EDA HOLDINGS LIMITED AND OTHERS v. ETEK HOLDINGS LIMITED AND ANOTHER

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. The plaintiff's case is run primarily on conversion. The real target for damages is the 2nd defendant, a finance company. The 1st defendant has been invited to institute proceedings on behalf of the plaintiffs. In the absence of any response, the 1st defendant is now being sued as a defendant for a Declaration and Accounts. The 1st defendant has taken no part in this action. The history that has given rise to the plaintiffs' claim is tortuous. I shall endeavour to refer only to facts and documents which are conspicuously relevant.

2. The conversion alleged is founded on the parting of some 10,886,885 bonus shares of Eda Investments Company Limited in one Share Scrip No. 364004 in the name of the 1st defendant. Eda Investments Ltd. was formally named Chiap Luen Enterprises Ltd. I shall refer to them as "EIL" and "Chiap Luen" respectively. I shall call the 1st defendant "Etek", the 2nd defendant "Bumi" and the plaintiffs "Eda Holdings", "Inland Realty" and "Ford Finance". The plaintiffs are all in liquidation, and the interest of their creditors is now eminently a matter of importance.

3. By an Agreement dated the 27th March 1981, Chiap Luen agreed to take over certain shareholdings, receivables in terms of debts and properties of each of the plaintiffs for 35,541,690 EIL shares. Chiap Luen resolved to chance its name to EIL on the same day. Of these 35,541,690 EIL shares, 18,143,436 were alloted to Eda Holdings, 11,885,497 to Inland Realty and 5,512,757 to Ford Finance. The plaintiffs' entitlements to the damages claimed in conversion are, therefore, proportionate to these of their respective shareholdings. The plaintiffs had each caused resolutions to he passed for entering into this Agreement of the 27th March 1981, and they instructed EIL to allot new EIL shares to Etek. EIL accordingly notified their then registrars, Rapid Registrars. Entries in the plaintiffs' internal vouchers for April 1981 duly reflected the activities embodied in the Agreement of the 27th March. On the 14th April 1981, Etek executed respective Declarations of Trust in favour of the plaintiffs for these EIL shares.

4. In addition to the proposed change of name from Chiap Luen to EIL, on the 27th March 1931, the broad of Chiap Luen resolved to issue bonus shares, one for two. Etek, as trustee of the EIL shares for the plaintiffs were entitled to and did receive these bonuses in mid May 1981. The bonuses came in two certificates and were exactly half of the plaintiffs' total EIL shareholdings registered in the name of Etek: one certificate No. 364004 for 10,886,855 bonus shares and another one No. 364003 for 6,883,990 bonus shares. The Agreed Bundle of Documents contains only the Declarations of Trust dated the 21st May 1981 for these bonus shares in favour of Inland Revenue and Ford Finance. No Declaration of Trust for the bonus shares issued to Etek for Eda Holdings is included. It is not in dispute that if Etek has been sufficiently shown to be a trustee for the plaintiffs in respect to the original shareholdings, Etek would he holding these respective bonus issues on similar trusts. A little earlier in time on the 15th May 1981, Chiap Luen wrote to the new registrars of EIL, Lowe Bingham Registrars Limited, for some bonus shares including those issued in the name of Etek in respect of the plaintiffs' shareholdings to be collected by a messenger so as to effect delivery direct to the registered holders.

5. Subsequent to these bonus issues, Silver Spoon Limited was incorporated on the 21st July 1981, and its first Directors' Meeting was convened on the 17th September 1981.

6. I turn next to deal with the manner in which the Certificate No. 364004 for 10,886,855 EIL shares came into the possession of Bumi. Bumi is now known as BBMB Finance (Hong Kong) Ltd. On the 25th August 1981, EIL formally sought a loan to the tune of US$60 M. from Bumi. Mr. Chung Ching Man was the Chairman of the Eda Group of companies. Mr. George Tan then headed the Carrian Group of companies which had been clients of Bumi since late 1979. In 1981, the Carrian Group of companies had become the biggest single borrower from Bumi both in Hong Kong currency, US currency and Sterling. On the recommendation of Mr. George Tan, a director of Bumi, Mr. Shamsudin, had earlier agreed in principle to grant a term loan to EIL up to US$60 mon a personal guarantee from Mr. Chung Ching Man of the Eda Group together with securities double the amount of the drawdown, i.e. a 50% margin in banking terms. Mr. Chung had also obtained the verbal approval from Mr. Shamsudin for an initial US$30 M drawdown, and the General Manager of Bumi, Mr. Jaafar, was instructed by Mr. Shamsudin to arrange for the US $30 M. on Mr. Chung's personal guarantee and a 50% margin security in the form of publicly quoted shares. Mr. Jaafar solicited and obtained guarantee for the full US$60 M. From Mr. Chung together with security coverage. On the 7th September 1981, Mr. Chung as Chairman of the Eda Group sent a certificate for 66,588,045 EIL shares to Mr. Jaafar of Bumi with a market value of HK$466 M. and formally applied for a US$30 M. partial drawdown. These 66,588,045 EIL shares were registered in the name of Silver Spoon Limited and said to he held by the parent company of EIL, i.e. the 1st plaintiff. However the Chief Dealer of Bumi could manage only US$20 M. Solicitors of Bumi, Hessrs. Wilkinson & Grist, were instructed to prepare loan documentation for US$20 M., and draft agreements for US$20 M. were sent to EIL and Silver Spoon Limited for the attention of Mr. Chung in mid September 1981. It was a draft Loan Agreement for US$20 M. secured by the US$60 M. personal guarantee of Mr. Chung and the 66½ million EIL shares A draft Pledge Agreement was also prepared. Its Schedule comprised only the 66½ million EIL shares registered in the name of Silver Spoon Limited. Amendments to the terns of these draft documents were then being proposed for consideration. US$20 M. was drawn down on the 9th September 1981. Even after the formal resolution of the Bumi Board on the 9th September 1981 approving a two-year term loan of US$60 M. with US$40 M drawdown to, be allowed by the end of 1981, there was nevertheless still no concluded agreement between EIL and Bumi. It was clearly envisaged that more security would be required for top-up or further loan to meet the 50% margin. On the 22nd September 1981, the two said Etek certificates for 10,886,855 and 6,883,990 bonus issues of EIL together with another certificate for 4,000,000 shares registered in the name of B.B.E. (Nominee) Ltd. were sent by Mr. Chung as Chairman of the Eda Group to Mr. Jaafar of Bumi. These share certificates and corresponding executed blank Instruments of Transfer were categorically stated to be sent "as security for a further US$20 M." Another drawdown of US$20 M. by the end of 1981 had been offered in principle, but the loan documentation had yet to be finalised in terms satisfactory to the parties concerned. The 66½ million EIL shares in the name of Silver Spoon Limited were adequate security for the existing US$20 M. already drawn town. These certificates were evidently sent over not for the US$20 M. loan already taken on the 9th September but were to be security for any further loan up to another US$20 M. if and when agreed and if and when made. In the meantime, the original drafts were amended to raise the term loan of US$20 M. to US$60 M. which amendment was effected both in the draft Loan Agreement as well as in the draft Pledge Agreement. Loan documentation amended to cater for "an aggregate sum of US$60 M." was sent on the 12th October 1981 by Messrs. Wilkinson & Grist to EIL with the following observations:-

