTA was to supply in the 1^st year the minimum amounts of 1 million WMT of Nickel Ore.  There was no provision that PTA could supply to BN nickel ore from other sources when it was unable to supply them from the Mine.

37.  The Acquisition Agreement refers in Recital (D) to the Mining Services Agreement, which agreement was entered into on 3 January 2008 between PTA and MS.  Under the Mining Services Agreement, MS was to provide mining services to the Mine, and not any other mine.

38.  It is not disputed by the parties that the original intention was for BG to acquire the Mine directly.  However, as it was unable to do so under Indonesian law, which did not allow a foreign entity to hold a mine, BG could only acquire the exclusive supply of nickel ore from the Mine through the structure of the Acquisition Agreement, and the Supply Agreement between BN and PTA.  Stephen admits this in his testimony in court, stating that BG “had basically bought the Mine”.

39.  According to the evidence, Stephen and representatives of BG had visited the Mine, and not any other mine.  The contemporaneous emails exchanged between Stephen, Syed and Liu on 14 September 2007 are consistent with and demonstrate BG’s intentions behind the purchase, that the aim and objective of entering into the Acquisition Agreement was to enable the listed company to acquire the mining rights and services, with the objective of controlling the mining operations.  Stephen and Syed agreed in their testimony that under the Acquisition Agreement, the issue of the Tranche 2 to 5 Bonds was conditional upon the production of the Mine, because the value of the Mine was dependent on its productivity. 

40.  On 21 December 2007, a circular was issued by BG in connection with the acquisition of the Target Company involving the issue of the Bonds (“Circular”). The Circular demonstrates that the Acquisition Agreement and the Supply Agreement related to and concerned nickel ore sourced from the Mine.  The “Mine” was stated in the Circular to be the Mine in Bunta.  The Circular referred to “Nickel Mining Licences, “Quarterly Supply Statement” and “Quarterly Target Output” according to definitions used in the Acquisition Agreement, which referred to the Mine, and to nickel ore under the Supply Agreement, which can only come from the Mine.  The Circular appended a report from IMC (“Technical Advisor”), which had been commissioned to complete a report on the mineral resources at the Mine only.  Information on the Mine was also set out in the Circular itself.

41.  Elite referred to the letter from the board of BG, which was part of the Circular, in which reference was made to the potential risks of the acquisition, and to the possibility of PTA and BG and its subsidiaries sourcing nickel ore from other mines as alternatives.  It was argued that this supports the contention that it was not the intention of the parties that the nickel ore would only be supplied from the Mine under the Acquisition Agreement.  I do not agree. 

42.  Reading the letter from the board as a whole, the directors were warning shareholders generally of the risks of BG’s entering into the acquisition being proposed, which risks included any uncertainties as to the ore being supplied from the Mine, and the risks of PTA failing to comply with its obligations under the Acquisition Agreement - as it would be the duty of the directors so to give warning, whenever a substantial acquisition is being proposed for a listed company.  The letter from the board pointed out that the estimate of the amount of nickel ores in the Mine is based on assumptions made by the Technical Advisor, and on variables which may prove to deviate from the actual state of the Mine over time and which are beyond PTA’s control. 

43.  The reference to the possibility of sourcing nickel ores from other mines was made under the heading “Default of the Master Supply Agreement”.  The letter from the board first identified the risks inherent in the transactions contemplated under the Acquisition Agreement and the Supply Agreement, in that PTA as the contracting party to the Supply Agreement may default under the Supply Agreement (made between PTA and BN) due to various reasons, including any failure to renew the material approvals and licences or regulatory requirements, inclement weather, labour disputes, political or social instability in Indonesia, change of mining law etc, which might result in the mining activities of PTA being terminated, thus disrupting the production schedule contemplated by BG and its subsidiaries.  In this context, the letter from the Board pointed out:

“Even though it is possible for (BG and its subsidiaries) and/or PTA to source nickel ore from other sources as alternatives, the cost and quality of such ores may be uncertain. Accordingly, the future operation, customer relationship and/or financial position of (BG and its subsidiaries) may be adversely affected.”

44.  Construing the letter as a whole, I reject the proposition that this warning of risks and the reference to the nickel ore being sourced from other alternatives is indicative of the fact that, irrespective of the clear definitions and terminology used in clause 3.5 of the Acquisition Agreement, “Mineral Resources” can mean nickel ore from a mine other than the “Mine” defined in the Acquisition Agreement.

45.  In seeking rectification of the Acquisition Agreement, Elite relies on the 18 September Understanding alleged to be reached between the parties at the 18 September Meeting, as to the meaning and operation of clause 3.5(1) of the Acquisition Agreement.  On Elite’s contention, under clause 3.5, the Tranche 2 Bonds shall be issued to Elite when the quantity of nickel ore supplied “by or on behalf of” PTA, and delivered to and accepted by BN, was not less than the Target of 250,000 WMT for the Relevant Quarter, and the common understanding was that mineral resources to meet the Target could be obtained from mines other than the Mine.

46.  As BG was keen to point out, the 18 September Understanding was only raised in pleadings in March 2016, and the only evidence on this came from Syed in his witness statement made in March 2016.  The 18 September Understanding is an essential plea going to the parties’ obligations under the Acquisition Agreement, and material to the core issue in dispute as to Elite’s entitlement to the Tranche 2 Bonds.  One would expect such an essential plea to have been made at an early stage in the proceedings as soon as BG’s claim for rescission was made in its original Defence filed in December 2012, and in the initial correspondence from Elite or its solicitors when the dispute first erupted before the commencement of proceedings.

47.  According to Syed’s evidence, at the all-parties meeting on 18 September 2007 when the 1 million WMT supply target imposed on the Mine under the draft agreements was being discussed for the 1^st year following completion, Lewis had already raised to Syed his concern that “no way” could the Mine have such a production capacity in the 1^st year.  The reasons given were the lack of necessary mining equipment and hauling trucks, the lack of infrastructure, the necessity to widen the roads from the Mine to the jetty to accommodate the heavy trucks, improvement of the jetty for loading, and the fact that the sourcing, delivery, construction and implementation of all these would take at least a year.  Syed claims that since Supardi who was responsible for PTA was sitting next to him, Syed considered it more relevant to speak to Supardi about this, and Supardi had said that he could always procure some other mine to supply nickel ores for and on behalf of PTA in order to meet the target.  According to Syed, he conveyed what Lewis informed him to both Supardi and Liu, the solicitor responsible for drafting the Acquisition Agreement.  Syed’s evidence is that Liu agreed to Supardi’s proposal, indicating that he would like the Acquisition Agreement to be signed first, so that BG could suspend trading in its shares and publish an announcement of the conditional agreement, but that he would proceed to work on the amendments which would reflect the 18 September Understanding, and that the amended pages would be inserted into the Acquisition Agreement.  According to Syed, at 6:52 pm on 21 September 2007, the 21 September Draft, of the relevant pages of the Acquisition Agreement, was circulated.  On Syed’s evidence, in the 21 September Draft, the definition of “Quarterly Supply Statement” was amended to include the phrase “or on behalf of”, so that “Mineral Resources supplied by (or on behalf of) the Indonesian Mining Company” would constitute a proper “supply” - pursuant to and in accordance with the 18 September Understanding.

48.  Syed’s claims are denied by Supardi and by Liu.  On this essential point of the alleged 18 September Understanding and the alleged discussions at the 18 September Meeting, Lewis (from whom the concerns as to the impossibility of the Target being met came) never gave evidence.

