LEE KA MAN v. NG TSZ MAN AND OTHERS

DCCJ 2840/2023

[2025] HKDC 1241

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2840 OF 2023

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BETWEEN

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JUDGMENT

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A. INTRODUCTION

1.  This is the 5-day trial of the action commenced by the Plaintiff (“P”) on 9 March 2016 to recover damages for misrepresentations whereby P was induced, in the main, to invest in New Asia Consulting Group Limited (“New Asia”) by paying a total sum of HK$1,466,001.82 for a Linguaphone (靈格風) language education business in Shanghai.

2.  The 1^st Defendant (“D1”) is the husband of the 2^nd Defendant (“D2”). Both D1 and D2 at the material time were the owners and directors of the 3^rd Defendant (“D3”), carrying on the education business of Hong Kong Communication Art Centre (“the Centre”). D1 was at the material time the principal of the Centre.

3.  I shall refer to D1, D2 and D3 collectively as “Ds” hereinbelow.

4.  On 22 June 2017, D1 and D2 counterclaimed against P for her share of further contribution in the Shanghai education business allegedly based on the investment ratio of 49 (P) to 51 (D1 and D2)[1] (“the Counterclaim”). On the eve of the 1^st day of the trial, solicitors for Ds sent a letter to P’s solicitors indicating that D1 and D2 shall not pursue the Counterclaim at the trial.

5.  The 5-day trial took place on 21-24 and 28 January 2025. P was represented by Mr Lau Ka Kin of Counsel (“Mr Lau”) and Ds represented by Mr Desmond Leung of Counsel (“Mr Leung”). On the 1^st day of the trial, D sought to abandon the Counterclaim and by consent, the Counterclaim was dismissed. There was no reason why P should not be awarded costs of the Counterclaim straightaway. However, I indicated at trial that the issue of costs in relation to the Counterclaim would be dealt with nisi at the time of the judgment.

6.  P and Ds each has called 1 witness. P has elected to testify and D1 elected to testify for Ds at trial. Both P and D1 have been subject to searching cross examination.

7.  Mr Lau and Mr Leung have helpfully filed their written Closing Submissions. After hearing the parties’ oral closing submissions on 28 January 2025, I reserved my judgment and informed the parties that I would hand down my written judgment on or before 28 July 2025.

8.  This I now do.

B. THE BACKGROUND

9.  The following is the pertinent background of this case gathered from the undisputed or indisputable evidence.

10.  D1 is a doctoral degree holder. As of 2010, he had more than 20 years of experience in marketing and running educational courses in language. He was the principal of the Centre owned and operated by D3[2]. D1 established D3 back in 1994.

11.  D2 is and at all material times D1’s wife. D2 was also quite experienced in education business: She became the shareholder and director of D3 in 1997. D2 was the sole shareholder of New Asia till 10 March 2010.

12.  P is qualified to practise as a solicitor in Hong Kong. She had practised as a solicitor in Hong Kong for 3 years from 2001 to 2004 and thereafter has worked as an in-house solicitor. Her husband is Mr Alan To (“Alan”).

13.  Prior to 2010, P did not know D1 and D2, but P had become acquainted with Mrs Ang Senior and her family members, including her son Mr Harry Ang (“Harry”). Mrs Ang Senior is D2’s aunt (姑母); Harry is D2’s cousin (表哥). In late 2009, P, through her husband Alan, learned from Harry about an opportunity to invest in a Linguaphone language centre in Shanghai (“the Intended Business”). P and Alan were interested in the opportunity and Harry arranged a meeting so that P and Alan could meet up with D1 and D2.

14.  Linguaphone is a well-known brand of language learning products. A statement entitled “Linguaphone Group appoints new language training partner for China”, dated 16 November 2009, announced and put up on the official website of the Linguaphone Group[3] (“the 2009 Announcement”) showed and stated the following:

(a) Above the title of the 2009 Announcement, the logos of (i) Pingu (a penguin), (ii) Linguaphone and (iii) Direct English were shown;

(b) Linguaphone had “replaced its Master Licensee for Linguaphone China with immediate effect”;

(c) Its Master Licensee for China “failed to prevent the temporary closure of their Linguaphone China training centers at certain locations in China”;

(d) A joint venture between the Centre and Linguaphone Singapore was appointed “as [Linguaphone Group’s] new Master Licensee for China”;

(e) The “new arrangement with [the Centre] and Linguaphone Singapore will see delivery of the Group’s adult-based Linguaphone and Direct English language learning programs to the mainland Chinese market and the reopening of all Linguaphone China language training centers” (Emphasis added);

(f) Clive Sawkins, the Chief Executive Officer of the Linguaphone Group, was quoted as saying that “as a result of this joint venture, teaching within Linguaphone language training centers will shortly recommence…”;

(g) D1, the principal of the Centre was quoted as saying that “… our immediate focus will be to work with Linguaphone Singapore to oversee the reopening of Linguaphone centers in Shanghai and Wuhan so that existing customers can continue their English language training with Linguaphone”;

(h) The 2009 Announcement directed Chinese speaking media enquiries to D1 at hkca@cac.edu.hk (the Centre’s email address);

(i) The Notes to editors stipulated that the Linguaphone Group was a language training provider, operating under Linguaphone, Direct English and Pingu’s English (“Pingu”) brands and had language training centres across 34 countries worldwide including China and Hong Kong; and

(j) The Chinese version of the 2009 Announcement was “Copyright © 2009 Hong Kong Communication Art Centre”.

15.  Pingu targeted children.[4]

16.  At the material time, D3 was the exclusive Master Licensee of the following products in the following localities:

(a) Linguaphone, Direct English and Pingu in Hong Kong[5]; and

(b) Linguaphone and Direct English in China[6].

17.  On 30 January 2010, P and Alan met D1 and D2 for the first time at the office of the Centre (“the 30/1/2010 Meeting”). During the 30/1/2010 Meeting, D1 and D2 introduced the background of D1 and D3 to P.[7] They also met at subsequent meetings in either Hong Kong and Shanghai.[8] The matters discussed and represented during such meetings are hotly disputed.

18.  On 10 February 2010, Alan sent an email to D1 and D2 (copied P)[9], identifying items to be settled on or before their trip to Shanghai and some of to do items (including “Meet shareholder”) in Shanghai (“the 10/2/2010 Email”).

19.  On 12 February 2010, D1 sent an email to Alan[10] (“the 12/2/2010 Email”), attaching a draft Unit License Agreement for Linguaphone Kids and Linguaphone or Direct English (Either One) in Shanghai, Pudong between D3 as licensor and a licensee not yet identified[11] (“the Draft UL/A”) for a period of 5 years from 1 April 2010 to 31 March 2025 with a 5 years option. The Draft UL/A referred to, inter alia, Linguaphone Kids[12] and provided that “License fee for first adult and first Children unit is RMB$[1.2m]”, of which RMB400,000 would be payable upon the signing of the draft UL/A.[13]

20.  By the 17/2/2010 Email, Alan and P sent, inter alia, a graph of License Relationship and a list of questions to D1 (“the 17/2/2020 List of Questions”), raising questions about Pingu.[14] Of note are the following questions:

Reference	Question
About the product/ service offering: Linguaphone, EF, Wallstreet English website	(i) … … (iv) Is Linguaphone kids the same as Pingu’s English?
Linguaphone Group website – Global Licensed Partner Network (k) [the Centre] appointment was as follows: China (Linguaphone and Direct English adult language courses) (ii) Direct English HK/Linguaphone HK/ Pingu’s English HK China ([Pingu] children’s English languages course) was appointed to QE (Shanghai) Management Consulting Co. (“QE Shanghai”)	(v) What is the authority of [the Centre] to appoint Linguaphone Kids in Shanghai Pudong? (vi) Is (sic, does) Linguaphone includes (sic, include) both adults and kids? (vii) Is [Pingu] competitor of Linguaphone kids
Linguaphone Group website – statement of temporary closure of Linguaphone Shanghai “Linguaphone Group announced a joint venture between [the Centre] and Linguaphone Singapore as new Master Licensee for China”	(i) What is the joint venture arrangement between [the Centre] and Linguaphone Singapore?
-ditto- “this new arrangement with [the Centre] and Linguaphone Singapore will see delivery of Group’s adult-based Linguaphone and Direct English’s language learning programs to the mainland Chinese market and the reopening of all Linguaphone China language training centres”	(i) Can [the Centre] deal with Kid’s market?  If so, Linguaphone kids or [Pingu]

(Emphasis added)

21.  On 1 March 2010, D1 introduced Andrew Koh (“Andrew”) to P and arranged for Andrew to sign the T/A for 3-year duration from 1 May 2010 to 30 April 2013[15] and an equipment transfer agreement[16] (“the ET/A”). Together with Andrew were D1 and Alan who jointly signed the T/A and the ET/A. D1, Alan and Andrew were authorised to sign the T/A pursuant to a letter of authorisation by New Asia.[17]

22.  By an email dated 3 March 2010 from the address “markos2@163.com” to “jolin2007andyou@hotmail.com” (copied P)[18], the sender sent a quotation and a layout plan for the renovation of the Pudong Linguaphone Centre to a 謝小姐. On the same day, P sent an email to D1 and Alan, commenting that “change carpet is expensive”.[19]

23.  On 3 and 4 March 2010, P sent an email to Alan and D1 respectively, attaching a draft Chinses shareholder agreement entitled “股東協議書” between D1 and P and the shareholders’ funding requirement.[20]

24.  On 4 March 2010,

(a) P paid HK$179,550.21 to New Success International Trading Co, Ltd[21] (“New Success”), a company carrying on the business of remittance of funds from Hong Kong to the Mainland, for the Intended Business; and

(b) in relation to P’s enquiry made with 上海教委諮詢熱綫, P wrote an email to D1 and Alan[22] about her enquiry made in relation to the licence requirement and that she would share with them the findings in due course.

25.  On 5 March 2010, P sent an email to Andrew asking to him to find 2 to 3 other contractors to make a quotation.[23] P then followed up with Andrew by another email dated 8 March 2010[24] with reply by email from Andrew on 11 March 2010[25] and 19 March 2010[26].

26.  Between 5 and 12 March 2010, there was a series of email correspondence between P and the staff of “Shanghai Hanbang International Investment Consulting Co, Ltd” (namely Jenny Zhang and Clare Sun) regarding the setting up of a PRC company.[27]

27.  On 10 March 2010:

(a) P and D2 entered into a Chinses shareholder agreement entitled “股東協議書”[28] (ie the Draft Shareholders’ Agreement) regarding their shareholders’ rights and obligations in New Asia.

(b) New Asia increased its share capital from HK$1 to HK$100. 50 shares were allotted to D2 whilst 49 shares allotted to P. [29] D2 and P then respectively became the 51% and 49% shareholders of New Asia, the company holding the Intended Business.

(c) Upon the subscription of the shares in New Asia, P became bound by the Articles of Association as her contract with D2.[30]

(d) D3 entered into a Unit License Agreement with New Asia (the “UL/A”).[31]

(e) P paid D3 HK$222,222[32] as part of the licence fee payable by New Asia to D3 according to Schedule 4 to the UL/A.

28.  At all material times, D2 was the 51% majority shareholder of New Asia. New Asia in turn was the sole shareholder of 上海直通教育信息咨询有限公司 (“the PRC Subsidiary”)[33]. D2 was the legal representative of the PRC Subsidiary. D2 together with D1 had control over New Asia and the PRC Subsidiary.

29.  On 11 March 2010, Alan sent an email to D1, D2 and Harry (copied P) with the subject “Direct English Marketing Plan”[34], discussing about various marketing ideas. In the same email, Alan said that he did not send the email to Andrew for the moment, that he had checked that the Chinese name of Direct English was “直捷英語”. The email also showed that D1 and Harry would meet with “Jiaotong” the following week.

30.  On 14 March 2010, P sent an email to D1 and D2, attaching a draft “股東轉讓協議書” which included a third party.[35] Apart from the name of D2 as Party A, the names of Party B and Party C were left empty.

31.  By an email dated 23 March 2010 from P to D1 and Alan[36], P attached a “to do list before 29 Mar” (“the 23/3/2010 To Do List”). One of the items was “Bring 1 set Direct English Materials, bring 1 set kids materials”, with D1 being the “Management”. Another item was “Discuss 交大 terms”, with Harry being the “Contact person” and Alan being the “Management”.

32.  D1 and D2 requested P to prepare draft agreements with Andrew. On 29 March 2010, D1 emailed to Andrew (forwarded to P and copied D2 on 31 March 2010) a draft “股份轉讓協議書”[37] (“the Draft ST/A”) which provided that D2 would transfer 20% shares in New Asia to Andrew.

33.  By an email dated 20 April 2010 from Alan to D1 (copied P and an “Echo Lai” of D3, “Echo”)[38], Alan forwarded to D1 his emails with a “Clara” between 7 to 20 April 2010.[39]

34.  By an email dated 22 April 2010 from P to Echo, a “Catherine” of D3 (“Catherine”) and D1[40], P told Catherine that she had 1 box Pingu Early learner English Course unit 1-12, 1 clip file Pingu teacher’s guide and 1 clip file Linguaphone recruitment manual.

35.  On 26 April 2020, P sent an email captioned “New Asia Shareholder Agreement” to D1, D2 and Alan[41], enclosing the draft shareholders’ agreement in English dated 9 March 2010 (“the Draft New Asia S/A”) in place of the previous Chinese version (ie the Draft Shareholders’ Agreement) and asking for its execution.

36.  By an email dated 23 May 2010[42], P informed D1, D2, Alan, Andrew and Harry of, inter alia, P’s previous meeting with Jiaotong University and her completion of the course approval application and the teaching venue application forms for Jiaotong University’s review, that after approval by the Education Authority, they could formally sell the course and that Jiaotong University was willing to wait for them to obtain the Business licence.

37.  On 6 July 2010, P sent an email to D1, D2 and Alan[43], proposing to have a meeting the following day on 7 July 2010. One of the items for discussion on 7 July 2010 was “[Andrew] arrangement. [D1] to update his communication with [Andrew] and the proposal.” In the same email, P also attached minutes of the meeting dated 26 June 2010 with attendance of D1, D2, P, Alan and a “Richard So”[44], recording that D1 said that Andrew had not invested in Shanghai yet, that Alan reported Andrew did not perform in Pudong Linguaphone Centre and that P commented that someone needed to be appointed as a partner to perform.