"We are also instructed that in addition to the 66,588,045 shares in the company to be pledged by Silver Spoon Limited, other shares either in your company or in other public companies in Hong Kong are to be deposited on signing of the Loan Agreement or hereafter."

 

"We are given to understand that further Pledge of Shares will be given. The Pledge of Shares enclosed herewith concerns the 66,588,045 shares only. We are in the course of preparing Memorandum of Deposit of other shares to be accompanied by other Certificates of shares if and when required."

7. Therefore, the Schedule to the amended draft Pledge Agreement for the revised term loan of US$60 M. was not enlarged beyond the said 66½ million EIL shares already deposited.

8. Later, the drafts were further amended from a term loan of US$60 M. to  a term loan of US$40 M. with the amount in the Pledge Agreement similarly reduced. The Schedule to the final version of the Pledge Agreement for US$40 M. included the following:

9. The 4 million shares were deleted on the date of the signing of the Pledge Agreement.

10. At the inception, the term loan approved was US$60 M. The first drawdown of US$20 M. on the 9th September was without any loan documentation or Board resolutions of EIL and Silver Spoon Limited. Mr. Ching, counsel for Bumi contended that this US$20 M. or any subsequent drawdown was part of the overall US$60 M. term loan and that therefore the 66,588,045 EIL shares registered in the name of Silver Spoon Limited together with the other shares in the Schedule to the subsequently signed Pledge Agreement were all additional security for thisoverall $60 M. term loan. The effect of Mr. Ching's approach is to embrace the Certificate No. 364004 for 10,886,855 EIL shares registered in the name of Etek as additional security for the overall term loan of US$60 M. including the first US$20 M. drawdown on the 9th September 1981. I shall call that the Etek Certificate. Mr. Ching's contention does not seem to be well founded in law or on facts.

11. The deposit of a document of title with a lender for a further advance would not, per se, create any lien in favour of an existing debt. The analysis of Lord Elden, L.C. made at p. 280 in Hountford v. Scott⁽¹⁾ was:-

"...... the transaction is that the lease was carried to the plaintiff, not for the purpose of being applied as a security for money already advanced, but for the purpose of obtaining future credit; I apprehend it has never been held, that if the deeds are carried to a man for the purpose of obtaining credit from him, he has a lien upon them for what is due to him in respect of moneies heretofor advanced. Such a decision would carry the doctrine upon mortgages by deposit of deeds, further than it has ever yet been carried."

12. At p. 47 of Fisher & Likewood on Mortgages, 9th edition, the following passage appears:-

"An equitable mortgage will, prima facie, be a security only for the debts specified in the agreement, and will not include debts previously due from the mortgagor to the mortgagee. But it may include such debts, if an intention that it should do so appear from the circumstances."

13. At the time when the Etek Certificate was given to Bumi on the 22nd September, ample security was being held for the first US$20 M. already drawn down on the 9th September. No additional security for that first drawdown was necessary or required. The Etek Certificate was expressly given "as security for a further US$20 M." The purpose for this handing over and the use to which the Etek Certificate might be put was so specified by that letter of the 22nd September. No agreement had then been concluded for the further US$20 M. Its repayment terms were still being negotiated. According to Mr. Jaafar since the Bumi Board Meeting, on the 19th September had resolved that the term loan of US$60 M. was to be granted for two years, he expected the further drawdown of US$20 M. permissible by the end of 1981 to be governed by the same repayment terms. That was no more than his impression. But even the repayment terms for the existing US$20 M. already advanced seemed to be quite undecided. By a letter dated the 9th September 1981 to EIL by Mr. Jaafar for Bumi and confirmed by EIL, the principal was "to be repaid by 4 every 6 months equal deduction from the first date of drawdown, i.e. 4 equal instalments @ US$5 M." The "principal" was defined as the then term loan of usUS$20 M. On the second page of its copy, the manuscript in Chinese, as translated, reads:

"This is just a formality in order to comply with the Banking Ordinance. In reality, he will write to us in due course to ask for our signed confirmation. In this way, it is not necessary to repay the principal every 6 month, but instead me can repay the loan in full upon its maturity two years later."