49.  Supardi’s evidence is that neither Lewis nor Syed ever mentioned to him before, during or after the 18 September Meeting, that the Mine could not have realistically met the production target of 1 million WMT in the 1^st year.  Supardi denied that he had ever said to Syed, or to anyone else, that he could always procure some other mine to supply nickel ores for and on behalf of PTA in order to meet the Target.  According to Supardi, the intention for the structure behind the Acquisition Agreement and Supply Agreement was for it to be equivalent to an outright sale and purchase of the Mine (which is also accepted by Stephen), and that it would not make any sense for the production target to be met by other mines, instead of the Mine.

50.  I accept Supardi’s testimony, that at the time of and prior to the execution of the Acquisition Agreement and the Supply Agreement, Stephen and the other representatives of BG had given assurances that there would be sufficient funding and capital to be made available, to provide to PTA and the Mine all the necessary equipment and infrastructure, and to have all the road and jetty improvements in place, in order to have the mining extractions and operations underway to achieve the targets set under the agreements.  It was only because such funding was not eventually provided, as promised, that difficulties emerged and the Target could not be achieved.

51.  According to Liu, the partner of the firm of solicitors acting for BG at the material time and who drafted the Acquisition Agreement and the amendments made in the 21 September Draft relied upon by Syed, the amendment by the insertion of the phrase “for and on behalf of” served a purpose totally different to that claimed by Syed.

52.  Liu explained that at the material time when the relevant agreements were negotiated, Indonesian law prohibited a foreign entity from directly acquiring mines situated in Indonesia.  Accordingly, an outright purchase of the Mine from PTA, or an outright purchase of PTA which held the licence to exploit the Mine, was not possible.  As an alternative, BG decided on a structure that would enable it to acquire and secure the exclusive supply by PTA of mineral resources from the Mine, with an option to purchase the Mine (if possible) during a certain period if the relevant Indonesian law could be relaxed.  Liu referred to the email exchanges between the parties on 14 and 17 September 2007, over which the parties agreed on the structure for the acquisition, and in particular to Stephen’s email of 14 September 2007, when he suggested that the parties should consider “to give the mining right and all benefit to the Listco”, and “to make it attractive, the quantity can be increased to 3M tons per year”.  According to Liu’s evidence, the common intention of the parties in structuring the deal was to ensure that BG and its subsidiary would have the exclusive supply of mineral resources from the Mine, which intention never changed throughout the course of the negotiations, as evidenced by the drafts of the Supply Agreement, and the definitions of the terms “Mineral Resources”, “Mine” and “Nickel Ore” used throughout, all referring to “nickel ore derived from the Mine”.

53.  Liu explained that one of the issues discussed by the parties at or before the 18 September Meeting was whether PTA’s right “to exploit mineral resources” under its mining licence was the same as the right “to engage in the trading of mineral resources”.  The parties had discussed jurisdictions like China where export activities may only be conducted by entities which hold import export licences, and there was a concern that PTA might not be able to export and sell the mineral resources it mined.  Consequently, and according to Liu, it was agreed that the agreements and in particular clause 3.5 of the Acquisition Agreement would be amended to cater for this risk.

54.  According to Liu, after some negotiations, it was agreed that PTA would be allowed to supply the mineral resources under the Supply Agreement through a third party Indonesian company.  Liu proposed amendments to the definition of “Quarterly Supply Statement”, and to clause 3.5 (1) (a), to refer to “the quantity of Mineral Resources supplied by (or on behalf of) the Indonesian Mining Company”.  These amendments were reflected in the 21 September Draft.

55.  Liu emphasized that the phrase “supplied by (or on behalf of) was inserted solely to provide for the circumstances where an export company would supply mineral ores from the Mine, on behalf of PTA.  He highlighted that the definitions of “Mineral Resources”, “Mine” and “Nickel Ore” remained unchanged after the 18 September Meeting and despite the 21 September Draft, all bearing references to the nickel ore derived from the Mine. 

56.  On review of the contemporaneous emails exchanged on 18 September 2007 and shortly thereafter, I agree that no amendments had been made to the Acquisition Agreement and the Supply Agreement which are consistent with or reflect the alleged 18 September Understanding.  The draft or attachment circulated by Liu’s email of 20 September 2007 at 11:51pm had the original version of clause 3.5 deleted (as Syed emphasized).  However, the attachment had the words “[Catch-up provisions - Clause 3.5 to be inserted]” added.  On 21 September 2007 at 6:52pm, the catch-up provisions were included, with the revised clause 3.5, which amendments had nothing to do with the source of the nickel ore or the supply of nickel from mines other than the Mine.  As Liu pointed out, when the solicitors responsible for the drafting of the Supply Agreement reverted to Liu on the amended clause 3.5, they never sought to change the definition of “Quarterly Supply Statement” or “Quarterly Target Output”, both of which provided that “Mineral Resources” should be supplied according to the Supply Agreement, which related solely to the Mine.

57.  Liu is an experienced solicitor, with no reason or motive to lie in court, and Elite has not suggested that Liu was lying in his evidence.  I find Liu’s evidence to be forthright, and his explanations with references to the contemporaneous email exchanges and drafts to be convincing.  Whatever subjective understanding (or misunderstanding) Syed may have had as to the effect of the amendments contained in the 21 September Draft, I accept the evidence of Liu and the other witnesses of BG, that there was no common mistake as to the content or effect of the Acquisition Agreement and clause 3.5 in particular.

58.  In fact, in the contemporaneous emails and documents leading up to the execution of the Acquisition Agreement, there was no mention made of any concern of any party as to the impossibility or unlikelihood of the Mine meeting the target of 1 million WMT to be supplied in the 1^st year of the Acquisition Agreement.

59.  In the Technical Advisor’s report dated 21 December 2007, which was prepared by Lewis and his team and attached to BG’s Circular in December 2007, it was anticipated that the initial production rate would be targeted at 1 million WMT per annum, with an increase to 2 million WMT per annum in the 2^nd year, and 3 million WMT per annum in the 3^rd year.  On a fair reading of the report, it can be said that the view expressed by Lewis and his team was that the Mine could meet the 1 million WMT per annum production target provided that the necessary infrastructure was installed.

60.  Clause 4.2 of the Supply Agreement also anticipated PTA supplying 1 million WMT per annum of nickel core from the Mine in the 1^st year of the Supply Agreement.

61.  Significantly, BG was still targeting the delivery of 250,000 WMT of nickel ore by the end of March 2008 (said to be the “short-term objective”), and 1 million WMT during the 1^st year of production (the “long-term objective”), as evidenced by the agendas of BG’s internal meetings dated 13 February 2008 and 20 February 2008, which meetings were attended by Stephen, Sunny, Syed, Pat and Danny Yim (“Danny”) who was the Chief Operation Officer of BN’s mining operations.  In discussing ways to achieve its short-term target of delivering 250,000 WMT by the end of March 2008, there was no mention whatsoever of any plan or action to source the nickel ore from any other mine.  If that was indeed an option under the Acquisition Agreement, as Elite claims on the basis of the 18 September Understanding, one would reasonably expect some discussion to take place in February or March 2008, particularly in view of the fact (as elaborated below) that by February 2008, it should already have been clear that the Target was not being met.

62.  As alluded to in paras 39 and 52 above, the contents of the contemporaneous emails support the construction contended by BG, that the parties intended 1 million WMT to be supplied by PTA from the Mine to BN in the 1^st year of the Agreement.  The 18 September Understanding was not referred to or mentioned in any of the contemporaneous documents before or after the signing of the Acquisition Agreement and the Supply Agreement.  If the 18 September Understanding had indeed been reached, it was an important understanding as to the obligations of the parties and the Target to be met, and one would expect the parties to refer to it in the emails after the 18 September Meeting, and/or after the signing of the Agreements, and in particular at the later period in time in early 2008, when the production volumes at the Mine were low.  On the evidence, there was no such reference at all.