38.  After 10 March 2010, P paid a total sum of HK$1,064,229.61 for the Intended Business[45]:

Date / Recipient	Amount
16 March 2010 / D1 and D2	HK$27,778.00[46]
29 April 2010 / New Asia	HK$245,000.00[47]
24 May 2010 / New Asia	HK$245,000.00[48]
24 June 2010 / New Asia	HK$490,000.00[49]
5 July 2010 / D1 and D2	HK$56,451.61[50]

39.  By an email dated 14 July 2010 from 康瀅 of Jiaotong University to D1 (copied Harry and a George Chiu)[51], D1 was informed that the Education Management Department had temporarily suspended the teaching activities at Pudong Linguaphone Centre because there was a delay in completing the filing. On the same day, the aforesaid email was forwarded to P (copied Alan) by Harry.[52]

40.  Between August and September 2010, some of the staff members at Pudong Linguaphone Centre tendered their resignations, including Andy, Michelle, Aaron, Cindy, Nikki, and Grabelle.[53]

41.  In September 2010, Andrew suddenly disappeared. On 13 September 2010, P sent an email to D2 and D1 (copied Alan), complaining that Andrew who agreed to purchase 25% shareholding in New Asia should be responsible for the operation of the Intended Business and demanding an explanation from D2 and D1.[54]

42.  On 14 November 2010, P under a pseudonym sent an email enquiry to Linguaphone to find out more about the Master Licence granted by Linguaphone to D3 for Mainland China.[55] On 17 November 2010, Linguaphone replied, stating, inter alia, that “… another partner has exclusive rights to Pingu’s English across China.”[56]

43.  On 29 November 2010, P instructed a solicitors firm, George Chan & Co (“GC”), to send a letter to D2 alleging, inter alia, acts of mismanagement by D2 involved bad faith and fraudulent conduct, offering D2 to buy her out and demanding D2 not to use New Asia and PRC Subsidiary’s funds without her written consent.[57] By email of even date, P notified D1, D2 and Harry of her engagement of lawyer to advise on her legal rights and interest regarding her investment in Shanghai business and her partnership with D1/D2 and legal actions would be followed if the situation was not resolved effectively.[58]

44.  By a letter dated 4 December 2010[59], GC demanded D2 to provide with them all books and records of New Asia for their inspection. By another letter of the same date[60], GC P issued a statutory demand to New Asia, demanding payment of HK$1,466,001.61.

45.  By a letter dated 9 December 2010[61], Messrs Chan, Wong & Lam (“CWL”) acting for D2 replied to P’s letters of 29 November and 4 December 2010.

46.  On 23 January 2011, P sent a demand email to D2 (copied Harry)[62], following the telephone conversations between Mrs Ang Senior and D1/D2 respectively. What followed was an exchange of emails between D2 and P from 24 January 2011 to 22 February 2011.[63]

47.  On 28 August 2011, P lodged a complaint to Linguaphone.[64] On 3 September 2011, D1 wrote to Linguaphone to deny the allegations.[65]

C. THE ISSUES

48.  As culled from the pleadings, the issues between the parties can be essentially stated as follows:

(a) Whether Ds had made the following representations to P from 30 January to 10 March 2010:

(i) D3 had acquired licence rights to market, to grant licence to “Unit Licensees” and to carry on operation in Linguaphone Kids (Pingu) products and services in Mainland China. The Intended Business would provide such products and services. Ds made the aforesaid representations during the 30/1/2010 Meeting verbally and by conduct (in particular, by Ds’ showing the Linguaphone Kids (Pingu) teaching materials to P) and during a meeting between the parties at D3’s office shortly after 17 February 2010 verbally by saying that “Linguaphone Kids” and “Pingu” were the same products and services. (“the Pingu Representations”)

(ii) D1 and D2 told P that a “hidden shareholder” who invested in the business through D1 and D2 and who was a resident in Shanghai, would be responsible for looking after the operation of the Intended Business in Shanghai. Ds made the aforesaid representations verbally during a meeting with P at D3’s office in February 2010 and by conduct in Shanghai (by D1 and D3 via D1 introducing Andrew to P and D1 arranging for himself, Andrew and Alan to sign the T/A for the Intended Business) on around 1 March 2010. (“the Shanghai Shareholder Representations”)

(iii) There was no need for any education licence from the Mainland government authorities for the operation of the business under the intended Unit Licence agreement. Ds made the aforesaid representation during a meeting at D3’s office verbally. (“the Licence Representations”)

(b) Whether P relied on and induced by the Pingu Representations and/or the Shanghai Shareholder Representations and/or the Licence Representations to agree to invest in the business of D1 and D2 and to become the 49% minority shareholder of New Asia which, through the PRC Subsidiary, would carry on the Intended Business.

(c) Whether, from around 10 March to around 5 July 2010, D1 and D2 repeated and/or continued to make the Pingu Representations and the Shanghai Shareholder Representations verbally and by conduct:

(i) Since around March 2010, D1 and D2 caused and/or procured the placing of teaching materials of Pingu at the Pudong Linguaphone Centre. In around April 2010, D2 gave the teaching materials of Pingu to P.

(ii) In March 2010, D1 and D2 instructed P to prepare the Draft ST/A. On 31 March 2010, D1 sent the Draft ST/A which stipulated that D2 would transfer 20% of New Asia to Andrew (copied D2 and P). D1 and D2 also told P at the material time that the Draft ST/A was to formalise Andrew’s role as a hidden shareholder.

(d) Whether P relied on and induced by the Pingu Representation and/or the Shanghai Shareholder Representation to pay an additional aggregate sum of HK$1,064,229.61 to D1, D2 and New Asia from 16 March 2010 to 5 July 2010.

(e) Whether the Pingu Representation, the Shanghai Shareholder Representation and the Licence Representation (collectively as “the Representations”) were false.

(f) At the time when Ds made the Representations, whether Ds were under the following state of mind:

(i) whether D1 and D2 knew that the Representations were false; or

(ii) whether the Representations were made without belief in their truth; or

(iii) whether each of Ds was reckless, not caring whether the Representations were true or false.

(g) Whether D1’s and/or D2’s knowledge of the falsity or lack of belief in the truth or recklessness as to the falsity of the Representations was attributed to D3 by reason of his/her/their directorship with D3.

(h) (i) Whether Ds were under a common law duty of care to P in making the Representations in the course of negotiations on P’s investment in the Intended Business.

(ii) Whether Ds were in breach of the aforesaid common law duty of care when they made the Representations if the Representations were false.

(i) Whether P could rely on section 3 of the Misrepresentation Ordinance (Cap 284) (“MO”), entitling her to the relief claimed.

(j) The quantum of damages recoverable by P.

D. THE APPLICABLE LEGAL PRINCIPLES

49.  The law on misrepresentation is trite. Mr Lau and Mr Leung have helpfully summarised the relevant legal principles with the supporting authorities in their written opening and closing submissions. The following are some legal principles apposite for recapitulation here.

D.1. The Core Principles of Misrepresentation

50.  DHCJ Alexander Stock SC in Joytex Development Ltd v Super Homes Ltd [2018] HKCFI 2286 at para 77:

“77. I consider it helpful to outline a few core principles, for which see eg Yang Dandan v Hong Kong Resort Company Ltd CACV 247/2015, 9 August 2016 per Kwan JA at §§52 - 55 and 67 - 74, and Misrepresentation, Mistake and Non-Disclosure by Cartwright (4^th ed) Chapter 3:

(1) Generally, an actionable misrepresentation requires a false statement of past or present fact, as distinct from a statement of opinion or intention; though a statement of opinion/intention or as to the future may entail an implied statement of fact.

(2) Where there is a dispute as to the meaning conveyed, the court interprets the relevant words or conduct. The approach is objective, viewing the communication from the perspective of a reasonable person in the position of the representee. The test is whether: (a) the words or conduct in fact led the representee to believe the alleged false fact; and (b) it was reasonable for the representee to believe it from the words or conduct as he perceived them. In applying the test, the characteristics of the representee, including level of sophistication, are taken into account.

(3) Where an implied representation is alleged, the question is what a reasonable person would have inferred was being impliedly represented by the representor's words and conduct in their context.

(4) The statement must have the character of one upon which the representee was intended and entitled to rely.

(5) The representee must have in fact relied on the statement; though this can sometimes be inferred. The representation need not be the only or main cause of the decision to contract. It is generally sufficient that it be a cause (in other words, a material inducement).”