No reliance was sought to be placed on this manuscript although it was an accurate forecast of what was contained in the signed loan documentation. Indeed, it seemed quite unlikely that despite EIL's confirmation of the last-mentioned letter of the 9th September, terms of repayment had been agree even for this first drawdown, because Mr. Chung did manage to have what could have been only tentative repayment terms modified. In the final Loan Agreement dated the 10th September 1981 but signed on the 26th November 1981, the first drawdown of US$20 M. was not repayable by four equal instalments every six months within two years but at the end of two years from the date 9th September. The further drawdown of US$20 M. as was payable within two years after the date of its actual Advance.

14. There was obviously no concluded agreement either at the time of the handing over of, the Certificate for 66½ million EIL shares registered in the name of Silver Spoon Limited or at the time of the handing over of the Etek Certificate. The release of first US$20 M. was made on the security of what I shall call the Silver Spoon Certificate and Mr. Chung's US$60 M. Guarantee but without even the requisite Board resolutions. As for the US$60 M. Guarantee, it was subsequently cancelled, and ultimately the Guarantee from Mr. Chung was for only US$40 M.

15. By the time the final Loan Agreement and Pledge Agreement were in place, the term loan was specified to be "an aggregate amount not exceeding" US$40 M. It is difficult to see how the subsequently stipulated loan amount could be tied by these signed documents to the US$60 M. approved by Bumi. Mr. Jaafar acknowledged the fact that at one time the first drawdown of US$20 M. was treated as a separate loan and that legal advisers of Bumi were accordingly instructed. When the loan documentation was finalised, it was a term loan of US$40 M., not US$20 M. or US$60 M.

16. It can be readily appreciated that upon the signing of the Loan Agreement and the Pledge Agreement, all the share certificates must have become "continuing security" for every part of the US$40 M. term loan and that the Etek Certificate would have been no exception if it had still been available for inclusion as security in the Schedule to the Pledge Agreement.

17. The loan documentation was signed at a time when the drawdown of the further loan of US$20 M. was expected to he imminent. Formal notice for a US$15 M. drawdown was given on the 30th November 1981, and it was advanced on the next day, the 1st December. The balance of US$5 M. was drawn down on the 9th December. The Etek Certificate was handed over as security for a further loan of US$20 M. if and when agreed and if and when made, but the legal effect of the signed loan documentation would have charged it instantaneously as a "continuing security" for all the US$40 M. If it had been available.

18. Was the Etek Certificate available to he included in the Schedule to the Pledge Agreement? Was it still there to he accepted or relied upon by Bumi as security? The Etek Certificate together with the shares of 10,886,855 which it signified was clearly converted on the 14th October 1981. Pursuant to his arrangement with Mr. George Tan, Mr. Jaafar, on behalf of Bumi, sent the Etck Certificate to Carrian Holdings Limited, a holding company for George Tan's Carrian Group. Acting on the same arrangement with Mr. Tan, earlier on the 13th October, 5 million EIL shares in Street Names were handed over to Mr. George Tan's holding company, the Carrian Holdings Limited by Bumi. The passing over of these over 15 million EIL shares was against a cheque of Carrian Holdings Ltd. for HK$90 M. given on the 13th October 1981 but postdated a month later to the 13th November.

19. Mr. Jaafar maintained that this transaction was not an outright sale against a HK$90 M. postdated cheque as there was no instant payment of cash.

20. Mr. Jaafar sought to explain his alleged approach to Mr. George Tan in respect to this Etek Certificate thus : first, there was much fluctuation of EIL shares in the market. Secondly, there were rumours of Mr. Chung being investigaged for insider trading activities in the setting-up of his Eda Group, and a possible suspension of EIL shares was feared. Thirdly, the size of the Etek Certificate had throughout been felt to be a hindrance to its realisation as a loan security.

21. On fluctuation, Mr. Jaafar conceded that it was equally if not more evident at the time when the first drawdown was made and that insofar as the drastic drop of HK$ exchange rate affected the security, it was no fault on he part of Mr. Chung. The security for the first drawdown was sufficient, and Bumi had not committed itself to the further US$20 M. Mr. Jaafar and Mr. Chin regarded themselves as wholly free to refuse the release of any of the further US$20 M. before the completion of the legal documentation. Moreover, security could be requested to be topped up. The rumours of investigation into insider trading activities were rampant even at the time of the negotiation for the term loan of US$60 M. in the summer of 1981. Lastly, it would have been more advantageous to approach EIL instead of Mr. Tan for splitting the Etek Certificate. Mr. Jaafar was visibly hard pressed, but nevertheless he maintained that for these reasons he spoke to Mr. George Tan whom he held morally responsible for having recommended Mr. Chung to Bumi for facilities.

22. At his meeting with Mr. Tan, so ran Mr. Jaafar's evidence, splitting and substituting of shares were discussed, but because Mr. Tan intimated that only up to 10 million EIL shares could be split, the 66½ million Silver Spoon Certificate was not handed over. I should comment, in passing, that there is no evidence of any contemporaneous effort made for splitting the larger Silver Spoon Certificate elsewhere. It was said that the 5 million EIL shares in Street Names were handed over to Mr. Tan in the expectation that the same would be substituted by other publicly quoted shares in other companies.