63.  The email from Danny dated 2 October 2007 referred to supply from the Toili mine and from other parts of Sulawesi and Morowali.  This was in response to Syed’s email of the same date, regarding the nickel content of the ore to be supplied under the Supply Agreement.  Danny was not involved in the negotiation of the Acquisition Agreement or the Supply Agreement and was not a recipient of any of the emails in which the drafting of the agreements was discussed.  Syed expressly stated in his email that the parties to whom he sent his email did not have a copy of the Supply Agreement with them, but Syed mentioned in his email that it was proposed that the quality of the nickel ore to be delivered by PTA had to fulfill the typical specification of “NI not being lower than 1.5%”.  The questions he posed in the email was:

“There will definitely be ore with Ni content below 1.5%. What will we do that (sic)? We will sell it to other buyers? ...”

64.  Read in the proper context, I accept the explanation offered on behalf of BG, that Danny was commenting on the quality of the nickel ore to be supplied under the Supply Agreement, and how they could be sold by BN to third party buyers, ie by blending with nickel ores from other sources.  As confirmed by Stephen in his evidence, nothing was in fact done to follow up on Syed’s comments in his email.

65.  On behalf of Elite, counsel referred to an email from Syed dated 5 October 2007, in which Syed remarked:

“As long as the HK subsidiary (ie BN) has received the economic benefit, i.e. the difference between the agreed US $16 FOB price of the ore and the selling price of the ore at market rates to a third party and with tonnage from this shipment included, if the quarterly tonnage reaches or exceeds 250,000 MT in any quarter in the 1^st year the CBs payable to the vendors should not be withheld”.

66.  It was argued that this email indicates that the intention of the parties was simply for BG and its subsidiary to receive the economic benefit of obtaining nickel ores at the fixed price of US$16 and to sell the ore at a higher market rate, and it made no difference whether the nickel ore came from the Mine, or elsewhere.

67.  Again, viewed in its proper context, the emails exchanged between Syed and the other parties including Xia Shen of Macquarie (“Xia”) were in relation to the catch-up provisions being discussed, leading to the finalization of clause 3.5 (9) of the Acquisition Agreement, and the content of the letter from the board dealing with this issue, on page 16 of the Circular. Neither Syed’s email exchange with Xia on 5 October 2007, nor Danny’s email of 2 October 2007, can be read as an indication that the parties had the understanding that nickel ore from mines other than the Mine would count towards the calculation of the Quarterly Actual Output or the Quarterly Target Output for the purposes of clause 3.5 (1) and (4) of the Acquisition Agreement.

68.  The alleged objective of simply securing a constant supply of nickel at a low price, without the requirement as to the Mine being the source or origin of the ore supplied, is totally inconsistent with the express terms and the elaborate provisions of the Acquisition Agreement and the Supply Agreement.  As Liu rightly pointed out, the only asset in discussion under the structure and scheme of the agreements was the Mine, and nothing else.  The acquisition was considered a major transaction of the listed company, and was the subject of elaborate discussions amongst the parties and the professionals, with the terms of the acquisition being set out in elaborate detail in the Acquisition Agreement, the Supply Agreement and the Mining Services Agreement.  It does not make commercial sense if, notwithstanding the clear and express provisions of the relevant agreements, the nickel ore could be supplied from other mines, and that this deviation should not be made clear by express provisions in the Acquisition Agreement and the Supply Agreement.

69.  I reject the 18 September Understanding, as well as Elite’s claim that there was any mutual mistake, common to Elite and BG, that nickel ore from sources other than the Mine would constitute proper “supply” to be counted for the purposes of clause 3.5 and whether the Target has been met under the Acquisition Agreement.  I reject the claim that the Acquisition Agreement should be rectified on the basis of any alleged common mistake, and the claim that BG is estopped from complaining that the nickel ore supplied was not sourced from the Mine.

Is the BN Statement final and conclusive?

70.  Elite argued that the BN Statement should be conclusive evidence of the quantity of Mineral Resources supplied by (or on behalf of) PTA and delivered to and accepted by BN (defined as “Quarterly Actual Output” in the Acquisition Agreement), as a result of clause 3.5 (2) of the Acquisition Agreement.  Clause 3.5 (2) reads:

“If there is no difference in the record kept by (PTA) as to the Quarterly Actual Output, the Quarterly Actual Output as recorded in the Draft Quarterly Supply Statement shall be conclusive evidence of the Quarterly Actual Output (“Final Quarterly Actual Output”).”

71.  The Draft Quarterly Supply Statement is the statement prepared by BN and supplied to Elite as the vendor and PE as purchaser under the Acquisition Agreement.

72.  I accept the submissions made by Leading counsel for BG on this issue.

73.  First, a conforming Quarterly Supply Statement is a condition precedent to the issuance of the Tranche 2 Bonds under clause 3.5 of the Acquisition Agreement.  If the BN Statement was not in conformity with clause 3.5, BG’s obligation to issue the Tranche 2 Bonds was not triggered.

74.  Secondly, clause 3.5 (1) (a) requires the relevant BN Statement to contain “the quantity of Mineral Resources supplied by (or on behalf of) (PTA)”.  As defined, Mineral Resources means nickel ore from the Mine.  A statement which contains deliveries of nickel ore which did not come from the Mine, or contains deliveries which did not in fact occur, is clearly defective and non-compliant with clause 3.5 (1) (a).

75.  Importantly, the output recorded in the Draft Quarterly Supply Statement is only conclusive evidence of the Quarterly Actual Output under clause 3.5 (2), properly construed.  Under clause 3.5 (2), if there is no difference in the record kept by PTA as to the Quarterly Actual Output (of the quantity of Mineral Resources supplied), such output as recorded in the Draft Quarterly Supply Statement shall be conclusive of the said Quarterly Actual Output, namely, the quantity of the output, and not of the origin of the nickel ore, and whether deliveries had in fact taken place.

76.  In my judgment, clause 3.5 (2) does not preclude the Court from considering whether the BN Statement is compliant with the provisions of clause 3.5 (1), whether it does state the quantity of Mineral Resources, as defined to mean nickel ore from the Mine, and whether it states the quantity of Mineral Resources delivered to and accepted by BN or its designated recipient(s).

Were there misrepresentations in the BN Statement?

77.  The BN Statement was tabled at the meeting of the directors held on 6 May 2008 (“Meeting”), when the issue of the Tranche 2 Bonds was considered and the Board Resolution was passed.  The Meeting was attended by Stephen, who was chairman of the Meeting, Sunny, Pat, Francis and 5 other directors of BG.  According to the minutes of the Meeting (“Minutes”), Stephen informed the Meeting that approval from the shareholders had been obtained at the EGM on 7 January 2008, for the allotment and issue of the consideration shares under the Acquisition Agreement, and that such number of Conversion Shares as may be allotted and issued upon exercise of the conversion rights attaching to the Bonds.  As the Minutes record, the BN Statement and the PTA Statement were tabled at the Meeting.  On BG’s case, Stephen, Sunny and Pat all had actual knowledge at the time that the Mine had failed to achieve the output of nickel ore required for the issue of the Tranche 2 Bonds, but they presented the BN Statement with its false contents to the board at the Meeting, and voted in favor of the issue of the Tranche 2 Bonds to Elite. 