D.2. Deceit/Fraudulent Misrepresentation

51.  Where a defendant makes a false representation, knowing it to be untrue, or being reckless as to whether it is true, and intends that the plaintiff should act in reliance on it, then in so far as the latter does so and suffers loss the defendant is liable.[66]

52.  In Haifa International Finance Co Ltd v Concord Strategic Investments Ltd [2009] 4 HKLRD 29, Cheung JA, at para 15, relied on Winfield & Jolowicz on Tort (17^th ed, 2006) at p 472 para 11-3 as a clear exposition of the elements of fraud or deceit, which is as follows:

“(1) There must be a representation of fact made by words or conduct.

(2) The representation must be made with knowledge that it is or may be false. It must be wilfully false, or at least made in the absence of any genuine belief that it is true.

(3) The representation must be made with the intention that it should be acted upon by the claimant, or by a class of persons which includes the claimant, in the manner which resulted in damage to him.

(4) It must be proved that the claimant has acted upon the false statement.

(5) It must be proved that the claimant suffered damage by so doing.”

53.  A representation as to the future will not as such found liability in deceit. Nor will a broken promise, as such. However, the limits of this principle must be borne in mind. A representation of present intention, whether the intention be that of the representor or of a third party, is a sufficient representation of an existing fact to form the foundation of an action for deceit if the state of a man’s mind at a particular time can be ascertained. Therefore, a statement as to the future will often indeed imply a statement as to present intention: He has at the moment of making the promise the intention of fulfilling it.[67]

54.  A statement of opinion is invariably regarded as incorporating an assertion that the maker does actually hold that opinion; hence, the expression of an opinion not honestly entertained amounts to fraud. The only serious obstacle in the way of maintaining an action for a false representation on this basis lies in the difficulty of proving what the defendant’s real opinion was.[68]

55.  Deceit is not actionable per se: damage, in other words, is of the gist of the action. Where a plaintiff proves that he has been deceived into expending money, the burden shifts to the defendant if he wishes to argue that the expenditure did not in fact amount to a loss to the plaintiff.[69]

D.3. Section 3 of MO

56.  Section 3(1) of MO provides that:

“Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true.”

57.  The question under section 3 of MO is not one of negligence. Section 3 of MO has imposed an absolute obligation not to state facts which the representor cannot prove he had reasonable grounds to believe. Circumstances may exist in which a person may make a statement without having reasonable ground to believe it, yet in which it would be held that he was not (having regard to all the circumstances) negligent.[70]

58.  The basic measure of damages under MO is the same as the measure of damages for fraud.[71]

D.4. Negligent Misrepresentation

59.  At common law, a negligent misrepresentation is one which is made carelessly, or without reasonable grounds for believing it to be true.[72]

60.  A person who made a negligent statement could owe a duty of care to a person who suffered financial loss through reliance upon the statement.[73]

61.  The House of Lords case of Hedley Byre [1964] AC 465 recognised a cause of action in negligence for causing pure economic loss. The House of Lords held that there might be relationships which imposed a duty of care in making a representation independently of contract and fiduciary duty. The case before them gave rise to such a relationship and the plaintiffs only failed because liability had been excluded by the disclaimer.

62.  A special relationship, giving rise to a duty of care, may subsist between parties negotiating a contract if information is given in connection with the contract. In Esso Petroleum Co Ltd v Mardon, it was held that a petroleum company negotiating a lease of a filling station was liable to the tenant for negligently giving him overoptimistic estimates of the sales potential of the filling station. It should be noted that this was not a casual observation made between parties each of whom was in the same position to judge the accuracy of the estimate. The information was based on a detailed evaluation of the position by the petroleum company and the tenant was clearly not in as good a position as was the company to make such an estimate.[74]

63.  In Henderson v Merrett Syndicates Ltd, Lord Goff identified the governing principle of Hedley Byrne as being assumption of responsibility by the defendant along with reliance by the claimant. He said that from the speeches in Hedley Byrne: “we can derive some understanding of the breadth of the principle underlying the case. We can see that it rests upon a relationship between the parties, which may be general or specific to the particular transaction, and which may or may not be contractual in nature. All of their Lordships spoke in terms of one party having assumed or undertaken a responsibility towards the other. On this point, Lord Devlin spoke in particularly clear terms … Further, Lord Morris spoke of that party being possessed of a ‘special skill’ which he undertakes ‘to apply for the assistance of another who relies upon such skill’.”[75]

64.  On “special skill”, in Spring v Guardian Assurance Plc, Lord Goff duly confirmed that the reference to special skill in Hedley Byrne had “to be understood in a broad sense, certainly broad enough to embrace special knowledge” and that this could include situations where the “defendant has access to information and fails to exercise due care … in drawing on that source of information”.[76]

D.5. Evaluation and Assessment of Witnesses

65.  The legal principles on evaluating the truthfulness of an account given by a witness are relevant. These principles were referred to in Hui Cheung Fai v Daiwa Development Ltd (HCA 1734/2009, 8 April 2014) at paras 77-80 by DHCJ Eugene Fung SC, and helpfully summarized by Madam Recorder Yvonne Cheng SC (as her Ladyship then was) in Joint and Several Trustees of the Property of Yeung Wing Sing v Yeung Wing Sing [2021] HKCFI 2018 at para 26 as follows:

“(1) contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility;

(2) in deciding whether to accept a witness’ account, importance should also be attached to the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events;

(3) regard should be had to the consistency of the witness’ evidence with undisputed or indisputable evidence, and the internal consistency of the witness’ evidence;

(4) care should be taken in drawing conclusions about truthfulness and reliability solely or mainly from the appearance of a witness or from the assessment of a witness’ character;

(5) witnesses’ credibility should be tested by reference to the objective facts proved independently of their testimony, and regard should be had to their motives and to the overall probabilities.”

66.  I have also borne in mind the principles on evaluation of evidence enunciated by HH Judge Simon Barker QC in Northampton Borough Council v Cardozq and others [2019] BCC 582 at paras 37-39 and the reminder given by K Yeung J in Siao Miu Hua v Wu Ching Kuen [2024] HKCFI 232 at para 84 where his Lordship quoted H Au-Yeung DJ’s observations at para 14(5) of High Fashion New Media Corporation Ltd v Leong Ma Li [2022] HKCFI 2234 as follows:

“It is essential to have regard to the entirety of a witness’ evidence. A witness can make mistakes, but the mistakes do not necessarily affect other parts of his evidence. Likewise, a witness may lie. However, lies themselves do not mean necessarily that the entirety of that witness’ evidence is to be rejected. A witness may lie in a stupid attempt to bolster his case, but the actual case nevertheless remains good irrespective of the lie”.

E. EVIDENCE AND ANALYSIS

E.1. The Representations

67.  Here, I am grappling with the issues set out at para 48(a) and (c) hereinabove and shall resolve the issues of the Pingu Representations, the Shanghai Shareholder Representations and the Licence Representations one by one.

E.1.1. The Pingu Representations

68.  According to P’s evidence:

(a) P and Alan first met with D1 and D2 at the 30/1/2010 Meeting. At the meeting, D1 and D2 told P, inter alia, that D3 was granted licence for Linguaphone adult and kid products in Hong Kong and Mainland China, that the kid teaching brand was named “PINGU” and the adult teaching brand named “Linguaphone” and “Direct English” and that D3 had obtained the Unit Licence for Linguaphone Kids (Pingu). During the same meeting, D1 and D2 showed and introduced Linguaphone/Direct English and Pingu teaching materials to P. P indicated that the kid market had better potential for development than the adult market. So, they proposed that P should cooperate with them to carry on Linguaphone adult-and-kid education centre in Mainland China. D1 and D2 had also talked about the 3 brands of (i) Pingu, (ii) Linguaphone and (iii) Direct English during the 30/1/2010 Meeting and mentioned to P that Linguaphone had published the 2009 Announcement.