23. Mr. Jaafar's appreciation of the situation was quite extraordinary: because of his previous conversation with Mr. Tan, when the over 15 million shares in the Etek Certificate and 5 million shares in Street Names were asked for by Mr. Tan, he was expecting Mr. Tan to split the Etek Certificate and substitute the Street Name EIL shares, but, he had never enquired of Mr. Tan the purpose for which these shares were sought. Mr. Jaafar testified that it would be up to Mr. Tan "to do what he liked with them within that context", but he had no control as to what action Mr. Tan took. As for the HK$90 M. cheque of Carrian Holdings Limited, Mr. Jaafar claimed that there was no agreement to present it for payment on due date, i.e. 13th November, but his understanding was that if Mr. Tan returned 15 odd million shares before the 13th November, the cheque would be passed back to him and if not then, he, Mr. Jaafar was free to bank it.

24. The Etek Certificate was for 10,886,855 EIL shares. All the Street name EIL shares delivered to Bumi by EIL came to 29,079,000 of which only 22,964,000 were in fact registered,  leaving a deficit of 4,115,000. Calculation can be better illustrated as follows:-

25. The same deficit of 19,502,411 was detected by Messrs. Touche Ross, Bumi's auditors and Klynveld Main & Geordler, EIL's auditors. Since Bumi through Mr. Jaafar handed over 5 million EIL Street am shares to Carrian holdings, Bumi must have secured an additional 885,000 Street Name shares from other source. (5,000,000 - 4,115,000 = 885,000).

26. After Mr. Chung Ching Man suspected some wrongdoings with respect to the EIL shares pledged as security, Mr. Jaafar embarked on a fraudulent exercise to conceal the 19,502,411 deficit.  Upon pressure to bear being brought on Mr. Tan by Mr. Jaafar, a cheque for HK$1,500,185.50 from a relative of Mr. Tan, one Dr. Yong was given to make up for the dividends payable for, inter alia, the shares in the Etek Certificate. Mr. Jaafar caused to be fabricated even handling charges in respect to some of the shares. Mr. Jaafar ultimately threatened to bank in the HK$90 M. cheque.

27. Throughout the correspondence with Carrian Holdings Limited, Mr. Jaafar had himself referred to this transaction of 15 million odd EIL shares (10,886,855 in the Etek Certificate and 5 million Street Name shares) against the HK$90 M. postdated cheque as a purchase. Mr. Jaafar would have the Court believe that he innocently adopted this inapt term used by Mr. Bentley Ho. Mr. Jaafar claimed that although he had not corrected himself in writing, he did refer this to Mr. Tan.

28. He is a self-confessed liar to both firms of auditors, Mr. Chung Ching Man, Commissioner Robert Tang, Q. C. his own Bumi Board and Headquarters as well as Bumi's own solicitors, Messrs. Wilkinson & Grist.

29. These circumstances I have referred to are all one way : for the HK$90 M. postdated cheque, on the 14th October Mr. Jaafar disposed of, inter alia, the shares in the Etek Certificate, over which Mr. Tan's power was unrestricted. Even on Mr. Jaafar's expectation that unless Mr. Tan was to return the same quantity, though perhaps different EIL shares by the 13th November 1981, he could bank the cheque, the transaction would have become irreversible at the latest by the 13th November when Mr. Tan did not return any shares. Mr. Jaafar even claimed that he knew the Etek shares were still with Mr. Tan although he was at a loss as to why Mr. Tan had chosen not to return them.

30. Mr. Jaafar did not present the HK$90 M. cheque for payment. He should have realised that Carrian Holdings Limited would not then likely have allowed that cheque to be dishonoured. Mr. Jaafar's explanation was that since Mr. Tan had warned him about there being insufficient fund to meet it, he was concerned with the probable economic repercussions brought about by a dishonour which would effectively damage the security of EIL shares held by Bumi.

31. He had a meeting with Mr. Tan on the 31st December 1981, which provided no satisfactory answer to his demand for the return of the shares, but he was given a cheque of HK$50,706,270 drawn by one Madam Tsoi Sau Yuk. Then, Mr. Jaafar described his follow-up activities which sound monumentally unreal : Mr. Tan was said to have instructed him to place the cheque on deposit for an overseas investor. Without any or any specific directions, Mr. Jaafar deposited the cheque with Bumi in favour of Mr. Tan's private company, Plessey Investments Limited. He was also instructed by Mr. Tan to acquire EIL shares, but he was not briefed as to at what time or price EIL shares were to be taken up. He was allegedly told to buy simply as many EIL shares as the honey would last. It was a vast sum of money entrusted to him with less than minimal guidance and no supervision.

32. At the turn of the year in 1981, so Mr. Jaafar agreed, EIL shares were quoted at round about $2.60. If one should divide $2.60 into $50,706,270, one would get a somewhat interesting figure of 19,502,411, the number of the missing EIL shares. Mr. Jaafar maintained that it was a sheer coincidence.