78.  It is debatable whether the form and substance of the BN Statement actually comply with the requirements of clause 3.5 (1) for a “Quarterly Supply Statement”, which refers to a statement of the quantity of Mineral Resources supplied by (or on behalf of of) PTA and delivered to and accepted by BN or its designated recipient(s).  As Mr Scott SC acting for BG pointed out, the BN Statement only sets out “Shipment Details from January 15 2008 to March 31 2008”, with names of the alleged buyers, description of the shipment (being nickel ore), the quantities in WMT, the respective ports of discharge, the estimated time of departure, the FOB price, the total amount in US dollars, the mining cost per WMT and the gross profit.  I accept, however, that as recorded in the Minutes, the BN Statement in such form was tabled at the Meeting as evidence of the Quarterly Actual Output referred to in clause 3.5 (1) (a) of the Acquisition Agreement, for the purpose of seeking the Board Resolution to issue the Tranche 2 Bonds.  As such, the representation made to the board is that the BN Statement sets out the quantity of the Mineral Resources (ie defined to mean resources containing nickel in the Mine) which had been supplied by or on behalf of PTA, and delivered to and accepted by BN or its designated recipient(s).

Shipments 4 and 7: the Source Claim

79.  There is no dispute, as Elite agrees with BG, that the nickel ore comprising the 4^th and 7^th deliveries referred to in the BN Statement did not come from the Mine.  To that extent, the representation in relation to the contents of each of shipments 4 and 7 is untrue, since the nickel ore comprising these shipments were not from the Mine, and do not fall within the definition of “Mineral Resources” in the Acquisition Agreement.

Shipments 2, 5 and 6: the Falsification Claim

80.  The issue in hot dispute is whether or not shipments 2, 5 and 6 referred to in the BN Statement actually took place, or were fictitious.

81.  Whatever the witnesses for Elite (who were at the material time part of the management of BG) may claim in these proceedings, the contemporaneous documents and records speak for themselves.  

82.  If the BN Statement was accurate and true, between 15 January and 31 March 2008, PTA had supplied and BN had received 257,166.75 WMT of nickel for shipment to buyers of BN/BG.

83.  According to the Organisation Chart prepared by Francis and sent to Syed, and referred to by Sunny in his witness statement, Jacob Pang (“Jacob”) was at the material time the Business Manager of Mining Operation.  He produced Daily Production Reports for the Mine, which were sent by email each month to Stephen, Sunny, Anita, Syed, Danny and Nancy Jiang, the General Manager of Sales and Marketing (“Nancy”).  According to the Daily Production Report sent by Jacob and dated 30 January 2008, the total amount of nickel produced from 2 January to 30 January 2008 was 27,845 WMT.  According to the Daily Production Report dated 25 February 2008, the total accumulated quantity of nickel produced was 15,870 WMT. 

84.  As highlighted by Leading Counsel, from February to March 2008, the records show that the Mine did not produce 120,000 WMT of nickel ore which was allegedly delivered under shipments 2, 5 and 6 on 20 February, 18 March and 20 March 2008.  According to Jacob’s email of 16 March 2008 headed “Bunta Update 16/3”, production “had stopped for the past couple of days due to heavy rain”, “production figures had slipped over the past few weeks”, and the “average figures had dropped to about 500-600 MT daily”.  On 18 March 2008, in Jacob’s email headed “18^th March update”, it was stated:

“As per above, due to the uncertainty surrounding our quality and the lack of space in our stockpile, it is much better to STOP PRODUCTION NOW with the idea that it is IMC’s requirements.”

Jacob further recorded that as at 17 March 2008, production figures were 26,830 MT.

85.  It is also evident from Jacob’s email of 18 March 2008 that by 17 March 2008, the stockpile was full (which was the reason he asked to stop production), that loading was very slow due to the constant breakdown of heavy equipment, unskilled crane operators and other reasons, and that inquiries had been raised as to whether the next shipment could be made.

86.  Jacob’s email of 24 March 2008 headed “24^th March Update” still referred to the continuing problems of the need for bulldozers and appropriate equipment, purchase of land for the expansion of the mining activities, and the need to clear up the jetty stockpile for production to continue.  His email recorded that by 24 March 2008, there had been no production for the past 6 days, and no direction had been given as to whether production could continue.  On 27 March 2008, Jacob sent his “26^th update” to Danny and Patrick Chan the shipping manager of Mining Operation (“Patrick”), in which he stated:

“You can choose whether this is to be sent to our Chairman, managing Director and VP.

I have read our “expected” production schedule. Frankly told, with the current speed of infrastructure build up in Bunta and some of the issues as I mentioned below, it will make getting up to that level quite impossible in my opinion.”

Jacob then referred to the same and repeated issues of the lack of bulldozers, lack of trucks, the need for new rental equipment, and the problem of the existing haul road.  He further stated:

“We will still be using the existing haul road and current contractor’s trucks for our ore production. Based on our past experience, the max production is average 1,000-1,500 MT per day. Tony our local manager has expressed that he will need 4,000 MT per day to get us up to 100,000 MT per month since there are many wet weather days involved. Off the record, he thinks he can deliver 30,000 in April given the right conditions.

Even with our increased mining, quantity per day cannot be ramped up unless Ulos Kalaka Road has being built along with own Iveco trucks all in place. The Ulos Kalaka road is again a pressing need.” (Emphasis added)

87.  Another contemporaneous document was the IMC Bunta Monthly Project Report from the Technical Adviser dated March 2008.  This also stated, under “Monthly Project Overview”, that hauling from the Mine to the jetty was suspended on 17 March 2008 and was only expected to resume in early April, and that the total ore tonnes hauled for March 2008 was 26,830. 

88.  The problems encountered at the Mine during this period of time, which Supardi explained in his evidence was due to BG and Stephen failing to live up to their promises to inject the necessary funds into MS to enable the mining operations to be carried out, were perhaps aptly summarized by Jacob in his email to Danny of 31 March 2008, when he stated:

“We are now entering a critical stage. The main themes of the tension now in Bunta is as follows:

(1) Head Office (HK) pushing IMC for production

(2) IMC pushing Indonesian side to purchase land, do this and that fast

(3) Indonesian office requesting funds to do so from Hong Kong office

These are all interlinked and really similar to a scissors paper stone issue.”

89.  In any event, it is clear that the production output recorded in the Daily Production Reports, and as summarized in Jacob’s 1 April Update, does not support the quantities of a total of 120,000 WMT alleged to have been delivered under shipments 2, 5 and 6.  In Jacob’s email of 2 April 2008 to Danny headed “April 1^st 2008 Update”, it was stated:

“Contractually, there is supposed to be a production of 30,000 MT per month subject to weather. There is a 50% penalty for the contractor if he does not perform. The past record was January 26,500 MT, February 19,145 MT, March 9,000 MT (till 18^th March).” (Emphasis added)

On Jacob’s fingers, therefore, the total quantity produced for the 3 months from January to March was 56,645 MT only.

90.  On the documentary evidence, it is highly improbable (if not impossible) that the Mine could produce as much as 50,000 WMT to meet the delivery under shipment 2, which allegedly took place on 20 February 2008, or 40,000 WMT to meet the delivery under shipment 5 which allegedly took place on 18 March 2008.

91.  As for shipment 6 which allegedly took place on 20 March 2008, the Mine was only producing 9,000 WMT by 18 March 2008 according to the 1 April Update. It was impossible for the Mine to have produced 21,000 WMT in 2 days to meet shipment 6 (of 30,000 WMT).  As evidenced by Jacob’s Daily Production Reports for February 2008 and March 2008, the average production rate did not exceed 900 WMT per day in January to March, which fell to 500 to 600 WMT per day in early March 2008.