(b) P denied that at the 30/1/2010 Meeting, D1 told her that D3 was granted licence for Pingu in Hong Kong and had no licence for Pingu in Mainland China.

(c) Shortly after the 30/1/2010 Meeting, P read the 2009 Announcement. The 2009 Announcement showed the logos of (i) Pingu, (ii) Linguaphone and (iii) Direct English “operating under the internationally recognised Linguaphone, Direct English and Pingu’s English brand names”.

(d) On 12 February 2010, D1 sent out the Draft UL/A. The “Marks” therein purportedly included Linguaphone Kids, but the Draft UL/A made no reference to Pingu.

(e) P noted from Linguaphone’s website that the licensee of Pingu in China was said to be QE Shanghai.

(f) In the circumstances, on 17 February 2010, P sent, inter alia, the 17/2/2010 List of Questions to D1 and D2 and asked, inter alia, whether Linguaphone Kids was the same as Pingu, whether Linguaphone included both adults and kids and whether Pingu was competitor of Linguaphone Kids.

(g) A few days after the foregoing email, P met D1 and D2. D1 and D2 confirmed that Linguaphone Kids was the same as Pingu. D1 said that Linguaphone Kids was the former name of children product and that the brand name now was Pingu. In response to the question about Pingu China being “appointed” to QE Shanghai, D1 emphasised that that was not a problem and that he could and would sort it out. He reiterated that he had over 20 years of experience in the education business.

(h) After 10 March 2010, D1 and D2 repeated the above Pingu Representations.

(i) By email of 13 March 2010, a recruitment advertisement, stating that Direct English established an adult and children language training centre was posted. In the same email, the requirements of “Native English Teacher” included “2. one year pre-school/kindergarten … experience”.

(ii) On 23 March 2010, P circulated the 23/3/2010 To Do List. D1 was to “Bring 1 set Direct English Materials, bring 1 set kids materials”. That month, D1 and D2 brought Pingu products to Shanghai for display at the Pudong Linguaphone Centre.

(iii) On 7 April 2010, Clara’s email recorded that “Made Direct English introduction that will send to potential customers, Pingu English is in preparation”. The email chain was forwarded to, inter alios, D1 on 20 April 2010.

(iv) In April 2010, D2 gave one set of Pingu teaching materials (first shown and introduced to P at the 30/1/2010 Meeting and too heavy for P to take away on 30/1/2010) to P, which was produced as Exhibit “P-1” at trial.

69.  According to D1’s evidence:

(a) Linguaphone had 4 products, namely Linguaphone, Linguaphone Kids, Direct English and Pingu. The Centre obtained the licences of all 4 products in Hong Kong. In China, since the licence for Pingu was given to QE Shanghai, the Centre was only the master licensee of Linguaphone, Linguaphone Kids and Direct English.

(b) Linguaphone and Direct English were courses designed for adults, while Linguaphone Kids and Pingu were for children. Linguaphone was more focused on conversational English while Direct English was more academic, such as the teaching of formal English and gramma. Linguaphone Kids was similar to Linguaphone – the children’s version of Linguaphone and targeted primary students. “Pingu” was a famous penguin carton character which Linguaphone had obtained the right to use in classrooms and materials for the teaching of children between the age of 3 and 8 – Pingu product. The Pingu products targeted kindergartens.

(c) During the meetings before 10 March 2010, D1 and D2 did not expressly refer to Pingu because P was only interested in operating a language centre in Pudong Shanghai and Ds were not the master licensee of Pingu in Mainland China. D1 and D2 never mentioned Pingu or “Pingu’s English”.

(d) During the negotiation stage, Ds did not represent to P and Alan that Linguaphone Kids and Pingu/“Pingu’s English” were the same products and services.

(e) D1 denied having mentioned the 2009 Announcement to P. The 2009 Announcement was drafted and published by the Linguaphone Group and Ds were not involved in the drafting. Neither did the Linguaphone Group seek Ds’ approval for the publication of the 2009 Announcement.

(f) In Court, D1 said that he could not remember when he met P to discuss the 17/2/2010 List of Questions.

(g) The UL/A was for “Linguaphone Kids and Linguaphone or Direct English”. At the time when the UL/A was drafted, the parties had yet decided whether the Pudong Linguaphone Centre was to market Linguaphone Kids and Linguaphone or it would only market Direct English. However, when the UL/A was signed, the parties were quite sure that Direct English was the product they would market and Pingu was thus never a choice.

(h) In witness box,

(i) D1, however, confirmed that the fact that Direct English was chosen did not exclude the kid products business to be carried on at the Pudong Linguaphone Centre and that at all material times, the common understanding of all parties concerned was that the Pudong Linguaphone Centre would carry on the business of Direct English and education of children.

(ii) At the 30/1/2010 Meeting, D1 did introduce Pingu to P and Alan, but denied having told P that the Pudong Linguaphone Centre would carry on Pingu business.

(iii) D1 denied having told P that that master licence for Pingu was granted to QE Shanghai was not a problem and that he could and would sort it out.

(iv) Following the 23/3/2010 To Do List, D1 brought kids materials from Hong Kong to the Pudong Linguaphone Centre.

(i) Direct English did not have any teacher training kit and Pingu did have materials for training teacher. D1 therefore provided Pingu’s teacher training kit to P for reference purposes only and in the hope of helping with the training of teachers in the Pudong Linguaphone Centre. Apart from the teacher training kit, no other materials of Pingu had been provided to P and/or Alan. The materials of Pingu were never supposed to be displayed in the Pudong Linguaphone Centre.

(j) In witness box, D1 could not tell who gave the materials to P and could not be sure about what materials were given to P. D1 accepted that the student’s flashcards[77] were for kids.

70.  On this aspect, I do not accept D1’s evidence on the following grounds:

(a) At the stage of negotiation, D1 must have referred to P and Alan Pingu and P regarded Pingu and kids’ market in Shanghai as important. Otherwise, P and Alan would not have asked D1 whether Linguaphone Kids was the same as Pingu after they received the Draft UL/A from D1.

(b) Having regard to the entire contents of the 2009 Announcement, it lies ill in the mouth of D1 to deny his involvement in the drafting of the same.

(c) The 17/2/2010 List of Questions made reference to the contents of the 2009 Announcement. It is more likely than not that the 2009 Announcement was mentioned to P and Alan at the 30/1/2010 Meeting.

(d) D1’s initial position that Direct English was the only product they would market in Shanghai and Pingu was never their choice contradicts the contemporaneous documentary evidence which shows clearly that the Pudong Linguaphone Centre was set up and targeted pre-school/kindergarten kids market and that Pingu was in preparation for the Pudong Linguaphone Centre. This led D1 to confirm in Court that the common understanding of all parties concerned was that the Pudong Linguaphone Centre would carry on the business of Direct English and education of children.

(e) D1 testified that Pingu was a product for pre-school and kindergarten whereas Linguaphone Kids was for primary school students. Judging from the contemporaneous documentation, it is more likely than not that the Pudong Linguahpone Centre was set up also for Pingu products – the pre-school/kindergarten kids market.

(f) D1 did not simply provide Pingu’s teacher training kit to P for reference purposes only. If Pingu materials were provided for the purpose of training teachers, it would not be necessary to provide P with the student flashcards. D1 had in fact provided P Pingu materials for the Intended Business.