33. Then in early 1982, Mr. Tan informed him that Multi Profits Limited was a company of the overseas investor. Under cross-examination, Mr. Jaafar disclosed that the account of Multi Profits Limited with Bumi was opened on the verbal instructions from Mr. Tan. No search was made in the Companies Registry for data; no mandate was procured from its Board. Mr. Jaafar claimed that it was not unusual in connection with Mr. Tan. Mr. Tan also intimated that the overseas investor was a Philippine Group headed by Mr. Salonga. Share purchasing continued. Mr. Jaafar claimed to have constantly demanded the return of the 19 million odd shares, in all, from Mr. Tan and threatened at last to take over the EIL shares newly acquired for Multi Profits Limited as compensation. Thereupon, according to Mr. Jaafar, Mr. Tan demanded the return of all the newly acquired EIL shares together with the unused balance. Mr. Tans request w allegedly ignored. Purchasing just continued until 19 million odd shares had been acquired. Mr. Jaafar simply helped himself to these shares. A cheque drawn in favour of Multi Profits Limited in the sum of over HK$8 M. representing the surplus, was handed over to Mr. Tan. The share purchasing had been via Tactfuse Securities Company and was paid for by Bumi's cheques drawn from the account of Multi Profits Limited.

34. On the 4th May 1982, Bumiputra Malaysia Nominee Limited sent to Lowe Bingham & Mathews 19,502,000 Street Name EIL shares purchased on behalf of Multi Profits Limited for registration. Mr. Jaafar's take over was complete. The missing EIL shares were almost replaced. Another 411 shares came in on 18th May. The plaintiffs are prepared to take the date of 4th May 1982 as the time at which the shares in the Etek Certificate converted on the 14th October 1981 as being then wholly replaced. And only after the 13th May, the HK$90 M. cheque was, according to Mr. Jaafar, given back to Mr. George Tan. Although to Commissioner Robert Tang, Q.C., Mr. Jaafar claimed to have in fact presented this particular cheque for payment, Mr. Jaafar explained that the version given to the Commissioner was on a faulty recollection confusing the HK$90 M. postdated cheque with another cheque.

35. Mr. Jaafar had secured from Bumi and its Malaysian Headquarters a concession in respect to his misconduct on the condition that he tells the whole truth. The concession was granted by a document bearing the date, the 14th October 1985, and Mr. Jaafar conceded that his full disclosure to Bumi was not made until about three weeks before the trial.

36. I find that the Etek shares and Certificate permanently left Bumi on the 14th October 1981 and were wrongfully converted when it was sent to Carrian Holdings Limited against its HK$90 M. postdated cheque pursuant to the arrangement with Mr. Tan.

37. Mr. Ching submitted that in fact shares are fungibles and that the same quantity of 10,886,855 EIL shares under the Etek Certificate had been returned to Bumi as pledged security very after the 14th October 1981. Hence, counsel argued that whatever conversion there had been, after such return the loss to the plaintiffs was merely the very piece of paper in the form of the Etek Certificate itself, which would draw minimal damages. Mr. Ching, explained that 10 million EIL shares went back to Bumi in five certificates of 2 million each between 16th to 19th October 1981 and that a further 886,000 EIL shares went back to Bumi on the 21st October 1981. The balance of 855 EIL shares went back to Bumi together with the 3 for 10 bonus issues an 886,855 EIL shares in mid December 1981.

38. All these shares were in Street Names. For the 10 million shares, they were eventually registered in Bumiputra Malaysia Nominee Limited; the 886,000 EIL shares went to EIL and said to be pledged subsequently to Ayala Finance (H.K.) Limited; the 855 plus bonus issues were given eventually also to EIL. Mr. Ching commented that "these looked like the same number of shares" from the Etek Certificate. Mr. Ching submitted that apart from there being no moral merit in the plaintiffs' claim for damages as no evidence of actual loss had  been led, with 10,886,885 and the unaccounted for 3 for 10 bonuses coming back, though not in return for the shares in the Etek Certificate, the plaintiffs had not shown which shares had not been replaced or which 19 million odd shares were deficient. Were they shares in the Etek Certificate, Silver Spoon Certificate or Street Names? Counsel further suggested, if I understand him correctly, that even for the handing over of the Etek Certificate, the plaintiffs had also failed to identify precisely what shares had originally been converted. However, counsel, I believe, conceded the obvious that the chose in action in the Etek Certificate was the subject matter of conversion.

39. It is common ground that the 10 million EIL Street Name shares derived from a title separate from the shares in the Etek Certificate. Mr. Jaafar readily admitted that these 10 million shares were not "the shares that had been released to Carrian Holdings". Secondly, these 10 million Street Name shares returned via a number of intermediate transactions. Thirdly, these 10 million shares could not even be traced back to Etek or the plaintiffs; instead they went to Bumi and EIL. Fourthly, they appeared to be part of the 13,443,000 Street Name shares for which a receipt dated the 19th October 1981 was given. Including these 13,443,000, altogether the Street Name shares deposited were 27,079,000. Both these Street Name shares and the shares in the Etek Certificate had been taken into consideration for computing the grand total of 111,437,890 in the Recital of and the Schedule to the finally signed Pledge Agreement:-

Therefore, since the Street Name shares and the Etek shares were both accounted for. Bumi had never regarded the 10 million or the other 886,855 Street Name shares as replacement for the Etek Certificate. Nor had these 10.8 million odd Street Name shares been appropriated as such. Moreover although false statements were once made as to the Etek Certificate having been sent for splitting and the existence of a pool system leaving enough shares to cover the Etek Certificate, no one had ever suggested that the Etek shares had been replaced. There would have been no need for any replacement on these untrue explanations. Indeed, Mr. Jaafar himself allegedly demanded frog Mr. Tan the return of shares including those in the Etek Certificate and bonuses. There was evidently a subsequent purchase to replenish these Etek and other shares with the HK$50,706,270 cheque of Madam Tsoi. The onus is on Bumi to demonstrate that the quantity of Etek shares wrongfully converted had been restored. Bumi's suggestion was that although the Etek Certificate had been taken out for splitting, there was kept a sufficient quantity of EIL shares in the Bumi's pool for all the customers including EiL. Both these assertions have now Seen withdrawn. There was no pooling system and therefore the EIL shares acquired by Multi Profits Limited in early 1982 were genuine replacement shares. Such replacement presupposes that there existed a deficit up to early 1982. It is a plain recognition that there was no equivalent exchange by these Street Name shares at all.