92.  Leading Counsel highlighted the fact that according to the BN Statement, shipments 2, 5 and 6 were alleged to be deliveries from the stockpile.  However, according to Jacob’s 18^th March Update, the stockpile could only hold around 26,830 WMT to full capacity.

93.  Before turning to the testimony of the witnesses on the subject of the Falsification Claim involving fictitious shipments, it is pertinent to consider the email from Stephen on 1 April 2008, immediately after the expiry of the Relevant Quarter, as it is illuminating on the state of the deliveries relevant at the material time to the question of whether the Target had been met, for the Tranche 2 Bonds to be issued under clause 3.5.

94.  To put things in the proper perspective, the Quarterly Supply Statement was to be prepared, under clause 3.5 (1) of the Acquisition Agreement, for the 1^st quarter of 2008 ending 31 March 2008.  The PTA Statement, on which the BN Statement tabled at the Meeting was based, was dated 31 March 2008.

95.  On 1 April 2008 at 10:41 am, Jacob sent an email to Danny, saying:

“The fence was taken down yesterday, but production cannot start.

(a) there is so no more land for them to work on, topsoil, overburn, pit 2 etc.

(b) Bunta has no $for fuel! All machinery including Ricky will come to standstill ...”

96.  Danny then sent an email to Stephen, Pat, Sunny, Syed, Nancy, Jacob and Patrick at 10:59 am on 1 April 2008, stating:

“As anticipated, we are unable to proceed on the production for lack of MONEY in Bunta:

(1) We cannot supply fuel after today - costing about US $5,000 each day.

(2) We are short of land for topsoil storage -we need to buy land.

(3) We owe Ricky too much money - not only the outstanding payments for the last 2 shipment. David has borrowed four new Mazda cars from Ricky for use by IMC (IMC badly wants the four cars). Now Ricky pressing for payment, otherwise he may take back all. This will end up big embarrassment for IMC and us.

If there is no money to be supplied to Bunta, IMC must stop work today for lack of fuel.

I believe IMC will raise complaint to Ahmed today.”

97.  This prompted an email from Stephen, sent to Pat and Syed, and copied to Sunny, at 11:12 am on 1 April 2008, in which Stephen stated:

“Pat,

I am really frustrate (sic) about this type of msg>>> what happened to Bunta now, they only ship last 30K plus chen peing 16K. How much we totally send now, can someone make it clear on the accounts.” (Emphasis added)

98.  The figures of 30,000 and 16,000 (WMT) referred to by Stephen as having been shipped from the Mine appear to be consistent with the figures given in shipment 1 referred to in the BN Statement (a total of 29,675 WMT), and in shipment 3 (of 16,207.35 WMT), the only 2 deliveries which are not disputed.  These deliveries took place on 5 February 2008 and 20 March 2008.  Stephen’s email of 1 April 2008 made no mention of the 5 other alleged shipments and deliveries which should (on Elite’s case) have taken place by then, on 20 February, 13 March, 18 March, 20 March and 28 March 2008.  It is most improbable that they had in fact taken place, and they should not have been included in the Quarterly Supply Statement under clause 3.5 (1), as Stephen knew on 1 April 2008.

99.  The evidence of Nancy, Supardi, Sun Can Ping of CZ (“Sun”) and JS confirm that the deliveries comprising shipments 2, 5 and 6 did not take place.

100.  According to the Organization Chart prepared for BN, Nancy was at the material time the General Manager of sales and marketing, with responsibility for the sales of nickel ore to the PRC market.  On Nancy’s evidence, she was in charge of sourcing buyers for the nickel ore from the Mine supplied by PTA to BN, and identifying other trading opportunities for the company.  She was familiar with the production capacity of the Mine, and was kept informed of all transactions involving the sale of nickel ore obtained from the Mine.  She worked closely with Danny and Jacob during the relevant time.  According to Nancy, Jacob’s Daily Production Reports were sent and copied to the personnel involved with the mining operations, which included Stephen, Anita, Danny and herself, and these daily reports set out the daily production rate of the Mine, and the total quantity of ore available at the Mine.

101.  Nancy confirmed that from 18 March 2008, production at the Mine had come to a halt, as new contractors were appointed to take over the mining operations.

102.  Nancy’s evidence is that of the 7 shipments set out in the PTA Statement and the BN Statement, only shipment 1 and shipment 3 were of nickel ore which was obtained from the Mine and supplied by PTA to BN during the Relevant Quarter.  According to Nancy, shipment 4 and shipment 7 comprised deliveries of ore from Gee Island, since she negotiated the deal directly with the supplier and the end buyers.

103.  Despite being in charge of sourcing buyers for the nickel ore supplied to BN/BG, and in particular buyers from the Mainland, Nancy’s evidence is that she was not aware of the contracts behind shipments 2, 5 and 6, nor of the shipments in question, although it was part of her job to be informed of all contracts relating to nickel ore obtained from the Mine.  That makes sense, since her job was to sell the nickel ore so obtained.  Nancy further pointed out that the deliveries comprising shipments 2, 5 and 6 were not mentioned in Jacob’s Daily Production Reports, nor in the Technical Adviser’s Monthly Project Report for March 2008.

104.  On Nancy’s evidence, she was on a trip back to her hometown in Jiangsu in May 2013, when she met with Chen Ping (“Chen”), Xu Feng and Sun of CZ, which was the alleged purchaser of the nickel ore comprising shipment 2 and shipment 5.  During such visit, Nancy was informed by Chen that in early March 2008, CZ did sign 2 contracts with BN for the purchase of 50,000 WMT and 40,000 WMT respectively of nickel ore, but the cargo was never delivered by BN, and consequently, CZ never paid for the same.

105.  In support of the purported deliveries under shipment 2 and shipment 5, the buyers of which were stated in the BN Statement to be “Changzhou Wufan”, 2 sales contracts (“Sales Contracts”) were relied upon, purportedly signed by BN and CZ, and respectively dated 1 February 2008 and 3 March 2008, for CZ’s purchase of 50,000 WMT and 14,000 WMT respectively of nickel ore from BN.  Under these contracts (which were on identical terms), the nickel was to be delivered by BN in February 2008 and March 2008 respectively, “from any Indonesian port to China”.  Elite also relies upon 2 Notices of Acceptance (“NOA”), purportedly issued by CZ and respectively dated 20 February 2008 for shipment 2 and 18 March 2008 for shipment 5, by which CZ acknowledged that the cargo comprising shipments 2 and 5 had been transferred to CZ at the port of Bunta.

106.  As highlighted by BG, clause 8 of the Sales Contracts requires the nickel shipment to be weighed at the port of loading and to be certified by the Ship Master according to the draft survey report of the vessel.  The weight in the provisional invoice was to be based on the draft survey report of the vessel at the loading port.  In respect of shipments 1, 3, 4 and 7, the draft survey reports showing the weight of the cargo have all been produced at trial. For shipments 2, 5 and 6, no draft surveys were available and the quantity of each of the disputed shipments was in exact round figures.  According to the evidence relied upon by Elite, the round figures are explained by the fact that the weighing of the nickel ore took place either by counting the number of trucks, multiplied by the capacity of the trucks, at the time of delivery, or by using weigh load scales at the port, and rounding up the figures.  Nancy’s evidence, however, is that there was no weighbridge at the loading port in Bunta.  The explanation offered by Elite also ignores the contractual requirement for weighing under clause 8 of the Sales Contracts.