71.  P’s evidence is well supported by contemporaneous documentation and I accept her evidence. If D1 and D2 had not confirmed that Linguaphone Kids was the same as Pingu[78] and assured P that that Pingu China was appointed to QE Shanghai was not a problem and he could and would sort it out, the T/A would not have been signed and payments would not have been made by P for the Intended Business subsequently. More importantly, the Pudong Linguaphone Centre would not have been intended to be set up to provide English teaching to pre-school/kindergarten kids which was the province of Pingu. P’s evidence that in April 2010, D2 gave one set of Pingu teaching materials (first shown and introduced to her at the 30/1/2010 Meeting and too heavy for P to take away on 30/1/2010) to her[79] was corroborated by the email of 22 April 2010 by P to, inter alios, D1: “I have the following materials on hand … 1 box Pingu Early learner English Course unit 1-12 … 1 clip file Pingu teacher’s guide … 1 clip file Linguaphone recruitment manual”.[80]

72.  I find as facts the following:

(a) At the 30/1/2010 Meeting, D1 and D2 told P, inter alia, that D3 was granted licence for Linguaphone adult and kid products in Hong Kong and Mainland China, that the kid teaching brand was named “PINGU” and the adult teaching brand named “Linguaphone” and “Direct English” and that D3 had obtained the Unit Licence for Linguaphone Kids (Pingu).

(b) During the same meeting, D1 and D2 showed and introduced Linguaphone/Direct English and Pingu teaching materials to P. P indicated that the kid market had better potential for development than the adult market. So, they proposed that P should cooperate with them to carry on Linguaphone adult-and-kid education centre in Mainland China. D1 and D2 had also talked about the 3 brands of (i) Pingu, (ii) Linguaphone and (iii) Direct English during the 30/1/2010 Meeting and mentioned to P that Linguaphone had published the 2009 Announcement.

(c) At the 30/1/2010 Meeting, D1 did not tell P that D3 was granted licence for Pingu in Hong Kong and had no licence for Pingu in Mainland China.

(d) Shortly after the 30/1/2010 Meeting, P read the 2009 Announcement.

(e) On 12 February 2010, D1 sent out the Draft UL/A.

(f) P noted from Linguaphone’s website that the licensee of Pingu in China was said to be QE Shanghai. In the circumstances, on 17 February 2010, P sent, inter alia, the 17/2/2010 List of Questions to D1 and D2 and asked, inter alia, whether Linguaphone Kids was the same as Pingu, whether Linguaphone included both adults and kids and whether Pingu was the competitor of Linguaphone Kids.

(g) A few days after the aforesaid email, P met D1 and D2. D1 and D2 confirmed that Linguaphone Kids was the same as Pingu. D1 said that Linguaphone Kids was the former name of children product and that the brand name was now Pingu. In response to the question about Pingu China being “appointed” to QE Shanghai, D1 emphasised that that was not a problem and that he could and would sort it out. He reiterated that he had over 20 years of experience in the education business.

(h) Since D1 and D2 had, during the 30/1/2010 Meeting, already told P that D3 was granted licence for Linguaphone adult and kid products in Hong Kong and Mainland China and that the kid teaching brand was Pingu, the cumulative effect of the Pingu Representations remained that the Pudong Linguaphone Centre and the Intended Business would provide Linguaphone Kids (Pingu) products and services in Mainland China.

(i) After 10 March 2010, D1 and D2 repeated the above Pingu Representations by the matters as mentioned in para 68(h)(i)-(iv) hereinabove.

73.  I reject D1’s evidence which is at variance with that of P on this aspect.

E.1.2. The Shanghai Shareholder Representations

74.  According to P’s evidence:

(a) During a meeting in D3’s office in February 2010, D1 and D2, in reply to P’s concern that both P and Alan had a full time job and could not devote time to manage the Intended Business, told P that a “hidden” shareholder[81] who invested through them (D1 and D2) and who resided in Shanghai would be responsible for managing the business in Shanghai.

(b) On 1 March 2010, D1 introduced Andrew to P and arranged for Andrew to sign the T/A and the ET/A jointly with him and Alan.

(c) After signing the T/A, P, Alan, D1 and Andrew started discussion on the Shanghai business plan, including renovation of premises and recruitment of manager.

(d) At the request of D1 and D2, P prepared (i) a draft shareholders’ agreement for P and D2 to sign and (ii) a draft shares transfer agreement whereby D2 would transfer part of her shares in New Asia to a 3^rd party.

(e) In reliance on the Shanghai Shareholder Representations:

(i) P, on 14 March 2010, sent an email to D1 and D2, attaching a draft “股東轉讓協議書” which included a third party.[82] Apart from the name of D2 as Party A, the names of Party B and Party C were left empty. Clause 1 of the draft provided that Party C would not have any voting rights in New Asia.

(ii) On 29 March 2010, D1 emailed to Andrew (forwarded to P and copied D2 on 31 March 2010) the Draft ST/A[83] which provided that D2 would transfer 20% shares to Andrew on the basis that Andrew would have no voting rights. D1 and D2 told P that the Draft ST/A was to formalise Andrew’s role as a shareholder (as they had previously told P).

(iii) D2 would complete the transfer of part of her shares in New Asia to Andrew and Andrew would be responsible for the daily operation of the Intended Business.

(f) In witness box:

(i) P testified that the word “hidden shareholder” was understood to mean that P was not supposed to have dealing with Andrew when it came to Andrew’s shareholding; Andrew invested through D1 and D2 only.

(ii) When P was confronted by the discrepancy between “invested” in the Amended Statement of Claim and “有興趣入股” in her Witness Statement, P testified that as to the “hidden shareholder”, there were in fact two stages. At stage one, D1 and D2 told P that the “hidden shareholder” “有興趣” invest. At stage two, P asked D1 and D2 whether the “hidden shareholder” “會投資”, D1 and D2 then confirmed that the “hidden shareholder” “會投資”. When being further asked whether at stage 2, D1 and D2 in fact said “投資咗” or “會投資”, P testified that she could not confirm, but then added that after Andrew did something, she understood that Andrew had already invested. However, after she answered the last question on Day 1 of the trial, she volunteered to supplement that she could now confirm that D1 and D2 indeed told her that the “hidden shareholder” “投資咗” before P went to Shanghai. When asked by the Court why she could now confirm that, she said that she was distracted and was too nervous at that time, but now she had thought over it clearly.

75.  According to D1’s evidence:

(a) At the 30/1/2010 Meeting, D1 and D2 had made known to P that they could not be in Shanghai to look after the operation and day-to-day running of the Intended Business. At the time, D1 was busily looking after his education business in Hong Kong while his children who were about 9 and 7 years of age required the full- time attention of D2. The recruitment and day-to-day operation of the Intended Business would be for P and Alan to handle as they would be in Shanghai.

(b) D1 was sure that P and Alan would move to Shanghai for good.

(c) D1 knew Andrew because the Centre had an office in Tai Shing Commercial Building, Yaumatei, and D1 was the chairman of the Owners Incorporation while Andrew was a committee member. Thereafter, they became friends. D1 knew that Andrew lived in Shanghai and was a businessman with no connection or experience in education. Since he was living in Shanghai and appeared to be a wise and sensible person, D1 thought that if he would accept their offer to take up some shares, then they would have a trusted person in Shanghai who could provide some healthy checks and balances. In D1’s words in cross examination, Andrew would become his “eyes” in Shanghai.

(d) Andrew was initially interested and during preparation for the setting up of the Intended Business, he provided his assistance because he was in Shanghai. However, by about mid-2010, Andrew was no longer interested in investing. He said that he could not get along with P.

(e) On 11 March 2010, Alan sent an email to D1, D2 and Harry (copied P) with the subject “Direct English Marketing Plan”[84], discussing about various marketing ideas. Alan did not send the email to Andrew.

(f) After receiving the draft “股東轉讓協議書” on 14 March 2010, D1 subsequently inserted the name of Andrew to the draft and sent the same to Andrew by an email dated 29 March 2010. The draft was never signed by Andrew because Andrew’s proposed investment never materialized.