40. Throughout, Mr. Jaafar made an untrue report to his own Board. To Bumi, on the advice of Mr. Jaafar, these Etek shares had never been parted with possession of. As I have mentioned before, even dividends and handling charges were so falsified as to give an impression that these shares in the Etek Certificate were still in the possession of Bumi. Consequently, Bumi could not have intended any substitution or replacement.

41. As a mere depositary and bailee of the Etek Certificate before the signing of the Loan Agreement and the Pledge Agreement, Bumi had no more right to deal with the Etek Certificate than the mandate in the letter of the 22nd September, that is to say, as security for a further loan if and when agreed and if and when made. See Solloway v. McLaughlin⁽²⁾.

42. In my judgment, the shares in the Etek Certificate wrongfully converted on the 14th October 1987 were not so replaced as suggested by Mr. Ching.

43. Were the plaintiffs the respective beneficial owners of the shares in the Etek Certificate? Mr. Ching, counsel for Bumi submitted that the plaintiffs have failed to prove, on the balance of probabilities, that they were such beneficial owners. Mr. Ching submitted that the Agreement of the 27th March 1981 itself was no conclusive or sufficient proof of beneficial ownership. Even the shareholdings sold by the plaintiffs under that 27th March Agreement were registered in the names of nominees, but apart from some warranties in the companies' documents, there were no Declarations of Trusts in favour of the plaintiffs by the registered holders. Mr. Ching drew attention to the practice of running these private companies quite informally. Counsel invited me to take a bird's-eye view of the whole situation and counsel suggested that in the final analysis the Court would inevitably conclude that the documents deserve little weight and their masters lack credibility.

44. There was no explanation, so Mr. Ching charged, for any real need to have the original and bonus shares put in the name of Etek. The Eda Group companies shared common directorship, and inconsistent assertions as to ownership of these shares in the Etek Certificate had been made by one or the other of these common directors. On the 18th September 1981, the Etek Board even passed a resolution to pledge these shares for the purposes of the Loan Agreement and Pledge Agreement. Mr. Ching directed my attention to the absence of any reference, in the plaintiffs' Board resolutions, to their beneficial ownership in these Etek shares. The certificate was for new bonus issues, and except for the pledge with Bumi nothing called for the signing of a blank transfer form. No evidence was adduced as to where the Etek Certificate and the signed blank transfer form were kept and how they came into the possession of person of persons or companies for their despatch to Messrs. Wilkinson & Grist. When top-up of the security was requested, Silver Spoon Limited had even responded. At one time, EIL and Silver Spoon Limited were pressing for information of these shares in the Etek Certificate as if they were the beneficial owners. These, so Mr. Ching argued, could not have been matters of sheer oversight or irregularity. As a matter of fact, the plaintiffs had not begun to claim beneficial ownership until after Messrs. Hubert Smith had been consulted in March/April 1984. There was no viva voce evidence either from the legal advisers, former in-house lawyer or auditors of EIL or from any directors or officers of one or the other of the Eda Group companies. On the face of the documents, the Silver Spoon Certificate also involved other beneficial owners. Of the 66½ million odd shares, some 33½ million were said to be held in trust for the plaintiffs. Mr. Ching strenuously pressed his point that it is an important question of credibility and that no justification was supplied to this court for preferring any particular documents or sets of documents as opposed to the others. Further, so counsel complained, there is little to show that the plaintiffs had not disposed of their shareholdings in the Etek Certificate in between the Agreement of the 27th March 1981 and the handing over of the Etek Certificate on the 22nd September 1981.

45. The circumstances surrounding the Agreement of the 27th March 1981, whereby shares were given by Chiap Luen/EIL to the plaintiffs as well as the conduct and documents of the plaintiffs and others concerned during that period were all consistent with the plaintiffs having acquired the beneficial ownership of the EIL shares and those bonus issues in the Etek Certificate. There were no suspicious circumstances or valid reasons as to why, at that stage, there was anything to gain for the plaintiffs to set out deliberately to mislead. Moreover, the Declarations of Trust, in particular, were documents executed against interest. The subsequent conduct, if incompatible, would be matters for the consideration of an estoppel when it is raised but would not affect title. In that initial period of time, the documents, conduct and circumstances, all point to the conclusion that the plaintiffs were beneficial owners of the shares in the Etek Certificate as bonus issues, and I so find.

46. As absolute beneficial owners of the respective shares in the Etek Certificate, the plaintiffs were entitled to immediate possession in the instant case, and their cause of action in conversion is well founded. Etek has been invited as a trustee to sue on the plaintiffs' behalf with an indemnity in costs. In the absence of any response, it does not seem to be disputed that the plaintiffs are themselves entitled to institute these proceedings in their own names against Bumi, joining Etek as the 1st defendant. See generally paragraph 933, Vol. 48 Halsburys Laws of England, 4th edition.