107.  Unlike shipments 1, 3, 4 and 7 which did take place, there were no shipping documents such as bills of lading, certificates of readiness, or certificates of origin relating to shipments 2, 5 and 6.  Under clause 2 of the Sales Contracts, delivery of the nickel was to be “from any Indonesian port to China”.  Even if the sale of the nickel was to be on FOB basis, and the nickel was to be delivered by BN to CZ at the Indonesian port, CZ would be responsible for chartering the vessel, insuring the cargo and nominating a port of discharge, and a set of the relevant shipping documents would have been supplied to BN.  None has been produced for shipments 2, 5 and 6.  There was no way to transport the cargo from Bunta in Indonesia to China, other than by ship.

108.  Sun, a shareholder and director of CZ, also gave evidence at the trial as to the Sales Contracts underlying the deliveries for shipments 2 and 5.  Sun’s evidence is that the 2 Sales Contracts were in fact never performed, as the cargo was not delivered to CZ at any time, and since the cargo was never delivered, CZ did not make any payment under the contracts. 

109.  The BN Statement names Changshan Wufan as the buyer of the nickel comprising shipments 2 and 5.  According to Sun, it was CZ which entered into and was named in the Sales Contracts, and CZ had no knowledge of and was never associated with the company “Changzhou Wufan” named in the BN Statement.

110.  According to Sun’s witness statement, CZ’s company accountant had conducted a search of CZ’s files, and this confirmed that no records of any shipment or payment existed.  Sun maintains that CZ never received the invoices which BN claimed to have issued to CZ in respect of shipment 2 and shipment 5. According to Sun, the directors and shareholders of CZ have no knowledge of the NOA (which acknowledged CZ’s receipt of the cargo comprising shipment 2 and shipment 5), and they were not issued with the authority of CZ.

111.  Sun maintains that despite the chops which appeared on the NOA, the NOA were not signed by any representative on behalf of CZ.  Sun pointed out that it was impossible for the NOA to be issued with the chop of NOA but without any signature to accompany the chop.  Neither of the 2 NOA bore any signature.  The NOA dated 18 March 2008 bore a chop which was only to be used on contracts.

112.  In Court, Sun candidly explained that the Sales Contracts were only “contracts to show intention”, which Chen had signed in February and March 2008 to accommodate Stephen who wanted the Sales Contracts to be signed.  Sun admitted that the Sales Contracts were entered into by CZ to show that it had the intention then to purchase the nickel, but the truth of the matter was that BN never delivered the cargo, and no payment had ever been made by CZ for the shipments which never took place.

113.  I find Sun to be a truthful witness, and do not consider that he had any reason to lie or to perjure in court.  His candid testimony bears the ring of truth, that the Sales Contracts were signed in February and March 2008, at Stephen’s behest, only to show that CZ had the intention then to purchase the nickel.  As Sun pointed out, CZ did not consider that signing such a contract to show intent would matter, as BN never offered delivery of the cargo, and did not ever ask CZ to take delivery or to pay for the cargo.  BN did not complain about CZ’s failure to make payment or to nominate any vessel to take delivery, and CZ did not complain about BN’s failure to make delivery, which shows that neither intended to perform the Sales Contracts. 

114.  As for Nancy, her evidence is supported by the contemporaneous documents, and I do not agree with the suggestion made by counsel for Elite that Nancy is unreliable, or was motivated by personal grudges to lie in her evidence.

115.  JS, the purported purchaser of the delivery comprising shipment 6, issued a letter on 9 May 2013, stating that the sales contract dated 28 February 2008 made between BN and JS was never performed.  According to JS’s letter, BN never notified JS of the date of delivery of the cargo, and JS never made any payment.

116.  The BN Statement is said to have been prepared on the basis of the PTA Statement.  According to the evidence of Supardi, none of the sales contracts claimed to have been made between BN and PTA (“PTA Contracts”), and which are said to be the subject matter of the 7 shipments set out in the PTA Statement, is genuine.  Supardi claims that after checking the records of PTA, only shipments 1 and 3 contain nickel ore from the Mine, and he was adamant that the PTA Statement was not issued by PTA, as it was not signed by him, or by any officer of PTA.  On Supardi’s evidence, the imprintment of the company chop appearing on the PTA Statement was not of the same color as PTA’s authentic chop, and the spelling of PTA’s name was also wrong.  Supardi claims that he and his staff have not seen the PTA Contracts purportedly made between PTA and BN, and that it was contrary to PTA’s usual policy and practice of executing documents, for the PTA Contracts not to be signed by any officer of PTA.

117.  Supardi obviously felt aggrieved and was disgruntled that BG and Stephen had not honored the promises given, when the Acquisition Agreement and Supply Agreement were signed, that sufficient funds would be injected into MS for the operation of the Mine, so that extraction operations could be carried out in full at the Mine.  Supardi described himself as just a miner, whose focus and target was to make the Mine run and to produce the ore.  He was adamant that the only reason why the Mine did not produce 250,000 WMT of nickel in the 1^st quarter of 2008 was because Stephen, who ran BG’s operations like his own private company, would not send the necessary funds to MS for the Mine.  According to Supardi, Stephen and Elite bought less than US$1 million worth of equipment for the Mine, which was plainly inadequate.  Supardi denied that Lewis had ever mentioned that the production target of 1 million WMT for the 1^st year of the Acquisition Agreement could not realistically be met.  He maintained that based on his own knowledge and experience of works in the Mine, which had obtained its licence and had commenced field activities in 2006, the target production capacity under the Acquisition Agreement was reasonable, and could be met.  

118.  Supardi denied Syed’s claims of the 18 September Understanding reached as a result of Supardi’s alleged proposal to procure nickel ores from other mines.  He was confident in the answers he gave as to the non-authenticity of the PTA Contracts, and on the PTA Statement.  He answered directly the questions put to him in cross-examination, and overall, I accept his evidence as credible.

119.  In all, considering the evidence of all the witnesses at trial and, more importantly, taking into account all the contemporaneous documentation, I am not at all satisfied that the deliveries comprising shipments 2, 5 and 6 ever took place.

120.  The BN Statement, tabled and relied upon as the Quarterly Supply Statement prepared under clause 3.5 (1) of the Acquisition Agreement, contained misrepresentations by virtue of its inclusion of shipments 2, 5 and 6 which never took place, and shipments 4 and 7 which did not comprise deliveries of nickel ore from the Mine.  The Board Resolution was passed in reliance upon the representations made in the BN Statement, and upon Stephen’s assurance at the Meeting that the condition for issuing the Tranche 2 Bonds was fulfilled.

Were the misrepresentations known by Stephen and Elite to be false and acted upon by BG?

121.  I find Stephen to be an unimpressive and unreliable witness.  He was totally evasive in his evidence as to matters such as the ownership of BT and Elite (his purported ignorance being totally unbelievable) and the extent of his knowledge of the production activities of the Mine in the 1^st quarter of 2008.  It is clear from the documentary evidence that he had been sent the emails and the Daily Production Reports, all of which contained details of the quantities being produced by the Mine on a daily and monthly basis.  The Daily Production Reports were sent by Jacob to a selected group of recipients (“Selected Circle”), and these were Stephen, Syed, Danny, and the other members of the Sy family, namely, Anita, Sunny, Pat and Sandy (Stephen’s daughter).  Stephen feigned ignorance of the contents of the relevant emails which were sent to him, claiming that he had no idea why these reports on the production of the Mine were sent to his family members, and that he had not read them as it was not his business.  This is in fact contradicted by his own evidence that he needed to know “the big picture” of how much was produced from the Mine in the 1^st quarter of 2008, that he had discussed from time to time with the shareholders how much had been produced, and that he had been told of the quantities comprising shipments 1 and 3 of the BN Statement, and further, that his staff had later reported the shipments to him.