(g) On 26 April 2020, P sent an email captioned “New Asia Shareholder Agreement” to D1, D2 and Alan, enclosing the Draft New Asia S/A. Clause 5.04 of the Draft New Asia S/A, P had the right to appoint Andrew as CEO. [85]

(h) Andrew never signed the agreement for the sale of shares to him and he never actually invested in the Intended Business. When he was involved in the Intended Business, he was merely trying to learn about the education business for his own sake while providing some assistance to Ds. He was never a key player.

(i) The 3^rd party investor was only a possibility. At no time did D1 or D2 mention that a 3^rd party had already invested (or would definitely invest) in the Intended Business. Neither did they mention that someone (whether Andrew or not) would be responsible for looking after the operation of the Intended Business. D1 and D2 only considered Andrew a potential investor.

76.  Although P’s stance on the Shanghai Shareholder Representations has wavered, I nevertheless accept P’s evidence in Court since her evidence is more consistent with the contemporaneous emails. This is particularly so where a few days after the 30/1/2010 Meeting, Alan sent the 10/2/2010 Email to D1 and D2 (copied P)[86], identifying items to be settled on or before their trip to Shanghai and some of to do items (including “Meet shareholder”) in Shanghai. If P did not understand Andrew was a shareholder but only a potential investor (through D1 and D2 only), there would be no need for P to meet Andrew at that point in time.

77.  D1 admitted that he received the 10/2/2010 Email and noted P’s understanding that the Shanghai shareholder mentioned by Ds was not merely a potential investor. D1 and D2, however, did not correct P’s misunderstanding and allowed P to labour under her misunderstanding. To arrange for P to see Andrew in Shanghai and to further allow Andrew to sign the T/A and the ET/A jointly with D1 and Alan with the effect of undertaking personal liability thereunder were conducts furthering the representation that Andrew was a shareholder who had invested in the Intended Business. The same is true of the conduct of D1 and D2 requesting P to prepare the Draft ST/A, providing that D2 would transfer 20% shares in New Asia to Andrew.

78.  Ds’ case is that they did not mention that a 3^rd party had already invested (or would definitely invest) in the Intended Business and neither did they mention that someone (whether Andrew or not) would be responsible for looking after the operation of the Intended Business. It is not Ds’ case that D1 and/or D2 had told P prior to P’s investment in the Intended Business that someone (whether Andrew or not) was merely a potential investor. The fact that Andrew had gone to the length of signing the T/A and the ET/A and undertaking work for the Pudong Linguaphone Centre on the instructions of P from 5 March to around early July 2010 goes a long way to disprove Ds’ case. I reject D1’s evidence which is at variance with P’s evidence on this aspect.

79.  Accordingly, I find the matters stated in para 74 hereinabove as facts, particularly the following:

(a) During a meeting in D3’s office in February 2010, D1 and D2, in reply to P’s concern that both P and Alan had a full time job and could not devote time to manage the Intended Business, told P that a shareholder who invested through them (D1 and D2) and who resided in Shanghai would be responsible for managing the business in Shanghai.

(b) On 1 March 2010, D1 introduced Andrew to P and arranged for Andrew to sign the T/A and the ET/A jointly with him and Alan.

(c) After signing the T/A, P, Alan, D1 and Andrew started discussion on the Shanghai business plan, including renovation of premises and recruitment of manager.

(d) At the request of D1 and D2, P prepared the Draft ST/A, providing that D2 would transfer 20% shares in New Asia to Andrew on the basis that Andrew would have no voting rights. D1 and D2 told P that the Draft ST/A was to formalise Andrew’s role as a shareholder.

E.1.3. The Licence Representations

80.  According to P’s evidence:

(a) At the 30/1/2010 Meeting, P specifically asked D1 whether an education licence would be required to operate the Intended Business. D1 answered “no”, citing their experience in their Guangzhou centre.

(b) When cross-examined on her online enquiry about education licence to the Shanghai authority on 4 March 2010[87], P explained that during the meeting in Shanghai on 1 March 2010, Harry casually asked whether licence would be required; D1 reacted strongly saying that people should listen to him and licence was not required. The conversation ended up in somewhat an irrelevant argument of seniority because Harry was D2’s elder cousin whereas D1 was, among the people there, the only person experienced in education. P sent the enquiry just to wrap up the matter. P did not receive any response to her online enquiry and did not follow up on her enquiry. To her, the authority would probably confirm that a licence was not needed, as D1 and D2 had told her.

(c) The lack of licence resulted in suspension of business at the Pudong Linguaphone Centre. D1 then asked Harry to find an organisation with education licence to cooperate.

(d) Initially, D1 and Harry would meet with Jiaotong University for the purpose of marketing the Intended Business.[88] It was only after the suspension of business at the Pudong Linguaphone Centre by the authority for lack of education license that D1 suggested that co-operation with Jiaotong University would resolve the licence issue.

(e) A sum of RMB200,000 was paid to Jiaotong University on 9 June 2010 for cooperation with Jiaotong University.

81.  According to D1’s evidence:

(a) At the 30/1/2010 Meeting, D1 made clear that an education licence was necessary for the operation of the Intended Business and they should apply for one. D1 knew about the requirement as he had the experience in running an education institute in Guangzhou, PRC.

(b) The parties were aware of the need for an education licence and had started applying for one. However, Shanghai was staging the Shanghai World Expo at the time and the application was delayed. For such reason, an arrangement with Jiaotong University was entered into and a license fee of RMB200,000 was paid on 9 June 2010. They were totally free to operate their courses as long as they were done in conjunction with Jiaotong University.

(c) In witness box:

(i) Prior to 10 March 2010, the parties did not specifically talk about education licence and that he could not remember whether an application for an education licence was ever made.

(ii) After it was pointed out to D1 that ascertaining, enquiry and application were different, D1 then said that to his knowledge, an application was made. The application for education licence was made in March 2010. After he was shown the email of 11 March 2010[89], he claimed that the application was made at the outset. He testified that immediately after they submitted the application, they learned from source(s) in the government that due to World Expo, the education licence would not be granted anytime soon, and therefore the discussions with Jiaotong University since or before 11 March 2010.

(iii) D1 did not know who the applicant for the education licence was. When it was pointed out to him that the PRC Subsidiary was not incorporated until 3 June 2010, he said that an individual could be a licence holder.

(iv) D1 did not claim to have seen any application forms or emails relating to the application. He was unable to tell which staff told him that the application for education licence had been made. He was not clear who made the application. Neither has he enquired from his staff to discover the facts and documents about the application. He did not consult any lawyers or advisors about carrying on education business in Mainland China.

(v) D1 claimed that the processing of the application was delayed by the World Expo. He testified that due to the need to maintain social stability and prevent chaos, the government would not proceed to grant new education licence. In the following years, there was no follow-up, no withdrawal and no result.

(vi) The PRC Education Bureau did not stop the education activities of the Pudong Linguaphone Centre because the latter had no education licence. However, it was possible that the Pudong Linguaphone Centre did not hold any education activities.

82.  On the Licence Representations issue, I have no hesitation in rejecting D1’s evidence. My reasons are as follows:

(a) According to D1, the application for education licence was made in March 2010. D1’s testimony that immediately after they submitted the application for an education licence, they learned from source(s) in the government that due to World Expo, the education licence would not be granted anytime soon. This led to the discussions with Jiaotong University since or before 11 March 2010. All these (i) preparation for the application, (ii) submission of the application, (iii) gathering of information from the government and (iv) discussions with Jiaotong University with a view to overcoming the licence issue happened in 10 calendar days. This defies belief.