47. Can Bumi successfully rely on any estoppel? Bumi seeks to raise estoppel on three fronts : first, the representations set out in the Pledge Agreement signed on the 26th November 1981; secondly, representations impliedly arising from the delivery of the Etek Certificate with a signed blank Instrument of Transfer; thirdly, failure on the part of each of the plaintiffs to put Bumi on notice of their title to the Etek Certificate.

48. Bumi relies heavily on common directorship, common personalities in the Eda Group of companies and the duty of the directors of these family or private companies to brief one another on the terms in the Loan Agreement and the Pledge Agreement.

49. Miss Ng Quinn has suggested that she was misled by Mr. Michael Chiu of EIL on the 24th November 1981. Such alleged misrepresentation has not been pleaded, but Mr. Ching maintained that Bumi had suffered no real prejudice as the same representations were virtually repeated in the Pledge Agreement, on which Bumi allegedly acted.

50. In the Defence, no reliance has been sought to be placed on Etek's Board resolution for pledging the shares. That resolution might be open to challenge by reason of the vote cast by Chung Ching Man, himself an interested Guarantor in the Loan Agreement.

51. Counsel for Bumi contended that imputed knowledge through the channel of common directorship arose simply from the hare fiduciary duty of a director. Knowledge would only he inferred if a director was under a duty to communicate his knowledge to the other company, and a duty imposed upon him by the other company to receive it provided always that the director was not himself guilty of any fraud or irregularity. See In Re Hampshire Land Company⁽³⁾. where Vaughan Williams J. Said:-

"First, was it within the scope of the duty of the officer to give notice to the other company of the information he had got; and, secondly, was it within the scope of his duty, as the officer of the company sought to be affected by notice, to receive such notice? It seems to me that that is not at all the case here. The case is very much more like the one which both Mr. Bramwell Davis and Mr. Jenkins had to admit was an exception to the general rule that they sought to lay down, for they admitted that if Wills had been guilty of a fraud, the personal knowledge of Wills of the fraud that he had committed upon the company would not have been the knowledge of the Society of the facts constituting that fraud; because common sense at once leads one to the conclusion that it would be impossible to infer that the duty, either of giving or receiving notice, will be fulfilled when the common agent is himself guilty of fraud. It seems to me that if you assume here that Mr. Wills was guilty of irregularity- a breach of duty in respect of these transactions- the same inference is to he drawn as if be had been guilty of fraud."

52. Mere directorship or mere common directorship would not impose any legal duty on the director or common director to impart his knowledge. Sometimes, the requisite duty to communicate and to receive could be modified or removed by whether the company to be affected had an obligation to make an enquiry. See In Re David Paine & Co., Ltd.⁽⁴⁾ ,where it was held that since the "loan transaction was of such a nature that there was no obligation on the part of the lending company to enquire to what purposes the borrowed money was going to be applied," "there caws no obligation upon one Kolckmann (a director of the lending company) to receive or disclose any such information". The very nature of the knowledge of the director involved could also become relevant. See In Re Marseilaes Extension RailwayCompany ex parte Credit Foncier & Mobilier of England⁽⁵⁾, where Sir W.M. James, L.J. asked rhetorically : "Is it to be imputed to the banking company that they have knowledge of everything the director knows about his own private affairs?"

53. It is difficult to visualise that falling short of fraud, any of these common directors would not have taken proper steps to put matters right if it had ever come to their knowledge that the shares in the Etek Certificate did not belong beneficially to Silver Spoon Limited but to the plaintiffs. There is no evidence or even suggestion that there was any warrant or incentive for any such fraud to he attempted at that particular time. If these common directors had themselves been unaware of the legal situation, they could not have been expected to part with information which they had no knowledge of due to oversight, negligence, ignorance or inadvertence. If they had been fully conversant with the whole situation, they would have been at least parties to an irregularity, is not fraud. It is futile to try to speculate what was in fact in the mind of each of these common directors or the in-house lawyer Mr. Michael Chiu. In the instant case, suffice it to say that there is no or no sufficient evidence to establish what these common directors knew or how much they knew. In addition, these directors have not been shown to have any of the said duties to communicate or receive. How is it that these directors could be said to have failed to speak up? In conclusion, the plaintiffs could not be said to have had inferred knowledge of the representations and these representations could not therefore be taken as made by the plaintiffs.

54. Further, at the time when the pledge Agreement containing the material representations was signed on the 26th November 1981, the Etek Certificate had gone and was no longer in the possession of Bumi. Inclusion of an non-existent Etek Certificate in the Schedule to the Pledge Agreement could not provide any security which Bumi would not otherwise have. The representation that the Etek Certificate was beneficially owned by Silver Spoon Limited could not have been and was not relied upon by Bumi. It is difficult to understand, as in the words of Williams, J. in Edmondson v. Nuttal⁽⁶⁾, how Bumi could "resort to an act unlawful at the time, and to justify it afterwards by something which did not then exist". A like attitude was adopted in Hocking v. Western Australian Bank⁽⁷⁾ by Griffith, C.J. of the High Court of Australia. In that Australian case, on the assumption that attendance at a later meeting in the capacity of members of a syndicate would rive rise to an estoppel binding on the members so in attendance from denying that they were such members, the learned Chief Justice failed "to see how the bank, which had made the advance to the syndicate some days before the meeting, can take advantage of the estoppel". See p. 744.

55. It has not been established that any of the plaintiffs is deemed to have made or was responsible for the representations contained in the Pledge Agreement. Moreover, there was clearly no reliance on these representations by Bumi. In any case, even assuming, the plaintiffs had in some way been responsible for the representations and they had in fact been relied on by Bumi, I agree with Mr. Morritt that whatever estoppel it created, it came too late.