122.  Stephen’s email of 1 April 2008 clearly demonstrates that he had full knowledge, at the material time, of the fact that not more than 50,000 WMT had been produced from the Mine for shipments 1 and 3.  His evidence, and the attempts he made to explain his email otherwise, is totally incredible.  As is his testimony on the Meeting held on 6 May 2008, when the Board Resolution was passed to issue the Tranche 2 Bonds.  He totally evaded the question put to him as to his involvement in presenting the BN Statement at the Meeting and his procuring the issue of the relevant bonds at the first meeting he attended as director of BG, referring only to the fact that it was Francis and not himself who prepared the agenda for the Meeting.  It is the evidence of both Francis and Paul Ho who attended the Meeting that after Pat had tabled the BN Statement, Stephen had assured the directors present that the conditions for issuing the Tranche 2 Bonds had been fulfilled.  When Stephen was cross-examined on this, he had to accept that he did say that “everything had been done” (“做齊”), on the basis of the BN Statement. 

123.  Overall, I have to agree with Leading Counsel for BG that Stephen is not a witness of credibility, and his capability for telling the truth is dubious. His education and qualification, his Harvard MBA degree, his title of “Doctor”, publicized in the documents of listed companies, are all but lies.

124.  The inevitable conclusion from all the evidence and the contemporaneous emails is that Stephen, who admitted that he had been closely involved in the negotiations for the Acquisition Agreement and the Supply Agreement, knew that the BN Statement was inaccurate and the information therein was false, in purporting to represent that 257,166.75 WMT of nickel ore from the Mine had been delivered to BN for the Relevant Quarter, and that the condition for the issue of the Tranche 2 Bonds under clause 3.5 had been fulfilled.  The reports sent to Stephen clearly indicated to him that the Mine did not produce enough ore to make up 7 shipments of 257,166.75 WMT in the Relevant Quarter.  Stephen obviously had a role to play in procuring Pat to sign the BN Statement.  At the material time, Pat was (at the least) part of the extended Sy family, working closely with Stephen as can be seen from the fact that Pat was included in the emails which were sent to the Selected Circle, although there were suggestions that they enjoyed a closer relationship.  In relying on the BN Statement, the board of BG was misled, and deceived, into believing that the shipments of nickel ore from the Mine had exceeded the Target, when such false case was known by Stephen to be false, or not believed by him to be true.

Whether breach of fiduciary duties

125.  Sunny was at the material time since January 2008 until March 2012 an executive director and the Vice Chairman of BG.  Stephen was the Chairman and executive director of BG since his appointment on 30 April 2008.  As directors, both Stephen and Sunny owed fiduciary duties to BG, to act in good faith and in BG’s best interests and not for any improper purpose, and not to place themselves in a position where there might be a conflict between their interests and those of BG.  Since Stephen was declared bankrupt in 2014, BG is not pursuing its claims against him.

126.  With regard to Sunny’s work duties, I reject his claim that he was only charged with responsibilities for matters relating to human resources and administration.  Although Sunny claims that it was Francis who, as Finance Director as well as Company Secretary, was responsible for accounts and financial matters, such that Sunny himself had no knowledge of matters such as the sales and shipments of the nickel ore, and had nothing to do with production from and the operations of the Mine, even under the Organization Chart relied upon by him (and claimed to have been indeed used and implemented), Sunny as Executive Director and department head of Human Resources and Administration was said to be also responsible, explicitly, for “the Accounting and Finance operation of the mining operation”.  This is in fact corroborated by BG’s Annual Report for 2008, which also stated that Sunny was “responsible for the overall finance, human resources and administration of the mining operation of the Group”.  No doubt it was precisely for that reason, and in line with what he was assigned to do, that it was Sunny (and not Francis) who was sent, at all material times, the Daily Production Reports with details of the daily and monthly production volume of nickel from the Mine.  The Daily Production Reports were sent to Sunny as the person in charge of finances for the mining operations.  The evidence from BG is that Francis’ work was to deal with the traditional apparel side of the business of BG, rather than the mining operations. 

127.  Contrary to Sunny’s claims of having no involvement in and no knowledge of the mining operations of BN, all the documentary evidence shows otherwise. He (and not Francis) attended the “internal meetings” at which the objectives of delivering 250,000 WMT of nickel by 31 March 2008 and 1 million WMT during the 1^st year of operation of the Mine, and concrete plans and funding therefor, were discussed in February 2008.  Daily Production Reports of the Mine were sent to him.  On Francis’s evidence (dealt with below), the meeting held in March 2008 at which delivery of nickel ore from the Mine was discussed was attended by Sunny.  If he was only responsible for human resources and administration, as Sunny claims, there was no reason for his attendance at and participation in these meetings at all.

128.  I reject Sunny’s claim that he had not read the Daily Production Reports and emails which were sent to him.  It was part of his work and responsibility for the accounting and financial operation of the mining operations of BN and the group to receive and to read reports on the production and operations of the Mine, and it is not credible that he would turn a blind eye to these reports sent to the Selected Circle.  If it is true that Sunny had chosen not to read these documents, then by turning a blind eye to what was presented to him as part of his responsibilities, I consider that he was reckless in the sense of not caring whether his act or omission is or is not a breach of his duty as a director. 

129.  Much reliance has been placed by Counsel for Sunny on the judgments in Re City Equitable Fire Insurance Company, Limited [1925] 1 Ch 407 and Dovey v Cory [1901] AC 477, that a director only has to act with the degree of care reasonably expected of him, that a director is not bound to give continuous attention to the affairs of a company, and that a director is entitled to trust his fellow directors and the managers of the company unless there are reasons for suspicion.

130.  As the court emphasized in Re City Equitable, it is relevant to consider the knowledge and experience of the director, when deciding the care which is reasonably to be expected from him.  Significantly, the court emphasized in Re City Equitable that a director must act honestly, and that it is only in the absence of any grounds for suspicion, that a director may be justified in trusting someone else to perform his duties honestly.

131.  Sunny graduated from university in about 2001 with a degree in Business, and was a chartered accountant who had worked at Ernst & Young before joining BG.  It is Stephen’s evidence that he had asked Sunny to become a director of BG, as Sunny had been a manager at Ernst & Young, and had the relevant experience.  Sunny was appointed, and paid, as an Executive Director and the Vice Chairman of BG, a listed company, a position which carries serious responsibilities, rather than one to be occupied by a person just to “learn”, as Sunny chose to put it - as an excuse for not reading the emails and documents sent to him as part of his job.  If he was indeed to learn his job, the more reason there was for him to have read what he was sent, and to reject any suggestion that he had not read the documents.

132.  According to Francis’ evidence, all accounting work in 2008 was carried out by Sunny leading the relevant staff, namely Katherine Chong (“Katherine”) (who was Sunny’s assistant) and Vincent Wong, and they kept the accounting documents in a locked cabinet next to Katherine’s desk.  All the shipping documents could only be obtained with Pat’s prior approval.  It is also Nancy’s evidence that it was Sunny who was in charge of finance.  Anita controlled Good Year Corporation Limited and Golden Link Shipping Limited, companies which handled the shipment arrangements and banking facilities for BN at the material time in 2008.  The accounting and shipping documents relating to the shipments referred to in the BN Statement were accordingly prepared and kept by departments which were under the control of the Sy extended family.