(b) If the application for an education licence was made since around 1 March 2010, it would be very difficult to comprehend why P submitted an online enquiry on 4 March 2010. This testimony is also inconsistent with D1’s testimony that prior to 10 March 2010, the parties did not specifically talk about education license.

(c) He did not claim to have seen any application forms or emails relating to the application for the education licence. Not a scintilla of documentation relating to the application was discovered. The complete absence of a paper trail is inexplicable and remains unexplained.

(d) D1 claimed that the processing of the application for an education licence was delayed by the World Expo. He testified that due to the need to maintain social stability and prevent chaos, the government would delay processing applications for education license. It strains credulity to say that granting a license to teach Direct English and/or Pingu would result in chaos. And if World Expo in May 2010 were a factor, then there would be no reason why the application made zero progress in 2011 and the following years, and the PRC Subsidiary still took no steps to follow up.

83.  I accept P’s evidence and, in this context, it is inherently probable that P asked D1 whether an education licence would be required to operate the Intended Business and D1 answered in the negative. This tallies with the absence of a paper trail relating to Ds’ application for the education licence.

84.  Hence, I find as facts the following:

(a) At the 30/1/2010 Meeting, P specifically asked D1 whether an education licence would be required to operate the Intended Business. D1 answered “no”, citing his experience in their Guangzhou centre.

(b) P made online enquiry about education licence to the Shanghai authority on 4 March 2010 to end the argument between D1 and Harry. P did not receive any response to her online enquiry and did not follow up on her enquiry.

(c) The lack of licence resulted in suspension of business at the Pudong Linguaphone Centre. D1 then asked Harry to find an organisation with education licence to cooperate.

(d) Initially, D1 and Harry would meet with Jiaotong University for the purpose of marketing of the Intended Business. It was only after the suspension of business at the Pudong Linguaphone Centre by the authority for lack of education license that D1 suggested that co-operation with Jiaotong University would resolve the licence issue.

(e) A sum of RMB200,000 was paid to Jiaotong University on 9 June 2010 for cooperation with Jiaotong University.

F. RELIANCE AND INDUCEMENT

85.  It is undisputed[90]:

(a) that D3 was solely owned and operated by D1 and D2;

(b) that D1 at the material time had more than 20 years’ experience in the business of language education; and

(c) that Ds had, prior to 30 January 2010, already had dealings with Linguaphone.

86.  The Pingu Representations, the Shanghai Shareholder Representations and the Licence Representations were made by D1 and/or D2 (for which D3 was responsible) in the context of their discussion with P and Alan for P to decide whether to invest in the Intended Business. Against this context, it is beyond question that the Pingu Representations, the Shanghai Shareholder Representations and the Licence Representations each were material and an inducing cause of the alteration of P’s position mentioned in para 87 hereinbelow, and I so find.[91]

87.  The Pingu Representations, the Shanghai Shareholder Representations and the Licence Representations each contributed to P doing, inter alia, the following acts:

(a) Payment of HK$179,550.21 by P to New Success on 4 March 2010;

(b) Subscription of 49 shares in New Asia by P on 10 March 2010;

(c) Payment of HK$222,222 by P to D3 on 10 March 2010;

(d) Payment of HK$27,778 by P to D1 and D2 on 16 March 2010;

(e) Payment of HK$245,000 by P to New Asia on 29 April 2010;

(f) Payment of HK$245,000 by P to New Asia on 24 May 2010;

(g) Payment of HK$490,000 by P to New Asia on 24 June 2010; and

(h) Payment of HK$56,451.61 by P to D1 and D2 on 5 July 2010.

88.  It is undisputed that P paid a total sum of HK$1,466,001.82 and did not receive any income, profits, dividends or share of assets from the business.[92]

G. FALSITY

89.  The burden of proving falsity, as relates to the Pingu Representations, the Shanghai Shareholder Representations and the Licence Representations, rests on P.

90.  It is undisputed[93]:

(a) that Linguaphone Kids did not include Pingu;

(b) that the Master Licence granted to D3 in respect of Pingu was confined to Hong Kong;

(c) that Ds knew:

(i) the scope of the licence granted to D3;

(ii) the fact that Linguaphone Kids did not include Pingu; and

(iii) D1 and D2 in any event had no intention or plan to develop Pingu’s related business in the PRC through New Asia.

(d) that Ds never intended or contemplated that New Asia would carry on any business in respect of Pingu;

(e) that an education licence was required by the authorities in Mainland China for the Intended Business; and

(f) that Andrew never invested in New Asia.

91.  Viewed thus, I find that the Pingu Representations, the Shanghai Shareholder Representations and the Licence Representations were false.

H. STATE OF MIND

92.  P’s case against Ds is principally on fraudulent misrepresentation/deceit.

93.  The relevant state of mind in fraudulent misrepresentation is: whether D1, D2 and D3 made the Pingu Representations, the Shanghai Shareholder Representations and the Licence Representations, knowing them to be untrue, or being reckless as to whether they were true, and intended that P should act in reliance on it.

94.  In reaching my views on this issue, I bear in mind that the very gravity of an allegation of fraud is a circumstance which has to be weighed in the scale in deciding as to the balance of probabilities.[94]

95.  Considering all the circumstances, the findings which I have made above, and the undisputed facts mentioned in paras 85 and 90 above, I find the following:

(a) (i) When the Pingu Representations were made, D1 and D2 knew that the Pingu Representations were false and intended that P should act in reliance on it.

(ii) Since D3 was solely owned and operated by D1 and D2, the state of mind of D1 and D2 was attributed to that of D3.

(b) (i) When the Shanghai Shareholder Representations were made, D1 and D2 knew that the Shanghai Shareholder Representations were false and intended that P should act in reliance on it.

(ii) Since D3 was solely owned and operated by D1 and D2, the state of mind of D1 and D2 was attributed to that of D3.

(c) (i) When the Licence Representations were made, D1 knew that the Licence Representations were false and intended that P should act in reliance on it.

(ii) Since D3 was solely owned and operated by D1 and D2, the state of mind of D1 was attributed to that of D3.

96.  For completeness sake, D3 have not pleaded and adduced evidence to show that it had reasonable grounds to believe and did believe up to the time the contract was made[95] that the facts represented in the Pingu Representations, the Shanghai Shareholder Representations and the Licence Representations were true.

97.  Because of my findings in para 95, it becomes unnecessary for me to reach any finding on negligent misrepresentation.

I. LIABILITY & QUANTUM

98.  For the above reasons,

(a) D1, D2 and D3 were liable to P in damages for fraudulent misrepresentation[96]; and

(b) D3 was liable to P in damages under section 3(1) of MO.

99.  It is indisputable that acting in reliance on the fraudulent misrepresentations and induced thereby, P has suffered out-of-pocket loss to the tune of HK$1,466,001.82.

J. DISPOSITION

100.  D1, D2 and D3 are jointly and severally liable to pay P the sum of HK$1,466,001.82.

101.  Accordingly, I make the following Order:

(a) Judgment be entered for P against D1, D2 and D3 jointly and severally on her claim for the sum of HK$1,466,001.82 with interest at 1% above the HSBC best lending rate from 4 December 2010 to the date of judgment and thereafter at the judgment rate; and

(b) the Counterclaim be dismissed.

102.  As to costs, I make the following order nisi:

(a) D1, D2 and D3 do pay P’s costs of the action on a party and party basis, such costs to be taxed if not agreed with certificate for counsel; and

(b) D1 and D2 do pay P’s costs of the counterclaim on a party and party basis, such costs to be taxed if not agreed with certificate for counsel.

103.  The costs order nisi shall be made absolute unless application for variation is made within 14 days from the date of this judgment.

104.  Lastly, it remains for me to thank counsel for their able assistance.