56. Mr. Ching readily conceded that the mere possession of the Etek Certificate and the signed blank transfer form could not be relied upon to raise an estoppel. Counsel himself readily offered examples of a depositary or a bare bailee such as finance companies or banks. Mr. Ching referred to some decisions on an agent's authority or the undisclosed limitation of it. The cases cited cannot he relevant. Etek's position as a trustee was known to Bumi. Bumi was told that some other company was the beneficial owner. In Bumi's transaction, Silver Spoon Limited claimed to be and was put up as the beneficiary. EIL supported that claim in the Pledge Agreement. It was at one time quite undecided as to who was to be the borrower for the Loan Agreement and pledge Agreement. Ultimately with Silver Spoon Limited as the alleged owner, EIL was accepted as the borrower. Silver Spool Limited in its alleged capacity of beneficial owner of the Etek certificate, was joined as a party to the Loan Agreemnt and the Pledge Agreement. It was not a case that possession of the Etek Certificate and the signed blank transfer form by Etek as trustee was relied upon. It was the participation and/or consensus of the alleged true owner, Silver Spoon Limited, which Bumi really acted on. Insofar as possession of the Etek Certificate and the signed blank transfer form was ever relied upon by Bumi, the limitation of the trustee's or agent's authority was well known to Bumi as it was set out in the letter of the 22nd September 1981, that is to say, the shares were to be security for a further loan and not otherwise.

57. Mr. Ching conceded that Bumi was not seeking to rley on these matters to justify the wrongful conversion on the 14th October 1981. Insofar as Bumi had been able to rely on the alleged concealed limit of an agent's authority, by the time any undisclosed limit of authority became relevant, the Etek Certificate was no longer in existence, and Bumi could hardly claim to have placed any reliance on something which did not then exist.

58. In my view, the estoppel point in all its ramifications fails.

59. Mr. Jaafar, despite the letter he produced, does not impress me as a truthful witness. He has given versions which are almost beyond belief. It may well be Mr. Jaafar's notion that so long as he lies to the advantage of his former masters, he could or is to be allowed to retain the benefits of the document given him. However it is not for me to speculate what his true motive is. Mr. Chim of C & M Securities Limited is a reluctant witness. He must have known much mare than he was prepared to divulge. However, I do accept his explanation as to the affixing of the Ad Valorem chops, but that is a matter which has little bearing on the matters which I have to decide in the instant case. This man volunteered the information that he was uncooperative before Commissioner Robert Tang, Q.C. and he has been shown to have given inconsistent versions at different times. Miss Ng Quinn's evidence is of little real interest. The representation said to have been made by Michael Chiu on the 24th November 1981 has not been pleaded and Mr. Ching has chosen to concentrate exclusively on the recital in the Pledge Agreement ultimately signed. Miss Ng Quinn had little alternative but to support Mr. Morritt's demolition of Bumi's estoppel defence. The rest were witnesses on technical matters and documents. Mr. Ma was formerly of Touche Ross. In his statement, Mr. Guess commented on the general effect of the use of the Ad Valorem stamp. Mr. Lam of Wardley Investments Services (Hong Kong) Limited together with Mr. Sabine of the same establishment gave me assistance on the documents, Mr. Yuen of Bumi explained that there was no single cheque of HK$90 M. In his statement, Mr. Chung of Peat, Marwick Mitchell & Co. observed that barring any ingenuous devices, the fairly exhaustive documents which he had perused also contained no trace of a HK$90 M. cheque.

60. Lastly, the consequence which flows from the wrongful conversion of the Etek Certificate on the 14th October 1981 is, prima facie, damages to be measured by the difference between the value as at the date of conversion and the value as at the late of replacement or return.  See Solloway v. MaLaighlin⁽²⁾. Bumi has not displaced such prima facie yardstick. In fact, Mr. Ching was silent on matters of damages, save for moral merits and the suggested contemporaneous replacement of the Etek shares first by 10 million Street Name EIL shares to be followed by 866,000 shares and thereafter 855 shares plus bonuses. The price quoted on the day in question was. I find, between HK$5.75 to HK$5.80. The plaintiffs are quite prepared to accept the 4th May 1982 as the date of replacement, and I am content to adopt the same date. Market value on the average on the 4th May 1982 was HK$2.4, hence damages are:-

61. On this sum of HK$28,632,425, instead of l% above prime from the 5th May 1982 until judgment, I propose, subject to what counsel have to say, simply to  order an 8% per annum. As for interest on HK$62,599,413 from the 15th October 1981 to the 4th May 1982, I would simply, again subject to what counsel have to say, grant a 9% per annum. The plaintiffs are to have costs against the 2nd defendant.

62. I propose also to grant relief as claimed against the 1st defendant.

63. Judgment is therefore entered against both defendants with costs.

64. At the commencement of these proceedings, the plaintiffs and the 2nd defendant invited me to make consent orders on the plaintiffs' summons for particulars and the 2nd defendant's summons to amend. Costs have finally been agreed. I should now formally order by consent : On the plaintiffs' summons, costs in the cause and or, the 2nd defendant's summons, leave ranted with costs be plaintiffs' costs in the cause.

(1)     (1823) Turn & P. 274

(2)     [1938] A. C. 247

(3)    [1896] 2 Ch. D. 743 at p. 749

(4)     [1904] 2 Ch. 608 at P 616

(5)     (1871) 7 Ch. A. 161 at p. 170

(6)     (1864) 17 C.B. (N. S.) 280 at p. 296

(7)     (1909) 9 C.L.P. 738