133.  According to Francis, he was asked to attend a meeting in Stephen’s office at the end of March 2008, when Sunny, Pat and Syed were present.  Francis was asked for his opinion as to how it could be ensured that all 250,000 WMT of nickel ore was entirely derived from the Mine, as provided for in the Acquisition Agreement.  Francis had replied that the sales and shipping departments would be able to verify this based on the documents which they held, that the sales department should check with the supplier, and that Danny and his team stationed at the Mine should be able to provide the relevant information to BG’s management.  This meeting was followed by Francis’ email, addressed to Sunny and Pat dated 17 April 2008, and copied to Syed on 25 April 2008, with the subject “Tranche 2 Bond to be issued ??” This email is consistent with Pat and Sunny being the persons responsible for and in possession of the information required to prepare the Quarterly Supply Statement for the purposes of clause 3.5 (1) of the Acquisition Agreement. 

134.  On all the evidence, I find that by virtue of Sunny’s involvement in the finances and accounting work for the mining operation and the sales of nickel, he knew that the Target of 250,000 WMT had not been met for the Relevant Period. Sunny knew, from the emails on production and on shipment, and from the Daily Production Reports sent to him at the material time before 31 March 2008, that less than 250,000 WMT of nickel had been produced from the Mine, and that the Tranche 2 Bonds should not have been issued, as the Target had not been met.  Sunny had received the email dated 1 April 2008 with the heading “31^st Update - Urgent”, in which it was made clear to all recipients that the Mine had ceased production due to lack of funding.  He was also sent his father’s email of 1 April 2008, in which Stephen stated that Bunta had only shipped 46,000 tonnes of ore.  All these would have raised queries and given Sunny room to suspect that 250,000 WMT of nickel could not have been shipped from the Mine between February and March 2008.  Yet, he failed to inform the board of these facts at the Meeting, failed to raise any queries at all before or at the Meeting, and failed to contradict his father when Stephen informed the board that the conditions for the issue of the Tranche 2 Bonds had been met. 

135.  Notwithstanding these suspicions which an honest and reasonable person would have had in Sunny’s position, and notwithstanding his knowledge that the Mine could not have delivered the 257,166.75 WMT, he chose instead to vote for the issuance of the Bonds at the Meeting.  BG’s interests were placed over the interests of Elite (of which Sunny’s father was the 80% beneficial owner), that the Tranche 2 Bonds be issued to Elite.

136.  As distinguishable from Dovey, Sunny was by my finding conscious of the falsehood in the BN Statement.

137.  Further, the Court of Final Appeal accepted, in Thanakarn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479, that recklessly turning a blind eye or irrationality is equivalent to dishonesty.  The observations made by Lord Neuberger of Abbottsbury NPJ (at paragraph 52 of his judgment) is relevant in the context of the present case:

“In a commercial context, absent dishonesty or irrationality, a person should be entitled to rely on what he is told: this may occasionally produce harsh results, but it enables people engaged in business to know where they stand... In the field of misrepresentation, it is clear that “it is no defence to an action for rescission that the representee might have discovered its falsity by the exercise of reasonable care”...”

138.  At paragraph 53 of his judgment, Lord Neuberger also cited Lord Blackburn’s explanation (in Jones v Gordon (1876-77) 2 App Cas 616, 628- 629) of what constitutes blind eye knowledge, or turning a blind eye:

“If the facts and circumstances are such that the [judge comes] to the conclusion that he was not honestly blundering and careless, but that he must have had a suspicion that there was something wrong, and that he refrained from asking questions, not because he was an honest blunderer or stupid man, but because he thought in his own secret mind - I suspect there is something wrong, and if I ask questions and make farther inquiry, it will no longer be my suspecting it, but my knowing it, and then I shall not be able to recover - I think that is dishonesty.”

139.  With respect, the above passage aptly describes what I find to be Sunny’s state of mind at the relevant time in March 2008 and at the time of the Meeting in May 2008.  On the evidence, my conclusion is that by voting in favour of the issue of the Tranche 2 Bonds to Elite at the Meeting, Sunny was in breach of his fiduciary duties of honesty and good faith, owed as a director to BG.

140.  Counsel for Elite and Sunny sought to place reliance on the fact that the fraud or fictitious shipments were never detected by the auditors of BG. That cannot be evidence that shipments 2, 5 and 6 had in fact been made, in view of what I consider to be the clear evidence from the other witnesses in this case and from the contemporaneous emails and reports.  The auditors may have relied on the false documents produced by BN, and as pointed out by BG’s Leading Counsel, the court has dealt with too many cases of fraud which were undetected by auditors.  

Elite’s knowing receipt

141.  BG is not pursuing its counterclaim against Stephen since he was made bankrupt.  However, it is clear on the evidence that Stephen had knowingly made false statements to the board of BG at the Meeting.  Since Stephen was at the material time the majority beneficial owner and the sole director and directing mind of Elite, I accept that Elite, through Stephen, had imputed and constructive knowledge that the Representations in the BN Statement were untrue, and that the Tranche 2 Bonds had been received as a result of the fraudulent misrepresentations and breaches of fiduciary duties of Stephen and Sunny.

Relief

142.  By reason of fraudulent misrepresentation, BG is entitled to rescind the issue of the Tranche 2 Bonds.  Affirmation of the Tranche 2 Bonds has not been pleaded, nor was there affirmation of the said Bonds.  By letter of 20 June 2012, BG had rescinded the Tranche 2 Bonds by demanding for the return of the Tranche 2 Bonds for cancellation.  Nor is there any pleading of the claim of Elite that BG had received financial benefit under the Acquisition Agreement by obtaining some supply of some nickel, such that there was allegedly no failure of consideration, or that there was any delay in the rescission of the relevant bonds.

143.  On the available evidence, the total value of the Tranche 2 Bonds issued to Elite is HK $292.5 million.  Elite is seeking by this action to enforce the Tranche 2 Bonds registered in its name, of the value of HK$31.5 million.  Some of the Tranche 2 Bonds have been converted into shares in BG, some have been transferred to third parties, and the total value of the unconverted Tranche 2 Bonds in circulation is HK$132,750,000.

144.  By reason of my findings of fraudulent misrepresentation, BG was entitled to rescind the Tranche 2 Bonds issued to Elite, and I grant the order sought that the Tranche 2 Bonds issued under Certificates Nos T2-032, 084 and 088 are rescinded.  Elite is not entitled to enforce any of the Tranche 2 Bonds, and its claims in the action against BG under the Tranche 2 Bonds are dismissed.

145.  Elite is to indemnify BG for its loss sustained by the issue of the Tranche 2 Bonds, which loss is represented by the value of the remaining unconverted Tranche 2 Bonds in circulation, HK$132.75 million less HK$31.5 million being the Tranche 2 Bonds currently held by Elite, giving the sum of HK$101.25 million. 

146.  In relation to BG’s claim for damages sustained as a result of Sunny’s breach of fiduciary duties, and Elite’s knowing receipt of the Tranche 2 Bonds, I order that Elite and Sunny are to account for all profits, if any, each of them has made as a result of the issuance of the Tranche 2 Bonds to Elite. 

147.  On Elite’s claim under the Tranche 1 Bonds, the value of the Tranche 1 Bonds of HK$58.151 million is to be set off against the sum of HK$101.25 million allowed to BG under paragraph 145 above.

148.  In view of the net amount ordered to be paid to BG, the costs order nisi is that Elite and Sunny are to pay to BG the costs of the original action and of the counterclaim, with certificate for 2 counsel.

149.  There will be liberty to the parties to apply for any consequential order as cannot be agreed.